2011-10159. Medicare Program; Inpatient Rehabilitation Facility Prospective Payment System for Federal Fiscal Year 2012; Changes in Size and Square Footage of Inpatient Rehabilitation Units and Inpatient Psychiatric Units

AGENCY:

Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION:

Proposed rule.

SUMMARY:

This proposed rule would implement section 3004 of the Affordable Care Act, which establishes a new quality reporting program that provides for a 2 percent reduction in the annual increase factor beginning in 2014 for failure to report quality data to the Secretary of Health and Human Services. This proposed rule would also update the prospective payment rates for inpatient rehabilitation facilities (IRFs) for Federal fiscal year 2012 (for discharges occurring on or after October 1, 2011 and on or before September 30, 2012) as required by the Social Security Act (the Act). The Act requires the Secretary to publish in the Federal Register on or before the August 1 that precedes the start of each FY the classification and weighting factors for the IRF prospective payment system (PPS) case-mix groups and a description of the methodology and data used in computing the prospective payment rates for that fiscal year. We are also proposing to consolidate, clarify, and revise existing policies regarding IRF hospitals and IRF units of hospitals to eliminate unnecessary confusion and enhance consistency. Furthermore, in accordance with the general principles of the President's January 18, 2011 Executive Order entitled “Improving Regulation and Regulatory Review,” we are proposing to amend existing regulatory provisions regarding “new” facilities and changes in the bed size and square footage of IRFs and inpatient psychiatric facilities (IPFs) to improve clarity and remove obsolete material.

DATES:

To be assured consideration, comments must be received at one of the addresses provided below, no later than 5 p.m. on June 21, 2011.

ADDRESSES:

In commenting, please refer to file code CMS-1349-P. Because of staff and resource limitations, we cannot accept comments by facsimile (FAX) transmission.

You may submit comments in one of four ways (please choose only one of the ways listed):

1. Electronically. You may submit electronic comments on this regulation to http://www.regulations.gov. Follow the “Submit a comment” instructions.

2. By regular mail. You may mail written comments to the following address only: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-1349-P, P.O. Box 8016, Baltimore, MD 21244-8016.

Please allow sufficient time for mailed comments to be received before the close of the comment period.

3. By express or overnight mail. You may send written comments to the following address only: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-1349-P, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.

4. By hand or courier. If you prefer, you may deliver (by hand or courier) your written comments before the close of the comment period to either of the following addresses: a. For delivery in Washington, DC—Centers for Medicare & Medicaid Services, Department of Health and Human Services, Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201.

(Because access to the interior of the Hubert H. Humphrey Building is not readily available to persons without Federal government identification, commenters are encouraged to leave their comments in the CMS drop slots located in the main lobby of the building. A stamp-in clock is available for persons wishing to retain a proof of filing by stamping in and retaining an extra copy of the comments being filed.)

b. For delivery in Baltimore, MD—Centers for Medicare & Medicaid Services, Department of Health and Human Services, 7500 Security Boulevard, Baltimore, MD 21244-1850.

If you intend to deliver your comments to the Baltimore address, please call telephone number [phone] in advance to schedule your arrival with one of our staff members.

Comments mailed to the addresses indicated as appropriate for hand or courier delivery may be delayed and received after the comment period.

Submission of comments on paperwork requirements. You may submit comments on this document's paperwork requirements by following the instructions at the end of the “Collection of Information Requirements” section in this document.

For information on viewing public comments, see the beginning of the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT:

Gwendolyn Johnson, [phone], for general information about the proposed rule.

Hillary Loeffler, [phone], for information about the proposed payment rates.

Stella R. Mandl, [phone], for information about the proposed quality reporting program.

Susanne Seagrave, [phone], for information about the proposed payment policies.

SUPPLEMENTARY INFORMATION:

Inspection of Public Comments: All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. We post all comments received before the close of the comment period on the following Web site as soon as possible after they have been received: http://www.regulations.gov. Follow the search instructions on that Web site to view public comments.

Comments received timely will also be available for public inspection as they are received, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone [phone].

Table of Contents

To assist readers in referencing sections contained in this document, we are providing the following table of contents.

I. Background

A. Historical Overview of the Inpatient Rehabilitation Facility Prospective Payment System (IRF PPS)

B. Provisions of the Affordable Care Act Affecting the IRF PPS in FY 2012 and Beyond

C. Operational Overview of the Current IRF PPS

II. Summary of Provisions of the Proposed Rule

A. Proposed Updates to the IRF Federal Prospective Payment Rates for Federal Fiscal Year (FY) 2012

B. Proposed Revisions to Existing Regulation Text

III. Proposed Update to the Case-Mix Group (CMG) Relative Weights and Average Length of Stay Values for FY 2012

IV. Proposed Updates to the Facility-Level Adjustment Factors for FY 2012

A. Proposed Updates to the IRF Facility-Level Adjustment Factors

B. Budget Neutrality Methodology for the Proposed Updates to the IRF Facility-Level Adjustment Factors

C. Proposed Policy for Temporary Cap Adjustments to Reflect Interns and Residents Displaced Due to Closure of IRFs or IRF Residency Training Programs

1. Background

2. Proposed FTE Intern and Resident Temporary Cap Adjustment

3. Proposed Temporary Adjustment to the FTE Cap to Reflect Interns and Residents Displaced Due to IRF Closure

4. Proposed Temporary Adjustment to the FTE Cap to Reflect Interns and Residents Displaced Due to a Residency Program Closure

V. Proposed FY 2012 IRF PPS Federal Prospective Payment Rates

A. Proposed Market Basket Increase Factor, Productivity Adjustment, and Labor-Related Share for FY 2012

1. Proposed Rebasing of the RPL Market Basket for FY 2012

2. Proposed Productivity Adjustment

3. Proposed Calculation of the IRF PPS Market Basket Increase Factor for FY 2012

4. Proposed Calculation of the Labor-Related Share for FY 2012

B. Proposed Area Wage Adjustment

C. Description of the Proposed IRF Standard Conversion Factor and Payment Rates for FY 2012

D. Example of the Methodology for Adjusting the Proposed Federal Prospective Payment Rates

VI. Proposed Update to Payments for High-Cost Outliers Under the IRF PPS

A. Proposed Update to the Outlier Threshold Amount for FY 2012

B. Proposed Update to the IRF Cost-to-Charge Ratio Ceilings

VII. Impact of the IPPS Data Matching Process Changes on the IRF PPS Calculation of the Low-Income Percentage Adjustment Factor

VIII. Proposed Updates to the Policies in 42 CFR 412

A. Proposed Consolidation of the Requirements for Rehabilitation Hospitals and Rehabilitation Units

B. Proposed Revisions to the Regulations at Proposed § 412.29

C. Proposed Revisions to the Requirements for Changes in Bed Size and Square Footage

D. Proposed Revisions to Enhance Consistency Between the IRF Coverage and Payment Requirements

IX. Proposed Quality Reporting Program for IRFs

A. Background and Statutory Authority

B. Quality Measures for IRF Quality Reporting Program for FY 2014

1. General

2. Considerations in the Selection of the Proposed Quality Measures

3. FY 2014 Measure #1: Healthcare Associated Infection Measure (HAI): Urinary Catheter-Associated Urinary Tract Infections (CAUTI)

4. FY 2014 Measure #2: Percent of Patients with Pressure Ulcers that are New or Worsened

5. Potential FY 2014 Measure #3: 30-Day Comprehensive All Cause Risk Standardized Readmission Measure

C. Data Submission Requirements

1. Proposed Method of Data Submission for HAI Measure (CAUTI)

2. Proposed Method of Data Submission for the Percent of Patients with New or Worsened Pressure Ulcer Measure

3. Potential Method of Data Submission for the 30-Day Comprehensive All-Cause Risk-Standardized Readmission Measure

D. Public Reporting

E. Quality Measures for Future Consideration for Determination of Increase Factors for Future Fiscal Year Payments

F. Proposed New Regulation Text for the IRF Quality Reporting Program

X. Collection of Information Requirements

XI. Response to Public Comments

XII. Economic Analyses

A. Regulatory Impact Analysis

1. Introduction

2. Statement of Need

3. Overall Impacts

4. Detailed Economic Analysis

5. Alternatives Considered

6. Accounting Statement

7. Conclusion

B. Regulatory Flexibility Act Analysis

C. Unfunded Mandates Reform Act Analysis

XIII. Federalism Analysis

Regulation Text

Addendum

Acronyms

To assist the reader, we are listing the acronyms used and their corresponding meaning in alphabetical order.

ADC Average Daily Census

AHA American Hospital Association

ASCA Administrative Simplification Compliance Act of 2002, Public Law 107-105

BBA Balanced Budget Act of 1997, Public Law 105-33

BBRA Medicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Balanced Budget Refinement Act of 1999, Public Law 106-113

BEA Bureau of Economic Analysis

BIPA Medicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Benefits Improvement and Protection Act of 2000, Public Law 106-554

BLS Bureau of Labor Statistics

CAH Critical Access Hospital

CAUTI Catheter-Associated Urinary Tract Infection

CDC Centers for Disease Control and Prevention

CBSA Core-Based Statistical Area

CCR Cost-to-Charge Ratio

CFR Code of Federal Regulations

CIPI Capital Input Price Index

CMG Case-Mix Group

CMS Centers for Medicare & Medicaid Services

CPI Consumer Price Index

DSH Disproportionate Share Hospital

ECI Employment Cost Index

EHR Electronic Health Record

FI Fiscal Intermediary

FR Federal Register

FTE Full-time Equivalent

FY Federal Fiscal Year

GDP Gross Domestic Product

GME Graduate Medical Education

HAI Healthcare Associated Infection

HHH Hubert H. Humphrey Building

HHS Department of Health Human Services

HIPAA Health Insurance Portability and Accountability Act of 1996, Public Law 104-191

HOMER Home Office Medicare Records

IGI IHS Global Insight

IME Indirect Medical Education

I-O Input-Output

IPF Inpatient Psychiatric Facility

IPPS Inpatient Prospective Payment System

IRF Inpatient Rehabilitation Facility

IRF-PAI Inpatient Rehabilitation Facility-Patient Assessment Instrument

IRF PPS Inpatient Rehabilitation Facility Prospective Payment System

IRVEN Inpatient Rehabilitation Validation and Entry

LTCH Long Term Care Hospital

LIP Low-Income Percentage

LOS Length of Stay

MA Medicare Advantage

MAC Medicare Administrative Contractor

MedPAR Medicare Provider Analysis and Review

MFP Multifactor Productivity

MMSEA Medicare, Medicaid, and SCHIP Extension Act of 2007, Public Law 110-173

MSA Metropolitan Statistical Area

NAICS North American Industry Classification System

NHSN National Healthcare Safety Network

NQF National Quality Forum

OMB Office of Management and Budget

PLI Professional Liability Insurance

PPI Producer Price Indexes

PPS Prospective Payment System

QM Quality Measure

RFA Regulatory Flexibility Act of 1980, Public Law 96-354

RIA Regulatory Impact Analysis

RIC Rehabilitation Impairment Category

RO Regional Office

RP Rehabilitation and Psychiatric

RPL Rehabilitation, Psychiatric, and Long-Term Care Hospital

SCHIP State Children's Health Insurance Program

SSI Supplemental Security Income

TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Public Law 97-248

I. Background

A. Historical Overview of the Inpatient Rehabilitation Facility Prospective Payment System (IRF PPS)

Section 4421 of the Balanced Budget Act of 1997 (Pub. L. 105-33, enacted on August 5, 1997) (BBA), as amended by section 125 of the Medicare, Medicaid, State Children's Health Insurance Program (SCHIP) Balanced Budget Refinement Act of 1999 (Pub. L. 106-113, enacted on November 29, 1999) (BBRA) and by section 305 of the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (Pub. L. 106-554, enacted on December 21, 2000) (BIPA) provides for the implementation of a per discharge prospective payment system (PPS) under section 1886(j) of the Social Security Act (the Act) for inpatient rehabilitation hospitals and inpatient rehabilitation units of a hospital (hereinafter referred to as IRFs).

Payments under the IRF PPS encompass inpatient operating and capital costs of furnishing covered rehabilitation services (that is, routine, ancillary, and capital costs) but not direct graduate medical education costs, costs of approved nursing and allied health education activities, bad debts, and other services or items outside the scope of the IRF PPS. Although a complete discussion of the IRF PPS provisions appears in the original FY 2002 IRF PPS final rule (66 FR 41316) and the FY 2006 IRF PPS final rule (70 FR 47880), we are providing below a general description of the IRF PPS for fiscal years (FYs) 2002 through 2010.

Under the IRF PPS from FY 2002 through FY 2005, as described in the FY 2002 IRF PPS final rule (66 FR 41316), the Federal prospective payment rates were computed across 100 distinct case-mix groups (CMGs). We constructed 95 CMGs using rehabilitation impairment categories (RICs), functional status (both motor and cognitive), and age (in some cases, cognitive status and age may not be a factor in defining a CMG). In addition, we constructed five special CMGs to account for very short stays and for patients who expire in the IRF.

For each of the CMGs, we developed relative weighting factors to account for a patient's clinical characteristics and expected resource needs. Thus, the weighting factors accounted for the relative difference in resource use across all CMGs. Within each CMG, we created tiers based on the estimated effects that certain comorbidities would have on resource use.

We established the Federal PPS rates using a standardized payment conversion factor (formerly referred to as the budget neutral conversion factor). For a detailed discussion of the budget neutral conversion factor, please refer to our FY 2004 IRF PPS final rule (68 FR 45684 through 45685). In the FY 2006 IRF PPS final rule (70 FR 47880), we discussed in detail the methodology for determining the standard payment conversion factor.

We applied the relative weighting factors to the standard payment conversion factor to compute the unadjusted Federal prospective payment rates under the IRF PPS from FYs 2002 through 2005. Within the structure of the payment system, we then made adjustments to account for interrupted stays, transfers, short stays, and deaths. Finally, we applied the applicable adjustments to account for geographic variations in wages (wage index), the percentage of low-income patients, location in a rural area (if applicable), and outlier payments (if applicable) to the IRF's unadjusted Federal prospective payment rates.

For cost reporting periods that began on or after January 1, 2002 and before October 1, 2002, we determined the final prospective payment amounts using the transition methodology prescribed in section 1886(j)(1) of the Act. Under this provision, IRFs transitioning into the PPS were paid a blend of the Federal IRF PPS rate and the payment that the IRF would have received had the IRF PPS not been implemented. This provision also allowed IRFs to elect to bypass this blended payment and immediately be paid 100 percent of the Federal IRF PPS rate. The transition methodology expired as of cost reporting periods beginning on or after October 1, 2002 (FY 2003), and payments for all IRFs now consist of 100 percent of the Federal IRF PPS rate.

We established a CMS Website as a primary information resource for the IRF PPS. The Web site URL is http://www.cms.gov/​InpatientRehabFacPPS/​ and may be accessed to download or view publications, software, data specifications, educational materials, and other information pertinent to the IRF PPS.

Section 1886(j) of the Act confers broad statutory authority upon the Secretary to propose refinements to the IRF PPS. In the FY 2006 IRF PPS final rule (70 FR 47880) and in correcting amendments to the FY 2006 IRF PPS final rule (70 FR 57166) that we published on September 30, 2005, we finalized a number of refinements to the IRF PPS case-mix classification system (the CMGs and the corresponding relative weights) and the case-level and facility-level adjustments. These refinements included the adoption of the Office of Management and Budget's (OMB) Core-Based Statistical Area (CBSA) market definitions, modifications to the CMGs, tier comorbidities, and CMG relative weights, implementation of a new teaching status adjustment for IRFs, revision and rebasing of the market basket index used to update IRF payments, and updates to the rural, low-income percentage (LIP), and high-cost outlier adjustments. Beginning with the FY 2006 IRF PPS final rule (70 FR 47908 through 47917), the market basket index used to update IRF payments is a market basket reflecting the operating and capital cost structures for freestanding IRFs, freestanding inpatient psychiatric facilities (IPFs), and long-term care hospitals (LTCHs) (hereafter referred to as the rehabilitation, psychiatric, and long-term care (RPL) market basket). Any reference to the FY 2006 IRF PPS final rule in this proposed rule also includes the provisions effective in the correcting amendments. For a detailed discussion of the final key policy changes for FY 2006, please refer to the FY 2006 IRF PPS final rule (70 FR 47880 and 70 FR 57166).

In the FY 2007 IRF PPS final rule (71 FR 48354), we further refined the IRF PPS case-mix classification system (the CMG relative weights) and the case-level adjustments, to ensure that IRF PPS payments would continue to reflect as accurately as possible the costs of care. For a detailed discussion of the FY 2007 policy revisions, please refer to the FY 2007 IRF PPS final rule (71 FR 48354).

In the FY 2008 IRF PPS final rule (72 FR 44284), we updated the Federal prospective payment rates and the outlier threshold, revised the IRF wage index policy, and clarified how we determine high-cost outlier payments for transfer cases. For more information on the policy changes implemented for FY 2008, please refer to the FY 2008 IRF PPS final rule (72 FR 44284), in which we published the final FY 2008 IRF Federal prospective payment rates.

After publication of the FY 2008 IRF PPS final rule (72 FR 44284), section 115 of the Medicare, Medicaid, and SCHIP Extension Act of 2007 (Pub. L. 110-173, enacted on December 29, 2007) (MMSEA), amended section 1886(j)(3)(C) of the Act to apply a zero percent increase factor for FYs 2008 and 2009, effective for IRF discharges occurring on or after April 1, 2008. Section 1886(j)(3)(C) of the Act required the Secretary to develop an increase factor to update the IRF Federal prospective payment rates for each FY. Based on the legislative change to the increase factor, we revised the FY 2008 Federal prospective payment rates for IRF discharges occurring on or after April 1, 2008. Thus, the final FY 2008 IRF Federal prospective payment rates that were published in the FY 2008 IRF PPS final rule (72 FR 44284) were effective for discharges occurring on or after October 1, 2007 and on or before March 31, 2008; and the revised FY 2008 IRF Federal prospective payment rates were effective for discharges occurring on or after April 1, 2008 and on or before September 30, 2008. The revised FY 2008 Federal prospective payment rates are available on the CMS Web site at http://www.cms.gov/​InpatientRehabFacPPS/​07_​DataFiles.asp#TopOfPage.

In the FY 2009 IRF PPS final rule (73 FR 46370), we updated the CMG relative weights, the average length of stay values, and the outlier threshold; clarified IRF wage index policies regarding the treatment of “New England deemed” counties and multi-campus hospitals; and revised the regulation text in response to section 115 of the MMSEA to set the IRF compliance percentage at 60 percent (“the 60 percent rule”) and continue the practice of including comorbidities in the calculation of compliance percentages. We also applied a zero percent market basket increase factor for FY 2009 in accordance with section 115 of the MMSEA. For more information on the policy changes implemented for FY 2009, please refer to the FY 2009 IRF PPS final rule (73 FR 46370), in which we published the final FY 2009 IRF Federal prospective payment rates.

In the FY 2010 IRF PPS final rule (74 FR 39762) and in correcting amendments to the FY 2010 IRF PPS final rule (74 FR 50712) that we published on October 1, 2009, we updated the Federal prospective payment rates, the CMG relative weights, the average length of stay values, the rural, LIP, and teaching status adjustment factors, and the outlier threshold; implemented new IRF coverage requirements for determining whether an IRF claim is reasonable and necessary; and revised the regulation text to require IRFs to submit patient assessments on Medicare Advantage (MA) (Medicare Part C) patients for use in the 60 percent rule calculations. Any reference to the FY 2010 IRF PPS final rule in this proposed rule also includes the provisions effective in the correcting amendments. For more information on the policy changes implemented for FY 2010, please refer to the FY 2010 IRF PPS final rule (74 FR 39762 and 74 FR 50712), in which we published the final FY 2010 IRF Federal prospective payment rates.

After publication of the FY 2010 IRF PPS final rule (74 FR 39762), section 3401(d) of the Patient Protection and Affordable Care Act (Pub. L. 111-148, enacted on March 23, 2010) as amended by section 10319 of the same Act and by section 1105 of the Health Care and Education Reconciliation Act of 2010 (Pub. L. 111-152, enacted on March 30, 2010) (collectively, hereafter referred to as “The Affordable Care Act”), amended section 1886(j)(3)(C) of the Act and added section 1886(j)(3)(D) of the Act. Section 1886(j)(3)(C) of the Act requires the Secretary to estimate a multi-factor productivity adjustment to the market basket increase factor, and to apply other adjustments as defined by the Act. The productivity adjustment applies to FYs from 2012 forward. The other adjustments apply to FYs 2010-2019.

Sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(i) of the Act defined the adjustments that were to be applied to the market basket increase factors in FYs 2010 and 2011. Under these provisions, the Secretary was required to reduce the market basket increase factor in FY 2010 by a 0.25 percentage point adjustment. Notwithstanding this provision, in accordance with section 3401(p) of the Affordable Care Act, the adjusted FY 2010 rate was only to be applied to discharges occurring on or after April 1, 2010. Based on the self-implementing legislative changes to section 1886(j)(3) of the Act, we adjusted the FY 2010 Federal prospective payment rates as required, and applied these rates to IRF discharges occurring on or after April 1, 2010 and on or before September 30, 2010. Thus, the final FY 2010 IRF Federal prospective payment rates that were published in the FY 2010 IRF PPS final rule (74 FR 39762) were used for discharges occurring on or after October 1, 2009 and on or before March 31, 2010; and the adjusted FY 2010 IRF Federal prospective payment rates applied to discharges occurring on or after April 1, 2010 and on or before September 30, 2010. The adjusted FY 2010 Federal prospective payment rates are available on the CMS Web site at http://www.cms.gov/​InpatientRehabFacPPS/​07_​DataFiles.asp#TopOfPage.

In addition, sections 1886(j)(3)(C) and (D) of the Act also affected the FY 2010 IRF outlier threshold amount because they required an adjustment to the FY 2010 RPL market basket increase factor, which changed the standard payment conversion factor for FY 2010. Specifically, the original FY 2010 IRF outlier threshold amount was determined based on the original estimated FY 2010 RPL market basket increase factor of 2.5 percent and the standard payment conversion factor of $13,661. However, as adjusted, the IRF prospective payments are based on the adjusted RPL market basket increase factor of 2.25 percent and the revised standard payment conversion factor of $13,627. To maintain estimated outlier payments for FY 2010 equal to the established standard of 3 percent of total estimated IRF PPS payments for FY 2010, we revised the IRF outlier threshold amount for FY 2010 for discharges occurring on or after April 1, 2010 and on or before September 30, 2010. The revised IRF outlier threshold amount for FY 2010 was $10,721.

Sections 1886(j)(3)(ii)(II) and 1886(j)(3)(D)(i) also required the Secretary to reduce the market basket increase factor in FY 2011 by a 0.25 percentage point adjustment. The FY 2011 IRF PPS notice (75 FR 42836) and the correcting amendments to the FY 2011 IRF PPS notice (75 FR 70013, November 16, 2010) described the required adjustments to the FY 2011 and FY 2010 IRF PPS Federal prospective payment rates and outlier threshold amount for IRF discharges occurring on or after April 1, 2010 and on or before September 30, 2011. It also updated the FY 2011 Federal prospective payment rates, the CMG relative weights, and the average length of stay values. Any reference to the FY 2011 IRF PPS notice in this proposed rule also includes the provisions effective in the correcting amendments. For more information on the FY 2010 and FY 2011 adjustments or the updates for FY 2011, please refer to the FY 2011 IRF PPS notice (75 FR 42836 and 75 FR 70013).

B. Provisions of the Affordable Care Act Affecting the IRF PPS in FY 2012 and Beyond

The Affordable Care Act included several provisions that affect IRF PPS in FYs 2012 and beyond. In addition to what was discussed above, section 3401(d) of the Affordable Care Act also added section 1886(j)(3)(C)(ii)(I) (providing for a “productivity” adjustment” for fiscal year 2012 and each subsequent fiscal year). The proposed productivity adjustment for FY 2012 is discussed in section V.A.6. of this proposed rule, and the 0.1 percentage point adjustment is discussed in section V.A of this proposed rule. Section 1886(j)(3)(C)(ii)(II) of the Act notes that the application of these adjustments to the market basket update may result in an update that is less than 0.0 for a fiscal year and in payment rates for a fiscal year being less than such payment rates for the preceding fiscal year.

Section 3004(b) of the Affordable Care Act also addressed the IRF PPS program. It reassigned the previously-designated section 1886(j)(7) of the Act to section 1886(j)(8) and inserted a new section 1886(j)(7), which contains new requirements for the Secretary to establish a quality reporting program for IRFs. Under that program, data must be submitted in a form and manner, and at a time specified by the Secretary. Beginning in FY 2014, section 1886(j)(7)(A)(i) will require application of a 2 percentage point reduction of the applicable market basket increase factor for IRFs that fail to comply with the quality data submission requirements. Application of the 2 percentage point reduction may result in an update that is less than 0.0 for a fiscal year and in payment rates for a fiscal year being less than such payment rates for the preceding fiscal year. Reporting-based reductions to the market basket increase factor will not be cumulative; they will only apply for the FY involved.

Under section 1886(j)(7)(D)(i) and (ii) of the Act, the Secretary is generally required to select quality measures for the IRF quality reporting program from those that have been endorsed by the consensus-based entity which holds a performance measurement contract under section 1890(a) of the Act. This contract is currently held by the National Quality Forum (NQF). So long as due consideration is given to measures that have been endorsed or adopted by a consensus-based organization, section 1886(j)(7)(D)(ii) of the Act authorizes the Secretary to select non-endorsed measures for specified areas or medical topics when there are no feasible or practical endorsed measure(s). Under section 1886(j)(7)(D)(iii) of the Act, the Secretary is required to publish the measures that will be used in FY 2014 no later than October 1, 2012.

Section 1886(j)(7)(E) of the Act requires the Secretary to establish procedures for making the IRF PPS quality reporting data available to the public. In so doing, the Secretary must ensure that IRFs have the opportunity to review any such data prior to its release to the public. Future rulemaking will address these public reporting obligations.

The proposed quality reporting program for IRFs, in accordance with section 1886(j)(7) of the Act, is discussed in detail in section IX. of this proposed rule.

C. Operational Overview of the Current IRF PPS

As described in the FY 2002 IRF PPS final rule, upon the admission and discharge of a Medicare Part A fee-for-service patient, the IRF is required to complete the appropriate sections of a patient assessment instrument, designated as the Inpatient Rehabilitation Facility-Patient Assessment Instrument (IRF-PAI). In addition, beginning with IRF discharges occurring on or after October 1, 2009, the IRF is also required to complete the appropriate sections of the IRF-PAI upon the admission and discharge of each Medicare Part C (Medicare Advantage) patient, as described in the FY 2010 IRF PPS final rule. All required data must be electronically encoded into the IRF-PAI software product. Generally, the software product includes patient classification programming called the GROUPER software. The GROUPER software uses specific IRF-PAI data elements to classify (or group) patients into distinct CMGs and account for the existence of any relevant comorbidities.

The GROUPER software produces a 5-digit CMG number. The first digit is an alpha-character that indicates the comorbidity tier. The last 4 digits represent the distinct CMG number. Free downloads of the Inpatient Rehabilitation Validation and Entry (IRVEN) software product, including the GROUPER software, are available on the CMS Web site at http://www.cms.gov/​InpatientRehabFacPPS/​06_​Software.asp.

