Medicare Program; Proposed Changes to the Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and the Long-Term Care Hospital Prospective Payment System and Fiscal Year 2012 Rates

Summary:

We are proposing to revise the Medicare hospital inpatient prospective payment systems (IPPS) for operating and capital-related costs of acute care hospitals to implement changes arising from our continuing experience with these systems and to implement certain statutory provisions contained in the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively known as the Affordable Care Act) and other legislation. These changes would be applicable to discharges occurring on or after October 1, 2011. We also are setting forth the proposed update to the rate-of-increase limits for certain hospitals excluded from the IPPS that are paid on a reasonable cost basis subject to these limits. The proposed updated rate-of-increase limits would be effective for cost reporting periods beginning on or after October 1, 2011.

We are proposing to update the payment policy and the annual payment rates for the Medicare prospective payment system (PPS) for inpatient hospital services provided by long-term care hospitals (LTCHs) and implement certain statutory changes made by the Affordable Care Act. These changes would be applicable to discharges occurring on or after October 1, 2011.

Table of Contents

Addresses:

When commenting, please refer to file code CMS-1518-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 at http://www.regulations.gov. Follow the instructions for “Comment or Submission” and enter the file code CMS-1518-P to submit comments on this proposed rule.

2. By regular mail. You may mail written comments (one original and two copies) to the following address only: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-1518-P, P.O. Box 8011, Baltimore, MD 21244-1850.

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 (one original and two copies) to the following address only: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-1518-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 (one original and two copies) before the close of the comment period to either of the following addresses:

a. Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201.

(Because access to the interior of the HHH 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. 7500 Security Boulevard, Baltimore, MD 21244-1850.

If you intend to deliver your comments to the Baltimore address, please call telephone number (410) 786-7195 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.

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

For further information contact:

Tzvi Hefter, (410) 786-4487, and Ing-Jye Cheng, (410) 786-4548, Operating Prospective Payment, MS-DRGs, Hospital Acquired Conditions (HAC), Wage Index, New Medical Service and Technology Add-On Payments, Hospital Geographic Reclassifications, Capital Prospective Payment, Excluded Hospitals, Medicare Disproportionate Share Hospital (DSH), and Postacute Care Transfer Issues.

Michele Hudson, (410) 786-4487, and Judith Richter, (410) 786-2590, Long-Term Care Hospital Prospective Payment System and MS-LTC-DRG Relative Weights Issues.

Bridget Dickensheets, (410) 786-8670, Rebasing and Revising of the Market Basket for LTCHs Issues.

Siddhartha Mazumdar, (410) 786-6673, Rural Community Hospital Demonstration Program Issues.

James Poyer, (410) 786-2261, Inpatient Quality Reporting—Program Administration, Validation, and Reconsideration Issues.

Shaheen Halim, (410) 786-0641, Inpatient Quality Reporting—Measures Issues Except Hospital Consumer Assessment of Healthcare Providers and Systems Issues; and Readmission Measures for Hospitals Issues.

Elizabeth Goldstein, (410) 786-6665, Inpatient Quality Reporting—Hospital Consumer Assessment of Healthcare Providers and Systems Measures Issues.

Mary Pratt, (410) 786-6867, LTCH Quality Data Reporting Issues.

Kim Spaulding Bush, (410) 786-3232, Hospital Value-Based Purchasing Efficiency Measures Issues.

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 at that Web site to view public comments.

Comments received timely will also be available for public inspection, 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 4:00 p.m. To schedule an appointment to view public comments, phone 1-800-743-3951.

Electronic Access

This Federal Register document is also available from the Federal Register online database through GPO Access, a service of the U.S. Government Printing Office. Free public access is available on a Wide Area Information Server (WAIS) through the Internet and via asynchronous dial-in. Internet users can access the database by using the World Wide Web, (the Superintendent of Documents' home Web page address is http://www.gpoaccess.gov/), by using local WAIS client software, or by telnet to swais.access.gpo.gov, then login as guest (no password required). Dial-in users should use communications software and modem to call (202) 512-1661; type swais, then login as guest (no password required).

Tables Available Only Through the Internet on the CMS Web Site

In the past, a majority of the tables referred to throughout this preamble and in the Addendum to this proposed rule were published in the Federal Register as part of the annual proposed and final rules. However, beginning in FY 2012, some of the IPPS tables and LTCH PPS tables will no longer be published as part of the annual IPPS/LTCH PPS proposed and final rules. Instead, these tables will be available only through the Internet. The IPPS tables for this proposed rule are available only through the Internet on the CMS Web site at:http://www.cms.hhs.gov/AcuteInpatientPPS/01_overview.asp. Click on the link on the left side of the screen titled, “FY 2012 IPPS Proposed Rule Home Page” or “Acute Inpatient—Files for Download”. The LTCH PPS tables for this FY 2012 proposed rule are available only through the Internet on the CMS Web site at:http://www.cms.gov/LongTermCareHospitalPPS/LTCHPPSRN/list.asp under the list item for Regulation Number CMS-1518-P. For complete details on the availability of the tables referenced in this proposed rule, we refer readers to section VI. of the Addendum to this proposed rule. Readers who experience any problems accessing any of the tables that are posted on the CMS Web sites identified above should contact Nisha Bhat at (410) 786-4487.

Acronyms

3M3M Health Information System

AAMCAssociation of American Medical Colleges

ACGMEAccreditation Council for Graduate Medical Education

AHAAmerican Hospital Association

AHICAmerican Health Information Community

AHIMAAmerican Health Information Management Association

AHRQAgency for Healthcare Research and Quality

ALOSAverage length of stay

ALTHAAcute Long Term Hospital Association

AMAAmerican Medical Association

AMGAAmerican Medical Group Association

AOAAmerican Osteopathic Association

APRDRG All Patient Refined Diagnosis Related Group System

ARRAAmerican Recovery and Reinvestment Act of 2009, Public Law 111-5

ASCAmbulatory surgical center

ASCAAdministrative Simplification Compliance Act of 2002, Public Law 107-105

ASITNAmerican Society of Interventional and Therapeutic Neuroradiology

BBABalanced Budget Act of 1997, Public Law 105-33

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

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

BLSBureau of Labor Statistics

CAHCritical access hospital

CARE[Medicare] Continuity Assessment Record & Evaluation [Instrument]

CARTCMS Abstraction & Reporting Tool

CBSAsCore-based statistical areas

CCComplication or comorbidity

CCRCost-to-charge ratio

CDAC[Medicare] Clinical Data Abstraction Center

CDAD Clostridium difficile-associated disease

CIPICapital input price index

CMICase-mix index

CMSCenters for Medicare & Medicaid Services

CMSAConsolidated Metropolitan Statistical Area

COBRAConsolidated Omnibus Reconciliation Act of 1985, Public Law 99-272

COLACost-of-living adjustment

CoP[Hospital] condition of participation

CPIConsumer price index

CRNACertified Registered Nurse Anesthetist

CYCalendar year

DPPDisproportionate patient percentage

DRADeficit Reduction Act of 2005, Public Law 109-171

DRGDiagnosis-related group

DSHDisproportionate share hospital

ECIEmployment cost index

EDB[Medicare] Enrollment Database

EHRElectronic health record

EMRElectronic medical record

FAHFederation of Hospitals

FDAFood and Drug Administration

FFYFederal fiscal year

FQHCFederally qualified health center

FTEFull-time equivalent

FYFiscal year

GAAPGenerally Accepted Accounting Principles

GAFGeographic Adjustment Factor

GMEGraduate medical education

HACsHospital-acquired conditions

HCAHPSHospital Consumer Assessment of Healthcare Providers and Systems

HCFAHealth Care Financing Administration

HCOHigh-cost outlier

HCRISHospital Cost Report Information System

HHAHome health agency

HHSDepartment of Health and Human Services

HICANHealth Insurance Claims Account Number

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

HIPCHealth Information Policy Council

HISHealth information system

HITHealth information technology

HMOHealth maintenance organization

HPMPHospital Payment Monitoring Program

HSAHealth savings account

HSCRC[Maryland] Health Services Cost Review Commission

HSRVHospital-specific relative value

HSRVccHospital-specific relative value cost center

HQAHospital Quality Alliance

HQIHospital Quality Initiative

ICD-9-CMInternational Classification of Diseases, Ninth Revision, Clinical Modification

ICD-10-CMInternational Classification of Diseases, Tenth Revision, Clinical Modification

ICD-10-PCSInternational Classification of Diseases, Tenth Revision, Procedure Coding System

ICRInformation collection requirement

IGIIHS Global Insight, Inc.

IHSIndian Health Service

IMEIndirect medical education

I-OInput-Output

IOMInstitute of Medicine

IPFInpatient psychiatric facility

IPPS[Acute care hospital] inpatient prospective payment system

IRFInpatient rehabilitation facility

IQRInpatient Quality Reporting

LAMCsLarge area metropolitan counties

LOSLength of stay

LTC-DRGLong-term care diagnosis-related group

LTCHLong-term care hospital

MAMedicare Advantage

MACMedicare Administrative Contractor

MCCMajor complication or comorbidity

MCEMedicare Code Editor

MCOManaged care organization

MCVMajor cardiovascular condition

MDCMajor diagnostic category

MDHMedicare-dependent, small rural hospital

MedPACMedicare Payment Advisory Commission

MedPARMedicare Provider Analysis and Review File

MEIMedicare Economic Index

MGCRBMedicare Geographic Classification Review Board

MIEA-TRHCAMedicare Improvements and Extension Act, Division B of the Tax Relief and Health Care Act of 2006, Public Law 109-432

MIPPAMedicare Improvements for Patients and Providers Act of 2008, Public Law 110-275

MMAMedicare Prescription Drug, Improvement, and Modernization Act of 2003, Public Law 108-173

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

MRHFPMedicare Rural Hospital Flexibility Program

MRSAMethicillin-resistant Staphylococcus aureus

MSAMetropolitan Statistical Area

MS-DRGMedicare severity diagnosis-related group

MS-LTC-DRGMedicare severity long-term care diagnosis-related group

NAICSNorth American Industrial Classification System

NALTHNational Association of Long Term Hospitals

NCDNational coverage determination

NCHSNational Center for Health Statistics

NCQANational Committee for Quality Assurance

NCVHSNational Committee on Vital and Health Statistics

NECMANew England County Metropolitan Areas

NQFNational Quality Forum

NTISNational Technical Information Service

NTTAANational Technology Transfer and Advancement Act of 1991 (Public Law 104-113)

NVHRINational Voluntary Hospital Reporting Initiative

OACT[CMS'] Office of the Actuary

OBRA86 Omnibus Budget Reconciliation Act of 1996, Public Law 99-509

OESOccupational employment statistics

OIGOffice of the Inspector General

OMBExecutive Office of Management and Budget

OPMU.S. Office of Personnel Management

O.R.Operating room

OSCAROnline Survey Certification and Reporting [System]

PMSAsPrimary metropolitan statistical areas

POAPresent on admission

PPACAPatient Protection and Affordable Care Act, Public Law 111-148

PPIProducer price index

PPSProspective payment system

PRMProvider Reimbursement Manual

ProPACProspective Payment Assessment Commission

PRRBProvider Reimbursement Review Board

PRTFsPsychiatric residential treatment facilities

PSFProvider-Specific File

PS&RProvider Statistical and Reimbursement (System)

QIGQuality Improvement Group, CMS

QIOQuality Improvement Organization

RCEReasonable compensation equivalent

RHCRural health clinic

RHQDAPUReporting hospital quality data for annual payment update

RNHCIReligious nonmedical health care institution

RPLRehabilitation psychiatric long-term care (hospital)

RRCRural referral center

RTIResearch Triangle Institute, International

RUCAsRural-urban commuting area codes

RYRate year

SAFStandard Analytic File

SCHSole community hospital

SFYState fiscal year

SICStandard Industrial Classification

SNFSkilled nursing facility

SOCsStandard occupational classifications

SOMState Operations Manual

SSOShort-stay outlier

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

TEPTechnicalexpert panel

TMA TMA [Transitional Medical Assistance], Abstinence Education, and QI [Qualifying Individuals] Programs Extension Act of 2007, Public Law 110-90

UHDDSUniform hospital discharge data set

Table of Contents

I. Background

A. Summary

1. Acute Care Hospital Inpatient Prospective Payment System (IPPS)

2. Hospitals and Hospital Units Excluded From the IPPS

3. Long-Term Care Hospital Prospective Payment System (LTCH PPS)

4. Critical Access Hospitals (CAHs)

5. Payments for Graduate Medical Education (GME)

B. Provisions of the Patient Protection and Affordable Care Act (Pub. L. 111-148) and the Health Care and Education Reconciliation Act of 2010 (Pub. L. 111-152) Applicable to FY 2012

C. Major Contents of This Proposed Rule

1. Proposed Changes to MS-DRG Classifications and Recalibrations of Relative Weights

2. Proposed Changes to the Hospital Wage Index for Acute Care Hospitals

3. Other Decisions and Proposed Changes to the IPPS for Operating Costs and GME Costs

4. Proposed FY 2012 Policy Governing the IPPS for Capital-Related Costs

5. Proposed Changes to the Payment Rates for Certain Excluded Hospitals: Rate-of-Increase Percentages

6. Proposed Changes to the LTCH PPS

7. Proposed Changes to the Electronic Prescribing (eRx) Incentive Program

8. Determining Proposed Prospective Payment Operating and Capital Rates and Rate-of-Increase Limits for Acute Care Hospitals

9. Determining Proposed Prospective Payments Rates for LTCHs

10. Impact Analysis

11. Recommendation of Update Factors for Operating Cost Rates of Payment for Hospital Inpatient Services

12. Discussion of Medicare Payment Advisory Commission Recommendations

II. Proposed Changes to Medicare Severity Diagnosis-Related Group (MS-DRG) Classifications and Relative Weights

A. Background

B. MS-DRG Reclassifications

1. General

2. Yearly Review for Making MS-DRG Changes

C. Adoption of the MS-DRGs in FY 2008

D. Proposed FY 2012 MS-DRG Documentation and Coding Adjustment, Including the Applicability to the Hospital-Specific Rates and the Puerto Rico-Specific Standardized Amount

1. Background on the Prospective MS-DRG Documentation and Coding Adjustments for FY 2008 and FY 2009 Authorized by Public Law 110-90

2. Prospective Adjustment to the Average Standardized Amounts Required by Section 7(b)(1)(A) of Public Law 110-90

3. Recoupment or Repayment Adjustments in FYs 2010 Through 2012 Required by Pub. L. 110-90

4. Retrospective Evaluation of FY 2008 and FY 2009 Claims Data

5. Prospective Adjustment for FY 2010 and Subsequent Years Authorized by Section 7(b)(1)(A) of Public Law 110-90 and Section 1886(d)(3)(vi) of the Act

6. Recoupment or Repayment Adjustment for FY 2010 Authorized by Section 7(b)(1)(B) of Public Law 110-90

7. Background on the Application of the Documentation and Coding Adjustment to the Hospital-Specific Rates

8. Documentation and Coding Adjustment to the Hospital-Specific Rates for FY 2011 and Subsequent Fiscal Years

9. Application of the Documentation and Coding Adjustment to the Puerto Rico-Specific Standardized Amount

E. Refinement of the MS-DRG Relative Weight Calculation

1. Background

2. Summary of the RTI Study of Charge Compression and CCR Refinement

3. Summary of Policy Changes Made in FY 2011

4. Discussion for FY 2012

F. Preventable Hospital-Acquired Conditions (HACs), Including Infections

1. Background

a. Statutory Authority

b. HAC Selection

c. Collaborative Process

d. Application of HAC Payment Policy to MS-DRG Classifications

e. Public Input Regarding Selected and Potential Candidate HACs

f. POA Indicator Reporting

2. Proposed Additions and Revisions to the HAC Policy for FY 2012

a. Contrast-Induced Acute Kidney Injury

b. New Diagnosis Codes Proposed To Be Added to Existing HACs

c. Revision to HAC Subcategory Title

d. Conclusion

3. RTI Program Evaluation Summary

a. Background

b. FY 2009 Data Analysis

c. FY 2010 Data Analysis

G. Proposed Changes to Specific MS-DRG Classifications

1. Pre-Major Diagnostic Categories (Pre-MDCs)

a. Noninvasive Mechanical Ventilation

b. Debridement With Mechanical Ventilation Greater Than 96 Hours With Major Operating Room (O.R.) Procedure

c. Autologous Bone Marrow Transplant

2. MDC 1 (Diseases and Disorders of the Nervous System): Rechargeable Dual Array Deep Brain Stimulation System

3. MDC 3 (Diseases and Disorders of the Ear, Nose, Mouth, and Throat): Skull Based Surgeries

4. MDC 5 (Diseases and Disorders of the Circulatory System)

a. Percutaneous Mitral Valve Repair With Implant

b. Aneurysm Repair Procedure Codes

5. MDC 8 (Diseases and Disorders of the Musculoskeletal System and Connective Tissue)

a. Artificial Discs

b. Major Joint Replacement or Reattachment of Lower Extremities

c. Combined Anterior/Posterior Spinal Fusion

6. MDC 9 (Diseases and Disorders of the Skin, Subcutaneous Tissue, and Breast): Excisional Debridement of Wound, Infection, or Burn

7. MDC 10 (Endocrine, Nutritional, and Metabolic Diseases and Disorders)

a. Nutritional and Metabolic Diseases: Update of MS-DRG Titles

b. Sleeve Gastrectomy Procedure for Morbid Obesity

8. MDC 15 (Newborns and Other Neonates with Conditions Originating in the Perinatal Period): Discharge Status Code 66 (Discharged/Transferred to Critical Access Hospital (CAH))

9. Proposed Medicare Code Editor (MCE) Changes

10. Surgical Hierarchies

11. Complications or Comorbidity (CC) Exclusions List

a. Background

b. Proposed CC Exclusions List for FY 2012

12. Review of Procedure Codes in MS-DRGs 981 Through 983, 984 Through 986, and 987 Through 989

a. Moving Procedure Codes From MS-DRGs 981 Through 983 or MS-DRGs 987 Through 989 Into MDCs

b. Reassignment of Procedures Among MS-DRGs 981 Through 983, 984 Through 986, and 987 Through 989

c. Adding Diagnosis or Procedure Codes to MDCs

13. Changes to the ICD-9-CM Coding System, Including Discussion of the Replacement of the ICD-9-CM System With the ICD-10-CM and ICD-10-PCS Systems in FY 2014

a. ICD-9-CM Coding System

b. Code Freeze

c. Processing of 25 Diagnosis Codes and 25 Procedure Codes on Hospital Inpatient Claims

d. ICD-10 MS-DRGs

14. Other Issues

a. O.R./Non-O.R. Status of Procedures

b. IPPS Recalled Device Policy Clarification

H. Recalibration of MS-DRG Weights

I. Proposed Add-On Payments for New Services and Technologies

1. Background

2. Public Input Before Publication of a Notice of Proposed Rulemaking on Add-On Payments

3. FY 2012 Status of Technologies Approved for FY 2011 Add-On Payments

a. Spiration® IBV Valve System

b. Cardio West TM Temporary Artificial Heart System (Cardio West TM TAH-t)

c. Auto Laser Interstitial Thermal Therapy (AutoLITT TM) System

4. FY 2012 Applications for New Technology Add-On Payments

a. AxiaLIF® 2L+TM System

b. Champion TM HF Monitoring System

c. PerfectCLEAN With Micrillon®

III. Proposed Changes to the Hospital Wage Index for Acute Care Hospitals

A. Background

B. Core-Based Statistical Areas for the Hospital Wage Index

C. Proposed Occupational Mix Adjustment to the FY 2012 Wage Index

1. Development of Data for the Proposed FY 2012 Occupational Mix Adjustment Based on the 2007-2008 Occupational Mix Survey

2. New 2010 Occupational Mix Survey for the FY 2013 Wage Index

3. Calculation of the Proposed Occupational Mix Adjustment for FY 2012

D. Worksheet S-3 Wage Data for the Proposed FY 2012 Wage Index

1. Included Categories of Costs

2. Proposal for Changes to the Reporting Requirements for Pension Costs for the Medicare Wage Index

a. Background

b. Proposal for Allowable Pension Cost for the Medicare Wage Index

3. Excluded Categories of Costs

4. Use of Wage Index Data by Providers Other Than Acute Care Hospitals Under the IPPS

E. Verification of Worksheet S-3 Wage Data

F. Method for Computing the Proposed FY 2012 Unadjusted Wage Index

1. Steps for Computation

2. Expiration of the Imputed Floor Policy

3. Proposed FY 2012 Puerto Rico Wage Index

G. Analysis and Implementation of the Proposed Occupational Mix Adjustment and the Proposed FY 2012 Occupational Mix Adjusted Wage Index

H. Revisions to the Wage Index Based on Hospital Redesignations and Reclassifications

1. General

2. Effects of Reclassification/Redesignation

3. FY 2012 MGCRB Reclassifications

a. FY 2012 Reclassification Requirements and Approvals

b. Applications for Reclassifications for FY 2013

4. Redesignations of Hospitals Under Section 1886(d)(8)(B) of the Act

5. Reclassifications Under Section 1886(d)(8)(B) of the Act

6. Reclassifications Under Section 508 of Public Law 108-173

7. Waiving Lugar Redesignation for the Out-Migration Adjustment

8. Other Geographic Reclassification Issues

a. Requested Reclassification for Single Hospital MSAs

b. Requests for Exceptions to Geographic Reclassification Rules

I. Proposed FY 2012 Wage Index Adjustment Based on Commuting Patterns of Hospital Employees

J. Process for Requests for Wage Index Data Corrections

K. Labor-Related Share for the Proposed FY 2012 Wage Index

IV. Other Proposed Decisions and Changes to the IPPS for Operating Costs and GME Costs

A. Hospital Inpatient Quality Reporting Program

1. Background

a. Overview

b. Statutory History and History of Measures Adopted for the Hospital IQR Program

c. Maintenance of Technical Specifications for Quality Measures

d. Public Display of Quality Measures

2. Retirement of Hospital IQR Program Measures

a. Considerations in Retiring Quality Measures from the Hospital IQR Program

b. Proposed Retirement of Quality Measures under the Hospital IQR Program for the FY 2014 Payment Determination and Subsequent Years

3. Proposed Quality Measures for the FY 2014 and FY 2015 Payment Determinations

a. Considerations in Expanding and Updating Quality Measures Under the Hospital IQR Program

b. Proposed Hospital IQR Program Quality Measures for the FY 2014 Payment Determination

c. Proposed Hospital IQR Program Quality Measures for the FY 2015 Payment Determination

4. Possible New Quality Measures and Measure Topics for Future Years

5. Form, Manner, and Timing of Quality Data Submission

a. Background

b. Proposed Procedural Requirements for FY 2013 and Subsequent Years

c. Proposed General Data Collection and Submission Requirements

d. Proposed Data Submission Requirements for Chart-Abstracted Measures

e. Proposed Sampling and Case Thresholds

f. Proposed HCAHPS Requirements for the FY 2013, FY 2014, and FY 2015 Payment Determinations

g. Proposed Procedures for Claims-Based Measures

h. Proposed Data Submission Requirements for Structural Measures

i. Proposed Data Submission and Reporting Requirements for Healthcare-Associated Infection (HAI) Measures Reported via NHSN

6. Proposed Chart Validation Requirements for Chart-Abstracted Measures

a. Proposed Chart Validation Requirements and Methods for the FY 2012 Payment Determination

b. Proposed Supplements to the Chart Validation Process for the FY 2013 Payment Determination and Subsequent Years

7. Proposed QIO Regulation Changes for Provider Medical Record Deadlines Possibly Including Serious Reportable Events

8. Proposed Data Accuracy and Completeness Acknowledgement Requirements for the FY 2012 Payment Determination and Subsequent Years

9. Proposed Public Display Requirements for the FY 2013 Payment Determination and Subsequent Years

10. Proposed Reconsideration and Appeal Procedures for the FY 2012 Payment Determination

11. Proposed Hospital IQR Program Disaster Waivers

12. Electronic Health Records

a. Background

b. HITECH Act EHR Provisions

B. Hospital Value-Based Purchasing (VBP) Program

1. Background

2. Overview of the Hospital VBP Program Proposed Rule

3. Proposed FY 2014 Hospital VBP Program Measures

a. Background

b. Proposed Efficiency Measure—Medicare Spending per Beneficiary Measure—for the FY 2014 Hospital VBP Program

4. Proposed Efficiency Domain (Medicare Spending per Beneficiary Measure) Performance Period and Baseline Period

C. Hospital Readmission Reduction Program

1. Background

a. Overview

b. Statutory Basis for the Hospital Readmission Reduction Program

2. Implementation of the Hospital Readmission Reduction Program

a. Overview

b. Proposed Provisions in the FY 2012 IPPS/LTCH PPS Rulemaking

c. Proposed Provisions To Be Included in the FY 2013 IPPS/LTCH PPS Proposed Rule

d. Proposed Expansion of the Applicable Conditions To Be Included in the Future Rulemaking

3. Proposed Provisions of the Hospital Readmission Reduction Program

a. Proposed Applicable Conditions for FY 2013 Hospital Readmission Reduction Program

b. Proposed Definition of “Readmissions”

c. Proposed Readmission Measures and Related Methodology

D. Rural Referral Centers (RRCs) (§ 412.96)

1. Case-Mix Index (CMI)

2. Discharges

E. Payment Adjustment for Low-Volume Hospitals (§ 412.101)

1. Background

2. Temporary Changes for FYs 2011 and 2012

3. Proposed Discharge Data Source to Identify Qualifying Low-Volume Hospitals and Calculate the Payment Adjustment (Percentage Increase) for FY 2012

F. Indirect Medical Education (IME) Adjustment

1. Background

2. IME Adjustment Factor for FY 2012

G. Payment Adjustment for Medicare Disproportionate Share Hospitals (DSHs) and Indirect Medical Education (IME) (§§ 412.105 and 412.106)

1. Background

2. Proposed Policy Change Relating to Exclusion of Hospice Beds and Patient Days From the Medicare DSH Calculation

H. Medicare-Dependent, Small Rural Hospitals (MDHs) (§ 412.108)

1. Background

2. Extension of the MDH Program

I. Certified Register Nurse Anesthetists (CRNA) Services Furnished in Rural Hospitals and CAHs (§ 412.113)

J. Additional Payments for Qualifying Hospitals with Lowest per Enrollee Medicare Spending

1. Background

2. Method for Identifying Qualifying Hospitals and Eligible Counties

3. Determination of Annual Payment Amounts

4. Eligible Counties and Qualifying Hospitals

5. Payment Determination and Distributions for FY 2011 and FY 2012

K. Proposed Changes in the Inpatient Hospital Update

1. FY 2012 Inpatient Hospital Update

2. FY 2012 Puerto Rico Hospital Update

3. Productivity Adjustment

L. Additional Payments to Hospitals With High Percentage of End-Stage Renal Disease (ESRD) Discharges (§ 412.104)

M. Proposal for Changes to the Reporting Requirements for Pension Costs for Medicare Cost-Finding Purposes

1. Background

2. Proposal for Allowable Defined Benefit Pension Plan Cost for Medicare Cost-Finding Purposes

N. Rural Community Hospital Demonstration Program

1. Background

2. Changes to the Demonstration Program Made by the Affordable Care Act

3. Proposed FY 2012 Budget Neutrality Adjustment

a. Component of the Proposed FY 2012 Budget Neutrality Adjustment That Accounts for Estimated Demonstration Program Costs of the “Pre-Expansion” Participating Hospitals

b. Portion of the Proposed FY 2012 Budget Neutrality Adjustment That Accounts for Estimated FY 2012 Demonstration Program Costs for Hospitals Newly Selected to Participate in the Demonstration Program

c. Portion of the Proposed FY 2012 Budget Neutrality Adjustment to Offset the Amount by Which the Costs of the Demonstration Program in FYs 2007 and 2008 Exceeded the Amount That Was Identified in the FYs 2007 and 2008 IPPS Final Rules as the Budget Neutrality Offset for FYs 2007 and 2008

O. Bundling of Payments for Services Provided to Outpatients Who Later Are Admitted as Inpatients: 3-Day Payment Window

1. Background

2. Establishment of Condition Code 51 (Attestation of Unrelated Outpatient Nondiagnostic Services)

3. Applicability of the Payment Window Policy to Services Furnished at Physicians' Practices

P. Proposed Changes to MS-DRGs Subject to the Postacute Care Transfer Policy

Q. Hospital Services Furnished under Arrangements

V. Proposed Changes to the IPPS for Capital-Related Costs

A. Overview

B. Exception Payments

C. New Hospitals

D. Hospitals Located in Puerto Rico

E. Proposed Changes for FY 2012: MS-DRG Documentation and Coding Adjustment

F. Other Proposed Changes for FY 2012

VI. Proposed Changes for Hospitals Excluded From the IPPS

A. Excluded Hospitals

B. Critical Access Hospital (CAH) Payment for Ambulance Services

1. Background

2. Requirement for CAH Ambulance Within a 35-Mile Location of a CAH or Entity

VII. Proposed Changes to the Long-Term Care Hospital Prospective Payment System (LTCH PPS) for FY 2012

A. Background of the LTCH PPS

1. Legislative and Regulatory Authority

2. Criteria for Classification as a LTCH

a. Classification as a LTCH

b. Hospitals Excluded From the LTCH PPS

3. Limitation on Charges to Beneficiaries

4. Administrative Simplification Compliance Act (ASCA) and Health Insurance Portability and Accountability Act (HIPAA) Compliance

B. Proposed Medicare Severity Long-Term Care Diagnosis-Related Group (MS-LTC-DRG) Classifications and Relative Weights

1. Background

2. Patient Classifications into MS-LTC-DRGs

a. Background

b. Proposed Changes to the MS-LTC-DRGs for FY 2012

3. Development of the Proposed FY 2012 MS-LTC-DRG Relative Weights

a. General Overview of the Development of the MS-LTC-DRG Relative Weights

b. Development of the Proposed MS-LTC-DRG Relative Weights for FY 2012

c. Data

d. Hospital-Specific Relative Value (HSRV) Methodology

e. Proposed Treatment of Severity Levels in Developing the MS-LTC-DRG Relative Weights

f. Proposed Low-Volume MS-LTC-DRGs—Steps for Determining the Proposed FY 2012 MS-LTC-DRG Relative Weights

C. Proposed Quality Reporting Program for LTCHs

1. Background and Statutory Authority

2. Proposed Quality Measures for the LTCH Quality Reporting Program for FY 2014

a. Considerations in the Selection of the Proposed Quality Measures

b. Proposed LTCH Quality Measures for FY 2014 Payment Determination

3. Possible LTCH Quality Measures under Consideration for Future Years

4. Proposed Data Submission Methods and Timelines

a. Proposed Method of Data Submission for HAIs

b. Proposed Timeline for Data Reporting Related to HAIs

c. Proposed Method of Data Collection and Submission for the Pressure Ulcer Measure Data

d. Proposed Timeline for Data Reporting Related to Pressure Ulcers

5. Public Reporting and Availability of Data Submitted

D. Proposed Rebasing and Revising of the Market Basket Used Under the LTCH PPS

1. Background

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

3. Proposed Rebasing and Revising of the RPL Market Basket

a. Development of Cost Categories

b. Final Cost Category Computation

c. Selection of Price Proxies

d. Proposed Methodology for Capital Portion of the RPL Market Basket

e. Proposed FY 2012 Market Basket Update for LTCHs

f. Proposed Labor-Related Share

E. Proposed Changes to the LTCH Payment Rates and Other Proposed Changes to the FY 2012 LTCH PPS

1. Overview of Development of the LTCH Payment Rates

2. Proposed FY 2012 LTCH PPS Annual Market Basket Update

a. Overview

b. Revision of Certain Market Basket Updates as Required by the Affordable Care Act

c. Proposed Market Basket Under the LTCH PPS for FY 2012

d. Productivity Adjustment

e. Proposed Annual Market Basket Update for LTCHs for FY 2012

3. Proposed Budget Neutrality Adjustment for the Changes to the Area Wage Level Adjustment

4. Proposed Budget Neutrality Adjustment for the Changes to the Area Wage Level Adjustment

5. Greater Than 25 Day Average Length of Stay Requirement for LTCHs

a. Determining the Average Length of Stay When There Is a Change of Ownership

b. Inclusion of Medicare Advantage (MA) Days in the Average Length of Stay Calculation

F. Proposed Application of LTCH Moratorium on the Increase in Beds at Section 114(d)(1)(B) of Public Law 110-173 (MMSEA) to LTCHs and LTCH Satellite Facilities Established or Classified as Such Under Section 114(d)(2) of Public Law 110-173

VIII. MedPAC Recommendations

IX. Other Required Information

A. Requests for Data From the Public

B. Collection of Information Requirements

1. Legislative Requirement for Solicitation of Comments

2. ICRs for Add-On Payments for New Services and Technologies

3. ICRs for the Hospital Inpatient Quality Reporting (IQR) Program

4. ICRs for the Occupational Mix Adjustment to the Proposed FY 2012 Index (Hospital Wage Index Occupational Mix Survey)

5. Hospital Applications for Geographic Reclassifications by the MGCRB

6. ICRs for the Proposed Quality Reporting Program for LTCHs

C. Response to Public Comments

Regulation Text

Addendum—Proposed Schedule of Standardized Amounts, Update Factors, and Rate-of-Increase Percentages Effective With Cost Reporting Periods Beginning on or After October 1, 2011

I. Summary and Background

II. Proposed Changes to the Prospective Payment Rates for Hospital Inpatient Operating Costs for Acute Care Hospitals for FY 2012

A. Calculation of the Proposed Adjusted Standardized Amount

B. Proposed Adjustments for Area Wage Levels and Cost-of-Living

C. Proposed MS-DRG Relative Weights

D. Calculation of the Proposed Prospective Payment Rates

III. Proposed Changes to Payment Rates for Acute Care Hospital Inpatient Capital-Related Costs for FY 2012

A. Determination of Federal Hospital Inpatient Capital-Related Prospective Payment Rate Update

B. Calculation of the Proposed Inpatient Capital-Related Prospective Payments for FY 2012

C. Capital Input Price Index

IV. Proposed Changes to Payment Rates for Certain Excluded Hospitals: Rate-of-Increase Percentages for FY 2012

V. Proposed Changes to the Payment Rates for the LTCH PPS for FY 2012

A. Proposed LTCH PPS Standard Federal Rate for FY 2012

B. Proposed Adjustment for Area Wage Levels Under the LTCH PPS for FY 2012

C. Proposed Adjustment for LTCH PPS High-Cost Outlier (HCO) Cases

D. Computing the Proposed Adjusted LTCH PPS Federal Prospective Payments for FY 2012

VI. Tables Referenced in This Proposed Rulemaking and Available Through the Internet on the CMS Web Site

Appendix A—Regulatory Impact Analysis

I. Overall Impact

II. Objectives of the IPPS

III. Limitations of Our Analysis

IV. Hospitals Included in and Excluded From the IPPS

V. Effects on Hospitals and Hospital Units Excluded From the IPPS

VI. Quantitative Effects of the Proposed Policy Changes Under the IPPS for Operating Costs

A. Basis and Methodology of Estimates

B. Analysis of Table I

C. Impact Analysis of Table II

VII. Effects of Other Proposed Policy Changes

A. Effects of Proposed Policy on HACs, Including Infections

B. Effects of Proposed Policy Changes Relating to New Medical Service and Technology Add-On Payments

C. Effects of Requirements for Hospital Inpatient Quality Reporting (IQR) Program

D. Effects of Additional Proposed Hospital Value-Based Purchasing (VBP) Program Requirements

E. Effects of Proposed Requirements for Hospital Readmissions Reduction Program

F. Effects of Proposed Policy Changes Relating to Payment Adjustments for Medicare Disproportionate Share Hospitals (DSHs) and Indirect Medical Education (IME)

G. Effects of the FY 2012 Low-Volume Hospital Payment Adjustment

H. Effects of Proposed Changes Relating to MDHs

I. Effects of Proposed Policy Relating to CRNA Services Furnished in Rural Hospitals and CAHs

J. Effects of Proposed Changes Relating to ESRD Add-On Payment

K. Effects of Proposed Changes Relating to the Reporting Requirements for Pension Costs for Medicare Cost-Finding and Wage Reporting Purposes

L. Effects of Implementation of Rural Community Hospital Demonstration Program

M. Effects of Proposed Changes to List of MS-DRGs Subject to the Postacute Care Transfer and DRG Special Pay Policy

N. Effects of Proposed Changes Relating to Hospital Services Furnished Under Arrangements

O. Effects of Proposed Change Relating to CAH Payment for Ambulance Services

VIII. Effects of Proposed Changes in the Capital IPPS

A. General Considerations

B. Results

IX. Effects of Proposed Payment Rate Changes and Policy Changes Under the LTCH PPS

A. Introduction and General Considerations

B. Impact on Rural Hospitals

C. Anticipated Effects of Proposed LTCH PPS Payment Rate Change and Policy Changes

D. Effect on the Medicare Program

E. Effect on Medicare Beneficiaries

X. Alternatives Considered

XI. Overall Conclusion

A. Acute Care Hospitals

B. LTCHs

XII. Accounting Statements

A. Acute Care Hospitals

B. LTCHs

XIII. Executive Order 12866

Appendix B: Recommendation of Update Factors for Operating Cost Rates of Payment for Inpatient Hospital Services

I. Background

II. Inpatient Hospital Update for FY 2012

A. Proposed FY 2012 Inpatient Hospital Update

B. Proposed Update for SCHs and MDHs for FY 2012

C. Proposed FY 2012 Puerto Rico Hospital Update

D. Proposed Update for Hospitals Excluded From the IPPS

III. Secretary's Recommendation

IV. MedPAC Recommendation for Assessing Payment Adequacy and Updating Payments in Traditional Medicare

I. Background

A. Summary

1. Acute Care Hospital Inpatient Prospective Payment System (IPPS)

Section 1886(d) of the Social Security Act (the Act) sets forth a system of payment for the operating costs of acute care hospital inpatient stays under Medicare Part A (Hospital Insurance) based on prospectively set rates. Section 1886(g) of the Act requires the Secretary to pay for the capital-related costs of hospital inpatient stays under a prospective payment system (PPS). Under these PPSs, Medicare paymentfor hospital inpatient operating and capital-related costs is made at predetermined, specific rates for each hospital discharge. Discharges are classified according to a list of diagnosis-related groups (DRGs).

The base payment rate is comprised of a standardized amount that is divided into a labor-related share and a nonlabor-related share. The labor-related share is adjusted by the wage index applicable to the area where the hospital is located. If the hospital is located in Alaska or Hawaii, the nonlabor-related share is adjusted by a cost-of-living adjustment factor. This base payment rate is multiplied by the DRG relative weight.

If the hospital treats a high percentage of certain low-income patients, it receives a percentage add-on payment applied to the DRG-adjusted base payment rate. This add-on payment, known as the disproportionate share hospital (DSH) adjustment, provides for a percentage increase in Medicare payments to hospitals that qualify under either of two statutory formulas designed to identify hospitals that serve a disproportionate share of low-income patients. For qualifying hospitals, the amount of this adjustment varies based on the outcome of the statutory calculations.

If the hospital is an approved teaching hospital, it receives a percentage add-on payment for each case paid under the IPPS, known as the indirect medical education (IME) adjustment. This percentage varies, depending on the ratio of residents to beds.

Additional payments may be made for cases that involve new technologies or medical services that have been approved for special add-on payments. To qualify, a new technology or medical service must demonstrate that it is a substantial clinical improvement over technologies or services otherwise available, and that, absent an add-on payment, it would be inadequately paid under the regular DRG payment.

The costs incurred by the hospital for a case are evaluated to determine whether the hospital is eligible for an additional payment as an outlier case. This additional payment is designed to protect the hospital from large financial losses due to unusually expensive cases. Any eligible outlier payment is added to the DRG-adjusted base payment rate, plus any DSH, IME, and new technology or medical service add-on adjustments.

Although payments to most hospitals under the IPPS are made on the basis of the standardized amounts, some categories of hospitals are paid in whole or in part based on their hospital-specific rate, which is determined from their costs in a base year. For example, sole community hospitals (SCHs) receive the higher of a hospital-specific rate based on their costs in a base year (the highest of FY 1982, FY 1987, FY 1996, or FY 2006) or the IPPS Federal rate based on the standardized amount. Through and including FY 2006, a Medicare-dependent, small rural hospital (MDH) received the higher of the Federal rate or the Federal rate plus 50 percent of the amount by which the Federal rate is exceeded by the higher of its FY 1982 or FY 1987 hospital-specific rate. As discussed below, for discharges occurring on or after October 1, 2007, but before October 1, 2012, an MDH will receive the higher of the Federal rate or the Federal rate plus 75 percent of the amount by which the Federal rate is exceeded by the highest of its FY 1982, FY 1987, or FY 2002 hospital-specific rate. SCHs are the sole source of care in their areas, and MDHs are a major source of care for Medicare beneficiaries in their areas. Specifically, section 1886(d)(5)(D)(iii) of the Act defines an SCH as a hospital that is located more than 35 road miles from another hospital or that, by reason of factors such as isolated location, weather conditions, travel conditions, or absence of other like hospitals (as determined by the Secretary), is the sole source of hospital inpatient services reasonably available to Medicare beneficiaries. In addition, certain rural hospitals previously designated by the Secretary as essential access community hospitals are considered SCHs. Section 1886(d)(5)(G)(iv) of the Act defines an MDH as a hospital that is located in a rural area, has not more than 100 beds, is not an SCH, and has a high percentage of Medicare discharges (not less than 60 percent of its inpatient days or discharges in its cost reporting year beginning in FY 1987 or in two of its three most recently settled Medicare cost reporting years). Both of these categories of hospitals are afforded this special payment protection in order to maintain access to services for beneficiaries.

Section 1886(g) of the Act requires the Secretary to pay for the capital-related costs of inpatient hospital services “in accordance with a prospective payment system established by the Secretary.” The basic methodology for determining capital prospective payments is set forth in our regulations at 42 CFR 412.308 and 412.312. Under the capital IPPS, payments are adjusted by the same DRG for the case as they are under the operating IPPS. Capital IPPS payments are also adjusted for IME and DSH, similar to the adjustments made under the operating IPPS. In addition, hospitals may receive outlier payments for those cases that have unusually high costs.

The existing regulations governing payments to hospitals under the IPPS are located in 42 CFR part 412, subparts A through M.

2. Hospitals and Hospital Units Excluded From the IPPS

Under section 1886(d)(1)(B) of the Act, as amended, certain hospitals and hospital units are excluded from the IPPS. These hospitals and units are: rehabilitation hospitals and units; long-term care hospitals (LTCHs); psychiatric hospitals and units; children's hospitals; and cancer hospitals. Religious nonmedical health care institutions (RNHCIs) are also excluded from the IPPS. Various sections of the Balanced Budget Act of 1997 (BBA, Pub. L. 105-33), the Medicare, Medicaid and SCHIP [State Children's Health Insurance Program] Balanced Budget Refinement Act of 1999 (BBRA, Pub. L. 106-113), and the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA, Pub. L. 106-554) provide for the implementation of PPSs for rehabilitation hospitals and units (referred to as inpatient rehabilitation facilities (IRFs)), LTCHs, and psychiatric hospitals and units (referred to as inpatient psychiatric facilities (IPFs)). (We note that the annual updates to the LTCH PPS are now included as part of the IPPS annual update document. Updates to the IRF PPS and IPF PPS are issued as separate documents.) Children's hospitals, cancer hospitals, and RNHCIs continue to be paid solely under a reasonable cost-based system subject to a rate-of-increase ceiling on inpatient operating costs per discharge.

The existing regulations governing payments to excluded hospitals and hospital units are located in 42 CFR parts 412 and 413.

3. Long-Term Care Hospital Prospective Payment System (LTCH PPS)

The Medicare prospective payment system (PPS) for LTCHs applies to hospitals described in section 1886(d)(1)(B)(iv) effective for cost reporting periods beginning on or after October 1, 2002. The LTCH PPS was established under the authority of sections 123(a) and (c) of Public Law 106-113 and section 307(b)(1) of Public Law 106-554 (as codified under section 1886(m)(1) of the Act). During the 5-year (optional) transition period, a LTCH's payment under the PPS was based on an increasing proportion of the LTCH Federal rate with a corresponding decreasing proportion based onreasonable cost principles. Effective for cost reporting periods beginning on or after October 1, 2006, all LTCHs are paid 100 percent of the Federal rate. The existing regulations governing payment under the LTCH PPS are located in 42 CFR part 412, subpart O. Beginning October 1, 2009, we issue the annual updates to the LTCH PPS in the same documents that update the IPPS (73 FR 26797 through 26798).

4. Critical Access Hospitals (CAHs)

Under sections 1814(l), 1820, and 1834(g) of the Act, payments are made to critical access hospitals (CAHs) (that is, rural hospitals or facilities that meet certain statutory requirements) for inpatient and outpatient services are generally based on 101 percent of reasonable cost. Reasonable cost is determined under the provisions of section 1861(v)(1)(A) of the Act and existing regulations under 42 CFR parts 413 and 415.

5. Payments for Graduate Medical Education (GME)

Under section 1886(a)(4) of the Act, costs of approved educational activities are excluded from the operating costs of inpatient hospital services. Hospitals with approved graduate medical education (GME) programs are paid for the direct costs of GME in accordance with section 1886(h) of the Act. The amount of payment for direct GME costs for a cost reporting period is based on the hospital's number of residents in that period and the hospital's costs per resident in a base year. The existing regulations governing payments to the various types of hospitals are located in 42 CFR part 413.

B. Provisions of the Patient Protection and Affordable Care Act (Pub. L. 111-148) and the Health Care and Education Reconciliation Act of 2010 (Pub. L. 111-152) Applicable to FY 2012

The Patient Protection and Affordable Care Act (Pub. L. 111-148), enacted on March 23, 2010, and the Health Care and Education Reconciliation Act of 2010 (Pub. L. 111-152), enacted on March 30, 2010, made a number of changes that affect the IPPS and the LTCH PPS. (Pub. L. 111-148 and Pub. L. 111-152 are collectively referred to as the “Affordable Care Act.”) A number of the provisions of the Affordable Care Act affect the updates to the IPPS and the LTCH PPS and providers and suppliers. The provisions of the Affordable Care Act that were applicable to the IPPS and the LTCH PPS for FYs 2010 and 2011 were implemented in the following documents:

On June 2, 2010, we issued in the Federal Register a notice (75 FR 31118) that contained the final wage indices, hospital reclassifications, payment rates, impacts, and other related tables, effective for the FY 2010 IPPS and the RY 2010 LTCH PPS, which were required by or directly resulted from implementation of provisions of the Affordable Care Act.

On August 16, 2010, we issued in the Federal Register a final rule (75 FR 50042) that implemented provisions of the Affordable Care Act applicable to the IPPS and LTCH/PPS for FY 2011.

In this proposed rule, we are proposing to implement the following provisions (or portions of the following provisions) of the Affordable Care Act that are applicable to the IPPS and LTCH PPS for FY 2012:

• Section 3001 of Public Law 111-148, which provides for establishment of a hospital value-based purchasing program and applicable measures for value-based incentive payments with respect to discharges occurring during FY 2013.

• Section 3004 of Public Law 111-148, which provides for the submission of quality data for LTCHs in order to receive the full annual update to the payment rates and the establishment of quality data measures.

• Section 3025 of Public Law 111-148, which provides for a hospital readmissions reduction program and related quality data reporting measures.

• Section 3124 of Public Law 111-148, which provides for extension of the Medicare-dependent, small rural hospital (MDH) program through FY 2012.

• Section 3401 of Public Law 111-148, which provides for the incorporation of productivity improvements into the market basket updates for IPPS hospitals and LTCHs.

In addition, we are proposing to continue in FY 2012 to implement the following provisions, which were initiated in FY 2011:

• Section 10324 of Public Law 111-148, which provided for a wage adjustment for hospitals located in frontier States.

• Sections 3401 and 10319 of Public Law 111-148 and section 1105 of Public Law 111-152, which revise certain market basket update percentages for IPPS and LTCH PPS payment rates for FY 2012.

• Sections 3125 and 10314 of Public Law 111-148, which provides for temporary percentage increases in payment adjustments to low-volume hospitals for discharges occurring in FY 2012.

• Section 1109 of Public Law 111-152, which provides for additional payments in FY 2012 for qualifying hospitals in the lowest quartile of per capita Medicare spending.

C. Major Contents of This Proposed Rule

In this proposed rule, we are setting forth proposed changes to the Medicare IPPS for operating costs and for capital-related costs of acute care hospitals in FY 2012. We also are setting forth proposed changes relating to payments for IME costs and payments to certain hospitals that continue to be excluded from the IPPS and paid on a reasonable cost basis.

In addition, in this proposed rule, we are setting forth proposed changes to the payment rates, factors, and other payment rate policies under the LTCH PPS for FY 2012.

Below is a summary of the major changes that we are proposing to make:

1. Proposed Changes to MS-DRG Classifications and Recalibrations of Relative Weights

In section II. of the preamble of the proposed rule, we include—

• Proposed changes to MS-DRG classifications based on our yearly review.

• Proposed application of the documentation and coding adjustment for FY 2012 resulting from implementation of the MS-DRG system.

• A discussion of the Research Triangle International, Inc. (RTI) reports and recommendations relating to charge compression.

• Proposed recalibrations of the MS-DRG relative weights.

• Proposed changes to hospital-acquired conditions (HACs) and a listing and discussion of HACs, including infections, that would be subject to the statutorily required quality adjustment in MS-DRG payments for FY 2012.

We discussed the FY 2012 status of new technologies approved for add-on payments for FY 2011 and present our evaluation and analysis of the FY 2012 applicants for add-on payments for high-cost new medical services and technologies (including public input, as directed by Pub. L. 108-173, obtained in a town hall meeting).

2. Proposed Changes to the Hospital Wage Index for Acute Care Hospitals

In section III. of the preamble to this proposed rule, we are proposing revisions to the wage index for acute care hospitals and the annual update of the wage data. Specific issues addressed include the following:

• The proposed FY 2012 wage index update using wage data from cost reporting periods beginning in FY 2008.

• Analysis and implementation of the proposed FY 2012 occupational mix adjustment to the wage index for acute care hospitals, including discussion of the 2010 occupational mix survey.

• A proposal to change the reporting requirements for pension costs for the Medicare wage index.

• Proposed revisions to the wage index for acute care hospitals based on hospital redesignations and reclassifications.

• The proposed adjustment to the wage index for acute care hospitals for FY 2012 based on commuting patterns of hospital employees who reside in a county and work in a different area with a higher wage index.

• The timetable for reviewing and verifying the wage data used to compute the proposed FY 2012 hospital wage index.

• Determination of the labor-related share for the proposed FY 2012 wage index.

3. Other Decisions and Proposed Changes to the IPPS for Operating Costs and GME Costs

In section IV. of the preamble of this proposed rule, we discuss a number of the provisions of the regulations in 42 CFR parts 412, 413, and 476, including the following:

• The reporting of hospital quality data under the Hospital Inpatient Quality Reporting (IQR) Program as a condition for receiving the full annual payment update increase.

• The proposed implementation of the Hospital Value-Based Purchasing Program measures.

• The proposed establishment of hospital readmisssion measures for reporting of hospital quality data.

• The proposed updated national and regional case-mix values and discharges for purposes of determining RRC status.

• The statutorily required IME adjustment factor for FY 2012.

• Proposed payment adjustment for low-volume hospitals.

• Proposal for counting hospice days in the formula for determining the payment adjustment for disproportionate share hospitals.

• Proposal for making additional payments for qualifying hospitals with lowest per enrollee Medicare spending for FY 2012.

• Proposal to clarify ESRD add-on payment requirements based on cost report requirements.

• Proposal relating to changes to the reporting requirements for pension costs for Medicare cost-finding purposes.

• Proposal to implement statutory change to the hospital payment update, including incorporation of a productivity adjustment.

• Discussion of the Rural Community Hospital Demonstration Program and a proposal for making a budget neutrality adjustment for the demonstration program.

• Discussion of August 2010 interim final rule with comment period and further proposed changes relating to the 3-day payment window for payments for services provided to outpatients who are later admitted as inpatients.

4. Proposed FY 2012 Policy Governing the IPPS for Capital-Related Costs

In section V. of the preamble to this proposed rule, we discuss the proposed payment policy requirements for capital-related costs and capital payments to hospitals for FY 2012 and the proposed MS-DRG documentation and coding adjustment for FY 2012.

5. Proposed Changes to the Payment Rates for Certain Excluded Hospitals: Rate-of-Increase Percentages

In section VI. of the preamble of this proposed rule, we discuss proposed changes to payments to certain excluded hospitals. In addition, we discuss proposed changes relating to payment for TEFRA services furnished under arrangements and payment for ambulance services furnished by CAH-owned and operated entities.

6. Proposed Changes to the LTCH PPS

In section VII. of the preamble of this proposed rule, we set forth proposed changes to the payment rates, factors, and other payment rate policies under the LTCH PPS for FY 2012, including the annual update of the MS-LTC-DRG classifications and relative weights for use under the LTCH PPS for FY 2012, the proposed documentation and coding adjustment under the LTCH PPS for FY 2012, and the proposed rebasing and revising of the market basket for LTCHs. In addition, we are setting forth proposals for implementing the quality data reporting program for LTCHs. We also are proposing to clarify two policies regarding the calculation of the average length of stay requirement for LTCHs, and proposing a policy to address a LTCH moratorium issue.

7. Determining Proposed Prospective Payment Operating and Capital Rates and Rate-of-Increase Limits for Acute Care Hospitals

In the Addendum to this proposed rule, we set forth proposed changes to the amounts and factors for determining the proposed FY 2012 prospective payment rates for operating costs and capital-related costs for acute care hospitals. We also are proposing to establish the threshold amounts for outlier cases. In addition, we address the proposed update factors for determining the rate-of-increase limits for cost reporting periods beginning in FY 2012 for certain hospitals excluded from the IPPS.

8. Determining Proposed Prospective Payment Rates for LTCHs

In the Addendum to this proposed rule, we set forth proposed changes to the amounts and factors for determining the proposed FY 2012 prospective standard Federal rate. We also are proposing to establish the proposed adjustments for wage levels, the labor-related share, the cost-of-living adjustment, and high-cost outliers, including the fixed-loss amount, and the LTCH cost-to-charge ratios (CCRs) under the LTCH PPS.

9. Impact Analysis

In Appendix A of this proposed rule, we set forth an analysis of the impact that the proposed changes would have on affected acute care hospitals and LTCHs.

10. Recommendation of Update Factors for Operating Cost Rates of Payment for Hospital Inpatient Services

In Appendix B of this proposed rule, as required by sections 1886(e)(4) and (e)(5) of the Act, we provide our recommendations of the appropriate percentage changes for FY 2012 for the following:

• A single average standardized amount for all areas for hospital inpatient services paid under the IPPS for operating costs of acute care hospitals (and hospital-specific rates applicable to SCHs and MDHs).

• Target rate-of-increase limits to the allowable operating costs of hospital inpatient services furnished by certain hospitals excluded from the IPPS.

• The standard Federal rate for hospital inpatient services furnished by LTCHs.

11. Discussion of Medicare Payment Advisory Commission Recommendations

Under section 1805(b) of the Act, MedPAC is required to submit a report to Congress, no later than March 1 of each year, in which MedPAC reviews and makes recommendations on Medicare payment policies. MedPAC's March 2011 recommendations concerning hospital inpatient payment policies address the update factor for hospital inpatient operating costs andcapital-related costs under the IPPS, for hospitals and distinct part hospital units excluded from the IPPS. We address these recommendations in Appendix B of this proposed rule. For further information relating specifically to the MedPAC March 2011 report or to obtain a copy of the report, contact MedPAC at (202) 220-3700 or visit MedPAC's Web site at:http://www.medpac.gov.

II. Proposed Changes to Medicare Severity Diagnosis-Related Group (MS-DRG) Classifications and Relative Weights

A. Background

Section 1886(d) of the Act specifies that the Secretary shall establish a classification system (referred to as DRGs) for inpatient discharges and adjust payments under the IPPS based on appropriate weighting factors assigned to each DRG. Therefore, under the IPPS, Medicare pays for inpatient hospital services on a rate per discharge basis that varies according to the DRG to which a beneficiary's stay is assigned. The formula used to calculate payment for a specific case multiplies an individual hospital's payment rate per case by the weight of the DRG to which the case is assigned. Each DRG weight represents the average resources required to care for cases in that particular DRG, relative to the average resources used to treat cases in all DRGs.

Congress recognized that it would be necessary to recalculate the DRG relative weights periodically to account for changes in resource consumption. Accordingly, section 1886(d)(4)(C) of the Act requires that the Secretary adjust the DRG classifications and relative weights at least annually. These adjustments are made to reflect changes in treatment patterns, technology, and any other factors that may change the relative use of hospital resources.

B. MS-DRG Reclassifications

1. General

As discussed in the preamble to the FY 2008 IPPS final rule with comment period (72 FR 47138), we focused our efforts in FY 2008 on making significant reforms to the IPPS consistent with the recommendations made by MedPAC in its “Report to the Congress, Physician-Owned Specialty Hospitals” in March 2005. MedPAC recommended that the Secretary refine the entire DRG system by taking severity of illness into account and applying hospital-specific relative value (HSRV) weights to DRGs. [1] We began this reform process by adopting cost-based weights over a 3-year transition period beginning in FY 2007 and making interim changes to the DRG system for FY 2007 by creating 20 new CMS DRGs and modifying 32 other DRGs across 13 different clinical areas involving nearly 1.7 million cases. As described in more detail below, these refinements were intermediate steps towards comprehensive reform of both the relative weights and the DRG system as we undertook further study. For FY 2008, we adopted 745 new Medicare Severity DRGs (MS-DRGs) to replace the CMS DRGs. We refer readers to section II.D. of the FY 2008 IPPS final rule with comment period for a full detailed discussion of how the MS-DRG system, based on severity levels of illness, was established (72 FR 47141).

Currently, cases are classified into MS-DRGs for payment under the IPPS based on the following information reported by the hospital: The principal diagnosis, up to eight additional diagnoses, and up to six procedures performed during the stay. (We refer readers to section II.G.11.c. of this proposed rule for a discussion of our efforts to increase our internal systems capacity to process diagnosis and procedures on hospital claims to 25 diagnosis codes and 25 procedure codes prior to the use of the International Classification of Diseases, 10th Revision, Clinical Modification (ICD-10-CM) for diagnosis coding and the International Classification of Diseases, 10th Revision, Procedure Coding System (ICD-10 PCS) for inpatient hospital procedure coding, effective October 1, 2013.) In a small number of MS-DRGs, classification is also based on the age, sex, and discharge status of the patient. The diagnosis and procedure information is reported by the hospital using codes from the International Classification of Diseases, Ninth Revision, Clinical Modification (ICD-9-CM) prior to October 1, 2013. We refer readers to section II.G.11.b. of this proposed rule for a reference to the replacement of ICD-9-CM, Volumes 1 and 2, including the Official ICD-9-CM Guidelines for Coding and Reporting, Volume 3, with the ICD-10-CM and ICD-10-PCS, including the Official ICD-10-CM and ICD-10-PCS Guidelines for Coding and Reporting, effective October 1, 2013 (FY 2014).

The process of developing the MS-DRGs was begun by dividing all possible principal diagnoses into mutually exclusive principal diagnosis areas, referred to as Major Diagnostic Categories (MDCs). The MDCs were formulated by physician panels to ensure that the DRGs would be clinically coherent. The diagnoses in each MDC correspond to a single organ system or etiology and, in general, are associated with a particular medical specialty. Thus, in order to maintain the requirement of clinical coherence, no final MS-DRG could contain patients in different MDCs. For example, MDC 6 is Diseases and Disorders of the Digestive System. This approach is used because clinical care is generally organized in accordance with the organ system affected. However, some MDCs are not constructed on this basis because they involve multiple organ systems (for example, MDC 22 (Burns)). For FY 2011, cases were assigned to one of 747 MS-DRGs in 25 MDCs. The table below lists the 25 MDCs.

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In general, cases are assigned to an MDC based on the patient's principal diagnosis before assignment to an MS-DRG. However, under the most recent version of the Medicare GROUPER (Version 28.0), there are 13 MS-DRGs to which cases are directly assigned on the basis of ICD-9-CM procedure codes. These MS-DRGs are for heart transplant or implant of heart assist systems; liver and/or intestinal transplants; bone marrow transplants; lung transplants; simultaneous pancreas/kidney transplants; pancreas transplants; and tracheostomies. Cases are assigned to these MS-DRGs before they are classified to an MDC. The table below lists the 13 current pre-MDCs.

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Once the MDCs were defined, each MDC was evaluated to identify those additional patient characteristics that would have a consistent effect on hospital resource consumption. Because the presence of a surgical procedure that required the use of the operating room would have a significant effect on the type of hospital resources used by a patient, most MDCs were initially divided into surgical DRGs and medical DRGs. Surgical DRGs are based on a hierarchy that orders operating room (O.R.) procedures or groups of O.R. procedures by resource intensity. Medical DRGs generally are differentiated on the basis of diagnosis and age (0 to 17 years of age or greater than 17 years of age). Some surgical and medical DRGs are further differentiated based on the presence or absence of a complication or comorbidity (CC) or a major complication or comorbidity (MCC).

Generally, nonsurgical procedures and minor surgical procedures that are not usually performed in an operating room are not treated as O.R. procedures. However, there are a few non-O.R. procedures that do affect MS-DRG assignment for certain principal diagnoses. An example is extracorporeal shock wave lithotripsy for patients with a principal diagnosis of urinary stones. Lithotripsy procedures are not routinely performed in an operating room. Therefore, lithotripsy codes are not classified as O.R. procedures. However, our clinical advisors believe that patients with urinary stones who undergo extracorporeal shock wave lithotripsy should be considered similar to other patients who undergo O.R. procedures. Therefore, we treat this group of patients similar to patients undergoing O.R. procedures.

Once the medical and surgical classes for an MDC were formed, each diagnosis class was evaluated to determine if complications or comorbidities would consistently affect hospital resource consumption. Each diagnosis was categorized into one of three severity levels. These three levels include a major complication or comorbidity (MCC), a complication or comorbidity (CC), or a non-CC. Physician panels classified each diagnosis code based on a highly iterative process involving a combination of statistical results from test data as well as clinical judgment. As stated earlier, we refer readers to section II.D. of the FY 2008 IPPS final rule with comment period for a full detailed discussion of how the MS-DRG system was established based on severity levels of illness (72 FR 47141).

A patient's diagnosis, procedure, discharge status, and demographic information is entered into the Medicare claims processing systems and subjected to a series of automated screens called the Medicare Code Editor (MCE). The MCE screens are designed to identify cases that require further review before classification into an MS-DRG.

After patient information is screened through the MCE and further development of the claim is conducted, the cases are classified into the appropriate MS-DRG by the Medicare GROUPER software program. The GROUPER program was developed as a means of classifying each case into an MS-DRG on the basis of the diagnosis and procedure codes and, for a limited number of MS-DRGs, demographic information (that is, sex, age, and discharge status).

After cases are screened through the MCE and assigned to an MS-DRG by the GROUPER, the PRICER software calculates a base MS-DRG payment. The PRICER calculates the payment for each case covered by the IPPS based on the MS-DRG relative weight and additional factors associated with each hospital, such as IME and DSH payment adjustments. These additional factors increase the payment amount to hospitals above the base MS-DRG payment.

The records for all Medicare hospital inpatient discharges are maintained in the Medicare Provider Analysis and Review (MedPAR) file. The data in this file are used to evaluate possible MS-DRG classification changes and to recalibrate the MS-DRG weights. However, in the FY 2000 IPPS final rule (64 FR 41499 and 41500), we discussed a process for considering non-MedPAR data in the recalibration process. We stated that for use of non-MedPAR datato be feasible for purposes of DRG recalibration and reclassification, the data must, among other things: (1) Be independently verified; (2) reflect a complete set of cases (or a representative sample of cases); and (3) enable us to calculate appropriate DRG relative weights and ensure that cases are classified to the “correct” DRG, and to one DRG only, in the recalibration process. Further, in order for us to consider using particular non-MedPAR data, we must have sufficient time to evaluate and test the data. The time necessary to do so depend upon the nature and quality of the non-MedPAR data submitted. Generally, however, a significant sample of the non-MedPAR data should be submitted by mid-October for consideration in conjunction with the next year's proposed rule. This date allows us time to test the data and make a preliminary assessment as to the feasibility of using the data. Subsequently, a complete non-MedPAR database should be submitted by early December for consideration in conjunction with the next year's proposed rule.

As we indicated above, for FY 2008, we made significant improvements in the DRG system to recognize severity of illness and resource usage by adopting MS-DRGs that were reflected in the FY 2008 GROUPER, Version 25.0, and were effective for discharges occurring on or after October 1, 2007. Our MS-DRG analysis for this FY 2012 proposed rule is based on data from the September 2010 update of the FY 2010 MedPAR file, which contained hospital bills received through September 30, 2010, for discharges occurring through September 30, 2010.

2. Yearly Review for Making MS-DRG Changes

Many of the changes to the MS-DRG classifications we make annually are the result of specific issues brought to our attention by interested parties. We encourage individuals with comments about MS-DRG classifications to submit these comments no later than early December of each year so they can be carefully considered for possible inclusion in the annual proposed rule and, if included, may be subjected to public review and comment. Therefore, similar to the timetable for interested parties to submit non-MedPAR data for consideration in the MS-DRG recalibration process, comments about MS-DRG classification issues should be submitted no later than early December in order to be considered and possibly included in the next annual proposed rule updating the IPPS.

The actual process of forming the MS-DRGs was, and will likely continue to be, highly iterative, involving a combination of statistical results from test data combined with clinical judgment. In the FY 2008 IPPS final rule (72 FR 47140 through 47189), we described in detail the process we used to develop the MS-DRGs that we adopted for FY 2008. In addition, in deciding whether to make further modification to the MS-DRGs for particular circumstances brought to our attention, we considered whether the resource consumption and clinical characteristics of the patients with a given set of conditions are significantly different than the remaining patients in the MS-DRG. We evaluated patient care costs using average charges and lengths of stay as proxies for costs and relied on the judgment of our medical advisors to decide whether patients are clinically distinct or similar to other patients in the MS-DRG. In evaluating resource costs, we considered both the absolute and percentage differences in average charges between the cases we selected for review and the remainder of cases in the MS-DRG. We also considered variation in charges within these groups; that is, whether observed average differences were consistent across patients or attributable to cases that were extreme in terms of charges or length of stay, or both. Further, we considered the number of patients who will have a given set of characteristics and generally preferred not to create a new MS-DRG unless it would include a substantial number of cases.

C. Adoption of the MS-DRGs in FY 2008

In the FY 2006, FY 2007, and FY 2008 IPPS final rules, we discussed a number of recommendations made by MedPAC regarding revisions to the DRG system used under the IPPS (70 FR 47473 through 47482; 71 FR 47881 through 47939; and 72 FR 47140 through 47189). As we noted in the FY 2006 IPPS final rule, we had insufficient time to complete a thorough evaluation of these recommendations for full implementation in FY 2006. However, we did adopt severity-weighted cardiac DRGs in FY 2006 to address public comments on this issue and the specific concerns of MedPAC regarding cardiac surgery DRGs. We also indicated that we planned to further consider all of MedPAC's recommendations and thoroughly analyze options and their impacts on the various types of hospitals in the FY 2007 IPPS proposed rule.

For FY 2007, we began this process. In the FY 2007 IPPS proposed rule, we proposed to adopt Consolidated Severity DRGs (CS DRGs) for FY 2008 (if not earlier). Based on public comments received on the FY 2007 IPPS proposed rule, we decided not to adopt the CS DRGs. In the FY 2007 IPPS final rule (71 FR 47906 through 47912), we discussed several concerns raised by public commenters regarding the proposal to adopt CS DRGs. We acknowledged the many public comments suggesting the logic of Medicare's DRG system should continue to remain in the public domain as it has since the inception of the PPS. We also acknowledged concerns about the impact on hospitals and software vendors of moving to a proprietary system. Several commenters suggested that CMS refine the existing DRG classification system to preserve the many policy decisions that were made over the last 20 years and were already incorporated into the DRG system, such as complexity of services and new device technologies. Consistent with the concerns expressed in the public comments, this option had the advantage of using the existing DRGs as a starting point (which was already familiar to the public) and retained the benefit of many DRG decisions that were made in recent years. We stated our belief that the suggested approach of incorporating severity measures into the existing DRG system was a viable option that would be evaluated.

Therefore, we decided to make interim changes to the existing DRGs for FY 2007 by creating 20 new DRGs involving 13 different clinical areas that would significantly improve the CMS DRG system's recognition of severity of illness. We also modified 32 DRGs to better capture differences in severity. The new and revised DRGs were selected from 40 existing CMS DRGs that contained 1,666,476 cases and represented a number of body systems. In creating these 20 new DRGs, we deleted 8 existing DRGs and modified 32 existing DRGs. We indicated that these interim steps for FY 2007 were being taken as a prelude to more comprehensive changes to better account for severity in the DRG system by FY 2008.

In the FY 2007 IPPS final rule (71 FR 47898), we indicated our intent to pursue further DRG reform through two initiatives. First, we announced that we were in the process of engaging a contractor to assist us with evaluating alternative DRG systems that were raised as potential alternatives to the CMS DRGs in the public comments. Second, we indicated our intent to review over 13,000 ICD-9-CM diagnosis codes as part of making further refinements to the current CMS DRGs to better recognize severity of illness basedon the work that CMS (then HCFA) did in the mid-1990's in connection with adopting severity DRGs. We describe below the progress we have made on these two initiatives and our actions for FYs 2008, 2009, 2010, and 2011, and our proposed actions for FY 2012 based on our continued analysis of reform of the DRG system. We note that the adoption of the MS-DRGs to better recognize severity of illness has implications for the outlier threshold, the application of the postacute care transfer policy, the measurement of real case-mix versus apparent case-mix, and the IME and DSH payment adjustments. We discuss these implications for FY 2012 in other sections of this preamble and in the Addendum to this proposed rule.

In the FY 2007 IPPS proposed rule, we discussed MedPAC's recommendations to move to a cost-based HSRV weighting methodology using HSRVs beginning with the FY 2007 IPPS proposed rule for determining the DRG relative weights. Although we proposed to adopt the HSRV weighting methodology for FY 2007, we decided not to adopt the proposed methodology in the final rule after considering the public comments we received on the proposal. Instead, in the FY 2007 IPPS final rule, we adopted a cost-based weighting methodology without the HSRV portion of the proposed methodology. The cost-based weights were adopted over a 3-year transition period in1/3increments between FY 2007 and FY 2009. In addition, in the FY 2007 IPPS final rule, we indicated our intent to further study the HSRV-based methodology as well as other issues brought to our attention related to the cost-based weighting methodology adopted in the FY 2007 final rule. There was significant concern in the public comments that our cost-based weighting methodology does not adequately account for charge compression—the practice of applying a higher percentage charge markup over costs to lower cost items and services and a lower percentage charge markup over costs to higher cost items and services. Further, public commenters expressed concern about potential inconsistencies between how costs and charges are reported on the Medicare cost reports and charges on the Medicare claims. In the FY 2007 IPPS final rule, we used costs and charges from the cost reports to determine departmental level cost-to-charge ratios (CCRs) which we then applied to charges on the Medicare claims to determine the cost-based weights. The commenters were concerned about potential distortions to the cost-based weights that would result from inconsistent reporting between the cost reports and the Medicare claims. After publication of the FY 2007 IPPS final rule, we entered into a contract with RTI International (RTI) to study both charge compression and the extent, if any, to which our methodology for calculating DRG relative weights is affected by inconsistencies between how hospitals report costs and charges on the cost reports and how hospitals report charges on individual claims. Further, as part of its study of alternative DRG systems, the RAND Corporation analyzed the HSRV cost-weighting methodology. We refer readers to section II.E. of the preamble of this proposed rule for a discussion of the issue of charge compression and the cost-weighting methodology for FY 2012.

We believe that revisions to the DRG system to better recognize severity of illness and changes to the relative weights based on costs rather than charges are improving the accuracy of the payment rates in the IPPS. We agree with MedPAC that these refinements should be pursued. Although we continue to caution that any prospective payment system based on grouping cases will always present some opportunities for providers to specialize in cases they believe have higher margins, we believe that the changes we have adopted and the continuing reforms we are proposing to make in this proposed rule for FY 2012 will improve payment accuracy and reduce financial incentives to create specialty hospitals.

We refer readers to section II.D. of the FY 2008 IPPS final rule with comment period for a full discussion of how the MS-DRG system was established based on severity levels of illness (72 FR 47141).

D. Proposed FY 2012 MS-DRG Documentation and Coding Adjustment, Including the Applicability to the Hospital-Specific Rates and the Puerto Rico-Specific Standardized Amount

1. Background on the Prospective MS-DRG Documentation and Coding Adjustments for FY 2008 and FY 2009 Authorized by Public Law 110-90

As we discussed earlier in this preamble, we adopted the MS-DRG patient classification system for the IPPS, effective October 1, 2007, to better recognize severity of illness in Medicare payment rates for acute care hospitals. The adoption of the MS-DRG system resulted in the expansion of the number of DRGs from 538 in FY 2007 to 745 in FY 2008. (Currently, there are 747 MS-DRGs, and we are proposing 4 additional MS-DRGs for FY 2012.) By increasing the number of MS-DRGs and more fully taking into account patient severity of illness in Medicare payment rates for acute care hospitals, MS-DRGs encourage hospitals to improve their documentation and coding of patient diagnoses.

In the FY 2008 IPPS final rule with comment period (72 FR 47175 through 47186), we indicated that the adoption of the MS-DRGs had the potential to lead to increases in aggregate payments without a corresponding increase in actual patient severity of illness due to the incentives for additional documentation and coding. In that final rule with comment period, we exercised our authority under section 1886(d)(3)(A)(vi) of the Act, which authorizes us to maintain budget neutrality by adjusting the national standardized amount, to eliminate the estimated effect of changes in coding or classification that do not reflect real changes in case-mix. Our actuaries estimated that maintaining budget neutrality required an adjustment of −4.8 percent to the national standardized amount. We provided for phasing in this −4.8 percent adjustment over 3 years. Specifically, we established prospective documentation and coding adjustments of −1.2 percent for FY 2008, −1.8 percent for FY 2009, and −1.8 percent for FY 2010.

On September 29, 2007, Congress enacted the TMA [Transitional Medical Assistance], Abstinence Education, and QI [Qualifying Individuals] Programs Extension Act of 2007, Public Law 110-90. Section 7(a) of Public Law 110-90 reduced the documentation and coding adjustment made as a result of the MS-DRG system that we adopted in the FY 2008 IPPS final rule with comment period to −0.6 percent for FY 2008 and −0.9 percent for FY 2009. Section 7(a) of Public Law 110-90 did not adjust the FY 2010 −1.8 percent documentation and coding adjustment promulgated in the FY 2008 IPPS final rule with comment period. To comply with section 7(a) of Public Law 110-90, we promulgated a final rule on November 27, 2007 (72 FR 66886) that modified the IPPS documentation and coding adjustment for FY 2008 to −0.6 percent, and revised the FY 2008 payment rates, factors, and thresholds accordingly. These revisions were effective on October 1, 2007.

For FY 2009, section 7(a) of Pub. L. 110-90 required a documentation and coding adjustment of −0.9 percent instead of the −1.8 percent adjustment established in the FY 2008 IPPS finalrule with comment period. As discussed in the FY 2009 IPPS final rule (73 FR 48447) and required by statute, we applied a documentation and coding adjustment of −0.9 percent to the FY 2009 IPPS national standardized amount. The documentation and coding adjustments established in the FY 2008 IPPS final rule with comment period, as amended by Public Law 110-90, are cumulative. As a result, the −0.9 percent documentation and coding adjustment for FY 2009 was in addition to the −0.6 percent adjustment for FY 2008, yielding a combined effect of −1.5 percent.

2. Prospective Adjustment to the Average Standardized Amounts Required by Section 7(b)(1)(A) of Public Law 110-90

Section 7(b)(1)(A) of Public Law 110-90 requires that, if the Secretary determines that implementation of the MS-DRG system resulted in changes in documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008 or FY 2009 that are different than the prospective documentation and coding adjustments applied under section 7(a) of Public Law 110-90, the Secretary shall make an appropriate adjustment under section 1886(d)(3)(A)(vi) of the Act. Section 1886(d)(3)(A)(vi) of the Act authorizes adjustments to the average standardized amounts for subsequent fiscal years in order to eliminate the effect of such coding or classification changes. These adjustments are intended to ensure that future annual aggregate IPPS payments are the same as the payments that otherwise would have been made had the prospective adjustments for documentation and coding applied in FY 2008 and FY 2009 reflected the change that occurred in those years.

3. Recoupment or Repayment Adjustments in FYs 2010 Through 2012 Required by Public Law 110-90

If, based on a retroactive evaluation of claims data, the Secretary determines that implementation of the MS-DRG system resulted in changes in documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008 or FY 2009 that are different from the prospective documentation and coding adjustments applied under section 7(a) of Public Law 110-90, section 7(b)(1)(B) of Public Law 110-90 requires the Secretary to make an additional adjustment to the standardized amounts under section 1886(d) of the Act. This adjustment must offset the estimated increase or decrease in aggregate payments for FYs 2008 and 2009 (including interest) resulting from the difference between the estimated actual documentation and coding effect and the documentation and coding adjustment applied under section 7(a) of Public Law 110-90. This adjustment is in addition to making an appropriate adjustment to the standardized amounts under section 1886(d)(3)(A)(vi) of the Act as required by section 7(b)(1)(A) of Public Law 110-90. That is, these adjustments are intended to recoup (or repay, in the case of underpayments) spending in excess of (or less than) spending that would have occurred had the prospective adjustments for changes in documentation and coding applied in FY 2008 and FY 2009 precisely matched the changes that occurred in those years. Public Law 110-90 requires that the Secretary make these recoupment or repayment adjustments for discharges occurring during FYs 2010, 2011, and 2012.

4. Retrospective Evaluation of FY 2008 and FY 2009 Claims Data

In order to implement the requirements of section 7 of Public Law 110-90, we indicated in the FY 2009 IPPS final rule (73 FR 48450) that we planned a thorough retrospective evaluation of our claims data. We stated that the results of this evaluation would be used by our actuaries to determine any necessary payment adjustments to the standardized amounts under section 1886(d) of the Act to ensure the budget neutrality of the MS-DRGs implementation for FY 2008 and FY 2009, as required by law. In the FY 2009 IPPS proposed rule (73 FR 23541 through 23542), we described our preliminary plan for a retrospective analysis of inpatient hospital claims data and invited public input on our proposed methodology.

In that proposed rule, we indicated that we intended to measure and corroborate the extent of the overall national average changes in case-mix for FY 2008 and FY 2009. We expected that the two largest parts of this overall national average change would be attributable to underlying changes in actual patient severity of illness and to documentation and coding improvements under the MS-DRG system. In order to separate the two effects, we planned to isolate the effect of shifts in cases among base DRGs from the effect of shifts in the types of cases within base DRGs.

The MS-DRGs divide the base DRGs into three severity levels (with MCC, with CC, and without CC); the previously used CMS DRGs had only two severity levels (with CC and without CC). Under the CMS DRG system, the majority of hospital discharges had a secondary diagnosis which was on the CC list, which led to the higher severity level. The MS-DRGs significantly changed the code lists of what was classified as an MCC or a CC. Many codes that were previously classified as a CC are no longer included on the MS-DRG CC list because the data and clinical review showed these conditions did not lead to a significant increase in resource use. The addition of a new level of high severity conditions, the MCC list, also provided a new incentive to code more precisely in order to increase the severity level. We anticipated that hospitals would examine the MS-DRG MCC and CC code lists and then work with physicians and coders on documentation and coding practices so that coders could appropriately assign codes from the highest possible severity level. We note that there have been numerous seminars and training sessions on this particular coding issue. The topic of improving documentation practices in order to code conditions on the MCC list was also discussed extensively by participants at the March 11-12, 2009 ICD-9-CM Coordination and Maintenance Committee meeting. Participants discussed their hospitals' efforts to encourage physicians to provide more precise documentation so that coders could appropriately assign codes that would lead to a higher severity level. Because we expected most of the documentation and coding changes under the MS-DRG system would occur in the secondary diagnoses, we believed that the shifts among base DRGs were less likely to be the result of the MS-DRG system and the shifts within base DRGs were more likely to be the result of the MS-DRG system. We also anticipated evaluating data to identify the specific MS-DRGs and diagnoses that contributed significantly to the documentation and coding payment effect and to quantify their impact. This step entailed analysis of the secondary diagnoses driving the shifts in severity within specific base DRGs.

In the FY 2009 IPPS proposed rule, we solicited public comments on the analysis plans described above, as well as suggestions on other possible approaches for performing a retrospective analysis to identify the amount of case-mix changes that occurred in FY 2008 and FY 2009 that did not reflect real increases in patient severity of illness.

A few commenters, including MedPAC, expressed support for the analytic approach described in the FY2009 IPPS proposed rule. A number of other commenters expressed concerns about certain aspects of the approach and/or suggested alternate analyses or study designs. In addition, one commenter recommended that any determination or retrospective evaluation by the actuaries of the impact of the MS-DRGs on case-mix be open to public scrutiny prior to the implementation of the payment adjustments beginning in FY 2010.

We took these comments into consideration as we developed our proposed analysis plan, and in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24092 through 24101), we solicited public comment on our methodology and analysis. For the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we performed a retrospective evaluation of the FY 2008 data for claims paid through December 2008. Based on this evaluation, our actuaries determined that implementation of the MS-DRG system resulted in a 2.5 percent change due to documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008. In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43768 through 43772), we responded to comments on our methodology for the retrospective evaluation of FY 2008 claims data. We refer readers to that final rule for a detailed description of our analysis and prior responses to comments.

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50057 through 50068), we performed the same analysis for FY 2009 claims data using the same methodology as we did for FY 2008 claims. We note that, in the FY 2011 IPPS/LTCH PPS proposed rule, we performed this analysis using FY 2009 claims paid through December 2009. In the FY 2011 IPPS/LTCH PPS final rule, we updated the analysis with FY 2009 claims paid through March 2010, as we discussed in the proposed rule. We note that, for all IPPS hospitals, other than those in Puerto Rico, the estimates were unchanged from those in the proposed rule. We refer readers to the FY 2011 IPPS/LTCH PPS final rule (75 FR 50057 through 50068) for a detailed description of our analysis and prior responses to comments. The results of the analysis for the FY 2011 proposed and final rules provided additional support for our conclusion that the proposed 5.4 percent estimate accurately reflected the FY 2009 increases in documentation and coding under the MS-DRG system.

As in prior years, the FY 2008 and FY 2009 MedPAR files are available to the public to allow independent analysis of the FY 2008 and FY 2009 documentation and coding effect. Interested individuals may still order these files through the Web site at:http://www.cms.hhs.gov/LimitedDataSets/ by clicking on MedPAR Limited Data Set (LDS)-Hospital (National). This Web page describes the file and provides directions and further detailed instructions for how to order.

Persons placing an order must send the following: A Letter of Request, the LDS Data Use Agreement and Research Protocol (refer to the Web site for further instructions), the LDS Form, and a check for $3,655 to:

Mailing address if using the U.S. Postal Service: Centers for Medicare & Medicaid Services, RDDC Account, Accounting Division, P.O. Box 7520, Baltimore, MD 21207-0520.

Mailing address if using express mail: Centers for Medicare & Medicaid Services, OFM/Division of Accounting—RDDC, 7500 Security Boulevard, C3-07-11, Baltimore, MD 21244-1850.

5. Prospective Adjustment for FY 2010 and Subsequent Years Authorized by Section 7(b)(1)(A) of Public Law 110-90 and Section 1886(d)(3)(vi) of the Act

Based on our evaluation of FY 2008 Medicare claims data that were most current at the time of the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, the estimated 2.5 percent change in FY 2008 case-mix due to changes in documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008 exceeded the −0.6 percent prospective documentation and coding adjustment applied under section 7(a) of Public Law 110-90 by 1.9 percentage points. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24096), we solicited public comment on our proposal to make a −1.9 percent prospective adjustment to the standardized amounts under section 1886(d) of the Act to address the effects of documentation and coding changes unrelated to changes in real case-mix in FY 2008. In the FY 2010 IPPS/RY 2010 LTCH PPS final rule, in response to public comments, we indicated that we fully understood that our proposed adjustment of −1.9 percent would reduce the increase in payments that affected hospitals would have received in FY 2009 in the absence of the adjustment, and we determined that it would be appropriate to postpone adopting documentation and coding adjustments as authorized under section 7(a) of Public Law 110-90 and section 1886(d)(3)(A)(vi) of the Act until a full analysis of case-mix changes could be completed. We refer readers to the FY 2010 IPPS/LTCH PPS final rule (74 FR 43767 through 43777) for a detailed description of our proposal, responses to comments, and finalized policy.

After analysis of the FY 2009 claims data for the FY 2011 IPPS/LTCH PPS final rule (75 FR 50057 through 50073), we found a total prospective documentation and coding effect of 1.054. After accounting for the −0.6 percent and the −0.9 percent documentation and coding adjustments in FYs 2008 and 2009, we found a remaining documentation and coding effect of 3.9 percent. As we have discussed, an additional cumulative adjustment of −3.9 percent would be necessary to meet the requirements of section 7(b)(1)(A) of Public Law 110-90 to make an adjustment to the average standardized amounts in order to eliminate the full effect of the documentation and coding changes on future payments. Unlike section 7(b)(1)(B) of Public Law 110-90, section 7(b)(1)(A) does not specify when we must apply the prospective adjustment, but merely requires us to make an “appropriate” adjustment. Therefore, as we stated in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50061), we believe we have some discretion as to the manner in which we apply the prospective adjustment of −3.9 percent. We indicated that applying the full prospective adjustment of −3.9 percent for FY 2011, in combination with the proposed recoupment adjustment of −2.9 percent in FY 2011 (discussed below) would require an aggregate adjustment of −6.8 percent. As we discuss elsewhere in this section II.D., and more extensively in the FY 2011 IPPS/LTCH PPS final rule, it has been our practice to moderate payment adjustments when necessary to mitigate the effects of significant downward adjustments on hospitals, to avoid what could be widespread, disruptive effects of such adjustments on hospitals. As we also discuss below in this section II.D., we are required to implement the remaining adjustment in section 7(b)(1)(B) of Public Law 110-90 no later than the FY 2012 rulemaking period, and accordingly, in the FY 2011 IPPS/LTCH PPS proposed rule, we proposed a recoupment adjustment under section 7(b)(1)(B) of −2.9 percent for FY 2011 (75 FR 23870 and 23871). Therefore, we stated that we believed it was appropriate to not implement any or all of the −3.9 percent prospective adjustment in FY 2011. Accordingly, we did not propose a prospectiveadjustment under section 7(b)(1)(A) of Public Law 110-90 for FY 2011 (75 FR 23868 through 23870) for FY 2011. We note that, as a result, payments in FY 2011 (and in each future year until we implement the requisite adjustment) would be 3.9 percent higher than they would have been if we had implemented an adjustment under section 7(b)(1)(A) of Public Law 110-90. Our actuaries estimate that this 3.9 percentage point increase will result in an aggregate payment of approximately $4 billion. We also noted that payments in FY 2010 were also expected to be 3.9 percent higher than they would have been if we had implemented an adjustment under section 7(b)(1)(A) of Public Law 110-90, which our actuaries estimated increased aggregate payments by approximately $4 billion in FY 2010.

Because further delay of this prospective adjustment will result in a continued accrual of unrecoverable overpayments, it is imperative that we propose a prospective adjustment for FY 2012, while recognizing CMS' continued desire to mitigate the effects of any significant downward adjustments to hospitals. Therefore, we are proposing a −3.15 percent prospective adjustment to the standardized amount to partially eliminate the full effect of the documentation and coding changes on future payments. Due to the offsetting nature of the remaining recoupment adjustment under section 7(b)(1)(B) of Public Law 110-90 (described below in section II.D.6. of this preamble), and after considering other payment adjustments to FY 2012 rates proposed elsewhere within this proposed rule, we believe that the proposed −3.15 percent adjustment will allow for a significant reduction in potential unrecoverable overpayments, yet will maintain a comparable adjustment level between FY 2011 and FY 2012, reflecting the applicable percentage increase with a documentation and coding adjustment. We recognize that an additional adjustment of −0.75 (3.9 minus 3.15) percent will be required in future rule making to complete the necessary −3.9 adjustment to meet CMS' statutory requirement under section 7(b)(1)(A) of Public Law 110-90. We are not at this time proposing a timeline to implement the remainder of this prospective adjustment.

6. Recoupment or Repayment Adjustment for FY 2010 Authorized by Section 7(b)(1)(B) of Public Law 110-90

As discussed in section II.D.1. of this preamble, section 7(b)(1)(B) of Public Law 110-90 requires the Secretary to make an adjustment to the standardized amounts under section 1886(d) of the Act to offset the estimated increase or decrease in aggregate payments for FY 2008 and FY 2009 (including interest) resulting from the difference between the estimated actual documentation and coding effect and the documentation and coding adjustments applied under section 7(a) of Public Law 110-90. This determination must be based on a retrospective evaluation of claims data.

In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43773), we estimated a 2.5 percent change due to documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008, exceeding the −0.6 percent prospective documentation and coding adjustment applied under section 7(a) of Public Law 110-90 by 1.9 percentage points. We stated that our actuaries had estimated that this 1.9 percentage point increase resulted in an increase in aggregate payments of approximately $2.2 billion in FY 2008. We did not propose to make an adjustment to the FY 2010 average standardized amounts to offset, in whole or in part, the estimated increase in aggregate payments for discharges occurring in FY 2008, but stated in the proposed rule that we intended to address this issue in future rulemaking. In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43774), we stated that because we would not receive all FY 2009 claims data prior to publication of the final rule, we would address any increase or decrease in FY 2009 payments in future rulemaking for FY 2011 and 2012 after we performed a retrospective evaluation of the FY 2009 claims data. In response to public comments in FY 2010, we indicated that we recognized that any adjustment to account for the documentation and coding effect observed in the FY 2008 and FY 2009 claims data may result in significant future payment reductions for providers. However, we indicated that we are required under section 7(b)(1)(B) of Pub. L. 110-90 to recover the difference of actual documentation and coding effect in FY 2008 and FY 2009 that is greater than the prior adjustments. We agreed with the commenters who requested that CMS delay any adjustment and, for the reasons stated above, indicated that we expected to address this issue in the FY 2011 rulemaking. We refer readers to the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43767 through 43777) for a detailed description of our proposal, responses to comments, and finalized policy.

As we indicated in the FY 2011 IPPS/LTCH PPS final rule, the change due to documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008 and FY 2009 exceeded the −0.6 and −0.9 percent prospective documentation and coding adjustments applied under section 7(a) of Pub. L. 110-90 for those 2 years, respectively, by 1.9 percentage points in FY 2008 and 3.9 percentage points in FY 2009. In total, this change exceeded the cumulative prospective adjustments by 5.8 (1.9 plus 3.9) percentage points. Our actuaries estimated that this 5.8 percentage point increase resulted in an increase in aggregate payments of approximately $6.9 billion. In the FY 2011 IPPS/LTCH PPS final rule, we noted that there may be a need to actuarially adjust the recoupment adjustment to accurately reflect accumulated interest. Therefore, we determined that an aggregate adjustment of −5.8 percent in FYs 2011 and 2012, subject to actuarial adjustment to reflect accumulated interest, would be necessary in order to meet the requirements of section 7(b)(1)(B) of Public Law 110-90 to adjust the standardized amounts for discharges occurring in FYs 2010, 2011, and/or 2012 to offset the estimated amount of the increase in aggregate payments (including interest) in FYs 2008 and 2009. In the FY 2011 IPPS/LTCH PPS proposed rule (75 FR 23871), we stated that we intended to take into account the need to reflect accumulated interest in proposing a recoupment adjustment under section 7(b)(1)(B) of Public Law 110-90 for FY 2012.

It is often our practice to phase in rate adjustments over more than one year in order to moderate the effect on rates in any one year. Therefore, consistent with the policies that we have adopted in many similar cases, in the FY 2011 IPPS/LTCH PPS proposed rule, we proposed to make an adjustment to the standardized amount of −2.9 percent, representing approximately half of the aggregate adjustment required under section 7(b)(1)(B) of Public Law 110-90, for FY 2011. An adjustment of this magnitude would allow us to moderate the effects on hospitals in one year while simultaneously making it possible to implement the entire adjustment within the timeframe required under section 7(b)(1)(B) of Public Law 110-90 (that is, no later than FY 2012).

Unlike the permanent prospective adjustment to the standardized amounts under section 7(b)(1)(A) of Public Law 110-90 described earlier, the recoupment adjustment to the standardized amounts under section 7(b)(1)(B) of Public Law 110-90 is not cumulative, and, therefore, would be removed for subsequent fiscal yearsonce we have completely offset the increase in aggregate payments for discharges for FY 2008 and FY 2009 expenditures. In keeping with our practice of moderating payment adjustments when necessary, we stated that we anticipated that the proposal of phasing in the recoupment adjustment will have an additional, and significant, moderating effect on implementing the requirements of section 7(b)(1)(B) of Public Law 110-90 for FY 2012.

In the FY 2011 IPPS/LTCH PPS proposed rule, we sought public comment on our proposal to offset part of the total 5.8 percent increase in aggregate payments (including interest) for discharges occurring in FY 2008 and FY 2009 resulting from the adoption of the MS-DRGs in FY 2011, noting that this proposal would result in a −2.9 percent adjustment to the standardized amount. We received numerous comments on our proposal, especially from national and regional hospital associations, hospital systems, and individual hospitals. MedPAC also commented on our proposal. We refer readers to the FY 2011 IPPS/LTCH PPS final rule (75 FR 50055 through 50073) for a detailed description of our analysis and prior responses to comments, and finalized policy.

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50062 through 50068), we finalized the proposed adjustment to the standardized amount of −2.9 percent, which represented approximately half of the aggregate recoupment adjustment required under section 7(b)(1)(B) of Public Law 110-90, for FY 2011. We were persuaded by both MedPAC's analysis, and our own review of the methodologies recommended by various commenters, that the methodology we employed to determine the required recoupment adjustment was sound. Since the statute required that we implement the entire recoupment adjustment no later than FY 2012, we have sought, as we commonly do, to moderate the potential impact on hospitals by phasing in the required adjustment over more than one year. As we stated in prior rulemaking, a major advantage of making the −2.9 percent adjustment to the standardized amount in FY 2011 was that, because the required recoupment adjustment is not cumulative, we anticipated removing the FY 2011 −2.9 percent adjustment from the rates (in other words, making a positive 2.9 percent adjustment to the rates) in FY 2012, at the same time that the law required us to apply the remaining approximately −2.9 percent adjustment required by section 7(b)(1)(B) of Public Law 110-90. These two steps in FY 2012, restoring the FY 2011 −2.9 percent adjustment and then applying the remaining adjustment of approximately −2.9 percent, would effectively cancel each other out. The result of these two steps would be an aggregate adjustment of approximately 0.0 percent. While we stated in the FY 2011 IPPS/LTCH PPS final rule the need to potentially adjust the remaining −2.9 percent estimate to account for accumulated interest, our actuaries have determined that there has been no significant interest accumulation and that no additional adjustment will be required. Therefore, for FY 2012, pursuant to the timeframes set forth by section 7(b)(1)(B) of Public Law 110-90, and consistent with the discussion in the FY 2011 IPPS/LTCH PPS final rule, we are proposing to complete the recoupment adjustment by implementing the remaining −2.9 percent adjustment, in addition to removing the effect of the −2.9 percent adjustment to the standardized amount finalized for FY 2011. Because these adjustments will, in effect, balance out, there will be no year-to-year change in the standardized amount due to this recoupment adjustment. As this adjustment will complete the required recoupment for overpayments due to documentation and coding effects on discharges occurring in FYs 2008 and 2009, we anticipate removing the effect of this adjustment by adding 2.9 percent to the standardized amount in FY 2013. We continue to believe that this is a reasonable and fair approach that satisfies the requirements of the statute while substantially moderating the financial impact on hospitals.

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The table above summarizes the proposed adjustments for FY 2012 for documentation and coding for IPPS hospitals.

7. Background on the Application of the Documentation and Coding Adjustment to the Hospital-Specific Rates

Under section 1886(d)(5)(D)(i) of the Act, SCHs are paid based on whichever of the following rates yields the greatest aggregate payment: The Federal rate; the updated hospital-specific rate based on FY 1982 costs per discharge; the updated hospital-specific rate based on FY 1987 costs per discharge; the updated hospital-specific rate based on FY 1996 costs per discharge; or the updated hospital-specific rate based on FY 2006 costs per discharge. Under section 1886(d)(5)(G) of the Act, MDHs are paid based on the Federal national rate or, if higher, the Federal national rate plus 75 percent of the difference between the Federal national rate and the updated hospital-specific rate based on the greatest of the FY 1982, FY 1987, or FY 2002 costs per discharge. In the FY 2008 IPPS final rule with comment period (72 FR 47152 through 47188), we established a policy of applying the documentation and coding adjustment to the hospital-specific rates. In that final rule with comment period, we indicated that because SCHs and MDHs use the same DRG system as all other hospitals, we believe they should be equally subject to the budget neutrality adjustment that we are applying for adoption of the MS-DRGs to all other hospitals. In establishing this policy, we relied on section 1886(d)(3)(A)(vi) of the Act, which provides us with the authority to adjust “the standardized amount” to eliminate the effect of changes in coding or classification that do not reflect real change in case-mix.

However, in the final rule that appeared in the Federal Register on November 27, 2007 (72 FR 66886), we rescinded the application of thedocumentation and coding adjustment to the hospital-specific rates retroactive to October 1, 2007. In that final rule, we indicated that, while we still believe it would be appropriate to apply the documentation and coding adjustment to the hospital-specific rates, upon further review, we decided that the application of the documentation and coding adjustment to the hospital-specific rates is not consistent with the plain meaning of section 1886(d)(3)(A)(vi) of the Act, which only mentions adjusting “the standardized amount” under section 1886(d) of the Act and does not mention adjusting the hospital-specific rates.

In the FY 2009 IPPS proposed rule (73 FR 23540), we indicated that we continued to have concerns about this issue. Because hospitals paid based on the hospital-specific rate use the same MS-DRG system as other hospitals, we believe they have the potential to realize increased payments from documentation and coding changes that do not reflect real increases in patient severity of illness. In section 1886(d)(3)(A)(vi) of the Act, Congress stipulated that hospitals paid based on the standardized amount should not receive additional payments based on the effect of documentation and coding changes that do not reflect real changes in case-mix. Similarly, we believe that hospitals paid based on the hospital-specific rates should not have the potential to realize increased payments due to documentation and coding changes that do not reflect real increases in patient severity of illness. While we continue to believe that section 1886(d)(3)(A)(vi) of the Act does not provide explicit authority for application of the documentation and coding adjustment to the hospital-specific rates, we believe that we have the authority to apply the documentation and coding adjustment to the hospital-specific rates using our special exceptions and adjustment authority under section 1886(d)(5)(I)(i) of the Act. The special exceptions and adjustment provision authorizes us to provide “for such other exceptions and adjustments to [IPPS] payment amounts * * * as the Secretary deems appropriate.” In the FY 2009 IPPS final rule (73 FR 48448 through 48449), we indicated that, for the FY 2010 rulemaking, we planned to examine our FY 2008 claims data for hospitals paid based on the hospital-specific rate. We further indicated that if we found evidence of significant increases in case-mix for patients treated in these hospitals that do not reflect real changes in case-mix, we would consider proposing application of the documentation and coding adjustments to the FY 2010 hospital-specific rates under our authority in section 1886(d)(5)(I)(i) of the Act.

In response to public comments received on the FY 2009 IPPS proposed rule, we stated in the FY 2009 IPPS final rule that we would consider whether such a proposal was warranted for FY 2010. To gather information to evaluate these considerations, we indicated that we planned to perform analyses on FY 2008 claims data to examine whether there has been a significant increase in case-mix for hospitals paid based on the hospital-specific rate. If we found that application of the documentation and coding adjustment to the hospital-specific rates for FY 2010 was warranted, we indicated that we would propose to make such an adjustment in the FY 2010 IPPS proposed rule.

8. Documentation and Coding Adjustment to the Hospital-Specific Rates for FY 2011 and Subsequent Fiscal Years

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule and final rule (74 FR 24098 through 24100 and 74 FR 43775 through 43776, respectively), we discussed our retrospective evaluation of the FY 2008 claims data for SCHs and MDHs using the same methodology described earlier for other IPPS hospitals. We found that, independently for both SCHs and MDHs, the change due to documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008 slightly exceeded the proposed 2.5 percent result discussed earlier for other IPPS hospitals, but did not significantly differ from that result. We refer readers to those rules for a more complete discussion.

Therefore, consistent with our statements in prior IPPS rules, we proposed to use our authority under section 1886(d)(5)(I)(i) of the Act to prospectively adjust the hospital-specific rates by the proposed −2.5 percent in FY 2010 to account for our estimated documentation and coding effect in FY 2008 that does not reflect real changes in case-mix. We proposed to leave this adjustment in place for subsequent fiscal years in order to ensure that changes in documentation and coding resulting from the adoption of the MS-DRGs do not lead to an increase in aggregate payments for SCHs and MDHs not reflective of an increase in real case-mix. The proposed −2.5 percent adjustment to the hospital-specific rates exceeded the −1.9 percent adjustment to the national standardized amount under section 7(b)(1)(A) of Public Law 110-90 because, unlike the national standardized rates, the FY 2008 hospital-specific rates were not previously reduced in order to account for anticipated changes in documentation and coding that do not reflect real changes in case-mix resulting from the adoption of the MS-DRGs.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24100), we solicited public comment on this proposal. Consistent with our approach for IPPS hospitals discussed earlier, in the FY 2010 IPPS/RY 2010 LTCH PPS final rule, we also delayed adoption of a documentation and coding adjustment to the hospital-specific rate until FY 2011. We refer readers to the FY 2010 IPPS/RY 2010 LTCH PPS final rule for a more detailed discussion of our proposal, responses to comments, and finalized policy.

As we have noted previously, because SCHs and MDHs use the same MS-DRG system as all other IPPS hospitals, we believe they have the potential to realize increased payments from documentation and coding changes that do not reflect real increases in patient severity of illness. Therefore, we believe they should be equally subject to a prospective budget neutrality adjustment that we are applying for adoption of the MS-DRGs to all other hospitals. We believe the documentation and coding estimates for all subsection (d) hospitals should be the same. While the findings for the documentation and coding effect for all IPPS hospitals are similar to the effect for SCHs and slightly different to the effect for MDHs, we continue to believe that this is the appropriate policy so as to neither advantage or disadvantage different types of providers. As we discuss in section II.D.4. of this preamble, our best estimate, based on the most recently available data, is that a cumulative adjustment of −5.4 percent is required to eliminate the full effect of the documentation and coding changes on future payments to SCHs and MDHs. Unlike the case of standardized amounts paid to IPPS hospitals, prior to FY 2011, we had not made any previous adjustments to the hospital-specific rates paid to SCHs and MDHs to account for documentation and coding changes. Therefore, the entire −5.4 percent recoupment adjustment needed to be made, as opposed to a −3.9 percent remaining adjustment for IPPS hospitals.

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50068 through 50071), we made an adjustment to the standardized amount for IPPS hospitals of −2.9 percent under section 7(b)(1)(B) ofPublic Law 110-90, for FY 2011. As we noted in the FY 2011 IPPS/LTCH PPS final rule, in determining the level and pace of adjustments to account for such documentation and coding changes, we believe that it is important to maintain, as much as possible, both consistency and equity among these classes of hospitals. Therefore, we finalized a prospective adjustment of −2.9 percent to the hospital-specific rates paid to SCHs and MDHs. We refer readers to the FY 2011 IPPS/LTCH PPS final rule for a more detailed discussion of our proposal, responses to comments, and finalized policy.

As discussed earlier in this section II.D., we are proposing a net −3.15 percent documentation and coding adjustment for IPPS hospitals in FY 2012 (−3.15 percent prospective adjustment plus a −2.9 percent recoupment adjustment in FY 2012, offset by the removal of the −2.9 percent recoupment adjustment for FY 2010). The proposed IPPS adjustment exceeds the remaining −2.5 percent documentation and coding adjustment for hospitals receiving a hospital-specific rate (that is, the entire −5.4 percent adjustment, minus the −2.9 percent adjustment finalized for FY 2011). As we indicated in the FY 2011 IPPS/LTCH PPS proposed rule and final rule, we are continuing, as much as possible, consistent with section 7(b)(1) of Public Law 110-90 and section 1886(d)(5)(I)(i) of the Act, to take such consistency and equity into account in developing future proposals for implementing documentation and coding adjustments. We believe that any adjustment to the hospital-specific rate due to documentation and coding effect should be as similar as possible to adjustments to the IPPS rate. Accordingly, we are proposing a −2.5 percent payment adjustment to the hospital-specific rate. We believe that proposing the entire remaining prospective adjustment of −2.5 percent allows CMS to maintain, to the extent possible, similarity and consistency in payment rates for different IPPS hospitals paid using the MS-DRG. As discussed below, we took a similar approach in finalizing an adjustment to the Puerto-Rico specific rate in FY 2011.

9. Application of the Documentation and Coding Adjustment to the Puerto Rico-Specific Standardized Amount

a. Background

Puerto Rico hospitals are paid based on 75 percent of the national standardized amount and 25 percent of the Puerto Rico-specific standardized amount. As noted previously, the documentation and coding adjustment we adopted in the FY 2008 IPPS final rule with comment period relied upon our authority under section 1886(d)(3)(A)(vi) of the Act, which provides the Secretary the authority to adjust “the standardized amounts computed under this paragraph” to eliminate the effect of changes in coding or classification that do not reflect real changes in case-mix. Section 1886(d)(3)(A)(vi) of the Act applies to the national standardized amounts computed under section 1886(d)(3) of the Act, but does not apply to the Puerto Rico-specific standardized amount computed under section 1886(d)(9)(C) of the Act. In calculating the FY 2008 payment rates, we made an inadvertent error and applied the FY 2008 -0.6 percent documentation and coding adjustment to the Puerto Rico-specific standardized amount, relying on our authority under section 1886(d)(3)(A)(vi) of the Act. However, section 1886(d)(3)(A)(vi) of the Act authorizes application of a documentation and coding adjustment to the national standardized amount and does not apply to the Puerto Rico specific standardized amount. In the FY 2009 IPPS final rule (73 FR 48449), we corrected this inadvertent error by removing the -0.6 percent documentation and coding adjustment from the FY 2008 Puerto Rico-specific rates (that is, we made a positive 0.6 percent adjustment, increasing the Puerto Rico-specific rates).

While section 1886(d)(3)(A)(vi) of the Act is not applicable to the Puerto Rico-specific standardized amount, we believe that we have the authority to apply the documentation and coding adjustment to the Puerto Rico-specific standardized amount using our special exceptions and adjustment authority under section 1886(d)(5)(I)(i) of the Act. Similar to SCHs and MDHs that are paid based on the hospital-specific rate, we believe that Puerto Rico hospitals that are paid based on the Puerto Rico-specific standardized amount should not have the potential to realize increased payments due to documentation and coding changes that do not reflect real increases in patient severity of illness. Consistent with the approach described for SCHs and MDHs, in the FY 2009 IPPS final rule (73 FR 48449), we indicated that we planned to examine our FY 2008 claims data for hospitals in Puerto Rico. We indicated in the FY 2009 IPPS proposed rule (73 FR 23541) that if we found evidence of significant increases in case-mix for patients treated in these hospitals, we would consider proposing to apply documentation and coding adjustments to the FY 2010 Puerto Rico-specific standardized amount under our authority in section 1886(d)(5)(I)(i) of the Act.

b. Documentation and Coding Adjustment to the Puerto Rico-Specific Standardized Amount

For the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we performed a retrospective evaluation of the FY 2008 claims data for Puerto Rico hospitals using the same methodology described earlier for IPPS hospitals paid under the national standardized amounts under section 1886(d) of the Act. We found that, for Puerto Rico hospitals, the increase in payments for discharges occurring during FY 2008 due to documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008 was approximately 1.1 percent. However, as we note earlier for IPPS hospitals and hospitals receiving hospital-specific rates, if the estimated documentation and coding effect determined based on a full analysis of FY 2009 claims data was more or less than our then current estimates, it would change, possibly lessen, the anticipated cumulative adjustments that we had estimated we would have to make for the FY 2008 and FY 2009 combined adjustment. Therefore, we believed that it would be more prudent to delay implementation of the documentation and coding adjustment to allow for a more complete analysis of FY 2009 claims data for Puerto Rico hospitals.

In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43777), we indicated that, given these documentation and coding increases, consistent with our statements in prior IPPS rules, we would use our authority under section 1886(d)(5)(I)(i) of the Act to adjust the Puerto Rico-specific rate and solicited public comment on the proposed −1.1 percent prospective adjustment. However, in parallel to our decision to postpone adjustments to the Federal standardized amount, we also indicated that we were adopting a similar policy for the Puerto Rico-specific rate for FY 2010 and would consider the phase-in of this adjustment over an appropriate time period through future rulemaking. We noted that, as with the hospital-specific rates, the Puerto Rico-specific standardized amount had not previously been adjusted based on estimated changes in documentation and coding associated with the adoption of the MS-DRGs.

Consistent with our approach for IPPS hospitals for FY 2010, we indicated thatwe would address in the FY 2011 rulemaking cycle any change in FY 2009 case-mix due to documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2009.

As we have noted above, similar to SCHs and MDHs, hospitals in Puerto Rico use the same MS-DRG system as all other hospitals and we believe they have the potential to realize increased payments from documentation and coding changes that do not reflect real increases in patient severity of illness. Therefore, we believe they should be equally subject to the prospective budget neutrality adjustment that we intend to apply to prospective payment rates for IPPS hospitals, including SCHs and MDHs, in order to eliminate the full effect of the documentation and coding changes associated with implementation of the MS-DRG system.

As discussed in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50071 through 50073), using the same methodology we applied to estimate documentation and coding changes under IPPS for non-Puerto Rico hospitals, our best estimate, based on the then most recently available data (FY 2009 claims paid through March 2010), was that, for documentation and coding that occurred over FY 2008 and FY 2009, a cumulative adjustment of −2.6 percent was required to eliminate the full effect of the documentation and coding changes on future payments from the Puerto Rico-specific rate. As we stated above, we believe it important to maintain both consistency and equity among all hospitals paid on the basis of the same MS-DRG system. At the same time, however, we recognize that the estimated cumulative impact on aggregate payment rates resulting from implementation of the MS-DRG system was smaller for Puerto Rico hospitals as compared to IPPS hospitals and SCHs and MDHs. Therefore, in the FY 2011 IPPS LTCH PPS proposed rule (75 FR 23876), we proposed an adjustment to eliminate the full effect of the documentation and coding changes on the portion of future payments to Puerto Rico hospitals based on the Puerto Rico-specific rate. We stated that we believed that a full prospective adjustment was the most appropriate means to take into full account the effect of documentation and coding changes on payments, while maintaining equity as much as possible between hospitals paid on the basis of different prospective rates. We noted that our updated data analysis in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50072 through 50073) final rule showed that this adjustment would be −2.6 percent. The previous estimate in the proposed rule was a −2.4 percent adjustment.

One reason we proposed the full prospective adjustment for the Puerto Rico-specific rate in FY 2011 was to maintain equity as much as possible in the documentation and coding adjustments applied to various hospital rates in FY 2011. Because our proposal was to make an adjustment that represents the full adjustment that is warranted for the Puerto Rico-specific rate, we indicated that we did not anticipate proposing any additional adjustments to the this rate for documentation and coding effects.

Therefore, because the Puerto Rico-specific rate received a full prospective adjustment of −2.6 percent in FY 2011, we are proposing no further adjustment in this proposed rule for FY 2012.

E. Refinement of the MS-DRG Relative Weight Calculation

1. Background

In the FY 2009 IPPS final rule (73 FR 48450), we continued to implement significant revisions to Medicare's inpatient hospital rates by completing our 3-year transition from charge-based relative weights to cost-based relative weights. Beginning in FY 2007, we implemented relative weights based on cost report data instead of based on charge information. We had initially proposed to develop cost-based relative weights using the hospital-specific relative value cost center (HSRVcc) methodology as recommended by MedPAC. However, after considering concerns expressed in the public comments we received on the proposal, we modified MedPAC's methodology to exclude the hospital-specific relative weight feature. Instead, we developed national CCRs based on distinct hospital departments and engaged a contractor to evaluate the HSRVcc methodology for future consideration. To mitigate payment instability due to the adoption of cost-based relative weights, we decided to transition cost-based weights over 3 years by blending them with charge-based weights beginning in FY 2007. (We refer readers to the FY 2007 IPPS final rule for details on the HSRVcc methodology and the 3-year transition blend from charge-based relative weights to cost-based relative weights (71 FR 47882 through 47898).)

In FY 2008, we adopted severity-based MS-DRGs, which increased the number of DRGs from 538 to 745. Many commenters raised concerns as to how the transition from charge-based weights to cost-based weights would continue with the introduction of new MS-DRGs. We decided to implement a 2-year transition for the MS-DRGs to coincide with the remainder of the transition to cost-based relative weights. In FY 2008, 50 percent of the relative weight for each DRG was based on the CMS DRG relative weight and 50 percent was based on the MS-DRG relative weight.

In FY 2009, the third and final year of the transition from charge-based weights to cost-based weights, we calculated the MS-DRG relative weights based on 100 percent of hospital costs. We refer readers to the FY 2007 IPPS final rule (71 FR 47882) for a more detailed discussion of our final policy for calculating the cost-based DRG relative weights and to the FY 2008 IPPS final rule with comment period (72 FR 47199) for information on how we blended relative weights based on the CMS DRGs and MS-DRGs.

2. Summary of the RTI Study of Charge Compression and CCR Refinement

As we transitioned to cost-based relative weights, some public commenters raised concerns about potential bias in the weights due to “charge compression,” which is the practice of applying a higher percentage charge markup over costs to lower cost items and services, and a lower percentage charge markup over costs to higher cost items and services. As a result, the cost-based weights would undervalue high-cost items and overvalue low-cost items if a single CCR is applied to items of widely varying costs in the same cost center. To address this concern, in August 2006, we awarded a contract to RTI to study the effects of charge compression in calculating the relative weights and to consider methods to reduce the variation in the CCRs across services within cost centers. RTI issued an interim draft report in January 2007 with its findings on charge compression (which was posted on the CMS Web site at:http://www.cms.hhs.gov/reports/downloads/Dalton.pdf). In that report, RTI found that a number of factors contribute to charge compression and affect the accuracy of the relative weights. RTI's findings demonstrated that charge compression exists in several CCRs, most notably in the Medical Supplies and Equipment CCR.

In its interim draft report, RTI offered a number of recommendations to mitigate the effects of charge compression, including estimating regression-based CCRs to disaggregate the Medical Supplies Charged to Patients, Drugs Charged to Patients, and Radiology cost centers, and adding new cost centers to the Medicare cost report, such as adding a “Devices, Implants and Prosthetics” line under “MedicalSupplies Charged to Patients” and a “CT Scanning and MRI” subscripted line under “Radiology-Diagnostics”. Despite receiving public comments in support of the regression-based CCRs as a means to immediately resolve the problem of charge compression, particularly within the Medical Supplies and Equipment CCR, we did not adopt RTI's recommendation to create additional regression-based CCRs. (For more details on RTI's findings and recommendations, we refer readers to the FY 2009 IPPS final rule (73 FR 48452).) RTI subsequently expanded its analysis of charge compression beyond inpatient services to include a reassessment of the regression-based CCR models using both outpatient and inpatient charge data. This interim report was made available in April 2008 during the public comment period on the FY 2009 IPPS proposed rule and can be found on RTI's Web site at:http://www.rti.org/reports/cms/HHSM-500-2005-0029I/PDF/Refining_Cost_to_Charge_Ratios_200804.pdf. The IPPS-specific chapters, which were separately displayed in the April 2008 interim report, as well as the more recent OPPS chapters, were included in the July 3, 2008 RTI final report entitled, “Refining Cost-to-Charge Ratios for Calculating APC [Ambulatory Payment Classification] and DRG Relative Payment Weights,” that became available at the time of the development of the FY 2009 IPPS final rule. The RTI final report can be found on RTI's Web site at:http://www.rti.org/reports/cms/HHSM-500-2005-0029I/PDF/Refining_Cost_to_Charge_Ratios_200807_Final.pdf.

RTI's final report found that, under the IPPS and the OPPS, accounting improvements to the cost reporting data reduce some of the sources of aggregation bias without having to use regression-based adjustments. In general, with respect to the regression-based adjustments, RTI confirmed the findings of its March 2007 report that regression models are a valid approach for diagnosing potential aggregation bias within selected services for the IPPS and found that regression models are equally valid for setting payments under the OPPS.

RTI also noted that cost-based weights are only one component of a final prospective payment rate. There are other rate adjustments (wage index, IME, and DSH) to payments derived from the revised cost-based weights, and the cumulative effect of these components may not improve the ability of final payment to reflect resource cost. RTI endorsed short-term regression-based adjustments, but also concluded that more refined and accurate accounting data are the preferred long-term solution to mitigate charge compression and related bias in hospital cost-based weights. For a more detailed summary of RTI's findings, recommendations, and public comments we received on the report, we refer readers to the FY 2009 IPPS final rule (73 FR 48452 through 48453).

3. Summary of Policy Changes Made in FY 2011

In the FY 2009 IPPS/LTCH PPS final rule (73 FR 48458 through 48467), in response to the RTI's recommendations concerning cost report refinements, and because of RAND's finding that regression-based adjustments to the CCRs do not significantly improve payment accuracy, we discussed our decision to pursue changes to the cost report to split the cost center for Medical Supplies Charged to Patients into one line for “Medical Supplies Charged to Patients” and another line for “Implantable Devices Charged to Patients.” (We refer readers to the Web site:http://www.rand.org/pubs/working_papers/WR560/, and the FY 2009 IPPS/LTCH PPS final rule for details on the RAND report (73 FR 48453 through 48457).) We acknowledged, as RTI had found, that charge compression occurs in several cost centers that exist on the Medicare cost report. However, as we stated in the FY 2009 IPPS/LTCH PPS final rule, we focused on the CCR for Medical Supplies and Equipment because RTI found that the largest impact on the MS-DRG relative weights could result from correcting charge compression for devices and implants. In determining what should be reported in these respective cost centers, we adopted the commenters' recommendation that hospitals should use revenue codes established by AHA's National Uniform Billing Committee to determine what should be reported in the “Medical Supplies Charged to Patients” and the “Implantable Devices Charged to Patients” cost centers. Accordingly, a new subscripted line 55.30 for “Implantable Devices Charged to Patients” was created in July 2009 as part of CMS' Transmittal 20 update to the existing cost report Form CMS-2552-96. This new subscripted cost center has been available for use for cost reporting periods beginning on or after May 1, 2009.

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50075 through 50080), we finalized our proposal to create standard cost centers for CT scans, MRI, and cardiac catheterization, and to require that hospitals report the costs and charges for these services under new cost centers on the revised Medicare cost report Form CMS 2552-10. As we discussed in the FY 2009 IPPS/LTCH PPS and CY 2009 OPPS/ASC proposed and final rules, RTI found that the costs and charges of CT scans, MRI, and cardiac catheterization differ significantly from the costs and charges of other services included in the standard associated cost center. RTI also concluded that both the IPPS and OPPS relative weights would better estimate the costs of those services if CMS were to add standard costs centers for CT scans, MRI, and cardiac catheterization in order for hospitals to report separately the costs and charges for those services and in order for CMS to calculate unique CCRs to estimate the cost from charges on claims data. (We refer readers to the FY 2011 IPPS/LTCH PPS final rule (75 FR 50075 through 50080) for a more detailed discussion on the reasons for the creation of standard cost centers for CT scans, MRI, and cardiac catheterization.) The new standard cost centers for MRI, CT scans, and cardiac catheterization are effective for cost report periods beginning on or after May 1, 2010, on the revised cost report Form CMS-2552-10. CMS issued the new hospital cost report Form CMS-2552-10 on December 30, 2010. The new cost report form can be accessed at the CMS Web site at:https://www.cms.gov/Manuals/PBM/itemdetail.asp?filterType=none&filterByDID=-99&sortByDID=1&sortOrder=ascending&itemID=CMS021935&intNumPerPage=10. Once at this Web site, users should double click on “Chapter 40.”

4. Discussion for FY 2012

In the FY 2009 IPPS/LTCH PPS final rule (73 FR 48468), we stated that, due to what is typically a 3-year lag between the reporting of cost report data and the availability for use in ratesetting, we anticipated that we might be able to use data from the new “Implantable Devices Charged to Patients” cost center to develop a CCR for Implantable Devices Charged to Patients in the FY 2012 or FY 2013 IPPS rulemaking cycle. Specifically, we stated, “Because there is approximately a 3-year lag between the availability of cost report data for IPPS and OPPS rate-setting purposes in a given fiscal year, we may be able to derive two distinct CCRs, one for medical supplies and one for devices, for use in calculating the FY 2012 or FY 2013 IPPS relative weights and the CY 2012 or CY 2013 OPPS relative weights” (73 FR 48468). However, as noted in the FY 2010 IPPS/LTCH PPS final rule (74 FR 43782), due to delays in the issuance of the revised cost report CMS 2552-10,a new CCR for Implantable Devices Charged to Patients may not be available until FY 2013. Similarly, when we finalized the decision in the FY 2011 IPPS/LTCH PPS final rule to add new cost centers for MRI, CT scans, and cardiac catheterization, we explained that data from any new cost centers that may be created will not be available until at least 3 years after they are first used (75 FR 50077). That is, in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50077), we stated that the data from the standard cost centers for MRI, CT scans, and cardiac catheterization, respectively, would not even be available for possible use in calculating the relative weights earlier than 3 years after Form CMS-2552-10 becomes available. We further stated that, at that time, we would analyze the data and determine if it is appropriate to use those data to create distinct CCRs from these cost centers for use in the relative weights for the respective payment systems. We also reassured public commenters that there was no need for immediate concern regarding possible negative payment impacts on MRI and CT scans under the IPPS and the OPPS because the cost report data that would be used for the calculation of the relative weights were at least 3 years from being available. We stated that we will first thoroughly analyze and run impacts on the data and provide the public with the opportunity to comment before distinct CCRs for MRI and CT scans would be finalized for use in the calculation of the relative weights. We also urged all hospitals to properly report their costs and charges for MRI, CT scans, and all other services so that, in several years' time, we will have reliable data from all hospitals on which to base a decision as to whether to incorporate additional CCRs into the relative weight calculation (75 FR 50077).

Accordingly, in preparation for this FY 2012 IPPS/LTCH PPS proposed rule, we have assessed the availability of data in the “Implantable Devices Charged to Patients” cost center. In order to develop a robust analysis regarding the use of cost data from the “Implantable Devices Charged to Patients” cost center, it is necessary to have a critical mass of cost reports filed with data in this cost center. The cost center for “Implantable Devices Charged to Patients” is effective for cost reporting periods beginning on or after May 1, 2009. We have checked the availability of FY 2009 cost reports in the December 31, 2010 quarter ending update of HCRIS, which is the latest upload of FY 2009 cost report data that we could use for this proposed rule. We have determined that there are only 437 hospitals (out of approximately 3,500 IPPS hospitals) that have completed the “Implantable Devices Charged to Patients” cost center. We do not believe that this is a sufficient amount of data from which to generate a meaningful analysis in this particular situation. Therefore, we are not proposing to use data from the “Implantable Devices Charged to Patients” cost center to create a distinct CCR for Implantable Devised Charged to Patients for use in calculating the MS-DRG relative weights for FY 2012. We will reassess the availability of data for the “Implantable Devices Charged to Patients” cost center, and the “MRI, CT Scans, and Cardiac Catheterization” cost centers, for the FY 2013 IPPS rulemaking cycle and, if appropriate, we will propose to create a distinct CCR at that time.

F. Preventable Hospital-Acquired Conditions (HACs), Including Infections

1. Background

a. Statutory Authority

Section 1886(d)(4)(D) of the Act addresses certain hospital-acquired conditions (HACs), including infections. Section 1886(d)(4)(D) of the Act specifies that by October 1, 2007, the Secretary was required to select, in consultation with the Centers for Disease Control and Prevention (CDC), at least two conditions that: (a) Are high cost, high volume, or both; (b) are assigned to a higher paying MS-DRG when present as a secondary diagnosis (that is, conditions under the MS-DRG system that are CCs or MCCs); and (c) could reasonably have been prevented through the application of evidence-based guidelines. Section 1886(d)(4)(D) of the Act also specifies that the list of conditions may be revised, again in consultation with CDC, from time to time as long as the list contains at least two conditions.

Section 1886(d)(4)(D)(iii) of the Act requires that hospitals, effective with discharges occurring on or after October 1, 2007, submit information on Medicare claims specifying whether diagnoses were present on admission (POA). Section 1886(d)(4)(D)(i) of the Act specifies that effective for discharges occurring on or after October 1, 2008, Medicare no longer assigns an inpatient hospital discharge to a higher paying MS-DRG if a selected condition is not POA. Thus, if a selected condition that was not POA manifests during the hospital stay, it is considered a HAC and the case is paid as though the secondary diagnosis was not present. However, even if a HAC manifests during the hospital stay, if any nonselected CC/MCC appears on the claim, the claim will be paid at the higher MS-DRG rate. Under the HAC payment policy, all CCs/MCCs on the claim must be HACs in order to generate a lower MS-DRG payment. In addition, Medicare continues to assign a discharge to a higher paying MS-DRG if a selected condition is POA.

The POA indicator reporting requirement and the HAC payment provision apply to IPPS hospitals only. Non-IPPS hospitals, including CAHs, LTCHs, IRFs, IPFs, cancer hospitals, children's hospitals, hospitals in Maryland operating under waivers, rural health clinics, federally qualified health centers, RNHCIs, and Department of Veterans Affairs/Department of Defense hospitals, are exempt from POA reporting and the HAC payment provision. Throughout this section, the term “hospital” refers to an IPPS hospital.

The HAC provision found in section 1886(d)(4)(D) of the Act is part of an array of Medicare value-based purchasing (VBP) tools that we are using to promote increased quality and efficiency of care. Those tools include measuring performance, using payment incentives, publicly reporting performance results, applying national and local coverage policy decisions, enforcing conditions of participation, and providing direct support for providers through Quality Improvement Organization (QIO) activities. The application of VBP tools, such as this HAC provision, is transforming Medicare from a passive payer to an active purchaser of higher value health care services. We are applying these strategies for inpatient hospital care and across the continuum of care for Medicare beneficiaries.

These VBP tools are highly compatible with the underlying purposes as well as existing structural features of Medicare's IPPS. Under the IPPS, hospitals are encouraged to treat patients efficiently because they receive the same DRG payment for stays that vary in length and in the services provided, which gives hospitals an incentive to avoid unnecessary costs in the delivery of care. In some cases, conditions acquired in the hospital do not generate higher payments than the hospital would otherwise receive for cases without these conditions. To this extent, the IPPS encourages hospitals to avoid complications.

However, the treatment of certain conditions can generate higher Medicare payments in two ways. First, if a hospital incurs exceptionally high costs treating a patient, the hospital stay maygenerate an outlier payment. Because the outlier payment methodology requires that hospitals experience large losses on outlier cases before outlier payments are made, hospitals have an incentive to prevent outliers. Second, under the MS-DRG system that took effect in FY 2008 and that has been refined through rulemaking in subsequent years, certain conditions can generate higher payments even if the outlier payment requirements are not met. Under the MS-DRG system, there are currently 259 sets of MS-DRGs that are split into 2 or 3 subgroups based on the presence or absence of a CC or an MCC. The presence of a CC or an MCC generally results in a higher payment. However, since we implemented the HAC provisions, if a secondary diagnosis acquired during a hospital stay is a HAC and no other CCs or MCCs are present, the hospital receives a payment under the MS-DRGs as if the HACs were not present. (We refer readers to section II.D. of the FY 2008 IPPS final rule with comment period for a discussion of DRG reforms (72 FR 47141).)

b. HAC Selection

Beginning in FY 2007, we have proposed, solicited, and responded to public comments and have implemented section 1886(d)(4)(D) of the Act through the IPPS annual rulemaking process. For specific policies addressed in each rulemaking cycle, we direct readers to the following publications: the FY 2007 IPPS proposed rule (71 FR 24100) and final rule (71 FR 48051 through 48053); the FY 2008 IPPS proposed rule (72 FR 24716 through 24726) and final rule with comment period (72 FR 47200 through 47218); the FY 2009 IPPS proposed rule (73 FR 23547) and final rule (73 FR 48471); the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24106) and final rule (74 FR 43782); and the FY 2011 IPPS/LTCH PPS proposed rule (75 FR 23880) and final rule (75 FR 50080). A complete list of the 10 current categories of HACs is included in section II.F.2. of this preamble.

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50080 through 50101), we did not add any additional HACs or make any changes to policies already established under the authority of section 1886(d)(4)(D) of the Act.

c. Collaborative Process

In establishing the HAC payment policy under section 1886(d)(4)(D) of the Act, our experts have worked closely with public health and infectious disease professionals from across the Department of Health and Human Services, including CDC, the Agency for Healthcare Research and Quality (AHRQ), and the Office of Public Health and Science (OPHS), to identify the candidate preventable HACs, review comments, and select HACs. CMS and CDC also have collaborated on the process for hospitals to submit a POA indicator for each diagnosis listed on IPPS hospital Medicare claims and on the payment implications of the various POA reporting options. In addition, as discussed below, we have used rulemaking and Listening Sessions to obtain public input.

d. Application of HAC Payment Policy to MS-DRG Classifications

As described above, in certain cases, application of the HAC payment policy provisions can result in MS-DRG reassignment to a lower paying MS-DRG. The following diagram portrays the logic of the HAC payment policy provision as adopted in the FY 2008 IPPS final rule with comment period (72 FR 47200) and in the FY 2009 IPPS final rule (73 FR 48471):

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e. Public Input Regarding Selected and Potential Candidate HACs

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50080 through 50101), we did not add or remove categories of HACs, nor did we make any changes to previously established policies. However, we continue to encourage public dialogue about refinement of the HAC list.

Given the timeliness of the HAC discussion, particularly when considered within the context of recent legislative health care reform initiatives, we remain eager to engage in an ongoing public dialogue about the various aspects of this policy. We plan to continue to include updates and findings from the RTI evaluation on CMS' Hospital-Acquired Conditions and Present on Admission Indicator Web site available at:http://www.cms.hhs.gov/HospitalAcqCond/.

f. POA Indicator Reporting

Collection of POA indicator data is necessary to identify which conditions were acquired during hospitalization for the HAC payment provision as well as for broader public health uses of Medicare data. In the FY 2011 IPPS/LTCH PPS proposed rule, we listed the instructions and change requests that were issued to IPPS hospitals and also to non-IPPS hospitals regarding the submission of POA indicator data for all diagnosis codes on Medicare claims and the processing of non-PPS claims (75 FR 23381). We also indicated that specific instructions on how to select the correct POA indicator for each diagnosis code were included in the ICD-9-CM Official Guidelines for Coding and Reporting, available on the CDC Web site at:http://www.cdc.gov/nchs/data/icd9/icdguide10.pdf. We reiterate that additional information regarding POA indicator reporting and application of the POA reporting options is available on the CMS Web site at:http://www.cms.gov/HospitalAcqCond/. Historically, we have not provided coding advice. Rather, we collaborate with the American Hospital Association (AHA) through the Coding Clinic for ICD-9-CM. We will continue to collaborate with the AHA to promote the Coding Clinic for ICD-9-CM as the source for coding advice about the POA indicator.

As discussed in previous IPPS proposed and final rules, there are five POA indicator reporting options, as defined by the ICD-9-CM Official Guidelines for Coding and Reporting:

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In the FY 2009 IPPS final rule (73 FR 48486 through 48487), we adopted final payment policies to: (1) Pay the CC/MCC MS-DRGs for those HACs coded with “Y” and “W” indicators; and (2) not pay the CC/MCC MS-DRGs for those HACs coded with “N” and “U” indicators.

Beginning on or after January 1, 2011, hospitals are required to begin reporting POA indicators using the 5010 electronic transmittal standards format. The 5010 format removes the need to report a POA indicator of “1” for codes that are exempt from POA reporting. However, for claims that continue to be submitted using the 4010 electronic transmittal standards format, the POA indicator of “1” is still necessary because of reporting restrictions from the use of the 4010 electronic transmittal standards format.

Hospitals that began reporting with the 5010 format on and after January 1, 2011, can no longer report a POA indicator of “1” for POA exempt codes. The POA field should instead be left blank for codes exempt from POA reporting. We have issued CMS instructions on this reporting change as a One-Time Notification, Pub. No. 100-20, Transmittal No. 756, Change Request 7024, effective on August 13, 2010. These instructions, entitled 5010 Implementation-Changes to Present on Admission (POA) Indicator “1” and the K3 Segment, can be located at the following link on the CMS Web site:http://www.cms.gov/manuals/downloads/Pub100_20.pdf.

We are continuing our efforts to clarify instructions regarding use of the POA indicator. As discussed in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50088), we received public comments in response to the FY 2011 IPPS/LTCH PPS proposed rule that expressed concern about the accuracy of reporting of POA indicators for HACs related to intracranial injury with loss of consciousness. The codes for loss of consciousness are listed in the Falls and Trauma HAC category, within the “Intracranial Injury” subcategory. Because loss of consciousness is a component of intracranial injuries rather than a separate condition, we agreed that the POA guidelines that instructed coders to assign an “N” indicator if any part of the combination code was not present on admission did not apply to the loss of consciousness codes. As a member of the Editorial Advisory Board for the Coding Clinic for ICD-9-CM, we worked with the American Hospital Association (AHA), American Health Information Management Association (AHIMA), and the Centers for Disease Control and Prevention (CDC) to provide additional clarification on how these conditions should be reported. Additional guidance on how these cases should be reported can be found in AHA's Coding Clinic for ICD-9-CM,2nd Quarter 2010, “Frequently Asked POA Questions” section. That publication clarified the POA reporting for patients in whom a single code captures the fact that the patient was admitted as a result of a head injury and then subsequently lost consciousness after the admission. For these cases, we clarified that the POA indicator assigned should be “Y,” indicating that the head injury and resulting loss of consciousness occurred prior to (and was present on) admission.

We expect that this clarification will lead to greater consistency and accuracy in POA indicator reporting for these conditions. We look forward to continuing our efforts as part of the AHA's Editorial Advisory Board for Coding Clinic for ICD-9-CM to provide guidance on accuracy of coding and the reporting of POA indicators. Hospitals look to this publication to provide detailed guidance on ICD-9-CM coding and POA reporting. We encouragehospitals to send any other questions about ICD-9-CM codes or POA indicator selection to the AHA so that the Editorial Advisory Board can continue its role of providing instruction on the accurate selection and reporting of both ICD-9-CM codes and POA indicators.

2. Proposed Additions and Revisions to the HAC Policy for FY 2012

a. Contrast-Induced Acute Kidney Injury

We discuss below our analysis for a proposed new condition as a possible candidate for selection for FY 2012 under section 1886(d)(4)(D) of the Act. As described in more detail in section II.F.1.a. of this preamble, each HAC must be: (1) High cost, high volume, or both; (2) assigned to a higher paying MS-DRG when present as a secondary diagnosis (that is, conditions under the MS-DRG system that are CCs or MCCs); and (3) could reasonably have been prevented through the application of evidence-based guidelines. We also discuss other considerations relating to the selection of a HAC, including any administrative or operational issues associated with a proposed condition. For example, the condition may only be able to be identified by multiple codes, thereby requiring the development of special GROUPER logic to also exclude similar or related ICD-9-CM codes from being classified as a CC or an MCC. Similarly, a condition acquired during a hospital stay may arise from another condition that the patient had prior to admission, making it difficult to determine whether the condition was reasonably preventable. We invite public comment on clinical, coding, and prevention issues on our proposal to add contrast-induced acute kidney injury as a condition subject to the HAC payment provision for FY 2012 (for discharges occurring on or after October 1, 2011).

Contrast-induced acute kidney injury is a significant complication of the use of iodinated contrast media and accounts for a large number of cases of hospital-acquired acute kidney injury cases. A published study has shown that renal failure associated with contrast administration is correlated with up to 11 percent of cases of renal failure that occur in hospitals (Nash, et al.: American Journal on Kidney Disease, 2002, Vol. 39, pp. 930-936). Patients who experience acute kidney injury have an increased risk of inhospital mortality even after adjustments for disease comorbidities (McCullough, J.: American College of Cardiology, 2008, pp. 1419 through 1428). Data suggest that the risk for mortality extends beyond the period of hospitalization, resulting in 1-year and 5-year mortality rates significantly higher than those patients who have not developed acute kidney injury. In addition, contrast-induced acute kidney injury is associated with an increased incidence of myocardial infarction, bleeding requiring transfusion, and prolonged hospital stays (McCullough, J.: American Journal of Medicine, 1997, Vol. 103, pp. 368 through 375). We note that “acute kidney injury” is a new terminology endorsed by the National Kidney Foundation to replace “acute renal failure.”

There is not a unique code that identifies kidney injury. However, kidney injury can be identified as a subset of discharges with ICD-9-CM diagnosis code 584.9 (Acute kidney failure, unspecified). Our clinical advisors believe that diagnosis code 584.9, in combination with the associated procedure codes below, can accurately identify contrast-induced acute kidney injury:

• 88.40 (Arteriography using contrast material, unspecified site)

• 88.41 (Arteriography of cerebral arteries)

• 88.42 (Aortography)

• 88.43 (Arteriography of pulmonary arteries)

• 88.44 (Arteriography of other intrathoracic vessels)

• 88.45 (Arteriography of renal arteries)

• 88.46 (Arteriography of placenta)

• 88.47 (Arteriography of other intra-abdominal arteries)

• 88.48 (Arteriography of femoral and other lower extremity arteries)

• 88.49 (Arteriography of other specified sites)

• 88.50 (Angiocardiography, not otherwise specified)

• 88.51 (Angiocardiography of venae cavae)

• 88.52 (Angiocardiography of right heart structures)

• 88.53 (Angiocardiography of left heart structures)

• 88.54 (Combined right and left heart angiocardiography)

• 88.55 (Coronary arteriography using a single catheter)

• 88.56 (Coronary arteriography using two catheters)

• 88.57 (Other and unspecified coronary arteriography)

• 88.58 (Negative-contrast cardiac roentgenography)

• 88.59 (Intra-operative coronary fluorescence vascular angiography)

• 88.60 (Phlebography using contrast material, unspecified site)

• 88.61 (Phlebography of veins of head and neck using contrast material)

• 88.62 (Phlebography of pulmonary veins using contrast material)

• 88.63 (Phlebography of other intrathoracic veins using contrast material)

• 88.64 (Phlebography of the portal venous system using contrast material)

• 88.65 (Phlebography of other intra-abdominal veins using contrast material)

• 88.66 (Phlebography of femoral and other lower extremity veins using contrast material)

• 88.67 (Phlebography of other specified sites using contrast material)

• 87.71 (C.A.T. of kidney)

• 87.72 (Other nephrotomogram)

• 87.73 (Intravenous pyelogram)

• 87.74 (Retrograde pyelogram)

• 87.75 (Percutaneous pyelogram)

We are proposing to identify contrast-induced acute kidney injury with diagnosis code 584.9 in combination with one or more of the above associated procedure codes.

We also considered identifying contrast-induced acute kidney injury through the use of external injury codes, or E-codes. Code E947.8 (Other drugs and medicinal substances) has an inclusion term “Contrast media used for diagnostic x-ray procedures” to identify the use of contrast. However, we note that we do not currently require the reporting of E-codes for the HAC payment provisions under the IPPS. Therefore, we would be unable to rely on the identification of contrast-induced acute kidney injury through E-codes on Medicare IPPS HAC claims.

Section 1886(d)(4)(D) of the Act requires that a HAC be a condition that is “high cost, high volume, or both.” In FY 2009, there were 38,324 inpatient discharges coded with acute renal failure as specified by ICD-9-CM diagnosis code 584.9 reported as not present on admission (POA status = N) when reported with one of the above procedure codes submitted through Medicare claims. The cases had an average charge of $29,122 for the entire hospital stay. Studies suggest the additional average cost per day for a patient who has acquired contrast-induced acute kidney injury is $2,654. Other data report patients stays increases by 3.75 days once they have acquired the diagnosis (Subramanian, et al.: Journal of Medical Economics,2007, Vol. 10, pp. 119 through 134).

There are widely recognized guidelines for the prevention of acute kidney injury that address the prevention of contrast-induced acute kidney injury, and we believe the condition is reasonably preventable. One of these guidelines can be found at:http://www.renal.org/Clinical/GuidelineSection/AcuteKidneyInjury.aspx.

The condition of contrast-induced acute kidney injury as specified in our proposal is a CC under the MS DRGs.

We have not identified any additional administrative or operational difficulties with proposing this condition as a HAC. We invite public comment on whether contrast-induced acute kidney injury meets the requirements set forth under section 1886(d)(4)(D) of the Act, as well as other coding and prevention issues associated with our proposal to add this injury as a condition subject to the HAC payment provision for FY 2012 (for discharges occurring on or after October 1, 2011). We are particularly interested in receiving comments on the degree to which contrast-induced acute kidney injury is reasonably preventable through the application of evidence-based guidelines.

b. New Diagnosis Codes Proposed to be Added to Existing HACs

As changes to diagnosis codes and new diagnosis codes are proposed and finalized for the list of CCs and MCCs, we modify the list of selected HACs to reflect these changes. Included in Table 6A, which is listed in section VI. of the Addendum to this proposed rule and available via the Internet, are five new ICD-9-CM diagnosis codes that we are proposing to add to three of the current HAC categories. We are proposing to add two new codes for the Falls and Trauma HAC category, two new codes for the Surgical Site Infection (SSI) Following Certain Bariatric Procedures HAC category, and one new code for the Deep Vein Thrombosis and Pulmonary Embolism (DVT/PE) Following Certain Orthopedic Procedures HAC category. The two new diagnosis codes that we are proposing to add to the Falls and Trauma HAC category are code 808.44 (Multiple closed pelvic fractures without disruption of pelvic circle) and code 808.54 (Multiple open pelvic fractures without disruption of pelvic circle). These codes fall within the range of the fracture code subcategory (800 through 829). The two new diagnosis codes that we are proposing to add to the Surgical Site Infection (SSI) Following Certain Bariatric Procedures HAC category are code 539.01 (Infection due to gastric band procedure) and code 539.81 (Infection due to other bariatric procedure). We believe these diagnosis codes are appropriate for inclusion in the existing category when reported as a secondary diagnosis with the specified principal diagnosis code of morbid obesity (code 278.01) and one of the designated bariatric procedure codes (code 44.38, 44.39, or 44.95). Lastly, the one new diagnosis code that we are proposing to add to the Deep Vein Thrombosis and Pulmonary Embolism (DVT/PE) Following Certain Orthopedic Procedures HAC category is code 415.13 (Saddle embolus of pulmonary artery). Diagnosis code 415.13 would be applicable when reported along with one of the following procedures codes describing certain orthopedic procedures: 00.85 through 00.87, 81.51, 81.52, or 81.54. Shown in the table below are these five new diagnosis codes with their corresponding descriptions and their proposed CC/MCC designations.

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We are inviting public comments on the proposed adoption of theses five new ICD-9-CM diagnosis codes as CC/MCCs that are listed above, which, if finalized, would be added to the current Falls and Trauma HAC category, Surgical Site Infection (SSI) Following Certain Bariatric Procedures HAC category and Deep Vein Thrombosis and Pulmonary Embolism (DVT/PE) Following Certain Orthopedic Procedures HAC category and would be subject to the HAC payment provision for FY 2012.

c. Revision to HAC Subcategory Title

After publication of the FY 2011 IPPS/LTCH PPS final rule, we received a comment stating that the subcategory title “Electric Shock” that is included in the Falls and Trauma HAC category was misleading. The commenter stated that this subcategory title did not accurately describe the CC/MCC ICD-9-CM diagnoses codes (991 through 994) contained within this subcategory. The commenter requested that CMS develop a new title that would more accurately describe this group of codes.

We agree with the commenter that the HAC subcategory title “Electric Shock” is potentially misleading because the codes included within these ranges contain a variety of injuries, including the following:

• Category 991 (Effects of Reduced Temperature)

• Category 992 (Effects of Heat and Light)

• Category 993 (Effects of Air Pressure)

• Category 994 (Effects of Other External Causes)

We are proposing to change the title of this HAC subcategory from “Electric Shock” to “Other Injuries” because it includes a variety of injury codes. The subcategory will continue to include the codes within the 991-994 code ranges appearing on the CC/MCC list. We are proposing no changes to the list of codes in this subcategory; we are simply proposing to rename the subcategory title. We invite public comments on this proposed title change to the HAC subcategory from “Electric Shock” to “Other Injuries” for FY 2012.

d. Conclusion

The following table lists the current HAC categories and the ICD-9-CM codes that identify the conditions and have been finalized through FY 2011. For FY 2012, we are proposing that these conditions continue to be subject to the HAC payment provision, along with the creation of a new HAC category for Contrast-Induced Acute Kidney Injury as discussed in section II.F.2.a. of this preamble. In addition, we are proposing to add five new ICD-9-CM diagnosis codes and to revise the title of the “Electric Shock” subcategory in the Falls and Trauma HAC category.

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We refer readers to section II.F.6. of the FY 2008 IPPS final rule with comment period (72 FR 47202 through 47218) and to section II.F.7. of the FY 2009 IPPS final rule (73 FR 48474 through 48486) for detailed analyses supporting the selection of each of the HACs selected through FY 2011.

3. RTI Program Evaluation Summary

a. Background

On September 30, 2009, a contract was awarded to Research Triangle Incorporated (RTI) to evaluate the impact of the Hospital-Acquired Condition-Present on Admission (HAC-POA) provisions on the changes in the incidence of selected conditions, effects on Medicare payments, impacts on coding accuracy, unintended consequences, and infection and event rates. This is an intra-agency project with funding and technical support coming from CMS, OPHS, AHRQ, and CDC. The evaluation will also examine the implementation of the program and evaluate additional conditions for future selection.

RTI's evaluation of the HAC-POA provisions is divided into several parts. In the FY 2011 IPPS/LTCH PPS final rule (50085 through 50101), we summarized the analyses by RTI that had been completed at that time. These RTI analyses of POA indicator reporting, frequencies and net savings associated with current HACs, and frequencies of previously considered candidate HACs reflected MedPAR claims from October 2008 through September 2009.

b. FY 2009 Data Analysis

As we describe above, we have provided instructions to IPPS hospitals and non-IPPS hospitals regarding the submission of POA indicator data for all diagnosis codes on Medicare claims and the processing of non-PPS claims (75 FR 23381) and note that specific instructions on how to select the correct POA indicator for each diagnosis code were included in the ICD-9-CM Official Guidelines for Coding and Reporting, available on the CDC Web site at:http://www.cdc.gov/nchs/data/icd9/icdguide10.pdf. After publication of the FY 2011 IPPS/LTCH PPS final rule, we identified a discrepancy between the claims data that hospitals submitted and the CMS data file used to calculate the HAC measures. Specifically, this error led to incorrect HAC assignments in cases where a hospital reported an external cause of injury (E-code). Since then, we have corrected this error in the data file.

As a result, the RTI analysis of the HAC-POA program that was conducted using FY 2009 claims data will be updated using the corrected data file. We do not expect the corrected data to have a material impact on our previous findings for FY 2009. Revised data tables will be made publicly available on the CMS Web site at http://www.cms.gov/HospitalAcqCond/01_Overview.asp and the RTI Web site at http://www.rti.org/reports/cms/ soon after publication of this proposed rule.

c. FY 2010 Data Analysis

RTIs analysis of the FY 2010 MedPAR data file for the HAC-POA program evaluation was not fully complete in time for publication in this proposed rule. We will provide the results from the study on the CMS Web site at http://www.cms.gov/HospitalAcqCond/01_Overview.asp and on the RTI Web site at http://www.rti.org/reports/cms/ when available. We anticipate that the examination of FY 2010 MedPAR data will be completed soon after publication of this proposed rule. We invite public comment on RTI's analysis of the FY 2010 MedPAR data for the HAC-POA program.

G. Proposed Changes to Specific MS-DRG Classifications

In this proposed rule, we are inviting public comment on each of the MS-DRG classification proposed changes described below, as well as our proposals to maintain certain existing MS-DRG classifications, which are also discussed below. In some cases, we are proposing changes to the MS-DRG classifications based on our analysis of claims data. In other cases, we are proposing to maintain the existing MS-DRG classification based on our analysis of claims data.

1. Pre-Major Diagnostic Categories (Pre-MDCs)

a. Noninvasive Mechanical Ventilation

We received a request from the National Association for Medical Direction of Respiratory Care (NAMDRC) which suggested that wecreate a new MS-DRG for patients with certain respiratory conditions who receive noninvasive mechanical ventilation (NIV). The requestor stated that patients who receive NIV are almost always placed within an intensive care unit (ICU) or an emergency department and use the resources available in those areas. The requestor recommended that this new MS-DRG recognize current practice and allow for appropriate reimbursement for the technical complexity and monitoring required for NIV as a form of acute life support. According to the requestor, NIV has evolved to become first-line supportive therapy for several forms of acute respiratory failure. Lastly, the requestor recommended that the new MS-DRG identify NIV usage of approximately 6 to 12 hours to account for the “legitimate but very short term use of this therapy.”

Historically, the concept of mechanical ventilation for critically ill patients included establishment of an artificial airway, invasively, through endotracheal intubation or a tracheostomy. According to the requestor, a significant portion of these patients can now be treated through noninvasive mechanical ventilation with the use of a face or nasal mask. In the ICD-9-CM classification system, NIV is described by procedure code 93.90 (Noninvasive mechanical ventilation), while invasive mechanical ventilation is described by procedure codes 96.70 (Continuous invasive mechanical ventilation of unspecified duration), 96.71 (Continuous invasive mechanical ventilation for less than 96 consecutive hours), and 96.72 (Continuous invasive mechanical ventilation for 96 consecutive hours or more). The requestor submitted external data to illustrate trends in NIV use over the past decade. These data were derived from a survey conducted during 2002-2003 of several hospitals located in Massachusetts and Rhode Island. The requestor believed that these data indicate patients with exacerbation of chronic obstructive pulmonary disease (COPD), acute pulmonary edema, or worsening congestive heart failure are successfully managed with NIV.

We analyzed FY 2010 MedPAR claims data that are representative of the respiratory conditions the requestor identified when reported with NIV. We found 14 MS-DRGs reporting procedure code 93.90 using the above specifications. The MS-DRGs are as follows:

Pre-MDC MS-DRGs:

• MS-DRG 003 (ECMO or Tracheostomy with Mechanical Ventilation 96+ Hrs or PDX Except Face, Mouth & Neck with Major O.R.)

• MS-DRG 004 (Tracheostomy with Mechanical Ventilation 96+ Hrs or PDX Except Face, Mouth & Neck without Major O.R.)MS-DRGs:

• MS-DRG 189 (Pulmonary Edema & Respiratory Failure)

• MS-DRG 190 (Chronic Obstructive Pulmonary Disease with MCC)

• MS-DRG 191 (Chronic Obstructive Pulmonary Disease with CC)

• MS-DRG 192 (Chronic Obstructive Pulmonary Disease without CC/MCC)

• MS-DRG 204 (Respiratory Signs & Symptoms)

• MS-DRG 207 (Respiratory System Diagnosis with Ventilator Support 96+ Hours)

• MS-DRG 208 (Respiratory System Diagnosis with Ventilator Support <96 Hours)

• MS-DRG 222 (Cardiac Defibrillator Implant with Cardiac Catheterization with AMI/HF/Shock with MCC)

• MS-DRG 223 (Cardiac Defibrillator Implant with Cardiac Catheterization with AMI/HF/Shock without MCC)

• MS-DRG 291 (Heart Failure & Shock with MCC)

• MS-DRG 292 (Heart Failure & Shock with CC)

• MS-DRG 293 (Heart Failure & Shock without CC/MCC)

As shown in the list above and in the chart below, the MS-DRGs identified also include those that describe invasive mechanical ventilation. The ICD-9-CM coding convention instructs the reporting of both types of mechanical ventilation when patients are admitted on noninvasive mechanical ventilation that subsequently requires invasive mechanical ventilation therapy.

The data demonstrate that, in certain MS-DRGs, for example, MS-DRGs 003, 004, and 222 that the cases with NIV primarily have shorter lengths of stay and lower average costs compared to all the cases in those MS-DRGs. Alternatively, the data for MS-DRGs 189, 190, 191, and 192 demonstrate that the cases with NIV have an increased length of stay and higher average costs, but a relatively low volume compared to all the cases in those MS-DRGs. Combining the current surgical and medical MS-DRGs into a single, new MS-DRG would include noninvasive mechanical ventilation cases with a wide range of costs for several indications with varying levels of severity. The average costs for these cases range from a low of $5,794 in MS-DRG 293 to a high of $95,940 in MS-DRG 003. We believe the cases are more appropriately assigned and reimbursed in the MS-DRGs to which they are currently assigned.

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As mentioned in the requestor's comments, and our clinical advisors agree, NIV encompasses a broad range of interventions and utilizes periods of time that range from a few hours to a few days of continuous chronic use. Resource requirements are vastly different for the various intended indications. For example, as also noted by the requestor, respiratory failure can have many forms. Our clinical advisors provided three subsets of patients as an example: Those that are given oxygen support, those that are given pressure (rate) support, and those that are intubated. There is overlap between the three subsets in that a patient may require one, two, or all three types of therapy and there are multiple options for any given patient. Our clinical advisors stated that these various subsets of patients can require significantly different resources. Lastly, respiratory failure reflects the severity of the diagnosis (it is a complication) while NIV is a therapeutic option. Unlike a major surgical intervention where the intervention creates morbidity, NIV merely reflects the severity of the underlying respiratory failure.

The requestor further noted in its comments that a significant number of patients who receive NIV fail this therapy and must be intubated and subsequently placed on a ventilator. However, those patients who require both noninvasive and invasive mechanical ventilation are already accounted for in the invasive mechanical ventilation MS-DRGs. Similar to patients with respiratory failure, patients with heart failure and shock have a comparable severity of illness where each condition reflects the severity of the diagnosis (it is a complication). Therefore, the cost is already reflected in the high resource expenditure estimates for MS-DRGs 222, 223, 291, 292, and 293, as are all other severity-correlated resource costs.

In conclusion, we believe that the data do not support the creation of a single MS-DRG to identify NIV cases. As stated previously, the average costs for the NIV cases range from a low of $5,794 in MS-DRG 293 to a high of $95,940 in MS-DRG 003. If created, this single MS-DRG would include patients with a wide range in average costs. We believe the cases are more appropriately captured in their current MS-DRGs. In addition to the clinical points raised by our clinical advisors and outlined above, the volume and length of stay data for cases where NIV was reported with the specified respiratory conditions further support their present MS-DRG assignments. Therefore, we are not proposing to create a new MS-DRG for patients receiving NIV. We invite public comment on our proposal not to create a new MS-DRG for patients receiving NIV for FY 2012.

b. Debridement With Mechanical Ventilation Greater Than 96 Hours With Major Operating Room (O.R.) Procedure

We received a comment concerning the use of excisional debridement in cases with complications that lead to the need for extended mechanical ventilation. The commenter stated that patients undergoing procedures such as excisional debridement may also develop extensive complications such as respiratory failure and sepsis. The commenter indicated that these patients tend to use significant resources. The commenter stated that these cases are currently assigned to MS-DRG 207 (Respiratory System Diagnosis with Ventilator Support 96+ Hours) or MS-DRG 870 (Septicemia with or Severe Sepsis with Mechanical Ventilation 96+ Hours). The commenter expressed a concern that the operating room (OR) procedure of the excisional debridement was not fully recognized through either of these two medical MS-DRGs. The commenter requested that a new MS-DRG be created that would include mechanical ventilation of greater than 96 hours with the presence of an additional major OR procedure.

We agree that patients with long-term mechanical ventilation greater than 96 hours and a major OR procedure utilize extensive resources. However, we point out that these patient cases are not currently assigned to MS-DRG 207 or MS-DRG 870 as the commenter stated. Many of these long-term mechanical ventilation patient cases are instead assigned to MS-DRG 003 (ECMO or Tracheostomy with Mechanical Ventilation 96+ Hours or PDX, Excluding Face, Mouth & Neck with Major Operating Room Procedure). Cases that require mechanical ventilation for greater than 96 hours, that have a tracheostomy performed, and that have a procedure on the major O.R. list (including excisional debridement) are assigned to MS-DRG 003. We specifically created MS-DRG 003 to capture these complicated patients on long-term mechanical ventilation who also have a major O.R. procedure. Therefore, we are not proposing to create a second MS-DRG to capture these patients at this time. We welcome public comments on our proposal not to create a new MS-DRG for these patients for FY 2012.

c. Autologous Bone Marrow Transplant

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50101), effective October 1, 2011, we deleted MS-DRG 009 (Bone Marrow Transplant) and created two new MS-DRGs: MS-DRG 014 (Allogeneic Bone Marrow Transplant) and MS-DRG 015 (Autologous Bone Marrow Transplant). We created new MS-DRGs 014 and 015 because of differences in costs associated with these procedures. During the comment period for the FY 2011 IPPS/LTCH PPS proposed rule, two commenters who supported the proposed reclassification of the bone marrow transplant MS-DRGs requested further refinement to account for severity of illness. At that time, we did not subdivide MS-DRG 014 and MS-DRG 015 based on severity of illness because they did not meet our criteria for subdivision (75 FR 50102).

As we outlined in our FY 2008 IPPS/LTCH PPS final rule with comment period (72 FR 47169), in designating an MS-DRG as one that would be subdivided into subgroups based on the presence of a CC or an MCC, we developed a set of criteria to facilitate our decision-making process. The original criteria were based on average charges; we now use average costs (FY 2007 IPPS final rule, 71 FR 47882). In order to warrant creation of a CC or an MCC subgroup within a base MS-DRG, the subgroup must meet all of the following five criteria:

• A reduction in variance of cost of at least 3 percent.

• At least 5 percent of the patients in the MS-DRG fall within the CC or MCC subgroup.

• At least 500 cases are in the CC or MCC subgroup.

• There is at least a 20-percent difference in average cost between subgroups.

• There is a $2,000 difference in average cost between subgroups.

We examined FY 2010 MedPAR claims data for these newly created MS-DRGs, and based on these criteria, we identified MS-DRG 015 as a possible MS-DRG that would require further subdivision. MS-DRG 014 was not identified, as this MS-DRG did not meet the criteria stated above for possible subdivision. Autologous bone marrow transplantation utilizes the patient's own bone marrow or stem cells in the treatment of certain cancers and bone marrow diseases. These procedures restore stem cells that have been destroyed either by chemotherapy and/or radiation treatment.