Once a patient is discharged, the IRF submits a Medicare claim as a Health Insurance Portability and Accountability Act of 1996 (Pub. L. 104-191, enacted on August 21, 1996) (HIPAA), compliant electronic claim or, if the Administrative Simplification Compliance Act of 2002 (Pub. L. 107-105, enacted on December 27, 2002) (ASCA) permits, a paper claim (a UB-04 or a CMS-1450 as appropriate) using the five-digit CMG number and sends it to the appropriate Medicare fiscal intermediary (FI) or Medicare Administrative Contractor (MAC). Claims submitted to Medicare must comply with both ASCA and HIPAA.

Section 3 of the ASCA amends section 1862(a) of the Act by adding paragraph (22) which requires the Medicare program, subject to section 1862(h) of the Act, to deny payment under Part A or Part B for any expenses for items or services “for which a claim is submitted other than in an electronic form specified by the Secretary.” Section 1862(h) of the Act, in turn, provides that the Secretary shall waive such denial in situations in which there is no method available for the submission of claims in an electronic form or the entity submitting the claim is a small provider. In addition, the Secretary also has the authority to waive such denial “in such unusual cases as the Secretary finds appropriate.” For more information, see the “Medicare Program; Electronic Submission of Medicare Claims” final rule (70 FR 71008, November 25, 2005). CMS instructions for the limited number of Medicare claims submitted on paper are available at http://www.cms.gov/​manuals/​downloads/​clm104c25.pdf.

Section 3 of the ASCA operates in the context of the administrative simplification provisions of HIPAA, which include, among others, the requirements for transaction standards and code sets codified in 45 CFR, parts 160 and 162, subparts A and I through R (generally known as the Transactions Rule). The Transactions Rule requires covered entities, including covered healthcare providers, to conduct covered electronic transactions according to the applicable transaction standards. (See the CMS program claim memoranda at http://www.cms.gov/​ElectronicBillingEDITrans/​ and listed in the addenda to the Medicare Intermediary Manual, Part 3, section 3600).

The Medicare FI or MAC processes the claim through its software system. This software system includes pricing programming called the “PRICER” software. The PRICER software uses the CMG number, along with other specific claim data elements and provider-specific data, to adjust the IRF's prospective payment for interrupted stays, transfers, short stays, and deaths, and then applies the applicable adjustments to account for the IRF's wage index, percentage of low-income patients, rural location, and outlier payments. For discharges occurring on or after October 1, 2005, the IRF PPS payment also reflects the new teaching status adjustment that became effective as of FY 2006, as discussed in the FY 2006 IRF PPS final rule (70 FR 47880).

II. Summary of Provisions of the Proposed Rule

In this proposed rule, we are proposing to update the IRF Federal prospective payment rates, to rebase and revise the RPL market basket, to implement refinements to the methodologies for calculating the LIP adjustment, and to establish a new quality reporting program for IRFs in accordance with section 1886(j)(7) of the Act. We are also proposing to revise existing regulations text for the purpose of updating and providing greater clarity. These proposals are as follows:

A. Proposed Updates to the IRF Federal Prospective Payment Rates for Federal Fiscal Year (FY) 2012

The proposed updates to the IRF Federal prospective payment rates for FY 2012 are as follows:

• Update the FY 2012 IRF PPS relative weights and average length of stay values using the most current and complete Medicare claims and cost report data in a budget neutral manner, as discussed in section III. of this proposed rule.
• Update the FY 2012 IRF facility-level adjustments (rural, LIP, and teaching status adjustments) in a budget neutral manner using the most current and complete Medicare claims and cost report data and by removing the weighting methodology previously used to analyze such data, and propose a temporary cap adjustment policy for the teaching status adjustment to reflect interns and residents displaced due to closure of IRFs or IRF residency training programs, as discussed in section IV. of this proposed rule.
• Update the FY 2012 IRF PPS payment rates by the proposed market basket increase factor, based upon the most current data available, with a 0.1 percentage point reduction as required by sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of the Act and a productivity adjustment required by section 1886(j)(3)(C)(ii)(I) of the Act, as described in section V. of this proposed rule.
• Update the wage index and the labor-related share of the FY 2012 IRF PPS payment rates in a budget neutral manner, as discussed in section V. of this proposed rule.
• Calculate the IRF Standard Payment Conversion Factor for FY 2012, as discussed in section V. of this proposed rule.
• Update the outlier threshold amount for FY 2012, as discussed in section VI. of this proposed rule.
• Update the cost-to-charge ratio (CCR) ceiling and urban/rural average CCRs for FY 2012, as discussed in section VI. of this proposed rule.
• Discuss the impact of the IPPS data matching process changes on the IRF PPS calculation of the Supplemental Security Income (SSI) ratios used to compute the IRF LIP adjustment factor, as discussed in section VII. of this proposed rule.
• Implement the IRF quality reporting program provisions of section 1886(j)(7) of the Act, as discussed in section IX. of this proposed rule.

B. Proposed Revisions to Existing Regulation Text

In this proposed rule, we are proposing to revise the existing requirements at § 412.25(b), § 412.25(b)(1), § 412.25(b)(2), § 412.25(b)(3), and § 412.25(e)(2)(ii)(A) that apply to all units that are excluded from the inpatient prospective payment system (IPPS), as described in section VIII. of this proposed rule. These proposed revisions would affect IRFs and inpatient psychiatric facilities (IPFs).

We are also proposing to relocate and revise the existing requirements at § 412.23(b), § 412.29, and § 412.30 that describe the requirements for facilities to qualify to receive payment under the IRF PPS, as described in section VIII. of this proposed rule.

Finally, we are proposing to re-designate the existing paragraph § 412.624(c)(4) as § 412.624(c)(5) and add a new paragraph § 412.624(c)(4) to implement the IRF quality reporting program.

III. Proposed Update to the Case-Mix Group (CMG) Relative Weights and Average Length of Stay Values for FY 2012

As specified in § 412.620(b)(1), we calculate a relative weight for each CMG that is proportional to the resources needed by an average inpatient rehabilitation case in that CMG. For example, cases in a CMG with a relative weight of 2, on average, will cost twice as much as cases in a CMG with a relative weight of 1. Relative weights account for the variance in cost per discharge due to the variance in resource utilization among the payment groups, and their use helps to ensure that IRF PPS payments support beneficiary access to care, as well as provider efficiency.

In this proposed rule, we propose to update the CMG relative weights and average length of stay values for FY 2012. As required by statute, we always use the most recent available data to update the CMG relative weights and average lengths of stay. This ensures that the CMG relative weights and average length of stay values reflect as accurately as possible the current costs of care in IRFs. For FY 2012, we are proposing to use the FY 2010 IRF claims and FY 2009 IRF cost report data. These data are the most current and complete data available at this time. Currently, only a small portion of the FY 2010 IRF cost report data are available for analysis, but the majority of the FY 2010 IRF claims data are available for analysis.

In this proposed rule, we propose to use the same methodology that we used to update the CMG relative weights and average length of stay values in the FY 2009 IRF PPS final rule (73 FR 46370), which we also used to update the CMG relative weights and average length of stay values in the FY 2010 IRF PPS final rule (74 FR 39762) and the FY 2011 notice (75 FR 42836).

In calculating the CMG relative weights, we use a hospital-specific relative value method to estimate operating (routine and ancillary services) and capital costs of IRFs. The process used to calculate the CMG relative weights for this proposed rule is as follows:

Step 1. We estimate the effects that comorbidities have on costs.

Step 2. We adjust the cost of each Medicare discharge (case) to reflect the effects found in the first step.

Step 3. We use the adjusted costs from the second step to calculate CMG relative weights, using the hospital-specific relative value method.

Step 4. We normalize the FY 2012 CMG relative weights to the same average CMG relative weight from the CMG relative weights implemented in the FY 2011 IRF PPS notice (75 FR 42836).

Consistent with the methodology that we have used to update the IRF classification system in each instance in the past, we are proposing to update the CMG relative weights for FY 2012 in such a way that total estimated aggregate payments to IRFs for FY 2012 are the same with or without the changes (that is, in a budget neutral manner) by applying a budget neutrality factor to the standard payment amount. To calculate the appropriate proposed budget neutrality factor for use in updating the FY 2012 CMG relative weights, we propose to use the following steps:

Step 1. Calculate the estimated total amount of IRF PPS payments for FY 2012 (with no proposed changes to the CMG relative weights).

Step 2. Calculate the estimated total amount of IRF PPS payments for FY 2012 by applying the proposed changes to the CMG relative weights (as discussed above).

Step 3. Divide the amount calculated in step 1 by the amount calculated in step 2 to determine the proposed budget neutrality factor (0.9989) that would maintain the same total estimated aggregate payments in FY 2012 with and without the proposed changes to the CMG relative weights.

Step 4. Apply the proposed budget neutrality factor (0.9989) to the FY 2011 IRF PPS standard payment amount after the application of the budget-neutral wage adjustment factor.

In section V.C. of this proposed rule, we discuss the proposed use of the existing methodology to calculate the standard payment conversion factor for FY 2012.

Table 1, “Proposed Relative Weights and Average Length of Stay Values for Case-Mix Groups,” presents the CMGs, the comorbidity tiers, the proposed corresponding relative weights, and the proposed average length of stay values for each CMG and tier for FY 2012. The average length of stay for each CMG is used to determine when an IRF discharge meets the definition of a short-stay transfer, which results in a per diem case level adjustment. The proposed relative weights and average length of stay values shown in Table 1 are subject to change for the final rule if more recent data become available for use in these analyses.

Generally, updates to the CMG relative weights result in some increases and some decreases to the CMG relative weight values. Table 2 shows how the application of the proposed revisions for FY 2012 would affect particular CMG relative weight values, which affect the overall distribution of payments within CMGs and tiers. Note that, because we propose to implement the CMG relative weight revisions in a budget neutral manner (as described above), total estimated aggregate payments to IRFs for FY 2012 would not be affected as a result of the CMG relative weight revisions. However, the proposed revisions would affect the distribution of payments within CMGs and tiers.

As Table 2 shows, 97 percent of all IRF cases are in CMGs and tiers that would experience less than a 5 percent change (either increase or decrease) in the CMG relative weight value as a result of the proposed revisions for FY 2012. The largest increase in the proposed CMG relative weight values that affects a particularly large number of IRF discharges is a 1.7 percent increase in the CMG relative weight value for CMG A0704—Fracture of Lower Extremity with a motor score of less than 28.15—in the “no comorbidity” tier. In the FY 2010 data, 24,162 IRF discharges were classified into this CMG and tier. The largest decrease in a CMG relative weight value that affects a particularly large number of IRF discharges is a 0.7 percent decrease in the CMG relative weight for CMG A0110—Stroke, with a motor score of less than 22.35 and a patient age of less than 84.5 years in the “no comorbidity” tier. In the FY 2010 IRF claims data, this change affects 16,975 cases.

Given the changes in IRFs' case mix over time, we believe that it is important to update the CMG relative weights and average length of stay (LOS) values periodically to continue to reflect the trends in IRF patient populations. As we have more recent data that better reflect IRFs' case mix at this time, we propose the updates described in this section.

IV. Proposed Updates to the Facility-Level Adjustment Factors for FY 2012

A. Proposed Updates to the IRF Facility-Level Adjustment Factors

Section 1886(j)(3)(A)(v) of the Act confers broad authority upon the Secretary to adjust the per unit payment rate “by such * * * factors as the Secretary determines are necessary to properly reflect variations in necessary costs of treatment among rehabilitation facilities.” For example, we adjust the Federal prospective payment amount associated with a CMG to account for facility-level characteristics such as an IRF's LIP, teaching status, and location in a rural area, if applicable, as described in § 412.624(e).

In the FY 2010 IRF PPS final rule (74 FR 39762), we updated the adjustment factors for calculating the rural, LIP, and teaching status adjustments based on the most recent three consecutive years worth of IRF claims data (at that time, FY 2006, FY 2007, and FY 2008) and the most recent available corresponding IRF cost report data. As discussed in the FY 2010 IRF PPS proposed rule (74 FR 21060 through 21061), we observed relatively large year-to-year fluctuations in the underlying data used to compute the adjustment factors, especially the teaching status adjustment factor. Therefore, we implemented a three-year moving average approach to updating the facility-level adjustment factors in the FY 2010 IRF PPS final rule (74 FR 39762) to provide greater stability and predictability of Medicare payments for IRFs.

Though the 3-year moving average approach that we implemented in FY 2010 improves the year-to-year stability and predictability of the facility-level adjustment factors, we have continued to estimate unusually large year-to-year fluctuations in the teaching status adjustment factor. To determine the underlying reasons for these large year-to-year fluctuations in the teaching status adjustment factor, we analyzed the data and reviewed the methodology that we were using to estimate all three of the facility-level adjustment factors (that is, the rural, the LIP, and the teaching status adjustment factors). We found that the unusually large year-to-year fluctuations in the teaching status adjustment factors were the result of a weighting methodology that we have been applying to the regression analysis used to estimate the facility-level adjustment factors since the implementation of the IRF PPS. This weighted regression methodology assigns greater weight to some facilities than to others and, in effect, exaggerates the differences among different types of IRF facilities. While this weighted regression methodology was appropriate when the IRF PPS was first being developed because we had limited data on which to base the initial facility-level adjustment factors, we believe that a more appropriate and conservative approach for the current IRF PPS is to assign equal weight to all facilities in the regression analysis that is used to estimate all of the IRF facility-level adjustment factors (that is, the rural, LIP, and teaching status adjustment factors). Thus, we propose to remove the weighting methodology from our analysis of the facility-level adjustment factors and update the IRF facility-level adjustment factors for FY 2012 using an unweighted regression analysis. The primary effect of the proposed change in methodology is to stabilize all three of the facility-level adjustment factors (that is, the rural, the LIP, and the teaching status adjustment factor) over time. However, the proposed change in the methodology also has a relatively large effect on our estimate of the LIP adjustment factor that we discuss in this section.

To update the facility-level adjustment factors for FY 2012, we propose using updated data (FY 2008, FY 2009, and 2010 IRF claims data and the corresponding year's cost report data or, if unavailable, the most recent available cost report data). To analyze the updated data, we propose to use a revised methodology from the methodology that we used to update the facility-level adjustment factors in the FY 2010 IRF PPS final rule (74 FR 39762). The revised methodology would remove a weighting factor from the regression analysis and, instead, assign equal weight to all facilities in the regression analysis. Based on analysis of the updated data using the proposed unweighted regression analysis and the 3-year moving average approach, we estimate that IRF PPS payments to IRFs in rural areas would be increased by 18.7 percent for FY 2012. In addition, to account for the percentage of low-income patients that an IRF treats, we estimate that IRF PPS payments for FY 2012 would be adjusted using an updated LIP adjustment formula of (1 + disproportionate share hospital (DSH) patient percentage) raised to the power of (0.1897), where the—

Note that the proposed LIP adjustment factor of 0.1897 is substantially lower than the current LIP adjustment factor of 0.4613 due to the use of updated data and the proposed use of the unweighted regression methodology, which would give equal weight to all facilities in the regression. Finally, we estimate that IRF PPS payments to eligible IRFs that qualify for the teaching status adjustment will be adjusted by the following updated formula for FY 2012: (1 + full-time equivalent (FTE) interns and residents/average daily census) raised to the power of (0.4888). To calculate the proposed updates to the rural, LIP, and teaching status adjustment factors for FY 2012, we used the following steps:

[Steps 1 and 2 are performed independently for each of 3 years of IRF claims data: FY 2008, FY 2009, and FY 2010]

Step 1. Calculate the average cost per case for each IRF in the IRF claims data.

Step 2. Use logarithmic regression analysis on average cost per case to compute the coefficients for the rural, LIP, and teaching status adjustments. For FY 2012, we are proposing to update the logarithmic regression analysis so that we no longer apply weights to the analysis. The proposed unweighted regression analysis gives equal weight to all facilities in the regression analysis.

Step 3. Calculate a simple mean for each of the coefficients across the 3 years of data using logarithms for the LIP and teaching status adjustment coefficients (because they are continuous variables), but not for the rural adjustment coefficient (because the rural variable is either zero (if not rural) or 1 (if rural)). To compute the proposed LIP and teaching status adjustment factors, we convert these factors back out of the logarithmic form.

The proposed adjustment factors are subject to change for the final rule if more recent data become available for use in these analyses.

B. Budget Neutrality Methodology for the Proposed Updates to the IRF Facility-Level Adjustment Factors

Consistent with the way that we implemented changes to the IRF facility-level adjustment factors (the rural, LIP, and teaching status adjustment factors) in the FY 2006 and FY 2010 IRF PPS final rules (70 FR 47880, 70 FR 57166, and 74 FR 39762), we propose to make changes to the rural, LIP, and teaching status adjustment factors for FY 2012 in such a way that total estimated aggregate payments to IRFs for FY 2012 would be the same with or without the proposed changes (that is, in a budget neutral manner) by applying budget neutrality factors for each of these three changes to the standard payment amount. To calculate the proposed budget neutrality factors used to update the rural, LIP, and teaching status adjustment factors, we propose to use the following steps:

Step 1. Using the most recent available data (currently FY 2010), calculate the estimated total amount of IRF PPS payments that would be made in FY 2012 (without applying the proposed changes to the rural, LIP, or teaching status adjustment factors).

Step 2. Calculate the estimated total amount of IRF PPS payments that would be made in FY 2012 if the proposed update to the rural adjustment factor were applied.

Step 3. Divide the amount calculated in step 1 by the amount calculated in step 2 to determine the proposed budget neutrality factor (0.9998) that would maintain the same total estimated aggregate payments in FY 2012 with and without the proposed change to the rural adjustment factor.

Step 4. Calculate the estimated total amount of IRF PPS payments that would be made in FY 2012 if the proposed update to the LIP adjustment factor were applied.

Step 5. Divide the amount calculated in step 1 by the amount calculated in step 4 to determine the proposed budget neutrality factor (1.0327) that would maintain the same total estimated aggregate payments in FY 2012 with and without the proposed change to the LIP adjustment factor.

Step 6. Calculate the estimated total amount of IRF PPS payments that would be made in FY 2012 if the proposed update to the teaching status adjustment factor were applied.

Step 7. Divide the amount calculated in step 1 by the amount calculated in step 6 to determine the proposed budget neutrality factor (1.0024) that would maintain the same total estimated aggregate payments in FY 2012 with and without the proposed change to the teaching status adjustment factor.

Step 8. Apply the proposed budget neutrality factors for the updates to the rural, LIP, and teaching status adjustment factors to the FY 2011 IRF PPS standard payment amount after the application of the proposed budget neutrality factors for the wage adjustment and the CMG relative weights.

The proposed budget neutrality factors for the proposed changes to the rural, LIP, and teaching status adjustment factors are subject to change for the final rule if more recent data become available for use in these analyses or if the proposed payment policies associated with the proposed budget neutrality factors change.

In section V.C. of this proposed rule, we discuss the proposed methodology for calculating the standard payment conversion factor for FY 2012.

C. Proposed Policy for Temporary Cap Adjustments To Reflect Interns and Residents Displaced Due to Closure of IRFs or IRF Residency Training Programs

1. Background

In the FY 2006 IRF PPS final rule (70 FR 47880 at 47928 through 47932), we implemented regulations at § 412.624(e)(4) to establish a facility-level adjustment for IRFs that are, or are part of, teaching hospitals. The teaching status adjustment accounts for the higher indirect operating costs experienced by hospitals that participate in graduate medical education (GME) programs. The payment adjustments are made based on the number of FTE interns and residents training in the IRF and the IRF's average daily census.

We established the IRF teaching status adjustment in a manner that limited the incentives for IRFs to add FTE interns and residents for the purpose of increasing their teaching status adjustment. We imposed a cap on the number of FTE interns and residents that may be counted for purposes of calculating the teaching status adjustment. The cap limits the number of FTE interns and residents that teaching IRFs may count for the purpose of calculating the IRF PPS teaching status adjustment, not the number of interns and residents teaching institutions can hire or train. We calculated the number of FTE interns and residents that trained in the IRF during a “base year” and used that FTE intern and resident number as the cap. An IRF's FTE intern and resident cap is ultimately determined based on the final settlement of the IRF's most recent cost reporting period ending on or before November 15, 2004. A complete discussion of how the IRF teaching status adjustment was calculated appears in the FY 2006 IRF PPS final rule (70 FR 47880, 47928 through 47932).

2. Proposed Temporary FTE Intern and Resident Cap Adjustment

Sometimes, interns and residents that are training in an IRF find themselves unable to complete their training in the IRF, either because the IRF closes or closes a residency training program (we refer to these interns and residents as “displaced”). Although we have not heard of any instances where IRFs did not accept displaced interns and residents because the additional interns and residents would put the facility over the facility's FTE intern and resident cap, we believe that it is important to maintain consistent policies with other Medicare PPS systems, to the extent feasible. The IPPS indirect medical education (IME) adjustment and the direct GME policies contain provisions that allow for temporary adjustments to the IME/GME caps for IPPS hospitals that train interns and residents that are displaced because a hospital closes or closes a medical residency training program. CMS has recently proposed to include a similar temporary cap adjustment policy for the inpatient psychiatric facility (IPF) PPS teaching status adjustment outlined in the rate year 2012 IPF PPS proposed rule (76 FR 4998 at 5018 through 5020). Consistent with the IPPS and the IPF PPS, in this proposed rule, we propose to permit a temporary increase in the FTE intern and resident cap when an IRF increases the number of FTE interns and residents it trains in order to accept displaced interns and residents because another IRF closes or closes a medical residency training program.

When an IRF temporarily takes on interns and residents that are displaced because another IRF closes or closes a residency training program, we believe that a temporary adjustment to the cap would be appropriate. In these situations, interns and residents may have partially completed a residency training program at the IRF that has closed or closed a training program and may be unable to complete their training at another IRF that is already training interns and residents up to or in excess of its FTE intern and resident cap. We believe that it is appropriate to allow temporary adjustments to the FTE caps for an IRF that provides residency training to medical interns and residents who have partially completed a residency training program at an IRF that closes or at an IRF that discontinues training interns and residents in a residency training program(s). For this reason, we are proposing to adopt the following temporary intern and resident cap adjustment policies, similar to the temporary adjustments to the FTE cap used for acute care hospitals and the proposed temporary adjustments to the FTE caps for IPFs.

We are proposing that the cap adjustment would be temporary because it is intern and resident specific and would only apply to the displaced intern(s) or resident(s) until those intern(s) or resident(s) have completed their training in the program in which they were training at the time of the IRF closure or the closure of the program. We propose that, as under the IPPS policy for displaced interns and residents, the IRF PPS temporary cap adjustment would apply only to interns and residents that were still training at the IRF at the time the IRF closed or at the time the IRF ceased training interns and residents in the residency training program(s). Interns and residents who leave the IRF, for whatever reason, before the closure of the IRF or the closure of the residency training program would not be considered displaced interns and residents for purposes of the IRF temporary cap adjustment policy. We are proposing to adopt the same definition of “closure of a hospital residency training program” as it is currently defined at § 413.79(h)(1)(ii); that is, the hospital ceases to offer training for residents in a particular approved medical residency training program. Similarly, as under the IPPS policy, we are proposing that medical students who are accepted into a program at an IRF but the IRF or residency training program closes before the individual begins training at that IRF are also not considered displaced interns and residents for purposes of the IRF temporary cap adjustments. We note that although we are proposing to adopt a policy under the IRF PPS that is consistent with the policy applicable under the IPPS, the actual caps under the two payment systems are separate and distinct. This means, for example, if a program closes at an IPPS hospital that has an IRF unit, but the interns and residents from that closed program were not rotating into the IRF unit when the program closed, then there would be no temporary FTE cap adjustment under the IRF PPS, since the interns and residents were not displaced from the IRF. However, if an IPPS hospital that has an IRF unit closes a training program and interns and residents from that program were rotating into the IRF unit when the program closed, an IRF hospital or IRF unit may temporarily adjust their FTE intern and resident cap if they train the displaced interns and residents, but only for the portion of the training that has to be completed in the IRF setting and only if all of the requirements specified in section IV.C. of this proposed rule are met.

3. Proposed Temporary Adjustment to the FTE Cap To Reflect Interns and Residents Displaced Due to an IRF Closure

We are proposing to allow an IRF to receive a temporary adjustment to the FTE cap to reflect interns and residents added because of another IRF's closure. The temporary cap adjustment is intended to account for medical interns and residents who have partially completed a medical residency training program at the IRF that has closed and may be unable to complete their training at another IRF because that IRF is already training interns and residents up to or in excess of its cap. We are proposing this change because IRFs may be reluctant to accept additional interns and residents from a closed IRF without a temporary adjustment to their caps. For purposes of this policy, we are proposing to adopt the IPPS definition of “closure of a hospital” in § 413.79(h)(1)(i) to mean the IRF terminates its Medicare provider agreement as specified in § 489.52. Therefore, we are proposing to allow a temporary adjustment to an IRF's FTE cap to reflect interns and residents added because of an IRF's closure. The proposed policy would be effective for cost reporting periods beginning on or after October 1, 2011, when an IRF trains an intern or resident from an IRF that closed on or after October 1, 2011. We would allow an adjustment to an IRF's FTE cap if the IRF meets the following criteria:

(a) The IRF is training displaced interns and residents from an IRF that closed on or after October 1, 2011.

(b) The IRF that is training the displaced interns and residents from the closed IRF submits a request for a temporary adjustment to its FTE cap to its Medicare contractor no later than 60 days after the hospital first begins training the displaced interns and residents, and documents that the IRF is eligible for this temporary adjustment to its FTE cap by identifying the interns and residents who have come from the closed IRF and have caused the IRF to exceed its cap, (or the IRF may already be over its cap), and specifies the length of time that the adjustment is needed.

After the displaced interns and residents leave the IRF's training program or complete their residency program, the IRF's cap would revert to its original level. This means that the temporary adjustment to the FTE cap would be available to the IRF only for the period of time necessary for the displaced interns and residents to complete their training. Further, as under the IPPS policy, we are also proposing that the total amount of temporary cap adjustment that can be allotted to all receiving IRFs cannot exceed the cap amount of the IRF that closed.

We also note that section 5506 of the Affordable Care Act, “Preservation of Resident Cap Positions from Closed Hospitals,” does not apply to IRFs that closed. Section 5506 of the Affordable Care Act only amends sections 1886(d) and (h) of the Act for direct GME and IPPS IME payments. Therefore, the IME FTE cap redistributions under section 5506 of the Affordable Care Act only apply to “subsection (d)” IPPS hospitals. Section 5506 of the Affordable Care Act has no applicability to the teaching status adjustments under the IRF PPS (or the IPF PPS, for that matter).