In our analysis, we found 1,338 total cases assigned to MS-DRG 015 with average costs of approximately $38,608and an average length of stay of approximately 18.8 days. There were 1,092 cases that had a secondary diagnosis code reported on the claim that was designated as a CC or an MCC with average costs of approximately $40,974 and an average length of stay of approximately 19.7 days. There were 246 cases without a secondary diagnosis code reported on the claim that had a CC or an MCC designation with average cost of approximately $28,105 and an average length of stay of approximately 14.6 days. The following table illustrates our findings:

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We found that the cases reported with a secondary diagnosis code of a CC or an MCC were more costly and had a longer average length of stay than both the overall cases assigned to MS-DRG 015 and the cases without a CC or an MCC. The cases without a CC or an MCC were less costly and had a shorter average length of stay than both the cases with a CC or an MCC and the overall cases assigned to that MS-DRG. Based on our analysis, all five criteria for a subgroup division were met, thereby supporting a 2-level severity split for MS-DRG 015. Therefore, we are proposing to delete MS-DRG 015 and create two new MS-DRGs:

• Proposed MS-DRG 016 (Autologous Bone Marrow Transplant with MCC/CC); and

• Proposed MS-DRG 017 (Autologous Bone Marrow Transplant without MCC/CC).

We invite public comment on our proposal to delete MS-DRG 015 and create two new MS-DRGs 016 and 017 for autologous bone marrow transplant for FY 2012.

2. MDC 1 (Diseases and Disorders of the Nervous System): Rechargeable Dual Array Deep Brain Stimulation System

We received a public comment in response to the FY 2011 IPPS/LTCH PPS proposed rule regarding the MS-DRG assignment for rechargeable dual array deep brain neurostimulators. In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50128), we indicated that we considered this comment outside of the scope of the proposed rule as we did not propose any changes for these procedures for FY 2011. However, we are addressing this issue in this FY 2012 proposed rule.

Deep brain stimulation is a surgical treatment that involves the implantation of a neurostimulator, used in the treatment of essential tremor, Parkinson's disease, dystonia, and chronic pain. The commenter recommended that CMS assign the combination of procedure codes representing rechargeable systems for deep brain stimulation therapy, procedure code 02.93 (Implantation or replacement of intracranial neurostimulator lead(s)) and procedure code 86.98 (Insertion or replacement of dual array rechargeable neurostimulator pulse generator) to MS-DRG 023 (Craniotomy with Major Device Implant/Acute Complex CNS PDX with MCC or Chemo Implant) and MS-DRG 024 (Craniotomy with Major Device Implant/Acute Complex CNS PDX without MCC).

The commenter stated that this recommendation would allow all full system dual array deep brain stimulation cases to be appropriately grouped to the same MS-DRGs. Currently, procedure codes 02.93 and 86.98 are assigned to MS-DRG 025 (Craniotomy and Endovascular Intracranial Procedures with MCC), MS-DRG 026 (Craniotomy and Endovascular Intracranial Procedures with CC), and MS-DRG 027 (Craniotomy and Endovascular Intracranial Procedures without CC/MCC), while the procedure codes for the nonrechargeable dual array systems, procedure codes 02.93 and 86.95 (Insertion or replacement of dual array neurostimulator pulse generator, not specified as rechargeable), are already assigned to MS-DRGs 023 and 024. The commenter stated that the procedures to implant the rechargeable and nonrechargeable dual array systems are similar clinically as well as comparable in resource utilization.

We analyzed FY 2010 MedPAR data and found a total of 16 full system rechargeable dual array deep brain stimulation systems reported with procedure codes 02.93 and 86.98 assigned to MS-DRGs 025 through 027. We found one case assigned to MS-DRG 025 and one case assigned to MS-DRG 026. The majority of the cases, 14, were assigned to MS-DRG 027, with average costs of approximately $23,870 and an average length of stay of approximately 2.2 days. We found that the deep brain stimulation cases assigned to MS-DRG 027 had higher average costs than the overall cases assigned to MS-DRG 027 of approximately $14,200. However, the average length of stay was shorter for these cases than the overall length of stay for MS-DRG 027 cases of approximately 3.7 days.

We also examined the data for the nonrechargeable dual array systems to assess the commenter's assumption that both the rechargeable and nonrechargeable dual array systems are similar in resource use. We found 155 total nonrechargeable dual array systems (procedure codes 02.93 and 86.95) assigned to MS-DRGs 023 and 024. There were 5 cases assigned to MS-DRG 023, with average costs of approximately $36,159 and an average length of stay of approximately 10 days. We found that the majority of the cases, 150, were assigned to MS-DRG 024, with average costs of approximately $25,855 and an average length of stay of approximately 2.2 days. We believe that these data support the commenter's statement that, for the majority of these cases, the resource use is similar for both systems.

For comparison purposes, if we propose the changes that the commenter suggested, those deep brain stimulation cases currently assigned to MS-DRG 027 and the one case assigned to MS-DRG 026 (with average costs of approximately $27,836) would be reassigned to MS-DRG 024. The average costs of approximately $23,870 of these deep brain stimulation cases assigned to MS-DRG 027 are similar to the overall average costs of approximately $23,249 for MS-DRG 024. The one case assigned to MS-DRG 025 (with average costs of approximately $29,361) would be reassigned to MS-DRG 023 (with average costs of approximately $34,168). The following table illustrates our findings:

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Based on our findings, we believe that the data support reassigning the combination of procedure codes representing rechargeable systems for deep brain stimulation therapy, code 02.93 and code 86.98, to MS-DRGs 023 and 024. Our clinical advisors support this reassignment. Therefore, we are proposing to assign rechargeable dual array systems for deep brain stimulation cases identified by reporting both procedure codes 02.93 and 86.98 to MS-DRGs 023 and 024 for FY 2012. We invite public comment on our proposal to assign these cases to MS-DRG 023 and 024 for FY 2012.

3. MDC 3 (Diseases and Disorders of the Ear, Nose, Mouth, and Throat): Skull Based Surgeries

We received a request from a commenter recommending that CMS reclassify skull-based surgical procedures that are currently assigned to MS-DRGs 135 and 136 (Sinus and Mastoid Procedures with CC/MCC and without CC/MCC, respectively) and reassign them to MS-DRGs 025, 026, and 027 (Craniotomy and Endovascular Intracranial Procedures with MCC, with CC, and without CC/MCC, respectively). The commenter stated that the current MS-DRG assignment does not reflect the resource utilization and technical complexity of these difficult procedures when performed for anterior skull base tumors.

Skull (or cranial) based surgery is performed for a variety of serious medical conditions including esthesioneuroblastomas, which are rare, malignant tumors that arise from the epithelium overlying the olfactory bulb; sinonasal melanomas, which are malignant melanomas that may develop in the mucosa of the nose and sinuses; and sinonasal undifferentiated carcinomas, which are rapidly growing malignant tumors arising in the nasal cavity and/or sinuses. These types of conditions are generally identified by the following ICD-9-CM diagnosis codes:

• 160.0 (Malignant neoplasm of nasal cavities)

• 160.1 (Malignant neoplasm of auditory tube, middle ear, and mastoid air cells)

• 160.2 (Malignant neoplasm of maxillary sinus)

• 160.3 (Malignant neoplasm of ethmoidal sinus)

• 160.4 (Malignant neoplasm of frontal sinus)

• 160.5 (Malignant neoplasm of sphenoidal sinus)

• 160.8 (Malignant neoplasm of other accessory sinuses)

• 160.9 (Malignant neoplasm of accessory sinus, unspecified)

• 210.7 (Benign neoplasm of nasopharynx)

• 212.0 (Benign neoplasm of nasal cavities, middle ear, and accessory sinuses)

According to the commenter, procedure code 22.63 (Ethmoidectomy) describes the type of surgery being performed for these patients and is currently assigned to MS-DRGs 135 and 136.

Using the FY 2010 MedPAR file, we examined data on cases identified by procedure code 22.63 when reported with one of the above listed diagnosis codes in MS-DRGs 135 and 136. We found a total of 402 cases in MS-DRG 135 with an average length of stay of 6.30 days and average costs of $12,869. We found only 23 cases in MS-DRG 135 identified by procedure code 22.63 with one of the diagnosis codes listed above with an average length of stay of 3.96 days and average costs of $10,510. In MS-DRG 136, there were a total of 320 cases with an average length of stay of 2.36 days and average costs of $6,683. We found only 27 cases in MS-DRG 136 identified by procedure code 22.63 with one of the diagnosis codes listed above with an average length of stay of 2.04 days and average costs of $6,844. As shown in the table below, the cases reporting procedure code 22.63 in MS-DRGs 135 and 136 have a lower volume, a shorter length of stay, and primarily lower average costs compared to all cases in MS-DRGs 135 and 136. The data demonstrate that these cases are appropriately assigned to their current MS-DRG classifications.

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We also analyzed claims data for MS-DRGs 25 through 27. We determined that if the cases identified by procedure code 22.63 were to be reassigned to MS-DRGs 25-27, they would be significantly overpaid. As shown in the table below, we found that the average costs for these MS-DRGs range from $14,200 to $29,524.

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In summary, the data do not support moving cases with procedure code 22.63 when reported with one of the previously listed diagnosis codes from MS-DRGs 135 and 136 to MS-DRGs 25, 26 and 27. We invite public comment on our proposal not to make any MS-DRG modifications for these codes for FY 2012.

4. MDC 5 (Diseases and Disorders of the Circulatory System)

a. Percutaneous Mitral Valve Repair With Implant

Procedure code 35.97 (Percutaneous mitral valve repair with implant) was created for use beginning October 1, 2010 (FY 2011) after the concept of a percutaneous valve repair was presented and approved at the February 2010 ICD-9-CM Coordination and Maintenance Committee Meeting. Procedure code 35.97 was created at that time to describe the MitraClip TM device and any other percutaneous mitral valve repair devices currently on the market. This procedure code is assigned to the following MS-DRGs: 231 and 232 (Coronary Bypass with PTCA with MCC and without MCC, respectively); 246 (Percutaneous Cardiovascular Procedure with Drug-Eluting Stent with MCC or 4+ Vessels/Stents); 247 (Percutaneous Cardiovascular Procedure with Drug-Eluting Stent without MCC); 248 (Percutaneous Cardiovascular Procedure with Non-Drug-Eluting Stent with MCC or 4+ Vessels/Stents); 249 (Percutaneous Cardiovascular Procedure with Non-Drug-Eluting Stent without MCC); 250 (Percutaneous Cardiovascular Procedure without Coronary Artery Stent or AMI with MCC); and 251 (Percutaneous Cardiovascular Procedure without Coronary Artery Stent or AMI without MCC).

According to the Food and Drug Administration's (FDA's) terms of the clinical trial for MitraClip TM, the device is to be implanted in patients without any additional surgeries performed. Therefore, based on these terms, we believe that the most likely MS-DRG assignments would be MS-DRGs 250 and 251, as described above. However, because procedure code 35.97 has only been in use since October 1, 2010, there are no claims data in the most recent MedPAR update file with which to evaluate any alternative MS-DRG assignments. Therefore, we are not proposing to make any MS-DRG changes for procedure code 35.97 for FY 2012. We are proposing to keep procedure code 35.97 in its current MS-DRG assignments. We invite public comment on this proposal.

b. Aneurysm Repair Procedure Codes

Thoracic aorta defects, such as aneurysm, dissection, or injury, are uncommon but serious conditions that may arise from a disease or an accident. Some patients can be medically managed but most patients are treated with surgery. Often these defects result in death if they are not diagnosed and treated promptly. Currently, there are two techniques used for repair of aortic defects; both are O.R. procedures performed in an inpatient hospital setting. These two procedures are described by ICD-9-CM procedure codes 38.45 (Resection of vessel with replacement, thoracic vessel) and 39.73 (Endovascular implantation of graft in thoracic aorta). Both procedure codes 38.45 and 39.73 are currently assigned to MS-DRGs 237 (Major Cardiovascular Procedures with MCC or Thoracic Aortic Aneurysm Repair) and 238 (Major Cardiovascular Procedures without MCC).

We received a request that we consider the reassignment of procedure codes 38.45 and 39.73 within the MS-DRG structure by removing the procedure codes from MS-DRGs 237 and 238 and adding them to a more clinically coherent set of MS-DRGs reflecting higher resource consumption. The requestors believed that, based on their analysis of MedPAR claims data ofMS-DRGs 237 and 238, the resource utilization of both the endovascular and open repairs of the abdominal and thoracic aortas are higher than the overall average resource utilization for the MS-DRGs to which these procedures are currently assigned. The requestors also believed that an unusually high number of cases probably fall into cost outlier status.

We reviewed the MedPAR claims data for these two procedure codes. Our findings are shown in the following two tables.

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Our findings of the analysis of the cases with procedure code 39.73 showed that the average costs are substantially higher than those costs for the cases overall in both MS-DRGs 237 and 238. We found that the average length of stay for the 1,851 cases identified in MS-DRG 237 is somewhat lower at 7.73 days than the average length of stay of 10.26 days in cases not containing procedure code 39.73.

Our findings of the analysis of the cases with procedure code 38.45 showed that both the average costs and the average length of stay are considerably higher than the average costs and the average length of stay for those cases without procedure code 38.45.

In addition, we reviewed the cases in which both procedure codes 38.45 and 39.73 were documented during the same admission. As can be seen in the charts below, we found 22 cases in which both procedure codes 38.45 and 39.73 were reported. Therefore, the sum of the values in the next two charts below will differ from the charts above because of the cases containing both procedure codes that have been removed and the data have been reworked.

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We found in our analysis of the claims data for cases with both procedure codes 38.45 and 39.73 that the average costs are substantially higher than those costs for the cases overall in MS-DRG 237. In addition, we found that the average length of stay for the 22 cases with both procedure codes 38.45 and 39.73 is higher at 11.86 days than the average length of stay of 10.03 days for all cases in MS-DRG 237.

Our analysis of the claims data for the procedure codes in MDC 5 showed that procedure code 34.85 is also assigned to MS-DRGs 228 (Other Cardiothoracic Procedures with MCC), 229 (Other Cardiothoracic Procedures with CC), and 230 (Other Cardiothoracic Procedures without CC/MCC) when it occurs in combination with procedure code 38.44 (Resection of vessel with replacement, aorta, abdominal). We found that when procedure code 39.73 is not assigned to MS-DRGs 228 through 230, there are no cases reported.

The table below shows our findings of the average costs and the average length of stay for procedure code 38.45 in combination with procedure code 38.44 in MS-DRGs 228 through 230 and the average costs and the average length of stay in all cases in MS-DRGs 228 through 230 when both procedure codes 38.45 and 38.44 are not assigned.

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Our findings show that both the average length of stay and average costs are higher in those cases containing procedure code 34.85 than those cases without this procedure code in MS-DRGs 228 through 230.

We then analyzed the 1,851 cases containing procedure code 39.73 in MS-DRGs 237 and 238 and the 912 cases containing procedure code 38.45 in MS-DRGs 237 and 238 to determine if they would meet the established criteria for a 3-way severity of illness split. This criterion is described in section III.G.1.c. of this preamble. The chart below shows our findings, with MS-DRG 237 acting as a severity of illness proxy for all cases, as there were no cases in MS-DRG 238. In the chart, the extensions “-1,” “-2,” and “-3” correspond to severity levels, with “-1” representing cases with MCC, “-2” representing cases with CC, and “-3” representing cases without CC/MCC.

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Our next step was to analyze the claims data for the cases in the clinically coherent MS-DRGs to which we are proposing to move these cases. These six MS-DRGs are: 216 (Cardiac Valve & Other Major Cardiothoracic Procedures with Cardiac Catheterization with MCC); 217 (Cardiac Valve & Other Major Cardiothoracic Procedures with Cardiac Catheterization with CC); 218 (Cardiac Valve & Other Major Cardiothoracic Procedures with Cardiac Catheterization without CC/MCC); 219 (Cardiac Valve & Other Major Cardiothoracic Procedures without Cardiac Catheterization with MCC), 220 (Cardiac Valve & Other Major Cardiothoracic Procedures without Cardiac Catheterization with CC); and 221 (Cardiac Valve & Other Major Cardiothoracic Procedures without Cardiac Catheterization without CC/MCC). For the sake of the grouping algorithm, procedure codes 39.73 and 38.45 must also be added to MS-DRGs 216 through 219. However, if these codes are documented in cases in which a cardiac catheterization occurs, they will be “trumped” by those catheterizations. Therefore, when we reviewed the data in order to make length of stay and cost comparisons, we only used the three MS-DRGs to which procedure codes 39.73 and 38.45 would appear without cardiac catheterization; that is MS-DRGs 219, 220, and 221. Our findings describing these three MS-DRGs are displayed in the following chart:

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Our evaluation of the severity levels in the cases containing procedure codes 39.73 and 38.45 using the proxy MS-DRGs 237-1, 237-2, and 237-3 compared to the claims data in the table above with MS-DRGs 219 through 221 demonstrates that the cases are similar in resource consumption. In addition, the cases are clinically coherent.

By proposing to move procedure code 38.45 to MS-DRGs 216 through 221, we do not believe that there is a need for combination codes 38.45 plus 38.44 to be specifically assigned to MS-DRGs 228, 229, and 230. Because MS-DRGs 216 through 221 are higher in the surgical hierarchy for MDC 5 than MS-DRGs 228 through 230, the result of the proposal would be that either procedure code 38.45 by itself or in combination with procedure code 38.44 will always be assigned to MS-DRGs 216 through 221. When reported alone, under our proposal, procedure code 38.44 would continue to be assigned to MS-DRGs 237 and 238, as it has been in the past.

Therefore, for FY 2012, we are proposing to move procedure codes 38.45 and 39.73 from MS-DRGs 237 and 238 and to add these codes to MS-DRGs 216, 217, 218, 219, 220, and 221 based on our findings of similar resource consumption and clinical coherence. To conform to this proposed change, we also are proposing to change the title of MS-DRG 237 (Major Cardiovascular Procedures with MCC or Thoracic Aortic Aneurysm Repair) by removing the terms “or Thoracic Aortic Aneurysm Repair.” Therefore, the new proposed title of MS-DRG 237 would be “Major Cardiovascular Procedures with MCC.” We invite public comment on these proposals.

5. MDC 8 (Diseases and Disorders of the Musculoskeletal System and Connective Tissue)

a. Artificial Discs

In response to the FY 2011 IPPS/LTCH PPS proposed rule, we received a public comment that was outside of the scope of any proposal in that proposed rule. The commenter urged CMS to reassign procedure code 84.62 (Insertion of total spinal disc prosthesis, cervical) from MS-DRG 490 (Back and Neck Procedures Except Spinal Fusion with CC/MCC or Disc Device/Neurostimulator) into MS-DRGs 471 through 473 (Cervical Spinal Fusion with MCC, with CC, and without CC/MCC, respectively). In addition, the commenter requested that CMS reassign procedure code 84.65 (Insertion of total spinal disc prosthesis, lumbosacral) from MS-DRG 490 (Back and Neck Procedures Except Spinal Fusion with CC/MCC or Disc Device/Neurostimulator) to MS-DRGs 459 and 460 (Spinal Fusion Except Cervical with MCC and without MCC, respectively). However, the commenter also provided an alternative option to reassigning the procedure codes to different MS-DRGs. The commenter suggested the creation of a new, separate MS-DRG for the two artificial disc procedures if reassignment to the fusion MS-DRGs was not feasible.

We refer the reader to the FY 2008 IPPS proposed rule and final rule with comment period (72 FR 24731 through 24735 and 47226 through 47232) for discussion on the comprehensive evaluation of all the spinal DRGs in the development of the MS-DRG classification system. The modifications made to the spinal DRGs for FY 2008 recognized the similar utilization of resources, differences in levels of severity, and the complexity of the services being performed on patients undergoing the various types of spinal procedures.

We analyzed FY 2010 MedPAR claims data for procedure codes 84.62 and 84.65 in MS-DRG 490 and compared those results to the claims data for MS-DRGs 459, 460, 471, 472, and 473. We found a total of 19,840 cases in MS-DRG 490 with an average length of stay of 4.24 days and average costs of $11,940. As displayed in the chart below, we found 97 cases reporting procedure code 84.62, with an average length of stay of 1.80 days and average costs of $13,194 in MS-DRG 490. We also found 35 cases reporting procedure code 84.65, with an average length of stay of 2.91 days and average costs of $20,753. While average costs for the artificial disc cases were slightly higher ($1,254 for procedure code 84.62 and $8,813 for procedure code 84.65) compared to the average cost for all cases in MS-DRG 490, the artificial disc cases were of extremely low volume and reflected shorter lengths of stay compared to all the cases in MS-DRG 490.

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We recognize the disparity in average costs for cases reporting the insertion of a cervical or lumbar artificial disc in MS-DRG 490 compared to all the cases in that MS-DRG. However, we do not believe this supports reassignment of procedure codes 84.62 and 84.65 to the MS-DRGs for spinal fusion as the commenter requested. Even with the disparity in costs, clinically, the insertion of an artificial disc is not a spinal fusion. Therefore, reassignment of the artificial disc cases to the fusion MS-DRGs would be clinically inappropriate. In addition, for certain Medicare populations, the insertion of an artificial disc is considered a noncovered procedure.

As stated earlier, the commenter also provided an alternative option to reassigning procedure codes 84.62 and 84.65. The commenter suggested the creation of a new, separate MS-DRG for the two artificial disc procedures if reassignment to the fusion MS-DRGs was not feasible. In our evaluation of the claims data and as shown above in the data chart, the artificial disc cases are of extremely low volume; therefore, we do not believe the findings warrant the creation of a separate MS-DRG.

We invite public comment on our proposal not to reassign procedure code 84.62 from MS-DRG 490 to MS-DRGs 471 through 473 and procedure code 84.65 from MS-DRG 490 to MS-DRGs 459 and 460. We also invite public comment on our proposal not to create a new, separate MS-DRG for artificial disc procedures (codes 84.62 and 84.65) for FY 2012.

b. Major Joint Replacement or Reattachment of Lower Extremities

We received a request to add an additional severity level for MS-DRG 469 (Major Joint Replacement or Reattachment of Lower Extremity with MCC) and MS-DRG 470 Major Joint Replacement or Reattachment of Lower Extremity without MCC). We examined FY 2010 MedPAR claims data to determine if we could subdivide the base MS-DRG into three severity levels: With MCC, with CC, and without CC/MCC. We applied the criteria used in the development of the MS-DRGs included in the FY 2008 IPPS final rule with comment period (72 FR 47169). We refer readers to this final rule with comment period for a complete description of these criteria. As discussed earlier, the original criteria were based on average charges. However, subsequent to the FY 2007 IPPS final rule (71 FR 47882), we now use average costs. The five criteria using costs are listed below. In order to warrant creation of a CC or an MCC subgroup within a base MS-DRG, the subgroup must meet all of the following five criteria:

• A reduction in variance of costs of at least 3 percent.

• At least 5 percent of the patients in the MS-DRG fall within the CC or MCC subgroup.

• At least 500 cases are in the CC or MCC subgroup.

• There is at least a 20-percent difference in average costs between subgroups.

• There is a $2,000 difference in average costs between subgroups

The following table shows our determination of the number of cases and average costs by MCC, CC, and non-CC levels.

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We determined that these cases do not meet our five criteria for adding a new severity level. The cases failed to meet criterion four (requiring at least a 20-percent difference in average costs between subgroups) and criterion five (requiring a $2,000 difference in average costs between subgroups). Therefore, we are not proposing the addition of a new severity level for the base MS-DRG. Instead, we are proposing to maintain the two existing severity levels for MS-DRGs 469 and 470. We welcome public comments on our proposal not to add an additional severity level to MS-DRGs 469 and 470.

c. Combined Anterior/Posterior Spinal Fusion

A manufacturer requested that CMS reassign spinal fusion cases utilizing the AxiaLIF technology from MS-DRGs 459 and 460 (Spinal Fusion Except Cervical with MCC and without MCC, respectively) to MS-DRGs 453, 454, and455 (Combined Anterior/Posterior Spinal Fusion with MCC, with CC, and without CC/MCC, respectively). The commenter stated that an anterior lumbar interbody spinal fusion performed with a lateral approach, the extreme lateral interbody fusion (XLIF®), with posterior spinal fixation, can report two codes resulting in assignment to the combined fusion MS-DRGs. The commenter also stated that the AxiaLIF technology, which is also utilized in an anterior lumbar interbody spinal fusion and uses a pre-sacral approach, can only report one code, resulting in assignment to the single fusion MS-DRGs. The commenter expressed concern that the payment incentives are not properly aligned for the recently available minimally invasive spinal fusion technologies. The commenter compared the XLIF® to the AxiaLIF and urged CMS to consider the AxiaLIF technology similar to the XLIF® for purposes of MS-DRG assignment.

Spinal fusion is a surgical procedure that joins two or more vertebrae by the use of bone graft (or bone graft substitute), with the goal of maintaining alignment, providing stability, decreasing pain, and restoring the function of the spinal nerves. Routinely, a spinal fusion also utilizes internal fixation devices (instrumentation) to assist in stabilizing the spine. These fixation devices may include pedicle screws, cages, rods, or plates. Effective October 1, 2010, ICD-9-CM procedure code 81.06 (Lumbar and lumbosacral fusion of the anterior column, anterior technique) describes the XLIF® procedure, and code 81.08 (Lumbar and lumbosacral fusion of the anterior column, posterior technique) describes the AxiaLIF technology.

The spinal fusion codes and their corresponding MS-DRG assignment include the use of bone graft and internal fixation. The requestor's comment regarding the assignment of one procedure code for one technology versus assigning two procedure codes for another technology indicates that the commenter may not fully understand the MS-DRG GROUPER logic for spinal fusions. For example, if an anterior lumbar interbody fusion is performed and posterior spinal fixation (or instrumentation) is also utilized, this requires one code and results in a single fusion MS-DRG assignment. However, if a posterior spinal fusion (procedure code 81.07 (Lumbar and lumbosacral fusion of the posterior column, posterior technique) was performed in addition to an anterior fusion, for example, the XLIF® procedure (procedure code 81.06), that scenario would necessitate the assignment of both codes, resulting in assignment to the combined spinal fusion MS-DRGs (453, 454, or 455). MS-DRGs 453, 454, and 455 were created to capture patients who have both an anterior and posterior fusion. We believe the requestor may have confused the terms “fixation” and “fusion” for MS-DRG assignment in its request.

We analyzed the FY 2010 MedPAR data to evaluate claims reporting procedure codes 81.06, 81.07, and 81.08 in MS-DRGs 456 through 458 (Spinal Fusion Except Cervical with Spinal Curvature/Malignancy/Infection or 9+ Fusions with MCC, with CC and without CC/MCC, respectively) and MS-DRGs 459 and 460. We found a total of 1,115 cases in MS-DRG 456, with an average length of stay of 13.14 days and average costs of $63,856. We found 278 cases reporting procedure code 81.08, with an average length of stay of 12.04 days and average costs of $56,585. Similar results can be seen for procedure code 81.08 in the remaining MS-DRGs as shown in the chart below in terms of volume, length of stay, and average cost. Clearly, the data demonstrate that the AxiaLIF technology (procedure code 81.08) is appropriately assigned to its current MS-DRG assignments, as is the XLIF® procedure (procedure code 81.06).

[The GPO has not yet made images accessible. Image EP05MY11.022]

We also analyzed data for combinations of the spinal fusion codes that result in assignment to MS-DRGs 453, 454, and 455. We evaluated the following combinations:

• 81.06 (Lumbar and lumbosacral fusion of the anterior column, anterior technique) and 81.07 (Lumbar and lumbosacral fusion of the posterior column, posterior technique).

• 81.06 (Lumbar and lumbosacral fusion of the anterior column, anterior technique) and 81.08 (Lumbar and lumbosacral fusion of the anterior column, posterior technique).

We further analyzed data with the following combination of spinal fusion codes in MS-DRGs 456, 457, and 458 and MS-DRGs 459 and 460:

• 81.07 (Lumbar and lumbosacral fusion of the posterior column, posterior technique) and 81.08 (Lumbar and lumbosacral fusion of the anterior column, posterior technique).

The chart below shows the results of the data analysis for the combination of procedure codes listed above where an anterior and posterior spinal fusion was performed in the same episode of care. There were a total of 1,190 cases in MS-DRG 453, with an average length of stay of 13.08 days and average costs of $71,693. The cases reporting the combination of procedure codes 81.06 and 81.08 in this same MS-DRG totaled 431, with an average length of stay of 11.59 days and average costs of $69,859. Results for the procedure code combination (81.06 and 81.08) in MS-DRGs 454 and 455 with regard to volume of cases, length of stay, and average costs data also support that these spinal fusion procedure code combinations are appropriately placed in their current MS-DRG assignments. Likewise, for MS-DRGs 456, 457, and 458, the data support that the spinal fusion procedure code combinations of 81.07 and 81.08 are appropriately placed in their current MS-DRG assignments. There were a total of 1,115 cases in MS-DRG 456 with an average length of stay of 13.14 days and average costs of $68,856. The cases reporting the combination of procedure codes 81.07 and 81.08 in this same MS-DRG totaled 54, with an average length of stay of 14.37 days and average costs of $52,392. Results for the procedure code combination (81.07 and 81.08) in MS-DRGs 457 and 458 with regard to volume of cases and average length of stay were lower compared to all the cases in those two MS-DRGs. While the data show higher average costs for the procedure code combination of 81.07 and 81.08 in MS-DRGs 457 and 458, as stated previously, the volume was extremely low.

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As the focus of the analysis was to evaluate procedure code 81.08 in comparison to procedure code 81.06, we believe the AxiaLIF technology (procedure code 81.08) is grouped appropriately in its current MS-DRG assignments, as is the XLIF® procedure (procedure code 81.06). The volume, length of stay, and cost data analyzed demonstrate that the complexity of services and resources utilized for each of these technologies are properly accounted for in their respective MS-DRG assignments. Therefore, the data does not support making changes for procedure code 81.08. As a result, we are not proposing to reassign cases reporting this procedure code to the combined fusion MS-DRGs. We invite public comment on our proposal to not reassign procedure code 81.08 from MS-DRGs 456 through 460 to MS-DRGs 453 through 455 for FY 2012.

6. MDC 9 (Diseases and Disorders of the Skin, Subcutaneous Tissue, and Breast): Excisional Debridement of Wound, Infection, or Burn

We received a request that we remove procedure code 86.22 (Excisional debridement of wound, infection, or burn) from the list of codes considered to be O.R. procedures. The commenter stated that many inpatient excisional debridements are performed in a patient's room instead of in an operating room. The commenter believed that the original assignment of procedure code 86.22 to the O.R. list served to help reflect the resource intensity required by a patient with wounds and ulcers that required an excisional debridement. The commenter stated that, by doing so, the code served as a proxy for severity of illness in the original CMS DRGs prior to the implementation of MS-DRGs in FY 2008. The commenter stated that the creation of the most serious pressure ulcer codes for stage 3 and stage 4 pressure ulcers (codes 707.23 and 707.24) allows these conditions to be classified as MCCs. Therefore, the commenter stated that the need to use procedure code 86.22 to capture severity of illness was no longer needed. The commenter also stated that procedure code 86.22 is a non-O.R. code under the APR-DRGs and does not affect the DRG assignment. The commenter requested that procedure code 86.22 be changed from an O.R. procedure code to a non-O.R. procedure code.

As the commenter stated, excisional debridements are currently captured in procedure code 86.22. Procedure code 88.22 is classified as an O.R. procedure in the current MS-DRGs and, therefore, leads to a surgical MS-DRG assignment. We examined MedPAR claims data on all excisional debridement cases and found that these debridement cases use appreciably fewer resources than other cases in their current surgical DRGs. However, we determined that if we were to classify debridement cases as non-O.R. cases and assign them to medical DRGs, we would significantly underpay these cases. The following chart shows differences in average costs for all excisional debridement cases compared to other cases within their current MS-DRG and compared to medical DRGs to which the patients would be assigned if the procedure were reclassified as a non-O.R. procedure.

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The chart illustrates that when debridement is the only O.R. procedure, it is assigned to MS-DRGs that have an average cost that is approximately $5,000 more than the actual cost of the debridement ($12,427 versus $17,332). Conversely, if the debridement is made a non-O.R. code, it would, on average, be assigned to MS-DRGs that have an average cost that is approximately $4,000 less than the actual cost of the debridement ($8,070 versus $12,427). Therefore, we believe it would be inappropriate to propose to classify these procedures as a non-O.R. procedure.

We explored alternative approaches to classifying procedure code 86.22 as a non-O.R. procedure. We evaluated the possibility of removing excisional debridements from their current MS-DRG assignments within the following skin-related MS-DRGs, where they are combined with skin grafts, and creating a new set of debridement MS-DRGs. The current MS-DRGs that combine skin grafts and debridements into the same MS-DRGs are as follows:

• MS-DRGs 573 through 575 (Skin Graft &/or Debridement for Skin Ulcer or Cellulitis with MCC, with CC, and without CC/MCC, respectively).

• MS-DRGs 576 through 578 (Skin Graft &/or Debridement Except for Skin Ulcer or Cellulitis with MCC, with CC, and without CC/MCC, respectively).

We analyzed MedPAR claims data on the severity level of graft cases without any debridements in these six MS-DRGs. Our findings are shown in the chart below.

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We compared these data to a proposed new set of skin-related MS-DRGs that would include only debridements. The results of the findings of the severity levels of debridements without skin grafts in these six MS-DRGs are shown in the chart below.

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Our findings indicate that the graft procedure cases have higher average costs than the excisional debridement cases. The average costs for the excisional debridement cases in MS-DRGs 573 through 575 compared to the debridement cases in MS-DRGs 576 through 578 are very similar. We believe that the data support creating a single set of skin-related excisional debridement MS-DRGs composed of cases previously captured in MS-DRGs 573 through 575 as well as MS-DRGs 576 through 578. The following chart illustrates those combined average costs.

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We believe that the data support separating skin graft procedures from excisional debridements by creating a new set of MS-DRGs. This would result in more accurate payment for both skin grafts and debridement. Therefore, we are proposing to remove excisional debridements (procedure code 86.22) from their current MS-DRG assignments within MS-DRGs 573 through 578 for skin grafts and assign them to new excisional debridement MS-DRGs. We are proposing to maintain MS-DRGs 573 through 578 for skin grafts. The following list describes the proposed new and revised MS-DRG titles:

Proposed new MS-DRGs based on procedure code 86.22:

• Proposed MS-DRG 570 (Skin Debridement with MCC)

• Proposed MS-DRG 571 (Skin debridement with CC)

• Proposed MS-DRG 572 (Skin Debridement without CC/MCC)

Proposed Revised MS-DRGs based on codes currently assigned to MS-DRGs 573 through 578, excluding procedure code 86.22:

• Proposed revised MS-DRG 573 (Skin Graft for Skin Ulcer or Cellulitis with MCC)

• Proposed revised MS-DRG 574 (Skin Graft for Skin Ulcer or Cellulitis with CC)

• Proposed revised MS-DRG 575 (Skin Graft for Skin Ulcer or Cellulitis without CC/MCC)

• Proposed revised MS-DRG 576 (Skin Graft Except for Skin Ulcer or Cellulitis with MCC)

• Proposed revised MS-DRG 577 (Skin Graft except for Skin Ulcer or Cellulitis with CC)

• Proposed revised MS-DRG 578 (Skin Graft Except for Skin Ulcer or Cellulitis without CC/MCC)

We welcome public comments on our proposal for FY 2012 to create three new debridement MS-DRGs 570, 571, and 572 for skin debridement and to revise MS-DRGs 573 through 578 to include skin grafts only, as indicated above.

7. MDC 10 (Endocrine, Nutritional, and Metabolic Diseases and Disorders)

a. Nutritional and Metabolic Diseases: Update of MS-DRG Titles

We received a request to revise the MS-DRG titles for MS-DRGs 640 through 642 to more clearly capture the cases that are currently assigned to these MS-DRGs. The current titles for these MS-DRGs are: MS-DRGs 640 (Nutritional & Miscellaneous Metabolic Disorders with MCC); MS-DRG 641 (Nutritional & Miscellaneous Metabolic Disorders without MCC); and MS-DRG 642 (Inborn Errors of Metabolism). The requestor suggested that we change the titles to: MS-DRG 640 (Miscellaneous Disorders of Nutrition, Metabolism, and Fluids and Electrolytes with MCC); MS-DRG 641 (Miscellaneous Disorders of Nutrition, Metabolism, and Fluids and Electrolytes without MCC); and MS-DRG 642 (Inborn and Other Disorders of Metabolism).

Our clinical advisors support these suggested changes to the titles, as the suggested changes would provide a better description of the diagnoses assigned to MS-DRGs 640, 641, and 642. Therefore, we are proposing to revise the MS-DRG titles for MS-DRGs 640, 641, and 642 as the requested suggested. We invite public comment on our proposal to change the MS-DRG titles for MS-DRGs 640, 641, and 642 for FY 2012.

b. Sleeve Gastrectomy Procedure for Morbid Obesity

Sleeve gastrectomy is a 70 percent to 80 percent greater curvature gastrectomy (sleeve resection of the stomach) with continuity of the gastric lesser curve being maintained while simultaneously reducing stomach volume. It may be the first step in a two-stage procedure when performing Roux-en-Y Gastric Bypass (RYGBP). Sleeve gastrectomy can be performed either as an open or a laparoscopic procedure. Sleeve gastrectomy is currently coded using ICD-9-CM procedure code 43.89 (Other total gastrectomy). Procedure code 43.89 is currently assigned to several MS-DRGs. However, the code is not assigned to MS-DRG 619, 620, or 621 (O.R. Procedures for Obesity with MCC, with CC, and without CC/MCC, respectively).

We received a request for CMS to review MDC 10 (Endocrine, Nutritional, and Metabolic Diseases and Disorders) for consistency. Specifically, the requestor questioned why diagnosis code 278.01 (Morbid obesity), when paired on a claim with procedure code 43.89, would be assigned to MS-DRG 981, 982, or 983 (Extensive O.R. Procedure Unrelated to Principal Diagnosis with MCC, with CC, or without CC/MCC, respectively) instead of MS-DRG 619, 620, or 621.

Upon review, we determined that diagnosis code 278.01 is assigned to MDC 10. However, procedure code 43.89 is not assigned to any MS-DRG set in this MDC. Therefore, the cases are assigned to MS-DRGs 981 through 983, reflecting procedures not related to the principal diagnosis. This was an inadvertent oversight on CMS' part when the MS-DRGs were created. Therefore, we are proposing to add a procedure code or codes identifying sleeve gastrectomy to MS-DRGs 619 through 621 for FY 2012.

Currently, sleeve gastrectomy is identified in the ICD-9-CM procedure code Index as follows: Gastrectomy (partial) (subtotal) NEC 43.89. At procedure code 43.89 in the ICD-9-CM procedure code Tabular, an inclusion note identifies this code as including sleeve resection of the stomach.

In light of our proposal to add a procedure code or codes to MS-DRGs 619 through 621, we point out that there is an NCD that has precluded coverage of sleeve gastrectomy when performed either open or laparoscopically. This decision may be found in the Medicare National Coverage Determination Manual, Section 100.1, Nationally Non-Covered Indications for Bariatric Surgery for Treatment of Morbid Obesity, effective on February 12, 2009. This manual is available through the CMS Web site through a link at:http://www.cms.gov/manuals/downloads/mcd103c1_Part2.pdf. This manual entry affirms that treatment for obesity via use of the open or laparoscopic sleeve gastrectomy is determined to be noncovered for Medicare beneficiaries.

Noncoverage of these cases is determined by the fiscal intermediary or MAC because of the nature of procedure code 43.89, which is a code that identifies several gastrectomy procedures. Therefore, to identify a code describing many procedures in the MCE would be inappropriately restricting other procedures which are covered. However, we have received a request to create specific codes identifying both laparoscopic sleeve gastrectomy and the open procedure, vertical sleeve gastrectomy. We addressed this request at the ICD-9-CM Coordination and Maintenance Committee meeting held on March 9, 2011. Should a code or codes be created as a result of this request, we will then be able to add these codes to the MCE as a conforming noncoverage edit when combined with diagnosis code 278.01. The background information discussing sleeve gastrectomy coding can be accessed on the CMS Web site at:http://www.cms.gov/ICD9ProviderDiagnosticcodes/03_meetings.asp#TopOfPage. A summary of the meeting will be available soon after the meeting is held. This summary can be found on CMS' Web site for the ICD-9-CM Coordination and Maintenance Committee at:http://www.cms.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp#TopOfPage by scrolling down to the .pdf zip files containing the meeting agenda and handouts.

Therefore, for FY 2012, we are proposing to add a procedure code or codes identifying sleeve gastrectomy to MS-DRGs 619 through 621. However, we also intend to add any code or codes created at the ICD-9-CM Coordination and Maintenance Committee on March 9, 2011, to the MCE as sleeve gastrectomy, whether open or laparoscopic, is not covered for Medicare beneficiaries. The code or codes would appear in the “Noncovered Procedures” edit of the MCE. As the timing of the development of this proposed rule and the date of the March 2011 meeting of the ICD-9-CM Coordination and Maintenance Committee overlap, it is not possible to determine what those codes might be, or even if they will be created. However, should a code or codes be created, we propose that they will simultaneously be placed in both MS-DRGs 619 through 621 and the MCE. This decision may seem to be counterintuitive, but CMS realizes that our MS-DRGs and the Medicare GROUPER program are used for other beneficiaries and insurance plans rather than strictly for Medicare beneficiaries. A complete description of this issue will be addressed in the final rule. Any new code or codes created as a result of the ICD-9-CM Coordination and Maintenance Committee meeting will only be included in Table 6B, which will be listed in section VI. of the Addendum to the final rule and available via the Internet; we do not have a mechanism to make the codes available prior to the final rule's publication. We invite public comment on this proposal.

8. MDC 15 (Newborns and Other Neonates With Conditions Originating in the Perinatal Period): Discharge Status Code 66 (Discharged/Transferred to Critical Assess Hospital (CAH))

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50236), we finalized our transfer policy regarding transfer of patients from an acute care hospital to a CAH. In that final rule, we stated that hospitals are required to use patient discharge status code 66 on the IPPS claims to identify transfers to CAHs.

With this new requirement, a discharge from an IPPS hospital to a CAH equates to a transfer status. However, discharge status code 66 is currently not included in the MS-DRG GROUPER logic for MS-DRG 789 (Neonate, Died or Transferred to Another Acute Care Facility). Therefore, in this proposed rule, we are proposing to add discharge status code 66 to the MS-DRG GROUPER logic for MS-DRG 789. We invite public comment on our proposal to add discharge status code 66 to the MS-DRG GROUPER logic for MS-DRG 789 for FY 2012.

9. Proposed Medicare Code Editor (MCE) Changes

As explained under section II.B.1. of the preamble of this proposed rule, the Medicare Code Editor (MCE) is a software program that detects and reports errors in the coding of Medicare claims data. Patient diagnoses, procedure(s), and demographic information are entered into the Medicare claims processing systems and are subjected to a series of automated screens. The MCE screens are designed to identify cases that require further review before classification into a MS-DRG. In this proposed rule, we discuss our intention to make the following change to the MCE edits.

In section II.G.7.a. of this preamble, we discuss that the current ICD-9-CM procedure code for sleeve gastrectomy (43.89 (Other partial gastrectomy, other)) is a noncovered code when performed for resection of the stomach in patients with morbid obesity. We also discussed that noncoverage for Medicare beneficiaries of cases containing procedure code 43.89 is determined by the fiscal intermediaries or MACs because of the nature of procedure code 43.89. This code is imprecise and identifies several other gastrectomy procedures in addition to sleeve resection. Therefore, to limit coverage by identifying a code that describes many procedures through the use of the MCE would inappropriately restrict other procedures that are covered by Medicare. In this same section, we also stated that we received a request to create specific codes identifying both laparoscopic sleeve gastrectomy and the open procedure, vertical sleeve gastrectomy. As we stated above, we addressed this request at the ICD-9-CM Coordination and Maintenance Committee meeting held on March 9, 2011. If a code or codes should be created as a result of this request, we will then be able to add these codes to the MCE as a conforming noncoverage edit when combined with diagnosis code 278.01 (Morbid obesity).

As the timing of development of this proposed rule and the holding of the ICD-9-CM Coordination and Maintenance Committee meeting on March 9, 2011 overlap, it is not possible to determine what those codes might be, or even if they will be created. However, should a code or codes be created, we propose that any code or codes for laparoscopic or open sleeve resection of the stomach be added to the MCE as a noncovered procedure or procedures, in combination with ICD-9-CM diagnosis code 278.01 (Morbid obesity). The background information discussing sleeve gastrectomy coding can be accessed on the CMS Web site at:http://www.cms.gov/ICD9ProviderDiagnosticcodes/03_meetings.asp#TopOfPage. A complete description of this issue will be addressed in the final rule. Any new code or codes describing sleeve gastrectomy will only be included in Table 6B, which will be listed in section VI. of the Addendum to the final rule and available via the Internet; we do not have a mechanism to make the codes available prior to the final rule's publication. We invite public comments on this proposal.

10. Surgical Hierarchies

Some inpatient stays entail multiple surgical procedures, each one of which, occurring by itself, could result in assignment of the case to a different MS-DRG within the MDC to which the principal diagnosis is assigned. Therefore, it is necessary to have a decision rule within the GROUPER by which these cases are assigned to a single MS-DRG. The surgical hierarchy, an ordering of surgical classes from most resource-intensive to least resource-intensive, performs that function. Application of this hierarchy ensures that cases involving multiple surgical procedures are assigned to the MS-DRG associated with the most resource-intensive surgical class.

Because the relative resource intensity of surgical classes can shift as a function of MS-DRG reclassification and recalibrations, we reviewed the surgical hierarchy of each MDC, as we have for previous reclassifications and recalibrations, to determine if the ordering of classes coincides with the intensity of resource utilization.

A surgical class can be composed of one or more MS-DRGs. For example, in MDC 11, the surgical class “kidney transplant” consists of a single MS-DRG (MS-DRG 652) and the class “major bladder procedures” consists of three MS-DRGs (MS-DRGs 653, 654, and 655). Consequently, in many cases, the surgical hierarchy has an impact on more than one MS-DRG. The methodology for determining the most resource-intensive surgical class involves weighting the average resources for each MS-DRG by frequency to determine the weighted average resources for each surgical class. For example, assume surgical class A includes MS-DRGs 1 and 2 and surgical class B includes MS-DRGs 3, 4, and 5. Assume also that the average costs of MS-DRG 1 is higher than that of MS-DRG 3, but the average costs of MS-DRGs 4 and 5 are higher than the average costs of MS-DRG 2. To determine whether surgical class A should be higher or lower than surgical class B in the surgical hierarchy, we would weigh the average costs of each MS-DRG in the class by frequency (that is, by the number of cases in the MS-DRG) to determine average resource consumption for the surgical class. The surgical classes would then be ordered from the class with the highest average resource utilization to that with the lowest, with the exception of “other O.R. procedures” as discussed below.

This methodology may occasionally result in assignment of a case involving multiple procedures to the lower-weighted MS-DRG (in the highest, most resource-intensive surgical class) of the available alternatives. However, given that the logic underlying the surgical hierarchy provides that the GROUPER search for the procedure in the most resource-intensive surgical class, in cases involving multiple procedures, this result is sometimes unavoidable.

We note that, notwithstanding the foregoing discussion, there are a few instances when a surgical class with a lower average cost is ordered above a surgical class with a higher average cost. For example, the “other O.R. procedures” surgical class is uniformly ordered last in the surgical hierarchy of each MDC in which it occurs, regardless of the fact that the average costs for the MS-DRG or MS-DRGs in that surgical class may be higher than those for other surgical classes in the MDC. The “other O.R. procedures” class is a group of procedures that are only infrequently related to the diagnoses in the MDC, butare still occasionally performed on patients in the MDC with these diagnoses. Therefore, assignment to these surgical classes should only occur if no other surgical class more closely related to the diagnoses in the MDC is appropriate.

A second example occurs when the difference between the average costs for two surgical classes is very small. We have found that small differences generally do not warrant reordering of the hierarchy because, as a result of reassigning cases on the basis of the hierarchy change, the average costs are likely to shift such that the higher-ordered surgical class has a lower average costs than the class ordered below it.

Based on the changes that we are proposing to make for FY 2012, as discussed in sections II.G.1. and 6. of this preamble, we are proposing to revise the surgical hierarchy for Pre-MDCs and MDC 9 (Diseases and Disorders of the Skin, Subcutaneous Tissue, and Breast) as follows:

In Pre-MDCs, we are proposing to reorder proposed new MS-DRG 016 (Autologous Bone Marrow Transplant with CC/MCC) and proposed new MS-DRG 017 (Autologous Bone Marrow Transplant without CC/MCC) above MS-DRG 010 (Pancreas Transplant).

In MDC 9, we are proposing to reorder—

• MS-DRG 578 (Skin Graft Except for Skin Ulcer or Cellulitis without CC/MCC) above proposed new MS-DRG 570 (Skin Debridement with MCC);

• Proposed new MS-DRG 570 above proposed new MS-DRG 571 (Skin Debridement with CC);

• Proposed new MS-DRG 571 above proposed new MS-DRG 572 (Skin Debridement without CC/MCC; and

• Proposed new MS-DRG 572 above MS-DRG 579 (Other Skin, Subcutaneous Tissue, and Breast Procedures with MCC).

11. Complications or Comorbidity (CC) Exclusions List

a. Background

As indicated earlier in the preamble of this proposed rule, under the IPPS MS-DRG classification system, we have developed a standard list of diagnoses that are considered CCs. Historically, we developed this list using physician panels that classified each diagnosis code based on whether the diagnosis, when present as a secondary condition, would be considered a substantial complication or comorbidity. A substantial complication or comorbidity was defined as a condition that, because of its presence with a specific principal diagnosis, would cause an increase in the length of stay by at least 1 day in at least 75 percent of the patients. We refer readers to section II.D.2. and 3. of the preamble of the FY 2008 IPPS final rule with comment period for a discussion of the refinement of CCs in relation to the MS-DRGs we adopted for FY 2008 (72 FR 47121 through 47152).

b. Proposed CC Exclusions List for FY 2012

In the September 1, 1987 final notice (52 FR 33143) concerning changes to the DRG classification system, we modified the GROUPER logic so that certain diagnoses included on the standard list of CCs would not be considered valid CCs in combination with a particular principal diagnosis. We created the CC Exclusions List for the following reasons: (1) To preclude coding of CCs for closely related conditions; (2) to preclude duplicative or inconsistent coding from being treated as CCs; and (3) to ensure that cases are appropriately classified between the complicated and uncomplicated DRGs in a pair. As we indicated above, we developed a list of diagnoses, using physician panels, to include those diagnoses that, when present as a secondary condition, would be considered a substantial complication or comorbidity. In previous years, we have made changes to the list of CCs, either by adding new CCs or deleting CCs already on the list.

In the May 19, 1987 proposed notice (52 FR 18877) and the September 1, 1987 final notice (52 FR 33154), we explained that the excluded secondary diagnoses were established using the following five principles:

• Chronic and acute manifestations of the same condition should not be considered CCs for one another.

• Specific and nonspecific (that is, not otherwise specified (NOS)) diagnosis codes for the same condition should not be considered CCs for one another.

• Codes for the same condition that cannot coexist, such as partial/total, unilateral/bilateral, obstructed/unobstructed, and benign/malignant, should not be considered CCs for one another.

• Codes for the same condition in anatomically proximal sites should not be considered CCs for one another.

• Closely related conditions should not be considered CCs for one another.

The creation of the CC Exclusions List was a major project involving hundreds of codes. We have continued to review the remaining CCs to identify additional exclusions and to remove diagnoses from the master list that have been shown not to meet the definition of a CC. [2]

(1) Proposed Limited Revisions Based on Changes to the ICD-9-CM Diagnosis Codes

For FY 2012, we are proposing to make limited revisions to the CC Exclusions List to take into account the changes made in the ICD-9-CM diagnosis coding system effective October 1, 2011. (We refer readers to section II.G.13. of the preamble of this proposed rule for a discussion of ICD-9-CM changes.) We are proposing to make these changes in accordance with the principles established when we created the CC Exclusions List in 1987. In addition, we are indicating on the CC Exclusions List some changes as a result of updates to the ICD-9-CM codes to reflect the exclusion of codes from being MCCs under the MS-DRG system that we adopted in FY 2008.

CMS encourages input from our stakeholders concerning the annual IPPS updates when that input is made available to us by December of the year prior to the next annual proposed rule update. For example, to be considered for any updates or changes in FY 2012, comments and suggestions should have been submitted by early December 2010. The following comments were submitted in a timely manner, and are therefore being discussed in this section.

a. Pressure Ulcer Diagnosis Codes

We received a comment recommending that CMS remove diagnosis codes 707.23 (Pressure ulcer, stage III) and 707.24 (Pressure ulcer, stage IV) from the CC Exclusion List when reported as a secondary diagnosis code with a principal diagnosis code for the pressure ulcer site: Diagnosis code 707.00 (Pressure ulcer, unspecified); diagnosis code 707.01 (Pressure ulcer, elbow); diagnosis code 707.02 (Pressure ulcer, upper back); diagnosis code 707.03 (Pressure ulcer, lower back); diagnosis code 707.04 (Pressure ulcer, hip); diagnosis code 707.05 (Pressure ulcer, buttock); diagnosis code 707.06 (Pressure ulcer, ankle); diagnosis code 707.07 (Pressure ulcer, heel); or diagnosis code 707.09 (Pressure ulcer, other site). Currently, when a patient is admitted with a pressure ulcer, the CC Exclusion List prevents a pressure ulcer stage diagnosis code from being designated as an MCC when reported as a secondary diagnosis. The commenter disagreed with this approach and contended that a patient admitted for treatment of a stage III or stage IV pressure ulcer likely requires resources that would qualify the case as a diagnosis with an MCC or, at a minimum, as a CC.

Our clinical advisors agree with the commenter. Therefore, we are proposing to remove diagnosis codes 707.23 and 707.24 from the CC Exclusion List when a principal diagnosis code of one of codes 707.00 through 707.09 is reported. Under this proposal, diagnosis code 707.23 or diagnosis code 707.24 would be an MCC when reported as a secondary diagnosis code with a principal diagnosis code of one of codes 707.00 through 707.09.

b. End-Stage Renal Disease Diagnosis Code

We received a suggestion from a commenter that diagnosis code 585.6 (End-stage renal disease) be added to the CC Exclusion List when reported with a principal diagnosis code of 403.90 (Hypertensive chronic kidney disease, unspecified, with chronic kidney disease stage I through stage IV, or unspecified) or diagnosis code 403.91 (Hypertensive chronic kidney disease, unspecified, with chronic kidney disease stage V or end-stage renal disease). Currently, diagnosis code 585.6 is designated as an MCC.

According to the commenter, diagnosis codes 585.6 and 403.91 are essentially the same diagnosis but coding guidelines require the reporting of two codes to identify the stage of chronic kidney disease when associated with hypertensive chronic kidney disease. The commenter suggested that there is no need for diagnosis code 585.6 to be designated as an MCC when reported with a principal diagnosis of hypertensive chronic kidney disease, stage V or end-stage renal disease. The commenter also pointed out that, while coding guidelines would preclude diagnosis codes 403.90 and 585.6 from being reported together, the MS-DRG GROUPER allows diagnosis code 585.6 to act as an MCC when reported as a secondary diagnosis with principal diagnosis code 403.90.

In response to the first issue, our clinical advisors disagree with the commenter. Diagnosis code 403.91 includes chronic kidney disease stage V or end-stage renal disease. These are two separate conditions (or stages) that are identified by two unique codes. Diagnosis code 585.5 identifies stage V chronic kidney disease and is classified as a CC. Diagnosis code 585.6 identifies end-stage renal disease, is classified as an MCC, and describes patients who require chronic dialysis. The patients diagnosed with stage V chronic kidney disease are a different population who require different resources than those patients who are diagnosed with end-stage renal disease. Therefore, we are not proposing to add diagnosis code 585.6 to the CC Exclusion List when reported with a principal diagnosis of code 403.91.

On the second issue raised by the commenter, our clinical advisors agree. Diagnosis code 403.90 identifies patients with chronic kidney disease, stages I through IV or unspecified, and diagnosis code 585.6 identifies end-stage renal disease. Our clinical advisors indicate that the reporting of diagnosis code 585.6 should not be designated as an MCC in this case. We agree with the commenter that diagnosis codes 403.90 and 585.6 should not be reported together as instructed by the Coding Guidelines. Only a code from the 585.1 through 585.4 range (stages I through IV, or unspecified) should be reported with diagnosis code 403.90. Diagnosis code 585.6 is the exclusive code that uniquely identifies end-stage renal disease and should only be reported with diagnosis code 403.91. Therefore, we are proposing to add diagnosis code 585.6 to the CC Exclusion List when reported with a principal diagnosis code of 403.90.

c. Hypertensive Chronic Kidney Disease With Chronic Kidney Disease Stage V or End-Stage Renal Disease Code

We received a comment recommending the addition of diagnosis code 403.91 (Hypertensive chronic kidney disease, unspecified, with chronic kidney disease stage V or end-stage renal disease) to the CC Exclusion List when reported as a secondary diagnosis code with principal diagnosis code 585.6 (End stage renal disease). The commenter stated that it would be unlikely that diagnosis code 403.91 would be reported as a secondary diagnosis code with diagnosis code 585.6 as the principal diagnosis code due to sequencing rules for end-stage renal disease with hypertension. Currently, diagnosis code 403.91 is designated as a CC.

Our clinical advisors agree with the commenter. Therefore, we are proposing to add diagnosis code 403.91 to the CC Exclusion List when reported as a secondary diagnosis code with principal diagnosis code 585.6.

We invite public comment on the above three proposals regarding the CC Exclusion List for FY 2012.

(2) Suggested Changes to Severity Levels for Encephalopathy

We received a request that we consider changing the following diagnosis codes from an MCC to a CC:

• 348.30 (Encephalopathy NOS)

• 348.32 (Metabolic encephalopathy)

• 348.39 (Encephalopathy NEC)

• 349.82 (Toxic encephalopathy)

• 572.2 (Hepatic encephalopathy)

For this FY 2012 IPPS/LTCH PPS proposed rule, we analyzed the claims data for the diagnosis codes mentioned above related to encephalopathy. We used the same approach we used in initially creating the MS-DRGs and classifying secondary diagnosis codes as non-CCs, CCs, or MCCs. A detailed discussion of the process and criteria we used in this process is described in the FY 2008 IPPS final rule (72 FR 47158 through 47161). We refer the readers to this discussion for complete information on our approach to developing the non-CC, CC, and MCC lists. Each diagnosis for which Medicare data were available was evaluated to determine its impact on resource use and to determine the most appropriate CC subclass (non-CC, CC, or MCC) assignment. In order to make this determination, the average cost for each subset of cases was compared to the expected cost for cases in that subset. The following format was used to evaluate each diagnosis:

Code Diagnosis Cnt1 C1 Cnt2 C2 Cnt3 C3

Count (Cnt) is the number of patients in each subset. C1, C2, and C3 are a measure of the impact on resource use of patients in each of the subsets. The C1, C2, and C3 values are a measure of the ratio of average costs for patients with these conditions to the expected average cost across all cases. The C1 value reflects a patient with no other secondary diagnosis or with all other secondary diagnoses that are non-CCs. The C2 value reflects a patient with at least one other secondary diagnosis that is a CC but none that is a MCC. The C3 value reflects a patient with at least one other secondary diagnosis that is a MCC. A value close to 1.0 in the C1 field would suggest that the diagnosis code produces the same expected value as a non-CC. A value close to 2.0 suggests the condition is more like a CC than a non-CC but not as significant in resource usage as an MCC. A value close to 3.0 suggests the condition is expected to consume resources more similar to an MCC than a CC or non-CC. For additional details on this analysis, we refer readers to the FY 2008 IPPS final rule (72 FR 47158 through 47161).

The following chart shows the analysis for each of the encephalopathy diagnosis codes that are currently classified as MCCs.

[The GPO has not yet made images accessible. Image EP05MY11.028]

We ran the following data as described in FY 2008 IPPS final rule (72 FR 47158 through 47161). The C1 value reflects a patient with no other secondary diagnosis or with all other secondary diagnoses that are non-CCs. The C2 value reflects a patient with at least one other secondary diagnosis that is a CC but none that is a MCC. The C3 value reflects a patient with at least one other secondary diagnosis that is a MCC.

The chart above shows that the C1 findings ranged from a low of 1.5448 to a high of 2.3158. As stated earlier, a C1 value close to 2.0 suggests the condition is more like a CC than a non-CC but not as significant in resource usage as an MCC. The C1 findings suggest that these codes are more like a CC than a MCC. However, the C2 findings ranged from a low of 2.5054 to a high of 3.0023. Values close to 3.0 suggests the condition is more similar to an MCC than a CC or non-CC. The C2 findings support maintaining the encephalopathy codes as an MCC level. The data are clearly mixed between the C1 and C2 findings, and does not consistently support a change in the severity level. Our clinical advisers recommended that these encephalopathy codes remain at an MCC level because these patients with encephalopathy typically utilize significant resources and are at a higher severity level. Based on the clinical analysis and the lack of consistent claims data support for the severity level change, we believe that the encephalopathy codes should remain on the MCC list. Therefore, we are proposing to retain the following encephalopathy codes on the MCC list:

• 348.30 (Encephalopathy NOS)

• 348.32 (Metabolic encephalopathy)

• 348.39 (Encephalopathy NEC)

• 349.82 (Toxic encephalopathy)

• 572.2 (Hepatic encephalopathy)

We invite public comment on our proposal not to change the severity level classification for these codes.

(3) Suggested Changes to Severity Levels for Mechanical Complication and Infection Due to Device Related Codes

We received a request to change the severity classification from CCs to MCCs for the following diagnosis codes:

• 996.01 (Mechanical of cardiac device, implant and graft due to cardiac pacemaker (electrode)).

• 996.04 (Mechanical complication of cardiac device, implant, and graft due to automatic implantable cardiac defibrillator).

• 996.61 (Infection and inflammatory reaction due to internal prosthetic device, implant, and graft due to cardiac device, implant, and graft).

Currently, all three diagnosis codes are classified as a CC. For this proposed rule, we analyzed claims data using the methodology described previously in this section for these diagnosis codes. The following chart shows our findings:

[The GPO has not yet made images accessible. Image EP05MY11.029]

We reviewed the findings from these data. The C1 findings ranged from a low of 1.6723 to a high of 1.9922. As stated earlier, a value close to 2.0 in the C1 field suggests that the condition is more like a CC than a non-CC but not assignificant in resource usage as an MCC. The C1 findings clearly support the current classification of these three codes on the CC list and the C2 findings supports this classification. Our clinical advisors agree that the data findings and their own clinical evaluation of the severity level of these conditions support the classification of these three codes on the CC list. Therefore, we are proposing that these codes remain on the CC list. We invite public comment on this proposal.

Tables 6G and 6H, Additions to and Deletions from the CC Exclusion List, respectively, which are proposed to be effective for discharges occurring on or after October 1, 2011, are not being published in the Addendum to this proposed rule because of the length of the two tables. Instead, we are making them available through the Internet on the CMS Web site at:http://www.cms.hhs.gov/AcuteInpatientPPS. Each of these principal diagnoses for which there is a CC exclusion is shown in Tables 6G and 6H, which are listed in section VI. of the Addendum to this proposed rule (and available via the Internet) with an asterisk, and the conditions that will not count as a CC, are provided in an indented column immediately following the affected principal diagnosis.

A complete updated MCC, CC, and Non-CC Exclusions List is also available through the Internet on the CMS Web site at:http://www.cms.hhs.gov/AcuteInpatientPPS. If finalized in this rulemaking cycle, beginning with discharges on or after October 1, 2011, the indented diagnoses will not be recognized by the GROUPER as valid CCs for the asterisked principal diagnosis.

To assist readers in identifying the changes to the MCC and CC lists that occurred as a result of updates to the ICD-9-CM codes, as described in Tables 6A, 6C, and 6E, which are listed in section VI. of the Addendum to this proposed rule and available via the Internet, we are providing the following summaries of those MCC and CC changes for FY 2012.

[The GPO has not yet made images accessible. Image EP05MY11.030]
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Alternatively, the complete documentation of the GROUPER logic, including the current CC Exclusions List, is available from 3M/Health Information Systems (HIS), which, under contract with CMS, is responsible for updating and maintaining the GROUPER program. The current MS-DRG Definitions Manual, Version 28.0, is available on a CD for $225.00. Version 29.0 of this manual, which will include the final FY 2012 MS-DRG changes, will be available on a CD for $225.00. These manuals may be obtained by writing 3M/HIS at the following address: 100 Barnes Road, Wallingford, CT 06492; or by calling (203) 949-0303, or by obtaining an order form at the Web site:http://www.3MHIS.com. Please specify the revision or revisions requested.

12. Review of Procedure Codes in MS DRGs 981 Through 983; 984 Through 986; and 987 Through 989

Each year, we review cases assigned to former CMS DRG 468 (Extensive O.R. Procedure Unrelated to Principal Diagnosis), CMS DRG 476 (Prostatic O.R. Procedure Unrelated to Principal Diagnosis), and CMS DRG 477 (Nonextensive O.R. Procedure Unrelated to Principal Diagnosis) to determine whether it would be appropriate to change the procedures assigned among these CMS DRGs. Under the MS-DRGs that we adopted for FY 2008, CMS DRG 468 was split three ways and became MS-DRGs 981, 982, and 983 (Extensive O.R. Procedure Unrelated to Principal Diagnosis with MCC, with CC, and without CC/MCC, respectively). CMS DRG 476 became MS-DRGs 984, 985, and 986 (Prostatic O.R. Procedure Unrelated to Principal Diagnosis with MCC, with CC, and without CC/MCC, respectively). CMS DRG 477 became MS-DRGs 987, 988, and 989 (Nonextensive O.R. Procedure Unrelated to Principal Diagnosis with MCC, with CC, and without CC/MCC, respectively).

MS-DRGs 981 through 983, 984 through 986, and 987 through 989 (formerly CMS DRGs 468, 476, and 477, respectively) are reserved for those cases in which none of the O.R. procedures performed are related to the principal diagnosis. These MS-DRGs are intended to capture atypical cases, that is, those cases not occurring with sufficient frequency to represent a distinct, recognizable clinical group. MS-DRGs 984 through 986 (previously CMS DRG 476) are assigned to those discharges in which one or more of the following prostatic procedures are performed and are unrelated to the principal diagnosis:

• 60.0, Incision of prostate

• 60.12, Open biopsy of prostate

• 60.15, Biopsy of periprostatic tissue

• 60.18, Other diagnostic procedures on prostate and periprostatic tissue

• 60.21, Transurethral prostatectomy

• 60.29, Other transurethral prostatectomy

• 60.61, Local excision of lesion of prostate

• 60.69, Prostatectomy, not elsewhere classified

• 60.81, Incision of periprostatic tissue

• 60.82, Excision of periprostatic tissue

• 60.93, Repair of prostate

• 60.94, Control of (postoperative) hemorrhage of prostate

• 60.95, Transurethral balloon dilation of the prostatic urethra

• 60.96, Transurethral destruction of prostate tissue by microwave thermotherapy

• 60.97, Other transurethral destruction of prostate tissue by other thermotherapy

• 60.99, Other operations on prostate

All remaining O.R. procedures are assigned to MS-DRGs 981 through 983 and 987 through 989, with MS-DRGs 987 through 989 assigned to those discharges in which the only procedures performed are nonextensive procedures that are unrelated to the principal diagnosis. [3]

Our review of MedPAR claims data showed that there were no cases that merited movement or should logically be assigned to any of the other MDCs. Therefore, for FY 2012, we are not proposing to change the procedures assigned among these MS-DRGs.

a. Moving Procedure Codes From MS-DRGs 981 Through 983 or MS-DRGs 987 Through 989 Into MDCs

We annually conduct a review of procedures producing assignment to MS-DRGs 981 through 983 (Extensive O.R. procedure unrelated to principal diagnosis with MCC, with CC, and without CC/MCC, respectively) or MS-DRGs 987 through 989 (Nonextensive O.R. procedure unrelated to principal diagnosis with MCC, with CC, and without CC/MCC, respectively) on the basis of volume, by procedure, to see if it would be appropriate to move procedure codes out of these MS-DRGs into one of the surgical MS-DRGs for the MDC into which the principal diagnosis falls. The data are arrayed in two ways for comparison purposes. We look at a frequency count of each major operative procedure code. We also compare procedures across MDCs by volume of procedure codes within each MDC.

We identify those procedures occurring in conjunction with certain principal diagnoses with sufficient frequency to justify adding them to one of the surgical MS-DRGs for the MDC in which the diagnosis falls. As noted above, there were no cases that merited movement or that should logically be assigned to any of the other MDCs. Therefore, for FY 2012, we are not proposing to remove any procedures from MS-DRGs 981 through 983 or MS-DRGs 987 through 989 into one of the surgical MS-DRGs for the MDC into which the principal diagnosis is assigned.

b. Reassignment of Procedures Among MS-DRGs 981 Through 983, 984 Through 986, and 987 Through 989

We also annually review the list of ICD-9-CM procedures that, when in combination with their principal diagnosis code, result in assignment to MS-DRGs 981 through 983, 984 through 986 (Prostatic O.R. procedure unrelated to principal diagnosis with MCC, with CC, or without CC/MCC, respectively), and 987 through 989, to ascertain whether any of those procedures should be reassigned from one of these three MS-DRGs to another of the three MS-DRGs based on average charges and the length of stay. We look at the data for trends such as shifts in treatment practice or reporting practice that would make the resulting MS-DRG assignment illogical. If we find these shifts, we would propose to move cases to keepthe MS-DRGs clinically similar or to provide payment for the cases in a similar manner. Generally, we move only those procedures for which we have an adequate number of discharges to analyze the data.

There were no cases representing shifts in treatment practice or reporting practice that would make the resulting MS-DRG assignment illogical, or that merited movement so that cases should logically be assigned to any of the other MDCs. Therefore, for FY 2012, we are not proposing to move any procedure codes among these MS-DRGs.

c. Adding Diagnosis or Procedure Codes to MDCs

Based on the review of cases in the MDCs as described above in sections III.G.12.a. and b., we are not proposing to add any diagnosis or procedure codes to MDCs for FY 2012.

13. Changes to the ICD-9-CM Coding System, Including Discussion of the Replacement of the ICD-9-CM Coding System With the ICD-10-CM and ICD-10-PCS Systems in FY 2014

a. ICD-9-CM Coding System

As described in section II.B.1. of the preamble of this proposed rule, the ICD-9-CM is a coding system currently used for the reporting of diagnoses and procedures performed on a patient. In September 1985, the ICD-9-CM Coordination and Maintenance Committee was formed. This is a Federal interdepartmental committee, co-chaired by the National Center for Health Statistics (NCHS), the Centers for Disease Control and Prevention, and CMS, charged with maintaining and updating the ICD-9-CM system. The Committee is jointly responsible for approving coding changes, and developing errata, addenda, and other modifications to the ICD-9-CM to reflect newly developed procedures and technologies and newly identified diseases. The Committee is also responsible for promoting the use of Federal and non-Federal educational programs and other communication techniques with a view toward standardizing coding applications and upgrading the quality of the classification system.

The Official Version of the ICD-9-CM contains the list of valid diagnosis and procedure codes. (The Official Version of the ICD-9-CM is available from the Government Printing Office on CD-ROM for $19.00 by calling (202) 512-1800.) Complete information on ordering the CD-ROM is also available at:http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/05_CDROM.asp#TopOfPage. The Official Version of the ICD-9-CM is no longer available in printed manual form from the Federal Government; it is only available on CD-ROM. Users who need a paper version are referred to one of the many products available from publishing houses.

The NCHS has lead responsibility for the ICD-9-CM diagnosis codes included in the Tabular List and Alphabetic Index for Diseases, while CMS has lead responsibility for the ICD-9-CM procedure codes included in the Tabular List and Alphabetic Index for Procedures.

The Committee encourages participation in the above process by health-related organizations. In this regard, the Committee holds public meetings for discussion of educational issues and proposed coding changes. These meetings provide an opportunity for representatives of recognized organizations in the coding field, such as the American Health Information Management Association (AHIMA), the American Hospital Association (AHA), and various physician specialty groups, as well as individual physicians, health information management professionals, and other members of the public, to contribute ideas on coding matters. After considering the opinions expressed at the public meetings and in writing, the Committee formulates recommendations, which then must be approved by the agencies.

The Committee presented proposals for coding changes for implementation in FY 2012 at a public meeting held on September 15-16, 2010 and finalized the coding changes after consideration of comments received at the meetings and in writing by November 19, 2010. Those coding changes are announced in Tables 6A through 6F, which are listed in section VI. of the Addendum to this proposed rule and available via the Internet.

The Committee held its 2011 meeting on March 9-10, 2011. New codes for which there was a consensus of public support and for which complete tabular and indexing changes are made by May 2011 will be included in the October 1, 2011 update to ICD-9-CM. Code revisions that were discussed at the March 9-10, 2011 Committee meeting but that could not be finalized in time to include them in the tables listed in section VI. of the Addendum to this proposed rule will be included in Tables 6A through 6F, which will be listed in section VI. of the Addendum to the final rule and available via the Internet, and will be marked with an asterisk (*).

Copies of the minutes of the procedure codes discussions at the Committee's September 15-16, 2010 meeting and March 9-10, 2011 meeting can be obtained from the CMS Web site at:http://cms.hhs.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp. The minutes of the diagnosis codes discussions at the September 15-16, 2010 meeting and March 9-10, 2011 meeting are found at:http://www.cdc.gov/nchs/icd.htm. These Web sites also provide detailed information about the Committee, including information on requesting a new code, attending a Committee meeting, and timeline requirements and meeting dates.

We encourage commenters to address suggestions on coding issues involving diagnosis codes to: Donna Pickett, Co-Chairperson, ICD-9-CM Coordination and Maintenance Committee, NCHS, Room 2402, 3311 Toledo Road, Hyattsville, MD 20782. Comments may be sent by E-mail to:dfp4@cdc.gov.

Questions and comments concerning the procedure codes should be addressed to: Patricia E. Brooks, Co-Chairperson, ICD-9-CM Coordination and Maintenance Committee, CMS, Center for Medicare Management, Hospital and Ambulatory Policy Group, Division of Acute Care, C4-08-06, 7500 Security Boulevard, Baltimore, MD 21244-1850. Comments may be sent by E-mail to:patricia.brooks2@cms.hhs.gov.

The ICD-9-CM code changes that have been approved will become effective October 1, 2011. The new ICD-9-CM codes are listed, along with their MS-DRG classifications, in Tables 6A and 6B (New Diagnosis Codes and New Procedure Codes, respectively), which are listed in section VI. of the Addendum to this proposed rule and available via the Internet. As we stated above, the code numbers and their titles were presented for public comment at the ICD-9-CM Coordination and Maintenance Committee meetings. Both oral and written comments were considered before the codes were approved.

In this proposed rule, we are soliciting comments on the proposed classification of these new codes, which are shown in Tables 6A and 6B listed in section VI. of the Addendum to this proposed rule and available via the Internet.

For codes that have been replaced by new or expanded codes, the corresponding new or expanded diagnosis codes are included in Table 6A, which is listed in section VI. of the Addendum to this proposed rule and available via the Internet. Newprocedure codes are shown in Table 6B, which is listed in section VI. of the Addendum to this proposed rule and available via the Internet. Diagnosis codes that have been replaced by expanded codes or other codes or have been deleted are in Table 6C (Invalid Diagnosis Codes), which is listed in section VI. of the Addendum to this proposed rule and available via the Internet. These invalid diagnosis codes will not be recognized by the GROUPER beginning with discharges occurring on or after October 1, 2011. Table 6D, which is listed in section VI. of the Addendum to this proposed rule and available via the Internet contains invalid procedure codes. These invalid procedure codes will not be recognized by the GROUPER beginning with discharges occurring on or after October 1, 2011. Revisions to diagnosis code titles are in Table 6E (Revised Diagnosis Code Titles), which is listed in section VI. of the Addendum to this proposed rule and available via the Internet, and also includes the MS-DRG assignments for these revised codes. Table 6F, which is listed in section VI. of the Addendum to this proposed rule and available via the Internet includes revised procedure code titles for FY 2012.

In the September 7, 2001 final rule implementing the IPPS new technology add-on payments (66 FR 46906), we indicated we would attempt to include proposals for procedure codes that would describe new technology discussed and approved at the Spring meeting as part of the code revisions effective the following October. As stated previously, ICD-9-CM codes discussed at the March 9-10, 2011 Committee meeting that received consensus and that are finalized by May 2011 will be included in Tables 6A through 6F, which will be listed in section VI. of the Addendum to the final rule and available via the Internet.

Section 503(a) of Public Law 108-173 included a requirement for updating ICD-9-CM codes twice a year instead of a single update on October 1 of each year. This requirement was included as part of the amendments to the Act relating to recognition of new technology under the IPPS. Section 503(a) amended section 1886(d)(5)(K) of the Act by adding a clause (vii) which states that the “Secretary shall provide for the addition of new diagnosis and procedure codes on April 1 of each year, but the addition of such codes shall not require the Secretary to adjust the payment (or diagnosis-related group classification) * * * until the fiscal year that begins after such date.” This requirement improves the recognition of new technologies under the IPPS system by providing information on these new technologies at an earlier date. Data will be available 6 months earlier than would be possible with updates occurring only once a year on October 1.

While section 1886(d)(5)(K)(vii) of the Act states that the addition of new diagnosis and procedure codes on April 1 of each year shall not require the Secretary to adjust the payment, or DRG classification, under section 1886(d) of the Act until the fiscal year that begins after such date, we have to update the DRG software and other systems in order to recognize and accept the new codes. We also publicize the code changes and the need for a mid-year systems update by providers to identify the new codes. Hospitals also have to obtain the new code books and encoder updates, and make other system changes in order to identify and report the new codes.

The ICD-9-CM Coordination and Maintenance Committee holds its meetings in the spring and fall in order to update the codes and the applicable payment and reporting systems by October 1 of each year. Items are placed on the agenda for the ICD-9-CM Coordination and Maintenance Committee meeting if the request is received at least 2 months prior to the meeting. This requirement allows time for staff to review and research the coding issues and prepare material for discussion at the meeting. It also allows time for the topic to be publicized in meeting announcements in the Federal Register as well as on the CMS Web site. The public decides whether or not to attend the meeting based on the topics listed on the agenda. Final decisions on code title revisions are currently made by March 1 so that these titles can be included in the IPPS proposed rule. A complete addendum describing details of all changes to ICD-9-CM, both tabular and index, is published on the CMS and NCHS Web sites in May of each year. Publishers of coding books and software use this information to modify their products that are used by health care providers. This 5-month time period has proved to be necessary for hospitals and other providers to update their systems.

A discussion of this timeline and the need for changes are included in the December 4-5, 2005 ICD-9-CM Coordination and Maintenance Committee minutes. The public agreed that there was a need to hold the fall meetings earlier, in September or October, in order to meet the new implementation dates. The public provided comment that additional time would be needed to update hospital systems and obtain new code books and coding software. There was considerable concern expressed about the impact this new April update would have on providers.

In the FY 2005 IPPS final rule, we implemented section 1886(d)(5)(K)(vii) of the Act, as added by section 503(a) of Public Law 108-173, by developing a mechanism for approving, in time for the April update, diagnosis and procedure code revisions needed to describe new technologies and medical services for purposes of the new technology add-on payment process. We also established the following process for making these determinations. Topics considered during the Fall ICD-9-CM Coordination and Maintenance Committee meeting are considered for an April 1 update if a strong and convincing case is made by the requester at the Committee's public meeting. The request must identify the reason why a new code is needed in April for purposes of the new technology process. The participants at the meeting and those reviewing the Committee meeting summary report are provided the opportunity to comment on this expedited request. All other topics are considered for the October 1 update. Participants at the Committee meeting are encouraged to comment on all such requests. There were no requests approved for an expedited April l, 2011 implementation of an ICD-9-CM code at the September 15-16, 2010 Committee meeting. Therefore, there were no new ICD-9-CM codes implemented on April 1, 2011.

Current addendum and code title information is published on the CMS Web site at:http://www.cms.hhs.gov/icd9ProviderDiagnosticCodes/01_overview.asp#TopofPage. Information on ICD-9-CM diagnosis codes, along with the Official ICD-9-CM Coding Guidelines, can be found on the Web site at:http://www.cdc.gov/nchs/icd9.htm. Information on new, revised, and deleted ICD-9-CM codes is also provided to the AHA for publication in the Coding Clinic for ICD-9-CM. AHA also distributes information to publishers and software vendors.

CMS also sends copies of all ICD-9-CM coding changes to its Medicare contractors for use in updating their systems and providing education to providers.

These same means of disseminating information on new, revised, and deleted ICD-9-CM codes will be used to notify providers, publishers, software vendors, contractors, and others of any changes to the ICD-9-CM codes that are implemented in April. The code titlesare adopted as part of the ICD-9-CM Coordination and Maintenance Committee process. Thus, although we publish the code titles in the IPPS proposed and final rules, they are not subject to comment in the proposed or final rules. We will continue to publish the October code updates in this manner within the IPPS proposed and final rules. For codes that are implemented in April, we will assign the new procedure code to the same MS-DRG in which its predecessor code was assigned so there will be no MS-DRG impact as far as MS-DRG assignment. Any midyear coding updates will be available through the Web sites indicated above and through the Coding Clinic for ICD-9-CM. Publishers and software vendors currently obtain code changes through these sources in order to update their code books and software systems. We will strive to have the April 1 updates available through these Web sites 5 months prior to implementation (that is, early November of the previous year), as is the case for the October 1 updates.

b. Code Freeze

The International Classification of Diseases, 10th Revision (ICD-10) coding system applicable to hospital inpatient services will be implemented on October 1, 2013, as described in the Health Insurance Portability and Accountability Act (HIPAA) Administrative Simplification: Modifications to Medical Data Code Set Standards to Adopt ICD-10-CM and ICD-10-PCS final rule (74 FR 3328 through 3362, January 16, 2009). The ICD-10 coding system includes the International Classification of Diseases, 10th Revision, Clinical Modification (ICD-10-CM) for diagnosis coding and the International Classification of Diseases, 10th Revision, Procedure Coding System (ICD-10-PCS) for inpatient hospital procedure coding, as well as the Official ICD-10-CM and ICD-10-PCS Guidelines for Coding and Reporting. In the January 16, 2009 ICD-10-CM and ICD-10-PCS final rule (74 FR 3328 through 3362), there was a discussion of the need for a partial or total freeze in the annual updates to both ICD-9-CM and ICD-10-CM and ICD-10-PCS codes. The public comment addressed in that final rule stated that the annual code set updates should cease l year prior to the implementation of ICD-10. The commenters stated that this freeze of code updates would allow for instructional and/or coding software programs to be designed and purchased early, without concern that an upgrade would take place immediately before the compliance date, necessitating additional updates and purchases.

We responded to comments in the ICD-10 final rule that the ICD-9-CM Coordination and Maintenance Committee has jurisdiction over any action impacting the ICD-9-CM and ICD-10 code sets. Therefore, we indicated that the issue of consideration of a moratorium on updates to the ICD-9-CM, ICD-10-CM, and ICD-10-PCS code sets in anticipation of the adoption of ICD-10-CM and ICD-10-PCS would be addressed through the Committee at a future public meeting.

The code freeze was discussed at multiple meetings of the ICD-9-CM Coordination and Maintenance Committee and public comment was actively solicited. The Committee evaluated all comments from participants attending the Committee meetings as well as written comments that were received. There was an announcement at the September 15-16, 2010 ICD-9-CM Coordination and Maintenance Committee meeting that a partial freeze of both ICD-9-CM and ICD-10 codes would be implemented as follows:

• The last regular annual update to both ICD-9-CM and ICD-10 code sets will be made on October 1, 2011.

• On October 1, 2012, there will be only limited code updates to both ICD-9-CM and ICD-10 code sets to capture new technology and new diseases.

• There will be no updates to ICD-9-CM on October 1, 2013, as the system will no longer be a HIPAA standard. There will be only limited code updates to ICD-10 code sets on October 1, 2013, to capture new technology and new diseases.

• On October 1, 2014, regular updates to ICD-10 will begin.

The ICD-9-CM Coordination and Maintenance Committee announced that it would continue to meet twice a year during the freeze. At these meetings, the public will be encouraged to comment on whether or not requests for new diagnosis and procedure codes should be created based on the need to capture new technology and new diseases. Any code requests that do not meet the criteria will be evaluated for implementation within ICD-10 on or after October 1, 2014, once the partial freeze is ended.

Complete information on the partial code freeze and discussions of the issues at the Committee meetings can be found on the ICD-9-CM Coordination and Maintenance Committee Web site at:http://www.cms.gov/ICD9ProviderDiagnosticCodes/03. A summary of the September 15-16, 2010 Committee meeting, along with both written and audio transcripts of this meeting, are posted on the “Download” section of this Web page.

c. Processing of 25 Diagnosis Codes and 25 Procedure Codes on Hospital Inpatient Claims

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50127), we discussed that we had received repeated requests from the hospital community to process all 25 diagnosis codes and 25 procedure codes submitted on electronic hospital inpatient claims. Prior to January 1, 2011, hospitals could submit up to 25 diagnoses and 25 procedures; however, CMS' system limitations allowed for the processing of only the first 9 diagnoses and 6 procedures. We indicated in that final rule that, as part of our efforts to update Medicare systems prior to the implementation of ICD-10 on October 1, 2013, we were undergoing extensive system updates as part of the move to 5010, which includes the ability to accept ICD-10 codes. This complicated transition involved converting many internal systems prior to October 1, 2013, when ICD-10 will be implemented. We stated that, as one important step in this planned conversion process, we were planning to complete the expansion of our internal system capability so that we are able to process up to 25 diagnoses and 25 procedures on hospital inpatient claims as part of the HIPAA ASC X12 Technical Reports Type 3, Version 005010 (Version 5010) standards system update. We have not completed this expansion, and, as a result, we were able to process up to 25 diagnosis codes and 25 procedure codes when received on the 5010 format starting on January 1, 2011. We continue to recognize the value of the additional information provided by this coded data for multiple uses such as for payment, quality measures, outcome analysis, and other important uses.

d. ICD-10 MS-DRGs

In response to the FY 2011 IPPS/LTCH PPS proposed rule, we received comments on the creation of the ICD-10 version of the MS-DRGs, which will be implemented on October 1, 2013 (FY 2014) when we implement the reporting of ICD-10 codes (75 FR 50127 and 50128). While we did not propose an ICD-10 version of the MS-DRGs in the FY 2011 IPPS/LTCH PPS proposed rule, we noted that we have been actively involved in converting our current MS-DRGs from ICD-9-CM codes to ICD-10 codes and sharing this information through the ICD-9-CM Coordination and Maintenance Committee. We undertook this early conversion projectto assist other payers and providers in understanding how to go about their own conversion projects. We posted ICD-10 MS-DRGs based on V26.0 (FY 2009) of the MS-DRGs. We also posted a paper that describes how CMS went about completing this project and suggestions for others to follow. All of this information can be found on the CMS Web site at:http://www.cms.gov/ICD10/17_ICD10_MS_DRG_Conversion_Project.asp. We have continued to keep the public updated on our maintenance efforts for ICD-10-CM and ICD-10-PCS coding systems as well as the General Equivalence Mappings that assist in conversion through the ICD-9-CM Coordination and Maintenance Committee. Information on these committee meetings can be found at:http://www.cms.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp.

During FY 2011, we developed and posted Version 28.0 of the ICD-10 MS-DRGs based on the FY 2011 MS-DRGs (Version 28.0) that we finalized in the FY 2011 IPPS/LTCH PPS final rule on the CMS Web site. This ICD-10 MS-DRG Version 28.0 also includes the CC Exclusion List and the ICD-10 version of the hospital acquired conditions (HACs), which was not posted with Version 26.0. We also discussed this update at the September 15-16, 2010 and the March 9-10, 2011 meetings of the ICD-9-CM Coordination and Maintenance Committee. The minutes of these two meetings are posted on the CMS Web site at:http://www.cms.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp. We will continue to work with the public to explain how we are approaching the conversion of MS-DRGs to ICD-10 and will post drafts of updates as they are developed for public review. The final version of the ICD-10 MS-DRGs to be implemented in FY 2014 will be subject to notice and comment rulemaking. In the meantime, we will provide extensive and detailed information on this activity through the ICD-9-CM Coordination and Maintenance Committee.

14. Other Issues

a. O.R./Non-O.R. Status of Procedures

(1) Brachytherapy Code

We received a request that we add ICD-9-CM procedure code 92.27 (Implantation or Insertion of Radioactive Elements) [Brachytherapy] into 41 MS-DRGs that are listed below:

• 129 (Major Head and Neck Procedures with CC/MCC or Major Device)

• 130 (Major Head and Neck Procedures without CC/MCC)

• 163 (Major Chest Procedures with MCC)

• 164 (Major Chest Procedures with CC)

• 165 (Major Chest Procedures without CC/MCC)

• 180 (Respiratory Neoplasms with MCC)

• 181 (Respiratory Neoplasms with CC)

• 182 (Respiratory Neoplasms without CC/MCC)

• 326 (Stomach, Esophageal and Duodenal Procedures with MCC)

• 327 (Stomach, Esophageal and Duodenal Procedures with CC)

• 328 (Stomach, Esophageal and Duodenal Procedures without CC/MCC)

• 329 (Major Small and Large Bowel Procedures with MCC)

• 330 (Major Small and Large Bowel Procedures with CC)

• 331 (Major Small and Large Bowel Procedures without CC/MCC)

• 332 (Rectal Resection with MCC)

• 333 (Rectal Resection with CC)

• 334 (Rectal Resection without CC/MCC)

• 344 (Minor Small and Large Bowel Procedures with MCC)

• 345 (Minor Small and Large Bowel Procedures with CC)

• 346 (Minor Small and Large Bowel Procedures without CC/MCC)

• 347 (Anal and Stomal Procedures with MCC)

• 348 (Anal and Stomal Procedures with CC)

• 349 (Anal and Stomal Procedures without CC/MCC)

• 405 (Pancreas, Liver and Shunt Procedures with MCC)

• 406 (Pancreas, Liver and Shunt Procedures with CC)

• 407 (Pancreas, Liver and Shunt Procedures without CC/MCC)

• 490 (Back and Neck Procedures Except Spinal Fusion with CC/MCC or Disc Device/Neurostimulator)

• 491 (Back and Neck Procedures Except Spinal Fusion without CC/MCC)

• 500 (Soft Tissue procedures with MCC)

• 501 (Soft Tissue procedures with CC)

• 502 (Soft Tissue procedures without CC/MCC)

• 584 (Breast Biopsy, Local Excision and Other Breast Procedures with CC/MCC)

• 585 (Breast Biopsy, Local Excision and Other Breast Procedures without CC/MCC)

• 597 (Malignant Breast Disorders with MCC)

• 598 (Malignant Breast Disorders with CC)

• 599 (Malignant Breast Disorders without CC/MCC)

• 653 (Major Bladder Procedures with MCC)

• 654 (Major Bladder Procedures with CC)

• 655 (Major Bladder Procedures without CC/MCC)

• 656 (Kidney and Ureter Procedures for Neoplasm with MCC)

• 657 (Kidney and Ureter Procedures for Neoplasm with CC)

• 658 (Kidney and Ureter Procedures for Neoplasm without CC/MCC)

• 662 (Minor Bladder Procedures with MCC)

• 663 (Minor Bladder Procedures with CC)

• 664 (Minor Bladder Procedures without CC/MCC)

• 668 (Transurethral Procedures with MCC)

• 669 (Transurethral Procedures with CC)

• 670 (Transurethral Procedures without CC/MCC)

• 671 (Urethral Procedures with CC/MCC)

• 672 (Urethral Procedures without CC/MCC)

• 707 (Major Male Pelvic Procedures with CC/MCC)

• 708 (Major Male Pelvic Procedures without CC/MCC)

• 736 (Uterine and Adnexa Procedures for Ovarian or Adnexal Malignancy with MCC)

• 737 (Uterine and Adnexa Procedures for Ovarian or Adnexal Malignancy with CC)

• 738 (Uterine and Adnexa Procedures for Ovarian or Adnexal Malignancy without CC/MCC)

• 739 (Uterine and Adnexa Procedures for Nonovarian or Adnexal Malignancy with MCC)

• 740 (Uterine and Adnexa Procedures for Nonovarian or Adnexal Malignancy with CC)

• 741 (Uterine and Adnexa Procedures for Nonovarian or Adnexal Malignancy without CC/MCC)

• 746 (Vagina, Cervix and Vulva Procedures with CC/MCC)

• 747 (Vagina, Cervix and Vulva Procedures without CC/MCC)

• 748 (Female Reproductive System Reconstructive Procedures)

• 749 (Other Female Reproductive System O.R. Procedures with CC/MCC)

• 750 (Other Female Reproductive System O.R. Procedures without CC/MCC)

We examined MedPAR claims data on this request and only found 150 cases throughout these MS-DRGs. Our findings are presented in the table below.

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The numbers of cases in any of the MS-DRGs listed were minimal. Many of the MS-DRGs listed had no occurrences of procedure code 92.27. The highest number of cases found was 52, in MS-DRG 164 (Major Chest Procedures with CC). Based on these findings, we do not believe that making a MS-DRG change based on such a minimal number of cases can be justified. Therefore, we are proposing not to add procedure code 92.27 to any of the 41 MS-DRGs listed above. Further, we are not proposing any MS-DRG changes for procedure code 92.27. We welcome public comment on our proposal not to make changes to procedure code 92.27.

(2) Intraoperative Electron Radiation Therapy (IOERT)

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We received a public comment that was outside of the scope of the FY 2011 IPPS/LTCH PPS proposed rule regarding the MS-DRG assignment for intraoperative electron radiation therapy (IOERT). This issue was discussed briefly in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50128). However, we are addressing this issue in this FY 2012 proposed rule. IOERT is the direct application of radiation to a tumor and/or tumor bed while the patient is undergoing surgery for cancer. This technology may be used for cancers of the rectum, head/neck, pancreas, lung, genitourinary, soft tissue, and breast. IOERT is a secondary procedure performed during the primary tumor removal surgery.

The commenter requested that CMS update the MS-DRG assignments for procedure code 92.41 (Intraoperative electron radiation therapy) to ensure that the cost of this technology is captured in each MS-DRG involving tumor removal in the rectum, head/neck, pancreas, lung, genitourinary, soft tissue, and breast. Currently, this code is not assigned to a specific MS-DRG as the primary procedure performed, the tumor removal, would determine the appropriate MS-DRG assignment.

The commenter provided a recommended list of MS-DRGs to which IOERT should be assigned:

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Based on our review of the FY 2010 MedPAR claims data, we found a total of 12 cases with procedure code 92.41 reported. There were three cases assigned to MS-DRG 502; two cases each assigned to two different MS-DRGs: MS-DRG 333 and MS-DRG 501; and one case assigned each to five MS-DRGs: MS-DRGs 130, 168, 327, 329, and 330.

The IOERT cases were assigned to an MS-DRG that included the tumor removal of that particular site, which was listed on the table above. Therefore, the cost of this technology is appropriately identified in the MS-DRG assignment for the removal of the tumor by specific site, and no change is warranted at this time. Therefore, we are not proposing any changes to the assignment for IOERT cases. We invite public comment on our proposal to not change the assignment for IOERT cases for FY 2012.

b. IPPS Recalled Device Policy Clarification

In the FY 2008 IPPS final rule with comment period (72 FR 47246 through 47251), we discussed the topic of Medicare payment for devices that are replaced without cost or where credit for a replaced device is furnished to the hospital. We implemented a policy to reduce a hospital's IPPS payment for certain MS-DRGs where the implantation of a device that has been recalled determined the base MS-DRG assignment. At that time, we specified that we would reduce a hospital's IPPS payment for those MS-DRGs where the hospital received a credit equal to 50 percent or more of the cost of the device when a manufacturer provided a credit for a recalled device.

A similar policy was adopted under the Outpatient Prospective Payment System (OPPS) in CY 2008 (the “partial credit” policy). This policy can be viewed in its entirety at 72 FR 66743 though 66748. In general terms, under the partial credit policy, CMS reduces the amount of payment for an implanted device made under the OPPS for which CMS determines that a significant portion of the payment is attributable to the cost of an implanted device when the provider receives partial credit for the cost of a replaced device, but only where the amount of the device credit is greater than or equal to 50 percent of the cost of the new replacement device being implanted.

It has come to our attention that there is a discrepancy between the IPPS policy and the OPPS partial credit policy for replacement devices. In particular, the OPPS partial credit policy specifies that the credit must be 50 percent or greater of the cost of the replacement device. However, the IPPS policy does not specify whether the credit should be 50 percent or greater of the replacement device or the original device. We believe that the OPPS partial credit policy and the IPPS policy should be consistent with each other on the issue of whether the 50 percent or more credit is with respect to the replacement device or the original device. Therefore, we are proposing to clarify the IPPS policy to state that the policy applies where “the hospital received a credit equal to 50 percent or more of the cost of the replacement device.” We invite public comment on this proposal.

H. Recalibration of MS-DRG Weights

In developing the proposed FY 2012 system of weights, we used two data sources: Claims data and cost report data. As in previous years, the claims data source is the MedPAR file. This file is based on fully coded diagnostic and procedure data for all Medicare inpatient hospital bills. The FY 2010 MedPAR data used in this proposed rule include discharges occurring on October 1, 2009, through September 30, 2010, based on bills received by CMS through December 31, 2010, from all hospitals subject to the IPPS and short-term, acute care hospitals in Maryland (which are under a waiver from the IPPS under section 1814(b)(3) of the Act). The FY 2010 MedPAR file used in calculating the proposed relative weights includes data for approximately 10,814,950 Medicare discharges from IPPS providers. Discharges for Medicare beneficiaries enrolled in a Medicare Advantage managed care plan are excluded from this analysis. These discharges are excluded when the MedPAR “GHO Paid” indicator field on the claim record is equal to “1” or when the MedPAR DRG payment field, which represents the total payment for the claim, is equal to the MedPAR “Indirect Medical Education (IME)” payment field, indicating that the claim was an “IME only” claim submitted by a teaching hospital on behalf of a beneficiary enrolled in a Medicare Advantage managed care plan. The data exclude CAHs, including hospitals that subsequently became CAHs after the period from which the data were taken. The second data source used in the cost-based relative weighting methodology is the FY 2009 Medicare cost report data files from HCRIS (that is, cost reports beginning on or after October 1, 2008, and before October 1, 2009), which represents the most recent full set of cost report data available. We used the December 31, 2010 update of the HCRIS cost report files for FY 2009 in setting the relative cost-based weights.

The methodology we used to calculate the DRG cost-based relative weights from the FY 2010 MedPAR claims data and FY 2009 Medicare cost report data is as follows:

• To the extent possible, all the claims were regrouped using the proposed FY 2012 MS-DRG classifications discussed in sections II.B. and G. of the preamble of this proposed rule.

• The transplant cases that were used to establish the relative weights for heart and heart-lung, liver and/or intestinal, and lung transplants (MS-DRGs 001, 002, 005, 006, and 007, respectively) were limited to those Medicare-approved transplant centers that have cases in the FY 2010 MedPAR file. (Medicare coverage for heart, heart-lung, liver and/or intestinal, and lung transplants is limited to those facilities that have received approval from CMS as transplant centers.)

• Organ acquisition costs for kidney, heart, heart-lung, liver, lung, pancreas, and intestinal (or multivisceral organs) transplants continue to be paid on a reasonable cost basis. Because these acquisition costs are paid separately from the prospective payment rate, it is necessary to subtract the acquisition charges from the total charges on each transplant bill that showed acquisition charges before computing the average cost for each MS-DRG and before eliminating statistical outliers.

• Claims with total charges or total lengths of stay less than or equal to zero were deleted. Claims that had an amount in the total charge field that differed by more than $10.00 from the sum of the routine day charges, intensive care charges, pharmacy charges, special equipment charges, therapy services charges, operating room charges, cardiology charges, laboratory charges, radiology charges, other service charges, labor and delivery charges, inhalation therapy charges, emergency room charges, blood charges, and anesthesia charges were also deleted.

• At least 96.2 percent of the providers in the MedPAR file had charges for 10 of the 15 cost centers. Claims for providers that did not have charges greater than zero for at least 10 of the 15 cost centers were deleted.

• Statistical outliers were eliminated by removing all cases that were beyond 3.0 standard deviations from the mean of the log distribution of both the total charges per case and the total charges per day for each MS-DRG.

• Effective October 1, 2008, because hospital inpatient claims include a POAindicator field for each diagnosis present on the claim, only for purposes of relative weight-setting, the POA indicator field was reset to “Y” for “Yes” for all claims that otherwise have an “N” (No) or a “U” (documentation insufficient to determine if the condition was present at the time of inpatient admission) in the POA field.

Under current payment policy, the presence of specific HAC codes, as indicated by the POA field values, can generate a lower payment for the claim. Specifically, if the particular condition is present on admission (that is, a “Y” indicator is associated with the diagnosis on the claim), then it is not a HAC, and the hospital is paid for the higher severity (and, therefore, the higher weighted MS-DRG). If the particular condition is not present on admission (that is, an “N” indicator is associated with the diagnosis on the claim) and there are no other complicating conditions, the DRG GROUPER assigns the claim to a lower severity (and, therefore, the lower weighted MS-DRG) as a penalty for allowing a Medicare inpatient to contract a HAC. While the POA reporting meets policy goals of encouraging quality care and generates program savings, it presents an issue for the relative weight-setting process. Because cases identified as HACs are likely to be more complex than similar cases that are not identified as HACs, the charges associated with HACs are likely to be higher as well. Thus, if the higher charges of these HAC claims are grouped into lower severity MS-DRGs prior to the relative weight-setting process, the relative weights of these particular MS-DRGs would become artificially inflated, potentially skewing the relative weights. In addition, we want to protect the integrity of the budget neutrality process by ensuring that, in estimating payments, no increase to the standardized amount occurs as a result of lower overall payments in a previous year that stem from using weights and case-mix that are based on lower severity MS-DRG assignments. If this would occur, the anticipated cost savings from the HAC policy would be lost.

To avoid these problems, we reset the POA indicator field to “Y” only for relative weight-setting purposes for all claims that otherwise have a “N” or an “U” in the POA field. This resetting “forced” the more costly HAC claims into the higher severity MS-DRGs as appropriate, and the relative weights calculated for each MS-DRG more closely reflect the true costs of those cases.

Once the MedPAR data were trimmed and the statistical outliers were removed, the charges for each of the 15 cost groups for each claim were standardized to remove the effects of differences in area wage levels, IME and DSH payments, and for hospitals in Alaska and Hawaii, the applicable cost-of-living adjustment. Because hospital charges include charges for both operating and capital costs, we standardized total charges to remove the effects of differences in geographic adjustment factors, cost-of-living adjustments, and DSH payments under the capital IPPS as well. Charges were then summed by MS-DRG for each of the 15 cost groups so that each MS-DRG had 15 standardized charge totals. These charges were then adjusted to cost by applying the national average CCRs developed from the FY 2009 cost report data.

The 15 cost centers that we used in the relative weight calculation are shown in the following table. The table shows the lines on the cost report and the corresponding revenue codes that we used to create the 15 national cost center CCRs.

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We developed the national average CCRs as follows:

Taking the FY 2009 cost report data, we removed CAHs, Indian Health Service hospitals, all-inclusive rate hospitals, and cost reports that represented time periods of less than 1 year (365 days). We included hospitals located in Maryland as we are including their charges in our claims database. We then created CCRs for each provider for each cost center (see prior table for line items used in the calculations) and removed any CCRs that were greater than 10 or less than 0.01. We normalized the departmental CCRs by dividing the CCR for each department by the total CCR for the hospital for the purpose of trimming the data. We then took the logs of the normalized cost center CCRs and removed any cost center CCRs where the log of the cost center CCR was greater or less than the mean log plus/minus 3 times the standard deviation for the log of that cost center CCR. Once the cost report data were trimmed, we calculated a Medicare-specific CCR. The Medicare-specific CCR was determined by taking the Medicare charges for each line item from Worksheet D-4 and deriving the Medicare-specific costs by applying the hospital-specific departmental CCRs to the Medicare-specific charges for each line item from Worksheet D-4. Once each hospital's Medicare-specific costs were established, we summed the total Medicare-specific costs and divided by the sum of the total Medicare-specific charges to produce national average, charge-weighted CCRs.

After we multiplied the total charges for each MS-DRG in each of the 15 cost centers by the corresponding national average CCR, we summed the 15 “costs” across each MS-DRG to produce a total standardized cost for the MS-DRG. The average standardized cost for each MS-DRG was then computed as the total standardized cost for the MS-DRG divided by the transfer-adjusted case count for the MS-DRG. The average cost for each MS-DRG was then divided by the national average standardized cost per case to determine the relative weight.

The new cost-based relative weights were then normalized by an adjustment factor of 1.5798292955 so that the average case weight after recalibration was equal to the average case weight before recalibration. The normalization adjustment is intended to ensure that recalibration by itself neither increases nor decreases total payments under the IPPS, as required by section 1886(d)(4)(C)(iii) of the Act.

The 15 proposed national average CCRs for FY 2012 are as follows:

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Since FY 2009, the relative weights have been based on 100 percent cost weights based on our MS-DRG grouping system.

When we recalibrated the DRG weights for previous years, we set a threshold of 10 cases as the minimum number of cases required to compute a reasonable weight. In this FY 2012 IPPS/LTCH PPS proposed rule, we are proposing to use that same case threshold in recalibrating the MS-DRG weights for FY 2012. Using the FY 2010 MedPAR data set, there are 8 MS-DRGs that contain fewer than 10 cases. Under the MS-DRGs, we have fewer low-volume DRGs than under the CMS DRGs because we no longer have separate DRGs for patients age 0 to 17 years. With the exception of newborns, we previously separated some DRGs based on whether the patient was age 0 to 17 years or age 17 years and older. Other than the age split, cases grouping to these DRGs are identical. The DRGs for patients age 0 to 17 years generally have very low volumes because children are typically ineligible for Medicare. In the past, we have found that the low volume of cases for the pediatric DRGs could lead to significant year-to-year instability in their relative weights. Although we have always encouraged non-Medicare payers to develop weights applicable to their own patient populations, we have heard frequent complaints from providers about the use of the Medicare relative weights in the pediatric population. We believe that eliminating this age split in the MS-DRGs will provide more stable payment for pediatric cases by determining their payment using adult cases that are much higher in total volume. Newborns are unique and require separate MS-DRGs that are not mirrored in the adult population. Therefore, it remains necessary to retain separate MS-DRGs for newborns. All of the low-volume MS-DRGs listed below are for newborns. In FY 2012, because we do not have sufficient MedPAR data to set accurate and stable cost weights for these low-volume MS-DRGs, we areproposing to compute weights for the low-volume MS-DRGs by adjusting their FY 2011 weights by the percentage change in the average weight of the cases in other MS-DRGs. The crosswalk table is shown below:

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I. Proposed Add-On Payments for New Services and Technologies

1. Background

Sections 1886(d)(5)(K) and (L) of the Act establish a process of identifying and ensuring adequate payment for new medical services and technologies (sometimes collectively referred to in this section as “new technologies”) under the IPPS. Section 1886(d)(5)(K)(vi) of the Act specifies that a medical service or technology will be considered new if it meets criteria established by the Secretary after notice and opportunity for public comment. Section 1886(d)(5)(K)(ii)(I) of the Act specifies that a new medical service or technology may be considered for new technology add-on payment if, “based on the estimated costs incurred with respect to discharges involving such service or technology, the DRG prospective payment rate otherwise applicable to such discharges under this subsection is inadequate.” We note that beginning with discharges occurring in FY 2008, CMS transitioned from CMS-DRGs to MS-DRGs.

The regulations implementing these provisions specify three criteria for a new medical service or technology to receive the additional payment: (1) The medical service or technology must be new; (2) the medical service or technology must be costly such that the DRG rate otherwise applicable to discharges involving the medical service or technology is determined to be inadequate; and (3) the service or technology must demonstrate a substantial clinical improvement over existing services or technologies. Thesethree criteria are explained below in the ensuing paragraphs in further detail.

Under the first criterion, as reflected in 42 CFR 412.87(b)(2), a specific medical service or technology will be considered “new” for purposes of new medical service or technology add-on payments until such time as Medicare data are available to fully reflect the cost of the technology in the MS-DRG weights through recalibration. Typically, there is a lag of 2 to 3 years from the point a new medical service or technology is first introduced on the market (generally on the date that the technology receives FDA approval/clearance) and when data reflecting the use of the medical service or technology are used to calculate the MS-DRG weights. For example, data from discharges occurring during FY 2010 are used to calculate the FY 2012 MS-DRG weights in this proposed rule. Section 412.87(b)(2) of the regulations therefore provides that “a medical service or technology may be considered new within 2 or 3 years after the point at which data begin to become available reflecting the ICD-9-CM code assigned to the new medical service or technology (depending on when a new code is assigned and data on the new medical service or technology become available for DRG recalibration). After CMS has recalibrated the MS-DRGs, based on available data to reflect the costs of an otherwise new medical service or technology, the medical service or technology will no longer be considered `new' under the criterion for this section.”

The 2-year to 3-year period during which a medical service or technology can be considered new would ordinarily begin on the date on which the medical service or technology received FDA approval or clearance. (We note that, for purposes of this section of this proposed rule, we generally refer to both FDA approval and FDA clearance as FDA “approval.”) However, in some cases, there may be few to no Medicare data available for the new service or technology following FDA approval. For example, the newness period could extend beyond the 2-year to 3-year period after FDA approval is received in cases where the product initially was generally unavailable to Medicare patients following FDA approval, such as in cases of a national noncoverage determination or a documented delay in bringing the product onto the market after that approval (for instance, component production or drug production has been postponed following FDA approval due to shelf life concerns or manufacturing issues). After the MS-DRGs have been recalibrated to reflect the costs of an otherwise new medical service or technology, the medical service or technology is no longer eligible for special add-on payment for new medical services or technologies (as specified under § 412.87(b)(2)). For example, an approved new technology that received FDA approval in October 2009 and entered the market at that time may be eligible to receive add-on payments as a new technology for discharges occurring before October 1, 2012 (the start of FY 2013). Because the FY 2013 MS-DRG weights would be calculated using FY 2011 MedPAR data, the costs of such a new technology would be fully reflected in the FY 2013 MS-DRG weights. Therefore, the new technology would no longer be eligible to receive add-on payments as a new technology for discharges occurring in FY 2013 and thereafter.

We do not consider a service or technology to be new if it is substantially similar to one or more existing technologies. That is, even if a technology receives a new FDA approval, it may not necessarily be considered “new” for purposes of new technology add-on payments if it is “substantially similar” to a technology that was approved by FDA and has been on the market for more than 2 to 3 years. In the FY 2006 IPPS final rule (70 FR 47351), we explained our policy regarding substantial similarity in detail and its relevance for assessing if the hospital charge data used in the development of the relative weights for the relevant DRGs reflect the costs of the technology. In that final rule, we stated that, for determining substantial similarity, we consider (1) Whether a product uses the same or a similar mechanism of action to achieve a therapeutic outcome, and (2) whether a product is assigned to the same or a different DRG. We indicated that both of the above criteria should be met in order for a technology to be considered “substantially similar” to an existing technology. However, in that same final rule, we also noted that, due to the complexity of issues regarding the substantial similarity component of the newness criterion, it may be necessary to exercise flexibility when considering whether technologies are substantially similar to one another. Specifically, we stated that we may consider additional factors, depending on the circumstances specific to each application.

In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43813 and 43814), we noted that the discussion of substantial similarity in the FY 2006 IPPS final rule related to comparing two separate technologies made by different manufacturers. Nevertheless, we stated that the criteria discussed in the FY 2006 IPPS final rule also are relevant when comparing the similarity between a new use and existing uses of the same technology (or a very similar technology manufactured by the same manufacturer). In other words, we stated that it is necessary to establish that the new indication for which the technology has received FDA approval is not substantially similar to that of the prior indication. We explained that such a distinction is necessary to determine the appropriate start date of the newness period in evaluating whether the technology would qualify for add-on payments (that is, the date of the “new” FDA approval or that of the prior approval), or whether the technology could qualify for separate new technology add-on payments under each indication.

In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43814), we added a third factor of consideration to our analysis of whether a new technology is substantially similar to one or more existing technologies. Specifically, in making a determination of whether a technology is substantially similar to an existing technology, we adopted a policy to consider whether the new use of the technology involves the treatment of the same or similar type of disease and the same or similar patient population (74 FR 24130), in addition to considering the already established factors described in the FY 2006 IPPS final rule (that is, (1) whether a product uses the same or a similar mechanism of action to achieve a therapeutic outcome; and (2) whether a product is assigned to the same or a different DRG). As we noted in the FY 2010 IPPS/RY 2010 LTCH PPS final rule, if all three components are present and the new use is deemed substantially similar to one or more of the existing uses of the technology (that is, beyond the newness period), we would conclude that the technology is not new and, therefore, is ineligible for the new technology add-on payment.

Under the second criterion, § 412.87(b)(3) further provides that, to be eligible for the add-on payment for new medical services or technologies, the MS-DRG prospective payment rate otherwise applicable to the discharge involving the new medical services or technologies must be assessed for adequacy. Under the cost criterion, to assess the adequacy of payment for a new technology paid under the applicable MS-DRG prospective payment rate, we evaluate whether the charges for cases involving the new technology exceed certain thresholdamounts. In the FY 2004 IPPS final rule (68 FR 45385), we established the threshold at the geometric mean standardized charge for all cases in the MS-DRG plus 75 percent of 1 standard deviation above the geometric mean standardized charge (based on the logarithmic values of the charges and converted back to charges) for all cases in the MS-DRG to which the new medical service or technology is assigned (or the case-weighted average of all relevant MS-DRGs, if the new medical service or technology occurs in more than one MS-DRG).

However, section 503(b)(1) of Public Law 108-173 amended section 1886(d)(5)(K)(ii)(I) of the Act to provide that, beginning in FY 2005, CMS will apply “a threshold * * * that is the lesser of 75 percent of the standardized amount (increased to reflect the difference between cost and charges) or 75 percent of one standard deviation for the diagnosis-related group involved.” (We refer readers to section IV.D. of the preamble to the FY 2005 IPPS final rule (69 FR 49084) for a discussion of the revision of the regulations to incorporate the change made by section 503(b)(1) of Pub. L. 108-173.) Table 10 that was included in the IPPS/LTCH PPS final rule published in the Federal Register on August 16, 2010, contained the final thresholds that were used to evaluate applications for new technology add-on payments for this proposed rule for FY 2012 (75 FR 50605 through 50613).

In the September 7, 2001 final rule that established the new technology add-on payment regulations (66 FR 46917), we discussed the issue of whether the Health Insurance Portability and Accountability Act (HIPAA) Privacy Rule at 45 CFR Parts 160 and 164 applies to claims information that providers submit with applications for new technology add-on payments. Specifically, we explained that health plans, including Medicare, and providers that conduct certain transactions electronically, including hospitals that would receive new technology add-on payments, are required to comply with the HIPAA Privacy Rule. We further explained how such entities could meet the applicable HIPAA requirements by discussing how the HIPAA Privacy Rule permitted providers to share with health plans information needed to ensure correct payment, if they had obtained consent from the patient to use that patient's data for treatment, payment, or health care operations. We also explained that, because the information to be provided within applications for new technology add-on payment would be needed to ensure correct payment, no additional consent would be required. The HHS Office for Civil Rights has since amended the HIPAA Privacy Rule, but the results remain. The HIPAA Privacy Rule does not require a covered entity to obtain consent from patients to use or disclose protected health information for the covered entity's treatment, payment, or health care operations purposes, and expressly permits such entities to use or to disclose protected health information for these purposes and for the treatment purposes of another health care provider and the payment purposes of another covered entity or health care provider. (We refer readers to 45 CFR 164.502(a)(1)(ii) and 164.506(c)(1) and (c)(3) and the Standards for Privacy of Individually Identifiable Health Information published in the Federal Register(67 FR 53208 through 53214) on August 14, 2002, for a full discussion of consent in the context of the HIPAA Privacy Rule.)

Under the third criterion, § 412.87(b)(1) of our existing regulations provides that a new technology is an appropriate candidate for an additional payment when it represents “an advance that substantially improves, relative to technologies previously available, the diagnosis or treatment of Medicare beneficiaries.” For example, a new technology represents a substantial clinical improvement when it reduces mortality, decreases the number of hospitalizations or physician visits, or reduces recovery time compared to the technologies previously available. (We refer readers to the September 7, 2001 final rule for a complete discussion of this criterion (66 FR 46902).)

The new medical service or technology add-on payment policy under the IPPS provides additional payments for cases with relatively high costs involving eligible new medical services or technologies while preserving some of the incentives inherent under an average-based prospective payment system. The payment mechanism is based on the cost to hospitals for the new medical service or technology. Under § 412.88, if the costs of the discharge (determined by applying cost to charge ratios (“CCRs”) as described in § 412.84(h)) exceed the full DRG payment (including payments for IME and DSH, but excluding outlier payments), Medicare will make an add-on payment equal to the lesser of: (1) 50 percent of the estimated costs of the new technology (if the estimated costs for the case including the new technology exceed Medicare's payment); or (2) 50 percent of the difference between the full DRG payment and the hospital's estimated cost for the case. Unless the discharge qualifies for an outlier payment, Medicare payment is limited to the full MS-DRG payment plus 50 percent of the estimated costs of the new technology.

Section 1886(d)(4)(C)(iii) of the Act requires that the adjustments to annual MS-DRG classifications and relative weights be made in a manner that ensures that aggregate payments to hospitals are not more or less than they were in the prior fiscal year (i.e., they are “budget neutral”). Therefore, in the past, we accounted for projected payments under the new medical service and technology provision during the upcoming fiscal year, while at the same time estimating the payment effect of changes to the MS-DRG classifications and recalibration. The impact of additional payments under this provision was then included in the budget neutrality factor, which was applied to the standardized amounts and the hospital-specific amounts. However, section 503(d)(2) of Public Law 108-173 provides that there shall be no reduction or adjustment in aggregate payments under the IPPS due to add-on payments for new medical services and technologies. Therefore, in accordance with section 503(d)(2) of Public Law 108-173, add-on payments for new medical services or technologies for FY 2005 and later years have not been subjected to budget neutrality.

In the FY 2009 IPPS final rule (73 FR 48561 through 48563), we modified our regulations at § 412.87 to codify our longstanding practice of how CMS evaluates the eligibility criteria for new medical service or technology add-on payment applications. That is, we first determine whether a medical service or technology meets the newness criteria, and only if so, do we then make a determination as to whether the technology meets the cost threshold and represents a substantial clinical improvement over existing medical services or technologies. We also amended § 412.87(c) to specify that all applicants for new technology add-on payments must have FDA approval or clearance for their new medical service or technology by July 1 of each year prior to the beginning of the fiscal year that the application is being considered.

The Council on Technology and Innovation (CTI) at CMS oversees the agency's cross-cutting priority on coordinating coverage, coding and payment processes for Medicare with respect to new technologies and procedures, including new drug therapies, as well as promoting the exchange of information on new technologies between CMS and otherentities. The CTI, composed of senior CMS staff and clinicians, was established under section 942(a) of Public Law 108-173. The Council is co-chaired by the Director of the Office of Clinical Standards and Quality (OCSQ) and the Director of the Center for Medicare (CM), who is also designated as the CTI's Executive Coordinator.

The specific processes for coverage, coding, and payment are implemented by CM, OCSQ, and the local claims-payment contractors (in the case of local coverage and payment decisions). The CTI supplements, rather than replaces, these processes by working to assure that all of these activities reflect the agency-wide priority to promote high-quality, innovative care. At the same time, the CTI also works to streamline, accelerate, and improve coordination of these processes to ensure that they remain up to date as new issues arise. To achieve its goals, the CTI works to streamline and create a more transparent coding and payment process, improve the quality of medical decisions, and speed patient access to effective new treatments. It is also dedicated to supporting better decisions by patients and doctors in using Medicare-covered services through the promotion of better evidence development, which is critical for improving the quality of care for Medicare beneficiaries.

CMS plans to continue its Open Door forums with stakeholders who are interested in CTI's initiatives. In addition, to improve the understanding of CMS' processes for coverage, coding, and payment and how to access them, the CTI has developed an “Innovator's Guide” to these processes. The intent is to consolidate this information, much of which is already available in a variety of CMS documents and in various places on the CMS Web site, in a user-friendly format. This guide was published in August 2008 and is available on the CMS Web site at:http://www.cms.gov/CouncilonTechInnov/Downloads/InnovatorsGuide5_10_10.pdf.

As we indicated in the FY 2009 IPPS final rule (73 FR 48554), we invite any product developers or manufacturers of new medical technologies to contact the agency early in the process of product development if they have questions or concerns about the evidence that would be needed later in the development process for the agency's coverage decisions for Medicare.

The CTI aims to provide useful information on its activities and initiatives to stakeholders, including Medicare beneficiaries, advocates, medical product manufacturers, providers, and health policy experts. Stakeholders with further questions about Medicare's coverage, coding, and payment processes, or who want further guidance about how they can navigate these processes, can contact the CTI at CTI@cms.hhs.gov.

We note that applicants for add-on payments for new medical services or technologies for FY 2013 must submit a formal request, including a full description of the clinical applications of the medical service or technology and the results of any clinical evaluations demonstrating that the new medical service or technology represents a substantial clinical improvement, along with a significant sample of data to demonstrate that the medical service or technology meets the high-cost threshold. Complete application information, along with final deadlines for submitting a full application, will be posted as it becomes available on the CMS Web site at:http://www.cms.hhs.gov/AcuteInpatientPPS/08_newtech.asp. To allow interested parties to identify the new medical services or technologies under review before the publication of the proposed rule for FY 2013, the Web site also will post the tracking forms completed by each applicant.

2. Public Input Before Publication of a Notice of Proposed Rulemaking on Add-On Payments

Section 1886(d)(5)(K)(viii) of the Act, as amended by section 503(b)(2) of Public Law 108-173, provides for a mechanism for public input before publication of a notice of proposed rulemaking regarding whether a medical service or technology represents a substantial clinical improvement or advancement. The process for evaluating new medical service and technology applications requires the Secretary to—

• Provide, before publication of a proposed rule, for public input regarding whether a new service or technology represents an advance in medical technology that substantially improves the diagnosis or treatment of Medicare beneficiaries;

• Make public and periodically update a list of the services and technologies for which applications for add-on payments are pending;

• Accept comments, recommendations, and data from the public regarding whether a service or technology represents a substantial clinical improvement; and

• Provide, before publication of a proposed rule, for a meeting at which organizations representing hospitals, physicians, manufacturers, and any other interested party may present comments, recommendations, and data regarding whether a new medical service or technology represents a substantial clinical improvement to the clinical staff of CMS.

In order to provide an opportunity for public input regarding add-on payments for new medical services and technologies for FY 2012 prior to publication of the FY 2012 IPPS/LTCH PPS proposed rule, we published a notice in the Federal Register on November 29, 2010 (75 FR 73091 through 73094), and held a town hall meeting at the CMS Headquarters Office in Baltimore, MD, on February 2, 2011. In the announcement notice for the meeting, we stated that the opinions and alternatives provided during the meeting would assist us in our evaluations of applications by allowing public discussion of the substantial clinical improvement criterion for each of the FY 2012 new medical service and technology add-on payment applications before the publication of the FY 2012 proposed rule.

Approximately 50 individuals registered to attend the town hall meeting in person, while additional individuals listened over an open telephone line. Each of the three FY 2012 applicants presented information on its technology, including a discussion of data reflecting the substantial clinical improvement aspect of the technology. We considered each applicant's presentation made at the town hall meeting, as well as written comments submitted on the applications, in our evaluation of the new technology add-on applications for FY 2012 in this proposed rule.

In response to the published notice and the new technology town hall meeting, we received three written comments regarding applications for FY 2012 new technology add-on payments. We summarize these comments or, if applicable, indicate that there were no comments received, at the end of each discussion of the individual applications in this proposed rule.

Comment: A number of attendees at the new technology town hall meeting provided comments that were unrelated to “substantial clinical improvement.”

Response: As explained above and in the Federal Register notice announcing the meeting (75 FR 73091), the purpose of the new technology town hall meeting was specifically to discuss substantial clinical improvement of pending new technology applications for FY 2012. Therefore, we are not summarizing those comments in this proposed rule. Commenters are welcome to resubmit these comments inresponse to proposals in this proposed rule.

Comment: One commenter, a major device association, requested that CMS provide more flexibility for the substantial clinical improvement criteria by allowing new technologies to demonstrate a substantial likelihood that clinical improvement will result. The commenter believed that this request was not unreasonable, given the fact that conclusive evidence would not necessarily be available in the short period of time for which an add-on payment would be available. The commenter also suggested that CMS consider a broader range of evidence in assessing whether a new technology meets the test of providing substantial clinical improvement over an older technology.

Response: As stated in the 2001 new technology add-on payment final rule (66 FR 46913), we believe that the “substantial clinical improvement” criterion is intended “to limit these special payments for those technologies that afford clear improvements over the use of previously available technologies.” We believe that special payments for new technology should be limited to those new technologies that have been demonstrated to represent a substantial clinical improvement in caring for Medicare beneficiaries, such that there is a clear advantage to creating a payment incentive for physicians and hospitals to utilize the new technology. If such an improvement is not demonstrated, we continue to believe the incentives of the MS-DRG system provide a useful balance to the introduction of new technologies. In that regard, we point out that various new technologies introduced over the years have been demonstrated to have been less effective than initially thought, or in some cases even potentially harmful. We believe it is in the best interest of Medicare beneficiaries for CMS to proceed carefully with respect to the incentives created to quickly adopt new technologies.

With respect to the comment that CMS should consider a broader range of evidence in assessing whether a new technology meets the test of providing substantial clinical improvement over an older technology, we accept different types of data (for example, peer-reviewed articles, study results, or letters from major associations, among others) that demonstrate and support the substantial clinical improvement associated with the new technology. In addition to clinical data, we will consider any evidence that would support the substantial clinical improvement associated with a new technology. Therefore, we believe we already consider an appropriate range of evidence as the commenter has requested.

Comment: One commenter stated that, while it appreciated that new technology add-on payments are intended to encourage innovation, CMS' application of the substantial clinical improvement criterion fails to account for how many technological advances may occur in practice. The commenter expressed confidence that many recent design improvements in medical devices represent significant advances in clinical utility of older/established technologies, and indicated CMS may fail to recognize these improvements in the current context of applying add-on payments.

Response: As discussed above, a service or technology is not “new” for purposes of the new technology add-on payment if it is substantially similar to one or more existing technologies. That is, even if a technology receives a new FDA approval, it may not necessarily be considered “new” for purposes of new technology add-on payments if it is “substantially similar” to a technology that was approved by FDA and has been on the market for more than 2 to 3 years. To determine substantial similarity, we consider (1) Whether a product uses the same or a similar mechanism of action to achieve a therapeutic outcome, (2) whether a product is assigned to the same or a different DRG and (3) whether the new use of the technology involves the treatment of the same or similar type of disease and the same or similar patient population. As we noted in the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43813 through 43814), if all three components are present and the new use is deemed substantially similar to one or more of the existing uses of the technology (that is, beyond the newness period), we would conclude that the technology is not new and, therefore, is ineligible for the new technology add-on payment. A complete discussion of the substantial similarity criteria and policy can be found in the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43813 through 43814)

Comment: One commenter believed that CMS has narrowly interpreted the statutory criteria for granting new technology add-on payments, which has created a situation in which it has become increasingly difficult for new technologies to qualify for this add-on payment. The commenter asserted that the criteria are so steep and the process so opaque that many companies, especially small companies, cannot afford to undertake the process at all. The commenter recommended that CMS continue to engage stakeholders to improve the new technology add-on payment process. The commenter also recommended that CMS consider creating additional guidance to further clarify the requirements as to what qualifies as a new technology. The commenter believed that additional guidance could provide greater certainty and predictability for many companies developing novel technologies.

Response: We believe it is important to maintain an open dialogue on the IPPS new technology add-on payment process, as well as the broader issue of how new technology is introduced into all of the Medicare payment systems. As announced in a notice published in the Federal Register(75 FR 73091 through 73094), on February 2, 2011, prior to the new technology town hall meeting, we held an informational workshop for the general public that gave an overview on the processes of the new technology provisions in both the inpatient hospital and outpatient hospital settings, in addition to the procedures involved with ICD-9-CM coding and MS-DRG reassignment under the IPPS. We believe that our annual new technology town hall meeting and rulemaking process (including the posting of the applicants' tracking forms on the CMS Web site) allow for an ongoing dialogue between CMS and the public on the new technology add-on payment process. Furthermore, we are willing to meet with potential applicants prior to and after an application has been submitted in order to ensure an application meets the submission requirements and to provide technical feedback on an applicant's application.

In reference to the commenter's general statement that CMS' interpretation of the statutory criteria has been narrowly cited, we are interested in and welcome comment on any specific criteria or data quality standards that commenters believe we should adopt to improve the new technology add-on application process, or any concerns or challenges that commenters believe we may encounter in undertaking this effort. Again, as we stated at the new technology town hall meeting, we are interested in working with stakeholders to improve the inpatient new technology add-on payment process. We are interested in ensuring that the latest medical technology that improves care for the Medicare patient population continues to be available to our beneficiaries. In addition, we invite potential applicants to contact CMS with any specific questions or concerns they may have prior to the submission of theirapplication for new technology add-on payment.

3. FY 2012 Status of Technologies Approved for FY 2011 Add-On Payments

a. Spiration® IBV® Valve System

Spiration, Inc. submitted an application for new technology add-on payments for the Spiration® IBV® Valve System (Spiration® IBV®). The Spiration® IBV® is a device that is used to place, via bronchoscopy, small, one-way valves into selected small airways in the lung in order to limit airflow into selected portions of lung tissue that have prolonged air leaks following surgery while still allowing mucus, fluids, and air to exit, thereby reducing the amount of air that enters the pleural space. The device is intended to control prolonged air leaks following three specific surgical procedures: Lobectomy; segmentectomy; or lung volume reduction surgery (LVRS). According to the applicant, an air leak that is present on postoperative day 7 is considered “prolonged” unless present only during forced exhalation or cough. In order to help prevent valve migration, there are five anchors with tips that secure the valve to the airway. The implanted valves are intended to be removed no later than 6 weeks after implantation.

With regard to the newness criterion, the Spiration® IBV® received a HDE approval from the FDA on October 24, 2008. We were unaware of any previously FDA-approved predicate devices, or otherwise similar devices, that could be considered substantially similar to the Spiration® IBV®. However, the applicant asserted that the FDA had precluded the device from being used in the treatment of any patients until the Institutional Review Board (IRB) granted approvals regarding its study sites. Therefore, the Spiration® IBV® met the newness criterion once it obtained at least one IRB approval because the device would then be available on the market to treat Medicare beneficiaries. In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43819), the applicant stated that the first IRB approval for the Spiration® IBV® was March 12, 2009. In that final rule, based on the information above from the applicant, we determined that the Spiration® IBV® meets the newness criterion and the newness period for the Spiration® IBV® begins on March 12, 2009.

After evaluation of the newness, costs, and substantial clinical improvement criteria for new technology payments for the Spiration® IBV® and consideration of the public comments we received in response to the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, including the additional analysis of clinical data and supporting information submitted by the applicant, we approved the Spiration® IBV® for new technology add-on payments for FY 2010 with a maximum add-on payment of $3,437.50.

In the FY 2011 IPPS/LTCH PPS proposed rule, we did not propose any changes to the new technology add-on payments for the Spiration® IBV®. We did not receive any public comments on whether to continue or discontinue the new technology add-on payment for the Spiration® IBV® for FY 2011. Therefore, for FY 2011, we continued new technology add-on payments for cases involving the Spiration® IBV® in FY 2011, with a maximum add-on payment of $3,437.50.

The new technology add-on payment regulations provide that “a medical service or technology may be considered new within 2 or 3 years after the point at which data begin to become available reflecting the ICD-9-CM code assigned to the new medical service or technology” (42 CFR 412.87(b)(2)). Our practice has been to begin and end new technology add-on payments on the basis of a fiscal year, and we have generally followed a guideline that uses a 6-month window before and after the start of the fiscal year to determine whether to extend the new technology add-on payment for an additional fiscal year. In general, we extend add-on payments for an additional year only if the 3-year anniversary date of the product's entry on the market occurs in the latter half of the fiscal year (70 FR 47362). With regard to the newness criterion for the Spiration® IBV®, as stated above, we consider the beginning of the newness period for the device to have commenced on the date of the first IRB approval for the Spiration® IBV®, which was March 12, 2009. For FY 2012, as of March 12, 2012, the Spiration® IBV® will have been on the market for 3 years, and is therefore no longer considered “new” as of March 12, 2012. Because the 3-year anniversary date of the Spiration® IBV®'s entry onto the market will occur in the first half of the fiscal year, we are proposing to discontinue its new technology add-on payment for FY 2012.

b. CardioWest TM Temporary Total Artificial Heart System (CardioWest TM TAH-t)

SynCardia Systems, Inc. submitted an application for approval of the CardioWest TM Temporary Total Artificial Heart System (TAH-t) in FY 2009. The TAH-t is a technology that is used as a bridge to heart transplant device for heart transplant-eligible patients with end-stage biventricular failure. The TAH-t pumps up to 9.5 liters of blood per minute. This high level of perfusion helps improve hemodynamic function in patients, thus making them better heart transplant candidates.

The TAH-t was approved by the FDA on October 15, 2004, for use as a bridge to transplant device in cardiac transplant-eligible candidates at risk of imminent death from biventricular failure. The TAH-t is intended to be used in hospital inpatients. One of the FDA's post-approval requirements is that the manufacturer agrees to provide a post-approval study demonstrating that success of the device at one center can be reproduced at other centers. The study was to include at least 50 patients who would be followed up to 1 year, including (but not limited to) the following endpoints: Survival to transplant; adverse events; and device malfunction.

In the past, Medicare did not cover artificial heart devices, including the TAH-t. However, on May 1, 2008, CMS issued a final national coverage determination (NCD) expanding Medicare coverage of artificial hearts when they are implanted as part of a study that is approved by the FDA and is determined by CMS to meet CMS' Coverage with Evidence Development (CED) clinical research criteria. (The final NCD is available on the CMS Web site at:http://www.cms.hhs.gov/mcd/viewdecisionmemo.asp?id=211.)

We indicated in the FY 2009 IPPS final rule (73 FR 48555) that, because Medicare's previous coverage policy with respect to this device had precluded payment from Medicare, we did not expect the costs associated with this technology to be currently reflected in the data used to determine the relative weights of MS-DRGs. As we have indicated in the past, and as we discussed in the FY 2009 IPPS final rule, although we generally believe that the newness period would begin on the date that FDA approval was granted, in cases where the applicant can demonstrate a documented delay in market availability subsequent to FDA approval, we would consider delaying the start of the newness period. This technology's situation represented such a case. We also noted that section 1886(d)(5)(K)(ii)(II) of the Act requires that we provide for the collection of cost data for a new medical service or technology for a period of at least 2 years and no more than 3 years “beginning on the date on which an inpatient hospital code is issued withrespect to the service or technology.” Furthermore, the statute specifies that the term “inpatient hospital code” means any code that is used with respect to inpatient hospital services for which payment may be made under the IPPS and includes ICD-9-CM codes and any subsequent revisions. Although the TAH-t has been described by the ICD-9-CM code(s) since the time of its FDA approval, because the TAH-t had not been covered under the Medicare program (and, therefore, no Medicare payment had been made for this technology), this code could not be “used with respect to inpatient hospital services for which payment” is made under the IPPS, and thus we assumed that none of the costs associated with this technology would be reflected in the Medicare claims data used to recalibrate the MS-DRG relative weights for FY 2009. For this reason, as discussed in the FY 2009 IPPS final rule, despite the FDA approval date of the technology, we determined that TAH-t would still be eligible to be considered “new” for purposes of the new technology add-on payment because the TAH-t met the newness criterion on the date that Medicare coverage began, consistent with issuance of the final NCD, effective on May 1, 2008.

After evaluation of the newness, costs, and substantial clinical improvement criteria for new technology add-on payments for the TAH-t and consideration of the public comments we received in response to the FY 2009 IPPS proposed rule, we approved the TAH-t for new technology add-on payments for FY 2009 (73 FR 48557). We also continued to make new technology add-on payments for the TAH-t in FY 2010 and FY 2011.

We describe the new technology add-on payment requirements with regard to newness above. With regard to the newness criterion for the TAH-t, as stated above, we consider the beginning of the newness period for the device to have commenced from the Medicare NCD date of May 1, 2008; it is no longer considered new as of May 11, 2011. Because the 3-year anniversary date of the TAH-t will occur prior to the start of FY 2012, we are proposing to discontinue the new technology add-on payment for the TAH-t in FY 2012.

c. Auto Laser Interstitial Thermal Therapy (AutoLITT [TM] ) System

Monteris Medical submitted an application for new technology add-on payments for FY 2011 for the AutoLITT [TM] . AutoLITT [TM] is a minimally invasive, MRI-guided laser tipped catheter designed to destroy malignant brain tumors with interstitial thermal energy causing immediate coagulation and necrosis of diseased tissue. The technology can be identified by ICD-9-CM procedure codes 17.61 (Laser interstitial thermal therapy [LITT] of lesion or tissue of brain under guidance), and 17.62 (Laser interstitial thermal therapy [LITT] of lesion or tissue of head and neck under guidance), which became effective on October 1, 2009.

The AutoLITT [TM] received a 510K FDA clearance in May 2009. The AutoLITT [TM] is indicated for use to necrotize or coagulate soft tissue through interstitial irradiation or thermal therapy in medicine and surgery in the discipline of neurosurgery with 1064 nm lasers. The AutoLITT [TM] may be used in patients with glioblastoma multiforme brain (GBM) tumors. The applicant stated in its application and through supplemental information that, due to required updates, the technology was actually introduced to the market in December 2009. The applicant explained that it was necessary to reduce the thermal damage lines from three to one and complete International Electrotechnical Commission/Underwriter Laboratory testing, which led to the introduction of the technology to the market in December 2009, although the technology was approved by FDA in May 2009. The applicant also stated through supplementary information to its application that the first sale of the product took place on March 19, 2010. However, because the product was already available for use in December 2009, it appears that the newness date would begin in December 2009. In the FY 2011 IPPS/LTCH PPS proposed rule, we welcomed public comments on this issue.

After evaluation of the newness, costs, and substantial clinical improvement criteria for new technology payments for the AutoLITT [TM] and consideration of the public comments we received in response to the FY 2011 IPPS/RY 2011 LTCH PPS proposed rule, including the additional analysis of clinical data and supporting information submitted by the applicant, we approved the AutoLITT [TM] for new technology add-on payments for FY 2011. Consistent with the applicant's clinical trial, the add-on payment is intended only for use of the device in cases of Glioblastoma Multiforme. Therefore, we limited the new technology add-on payment to cases involving the AutoLITT [TM] in MS-DRGs 025 (Craniotomy and Endovascular Intracranial Procedures with MCC), 026 (Craniotomy and Endovascular Intracranial Procedures with CC), and 027 (Craniotomy and Endovascular Intracranial Procedures without CC or MCC). Cases involving the AutoLITT [TM] that are eligible for the new technology add-on payment are identified by assignment to MS-DRGs 025, 026, and 027 with a procedure code of 17.61 (Laser interstitial thermotherapy of lesion or tissue of brain under guidance) in combination with a primary diagnosis code that begins with a prefix of 191 (Malignant neoplasm of brain). We note that using the procedure and diagnosis codes above and restricting the add-on payment to cases that map to MS-DRGs 025, 026, and 027 is consistent with information provided by the applicant, which demonstrated that cases of the AutoLITT [TM] would only map to MS-DRGs 025, 026, and 027. Procedure code 17.62 (Laser interstitial thermotherapy of lesion or tissue of head and neck under guidance) does not map to MS-DRGs 025, 026, or 027 under the GROUPER software and, therefore, is ineligible for new technology add-on payment.

The average cost of the AutoLITT [TM] is reported as $10,600 per case. Under § 412.88(a)(2) of the regulations, new technology add-on payments are limited to the lesser of 50 percent of the average cost of the device or 50 percent of the costs in excess of the MS-DRG payment for the case. As a result, the maximum add-on payment for a case involving the AutoLITT [TM] is $5,300.

We describe the new technology add-on payment requirements with regard to newness above. With regard to the newness criterion for the AutoLITT [TM] , as stated above, we consider the beginning of the newness period for the device to commence from the market release date of December 2009. Therefore, the device will be considered “new” until December 2012. Because the 3-year anniversary date for the AutoLITT [TM] will occur after FY 2012, we are proposing to continue to make new technology add-on payments for the AutoLITT [TM] in FY 2012.

4. FY 2012 Applications for New Technology Add-On Payments

a. AxiaLIF® 2L+ [TM] System

TranS1 submitted an application for new technology add-on payments for the AxiaLIF® 2L+ [TM] System for FY 2012. The AxiaLIF® 2L+ [TM] System is an implantable spinal fixation system, delivered through a pre-sacral approach, facilitating spinal fusion through axial stabilization of the anterior lumbar spine at Lumbar vertebrae 4 through Sacral vertebrae 1 (L4-S1).

The AxiaLIF® 2L+ [TM] System received 510K FDA clearance (K092124) on January 21, 2010, and the applicant asserts that the device was available on the market immediately afterward through a limited market release program. The AxiaLIF® 2L+ [TM] System is indicated for use to provide anterior stabilization of the L4-S1 spinal segments as an adjunct to spinal fusion. It is also indicated for minimally invasive access to the anterior portion of the lower spine for assisting in the treatment of degeneration of the lumbar disc, performing lumbar discectomy, or for assistance in the performance of L4-S1 interbody fusion. The AxiaLIF® 2L+ [TM] System may be used in patients requiring fusion to treat pseudoarthrosis, unsuccessful previous fusion, spinal stenosis, spondylolisthesis (Grade 1), or degenerative disc disease as defined as back pain of discogenic origin with degeneration of the disc confirmed by history and radiographic studies. The AxiaLIF® 2L+ [TM] System is coded using ICD-9-CM procedure code 81.08 (Lumbar and lumbosacral fusion of the anterior column, posterior technique).

With regard to the newness criterion, we are concerned that the AxiaLIF® 2L+ [TM] System may be substantially similar to the other devices manufactured by the applicant, AxiaLIF® System and AxiaLIF® II [TM] System, the latter of which is listed as the predicate device on the AxiaLIF® 2L+ [TM] System's application for FDA approval. Specifically, in making a determination of substantial similarity, we consider the following: (1) Whether a product uses the same or similar mechanism of action to achieve a therapeutic outcome; (2) whether a product is assigned to the same or different DRG; and (3) whether the new use of a technology involves the treatment of the same or similar type of disease and the same or similar patient population.

We are particularly concerned that the AxiaLIF® 2L+ [TM] System uses the same or similar mechanism of action as the AxiaLIF® II [TM] System to achieve a therapeutic outcome. According to the applicant's 510K summary submitted to the FDA (K073514), the AxiaLIF® System is a multicomponent system including titanium alloy implantable devices and instrumentation for creating a pre-sacral axial track to the L5-S1 disk space. Similarly, the AxiaLIF® II [TM] System is described in the applicant's 510K summary submitted to the FDA (K073643) as a system of medical grade titanium alloy for the anterior stabilization of the L4-S1 spinal segments as an adjunct to spinal fusion. The applicant states that the AxiaLIF® 2L+ [TM] System was created from the AxiaLIF® II [TM] System platform. The applicant submitted the following to distinguish the AxiaLIF® 2L+ [TM] System from the AxiaLIF® II [TM] System:

• There have been internal thread changes for the 2L+ implant to accompany the Spanning Distraction Rod, which is designed to create and hold distraction in the L5-S1 disc space and allow for a higher degree of control over the Rod advancement and distraction;

• The design enhancements in the 2L+ System remove the dependence of distraction on size and placement of the S1 Rod, thus allowing precise implant placement in the vertebral bodies;

• In the 2L+ Implant, the L4 section of the L4-L5 Rod incorporates a conical design to increase fixation. The outer diameter (O.D.) of the L5 section is increased to be identical to the O.D. of the S1 implant to provide more surface area bone contact;

• The 2L+ Instrumentation incorporates Dilator Trials as an opportunity to enhance and simplify the intraoperative measuring technique by providing a direct visual means of measurement; and

• The 2L+ Fixation Rod fills the cannulation to prevent graft from moving into the rod from the disc space. The Fixation Rod also fixates the S1 Anchor and L4-L5 Rod together such that these components cannot passively separate.

Based on indications for use listed by the FDA for the AxiaLIF® System (K073514), the AxiaLIF®II [TM] System (K073643), and the AxiaLIF® 2L+ [TM] System (as described above), we also are concerned that all of these devices involve the treatment of the same or similar type of disease and the same or similar patient population. With respect to whether a product is assigned to the same or different DRG, we note that currently the AxiaLIF® System and the AxiaLIF® 2L+ [TM] System both generally map to MS-DRGs 459 (Spinal Fusion Except Cervical with MCC) and 460 (Spinal Fusion Except Cervical without MCC). Though the AxiaLIF® II [TM] System is no longer on the market, it would also map to the same DRGs.

If the AxiaLIF® 2L+ [TM] System is found to be substantially similar to the AxiaLIF® System or the AxiaLIF® II [TM] System, the AxiaLIF® 2L+ [TM] System would no longer qualify for the new technology add-on payment. Specifically, the appropriate start date for the AxiaLIF® 2L+ [TM] System would be the start date of the device that is found to be substantially similar to the AxiaLIF® 2L+ [TM] System. As noted above, the AxiaLIF® II [TM] System received FDA approval on April 28, 2008. The 3-year newness period for the AxiaLIF® II [TM] System ends prior to the start of FY 2012 (July 28, 2011). Given the length of time since the AxiaLIF® II [TM] System's entry into the market, cost-related data for the AxiaLIF® II [TM] System is already reflected in the most recent MS-DRG relative weights. Additionally, the AxiaLIF® System received multiple FDA approvals, the most recent of which was on January 11, 2008. The 3-year newness period for the AxiaLIF® System also ends prior to the start of FY 2012 (January 11, 2011). Given the length of time since the AxiaLIF® System's entry into the market, cost-related data for the AxiaLIF® System is already reflected in the most recent MS-DRG relative weights. However, if the AxiaLIF® 2L+ [TM] System is not substantially similar to any of the predicate devices mentioned above, then the newness period for the AxiaLIF® 2L+ [TM] System would begin on January 21, 2010 (the AxiaLIF® 2L+ [TM] System's FDA approval date) and would be within the year newness period for FY 2012. We invite public comment regarding whether or not the AxiaLIF® 2L+ [TM] System meets the newness criteria, and, in particular, whether it is substantially similar to the AxiaLIF® System or the AxiaLIF® II [TM] System.

In an effort to demonstrate that the AxiaLIF® 2L+ [TM] System meets the cost criterion, the applicant used data from the FY 2009 MedPAR file. The applicant explained through supplemental information to its application that most cases of the AxiaLIF® 2L+ [TM] System would map to MS-DRGs 459 (Spinal Fusion Except Cervical with MCC) and 460 (Spinal Fusion Except Cervical without MCC). The applicant searched the FY 2009 MedPAR file for cases with an ICD-9-CM procedure code of 81.08 (Lumbar and lumbosacral fusion of the anterior column, posterior technique). The applicant found 2,533 cases in MS-DRG 459 (5 percent of all cases) and 48,135 cases in MS-DRG 460 (95 percent of all cases). The average standardized charge per case was $117,847 for MS-DRG 459 and $84,153 for MS-DRG 460, equating to a case-weighted average standardized charge per case of $77,195.

This case-weighted standardized charge per case contains charges related to other implantable devices. Therefore, it is necessary to remove charges of other implantable devices from the case-weighted standardized charge per case (before substituting charges for the AxiaLIF® 2L+ [TM] System). The applicant used the following methodology todetermine the average amount of charges related to other implantable devices within the case-weighted average standardized charge per case. The applicant estimated a standardized medical/surgical supplies charge of $47,860. After searching all claims in the CY 2008 100 percent inpatient limited data set standardized file, the applicant determined that, on average, implantable devices (revenue center 0278) accounted for 75 percent of the of medical/surgical supplies charges, equating to $36,104 for the cases the applicant found in MS-DRGs 459 and 460. The applicant then subtracted this amount from the case-weighted average standardized charge per case, which resulted in a case-weighted average standardized charge per case, excluding an implantable device, of $41,090 ($77,195−$36,104).

The applicant then estimated the charges for the AxiaLIF® 2L+ [TM] System by inflating the expected purchase price of the AxiaLIF® 2L+ [TM] System by 2.77 times the purchase price of defibrillators, resulting in a standardized charge of $51,482 for the AxiaLIF® 2L+ [TM] System. The applicant stated that using a markup based on defibrillators was appropriate because, like the AxiaLIF® 2L+ [TM] System, defibrillators are also a high-cost implantable device. The applicant then added the average standardized charge for the AxiaLIF® 2L+ [TM] System to the average standardized charge per case excluding an implantable device, which resulted in a total case-weighted average standardized charge per case of $92,557 ($41,075 + $51,482). The applicant calculated a case-weighted threshold of $78,354 for MS-DRGs 459 and 460. Because the total average standardized charge per case ($92,557), as calculated by the applicant, exceeds the case-weighted threshold ($78,354), the applicant maintains that it meets the cost criteria.

We have concerns with the applicant's methodology. Specifically, in determining the projected standardized charge for the AxiaLIF® 2L+ [TM] System, the applicant relies on a charge markup for defibrillators because it is also a high-cost implantable device for which a hospital purchase price is known. We are concerned about whether more direct data or different proxies are available, including a charge markup for the AxiaLIF® System or AxiaLIF® II [TM] System. In reviewing the applicant's charge markup, we also are concerned about the source data for determining the 2.77 charge markup ratio for defibrillators. We invite public comment on whether the AxiaLIF® 2L+ [TM] System meets the cost criterion for a new technology add-on payment for FY 2012.

With respect to the substantial clinical improvement criterion, the applicant asserts that it meets this criterion in its application. The applicant stated that substantial clinical improvement is demonstrated by the AxiaLIF® 2L+ [TM] System's facilitation of spinal fusion surgery without a laparotomy. By avoiding a laparotomy, the AxiaLIF® 2L+ [TM] System reduces blood loss, postoperative pain, narcotic use, denervation, morbidity, the probability of complications, and the risk of trauma to the tissue area surrounding the lumbar. The applicant further stated that the AxiaLIF® 2L+ [TM] System reduces morbidity and has reduced risk of injuring vital organs and important intrinsic stabilizing structures, with a lower complication profile than traditional open fusion techniques. The applicant noted that long-term results can include better support of lordosis and prevention of adjacent level disease. We are concerned that this does not demonstrate a substantial clinical improvement from the AxiaLIF® II [TM] System, which also facilitated spinal fusion surgery without a laparotomy.

The applicant has not conducted clinical trials, but the 300 cases of AxiaLIF® 2L+ [TM] System's use (through the Limited Market Release) yielded a complication rate of 0.7 percent. The applicant also asserts that the pre-sacral approach results in a lower average length of stay than a non-sacral approach.

The applicant has referred us to several sources of literature presenting data related to the pre-sacral approach for the applicant's AxiaLIF® device. We are concerned that the applicant has generally repeated the statements made regarding the clinical improvement of its AxiaLIF® device and has not provided information that indicates that the AxiaLIF® 2L+ [TM] System offers a substantial clinical benefit over the earlier AxiaLIF® or AxiaLIF® II [TM] devices. Moreover, the applicant has not provided any clinical outcomes data for the AxiaLIF® 2L+ [TM] System to substantiate its assertions regarding substantial clinical improvement for the AxiaLIF® 2L+ [TM] System. While the applicant maintains that data from the AxiaLIF® device are relevant and can be used to substantiate its assertions for the AxiaLIF® 2L+ [TM] System, we are concerned that data directly associated with the use of the AxialLIF® 2L+ [TM] System are not available. For example, it is not clear the degree to which the population that requires treatment with the AxiaLIF® 2L+ [TM] System differs from the population that requires treatment with the AxiaLIF® device or the AxiaLIF® II [TM] System, and it is also not clear the degree to which the differences between the devices discussed above may affect clinical outcomes.

The applicant also believes that an inline placement of the fixation implant may provide an advantage due to closeness of the implant to functional axis of the spine and through alignment with the direction of the compressive forces on the vertebral bodies. The applicant maintains that evaluation and testing have proven the AxiaLIF® 2L+ [TM] System to be a biomechanically sturdy L4-S1 axial construct that significantly reduces the range of motion at the desired point and achieves decompression by increasing the L4-S1 disc spaces. We note that the only clinical change from the AxiaLIF® device and the AxiaLIF® 2L+ [TM] System is that the latter reaches the L4. There is no stated clinical change between the AxiaLIF® II [TM] and the AxiaLIF® 2L+ [TM] System. We invite public comment on whether the AxiaLIF® 2L+ [TM] System meets the substantial clinical improvement criterion for the new technology add-on payment for FY 2012.

b. Champion [TM] HF Monitoring System

CardioMEMS, Inc. submitted an application for new technology add-on payment for FY 2012 for the Champion [TM] HF Monitoring System, an Implantable Hemodynamic Monitor System (IHMS). The IHMS is comprised of an implantable sensor/monitor placed in the distal pulmonary artery. Pulmonary artery hemodynamic monitoring is used in the management of heart failure. The IHMS measures multiple pulmonary artery pressure parameters for an ambulatory patient to measure and transmit data via a wireless sensor to a secure Web site. The IHMS utilizes radiofrequency energy to power the sensor and to measure pulmonary artery pressure. The data are accessed by clinicians via the Internet. Interpretation of trend data allows the clinician to make adjustments to therapy while the patient is at home. Changes in pulmonary artery pressure can be used along with heart failure signs and symptoms to adjust medications. There are currently no FDA approved devices performing this IHMS function. The IHMS consists of three components: (1) A wireless implantable hemodynamic sensor/monitor which is implanted in the distal pulmonary artery (sensor); (2) an external patient measurement system; and (3) a patient data management system.

CardioMEMS, Inc. believes that a large majority of patients receiving the sensor will be admitted to an inpatient hospital with a diagnosis of “acute or chronic heart failure” (ICD-9-CM code 428.43 (Acute or chronic combine systolic and diastolic heart failure)) and the sensor will be implanted during this hospital stay. For safety considerations, a small portion of these patients may be discharged and the sensor implanted at a future date in the hospital outpatient setting. In addition, there will likely be a group of patients in chronic heart failure who are not currently hospitalized, but who have been hospitalized in the past few months for whom the treating physician believes that regular pulmonary artery pressure readings are necessary to optimize patient management. Depending on the patient's status, these patients may have the sensor implanted in the hospital inpatient or outpatient setting.

With respect to the newness criterion, we note that this device is not currently approved by the FDA, but the manufacturer anticipates that FDA approval will be granted in the second quarter of 2011. No ICD-9-CM procedure code exists at this time that uniquely identifies the System. As noted in Table 6B, which is listed in section VI. of the Addendum to this proposed rule and available via the Internet, we have approved the use of new procedure code 38.26 (Insertion of implantable wireless pressure sensor for intracardiac or great vessel hemodynamic monitoring), which will identify use of the System. The new ICD-9-CM procedure code 38.26 will be assigned to MS-DRG 264 (Other Circulatory System O.R. Procedures).

In an effort to demonstrate that the System meets the cost criteria, the applicant used data from a clinical trial. Specifically, the manufacturer used data from the C ardioMEMS H eart Sensor A llows Monitoring of P ressure to I mprove Outcomes in NYHA Class III heart failure patients (CHAMPION) trial [4] which enrolled 550 patients in 30 hospitals within the United States. We note that there were 575 patients initially enrolled in the trial. Of these 575 patients, 25 underwent a right heart catheterization and did not receive an implant primarily because of anatomical/physiological conditions identified during the catheterization. The manufacturer collected 310 hospital claims from the 550 patients enrolled in the CHAMPION trial. The applicant eliminated claims with incomplete data or statistical outliers, and was left with 137 claims for its cost analysis. CardioMEMS funded the clinical trial and, therefore, did not submit these 137 claims. The applicant believes that cases eligible for the System would map to MS-DRG 264. Using the 137 claims from the CHAMPION trial, the manufacturer determined an average standardized charge per case without the new technology to equal $12,817. The applicant indicated that the case-weighted average standardized charge per case does not include charges related to the System, so it is then necessary to add the charges related to the device to the average standardized charge per case to evaluate the cost threshold criterion. To convert the costs of the technology to charges, CardioMEMS used an average cost-to-charge ratio (CCR) of 0.311 based on FY 2008 hospital cost reports from the 30 hospitals who participated in the CHAMPION trial. Based on this CCR, the manufacturer determined an average charge for the System to equal $45,016. Using this methodology, the total average standardized charge per case including the new technology equals $57,833 ($45,016 + $12,817). This amount exceeds the cost threshold of $46,546 for MS-DRG 264 (Table 10 of the FY 2011 IPPS/LTCH PPS final rule (75 FR 50607)). Because the total average standardized charge per case ($57,833) exceeds the threshold ($46,546), the applicant maintains that it meets the cost criteria.

In addition to the methodology described above, the manufacturer searched for claims for patients in the CHAMPION trial that were aged 65 years or older at the time of device implantation as a proxy for Medicare patients. Out of the original 137 hospital claims, 56 (41 percent) were for patients aged 65 years or older. From these 56 claims (across 23 hospitals from the CHAMPION study), the applicant calculated an average standardized charge of $13,031, which did not include charges for the device. The applicant added the charges related to the device ($45,016, calculated as described above) to the average standardized charge per case to evaluate the cost threshold criterion. Using this methodology, the total average standardized charge per case including the new technology equals $58,047 ($45,016 + $13,031). This amount also exceeds the FY 2012 cost threshold of $46,546 for MS-DRG 264. Because the total average standardized charge per case ($58,047) exceeds the threshold ($46,546), the applicant maintains that it meets the cost criteria. We invite public comment on whether or not the Champion [TM] HF Monitoring System meets the cost criterion.

With regard to substantial clinical improvement, the applicant cited clinical data from the CHAMPION trial. The trial is a prospective, multicenter, randomized, single-blinded clinical trial conducted in the United States, designed to evaluate the safety and efficacy of the System in reducing heart failure-related hospitalizations in a subset of subjects suffering from heart failure. The applicant shared several major findings from the CHAMPION trial [5] as described below. First, at 6 months, the treatment group exhibited a 30 percent relative risk reduction in the rate of heart failure-related hospitalization (0.31 vs. 0.44, p < 0.0001). There were 83 heart failure-related hospitalizations in 270 treatment patients compared to 120 heart failure-related hospitalizations in the 280 control subjects. The “number needed to treat” (NNT) to reduce one heart failure-related hospitalization was eight patients. Second, during the 6-month follow-up period, the proportion of subjects hospitalized for one or more heart failure-related hospitalizations was significantly lower in the treatment group (54 out of 270 patients) than in the control group (80 out of 280 patients) (20 percent vs. 28.6 percent; p = 0.0222). Third, at 6 months, treatment patients had more days alive outside of the hospital (174.4 vs. 172.1, p = 0.0222) and fewer average days in the hospital (2.2 vs. 3.8, p = 0.0194) compared to control patients. Treatment patients spent 472 fewer days in the hospital than the control patients. Finally, the treatment group was assessed with the Minnesota Living with Heart Failure Questionnaire, which reported a greater improvement in quality of life (QOL) than the control group (−10.6 vs. −7.4, p = 0.0373). The applicant concluded that the CHAMPION trial demonstrated that, with knowledge of class III heart failure patients' pulmonary artery pressures, physicians could improve medical management leading to fewer heart failure-related hospitalizations. The applicant further stated that the devicehad very few device-related and system-related complications over the course of the clinical trial, and that primary and secondary study endpoints were successfully achieved. There was one report of an “Unanticipated Serious Adverse Device Event” involving a “tingling sensation” in a control patient, which was adjudicated by the Clinical Events Committee as not device/system-related. There were two reports of Serious Adverse Device Events due to hemoptysis and a blood clot, both of which resolved without permanent sequelae. The Clinical Events Committee adjudicated both events as device/system-related. The applicant maintained that during the first 6 months, there were 336 Serious Adverse Events (hospitalizations or deaths due to heart failure or other common comorbidities seen in this population) in 121 patients in the treatment group (44.8 percent) versus 385 Serious Adverse Events in 155 patients in the control group (55.4 percent).