4. Proposed Temporary Adjustment to FTE Cap To Reflect Interns and Residents Displaced Due to a Residency Program Closure

We are proposing that if an IRF ceases training interns and residents in a residency training program(s) and agrees to temporarily reduce its FTE cap, another IRF may receive a temporary adjustment to its FTE cap to reflect the addition of the displaced interns and residents. For purposes of this policy on closed residency programs, we are proposing to adopt the IPPS definition of “closure of a hospital residency training program” as specified in § 413.79(h)(1)(ii) which means that the hospital ceases to offer training for interns and residents in a particular approved medical residency training program. The methodology for adjusting the caps for the “receiving IRF” and the “IRF that closed its program” is described below.

a. Receiving IRF

We are proposing that an IRF may receive a temporary adjustment to its FTE cap to reflect interns and residents added because of the closure of another IRF's residency training program for cost reporting periods beginning on or after October 1, 2011 if—

• The IRF is training additional interns and residents from the residency training program of an IRF that closed its program on or after October 1, 2011; and
• No later than 60 days after the IRF begins to train the interns and residents, the IRF submits to its Medicare contractor a request for a temporary adjustment to its FTE cap, documents that the IRF is eligible for this temporary adjustment by identifying the interns and residents who have come from another IRF's closed program and have caused the IRF to exceed its cap (or the IRF may already be in excess of its cap), specifies the length of time the adjustment is needed, and, as explained in more detail below, submits to its Medicare contractor a copy of the FTE cap reduction statement by the IRF closing the residency training program.

In general, the proposed temporary adjustment criteria established for closed medical residency training programs at IRFs is similar to the criteria established for closed IRFs. We are proposing that more than 1 IRF may be eligible to apply for the temporary adjustment because interns and residents from one closed program may rotate to different IRFs, or they may complete their training at more than one IRF. Also, only to the extent to which an IRF would exceed its FTE cap by training displaced interns and residents would it be eligible for the temporary adjustment. Thus, for example, if the IRF has room below its cap to take 1 additional displaced FTE intern or resident but taking a second displaced FTE intern or resident would cause the IRF to exceed its FTE intern and resident cap, then the IRF would potentially qualify for a temporary cap adjustment for 1 FTE intern or resident, not 2.

b. IRF That Closed Its Program(s)

We are proposing that an IRF that agrees to train interns and residents who have been displaced by the closure of another IRF's residency training program may receive a temporary FTE cap adjustment only if the IRF that closed its program meets the following criteria—

• Temporarily reduces its FTE cap by the number of FTE interns and residents in each program year training and in the program at the time of the program's closure. The yearly reduction would be determined by deducting the number of those interns and residents who would have been training in the program up to the IRF's cap during the year of the closure, had the program not closed; and
• No later than 60 days after the interns and residents who were in the closed program begin training at another IRF, submits to its Medicare contractor a statement signed and dated by its representative that specifies that it agrees to the temporary reduction in its FTE cap to allow the IRF training the displaced interns and residents to obtain a temporary adjustment to its cap; identifies the interns and residents who were training at the time of the program's closure; identifies the IRFs to which the interns and residents are transferring once the program closes; and specifies the reduction for the applicable program years.

In addition, we propose under this closed program policy that in order for the receiving IRF(s) to qualify for a temporary adjustment to their FTE cap, the IRFs that are closing their programs would need to reduce their FTE cap for the expected duration of time the displaced interns and residents would need to finish their training. We are proposing this because the IRF that closes the program still retains the FTE slots in its cap, even if the IRF chooses not to fill the slots with interns and residents. We believe that it is inappropriate to allow an increase to the receiving IRF's cap without an attendant decrease to the cap of the IRF with the closed program, because the IRF that ceased training the interns and residents could fill these slots with interns and residents from other programs even if the increase and related decrease is only temporary.

We are proposing that the cap reduction for the IRF with the closed program would be based on the number of FTE interns and residents in each program year that were in the program at the IRF at the time of the program's closure, and who begin training at another IRF.

In summary, we are proposing new IRF policies related to temporary adjustments to FTE caps to reflect interns and residents added due to closure of an IRF or closure of a residency training program. Finally, we are proposing that the IRFs that meet the proposed criteria would be eligible to receive temporary adjustments to their FTE caps for cost reporting periods beginning on or after October 1, 2011.

V. Proposed FY 2012 IRF PPS Federal Prospective Payment Rates

A. Proposed Market Basket Increase Factor, Productivity Adjustment, and Labor-Related Share for FY 2012

Section 1886(j)(3)(C) of the Act requires the Secretary to establish an increase factor that reflects changes over time in the prices of an appropriate mix of goods and services included in the covered IRF services, which is referred to as a market basket index. According to section 1886(j)(3)(A)(i) of the Act, the increase factor shall be used to update the IRF Federal prospective payment rates for each FY. Sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of the Act require the application of a 0.1 percentage point reduction to the market basket increase factor for FYs 2012 and 2013. In addition, section 1886(j)(3)(C)(ii)(I) of the Act requires the application of a productivity adjustment, as described below. Thus, in this proposed rule, we are proposing to update the IRF PPS payments for FY 2012 by a market basket increase factor based upon the most current data available, with a productivity adjustment as required by section 1886(j)(3)(C)(ii)(I) of the Act as described below and a 0.1 percentage point reduction as required by sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of the Act. Further, we are proposing to rebase the RPL market basket from a 2002-based market basket to a 2008-based market basket. We typically rebase the RPL market basket every 5 to 7 years to ensure that it continues to reflect the most accurate account of the cost of relevant goods and services.

Thus, in this proposed rule, we propose to start with a rebased RPL market basket (updated from a 2002 base year to a 2008 base year) and then apply a productivity adjustment as required by section 1886(j)(3)(C)(ii)(I) of the Act and a 0.1 percentage point reduction as required by sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of the Act. In section V.A.1 of this proposed rule, we describe the proposed methodology for rebasing the RPL market basket from a 2002 base year to a 2008 base year, and then in section V.A.2 of this proposed rule, we describe the proposed methodology for calculating the productivity adjustment as required by section 1886(j)(3)(C)(ii)(I) of the Act. Finally, in section V.A.3 of this proposed rule, we describe the proposed calculation of the market basket increase factor to be used to adjust IRF PPS payments for FY 2012.

1. Proposed Rebasing of the RPL Market Basket for FY 2012

a. Background

The input price index (that is, the market basket) that was used to develop the IRF PPS was the Excluded Hospital with Capital market basket. This market basket was based on 1997 Medicare cost report data and included data for Medicare participating IRFs, IPFs, LTCHs, cancer hospitals, and children's hospitals. Although “market basket” technically describes the mix of goods and services used in providing hospital care, this term is also commonly used to denote the input price index (that is, cost category weights and price proxies combined) derived from that market basket. Accordingly, the term “market basket”, as used in this document, refers to an input price index.

Beginning with the FY 2006 IRF PPS final rule (70 FR 47908), IRF PPS payments were updated using a FY 2002-based RPL market basket reflecting the operating and capital cost structures for freestanding IRFs, freestanding IPFs, and LTCHs.

We excluded cancer and children's hospitals from the RPL market basket because their payments are based entirely on reasonable costs subject to rate-of-increase limits established under the authority of section 1886(b) of the Act, which is implemented at § 413.40. Cancer and children's hospitals are not reimbursed through a PPS. Also, the FY 2002 cost structures for cancer and children's hospitals are noticeably different than the cost structures of freestanding IRFs, freestanding IPFs, and LTCHs. See the FY 2006 IRF PPS final rule (70 FR 47908) for a complete discussion of the FY 2002-based RPL market basket.

In the FY 2010 IRF proposed rule (74 FR 21062), we expressed our interest in exploring the possibility of creating a stand-alone IRF market basket that reflects the cost structures of only IRF providers. We noted that, of the available options, one is to combine the Medicare cost report data from freestanding IRF providers (presently incorporated into the FY 2002-based RPL market basket) with data from hospital-based IRF providers. We indicated that an examination of the Medicare cost report data comparing freestanding and hospital-based IRFs revealed considerable differences between the two with respect to cost levels and cost structures. At that time, we were unable to fully understand the differences between these two types of IRF providers. As a result, we believed that further research was required and we solicited public comment for additional information that might help us to better understand the reasons for the variations in costs and cost structures, as indicated by the cost report data, between freestanding and hospital-based IRFs (74 FR 21062).

We summarized the public comments we received and our responses in the FY 2010 IRF PPS final rule (74 FR 39762, 39776 through 39777). Despite receiving comments from the public on this issue, we remain unable to sufficiently understand the observed differences in costs and cost structures between hospital-based and freestanding IRFs, and therefore we do not believe it is appropriate at this time to incorporate data from hospital-based IRFs with those of freestanding IRFs to create a stand-alone IRF market basket.

Although we do not believe it would be appropriate to propose a stand-alone IRF market basket, we are currently exploring the viability of creating two separate market baskets from the current RPL, one of which would include freestanding IRFs and freestanding IPFs and would be used to update payments under both the IPF and IRF payment systems. The other would be a stand-alone LTCH market basket. Depending on the outcome of our research, we anticipate the possibility of proposing a rehabilitation and psychiatric (RP) market basket in the next update cycle. We welcome public comment on the possibility of using this type of market basket to update IRF payments in the future.

For this update cycle, we are proposing to rebase and revise the FY 2002-based RPL market basket by creating a proposed FY 2008-based RPL market basket. In the following discussion, we provide an overview of the market basket and describe the methodologies we propose to use for purposes of determining the operating and capital portions of the proposed FY 2008-based RPL market basket.

b. Overview of the Proposed FY 2008-Based RPL Market Basket

The proposed FY 2008-based RPL market basket is a fixed-weight, Laspeyres-type price index. A Laspeyres price index measures the change in price, over time, of the same mix of goods and services purchased in the base period. Any changes in the quantity or mix of goods and services (that is, intensity) purchased over time relative to a base period are not measured.

The index itself is constructed in three steps. First, a base period is selected (in this proposed rule, the base period is FY 2008) and total base period expenditures are estimated for a set of mutually exclusive and exhaustive spending categories with the proportion of total costs that each category represents being calculated. These proportions are called cost or expenditure weights. Second, each expenditure category is matched to an appropriate price or wage variable, referred to as a price proxy. In nearly every instance, these price proxies are derived from publicly available statistical series that are published on a consistent schedule (preferably at least on a quarterly basis). Finally, the expenditure weight for each cost category is multiplied by the level of its respective price proxy. The sum of these products (that is, the expenditure weights multiplied by their price levels) for all cost categories yields the composite index level of the market basket in a given period. Repeating this step for other periods produces a series of market basket levels over time. Dividing an index level for a given period by an index level for an earlier period produces a rate of growth in the input price index over that timeframe.

As noted above, the market basket is described as a fixed-weight index because it represents the change in price over time of a constant mix (quantity and intensity) of goods and services needed to furnish hospital services. The effects on total expenditures resulting from changes in the mix of goods and services purchased subsequent to the base period are not measured. For example, a hospital hiring more nurses to accommodate the needs of patients would increase the volume of goods and services purchased by the hospital, but would not be factored into the price change measured by a fixed-weight hospital market basket. Only when the index is rebased would changes in the quantity and intensity be captured, with those changes being reflected in the cost weights. Therefore, we rebase the market basket periodically so the cost weights reflect recent changes in the mix of goods and services that hospitals purchase (hospital inputs) to furnish inpatient care between base periods.

c. Proposed Rebasing and Revising of the RPL Market Basket

We are inviting public comments on our proposed methodological changes to the RPL market basket. The terms “rebasing” and “revising,” while often used interchangeably, actually denote different activities. “Rebasing” means moving the base year for the structure of costs of an input price index (for example, in this proposed rule, we are proposing to shift the base year cost structure for the RPL market basket from FY 2002 to FY 2008). “Revising” means changing data sources, price proxies, or methods, used to derive the input price index. For FY 2012, we are proposing to rebase and revise the market basket used to update the IRF PPS.

(1) Development of Cost Categories and Weights

(a) Medicare Cost Reports

The proposed FY 2008-based RPL market basket consists of several major cost categories derived from the FY 2008 Medicare cost reports for freestanding IRFs, freestanding IPFs, and LTCHs including wages and salaries, pharmaceuticals, professional liability insurance (PLI), capital, and a residual. This residual reflects all remaining costs that are not captured in the four cost categories listed above. The FY 2008 cost reports include providers whose cost report begin date is on or between October 1, 2007, and September 30, 2008. We choose to use FY 2008 as the base year because we believe that the Medicare cost reports for this year represent the most recent, complete set of Medicare cost report data available for IRFs, IPFs, and LTCHs. However, there is an issue with obtaining data specifically for benefits and contract labor from this set of FY 2008 Medicare cost reports since IRFs, IPFs, and LTCHs were not required to complete the Medicare cost report worksheet from which these data were collected (Worksheet S-3, part II). As a result, only a small number of providers (less than 30 percent) reported data for these categories, and we do not expect these data to improve over time. Furthermore, since IRFs, IPFs, and LTCHs were not required to submit data for Worksheet S-3, part II in previous cost reporting years, we have always had this issue of incomplete Medicare cost report data for benefits and contract labor (including when we finalized the FY 2002-based RPL market basket). Due to the incomplete benefits and contract labor data for IRFs, IPFs, and LTCHs, we propose to develop these cost weights using FY 2008 Medicare cost report data for IPPS hospitals (similar to the method that was used for the FY 2002-based RPL market basket). Additional detail is provided later in this section.

Since our goal is to measure cost shares that are reflective of case mix and practice patterns associated with providing services to Medicare beneficiaries, we are proposing to limit our selection of Medicare cost reports to those from hospitals that have a Medicare average length of stay (LOS) that is within a comparable range of their total facility average LOS. We believe this provides a more accurate reflection of the structure of costs for Medicare covered days. We propose to use the cost reports of IRFs and LTCHs with Medicare average LOS within 15 percent (that is, 15 percent higher or lower) of the total facility average LOS for the hospital. This is the same edit applied to derive the FY 2002-based RPL market basket and generally includes those LTCHs and IRFs with Medicare LOS within approximately 5 days of the facility average LOS of the hospital.

We are proposing to use a less stringent measure of Medicare LOS for IPFs. For this provider-type, and in order to produce a robust sample size, we propose to use those facilities' Medicare cost reports whose average LOS is within 30 or 50 percent (depending on the total facility average LOS) of the total facility average LOS. This is the same edit applied to derive the FY 2002-based RPL market basket.

We applied these LOS edits to first obtain a set of cost reports for facilities that have a Medicare LOS within a comparable range of their total facility LOS. Using this set of Medicare cost reports, we then calculated cost weights for four cost categories and a residual as represented by all other costs directly from the FY 2008 Medicare cost reports for freestanding IRFs, freestanding IPFs, and LTCHs (see Table 3 for these four cost categories and their associated weights). These Medicare cost report cost weights were then supplemented with information obtained from other data sources (explained in more detail below) to derive the proposed FY 2008-based RPL market basket cost weights.

(b) Other Data Sources

In addition to the IRF, IPF and LTCH Medicare cost reports for freestanding IRFs and freestanding IPFs, and LTCHs, the other data sources we used to develop the proposed FY 2008-based RPL market basket cost weights were the FY 2008 IPPS Medicare cost reports and the Benchmark Input-Output (I-O) Tables created by the Bureau of Economic Analysis (BEA), U.S. Department of Commerce. The FY 2008 Medicare cost reports include providers whose cost report begin date is on or between October 1, 2007 and September 30, 2008.

As noted above, the proposed FY 2008-based RPL cost weights for benefits and contract labor were derived using FY 2008-based IPPS Medicare cost reports. We used these Medicare cost reports to calculate cost weights for Wages and Salaries, Benefits, and Contract Labor for IPPS hospitals for FY 2008. For the proposed Benefits cost weight for the FY 2008-based RPL market basket, the ratio of the FY 2008 IPPS Benefits cost weight to the FY 2008 IPPS Wages and Salaries cost weight was applied to the RPL Wages and Salaries cost weight. Similarly, the ratio of the FY 2008 IPPS Contract Labor cost weight to the FY 2008 IPPS Wages and Salaries cost weight was applied to the RPL Wages and Salaries cost weight to derive a Contract Labor cost weight for the proposed FY 2008-based RPL market basket.

The All Other cost category is divided into other hospital expenditure category shares using the 2002 BEA Benchmark I-O data following the removal of the portions of the All Other cost category provided in Table 3 that are attributable to Benefits and Contract Labor. The BEA Benchmark I-O data are scheduled for publication every 5 years. The most recent data available are for 2002. BEA also produces Annual I-O estimates; however, the 2002 Benchmark I-O data represent a much more comprehensive and complete set of data that are derived from the 2002 Economic Census. The Annual I-O is simply an update of the Benchmark I-O tables. For the FY 2002-based RPL market basket, we used the 1997 Benchmark I-O data. We are proposing to use the 2002 Benchmark I-O data in the FY 2008-based RPL market basket. Instead of using the less detailed Annual I-O data, we inflated the 2002 Benchmark I-O data forward to 2008. The methodology we used to inflate the data forward involves applying the annual price changes from the respective price proxies to the appropriate cost categories. We repeat this practice for each year.

The “All Other” cost category expenditure shares are determined as being equal to each category's proportion to total “all other” based on the inflated 2002 Benchmark I-O data. For instance, if the cost for telephone services represented 10 percent of the sum of the “all other” Benchmark I-O hospital expenditures, then telephone services would represent 10 percent of the RPL market basket's All Other cost category.

(2) Final Cost Category Computation

As stated previously, for this rebasing we are proposing to use the Medicare cost reports for IRFs, IPFs, and LTCHs to derive four major cost categories. The proposed FY 2008-based RPL market basket includes two additional cost categories that were not broken out separately in the FY 2002-based RPL market basket: “Administrative and Business Support Services” and “Financial Services”. The inclusion of these two additional cost categories, which are derived using the Benchmark I-O data, is consistent with the addition of these two cost categories to the FY 2006-based IPPS market basket (74 FR 43845). We are proposing to break out both categories so we can better match their respective expenses with more appropriate price proxies. A thorough discussion of our rationale for each of these cost categories is provided in the section V.A.1.c.(3) of this proposed rule. Also, the proposed FY 2008-based RPL market basket excludes 1 cost category: Photo Supplies. The 2002 Benchmark I-O weight for this category is considerably smaller than the 1997 Benchmark I-O weight, presently accounting for less than one-tenth of one percentage point of the RPL market basket. Therefore, we are proposing to include the photo supplies costs in the Chemical cost category weight with other similar chemical products.

We are not proposing to change our definition of the labor-related share. However, we are proposing to rename our aggregate cost categories from “labor-intensive” and “nonlabor-intensive” services to “labor-related” and “nonlabor-related” services. This is consistent with the FY 2006-based IPPS market basket (74 FR 43845). As discussed in more detail below and similar to the FY 2002-based RPL market basket, we classify a cost category as labor-related and include it in the labor-related share if the cost category is defined as being labor-intensive and its cost varies with the local labor market. In previous regulations, we grouped cost categories that met both of these criteria into labor-intensive services. We believe the proposed new labels more accurately reflect the concepts that they are intended to convey. We are not proposing to change our definition of the labor-related share because we continue to classify a cost category as labor-related if the costs are labor-intensive and vary with the local labor market.

(3) Selection of Price Proxies

After computing the FY 2008 cost weights for the proposed rebased RPL market basket, it was necessary to select appropriate wage and price proxies to reflect the rate of price change for each expenditure category. With the exception of the proxy for PLI, all of the proxies for the operating portion of the proposed FY 2008-based RPL market basket are based on Bureau of Labor Statistics (BLS) data and are grouped into one of the following BLS categories:

(a) Producer Price Indexes—Producer Price Indexes (PPIs) measure price changes for goods sold in markets other than the retail market. PPIs are preferable price proxies for goods and services that hospitals purchase as inputs because these PPIs better reflect the actual price changes faced by hospitals. For example, we use a special PPI for prescription drugs, rather than the Consumer Price Index (CPI) for prescription drugs, because hospitals generally purchase drugs directly from a wholesaler. The PPIs that we use measure price changes at the final stage of production.

(b) Consumer Price Indexes—CPIs measure change in the prices of final goods and services bought by the typical consumer. Because they may not represent the price faced by a producer, we used CPIs only if an appropriate PPI was not available, or if the expenditures were more similar to those faced by retail consumers in general rather than by purchasers of goods at the wholesale level. For example, the CPI for food purchased away from home is used as a proxy for contracted food services.

(c) Employment Cost Indexes—Employment Cost Indexes (ECIs) measure the rate of change in employee wage rates and employer costs for employee benefits per hour worked. These indexes are fixed-weight indexes and strictly measure the change in wage rates and employee benefits per hour. Appropriately, these indexes are not affected by shifts in employment mix.

We evaluated the price proxies using the criteria of reliability, timeliness, availability, and relevance. Reliability indicates that the index is based on valid statistical methods and has low sampling variability. Timeliness implies that the proxy is published regularly, preferably at least once a quarter. Availability means that the proxy is publicly available. Finally, relevance means that the proxy is applicable and representative of the cost category weight to which it is applied. The proposed CPIs, PPIs, and ECIs selected meet these criteria.

Table 4 sets forth the proposed FY 2008-based RPL market basket including cost categories, and their respective weights and price proxies. For comparison purposes, the corresponding FY 2002-based RPL market basket cost weights are listed, as well. For example, Wages and Salaries are 49.447 percent of total costs in the proposed FY 2008-based RPL market basket compared to 52.895 percent for the FY 2002-based RPL market basket. Employee Benefits are 12.831 percent in the proposed FY 2008-based RPL market basket compared to 12.982 percent for the FY 2002-based RPL market basket. As a result, compensation costs (Wages and Salaries plus Employee Benefits) for the proposed FY 2008-based RPL market basket are 62.278 percent of total costs compared to 65.877 percent for the FY 2002-based RPL market basket.

Following Table 4 is a summary outlining the choice of the proxies we propose to use for the operating portion of the FY 2008-based RPL market basket. The price proxies proposed for the capital portion are described in more detail in the capital methodology section (see section V.A.1.c.(4) of this proposed rule).

We note that the proxies for the operating portion of the FY 2008-based RPL market basket are the same as those used for the FY 2006-based IPPS operating market basket. Because these proxies meet our criteria of reliability, timeliness, availability, and relevance, we believe they are the best measures of price changes for the cost categories. For further discussion on the FY 2006-based IPPS market basket, see the IPPS final rule published in the August 27, 2009 Federal Register (74 FR 43843).

(i) Wages and Salaries

We are proposing to use the ECI for Wages and Salaries for Hospital Workers (All Civilian) (BLS series code CIU1026220000000I) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based RPL market basket.

(ii) Employee Benefits

We are proposing to use the ECI for Employee Benefits for Hospital Workers (All Civilian) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based RPL market basket.

(iii) Electricity

We are proposing to use the PPI for Commercial Electric Power (BLS series code WPU0542). This same proxy was used in the FY 2002-based RPL market basket.

(iv) Fuel, Oil, and Gasoline

For the FY 2002-based RPL market basket, this category only included expenses classified under North American Industry Classification System (NAICS) 21 (Mining). We proxied this category using the PPI for Commercial Natural Gas (BLS series code WPU0552). For the proposed FY 2008-based market basket, we are proposing to add costs to this category that had previously been grouped in other categories. The added costs include petroleum-related expenses under NAICS 324110 (previously captured in the miscellaneous category), as well as petrochemical manufacturing classified under NAICS 325110 (previously captured in the chemicals category). These added costs represent 80 percent of the hospital industry's fuel, oil, and gasoline expenses (or 80 percent of this category). Because the majority of the industry's fuel, oil, and gasoline expenses originate from petroleum refineries (NAICS 324110), we are proposing to use the PPI for Petroleum Refineries (BLS series code PCU324110324110) as the proxy for this cost category.

(v) Water and Sewage

We are proposing to use the CPI for Water and Sewerage Maintenance (All Urban Consumers) (BLS series code CUUR0000SEHG01) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based RPL market basket.

(vi) Professional Liability Insurance

We are proposing to proxy price changes in hospital PLI premiums using percentage changes as estimated by the CMS Hospital Professional Liability Index. To generate these estimates, we collect commercial insurance premiums for a fixed level of coverage while holding non-price factors constant (such as a change in the level of coverage). This method is also used to proxy PLI price changes in the Medicare Economic Index (75 FR 73268). This same proxy was used in the FY 2002-based RPL market basket.

(vii) Pharmaceuticals

We are proposing to use the PPI for Pharmaceuticals for Human Use, Prescription (BLS series code WPUSI07003) to measure the price growth of this cost category. We note that we are not making a change to the PPI that is used to proxy this cost category. There was a recent change to the BLS naming convention for this series; however, this is the same proxy that was used in the FY 2002-based RPL market basket.

(viii) Food: Direct Purchases

We are proposing to use the PPI for Processed Foods and Feeds (BLS series code WPU02) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based RPL market basket.

(ix) Food: Contract Services

We are proposing to use the CPI for Food Away From Home (All Urban Consumers) (BLS series code CUUR0000SEFV) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based RPL market basket.

(x) Chemicals

We are proposing to use a blended PPI composed of the PPI for Industrial Gas Manufacturing (NAICS 325120) (BLS series code PCU325120325120P), the PPI for Other Basic Inorganic Chemical Manufacturing (NAICS 325180) (BLS series code PCU32518-32518-), the PPI for Other Basic Organic Chemical Manufacturing (NAICS 325190) (BLS series code PCU32519-32519-), and the PPI for Soap and Cleaning Compound Manufacturing (NAICS 325610) (BLS series code PCU32561-32561-). Using the 2002 Benchmark I-O data, we found that these NAICS industries accounted for approximately 90 percent of the hospital industry's chemical expenses.

Therefore, we are proposing to use this blended index because we believe its composition better reflects the composition of the purchasing patterns of hospitals than does the PPI for Industrial Chemicals (BLS series code WPU061), the proxy used in the FY 2002-based RPL market basket. Table 5 below shows the weights for each of the four PPIs used to create the blended PPI, which we determined using the 2002 Benchmark I-O data.

(xi) Medical Instruments

We are proposing to use the PPI for Medical, Surgical, and Personal Aid Devices (BLS series code WPU156) to measure the price growth of this cost category. In the 1997 Benchmark I-O data, approximately half of the expenses classified in this category were for surgical and medical instruments. Therefore, we used the PPI for Surgical and Medical Instruments and Equipment (BLS series code WPU1562) to proxy this category in the FY 2002-based RPL market basket. The 2002 Benchmark I-O data show that surgical and medical instruments now represent only 33 percent of these expenses and that the largest expense category is surgical appliance and supplies manufacturing (corresponding to BLS series code WPU1563). Due to this reallocation of costs over time, we are proposing to change the price proxy for this cost category to the more aggregated PPI for Medical, Surgical, and Personal Aid Devices.

(xii) Photographic Supplies

We are proposing to eliminate the cost category specific to photographic supplies for the proposed FY 2008 based RPL market basket. These costs would now be included in the Chemicals cost category because the costs are presently reported as all other chemical products. Notably, although we would be eliminating the specific cost category, these costs would still be accounted for within the RPL market basket.

(xiii) Rubber and Plastics

We are proposing to use the PPI for Rubber and Plastic Products (BLS series code WPU07) to measure price growth of this cost category. This same proxy was used in the FY 2002-based RPL market basket.

(xiv) Paper and Printing Products

We are proposing to use the PPI for Converted Paper and Paperboard Products (BLS series code WPU0915) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based RPL market basket.

(xv) Apparel

We are proposing to use the PPI for Apparel (BLS series code WPU0381) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based RPL market basket.

(xvi) Machinery and Equipment

We are proposing to use the PPI for Machinery and Equipment (BLS series code WPU11) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based RPL market basket.