In addition, the manufacturer stated that the CHAMPION trial suggests the safety and effectiveness of the device was maintained during longer term follow-up. (The primary efficacy endpoint of the CHAMPION trial was 6 months. However, patients remained in their assigned groups until the last patient reached 6 months, which is referred to as “the entire follow-up.” The mean time of this entire follow up was up to 15 months.) Therefore, the manufacturer believes that the System meets the substantial clinical improvement criterion. We invite public comment on whether or not the Champion [TM] HF Monitoring System technology represents a substantial clinical improvement in the Medicare population.

c. PerfectCLEAN With Micrillon®

UMF Corporation (the manufacturer) submitted an application for a technology called the PerfectCLEAN with Micrillon® (PerfectCLEAN). PerfectCLEAN is a cleaning textile product (or cleaning mat/wipe) with chlorine embedded or bound to the extruded fiber. The manufacturer asserts that PerfectCLEAN is intended to be used to trap and eliminate pathogens such as Methicillin-resistant Staphylococcus aureus (MRSA), Clostridium difficile (C diff.) and the H1N1 flu virus from surfaces within the hospital (as well as other health care facilities and locations). The applicant asserts that it can trap and remove more than 99.99 percent of bacteria on hard surfaces.

The manufacturer stated that the PerfectCLEAN is an Environmental Protection Agency (EPA) approved antimicrobial/disinfectant that will be available on the market in the first quarter of 2011. The applicant maintains that PerfectCLEAN is subject to review and approval by the EPA per the EPA's Federal Insecticide, Fungicide, Rodenticide Act (FIFRA) Treated Article Exemption and, therefore, is not subject to review by the FDA. The applicant states that it was determined in a pre-registry meeting with the EPA that the underlying chemistries used to create the chlorine binding effects of Micrillon® chemistry are EPA and FDA approved even though no FDA claims are being sought.

With respect to whether the PerfectCLEAN is eligible for new technology add-on payments, we note that our regulations at § 412.87(c) state, “CMS will only consider, for add-on payments for a particular fiscal year, an application for which the new medical service or technology has received FDA approval or clearance by July 1 prior to the particular fiscal year.” FDA “approval,” refers to the premarket approval application (PMA) process for most Class III devices, and FDA “clearance” refers to the 510(k) premarket notification submission process for most Class II devices and some Class I and Class III devices (section 515 of the Food, Drug and Cosmetic Act (FDCA) for PMA) and sections 510(k) and 513(i) of the FDCA (for premarket notification submission process)). Therefore, we believe our regulations, by requiring applicants to receive an FDA approval or clearance in order to be eligible for new technology add-on payments, limit the universe of items and services eligible to receive these payments to those that require FDA approval or clearance. The applicant has informed CMS that it is in the process of registering and listing its product with the FDA under section 510(b) through (d) and (j) and anticipates this process to be completed prior to the July 1 regulatory deadline. The registration process that the applicant is currently pursing will result in neither FDA approval nor clearance, and we are therefore concerned that the PerfectCLEAN is not eligible for new technology add-on payments under our existing regulations., which require “FDA approval or clearance by July 1 prior to the particular fiscal year” (42 CFR § 412.87(c)). We welcome public comments on whether the PerfectCLEAN is eligible for new technology add-on payments under the current regulations.

With regard to the cost criterion, the applicant used data from the FY 2011 After Outliers Removed (AOR) file (posted on the CMS Web site) for its cost analysis, which is based on the FY 2009 MedPAR file. The applicant considered MS-DRGs that relate to surgeries, skin abrasions, open sores, wounds, and similar inflamed tissue conditions where infection sites are thought to be more likely to occur for inpatient care situations. This resulted in the applicant determining that the technology would be most frequently used in 622 different MS-DRGs. The applicant noted that the charges from the FY 2011 AOR file were not inflated from FY 2009 to FY 2011; therefore the applicant applied a 2-year inflation factor of 12 percent (to update the charges from FY 2009 to FY 2011). The applicant based the 2-year inflation factor of 12 percent on a 3-year average of the 2 year rate-of-change in charges (the 2-year rate-of-change for FY 2009 of 11.841 percent (73 FR 48764); the 2-year rate-of-change for FY 2010 of 14.184 percent (74 FR 44010); and the 2-year rate-of-change for FY 2011 of 9.8843 percent (75 FR 50429)) that CMS uses in its outlier threshold calculation as published in section II. of the Addendum to the annual IPPS final rule. The applicant computed a case-weighted standardized charge per case of $40,442 for all 622 MS-DRGs, which did not include any charges related to the PerfectCLEAN. Therefore, it added the charges related to the technology to the case-weighted average standardized charge per case in evaluating the cost threshold criterion. The manufacturer estimates a charge per patient of $100 per day for the PerfectCLEAN. The applicant includes in this amount charges for payroll, treated textiles, packaging and protective gloves, laundering, storage, and distribution. The applicant multiplied the average length of stay for each MS-DRG (as found in Table 5 of the Addendum to the FY 2011 IPPS/LTCH PPS final rule (75 FR 50547 through 50566)) by the charge per patient per day to determine the total charges per stay by MS-DRG related to the PerfectCLEAN. The applicant added additional charges per stay for the PerfectCLEAN to the case-weighted standardized charge per case and determined a total case-weighted average standardized charge per case of $41,105. Based on the 622 MS-DRGs to which the technology mapped, the applicant computed a case-weighted threshold of $40,834. Because the total case-weighted average standardized charge per case of $41,105 exceeds the case weighted threshold of $40,834, theapplicant maintains that it meets the cost criteria.

We have several concerns regarding the applicant's cost analysis. First, although the technology can potentially be used in every single Medicare case, the application targets specific MS-DRGs. The applicant did not provide a detailed clinical justification regarding their selection of MS-DRGs, or a detailed justification for why the technology could not be used in other MS-DRGs. We believe it would be more appropriate to target all cases in every MS-DRG when conducting the cost analysis for this type of non-procedure or condition specific item. Using the FY 2011 AOR file, we conducted our own analysis with the same methodology above (and inflated the charges and included the total charges per stay related to the PerfectCLEAN) across all MS-DRGs. Based on our analysis, we determined a total case-weighted average standardized charge per case of $29,535. Using the applicant's methodology, we also determined a case-weighted threshold of $37,384 across all MS-DRGs. Because the total case-weighted average standardized charge per case of $29,535 is less than the case-weighted threshold of $37,384, we believe the PerfectCLEAN may not meet the cost criteria.

Second, the applicant included in the average charge per day more general charges unrelated to the specific new technology, such as payroll, packaging and protective gloves, laundering, storage and distribution. We do not believe it is appropriate to include charges for expenses already accounted for in MS-DRG based payments, such as laundering, storage, and distribution, and supplies already used by hospital staff such as packaging and protective gloves. We also note that the applicant states in its substantial clinical improvement discussion that the PerfectCLEAN represents the first comprehensive process for the removal and elimination of harmful micro-organisms responsible for HAIs from patient environments, the elimination of cross-contamination, and significant savings across many cost centers. If the PerfectCLEAN is a substitute for other cleaning mechanisms such as wiping down a hospital room with a spray and can produce significant savings across many cost centers, then it would be appropriate to deduct some charges from the average charge per day in order to accurately reflect the cost to hospitals of this technology. For these reasons, we remain concerned about the accuracy of the computation of a charge per patient of $100 per day and whether the PerfectCLEAN meets the cost criterion.

Thirdly, the applicant based the 12-percent, 2-year rate-of-change in charges on a 3-year average (FY 2009 through FY 2011) of the 2-year rate-of-change in charges as published in section II. of the Addendum to the annual IPPS final rule. We do not believe it is appropriate to use a 3-year average of the 2-year rate-of-change in charges as the 2-year rate-of-change in charges already uses the most recent data available to measure this change and, therefore, does not need to be averaged with prior years. Specifically, as described in section II. of the Addendum to this proposed rule, to calculate the proposed FY 2012 2-year rate-of-change in charges, we compared the 1-year average annualized rate-of-change in charges per case from the last quarter of FY 2009 in combination with the first quarter of FY 2010 (July 1, 2009 through December 31, 2009) to the last quarter of FY 2010 in combination with the first quarter of FY 2011 (July 1, 2010 through December 31, 2010). This rate-of-change was 4.43 percent (1.044394) or 9.07 percent (1.090759) over 2 years. If we substitute the FY 2012 proposed 2-year rate-of-change in charges of 9.07 percent for the 12-percent 3-year average of the 2-year rate-of-change in charges that the applicant used in its cost analysis, the total case-weighted average standardized charge per case would be $40,047 across the 622 MS-DRGs to which the applicant believes the technology would map. As mentioned above, the applicant computed a case-weighted threshold of $40,834. Because the total case-weighted average standardized charge per case of $40,047 is less than the case-weighted threshold of $40,834, it appears the applicant would not meet the cost criteria. We invite public comment on whether the PerfectCLEAN meets the cost criterion.

The applicant maintains that it meets the substantial clinical improvement criteria for the following reasons: The applicant believes the PerfectCLEAN significantly improves clinical outcomes for a patient population as compared to currently available treatments, decreases rate of subsequent diagnostic or therapeutic interventions, and decreases the number of future hospitalizations or physician visits. The applicant cited independent laboratory studies that set forth the level of removal and elimination of pathogens achieved by the PerfectCLEAN. The applicant stated that the PerfectCLEAN includes “more precise and focused patient room procedures that when properly applied utilize the textile and micro-denier efficacies” listed in the product's independent test reports. The applicant states that this results “in a safer patient environment where the likelihood of cross contamination is reasonable.” The applicant included test report data for the product, which demonstrated a 99.99 percent effectiveness of removing pathogens such as MRSA and C diff. The applicant cited industry and clinical support to demonstrate that improved patient environment can save lives. The applicant also stated that PerfectCLEAN represents the first comprehensive process for the removal and elimination of harmful micro-organisms responsible for hospital acquired infections from patient environments, the elimination of cross-contamination, and significant savings across many cost centers. The applicant stated that this new innovative system delivers reliable and repeatable results not currently achieved using currently available protocols and products. The applicant provided the following example: a traditional method of disinfection is to apply liquid disinfectants, which the applicant stated typically requires a 10-minute dwell time (which in most cases is not completed by the hospital) and then wiping or mopping up the nonevaporated liquids. Compared to this method, the applicant asserts that the PerfectCLEAN first removes the micro-organisms from those surfaces using specially designed microscopic fibers. The applicant asserts that these pathogens are trapped in a formulation of a chlorine binding technology which eliminates the pathogens.

The applicant further asserts that the PerfectCLEAN maintains its disinfecting capability longer than other methods because the chlorine-binding technology is introduced at the pellet stage of fiber extrusion so that it is present throughout the fiber, as opposed to a finish or coating process that wears off as textiles are used and laundered. Additionally, the applicant asserts that the technology's non-leaching chlorination system recharges in the wash process by attracting and binding free molecules of chlorine. The applicant further asserts that in this way the PerfectCLEAN recharges back to its original strength and efficacy which allows it to work more rapidly than other techniques. The applicant asserts that this reduces cross-contamination by those persons handling soiled textiles after the people contact surfaces which have been cleaned of harmful micro-organisms. The applicant added that the training in use of color coated textiles (different color mats) affords superior monitoring and compliance supervision of the hygiene specialists charged withresponsibility to reduce cross-contamination. We invite public comment on whether the PerfectCLEAN meets the substantial clinical improvement criterion.

III. Proposed Changes to the Hospital Wage Index for Acute Care Hospitals

A. Background

Section 1886(d)(3)(E) of the Act requires that, as part of the methodology for determining prospective payments to hospitals, the Secretary must adjust the standardized amounts “for area differences in hospital wage levels by a factor (established by the Secretary) reflecting the relative hospital wage level in the geographic area of the hospital compared to the national average hospital wage level.” In accordance with the broad discretion conferred under the Act, we currently define hospital labor market areas based on the delineations of statistical areas established by the Office of Management and Budget (OMB). A discussion of the proposed FY 2012 hospital wage index based on the statistical areas, including OMB's revised definitions of Metropolitan Areas, appears under section III.B. of this preamble.

Beginning October 1, 1993, section 1886(d)(3)(E) of the Act requires that we update the wage index annually. Furthermore, this section of the Act provides that the Secretary base the update on a survey of wages and wage-related costs of short-term, acute care hospitals. The survey must exclude the wages and wage-related costs incurred in furnishing skilled nursing services. This provision also requires us to make any updates or adjustments to the wage index in a manner that ensures that aggregate payments to hospitals are not affected by the change in the wage index. The proposed adjustment for FY 2012 is discussed in section II.B. of the Addendum to this proposed rule.

As discussed below in section III.H. of this preamble, we also take into account the geographic reclassification of hospitals in accordance with sections 1886(d)(8)(B) and 1886(d)(10) of the Act when calculating IPPS payment amounts. Under section 1886(d)(8)(D) of the Act, the Secretary is required to adjust the standardized amounts so as to ensure that aggregate payments under the IPPS after implementation of the provisions of sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the Act are equal to the aggregate prospective payments that would have been made absent these provisions. The proposed budget neutrality adjustment for FY 2012 is discussed in section II.A.4.b. of the Addendum to this proposed rule.

Section 1886(d)(3)(E) of the Act also provides for the collection of data every 3 years on the occupational mix of employees for short-term, acute care hospitals participating in the Medicare program, in order to construct an occupational mix adjustment to the wage index. A discussion of the occupational mix adjustment that we are proposing to apply beginning October 1, 2011 (the FY 2012 wage index) appears under section III.C. of this preamble.

B. Core-Based Statistical Areas for the Hospital Wage Index

The wage index is calculated and assigned to hospitals on the basis of the labor market area in which the hospital is located. In accordance with the broad discretion under section 1886(d)(3)(E) of the Act, beginning with FY 2005, we define hospital labor market areas based on the Core-Based Statistical Areas (CBSAs) established by OMB and announced in December 2003 (69 FR 49027). For a discussion of OMB's revised delineations of CBSAs and our implementation of the CBSA definitions, we refer readers to the preamble of the FY 2005 IPPS final rule (69 FR 49026 through 49032).

As with the FY 2011 final rule, in this FY 2012 proposed rule, we are proposing to provide that hospitals receive 100 percent of their wage index based upon the CBSA configurations. Specifically, for each hospital, we are proposing to determine a wage index for FY 2012 employing wage index data from hospital cost reports for cost reporting periods beginning during FY 2008 and using the CBSA labor market definitions. We consider CBSAs that are Metropolitan Statistical Areas (MSAs) to be urban, and CBSAs that are Micropolitan Statistical Areas as well as areas outside of CBSAs to be rural. In addition, it has been our longstanding policy that where an MSA has been divided into Metropolitan Divisions, we consider the Metropolitan Division to comprise the labor market areas for purposes of calculating the wage index (69 FR 49029) (regulations at § 412.64(b)(1)(ii)(A)).

In OMB Bulletin No. 10-2, issued on December 1, 2009, OMB announced that the CBSA changes in that bulletin would be the final update prior to the 2010 Census of Population and Housing. CMS adopted those changes in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50162), beginning October 1, 2010, and they are reflected in this FY 2012 proposed rule. In 2013, OMB plans to announce new area delineations based on its 2010 standards (75 FR 37246) and the 2010 Census data.

The OMB bulletin is available on the OMB Web site at http://www.whitehouse.gov/OMB—go to “Agency Information” and click on “Bulletins”.

C. Proposed Occupational Mix Adjustment to the FY 2012 Wage Index

As stated earlier, section 1886(d)(3)(E) of the Act provides for the collection of data every 3 years on the occupational mix of employees for each short-term, acute care hospital participating in the Medicare program, in order to construct an occupational mix adjustment to the wage index, for application beginning October 1, 2004 (the FY 2005 wage index). The purpose of the occupational mix adjustment is to control for the effect of hospitals' employment choices on the wage index. For example, hospitals may choose to employ different combinations of registered nurses, licensed practical nurses, nursing aides, and medical assistants for the purpose of providing nursing care to their patients. The varying labor costs associated with these choices reflect hospital management decisions rather than geographic differences in the costs of labor.

1. Development of Data for the Proposed FY 2012 Occupational Mix Adjustment Based on the 2007-2008 Occupational Mix Survey

As provided for under section 1886(d)(3)(E) of the Act, we collect data every 3 years on the occupational mix of employees for each short-term, acute care hospital participating in the Medicare program.

For the FY 2010 hospital wage index, we used occupational mix data collected on a revised 2007-2008 Medicare Wage Index Occupational Mix Survey (the 2007-2008 survey) to compute the occupational mix adjustment for FY 2010. (We refer readers to the FY 2010 IPPS final rule (74 FR 43827) for a detailed discussion of the 2007-2008 survey.) Again, for the FY 2011 hospital wage index, we used data from the 2007-2008 survey (including revised data for 45 hospitals) to compute the FY 2011 adjustment.

For the FY 2012 hospital wage index, we are proposing to again use occupational mix data collected on the 2007-2008 Medicare Wage Index Occupational Mix Survey to compute the occupational mix adjustment for FY 2012. We are including data for 3,165 hospitals that also have wage data included in the proposed FY 2012 wage index.

2. New 2010 Occupational Mix Survey for the FY 2013 Wage Index

As stated earlier, section 304(c) of Public Law 106-554 amended section 1886(d)(3)(E) of the Act to require CMS to collect data every 3 years on the occupational mix of employees for each short-term, acute care hospital participating in the Medicare program. We used occupational mix data collected on the 2007-2008 survey to compute the occupational mix adjustment for FY 2010 and the FY 2011 wage index and are proposing to use the 2007-2008 occupational mix survey data in this proposed rule for the FY 2012 wage index. Therefore, a new measurement of occupational mix will be required for FY 2013.

The new 2010 survey (Form CMS-10079 (2010)) provides for the collection of hospital-specific wages and hours data for calendar year 2010 (that is, payroll periods ending between January 1, 2010 and December 31, 2010) and will be applied beginning with the FY 2013 wage index. The 2010 survey was adopted in the Federal Register on January 15, 2010 (75 FR 2548) and approved by OMB on February 26, 2010 (OMB control number 0938-0907). The survey is available on the CMS Web site at:http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage and through the fiscal intermediaries/MACs. Hospitals are required to submit their completed 2010 surveys to their fiscal intermediaries/MACs by July 1, 2011. The preliminary, unaudited 2010 survey data will be released in early October 2011, along with the FY 2009 Worksheet S-3 wage data, for the FY 2013 wage index review and correction process.

3. Calculation of the Proposed Occupational Mix Adjustment for FY 2012

For FY 2012 (as we did for FY 2011), we are proposing to calculate the occupational mix adjustment factor using the following steps:

Step 1—For each hospital, determine the percentage of the total nursing category attributable to a nursing subcategory by dividing the nursing subcategory hours by the total nursing category's hours. Repeat this computation for each of the four nursing subcategories: (1) Registered nurses; (2) licensed practical nurses; (3) nursing aides, orderlies, and attendants; and (4) medical assistants.

Step 2—Determine a national average hourly rate for each nursing subcategory by dividing a subcategory's total salaries for all hospitals in the occupational mix survey database by the subcategory's total hours for all hospitals in the occupational mix survey database.

Step 3—For each hospital, determine an adjusted average hourly rate for each nursing subcategory by multiplying the percentage of the total nursing category (from Step 1) by the national average hourly rate for that nursing subcategory (from Step 2). Repeat this calculation for each of the four nursing subcategories.

Step 4—For each hospital, determine the adjusted average hourly rate for the total nursing category by summing the adjusted average hourly rate (from Step 3) for each of the nursing subcategories.

Step 5—Determine the national average hourly rate for the total nursing category by dividing total nursing category salaries for all hospitals in the occupational mix survey database by total nursing category hours for all hospitals in the occupational mix survey database.

Step 6—For each hospital, compute the occupational mix adjustment factor for the total nursing category by dividing the national average hourly rate for the total nursing category (from Step 5) by the hospital's adjusted average hourly rate for the total nursing category (from Step 4).

If the hospital's adjusted average hourly rate is less than the national average hourly rate (indicating the hospital employs a less costly mix of nursing employees), the occupational mix adjustment factor is greater than 1.0000. If the hospital's adjusted average hourly rate is greater than the national average hourly rate, the occupational mix adjustment factor is less than 1.0000.

Step 7—For each hospital, calculate the occupational mix adjusted salaries and wage-related costs for the total nursing category by multiplying the hospital's total salaries and wage-related costs (from Step 5 of the unadjusted wage index calculation in section III.F. of this preamble) by the percentage of the hospital's total workers attributable to the total nursing category (using the occupational mix survey data, this percentage is determined by dividing the hospital's total nursing category salaries by the hospital's total salaries for “nursing and all other”) and by the total nursing category's occupational mix adjustment factor (from Step 6 above).

The remaining portion of the hospital's total salaries and wage-related costs that is attributable to all other employees of the hospital is not adjusted by the occupational mix. A hospital's all other portion is determined by subtracting the hospital's nursing category percentage from 100 percent.

Step 8—For each hospital, calculate the total occupational mix adjusted salaries and wage-related costs for a hospital by summing the occupational mix adjusted salaries and wage-related costs for the total nursing category (from Step 7) and the portion of the hospital's salaries and wage-related costs for all other employees (from Step 7).

To compute a hospital's occupational mix adjusted average hourly wage, divide the hospital's total occupational mix adjusted salaries and wage-related costs by the hospital's total hours (from Step 4 of the unadjusted wage index calculation in section III.F. of this preamble).

Step 9—To compute the occupational mix adjusted average hourly wage for an urban or rural area, sum the total occupational mix adjusted salaries and wage-related costs for all hospitals in the area, then sum the total hours for all hospitals in the area. Next, divide the area's occupational mix adjusted salaries and wage-related costs by the area's hours.

Step 10—To compute the national occupational mix adjusted average hourly wage, sum the total occupational mix adjusted salaries and wage-related costs for all hospitals in the Nation, then sum the total hours for all hospitals in the Nation. Next, divide the national occupational mix adjusted salaries and wage-related costs by the national hours. The proposed FY 2012 occupational mix adjusted national average hourly wage is $36.1406.

Step 11—To compute the occupational mix adjusted wage index, divide each area's occupational mix adjusted average hourly wage (Step 9) by the national occupational mix adjusted average hourly wage (Step 10).

Step 12—To compute the Puerto Rico specific occupational mix adjusted wage index, follow Steps 1 through 11 above. The proposed FY 2012 occupational mix adjusted Puerto Rico-specific average hourly wage is $15.4107.

The table below is an illustrative example of the occupational mix adjustment.

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Because the occupational mix adjustment is required by statute, all hospitals that are subject to payments under the IPPS, or any hospital that would be subject to the IPPS if not granted a waiver, must complete the occupational mix survey, unless the hospital has no associated cost report wage data that are included in the proposed FY 2012 wage index. For the FY 2007-2008 survey, the response rate was 90.8 percent.

In computing the proposed FY 2012 wage index, if a hospital did not respond to the occupational mix survey, or if we determined that a hospital's submitted data were too erroneous to include in the wage index, we assigned the hospital the average occupational mix adjustment for its labor market area. This method has the least impact on the wage index for other hospitals in the area. For areas where no hospital submitted data for purposes of calculating the occupational mix adjustment, we applied the national occupational mix factor of 1.0000 in calculating the area's proposed FY 2012 occupational mix adjusted wage index. In addition, if a hospital submitted a survey, but that survey data could not be used because we determined the survey data to be aberrant, we also assigned the hospital the average occupational mix adjustment for its labor market area. For example, if a hospital's individual nurse category average hourly wages were out of range (that is, unusually high or low), and the hospital did not provide sufficient documentation to explain the aberrancy, or the hospital did not submit any registered nurse salaries or hours data, we assigned the hospital the average occupational mix adjustment for the labor market area in which it is located.

In calculating the average occupational mix adjustment factor for a labor market area, we replicated Steps 1 through 6 of the calculation for the occupational mix adjustment. However, instead of performing these steps at the hospital level, we aggregated the data at the labor market area level. In following these steps, for example, for CBSAs that contain providers that did not submit occupational mix survey data, the occupational mix adjustment factor ranged from a low of 0.9246 (CBSA 17780, College Station-Bryan, TX), to a high of 1.0761 (CBSA 19, Rural Louisiana). Also, in computing a hospital's occupational mix adjusted salaries and wage-related costs for nursing employees (Step 7 of the calculation), in the absence of occupational mix survey data, we multiplied the hospital's total salaries and wage-related costs by the percentage of the area's total workers attributable to the area's total nursing category. For FY 2012, there are five CBSAs (that include six hospitals) for which we did not have occupational mix data for any of its hospitals. The CBSAs are:

• CBSA 36140, Ocean City, NJ (1 hospital)

• CBSA 22140, Farmington, NM (1 hospital)

• CBSA 41900, San German-Cabo Rojo, PR (2 hospitals)

• CBSA 49500, Yauco, PR (1 hospital)

• CBSA 21940, Fajardo, PR (1 hospital)

Since the FY 2007 IPPS final rule, we have periodically discussed applying a hospital-specific penalty to hospitals that fail to submit occupational mix survey data (71 FR 48013 through 48014; 72 FR 47314 through 47315; 73 FR 48580; 74 FR 43832, and 75 FR 50167). During the FY 2008 rulemaking cycle, some commenters suggested a penalty equal to a 1- to 2-percent reduction in the hospital's wage index value or a set percentage of the standardized amount. During the FY 2009 and FY 2010 rulemaking cycles, several commenters reiterated their view that full participation in the occupational mix survey is critical, and that CMS should develop a methodology that encourages hospitals to report occupational mix survey data but does not unfairly penalize neighboring hospitals. We indicated in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule that, while we were not proposing a penalty at that time, we would consider the public comments we previously received, as well as any public comments on the proposed rule, as we developed the FY 2011 wage index.

In the FY 2011 IPPS/LTCH PPS proposed and final rules (75 FR 23943 and 50167, respectively), we stated that, in order to gain a better understanding of why some hospitals are not submitting the occupational mix data, we will require hospitals that do not submit occupational mix data to provide an explanation for not complying. This requirement will be effective beginning with the new 2010 occupational mix survey (the 2010 survey is discussed in section III.C.2. of this preamble). We will instruct fiscal intermediaries/MACs to begin gathering this information as part of the FY 2013 wage index desk review process. We note that we reserve the right to apply a different approach in future years, including potentially penalizing nonresponsive hospitals.

D. Worksheet S-3 Wage Data for the Proposed FY 2012 Wage Index

The proposed FY 2012 wage index values are based on the data collected from the Medicare cost reports submitted by hospitals for cost reporting periods beginning in FY 2008 (the FY 2011 wage index was based on data from cost reporting periods beginning during FY 2007).

1. Included Categories of Costs

The proposed FY 2012 wage index includes the following categories of data associated with costs paid under the IPPS (as well as outpatient costs):

• Salaries and hours from short-term, acute care hospitals (including paid lunch hours and hours associated with military leave and jury duty)

• Home office costs and hours

• Certain contract labor costs and hours (which includes direct patient care, certain top management, pharmacy, laboratory, and nonteaching physician Part A services, and certain contract indirect patient care services (as discussed in the FY 2008 final rule with comment period (72 FR 47315))

• Wage-related costs, including pensions and other deferred compensation costs.

2. Proposal for Changes to the Reporting Requirements for Pension Costs for the Medicare Wage Index

a. Background

The instructions for determining and reporting defined benefit pension costs on the cost report for Medicare cost-finding purposes are located in section 2142 of the Provider Reimbursement Manual, Part I (PRM-I). For Medicare wage index purposes, the instructions in section 3605.2 of the Provider Reimbursement Manual, Part II (PRM-II) for Worksheet S-3, Part II, Lines 13 through 20, require hospitals to comply with the requirements in section 2142 of the PRM-I.

Specifically, section 2142.5 of the PRM-I defines the current period liability for pension cost (that is, the maximum allowable pension cost) based on the actuarial accrued liability, normal cost, and unfunded actuarial liability. Under section 2142.4(A) of the PRM-I, these liability measurements are to be computed in accordance with the Employee Retirement Income Security Act of 1974 (ERISA), regardless of whether or not the pension plan is subject to ERISA. Also, section 2142.6(A) of the PRM-I requires the current period liability for pension costs to be funded in order to be allowable. In addition, section 2142.6(C) of the PRM-I allows for funding in excess ofthe current period liability to be carried forward and recognized in future periods. We note that, on March 28, 2008, CMS published Revision 436, a technical clarification to section 2142 of the PRM-I.

Actuarial accrued liability and normal cost are typically determined on an ongoing plan basis using long-term, best-estimate assumptions. The interest assumption reflects the average rates of return expected over the period during which benefits were payable, taking into account the investment mix of plan assets. Pension costs for plans not subject to ERISA (such as church plans and plans sponsored by public sector employers) are also typically based on the actuarial accrued liability and normal cost using long-term, best estimate assumptions.

The Pension Protection Act (PPA) of 2006 (Pub. L. 109-280) amended ERISA. Under the PPA amendments to ERISA, the actuarial accrued liability and normal cost are no longer used as a basis for determining ERISA minimum required or maximum tax deductible contributions. ERISA contribution limits are now based on a “funding target” and “target normal cost” measured on a settlement basis using the current market interest rates for investment grade corporate bonds that match the duration of the benefit payouts. The Internal Revenue Service (IRS) publishes the applicable interest rate tables on a monthly basis. Because pension liabilities are very sensitive to changes in the interest rate used to discount future benefit payouts, pension costs based on the PPA “funding target” and “target normal cost” values are expected to be less stable than those based on the pre-PPA traditional long-term, best-estimate assumptions, which change infrequently. Furthermore, plans not subject to the ERISA requirements, as amended by the PPA, are not likely to use the new “funding target” and “target normal cost” basis for determining pension costs, and ERISA plans are not likely to continue to report costs developed using the actuarial accrued liability and normal cost based on long-term, best estimate assumptions. Accordingly, there is no longer a standard actuarial basis used by all plans.

In response to the PPA amendments to ERISA, we began a review of the rules for determining pension costs for Medicare cost finding and wage index purposes. As an interim measure, we issued a Joint Signature Memorandum (JSM) in November 2009 that contained instructions and a spreadsheet to assist hospitals and Medicare contractors in determining the annual allowable defined benefit pension cost for the FY 2011 wage index (JSM/TDL-10061, 11-20-09, December 3, 2009). Although these instructions were released for purposes of the wage index, these instructions also serve as interim guidance for Medicare cost-finding purposes.

In this proposed rule, we are proposing to revise our policy for determining pension cost for Medicare purposes. As mentioned above, due to the ERISA rules, as amended by the PPA, there is no longer a standard actuarial cost basis to be used by all types of plans. Therefore, we are proposing to no longer rely on actuarial computation to determine the maximum annual cost limitation for Medicare. Instead, the general parameters of our proposal would maintain the current requirement that pension costs must be funded to be reportable, and would require all hospitals to report the actual pension contributions funded during the reporting period, on a cash basis.

In addition, under this cash basis approach, we are proposing separate methodologies for measuring pension costs for Medicare cost-finding purposes (discussed in section IV.M. of this preamble) and for purposes of updating the wage index (discussed below in section III.D.2.b. of this preamble). We believe it is necessary to have two distinct proposals in order to address the different goals of determining a hospital's payments and updating the average hourly wage to establish the geographic area wage index. The function of the wage index is to measure relative hospital labor costs across areas. This function is distinct from Medicare payment determinations, where the goal is to measure the actual costs incurred by individual hospitals. These two distinct proposals would require separate updated instructions to section 2142 of the PRM-I for Medicare cost-finding purposes and section 3605.2 of the PRM-II for purposes of the wage index. Below is a detailed discussion of our proposal for reporting pension costs under the wage index. A full discussion of our proposal for Medicare cost-finding is discussed in section IV.M. of this preamble.

The proposal below reflects our commitment to the general principles of the President's Executive Order released January 18, 2011, entitled “Improving Regulation and Regulatory Review.”

b. Proposal for Allowable Pension Cost for the Medicare Wage Index

As mentioned above, the function of the Medicare wage index is to measure relative hospital labor costs across all areas. Therefore, while we believe pension costs must be funded in order to be reportable (we refer readers to the August 12, 2010Federal Register(74 FR 47369) for an explanation of this longstanding policy), it also is important for pension costs to be relatively stable from year to year so that there is less volatility in the wage index. Thus, we are proposing to include, in the wage index, pension costs equal to the average actual cash contributions deposited to a hospital's defined benefit pension plan by the hospital and/or the hospital system over a 3-year period. The use of cash contributions as a measure of the costs incurred is necessary to ensure uniformity among all hospitals, regardless of their tax status or ERISA coverage. The 3-year average is intended to reduce the volatility that often occurs due to timing of contributions. Most pension plan sponsors have flexibility to determine the pension funding for a particular period and their decisions may be based on cash-flow considerations or other factors unrelated to the normal operation of the plan. Furthermore, the funding of current period pension costs may be delayed by almost a full year after the close of the period to which it applies. By using a 3-year average, we hope to enhance the stability of the wage index.

To ensure that the average annual pension cost reflected in the wage index is consistent with the reporting period applicable to all other costs included in the index, we are proposing that the 3-year average be centered on the base cost reporting year for the wage index. For example, the FY 2013 wage index will be based on Medicare cost reporting periods beginning during FY 2009 and would reflect the average pension contributions made in hospitals' cost reporting periods beginning during FYs 2008, 2009, and 2010. Thus, this proposal would require pension plan contribution data for the cost reporting periods immediately preceding and immediately following the base cost reporting period for the wage index.

We do not anticipate that the use of contributions made in the cost reporting period immediately following the reporting year will create an administrative burden because, even under the existing rule, contributions to fund current period costs are often deferred until the following period. In addition, trust account statements and general ledger reports to support the contributions should be readily available. We are proposing to apply the above methodology for reporting pension costs for the wage index beginning with the FY 2013 IPPS update. We invite public comment onthis policy proposal and are especially interested in receiving comments related to the proposed 3-year averaging period.

3. Excluded Categories of Costs

Consistent with the wage index methodology for FY 2011, the proposed wage index for FY 2012 also excludes the direct and overhead salaries and hours for services not subject to IPPS payment, such as SNF services, home health services, costs related to GME (teaching physicians and residents) and certified registered nurse anesthetists (CRNAs), and other subprovider components that are not paid under the IPPS. The proposed FY 2012 wage index also excludes the salaries, hours, and wage-related costs of hospital-based rural health clinics (RHCs), and Federally qualified health centers (FQHCs) because Medicare pays for these costs outside of the IPPS (68 FR 45395). In addition, salaries, hours, and wage-related costs of CAHs are excluded from the wage index, for the reasons explained in the FY 2004 IPPS final rule (68 FR 45397).

4. Use of Wage Index Data by Providers Other Than Acute Care Hospitals Under the IPPS

Data collected for the IPPS wage index are also currently used to calculate wage indices applicable to other providers, such as SNFs, home health agencies (HHAs), and hospices. In addition, they are used for prospective payments to IRFs, IPFs, and LTCHs, and for hospital outpatient services. We note that, in the IPPS rules, we do not address comments pertaining to the wage indices for non-IPPS providers, other than for LTCHs. Such comments should be made in response to separate proposed rules for those providers.

E. Verification of Worksheet S-3 Wage Data

The wage data for the proposed FY 2012 wage index were obtained from Worksheet S-3, Parts II and III of the Medicare cost report for cost reporting periods beginning on or after October 1, 2007, and before October 1, 2008. For wage index purposes, we refer to cost reports during this period as the “FY 2008 cost report,” the “FY 2008 wage data,” or the “FY 2008 data.” Instructions for completing Worksheet S-3, Parts II and III are in the Provider Reimbursement Manual (PRM), Part II, sections 3605.2 and 3605.3. The data file used to construct the proposed wage index includes FY 2008 data submitted to us as of March 3, 2011. As in past years, we performed an intensive review of the wage data, mostly through the use of edits designed to identify aberrant data.

We asked our fiscal intermediaries/MACs to revise or verify data elements that result in specific edit failures. For the proposed FY 2012 wage index, we identified and excluded 23 providers with data that was too aberrant to include in the proposed wage index, although if data elements for some of these providers are corrected, we intended to include some of these providers in the FY 2012 final wage index. We instructed fiscal intermediaries/MACs to complete their data verification of questionable data elements and to transmit any changes to the wage data no later than April 13, 2011. We intend that all unresolved data elements will be resolved by the date the final rule is issued. The revised data will be reflected in the FY 2012 IPPS final rule.

In constructing the proposed FY 2012 wage index, we included the wage data for facilities that were IPPS hospitals in FY 2008, inclusive of those facilities that have since terminated their participation in the program as hospitals, as long as those data did not fail any of our edits for reasonableness. We believe that including the wage data for these hospitals is, in general, appropriate to reflect the economic conditions in the various labor market areas during the relevant past period and to ensure that the current wage index represents the labor market area's current wages as compared to the national average of wages. However, we excluded the wage data for CAHs as discussed in the FY 2004 IPPS final rule (68 FR 45397). For this proposed rule, we removed 19 hospitals that converted to CAH status between February 16, 2010, the cut-off date for CAH exclusion from the FY 2011 wage index, and February 15, 2011, the cut-off date for CAH exclusion from the FY 2012 wage index. After removing hospitals with aberrant data and hospitals that converted to CAH status, the proposed FY 2012 wage index is calculated based on 3,484 hospitals.

In the FY 2008 final rule with comment period (72 FR 47317) and the FY 2009 IPPS final rule (73 FR 48582), we discussed our policy for allocating a multicampus hospital's wages and hours data, by full-time equivalent (FTE) staff, among the different labor market areas where its campuses are located. During the FY 2011 wage index desk review process, we requested fiscal intermediaries/MACs to contact multicampus hospitals that had campuses in different labor market areas to collect the data for the allocation. The FY 2011 wage index included separate wage data for campuses of three multicampus hospitals.

For FY 2012, as we discussed in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50168), we are proposing to no longer allow hospitals to use discharge data for the allocation of a multicampus hospital's wage data among the different labor market areas where its campuses are located. The Medicare cost report was updated in May 2008 to provide for the reporting of FTE data by campus for multicampus hospitals (Form CMS-2552-96, Worksheet S-2, lines 61 and 62). The data from cost reporting periods that begin in FY 2008 are now available for calculating the wage index for FY 2012. Therefore, a multicampus hospital will not have the option to use either FTE or discharge data for allocating wage data among its campuses by providing the information from the applicable cost reporting period to CMS through its fiscal intermediary/MAC. The table containing the proposed FY 2012 wage index, which is listed in section VI. of the Addendum to this proposed rule and available via the Internet, includes separate wage data for campuses of three multicampus hospitals.

F. Method for Computing the Proposed FY 2012 Unadjusted Wage Index

1. Steps for Computation

The method used to compute the proposed FY 2012 wage index without an occupational mix adjustment follows:

Step 1—As noted above, we are proposing to base the proposed FY 2012 wage index on wage data reported on the FY 2008 Medicare cost reports. We gathered data from each of the non-Federal, short-term, acute care hospitals for which data were reported on the Worksheet S-3, Parts II and III of the Medicare cost report for the hospital's cost reporting period beginning on or after October 1, 2007, and before October 1, 2008. In addition, we included data from some hospitals that had cost reporting periods beginning before October 2007 and reported a cost reporting period covering all of FY 2008. These data are included because no other data from these hospitals would be available for the cost reporting period described above, and because particular labor market areas might be affected due to the omission of these hospitals. However, we generally describe these wage data as FY 2008 data. We note that, if a hospital had more than one cost reporting period beginning during FY 2008 (for example, a hospital had two short cost reportingperiods beginning on or after October 1, 2007, and before October 1, 2008), we included wage data from only one of the cost reporting periods, the longer, in the wage index calculation. If there was more than one cost reporting period and the periods were equal in length, we included the wage data from the later period in the wage index calculation.

Step 2—Salaries—The method used to compute a hospital's average hourly wage excludes certain costs that are not paid under the IPPS. (We note that, beginning with FY 2008 (72 FR 47315), we include Lines 22.01, 26.01, and 27.01 of Worksheet S-3, Part II for overhead services in the wage index. However, we note that the wages and hours on these lines are not incorporated into Line 101, Column 1 of Worksheet A, which, through the electronic cost reporting software, flows directly to Line 1 of Worksheet S-3, Part II. Therefore, the first step in the wage index calculation for FY 2011 is to compute a “revised” Line 1, by adding to the Line 1 on Worksheet S-3, Part II (for wages and hours respectively) the amounts on Lines 22.01, 26.01, and 27.01.) In calculating a hospital's average salaries plus wage-related costs, we subtract from Line 1 (total salaries) the GME and CRNA costs reported on Lines 2, 4.01, 6, and 6.01, the Part B salaries reported on Lines 3, 5 and 5.01, home office salaries reported on Line 7, and exclude salaries reported on Lines 8 and 8.01 (that is, direct salaries attributable to SNF services, home health services, and other subprovider components not subject to the IPPS). We also subtract from Line 1 the salaries for which no hours were reported. To determine total salaries plus wage-related costs, we add to the net hospital salaries the costs of contract labor for direct patient care, certain top management, pharmacy, laboratory, and nonteaching physician Part A services (Lines 9 and 10), home office salaries and wage-related costs reported by the hospital on Lines 11 and 12, and nonexcluded area wage-related costs (Lines 13, 14, and 18).

We note that contract labor and home office salaries for which no corresponding hours are reported are not included. In addition, wage-related costs for nonteaching physician Part A employees (Line 18) are excluded if no corresponding salaries are reported for those employees on Line 4.

Step 3—Hours—With the exception of wage-related costs, for which there are no associated hours, we compute total hours using the same methods as described for salaries in Step 2.

Step 4—For each hospital reporting both total overhead salaries and total overhead hours greater than zero, we then allocate overhead costs to areas of the hospital excluded from the wage index calculation. First, we determine the ratio of excluded area hours (sum of Lines 8 and 8.01 of Worksheet S-3, Part II) to revised total hours (Line 1 minus the sum of Part II, Lines 2, 3, 4.01, 5, 5.01, 6, 6.01, 7, and Part III, Line 13 of Worksheet S-3). We then compute the amounts of overhead salaries and hours to be allocated to excluded areas by multiplying the above ratio by the total overhead salaries and hours reported on Line 13 of Worksheet S-3, Part III. Next, we compute the amounts of overhead wage-related costs to be allocated to excluded areas using three steps: (1) We determine the ratio of overhead hours (Part III, Line 13 minus the sum of Lines 22.01, 26.01, and 27.01) to revised hours excluding the sum of Lines 22.01, 26.01, and 27.01 (Line 1 minus the sum of Lines 2, 3, 4.01, 5, 5.01, 6, 6.01, 7, 8, 8.01, 22.01, 26.01, and 27.01). (We note that for the FY 2008 and subsequent wage index calculations, we are excluding the sum of Lines 22.01, 26.01, and 27.01 from the determination of the ratio of overhead hours to revised hours because hospitals typically do not provide fringe benefits (wage-related costs) to contract personnel. Therefore, it is not necessary for the wage index calculation to exclude overhead wage-related costs for contract personnel. Further, if a hospital does contribute to wage-related costs for contracted personnel, the instructions for Lines 22.01, 26.01, and 27.01 require that associated wage-related costs be combined with wages on the respective contract labor lines.); (2) we compute overhead wage-related costs by multiplying the overhead hours ratio by wage-related costs reported on Part II, Lines 13, 14, and 18; and (3) we multiply the computed overhead wage-related costs by the above excluded area hours ratio. Finally, we subtract the computed overhead salaries, wage-related costs, and hours associated with excluded areas from the total salaries (plus wage-related costs) and hours derived in Steps 2 and 3.

Step 5—For each hospital, we adjust the total salaries plus wage-related costs to a common period to determine total adjusted salaries plus wage-related costs. To make the wage adjustment, we estimate the percentage change in the employment cost index (ECI) for compensation for each 30-day increment from October 14, 2005, through April 15, 2007, for private industry hospital workers from the BLS'Compensation and Working Conditions. We use the ECI because it reflects the price increase associated with total compensation (salaries plus fringes) rather than just the increase in salaries. In addition, the ECI includes managers as well as other hospital workers. This methodology to compute the monthly update factors uses actual quarterly ECI data and assures that the update factors match the actual quarterly and annual percent changes. We also note that, since April 2006 with the publication of March 2006 data, the BLS' ECI uses a different classification system, the North American Industrial Classification System (NAICS), instead of the Standard Industrial Codes (SICs), which no longer exist. We have consistently used the ECI as the data source for our wages and salaries and other price proxies in the IPPS market basket, and we are not proposing to make any changes to the usage for FY 2012. The factors used to adjust the hospital's data were based on the midpoint of the cost reporting period, as indicated below.

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For example, the midpoint of a cost reporting period beginning January 1, 2008, and ending December 31, 2008, is June 30, 2008. An adjustment factor of 1.01766 would be applied to the wages of a hospital with such a cost reporting period. In addition, for the data for any cost reporting period that began in FY 2008 and covered a period of less than 360 days or more than 370 days, we annualize the data to reflect a 1-year cost report. Dividing the data by the number of days in the cost report and then multiplying the results by 365 accomplishes annualization.

Step 6—Each hospital is assigned to its appropriate urban or rural labor market area before any reclassifications under section 1886(d)(8)(B), section 1886(d)(8)(E), or section 1886(d)(10) of the Act. Within each urban or rural labor market area, we add the total adjusted salaries plus wage-related costs obtained in Step 5 for all hospitals in that area to determine the total adjusted salaries plus wage-related costs for the labor market area.

Step 7—We divide the total adjusted salaries plus wage-related costs obtained under both methods in Step 6 by the sum of the corresponding total hours (from Step 4) for all hospitals in each labor market area to determine an average hourly wage for the area.

Step 8—We add the total adjusted salaries plus wage-related costs obtained in Step 5 for all hospitals in the Nation and then divide the sum by the national sum of total hours from Step 4 to arrive at a national average hourly wage. Using the data as described above, the proposed national average hourly wage (unadjusted for occupational mix) is $36.1697.

Step 9—For each urban or rural labor market area, we calculate the hospital wage index value, unadjusted for occupational mix, by dividing the area average hourly wage obtained in Step 7 by the national average hourly wage computed in Step 8.

Step 10—Following the process set forth above, we develop a separate Puerto Rico-specific wage index for purposes of adjusting the Puerto Rico standardized amounts. (The national Puerto Rico standardized amount is adjusted by a wage index calculated for all Puerto Rico labor market areas based on the national average hourly wage as described above.) We add the total adjusted salaries plus wage-related costs (as calculated in Step 5) for all hospitals in Puerto Rico and divide the sum by the total hours for Puerto Rico (as calculated in Step 4) to arrive at an overall proposed average hourly wage (unadjusted for occupational mix) of $15.3863 for Puerto Rico. For each labor market area in Puerto Rico, we calculate the Puerto Rico-specific wage index value by dividing the area average hourly wage (as calculated in Step 7) by the overall Puerto Rico average hourly wage.

Step 11—Section 4410 of Public Law 105-33 provides that, for discharges on or after October 1, 1997, the area wage index applicable to any hospital that is located in an urban area of a State may not be less than the area wage index applicable to hospitals located in rural areas in that State. The areas affected by this provision are identified in Table 4D which is listed in section VI. of the Addendum to this proposed rule and available via the Internet.

2. Expiration of the Imputed Floor Policy

In the FY 2005 IPPS final rule (69 FR 49109 through 49111), we adopted the “imputed” floor as a temporary 3-year regulatory measure to address a concern by some individuals that hospitals in all-urban States were disadvantaged by the absence of rural hospitals to set a wage index floor in those States. There are two States that have no rural areas (New Jersey and Rhode Island). Rhode Island has only one urban area. In accordance with the imputed floor calculation (§ 412.64(h)(4) of the regulations), Rhode Island receives no benefit from the policy. As a result, the imputed floor policy only benefits one State—New Jersey. Although New Jersey may argue that it is disadvantaged bythe statutory rural floor because it has no rural areas, the imputed floor policy provides New Jersey with a guaranteed benefit that no other State has. In any given year, approximately one-half of the States have no hospitals that benefit from the rural floor provision. However, New Jersey benefits each year that the imputed floor policy is in place.

The imputed floor was originally set to expire in FY 2007, but we extended it an additional year in the FY 2008 IPPS final rule with comment period (72 FR 47321). In the FY 2009 IPPS final rule (73 FR 48570 through 48574 and 48584), we extended the imputed floor for an additional 3 years, through FY 2011, linking the extension to a policy to apply budget neutrality for the rural and imputed floors within each State, instead of nationally, over a 3-year transition period. Section 3141 of the Affordable Care Act replaced the statewide budget neutrality policy with the national budget neutrality policy that was in place during FY 2008. That is, section 3141 required that budget neutrality for the rural and imputed floor be applied “through a uniform, national adjustment to the area wage index” instead of within each State beginning in FY 2011 (75 FR 50160). However, we note that the Affordable Care Act did not include a provision to extend the imputed floor or to make the imputed floor permanent. Therefore, the imputed floor is set to expire with the FY 2011 wage index, and we are not proposing to extend the imputed floor policy. Thus, the imputed floor is not reflected in the table containing the proposed FY 2012 wage index, which is listed in section VI. of the Addendum to this proposed rule and available via the Internet.

As we discussed in the FY 2008 IPPS proposed rule and final rule with comment period (72 FR 24786 and 72 FR 47322, respectively), the application of the national budget neutrality requirement for the rural and imputed floors requires a transfer of payments from hospitals in States with rural hospitals but where the rural floor is not applied to hospitals in States where the rural or imputed floor is applied. For this reason, we believe that the floor policy should apply only when required by statute. Thus, only States containing both rural areas and hospitals located in such areas (including any hospital reclassified as rural under § 412.103) would benefit from the rural floor, as required by section 4410 of Public Law 105-33.

In the proposed FY 2012 wage index, the rural floor will apply to 189 hospitals in 26 States. If the imputed floor policy was to continue into FY 2012, it would apply to 39 additional hospitals in New Jersey. We are seeking public comments regarding the expiration of the imputed floor.

3. Proposed FY 2012 Puerto Rico Wage Index

We note that, for the proposed FY 2012 wage index, there is one new hospital in rural Puerto Rico when previously there were none. However, this hospital has no cost reporting period beginning during FY 2008 and, therefore, has no wage data for inclusion in the proposed FY 2012 wage index calculation for rural Puerto Rico. We discussed in the FY 2005 IPPS final rule that, under these circumstances, we would determine a State's rural floor based on the imputed floor policy in § 412.64(h)(4) of the regulations. However, as discussed above, the imputed floor is set to expire with the FY 2011 wage index. We adopted the policy in the FY 2008 IPPS final rule with comment period (72 FR 47323) that if there are no hospitals' cost report wage data available to calculate a State's rural floor, and the imputed floor policy has expired, “we will use the unweighted average of the wage indices from all CBSAs (urban areas) that are contiguous to the rural counties of the State to compute the State's rural floor. (We define contiguous as sharing a border.)” Except for Fajardo, Puerto Rico (CBSA 21940), all other Puerto Rico urban areas are contiguous to a rural area. Therefore, based on our existing policy, the proposed FY 2012 rural Puerto Rico wage index is calculated based on the average of the proposed FY 2012 wage indices for the following urban areas: Aguadilla-Isabela-San Sebastián, PR (CBSA 10380); Guayama, PR (CBSA 25020); Mayagüez, PR (CBSA 32420); Ponce, PR (CBSA 38660), San Germán-Cabo Rojo, PR (CBSA 41900), San Juan-Caguas-Guaynabo, PR (CBSA 41980), and Yauco, PR (CBSA 49500).

G. Analysis and Implementation of the Proposed Occupational Mix Adjustment and the Proposed FY 2012 Occupational Mix Adjusted Wage Index

As discussed in section III.C. of this preamble, for FY 2012, we are proposing to apply the occupational mix adjustment to 100 percent of the proposed FY 2012 wage index. We calculated the proposed occupational mix adjustment using data from the 2007-2008 occupational mix survey data, using the methodology described in section III.C.3. of this preamble.

Using the occupational mix survey data and applying the occupational mix adjustment to 100 percent of the proposed FY 2012 wage index results in a proposed national average hourly wage of $36.1406 and a proposed Puerto-Rico specific average hourly wage of $15.4107. After excluding data of hospitals that either submitted aberrant data that failed critical edits, or that do not have FY 2008 Worksheet S-3 cost report data for use in calculating the proposed FY 2012 wage index, we calculated the proposed FY 2012 wage index using the occupational mix survey data from 3,165 hospitals. Using the Worksheet S-3 cost report data of 3,484 hospitals and occupational mix survey data from 3,165 hospitals represents a 90.8 percent survey response rate. The proposed FY 2012 national average hourly wages for each occupational mix nursing subcategory as calculated in Step 2 of the occupational mix calculation are as follows:

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The proposed national average hourly wage for the entire nurse category as computed in Step 5 of the occupational mix calculation is $30.442540295. Hospitals with a nurse category average hourly wage (as calculated in Step 4) ofgreater than the national nurse category average hourly wage receive an occupational mix adjustment factor (as calculated in Step 6) of less than 1.0. Hospitals with a nurse category average hourly wage (as calculated in Step 4) of less than the national nurse category average hourly wage receive an occupational mix adjustment factor (as calculated in Step 6) of greater than 1.0.

Based on the 2007-2008 occupational mix survey data, we determined (in Step 7 of the occupational mix calculation) that the national percentage of hospital employees in the nurse category is 44.31 percent, and the national percentage of hospital employees in the all other occupations category is 55.69 percent. At the CBSA level, the percentage of hospital employees in the nurse category ranged from a low of 29.08 percent in one CBSA, to a high of 70.76 percent in another CBSA.

We compared the proposed FY 2012 occupational mix adjusted wage indices for each CBSA to the proposed unadjusted wage indices for each CBSA. As a result of applying the occupational mix adjustment to the wage data, the proposed wage index values for 209 (53.6 percent) urban areas and 32 (66.7 percent) rural areas would increase. One hundred seven (27.4 percent) urban areas would increase by 1 percent or more, and 5 (1.3 percent) urban areas would increase by 5 percent or more. Seventeen (35.4 percent) rural areas would increase by 1 percent or more, and no rural areas would increase by 5 percent or more. However, the wage index values for 181 (46.4 percent) urban areas and 16 (33.3 percent) rural areas would decrease. Eighty-eight (22.6 percent) urban areas would decrease by 1 percent or more, and no urban area would decrease by 5 percent or more. Seven (14.6 percent) rural areas would decrease by 1 percent or more, and no rural areas would decrease by 5 percent or more. The largest positive impacts are 7.81 percent for an urban area and 2.90 percent for a rural area. The largest negative impacts are 3.95 percent for an urban area and 2.78 percent for a rural area. No urban or rural areas are unaffected. These results indicate that a larger percentage of rural areas (66.7 percent) would benefit from the occupational mix adjustment than do urban areas (53.6 percent). While these results are more positive overall for rural areas than under the previous occupational mix adjustment that used survey data from 2006, approximately one-third (33.3 percent) of rural CBSAs would still experience a decrease in their wage indices as a result of the occupational mix adjustment.

The proposed wage index values for FY 2012 (except those for hospitals receiving wage index adjustments under section 1886(d)(13) of the Act) included in Tables 4A, 4B, 4C, and 4F, which are listed in section VI. of the Addendum to this proposed rule and available via the Internet, include the proposed occupational mix adjustment.

Tables 3A and 3B, which are listed in section VI. of the Addendum to this proposed rule and available via the Internet, list the 3-year average hourly wage for each labor market area before the redesignation or reclassification of hospitals based on FYs 2010, 2011, and 2012 cost reporting periods. Table 3A lists these data for urban areas, and Table 3B lists these data for rural areas. In addition, Table 2, which is listed in section VI. of the Addendum to this proposed rule and available via the Internet, includes the adjusted average hourly wage for each hospital from the FY 2006 and FY 2007 cost reporting periods, as well as the FY 2008 period used to calculate the proposed FY 2012 wage index. The 3-year averages are calculated by dividing the sum of the dollars (adjusted to a common reporting period using the method described previously) across all 3 years, by the sum of the hours. If a hospital is missing data for any of the previous years, its average hourly wage for the 3-year period is calculated based on the data available during that period. The proposed average hourly wages in Tables 2, 3A, and 3B, which are listed in section VI. of the Addendum to this proposed rule and available via the Internet, include the proposed occupational mix adjustment. The proposed wage index values in Tables 4A, 4B, 4C, and 4D also include the proposed national rural floor budget neutrality adjustment.

H. Revisions to the Wage Index Based on Hospital Redesignations and Reclassifications

1. General

Under section 1886(d)(10) of the Act, the MGCRB considers applications by hospitals for geographic reclassification for purposes of payment under the IPPS. Hospitals must apply to the MGCRB to reclassify 13 months prior to the start of the fiscal year for which reclassification is sought (generally by September 1). Generally, hospitals must be proximate to the labor market area to which they are seeking reclassification and must demonstrate characteristics similar to hospitals located in that area. The MGCRB issues its decisions by the end of February for reclassifications that become effective for the following fiscal year (beginning October 1). The regulations applicable to reclassifications by the MGCRB are located in 42 CFR 412.230 through 412.280. (We refer readers to a discussion of the proximity requirements in the FY 2002 IPPS final rule (66 FR 39874 and 39875).)

Section 1886(d)(10)(D)(v) of the Act provides that, beginning with FY 2001, a MGCRB decision on a hospital reclassification for purposes of the wage index is effective for 3 fiscal years, unless the hospital elects to terminate the reclassification. Section 1886(d)(10)(D)(vi) of the Act provides that the MGCRB must use average hourly wage data from the 3 most recently published hospital wage surveys in evaluating a hospital's reclassification application for FY 2003 and any succeeding fiscal year.

Section 304(b) of Public Law 106-554 provides that the Secretary must establish a mechanism under which a statewide entity may apply to have all of the geographic areas in the State treated as a single geographic area for purposes of computing and applying a single wage index, for reclassifications beginning in FY 2003. The implementing regulations for this provision are located at 42 CFR 412.235.

Section 1886(d)(8)(B) of the Act requires the Secretary to treat a hospital located in a rural county adjacent to one or more urban areas as being located in the labor market area to which the greatest number of workers in the county commute, if the rural county would otherwise be considered part of an urban area under the standards for designating MSAs and if the commuting rates used in determining outlying counties were determined on the basis of the aggregate number of resident workers who commute to (and, if applicable under the standards, from) the central county or counties of all contiguous MSAs. In light of the CBSA definitions and the Census 2000 data that we implemented for FY 2005 (69 FR 49027), we undertook to identify those counties meeting these criteria. Eligible counties are discussed and identified under section III.H.5. of this preamble.

2. Effects of Reclassification/Redesignation

Section 1886(d)(8)(C) of the Act provides that the application of the wage index to redesignated hospitals is dependent on the hypothetical impact that the wage data from these hospitals would have on the wage index value for the area to which they have been redesignated. These requirements for determining the wage index values forredesignated hospitals are applicable both to the hospitals deemed urban under section 1886(d)(8)(B) of the Act and hospitals that were reclassified as a result of the MGCRB decisions under section 1886(d)(10) of the Act. Therefore, as provided in section 1886(d)(8)(C) of the Act, the wage index values were determined by considering the following:

• If including the wage data for the redesignated hospitals would reduce the wage index value for the area to which the hospitals are redesignated by 1 percentage point or less, the area wage index value determined exclusive of the wage data for the redesignated hospitals applies to the redesignated hospitals.

• If including the wage data for the redesignated hospitals reduces the wage index value for the area to which the hospitals are redesignated by more than 1 percentage point, the area wage index determined inclusive of the wage data for the redesignated hospitals (the combined wage index value) applies to the redesignated hospitals.

• If including the wage data for the redesignated hospitals increases the wage index value for the urban area to which the hospitals are redesignated, both the area and the redesignated hospitals receive the combined wage index value. Otherwise, the hospitals located in the urban area receive a wage index excluding the wage data of hospitals redesignated into the area.

• Rural areas whose wage index values would be reduced by excluding the wage data for hospitals that have been redesignated to another area continue to have their wage index values calculated as if no redesignation had occurred (otherwise, redesignated rural hospitals are excluded from the calculation of the rural wage index). The wage index value for a redesignated rural hospital cannot be reduced below the wage index value for the rural areas of the State in which the hospital is located.

CMS also has adopted the following policies:

• The wage data for a reclassified urban hospital is included in both the wage index calculation of the urban area to which the hospital is reclassified (subject to the rules described above) and the wage index calculation of the urban area where the hospital is physically located.

• In cases where hospitals have reclassified to rural areas, such as urban hospitals reclassifying to rural areas under 42 CFR 412.103, the hospital's wage data are: (a) included in the rural wage index calculation, unless doing so would reduce the rural wage index; and (b) included in the urban area where the hospital is physically located. The effect of this policy, in combination with the statutory requirement at section 1886(d)(8)(C)(ii) of the Act, is that rural areas may receive a wage index based upon the highest of: (1) Wage data from hospitals geographically located in the rural area; (2) wage data from hospitals geographically located in the rural area, but excluding all data associated with hospitals reclassifying out of the rural area under section 1886(d)(8)(B) or section 1886(d)(10) of the Act; or (3) wage data associated with hospitals geographically located in the area plus all hospitals reclassified into the rural area.

In addition, in accordance with the statutory language referring to “hospitals” in the plural under sections 1886(d)(8)(C)(i) and 1886(d)(8)(C)(ii) of the Act, our longstanding policy is to consider reclassified hospitals as a group when deciding whether to include or exclude them from both urban and rural wage index calculations.

3. FY 2012 MGCRB Reclassifications

a. FY 2012 Reclassification Requirements and Approvals

Under section 1886(d)(10) of the Act, the MGCRB considers applications by hospitals for geographic reclassification for purposes of payment under the IPPS. The specific procedures and rules that apply to the geographic reclassification process are outlined in 42 CFR 412.230 through 412.280.

At the time this proposed rule was constructed, the MGCRB had completed its review of FY 2012 reclassification requests. Based on such reviews, there were 280 hospitals approved for wage index reclassifications by the MGCRB for FY 2012. Because MGCRB wage index reclassifications are effective for 3 years, for FY 2012, hospitals reclassified during FY 2010 or FY 2011 are eligible to continue to be reclassified to a particular labor market area based on such prior reclassifications. There were 283 hospitals approved for wage index reclassifications in FY 2010 and 294 hospitals approved for wage index reclassifications in FY 2011. Of all of the hospitals approved for reclassification for FY 2010, FY 2011, and FY 2012, based upon the review at the time of this proposed rule, 857 hospitals are in a reclassification status for FY 2012.

Under 42 CFR 412.273, hospitals that have been reclassified by the MGCRB are permitted to withdraw their applications within 45 days of the publication of a proposed rule. Generally stated, the request for withdrawal of an application for reclassification or termination of an existing 3-year reclassification that would be effective in FY 2012 has to be received by the MGCRB within 45 days of the publication of the proposed rule. Hospitals also may cancel prior reclassification withdrawals or terminations in certain circumstances. For further information about withdrawing, terminating, or canceling a previous withdrawal or termination of a 3-year reclassification for wage index purposes, we refer the reader to 42 CFR 412.273, as well as the FY 2002 IPPS final rule (66 FR 39887) and the FY 2003 IPPS final rule (67 FR 50065). Additional discussion on withdrawals and terminations, and clarifications regarding reinstating reclassifications and “fallback” reclassifications, were included in the FY 2008 IPPS final rule (72 FR 47333).

Changes to the wage index that result from withdrawals of requests for reclassification, terminations, wage index corrections, appeals, and the Administrator's review process for FY 2012 will be incorporated into the wage index values published in the FY 2012 IPPS/LTCH PPS final rule. These changes affect not only the wage index value for specific geographic areas, but also the wage index value redesignated/reclassified hospitals receive; that is, whether they receive the wage index that includes the data for both the hospitals already in the area and the redesignated/reclassified hospitals. Further, the wage index value for the area from which the hospitals are redesignated/reclassified may be affected.

b. Applications for Reclassifications for FY 2013

Applications for FY 2013 reclassifications are due to the MGCRB by September 1, 2011. We note that this is also the deadline for canceling a previous wage index reclassification withdrawal or termination under 42 CFR 412.273(d). Applications and other information about MGCRB reclassifications may be obtained, beginning in mid-July 2011, via the CMS Internet Web site at:http://cms.hhs.gov/MGCRB/02_instructions_and_applications.asp, or by calling the MGCRB at (410) 786-1174. The mailing address of the MGCRB is: 2520 Lord Baltimore Drive, Suite L, Baltimore, MD 21244-2670.

4. Redesignations of Hospitals Under Section 1886(d)(8)(B) of the Act

Section 1886(d)(8)(B) of the Act requires us to treat a hospital located in a rural county adjacent to one or moreurban areas as being located in the MSA if certain criteria are met. Effective beginning FY 2005, we use OMB's 2000 CBSA standards and the Census 2000 data to identify counties in which hospitals qualify under section 1886(d)(8)(B) of the Act to receive the wage index of the urban area. Hospitals located in these counties have been known as “Lugar” hospitals and the counties themselves are often referred to as “Lugar” counties. We provide the FY 2011 chart below with the listing of the rural counties containing the hospitals designated as urban under section 1886(d)(8)(B) of the Act. For discharges occurring on or after October 1, 2011, hospitals located in the rural county in the first column of this chart will be redesignated for purposes of using the wage index of the urban area listed in the second column.

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As in the past, hospitals redesignated under section 1886(d)(8)(B) of the Act are also eligible to be reclassified to a different area by the MGCRB. Affected hospitals are permitted to compare the reclassified wage index for the labor market area in Table 4C (which is listed in section VI. of the Addendum to this proposed rule and available via the Internet) into which they would be reclassified by the MGCRB to the wage index for the area to which they are redesignated under section 1886(d)(8)(B) of the Act. Hospitals may withdraw from an MGCRB reclassification within 45 days of the publication of this proposed rule.

5. Reclassifications Under Section 1886(d)(8)(B) of the Act

As discussed in the FY 2009 IPPS final rule (73 FR 48588), Lugar hospitals are treated like reclassified hospitals for purposes of determining their applicable wage index and receive the reclassified wage index for the urban area to which they have been redesignated. Because Lugar hospitals are treated like reclassified hospitals, when they are seeking reclassification by the MGCRB, they are subject to the rural reclassification rules set forth at 42 CFR 412.230. The procedural rules set forth at § 412.230 list the criteria that a hospital must meet in order to reclassify as a rural hospital. Lugar hospitals are subject to the proximity criteria and payment thresholds that apply to rural hospitals. Specifically, the hospital must be no more than 35 miles from the area to which it seeks reclassification (§ 412.230(b)(1)); and the hospital must show that its average hourly wage is at least 106 percent of the average hourly wage of all other hospitals in the area in which the hospital is located (§ 412.230(d)(1)(iii)(C)). In accordance with the requirements of section 3137(c) of the Affordable Care Act, beginning with reclassifications for the FY 2011 wage index, a Lugar hospital must also demonstrate that its average hourly wage is equal to at least 82 percent of the average hourly wage of hospitals in the area to which it seeks redesignation (§ 412.230(d)(1)(iv)(C)).

Hospitals not located in a Lugar county seeking reclassification to the urban area where the Lugar hospitals have been redesignated are not permitted to measure to the Lugar county to demonstrate proximity (no more than 15 miles for an urban hospital, and no more than 35 miles for a rural hospital or the closest urban or rural area for RRCs or SCHs) in order to be reclassified to such urban area. These hospitals must measure to the urban area exclusive of the Lugar County to meet the proximity or nearest urban or rural area requirement. We treat New England deemed counties in a manner consistent with how we treat Lugar counties. (We refer readers to FY 2008 IPPS final rule with comment period (72 FR 47337) for a discussion of this policy.)

6. Reclassifications Under Section 508 of Public Law 108-173

Section 508 of Public Law 108-173 allowed certain qualifying hospitals to receive wage index reclassifications and assignments that they otherwise would not have been eligible to receive under the law. Although section 508 originally was scheduled to expire after a 3-year period, Congress extended the provision several times, as well as certain special exceptions that would have otherwise expired. For a discussion of the original section 508 provision and its various extensions, we refer readers to the FY 2010 notice issued in the Federal Register on June 2, 2010 (75 FR 31118). Prior to the enactment of the Medicare and Medicaid Extenders Act of 2010 (Pub. L. 111-309) on December 15, 2010, the extension of the 508 provision was included in sections 3137(a) and 10317 of the Affordable Care Act (Pub. L. 111-148). Section 3137 of the Affordable Care Act extended, through FY 2010, section 508 reclassifications as well as certain special exceptions. The most recent extension of the provision was included in section 102 of the Medicare and Medicaid Extender Act, which extends, through FY 2011, section 508 reclassifications as well as certain special exceptions. The latest extension of these provisions expires on September 30, 2011, and will no longer be applicable effective with FY 2012.

7. Waiving Lugar Redesignation for the Out-Migration Adjustment

We have received several inquiries regarding the effect on a hospital's deemed urban status when a hospital waives its reclassification under section 1886(d)(8) of the Act in order to accept an out-migration adjustment to the wage index under section 1886(d)(13) of the Act. (We refer readers to a discussion of the out-migration adjustment under section III.I. of the preamble of this proposed rule.) In this proposed rule,we are clarifying that Lugar hospitals will be required to waive their Lugar urban status in its entirety in order to receive the out-migration adjustment. We believe this represents a permissible reading of the statute, as section 1886(d)(13)(G) of the Act states that a hospital with an out-migration adjustment is not “eligible” for a reclassification under subsection (8). Therefore, beginning with FY 2012, we are proposing that an eligible hospital that waives its Lugar status in order to receive the out-migration adjustment has effectively waived its deemed urban status and, thus, is rural for all purposes under the IPPS, including being considered rural for the DSH payment adjustment, effective for the fiscal year in which the hospital receives the out-migration adjustment. (We refer readers to a discussion of DSH payment adjustment under section IV.G. of this preamble.)

In addition, we are proposing to make a minor procedural change that would allow a Lugar hospital that qualifies for and accepts the out-migration adjustment (through written notification to CMS within 45 days from the publication of the proposed rule) to automatically waive its urban status for the 3-year period for which its out-migration adjustment is effective. That is, such a Lugar hospital would no longer be required during the second and third years of eligibility for the out-migration adjustment to advise us annually that it prefers to continue being treated as rural and receive the adjustment. We are making this proposal in response to public comments we received on the FY 2011 IPPS/LTCH proposed rule that discussed the burden of this annual request (74 FR 43840). Thus, under the proposed procedural change, a Lugar hospital that requests to waive its urban status in order to receive the rural wage index in addition to the out-migration adjustment would be deemed to have accepted the out-migration adjustment and agrees to be treated as rural for the duration of its 3-year eligibility period, unless prior to its second or third year of eligibility the hospital explicitly notifies CMS in writing, within 45 days from the publication of the proposed rule, that it instead elects to return to its deemed urban status and no longer wishes to accept the out-migration adjustment.

8. Other Geographic Reclassification Issues

a. Requested Reclassification for Single Hospital MSAs

Section 412.230 of the regulations sets forth criteria for an individual hospital to apply for geographic reclassification to a higher rural or urban wage index area. Specifically, under § 412.230(a)(3)(ii), an individual hospital may be redesignated from an urban area to another urban area, from a rural area to another rural area, or from a rural area to an urban area for the purpose of using the other area's wage index value. Such a hospital must also meet other criteria. One required criterion (under § 412.230(d)(1)(iii)(C) of the regulations) is that the hospital must demonstrate that its own average hourly wage is higher than the average hourly wage of hospitals in the area in which the hospital is located (108 percent for urban hospitals and 106 percent for rural hospitals). In cases where a hospital wishing to reclassify is the only hospital in its MSA, that hospital is unable to satisfy this criterion because it cannot demonstrate that its average hourly wage is higher than that of the other hospitals in the area in which the hospital is located (because there are no other hospitals in the area). For hospitals in the category described above, our current policy provides an alternative that allows hospitals to seek reclassification using the group reclassification rules under § 412.232 or § 412.234. Specifically, if a hospital is the single hospital in its area for the 3-year period over which the average hourly wage is calculated for the purpose of the comparison under § 412.230(d)(1)(iii)(C), the hospital may apply for geographic reclassification as a single hospital county group in accordance with the procedures set forth at § 412.232 or § 412.234. In addition to specifying the average hourly wage criteria, these regulations state that the county in which the hospital is located must be adjacent to the urban area to which it seeks redesignation. In addition, a certain level of economic integration needs to exist between the two areas. For example, for urban county group reclassifications (for FY 2008 and subsequent periods), § 412.234(a)(3)(iv) states that “hospitals located in counties that are in the same Combined Statistical Area (CSA) or Core-Based Statistical Area (CBSA) * * * as the urban area to which they seek redesignation qualify as meeting the proximity requirements for reclassification to the urban area to which they seek redesignation.”

Recently, we have been advised of a single hospital MSA scenario of concern to a particular hospital. In this scenario, an urban hospital located in an area in which there was only one other hospital had previously applied for and was granted a reclassification by the MGCRB to an adjacent urban area with a higher wage index. During the 3-year reclassification timeframe, the other hospital in its labor market area closed. After the expiration of its reclassification, the hospital became ineligible for reclassification to that same adjacent urban area with a higher wage index because it was no longer able to satisfy the wage data comparison criteria to reclassify individually under § 412.230(d)(1)(iii)(C). In addition, the hospital could not apply for redesignation under the urban county group regulation at § 412.234 because the hospital was not located in the same CSA or CBSA as the urban area to which it sought reclassification. In this example, the concern that was shared with CMS was that the hospital was competitively disadvantaged in competing for labor with neighboring hospitals where the hospital had a comparable average hourly wage, compared to the other hospitals in its surrounding area, because it receives a lower wage index.

We believe that the geographic reclassification regulations should not be revised to accommodate this situation. We have repeatedly rejected special rules to accommodate single hospital MSAs (69 FR 48915, 49109; 71 FR 47869, 48071 and 48072). In these explanations, we have highlighted the fact that hospitals in single hospital MSAs not only may be eligible for out-commuting adjustments, but that they also may apply to an adjacent MSA within the same CSA using the group reclassification rules without meeting the 108-percent test. Each year, we propose to adopt the OMB's statistical area definitions (75 FR 50162), so if a hospital in a single hospital MSA cannot meet group reclassification criteria because of the CSA standard, it means that OMB has determined that there is not a sufficient degree of employment interchange to suggest that the areas compete for the same labor. In addition, when we originally adopted the 108-percent test, we noted that “with respect to single hospital MSAs, a hospital in such an MSA receives a wage index value that is based entirely on its own wage data and, therefore, its actual wage levels. Since such a hospital is clearly not disadvantaged by its inclusion in a labor market area where its wage index is determined based onits own wage levels, it is appropriate under this guideline that a hospital should not be reclassified if it is the only one in its area.” (57 FR 39746) Allowing a hospital representing 100 percent of its area's wages to be exempt from the wage data comparison test could undermine the 108-percent test for hospitals in other circumstances where the standard cannot be met. Finally, we note that section 3137(c) of the Affordable Care Act prohibits us from altering average hourly wage comparison criteria for FY 2012. That provision states that “notwithstanding any other provision of law,” the MGCRB is required to use the “average hourly wage comparison criteria used in making such decisions as of September 30, 2008,” until the first fiscal year beginning on the date that is one year after the Secretary submits a report to Congress.

We are soliciting public comments on this issue. In particular, we invite comments on the types of regulatory solutions that could be made available to a hospital in this type of situation.

b. Requests for Exceptions to Geographic Reclassification Rules

Over the last several years, CMS has received numerous requests for exceptions to current Medicare law and regulation regarding geographic reclassification or requests to revise the existing regulations in order to allow a hospital or group of hospitals the ability to reclassify to a labor market area with a higher wage index. Section 3137(b) of the Affordable Care Act requires the Secretary to submit a report to Congress that includes a “plan to reform the hospital wage index.” This report to Congress is due by December 31, 2011. As part of our efforts in this regard, we are soliciting public comments, to be considered only as part of our report to Congress and not to be addressed in the FY 2012 IPPS/LTCH PPS final rule, on ways to redefine the geographic reclassification requirements to more accurately define labor markets.

I. Proposed FY 2012 Wage Index Adjustment Based on Commuting Patterns of Hospital Employees

In accordance with the broad discretion granted to the Secretary under section 1886(d)(13) of the Act, as added by section 505 of Public Law 108-173, beginning with FY 2005, we established a process to make adjustments to the hospital wage index based on commuting patterns of hospital employees (the “out-migration” adjustment). The process, outlined in the FY 2005 IPPS final rule (69 FR 49061), provides for an increase in the wage index for hospitals located in certain counties that have a relatively high percentage of hospital employees who reside in the county but work in a different county (or counties) with a higher wage index. Such adjustments to the wage index are effective for 3 years, unless a hospital requests to waive the application of the adjustment. A county will not lose its status as a qualifying county due to hospital wage index changes during the 3-year period, and counties will receive the same wage index increase for those 3 years. However, a county that qualifies in any given year may not necessarily qualify after the 3-year period, or it may qualify but receive a different adjustment to the wage index level. Hospitals that receive this adjustment to their wage index are not eligible for reclassification under section 1886(d)(8) or section 1886(d)(10) of the Act. Adjustments under this provision are not subject to the budget neutrality requirements under section 1886(d)(3)(E) of the Act.

Hospitals located in counties that qualify for the wage index adjustment are to receive an increase in the wage index that is equal to the average of the differences between the wage indices of the labor market area(s) with higher wage indices and the wage index of the resident county, weighted by the overall percentage of hospital workers residing in the qualifying county who are employed in any labor market area with a higher wage index. Beginning with the FY 2008 wage index, we use post-reclassified wage indices when determining the out-migration adjustment (72 FR 47339).

For the proposed FY 2012 wage index, we are proposing to calculate the out-migration adjustment using the same formula described in the FY 2005 IPPS final rule (69 FR 49064), with the addition of using the post-reclassified wage indices, to calculate the out-migration adjustment. This adjustment is calculated as follows:

Step 1—Subtract the wage index for the qualifying county from the wage index of each of the higher wage area(s) to which hospital workers commute.

Step 2—Divide the number of hospital employees residing in the qualifying county who are employed in such higher wage index area by the total number of hospital employees residing in the qualifying county who are employed in any higher wage index area. For each of the higher wage index areas, multiply this result by the result obtained in Step 1.

Step 3—Sum the products resulting from Step 2 (if the qualifying county has workers commuting to more than one higher wage index area).

Step 4—Multiply the result from Step 3 by the percentage of hospital employees who are residing in the qualifying county and who are employed in any higher wage index area.

These adjustments will be effective for each county for a period of 3 fiscal years. For example, hospitals that received the adjustment for the first time in FY 2011 will be eligible to retain the adjustment for FY 2012. For hospitals in newly qualified counties, adjustments to the wage index are effective for 3 years, beginning with discharges occurring on or after October 1, 2011.

Hospitals receiving the wage index adjustment under section 1886(d)(13)(F) of the Act are not eligible for reclassification under sections 1886(d)(8) or (d)(10) of the Act unless they waive the out-migration adjustment. Consistent with our FYs 2005 through 2011 IPPS final rules, we are specifying that hospitals redesignated under section 1886(d)(8) of the Act or reclassified under section 1886(d)(10) of the Act are deemed to have chosen to retain their redesignation or reclassification. Hospitals that reclassified under section 1886(d)(10) of the Act that wish to receive the out-migration adjustment, rather than their reclassification adjustment, are instructed to follow the termination/withdrawal procedures specified in 42 CFR 412.273 and section III.H.3. of the preamble of this proposed rule. Otherwise, they will be deemed to have waived the out-migration adjustment. Hospitals redesignated under section 1886(d)(8)(B) of the Act will be deemed to have waived the out-migration adjustment unless they explicitly notify CMS within 45 days from the publication of this proposed rule that they elect to receive the out-migration adjustment instead. These notifications should be sent to the following address: Centers for Medicare and Medicaid Services, Center for Medicare, Attention: Wage Index Adjustment Waivers, Division of Acute Care, Room C4-08-06, 7500 Security Boulevard, Baltimore, MD 21244-1850.

Table 4J, which is listed in section VI. of the Addendum to this proposed rule and available via the Internet, lists the proposed out-migration wage index adjustments for FY 2012. Hospitals that are not otherwise reclassified or redesignated under section 1886(d)(8) or section 1886(d)(10) of the Act will automatically receive the listed adjustment. In accordance with the procedures discussed above, redesignated/reclassified hospitals will be deemed to have waived the out-migration adjustment unless CMS is otherwise notified within the timeframe stated above. In addition, hospitals eligible to receive the out-migration wage index adjustment and that withdraw their application for reclassification will automatically receive the wage index adjustment listed in Table 4J, which is listed in section VI. of the Addendum to this proposed rule and available via the Internet.

J. Process for Requests for Wage Index Data Corrections

The preliminary, unaudited Worksheet S-3 wage data and occupational mix survey data files for the proposed FY 2012 wage index were made available on October 4 2010, through the Internet on the CMS Web site at:http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage.

In the interest of meeting the data needs of the public, beginning with the proposed FY 2009 wage index, we post an additional public use file on our Web site that reflects the actual data that are used in computing the proposed wage index. The release of this new file does not alter the current wage index process or schedule. We notified the hospital community of the availability of these data as we do with the current public use wage data files through our Hospital Open Door forum. We encouraged hospitals to sign up for automatic notifications of information about hospital issues and the scheduling of the Hospital Open Door forums at:http://www.cms.hhs.gov/OpenDoorForums/.

In a memorandum dated October 13, 2010, we instructed all fiscal intermediaries/MACs to inform the IPPS hospitals they service of the availability of the wage index data files and the process and timeframe for requesting revisions (including the specific deadlines listed below). We also instructed the fiscal intermediaries/MACs to advise hospitals that these data were also made available directly through their representative hospital organizations.

If a hospital wished to request a change to its data as shown in the October 4, 2010 wage and occupational mix data files, the hospital was to submit corrections along with complete, detailed supporting documentation to its fiscal intermediary/MAC by December 6, 2010. Hospitals were notified of this deadline and of all other deadlines and requirements, including the requirement to review and verify their data as posted on the preliminary wage index data files on the Internet, through the October 13, 2010 memorandum referenced above.

In the October 13, 2010 memorandum, we also specified that a hospital requesting revisions to its occupational mix survey data was to copy its record(s) from the CY 2007-2008 occupational mix preliminary files posted to our Web site in October, highlight the revised cells on its spreadsheet, and submit its spreadsheet(s) and complete documentation to its fiscal intermediary/MAC no later than December 6, 2010.

The fiscal intermediaries/MACs notified the hospitals by mid-February 2011 of any changes to the wage index data as a result of the desk reviews and the resolution of the hospitals' early-December revision requests. The fiscal intermediaries/MACs also submitted the revised data to CMS by mid-February 2011. CMS published the proposed wage index public use files that included hospitals' revised wage index data on February 22, 2011. Hospitals had until March 7, 2011, to submit requests to the fiscal intermediaries/MACs for reconsideration of adjustments made by the fiscal intermediaries/MACs as a result of the desk review, and to correct errors due to CMS's or the fiscal intermediary's (or, if applicable, the MAC's) mishandling of the wage index data. Hospitals also were required to submit sufficient documentation to support their requests.

After reviewing requested changes submitted by hospitals, fiscal intermediaries/MACs are required to transmit any additional revisions resulting from the hospitals' reconsideration requests by April 13, 2011. The deadline for a hospital to request CMS intervention in cases where the hospital disagrees with the fiscal intermediary's (or, if applicable, the MAC's) policy interpretations is April 20, 2011.

Hospitals should examine Table 2, which is listed in section VI. of the Addendum to this proposed rule and available via the Internet. Table 2 contains each hospital's adjusted average hourly wage used to construct the wage index values for the past 3 years, including the FY 2008 data used to construct the proposed FY 2012 wage index. We note that the hospital average hourly wages shown in Table 2 only reflect changes made to a hospital's data and transmitted to CMS by March 2011.

We will release the final wage index data public use files in early May 2011 on the Internet at:http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp. The May 2011 public use files are made available solely for the limited purpose of identifying any potential errors made by CMS or the fiscal intermediary/MAC in the entry of the final wage index data that resulted from the correction process described above (revisions submitted to CMS by the fiscal intermediaries/MACs by April 13, 2011). If, after reviewing the May 2011 final files, a hospital believes that its wage or occupational mix data are incorrect due to a fiscal intermediary/MAC or CMS error in the entry or tabulation of the final data, the hospital should send a letter to both its fiscal intermediary/MAC and CMS that outlines why the hospital believes an error exists and provide all supporting information, including relevant dates (for example, when it first became aware of the error). CMS and the fiscal intermediaries (or, if applicable, the MACs) must receive these requests no later than June 6, 2011.

Each request also must be sent to the fiscal intermediary/MAC. The fiscal intermediary/MAC will review requests upon receipt and contact CMS immediately to discuss any findings.

At this point in the process, that is, after the release of the May 2011 wage index data files, changes to the wage and occupational mix data will only be made in those very limited situations involving an error by the fiscal intermediary/MAC or CMS that the hospital could not have known about before its review of the final wage index data files. Specifically, neither the fiscal intermediary/MAC nor CMS will approve the following types of requests:

• Requests for wage index data corrections that were submitted too late to be included in the data transmitted to CMS by fiscal intermediaries or the MACs on or before April 13, 2011.

• Requests for correction of errors that were not, but could have been, identified during the hospital's review of the February 22, 2011 wage index public use files.

• Requests to revisit factual determinations or policy interpretations made by the fiscal intermediary or the MAC or CMS during the wage index data correction process.

Verified corrections to the wage index data received timely by CMS and the fiscal intermediaries or the MACs (that is, by June 6, 2011) will be incorporated into the final wage index in the FY 2012 IPPS/LTCH PPS final rule, which will be effective October 1, 2011.

We created the processes described above to resolve all substantive wage index data correction disputes before we finalize the wage and occupational mix data for the FY 2012 payment rates. Accordingly, hospitals that do not meetthe procedural deadlines set forth above will not be afforded a later opportunity to submit wage index data corrections or to dispute the fiscal intermediary's (or, if applicable, the MAC's) decision with respect to requested changes. Specifically, our policy is that hospitals that do not meet the procedural deadlines set forth above will not be permitted to challenge later, before the Provider Reimbursement Review Board, the failure of CMS to make a requested data revision. (See W. A. Foote Memorial Hospital v. Shalala, No. 99-CV-75202-DT (E.D. Mich. 2001) and Palisades General Hospital v. Thompson, No. 99-1230 (D.D.C. 2003).) We refer readers also to the FY 2000 IPPS final rule (64 FR 41513) for a discussion of the parameters for appealing to the PRRB for wage index data corrections.

Again, we believe the wage index data correction process described above provides hospitals with sufficient opportunity to bring errors in their wage and occupational mix data to the fiscal intermediary's (or, if applicable, the MAC's) attention. Moreover, because hospitals have access to the final wage index data by early May 2011, they have the opportunity to detect any data entry or tabulation errors made by the fiscal intermediary or the MAC or CMS before the development and publication of the final FY 2012 wage index by August 2011, and the implementation of the FY 2012 wage index on October 1, 2011. If hospitals avail themselves of the opportunities afforded to provide and make corrections to the wage and occupational mix data, the wage index implemented on October 1 should be accurate. Nevertheless, in the event that errors are identified by hospitals and brought to our attention after June 6, 2011, we retain the right to make midyear changes to the wage index under very limited circumstances.

Specifically, in accordance with 42 CFR 412.64(k)(1) of our existing regulations, we make midyear corrections to the wage index for an area only if a hospital can show that: (1) The fiscal intermediary or the MAC or CMS made an error in tabulating its data; and (2) the requesting hospital could not have known about the error or did not have an opportunity to correct the error, before the beginning of the fiscal year. For purposes of this provision, “before the beginning of the fiscal year” means by the June 6 deadline for making corrections to the wage data for the following fiscal year's wage index. This provision is not available to a hospital seeking to revise another hospital's data that may be affecting the requesting hospital's wage index for the labor market area. As indicated earlier, because CMS makes the wage index data available to hospitals on the CMS Web site prior to publishing both the proposed and final IPPS rules, and the fiscal intermediaries or the MACs notify hospitals directly of any wage index data changes after completing their desk reviews, we do not expect that midyear corrections will be necessary. However, under our current policy, if the correction of a data error changes the wage index value for an area, the revised wage index value will be effective prospectively from the date the correction is made.

In the FY 2006 IPPS final rule (70 FR 47385), we revised 42 CFR 412.64(k)(2) to specify that, effective on October 1, 2005, that is, beginning with the FY 2006 wage index, a change to the wage index can be made retroactive to the beginning of the Federal fiscal year only when: (1) The fiscal intermediary (or, if applicable, the MAC) or CMS made an error in tabulating data used for the wage index calculation; (2) the hospital knew about the error and requested that the fiscal intermediary (or, if applicable, the MAC) and CMS correct the error using the established process and within the established schedule for requesting corrections to the wage index data, before the beginning of the fiscal year for the applicable IPPS update (that is, by the June 6, 2011 deadline for the FY 2012 wage index); and (3) CMS agreed that the fiscal intermediary (or, if applicable, the MAC) or CMS made an error in tabulating the hospital's wage index data and the wage index should be corrected.

In those circumstances where a hospital requested a correction to its wage index data before CMS calculated the final wage index (that is, by the June 6, 2011 deadline), and CMS acknowledges that the error in the hospital's wage index data was caused by CMS' or the fiscal intermediary's (or, if applicable, the MAC's) mishandling of the data, we believe that the hospital should not be penalized by our delay in publishing or implementing the correction. As with our current policy, we indicated that the provision is not available to a hospital seeking to revise another hospital's data. In addition, the provision cannot be used to correct prior years' wage index data; and it can only be used for the current Federal fiscal year. In other situations where our policies would allow midyear corrections, we continue to believe that it is appropriate to make prospective-only corrections to the wage index.

We note that, as with prospective changes to the wage index, the final retroactive correction will be made irrespective of whether the change increases or decreases a hospital's payment rate. In addition, we note that the policy of retroactive adjustment will still apply in those instances where a judicial decision reverses a CMS denial of a hospital's wage index data revision request.

K. Labor-Related Share for the Proposed FY 2012 Wage Index

Section 1886(d)(3)(E) of the Act directs the Secretary to adjust the proportion of the national prospective payment system base payment rates that are attributable to wages and wage-related costs by a factor that reflects the relative differences in labor costs among geographic areas. It also directs the Secretary to estimate from time to time the proportion of hospital costs that are labor-related: “The Secretary shall adjust the proportion (as estimated by the Secretary from time to time) of hospitals' costs which are attributable to wages and wage-related costs of the DRG prospective payment rates * * *” We refer to the portion of hospital costs attributable to wages and wage-related costs as the labor-related share. The labor-related share of the prospective payment rate is adjusted by an index of relative labor costs, which is referred to as the wage index.

Section 403 of Public Law 108-173 amended section 1886(d)(3)(E) of the Act to provide that the Secretary must employ 62 percent as the labor-related share unless this “would result in lower payments to a hospital than would otherwise be made.” However, this provision of Public Law 108-173 did not change the legal requirement that the Secretary estimate “from time to time” the proportion of hospitals' costs that are “attributable to wages and wage-related costs.” We believe that this reflected Congressional intent that hospitals receive payment based on either a 62-percent labor-related share, or the labor-related share estimated from time to time by the Secretary, depending on which labor-related share resulted in a higher payment.

In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43850 through 43856), we rebased and revised the hospital market basket for operating costs. We established a FY-2006-based IPPS hospital market basket to replace the FY as 2002-based IPPS hospital market basket, effective October 1, 2009. In that final rule, we presented our analysis and conclusions regarding the frequency and methodology for updating the labor-related share for FY as 2010. We also recalculated a labor-related share of 68.8 percent, using the FY 2006-based IPPS market basket, fordischarges occurring on or after October 1, 2009. In addition, we implemented this revised and rebased labor-related share in a budget neutral manner, but consistent with section 1886(d)(3)(E) of the Act, we did not take into account the additional payments that would be made as a result of hospitals with a wage index less than or equal to 1.0 being paid using a labor-related share lower than the labor-related share of hospitals with a wage index greater than 1.0.

The labor-related share is used to determine the proportion of the national IPPS base payment rate to which the area wage index is applied. In this proposed rule, we are not proposing to make any further changes to the national average proportion of operating costs that are attributable to wages and salaries, fringe benefits, contract labor, the labor-related portion of professional fees, administrative and business support services, and all other labor-related services (previously referred to in the FY 2002-based IPPS market basket as labor-intensive).

Therefore, for FY 2012, we are proposing to continue to use a labor-related share of 68.8 percent for discharges occurring on or after October 1, 2011. Tables 1A and 1B, which are published in section VI. of the Addendum to this proposed rule and available via the Internet, reflect this labor-related share. We note that section 403 of Public Law 108-173 amended sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act to provide that the Secretary must employ 62 percent as the labor-related share unless this employment “would result in lower payments to a hospital than would otherwise be made.” Therefore, for all IPPS hospitals whose wage indices are less than 1.0000, we are proposing to apply the wage index to a labor-related share of 62 percent of the national standardized amount. For all IPPS hospitals whose wage indices are greater than 1.0000, we are proposing to apply the wage index to a labor-related share of 68.8 percent of the national standardized amount.

For Puerto Rico hospitals, the national labor-related share will always be 62 percent because the national wage index for all Puerto Rico hospitals is less than 1.0. In this proposed rule, we are proposing to continue to use a labor-related share for the Puerto Rico-specific standardized amounts of 62.1 percent for discharges occurring on or after October 1, 2011. This Puerto Rico labor-related share of 62.1 percent was also adopted in the FY 2010 IPPS/LTCH PPS final rule (74 FR 43857) at the time the FY 2006-based hospital market basket was established, effective October 1, 2009. Consistent with our methodology for determining the national labor-related share, we added the Puerto Rico-specific relative weights for wages and salaries, fringe benefits, contract labor, the labor-related portion of professional fees, administrative and business support services, and all other labor-related services (previously referred to in the FY 2002-based IPPS market basket as labor-intensive) to determine the labor-related share. Puerto Rico hospitals are paid based on 75 percent of the national standardized amounts and 25 percent of the Puerto Rico-specific standardized amounts. The labor-related share of a hospital's Puerto Rico-specific rate will be either the Puerto Rico-specific labor-related share of 62.1 percent or 62 percent, depending on which results in higher payments to the hospital. If the hospital has a Puerto Rico-specific wage index of greater than 1.0, we will set the hospital's rates using a labor-related share of 62.1 percent for the 25 percent portion of the hospital's payment determined by the Puerto Rico standardized amounts because this amount will result in higher payments. Conversely, a hospital with a Puerto Rico-specific wage index of less than 1.0 will be paid using the Puerto Rico-specific labor-related share of 62 percent of the Puerto Rico-specific rates because the lower labor-related share will result in higher payments. The Puerto Rico labor-related share of 62.1 percent for FY 2012 is reflected in Table 1C, which is published in section VI. of the Addendum to this proposed rule and available via the Internet.

IV. Other Proposed Decisions and Changes to the IPPS for Operating Costs and GME Costs

A. Hospital Inpatient Quality Reporting (IQR) Program

1. Background

a. Overview

CMS is seeking to promote higher quality and more efficient health care for Medicare beneficiaries. This effort is supported by the adoption of an increasing number of widely-agreed upon quality measures. CMS has worked with relevant stakeholders to define measures of quality in almost every setting and measures various aspects of care for almost all Medicare beneficiaries. These measures assess structural aspects of care, clinical processes, patient experiences with care, and, increasingly, outcomes.

CMS has implemented quality measure reporting programs for multiple settings of care. To measure the quality of hospital inpatient services, CMS implemented the Hospital Inpatient Quality Reporting (IQR) Program (formerly referred to as the Reporting Hospital Quality Data for Annual Payment Update (RHQDAPU) Program). In addition, CMS has implemented quality reporting programs for 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 referred to as the Physician Quality Reporting Program Initiative (PQRI)). CMS has 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 that links payment to performance.

In implementing the Hospital IQR Program and other quality reporting programs, we have focused on measures that have high impact and support CMS and HHS priorities for improved quality and efficiency of care for Medicare beneficiaries. Our goal for the future is to align the clinical quality measure requirements of the Hospital IQR Program with various other programs, including those authorized by the Health Information Technology for Economic and Clinical Health (HITECH) Act so that the burden for reporting will be reduced.

We also are proposing to implement a Hospital Value-Based Purchasing (VBP) Program under section 1886(o) of the Act. On January 7, 2011, we issued a proposed rule to implement the Hospital VBP Program under section 1886(o) of the Act (76 FR 2454 through 2491) (the Hospital Inpatient VBP Program proposed rule). We are proposing additional policies for the Hospital VBP Program in section IV.B. of this proposed rule. In the Hospital Inpatient VBP Program proposed rule (76 FR 2454 through 2491), we proposed that hospitals would receive value-based incentive payments if they meet performance standards with respect to measures for a performance period for the fiscal year involved. The measures under the Hospital VBP Program must be selected from the measures specified under the Hospital IQR Program. The Hospital VBP Program will apply to payments for discharges occurring on or after October 1, 2012, in accordance with section 1886(o) of the Act.

The Hospital IQR Program is intertwined with the Hospital VBP Program because the measures and reporting infrastructure for both programs will overlap. We view theHospital VBP Program as the next step in promoting higher quality care for Medicare beneficiaries by transforming Medicare into an active purchaser of quality health care for its beneficiaries. As we stated in the Hospital Inpatient VBP Program proposed rule (76 FR 2455), in developing that proposed rule as well as other value-based payment initiatives, we applied the following principles for the development and use of measures and scoring methodologies:

Purpose:

• We view value-based purchasing as an important step to revamping how care and services are paid for, moving increasingly toward rewarding better value, outcomes, and innovations instead of merely volume.

Use of Measures:

• Public reporting and value-based payment systems should rely on a mix of standards, process, outcomes, and patient experience of care measures, including measures of care transitions and changes in patient functional status. Across all programs, we seek to move as quickly as possible to the use of primarily outcome and patient experience measures. To the extent practicable and appropriate, outcome and patient experience measures should be adjusted for risk or other appropriate patient population or provider characteristics.

• To the extent possible and recognizing differences in payment system maturity and statutory authorities, measures should be aligned across public reporting and payment systems under Medicare and Medicaid. The measure sets should evolve so that they include a focused core set of measures appropriate to the specific provider category that reflects the level of care and the most important areas of service and measures for that provider.

• The collection of information should minimize the burden on providers to the extent possible. As part of that effort, we will continuously seek to align our measures with the adoption of meaningful use standards for health information technology (HIT), so the collection of performance information is part of care delivery.

• To the extent practicable, measures used by CMS should be nationally endorsed by a multi-stakeholder organization. Measures should be aligned with best practices among other payers and the needs of the end users of the measures.

We invite public comment on these principles.

b. Statutory History and History of Measures Adopted for the Hospital IQR Program

We refer readers to the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43860) and the FY 2011 IPPS/LTCH PPS final rule (75 FR 50180) for detailed discussions of the history of the Hospital IQR Program, including the statutory history and the measures we have adopted for the Hospital IQR measure set through FY 2014.

Section 1886(b)(3)(B)(viii)(V) of the Act requires that, effective for payments beginning with FY 2008, the Secretary to add quality measures that reflect consensus among affected parties, and to the extent feasible and practicable, have been set forth by one or more national consensus building entities. We are seeking comments on an option that would allow us from time to time to consider a range of consensus endorsement entities or bodies that can assist us with our measure development process. We believe that this approach would provide for a diverse endorsement process and the best body of evidence to support quality measures used in our quality programs.

c. Maintenance of Technical Specifications for Quality Measures

The technical specifications for the Hospital IQR Program measures, or links to Web sites hosting technical specifications, are contained in the CMS/The Joint Commission Specifications Manual for National Hospital Inpatient Quality Measures (Specifications Manual). This Specifications Manual is posted on the CMS QualityNet Web site at https://www.QualityNet.org. We maintain the technical specifications by updating this Specifications Manual semiannually, or more frequently in unusual cases, and include detailed instructions and calculation algorithms for hospitals to use when collecting and submitting data on required measures. These semiannual updates are accompanied by notifications to users, providing sufficient time between the change and the effective date in order to allow users to incorporate changes and updates to the specifications into data collection systems.

The technical specifications for the HCAHPS patient experience of care survey are contained in the current HCAHPS Quality Assurance Guidelines manual, which is available at the HCAHPS On-Line Web site, http://www.hcahpsonline.org. We maintain the HCAHPS technical specifications by updating the HCAHPS Quality Assurance Guidelines manual annually, and include detailed instructions on survey implementation, data collection, data submission and other relevant topics. As necessary, HCAHPS Bulletins are issued to provide notice of changes and updates to technical specifications in HCAHPS data collection systems.

d. Public Display of Quality Measures

Section 1886(b)(3)(B)(viii)(VII) of the Act, as amended by section 3001(a)(2) of the Affordable Care Act, requires that the Secretary establish procedures for making information regarding measures submitted available to the public after ensuring that a hospital has the opportunity to review its data before they are made public. We are proposing to display information regarding the measures (such as names of measures for which data will be displayed in the future) on the Hospital Compare Web site under this provision, and invite public comment on this proposal. We will continue our current practice of reporting data from the Hospital IQR Program as soon as it is feasible on CMS Web sites such as the Hospital Compare Web site, http://www.hospitalcompare.hhs.gov after a 30-day preview period.

The Hospital Compare Web site is an interactive Web tool that assists beneficiaries by providing information on hospital quality of care to those who need to select a hospital. It further serves to encourage beneficiaries to work with their doctors and hospitals to discuss the quality of care hospitals provide to patients, thereby providing an additional incentive to hospitals to improve the quality of care that they furnish. The Hospital IQR Program currently includes process of care measures, risk-adjusted outcome measures, the HCAHPS patient experience-of-care survey, and structural measures, all of which are featured on the Hospital Compare Web site.

However, information that may not be relevant to or easily understood by beneficiaries and information for which there are unresolved display issues or design considerations for inclusion on Hospital Compare may be made available on other CMS Web sites that are not intended to be used as an interactive Web tool, such as http://www.cms.hhs.gov/HospitalQualityInits/. Publicly reporting the information in this manner, though not on the Hospital Compare Web site, allows CMS to meet the requirement under section 1886(b)(3)(B)(viii)(VII) of the Act for establishing procedures to make information regarding measures submitted under the Hospital IQR Program available to the publicfollowing a preview period. In such circumstances, affected parties are notified via CMS listservs, CMS e-mail blasts, national provider calls, and QualityNet announcements regarding the release of preview reports followed by the posting of data on a Web site other than Hospital Compare.

2. Retirement of Hospital IQR Program Measures

a. Considerations in Retiring Quality Measures From the Hospital IQR Program

We generally retain measures from the previous year's Hospital IQR Program measure set for subsequent years' measure sets. We previously retired one “topped out” measure, PN-1: Oxygenation Assessment for Pneumonia, from the Hospital IQR Program on the basis of high unvarying performance among hospitals, because measures with very high performance among hospitals present little opportunity for improvement, and do not provide meaningful distinctions in performance for consumers.

We also have retired one measure from the Hospital IQR Program because it no longer “represent[ed] the best clinical practice,” as required under section 1886(b)(3)(B)(viii)(VI) of the Act. We stated that when there is reason to believe that the continued collection of a measure as it is currently specified raises potential patient safety concerns, we believe that it is appropriate for CMS to take immediate action to remove a measure from the Hospital IQR Program and not wait for the annual rulemaking cycle. Therefore, we adopted the policy (74 FR 43864 and 43865) that we would promptly retire such a measure, confirm the retirement in the next IPPS rulemaking cycle, and notify hospitals and the public of the decision to promptly retire measures through the usual hospital and QIO communication channels used for the Hospital IQR Program. These channels include memos and e-mail notification and QualityNet Web site articles and postings.

As we stated in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50185), among the criteria that we consider when determining whether to retire Hospital IQR Program measures are the following: (1) Measure performance among hospitals is so high and unvarying that meaningful distinctions and improvements in performance can no longer be made; (2) performance or improvement on a measure does not result in better patient outcomes; (3) a measure does not align with current clinical guidelines or practice; (4) the availability of a more broadly applicable (across settings, populations, or conditions) measure for the topic; (5) the availability of a measure that is more proximal in time to desired patient outcomes for the particular topic; (6) the availability of a measure that is more strongly associated with desired patient outcomes for the particular topic; (7) collection or public reporting of a measure leads to negative unintended consequences other than patient harm. These criteria were suggested by commenters during rulemaking, and we agreed that these criteria should be among those considered in evaluating Hospital IQR Program measures for retirement.

b. Proposed Retirement of Hospital IQR Program Measures for the FY 2014 Payment Determination and Subsequent Years

In order to reduce the reporting burden on hospitals, and in particular, the burden associated with reporting chart-abstracted measures, we have considered options to accommodate the expansion of the measure set through the retirement of additional Hospital IQR measures. Specifically, we have considered retiring one or more of the measures suggested by various commenters that were listed in the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43865). We noted in that final rule that commenters recommended for retirement 11 Hospital IQR Program chart-abstracted measures. Seven of these 11 measures were recommended by commenters for retirement based on their performance being uniformly high nationwide, with little variability among hospitals (topped-out measures). Based on our own analysis, we concluded that these measures are topped out and for this reason, we proposed not to include them in the FY 2013 Hospital VBP Program measure set (76 FR 2460). These measures are listed below:

• AMI-1 Aspirin at arrival

• AMI-3 ACEI/ARB for left ventricular systolic dysfunction

• AMI-4 Adult smoking cessation advice/counseling

• AMI-5 Beta-blocker prescribed at discharge

• HF-4 Adult smoking cessation advice/counseling

• PN-4 Adult smoking cessation advice/counseling

• SCIP INF-6 Appropriate Hair Removal

The methodology we used to determine that these measures are topped out is detailed in the Hospital Inpatient VBP Program proposed rule (76 FR 2460). We are proposing to retire these topped out measures from the Hospital IQR measure set. In addition, we proposed to not include an eighth measure in the FY 2013 Hospital VBP Program measure set because we believe that inclusion of this measure would result in the unintended consequence of inappropriate antibiotic use (76 FR 2462). This measure is PN-5c Timing of receipt of initial antibiotic following hospital arrival. We are also proposing to retire this measure from the Hospital IQR Program because of the potential for this negative unintended consequence.

For these reasons, we are proposing to retire these eight measures from the Hospital IQR measure set for FY 2014 and subsequent years, and that hospitals would no longer be required to submit data on these measures starting with January 1, 2012 discharges. We invite public comment on this proposal.

3. Proposed Measures for the FY 2014 and FY 2015 Hospital IQR Payment Determinations

a. Considerations in Expanding and Updating Quality Measures Under the Hospital IQR Program

In general, we seek to adopt measures for the Hospital IQR Program that promote better, safer, more efficient care. Our measure development and selection activities for the Hospital IQR Program take into account national priorities, such as those established by the National Priorities Partnership, HHS Strategic Plan, the National Strategy for Quality Improvement in Healthcare, as well as other widely accepted criteria established in medical literature. (We refer readers to the following Web sites regarding these priorities:http://www.nationalprioritiespartnership.org/(National Priorities Partnership);http://www.hhs.gov/secretary/about/priorities/priorities.html(HHS Strategic Plan); and http://www.healthcare.gov/center/reports/quality03212011a.html(National Strategy for Quality Improvement in Healthcare)). To the extent practicable, we have sought to adopt measures which have been endorsed by a national consensus organization, recommended by multi-stakeholder organizations, and developed with the input of providers, purchasers/payers and other stakeholders. Because measures for the Hospital VBP Program must be selected from the measures specified for the Hospital IQR Program, the measures to be selected for inclusion in the Hospital VBP Program also reflect these priorities. In addition, we believe it is important to expand the pool of measures to include measures that are directed toward improving patientsafety. This goal is supported by at least two Federal reports documenting that tens of thousands of patients do not receive safe care in the nation's hospitals. 6 7

Section 3001(a)(2) of the Affordable Care Act amended the Act by adding a new section 1886(b)(3)(B)(viii)(VIII) of the Act. This section states that, “[e]ffective for payments beginning with fiscal year 2013, with respect to quality measures for outcomes of care, the Secretary shall provide for such risk adjustment as the Secretary determines to be appropriate to maintain incentives for hospitals to treat patients with severe illnesses or conditions.” Section 3001(a)(2) of the Affordable Care Act also added new sections 1886(b)(3)(B)(viii)(IX)(aa) and (bb) of the Act. These sections state that “* * *effective for payments beginning with fiscal year 2013, each measure specified by the Secretary under this clause shall be endorsed by the entity with a contract under section 1890(a) [of the Act],” and “[i]n the case of a specified area or medical topic determined appropriate by the Secretary for which a feasible and practical 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 organization identified by the Secretary.” In the FY 2011 IPPS/LTCH PPS final rule, we established that all of the measures adopted in that rule for the FY 2013 and FY 2014 payment determinations meet these standards (75 FR 50200).

We have previously acknowledged the data collection burden for hospitals participating in the Hospital IQR Program, and reiterated our desire to expand the Hospital IQR Program measure set while minimizing burden and seeking to provide alternative mechanisms for data submission (75 FR 50189). We also stated that in future expansions and updates to the Hospital IQR Program measure set, we would be taking into consideration several important goals. These goals include: (a) Expanding the types of measures beyond process of care measures to include an increased number of outcome measures, efficiency measures, and patients' experience-of-care measures; (b) expanding the scope of hospital services to which the measures apply; (c) considering the burden on hospitals in collecting chart-abstracted data; (d) harmonizing the measures used in the Hospital IQR Program with other CMS quality programs to align incentives and promote coordinated efforts to improve quality; (e) seeking to use measures based on alternative sources of data that do not require chart abstraction or that utilize data already being reported by many hospitals, such as data that hospitals report to clinical data registries, or all-payer claims databases; and, (f) weighing the relevance and utility of the measures compared to the burden on hospitals in submitting data under the Hospital IQR Program.

Specifically, we give priority to measures that assess performance on: (a) Conditions that result in the greatest mortality and morbidity in the Medicare population; (b) conditions that are high volume and high cost for the Medicare program; and, (c) conditions for which wide cost and treatment variations have been reported, despite established clinical guidelines. We have used and continue to use these criteria to guide our decisions regarding what measures to add to the Hospital IQR Program measure set. In addition, in selecting measures, we seek to address the six quality aims of effective, safe, timely, efficient, patient-centered, and equitable healthcare. Current and long term priority topics include: Prevention and population health; safety; chronic conditions; high cost and high volume conditions; elimination of health disparities; healthcare-associated infections (HAIs) and other adverse healthcare outcomes; improved care coordination; improved efficiency; improved patient and family experience of care; effective management of acute and chronic episodes of care; reduced unwarranted geographic variation in quality and efficiency; and adoption and use of interoperable HIT.

Hospital IQR Program measures were initially based solely on a hospital's submission of chart-abstracted quality measure data. However, in recent years we have adopted measures that do not require chart abstraction, including structural measures and claims-based measures that we can calculate using other data sources. This approach supports our goal of expanding the measures for the Hospital IQR Program while minimizing the burden on hospitals and, in particular, without significantly increasing the chart abstraction burden.

In addition to structural measures and claims-based measures, we previously noted that registries are potential alternative sources of hospital data for the Hospital IQR Program. (A registry is a collection of clinical data for purposes of assessing clinical performance, quality of care, and opportunities for quality improvement.) We envisioned that instead of requiring hospitals to submit the same data to CMS that many hospitals are already submitting to registries, we would collect the data directly from the registries. This could enable the expansion of the Hospital IQR Program measure set without increasing the burden of data collection for those hospitals participating in the registries. We have previously adopted structural measures of registry participation, and we continue to evaluate the feasibility of leveraging registry-based data collection mechanisms for the Hospital IQR Program.

We also stated our intention to explore mechanisms for data submission using electronic health records (EHRs) (73 FR 48614; 74 FR 43866, 43892; and 75 FR 50189). Establishing such a system will require interoperability between EHRs and CMS data collection systems, additional infrastructure development on the part of hospitals and CMS, and the adoption of standards for capturing, formatting, and transmitting the data elements that make up the measures. However, once these activities are accomplished, the adoption of measures that rely on data obtained directly from EHRs will enable us to expand the Hospital IQR Program measure set with less cost and burden to hospitals. We believe that automatic collection and reporting of data through EHRs will greatly simplify and streamline reporting for various CMS quality reporting programs, and that at a future date, such as FY 2015, hospitals will be able to switch solely to EHR-based reporting of data that are currently manually chart-abstracted and submitted to CMS for the Hospital IQR Program.

We reiterate our commitment to pursue our goals to expand and update quality measures under the Hospital IQR Program and also to minimize burden. We note that in addition to the input we described above, we take into consideration the measures adopted by the Hospital Quality Alliance (HQA) as well as an array of input from the public. The HQA is a national public-private collaboration that is committed to making meaningful, relevant, and easily understood information about hospital performance accessible to the public and to informing and encouraging efforts to improve quality. We appreciate HQA's integral efforts toimprove hospital quality of care and its support of our public quality reporting programs.

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50191 through 502192), we finalized our proposal to adopt measures for the Hospital IQR Program for three consecutive payment determinations. The intent of this policy was to provide greater certainty for hospitals to plan to meet future reporting requirements and implement related quality improvement efforts. Aside from giving hospitals more advance notice in planning quality reporting, this 3-year approach also provides more time for us to prepare, organize and implement the infrastructure needed to collect data on the measures and make payment determinations. We indicated, however, that these preliminary measure sets could still be updated through the rulemaking process should we need to respond to agency and/or legislative changes.

Finally, in section IV.A.5.a.(2) of the FY 2011 IPPS/LTCH PPS final rule (75 FR 50219 through 50220), we adopted a proposal to make Hospital IQR Program payment determinations beginning with FY 2013 using one calendar year of data for chart-abstracted measures. We will use this approach, which synchronizes the quarters for which data on these measures must be submitted during each year with the quarters used to make payment determinations with respect to a fiscal year beginning with January 1, 2011 discharges. However, it will not affect our payment determinations until FY 2013.

Section 1886(o)(2)(A) of the Act requires the Secretary to select measures, other than readmission measures, for the Hospital VBP Program from the measures specified under the Hospital IQR Program. Section 1886(o)(2)(B)(i)(I) of the Act states that, for FY 2013, the selected measures must cover at least the following five specified conditions or procedures: Acute myocardial infarction (AMI), Heart failure (HF), Pneumonia (PN), Surgeries, as measured by the Surgical Care Improvement Project (SCIP), and Healthcare-associated infections (HAIs), as measured by the prevention metrics and targets established in the HHS Action Plan to Prevent Healthcare-Associated Infections (or any successor plan) of the Department of Health and Human Services. Section 1886(o)(2)(B)(i)(II) of the Act provides that, for FY 2013, measures selected for the Hospital Inpatient Program must also be related to the Hospital Consumer Assessment of Healthcare Providers and Systems survey (HCAHPS).

In selecting measures for the Hospital IQR Program, we are mindful of the conceptual framework of the Hospital VBP Program. We will focus on selecting measures that we believe will also meet the Hospital VBP Program measure inclusion criteria and advance the goals of the Hospital VBP Program by targeting hospitals' ability to improve patient care and patient outcomes.

In addition, in order to support HHS priorities such as patient safety and reduction of HAIs and readmissions, and meet more of the widespread goals of the Affordable Care Act in terms of improving the quality of care provided to Medicare beneficiaries, we are proposing in this proposed rule to adopt measures for the FY 2014 and FY 2015 Hospital IQR payment determinations. However, we note that the final measure sets to be used for these years' payment determinations could be changed via future rulemaking. This allows CMS the flexibility to accommodate changes in program needs and legislative changes. We invite public comment on these proposals.

b. Proposed Hospital IQR Program Measures for the FY 2014 Hospital IQR Payment Determination

(1) Proposed Retention of 52 Hospital IQR Program Measures Finalized in the FY 2011 IPPS/LTCH PPS Final Rule for the FY 2014 Payment Determination

We previously finalized 60 measures for the FY 2014 Hospital IQR Program measure set. However, as we discussed above, we are proposing to retire 8 measures from the FY 2014 measure set. We are proposing to retain the remaining 52 the 60 quality measures finalized in the FY 2011 IPPS/LTCH PPS final rule for the FY 2014 payment determination. We invite public comment on our proposal to retain 52 quality measures for the FY 2014 payment determination.

(2) Proposed Additional Hospital IQR Program Measures for the FY 2014 Payment Determination

(A) Proposed CDC/NHSN-Based Healthcare-Associated Infection (HAI) Measures

HAIs are among the leading causes of death in the U.S. The Centers for Disease Control (CDC) estimates that as many as 2 million infections are acquired each year in hospitals and result in approximately 90,000 deaths per year. [8] It is estimated that more Americans die each year from HAIs than from auto accidents and homicides combined. HAIs not only put the patient at risk, but also increase the days of hospitalization required for patients and add considerable health care costs.

HAIs are largely preventable with widely publicized interventions such as better hygiene and advanced scientifically tested techniques for surgical patients. Therefore, the public reporting of HAIs has been of great interest to many health care consumers and advocacy organizations because it promotes awareness and permits health care consumers to choose the hospitals with lower HAI rates, as well as gives hospitals an incentive to improve infection control efforts. To maximize the efficiency and improve the coordination of HAI prevention efforts across the Department, HHS established in 2008 a senior-level Steering Committee for the Prevention of Healthcare-Associated Infections. In 2009, the Steering Committee, along with scientists and program officials across the government, developed the HHS Action Plan to Prevent Healthcare-Associated Infections, providing a roadmap for HAI prevention in acute care hospitals. In the first iteration of the Action Plan, the Steering Committee chose to focus on infections in acute care hospitals because the associated morbidity and mortality was most severe in that setting and the scientific information on prevention and the capacity to measure improvement was most complete. Thus, prevention of HAIs in acute care hospitals became the first phase of the Action Plan and it focuses on six high priority HAI-related areas.

In addition, the Steering Committee included in the Action Plan five-year goals for nine specific measures of improvement tied to the six HAI prevention priority areas. Since the release of the first Action Plan in June 2009, the Steering Committee has been developing a successor plan in collaboration with public and private partners which is expected to incorporate advances in science and technology and expand the scope to the outpatient environment. The successor plan is also expected to address the health and safety of healthcare personnel, as well as the risks of influenza transmission from healthcare personnel to patients. The second Action Plan is due for publication in 2011.

We also note that the House Committee on Appropriations asked in a 2009 Report that CMS include in its “pay for reporting” system two infection control measures developed by theHospital Quality Alliance (HQA)—Central line-associated bloodstream infections and a surgical site infection rate (H. Rep. No. 111-220, at 159 (2009)). In the report, the Committee stated that “if the measures are included in Hospital Compare, the public reporting of the data is likely to reduce HAI occurrence, an outcome demonstrated in previous research.”

In the FY 2011 IPPS/LTCH PPS final rule, we adopted the two HAI measures identified by the House Committee on Appropriations in its 2009 report: Central Line [catheter] Associated Blood Stream Infection (CLABSI) measure, and Surgical Site Infection (SSI) measure. The CLABSI measure is currently part of the FY 2013 Hospital IQR measure set, and data submission on the measure began with January 2011 events. [9] The Surgical Site Infection (SSI) measure is currently part of the FY 2014 Hospital IQR measure set, and data submission on the measure will begin with January 2012 events.

In this proposed rule, we are proposing to adopt two additional HAI measures for the FY 2014 Hospital IQR measure set. These proposed measures were developed by the CDC and are currently collected by the CDC via the NHSN. These measures are: (1) Central Line Bundle Compliance (NQF #0298) (referred to by the CDC and in this proposed rule as Central Line Insertion Practices, or CLIP); and (2) Catheter Associated Urinary Tract Infection (CAUTI) (NQF #138). Both measures are high priority HAI measures that are included among the prevention metrics established in the HHS Action Plan to Prevent HAIs which, as we noted above, underscores the importance of reducing HAIs. As detailed below, both measures also meet Hospital IQR Program statutory requirements for measure selection. Furthermore, both measures are currently collected by the NHSN, which is a secure, Internet-based surveillance system maintained and managed by the CDC, and can be utilized by all types of healthcare facilities in the U.S., 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, adherence to clinical practices known to prevent HAIs, the incidence or prevalence of multidrug-resistant organisms within their organizations, and other adverse events. Some States use NHSN as a means for healthcare facilities to submit patient-level data on the measures mandated through their specific State legislation. Currently, 28 States require hospitals to report HAIs using NHSN, and CDC provides support to more than 4,000 hospitals that are using NHSN. NHSN data collection occurs via a Web-based tool hosted by CDC provided free of charge to providers. In addition, data submission for HAI measures through EHRs may be possible in the near future.

(i) Central Line Insertion Practice Adherence Percentage (CLIP)

Central line associated blood stream infections (CLABSIs) can be prevented through proper management of the central line. The CDC's Healthcare Infection Control Practices Advisory Committee (CDC/HICPAC)Guidelines for the Prevention of Intravascular Catheter-Related Infections recommends evidence-based central line insertion practices known to reduce the risk of subsequent central line-associated bloodstream infection. [10] These include hand-washing by inserters, use of maximal sterile barriers during insertion, proper use of a skin antiseptic prior to insertion, and allowing that skin antiseptic to dry before catheter insertion. Despite the scientific evidence supporting these practices, several reports suggest that adherence to these practices remains low in United States hospitals. The proposed CLIP process measure is a companion measure to the previously adopted CLABSI measure, and it assesses the extent to which a facility employs practices consistent with CDC/HICPAC recommendations that are known to reduce CLABSI. There are 2 States that currently require facilities to report to NHSN at least one month of CLIP data.

The CLIP measure is used in State reporting initiatives and is an NQF-endorsed measure (NQF #298) that is operationalized for collection via the NHSN. Therefore, the measure meets the selection criteria under section 1886(b)(3)(B)(viii)(IX)(aa) of the Act. This CLIP prevention metric is also listed in the HHS Action Plan to Prevent HAIs and, as we detailed above, has been widely identified as a high priority for public reporting.

(ii) Catheter Associated Urinary Tract Infection (CAUTI)

The urinary tract is the most common site of HAI, accounting for more than 30 percent of infections reported by acute care hospitals. [11] Healthcare-associated urinary tract infections (UTIs) are commonly attributed to catheterization of the urinary tract. CAUTI can lead to such 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 cause discomfort to the patient, prolonged hospital stay, and increased cost and mortality. Each year, more than 13,000 deaths are associated with UTIs. [12] Prevention of CAUTIs is discussed in the CDC/HICPAC document, Guideline for Prevention of Catheter-associated Urinary Tract Infections. The NQF-endorsed CAUTI measure we are proposing is currently collected by the NHSN as part of State-mandated reporting and surveillance requirements for hospitals. There are 3 States that require facilities to report to NHSN at least one month of CAUTI data.

Section 1886(b)(3)(B)(viii)(IX)(aa) of the Act requires that effective for payments beginning with FY 2013, each measure specified by the Secretary for inclusion in the Hospital IQR Program be endorsed by the entity with a contract under section 1890(a) of the Act, unless the exception set forth in section 1886(b)(3)(B)(viii)(IX)(bb) of the Act applies. The NQF currently holds the contract under section 1890(a) of the Act, and the NQF has endorsed this CAUTI measure (NQF #138). For this reason, we believe that this measure satisfies the endorsement requirement applicable to the Hospital IQR Program. This proposed measure is currently risk stratified,and therefore is consistent with section 1886(b)(3)(B)(viii)(VIII) of the Act. Risk stratification means that it is calculated using different categories of patients with varying risk of developing an infection. At the time of this proposed rule, this CAUTI measure (NQF #138) is undergoing measure maintenance review by the NQF and we note that the review may result in changes to the specifications. We invitepublic comment on our proposal to adopt these two HAI measures into the Hospital IQR Program for the FY 2014 payment determination. We are proposing that hospitals would begin submitting data on these measures beginning with events that occur on or after January 1, 2012. We are also proposing that hospitals use the NHSN infrastructure and protocols, as well as the specifications (available at http://www.cdc.gov/nhsn/PDFs/HSPmanual/HPS_Manual.pdf) to report the measures for Hospital IQR Program purposes. The proposed reporting mechanism for these HAI measures is discussed in greater detail in section IV.A.5.i. of this proposed rule.

(B) Proposed New Claims-Based Measure

We are proposing to add the following new claim-based measure to the Hospital IQR Program measure set for the FY 2014 payment determination: Medicare Spending per Beneficiary. The details of this measure are discussed below.

(i) Medicare Spending per Beneficiary Measure

Healthcare costs consume an ever-increasing amount of our Nation's resources, straining family, business, and government budgets. Healthcare costs take up a growing share of Federal and State budgets and imperil the governments' long-term fiscal outlooks. In the U.S., the sources of inefficiency that are leading to rising healthcare costs include payment systems that reward medical inputs rather than outcomes. Medicare is transforming from a system that rewards volume of service to one that rewards efficient, effective care and reduces delivery system fragmentation.

In order to further this transformation and help address the critical issue of health care costs, we are proposing to add a measure of Medicare spending per beneficiary to the Hospital IQR Program measure set for the FY 2014 payment determination. This proposed Medicare spending per beneficiary measure addressing the cost of care is a type of measure that is not currently included in the Hospital IQR Program. We are not aware that the NQF or any other consensus organizations under section 1886(b)(3)(B)(viii)(IX) of the Act have currently endorsed any Medicare spending per beneficiary measures. We will give due consideration under section 1886(b)(3)(B)(viii)(IX)(bb) of the Act to any Medicare spending per beneficiary measures that become endorsed in the future. It is important that the cost of care be explicitly measured so that, in conjunction with other measures that we have adopted and are proposing to adopt for the Hospital IQR Program, we can recognize hospitals that are involved in the provision of high quality care at lower cost.

We are proposing that this Medicare spending per beneficiary measure would be calculated using claims data for hospital discharges occurring between May 15, 2012 and February 14, 2013. Therefore, the addition of this proposed measure would not increase the data submission burden on hospitals. We outline below the methodology that we are proposing to use to calculate the measure, if finalized.

• The Medicare Spending per Beneficiary Episode

In order to calculate the Medicare spending per beneficiary for each hospital, we believed that it would be necessary to determine: (1) The timeframe, or length of the “spending per beneficiary episode” during which Medicare payments would be aggregated; (2) the types of Medicare payments to be aggregated over this timeframe; and (3) how to adjust or standardize these payments across hospitals (for example, risk adjustment).

• Length of the Medicare Spending per Beneficiary Episode

We are proposing an episode that runs from three days prior to an inpatient PPS hospital admission (the index admission) through 90 days post hospital discharge. We are proposing to include the time period 90 days post hospital discharge in order to emphasize the importance of care transitions and care coordination in improving patient care. We believe inclusion of this time period surrounding the hospital admission would reinforce the need to reduce adverse outcomes, including readmissions. Encouraging delivery of coordinated care in an efficient manner is an important goal which can best be achieved through inclusion of Medicare payments made outside the timeframe of the hospital inpatient stay.

We recognize that some outcome measures are based on an episode that runs 30 days post discharge. We considered proposing 30 days as the post discharge time period for the episode. However, we believe this shorter time period does not place sufficient emphasis on longer term care transitions and care coordination. Nevertheless, while we are proposing a 90 day post discharge period, we seek public comment on an alternative 30 day time period for the initial implementation of this measure that would be more consistent with the 30 day time period currently in use for some outcome measures.

• Medicare Payments Included in the Spending per Beneficiary Episode

In order to calculate the Medicare spending per beneficiary, it is necessary to define the Medicare payments included in the spending per beneficiary episode. Subject to the adjustments described below, we are proposing to include all Medicare Part A and Part B payments made for services provided to the beneficiary during the episode, including payments made by beneficiaries that we can determine using our claims data, such as Part B deductibles and coinsurance amounts. As with the 90 day post discharge period, we believe that this comprehensive inclusion of Medicare Part A and Part B spending emphasizes the importance of care coordination in improving patient care. Encouraging delivery of coordinated care in an efficient manner over an extended time period is an important goal which can best be achieved through the inclusion of comprehensive Medicare Part A and Part B spending.

We also are proposing that transfers, readmissions, and additional admissions that began during the 90-day post discharge window of an index admission would be included in the episode used for calculating the measure.

We are proposing to exclude from the Medicare spending per beneficiary calculation episodes where at any time during the episode the beneficiary is not enrolled in both Medicare Part A and Medicare Part B, including if the beneficiary is enrolled in a Medicare Advantage plan at any time during the episode or becomes deceased. We also are proposing to exclude any episodes where the beneficiary is covered by the Railroad Retirement Board. We also propose to exclude any episodes where Medicare is a secondary payer. The rationale for exclusion of these episodes from the calculation of the Medicare spending per beneficiary is that we do not have full payment data to identify and standardize spending which would otherwise be attributable to these episodes.

• Adjusting the Medicare Payments Included in the Spending per Beneficiary Episode

Section 1886(o)(2)(B)(ii) of the Act requires that a Medicare spending per beneficiary measure adopted for the Hospital VBP Program be “adjusted for factors such as age, sex, race, severity ofillness, and other factors that the Secretary determines appropriate.” Consistent with these statutory requirements, we are proposing to adjust the proposed Medicare spending per beneficiary measure for age and severity of illness. We are proposing to adjust for severity of illness based on the hierarchical condition categories (HCCs) for the period 90 days prior to the episode and based on the MS-DRG during the index admission. Adding the MS-DRG to the use of the HCC improves the severity of illness adjustment and better standardizes the data, allowing for more valid comparisons of Medicare spending per beneficiary amounts across hospitals. Note that we would exclude episodes where the beneficiary is not enrolled in both Medicare Part A and Medicare Part B, for the 90 days prior to the episode because we would not be able to capture all the data necessary for the severity of illness adjustment.

We are not proposing to adjust the Medicare spending per beneficiary for sex and race, consistent with our understanding of NQF's position strongly discouraging adjusting measures based on these factors.

In addition, we are proposing to exclude geographic payment rate differences (for example, based on the wage index and geographic practice cost index) in order to standardize the spending per beneficiary. Note, we are not proposing to adjust for geographic differences in spending that are unrelated to geographic payment rate differences. However, we seek comment on whether there are geographic factors other than payment rate differences that should be considered in the spending per beneficiary measure. We also propose to standardize spending by excluding the portion of IPPS payments resulting from the payment differentials caused by Hospital-Specific Rates, IME, and DSH. Note that we are not proposing to exclude spending for hospitals that are paid Hospital-Specific Rates, rather we are proposing to exclude the differential additional spending that results from the use of the Hospital-Specific Rates. Again, making these adjustments allows for more valid comparisons of Medicare spending per beneficiary amounts across hospitals. For example, without adjusting for geographic payment rate differences, a hospital might have higher or lower spending per beneficiary amounts compared to other hospitals based on its wage index and not its performance.

• Calculating a Hospital's Medicare Spending per Beneficiary Amount

For each subsection (d) hospital participating in the Hospital IQR Program, we are proposing to add together all the adjusted Medicare Part A and Part B payments, as defined above, included in all the Medicare spending per beneficiary episodes, as defined above, for that hospital. We would then divide this sum by the total number of Medicare Spending per Beneficiary episodes for that hospital. The resulting amount would constitute the hospital's Medicare spending per beneficiary amount for the period. The discharge period that we are proposing to apply the proposed measure for the FY 2014 Hospital IQR Program is May 15, 2012 through February 14, 2013.

• Calculating a Hospital's Medicare Spending per Beneficiary Ratio

We are proposing to calculate a hospital's Medicare spending per beneficiary ratio as the hospital's Medicare spending per beneficiary amount divided by the median Medicare spending per beneficiary amount across all hospitals.

As noted above, we are also proposing to adopt this proposed measure for the Hospital VBP Program FY 2014 measure set. The proposed method for scoring and incorporating this Medicare spending per beneficiary ratio into the hospital's total performance score for the Hospital VBP Program is fully described in section IV.B.3.b.(3)(C) of this proposed rule.

(C) Proposed New Web-Based Structural Measure

Structural measures assess the characteristics and capacity of the provider to deliver quality health care. In the FY 2009 IPPS final rule, we finalized the “Participation in a Systematic Database for Cardiac Surgery” measure (73 FR 48609) for the FY 2010 payment determination. This measure does not require the hospital to actually participate in a cardiac surgery registry, instead, it only requires the hospital to report whether or not it participates in a cardiac surgery registry. In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43871 and 43872), we adopted two more structural measures: Participation in a Systematic Clinical Database Registry for Stroke Care; and Participation in a Systematic Clinical Database Registry for Nursing Sensitive Care under the Hospital IQR Program for the FY 2011 payment determination. Based on public comments, we collect these structural measures once annually.

We are now proposing to include a new structural measure, Participation in a Systematic Clinical Database Registry for General Surgery, in the Hospital IQR Program beginning with the FY 2014 payment determination. The Participation in a Systematic Clinical Database Registry for General Surgery measure would require each hospital that participates in Hospital IQR Program to indicate whether it is participating in a Systematic Clinical Database Registry for General Surgery and, if so, to identify the registry. This measure, like two of the previously adopted structural measures on registry participation (Participation in a Systematic Clinical Database Registry for Stroke Care; and Participation in a Systematic Clinical Database Registry for Nursing Sensitive Care), is an application of an NQF-endorsed measure (NQF #0493) “Participation by a physician or other clinician in a systematic clinical database registry that includes consensus endorsed quality measures” to the inpatient facility.

We recognize that the NQF has endorsed this measure for the physician/clinician setting, but believe that this measure is highly relevant to the hospital setting, in that participation in a systematic clinical database registry for various topics is quite common in hospitals. Therefore, we previously adopted the Stroke and Nursing Sensitive Care registry participation measures as applications of the measure appropriate to the hospital inpatient setting. We reviewed the NQF's consensus endorsed measures, as well as measures endorsed or adopted by another consensus organization, and were unable to identify any other measures specifically for participation in a systematic clinical database registry for general surgery that have been endorsed for the hospital inpatient setting. Having given due consideration to other measures that have been endorsed or adopted by a consensus entity, we are proposing to adopt an application of this non-NQF endorsed measure under the Secretary's authority to select non-NQF endorsed measures where such measures do not exist for a specified topic or medical topic. We are proposing to adopt the measure under the exception authority provided in section 1886 (b)(3)(B)(IX)(bb) of the Act. Additionally, we believe that, for the same reasons, the previously adopted structural measures for Stroke and Nursing Sensitive Care registries also meet the requirements under this authority and propose to continue collecting them on that basis.

We are proposing that annual data submission for this proposed structuralmeasure via a Web-based collection tool would begin in July 2012 with respect to the time period January 1, 2012, through June 30, 2012. We believe that participation in a registry provides hospitals with valuable ongoing quality improvement information and demonstrates a commitment to improve. Many registries also collect outcome data and provide feedback to hospitals about their performance. We invite public comment on this proposal to include this structural measure for the FY 2014 payment determination.

In summary, we are proposing to retire 8 measures from the measure set for the FY 2014 payment determination that was finalized in the FY 2011 IPPS/LTCH PPS final rule, and we are proposing to add 4 measures to the measure set for the FY 2014 payment determination: 2 HAI measures collected through the NHSN, 1 claims-based measure (Medicare Spending Per Beneficiary), and 1 structural measure, for a total of 56 measures for the FY 2014 Hospital IQR payment determination. These 56 measures are listed below.

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c. Proposed Hospital IQR Program Quality Measures for the FY 2015 Payment Determination

(1) Proposed Retention of FY 2014 Payment Determination Measures for the FY 2015 Payment Determination

We generally retain the Hospital IQR Program measures from one year to the next. Consistent with this approach, we are proposing to retain all of the proposed measures for the FY 2014 payment determination, if finalized, for the FY 2015 payment determination. We invite public comment on this proposal.

(2) Proposed New Hospital IQR Program Measures for the FY 2015 Payment Determination

(A) Proposed New CDC/NHSN-Based Healthcare-Associated Infection (HAI) Measures for the 2015 Payment Determination

For the FY 2015 payment determination, we are proposing to adopt three additional HAI measures that are currently collected by CDC via the NHSN. These measures are: (1) Methicillin-resistant Staphylococcus Aureus (MRSA) Bacteremia measure; (2) C. Difficile SIR; and (3) Healthcare Personnel (HCP) Influenza Vaccination and the specifications for these 3 measures are available at http://www.cdc.gov/nhsn/PDFs/HSPmanual/HPS_Manual.pdf. Like the CLIP and the CAUTI measures that we are proposing for the FY 2014 payment determination, all three proposed HAI measures are high priority HAI measures listed in the HHS Action Plan to Prevent HAIs and were listed in previous rulemaking as possible quality measures for future payment determinations.

Our review indicated that there are no measures for MRSA or C. Difficile SIR that have been endorsed by the NQF or another consensus entity for the hospital inpatient setting. Therefore, we are proposing to adopt this non-NQF-endorsed measure under the Secretary's authority to select non-NQF endorsed measures where such measures do not exist for a specified topic or medical topic. We are proposing to adopt these two CDC-developed measures (MRSA and C. Difficile SIR) under the exception authority provided in section 1886 (b)(3)(B)(IX)(bb) of the Act.

The HCP Influenza Vaccination measure is NQF-endorsed (NQF #0431) for the hospital setting. Therefore, this measure meets the requirement for measure selection under section 1886(b)(3)(B)(viii)(IX)(aa) of the Act.

(1) Methicillin-Resistant Staphylococcus Aureus (MRSA) Bacteremia Measure

There are different types of staphylococcus aureus bacteria, commonly called “staph.” Staph bacteria are normally found on the skin or in the nose. The bacteria are generally harmless unless they enter the body through a cut or other wound, and even then they usually cause only minor skin problems in healthy people. MRSA infection is caused by a strain of staph bacteria that has become resistant to the antibiotics commonly used to treat ordinary staph infections. Older adults with weakened immune systems and patients in hospital or nursing home settings are most vulnerable to MRSA infections. Health care-associated MRSA infections typically are associated with invasive procedures or devices, such as surgeries, intravenous tubing, urinary catheters, or artificial joints. MRSA infections account for about 60 percent of skin infections seen in United States emergency departments and invasive MRSA infections may cause about 18,000 deaths during a hospital stay a year. [13] Currently, there are 6 States that require facilities to report MRSAinformation to NHSN. As stated above, we were unable to identify any other measures specifically for MRSA that have been endorsed by the NQF for the hospital inpatient setting. We found no other measures that have been endorsed or adopted by a consensus entity. Therefore, we are proposing to adopt this non-NQF-endorsed and CDC-developed measure under the Secretary's authority to select non-NQF endorsed measures where such measures do not exist for a specified topic or medical topic, under the exception authority provided in section 1886 (b)(3)(B)(IX)(bb) of the Act. The proposed reporting mechanism for the MRSA measure is discussed in greater detail in section IV.A.5.i. of this proposed rule. We invite public comment on this proposed HAI measure.

(2) C. Difficile SIR Measure

Clostridium Difficile(C. difficile) is a bacterium that can cause symptoms ranging from diarrhea, pseudo-membranous colitis, and toxic megacolon to life-threatening sepsis and even death. Illness from C. Difficile most commonly affects older adults in hospitals or in long term care facilities where germs spread easily, antibiotic use is common and people are especially vulnerable to infection. Illness from C. Difficile typically occurs after use of antibiotic medications. C. Difficile spreads mainly on hands from person to person, but also on commonly touched services such as cart handles, bedrails, bedside tables, toilets, sinks, stethoscopes, thermometers, and telephones. In recent years, C. Difficile infections have become more frequent, more severe and more difficult to treat. Each year, tens of thousands of people in the United States get sick from C. Difficile, including some otherwise healthy people who are not hospitalized or taking antibiotics. Healthcare providers have become more aware of the C. Difficile infection and therefore, more testing is being done for symptomatic patients. The C. Difficile pathogens may require specialized monitoring to evaluate if intensified infection control efforts are required to reduce the occurrence of these organisms and related infections. Currently, there are 3 States that require facilities to report C. Difficile data to NHSN. Our goal for this proposed C. Difficile SIR measure is to provide a common mechanism (CDC/NHSN) for all hospitals including hospitals participating in the Hospital IQR Program to report and analyze these data that will inform infection control staff of the impact of targeted prevention efforts. The NHSN is listed in the HHS Action Plan to Prevent HAIs as the data source for HAI measures. As stated above, we were unable to identify any other measures specifically for C. Difficile SIR that have been endorsed by the NQF for the hospital inpatient setting. We found no other measures that have been endorsed or adopted by a consensus entity. Therefore, we are proposing to adopt this non-NQF-endorsed and CDC-developed measure under the Secretary's authority to select non-NQF endorsed measures where such measures do not exist for a specified topic or medical topic, under the exception authority provided in section 1886 (b)(3)(B)(IX)(bb) of the Act. We have chosen to leverage existing NHSN reporting system to collect HAI measures since we have already established a mechanism for reporting to the NHSN.

The proposed reporting mechanism for these proposed HAI measures is discussed in greater detail in section IV.A.5.i. of this proposed rule. We invite public comment on these proposed HAI measures.

(3) Healthcare Personnel (HCP) Influenza Vaccination (NQF # 0431)

For the FY 2015 payment determination, we are proposing to adopt one additional HAI measure that is currently collected by CDC via the NHSN: Healthcare Personnel (HCP) Influenza Vaccination (NQF # 0431). This measure assesses the percentage of HCP employed at the facility that received a prophylactic vaccination for influenza. This measure is NQF endorsed, and therefore, the measure meets the selection criteria under section 1886(b)(3)(B)(viii)(IX)(aa) of the Act.

Rates of serious illness and death resulting from influenza and its complications are increased in high-risk populations such as persons over 50 years or under four years of age, and persons of any age who have underlying conditions that put them at an increased risk. HCP can acquire influenza from patients and can transmit influenza to patients and other HCP. Many HCP provide care for, or are in frequent contact with, patients with influenza or patients at high risk for complications of influenza. The involvement of HCP in influenza transmission has been a long-standing concern. 14 15 16

Vaccination is an effective preventive measure against influenza, and can prevent many illnesses, deaths, and losses in productivity. [17] HCP are considered a high priority for expanding influenza vaccine use. Achieving and sustaining high influenza vaccination coverage among HCP is intended to help protect HCP and their patients and reduce disease burden and healthcare costs. Results of several studies indicate that higher vaccination coverage among HCP is associated with lower incidence of nosocomial influenza. 18 19 20 Such findings have led some to call for mandatory influenza vaccination of HCP. 21 22 23 24 25

Until recently, vaccination coverage among HCP has been well below the national Healthy People 2010 target of 60 percent, [26] but preliminary data suggest 62 percent of HCP reported receiving seasonal influenza vaccine in2009-2010. [27] Only 37 percent reported receiving the 2009 pandemic A/H1N1 vaccine. [28]

HCP refers to all personnel working in healthcare settings who have the potential for exposure to patients and/or to infectious materials, including body substances, contaminated medical supplies and equipment, contaminated environmental surfaces, or contaminated air. [29] HCP may include (but are not limited to) physicians, nurses, nursing assistants, therapists, technicians, emergency medical service personnel, dental personnel, pharmacists, laboratory personnel, autopsy personnel, students and trainees, contractual staff not employed by the healthcare facility, and persons (for example, clerical, dietary, house-keeping, laundry, security, maintenance, billing, and volunteers) not directly involved in patient care but potentially exposed to infectious agents that can be transmitted to and from HCP and patients. Settings in which HCP may work include, but are not limited to, acute care hospitals, long-term care facilities, skilled nursing facilities, rehabilitation centers, physicians' offices, urgent care centers, outpatient clinics, home health agencies, and emergency medical services.

Currently, four States have “offer” laws for influenza vaccination of HCP, meaning that vaccine must be offered to HCP by healthcare facilities; and three States (Alabama, California, and New Hampshire) have “ensure” laws for influenza vaccination of HCP, meaning that vaccination of non-immune HCP is mandatory in the absence of a specified exemption or refusal; and, additionally, numerous hospitals and other healthcare facilities have established policies requiring mandatory influenza vaccination of their HCP. [30]

Currently, no State requires that hospitals report this measure to NHSN. However, approximately 13 hospitals (including long term acute care and rehabilitation), outpatient hemodialysis centers, long term care facilities, and ambulatory surgical centers are currently reporting HCP immunization data to NHSN. In September 2009, CDC released the Healthcare Personnel Safety (HPS) Component of NHSN, which complements Patient Safety and Biovigilance components available in NHSN. The HPS Component replaced CDC's National Surveillance System for Health Care Workers (NaSH) and is comprised of two modules: the Blood/Body Fluid Exposure Module and the Influenza Vaccination and Management and Exposure Module. [31] Currently, participation in either module is voluntary. The current Influenza Vaccination and Management and Exposure Module may soon offer options for healthcare facilities to submit vaccination summary data. NHSN plans to partner with vendor-based surveillance systems to permit periodic data extractions into NHSN.

The modules feature basic, custom, and advanced analysis capabilities available in real-time, which allow individual healthcare facilities to compile and analyze their own data, as well as benchmark these results to aggregate NHSN estimates. The HPS Component can assist participating facilities in developing surveillance and analysis capabilities to permit the timely recognition of HCP safety problems and prompt interventions with appropriate measures. Influenza vaccination data submitted to CDC will ultimately capture regional trends on the yearly uptake of the vaccine, prophylaxis and treatment for healthcare personnel, as well as the elements within yearly influenza campaigns that succeed or require improvement. At the State and national levels, the HPS Component will aid in monitoring rates and trends.

We are proposing to adopt the Healthcare Provider Influenza Vaccination measure that is currently collected by the CDC via the NHSN because of its importance in preventing influenza not only among healthcare workers but also patients that they attend.. As stated earlier, this measure assesses the percent of Healthcare Personnel employed at the facility that received a prophylactic vaccination for influenza. Detailed specifications for the proposed measure are available at:http://www.cdc.gov/nhsn/PDFs/HSPmanual/HPS_Manual.pdf. As we also stated above, this measure is NQF-endorsed for the hospital setting. The proposed reporting mechanism for this proposed HAI measure is discussed in greater detail in section IV.A.5.i. of this proposed rule. We invite public comment on this proposed HAI measure.

(B) Proposed New Chart-Abstracted Measures for the FY 2015 Payment Determination

We are proposing to adopt two sets of chart-abstracted measures for the FY 2015 payment determination: the Stroke and Venous Thromboembolism (VTE) measure sets. All of these proposed measures have either previously been proposed for the Hospital IQR Program, or have been listed as being under consideration for future adoption into the program. In addition, with one exception (STK-1: VTE Prophylaxis), all of the measures in these two measure sets have been electronically specified and are among the measures adopted for the EHR Incentive Program for eligible hospitals. While we are proposing to adopt these for chart-abstracted submission in 2013 for the FY 2015 payment determination, we believe that by a future date, such as 2015, hospitals will be able to switch to EHR-based submission of these and all other chart-abstracted measures submitted for the Hospital IQR Program, and, as we discuss in greater detail below, we intend to work toward this goal over the next few years.

The Stroke measure set we are proposing to adopt consists of 8 measures; and the VTE measure set consists of 6 measures. Both measure sets are NQF-endorsed and their specifications are currently available in the Specifications Manual, which can be found on QualityNet. We believe that both of the proposed measure sets compliment the data elements in our current SCIP VTE and AMI measure sets.

(i) Stroke Measure Set

Stroke is a topic of great relevance to the Medicare population due to its impact on morbidity and mortality, and it is an area with great potential for quality improvement for hospitals caring for stroke patients. Stroke is the third most common cause of death in the United States and is one of the top 20 conditions contributing to Medicare costs. Approximately 8 to 12 percent of ischemic strokes are fatal, [32] andmortality following stroke is influenced by the quality of care provided to patients during their initial hospitalization. [33] In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43873), we listed 8 Stroke measures as being under consideration for adoption for the FY 2012 Hospital IQR payment determination. Numerous commenters encouraged us to adopt the listed stroke measures which they see as evidence-based measures that accurately measure the care of the stroke patient (74 FR 43875 through 43876). Commenters believed that the measures are widely recognized for their roles in minimizing secondary strokes and other complications.

We are proposing to adopt a stroke measure set with 8 NQF-endorsed process-of-care measures for the FY 2015 payment determination. The table below lists and describes each of these eight proposed measures.

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Because the NQF is the entity that holds a contract with the Secretary under section 1890(a) of the Act, measures that are endorsed by the NQF meet the requirement for measure selection under section 1886(b)(3)(B)(viii)(IX)(aa) of the Act. Aside from the consideration of NQF-endorsement, we believe that the inclusion of the proposed stroke measure set in the Hospital IQR Program would provide a comprehensive view of how well stroke care is being managed in a hospital setting. As stated earlier, detailed measure specifications for these8 proposed measures are available in the Specifications Manual located in QualityNet. We invite public comment on the proposed stroke measure set.

(ii) VTE Measure Set

It is widely agreed that VTE is the number one preventable cause of hospital death in the United States and the cost of VTE when it occurs is very high. A recent study from AHRQ in Health Affairs highlighted that when an acute VTE event occurs, it increases the costs of care by 25 percent. In 2008, the Surgeon General issued a Call to Action to Prevent Deep Vein Thrombosis and Pulmonary Embolism. (This document can be found at:http://www.surgeongeneral.gov/topics/deepvein/calltoaction/call-to-action-on-dvt-2008.pdf.) VTE prevention with pharmacologic agents can impact the cost effectiveness of care. Specifically, patients who received anti-coagulant medication during hospitalization have less likelihood of recurrence of VTEs upon discharge to home. Parenteral anticoagulation is the first line of therapy because of its rapid onset of action. Because the oral anticoagulant medication has a very slow onset of action, it cannot be used as mono-therapy for acute VTE. A minimum of five days of parenteral anticoagulation is recommended as “overlap therapy” while oral anticoagulant medication is being initiated. More thrombotic complications and higher costs are associated with treatment in patients demonstrating a subtherapeutic aPTT. Unfractionated Heparin (UFH) Dosages/Platelet Count Monitoring by Protocol (or Nomogram) has significantly advanced the use of UFH with the demonstrated ability to achieve therapeutic aPTTs more rapidly than with standard UFH dosing. When this occurs, patients can be discharged sooner. However, anticoagulation therapy poses risks to patients and often leads to adverse drug events due to complex dosing, requisite follow-up monitoring and inconsistent patient compliance. The use of standardized practices for anticoagulation therapy that includes patient/caregiver involvement may reduce the risk of adverse drug events.

The Hospital IQR Program currently has 2 measures of VTE prophylaxis for surgical patients (SCIP-VTE-1: Venous thromboembolism (VTE) prophylaxis ordered for surgery patients; and SCIP-VTE-2: VTE prophylaxis within 24 hours pre/post surgery) in the SCIP measure set. In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43873), we listed 5 VTE measures (VTE-1; Venous thromboembolism prophylaxis; VTE-3: Venous thromboembolism patients with anticoagulation overlap therapy; VTE-4: Venous thromboembolism patients receiving unfractionated heparin with dosages/platelet count monitoring by protocol; VTE-5: Venous thromboembolism discharge instructions; and VTE-6: Incidence of potentially-preventable venous Thromboembolism) as possible new quality measures for the FY 2012 payment determination. In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50213 through 50218), we listed 6 VTE measures (VTE-1; Venous thromboembolism prophylaxis; VTE-2: Intensive care unit venous thromboembolism prophylaxis; VTE-3: Venous thromboembolism patients with anticoagulation overlap therapy; VTE-4: Venous thromboembolism patients receiving unfractionated heparin with dosages/platelet count monitoring by protocol; VTE-5: Venous thromboembolism discharge instructions; and VTE-6: Incidence of potentially-preventable venous thromboembolism) as measures we were considering for possible future adoption into the program.

We are now proposing to adopt for the FY 2015 Hospital IQR measure set 6 VTE measures which are aimed at preventing the incidence of potentially preventable VTE. These 6 measures are listed and described below.

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These 6 measures were endorsed in a 2008 NQF project titled: National Voluntary Consensus Standards for Prevention and Care of Venous Thromboembolism: Additional Performance Measures. Because the NQF is the entity that holds a contract with the Secretary under section 1890(a) of the Act, measures that are endorsed by the NQF meet the requirement for measure selection under section 1886(b)(3)(B)(viii)(IX)(aa) of the Act. Aside from the consideration of NQF-endorsement, we believe that the inclusion of the VTE measure set in the Hospital IQR Program would provide a comprehensive view of how well VTE care is being managed in a hospital setting. Detailed measure specifications for these 6 proposed measures are available in the Specifications Manual located on QualityNet. We invite public comment on the proposed VTE measure set.

In summary, for the FY 2015 payment determination, we are proposing to retain all of the FY 2014 measures (56 measures if all of the measures are finalized), to adopt 3 HAI measures, and 14 chart-abstracted measures for a total of 73 measures for the FY 2015 payment determination. The measures proposed for the Hospital IQR Program for the FY 2015 payment determinations are set forth below.

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4. Possible New Quality Measures and Measure Topics for Future Years

Looking forward, we anticipate that as EHR technology evolves, and more infrastructure is put in place, we will have the capacity to accept electronic reporting of all of the clinical chart-abstracted quality measures that are currently in the Hospital IQR Program or have been proposed for adoption into the program. We intend for this future progress to significantly reduce the administrative burden on hospitals under the Hospital IQR Program. We recognize that considerable work needs to be done by measure owners and developers to make this possible with respect to the clinical quality measures that we proposed. This includes completing electronic specifications for measures, pilot testing, reliability and validity testing, and implementing such specifications into EHR technology to capture and calculate the results, and implementing the systems. We believe that at a future date, such as 2015, CMS and hospitals will be able to switch to complete EHR-based reporting of all chart-abstracted measures to CMS for the Hospital IQR Program, and we intend to work diligently toward this goal. We believe this will simplify measure collection and submission for the Hospital IQR Program, and will reduce the burden on hospitals. We invite public comment and suggestions on this topic.

In future rules, it is our intention to propose to adopt outcome measures for stroke and joint replacement surgery which we have developed and anticipate submitting for NQF review. In addition, we intend to propose additional HAI measures as they gain NQF endorsement. We also invite public comment on the following quality measures and topics set out below that we are considering for the future. We seek to limit the number of chart-abstracted measures and topics in the near future, in order to facilitate the transition to EHR-based reporting.

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5. Form, Manner, and Timing of Quality Data Submission

a. Background

Sections 1886(b)(3)(B)(viii)(I) and (II) of the Act state that the applicable percentage increase, for FY 2007 and each subsequent fiscal year, shall be reduced by 2.0 percentage points (or, beginning with FY 2015, by one-quarter of such applicable percentage increase (determined without regard to sections 1886(b)(3)(B)(ix), (xi), or (xii) of the Act) for any subsection (d) hospital that does not submit quality data in a form and manner, and at a time, specified by the Secretary. The data submission requirements, Specifications Manual, and submission deadlines are posted on the QualityNet Web site at:http://www.QualityNet.org/. CMS requires that hospitals submit data in accordance with the specifications for the appropriate discharge periods. Hospitals submit quality data through the secure portion of the QualityNet Web site (formerly known as QualityNet Exchange) (https://www.QualityNet.org). This Web site meets or exceeds all current Health Insurance Portability and Accountability Act requirements for security of protected health information.

In order to participate in the Hospital IQR Program, hospitals must meet specific procedural requirements. Hospitals choosing to participate in the Hospital IQR Program must also meet specific data collection, submission, and validation requirements.

b. Procedural Requirements for FY 2012 Payment Determinations and Subsequent Years

The proposed Hospital IQR Program procedural requirements are, for the most part, the same as the procedures adopted in the FY 2011 IPPS/LTCH PPS final rule for the Hospital IQR Program. Hospitals must comply with the following procedural requirements to participate—

• Register with QualityNet, before participating hospitals initially beginreporting data, regardless of the method used for submitting data.

• Identify a QualityNet Administrator who follows the registration process located on the QualityNet Web site (http://www.QualityNet.org).

• Complete a Notice of Participation. New subsection (d) hospitals and existing hospitals that wish to participate in the Hospital IQR Program for the first time must complete an online Notice of Participation (formerly known as “Reporting Hospital Quality Data for Annual Payment Update Notice of Participation,” also referred to as IPledge) that includes the name and address of each hospital campus that shares the same CMS Certification Number (CCN). We revise the Notice of Participation periodically as needed and provide appropriate notification of any revisions to hospitals and QIOs through the routine Hospital IQR Program communication channels, which include memo and e-mail notification and QualityNet Web site articles and postings.

• Any hospital that receives a new CCN on or after October 15, 2009 (including new subsection (d) hospitals and hospitals that have merged) that wishes to participate in the Hospital IQR Program and has not otherwise submitted a Notice of Participation using the new CCN must submit a completed Notice of Participation no later than 180 days from the date identified as the open date (that is, the Medicare acceptance date) on the approved CMS Online System Certification and Reporting (OSCAR) system to participate in the Hospital IQR Program. We are proposing regulation text to codify this requirement.

• We will accept Hospital IQR Program withdrawal forms for the FY 2013 payment determination from hospitals any time from October 1, 2011 until August 15, 2012. The August 15, 2012 deadline will give us sufficient time to update the FY 2013 payment to hospitals starting on October 1, 2012. If a hospital withdraws from the program for the FY 2013 payment determination, it will receive a reduction of 2.0 percentage points to the FY 2013 applicable percentage increase. Once a hospital has submitted a Notice of Participation, it is considered to be an active Hospital IQR Program participant until such time as the hospital submits a withdrawal form to CMS.

• We will determine if a hospital has complied with our data submission requirements by looking at whether the hospital has properly submitted data to the appropriate data warehouses for HCAHPS, CDC/NHSN, chart-abstracted measures, and structural measure quality measure data during the four calendar year quarters of FY 2012.

The Hospital IQR Program procedural requirements have remained relatively unchanged for the past several years and we are proposing to codify them at 42 CFR 412.140. We invite public comment on this proposal.

c. Proposed Procedural Requirements for FY 2013 and Subsequent Years

We are proposing that hospitals that have an open date (as noted on the approved CMS OSCAR system) before March 31, 2009 that did not participate in the Hospital IQR Program in FY 2011 or FY 2012 but that wish to participate in the Hospital IQR Program for the FY 2013 payment determination must submit a completed Notice of Participation to CMS on or before December 31, 2011. These hospitals, unlike hospitals that receive a new CCN, do not need to get their operations up and running. Therefore, we believe this is a reasonable deadline that will enable these hospitals to decide whether they want to participate in the Hospital IQR Program while also enabling us to collect enough data from them to make an accurate FY 2013 payment determination. We are proposing regulation text that provides that hospitals that would like to participate in the Hospital IQR program for the first time, or that previously withdrew from the program and would like to participate again, must submit to CMS a completed Notice of Participation Form by December 31 of the fiscal year preceding the fiscal year in which they would like to participate.

d. Proposed Data Submission Requirements for Chart-Abstracted Measures

We are proposing to reduce the quarterly submission deadline for chart-abstracted quality measures from 41/2months to 104 days. In other words, for FY 2014 payment determinations, the quarterly deadline for the quality measures under the topic that require chart abstraction (AMI, HF, PN, SCIP, Emergency Department Throughput (EDT), and Global Immunization (GIM) will be 104 days following the last discharge date in the calendar quarter. We are proposing to reduce the data submission deadline in order to allow for a correction period, which we will propose in future rulemaking. We also believe that this proposed change will encourage hospitals to utilize quality measure information in a more rapid manner to facilitate quality improvement. We also want to provide hospitals sufficient notice of any proposed changes to our submission deadline, since we recognize the advance time needed by hospitals to modify their recordkeeping and abstraction practices to comply with this proposed requirement. We also are proposing to change the aggregate population and sampling deadline from 4 months to 3 months to align with the corresponding proposal to change the data submission deadline from 135 to 104 days.