(xvii) Miscellaneous Products

We are proposing to use the PPI for Finished Goods Less Food and Energy (BLS series code WPUSOP3500) to measure the price growth of this cost category. Using this index would remove the double-counting of food and energy prices, which would already be captured elsewhere in the market basket. This same proxy was used in the FY 2002-based RPL market basket.

(xviii) Professional Fees: Labor-Related

We are proposing to use the ECI for Compensation for Professional and Related Occupations (Private Industry) (BLS series code CIS2020000120000I) to measure the price growth of this category. It includes occupations such as legal, accounting, and engineering services. This same proxy was used in the FY 2002-based RPL market basket.

(xix) Administrative and Business Support Services

We are proposing to use the ECI for Compensation for Office and Administrative Support Services (Private Industry) (BLS series code CIU2010000220000I) to measure the price growth of this category. Previously these costs were included in the All Other: Labor-intensive category (now renamed the All Other: Labor-related Services category), and were proxied by the ECI for Compensation for Service Occupations. We believe that this compensation index better reflects the changing price of labor associated with the provision of administrative services and its incorporation represents a technical improvement to the market basket.

(xx) All Other: Labor-Related Services

We are proposing to use the ECI for Compensation for Service Occupations (Private Industry) (BLS series code CIU2010000300000I) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based RPL market basket.

(xxi) Professional Fees: Nonlabor-Related

We are proposing to use the ECI for Compensation for Professional and Related Occupations (Private Industry) (BLS series code CIS2020000120000I) to measure the price growth of this category. This is the same price proxy that we are proposing to use for the Professional Fees: Labor-related cost category.

(xxii) Financial Services

We are proposing to use the ECI for Compensation for Financial Activities (Private Industry) (BLS series code CIU201520A000000I) to measure the price growth of this cost category. Previously these costs were included in the All Other: Nonlabor-intensive category (now renamed the All Other: Nonlabor-related Services category), and were proxied by the CPI for All Items. We believe that this compensation index better reflects the changing price of labor associated with the provision of financial services and its incorporation represents a technical improvement to the market basket.

(xxiii) Telephone Services

We are proposing to use the CPI for Telephone Services (BLS series code CUUR0000SEED) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based RPL market basket.

(xxiv) Postage

We are proposing to use the CPI for Postage (BLS series code CUUR0000SEEC01) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based RPL market basket.

(xxv) All Other: Nonlabor-Related Services

We are proposing to use the CPI for All Items Less Food and Energy (BLS series code CUUR0000SA0L1E) to measure the price growth of this cost category. Previously these costs were proxied by the CPI for All Items in the FY 2002-based RPL market basket. We believe that using the CPI for All Items Less Food and Energy would remove the double counting of changes in food and energy prices, as they are already captured elsewhere in the market basket. Consequently, we believe that the incorporation of this proxy would represent a technical improvement to the market basket.

(4) Proposed Methodology for Capital Portion of the RPL Market Basket

In the FY 2002-based RPL market basket, we did not have freestanding IRF, freestanding IPF, and LTCH 2002 Medicare cost report data for the capital cost weights, due to a change in the 2002 reporting requirements. Therefore, we used these hospitals' 2001 expenditure data for the capital cost categories of depreciation, interest, and other capital expenses, and inflated the data to a 2002 base year using relevant price proxies.

For the proposed FY 2008-based RPL market basket, we are proposing to calculate weights for the proposed RPL market basket capital costs using the same set of FY 2008 Medicare cost reports used to develop the operating share for IRFs, IPFs, and LTCHs. To calculate the proposed total capital cost weight, we first apply the same LOS edits as applied when calculating the operating cost weights as described above in section V.A.1.c.(1)(a) of this proposed rule. The resulting proposed capital weight for the FY 2008 base year is 8.392 percent.

Lease expenses are unique in that they are not broken out as a separate cost category in the RPL market basket, but rather are proportionally distributed amongst the cost categories of Depreciation, Interest, and Other, reflecting the assumption that the underlying cost structure of leases is similar to that of capital costs in general. As was done in the FY 2002-based RPL market basket, we first assumed 10 percent of lease expenses represents overhead and assigned those costs to the “Other Capital-Related Costs” category accordingly. The remaining lease expenses were distributed across the three cost categories based on the respective weights of depreciation, interest, and other capital not including lease expenses.

Depreciation contains two subcategories: (1) Building and Fixed Equipment; and (2) Movable Equipment. The apportionment between building and fixed equipment and movable equipment was determined using the FY 2008 Medicare cost reports for freestanding IRFs, freestanding IPFs, and LTCHs. This methodology was also used to compute the apportionment used in the FY 2002-based RPL market basket (70 FR 47912).

The total Interest expense cost category is split between government/nonprofit interest and for-profit interest. The FY 2002-based RPL market basket allocated 75 percent of the total Interest cost weight to government/nonprofit interest and proxied that category by the average yield on domestic municipal bonds. The remaining 25 percent of the Interest cost weight was allocated to for-profit interest and was proxied by the average yield on Moody's Aaa bonds (70 FR 47912). This was based on the FY 2002-based IPPS Capital input price index (CIPI) (70 FR 23406) due to insufficient Medicare cost report data for freestanding IRFs, freestanding IPFs, and LTCHs. For the proposed FY 2008-based RPL market basket, we are proposing to derive the split using the FY 2008 Medicare cost report data on interest expenses for government/nonprofit and for-profit freestanding IRFs, freestanding IPFs, and LTCHs. Based on these data, we calculated a proposed 33/67 split between government/nonprofit and for-profit interest. We believe it is important that this split reflects the latest relative cost structure of interest expenses for RPL providers. As stated above, we first apply the LOS edits (as described in section V.A.1.c.(1)(a) of this proposed rule) prior to calculating this split. Therefore, we are using cost reports that are reflective of case mix and practice patterns associated with providing services to Medicare beneficiaries. Using data specific to government/nonprofit and for-profit freestanding IRFs, freestanding IPFs, and LTCHs as well as the application of these LOS edits are the primary reasons for the difference in this split relative to the FY 2002-based RPL market basket.

Because capital is acquired and paid for over time, capital expenses in any given year are determined by both past and present purchases of physical and financial capital. The vintage-weighted capital portion of the FY 2008-based RPL market basket is intended to capture the long-term consumption of capital, using vintage weights for depreciation (physical capital) and interest (financial capital). These vintage weights reflect the proportion of capital purchases attributable to each year of the expected life of building and fixed equipment, movable equipment, and interest. We are proposing to use the vintage weights to compute vintage-weighted price changes associated with depreciation and interest expense.

Vintage weights are an integral part of the proposed FY 2008-based RPL market basket. Capital costs are inherently complicated and are determined by complex capital purchasing decisions, over time, based on such factors as interest rates and debt financing. In addition, capital is depreciated over time instead of being consumed in the same period it is purchased. The capital portion of the proposed FY 2008-based RPL market basket would reflect the annual price changes associated with capital costs, and would be a useful simplification of the actual capital investment process. By accounting for the vintage nature of capital, we are able to provide an accurate and stable annual measure of price changes. Annual nonvintage price changes for capital are unstable due to the volatility of interest rate changes and, therefore, do not reflect the actual annual price changes for Medicare capital-related costs. The capital component of the proposed FY 2008-based RPL market basket would reflect the underlying stability of the capital acquisition process and provides hospitals with the ability to plan for changes in capital payments.

To calculate the vintage weights for depreciation and interest expenses, we needed a time series of capital purchases for building and fixed equipment and movable equipment. We found no single source that provides an appropriate time series of capital purchases by hospitals for all of the above components of capital purchases. The early Medicare cost reports did not have sufficient capital data to meet this need. Data we obtained from the American Hospital Association (AHA) do not include annual capital purchases. However, AHA does provide a consistent database back to 1963. We used data from the AHA Panel Survey and the AHA Annual Survey to obtain a time series of total expenses for hospitals. We then used data from the AHA Panel Survey supplemented with the ratio of depreciation to total hospital expenses obtained from the Medicare cost reports to derive a trend of annual depreciation expenses for 1963 through 2008.

To estimate capital purchases using data on depreciation expenses, the expected life for each cost category (building and fixed equipment, movable equipment, and interest) is needed to calculate vintage weights. For the FY 2002-based RPL market basket, due to insufficient Medicare cost report data for freestanding IRFs, freestanding IPFs, and LTCHs, we used 2001 Medicare Cost Reports for IPPS hospitals to determine the expected life of building and fixed equipment and movable equipment (70 FR 47913). The FY 2002-based RPL market basket was based on an expected life of building and fixed equipment of 23 years. It used 11 years as the expected life for movable equipment. We believed that this data source reflected the latest relative cost structure of depreciation expenses for hospitals at the time and was analogous to freestanding IRFs, freestanding IPFs, and LTCHs.

The expected life of any piece of equipment can be determined by dividing the value of the asset (excluding fully depreciated assets) by its current year depreciation amount. This calculation yields the estimated useful life of an asset if depreciation were to continue at current year levels, assuming straight-line depreciation. Following a similar method to what was applied for the FY 2002-based RPL market basket, we are proposing to use the expected life of building and fixed equipment to be equal to 26 years, and the expected life of movable equipment to be 11 years. These expected lives are calculated using FY 2008 Medicare cost reports for IPPS hospitals since we are currently unable to obtain robust measures of the expected lives for building and fixed equipment and movable equipment using the Medicare cost reports from freestanding IRFs, freestanding IPFs, and LTCHs.

We also propose to use the building and fixed equipment and movable equipment weights derived from FY 2008 Medicare cost reports for freestanding IRFs, freestanding IPFs, and LTCHs to separate the depreciation expenses into annual amounts of building and fixed equipment depreciation and movable equipment depreciation. Year-end asset costs for building and fixed equipment and movable equipment were determined by multiplying the annual depreciation amounts by the expected life calculations. We then calculated a time series, back to 1963, of annual capital purchases by subtracting the previous year asset costs from the current year asset costs. From this capital purchase time series, we were able to calculate the vintage weights for building and fixed equipment and for movable equipment. Each of these sets of vintage weights is explained in more detail below.

For the proposed building and fixed equipment vintage weights, we used the real annual capital purchase amounts for building and fixed equipment to capture the actual amount of the physical acquisition, net of the effect of price inflation. This real annual purchase amount for building and fixed equipment was produced by deflating the nominal annual purchase amount by the building and fixed equipment price proxy, BEA's chained price index for nonresidential construction for hospitals and special care facilities. Because building and fixed equipment have an expected life of 26 years, the vintage weights for building and fixed equipment are deemed to represent the average purchase pattern of building and fixed equipment over 26-year periods. With real building and fixed equipment purchase estimates available from 2008 back to 1963, we averaged twenty 26-year periods to determine the average vintage weights for building and fixed equipment that are representative of average building and fixed equipment purchase patterns over time. Vintage weights for each 26-year period are calculated by dividing the real building and fixed capital purchase amount in any given year by the total amount of purchases in the 26-year period. This calculation is done for each year in the 26-year period, and for each of the twenty 26-year periods. We used the average of each year across the twenty 26-year periods to determine the average building and fixed equipment vintage weights for the FY 2008-based RPL market basket.

For the proposed movable equipment vintage weights, the real annual capital purchase amounts for movable equipment were used to capture the actual amount of the physical acquisition, net of price inflation. This real annual purchase amount for movable equipment was calculated by deflating the nominal annual purchase amounts by the movable equipment price proxy, the PPI for Machinery and Equipment. This is the same proxy used for the FY 2002-based RPL market basket. Based on our determination that movable equipment has an expected life of 11 years, the vintage weights for movable equipment represent the average expenditure for movable equipment over an 11-year period. With real movable equipment purchase estimates available from 2008 back to 1963, thirty-five 11-year periods were averaged to determine the average vintage weights for movable equipment that are representative of average movable equipment purchase patterns over time. Vintage weights for each 11-year period are calculated by dividing the real movable capital purchase amount for any given year by the total amount of purchases in the 11-year period. This calculation was done for each year in the 11-year period and for each of the thirty-five 11-year periods. We used the average of each year across the thirty-five 11-year periods to determine the average movable equipment vintage weights for the FY 2008-based RPL market basket.

For the proposed interest vintage weights, the nominal annual capital purchase amounts for total equipment (building and fixed, and movable) were used to capture the value of the debt instrument. Because we have determined that hospital debt instruments have an expected life of 26 years, the vintage weights for interest are deemed to represent the average purchase pattern of total equipment over 26-year periods. With nominal total equipment purchase estimates available from 2008 back to 1963, twenty 26-year periods were averaged to determine the average vintage weights for interest that are representative of average capital purchase patterns over time. Vintage weights for each 26-year period are calculated by dividing the nominal total capital purchase amount for any given year by the total amount of purchases in the 26-year period. This calculation is done for each year in the 26-year period and for each of the twenty 26-year periods. We used the average of each year across the twenty 26-year periods to determine the average interest vintage weights for the FY 2008-based RPL market basket. The vintage weights for the capital portion of the FY 2002-based RPL market basket and the FY 2008-based RPL market basket are presented in Table 6.

After the capital cost category weights were computed, it was necessary to select appropriate price proxies to reflect the rate-of-increase for each expenditure category. We are proposing to use the same price proxies for the capital portion of the proposed FY 2008-based RPL market basket that were used in the FY 2002-based RPL market basket with the exception of the Boeckh Construction Index. We replaced the Boeckh Construction Index with BEA's chained price index for nonresidential construction for hospitals and special care facilities. The BEA index represents construction of facilities such as hospitals, nursing homes, hospices, and rehabilitation centers. Although these price indices move similarly over time, we believe that it is more technically appropriate to use an index that is more specific to the hospital industry. We believe these are the most appropriate proxies for hospital capital costs that meet our selection criteria of relevance, timeliness, availability, and reliability.

The price proxies (prior to any vintage weighting) for each of the capital cost categories are the same as those used for the FY 2006-based CIPI as described in the IPPS FY 2010 final rule (74 FR at 43857).

(5) Proposed FY 2012 Market Basket Increase Factor

For FY 2012 (that is, beginning October 1, 2011 and ending September 30, 2012), we are proposing to use an estimate of the proposed FY 2008-based RPL market basket increase factor based on the best available data. Consistent with historical practice, we estimate the RPL market basket update for the IRF PPS based on IHS Global Insight's forecast using the most recent available data. IHS Global Insight (IGI), Inc. is a nationally recognized economic and financial forecasting firm that contracts with CMS to forecast the components of the market baskets.

Based on IGI's 1st quarter 2011 forecast with historical data through the 4th quarter of 2010, the projected market basket increase factor for FY 2012 is 2.8 percent. Therefore, consistent with our historical practice of estimating market basket increases based on the best available data, we are proposing a market basket increase factor of 2.8 percent for FY 2012. Furthermore, because the proposed FY 2012 update is based on the most recent market basket estimate for the 12-month period (currently 2.8 percent), we are also proposing that if more recent data are subsequently available (for example, a more recent estimate of the market basket), we would use such data, if appropriate, to determine the FY 2012 update in the final rule.

Using the current FY 2002-based RPL market basket and IGI's 1st quarter 2011 forecast for the market basket components, the FY 2012 update would be 2.8 percent. Table 7 compares the proposed FY 2008-based RPL market basket and the FY 2002-based RPL market basket percent changes.

For FY 2012, the proposed FY 2008-based RPL market basket update is the same as the FY 2002-based RPL market basket (2.8 percent). The lower total compensation weight in the proposed FY 2008-based RPL market basket (62.278 percent) relative to the FY 2002-based RPL market basket (65.877 percent), absent other factors, would have resulted in a slightly lower market basket update using the FY 2008-based RPL market basket. This impact, however, is partially offset by the larger weight associated with the Professional Fees category. In both market baskets, these expenditures are proxied by the ECI for Compensation for Professional and Related Services. The weight for Professional Fees in the FY 2002-based RPL market basket is 2.892 percent compared to 6.325 percent in the proposed FY 2008-based RPL market basket. The net effect is that the updates are the same for FY 2012 based on the current 2002-based RPL market basket and the proposed FY 2008-based RPL market basket.

2. Proposed Productivity Adjustment

According to Section 1886(j)(3)(C)(i) of the Act, the Secretary shall establish an increase factor “based on an appropriate percentage increase in a market basket of goods and services.” As described in section V.A.1 of this proposed rule, we are proposing to estimate the IRF PPS increase factor for FY 2012 based on the proposed FY 2008-based RPL market basket. Section 1886(j)(3)(C)(ii) of the Act then requires that, after establishing the increase factor for a FY, “the Secretary shall reduce such increase factor for FY 2012 and each subsequent FY, by the productivity adjustment described in section 1886(b)(3)(B)(xi)(II)” of the Act. Section 1886(b)(3)(B)(xi)(II) of the Act sets forth the definition of this productivity adjustment. The statute defines the productivity adjustment to be equal to the 10-year moving average of changes in annual economy-wide private nonfarm business multifactor productivity (MFP) (as projected by the Secretary for the 10-year period ending with the applicable FY, year, cost reporting period, or other annual period) (the “MFP adjustment”). The BLS is the agency that publishes the official measure of private nonfarm business MFP. Please see http://www.bls.gov/​mfp to obtain the historical BLS-published MFP data.

The projection of MFP is currently produced by IGI, an economic forecasting firm. In order to generate a forecast of MFP, IGI replicated the MFP measure calculated by the BLS using a series of proxy variables derived from IGI's U.S. macroeconomic models. These models take into account a very broad range of factors that influence the total U.S. economy. IGI forecasts the underlying proxy components such as Gross Domestic Product (GDP), capital, and labor inputs required to estimate MFP and then combines those projections according to the BLS methodology. In Table 8, we identify each of the major MFP component series employed by the BLS to measure MFP. We also provide the corresponding concepts forecasted by IGI and determined to be the best available proxies for the BLS series.

IGI found that the historical growth rates of the BLS components used to calculate MFP and the IGI components identified are consistent across all series and therefore suitable proxies for calculating MFP. We have included below a more detailed description of the methodology used by IGI to construct a forecast of MFP, which is aligned closely with the methodology employed by the BLS. For more information regarding the BLS method for estimating productivity, see the BLS Web site at http://www.bls.gov/​mfp/​mprtech.pdf.

At the time of this proposed rule, the BLS has published a historical time series of private nonfarm business MFP for 1987 through 2009, with 2009 being a preliminary value. Using this historical MFP series and the IGI forecasted series, IGI has developed a forecast of MFP for 2010 through 2021, as described below.

To create a forecast of BLS' MFP index, the forecasted annual growth rates of the “non-housing, non-government, non-farm, real GDP”, “hours of all persons in private nonfarm establishments adjusted for labor composition,” and “real effective capital stock” series (ranging from 2010 to 2021) are used to “grow” the levels of the “real value-added output,” “private non-farm business sector labor input,” and “aggregate capital input” series published by the BLS. Projections of the “hours of all persons” measure are calculated using the difference between projections of the BLS index of output per hour and real GDP. This difference is then adjusted to account for changes in labor composition in the forecast interval.

Using these three key concepts, MFP is derived by subtracting the contribution of labor and capital inputs from output growth. However, in order to estimate MFP, we need to understand the relative contributions of labor and capital to total output growth. Therefore, two additional measures are needed to operationalize the estimation of the IGI MFP projection: Labor compensation and capital income. The sum of labor compensation and capital income represents total income. The BLS calculates labor compensation and capital income (in current dollar terms) to derive the nominal values of labor and capital inputs. IGI uses the “non-government total compensation” and “flow of capital services from the total private non-residential capital stock” series as proxies for the BLS' income measures. These two proxy measures for income are divided by total income to obtain the shares of labor compensation and capital income to total income. To estimate labor's contribution and capital's contribution to the growth in total output, the growth rates of the proxy variables for labor and capital inputs are multiplied by their respective shares of total income. These contributions of labor and capital to output growth are subtracted from total output growth to calculate the “change in the growth rates of multifactor productivity”:

MFP = Total output growth—((labor input growth * labor compensation share) + (capital input growth * capital income share))

The change in the growth rates (also referred to as the compound growth rates) of the IGI MFP are multiplied by 100 in order to calculate the percent change in growth rates (the percent change in growth rates are published by the BLS for its historical MFP measure). Finally, the growth rates of the IGI MFP are converted to index levels based to 2005 to be consistent with the BLS' methodology. For benchmarking purposes, the historical growth rates of IGI's proxy variables were used to estimate a historical measure of MFP, which was compared to the historical MFP estimate published by the BLS. The comparison revealed that the growth rates of the components were consistent across all series, and therefore validated the use of the proxy variables in generating the IGI MFP projections. The resulting MFP index was then interpolated to a quarterly frequency using the Bassie method for temporal disaggregation. The Bassie technique utilizes an indicator (pattern) series for its calculations. IGI uses the index of output per hour (published by the BLS) as an indicator when interpolating the MFP index.

3. Proposed Calculation of the IRF PPS Market Basket Increase Factor for FY 2012

To calculate the MFP-adjusted IRF PPS increase factor for FY 2012, in accordance with section 1886(j)(3)(C) of the Act, we propose to start with the FY 2008-based RPL market basket increase factor described above in section V.A.1. of this proposed rule and subtract from that the MFP percentage adjustment described in section V.A.2.of this proposed rule. Additionally, in accordance with sections 1886(j)(3)(C)(ii)(II) and (D)(ii) of the Act, we propose to further reduce the MFP-adjusted IRF PPS increase factor by 0.1 percentage point for FY 2012.

Specifically, in calculating the MFP percentage adjustment, we propose that the end of the 10-year moving average of changes in the MFP should coincide with the end of the appropriate FY update period. Since the market basket update is reduced by the MFP adjustment to determine the annual update for the IRF PPS, we believe it is appropriate for the numbers associated with both components of the calculation (the market basket and the productivity adjustment) to line up so that changes in market conditions are aligned. Therefore, for the FY 2012 update, the MFP adjustment is calculated as the 10-year moving average of changes in MFP for the period ending September 30, 2012. We propose to round the final annual adjustment to the one-tenth of 1 percentage point level up or down as applicable according to conventional rounding rules (that is, if the number we are rounding is followed by 5, 6, 7, 8, or 9, we will round the number up; if the number we are rounding is followed by 0, 1, 2, 3, or 4, we will round the number down).

Thus, in accordance with section 1886(j)(3)(C) of the Act, the proposed IRF PPS increase factor for FY 2012 is based on the 1st quarter 2011 forecast of the proposed FY 2008-based RPL market basket update, which is estimated to be 2.8 percent. This proposed increase factor is then reduced by the MFP adjustment (the 10-year moving average of MFP for the period ending FY 2012) of 1.2 percentage points, based on the proposed methodology described above and IHS Global Insight's 1st quarter 2011 forecast. The proposed increase factor for FY 2012 is then further reduced by 0.1 percentage point in accordance with sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of the Act. The resulting proposed IRF PPS increase factor reduced by the productivity adjustment and the “other adjustment” for FY 2012 is equal to 1.5 percent, or 2.8 percent less 1.2 percentage points for the MFP less 0.1 percentage point in accordance with sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of the Act. Consistent with historical practice, we propose to update the market basket increase factor estimate and the MFP adjustment in the final rule to reflect the most recent available data.

4. Proposed Calculation of the Labor-Related Share for FY 2012

Section 1886(j)(6) of the Act specifies that “[t]he Secretary shall adjust the proportion (as estimated by the Secretary from time to time) of rehabilitation facilities' costs which are attributable to wages and wage-related costs, of the prospective payment rates computed under paragraph (3) for area differences in wage levels by a factor (established by the Secretary) reflecting the relative hospital wage level in the geographic area of the rehabilitation facility compared to the national average wage level for such facilities. Not later than October 1, 2001 (and at least every 36 months thereafter), the Secretary shall update the factor under the preceding sentence on the basis of information available to the Secretary (and updated as appropriate) of the wages and wage-related costs incurred in furnishing rehabilitation services. Any adjustments or updates made under this paragraph for a fiscal year shall be made in a manner that assures that the aggregated payments under this subsection in the fiscal year are not greater or less than those that would have been made in the year without such adjustment.”

The labor-related share is determined by identifying the national average proportion of total costs that are related to, influenced by, or vary with the local labor market. We continue to classify a cost category as labor-related if the costs are labor-intensive and vary with the local labor market. Given this, based on our definition of the labor-related share, we are proposing to include in the labor-related share the sum of the relative importance of Wages and Salaries, Employee Benefits, Professional Fees: Labor-related, Administrative and Business Support Services, All Other: Labor-related Services (previously referred to in the FY 2002-based RPL market basket as labor-intensive), and a portion of the Capital-Related cost weight.

Consistent with previous rebasings, the “All Other” Labor-related Services cost category is mostly comprised of building maintenance and security services (including, but not limited to, commercial and industrial machinery and equipment repair, nonresidential maintenance and repair, and investigation and security services). Because these services tend to be labor-intensive and are mostly performed at the hospital facility (and therefore, unlikely to be purchased in the national market), we believe that they meet our definition of labor-related services.

As stated in the FY 2006 IRF PPS final rule (70 FR 47880, 47915), the labor-related share was defined as the sum of the relative importance of Wages and Salaries, Fringe Benefits, Professional Fees, Labor-intensive Services, and a portion of the capital share from an appropriate market basket. Therefore, to determine the labor-related share for the IRF PPS for FY 2011, we used the FY 2002-based RPL market basket cost weights relative importance to determine the labor-related share for the IRF PPS.

For the proposed FY 2008-based RPL market basket rebasing, the proposed inclusion of the Administrative and Business Support Services cost category into the labor-related share remains consistent with the current labor-related share because this cost category was previously included in the Labor-intensive cost category. As previously stated, we are proposing to establish a separate Administrative and Business Support Service cost category so that we can use the ECI for Compensation for Office and Administrative Support Services to more precisely proxy these specific expenses.

For the FY 2002-based RPL market basket, we assumed that all nonmedical professional services (including accounting and auditing services, engineering services, legal services, and management and consulting services) were purchased in the local labor market and, therefore, all of their associated fees varied with the local labor market. As a result, we previously included 100 percent of these costs in the labor-related share. In an effort to more accurately determine the share of professional fees that should be included in the labor-related share, we surveyed hospitals regarding the proportion of those fees that go to companies that are located beyond their own local labor market (the results are discussed below).

We continue to look for ways to refine our market basket approach to more accurately account for the proportion of costs influenced by the local labor market. To that end, we conducted a survey of hospitals to empirically determine the proportion of contracted professional services purchased by the industry that are attributable to local firms and the proportion that are purchased from national firms. We notified the public of our intent to conduct this survey on December 9, 2005 (70 FR 73250) and received no comments.

With approval from the OMB (Control Number 0938-1036), we contacted a sample of IPPS hospitals and received responses to our survey from 108 hospitals. We believe that these data serve as an appropriate proxy for the purchasing patterns of professional services for IRFs as they are also institutional providers of health care services. Using data on FTEs to allocate responding hospitals across strata (region of the country and urban/rural status), we calculated post-stratification weights. Based on these weighted results, we determined that hospitals purchase, on average, the following portions of contracted professional services outside of their local labor market:

• 34 percent of accounting and auditing services.
• 30 percent of engineering services.
• 33 percent of legal services.
• 42 percent of management consulting services.