We will continue to require hospitals to submit aggregate population and sample size counts to CMS on a quarterly basis for Medicare and non-Medicare discharges for the topic areas for which chart-abstracted data must be submitted (currently AMI, HF, PN, and SCIP) (75 FR 50221). Starting with the FY 2014 payment determination, we are proposing to change the submission deadline for hospitals to submit aggregate population and sample size count data for the measures requiring chart abstraction from four months to three months following the last discharge date in the calendar quarter. We are proposing this three-month deadline for submission of the aggregate population and sample size counts data to provide CMS with information necessary to notify hospitals about their data completeness status. Specifically, we currently provide a Provider Participation Report the day after the submitted file is processed, which includes a calculation of the number of hospital submitted cases by topic, hospital self-reported aggregate population and sample size count, and Medicare FFS claims by clinical topic and SCIP surgical category. We expect that hospitals will use this report after submission to assess their patient-level data completeness and will submit additional patient-level cases before the proposed quarterly patient-level deadline. We are proposing to provide hospitals with the same 14-day period after the proposed aggregate population and sample size count deadline to submit the required patient-level records.

e. Proposed Sampling and Case Thresholds Beginning With the FY 2015 Payment Determination

We are proposing to continue the requirement for hospital submission of population and sampling data for the FY 2015 payment determination and future years. Hospitals must submit to CMS quarterly aggregate population and sample size counts for Medicare and non-Medicare discharges for the topic areas for which chart-abstracted data must be submitted (AMI, HF, PN, SCIP, EDT and GIM). Hospitals are required tosubmit their aggregate population and sample size count for each topic area.

In accordance with the policy we adopted in the FY 2011 IPPS/LTCH PPS final rule, hospitals that have not treated patients in a specific topic area must still submit quarterly population and sample size counts for all Hospital IQR chart-abstracted data topics. For example, if a hospital has not treated AMI patients, the hospital is still required to submit a zero for its quarterly aggregate population and sample count for that topic in order to meet the requirement. We view it as vital for hospitals to determine accurately their aggregate population and appropriate sampling size data in order for CMS to assess hospitals' data reporting completeness for their total population of cases, Medicare and non-Medicare.

In order to reduce the burden on hospitals that treat a low number of patients in a Hospital IQR Program topic area, a hospital that has five or fewer discharges (Medicare and non-Medicare combined) in a topic area during a quarter in which data must be submitted would not be required to submit patient-level data for that topic area for the quarter. The hospital must still submit its aggregate population and sample size counts for Medicare and non-Medicare discharges for the topic areas each quarter. Hospitals meeting the five or fewer patient discharge exception may voluntarily submit these data.

We strongly recommend that hospitals review the QIO Clinical Warehouse Feedback Reports and the Hospital IQR Program Provider Participation Reports that are available after patient-level data are submitted to the QIO Clinical Warehouse. We generally update these reports on a daily basis to provide accurate information to hospitals about their submissions. These reports enable hospitals to ensure that their data were submitted on time and accepted into the QIO Clinical Warehouse.

f. Proposed HCAHPS Requirements for the FY 2013, FY 2014, and FY 2015 Payment Determinations

Beginning with discharges occurring in third quarter CY 2011, we are proposing to move the HCAHPS data submission deadline forward by one week in order to allow for a review and correction period, which we will propose in future rulemaking. Currently, hospitals have about 14 weeks after the end of a calendar quarter to submit HCAHPS data for that quarter to the QIO Clinical Warehouse. If this proposal is adopted, hospitals will have about 13 weeks after the end of a calendar quarter to submit HCAHPS data for that quarter to the QIO Clinical Warehouse.

Other than this proposed change, we are not proposing any other changes to the HCAHPS requirements for the FY 2013 and FY 2014 Hospital IQR Program payment determinations, which were adopted in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50220). For FY 2015 Hospital IQR payment determinations, we are proposing to continue the HCAHPS requirements as follows. Under these requirements, a hospital must continuously collect and submit HCAHPS data in accordance with the current HCAHPS Quality Assurance Guidelines and the quarterly data submission deadlines, both of which are posted at http://www.hcahpsonline.org. In order for a hospital to participate in the collection of HCAHPS data, a hospital must either: (1) Contract with an approved HCAHPS survey vendor that will conduct the survey and submit data on the hospital's behalf to the QIO Clinical Warehouse; or (2) self-administer the survey without using a survey vendor provided that the hospital attends HCAHPS training and meets Minimum Survey Requirements as specified on the HCAHPS Web site at:http://www.hcahpsonline.org. A current list of approved HCAHPS survey vendors can be found on the HCAHPS Web site. For the FY 2015 Hospital IQR Program, we are proposing that the HCAHPS data will be based on discharges from January 1, 2013 through December 31, 2013.

Every hospital choosing to contract with a survey vendor must provide the sample frame of HCAHPS-eligible discharges to its survey vendor with sufficient time to allow the survey vendor to begin contacting each sampled patient within 6 weeks of discharge from the hospital. (We refer readers to the Quality Assurance Guidelines located at http://www.hcahpsonline.org for details about HCAHPS survey administration.) Hospitals are strongly encouraged to submit their entire patient discharge list, excluding patients who had requested “no publicity” status or who are excluded because of State regulations, in a timely manner to their survey vendor to allow adequate time for sample creation, sampling, and survey administration. We wish to emphasize that hospitals must also provide the administrative data that is required for HCAHPS in a timely manner to their survey vendor. This includes the patient MS-DRG at discharge, or alternative information that can be used to determine the patient's service line, in accordance with the survey protocols in the most recent HCAHPS Quality Assurance Guidelines.

We note that the HCAHPS Quality Assurance Guidelines require that hospitals maintain complete discharge lists that indicate which patients were eligible for the HCAHPS survey, which patients were not eligible, which patients were excluded, and the reason(s) for ineligibility and exclusion. (We refer readers to the Quality Assurance Guidelines located at http://www.hcahpsonline.org for details about HCAHPS eligibility and sample frame creation.) In addition, the hospital must authorize the survey vendor to submit data via My QualityNet, the secure part of the QualityNet Web site, on the hospital's behalf.

Hospitals must submit at least 300 completed HCAHPS surveys in a rolling four-quarter period unless the hospital is too small to obtain 300 completed surveys. We wish to emphasize that the absence of a sufficient number of HCAHPS eligible discharges is the only acceptable reason for submitting fewer than 300 completed HCAHPS surveys in a rolling four quarter period. If a hospital obtains fewer than 100 completed surveys, the hospital's HCAHPS scores will be accompanied by a footnote on the Hospital Compare Web site alerting the Web site users that the scores should be reviewed with caution, as the number of surveys may be too low to reliably assess hospital performance.

After the survey vendor submits the data to the QIO Clinical Warehouse, we strongly recommend that hospitals employing a survey vendor promptly review the two HCAHPS Feedback Reports (the Provider Survey Status Summary Report and the Data Submission Detail Report) that are available. These reports enable a hospital to ensure that its survey vendor has submitted the data on time and the data has been accepted into the QIO Clinical Warehouse.

In order to ensure compliance with HCAHPS survey and administration protocols, hospitals and survey vendors must participate in all oversight activities. As part of the oversight process, during the onsite visits or conference calls, the HCAHPS Project Team will review the hospital's or survey vendor's survey systems and assess protocols based upon the most recent HCAHPS Quality Assurance Guidelines. All materials relevant to survey administration will be subject to review. The systems and program review includes, but is not limited to: (a) Survey management and data systems; (b) printing and mailing materials and facilities; (c) telephoneand Interactive Voice Response (IVR) materials and facilities; (d) data receipt, entry and storage facilities; and, (e) written documentation of survey processes. As needed, hospitals and survey vendors will be subject to follow-up site visits or conference calls. We wish to point out that the HCAHPS Quality Assurance Guidelines state that hospitals should refrain from activities that explicitly influence how patients respond on the HCAHPS survey. If we determine that a hospital is not compliant with HCAHPS program requirements, we may determine that the hospital is not submitting HCAHPS data that meet the requirements of the Hospital IQR Program.

We continue to strongly recommend that each new hospital participate in an HCAHPS dry run, if feasible, prior to beginning to collect HCAHPS data on an ongoing basis to meet Hospital IQR Program requirements. New hospitals can conduct a dry run in the last month of a calendar quarter. The dry run will give newly participating hospitals the opportunity to gain first-hand experience collecting and transmitting HCAHPS data without the public reporting of results. Using the official survey instrument and the approved modes of administration and data collection protocols, hospitals/survey vendors will collect HCAHPS dry-run data and submit the data to My QualityNet, the secure portion of QualityNet.

We again are encouraging hospitals to regularly check the HCAHPS Web site at http://www.hcahpsonline.org for program updates and information.

We proposed that HCAHPS scores become part of the Hospital VBP Program in FY 2013. As HCAHPS scores become incorporated in hospital payment, we believe that a neutral third-party should administer the survey for hospitals whose annual payment updates will be affected by their HCAHPS scores. It is our belief that an experienced survey vendor will be best able to ensure reliable results. Therefore, we are considering whether to allow only non-subsection (d) hospitals to self-administer the HCAHPS survey. We invite public comment that will inform our future policy on this issue.

g. Proposed Procedures for Claims-Based Measures

CMS is proposing to adopt a new claims-based measure for FY 2014, the Medicare Spending per Beneficiary Measure, which is included in the chart below.

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We are not proposing to change the procedures and time periods we adopted in the FY 2011 IPPS/LTCH PPS final rule for the FY 2012, FY 2013 and FY 2014 payment determinations. For the FY 2014 payment determination, we are proposing to use up to 3 years of Medicare FFS claims data to calculate the measures, as appropriate for the measure.

Hospitals are encouraged to regularly check the QualityNet Web site, http://www.QualityNet.org, for program updates and information.

h. Proposed Data Submission Requirements for Structural Measures

Structural measures assess the characteristics and capacity of the provider to deliver quality healthcare. We are proposing to add one additional structural measure for the FY 2014 payment determination, Participation in a Systematic Clinical Database Registry for General Surgery, and to align the submission deadline for all structural measures with the submission deadline for the fourth quarter of the chart-abstracted measures. We are proposing to update the period of data collection that hospitals will submit the required registry participation information once annually for the structural measures via a Web-based collection tool between April 1, 2012 and May 15, 2012 with respect to the time period of January 1, 2011 through December 31, 2011. This proposal will give CMS a more complete picture of registry participation as well as synchronize data submissions for structural and chart-abstracted measures. These measures do not require the hospital to participate in a registry.

Below is the list of structural measures we have adopted or are proposing to adopt for the FY 2014 payment determination:

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i. Proposed Data Submission and Reporting Requirements for Healthcare-Associated Infection (HAI) Measures Reported via NHSN

As discussed above, we are proposing to adopt 2 new HAI measures for the FY 2014 payment determination and 3 HAI measures for FY 2015 payment determination. For FY 2014, the two proposed measures are Central Line Insertion Practices Adherence Percentage and Catheter Associated Urinary Tract Infection. For FY 2015, the three proposed measures are: Healthcare Provider Influenza Vaccination, MRSA Bacterimia and C. Difficile. Below is the list of HAI measures we are proposing to adopt for the FY 2014 and FY 2015 payment determinations:

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We are proposing to update the current data submission and reporting requirements for these proposed measures. Specifically, we are proposing to utilize the data submission and reporting standard procedures that have been set forth by CDC for NHSN participation in general and for submission of these measures to NHSN. We refer readers to the CDC's NHSN Web site (http://www.cdc.gov/nhsn) for detailed data submission and reporting procedures. We believe that these procedures are feasible because they are already widely used by over 4,000 hospitals reporting HAI data using the NHSN. Our proposal seeks to reduce hospital burden by aligning CMS data submission and reporting procedures with NHSN procedures currently utilized by hospitals, including hospitals complying with 28 State HAI reporting requirements. The existing data collection and submission timeframes for the HAI measures for the FY 2014 payment determination, which we are proposing to use for the HAI measures we have proposed above, are shown below. Hospitals must submit their quarterly data to NHSN for Hospital IQR Program purposes on or around the dates shown in the table below (updates to this will be posted on the QualityNet Web site).

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Hospitals would have until the Hospital IQR Program final submission deadline to submit their quarterly data to NHSN. After the final Hospital IQR Program submission deadline has occurred for each CY 2012 quarter, CMS will obtain the hospital-specific calculations that have been generated by the NHSN for the Hospital IQR Program.

We invite public comment on this proposal.

6. Proposed Chart Validation Requirements for Chart-Abstracted Measures

a. Proposed Changes to the Chart Validation Requirements and Methods for the FY 2012 Payment Determination and Subsequent Years

We are proposing several changes to the chart validation requirements and methods we adopted in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50225 through 50229) for the FY 2012 payment determination and subsequent years. In previous years, charts were requested by the CMS CDAC contractor and hospitals were given 45 days from the date of the request to submit the requested records. If any record(s) were not received by the 45-day requirement, the CMS CDAC contractor assigned a “zero” validation score to each measure in a missing record. We are proposing to change the time period given to hospitals to submit medical records to the CDAC contractor to 30 calendar days, and we are proposing to codify this proposal at 42 CFR 412.140(d)(1). This proposed change in submission timeframe will align the current process with the requirements in 42 CFR 476.78(b)(2), which currently allow only 30 days for chart submission in the context of reviews by QIOs. We are proposing this deadline modification to reduce the time we need to complete validation, and provide hospitals with feedback on their abstraction accuracy. We believe that this linkage between Hospital IQR Program validation discharge quarters and the same fiscal year's Hospital VBP Program proposed performance period would improve the reliability and accuracy of the Hospital VBP Program's chart-abstracted measures. Hospitals that are subject to Hospital IQR payment reduction due to not passing our validation requirement would be excluded from receiving a Hospital VBP performance score and corresponding incentive payment under section 1886(o)(1)(C)(ii)(I) of the Act. Thus, CMS would ensure that the data submitted on chart-abstracted measures we adopt for the Hospital VBP Program is accurate by virtue of validating it under the validation procedures we have adopted for the Hospital IQR Program.

b. Proposed Supplements to the Chart Validation Process for the FY 2014 Payment Determination and Subsequent Years

We are proposing to continue to use the supplements to the chart validation requirements and methods we adopted in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50227 through 50229) for FY 2014 payment determinations and future years with several proposed modifications.

We are proposing to add hospitals to our validation sample if they were open under their current CCNs in FY 2012 but not selected for validation in the three previous annual Hospital IQR Program validation samples. We are proposing this addition to supplementour validation approach to ensure that all eligible Hospital IQR Program hospitals are selected for validation at least once every 4 years. We are proposing this addition starting in FY 2015 because FY 2015 would be the fourth year that CMS would have used the random validation approach (which begins in FY 2012 as adopted in the FY 2011 IPPS/LTCH PPS final rule). We invite public comment on this proposal.

We believe that this proposed Hospital IQR Program validation process meets the requirements set forth in section 1886(b)(3)(B)(viii)(XI) of the Act. This section states that “the Secretary shall establish a process to validate measures specified under this clause as appropriate. Such process shall include the auditing of a number of randomly selected hospitals sufficient to ensure validity of the reporting program under this clause as a whole and shall provide a hospital with an opportunity to appeal the validation of measures reported by such hospital.”

Starting with the FY 2012 payment determination and continuing in subsequent fiscal years, the chart validation process audits 800 randomly selected hospitals for the discharge quarters. This sample size is sufficient to validate more than 22 percent of subsection (d) hospitals in an applicable fiscal year and ensure accuracy of the Hospital IQR Program quality data.

For FY 2014 payment determination, we are proposing to validate 24 chart-abstracted measures including 19 currently validated measures, and 5 proposed additional measures. The FY 2014 proposed validation reflects the 5 measures we are proposing to add (2 EDT measures, Central Line Associated Blood Stream Infection, Global Influenza Immunization, and Global Pneumonia Immunization measures) and the 8 measures we are proposing to retire (AMI-1, AMI-3, AMI-4, AMI-5, HF-4, PN-4, PN-5c, and SCIP Infection 6).

Validation of the HCAHPS measure is conducted through our oversight activities. We provide oversight of all HCAHPS survey vendors and hospitals self-administering the survey in order to ensure that the data collection protocols are followed. We also provide oversight and validation through our review of Quality Assurance Plans, site visits, conference calls and detailed data analyses each quarter to ensure there are no anomalies found in the data. In particular, we use site visits to review all data collection activities, including data reviews to track a discharged patient from sampling to survey administration to data submission.

We are proposing, starting with FY 2014 payment determinations, a modest increase to the current Hospital IQR Program validation sample of SCIP, AMI, HF, and PN cases. Specifically, we are proposing to add three charts per selected hospital per quarter to the validation sample. This additional quarterly sample would enable us to validate the CLABSI measure that we added to the Hospital IQR Program measure set beginning with the FY 2014 payment determination. CLABSI is a relatively rare event compared to SCIP, AMI, HF, and PN cases. In 2009, about 18,000 CLABSIs occurred in ICU patients in the United States, and these infections were a major contributor to prolonged hospital stays and inpatient mortality. We are proposing a process to validate the CLABSI measure that takes into account the relative infrequency of this event and the case-finding methodology for it, specifically the requirements for a positive blood culture result and the presence of a central venous catheter in the patient at the time of, or within 48 hours before, onset of the infection. We recognize that the current validation process and sample size for AMI, HF, PN, and SCIP measures is not likely to be sufficiently reliable to detect systematic underreporting of CLABSI. Unlike the current AMI, HF, PN, and SCIP chart abstracted process of care measures, CLABSI is a rarely occurring infection among acute care inpatient discharges. We estimate that between 0.1 percent to 0.2 percent of all acute care inpatient patient discharges nationwide involve patients who are infected with a CLABSI. We believe that our current Hospital IQR AMI, HF, PN, and SCIP sample sizes and sample methods would not reliably validate CLABSI measure rates at the hospital level because of the relatively rare occurrence of these events. We also seek to target validation of the CLABSI measure to minimize hospital burden in complying with our sample size proposals, for which hospitals must find, photocopy, and return requested medical records to CMS. If CMS did not utilize this targeted validation approach for the CLABSI measure, hospitals would have to submit 200 to 300 additional randomly selected cases in order to effectively validate this measure, given its rare occurrence. We believe that our proposed CLABSI validation process addresses these limitations through the use of a targeted incremental validation sample comprised of three charts of possible CLABSI events, and will reliably validate the Hospital IQR Program CLABSI measure while not overly burdening hospitals with medical record requests.

Specifically, we are proposing to identify sampled hospitals' three quarterly potential CLABSI charts using a two-step selection process that would target intensive care unit patients with bloodstream infection (positive blood culture results) and a Central Venous Catheter (CVC) provided by sampled hospitals to CMS. In the first step of this process, a CMS contractor would require the 800 randomly sampled hospitals to provide a quarterly list of all blood cultures positive for infection status taken from intensive care units conducting CLABSI surveillance during the discharge quarter. We are aware that this list will include both reported CLABSI events and many non-CLABSI events, including patients with and without CVCs. In clinical terms, our intent in reviewing these positive blood culture lists is to identify the information needed to determine whether the blood culture isolate is a likely pathogen found at least once, or a common skin commensal (CSC) found in two or more positive blood cultures drawn on separate occasions. CSC's are microorganisms that are commonly found on the skin and often indicate contamination of the blood culture media rather than infection by the microorganism when it is identified in a single blood culture test. Two sets of blood cultures are needed to differentiate true infection from contamination. The list of CSCs is comprised of the following organisms: diphtheroids (Corynebacterium spp.);Bacillus spp. (not B. anthracis);Priopionibacterium spp.; coagulase negative staphylococci including S. epidermidis; viridans group streptococci;Aerococcus spp.; and Micrococcus spp. This list of CSCs is also found at the NHSN Web site, http://www.cdc.gov/nhsn/PDFs/pscManual/4PSC_CLABScurrent.pdf. We would also require hospitals to self-identify intensive care unit patients with a CVC that are on this blood culture list. Using all of this information, we would be able to identify intensive care unit patients with a bloodstream infection and with a CVC (that is, candidate CLABSI events) for subsequent sampling.

In the second step of this process, we would randomly sample these candidate CLABSI events (ICU patients with a CVC and where a pathogen was recovered at least once or the same CSC was cultured from 2 or more blood cultures drawn on separate occasions). Specifically, the CMS CDAC would require hospitals to submit up to 3 medical records each quarter meetingthese criteria, randomly selected by CMS from among eligible charts. This number of medical records is sufficient to detect unreported CLABSI events based on our sample size analysis and experience from State health department validation efforts. This proposed process utilizes the validation experience from at least ten current State health department validation initiatives. In addition, we are proposing to randomly validate CLABSI data by abstracting all necessary quality data from the 12 quarterly medical records in our AMI, HF, PN, and SCIP targets already collected for IQR validation as well as the 3 additional records we later propose to collect for ED throughput/Immunization. Our intent in validating all currently requested quarterly medical records for CLABSI is to assess reliability of CLABSI measure rates from a random sample of patients independent from the proposed 3 record sample selected using blood culture lists and CVC presence to target underreporting of CLABSI events to the CDC's NHSN. In our proposed 12 record random sample of CLABSI events, we will not use blood culture list and CVC presence in our sampling, since this sample is already drawn from the AMI, HF, PN, and SCIP hospital reported data reported to CMS. By combining a random and targeted sampling approach using two independent sources to validate CLABSI data, we believe that we are adequately assessing the accuracy and reliability of the CLABSI measure in accordance with section 1886(b)(3)(B)(viii)(XI) of the Act.

We are proposing to determine the CLABSI validation score using a process that begins with the CMS contractor validation coordinator comparing the CDAC's CLABSI infection status to the hospital's event data reported to NHSN for the applicable quarter. For each medical record reviewed, a hospital would receive a match only if the CMS contractor validation coordinator determines equivalency between the CMS contractor's determination of infection status and the infection status reported to NHSN. For example, if one of the CMS-requested validation medical records revealed CLABSI and the event was not reported to the NHSN, then the hospital would receive a zero score for the CLABSI measure for that validated record. If the CMS contractor discovered that a second record in the CMS validation sample indicated no CLABSI event, but a CLABSI was reported to the NHSN for the record, the hospital would also receive a zero score for the CLABSI measure for that validation record. Thus, Hospitals would only receive a 100% CLABSI validation score for individual records if their CMS validation records' CLABSI status was consistent with the information reported, or not reported, to NHSN. In the above example, if the CMS quarterly validation process identified that 13 out of 15 total sampled records accurately reported the presence of a CLABSI or did not report a CLABSI where none was present, then the hospital's CLABSI validation score would be13/15, or about 87 percent.

Starting with FY 2014 payment determination, we are also proposing to add a sixth quarterly sample, which would enable us to validate the EDT measures and the Immunization for Influenza and Immunization for Pneumonia global measures that we added to the Hospital IQR Program measure set. We are proposing to modify the current process (75 FR 50225-75 FR 50229) for these measures in two ways. First, we are proposing to select 3 additional records each quarter from the records submitted by the 800 annually sampled hospitals. These records would only include principal diagnoses and surgical procedures not already included in the AMI, HF, PN, and SCIP populations eligible for validation sampling in these four topic areas. Second, we would abstract EDT and the Immunization for Influenza and Immunization for Pneumonia global measure data from the 15 quarterly AMI, HF, PN, SCIP and CLABSI records already submitted by hospitals for IQR validation. We would validate 18 records per quarter for these measures. With the addition of this sample of three records, we would ensure that all hospitals that reported chart-abstracted Hospital IQR data in all principal procedure and diagnosis codes would be eligible for sample selection for these global measures, thus, starting in FY 2014, we would be validating a total of 18 records per quarter per validated hospital in 6 strata (1) SCIP, (2) AMI, (3) HF, (4) PN, (5) CLABSI, and (6) EDT/immunization measures.

7. Proposed QIO Regulation Changes for Provider Medical Record Deadlines Possibly Including Serious Reportable Events

Our Hospital IQR validation requirement has utilized 42 CFR 476.78 authority and deadlines to require participating hospitals to return requested medical record information in a timely manner. Our State QIOs use this information to educate hospitals on medical record abstraction accuracy, and identify potential opportunities for quality improvement through medical record review. It is our goal to improve the alignment of QIO work in the Hospital IQR Program, quality improvement assistance, beneficiary (or beneficiary representative) requested QIO quality of care reviews, and QIO medical necessity reviews to improve the following three aims: (1) Improve individual care; (2) improve health for populations; and (3) lower cost through improvement. QIOs serve a critical role in advancing these three aims through their work with Medicare providers and beneficiaries to advance quality care and health.

Moreover, because we developed our validation process based on the requirements of the QIO program regulations, we are also proposing corresponding changes to 42 CFR 476.78(b), along with minor editorial revisions. This section includes requirements related to the submission of medical information as well as other information associated with the prospective payment system. Specifically, we are proposing to add a new § 478.78(b)(2)(ii) that would require the submission of medical information within 21 days in those situations in which a “serious reportable event” or other circumstance has been identified during the course of a QIO review. For purposes of this subsection, we are proposing to define the term “serious reportable event” to be consistent with the NQF's definition of a serious reportable event in its report “Serious Reportable Events in Healthcare 2006 Update.” These events include the following:

Surgical Events

• Surgery performed on the wrong body part

• Surgery performed on the wrong patient

• Wrong surgical procedure performed on a patient

• Unintended retention of a foreign object in a patient after surgery or other procedure

• Intraoperative or immediately postoperative death in an ASA Class I patient

Product or Device Events

• Patient death or serious disability associated with the use of contaminated drugs, devices or biologics provided by the healthcare facility

• Patient death or serious disability associated with the use or function of a device in patient care in which the device is used or functions other than as intended

• Patient death or serious disability associated with intravascular air embolism that occurs while being cared for in a healthcare facility

Patient Protection Events

• Infant discharged to the wrong person

• Patient death or serious disability associated with patient leaving the facility without permission

• Patient suicide, or attempted suicide, resulting in serious disability while being cared for in a healthcare facility

Care Management Events

• Patient death or serious disability associated with a medication error (for example, errors involving the wrong drug, wrong dose, wrong patient, wrong time, wrong rate, wrong preparation or wrong route of administration)

• Patient death or serious disability associated with a hemolytic reaction (abnormal breakdown of red blood cells) due to the administration of ABO/HLA—incompatible blood or blood products

• Maternal death or serious disability associated with labor or delivery in a low-risk pregnancy while being cared for in a healthcare facility

• Patient death or serious disability associated with hypoglycemia, the onset of which occurs while the patient is being cared for in a healthcare facility

• Death or serious disability associated with failure to identify and treat hyperbilirubinemia (condition where there is a high amount of bilirubin in the blood) in newborns

• Stage 3 or 4 pressure ulcers acquired after admission to a healthcare facility

• Patient death or serious disability due to spinal manipulative therapy

• Artificial insemination with the wrong donor sperm or wrong egg

Environmental Events

• Patient death or serious disability associated with an electric shock while being cared for in a healthcare facility

• Any incident in which a line designated for oxygen or other gas to be delivered to a patient contains the wrong gas or is contaminated by toxic substances

• Patient death or serious disability associated with a burn incurred from any source while being cared for in a healthcare facility

• Patient death or serious disability associated with a fall while being cared for in a healthcare facility

• Patient death or serious disability associated with the use of restraints or bedrails while being cared for in a healthcare facility

Criminal Events

• Any instance of care ordered by or provided by someone impersonating a physician, nurse, pharmacist, or other licensed healthcare provider

• Abduction of a patient of any age

• Sexual assault on a patient within or on the grounds of a healthcare facility

• Death or significant injury of a patient or staff member resulting from a physical assault (that is, battery) that occurs within or on the grounds of a healthcare facility

This proposed 21 day medical record deadline would be used when, for example, in the QIO's judgment, delays in receiving medical information could negatively undermine its efforts to evaluate the quality of care provided or the facility's adherence to payment policies. It also would enable QIOs to better utilize, and respond to, information about adverse events gained from the quality reporting program, in a timely fashion so that QIOs can have an improved and more immediate impact on the quality of health care.

We also are proposing a technical correction to 42 CFR 476.78(a) to correct a cross reference.

We invite public comment on our proposal to improve patient care through QIO access to more rapid provider information about “serious reportable events” and our proposed technical correction to 42 CFR 476.78(a).

8. Proposed Data Accuracy and Completeness Acknowledgement Requirements for the FY 2012 Payment Determination and Subsequent Years

We are proposing to require hospitals to continue to electronically acknowledge their data accuracy and completeness once annually. However, we are proposing to change the submission deadline to be used for the FY 2012 Hospital IQR Program payment determination and subsequent years. This proposal will allow us to align the submission deadline with the final quarter of the chart-abstracted measures. Hospitals will continue to submit the required electronic acknowledgment attesting that the data provided to meet the FY 2012 Hospital IQR Program data submission requirements is accurate and complete to the best of the hospital's knowledge at the time of data submission. We are proposing to make the submission deadline for the Data Accuracy and Completeness Acknowledgement May 15, 2012 with respect to the time period of January 1, 2011 through December 31, 2011. We invite public comment on this proposal.

9. Proposed Public Display Requirements for the FY 2014 Payment Determination and Subsequent Years

We are proposing to continue, for the FY 2014 payment determination and subsequent years, the approach we adopted in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50230) for public display requirements for the FY 2012 payment determination and subsequent years.

The Hospital IQR Program quality measures are typically reported on the Hospital Compare Web site http://www.hospitalcompare.hhs.gov, but on occasion are reported on other CMS Web sites. We require that hospitals sign a Notice of Participation form when they first register to participate in the Hospital IQR Program. Once a hospital has submitted a form, the hospital is considered to be an active Hospital IQR Program participant until such time as the hospital submits a withdrawal form to CMS (72 FR 47360). Hospitals signing this form agree that they will allow us to publicly report the quality measures included in the Hospital IQR Program.

We will continue to display quality information for public viewing as required by section 1886(b)(3)(B)(viii)(VII) of the Act. Before we display this information, hospitals will be permitted to review their information as recorded in the QIO Clinical Warehouse.

We invite public comment on this proposal.

10. Proposed Reconsideration and Appeal Procedures for the FY 2012 Payment Determination

We are proposing to continue, for the FY 2012 payment determination and subsequent years, the general approach we adopted in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50230) for reconsideration and appeal procedures for the FY 2011 payment determination. We also are proposing to codify the requirements under this process at 42 CFR 412.140(e). We discuss each of the regulatory provisions being proposed, as well as specific changes, below.

We are proposing that the general deadline for submitting a request for reconsideration in connection with the FY 2012 payment determination will be 30 days from the date of receipt of the payment determination notification. Historically, most reconsideration requests are based on the failure to meet established data submission deadlines. While we want to ensure that hospitals have an opportunity to request reconsiderations when warranted, we also need to balance this goal with our need to complete the reconsiderationprocess in a timely manner and with the hospitals' desire to obtain final decisions on their requests in a timely manner. Therefore, we are proposing to reduce the reconsideration and appeal period from a deadline of November 1st 2012 to 30 days after hospital receipt of the payment determination notification. Notifications will be sent via a trackable mail option such as Certified U.S. Mail or Registered Mail. We include this change in the proposed § 412.140(e)(1).

As discussed more fully below, we are proposing that all hospitals submit a request for reconsideration and receive a decision on that request before they can file an appeal with the Provider Reimbursement Review Board (PRRB). For the FY 2012 payment determination, we are proposing to continue utilizing many of the same procedures that we utilized for the FY 2011 requests for reconsideration. We are, however, clarifying that a hospital must submit all documentation and evidence that supports its request for reconsideration at the time that it submits its request. This includes copies of any communications, such as e-mails that the hospital believes demonstrate its compliance with the program requirements, as well as all paper medical records that support the hospital's rationale for seeking reconsideration. The information that must be included when a hospital submits a reconsideration request has been listed in proposed § 412.140(e)(2). Under these proposed procedures, the hospital must:

—Submit to CMS, via QualityNet, a Reconsideration Request form (available on the QualityNet Web site) containing the following information:

—Hospital CMS Certification number (CCN).

—Hospital Name.

—CMS-identified reason for failure (as provided in the CMS notification of failure letter to the hospital).

—Hospital basis for requesting reconsideration. This must identify the hospital's specific reason(s) for believing it met the Hospital IQR Program requirements and should receive the full update to the standardized amount.

—CEO contact information, including name, e-mail address, telephone number, and mailing address (must include the physical address, not just the post office box). We note that to the extent a hospital can submit a request for reconsideration on-line, the burden on our staff would be reduced and, as a result, we can more quickly review the request.

—QualityNet System Administrator contact information, including name, e-mail address, telephone number, and mailing address (must include the physical address, not just the post office box).

—Paper medical record requirement for reconsideration requests involving validation. We are proposing that if a hospital asks us to reconsider an adverse Hospital IQR Program payment decision made because the hospital failed the validation requirement, the hospital must submit paper copies of all the medical records that it submitted to the CDAC contractor each quarter for purposes of the validation. Hospitals must submit this documentation to a CMS contractor. The contractor will be a QIO support contractor, which has authority to review patient level information under 42 CFR part 480. We will post the address where hospitals can ship the paper charts on the QualityNet Web site after we issue the FY 2012 IPPS/LTCH PPS final rule.

Hospitals submitting a Hospital IQR Program validation reconsideration request will have all data elements to be reconsidered reviewed by CMS, and not their State QIO. (The State QIO is available to conduct a quarterly validation appeal if requested to do so by a hospital.)

Hospitals must provide a written justification for each appealed data element classified during the validation process as a mismatch. We will review the data elements that were labeled as mismatched, as well as the written justifications provided by the hospitals, and make a decision on the reconsideration request.

As we mentioned above, hospitals that submit a reconsideration request to CMS must receive a decision on that request prior to submitting a PRRB appeal. We believe that the reconsideration process is less costly for both CMS and hospitals, and that it decreases the number of PRRB appeals by resolving issues earlier in the reconsideration and appeals process. We have proposed language at § 412.140(e)(3) stating that a hospital that receives an adverse decision on its reconsideration request may appeal that decision to the PRRB.

Following receipt of a request for reconsideration, we will—

• Provide an e-mail acknowledgement, using the contact information provided in the reconsideration request, to the CEO and the QualityNet Administrator that the request has been received.

• Provide written notification to the hospital CEO, using the contact information provided in the reconsideration request, regarding our decision. We expect the process to take approximately 90 days from the receipt of the reconsideration request.

We are proposing to continue for the FY 2012 Hospital IQR reconsideration and future years the scope of review when a hospital requests reconsideration because it failed our validation requirements, which we adopted in the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43892). The scope of this review will be as follows:

1. Hospital requests reconsideration for CDAC contractor-abstracted data elements classified as mismatches affecting validation scores. Hospitals must timely submit a copy of the entire requested medical record to the CDAC contractor during the quarterly validation process for the requested case to be eligible to be reconsidered on the basis of mismatched data elements. Only hospitals that fail to meet the passing threshold for the quarterly validation would receive an opportunity to appeal the validation results to their State QIO.

2. Hospital requests reconsideration for medical record copies submitted during the quarterly validation process and classified as invalid record selections. Invalid record selections are defined as medical records submitted by hospitals during the quarterly validation process that do not match the patient's episode of care information as determined by the CDAC contractor (in other words, the contractor determines that the hospital returned a medical record that is different from that which was requested). If the CDAC contractor determines that the hospital has submitted an invalid record selection case, it awards a zero validation score for the case because the hospital did not submit the entire copy of the medical record for that requested case. During the reconsideration process, our review of invalid record selections will initially be limited to determining whether the record submitted to the CDAC contractor was actually an entire copy of the requested medical record. If we determine during reconsideration that the hospital did submit the entire copy of the requested medical record, then we would abstract data elements from the medical record submitted by the hospital.

3. Hospital requests reconsideration for medical records not submitted to the CDAC contractor within the proposed 30 calendar day deadline. Our review will initially be limited to determining whether the CDAC contractor received the requested record within the proposed 30 calendar days, and whetherthe hospital received the initial medical record request. If we determine during reconsideration that the CDAC contractor did receive a paper copy of the requested medical record within the proposed 30 calendar days, then we would abstract data elements from the medical record submitted by the hospital. If we determine that the hospital received a request for medical records and did not submit the requested records within the proposed 30 day period, CMS will not accept these records as part of the reconsideration. CMS will not abstract data from charts not received timely by the CMS contractor. Please note that this proposed language is also designed to address those instances where the hospital's request is based on “invalid record selections,” which we have defined as medical records submitted during the quarterly validation process that do not match the patient's episode of care information as determined by the CMS contractor as described above in situation 2, above “Hospital requests reconsideration for medical record copies submitted during the quarterly validation process and classified as invalid record selections.”

In sum, we are proposing to continue to initially limit the scope of our reconsideration reviews involving validation to information already submitted by the hospital during the quarterly validation process, and we will not abstract medical records that were not submitted to the CMS contractor during the quarterly validation process. We would expand the scope of our review only if we find during the initial review that the hospital correctly and timely submitted the requested medical records. In that case, we would abstract data elements from the medical record submitted by the hospital as part of our review of its reconsideration request.

If a hospital is dissatisfied with the result of a Hospital IQR Program reconsideration decision, the hospital may file an appeal under 42 CFR Part 405, Subpart R (a PRRB appeal). We invite public comment on the extent to which these proposed procedures will be less costly for hospitals, and whether they will lead to fewer PRRB appeals.

11. Proposed Hospital IQR Program Disaster Waivers

In our experience, there have been times when hospitals have been unable to submit required quality data due to extraordinary circumstances that are not within their control. It is our goal to not penalize hospitals for such circumstances or unduly increase their burden during these times. Therefore, we are proposing to continue, for the FY 2014 and subsequent years payment determinations, the process we adopted in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50225), for hospitals to request and for CMS to grant waivers with respect to the reporting of required quality data when there are extraordinary circumstances beyond the control of the hospital. Under the process, in the event of extraordinary circumstances, such as a natural disaster, not within the control of the hospital, for the hospital to receive consideration for an extension or waiver of the requirement to submit quality data for one or more quarters, a hospital would submit to CMS a request form that would be made available on the QualityNet Web site. The following information should be noted on the form:

• Hospital CCN;

• Hospital Name;

• CEO and any other designated personnel contact information, including name, e-mail address, telephone number, and mailing address (must include a physical address, a post office box address is not acceptable);

• Hospital's reason for requesting an extension or waiver;

• Evidence of the impact of the extraordinary circumstances, including but not limited to photographs, newspaper and other media articles; and

• A date when the hospital will again be able to submit Hospital IQR Program data, and a justification for the proposed date.

The request form must be signed by the hospital's CEO. We are proposing that a request form must be submitted within 30, rather than 45, days of the date that the extraordinary circumstance occurred. The QIO in the hospital's state will forward the request form to CMS. Following receipt of the request form, CMS will: (1) provide a written acknowledgement using the contact information provided in the request, to the CEO and any additional designated hospital personnel, notifying them that the hospital's request has been received; and (2) provide a formal response to the CEO and any additional designated hospital personnel using the contact information provided in the request notifying them of our decision.

This proposal does not preclude CMS from granting waivers or extensions to hospitals that have not requested them when we determine that an extraordinary circumstance, such as an act of nature (for example, hurricane), affects an entire region or locale. If CMS makes the determination to grant a waiver or extension to hospitals in a region or locale, CMS proposes to communicate this decision through routine communication channels to hospitals, vendors and QIOs, including but not limited to issuing memos, e-mails and notices on the QualityNet Web site. We are proposing to include an overview of this process in proposed 42 CFR 412.140(c)(2). We invite public comment on this proposal.

12. Electronic Health Records (EHRs)

a. Background

Starting with the FY 2006 IPPS final rule, we have encouraged hospitals to take steps toward the adoption of EHRs (also referred to in previous rulemaking documents as electronic medical records) that will allow for reporting of clinical quality data from the EHRs directly to a CMS data repository (70 FR 47420 through 47421). We sought to prepare for future EHR submission of quality measures by sponsoring the creation of electronic specifications for quality measures under consideration for the Hospital IQR Program.

b. HITECH Act EHR Provisions

The HITECH Act (Title IV of Division B of the ARRA, together with Title XIII of Division A of the ARRA) authorizes payment incentives under Medicare for the adoption and use of certified EHR technology beginning in FY 2011. Hospitals are eligible for these payment incentives if they meet requirements for meaningful use of certified EHR technology, which include reporting on quality measures using certified EHR technology. With respect to the selection of quality measures for this purpose, under section 1886(n)(3)(A)(iii) of the Act, as added by section 4102 of the HITECH Act, the Secretary shall select measures, including clinical quality measures, that hospitals must provide to CMS in order to be eligible for the EHR incentive payments. With respect to the clinical quality measures, section 1886(n)(3)(B)(i) of the Act requires the Secretary to give preference to those clinical quality measures that have been selected for the Hospital IQR Program under section 1886(b)(3)(B)(viii) of the Act or that have been endorsed by the entity with a contract with the Secretary under section 1890(a) of the Act. All measures must be proposed for public comment prior to their selection, except in the case of measures previously selected for the Hospital IQR Program under section 1886(b)(3)(B)(viii) of the Act. The final rule for the Medicare and Medicaid EHR Incentive Programs includes 15 clinical quality measures for eligible hospitals and critical access hospitals (75 FR 44418), 2 of which were previouslyselected for the Hospital IQR Program under section 1886(b)(3)(B)(viii) of the Act. The remainder of the measures for these incentive programs are being proposed for the Hospital IQR Program for the FY 2015 payment determination.

We continue to believe there are important synergies with respect to the two programs. We believe the financial incentives under the HITECH Act for the adoption and meaningful use of certified EHR technology by hospitals will encourage the adoption and use of certified EHRs for the reporting of clinical quality measures under the Hospital IQR Program. Through the EHR Incentive Programs we expect that the submission of quality data through EHRs will provide a foundation for establishing the capacity of hospitals to send, and for CMS to receive, quality measures via hospital EHRs for Hospital IQR Program measures in the future.

The HITECH Act requires that the Secretary seek to avoid redundant and duplicative reporting, with specific reference to the Hospital IQR Program for eligible hospitals. To the extent that quality measures are included in both the Hospital IQR Program and the EHR Incentive Programs, this would mean that Hospital IQR Program would need to transition to use of certified EHR technology rather than manual chart abstraction. We are considering what the most practical approach to effect such a transition might be. One option is to select a date after which chart-abstracted data would no longer be used in the Hospital IQR Program. This would require sufficient advance notice to hospitals for hospitals to report the data via certified EHR technology. At that point, we believe that it is likely that nearly all IPPS hospitals will have implemented certified EHR technology as incentivized by the HITECH Act. Another option would be to allow hospitals to submit the same measure for the Hospital IQR Program based on either chart-abstraction or EHR-based reporting. This would require extensive testing to ensure equivalence given that the data for the Hospital IQR Program supports both the public reporting of such information and the Hospital VBP Program. We are concerned that this option would not be feasible. We invite public comment on the approach of selecting a date such as calendar year 2015 after which chart-abstracted data would no longer be accepted for the Hospital IQR Program.

Ultimately, we do not anticipate having two different sets of clinical quality measures for the EHR Incentive Program and the Hospital IQR Program. Rather, we anticipate a single set of hospital clinical quality measures, most of which we anticipate would be electronically specified. We envision a single reporting infrastructure for electronic submission in the future, and will strive to align the hospital quality initiative programs to seek to avoid redundant and duplicative reporting of quality measures for hospitals. We note that some important Hospital IQR Program quality measures such as HCAHPS experience of care measures are based on survey data and do not lend themselves to EHR reporting. Similarly, certain outcome quality measures, such as the current Hospital IQR Program readmission measures, are based on claims rather than clinical data. Thus, not all Hospital IRP quality measures will necessarily be capable of being submitted through EHRs. As a consequence, not all Hospital IQR Program measures would necessarily be appropriate for inclusion in the EHR Incentive Programs.

We again note that the provisions in this FY 2012 IPPS/LTCH PPS proposed rule do not implicate or implement any HITECH statutory provisions. Those provisions are the subject of separate rulemaking and public comment.

B. Hospital Value-Based Purchasing (VBP) Program

1. Background

Section 1886(o) of the Act requires the Secretary to establish a Hospital Inpatient VBP Program under which value-based incentive payments are made in a fiscal year to hospitals meeting performance standards established for a performance period for such fiscal year. Both the performance standards and the performance period for a fiscal year are to be established by the Secretary.

Section 1886(o)(1)(B) of the Act directs the Secretary to begin making value-based incentive payments under the Hospital Inpatient VBP Program to hospitals for discharges occurring on or after October 1, 2012. These incentive payments will be funded for FY 2013 through a reduction to the FY 2013 base operating MS-DRG payment for each discharge of 1 percent, as required by section 1886(o)(7)(B)(i) of the Act.

Section 1886(o)(1)(C) of the Act provides that the Hospital Inpatient VBP Program applies to subsection (d) hospitals (as defined in section 1886(d)(1)(B) of the Act), but excludes from the definition of the term “hospital,” with respect to a fiscal year: (1) A hospital that is subject to the payment reduction under section 1886(b)(3)(B)(viii)(I) of the Act (the Hospital IQR Program) for such fiscal year; (2) a hospital for which, during the performance period for the fiscal year, the Secretary cited deficiencies that pose immediate jeopardy to the health or safety of patients; and (3) a hospital for which there are not a minimum number (as determined by the Secretary) of measures for the performance period for the fiscal year involved, or for which there are not a minimum number (as determined by the Secretary) of cases for the measures that apply to the hospital for the performance period for such fiscal year.

2. Overview of the Hospital Inpatient VBP Program Proposed Rule

On January 7, 2011, we issued the Hospital Inpatient VBP Program proposed rule to implement section 1886(o) of the Act (76 FR 2454 through 2491). This proposed rule was developed based on extensive research we conducted on hospital value-based purchasing, including research that formed the basis of a 2007 report we submitted to Congress, entitled “Report to Congress: Plan to Implement a Medicare Hospital Value-Based Purchasing Program” (November 21, 2007). This report is available on the CMS Web site at:http://www.cms.gov/AcuteInpatientPPS/downloads/HospitalVBPPlanRTCFINALSUBMITTED2007.pdf. The report takes into account input from both stakeholders and other interested parties.

As described more fully in the Hospital Inpatient VBP Program proposed rule (76 FR 2458 through 2463), we proposed to initially adopt for the FY 2013 Hospital Inpatient VBP Program 18 measures that we have already adopted for the Hospital IQR Program, categorized into two domains. We proposed to group 17 of the proposed measures, which are clinical process of care measures, into a Clinical Process of Care domain, and proposed to place 1 measure, the Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) survey, into a Patient Experience of Care domain. We also proposed to use a 3-quarter performance period from July 1, 2011 through March 31, 2012 for these proposed measures for purposes of the FY 2013 Hospital Inpatient VBP Program and to determine whether hospitals meet the proposed performance standards for these measures by comparing their performance during the proposed performance period to their performance during a proposed 9-month (3-quarter) baseline period from July 1, 2009 through March 31, 2010.

We proposed to implement a methodology for assessing the totalperformance of each hospital based on performance standards, under which we will score each hospital based on achievement and improvement ranges for each applicable measure. In addition, we proposed for FY 2013 to calculate a total performance score for each hospital by combining the greater of the hospital's achievement or improvement points for each measure to determine a score for each domain, multiplying each domain score by a proposed weight (clinical process of care: 70 percent, patient experience of care: 30 percent), and adding together the weighted domain scores. We proposed to convert each hospital's total performance score into a value-based incentive payment utilizing a linear exchange function. We refer readers to the Hospital Inpatient VBP Program proposed rule for greater detail on all of these proposals.

3. Proposed FY 2014 Hospital Inpatient VBP Program Measures

a. Background

Section 1886(o)(2)(A) of the Act requires the Secretary to select for the Hospital Inpatient VBP Program measures, other than readmission measures, from the measures specified under section 1886(b)(3)(B)(viii) of the Act for the Hospital IQR Program. Section 1886(o)(2)(B)(i) of the Act requires the Secretary, with respect to value-based incentive payments made for discharges occurring during FY 2013, to ensure that the selected measures cover at least the following specified conditions or topics: Acute Myocardial Infarction (AMI); Heart Failure (HF); Pneumonia (PN); Surgeries, as measured by the Surgical Care Improvement Project (SCIP); Healthcare-Associated Infections (HAIs), as measured by the prevention metrics and targets established in the HHS Action Plan to Prevent HAIs (available at:http://www.hhs.gov/ash/initiatives/hai/actionplan/index.html)(or any successor plan); and HCAHPS. Section 1886(o)(2)(B)(ii) of the Act requires the Secretary, with respect to value-based incentive payments made for discharges occurring during FY 2014 or a subsequent year, to ensure that Hospital Inpatient VBP Program measures include efficiency measures, including measures of Medicare spending per beneficiary.

Section 1886(o)(2)(C)(i) of the Act provides that the Secretary may not select a measure with respect to a performance period for a fiscal year unless the measure has been specified under the Hospital IQR Program and included on the Hospital Compare Web site for at least one year prior to the beginning of the performance period. Section 1886(o)(2)(C)(ii) of the Act provides that a measure selected under section 1886(o)(2)(A) of the Act shall not apply to a hospital if the hospital does not furnish services appropriate to the measure.

b. Proposed Efficiency Measure—Medicare Spending per Beneficiary Measure—for the FY 2014 Hospital Inpatient VBP Program

(1) Introduction

Section 1886(o)(2)(B)(ii) of the Act requires the Secretary to ensure that, for Hospital Inpatient VBP discharges occurring during FY 2014 or a subsequent year, the measures selected “include efficiency measures, including measures of `Medicare spending per beneficiary'. * * *” Therefore, for the FY 2014 Hospital Inpatient VBP Program, we are proposing to adopt a Medicare spending per beneficiary measure. This measure also is proposed for inclusion in the Hospital IQR Program in this proposed rule and is described in detail above in section IV.A.3.b.(2)(B)(v). The proposed approach to scoring this measure and including it in the Hospital Inpatient VBP Program is described below.

(2) Scoring the Medicare Spending Per Beneficiary Measure

Section 1886(o)(5)(B)(ii) of the Act requires that the hospital performance score be determined using the higher of its achievement or improvement score for each measure. Therefore, we are proposing to calculate each hospital's achievement score and improvement score on the proposed Medicare spending per beneficiary measure, in order to determine which score will be used to calculate the total performance score for the hospital.

We are proposing this scoring methodology because it is generally similar to the methodology proposed for scoring the Clinical Process of Care and Outcome Measures in the Hospital Inpatient VBP Program proposed rule (76 FR 2465 through 2471).

(A) Scoring Based on Achievement

We are proposing to calculate a Medicare per beneficiary spending ratio of the Medicare spending per beneficiary amount for each hospital to the median Medicare spending per beneficiary amount across all hospitals during the performance period. We are proposing that a hospital would earn between 1 and 10 achievement points on the Medicare spending per beneficiary measure if its individual Medicare spending per beneficiary ratio during the performance period falls at or between the achievement threshold and the achievement benchmark for the measure. We are proposing to set the achievement threshold at the median Medicare spending per beneficiary ratio across all hospitals during the performance period. We are proposing to set the benchmark at the mean of the lowest decile of Medicare spending per beneficiary ratios during the performance period. A hospital whose individual Medicare spending per beneficiary ratio falls below the achievement threshold would score 0 achievement points on the measure, and a hospital whose individual Medicare spending per beneficiary ratio falls at or above the achievement benchmark would score the maximum of 10 achievement points on the measure. A hospital whose individual Medicare spending per beneficiary ratio falls at or above the achievement threshold, but below the benchmark, would score between 1-9 points according to the following formula:

[9 * ((Hospital's performance period score − achievement threshold)/(benchmark − achievement threshold))] + .5

(B) Scoring Based on Improvement

We are proposing that a hospital would earn between 1 and 9 improvement points on the proposed Medicare spending per beneficiary measure if its individual Medicare spending per beneficiary ratio during the performance period falls within the improvement range. We are proposing to set the threshold for improvement at the hospital's own Medicare spending per beneficiary ratio, as calculated during the baseline period. We are proposing a baseline period of May 15, 2010 through February 14, 2011 for the Medicare spending per beneficiary measure and discuss this proposal in section IV.B.3.b.(4) of the preamble of this proposed rule. We are proposing that the improvement benchmark would be equal to the achievement benchmark for the performance period, which is the mean of the lowest decile of Medicare spending per beneficiary ratios across all hospitals. A hospital whose Medicare spending per beneficiary ratio is equal to or lower than its baseline period Medicare spending per beneficiary ratio would score 0 improvement points on the measure. If a hospital's score on the measure during the performance period was greater than its baseline period score but below the benchmark (within the improvement range), the hospital would receive a score of 0-9 according to the following formula:

[10 * ((Hospital performance period score − Hospital baseline period score)/(Benchmark − Hospital baseline period score))] − .5

(C) Example of Scoring the Medicare Spending per Beneficiary Measure

If Hospital A had the following spending per beneficiary amounts during the baseline and performance period:

Baseline = $10,105

Performance = $9,125;

and the median spending per beneficiary amounts across all hospitals for the baseline and performance periods were:

Median Baseline = $11,672

Median Performance = $12,467;

then the Medicare spending per beneficiary ratios for Hospital A in the baseline and performance periods would be:

Baseline Ratio = 0.866

Performance Ratio = 0.732.

With an achievement threshold of 1.0 and an achievement benchmark of 0.712, we would then calculate attainment and improvement points for Hospital A as follows:

Attainment Points = 9 * (1.0 − 0.732)/(1.0 − 0.712) + 0.5 = 8.868

Improvement Points = 10 * (0.866 − 0.732)/(0.866 − 0.712) − 0.5 = 8.185

These points are rounded to yield 9 attainment points and 8 improvement points.

Because section 1886(o)(5)(B)(ii) of the Act, as added by section 3001 of the Affordable Care Act, requires that the hospital performance score will be determined using the higher of attainment or improvement score for each measure, the hospital in this example would receive 9 points on the Medicare spending per beneficiary measure.

(D) Incorporation of Medicare Spending per Beneficiary Measure Score Into the Overall Hospital Total Performance Score

We are proposing to incorporate the Medicare spending per beneficiary measure score into the FY 2014 Hospital Inpatient VBP Program as part of a new domain: The “Efficiency” domain. The Medicare spending per beneficiary measure score would be the Efficiency domain score for purposes of the FY 2014 Hospital Inpatient VBP Program. Consistent with the domain scoring method proposed in the Hospital Inpatient VBP Program proposed rule (76 FR 2454 through 2491), we are proposing to determine the total earned points for the Efficiency domain in general by adding the points earned for each domain measure and dividing by the total possible points, then multiplying that number by 100 percent. However, because we are proposing to adopt only one measure for the Efficiency domain for the FY 2014 Hospital Inpatient VBP Program, the total points earned for the domain would be the points earned on the Medicare spending per beneficiary measure. We are proposing that the total possible points that a hospital could earn for the Efficiency domain for FY 2014 would be 10, which is equal to the total possible points that the hospital could earn for the Medicare spending per beneficiary measure. We are proposing that the Efficiency domain percentage score would be calculated for FY 2014 as follows: Efficiency domain score = Total points earned on the Medicare spending per beneficiary measure divided by 10, then multiplied by 100 percent.

Once the Efficiency domain score has been determined, we are proposing to assign it a weight for use in the calculation of the total performance score. We intend to propose FY 2014 domain weighting, any additional FY 2014 measures, and other FY 2014 proposals for the Hospital Inpatient VBP Program in the CY 2012 Hospital Outpatient Prospective Payment System proposed rule.

4. Proposed Efficiency Domain (Medicare Spending per Beneficiary Measure) Performance Period and Baseline Period

Section 1886(o)(2)(C)(i) of the Act prohibits the Secretary from selecting a measure for the Hospital Inpatient VBP Program with respect to a performance period unless it has been specified under the Hospital IQR Program and included on the Hospital Compare Web site for at least 1 year prior to the beginning of such performance period. Section 1886(o)(8) of the Act requires that hospitals be notified of the calculation of their value-based incentive payment no later than 60 days prior to the fiscal year involved. In order to comply with these statutory requirements for the FY 2014 Hospital Inpatient VBP Program, we are proposing to adopt a 9-month period of performance from May 15, 2012 through February 14, 2013 for the proposed Medicare spending per beneficiary measure. If the measure is adopted, this would allow for a 1-year display period on Hospital Compare, a 60-day notification period, and would allow the time needed for administrative processes. We note that this would mean that only IPPS discharges occurring from May 15, 2012 through 90 days prior to February 14, 2013 would count as index stays for purposes of creating the Medicare spending per beneficiary episodes. The Medicare spending per beneficiary episode is described in section IV.A.3.b.(2).(B).(v) of this proposed rule.

For the purposes of calculating improvement points on the proposed Medicare spending per beneficiary measure, it is necessary to establish the baseline period to which the performance period score will be compared. For purposes of the FY 2014 Hospital Inpatient VBP Program, we are proposing to adopt a baseline period of May 15, 2010 through 90 days prior to February 14, 2011 for this proposed measure. The proposed baseline period is consistent with the baseline period that has been proposed for the FY 2013 clinical process of care and patient experience of care measures in the Hospital Inpatient VBP Program proposed rule (76 FR 2454 through 2491) because it precedes the performance period by 2 years.

We invite public comment on all of our proposals related to the Efficiency Domain and Medicare spending per beneficiary measure.

5. Proposal to Simultaneously Specify Additional Measures for the Hospital Inpatient VBP Program and Adoption Into the Hospital IQR Program

We are proposing to simultaneously specify additional measures for the Hospital Inpatient VBP Program and adoption into the Hospital IQR Program, as appropriate for usage in both programs. Our rationale is to improve patient safety and quality of care in an expedited manner that is compliant with applicable statutory guidance. We are currently utilizing this approach in this rule by proposing to add the Medicare Spending per Beneficiary measure to both Hospital Inpatient VBP and Hospital IQR Programs. We will provide all associated regulatory impact and policy rationale in future proposals for both programs. We believe that this proposal notifies stakeholders through rulemaking and welcome comments on this proposal.

C. Hospital Readmissions Reduction Program

1. Background

a. Overview

CMS is committed to promoting high quality health care and improving patient health outcomes. Readmission to a hospital may be an adverse event for patients and many times imposes afinancial burden on the health care system. Successful efforts to reduce preventable readmission rates will improve quality of care while simultaneously decreasing costs. Hospitals can work with their communities to lower readmission rates and improve patient care in a number of ways, such as ensuring patients are clinically ready to be discharged, reducing infection risk, reconciling medications, improving communication with community providers responsible for post-discharge patient care, improving care transitions, and ensuring that patients understand their care plans upon discharge.

Many studies have demonstrated the effectiveness of these types of in-hospital and post-discharge interventions in reducing the risk of readmission, confirming that hospitals and their partners have the ability to lower readmission rates. 34 35 36 These types of efforts taken during and after a hospitalization have been shown to be effective in reducing readmission rates in geriatric populations generally, 37 38 as well as for multiple specific conditions. Moreover, such interventions can be cost saving. For example, in the case of heart failure, improved hospital [39] and post-discharge care, 40 41 including pre-discharge planning, 42 43 home-based follow-up, and patient education, 44 45 have been shown to lower heart failure readmission rates, suggesting that heart failure readmission rates might be reduced if proven interventions were more widely adopted. Financial incentives to reduce readmissions will in turn promote improvement in care transitions and care coordination, as these are important means of reducing preventable readmissions. [46]

In its 2007 “Report to Congress: Promoting Better Efficiency in Medicare,” [47] MedPAC noted the potential benefit to patients of lowering readmissions and suggested payment strategies that would incentivize hospitals to reduce these rates. MedPAC identified 7 conditions and procedures that accounted for almost 30 percent of potentially preventable readmissions: heart failure; chronic obstructive pulmonary disease; pneumonia; acute myocardial infarction; coronary artery bypass graft surgery; percutaneous transluminal coronary angioplasty; and other vascular procedures. To promote quality of care, CMS developed hospital quality of care measures that compare patient outcomes across different hospitals. These measures, including hospital risk-standardized readmission measures for Acute Myocardial Infarction (AMI), Heart Failure (HF) and Pneumonia (PN), were originally developed for public reporting as a part of the Hospital IQR Program. We adopted the HF readmission measure for the Hospital IQR Program in the FY 2009 IPPS final rule for the FY 2010 payment determination (73 FR 48606) and the AMI and PN readmission measures in the CY 2009 OPPS/ASC final rule with comment period for the FY 2010 payment determination (73 FR 68781). Details about the methodology used for these measures may be found online at:http://www.qualitynet.org/dcs/ContentServer?c=Page&amp;pagename=QnetPublic%2FPage%2FQnetTier4&amp;cid=1219069855841.

As described above, readmission rates are important markers of quality of care, particularly of the care of a patient in transition from an acute care setting to a non-acute care setting, and improving readmissions can positively influence patient outcomes and the cost of care. The above hospital risk-standardized readmission measures are endorsed by the National Quality Forum (NQF) and have been publicly reported on Hospital Compare Web site since 2009 (http://www.hospitalcompare.hhs.gov) to encourage quality improvement and lower readmission rates. As discussed in detail below, we are now proposing that the readmission measures for these three conditions be used for the Hospital Readmission Reduction Program under section 1886(q) of the Act, as added by Section 3025 of the Affordable Care Act.

b. Statutory Basis for the Hospital Readmission Reduction Program

Section 3025 of the Affordable Care Act, as amended by section 10309 of the Affordable Care Act, added a new subsection (q) to section 1886 of the Act. Section 1886(q) of the Act establishes the “Readmission Reduction Program” effective for discharges from an “applicable hospital” beginning on or after October 1, 2012, under which payments to those hospitals under section 1886(d) of the Act will be reduced to account for certain excess readmissions.

In this year's IPPS rulemaking, we address: (i) Those aspects of the program that relate to the conditions and readmissions to which the program will apply for the first program year beginning October 1, 2012; (ii) the readmission measures and related methodology used for those measures, as well as the calculation of the readmission rates; and (iii) public reporting of the readmission data. Specific information regarding the payment adjustment required under section 1886(q) of the Act will be proposed in next year's IPPS/LTCH PPS proposed rule. Although we are not proposing specific policies regarding the payment adjustment under the Hospital Readmissions Reduction Program in this proposed rule, we believe that it is still important to set forth the general framework of the Hospital Readmissions Reduction Program, including the payment adjustment provisions, inorder for the public to understand how the proposed measures outlined in this rulemaking will affect certain hospital payments beginning in FY 2013.

Section 1886(q)(1) of the Act sets forth the methodology by which payments to “applicable hospitals” will be adjusted to account for excess readmissions. Pursuant to section 1886(q)(1) of the Act, payments for discharges from an “applicable hospital” will be an amount equal to the product of the “base operating DRG payment amount” and the adjustment factor for the hospital for the fiscal year. That is, the “base operating DRG payments” are reduced by an adjustment factor that accounts for excess readmissions. Section 1886(q)(1) of the Act requires the Secretary to make payments for a discharge in an amount equal to the product of “the base operating DRG payment amount” and “the adjustment factor” for the hospital in a given fiscal year. Section 1886(q)(2) of the Act defines the base operating DRG payment amount as “the payment amount that would otherwise be made under subsection (d) (determined without regard to subsection (o) [the Hospital VBP Program]) for a discharge if this subsection did not apply; reduced by * * * any portion of such payment amount that is attributable to payments under paragraphs (5)(A), (5)(B), (5)(F), and (12) of subsection (d).” Paragraphs (5)(A), (5)(B), (5)(F), and (12) of subsection(d) refer to outlier payments, IME payments, DSH payments, and payments for low volume hospitals, respectively.

Furthermore, section 1886(q)(2)(B) of the Act specifies special rules for defining “the payment amount that would otherwise be made under subsection (d)” for certain hospitals. Specifically, section 1886(q)(2)(B) of Act states that “[i]n the case of a Medicare-dependent, small rural hospital (with respect to discharges occurring during fiscal years 2012 and 2013) or a sole community hospital * * * the payment amount that would otherwise be made under subsection (d) shall be determined without regard to subparagraphs (I) and (L) of subsection (b)(3) and subparagraphs (D) and (G) of subsection (d)(5).” We intend to propose regulations to implement the statutory provisions related to the definition of “base operating DRG payment amount” in the FY 2013 IPPS/LTCH PPS proposed rule.

Section 1886(q)(3)(A) of the Act defines the “adjustment factor” for an applicable hospital for a fiscal year as equal to the greater of “(i) the ratio described in subparagraph (B) for the hospital for the applicable period (as defined in paragraph (5)(D)) for such fiscal year; or (ii) the floor adjustment factor specified in subparagraph (C).” Section 1886(q)(3)(B) of the Act in turn describes the ratio used to calculate the adjustment factor. It states that the ratio is “equal to 1 minus the ratio of—(i) the aggregate payments for excess readmissions * * *; and (ii) the aggregate payments for all discharges. * * *” Section 1886(q)(3)(C) of the Act describes the floor adjustment factor, which is set at 0.99 for FY 2013, 0.98 for FY 2014, and 0.97 for FY 2015 and subsequent fiscal years.

Section 1886(q)(4) of the Act sets forth the definitions of “aggregate payments for excess readmissions” and “aggregate payments for all discharges” for an applicable hospital for the applicable period. The term “aggregate payments for excess readmissions” is defined in section 1886(q)(4)(A) of the Act as “the sum, for applicable conditions * * * of the product, for each applicable condition, of (i) the base operating DRG payment amount for such hospital for such applicable period for such condition; (ii) the number of admissions for such condition for such hospital for such applicable period; and (iii) the “Excess Readmission Ratio* * * for such hospital for such applicable period minus 1.” The “Excess Readmission Ratio” is a hospital-specific ratio hospital-specific ratio based on each applicable condition. Specifically, section 1886(q)(4)(C) of the Act defines the Excess Readmission Ratio as the ratio of “risk-adjusted readmissions based on actual readmissions” for an applicable hospital for each applicable condition, to the “risk-adjusted expected readmissions” for the applicable hospital for the applicable condition.

Section 1886(q)(5) of the Act provides definitions of “applicable condition,” “expansion of applicable conditions,” “applicable hospital,” “applicable period,” and “readmission.” The term “applicable condition,” which we address in detail in this proposed rule, is defined as a “condition or procedure selected by the Secretary among conditions and procedures for which: (i) readmissions * * * represent conditions or procedures that are high volume or high expenditures * * * and (ii) measures of such readmissions * * * have been endorsed by the entity with a contract under section 1890(a) * * * and such endorsed measures have exclusions for readmissions that are unrelated to the prior discharge (such as a planned readmission or transfer to another applicable hospital).” The term “expansion of the applicable condition” refers to the Secretary's authority, beginning with fiscal year 2015, “to the extent practicable, [to] expand the applicable conditions beyond the 3 conditions for which measures have been endorsed * * * to the additional 4 conditions that have been identified by the Medicare Payment Advisory Commission in its report to Congress in June 2007 and to other conditions and procedures as determined appropriate by the Secretary.”

Section 1886(q)(5)(C) of the Act defines “applicable hospital,” that is, a hospital subject to the readmission reduction program, as a “subsection (d) hospital or a hospital that is paid under section 1814(b)(3) [of the Act], as the case may be.” The term “applicable period,” as defined by section 1886(q)(5)(D) of the Act, “means, with respect to a fiscal year, such period as the Secretary shall specify.” As explained in this proposed rule, the “applicable period” is the period from which data are collected in order to calculate various ratios and adjustments under the Hospital Readmissions Reduction Program.

Section 1886(q)(6) of the Act sets forth the reporting requirements for hospital-specific readmission rates. Section 1886(q)(7) of the Act limits administrative and judicial review of certain determinations made pursuant to section 1886(q) of the Act. Finally, section 1886(q)(8) of the Act requires the Secretary to collect data on readmission rates for all hospital inpatients for “specified hospitals” in order to calculate the hospital-specific readmission rates for all hospital inpatients and to publicly report these readmission rates.

2. Implementation of the Hospital Readmissions Reduction Program

a. Overview

We intend to implement the requirements of the Hospital Readmissions Reduction Program in the FY 2012, FY 2013, and future IPPS/LTCH PPS rulemaking cycles.

b. Proposed Provisions in the FY 2012 IPPS/LTCH PPS Rulemaking

As explained above, the adjustment factor set forth in section 1886(q) of the Act does not apply to discharges until FY 2013. Therefore, we are able to implement the Hospital Readmission Reduction Program over two years. We are first addressing issues such as the selection of readmission measures and the calculation of the excess readmission ratio, which will then be used, in part, to calculate the readmission payment adjustment factor. Specifically, in the FY 2012 IPPSrulemaking, we are addressing portions of section 1886(q) of the Act related to the following provisions:

• Selection of applicable conditions;

• Definition of “readmission;”

• Measures for the applicable conditions chosen for readmission;

• Methodology for calculating the Excess Readmission Ratio;

• Public reporting of the readmission data; and

• Definition of “applicable period.”

With respect to the topics of “measures for readmission” for the applicable conditions, and “methodology for calculating the Excess Readmission Ratio,” we will specifically address the following:

• Index hospitalizations;

• Risk Adjustment;

• Risk Standardized Readmission Rate;

• Data sources; and

• Exclusion of Certain Readmissions.

c. Proposed Provisions To Be Included in the FY 2013 IPPS/LTCH PPS Proposed Rule

In the FY 2013 IPPS rulemaking, we will address the provisions in section 1886(q) of the Act that are related to the payment adjustment, as well as the rest of the provisions in section 1886(q) of the Act that are not addressed in the FY 2012 IPPS/LTCH PPS rulemaking. Specifically, in the FY 2013 IPPS/LTCH proposed rule, we plan to address section 1886(q) of the Act related to the following provisions:

• Base operating DRG payment amount, including policies for SCHs and MDHs;

• Adjustment factor (both the ratio and floor adjustment factor);

• Aggregate payments for excess readmissions;

• Applicable hospital; and

We believe it is appropriate to first address the readmission measures and the calculation of the excess readmission ratio that will then be used, in part, to calculate the readmission payment adjustment factor and the application of the readmission payment adjustment factor to inpatient hospital payments. We believe the 2-year rulemaking schedule provides adequate time and opportunities for careful consideration of the various aspects of this program by both CMS and stakeholders prior to implementation of the Hospital Readmission Reduction Program in FY 2013.

d. Proposed Expansion of the Applicable Conditions To Be Included in the Future Rulemaking

Pursuant to section 1886(q)(5)(B) of the Act, the Secretary “shall, to the extent practicable,” expand the list of applicable conditions beyond the 3 conditions for which measures have been endorsed and add 4 conditions that have been identified by MedPAC for the Hospital Readmission Reduction Program. We plan to implement this section of the Act in later rulemaking.

3. Proposed Provisions for the Hospital Readmission Reduction Program

a. Proposed Applicable Conditions for the FY 2013 Hospital Readmission Reduction Program

Section 1886(q) of the Act sets forth payment adjustments for applicable hospitals to account for excess readmissions, for applicable conditions, that are high volume or high expenditure, in the hospital. These payment adjustments are determined based on the occurrence of readmissions for “applicable conditions.” When selecting “applicable conditions,” the Secretary must select among conditions and procedures for which (1) readmissions are “high volume or high expenditure; and (2) “measures of such readmissions” have been endorsed by the entity with a contract under section 1890(a) of the Act (currently NQF) and such endorsed measures have exclusions for readmissions that are unrelated to the prior discharge. Consistent with these requirements, we are proposing to include AMI, HF and PN as “applicable conditions” for the Hospital Readmissions Reduction Program in FY 2013 and subsequent fiscal years. As set forth below, we believe these conditions meet the criteria for “applicable conditions” under section 1886(q)(5)(A) of the Act. We also note that in the 2007 Report to Congress that we referred to earlier in the overview section, MedPAC listed three conditions: AMI, HF, and PN, as priorities for hospital-specific public reporting of readmission rates. [48]

With regards to the first criterion, that readmissions of “applicable conditions” be “high volume or high expenditure,” MedPAC identified AMI, HF, PN as being among the seven conditions and procedures associated with approximately 30 percent of potentially preventable readmissions, [49] based on an 3M analysis conducted for MedPAC of 2005 MedPAR (Medicare FFS hospital claims). Of these seven conditions and procedures, HF and PN were the highest in terms of volume and expenditures.

Additionally, in our analysis of the 235 diagnostic categories for hospitalization based on 2008 Medicare hospital claims data, HF and PN were first and second, respectively, as the most frequent diagnostic category for both total admissions and total readmissions. AMI was ninth among the 235 conditions in terms of frequency of admission and 8th in frequency of readmission. We therefore believe that AMI, HF and PN consitute high volume and high expenditure conditions particularly as relates to hospital admission and readmission.

With regards to the second criterion, we believe that measures of readmissions for these applicable conditions also meet the statutory requirements. Section 1886(q)(5)(A)(i) of the Act requires that each “applicable condition” have “measures of readmissions” that “(I) have been endorsed by the entity with a contract under section 1890(a); and (II) such endorsed measures have exclusions for readmissions that are unrelated to the prior discharge.” As discussed in section IV.C.3.c. below, we believe that our proposal to select AMI, HF, and PN as “applicable conditions” is consistent with this statutory requirement. The NQF (the entity with a contract under section 1890(a) of the Act) has endorsed “measures of readmissions” for each of these three conditions, and those NQF-endorsed measures “have exclusions for readmissions that are unrelated to the prior discharge (such as a planned readmission or transfer to another applicable hospital).”

We believe AMI, HF, and PN meet both prongs of the definition of “applicable condition.” Therefore, we are proposing to include AMI, HF, and PN as “applicable conditions” for the Hospital Readmissions Reduction Program for FY 2013 and subsequent fiscal years. We invite public comment on this proposal.

b. Proposed Definition of “Readmission”

Section 1886(q)(5)(E) of the Act defines “readmission” as, “in the case of an individual who is discharged from an applicable hospital, the admission of the individual to the same or another applicable hospital within a time period specified by the Secretary from the date of such discharge.” The definition further states that “[i]nsofar as the discharge relates to an applicable condition for which there is an endorsed measure * * * such time period (such as 30 days) shall beconsistent with the time period specified for such measure.”

The three NQF-endorsed readmission measures define a readmission as occurring when a patient is discharged from the applicable hospital to a non-acute setting (for example, home health, skilled nursing, rehabilitation or home) and then is admitted to the same or another acute care hospital within a specified time period from the time of discharge from the index hospitalization. The time period specified for these measures is 30 days. Because the measures as endorsed by NQF are calculated based on readmissions occurring within 30 days, we are proposing 30 days as the time period specified from the date of discharge for the purpose of defining readmission for the purpose of the Hospital Readmissions Reduction Program. This is in compliance with the statutory requirement that the time period specified by the Secretary from the date of discharge for the purpose of defining readmission be consistent with the time period specified for the endorsed measures. We invite public comment on our proposal to adopt, without revision, a proposed definition of readmission with a time period of 30 days from the date of discharge from the index hospital as set forth in the existing NQF-endorsed measures.

c. Proposed Readmission Measures and Related Methodology

(1) Proposed Readmission Measures for Applicable Conditions

As explained above, section 1886(q)(5)(A)(ii) of the Act requires that each “applicable condition” selected by the Secretary have “measures of readmissions” that “have been endorsed by the entity with a contract under section 1890(a)” and that “such endorsed measures have exclusions for readmissions that are unrelated to the prior discharge.” We are proposing to adopt three NQF-endorsed, hospital risk-standardized readmission measures for AMI, HF, and PN which are currently included in the Hospital IQR Program. These existing measures are:

• Acute Myocardial Infarction 30-day Risk Standardized Readmission Measure (NQF# 0505);

• Heart Failure 30-day Risk Standardized Readmission Measure (NQF#0330); and

• Pneumonia 30-day Risk Standardized Readmission Measure (NQF#0506).

CMS adopted these measures for the Hospital IQR Program in the FY 2009 IPPS/LTCH final rule for FY 2010 payment determination (73 FR 48606) and the CY 2009 OPPS/ASC final rule with comment period (73 FR 68781). The NQF (the entity with a contract under section 1890(a) of the Act) has endorsed each of these “measures of readmissions” and, as explained in more detail below, those NQF-endorsed measures “have exclusions for readmissions that are unrelated to the prior discharge.” Therefore, we believe these measures meet the statutory requirements for selection for the Hospital Readmissions Reduction Program, and we are proposing them, without modification, as measures for the program.

(2) NQF Endorsement of Measures of Readmissions

We note that these measures and their underlying methodologies were endorsed by NQF. We are proposing to adopt, for purposes of the Hospital Readmissions Reduction Program, the measures and related methodologies as they are currently endorsed by NQF. This includes the currently endorsed 30-day time window, risk-adjustment methodology, and exclusions for certain readmissions that comprise the measures. We believe that this proposal to adopt, without modification, these measures of readmission is consistent with the statutory language, which requires the measures of readmissions to be “endorsed by the entity with a contract under section 1890(a).” If we were to modify the endorsed measures, we are concerned that they would no longer be considered “endorsed.” If the NQF were to later endorse a revised measure for one of these conditions, we would then propose through notice and comment rulemaking that the revised measure be used prospectively for purposes of the Hospital Readmissions Reduction Program.

We welcome public comment on this proposal to use, for each of the proposed applicable conditions, existing measures as endorsed by the NQF.

(3) Endorsed Measures With Exclusions for Unrelated Readmissions

Section 1886(q)(5)(A)(i)(ii)(II) of the Act requires that each of the readmission measures also has “exclusions for readmissions that are unrelated to the prior discharge (such as a planned readmission or transfer to another applicable hospital).” The three NQF-endorsed readmission measures that we are proposing for inclusion in the Hospital Readmissions Reduction Program have exclusions that meet this statutory requirement. Under each measure, certain unrelated readmissions are not taken into account when determining the number of readmissions under the measures.

The AMI 30-day risk standardized readmission measure, as endorsed by the NQF and as proposed in this rule, has exclusions for certain unrelated readmissions. Because admissions for Percutaneous Transluminal Coronary Angioplasty (PTCA) or Coronary Artery Bypass Graft (CABG) may be staged or are typically scheduled readmissions for patients initially admitted for AMI, the AMI 30-day risk standardized readmission measure does not count as readmissions those admissions after discharge that include PTCA or CABG procedures, unless the principal discharge diagnosis for the readmission is one of the following diagnoses that are not consistent with a scheduled readmission: heart failure, acute myocardial infarction, unstable angina, arrhythmia, and cardiac arrest (that is, readmissions with these diagnoses and a PTCA or CABG procedure are counted as readmissions). We adopted this approach when first developing this measure after consultation with clinical experts, including cardiologists, and review of relevant readmissions data.

During the development of the readmission measures for both HF and PN, we similarly asked clinical experts to identify planned readmissions for these conditions, that is, those which would not count as a readmission, after an admission for HF or PN. Specifically, the clinical experts were asked whether there were common follow-up causes of readmissions for a scheduled procedure that represented a continuation of care after either a HF or PN admission, respectively. No such related, planned procedures were identified as occurring commonly after the index admissions for HF or PN at the time of the development of the IQR measures. Therefore, no similar exclusions exist for the HF and PN measures of readmissions as they are currently endorsed.