We applied each of these percentages to its respective Benchmark I-O cost category underlying the professional fees cost category to determine the Professional Fees: Nonlabor-related costs. The Professional Fees: Labor-related costs were determined to be the difference between the total costs for each Benchmark I-O category and the Professional Fees: Nonlabor-related costs. This is the methodology that we used to separate the FY 2008-based RPL market basket professional fees category into Professional Fees: Labor-related and Professional Fees: Nonlabor-related cost categories. In addition to the professional services listed above, we also classified expenses under NAICS 55, Management of Companies and Enterprises, into the Professional Fees cost category as was done in previous rebasings. The NAICS 55 data are mostly comprised of corporate, subsidiary, and regional managing offices, or otherwise referred to as home offices. Formerly, all of the expenses within this category were considered to vary with, or be influenced by, the local labor market and were thus included in the labor-related share. Because many hospitals are not located in the same geographic area as their home office, we analyzed data from a variety of sources in order to determine what proportion of these costs should be appropriately included in the labor-related share.

Using data primarily from the Medicare cost reports and a CMS database of Home Office Medicare Records (HOMER) (a database that provides city and state information (addresses) for home offices), we were able to determine that 19 percent of the total number of freestanding IRFs, IPFs, and LTCHs that had home offices had those home offices located in their respective local labor markets—defined as being in the same Metropolitan Statistical Area (MSA).

The Medicare cost report requires hospitals to report their home office provider numbers. Using the HOMER database to determine the home office location for each home office provider number, we compared the location of the provider with the location of the hospital's home office. We then placed providers into one of the following three groups:

• Group 1—Provider and home office are located in different States.
• Group 2—Provider and home office are located in the same State and same city.
• Group 3—Provider and home office are located in the same State and different city.

We found that 63 percent of the providers with home offices were classified into Group 1 (that is, different State) and, thus, these providers were determined to not be located in the same local labor market as their home office. Although there were a very limited number of exceptions (that is, providers located in different States but the same MSA as their home office), the 63 percent estimate was unchanged.

We found that 9 percent of all providers with home offices were classified into Group 2 (that is, same State and same city and, therefore, the same MSA). Consequently, these providers were determined to be located in the same local labor market as their home offices.

We found that 27 percent of all providers with home offices were classified into Group 3 (that is, same State and different city). Using data from the Census Bureau to determine the specific MSA for both the provider and its home office, we found that 10 percent of all providers with home offices were identified as being in the same State, a different city, but the same MSA.

Pooling these results, we were able to determine that approximately 19 percent of providers with home offices had home offices located within their local labor market (that is, 9 percent of providers with home offices had their home offices in the same State and city (and, thus, the same MSA), and 10 percent of providers with home offices had their home offices in the same State, a different city, but the same MSA). We are proposing to apportion the NAICS 55 expense data by this percentage. Thus, we are proposing to classify 19 percent of these costs into the Professional Fees: Labor-related cost category and the remaining 81 percent into the Professional Fees: Nonlabor-related Services cost category.

Using this proposed method and the IHS Global Insight, Inc. forecast for the 1st quarter 2011 of the proposed FY 2008-based RPL market basket, the IRF labor-related share for FY 2012 is the sum of the FY 2012 relative importance of each labor-related cost category. Consistent with our proposal to update the labor-related share with the most recent available data, the labor-related share for this proposed rule reflects IHS Global Insight's 1st quarter 2011 forecast of the proposed FY 2008-based RPL market basket. Table 9 shows the proposed FY 2012 relative importance labor-related share using the proposed FY 2008-based RPL market basket and the FY 2002-based RPL market basket.

The proposed labor-related share for FY 2012 is the sum of the proposed FY 2012 relative importance of each labor-related cost category, and would reflect the different rates of price change for these cost categories between the base year (FY 2008) and FY 2012. The sum of the proposed relative importance for FY 2012 for operating costs (Wages and Salaries, Employee Benefits, Professional Fees: Labor-Related, Administrative and Business Support Services, and All Other: Labor-related Services) would be 66.689 percent, as shown in Table 9.

We are proposing that the portion of Capital that is influenced by the local labor market is estimated to be 46 percent, which is the same percentage applied to the FY 2002-based RPL market basket. Since the relative importance for Capital-Related Costs would be 7.923 percent of the proposed FY 2008-based RPL market basket in FY 2012, we are proposing to take 46 percent of 7.923 percent to determine the proposed labor-related share of Capital for FY 2012. The result would be 3.645 percent, which we propose to add to 66.689 percent for the operating cost amount to determine the total proposed labor-related share for FY 2012. Thus, the labor-related share that we propose to use for IRF PPS in FY 2012 would be 70.334 percent. This proposed labor-related share is determined using the same methodology as employed in calculating all previous IRF labor-related shares. The wage index and the labor-related share are adjusted for budget neutrality.

B. Proposed Area Wage Adjustment

Section 1886(j)(6) of the Act requires the Secretary to adjust the proportion of rehabilitation facilities' costs attributable to wages and wage related costs (as estimated by the Secretary from time to time) by a factor (established by the Secretary) reflecting the relative hospital wage level in the geographic area of the rehabilitation facility compared to the national average wage level for those facilities. The Secretary is required to update the IRF PPS wage index on the basis of information available to the Secretary on the wages and wage-related costs to furnish rehabilitation services. Any adjustment or updates made under section 1886(j)(6) of the Act for a FY are made in a budget neutral manner.

In the FY 2009 IRF PPS final rule (73 FR 46378), we maintained the methodology described in the FY 2006 IRF PPS final rule to determine the wage index, labor market area definitions and hold harmless policy consistent with the rationale outlined in the FY 2006 IRF PPS final rule (70 FR 47880, 47917 through 47926).

For FY 2012, we are maintaining the policies and methodologies described in the FY 2009 IRF PPS final rule (73 FR 46378) relating to the labor market area definitions and the wage index methodology for areas with wage data. Thus, we are using the CBSA labor market area definitions and the FY 2011 pre-reclassification and pre-floor hospital wage index data. In accordance with section 1886(d)(3)(E) of the Act, the FY 2011 pre-reclassification and pre-floor hospital wage index is based on data submitted for hospital cost reporting periods beginning on or after October 1, 2006, and ending September 30, 2007 (that is, FY 2007 cost report data).

The labor market designations made by the OMB include some geographic areas where there are no hospitals and, thus, no hospital wage index data on which to base the calculation of the IRF PPS wage index. We propose to continue to use the same methodology discussed in the FY 2008 IRF PPS final rule (72 FR 44299) to address those geographic areas where there are no hospitals and, thus, no hospital wage index data in which to base the calculation for the FY 2012 IRF PPS wage index.

Additionally, we propose to incorporate the CBSA changes published in the most recent OMB bulletin that applies to the hospital wage data used to determine the current IRF PPS wage index. The changes were nominal and did not represent substantive changes to the CBSA-based designations. Specifically, OMB added or deleted certain CBSA numbers and revised certain titles. The OMB bulletins are available at http://www.whitehouse.gov/​omb/​bulletins/​index.html.

To calculate the wage-adjusted facility payment for the payment rates set forth in this proposed rule, we multiply the unadjusted Federal payment rate for IRFs by the proposed FY 2012 labor-related share based on the FY 2008-based RPL market basket (70.334 percent) to determine the labor-related portion of the standard payment amount. We then multiply the labor-related portion by the applicable IRF wage index from the tables in the addendum to this proposed rule. Table A is for urban areas and Table B is for rural areas.

Adjustments or updates to the IRF wage index made under section 1886(j)(6) of the Act must be made in a budget neutral manner. We calculate a proposed budget neutral wage adjustment factor as established in the FY 2004 IRF PPS final rule (68 FR 45689), codified at § 412.624(e)(1), as described in the steps below. We use the listed steps to ensure that the proposed FY 2012 IRF standard payment conversion factor reflects the update to the wage indexes (based on the FY 2007 hospital cost report data) and the proposed labor-related share in a budget neutral manner:

Step 1. Determine the total amount of the estimated FY 2011 IRF PPS rates, using the FY 2011 standard payment conversion factor and the labor-related share and the wage indexes from FY 2011 (as published in the FY 2011 IRF PPS final rule (75 FR 42836)).

Step 2. Calculate the total amount of estimated IRF PPS payments using the FY 2011 standard payment conversion factor and the proposed FY 2012 labor-related share and CBSA urban and rural wage indexes.

Step 3. Divide the amount calculated in step 1 by the amount calculated in step 2. The resulting quotient is the proposed FY 2012 budget neutral wage adjustment factor of 0.9989.

Step 4. Apply the proposed FY 2012 budget neutral wage adjustment factor from step 3 to the FY 2011 IRF PPS standard payment conversion factor after the application of the adjusted market basket update to determine the proposed FY 2012 standard payment conversion factor.

We discuss the calculation of the proposed standard payment conversion factor for FY 2012 in section V.C. of this proposed rule.

C. Description of the Proposed IRF Standard Conversion Factor and Payment Rates for FY 2012

To calculate the proposed standard payment conversion factor for FY 2012, as illustrated in Table 10, we begin by applying the proposed adjusted market basket increase factor for FY 2012 that was adjusted in accordance with sections 1886(j)(3)(C) and (D) of the Act (1.5 percent, or 2.8 percent less a cumulative total adjustment of 1.3 percentage points, as described in section V.A.3. of this proposed rule), to the standard payment conversion factor for FY 2011 ($13,860). Applying the proposed 1.5 percent adjusted market basket increase factor for FY 2012 to the standard payment conversion factor for FY 2011 of $13,860 yields a standard payment amount of $14,068. Then, we apply the proposed budget neutrality factor for the FY 2012 wage index and labor-related share of 0.9989, which results in a standard payment amount of $14,052. Then we apply the proposed budget neutrality factor for the revised CMG relative weights of 0.9989, which results in a proposed standard payment amount of $14,037. Finally, we apply the proposed budget neutrality factors for the updates to the rural, LIP and IRF teaching status adjustments of 0.9998, 1.0327, and 1.0024, respectively, which results in a proposed standard payment amount of $14,528 for FY 2012.

After the application of the CMG relative weights described in Section III of this proposed rule, to the proposed FY 2012 standard payment conversion factor ($14,528), the resulting proposed unadjusted IRF prospective payment rates for FY 2012 are shown in Table 11, “Proposed FY 2012 Payment Rates.”

D. Example of the Methodology for Adjusting the Proposed Federal Prospective Payment Rates

Table 12 illustrates the methodology for adjusting the proposed Federal prospective payments (as described in sections V.A. through V.C. of this proposed rule). The following examples are based on two hypothetical Medicare beneficiaries, both classified into CMG 0110 (without comorbidities). The proposed unadjusted Federal prospective payment rate for CMG 0110 (without comorbidities) appears in Table 11.

Example:

One beneficiary is in Facility A, an IRF located in rural Spencer County, Indiana, and another beneficiary is in Facility B, an IRF located in urban Harrison County, Indiana. Facility A, a rural non-teaching hospital has a DSH percentage of 5 percent (which would result in a LIP adjustment of 1.0093), a wage index of 0.8391, and a rural adjustment of 18.7 percent. Facility B, an urban teaching hospital, has a DSH percentage of 15 percent (which would result in a LIP adjustment of 1.0269 percent), a wage index of 0.8896, and a teaching status adjustment of 0.0610.

To calculate each IRF's labor and non-labor portion of the proposed Federal prospective payment, we begin by taking the proposed unadjusted Federal prospective payment rate for CMG 0110 (without comorbidities) from Table 11. Then, we multiply the proposed labor-related share for FY 2012 (70.334 percent) described in section V.A.4 of this proposed rule by the proposed unadjusted Federal prospective payment rate. To determine the non-labor portion of the proposed Federal prospective payment rate, we subtract the labor portion of the proposed Federal payment from the proposed unadjusted Federal prospective payment.

To compute the proposed wage-adjusted Federal prospective payment, we multiply the labor portion of the proposed Federal payment by the appropriate wage index found in the addendum in Tables A and B. The resulting figure is the wage-adjusted labor amount. Next, we compute the proposed wage-adjusted Federal payment by adding the wage-adjusted labor amount to the non-labor portion.

Adjusting the proposed wage-adjusted Federal payment by the facility-level adjustments involves several steps. First, we take the wage-adjusted Federal prospective payment and multiply it by the appropriate rural and LIP adjustments (if applicable). Second, to determine the appropriate amount of additional payment for the teaching status adjustment (if applicable), we multiply the teaching status adjustment (0.0610, in this example) by the wage-adjusted and rural-adjusted amount (if applicable). Finally, we add the additional teaching status payments (if applicable) to the wage, rural, and LIP-adjusted Federal prospective payment rates. Table 12 illustrates the components of the adjusted payment calculation.

Thus, the proposed adjusted payment for Facility A would be $32,392.77 and the proposed adjusted payment for Facility B would be $30,592.91.

VI. Proposed Update to Payments for High-Cost Outliers Under the IRF PPS

A. Proposed Update to the Outlier Threshold Amount for FY 2012

Section 1886(j)(4) of the Act provides the Secretary with the authority to make payments in addition to the basic IRF prospective payments for cases incurring extraordinarily high costs. A case qualifies for an outlier payment if the estimated cost of the case exceeds the adjusted outlier threshold. We calculate the adjusted outlier threshold by adding the IRF PPS payment for the case (that is, the CMG payment adjusted by all of the relevant facility-level adjustments) and the adjusted threshold amount (also adjusted by all of the relevant facility-level adjustments). Then, we calculate the estimated cost of a case by multiplying the IRF's overall CCR by the Medicare allowable covered charge. If the estimated cost of the case is higher than the adjusted outlier threshold, we make an outlier payment for the case equal to 80 percent of the difference between the estimated cost of the case and the outlier threshold.

In the FY 2002 IRF PPS final rule (66 FR 41362 through 41363), we discussed our rationale for setting the outlier threshold amount for the IRF PPS so that estimated outlier payments would equal 3 percent of total estimated payments. For the 2002 IRF PPS final rule, we analyzed various outlier policies using 3, 4, and 5 percent of the total estimated payments, and we concluded that an outlier policy set at 3 percent of total estimated payments would optimize the extent to which we could reduce the financial risk to IRFs of caring for high-cost patients, while still providing for adequate payments for all other (non-high cost outlier) cases.

Subsequently, we updated the IRF outlier threshold amount in the FYs 2006 through 2010 IRF PPS final rules and the FY 2011 notice (70 FR 47880, 71 FR 48354, 72 FR 44284, 73 FR 46370, 74 FR 39762, and 75 FR 42836, respectively) to maintain estimated outlier payments at 3 percent of total estimated payments. We also stated in the FY 2009 final rule (73 FR 46370 at 46385) that we would continue to analyze the estimated outlier payments for subsequent years and adjust the outlier threshold amount as appropriate to maintain the 3 percent target.

To update the IRF outlier threshold amount for FY 2012, we propose to use FY 2010 claims data and the same methodology that we used to set the initial outlier threshold amount in the FY 2002 IRF PPS final rule (66 FR 41316 and 41362 through 41363), which is also the same methodology that we used to update the outlier threshold amounts for FYs 2006 through 2011. Based on an analysis of this updated data, we estimate that IRF outlier payments as a percentage of total estimated payments are approximately 2.7 percent in FY 2011. Based on the updated analysis, we propose to update the outlier threshold amount to $11,822 to maintain estimated outlier payments at approximately 3 percent of total estimated aggregate IRF payments for FY 2012.

The proposed outlier threshold amount of $11,822 for FY 2012 is subject to change in the final rule if more recent data become available for analysis or if any changes are made to any of the other proposed payment policies set forth in this proposed rule.

B. Proposed Update to the IRF Cost-to-Charge Ratio Ceilings

In accordance with the methodology stated in the FY 2004 IRF PPS final rule (68 FR 45674, 45692 through 45694), we apply a ceiling to IRFs' CCRs. Using the methodology described in that final rule, we propose to update the national urban and rural CCRs for IRFs, as well as the national CCR ceiling for FY 2012, based on analysis of the most recent data that is available. We apply the national urban and rural CCRs in the following situations:

• New IRFs that have not yet submitted their first Medicare cost report.
• IRFs whose overall CCR is in excess of the national CCR ceiling for FY 2012, as discussed below.
• Other IRFs for which accurate data to calculate an overall CCR are not available.

Specifically, for FY 2012, we estimate a proposed national average CCR of 0.669 for rural IRFs, which we calculate by taking an average of the CCRs for all rural IRFs using their most recently submitted cost report data. Similarly, we estimate a national average CCR of 0.520 for urban IRFs, which we calculate by taking an average of the CCRs for all urban IRFs using their most recently submitted cost report data. We apply weights to both of these averages using the IRFs' estimated costs, meaning that the CCRs of IRFs with higher costs factor more heavily into the averages than the CCRs of IRFs with lower costs. For this proposed rule, we have used the most recent available cost report data (FY 2009). This includes all IRFs whose cost reporting periods begin on or after October 1, 2008, and before October 1, 2009. If, for any IRF, the FY 2009 cost report was missing or had an “as submitted” status, we used data from a previous fiscal year's (that is, FY 2004 through FY 2008) settled cost report for that IRF. We do not use cost report data from before FY 2004 for any IRF because changes in IRF utilization since FY 2004 resulting from the 60 percent rule and IRF medical review activities suggest that these older data do not adequately reflect the current cost of care.

In addition, in accordance with past practice, we propose to set the national CCR ceiling at 3 standard deviations above the mean CCR. Using this method, the national CCR ceiling is set at 1.55 for FY 2012. This means that, if an individual IRF's CCR exceeds this ceiling of 1.55 for FY 2012, we would replace the IRF's CCR with the appropriate national average CCR (either rural or urban, depending on the geographic location of the IRF). We estimate the national CCR ceiling by:

Step 1. Taking the national average CCR (weighted by each IRF's total costs, as discussed above) of all IRFs for which we have sufficient cost report data (both rural and urban IRFs combined).

Step 2. Estimating the standard deviation of the national average CCR computed in step 1.

Step 3. Multiplying the standard deviation of the national average CCR computed in step 2 by a factor of 3 to compute a statistically significant reliable ceiling.

Step 4. Adding the result from step 3 to the national average CCR of all IRFs for which we have sufficient cost report data, from step 1.

We note that the proposed national average rural and urban CCRs and our estimate of the national CCR ceiling in this section are subject to change in the final rule if more recent data become available for use in these analyses.

VII. Impact of the IPPS Data Matching Process Changes on the IRF PPS Calculation of the Low-Income Percentage Adjustment Factor

Section 1886(j)(3)(A)(v) of the Act confers broad authority upon the Secretary to adjust the per unit payment rate “by such * * * factors as the Secretary determines are necessary to properly reflect variations in necessary costs of treatment among rehabilitation facilities.” For example, we adjust the Federal prospective payment amount associated with a CMG to account for facility-level characteristics such as an IRF's LIP, teaching status, and location in a rural area, if applicable, as described in § 412.624(e).

In the FY 2002 IRF PPS final rule (66 FR 41359 through 41361) that implemented the IRF PPS, we established the IRF LIP adjustment. In that final rule, we said that we would calculate the LIP adjustment by using the same disproportionate share hospital (DSH) patient percentage used in the acute IPPS DSH adjustment.

The DSH patient percentage is equal to the sum of the “Supplemental Security Income (SSI) fraction” and the “Medicaid Fraction.” We compute the SSI fraction (also known as the “SSI ratio” or the “Medicare fraction”) by dividing the number of the facility's inpatient days that are furnished to patients who were entitled to both Medicare Part A (including patients who are enrolled in a Medicare Advantage (Part C) plan) and SSI benefits by the facility's total number of patient days furnished to patients entitled to benefits under Medicare Part A (including patients who are enrolled in a Medicare Advantage (Part C) plan). To determine the number of inpatient days for individuals entitled to both Medicare Part A and SSI, as required for calculation of the numerator of the SSI fraction, CMS matches the Medicare records and SSI eligibility records for each IRF's patients during the FY. The data underlying the match process are drawn from: (a) The Medicare Provider Analysis and Review (MedPAR) data file; and (b) SSI eligibility data provided by the Social Security Administration (SSA). CMS recently revised this data match. See the FY 2011 IPPS final rule (75 FR 50041, 50276).

As previously stated, it is our policy to calculate the LIP adjustment using the same DSH patient percentage used in the acute IPPS DSH adjustment. In keeping with this long-standing policy, we will use the same matching process as IPPS for calculating the SSI fractions for FYs 2011 and beyond. This process is described in the FY 2011 IPPS final rule, and will be used to calculate IRFs' SSI fractions for FY 2011. The FY 2011 IPPS final rule (75 FR 50277 through 50286) gives information on this revised data matching process.

VIII. Proposed Updates to the Policies in 42 CFR Part 412

Prior to the implementation of the IRF PPS on January 1, 2002, IRFs were paid based on the costs that they reported on their Medicare cost reports, subject to some limits. To simplify the cost reporting process, both for providers and for CMS and the Medicare contractors that monitored the cost reports, regulations were put into place that carefully defined, for example, when and how providers could be considered “new” and when and how they could expand their bed size and square footage. Under the IRF PPS, however, Medicare pays IRFs according to Federal prospective payment rates that are no longer tied to an individual IRF's Medicare cost reports. This new payment methodology has made some of the requirements regarding new IRFs and IRF expansions obsolete.

In addition, prior to 2002, the regulations distinguished between freestanding rehabilitation hospitals and rehabilitation units of acute care hospitals, with separate regulatory sections for the two types of facilities even though many of the same requirements applied to both. Under the IRF PPS, the distinctions between freestanding IRFs and IRF units are no longer relevant because both types of facilities are paid the same and are subject to the same rules and requirements. The current separation of the regulatory sections results in unnecessary repetition and confusion about which regulations apply to which types of facilities.

In addition, we added new IRF coverage requirements to § 412.622(a)(3), (4), and (5) in the FY 2010 IRF PPS final rule (74 FR 39762 at 39811 through 39812) for IRF discharges occurring on or after January 1, 2010. Several of the IRF conditions of payment in the existing § 412.23(b) and § 412.29, including the requirements for preadmission screenings to be conducted on all prospective patients, the requirements for IRF patients to receive close medical supervision, the requirements for plans of care to be developed for all IRF patients, and the requirements for patients to receive an interdisciplinary approach to care in the IRF, mirror some of the IRF coverage requirements in § 412.622(a)(3), (4), and (5).

Finally, in recent years, we have observed an increase in the number and complexity of acquisitions and mergers occurring in this industry. In some cases, the current Medicare rules and requirements for IRFs do not adequately address the number and complexity of acquisitions and mergers because they simply did not occur when the regulations were written. In other cases, regulations were written to address issues that do not exist today.

For all of these reasons, in this proposed rule we propose to consolidate, clarify, and revise the regulations for inpatient rehabilitation facilities at § 412.23(b), § 412.25(b), § 412.29, and § 412.30 to update and simplify the policies, to eliminate unnecessary repetition and confusion, and to enhance the consistency with the IRF coverage requirements in § 412.622(a)(3), (4), and (5). Since the proposed modifications would eliminate regulations that may no longer be strictly necessary under the IRF PPS, they would enable IRFs to more easily adjust to beneficiary changes in demand for IRF services, which would improve beneficiary access to these services. The proposed modifications would also reduce costs for providers and for the government by reducing the amount of time and expenditures devoted to adhering to (for providers) and enforcing (for the government) regulations that may no longer be strictly necessary. Since we have no way of determining how many IRFs might take advantage of the added flexibility these regulations afford to expand or change their operations, we are not able to quantify the savings. However, for example, each time an IRF unit submits a request to add beds to its facility under the current regulations, the Medicare contractor must determine whether or not the added IRF beds will be considered “new.” To be considered “new,” the beds must be added at the start of a cost reporting period, and the hospital must have “obtained approval, under State licensure and Medicare certification, for an increase in its hospital bed capacity that is greater than 50 percent of the number of beds it seeks to add to the unit.” We believe that the first requirement (that beds can only be added at the start of a cost reporting period) is difficult, and potentially costly, for IRFs that are expanding through new construction because the exact timing of the end of a construction project is often difficult to predict. Construction delays can hamper an IRF's ability to have the construction completed exactly at the start of a cost reporting period, which can lead to significant revenue loss for the facility if the IRF is unable to add beds until the next cost reporting period. We believe that it is no longer necessary to require IRF beds to be added at the start of a cost reporting period. Further, the current regulations require Medicare contractors to expend unnecessary resources determining whether the IRF has met the second criteria, which requires the hospital to have “obtained approval, under State licensure and Medicare certification, for an increase in its hospital bed capacity that is greater than 50 percent of the number of beds it seeks to add to the unit.” The proposed modifications to the regulations are designed to simplify the regulations in order to minimize the amount of effort that Medicare contractors would need to spend enforcing them. Finally, the proposed modifications would enhance the consistency between the IRF coverage and payment requirements.

We note that § 412.25(b) applies to both IRFs and inpatient psychiatric facilities (IPFs), so the proposed revisions to § 412.25(b) would also affect IPFs in similar ways.

A. Proposed Consolidation of the Requirements for Rehabilitation Hospitals and Rehabilitation Units

Under the IRF PPS, rehabilitation hospitals and rehabilitation units of acute care hospitals (and critical access hospitals (CAHs)) are paid the same and, with very few exceptions, are subject to the same Medicare rules and requirements. For this reason, we believe that it is no longer necessary to have separate sections in 42 CFR part 412 that define the requirements for rehabilitation hospitals and rehabilitation units of acute care hospitals (and CAHs). This leads to excessive repetition and potential confusion about which rules apply to which types of facilities.

Thus, we propose to revise and consolidate the regulations for rehabilitation facilities that are currently in § 412.23(b) (for rehabilitation hospitals), § 412.29 (for rehabilitation units), and § 412.30 (for rehabilitation units) into a revised § 412.29 that would contain the requirements for all IRFs, whether they be freestanding rehabilitation hospitals or rehabilitation units of acute care hospitals (or CAHs). We believe that this would simplify the regulations by consolidating the majority of the requirements for IRFs into just one sub-section of part 412.

Although we are proposing slight modifications to the regulations in § 412.25(b), as discussed in section VII.C. of this proposed rule, we are not proposing to move the IRF regulations in § 412.25 to § 412.29 in this proposed rule. The regulations in § 412.25, such as the requirement to have beds that are physically separate from the rest of the hospital, the requirement that the unit be serviced by the same Medicare contractor as the rest of the hospital, and the requirement that the unit be treated as a separate cost center for cost finding and apportionment purposes, by their nature apply uniquely to units that are part of another hospital. Since these requirements are not applicable to freestanding IRFs, we do not believe that it would be appropriate to include them with the rest of the IRF regulations in § 412.29 that are intended to apply to both freestanding IRF hospitals and to IRF units of hospitals. Further, we are not proposing modifications to § 412.25, other than the proposed changes to § 412.25(b) as discussed in section VII.C. of this proposed rule, because the regulations in § 412.25(a) through (g) (excluding (b)) remain relevant and important for defining IRF units of hospitals for payment purposes.

However, we propose to replace the text that is currently located at § 412.23(b) with text that simply refers the reader to the requirements in § 412.29, and move the rest of § 412.23(b) and all of § 412.30 to § 412.29. We propose to leave text in § 412.23(b) that refers IRFs to the requirements they must meet in § 412.29 only so that we do not disturb the ordering of the rest of § 412.23 that contain the Medicare regulations for inpatient psychiatric facilities, children's hospitals, and long-term care hospitals. Specifically, we propose to move all of the text in § 412.23(b) to § 412.29 except for a new paragraph that refers to the requirements in § 412.29, which would read as follows: “(b) Rehabilitation hospitals. A rehabilitation hospital must meet the requirements specified in § 412.29 to be excluded from the prospective payment systems specified in § 412.1(a)(1) and to be paid under the prospective payment system specified in § 412.1(a)(3) and in subpart P of this part.”

B. Proposed Revisions to the Regulations at Proposed § 412.29

As described in section VIII.A. of this proposed rule, we propose to replace the text that is currently located at § 412.23(b) with text that simply refers the reader to the requirements in § 412.29, and move the rest of § 412.23(b) and all of § 412.30 to § 412.29. To eliminate any unnecessary repetition, and to update and clarify the regulations, we are also proposing revisions to the language from all three of the current sections, § 412.23(b), § 412.29, and § 412.30. As stated in current § 412.30, a rehabilitation unit can only be considered “new” if the hospital has never had a rehabilitation unit before. We have encountered circumstances in which a hospital closed a rehabilitation unit over 20 years ago and is now seeking to re-open the rehabilitation unit, and we believe that it would be reasonable to consider the rehabilitation unit to be “new.” Thus, we are proposing to revise the requirements for an IRF to be considered “new” to indicate that an IRF can be considered “new” if it has not been paid under the IRF PPS in 42 CFR part 412, subpart P for at least 5 calendar years. These proposed requirements would now apply equally to both rehabilitation hospitals and rehabilitation units of acute care hospitals (or CAHs), and would be located in proposed § 412.29(c)(1). We believe that 5 calendar years would allow a sufficient amount of time between an IRF closing and an IRF reopening to prevent IRFs from closing and reopening annually to avoid meeting certain requirements, while allowing IRFs more flexibility to meet changing demand for IRF services.

In addition, we propose to clarify and simplify the rules regarding change of ownership (including mergers) or leasing, as defined in § 489.18. Changes of ownership or leasing, as defined in § 489.18, and mergers in which the new owner(s) accept assignment of the previous owner's provider agreements are transfers of the provider agreement. Therefore, we propose that IRFs in these situations would retain their excluded status and would continue to be paid under the IRF PPS before and after the change, as long as the IRF continues to meet all of the requirements specified in § 412.29. However, we propose to clarify that a change of ownership (including merger) or leasing in which the new owner(s) do not accept assignment of the previous owner's provider agreement would be considered a voluntary termination of the provider agreement, and the new owner(s) would need to reapply to the Medicare program as an initial applicant to operate a new IRF. In the case of changes of ownership (including mergers) or leasing, we propose that the new owner(s) would not be required to wait for 5 calendar years to reapply to operate a new IRF, but would be required to complete the initial hospital or critical access hospital certification process to participate in Medicare as a new IRF.

Further, we also propose to revise the regulations regarding new IRF beds. The regulations currently in § 412.30(d), which require an IRF to obtain “approval, under State licensure and Medicare certification, for an increase in its hospital bed capacity that is greater than 50 percent of the number of beds it seeks to add to the unit,” have become less and less relevant under a prospective payment system in which payments are no longer based on IRFs' reported costs. Thus, we propose to eliminate these requirements and, instead, propose in § 412.29(c)(2) that IRF beds would be considered “new” if they meet all applicable State Certificate of Need and State licensure laws and if they get written approval from the appropriate CMS regional office (RO), as described below. We propose that new IRF beds can be added one time at any point during a cost reporting period (instead of at the start of a cost reporting period), but we propose to require that a full 12-month cost reporting period elapse before an IRF that has had beds delicensed or decertified can add new beds. The reason for this proposed requirement is to prevent IRFs from decreasing and increasing bed size every year to avoid having to meet certain requirements. We propose to require the IRF to obtain written approval from the appropriate CMS RO for the addition of the new beds in order to allow the CMS RO to verify that a full 12-month cost reporting period has elapsed before an IRF that has had beds delicensed or decertified can add new beds.

C. Proposed Revisions to the Requirements for Changes in Bed Size and Square Footage

Prior to the IRF PPS and the IPF PPS, excluded units (IRFs and IPFs) were paid based on their costs, as reported on their Medicare cost reports, subject to certain facility-specific cost limits. These cost-based payments were determined separately for operating and capital costs. Thus, under cost-based payments, the facilities' capital costs were determined, in part, by their bed size and square footage. Changes in the bed size and square footage would complicate the facilities' capital cost allocation. Thus, the Medicare regulations at § 412.25 limited the situations under which an IRF or IPF could change its bed size and square footage.

Under the IRF PPS and IPF PPS, however, a facility's bed size and square footage is not relevant for determining the individual facility's Medicare payment. Thus, we believe it is appropriate to modify some of the restrictions on a facility's ability to change its bed size and square footage. We are therefore proposing in this proposed rule to relax the restrictions on a facility's ability to increase its bed size and square footage. Under the proposed requirements in § 412.25, an IRF or IPF could change (either increase or decrease) its bed size or square footage one time at any point in a given cost reporting period as long as it notifies the CMS RO within 30 days of the proposed change and maintains the required documentation. We note that any IRF beds that are added to an existing IRF during the IRF's cost reporting period would only be considered new through the end of that cost reporting period. Further, the new IRF beds would be included in the IRF's compliance review calculations under the 60 percent rule specified in § 412.29(b) beginning on the date that they are first added to the IRF.

D. Proposed Revisions To Enhance Consistency Between the IRF Coverage and Payment Requirements

In the FY 2010 IRF PPS final rule (74 FR 39762 at 39788 through 39798), CMS implemented new IRF coverage requirements in § 412.622(a)(3),(4), and (5). These new IRF coverage requirements replaced coverage requirements that were 25 years old and no longer reflected current medical practice. In updating these coverage requirements, we added further specificity to some of the terms that had been discussed in the old coverage requirements. For example, we more clearly defined in the new IRF coverage requirements what we mean by an IRF preadmission screening, care planning, and close medical supervision. In the proposed revisions to § 412.23(b) and § 412.29, we propose to enhance the consistency between the IRF coverage and payment requirements by incorporating some of the added specificity from the coverage requirements into the same requirements for payment. Specifically, we propose to clarify that, as in the IRF coverage requirements, IRF preadmission screenings must be reviewed and approved by a rehabilitation physician prior to each prospective patient's admission to an IRF. As we said in the FY 2010 IRF PPS final rule (74 FR 39791), we believe that it is important to require that a rehabilitation physician document the reasoning behind the decision to admit a patient to an IRF, to enable medical reviewers to understand the rationale for the decision.

Further, we propose to clarify, as we did in the coverage requirements at § 412.622(a)(3)(iv), that close medical supervision in an IRF means that the patient receives at least 3 face-to-face visits per week by a licensed physician with specialized training and experience in inpatient rehabilitation to assess the patient both medically and functionally, as well as to modify the course of treatment as needed to maximize the patient's capacity to benefit from the rehabilitation process. As we stated in the FY 2010 IRF PPS final rule (74 FR 39796), we believe that at least 3 face-to-face rehabilitation physician visits per week are necessary to coordinate the patient's medical needs with his or her functional rehabilitation needs while in the facility.

Finally, we propose to clarify that we believe that discharge planning, in addition to assessment of the patient's goals and progress toward those goals, is an integral part of the interdisciplinary team approach to care that is provided in IRFs.

The specific proposed changes to the regulations at part 412 are shown in the “Regulation Text” of this proposed rule of this proposed rule. We encourage stakeholder comment on these proposed changes.

IX. Quality Reporting for Inpatient Rehabilitation Hospitals

A. Background and Statutory Authority

CMS seeks to promote higher quality and more efficient health care for Medicare beneficiaries. Our efforts are, in part, effectuated by quality reporting programs coupled with the public reporting of data collected under those programs. The quality reporting programs exist for various settings such as hospital inpatient services (the Hospital Inpatient Quality Reporting (Hospital IQR) Program), hospital outpatient services (the Hospital Outpatient Quality Data Reporting Program (HOP QDRP)), and for physicians and other eligible professionals the Physician Quality Reporting System (formerly called the Physician Quality Reporting Initiative, or PQRI). We have also implemented quality reporting programs for home health agencies and skilled nursing facilities that are based on conditions of participation, and an end-stage renal disease quality incentive program (ESRD QIP) that links payment to performance.

Section 3004(b) of the Affordable Care Act added section 1886(j)(7) to the Act, which requires the Secretary to implement a quality reporting program for Inpatient Rehabilitation Facilities (IRFs), including freestanding IRF hospitals and IRF units within hospitals. Beginning in FY 2014, section 1886(j)(7)(A)(i) of the Act requires the Secretary to reduce the increase factor with respect to a fiscal year by 2 percentage points for any IRFs that do not submit data to the Secretary in accordance with requirements established by the Secretary for that fiscal year. Section 1886(j)(7)(A)(ii) of the Act notes that this reduction may result in the increase factor being less than 0.0 for a fiscal year, and in payment rates under this subsection for a fiscal year being less than the payment rates for the preceding fiscal year. Any reduction based on failure to comply with the reporting requirements is, in accordance with section 1886(j)(7)(B) of the Act, limited to the particular fiscal year involved. The reductions are not to be cumulative and will not be taken into account in computing the payment amount under subsection (j) for a subsequent fiscal year.

Section 1886(j)(7)(C) of the Act requires that each IRF submit data to the Secretary on quality measures specified by the Secretary. The data must be submitted in a form and manner, and at a time, specified by the Secretary. The Secretary is generally required to specify measures that have been endorsed by the entity with a contract under section 1890(a) of the Act. This contract is currently held by the National Quality Forum (NQF). The NQF is a voluntary consensus standard-setting organization with a diverse representation of consumer, purchaser, provider, academic, clinical, and other health care stakeholder organizations. The NQF was established to standardize health care quality measurement and reporting through its consensus development process. We have generally adopted NQF-endorsed measures in our reporting programs. However, section 1886(j)(7)(D)(ii)of the Act provides that “in the case of a specified area or medical topic determined appropriate by the Secretary for which a feasible and practical measure has not been endorsed by the entity with a contract under section 1890(a) of the Act, the Secretary may specify a measure that is not so endorsed as long as due consideration is given to measures that have been endorsed or adopted by a consensus-based organization identified by the Secretary.” Under section 1886(j)(7)(D)(iii) of the Act, the Secretary must publish the selected measures that will be applicable with respect to FY 2014 no later than October 1, 2012.

Section 1886(j)(7)(E) of the Act requires the Secretary to establish procedures for making data submitted under the IRF quality reporting program available to the public. The Secretary must ensure that an IRF is given the opportunity to review the data that is to be made public prior to the data being made public. The Secretary must report quality measures that relate to services furnished in inpatient settings in rehabilitation facilities on the CMS Web site.

B. Quality Measures for IRF Quality Reporting Program for FY 2014

1. General

We propose to adopt 2 quality measures for FY 2014. These quality measures are: (1) Urinary Catheter-Associated Urinary Tract Infections (CAUTI), and (2) Pressure Ulcers that are New or Have Worsened. We also discuss below a third measure that we are currently developing and intend to propose to adopt for FY 2014 in future rulemaking. That measure will be the 30-day Comprehensive All-Cause Risk-Standardized Readmission Measure.

2. Considerations in the Selection of the Proposed Quality Measures

In implementing the IRF Quality Reporting Program, we seek to collect data on measures that will provide information on the full spectrum of the quality of care being furnished by IRFs while imposing as little burden as possible on IRFs. We seek to collect data on valid, reliable, and relevant quality measures and to make that data available to the public in accordance with applicable law.

We also seek to align new Affordable Care Act reporting requirements for IRFs with HHS high priority conditions and topics, as reflected in the National Quality Strategy released by the Secretary (http://www.healthcare.gov/​center/​reports/​quality03212011a.html#es) and to ultimately provide a comprehensive assessment of the quality of healthcare delivered. We note that adopting a comprehensive set of measures may take multiple years because of the time, effort and resources required by IRFs and CMS to develop and implement the data collection and reporting infrastructure needed to support an expanded quality reporting program. Current areas of high priority for HHS include patient safety, healthcare associated infections, and reduction of avoidable readmissions. These priorities are consistent with the aim of providing safe, sound care for all patients receiving services in any healthcare setting including IRFs.

In our consideration and selection of a comprehensive set of quality measures, we have several objectives. First, the measures should align with CMS' three-part aim for better care for individuals, better health for populations, and lower cost through improvement. Second, the measures should relate to specific priorities in the care setting for which they are adopted. For IRFs, these include improving patient safety (such as avoiding healthcare associated infections (HAI)), reducing adverse events, and encouraging better coordination of care and person-and-family-centered care. Third, the measures should address improved quality for the primary role of IRFs, which is to address the rehabilitation needs of the individual including improved functional status and achievement of successful return to the community post-discharge.

Other considerations in proposing quality measures include alignment with other Medicare quality reporting programs and other private sector initiatives; suggestions and input received from multiple stakeholders and national subject matter experts; seeking measures that have a low probability of causing unintended adverse consequences; and considering measures that are feasible, that is, measures that can be technically implemented within the capacity of the CMS infrastructure for data collection, analyses, and calculation of reporting and performance rates as applicable.

3. FY 2014 Measure #1: Healthcare Associated Infection Measure (HAI): Urinary Catheter-Associated Urinary Tract Infections (CAUTI)

The first measure we propose for IRFs for purposes of calculating the FY 2014 Increase Factor is an application of the NQF-endorsed measure developed by the Centers for Disease Control (CDC) for hospitals entitled (NQF# 0138) “Urinary Catheter-Associated Urinary Tract Infection [CAUTI] for Intensive Care Unit Patients” to the IRF setting. This measure was developed by the CDC to measure the percentage of patients with urinary catheter associated urinary tract infections in the ICU context. At the time of this proposed rule, the measure we are applying (NQF# 0138) is undergoing measure maintenance review by NQF which may result in a change in how the CDC calculates the aggregated data from using a standard rate for CAUTI, to the use of a standardized infection ratio (SIR) of healthcare associated urinary catheter-associated urinary tract infections. We propose to adopt the current measure in this rulemaking cycle. However, we intend to propose the adoption of any modifications to this measure that may result from the NQF review process in future rulemaking. We recognize that the NQF has endorsed this measure for the hospital setting, but believe that this measure is highly relevant to IRFs in that urinary catheters are commonly used in the IRF setting. Section 1886(j)(7)(D)(ii) provides that “in the case of a specified area or medical topic determined appropriate by the Secretary for which a feasible and practical measure has not been endorsed by the entity with a contract under section 1890(a), the Secretary may specify a measure that is not so endorsed as long as due consideration is given to measures that have been endorsed or adopted by a consensus-based organization identified by the Secretary.” We reviewed the NQF's consensus endorsed measures, and were unable to identify any NQF-endorsed measures for urinary catheter-associated urinary tract infections for the IRF setting. We are unaware of any other measures of urinary tract infections that have been approved by voluntary consensus standards bodies.

Having given due consideration to other measures that have been endorsed or adopted by a consensus entity, we propose to adopt an application of the NQF-endorsed CAUTI measure under the Secretary's authority to select non-NQF endorsed measures where NQF-endorsed measures do not exist for a specified area or medical topic. While we are proposing to adopt the measure under the exception authority provided in section 1886(j)(7)(D)(ii), we note that we intend to ask NQF to formally extend its endorsement of the existing CAUTI measure to the IRF setting.

Urinary tract infections (UTIs) are a common cause of morbidity and mortality. The urinary tract is the most common site of healthcare-associated infection, accounting for more than 30 percent of infections reported by acute care hospitals.^[1] Healthcare-associated UTIs are commonly attributed to catheterization of the urinary tract.

CAUTI can lead to complications as cystitis, pyelonephritis, gram-negative bacteremia, prostatitis, epididymitis, and orchitis in males and, less commonly, endocarditis, vertebral osteomyelitis, septic arthritis, endophthalmitis, and meningitis in all patients. Complications associated with CAUTI include discomfort to the patient, prolonged hospital stay, and increased cost and mortality. Each year, more than 13,000 deaths are associated with UTIs.¹ Prevention of CAUTIs is discussed in the CDC/HICPAC document, Guideline for Prevention of Catheter-associated Urinary Tract Infections.^[2] The NQF endorsed CAUTI measure we are proposing is currently collected by the CDC's National Healthcare Safety Network (NHSN), a secure Internet-based health surveillance system, and we note that the CDC is also collecting data on this measure from IRFs. NHSN is currently used, in part, as one means by which certain State-mandated reporting and surveillance data are collected.

The HHS National Action Plan to Prevent HAI (http://www.hhs.gov/​ash/​initiatives/​hai/​actionplan/​index.html) identified catheter-associated urinary tract infections as the leading type of HAI that is largely preventable. The technical expert panel (TEP) convened by the CMS measure-developer-contractor on February 4, 2011 (https://www.cms.gov/​LTCH-IRF-Hospice-Quality-Reporting/​) also identified CAUTI as a high priority quality issue for IRFs.

4. FY 2014 Measure #2: Percent of Patients With Pressure Ulcers That are New or Worsened

The second measure we propose for IRFs for purposes of calculating the FY 2014 increase factor is an application of a CMS developed NQF-endorsed measure for short-stay nursing home patients; (NQF# NH-012-10) “Percent of Residents with Pressure Ulcers that Are New or Worsened.” This is the percentage of patients who have one or more stage 2-4 pressure ulcers that are new or worsened, when assessed at the time of discharge as compared with the patient's condition when it was assessed at admission. We recognize NQF endorsement of this measure is limited to short-stay nursing home patients, but believe that this measure is highly relevant and a high priority quality issue in the care of IRF patients. Currently, there are no other NQF-endorsed pressure ulcer measures that are applicable to IRFs and we were unable to identify other measures for pressure ulcers that have been endorsed or adopted for the IRF context by a consensus organization. We are also unaware of any other measures of pressure ulcers that have been approved by voluntary consensus standards bodies. For these reasons, we propose to adopt an application of this NQF-endorsed measure under the Secretary's authority to select non-NQF endorsed measures where measures do not exist for a specified area or medical topic. We also intend to ask NQF to extend its endorsement of the existing short-stay nursing home pressure ulcer measure to the IRF setting.

Pressure ulcers are high-volume and high-cost adverse events across the spectrum of health care settings from acute hospitals to home health. Patients in the IRF setting may have medically complex conditions and severe functional limitations, and are therefore at high risk for the development, or worsening, of pressure ulcers. Pressure ulcers are serious medical conditions and an important measure of quality. Pressure ulcers can lead to serious, life-threatening infections, which substantially increase the total cost of care. As reported in the August 22, 2007, Inpatient Hospital PPS Final Rule for FY 2008 (72 FR 47205) in 2006 there were 322,946 reported cases of Medicare patients with a pressure ulcer as a secondary diagnosis in acute care hospitals.

5. Potential FY 2014 measure #3: 30-day Comprehensive All-Cause Risk-Standardized Readmission Measure

Avoidable hospital readmissions are a high priority for HHS and CMS. We are currently developing setting-specific risk adjusted 30-day all-condition all-cause risk-standardized readmission measures for hospitals, IRFs, long term care hospitals and nursing homes. The main features of the measure methodology will be consistent with that of the NQF-endorsed CMS hospital risk-adjusted 30-day readmission measures for the Acute Myocardial Infarction (AMI), Heart Failure (HF), Pneumonia and Percutaneous Coronary Intervention (PCI). We plan to cover the maximum number of patient conditions possible in the all-condition measures. We will consult literature and national experts and conduct analyses on the types and comorbidities of the patients of each setting in order to establish appropriate risk-adjustment of the measures as well as the meaning/definition of readmission and the appropriate time-window for readmission for each care setting. To expand beyond the condition-specific measures to an all-condition readmission measure for each setting, we will conduct analyses to determine whether it is statistically and clinically sound to derive the all-condition measures from one single risk adjustment model, or if it would be better to form a composite of multiple models for multiple conditions. We plan to use hierarchical logistic regression modeling to take into account the effects of the clustering of patients and the sample size in the IRF setting. This measure is expected to be completed in late 2011, at which time it will be submitted to the entity with a contract under section 1890(a) of the Act for endorsement.

We invite public comments on the proposed quality measures for FY 2014: (1) Urinary Catheter-Associated Urinary Tract Infections (CAUTI); (2) Pressure Ulcers that are New or Have Worsened. We also invite public comment on our intent to propose a 30-day Comprehensive All-Cause Risk-Standardized Readmission Measure.

C. Data Submission Requirements

1. Proposed Method of Data Submission for HAI Measure (CAUTI)

We propose to require that IRFs submit data on the Urinary Catheter-Associated Urinary Tract Infection (CAUTI) measure through the Centers for Disease Control (CDC)/National Healthcare Safety Network (NHSN). As we noted above, the NHSN is a secure, Internet-based surveillance system maintained by the CDC that can be utilized by all types of healthcare facilities in the United States, including acute care hospitals, long term acute care hospitals, psychiatric hospitals, rehabilitation hospitals, outpatient dialysis centers, ambulatory surgery centers, and long term care facilities. The NHSN enables healthcare facilities to collect and use data about HAIs, including information on clinical practices known to prevent HAIs, information on the incidence or prevalence of multidrug-resistant organisms within their organizations, and information on other adverse events. Some States use the NHSN as a means of collecting state law mandated HAI reporting. NHSN collects data via a Web-based tool hosted by the CDC (http://www.cdc.gov/​). This reporting service is provided free of charge to healthcare facilities. Additionally, the ability of the CDC to receive NHSN measures data from electronic health records (EHR) may be possible in the near future. Currently, more than 20 States require hospitals to report HAIs using NHSN, and the CDC supports more 4,000 hospitals that are using the NHSN.

We propose for IRFs to submit the data elements needed to calculate the Urinary Catheter-Associated Urinary Tract Infection measure using the NHSN's standard data submission requirements which requires submission of data on HAI events on all patients. Collecting data on all patients will provide CMS with the most robust, accurate reflection of the quality of care delivered to Medicare beneficiaries as compared with non-Medicare patients. Therefore, to measure the quality of care that is delivered to Medicare beneficiaries in the IRF setting, we are proposing to collect quality data related to HAI events on all patients regardless of payor.

CDC/NHSN requirements may include adherence to training requirements, use of CDC measure specifications, data element definitions, data submission requirements and instructions, data reporting timeframes, as well as NHSN participation forms and indications to CDC allowing CMS to access data for this measure for the IRF quality reporting program purposes. Detailed requirements for NHSN participation, measure specifications, and data collection can be found at http://www.cdc.gov/​nhsn/​. We propose to require IRFs to use the specifications and data collection tools for the proposed Urinary Catheter-Associated Urinary Tract Infections as required by CDC as of the time that the data is submitted.

For purposes of calculating the FY 2014 increase factor we propose to collect data on CAUTI events that occur from October 1, 2012 through December 31, 2012, the final fiscal quarter of FY 2013. We propose that all subsequent IRF quality reporting cycles would be based on a full calendar year (CY) cycle (that is January 1 through December 31 of the applicable year). For example, the FY 2015 payment determinations will be made based on CY 2013 data submitted to CDC. We welcome comments on the proposed reporting cycle for IRFs.

Should this proposed measure be finalized, further details regarding data submission and reporting requirements for this measure will be posted on the CMS Web site http://www.cms.gov/​LTCH-IRF-Hospice-Quality-Reporting/​ by no later than January 31, 2012.

IRFs are also encouraged to visit the CDC Web site http://www.cdc.gov/​nhsn/​ in order to review the NHSN enrollment and reporting requirements.

2. Proposed Method of Data Submission for the Percent of Patients With New or Worsened Pressure Ulcer Measure

We seek to implement the IRF Quality Reporting Program in a manner that imposes as little burden as possible. IRFs already are required to submit certain data for purposes of determining payment via the current Inpatient Rehabilitation Facility-Patient Assessment Instrument (IRF-PAI). The IRF-PAI also includes currently optional “quality indicators” (QI). To support the standardized collection and calculation of quality measures specifically focused on IRF services, we propose to modify the current IRF-PAI by replacing the current optional pressure ulcer items in the QI section of the IRF-PAI with mandatory pressure ulcer data elements for the proposed measure.

We propose for IRFs to submit the data needed to calculate the measure “Percent of Patients with New or Worsened Pressure Ulcers” on all Medicare patients. Therefore, to measure the quality of care that is delivered to Medicare beneficiaries in the IRF setting, we are proposing to collect quality data related to new or worsening pressure ulcers on all Medicare patients.

We propose to use the IRF-PAI to collect pressure ulcer data elements that would be similar to those collected through the Minimum Data Set 3.0 (MDS 3.0), which is a reporting instrument that is used in nursing homes. A draft of the proposed IRF-PAI revisions with the new pressure ulcer elements is available on the CMS Web site at http://www.cms.gov/​InpatientRehabFacPPS/​04_​IRFPAI.asp#TopOfPage. The current MDS 3.0 pressure ulcer items evolved as an outgrowth of CMS' work to develop a standardized patient assessment instrument, now referred to as CARE (Continuity Assessment Record & Evaluation).

The CARE assessment instrument was developed and tested in the post-acute care payment reform demonstration (PAC-PRD) which included IRFs as required by section 5008 of the 2005 Deficit Reduction Act (DRA) (Pub. L. 109-171, enacted February 8, 2006) (more information may be found at http://www.pacdemo.rti.org). We note that the MDS data elements were supported by the National Pressure Ulcer Advisory Panel (NPUAP). We believe that modifying the current IRF-PAI pressure ulcer items to be consistent with the standardized data elements now used in the MDS 3.0, will drive uniformity across settings that will lead to better quality of care in IRFs and ultimately, across the continuum of care settings. If this proposal is finalized, additional details regarding the use of modified IRF-PAI data elements to calculate this measure will be published on the CMS Web site at http://www.cms.gov/​LTCH-IRF-Hospice-Quality-Reporting/​ by no later than January 31, 2012. We invite comments on these proposals for the submission of data on the proposed quality measure for pressure ulcers.

3. Potential Method of Data Submission for the 30-day Comprehensive All-Cause Risk-Standardized Readmission Measure

In the FY 2013 rule cycle we anticipate being able to propose using claims data otherwise submitted by the IRF as the data to calculate this measure. As such, we anticipate not needing additional reporting to fulfill the data needs if this measure is proposed and adopted. We generally anticipate calculating the measure based on 3 years of claims data in order to provide a sufficient number of discharges to calculate this measure.

D. Public Reporting

Under section 1886(j)(7)(E) of the Act, the Secretary is required to establish procedures for making data submitted by IRFs under the IRF quality reporting program available to the public. In accordance with this provision, we propose to establish procedures to make the data available to the public. We do not intend to make individual patient data public. We believe that existing laws governing access to agency records will adequately address requests for such data. We will adopt procedures that will ensure that an IRF has the opportunity to review the data to be made public prior to the data being made public. Additionally, as required under section 1886(j)(7)(E) of the Act, we will report quality measures that relate to services furnished in IRFs on CMS Web site.

E. Quality Measures for Future Consideration for Determination of Increase Factors for Future Fiscal Year Payments

As indicated previously in this section, we ultimately seek to adopt a comprehensive set of quality measures to be available for widespread use for informed decision making and quality improvement. While we are beginning with a limited set of measures in the IRF context, we expect to expand the measure set through rulemaking which will allow us, for example, to assess an IRF patient's functional status and whether he/she has achieved his or her rehabilitation goals and potential. As noted above, IRFs are currently required to submit certain data for purposes of determining payment via the IRF-PAI. The IRF-PAI currently includes optional QIs, and, if finalized, it would include mandatory data elements for use in the calculation of the pressure ulcer measure. Only a small number of IRFs are currently submitting data on the optional QI data elements.

We intend to propose a more robust set of measures for the IRF quality reporting program in the FY 2013 rulemaking cycle for the determination of the FY 2015 payment increase factor. We are considering the measures listed in Table 13 which include, but are not limited to, measure topics reported by providers of skilled nursing facility (SNF) services for short stay nursing home patients. We invite public comment on which quality measures would be considered most feasible and useful for IRFs to report for purposes of the FY 2015 payment update.

The quality data on short stay nursing home patients, which generates the short stay nursing home measures, are generated from the MDS 3.0 data collection vehicle. We are currently analyzing the quality data collected by nursing homes through the 3.0 version of the MDS which was implemented nationally in nursing homes in October 2010. Nursing homes are reporting data for long stay residents as well as short stay residents. We will be analyzing the performance of these nursing home measures through the end of 2011 and expect to have findings on their performance in the nursing home setting by early 2012. Next steps would include analyzing whether any of these measures would be appropriate for application in the IRF setting. We would invite public comment on the application of some or all of the short stay nursing home measures listed below. We are seeking NQF endorsement of these measures by August 2011. These measures may also be found at the NQF Web site http://www.qualityforum.org/​. CMS' short stay nursing home measures undergoing NQF endorsement include NH-010-10 percent of residents who self-report moderate to severe pain; NH-014-10 percent of residents assessed and appropriately given the seasonal influenza vaccine; NH-016-10 percent of residents assessed and appropriately given the seasonal pneumococcal vaccine and NH-009-10 percentage of residents on a scheduled pain medication regimen on admission who self-report a decrease in pain intensity or frequency.

If any of the short stay nursing home measures are appropriate for application to the IRF setting we would intend to propose some or all of those measures in the FY 2013 rulemaking cycle. Any added measures proposed through the FY 2013 rulemaking cycle would apply to the payment determination for FY 2015. We expect that any measures proposed through the FY 2013 rulemaking cycle would require changes to the IRF-PAI as a data collection vehicle and changes to the supporting information technology (IT) infrastructure. We expect that it would take providers, vendors, and CMS approximately one year to make the necessary changes to their IT systems to support the collection and reporting of new or modified IRF-PAI data elements. We would expect providers, vendors, and CMS to complete any needed changes to their IT systems by August 2013. We would intend to propose IRFs submit any additional or revised IRF-PAI data elements starting October 1, 2013 through December 31, 2013 for the FY 2015 payment update. Alternatively, we are considering and invite public comment on the possibility of basing future quality measures on data sources or assessment instruments other than the IRF-PAI. As stated earlier, we developed and tested the CARE assessment instrument for the post-acute demonstration under section 5008 of the DRA. We intend to submit a report to Congress by the end of 2011 with findings from the three year Post Acute Care-Payment Reform Demonstration (PAC-PRD) and its use of the CARE patient assessment instrument as a data collection vehicle. More details on the PAC-PRD which concluded in late 2010 are available at http://www.pacdemo.rti.org. We believe that the data elements that were collected using this CARE standardized assessment instrument could be used across all post-acute care sites to measure functional status and other factors during treatment and at discharge which are key indicators of quality in IRFs and in nursing homes treating short stay patients requiring rehabilitative services. We believe the instrument could be beneficial in supporting the submission of data on quality measures by IRFs and other care settings by ensuring standardized data collection. We invite comments on the use of a standardized assessment instrument such as the CARE assessment instrument in IRFs to collect data that would generate additional quality measures for the IRF quality reporting program in the future.

We also invite public comment on the measures and measures topics in Table 13, as well as potential methods for collecting quality data on the percent of patients whose individually stated goals were met and the percent of patients for whom care delivered was consistent with patient stated care preferences. During the NQF endorsement process for nursing home quality measures mentioned above, the NQF steering committee pointed to the need for CMS to consider pairing pain measures with a measure or measures that reflect patients' preferences for how their care, treatment and symptoms are managed by healthcare providers. These items, and other items in Table 13, are under consideration for future years. We also invite other suggestions regarding our implementation of the IRF quality measures program.

F. Proposed New Regulation Text for the IRF Quality Reporting Program

To implement the new IRF quality reporting program, we propose to re-designate the existing paragraph § 412.624(c)(4) as § 412.624(c)(5) and add a new paragraph § 412.624(c)(4). The specific proposed changes to the regulations at part 412 are shown in the “Regulation Text” of this proposed rule of this proposed rule. We encourage stakeholder comment on these proposed changes.

X. Collection of Information Requirements

Under the Paperwork Reduction Act of 1995, we are required to provide 60-day notice in the Federal Register and solicit public comment before a collection of information requirement is submitted to the Office of Management and Budget (OMB) for review and approval. In order to fairly evaluate whether an information collection should be approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act of 1995 requires that we solicit comment on the following issues:

• The need for the information collection and its usefulness in carrying out the proper functions of our agency.
• The accuracy of our estimate of the information collection burden.
• The quality, utility, and clarity of the information to be collected.
• Recommendations to minimize the information collection burden on the affected public, including automated collection techniques.

This proposed rule does not impose any new information collection requirements as outlined in the regulation text. However, this proposed rule does make reference to associated information collections that are not discussed in the regulation text contained in this document. The following is a discussion of these information collections, some of which have already received OMB approval.

As stated in Section IX.B. of the preamble of this proposed rule, for purposes of calculating the FY 2014 IRF PPS increase factor, we propose that IRFs submit data on 2 quality measures. These quality measures are: (1) Catheter Associated Urinary Tract Infections; and (2) Pressure Ulcers that are New or Have Worsened. The aforementioned measures will be collected via the following respective means.

Catheter Associated Urinary Tract Infections (CAUTI)

Regarding the collection of data on the first quality measure, Catheter Associated Urinary Tract Infections, we propose to require as the form and manner of submission for the measure, CAUTI rate per 1000 urinary catheter days, to be through the Centers for Disease Control (CDC)/National Health Safety Network (NHSN). Data collection by the NHSN occurs via a Web-based tool hosted by the CDC. This reporting service is provided free of charge to healthcare facilities. In fact, some IRFs are already using the NHSN to collect and submit this data. With this proposed rule, CMS seeks to impose an information collection requirement for the CAUTI measure. It should be noted that information collection activities associated with the CDC/NHSN are currently approved under OMB control number 0920-0666. Detailed requirements for NHSN participation, measure specifications, and data collection can be found at http://www.cdc.gov/​nhsn/​. IRFs must use the current specifications and data collection tools for Catheter Associated Urinary Tract Infections.

CMS does not currently require IRFs to report data to NHSN; however, according to the CDC, there are 26 IRFs that already submit data to NHSN either voluntarily or per state mandate. In order to report data to NHSN, the CDC requires the facility to enroll into the NHSN and take specified training. As per the NHSN Web site, we estimate that it will take 240 minutes (4 hours) to register and complete the necessary training provided by the CDC. The estimated annual burden associated with this requirement is 268,800 minutes/4,480 hours (240 minutes × 1,120 IRFs) at an estimated cost of $186,323. This cost is estimated using the average hourly wage of a Registered Nurse which is reported by the U.S. Bureau of Statistics to be $41.59. Once each facility has been properly registered into NHSN and trained, they will need to submit two types of forms in order for CDC to calculate the CAUTI rate per 1,000 urinary catheter days. The first form, the Urinary Tract Infection (UTI) form, is submitted by facilities for each patient with a CAUTI. We estimate that it will take 15 minutes per form per IRF. This time estimate consists of 5 minutes of nursing time needed to collect the clinical data and 10 minutes of clerical time necessary to enter the data into NHSN. We further anticipate that there will be approximately 2.25 forms submitted per IRF per month. Based on this estimate, we expect for each IRF to expend 33.75 minutes (0.5625 hours) per month and 405 minutes (6.75 hours) per year reporting to NHSN. The estimated annual burden to all IRFs in the U.S. for reporting to NHSN is 7,735.5 hours. The estimated cost per IRF is $186.14 per year. Similarly, the estimated total yearly cost across all IRFs is $213,322. These costs are estimated using an hourly wage for a Registered Nurse of $41.59 and a Medical Billing Clerk/Data Entry person of $20.57 as stated by the U.S. Bureau of Labor Statistics. The second form, the denominator form, is used to count daily the number of patients with an indwelling catheter device. These daily counts are summed and only the total for each month is submitted to NHSN. While CDC estimates that the denominator form takes 5 hours per month to complete, we estimate that it will take 2.5 hours per form per IRF per month, as the number of patients with an indwelling catheter is the only part of this form that IRFs will be required to complete. We anticipate that there will be one form submitted per IRF per month. Based on this estimate, we expect for each IRF to expend 150 minutes (2.5 hours) per month and 1,800 minutes (30 hours) per year reporting to NHSN. The estimated annual burden to all IRFs in the U.S. for reporting to NHSN is 34,380 hours. The estimated cost per IRF is $1,247.70 per year. Similarly, the estimated total yearly cost across all IRFs is $1,429,864. These costs are estimated using an hourly wage for a Registered Nurse of $41.59.

Pressure Ulcers That Are New or Have Worsened

As stated in Section IX.C.2 of this preamble, to support the standardized collection and calculation of quality measures specifically focused on IRF services, we propose to modify the current Inpatient Rehabilitation Facility-Patient Assessment Instrument (IRF-PAI) by replacing and harmonizing the pressure ulcer items with data elements similar to those collected through the Minimum Data Set 3.0 (MDS 3.0) used in nursing homes. Additionally, the MDS 3.0 pressure ulcer items have been harmonized with the Continuity Assessment Record and Evaluation (CARE) data set, which was developed for and broadly tested in the post-acute demonstration as required by section 5008 of the Deficit Reduction Act of 2005 (DRA) (Pub. L. 109-171, enacted on February 8, 2006). We believe modifying the IRF-PAI pressure ulcer items to be consistent with the standardized data elements now used in the MDS 3.0, and supported by the National Pressure Ulcer Advisory Panel (NPUAP), would provide better informed decision making and quality improvement in IRFs and ultimately, across the continuum of care settings.

Since all IRFs are already required to complete and transmit IRF-PAIs on all Medicare Part A fee-for-service and Medicare Part C (Medicare Advantage) patients in order to receive payment from Medicare, and the number of IRFs submitting claims to Medicare has remained stable over the past several years, we do not estimate that there are any IRFs that would need to conduct additional training or set-up for completing and transmitting the IRF-PAI. Thus, we do not estimate any additional burden on IRFs for these activities. In addition, we do not estimate any additional burden for IRFs to complete the IRF-PAI with the mandatory quality measures as the IRF-PAI currently contains a voluntary “Quality Indicators” section. If finalized, the voluntary data items will be replaced with the proposed pressure ulcer question set. When the original burden estimates were completed for the IRF-PAI, we estimated that the “Quality Indicators” section of the IRF-PAI would take about 10 minutes to complete, and we assumed that all IRFs would complete the Quality Indicators items, even though completion of this section was voluntary. Thus, removing the Quality Indicators items from the IRF-PAI would decrease the total estimated burden of completing each IRF-PAI by about 10 minutes. However, we estimate that it will take about 10 minutes to complete the new pressure ulcer item that we are proposing to require IRFs to complete as part of the new IRF quality reporting program. Since the time to complete the items that we are proposing to remove from the IRF-PAI is the same as the time to complete the new items we are proposing to add, we estimate no net change in the amount of time associated with completing each IRF-PAI and no net change in burden.

We will be submitting a revision to the IRF-PAI information collection request currently approved under OMB control number 0938-0842 for OMB review and approval.

If you comment on these information collection and recordkeeping requirements, please do either of the following:

1. Submit your comments electronically as specified in the ADDRESSES section of this proposed rule; or

2. Submit your comments to the Office of Information and Regulatory Affairs, Office of Management and Budget; Attention: CMS Desk Officer, CMS-1349-P; Fax: [phone]; or E-mail: [e-mail].

XI. Response to Public Comments

Because of the large number of public comments we normally receive on Federal Register documents, we are not able to acknowledge or respond to them individually. We will consider all comments we receive by the data and time specified in the DATES section of this preamble, and, when we proceed with a subsequent document, we will respond to the comments in the preamble to that document.

XII. Economic Analyses

A. Regulatory Impact Analysis

1. Introduction

We have examined the impacts of this proposed rule as required by Executive Order 12866 (September 30, 1993, Regulatory Planning and Review), Executive Order 13563 on Improving Regulation and Regulatory Review (January 18, 2011), the Regulatory Flexibility Act (September 19, 1980, Pub. L. 96-354) (RFA), section 1102(b) of the Social Security Act, section 202 of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), Executive Order 13132 on Federalism (August 4, 1999), and the Congressional Review Act (5 U.S.C. 804(2)).

Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. This rule has been designated an “economically” significant rule, under section 3(f)(1) of Executive Order 12866. Accordingly, the rule has been reviewed by the Office of Management and Budget.

2. Statement of Need

This proposed rule updates the IRF prospective payment rates for FY 2012 as required under section 1886(j)(3)(C) of the Act. It responds to Section 1886(j)(5) of the Act, which requires the Secretary to publish in the Federal Register on or before the August 1 that precedes the start of each fiscal year, the classification and weighting factors for the IRF PPS's case-mix groups and a description of the methodology and data used in computing the prospective payment rates for that fiscal year.

This rule also proposes some policy changes within the statutory discretion afforded to the Secretary under section 1886(j) of the Act. We believe that the proposed policy changes would better align IRF PPS policies with those of other Medicare payment systems and would clarify the current IRF payment regulations. Further, many of the proposed policy changes are designed to promote greater flexibility in the IRF PPS policies.

This proposed rule also implements section 3401(d) of the Affordable Care Act, which amended section 1886(j)(3)(C) of the Act and added section 1886(j)(3)(D) of the Act. Section 1886(j)(3)(C) of the Act requires the Secretary to estimate a multi-factor productivity adjustment to the market basket increase factor, and to apply other adjustments as defined by the Act. The productivity adjustment applies to FYs from 2012 forward. The other adjustments apply to FYs 2010-2019.

Finally, this proposed rule discusses the IRF quality measures that we are proposing to adopt for the first year of implementation of a new IRF quality reporting program, as required by section 3004(b) of the Affordable Care Act.

3. Overall Impacts

We estimate that the total impact of these proposed changes for estimated FY 2012 payments compared to estimated FY 2011 payments would be an increase of approximately $120 million (this reflects a $100 million increase from the update to the payment rates and a $20 million increase due to the proposed update to the outlier threshold amount to increase estimated outlier payments from approximately 2.7 percent in FY 2011 to 3 percent in FY 2012).

4. Detailed Economic Analysis

i. Basis and Methodology of Estimates

This proposed rule sets forth updates of the IRF PPS rates contained in the FY 2011 notice and proposes updates to the CMG relative weights and average length of stay values, the facility-level adjustments, the wage index, and the outlier threshold for high-cost cases. This proposed rule also implements a 0.1 percentage point reduction to the proposed FY 2012 rebased RPL market basket increase factor (updated from a 2002 base year to a 2008 base year) in accordance with sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of the Act and a 1.2 percent productivity adjustment to the proposed FY 2012 rebased RPL market basket increase factor as required by section 1886(j)(3)(C)(ii)(I) of the Act.

We estimate that the FY 2012 impact would be a net increase of $120 million in payments to IRF providers (this reflects a $100 million estimated increase from the proposed update to the payment rates and a $20 million estimated increase due to the proposed update to the outlier threshold amount to increase the estimated outlier payments from approximately 2.7 percent in FY 2011 to 3.0 percent in FY 2012). The impact analysis in Table 14 of this proposed rule represents the projected effects of the proposed policy changes in the IRF PPS for FY 2012 compared with estimated IRF PPS payments in FY 2011 without the proposed policy changes. We estimate the effects by estimating payments while holding all other payment variables constant. We use the best data available, but we do not attempt to predict behavioral responses to these proposed changes, and we do not make adjustments for future changes in such variables as number of discharges or case-mix.

We note that certain events may combine to limit the scope or accuracy of our impact analysis, because such an analysis is future-oriented and, thus, susceptible to forecasting errors because of other changes in the forecasted impact time period. Some examples could be legislative changes made by the Congress to the Medicare program that would impact program funding, or changes specifically related to IRFs. Although some of these changes may not necessarily be specific to the IRF PPS, the nature of the Medicare program is such that the changes may interact, and the complexity of the interaction of these changes could make it difficult to predict accurately the full scope of the impact upon IRFs.

In updating the rates for FY 2012, we are proposing a number of standard annual revisions and clarifications mentioned elsewhere in this proposed rule (for example, the proposed update to the wage index and market basket increase factor used to adjust the Federal rates). We estimate that these proposed revisions would increase payments to IRFs by approximately $100 million (all due to the update to the market basket increase factor, since the update to the wage index is done in a budget neutral manner—as required by statute—and therefore neither increases nor decreases aggregate payments to IRFs).

The aggregate change in estimated payments associated with this proposed rule is estimated to be an increase in payments to IRFs of $120 million for FY 2012. The market basket increase of $100 million and the $20 million increase due to the proposed update to the outlier threshold amount to increase estimated outlier payments from approximately 2.7 percent in FY 2011 to 3.0 percent in FY 2012 would result in a net change in estimated payments from FY 2011 to FY 2012 of $120 million.

The effects of the proposed changes that impact IRF PPS payment rates are shown in Table 14. The following proposed changes that affect the IRF PPS payment rates are discussed separately below:

• The effects of the proposed update to the outlier threshold amount, from approximately 2.7 to 3.0 percent of total estimated payments for FY 2012, consistent with section 1886(j)(4) of the Act.
• The effects of the 2.8 percent annual market basket update for FY 2012 (using the proposed rebased RPL market basket) to IRF PPS payment rates, as required by section 1886(j)(3)(A)(i) and section 1886(j)(3)(C) of the Act, including a 0.1 percentage point reduction for FY 2012 in accordance with sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of the Act and a 1.2 percent productivity adjustment as required by section 1886(j)(3)(C)(ii)(I) of the Act.
• The effects of applying the budget-neutral labor-related share and wage index adjustment, as required under section 1886(j)(6) of the Act.
• The effects of the proposed budget-neutral changes to the CMG relative weights and average length of stay values, under the authority of section 1886(j)(2)(C)(i) of the Act.
• The effects of the proposed budget-neutral changes to the facility-level adjustment factors, as permitted under section 1886(j)(3)(A)(v) of the Act.
• The effect of the data matching process to compute the DSH patient percentage used in the IPPS DSH adjustment that is also used by IRF PPS to compute the low-income percentage adjustment factor.
• The effect of the proposed IRF quality reporting program, Beginning in FY 2013.
• The total proposed change in estimated payments based on the FY 2012 proposed policies relative to estimated FY 2011 payments without the proposed policies.

ii. Description of Table 14

The table below categorizes IRFs by geographic location, including urban or rural location, and location with respect to CMS's nine census divisions (as defined on the cost report) of the country. In addition, the table divides IRFs into those that are separate rehabilitation hospitals (otherwise called freestanding hospitals in this section), those that are rehabilitation units of a hospital (otherwise called hospital units in this section), rural or urban facilities, ownership (otherwise called for-profit, non-profit, and government), and by teaching status. The top row of the table shows the overall impact on the 1,146 IRFs included in the analysis.

The next 12 rows of Table 14 contain IRFs categorized according to their geographic location, designation as either a freestanding hospital or a unit of a hospital, and by type of ownership; all urban, which is further divided into urban units of a hospital, urban freestanding hospitals, and by type of ownership; and all rural, which is further divided into rural units of a hospital, rural freestanding hospitals, and by type of ownership. There are 952 IRFs located in urban areas included in our analysis. Among these, there are 749 IRF units of hospitals located in urban areas and 203 freestanding IRF hospitals located in urban areas. There are 194 IRFs located in rural areas included in our analysis. Among these, there are 174 IRF units of hospitals located in rural areas and 20 freestanding IRF hospitals located in rural areas. There are 376 for-profit IRFs. Among these, there are 314 IRFs in urban areas and 62 IRFs in rural areas. There are 710 non-profit IRFs. Among these, there are 589 urban IRFs and 121 rural IRFs. There are 60 government-owned IRFs. Among these, there are 49 urban IRFs and 11 rural IRFs.

The remaining three parts of Table 14 show IRFs grouped by their geographic location within a region and by teaching status. First, IRFs located in urban areas are categorized with respect to their location within a particular one of the nine CMS geographic regions. Second, IRFs located in rural areas are categorized with respect to their location within a particular one of the nine CMS geographic regions. In some cases, especially for rural IRFs located in the New England, Mountain, and Pacific regions, the number of IRFs represented is small. Finally, IRFs are grouped by teaching status, including non-teaching IRFs, IRFs with an intern and resident to ADC ratio less than 10 percent, IRFs with an intern and resident to ADC ratio greater than or equal to 10 percent and less than or equal to 19 percent, and IRFs with an intern and resident to ADC ratio greater than 19 percent.

The estimated impacts of each proposed change to the facility categories listed above are shown in the columns of Table 14. The description of each column is as follows:

Column (1) shows the facility classification categories described above.

Column (2) shows the number of IRFs in each category in our FY 2010 analysis file.

Column (3) shows the number of cases in each category in our FY 2010 analysis file.

Column (4) shows the estimated effect of the proposed adjustment to the outlier threshold amount so that estimated outlier payments increase from approximately 2.7 percent in FY 2011 to 3.0 percent of total estimated payments for FY 2012.

Column (5) shows the estimated effect of the rebased market basket update to the IRF PPS payment rates.

Column (6) shows the estimated effect of the update to the IRF labor-related share and wage index, in a budget neutral manner.

Column (7) shows the estimated effect of the update to the CMG relative weights and average length of stay values, in a budget neutral manner.

Column (8) shows the estimated effects of the updates to the facility-level adjustment factors (rural, LIP, and teaching status), in a budget neutral manner.

Column (9) compares our estimates of the payments per discharge, incorporating all of the proposed changes reflected in this proposed rule for FY 2012, to our estimates of payments per discharge in FY 2011 (without these proposed changes).

The average estimated increase for all IRFs is approximately 1.8 percent. This estimated increase includes the effects of the 1.5 percent market basket update, which is derived from a 2.8 percent rebased market basket update that is reduced by 0.1 percentage point for FY 2012 in accordance with sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of the Act and by a 1.2 percentage point productivity adjustment as required by section 1886 (j)(3)(C)(ii)(I) of the Act. It also includes the 0.3 percent overall estimated increase (the difference between 2.7 percent in FY 2011 and 3.0 percent in FY 2012) in estimated IRF outlier payments from the proposed update to the outlier threshold amount. Because we are making the remainder of the proposed changes outlined in this proposed rule in a budget-neutral manner, they would not affect total estimated IRF payments in the aggregate. However, as described in more detail in each section, they would affect the estimated distribution of payments among providers.

iii. Impact of the Proposed Update to the Outlier Threshold Amount

In the FY 2011 IRF PPS notice (75 FR 42836), we used FY 2009 patient-level claims data (the best, most complete data available at that time) to set the outlier threshold amount for FY 2011 so that estimated outlier payments would equal 3 percent of total estimated payments for FY 2011. For this proposed rule, we are proposing to update our analysis using more current FY 2010 data. Using the updated FY 2010 data, we now estimate that IRF outlier payments, as a percentage of total estimated payments for FY 2011, decreased from 3 percent using the FY 2009 data to approximately 2.7 percent using the updated FY 2010 data. As a result, we are proposing to adjust the outlier threshold amount for FY 2012 to $11,822, reflecting total estimated outlier payments equal to 3 percent of total estimated payments in FY 2012.

The impact of the proposed update to the outlier threshold amount (as shown in column 4 of Table 14) is to increase estimated overall payments to IRFs by 0.3 percent. We do not estimate that any group of IRFs would experience a decrease in payments from this proposed update. We estimate the largest increase in payments to be a 1.1 percent increase in estimated payments to rural IRFs in the Pacific region.

iv. Impact of the Proposed Market Basket Update to the IRF PPS Payment Rates

The proposed adjusted market basket update to the IRF PPS payment rates is presented in column 5 of Table 14. The proposed FY 2008-based RPL market basket update is the same as the FY 2002-based RPL market basket (2.8 percent). In the aggregate the proposed update would result in a net 1.5 percent increase in overall estimated payments to IRFs. This net increase reflects the estimated rebased RPL market basket increase factor for FY 2012 of 2.8 percent, reduced by 0.1 percentage point in accordance with sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of the Act and a 1.2 percent productivity adjustment as required by section 1886(j)(3)(C)(ii)(I) of the Act.

v. Impact of the Proposed CBSA Wage Index and Labor-Related Share

In column 6 of Table 14, we present the effects of the proposed budget neutral update of the wage index and labor-related share. The changes to the wage index and the labor-related share are discussed together because the wage index is applied to the labor-related share portion of payments, so the changes in the two have a combined effect on payments to providers. As discussed in section V.A.4 of this proposed rule, the labor-related share decreased from 75.271 percent in FY 2011 to 70.334 percent in FY 2012.

In the aggregate, since these updates to the wage index and the labor-related share are applied in a budget-neutral manner as required under section 1886(j)(6) of the Act, we do not estimate that these updates will affect overall estimated payments to IRFs. However, we estimate that these proposed changes would have small distributional effects. For example, we estimate a 0.9 percent increase in payments to rural IRFs, with the largest increase in payments of 1.8 percent for rural IRFs in the Mid-Atlantic region. We estimate the largest decrease in payments from the proposed update to the CBSA wage index and labor-related share to be a 1.1 percent decrease for urban IRFs in the New England region.

vi. Impact of the Proposed Update to the CMG Relative Weights and Average Length of Stay Values

In column 7 of Table 14, we present the effects of the proposed budget neutral update of the CMG relative weights and average length of stay values. In the aggregate we do not estimate that these proposed updates will affect overall estimated payments to IRFs. However, we estimate that these proposed updates will have small distributional effects, with the largest increase in payments as a result of these updates being a 0.2 percent increase to rural government IRFs. The largest estimated decrease in payments as a result of these proposed updates is a 0.1 percent decrease to urban for-profit IRFs and urban IRFs in the Mountain region and East South Central region.

vii. Impact of the Proposed Update to the Rural, LIP, and Teaching Status Adjustment Factors

In column 8 of Table 14, we present the effects of the proposed budget neutral update to the rural, LIP, and teaching status adjustment factors. In the aggregate, we do not estimate that these proposed changes would affect overall estimated payments to IRFs. However, we estimate that these proposed changes would have small distributional effects. We estimate the largest increase in payments to be a 1.9 percent increase for IRFs in the rural Mid-Atlantic region. We estimate the largest decrease in payments to be a 5.3 percent decrease for teaching IRFs with resident to ADC ratios of greater than 19 percent.

viii. Impact of the IPPS Data Matching Process Changes on the IRF PPS Calculation of the Low-Income Percentage Adjustment Factor

In section VII of this proposed rule, we note the recent revision of the data matching process that is used to calculate the disproportionate share hospital (DSH) patient percentage used in the acute IPPS DSH adjustment. As we have stated previously, it is our policy in calculating the LIP adjustment factor to use the same disproportionate share hospital (DSH) patient percentage used in the acute IPPS DSH adjustment. This would include the data matching process. We are not able to provide a detailed analysis of the impact of the revised data matching process. That is, it is not possible to determine whether IRF LIP adjustment payments will generally increase or decrease, because IRFs' SSI fractions will vary depending on various factors, including the use of a more updated MedPAR claims data file, use of a more updated SSI eligibility data file, and the other features of the revised data matching process. See the FY 2011 IPPS final rule (75 FR 50663 through 50664) for more information on the revised data matching process.

ix. Impact of the Proposed IRF Quality Reporting Program Beginning in FY 2013

As discussed in section IX.B. of this proposed rule, we propose to begin collecting data on 2 quality measures from October 1, 2012 through December 31, 2012 (FY 2013). These quality measures are: (1) Catheter Associated Urinary Tract Infections; and (2) Pressure Ulcers that are New or Have Worsened. As discussed in section X. of this proposed rule, we estimate that IRFs would incur costs associated with the collection of these data, which we detail below.

Catheter Associated Urinary Tract Infections

As stated in section IX.C.1. of this proposed rule, we propose to collect data on the first quality measure, Catheter Associated Urinary Tract Infections, through the Centers for Disease Control (CDC)/National Health Safety Network (NHSN). CMS does not currently require IRFs to report data to NHSN. However, some IRFs submit data to NHSN either voluntarily or per state mandate. According to the CDC, 26 IRFs already report data to NHSN. We estimate that 1,120 IRFs (1146 minus the 26 IRFs that are already reporting data to NHSN) would incur costs for registering and completing the necessary training provided by the CDC in FY 2012 in preparation for submitting the data beginning on October 1, 2012 (FY 2013). We estimate that registering and completing the necessary training of the required personnel at each IRF would take 4 hours at a cost of $41.59 per hour, at an estimated cost per IRF of $166.36 per IRF and a total estimated cost across all IRFs of $186,323.

Once IRFs begin submitting data to the NHSN on Catheter Associated Urinary Tract Infections by October 1, 2012 (FY 2013), they will need to submit two types of forms in order for CDC to calculate the CAUTI rate per 1000 urinary catheter days. We estimate that the first form, the Urinary Tract Infection (UTI) form, will take 15 minutes per reporting episode per IRF and that there will be approximately 2.25 NHSN submissions per IRF per month. Based on this estimate, we expect for each IRF to expend 33.75 minutes (0.5625) hours per month and 405 minutes (6.75) hours per year reporting to NHSN. The estimated annual burden to all IRFs in the U.S. for reporting to NHSN is 7,735.5 hours. The estimated yearly cost per IRF is $186.14 and the estimated total yearly cost across all IRFs is $213,322. While CDC estimates that the second form, the denominator form used to count daily the number of patients with an indwelling catheter device, will take 5 hours per month to complete, we estimate that it will take 2.5 hours per form per IRF per month as the number of patients with an indwelling catheter is the only part of this form that IRFs will be required to complete. We anticipate that there will be one form submitted per IRF per month and each IRF will expend 150 minutes (2.5 hours) per month and 1,800 minutes (30 hours) per year reporting to NHSN. The estimated annual burden to all IRFs in the U.S. for reporting to NHSN is 34,380 hours. The estimated cost per IRF is $1,247.70 per year and the estimated total yearly cost across all IRFs is $1,429,864. These costs are estimated using an hourly wage for a Registered Nurse of $41.59 and a Medical Billing Clerk/Data Entry person of $20.57.

Pressure Ulcers That Are New or Have Worsened

As stated in Section IX.C.2 of this proposed rule, we propose to modify the current IRF-PAI by removing the items currently in the “Quality Indicators” section and replacing them with pressure ulcer items similar to elements from the Minimum Data Set 3.0 (MDS 3.0) nursing home instrument. Since all IRFs are already required to complete and transmit IRF-PAIs on all Medicare Part A fee-for-service and Medicare Part C (Medicare Advantage) patients in order to receive payment from Medicare, and since the number of IRFs submitting claims to Medicare has remained stable over the past several years, we do not estimate that there are any IRFs that would need to conduct additional training or set-up for completing and transmitting the IRF-PAI. Thus, we do not estimate any additional cost to IRFs in FY 2012 for these activities. In addition, since IRFs are already transmitting the IRF-PAI form to CMS, we do not estimate any additional transmission costs associated with the proposed IRF quality reporting program. Further, we do not estimate any additional burden for IRFs to complete an IRF-PAI with mandatory quality measures as the IRF-PAI currently contains a voluntary “Quality Indicators” section, which will be replaced with the proposed pressure ulcer question set. When the original burden estimates were completed for the IRF-PAI, we estimated that the “Quality Indicators” section of the IRF-PAI would take about 10 minutes to complete, and we assumed that all IRFs would complete the Quality Indicators items, even though completion of this section was voluntary. Thus, removing the Quality Indicators items from the IRF-PAI would decrease the total estimated burden of completing each IRF-PAI by about 10 minutes. However, we estimate that it will take about 10 minutes to complete the new pressure ulcer item that we are proposing to require IRFs to complete as part of the new IRF quality reporting program. Since the time to complete the items that we are proposing to remove from the IRF-PAI is the same as the time to complete the new items we are proposing to add, we estimate no net change in the amount of time or the costs associated with completing each IRF-PAI.

5. Alternatives Considered

Although we have determined that this proposed rule will not have a significant economic impact on a substantial number of small entities, we have voluntarily prepared a discussion on the alternatives considered to the IRF PPS.

Section 1886(j)(3)(C) of the Act requires the Secretary to update the IRF PPS payment rates by an increase factor that reflects changes over time in the prices of an appropriate mix of goods and services included in the covered IRF services. Thus, we did not consider alternatives to updating payments using the estimated RPL market basket increase factor for FY 2012. In this proposed rule, we are proposing to rebase the RPL market basket for FY 2012, as we typically do every 5 to 7 years, from a 2002 base year to a 2008 base year. We considered not proposing this rebasing of the RPL market basket for FY 2012; however, periodically rebasing the RPL market basket ensures that it continues to reflect the most accurate account of the cost of relevant goods and services. For FY 2012, the proposed update on the FY 2008-based RPL market basket is the same as the FY 2002-based RPL market basket (2.8 percent). In accordance with the recently amended section 1886(j)(3)(C) of the Act, we are proposing to update IRF Federal prospective payments in this proposed rule by 1.5 percent (which equals the 2.8 percent estimated rebased RPL market basket increase factor for FY 2012 reduced by 0.1 percentage point, as required by sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of the Act and reduced by a 1.2 percent productivity adjustment as required by section 1886(j)(3)(C)(ii)(I) of the Act).

We considered maintaining the existing CMG relative weights and average length of stay values for FY 2012. However, in light of recently available data and our desire to ensure that the CMG relative weights and average length of stay values are as reflective as possible of recent changes in IRF utilization and case mix, we believe that it is appropriate to update the CMG relative weights and average length of stay values at this time to ensure that IRF PPS payments continue to reflect as accurately as possible the current costs of care in IRFs.

We also considered maintaining the existing rural, LIP, and teaching status adjustment factors for FY 2012. However, as a result of recent changes in IRF utilization that have occurred because of changes in the IRF compliance percentage and the consequences of recent IRF medical necessity reviews, we believe that it is important to update these adjustment factors at this time to ensure that payments to IRFs reflect as accurately as possible the current costs of care in IRFs. In estimating the proposed updates to the rural, LIP, and teaching status adjustment factors, we implemented a 3-year moving average approach to updating the facility-level adjustment factors in the FY 2010 IRF PPS final rule (74 FR 39762) to provide greater stability and predictability of Medicare payments for IRFs.

We considered maintaining the existing outlier threshold amount for FY 2012. However, the proposed update to the outlier threshold amount would have a positive impact on IRF providers and, therefore, on small entities (as shown in Table 14, column 4). If we were to maintain the FY 2011 outlier threshold amount, less outlier cases would qualify for the additional outlier payments in FY 2012. Analysis of updated FY 2010 data indicates that estimated outlier payments would not equal 3 percent of estimated total payments for FY 2012 unless we proposed to update the outlier threshold amount. Thus, we believe that this update is appropriate for FY 2012.

6. Accounting Statement

As required by OMB Circular A-4 (available at http://www.whitehouse.gov/​omb/​circulars/​a004/​a-4.pdf), in Table 15 below, we have prepared an accounting statement showing the classification of the transfers associated with the provisions of this proposed rule. This table provides our best estimate of the increase in Medicare payments under the IRF PPS as a result of the proposed changes presented in this proposed rule based on the data for 1,146 IRFs in our database.

7. Conclusion

Overall, the estimated payments per discharge for IRFs in FY 2012 are projected to increase by 1.8 percent, compared with those in FY 2011, as reflected in column 9 of Table 14. IRF payments are estimated to increase 1.6 percent in urban areas and 3.4 percent in rural areas, per discharge, compared with FY 2011. Payments to rehabilitation units in urban areas are estimated to increase 1.4 percent per discharge. Payments to rehabilitation freestanding hospitals in urban areas are estimated to increase 1.8 percent per discharge. Payments to rehabilitation units in rural areas are estimated to increase 3.3 percent per discharge, while payments to freestanding rehabilitation hospitals in rural areas are estimated to increase 3.9 percent per discharge.

Overall, the largest payment increase is estimated at 5.4 percent for rural IRFs in the Mid-Atlantic region. The only payment decreases we estimate are a 0.5 percent decrease, a 1.9 percent decrease, and a 3.9 percent decrease for teaching IRFs with resident to ADC ratios less than 10 percent, 10 to 19 percent, and greater than 19 percent, respectively.

B. Regulatory Flexibility Act Analysis

The RFA requires agencies to analyze options for regulatory relief of small entities, if a rule has a significant impact on a substantial number of small entities. For purposes of the RFA, small entities include small businesses, nonprofit organizations, and small governmental jurisdictions. Most IRFs and most other providers and suppliers are small entities, either by nonprofit status or by having revenues of $34.5 million in any one year. (For details, see the Small Business Administration's Web site at http://ecfr.gpoaccess.gov/​cgi/​t/​text/​text-idx?​c=​ecfr&​sid=​2465b064ba6965cc1fbd2eae60854b11&​rgn=​div8&​view=​text&​node=​13:1.0.1.1.16.1.266.9&​idno=​13) (refer to subsector 622). Because we lack data on individual hospital receipts, we cannot determine the number of small proprietary IRFs or the proportion of IRFs' revenue that is derived from Medicare payments. Therefore, we assume that all IRFs (an estimated 1,146 IRFs that are in our analysis file by virtue of having submitted at least one IRF claim to Medicare in FY 2010 that we are able to match to an IRF-PAI, of which approximately 60 percent are nonprofit facilities) are considered small entities and that Medicare payment constitutes the majority of their revenues. The Department of Health and Human Services generally uses a revenue or cost impact of 3 to 5 percent as a significance threshold under the RFA. There is no negative estimated impact as a result of this proposed rule that is within the significance threshold of 3 to 5 percent. As shown in Table 14, we estimate that the net revenue impact, of this proposed rule, on all IRFs is to increase estimated payments by about 1.8 percent, with an estimated increase in payments of 3 percent or higher for some categories of IRFs (such as rural IRFs in the New England, Mid-Atlantic, South Atlantic, East North Central, West North Central, West South Central, and Mountain) and an estimated decrease in payments of 3 percent or more for 15 teaching IRFs with resident to ADC ratios greater than 19 percent. Therefore, the majority of IRFs will experience a net positive increase in payments. As a result, the Secretary has determined that this proposed rule would not have a significant impact on a substantial number of small entities. We present, in the Alternatives Considered section (XII.A.5) above, an analysis of the alternatives we considered for this proposed IRF PPS rule. Medicare fiscal intermediaries and carriers are not considered to be small entities. Individuals and States are not included in the definition of a small entity. We solicit comment on the RFA analysis.

In addition, section 1102(b) of the Act requires us to prepare a RIA if a rule may have a significant impact on the operations of a substantial number of small rural hospitals. This analysis must conform to the provisions of section 603 of the RFA. For purposes of section 1102(b) of the Act, we define a small rural hospital as a hospital that is located outside of a MSA and has fewer than 100 beds. Based on the data of the 174 rural units and 20 rural hospitals in our database of 1,146 IRFs, we estimate that small rural IRF hospitals would receive between 2.6 percent and 5.4 percent higher net payments in FY 2012 due to the provisions in this proposed rule, with no rural IRF hospitals estimated to receive negative net payments. Thus, the Secretary has determined that the rates and policies set forth in this proposed rule would not have a significant impact on the operations of a substantial number of small rural hospitals.

C. Unfunded Mandates Reform Act Analysis

Section 202 of the Unfunded Mandates Reform Act of 1995 also requires that agencies assess anticipated costs and benefits before issuing any rule whose mandates require spending in any one year of $100 million in 1995 dollars, updated annually for inflation. In 2011, that threshold level is approximately $136 million. This proposed rule will not impose spending costs on State, local, or tribal governments, in the aggregate, or by the private sector, of $136 million.

XIII. Federalism Analysis

Executive Order 13132 establishes certain requirements that an agency must meet when it promulgates a proposed rule (and subsequent final rule) that imposes substantial direct requirement costs on State and local governments, preempts State law, or otherwise has Federalism implications. This proposed rule would have no substantial direct effect on State and local governments, preempt State law, or otherwise have Federalism implications.

List of Subjects in 42 CFR 412

• Administrative practice and procedure
• Health facilities
• Medicare
• Puerto Rico
• Reporting and recordkeeping requirements

For the reasons set forth in the preamble, the Centers for Medicare & Medicaid Services proposes to amend 42 CFR chapter IV as follows:

PART 412—PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL SERVICES

1. The authority citation for part 412 continues to read as follows:

Authority: Sections 1102, 1862, and 1871 of the Social Security Act (42 U.S.C. 1302, 1395y, and 1395hh).

Subpart B—Hospital Services Subject to and Excluded From the Prospective Payment Systems for Inpatient Operating Costs and Inpatient Capital-Related Costs

2. Section 412.23 is amended by revising paragraph (b) to read as follows:

§ 412.23

Excluded hospitals: Classifications.

* * * * *

(b) Rehabilitation hospitals. A rehabilitation hospital or unit must meet the requirements specified in § 412.29 of this subpart to be excluded from the prospective payment systems specified in § 412.1(a)(1) of this subpart and to be paid under the prospective payment system specified in § 412.1(a)(3) of this subpart and in subpart P of this part.

* * * * *

3. Section 412.25 is amended by revising paragraphs (b) and (e)(2)(ii)(A) to read as follows:

§ 412.25

Excluded hospital units: Common requirements.

* * * * *

(b) Changes in the size of excluded units. Except in the special cases noted at the end of this paragraph, changes in the number of beds or square footage considered to be part of an excluded unit under this section are allowed one time during a cost reporting period if the hospital notifies its Medicare contractor and the CMS RO in writing of the planned change at least 30 days before the date of the change. The hospital must maintain the information needed to accurately determine costs that are attributable to the excluded unit. A change in bed size or a change in square footage may occur at any time during a cost reporting period and must remain in effect for the rest of that cost reporting period. Changes in bed size or square footage may be made at any time if these changes are made necessary by relocation of a unit to permit construction or renovation necessary for compliance with changes in Federal, State, or local law affecting the physical facility or because of catastrophic events such as fires, floods, earthquakes, or tornadoes.

* * * * *

(e) * * *

(2) * * *

(ii) * * *

(A) For a rehabilitation unit, the requirements under § 412.29 of this subpart; or

* * * * *

4. Section 412.29 is revised to read as follows:

§ 412.29

Classification criteria for payment Under the Inpatient Rehabilitation Facility Prospective Payment System.

To be excluded from the prospective payment systems described in § 412.1(a)(1) of this subpart and to be paid under the prospective payment system specified in § 412.1(a)(3) of this subpart, an inpatient rehabilitation hospital or an inpatient rehabilitation unit of a hospital (otherwise referred to as an IRF) must meet the following requirements:

(a) Have (or be part of a hospital that has) a provider agreement under part 489 of this chapter to participate as a hospital.

(b) Except in the case of a “new” IRF or “new” IRF beds, as defined in paragraph (c) of this section, an IRF must show that, during its most recent, consecutive, and appropriate 12-month time period (as defined by CMS or the Medicare contractor), it served an inpatient population that meets the following criteria:

(1) For cost reporting periods beginning on or after July 1, 2004, and before July 1, 2005, the IRF served an inpatient population of whom at least 50 percent, and for cost reporting periods beginning on or after July 1, 2005, the IRF served an inpatient population of whom at least 60 percent required intensive rehabilitation services for treatment of one or more of the conditions specified at paragraph (b)(2) of this section. A patient with a comorbidity, as defined at § 412.602 of this part, may be included in the inpatient population that counts toward the required applicable percentage if—

(i) The patient is admitted for inpatient rehabilitation for a condition that is not one of the conditions specified in paragraph (b)(2) of this section;

(ii) The patient has a comorbidity that falls in one of the conditions specified in paragraph (b)(2) of this section; and

(iii) The comorbidity has caused significant decline in functional ability in the individual that, even in the absence of the admitting condition, the individual would require the intensive rehabilitation treatment that is unique to inpatient rehabilitation facilities paid under subpart P of this part and that cannot be appropriately performed in another care setting covered under this title.

(2) List of conditions.

(i) Stroke.

(ii) Spinal cord injury.

(iii) Congenital deformity.

(iv) Amputation.

(v) Major multiple trauma.

(vi) Fracture of femur (hip fracture).

(vii) Brain injury.

(viii) Neurological disorders, including multiple sclerosis, motor neuron diseases, polyneuropathy, muscular dystrophy, and Parkinson's disease.

(ix) Burns.

(x) Active, polyarticular rheumatoid arthritis, psoriatic arthritis, and seronegative arthropathies resulting in significant functional impairment of ambulation and other activities of daily living that have not improved after an appropriate, aggressive, and sustained course of outpatient therapy services or services in other less intensive rehabilitation settings immediately preceding the inpatient rehabilitation admission or that result from a systemic disease activation immediately before admission, but have the potential to improve with more intensive rehabilitation.

(xi) Systemic vasculidities with joint inflammation, resulting in significant functional impairment of ambulation and other activities of daily living that have not improved after an appropriate, aggressive, and sustained course of outpatient therapy services or services in other less intensive rehabilitation settings immediately preceding the inpatient rehabilitation admission or that result from a systemic disease activation immediately before admission, but have the potential to improve with more intensive rehabilitation.

(xii) Severe or advanced osteoarthritis (osteoarthrosis or degenerative joint disease) involving two or more major weight bearing joints (elbow, shoulders, hips, or knees, but not counting a joint with a prosthesis) with joint deformity and substantial loss of range of motion, atrophy of muscles surrounding the joint, significant functional impairment of ambulation and other activities of daily living that have not improved after the patient has participated in an appropriate, aggressive, and sustained course of outpatient therapy services or services in other less intensive rehabilitation settings immediately preceding the inpatient rehabilitation admission but have the potential to improve with more intensive rehabilitation. (A joint replaced by a prosthesis no longer is considered to have osteoarthritis, or other arthritis, even though this condition was the reason for the joint replacement.)

(xiii) Knee or hip joint replacement, or both, during an acute hospitalization immediately preceding the inpatient rehabilitation stay and also meet one or more of the following specific criteria:

(A) The patient underwent bilateral knee or bilateral hip joint replacement surgery during the acute hospital admission immediately preceding the IRF admission.

(B) The patient is extremely obese with a Body Mass Index of at least 50 at the time of admission to the IRF.

(C) The patient is age 85 or older at the time of admission to the IRF.

(c) In the case of new IRFs (as defined in paragraph (c)(1) of this section) or new IRF beds (as defined in paragraph (c)(2)of this section), the IRF must provide a written certification that the inpatient population it intends to serve meets the requirements of paragraph (b) of this section. This written certification will apply until the end of the IRF's first full 12-month cost reporting period or, in the case of new IRF beds, until the end of the cost reporting period during which the new beds are added to the IRF.

(1) New IRFs. An IRF hospital or IRF unit is considered new if it has not been paid under the IRF PPS in subpart P of this part for at least 5 calendar years. A new IRF will be considered new from the point that it first participates in Medicare as an IRF until the end of its first full 12-month cost reporting period.

(2) New IRF beds. Any IRF beds that are added to an existing IRF must meet all applicable State Certificate of Need and State licensure laws. New IRF beds may be added one time at any point during a cost reporting period and will be considered new for the rest of that cost reporting period. A full 12-month cost reporting period must elapse between the delicensing or decertification of IRF beds in an IRF hospital or IRF unit and the addition of new IRF beds to that IRF hospital or IRF unit. Before an IRF can add new beds, it must receive written approval from the appropriate CMS RO, so that the CMS RO can verify that a full 12-month cost reporting period has elapsed since the IRF has had beds delicensed or decertified. New IRF beds are included in the compliance review calculations under paragraph (b) of this section from the time that they are added to the IRF.

(3) Change of Ownership or Leasing. An IRF hospital or IRF unit that undergoes a change of ownership or leasing, as defined in § 489.18 of this chapter, retains its excluded status and will continue to be paid under the prospective payment system specified in § 412.1(a)(3) of this subpart before and after the change of ownership or leasing if the new owner(s) of the IRF accept assignment of the previous owners' Medicare provider agreement and the IRF continues to meet all of the requirements for payment under the IRF prospective payment system. If the new owner(s) do not accept assignment of the previous owners' Medicare provider agreement, the IRF is considered to be voluntarily terminated and the new owner(s) may re-apply to participate in the Medicare program. If the IRF does not continue to meet all of the requirements for payment under the IRF prospective payment system, then the IRF loses its excluded status and is paid according to the prospective payment systems described in § 412.1(a)(1).

(4) Mergers. If an IRF hospital (or a hospital with an IRF unit) merges with another hospital and the owner(s) of the merged hospital accept assignment of the IRF hospital's provider agreement (or the provider agreement of the hospital with the IRF unit), then the IRF hospital or IRF unit retains its excluded status and will continue to be paid under the prospective payment system specified in § 412.1(a)(3) of this subpart before and after the merger, as long as the IRF hospital or IRF unit continues to meet all of the requirements for payment under the IRF prospective payment system. If the owner(s) of the merged hospital do not accept assignment of the IRF hospital's provider agreement (or the provider agreement of the hospital with the IRF unit), then the IRF hospital or IRF unit is considered voluntarily terminated and the owner(s) of the merged hospital may reapply to the Medicare program to operate a new IRF.

(d) Have in effect a preadmission screening procedure under which each prospective patient's condition and medical history are reviewed to determine whether the patient is likely to benefit significantly from an intensive inpatient hospital program. Each prospective patient's preadmission screening must be reviewed and approved by a rehabilitation physician prior to the patient's admission to the IRF.

(e) Ensure that the patients receive close medical supervision, as evidenced by at least 3 face-to-face visits per week by a licensed physician with specialized training and experience in inpatient rehabilitation to assess the patient both medically and functionally, as well as to modify the course of treatment as needed to maximize the patient's capacity to benefit from the rehabilitation process.

(f) Furnish, through the use of qualified personnel, rehabilitation nursing, physical therapy, and occupational therapy, plus, as needed, speech-language pathology, social services, psychological services (including neuropsychological services), and orthotic and prosthetic services.

(g) Have a director of rehabilitation who—

(1) Provides services to the IRF hospital and its inpatients on a full-time basis or, in the case of a rehabilitation unit, at least 20 hours per week;

(2) Is a doctor of medicine or osteopathy;

(3) Is licensed under State law to practice medicine or surgery; and

(4) Has had, after completing a one-year hospital internship, at least 2 years of training or experience in the medical-management of inpatients requiring rehabilitation services.

(h) Have a plan of treatment for each inpatient that is established, reviewed, and revised as needed by a physician in consultation with other professional personnel who provide services to the patient.

(i) Use a coordinated interdisciplinary team approach in the rehabilitation of each inpatient, as documented by the periodic clinical entries made in the patient's medical record to note the patient's status in relationship to goal attainment and discharge plans, and that team conferences are held at least once per week to determine the appropriateness of treatment.

(j) Retroactive adjustments. If a new IRF (or new beds that are added to an existing IRF) are excluded from the prospective payment systems specified in § 412.1(a)(1) of this subpart and paid under the prospective payment system specified in § 412.1(a)(3) of this subpart for a cost reporting period under paragraph (c) of this section, but the inpatient population actually treated during that period does not meet the requirements of paragraph (b) of this section, we adjust payments to the IRF retroactively in accordance with the provisions in § 412.130 of this subpart.

§ 412.30

[Removed and Reserved]

5. Section 412.30 is removed and reserved.

Subpart P—Prospective payment for inpatient rehabilitation hospitals and rehabilitation units

6. Section 412.624 is amended by:

A. Re-designating paragraph (c)(4) as (c)(5).

B. Adding a new paragraph (c)(4).

The addition reads as follows:

§ 412.624

Methodology for calculating the Federal prospective payment rates.

* * * * *

(c) * * *

(4) Applicable increase factor for fiscal year 2014 and for subsequent fiscal years. Subject to the provisions of paragraphs (c)(4)(i) and (c)(4)(ii) of this section, the applicable increase factor for fiscal year 2014 and for subsequent years for updating the standard payment conversion factor is the increase factor described in paragraph (a)(3) of this section, including adjustments described in paragraph (d) of this section as appropriate.

(i) In the case of an IRF that is paid under the prospective payment system specified in § 412.1(a)(3) of this part that does not submit quality data to CMS, in the form and manner specified by CMS, the applicable increase factor specified in paragraph (a)(3) of this section is reduced by 2 percentage points.

(ii) Any reduction of the increase factor will apply only to the fiscal year involved and will not be taken into account in computing the applicable increase factor for a subsequent fiscal year.

* * * * *

Authority: (Catalog of Federal Domestic Assistance Program No. 93.773, Medicare—Hospital Insurance; and Program No. 93.774, Medicare—Supplementary Medical Insurance Program)

Dated: March 18, 2011.

Donald M. Berwick,

Administrator, Centers for Medicare & Medicaid Services.

Approved: April 18, 2011.

Kathleen Sebelius,

Secretary.

The following addendum will not appear in the Code of Federal Regulations.

Addendum

In this addendum, we provide the wage index tables referred to throughout the preamble to this proposed rule. The tables presented below are as follows:

Table A.—Proposed Inpatient Rehabilitation Facility Wage Index for Urban Areas for Discharges Occurring from October 1, 2011 through September 30, 2012.

Table B—Proposed Inpatient Rehabilitation Facility Wage Index for Rural Areas for Discharges Occurring from October 1, 2011 through September 30, 2012.

Footnotes

1.  Klevens RM, Edward JR, et al. Estimating health care-associated infections and deaths in U.S. hospitals, 2002. Public Health Reports 2007;122:160-166.

2.  Wong ES. Guideline for prevention of catheter-associated urinary tract infections. Infect Control 1981; 2:126-30.