Under the three NQF-endorsed risk-standardized readmission measures that we are proposing in this proposed rule, transfers to other acute care facilities are excluded from each of the readmission measures. The NQF-endorsed proposed measures consider these multiple contiguous hospitalizations to be a single acute episode of care. The measures attribute the readmission for transferred patients to the hospital that ultimately discharges the patient to a non-acute care setting (for example, to home or a skilled nursing facility). Thus, in the case of a patient who is transferred between two or more hospitals, if the patient is readmitted in the 30 days following the finalhospitalization, the measures attribute such a readmission to the hospital that discharged the patient to a non-acute care setting. We believe that the exclusion of transfers to other applicable hospitals under the measures is sufficient to meet the requirement set forth in section 1886(q)(5)(A)(ii)(II) of the Act that certain “unrelated” readmissions be excluded from the measures selected for use in the program. We invite public comment on our proposal to adopt, without revision or modification, the exclusions for unrelated admissions set forth in the existing NQF-endorsed measures.

(4) Methodology of Proposed Readmission Measures

In the following section, we describe the major components of the measure methodology of the three NQF-endorsed risk-standardized readmission measures for AMI, HF and PN proposed for the implementation of the Hospital Readmissions Reduction Program. Additional details about each of these measures may be found online at http://www.QualityNet.org> Hospital-Inpatient > Readmission Measures > methodologies. This Web page is located at http://www.qualitynet.org/dcs/ContentServer?c=Page&amp;pagename=QnetPublic%2FPage%2FQnetTier4&amp;cid=1219069855841.

Briefly, as is described in more detail in the sections below, the measures are risk-standardized rates of readmission. For each hospital qualifying index hospitalizations are identified based on the principal discharge diagnosis of the patient and the inclusion/exclusion criteria (section IV.C.3.c.(4)(A), Index hospitalization). Each hospitalization is evaluated for whether the patient had a readmission to an acute care setting in the 30-days following discharge (section IV.C.3.c.(4)(B), Readmission). Patient-risk factors, including age, and chronic medical conditions are also identified from inpatient and outpatient claims for the 12-months prior to the hospitalization for risk-adjustment (section IV.C.3.c.(4)(D), Risk-Adjustment). The readmissions, sample size for each hospital, and patient risk-factors are then used to calculate a risk-standardized readmission ratio for each hospital. For the purposes of publicly-reporting the measures, this risk-standardized readmission ratio is then multiplied by the national crude rate of readmission for the given condition to produce a risk-standardized readmission rate (RSRR) (section IV.C.3.c.(5)(B)).

As stated above, we invite public comment on our selection of the three readmission measures, as endorsed by the NQF, and as described in more detail below.

(A) Index Hospitalization

An index hospitalization for each of the readmission measures is the hospitalization from which we evaluate the 30 days after discharge for possible readmissions. The measures, as endorsed by the NQF, evaluate eligible hospitalizations and readmissions of Medicare patients discharged from an applicable hospital (as defined by section 1886(q)(5)(C) of the Act) having a principal discharge diagnosis for the measured condition in an applicable period. The NQF endorsed measures, as specified, exclude patients under 65 years of age.

The discharge diagnoses for each applicable condition are based on a list of specific ICD-9-CM codes for that condition. These codes are listed in the 2010 Measures Maintenance Technical Report: Acute Myocardial Infarction, Heart Failure, and Pneumonia 30-Day Risk-Standardized Readmission Measures. They also are posted on the QualityNet Web site:http://www.QualityNet.org> Hospital-Inpatient > Readmission Measures > methodologies. See http://www.qualitynet.org/dcs/ContentServer?c=Page&amp;pagename=QnetPublic%2FPage%2FQnetTier4&amp;cid=1219069855841.

The current NQF-endorsed CMS 30-day risk standardized readmission measures exclude the following admissions from the group of index hospitalizations:

• Hospitalizations for patients with an in-hospital death (because they are not eligible for readmission);

• Hospitalizations for patients without at least 30 days post-discharge enrollment in Medicare FFS (because the 30-day readmission outcome cannot be assessed in this group);

• Hospitalizations for patients discharged against medical advice (because providers did not have the opportunity to deliver full care and prepare the patient for discharge).

(B) Readmission

As explained above, the initial hospitalization assessed for a readmission is called the index hospitalization. The proposed measures, as endorsed by the NQF, define readmission as a second admission to another acute care hospital within 30-days of the index hospitalization. Under the proposed measure, as endorsed by the NQF, a patient who is readmitted twice within 30 days simply is counted as having been readmitted; this patient's readmissions are not counted differently than a patient with a single readmission within 30 days of discharge.

With the exception of the exclusions discussed previously (transfers and planned readmissions, as discussed in the Exclusions for Unrelated Readmissions section above), the proposed measures, as currently endorsed by the NQF, include readmissions for all causes, without regard to the principal diagnosis of the readmission. There are several reasons for this approach. First, from the patient's perspective, readmission from any cause is an adverse event. We want the measures to be patient-centered measures. Second, although we would expect few hospitals to use gaming strategies, we strive to make sure that measures do not create incentives for them to do so. Limiting the readmissions to particular diagnoses creates an opportunity for hospitals to potentially avoid having readmissions counted by changing coding practices. Further, do so could create a perverse incentive whereby hospitals begin to avoid patients with conditions that are part of the readmissions measures. Third, there are not clinically and technically sound and accepted strategies for accurately identifying readmission that are unrelated to hospital quality based on the documented cause of readmission. For example, a patient with HF who develops an HAI may ultimately be readmitted for sepsis. It would be inappropriate to consider the readmission as unrelated to the care the patient received for HF. Finally, we believe it is important that hospitals strive to reduce readmissions from all causes, not just those that are readmissions measures; while the measures do not presume that each readmission is preventable, interventions have generally shown reductions in all types of readmissions. The NQF measures are intended to provide incentives for hospitals to reduce readmissions and not to achieve zero readmissions.

(C) Time Window

The three proposed measures, as endorsed by the NQF, count readmissions within a 30-day period from the date of the initial discharge from the index hospitalization. This is the standard time period to be considered a readmission. The timeframe of 30 days is a clinically meaningful period for hospitals, in collaboration with their medical communities, to reduce readmission risk. This time period for assessing readmission is an accepted standard in research and measurement. We believethat during this 30-day time period, hospital and community partners can take steps to reduce risk by ensuring patients are clinically ready to be discharged, improving communication across providers, reducing risks of infections, and educating patients on symptoms to monitor whom to contact with questions and where and when to seek follow-up care can influence readmission rates.

(D) Risk Adjustment

Section 1886(q)(4)(C)(i)(I) of the Act requires that the number of readmissions used in the Excess Readmission Ratio be risk adjusted. This language requires us, when comparing hospitals' readmission rates, to account for differences in the severity of illness of the patients that hospitals treat. Risk adjustment essentially “levels the playing field” for comparing hospital performance by taking into account that some hospitals' patients are sicker than others on admission and therefore have a higher risk of readmission.

The methodology for calculating the RSRRs under the NQF-endorsed measures that we are proposing adjust for key factors that are clinically relevant and have strong relationships with the outcome (for example, patient demographic factors, patient co-existing medical conditions, and indicators of patient frailty). Under the current NQF-endorsed methodology, these covariates are obtained from Medicare claims extending 12 months prior to, and including, the index admission. This risk-adjustment approach adjusts for differences in the clinical status of the patient at the time of the index admission as well as for demographic variables.

A complete list of the variables used for risk adjustment and the clinical and statistical process for selecting the variables for each NQF-endorsed measure, as proposed, is available in the publicly-available technical documentation of the existing measures for AMI, HF, and pneumonia. The risk adjustment variables for each condition are presented in the 2010 Measures Maintenance Technical Report: Acute Myocardial Infarction, Heart Failure, and Pneumonia 30-Day Risk-Standardized Readmissions Measures that are posted on http://www.QualityNet.org> Hospital-Inpatient > Readmission Measures > Resources. The variables used are Condition Categories that group ICD-9-CM codes into clinically coherent variables. The 2010 Condition Category-ICD-9-CM Crosswalk provides a map to the specific ICD-9-CM codes in each variable and is also posted on http://www.QualityNet.org> Hospital-Inpatient > Readmission Measures > Measure Calculation Methodology or readers may use the following Web site address:http://www.qualitynet.org/dcs/ContentServer?c=Page&amp;pagename=QnetPublic%2FPage%2FQnetTier4&amp;cid=1219069855841

(E) Applicable Period

Section 1886 (q)(5)(D) of the Act authorizes the Secretary to specify the “applicable period” with respect to a fiscal year. Currently, for Hospital IQR Program public reporting purposes, we use three years of data (three 12-month increments) to calculate the three proposed readmission measures. This provides substantially more data than a one or two year time frame and increases the precision of the measure in distinguishing performance among hospitals. This is advantageous in the display of the three proposed readmission measures on Hospital Compare where we categorize hospital performance into one of three discrete categories: “Better than the US national rate,” “No different than the US national rate,” and “Worse than the US national rate.”

For the FY 2013 Hospital Readmissions Reduction Program, we are proposing to use 3 years of data for discharges from July 1, 2008 through June 30, 2011 as the applicable period upon which to calculate excess readmission ratios for each of the three proposed measures. Based on our experience with the IQR program, we believe that this timeframe increases the precision of the measures in distinguishing performance among hospitals. However, for purposes of the Hospital Readmissions Reduction Program, we will not be categorizing hospital performance in three categories; rather, we will be using the measures to calculate excess readmission ratios for the three conditions. We are currently conducting analyses to determine an appropriate data period (for example, 1 year, 2 years, 3 years) that will yield reliable excess readmission ratios for the three proposed measures. We intend to consider both the positive and negative consequences of using longer or shorter data periods for this program. Should our analysis or public comment indicate that a shorter data period yields excess readmission ratios with acceptable reliability, we may consider finalizing a shorter time period.

We invite public comment and suggestions on the topic of an appropriate length for the applicable period to consider using for the three proposed readmission measures for the FY 2013 payment determination.

(F) Data Sources

As discussed above, the adjustment under section 1886(q) of the Act is made to the “base operating DRG payment amount,” and components of the ratio used to determine a hospital's adjustment factor also use that payment amount. Payments under section 1886 of the Act, including the “base operating DRG payment amount, are made for services furnished to Medicare's fee-for-service population under part A. Therefore, for purposes of implementing the Hospital Readmissions Program under section 1886(q) of the Act, we are proposing to use Medicare claims data for the Medicare FFS population only. This is the same universe of claims used for calculating the endorsed measures for the purposes of the IQR program.

The administrative data sources for the risk adjustment analyses are Medicare administrative claims datasets that contain FFS inpatient and outpatient (Medicare Parts A and B) claims information in the prior 12 months and subsequent one month for patients admitted in each of these years. We are proposing to use claims from the index hospitalization included the measure and from the prior 12 months from all of these data sources to gather risk factors. If the patient does not have any claims in the 12 months prior to the index hospitalization admission, only comorbidities from the included admission are used.

We welcome public comment on this proposal.

(G) Minimum Number of Discharges for Applicable Conditions

Section 1886 (q)(4)(C)(II)(ii) of the Act authorizes the Secretary to exclude readmissions for an applicable condition for which there are “fewer than a minimum number (as determined by the Secretary).” Currently, for public reporting purposes under the IQR program, only hospitals with at least 25 discharges for each of the three proposed applicable conditions are included in the display of the three proposed readmission measures on Hospital Compare. We chose this number of discharges for the IQR based on our findings that using fewer cases did not provide sufficiently reliable information on hospital performance. In general the larger the number of cases, the more reliable is the information. We are currently conducting additional analyses to determine further evaluate the appropriate minimum number of discharges needed to yield reliable excess readmission ratios for the threeproposed measures. However, based on our experience with the IQR program, we are proposing to use the current threshold of 25 discharges for each of the three measures for the Hospital Readmissions Reduction Program. However, should our analysis or public comment indicate that a different minimum number of discharges would be more appropriate for this program, we would consider finalizing a different number.

We invite public comment and suggestions on the topic of appropriate minimum number of discharges to consider for the three proposed readmission measures.

(H) Reporting Hospital-Specific Readmission Rates

Section 1886(q)(6)(A) of the Act requires the Secretary to “make information available to the public regarding readmission rates of each subsection (d) hospital under the readmission reduction program.” Section 1886(q)(6)(B) of the Act requires the Secretary to “ensure that a subsection (d) hospital has the opportunity to review and submit corrections for, the information to be made public with respect to the hospital * * * prior to such information being made public.” Section 1886(q)(6)(C) of the Act requires the Secretary to post the hospital-specific readmission information on the Hospital Compare Web site in an easily understandable format.

We currently report information on the three readmission rates we are proposing in this proposed rule on the Hospital Compare Web site for each subsection (d) hospital. We provide hospitals with an opportunity to preview their readmission rates for 30-days prior to posting on the Web site. We propose to use a similar process and timeframe for the rates calculated for the Hospital Readmissions Reduction Program. Through this process hospitals will be able to review the information and submit to CMS corrections in advance of the information to be made public. We will carefully review all such correction submissions and determine the appropriateness of any revisions. We will inform the hospital requesting corrections of our findings and we will make any appropriate revisions to the information to be made available to the public regarding the hospital's readmission rates.

We invite public comment on this proposal.

(I) Readmission Rates for All Patients

Section 1886(q)(8)(A) of the Act requires the Secretary to calculate readmission rates for all patients for a “specified hospital” for an applicable condition and “other conditions deemed appropriate by the Secretary for an applicable period.” Section 1886(q)(8)(D)(ii) of the Act defines “specified hospital” as: subsection (d) hospitals; hospitals described in clauses (i) through (v) of subsection (d)(1)(B) (psychiatric hospitals, rehabilitation hospitals, children's hospitals, LTCHs, and cancer hospitals); and, “as determined feasible and appropriate by the Secretary, other hospitals.” Such information is to be calculated in the same manner as used to calculate readmission rates for hospitals with respect to the postings on the CMS Hospital Compare Web site. Section 1886(q)(8)(C) of the Act requires specified hospitals, or a State or an appropriate entity on behalf of the hospitals, to submit to the Secretary, in a form, manner and time specified by the Secretary, data and information determined necessary to calculate the all patient readmission rates. Section 1886(q)(8)(D) of the Act defines “all patients” to mean patients who are treated on an inpatient basis and discharged from a specified hospital. We are not proposing any specific policies to implement section 1886(q)(8) of the Act at this time, but we invite public comment and suggestions for issues related to implementation of these provisions, such as the mechanisms to collect the all-patient data, the collection of patient identifiers to track patient care history across multiple settings to conduct risk adjustment for outcome measures, what entities could submit all patient data on behalf of hospitals, and more generally, the requirement for all patient data submission.

(5) Proposed Excess Readmission Ratio

(A) Statutory Background

Section 1886(q)(4)(C) of the Act requires the Secretary to develop a risk-adjusted “Excess Readmission Ratio.” The Excess Readmission Ratio will be used in the calculation of “aggregate payments for excess readmissions” as required under section 1886(q)(4)(A)(iii) of the Act, which, in turn, is used to determine the adjustment factor under section 1886(q)(3). Specifically, section 1886(q)(4)(C)(i) states that the term “ `Excess Readmission Ratio' means * * * with respect to an applicable condition for a hospital for an applicable period * * * the ratio of * * * risk adjusted readmissions based on actual readmissions * * * to * * * the risk adjusted expected readmissions.” The statute also requires that the numerator and denominator of the ratio, that is, “risk adjusted readmissions based on actual readmissions” and the “risk adjusted expected readmissions,” be determined “consistent with a readmission measure methodology that has been endorsed under paragraph (5)(A)(ii)(I).”

(B) Proposed Excess Readmission Ratio Methodology

We are proposing to use the risk-standardized ratio calculated for the NQF-endorsed measures for AMI, HF, and PN as the “excess readmission ratio.” This risk-standardized ratio (excess readmission ratio), as required by statute, is a ratio of “risk adjusted readmission based on actual” to “risk adjusted expected readmissions.” Moreover, use of this ratio meets the statutory requirement that the numerator and denominator of the ratio be determined in a manner that is “consistent with” an NQF-endorsed readmission measure methodology.

The proposed ratio is a measure of relative performance. If a hospital performs better than an average hospital that admitted similar patients (that is, patients with the same risk factors for readmission such as age and comorbidities), the ratio will be less than one. If a hospital performs worse than average, the ratio will be greater than one. Hospitals with a ratio greater than one have excess readmissions relative to average quality hospitals with similar types of patients

As part of the Hospital IQR Program, the risk-standardized ratio to the measure result is reported on Hospital Compare Web site. The risk-standardized ratio is the unique result produced by the measures for each hospital for each condition to assess relative hospital performance. Hospitals may not be familiar with this ratio, because the measure result reported on Hospital Compare for each hospital and each condition is this ratio multiplied by a constant (the national raw rate of readmission for the condition), and it is currently presented as the risk-standardized readmission rate (RSRR). Multiplying by a constant transforms the ratio into a rate (the risk-standardized readmission rate) that is better understood by consumers. Thus Hospital Compare results for CMS readmission measures are computed as follows:

[Hospital risk-standardized ratio] X [national raw readmission rate] (i) Numerator and Denominator of the Risk-Standardized Ratio (Excess Readmission Ratio)

The NQF-endorsed measures, which we are proposing for the Hospital Readmissions Reduction Program, calculate this risk-standardized ratio (excess readmission ratio) using hierarchical logistic modeling, which is a widely accepted statistical method that evaluates relative hospital performance based on outcomes such as readmission. The method adjusts for variation across hospitals in how sick their patients are when admitted to the hospital (and therefore variation in hospitals' patients' readmission risk) as well as the variation in the number of patients that a hospital treats to reveal difference in quality. The detailed methodology for these measures is publicly-available and the calculation SAS packs are made available upon request. This is the calculation software that permits the measures to be calculated. We describe the key details of the methodology here.

In order to model the extent to which hospitals affect patients' risk of readmission, this statistical model first analyzes data on all the patients discharged from all hospitals for a given condition that indicate for each patient what comorbidities were present when the patient was admitted and whether or not the patient was readmitted and calculates:

• How much variation in hospital readmission rates overall is accounted for by variation across hospitals in patients' individual risk factors (such as age and other medical conditions); a risk weight (beta-coefficient) is calculated for each patient risk factor at all hospitals. The specific approach and variables used in the risk adjustment are discussed below.

• How much variation in readmission rates is accounted for by hospitals' contribution to readmission risk, after adjusting for differences in readmission due to differences in patients' risk factors. The model estimates the amount by which a specific hospital increases or decreases patients' risk of readmission relative to an average hospital based on the hospitals actual readmission relative to hospitals with similar patients. The estimated amount each hospital contributes (or subtracts) from its patients readmission risk compared to hospitals with similar patients is called the “hospital-specific readmission effect.” It is used only in the numerator to estimate the adjusted actual readmissions. The hospital-specific effect will be negative for a better than average hospital, positive for a worse than average hospital, and close to zero for an average hospital. If there are no quality differences resulting in excess readmissions among hospitals (if all hospitals had the same readmission rates relative to hospitals with similar patients), the hospital-specific effects for all hospitals will be zero and the ratio for all hospitals will be one.

(ii) Numerator Calculation—Adjusted Actual Readmissions

For each hospital, the numerator of the ratio used in the NQF-endorsed methodology (actual adjusted readmissions) is calculated by estimating the probability of readmission for each patient at that hospital and summing up over all the hospital's patients to get the actual adjusted number of readmissions for that hospital. This estimated probability of readmission for each patient is calculated using:

• The hospital-specific effect (increase, decrease, or no change in probability of readmission relative to the probability of readmission at an average hospital);

• The intercept term for the model (the same for all hospitals and for both numerator and denominator equations);

• The increase or decrease in the probability of readmission contributed by each of the patients' risk factors (risk adjustment coefficients multiplied by the patient's risk factors, X)

Mathematically, the numerator equation can be expressed as:

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(iii) Denominator Calculation—Expected Readmissions (at an Average Quality Hospital Treating the Same Patients)

The denominator of the risk-standardized ratio (excess readmission ratio) under this NQF-endorsed methodology sums the probability of readmission for each patient at an average hospital. This probability is calculated using:

• The intercept term for the model (the same for all hospitals and for both numerator and denominator equations); and

• The increase or decrease in the probability of readmission contributed by each of the patients' risk factors (risk adjustment coefficients multiplied by the patient's risk factors, X).

This can be expressed mathematically as:

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Thus, the ratio compares the total adjusted actual readmissions at the hospital to the number that would be expected if the hospital's patients were treated at an average hospital with similar patients. Hospitals with more adjusted actual readmissions than expected readmissions will have a risk-standardized ratio (excess readmission ratio) greater than one.

Because the ratio is risk-adjusted, a hospital may have high crude readmission rates (number of 30-day readmissions among patients with the applicable condition divided by number of admissions for patients with the applicable condition) yet have a risk-standardized ratio (excess readmission ratio) less than one. For example, if a hospital with a higher than average raw readmission rate cares for very sick patients, the ratio may show that the adjusted actual number of readmissions (the numerator), which accounts for the case-mix, is actually lower than what would be expected for an average hospital caring for these patients (denominator) and therefore the Excess Readmission Ratio, as proposed, will be less than one, demonstrating that this hospital performs better than average, despite having a high crude readmission rate, and does not have excess readmissions. Similarly, if a hospital has a seemingly low unadjusted readmission rate but cares for a very low risk population of patients, it may be found to have an adjusted actual number of readmissions that is higher than the expected number of readmissions, and therefore a ratio greater than one.

In summary, we are proposing to use the risk-standardized readmission ratio of the NQF-endorsed readmission measures as the Excess Readmission Ratio. The ratio is a measure of relative performance. If a hospital performs better than an average hospital that admitted similar patients (that is, patients with the same risk factors for readmission such as age and comorbidities), the ratio will be less than 1.0. If a hospital performs worse than average, the ratio will be greater than 1.0.

We welcome public comment on our proposal to use this methodology for calculating the “risk adjusted readmissions based on actual readmissions” as well as the “risk adjusted expected readmissions” used to determine the Excess Readmission Ratio, as set forth in section 1886(q)(5)(C) of the Act.

D. Rural Referral Centers (RRCs) (§ 412.96)

Under the authority of section 1886(d)(5)(C)(i) of the Act, the regulations at § 412.96 set forth the criteria that a hospital must meet in order to qualify under the IPPS as an RRC. For discharges that occurred before October 1, 1994, RRCs received the benefit of payment based on the other urban standardized amount rather than the rural standardized amount (as discussed in the FY 1993 IPPS final rule (59 FR 45404 through 45409)). Although the other urban and rural standardized amounts are the same for discharges occurring on or after October 1, 1994, RRCs continue to receive special treatment under both the DSH payment adjustment and the criteria for geographic reclassification.

Section 402 of Public Law 108-173 raised the DSH adjustment for RRCs such that they are not subject to the 12-percent cap on DSH payments that is applicable to other rural hospitals. RRCs are also not subject to the proximity criteria when applying for geographic reclassification. In addition, they do not have to meet the requirement that a hospital's average hourly wage must exceed, by a certain percentage, the average hourly wage of the labor market area where the hospital is located.

Section 4202(b) of Public Law 105-33 states, in part, “[a]ny hospital classified as an RRC by the Secretary * * * for fiscal year 1991 shall be classified as such an RRC for fiscal year 1998 and each subsequent year.” In the August 29, 1997 IPPS final rule with comment period (62 FR 45999), CMS reinstated RRC status for all hospitals that lost the status due to triennial review or MGCRB reclassification. However, CMS did not reinstate the status of hospitals that lost RRC status because they were now urban for all purposes because of the OMB designation of their geographic area as urban. Subsequently, in the August 1, 2000 IPPS final rule (65 FR 47089), we indicated that we were revisiting that decision. Specifically, we stated that we would permit hospitals that previously qualified as an RRC and lost their status due to OMB redesignation of the county in which they are located from rural to urban, to be reinstated as an RRC. Otherwise, a hospital seeking RRC status must satisfy all of the other applicable criteria. We use the definitions of “urban” and “rural” specified in Subpart D of 42 CFR part 412. One of the criteria under which a hospital may qualify as an RRC is to have 275 or more beds available for use (§ 412.96(b)(1)(ii)). A rural hospital that does not meet the bed size requirement can qualify as an RRC if thehospital meets two mandatory prerequisites (a minimum CMI and a minimum number of discharges), and at least one of three optional criteria (relating to specialty composition of medical staff, source of inpatients, or referral volume). (We refer readers to § 412.96(c)(1) through (c)(5) and the September 30, 1988Federal Register(53 FR 38513).) With respect to the two mandatory prerequisites, a hospital may be classified as an RRC if—

• The hospital's CMI is at least equal to the lower of the median CMI for urban hospitals in its census region, excluding hospitals with approved teaching programs, or the median CMI for all urban hospitals nationally; and

• The hospital's number of discharges is at least 5,000 per year, or, if fewer, the median number of discharges for urban hospitals in the census region in which the hospital is located. (The number of discharges criterion for an osteopathic hospital is at least 3,000 discharges per year, as specified in section 1886(d)(5)(C)(i) of the Act.)

1. Case-Mix Index (CMI)

Section 412.96(c)(1) provides that CMS establish updated national and regional CMI values in each year's annual notice of prospective payment rates for purposes of determining RRC status. The methodology we used to determine the national and regional CMI values is set forth in the regulations at § 412.96(c)(1)(ii). The proposed national median CMI value for FY 2012 includes data from all urban hospitals nationwide, and the proposed regional values for FY 2012 are the median CMI values of urban hospitals within each census region, excluding those hospitals with approved teaching programs (that is, those hospitals that train residents in an approved GME program as provided in § 413.75). These proposed values are based on discharges occurring during FY 2010 (October 1, 2009 through September 30, 2010), and include bills posted to CMS' records through December 2010.

We are proposing that, in addition to meeting other criteria, if rural hospitals with fewer than 275 beds are to qualify for initial RRC status for cost reporting periods beginning on or after October 1, 2011, they must have a CMI value for FY 2010 that is at least—

• 1.5292; or

• The median CMI value (not transfer-adjusted) for urban hospitals (excluding hospitals with approved teaching programs as identified in § 413.75) calculated by CMS for the census region in which the hospital is located.

The proposed median CMI values by region are set forth in the following table:

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The preceding numbers will be revised in the FY 2012 IPPS final rule to the extent required to reflect the updated FY 2010 MedPAR file, which will contain data from additional bills received through March 2011.

A hospital seeking to qualify as an RRC should obtain its hospital-specific CMI value (not transfer-adjusted) from its fiscal intermediary or MAC. Data are available on the Provider Statistical and Reimbursement (PS&R) System. In keeping with our policy on discharges, the CMI values are computed based on all Medicare patient discharges subject to the IPPS MS-DRG-based payment.

2. Discharges

Section 412.96(c)(2)(i) provides that CMS set forth the national and regional numbers of discharges in each year's annual notice of prospective payment rates for purposes of determining RRC status. As specified in section 1886(d)(5)(C)(ii) of the Act, the national standard is set at 5,000 discharges. We are proposing to update the regional standards based on discharges for urban hospitals' cost reporting periods that began during FY 2009 (that is, October 1, 2008 through September 30, 2009), which are the latest cost report data available at the time this proposed rule was developed.

Therefore, we are proposing that, in addition to meeting other criteria, a hospital, if it is to qualify for initial RRC status for cost reporting periods beginning on or after October 1, 2011, must have, as the number of discharges for its cost reporting period that began during FY 2009, at least—

• 5,000 (3,000 for an osteopathic hospital); or

• The median number of discharges for urban hospitals in the census region in which the hospital is located, as indicated in the following table.

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These numbers will be revised in the FY 2012 final rule based on the latest available cost report data.

We note that the median number of discharges for hospitals in each census region is greater than the national standard of 5,000 discharges. Therefore, 5,000 discharges is the minimum criterion for all hospitals under this proposed rule.

We reiterate that, if an osteopathic hospital is to qualify for RRC status for cost reporting periods beginning on or after October 1, 2011, the hospital would be required to have at least 3,000 discharges for its cost reporting period that began during FY 2009.

E. Payment Adjustment for Low-Volume Hospitals (§ 412.101)

1. Background

Section 1886(d)(12) of the Act, as added by section 406(a) of Public Law 108-173, provides for a payment adjustment to account for the higher costs per discharge for low-volume hospitals under the IPPS, effective beginning FY 2005. The additional payment adjustment to a low-volume hospital provided for under section 1886(d)(12) of the Act is “in addition to any payment calculated under this section.” Therefore, the additional payment adjustment is based on the per discharge amount paid to the qualifying hospital under section 1886 of the Act. In other words, the low-volume add-on payment amount is based on all other per discharge payments made under section 1886 of the Act, including capital, DSH, IME, and outliers. For SCHs and MDHs, the low-volume add-on payment amount is based on either the Federal rate or the hospital-specific rate, whichever results in a greater operating IPPS payment. Sections 3125 and 10314 of the Affordable Care Act amended the definition of a low-volume hospital under section 1886(d)(12)(C) of the Act. Sections 3125 and 10314 of the Affordable Care Act also revised the methodology for calculating the payment adjustment for low-volume hospitals.

Prior to the amendments made by the Affordable Care Act, section 1886(d)(12)(C)(i) of the Act defined a low-volume hospital as “a subsection (d) hospital (as defined in paragraph (1)(B)) that the Secretary determines is located more than 25 road miles from another subsection (d) hospital and that has less than 800 discharges during the fiscal year.” Section 1886(d)(12)(C)(ii) of the Act further stipulates that the term “discharge” means “an inpatient acute care discharge of an individual regardless of whether the individual is entitled to benefits under Part A.” Therefore, the term “discharge” refers to total discharges, not merely Medicare discharges. Furthermore, under section 406(a) of Public Law 108-173, which initially added subparagraph (12) to section 1886(d) of the Act, the provision requires the Secretary to determine an applicable percentage increase for these low-volume hospitals based on the “empirical relationship” between “the standardized cost-per-case for such hospitals and the total number of discharges of such hospitals and the amount of the additional incremental costs (if any) that are associated with such number of discharges.” The statute thus mandates that the Secretary develop an empirically justifiable adjustment based on the relationship between costs and discharges for these low-volume hospitals. The statute also limits the adjustment to no more than 25 percent.

Based on an analysis we conducted for the FY 2005 IPPS final rule (69 FR 49099 through 49102), a 25 percent low-volume adjustment to all qualifying hospitals with less than 200 discharges was found to be most consistent with the statutory requirement to provide relief to low-volume hospitals where there is empirical evidence that higher incremental costs are associated with low numbers of total discharges. In the FY 2006 IPPS final rule (70 FR 47432 through 47434), we stated that a multivariate analyses supported the existing low-volume adjustment implemented in FY 2005. Therefore, the low-volume adjustment of an additional 25 percent would continue to be provided for qualifying hospitals with less than 200 discharges.

2. Temporary Changes for FYs 2011 and 2012

Section 1886(d)(12) of the Act was amended by sections 3125 and 10314 of the Affordable Care Act. The changes made by these sections of the Affordable Care Act are effective only for discharges occurring during FYs 2011 and 2012. Beginning with FY 2013, the preexisting low-volume hospital payment adjustment and qualifying criteria, as implemented in FY 2005, will resume. Specifically, as discussed above, the provisions of the Affordable Care Act revised the definition of a low-volume hospital and also revised the methodology for calculating the payment adjustment for low-volume hospitals for FYs 2011 and 2012.

Sections 3125(3) and 10314(1) of the Affordable Care Act amended thequalifying criteria for low-volume hospitals under section 1886(d)(12)(C)(i) of the Act to make it easier for hospitals to qualify for the low-volume adjustment. Specifically, the revised provision specifies that, for FYs 2011 and 2012, a hospital qualifies as a low-volume hospital if it is “more than 15 road miles from another subsection (d) hospital and has less than 1,600 discharges of individuals entitled to, or enrolled for, benefits under Part A during the fiscal year.” In addition, section 1886(d)(12)(D) of the Act, as added by section 3125(4) and amended by section 10314 of the Affordable Care Act, provides that the payment adjustment (the applicable percentage increase) is to be determined “using a continuous linear sliding scale ranging from 25 percent for low-volume hospitals with 200 or fewer discharges of individuals entitled to, or enrolled for, benefits under Part A in the fiscal year to 0 percent for low-volume hospitals with greater than 1,600 discharges of such individuals in the fiscal year.”

Section 3125(3)(A) of the Affordable Care Act revised the distance requirement of “25 road miles” to “15 road miles” for FYs 2011 and 2012 such that a low-volume hospital is required to be only more than 15 road miles, rather than more than 25 road miles, from another subsection (d) hospital for purposes of qualifying for the low-volume payment adjustment in FYs 2011 and 2012. The mileage requirement will revert back to “more than 25 road miles” for fiscal years after FY 2012.

Sections 3125(3)(B) and 10314(1) of the Affordable Care Act revised the discharge requirement for FYs 2011 and 2012 to less than 1,600 discharges of individuals entitled to, or enrolled for, benefits under Medicare Part A during the fiscal year. Prior to enactment of the Affordable Care Act, under section 1886(d)(12) of the Act, as added by section 406(a) of Public Law 108-173, the discharge requirement to qualify as a low-volume hospital is less than 800 total discharges annually, which includes discharges of both Medicare and non-Medicare patients. This discharge requirement will apply also for fiscal years after FY 2012.

Section 3125(4) of the Affordable Care Act added section 1886(d)(12)(D) to the Act, and section 10314(2) of the Affordable Care Act further modified that section of the Act. Section 1886(d)(12)(D) of the Act, as modified, revises the methodology for calculating the payment adjustment under section 1886(d)(12)(A) of the Act for low-volume hospitals for discharges occurring in FYs 2011 and 2012. For FY 2010 and prior fiscal years, and beginning again in FY 2013, sections 1886(d)(12)(A) and (B) of the Act require the Secretary to determine an applicable percentage increase for low-volume hospitals based on the “empirical relationship” between “the standardized cost-per-case for such hospitals and the total number of discharges of such hospitals and the amount of the additional incremental costs (if any) that are associated with such number of discharges.” The statute thus requires the Secretary to develop an empirically justifiable adjustment based on the relationship between costs and discharges for these low-volume hospitals. The statute also limits the adjustment to no more than 25 percent. Based on analyses we conducted for the FY 2005 IPPS final rule (69 FR 49099 through 49102) and the FY 2006 IPPS final rule (70 FR 47432 through 47434), a 25 percent low-volume adjustment to all qualifying hospitals with less than 200 discharges was found to be most consistent with the statutory requirement to provide relief to low-volume hospitals where there is empirical evidence that higher incremental costs are associated with low numbers of total discharges. However, section 1886(d)(12)(D) of the Act, as added by the Affordable Care Act, provides that, for discharges occurring in FYs 2011 and 2012, the Secretary shall determine the applicable percentage increase using a continuous linear sliding scale ranging from an additional 25 percent payment adjustment for hospitals with 200 or fewer Medicare discharges to a 0 percent additional payment adjustment for hospitals with more than 1,600 Medicare discharges.

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50238 through 50275), we revised our regulations at 42 CFR 412.101 to reflect the changes to the payment adjustment for low-volume hospitals provided for by the provisions of the Affordable Care Act. We also clarified the existing regulations to indicate that a hospital must continue to qualify as a low-volume hospital in order to receive the payment adjustment in that year; that is, it is not based on a one-time qualification. Furthermore, we established a procedure for a hospital to request low-volume hospital status.

Specifically, in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50238 and 50414), we revised our regulations at § 412.101(b)(2)(ii) to provide that, to qualify for the low-volume payment adjustment in FYs 2011 and 2012, a hospital must be located more than 15 road miles from the nearest subsection (d) hospital. We also defined, at § 412.101(a), the term “road miles” to mean “miles” as defined at § 412.92(c)(i). This change in the qualifying criteria from 25 to 15 road miles is applicable only for FYs 2011 and 2012, but the definition of “road miles” continues to apply even after the distance requirement reverts to 25 road miles beginning in FY 2013.

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50238 through 50239 and 50414), we revised our regulations at § 412.101(b)(2)(ii) to provide that, to qualify for the low-volume adjustment in FYs 2011 and 2012, a hospital must have fewer than 1,600 “Medicare discharges” during the fiscal year based on the hospital's Medicare discharges from the most recently available MedPAR data as determined by CMS. We also revised the regulations to specify at § 412.101(a) that the term “Medicare discharges” means a “discharge of inpatients entitled to Medicare Part A, including discharges associated with individuals whose inpatient benefits are exhausted or whose stay was not covered by Medicare and also discharges of individuals enrolled in a MA organization under Medicare Part C.”

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50240 through 50241), we adopted a continuous linear sliding scale equation to determine the low-volume payment adjustment for FYs 2011 and 2012 for eligible low-volume hospitals with Medicare discharges of more than 200 and less than 1,600(that is, from 201 to 1,599 Medicare discharges). Consistent with the statute, for FYs 2011 and 2012 for eligible low-volume hospitals with 200 or fewer Medicare discharges, we established a low-volume payment adjustment of 25 percent.

Under the regulations at § 412.101(c)(2), for FYs 2011 and 2012, the low-volume adjustment is determined as follows:

• Low-volume hospitals with 200 or fewer Medicare discharges will receive a low-volume adjustment of an additional 25 percent for each discharge.

• Low-volume hospitals with Medicare discharges of more than 200 and fewer than 1,600 will receive for each discharge a low-volume adjustment of an additional percent calculated using the formula: [(4/14) − (Medicare discharges/5600)]. For additional information on the mathematical interpretation of this formula, we refer readers to the FY 2011 IPPS/LTCH PPS final rule (75 FR 50241).

While we revised the qualifying criteria and the payment adjustment for low-volume hospitals for FYs 2011 and 2012, consistent with the amendments made by the Affordable Care Act, we also noted in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50240), that we did not modify the process for requesting and obtaining the low-volume hospital payment adjustment. In general, in order to qualify for the low-volume hospital payment adjustment, a hospital must provide to its fiscal intermediary or MAC sufficient evidence to document that it meets the discharge and distance requirements. The fiscal intermediary or MAC will determine, based on the most recent data available, if the hospital qualifies as a low-volume hospital, so that the hospital will know in advance whether or not it will receive a payment adjustment and, if so, the applicable add-on percentage. The fiscal intermediary or MAC and CMS may review available data, in addition to the data the hospital submits with its request for low-volume hospital status, in order to determine whether or not the hospital meets the qualifying criteria.

3. Proposed Discharge Data Source to Identify Qualifying Low-Volume Hospitals and Calculate the Payment Adjustment (Percentage Increase) for FY 2012

As described above, for FYs 2005 through 2010 and FY 2013 and subsequent years, since the discharge determination is made based on the hospital's number of total discharges, the hospital's most recently submitted cost report is used to determine if the hospital meets the criteria to receive the low-volume payment adjustment in the current year (§ 412.101(b)(2)(i)). For FYs 2011 and 2012, the hospital's Medicare discharges from the most recently available MedPAR data, as determined by CMS, are used to determine if the hospital meets the discharge criteria to receive the low-volume payment adjustment in the current year (§ 412.101(b)(2)(ii)). As also described above, the applicable low-volume percentage increase is determined using a continuous linear sliding scale equation that results in a low-volume adjustment ranging from an additional 25 percent for hospitals with 200 or fewer Medicare discharges to a 0 percent additional payment adjustment for hospitals with 1,600 or more Medicare discharges.

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50241), we established that, for FY 2011, the low-volume payment adjustment would be determined using Medicare discharge data for FY 2009 from the March 2010 update of the MedPAR files, as these were the most recent available data. We also stated that we expected to use Medicare claims data from FY 2010 to determine the low-volume payment adjustment for FY 2012, as these would be the most recent available data at that time.

In this proposed rule, we are proposing that, for FY 2012, qualifying low-volume hospitals and their payment adjustment would be determined using Medicare discharge data from the most recent update of the FY 2010 MedPAR file, that is, the December 2010 update, as these data are the most recent data available. Furthermore, we are proposing that if more recent FY 2010 Medicare discharge data are available (such as data from the March 2011 update of the MedPAR files), we would use such data in the final rule. Table 14, which is listed in section VI. of the Addendum to this proposed rule and available via the Internet, lists the “subsection (d)” hospitals with fewer than 1,600 Medicare discharges based on the December 2010 update of the FY 2010 MedPAR files and their proposed FY 2012 low-volume payment adjustment. Eligibility for the proposed low-volume payment adjustment for FY 2012 is also dependent upon meeting (if the hospital is qualifying for the low-volume payment adjustment for the first time in FY 2012), or continuing to meet (if the hospital qualified in FY 2011) the mileage criteria specified at § 412.101(b)(2)(ii).

We note that the list of hospitals with fewer than 1,600 Medicare discharges in Table 14 does not reflect whether or not the hospital meets the mileage criterion; that is, the hospital also must be located more than 15 road miles from any other IPPS hospital in order to qualify for a low-volume hospital payment adjustment in FY 2012.

In order to receive a low-volume hospital adjustment payment under § 412.101, a hospital must notify and provide documentation to its fiscal intermediary or MAC that it meets the mileage criterion. The use of a Web-based mapping tool, such as MapQuest, as part of documenting that the hospital meets the mileage criterion for low-volume hospitals, is acceptable. The fiscal intermediary or MAC will determine if the information submitted by the hospital, such as the name and street address of the nearest hospitals, location on a map, and distance (in road miles, as defined in the regulations at § 412.101(a)) from the hospital requesting low-volume hospital status, is sufficient to document that it meets the mileage criterion. If not, the fiscal intermediary or MAC will follow up with the hospital to obtain additional necessary information to determine whether or not the hospital meets the low-volume mileage criterion. The fiscal intermediary or MAC will refer to the hospital's Medicare discharge data determined by CMS (as proposed for FY 2012 as shown in Table 14, which is listed in section VI. of the Addendum to this proposed rule and available via the Internet), to determine whether or not the hospital meets the discharge criterion, and the amount of the payment adjustment, once it is determined that both the mileage and discharge criteria are met. The Medicare discharge data shown in Table 14, as well as the Medicare discharge data for all “subsection (d)” hospitals with claims in the December 2010 update of the FY 2010 MedPAR files, also will be available on the CMS Web site for hospitals to check their Medicare discharges to help them to decide whether or not to apply for low-volume hospital status.

Similar to the policy we established in the FY 2011 IPPS/LTCH PPS final rule (75 FR 20574 through 20575), we are proposing that, for FY 2012, a hospital make its request for low-volume hospital status in writing to its fiscal intermediary or MAC by September 1, 2011, so that the applicable low-volume percentage add-on would be applied to payments for its discharges beginning on or after October 1, 2011. For FY 2012, we are proposing that a hospital which qualified for the low-volume payment adjustment in FY 2011 may continue to receive a low-volume payment adjustment in FY 2012, without reapplying, if it continues to meet the Medicare discharge criterion, based on the latest available FY 2010 MedPAR data (as proposed above) and the distance criterion. However, the hospital would be required to verify in writing to its fiscal intermediary or MAC that it continues to be more than 15 miles from any other “subsection (d)” hospital no later than September 30, 2011. Further, similar to the policy we established for FY 2011 (Transmittal 2060, Change Request 7134; October 1, 2010), we are proposing that, for requests for low-volume hospital status for FY 2012 received after September 1, 2011, if the hospital meets the criteria to qualify as a low-volume hospital, the fiscal intermediary or MAC would apply the applicable low-volume adjustment in determining payments to the hospital's FY 2012 discharges prospectively within 30 days of the date of the fiscal intermediary's or MAC's low-volume status determination.

F. Indirect Medical Education (IME) Adjustment (§ 412.105)

1. Background

Section 1886(d)(5)(B) of the Act provides for an additional payment amount under the IPPS for hospitals that have residents in an approved graduate medical education (GME) program in order to reflect the higher indirect patient care costs of teaching hospitals relative to nonteaching hospitals. The regulations regarding the calculation of this additional payment, known as the indirect medical education (IME) adjustment, are located at § 412.105.

Public Law 105-33 (BBA 1987) established a limit on the number of allopathic and osteopathic residents that a hospital may include in its full-time equivalent (FTE) resident count for direct GME and IME payment purposes. Under section 1886(h)(4)(F) of the Act, for cost reporting periods beginning on or after October 1, 1997, a hospital's unweighted FTE count of residents for purposes of direct GME may not exceed the hospital's unweighted FTE count for its most recent cost reporting period ending on or before December 31, 1996. Under section 1886(d)(5)(B)(v) of the Act, a similar limit on the FTE resident count for IME purposes is effective for discharges occurring on or after October 1, 1997. Changes to the policies regarding counting residents for both IME and direct GME payment purposes as a result of the implementation of sections 5503 through 5506 of the Affordable Care Act were issued in a final rule published in the Federal Register on November 24, 2010 (75 FR 72133).

2. IME Adjustment Factor for FY 2012

The IME adjustment to the MS-DRG payment is based in part on the applicable IME adjustment factor. The IME adjustment factor is calculated by using a hospital's ratio of residents to beds, which is represented as r, and a formula multiplier, which is represented as c, in the following equation:c× [{1 +r}.405− 1]. The formula is traditionally described in terms of a certain percentage increase in payment for every 10-percent increase in the resident-to-bed ratio.

Section 502(a) of Public Law 108-173 modified the formula multiplier (c) to be used in the calculation of the IME adjustment. Prior to the enactment of Public Law 108-173, the formula multiplier was fixed at 1.35 for discharges occurring during FY 2003 and thereafter. In the FY 2005 IPPS final rule, we announced the schedule of formula multipliers to be used in the calculation of the IME adjustment and incorporated the schedule in our regulations at § 412.105(d)(3)(viii) through (d)(3)(xii). Section 502(a) modified the formula multiplier beginning midway through FY 2004 and provided for a new schedule of formula multipliers for FYs 2005 and thereafter as follows:

• For discharges occurring on or after April 1, 2004, and before October 1, 2004, the formula multiplier is 1.47.

• For discharges occurring during FY 2005, the formula multiplier is 1.42.

• For discharges occurring during FY 2006, the formula multiplier is 1.37.

• For discharges occurring during FY 2007, the formula multiplier is 1.32.

• For discharges occurring during FY 2008 and fiscal years thereafter, the formula multiplier is 1.35.

Accordingly, for discharges occurring during FY 2012, the formula multiplier is 1.35. We estimate that application of this formula multiplier for the FY 2012 IME adjustment will result in an increase in IPPS payment of 5.5 percent for every approximately 10-percent increase in the hospital's resident-to-bed ratio.

G. Payment Adjustment for Medicare Disproportionate Share Hospitals (DSHs) and Indirect Medical Education (IME) (§§ 412.105 and 412.106)

1. Background

Section 1886(d)(5)(F) of the Act provides for additional Medicare payments to subsection (d) hospitals that serve a significantly disproportionate number of low-income patients. The Act specifies two methods by which a hospital may qualify for the Medicare disproportionate share hospital (DSH) adjustment. Under the first method, hospitals that are located in an urban area and have 100 or more beds may receive a Medicare DSH payment adjustment if the hospital can demonstrate that, during its cost reporting period, more than 30 percent of its net inpatient care revenues are derived from State and local government payments for care furnished to needy patients with low incomes. This method is commonly referred to as the “Pickle method.”

The second method for qualifying for the DSH payment adjustment, which is the most common, is based on a complex statutory formula under which the DSH payment adjustment is based on the hospital's geographic designation, the number of beds in the hospital, and the level of the hospital's disproportionate patient percentage (DPP). A hospital's DPP is the sum of two fractions: the “Medicare fraction” and the “Medicaid fraction.” The Medicare fraction (also known as the “SSI fraction” or “SSI ratio”) is computed by dividing the number of the hospital'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 Supplemental Security Income (SSI) benefits by the hospital'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). The Medicaid fraction is computed by dividing the hospital's number of inpatient days furnished to patients who, for such days, were eligible for Medicaid, but were not entitled to benefits under Medicare Part A, by the hospital's total number of inpatient days in the same period.

Because the DSH payment adjustment is part of the IPPS, the DSH statutory references (under section 1886(d)(5)(F) of the Act) to “days” apply only to hospital acute care inpatient days. Regulations located at § 412.106 govern the Medicare DSH payment adjustment and specify how the DPP is calculated as well as how beds and patient days are counted in determining the Medicare DSH payment adjustment. Under § 412.106(a)(1)(i), the number of beds for the Medicare DSH payment adjustment is determined in accordance with bed counting rules for the IME adjustment under § 412.105(b).

In section IV.G.2. of this preamble, we are combining our discussion of proposed changes to the policies for counting beds in relation to the calculations for the IME adjustment at § 412.105(b) and the DSH payment adjustment at § 412.106(a)(1)(i) and for counting patient days for purposes of the DSH payment adjustment at § 412.106(a)(1)(ii).

2. Proposed Policy Change Relating to the Exclusion of Hospice Beds and Patient Days From the Medicare DSH Calculation

a. Background

As discussed in the FY 2004 IPPS final rule (68 FR 45415 through 45420), when determining a hospital's Medicare DSH payment, our policy is to include patient days in hospital units or wards that would be directly included in determining the allowable costs of inpatient hospital care payable under the IPPS on the Medicare cost report. Under this policy, CMS uses the level of care generally provided in such a unit or ward as a proxy for determining the level of care provided to a particularpatient on a particular day within that unit. As stated in the FY 2004 IPPS final rule, our policy is “not intended to focus on the level or type of care provided to individual patients in a unit, but rather on the level and type of care provided in the unit as a whole.” (68 FR 45417) In the FY 2005 IPPS final rule, we amended this policy to specifically exclude observation and swing days from the patient day count. In this proposed rule, we are proposing to establish an additional exclusion with respect to counting bed days and patient days for patients receiving hospice services in an inpatient setting of a hospital.

b. Hospice Inpatient Services

Section 1861(dd)(1) of the Act defines hospice care to include a limited set of “items and services provided to a terminally ill individual by, or by others under arrangements made by, a hospice program under a written plan (for providing such care to such individual) established and periodically reviewed by the individual's attending physician and by the medical director.” Among those items and services specified under section 1861(dd)(1)(G) of the Act is “short-term inpatient care (including both respite care and procedures necessary for pain control and acute and chronic symptom management) in an inpatient facility meeting such conditions as the Secretary determines to be appropriate to provide such care, but such respite care may be provided only on an intermittent, nonroutine, and occasional basis and may not be provided consecutively over longer than five days.” Based on these statutory definitions of hospice care, the Secretary, through regulation at § 418.302, has grouped hospice care services into four categories for payment purposes. Two of these payment categories describe hospice services in an inpatient setting: inpatient respite care day and general inpatient care day.

Section 418.302(b)(3) of the regulations defines an inpatient respite care day as “a day on which the individual who has elected hospice care receives care in an approved facility on a short-term basis for respite.” Section 40.2.2 of Chapter 9 of the Medicare Benefit Policy Manual (https://www.cms.gov/manuals/Downloads/bp102c09.pdf) further describes an inpatient respite care day as a short-term inpatient day provided only when necessary to relieve family members or other caregivers caring for the individual at home. Under the Act, inpatient respite care is limited to 5 consecutive days for a given stay. Similarly, the regulations at § 418.302(b)(4) describe a general inpatient care day as “a day on which an individual who has elected hospice care receives general inpatient care in an inpatient facility for pain control or acute or chronic symptom management which cannot be managed in other settings.”

Section 40.1.5 of Chapter 9 of the Medicare Benefit Policy Manual provides that general inpatient care is appropriate when care for pain control or acute or chronic symptom management cannot feasibly be provided in another setting. This section of the Medicare Benefit Policy Manual further states that such care is “not equivalent to a hospital level of care.” That hospice care is not hospital level care is further supported by the provision at § 418.202(e), which provides that general inpatient care and inpatient respite care hospice services can be “provided in a participating hospice inpatient unit, or a participating hospital or [skilled nursing facility], that additionally meets the standards in § 418.202(a) and (e) regarding staffing and patient areas * * * [and] must conform to the [hospice provider's] written plan of care.”

Furthermore, hospice services provided in an inpatient hospital setting are not payable under the IPPS. Rather, at this time, these services are payable under two of the four prospectively determined all-inclusive categories of care under the hospice payment system. In the FY 2004 IPPS final rule (68 FR 45418), we stated that we believed it “reasonable to interpret the phrase ‘hospital's patient days,’ to mean only the hospital's inpatient days at a level of care that would be covered under the IPPS as a means to determine an IPPS payment adjustment.” In that rule, we acknowledged that it would be “administratively inefficient and impracticable” to calculate a hospital' inpatient days based on a determination of whether a particular patient in a particular inpatient bed for a particular stay is receiving a level of care that would be covered under the IPPS (68 FR 45418). Accordingly, we adopted a policy under which we use the level of care that is generally provided in particular units or wards as a proxy for determining whether the care provided to a particular patient is of a type that would be covered under the IPPS. However, we have recognized exceptions to this policy for certain categories of nonacute care, even if that care is provided in an acute care unit.

Therefore, we are proposing to revise § 412.106(a)(1)(ii) to exclude patient days associated with hospice patients receiving inpatient hospice services in an inpatient hospital setting from the Medicare and Medicaid fractions of the DPP. We also are proposing to amend our cost reporting instructions accordingly. Our proposal to exclude hospice inpatient days is analogous to our decision in the FY 2005 IPPS final rule to exclude observation and swing-bed days from the Medicare and Medicaid fractions of the DPP. In that rule, we stated that our policies to exclude observation days and swing-bed days from the count of patient days “stem from the fact that although the services are provided in beds that would otherwise be available to provide an IPPS level of services, these days are not payable under the IPPS * * *” (69 FR 49097). Similarly, our proposal to exclude inpatient hospice days stems from the fact that these days are not acute care services generally payable under the IPPS.

We note that, on rare occasions, patients receiving care under a third payment category, routine home care, may also receive services in an inpatient hospital setting. Unlike inpatient respite care or general inpatient services, routine home care services are not intended to be provided in a hospital setting. For the same reasons stated above, such days should also be excluded from the Medicare and Medicaid fractions of the DPP.

We also are proposing to exclude from the hospital's bed count days associated with hospice patients who receive inpatient hospice services in the hospital for purposes of both the IME payment adjustment and the DSH payment adjustment. The rules for counting hospital beds for the purposes of the IME adjustment are codified in the IME regulations at § 412.105(b), which is cross-referenced in § 412.106(a)(1)(i) for purposes of the DSH payment adjustment. Our bed counting policy is to include bed days available for IPPS-level acute care hospital services. Inpatient hospice services provided in an acute unit or ward are occasional, alternative uses of acute inpatient beds that would otherwise be considered available for IPPS-level acute care hospital services (as long as other criteria for a bed to be considered as an available bed are met under § 412.105(b)). A bed used for inpatient hospice services on a given day is not available to be used for IPPS-level services. Therefore, we are proposing to revise § 412.105(b)(4) to state that such hospice days are excluded from the counts of available beds for purposes of the IME payment adjustment. Because the same rules govern the counting of available beds for purposes of the DSH paymentadjustment under § 412.106(a)(1)(i), hospice days will also be excluded from the count of available beds for purposes of the DSH payment adjustment.

We note that there is a circumstance in which a hospital will provide IPPS-level acute care hospital services to a hospice patient for which it would receive payment under the IPPS. This occurs when a Medicare beneficiary receiving hospice care under his or her hospice benefit requires acute care hospital services to treat a condition unrelated to his or her hospice plan of care. For example, an individual who has elected the hospice benefit could be treated in the inpatient hospital setting for a broken bone that is unrelated to his or her terminal illness. Under these circumstances, the patient is receiving acute care hospital services of the sort payable under the IPPS. As such, consistent with § 412.106(a)(ii), we are not proposing to exclude these patient days from the Medicare and Medicaid fractions of the DPP or from the count of available beds under § 412.105(b)(4) and § 412.106(a)(1)(i).

We further note that hospitals may have hospice units that are separate and distinct from their acute care inpatient units. Under existing regulations at § 412.105(b)(3) and § 412.106(a)(ii)(A), services provided in distinct nonacute inpatient units are excluded from the patient day and bed day count. Our proposal with respect to inpatient hospice services does not change or affect this policy.

In summary, we are proposing to exclude inpatient hospice days from the patient day count in § 412.106(a)(1)(ii) (for DSH) and the bed day count at § 412.105(b) (for IME) and at § 412.106(a)(1)(i) (for DSH).

H. Medicare-Dependent, Small Rural Hospitals (MDHs) (§ 412.108)

1. Background

Under the IPPS, separate special payment protections are provided to a Medicare-dependent, small rural hospital (MDH). MDHs are paid based on the higher of the Federal rate for their hospital inpatient services or a blended rate based in part on the Federal rate and in part on the MDH's hospital-specific rate. Section 1886(d)(5)(G)(iv) of the Act defines an MDH as a hospital that is located in a rural area, has not more than 100 beds, is not an SCH, and has a high percentage of Medicare discharges (that is, not less than 60 percent of its inpatient days or discharges either in its 1987 cost reporting year or in two of its most recent three settled Medicare cost reporting years). The regulations at 42 CFR 412.108 set forth the criteria that a hospital must meet to be classified as an MDH.

Although MDHs are paid under an adjusted payment methodology, they are still IPPS hospitals paid under section 1886(d) of the Act. Like all IPPS hospitals paid under section 1886(d) of the Act, MDHs are paid for their discharges based on the DRG weights calculated under section 1886(d)(4) of the Act.

Through and including FY 2006, under section 1886(d)(5)(G) of the Act, MDHs are paid based on the Federal rate or, if higher, the Federal rate plus 50 percent of the amount by which the Federal rate is exceeded by the updated hospital-specific rate based on the hospital's FY 1982 or FY 1987 costs per discharge, whichever of these hospital-specific rates is higher. Section 5003(b) of Public Law 109-171 (DRA 2005) amended section 1886(d)(5)(G) of the Act to provide that, for discharges occurring on or after October 1, 2006, MDHs are paid based on the Federal rate or, if higher, the Federal rate plus 75 percent of the amount by which the Federal rate is exceeded by the updated hospital-specific rate based on FY 1982, FY 1987, or FY 2002 costs per discharge, whichever of these hospital-specific rates is highest.

For each cost reporting period, the fiscal intermediary or MAC determines which of the payment options will yield the highest aggregate payment. Interim payments are automatically made at the highest rate using the best data available at the time the fiscal intermediary or MAC makes the determination. However, it may not be possible for the fiscal intermediary or MAC to determine in advance precisely which of the rates will yield the highest aggregate payment by year's end. In many instances, it is not possible to accurately forecast the outlier payments, the amount of the DSH adjustment or the IME adjustment, all of which are applicable only to payments based on the Federal rate and not to payments based on the hospital-specific rate. The fiscal intermediary or MAC makes a final adjustment at the settlement of the cost report after it determines precisely which of the payment rates would yield the highest aggregate payment to the hospital.

If a hospital disagrees with the fiscal intermediary's or the MAC's determination regarding the final amount of program payment to which it is entitled, it has the right to appeal the determination in accordance with the procedures set forth in 42 CFR Part 405, Subpart R, which govern provider payment determinations and appeals.

2. Extension of the MDH Program

As we discussed in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50286 and 50287), section 3124 of the Affordable Care Act extended the MDH program from the end of FY 2011 (that is, for discharges occurring before October 1, 2011) to the end of FY 2012 (that is, for discharges occurring before October 1, 2012). Under prior law, as specified in section 5003(a) of Public Law 109-171 (DRA 2005), the MDH program was to be in effect through the end of FY 2011 only. Section 3124(a) of the Affordable Care Act amended sections 1886(d)(5)(G)(i) and 1886(d)(5)(G)(ii)(II) of the Act to extend the MDH program and payment methodology from the end of FY 2011 to the end of FY 2012, by striking “October 1, 2011” and inserting “October 1, 2012”. Section 3124(b) of the Affordable Care Act also made conforming amendments to sections 1886(b)(3)(D)(i) and 1886(b)(3)(D)(iv) of the Act. Section 3124(b)(2) of the Affordable Care Act also amended section 13501(e)(2) of OBRA 1993 to extend the provision permitting hospitals to decline reclassification as an MDH through FY 2012. In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50287 and 50414), we amended the regulations at § 412.108(a)(1) and (c)(2)(iii) to reflect the statutory extension of the MDH program through FY 2012. We are not proposing any additional changes to this regulatory text for FY 2012.

I. Certified Registered Nurse Anesthetist (CRNA) Services Furnished in Rural Hospitals and CAHs (§ 412.113)

Section 2312 of the Deficit Reduction Act of 1984 (Pub. L. 98-369) provided for reimbursement to hospitals on a reasonable cost basis for the costs that hospitals incur in connection with the services of certified registered nurse anesthetists (CRNAs). Section 2312(c) provided that pass-through payment of CRNA costs was effective for cost reporting periods beginning on or after October 1, 1984, and before October 1, 1987. Section 9320 of the Omnibus Budget Reconciliation Act of 1986 (Pub. L. 99-509) (which established a fee schedule for the services of nurse anesthetists) amended section 2312(c) of Public Law 98-369 by extending the CRNA pass-through provision through cost reporting periods beginning before January 1, 1989. In addition, Public Law 99-509 amended section 1861 of the Act to add a new subsection (bb), which provides that CRNA services include anesthesia services and related care furnished by a CRNA. Section 608 of the Family Support Act of 1988 (Pub. L.100-485) extended pass-through payments for CRNA services through 1991 and amended section 9320 of Public Law 99-509 by including language referring to eligibility for pass-through payments for CRNA services if the facility is “* * *a hospital located in a rural area (as defined for purposes of section 1886(d) of the Social Security Act).” Reasonable cost-based payment for CRNA services was extended indefinitely by section 6132 of the Omnibus Budget Reconciliation Act of 1989 (Pub. L. 101-239).

Section 1886(d) of the Act defines “rural” as any area outside an urban area. This definition of “rural” was in effect when Public Law 100-485 was implemented. In 1999, the Balanced Budget Refinement Act (Pub. L. 106-113) amended section 1886(d)(8) of the Act by adding a new subparagraph (E), which permits a hospital physically located in an urban area to apply for reclassification to be treated as rural. In addition, Public Law 106-113 made a corresponding change to section 1820(c)(2)(B)(i) of the Act, which specifies the rural location requirement for CAH designation, by adding the phrase “or is treated as being located in a rural area pursuant to section 1886(d)(8)(E).”

The regulations implementing pass-through payments for anesthesia services and related care furnished by qualified nonphysician anesthetists employed by a hospital or CAH, including CRNAs, are located at § 412.113(c). In the FY 2011 IPPS/LTCH PPS proposed rule (75 FR 24010), we proposed to revise § 412.113(c)(2)(i)(A) to state that, effective for cost reporting periods beginning on or after October 1, 2010, CAHs and hospitals that have reclassified pursuant to section 1886(d)(8)(E) of the Act and § 412.103 of the regulations also are rural for purposes of section 1886(d) of the Act and, therefore, are eligible to be paid based on reasonable cost for anesthesia services and related care furnished by a qualified nonphysician anesthetist.

After consideration of the public comments, in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50303), we adopted a policy that would allow otherwise eligible critical access hospitals (CAHs) or hospitals, that have reclassified from urban to rural status under section 1886(d)(8)(E) of the Act and 42 CFR 412.103, to receive reasonable cost payments for anesthesia services and related care furnished by qualified nonphysician anesthetists (also referred to in this section as CRNA pass-through payments), effective for cost reporting periods beginning on or after October 1, 2010. After the issuance of the final rule, we received an inquiry from a public commenter who indicated that CMS had misunderstood its submitted comment on the FY 2011 IPPS/LTCH PPS proposed rule in which the commenter stated that the policy should be effective on the basis of a calendar year, not a cost reporting period, since as a rule a hospital can only begin receiving CRNA pass-through payments at the beginning of a calendar year. Our response to this public comment in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50303) indicated that it was unnecessary to modify the effective date in the final rule because “if the provision is effective for cost reporting periods beginning on or after October 1, 2010, it will also be in effect for the calendar year beginning January 1, 2011.” While this statement was accurate, it did not take into account that if a hospital's cost reporting period begins on or after January 1, 2011, the hospital would be ineligible to receive CRNA pass-through payments until the beginning of the next calendar year, on January 1, 2012. Under the finalized policy in the FY 2011 IPPS/LTCH PPS final rule, hospitals reclassifying from urban to rural areas with cost reporting periods beginning between October 1, 2010, and December 31, 2010, would be able to first receive CRNA pass-through payments effective January 1, 2011, while hospitals with cost reporting periods beginning on or after January 1, 2011, would not be able to receive CRNA pass-through payments until one year later on January 1, 2012.

In an interim final rule with comment period included in the Federal Register on November 24, 2010 (75 FR 72256), we stated that our intention in the FY 2011 IPPS/LTCH PPS final rule was not to make the provision for CRNA pass-through payment for anesthesia services and related care furnished by nonphysician anesthetists effective January 1, 2011, for some hospitals and CAHs and January 1, 2012, for other hospitals and CAHs. We stated our belief that the provision would be more equitable if it had a uniform effective date for all eligible hospitals and CAHs. While we considered changing the effective date to January 1, 2011, for all hospitals and CAHs to begin receiving CRNA pass-through payments under this provision, we noted that our regulations at 42 CFR 412.113(c)(2)(iii) state that the hospital or CAH must demonstrate to its fiscal intermediary prior to the start of the calendar year that it meets the requirements for receiving CRNA pass-through payments. For this reason, we stated our belief that the best option was to adopt an effective date of December 2, 2010, for all hospitals and CAHs, which we provided for in the interim final rule with comment period. With an effective date of December 2, 2010, all hospitals and CAHs regardless of their specific fiscal year beginning date were provided the opportunity to demonstrate prior to January 1, 2011, that they met the requirements for receiving CRNA pass-through payments beginning January 1, 2011. In the interim final rule with comment period, we amended the regulations at § 412.113(c)(2)(i)(A) to provide for an effective date of December 2, 2010, for all eligible hospitals and CAHs to receive CRNA pass-through payments for anesthesia services and related care furnished by qualified nonphysician anesthetists.

We intend to respond to public comments received on the interim final rule with comment period and will adopt our final policy in the FY 2012 IPPS/LTCH PPS final rule.

J. Additional Payments for Qualifying Hospitals With Lowest per Enrollee Medicare Spending

1. Background

Section 1109 of the Affordable Care Act requires additional payments for FYs 2011 and 2012 for “qualifying hospitals.” Section 1109(d) defines a “qualifying hospital” as a “subsection (d) hospital * * * that is located in a county that ranks, based upon its ranking in age, sex and race adjusted spending for benefits under parts A and B * * * per enrollee within the lowest quartile of such counties in the United States.” Therefore, a “qualifying hospital” is one that meets the following conditions: (1) It is a “subsection (d) hospital” as defined in section 1886(d)(1)(B) of the Act; and (2) it is located in a county that ranks within the lowest quartile of counties based upon its spending for benefits under Medicare Part A and Part B per enrollee adjusted for age, sex, and race. Section 1109(b) of the Affordable Care Act makes available $400 million to qualifying hospitals for FY 2011 and FY 2012. Section 1109(c) of the Affordable Care Act requires the $400 million to be divided among each qualifying hospital in proportion to the ratio of the individual qualifying hospital's FY 2009 IPPS operating hospital payments to the sum of total FY 2009 IPPS operating hospital payments made to all qualifying hospitals.

Section 1109 is one of several provisions in the Affordable Care Act that addresses concerns about how Medicare makes adjustments for geographic differences in the cost ofproviding services and geographic variation in the volume and intensity of health care spending. Some other provisions in the Affordable Care Act that relate to concerns about geographic variation in Medicare payments include:

• Section 3102(a), which provides a floor of 1.0 on the physician fee schedule work geographic practice cost index (GPCI) through the end of CY 2010 (later extended by the Medicare and Medicaid Extension Act of 2010 through the end of CY 2011);

• Section 3102(b), as amended by section 1108 of the Affordable Care Act, which requires that only one-half of the relative cost differences in employee wages and office rents be reflected in the practice expense GPCIs in 2010 and 2011;

• Section 10324, which provides for a floor on the wage index and the practice expense GPCI in frontier States (defined as 50 percent or more of the counties in the State having a population density of less than six people per square mile).

These provisions provide temporary adjustments in payments while other initiatives are underway to evaluate geographic adjustment factors that are used in Medicare's payment systems. For instance, section 3101 of the Affordable Care Act requires the Secretary, not later than January 1, 2012, to make appropriate adjustments to the practice expense GPCI considering alternative data sources such as the American Community Survey for the nonphysician employee portion of the GPCI. Section 3137 of the Affordable Care Act requires the Secretary to submit to Congress a report that includes a plan to reform the hospital wage index system under section 1886 of the Act by December 31, 2011. In addition to these provisions, the Secretary has contracted with the Institute of Medicine (IOM) to study the hospital wage index and the physician fee schedule GPCI. The IOM's first report to CMS is due in May 2011 and will provide an evaluation and assessment of:

(1) The empirical validity of the adjustment factors (the hospital wage index and physician fee schedule GPCI);

(2) The methodology used to determine the adjustment factors;

(3) Measures used for the adjustment factors, taking into account—

• Timeliness of data and frequency of revisions to such data;

• Sources of data and the degree to which such data are representative of costs; and

• Operational costs of providers who participate in Medicare.

The report will include recommendations for the Secretary to consider. We are looking forward to receiving IOM's report and acting expeditiously on its recommendations to improve Medicare's payment systems and better adjust for geographic differences in the cost of hospital labor as well as the cost of operating a physician practice.

2. Methodology for Identifying Qualifying Hospitals and Eligible Counties

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50303 through 50342), we finalized our methodology for distributing the $400 million to qualifying hospitals located in the lowest quartile of counties in per enrollee Medicare spending. First, we provided our methodology for determining the bottom quartile of counties with the lowest Medicare Part A and Part B spending adjusted by age, sex, and race for the purpose of disbursing the available $400 million. We developed an adjustment model by age, sex, and race, as required under the provisions of section 1109. We then applied this adjustment to the county Medicare Part A and Part B spending data to account for the demographics of the Medicare beneficiaries in those counties. After those adjustments were applied, we determined the Medicare Part A and Part B spending by county per enrollee. As we explained in the final rule, our methodology for determining the Medicare Part A and Part B spending per enrollee by county adjusted for age, sex, and race is similar to the methodology we use to calculate risk adjustment models for Medicare Advantage (MA) ratesetting. For more information on the methodology we used to calculate the county Medicare per enrollee spending rates, we refer readers to the FY 2011 IPPS/LTCH PPS final rule (75 FR 50303 through 75 FR 50307).

In addition, in the FY 2011 IPPS/LTCH PPS final rule, we developed a methodology to identify the qualifying hospitals located in each of the eligible counties. As we stated earlier, section 1109 defines a qualifying hospital is a “subsection (d) hospital” (as defined for purposes of section 1886(d) of the Act) that is “located in” an eligible county. A subsection (d) hospital is defined in section 1886(d)(1)(B) of the Act, in part, as a “hospital located in one of the 50 States or the District of Columbia.” Therefore, we excluded Puerto Rico hospitals and CAHs from the provisions of section 1109 because they do not meet the definition of a “subsection (d) hospital.”

In the FY 2011 IPPS/LTCH PPS final rule, we identified “qualifying hospitals” based on their Medicare provider number (now referred to as the “CMS certification number” (CCN)) because this number is used by hospitals to identify themselves on their Medicare cost reports. We also provided that, in order to meet the definition of a “qualifying hospital,” the hospital, as identified by its CCN, must: (1) Have existed as a subsection (d) hospital as of April 1, 2010; (2) be geographically located in an eligible county; and (3) have received IPPS operating payments (in accordance with section 1886(d)) of the Act) under its CCN in FY 2009. We used the Online Survey, Certification and Reporting (OSCAR) database to determine a hospital's county location associated with that CCN. We also specified that the address listed for a hospital's CCN must be currently located in a qualifying county in order for a hospital to meet the definition of a “qualifying hospital.” For more information on how we identified the qualifying hospitals, we refer readers to the FY 2011 IPPS/LTCH PPS final rule (75 FR 50307 and 50308). We note that we are proposing to clarify the application of our definition in section IV.J.4. of this preamble.

3. Determination of Annual Payment Amounts

The third step in the implementation of section 1109 of the Affordable Care Act required that we determine the payment amount that each qualifying hospital would receive. Specifically, section 1109(c) of the Affordable Care Act required that the payment amount for a qualifying hospital be determined “in proportion to the portion of the amount of the aggregate payments under section 1886(d) of the Social Security Act to the hospital for fiscal year 2009 bears to the sum of all such payments to all qualifying hospitals for such fiscal year.” As specified in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50310 through 50312), we determined that a qualifying hospital's payment amount will be based on the proportion of its IPPS operating payments made in FY 2009 under section 1886(d) of the Act relative to the total IPPS operating payments made to all qualifying hospitals in FY 2009 under section 1886(d) of the Act. The FY 2009 IPPS operating payments made under section 1886(d) of the Act includes DRG and wage-adjusted payments made under the IPPS standardized amount with add-on payments for operating DSH, operating IME, operating outliers, and new technology (collectively referred to in this preamble as the IPPS operating payment amount). We used the March 2010 update of the FY 2009 MedPARhospital inpatient claims data to determine the IPPS operating payment amounts for each qualifying hospital in order to calculate the proportion of money that each qualifying hospital would receive under this provision. For more information on the methodology we used to calculate the payment determinations, we refer readers to the FY 2011 IPPS/LTCH PPS final rule (75 FR 30310 through 75 FR 50312).

4. Eligible Counties and Qualifying Hospitals

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50312 through 50342), we published the list of eligible counties, that is, the lowest quartile of counties with Medicare Part A and Part B spending per enrollee adjusted for age, sex, and race, the qualifying hospitals located in those counties, and the qualifying hospitals' payment weighting factors, for purposes of making payments under section 1109 for FY 2011 and FY 2012. We identified 3,142 counties in the United States. Therefore, there are 786 eligible counties (rounded from 785.5 eligible counties). Of those 786 eligible counties, there are only 273 counties in which qualifying hospitals are located, using the methodology that we finalized in the FY 2011 IPPS/LTCH PPS final rule. Using CCNs, we identified 416 IPPS hospitals that are currently located in those eligible counties and that received IPPS operating payments in FY 2009.

In response to public comments on the FY 2011 IPPS/LTCH PPS proposed rule, in the FY 2011 IPPS/LTCH PPS final rule, we corrected the list of eligible counties by replacing two counties on our list of eligible counties (adding Crooks County, OR and Bottineu County, ND). However, we did not identify any qualifying hospitals located in those two eligible counties. Therefore, we provided the public an opportunity to notify CMS by August 30, 2010, if there were any qualifying IPPS hospitals located in either of the two newly added counties. We stated that if we added qualifying hospitals in these counties as a result of accurate notification from the public, we would publish a revised list of qualifying hospitals and their payment weighting factors on the CMS Web site after August 30, 2010. We did not receive any public comments that there were qualifying hospitals located in Crooks County, OR or Bottineu County, ND. Therefore, the list of eligible counties and qualifying hospitals that was finalized in Tables 1 and 2 in the FY 2011 IPPS/LTCH PPS final rule remained valid for distribution of payments under section 1109 for FY 2011 and FY 2012.

In auditing our determination of qualifying hospitals prior to the distribution of payments for FY 2011, we found that the following providers on the list of qualifying hospitals which we finalized in the FY 2011 IPPS/LTCH PPS final rule were not subsection (d) hospitals in FY 2011:

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Because these providers were not subsection (d) hospitals in FY 2011, the statute precludes them from being qualifying hospitals eligible to receive section 1109 payments for FY 2011. We are proposing to clarify in this proposed rule that, in applying our definition of qualifying hospitals for making payments under section 1109 of the Affordable Care Act, these 11 providers (and other providers that do not meet the statutory definition) are not qualifying hospitals and, therefore, should be removed from the list of qualifying hospitals. Furthermore, we are proposing to clarify that, in order to meet the definition of “qualifying hospital” under section 1109 for FY 2012, a hospital that is on the list of qualifying hospitals in this proposed rule must meet the statutory criteria of a “qualifying hospital” for some portion of FY 2012 (a hospital must be a subsection (d) hospital for some part of FY 2012).

In addition, we note that, prior to the issuance of the FY 2012 final rule and prior to making section 1109 payments for FY 2012, we intend to review providers' status vis-à-vis the statutory definition of qualifying hospital. Accordingly, we note that, in the FY 2012 final rule and again prior to distribution of section 1109 payments for FY 2012, we will update the list of qualifying hospitals and payment weighting factors based on these findings. In addition to the opportunity to submit comments on this proposed rule, we are proposing to provide hospitals an opportunity after the FY 2012 IPPS rulemaking cycle to notify CMS whether any qualifying hospitals removed from the list have been removed in error and to notify CMS if a hospital is on the list of qualifying hospitals and will not be a qualifying hospital (for example, a subsection (d) hospital) for any or all part of FY 2012. The public may submit input on these two topics via e-mail to Nisha Bhat, nisha.bhat@cms.hhs.gov. All information, including relevantdocumentation, must be received by November 1, 2011.

5. Payment Determinations and Distributions for FY 2011 and FY 2012

Under section 1109(b) of the Affordable Care Act, the total pool of payments available to qualifying hospitals for FY 2011 and FY 2012 is $400 million. In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50308 through 50310), we stated that we would distribute $150 million for FY 2011 and $250 million for FY 2012. We stated that we would distribute payments to the qualifying hospitals through an annual one-time payment during each of FY 2011 and FY 2012 through their Medicare contractor (fiscal intermediary or MAC). We instructed qualifying hospitals to report these additional payments on their Medicare hospital cost report corresponding to the appropriate cost reporting period that the hospitals receive the payments and that hospitals should report these payments on the “Other adjustment” line on Worksheet E, Part A of the Medicare hospital cost report Form 2552. We noted that we require these payments to be reported on the cost report for tracking purposes only and that these additional payments will not be adjusted or settled by the fiscal intermediary or MAC on the cost report.

At the time of the issuance of this FY 2012 proposed rule, we have not yet made the payments to the qualifying hospitals for FY 2011. As we stated in the FY 2011 IPPS/LTCH PPS final rule, we will make the FY 2011 payments during FY 2011 (that is, by September 30, 2011). However, in this proposed rule, we are notifying the public that we intend to change the method we will use to distribute the payment for FY 2011 and FY 2012, in order to ease the reporting burden on hospitals. Rather than making a one-time annual payment to the qualifying hospitals through their Medicare contractor using the Medicare cost report, we plan to make payments to the qualifying hospitals through a one-time annual payment made by one Medicare contractor who would directly pay all of the qualifying hospitals. We will send each qualifying hospital a letter stating the specifics of how the hospital will receive its payments. Because these one-time annual payments would be made through a special process outside of the scope of normal payments by their Medicare contractor, the hospitals' Medicare contractor would no longer need to track the payment amounts made to the hospitals under this provision. We believe this will simplify and expedite the payment process so that one Medicare contractor is responsible for overseeing the distribution of payments. In addition, this simplified process will ease the administrative burden within CMS to track that payments have been properly made to the qualifying hospitals. In addition, the burden to hospitals is reduced because hospitals would no longer have to report these additional payments on their Medicare hospital cost report corresponding to the appropriate cost reporting period for which the hospitals receive payments in FY 2011 or FY 2012 (as we instructed in the FY 2011 IPPS/LTCH PPS final rule and note above).

In the FY 2011 IPPS/LTCH PPS final rule, we also stated that we would make only one determination of eligible counties and qualifying hospitals for FY 2011 and FY 2012, with the caveat that we would accept additional public input on the limited issue of whether there are any qualifying hospitals in the two newly identified eligible counties. As we stated earlier, we did not receive any public input on qualifying hospitals for the two newly identified eligible counties. However, as we describe above, 11 hospitals that were included on the list of qualifying hospitals do not meet the statutory criteria in section 1109 of the Affordable Care Act. Therefore, we are proposing to revise our list of qualifying hospitals and their payment weighting factors finalized in the FY 2011 IPPS/LTCH PPS final rule to exclude these 11 providers. As explained in the FY 2011 IPPS/LTCH PPS final rule, we finalized in that rule (to the best of our ability) the list of eligible counties and qualifying hospitals once for ease of implementation of the section 1109 provision and to allow hospitals to plan their budgets accordingly. The proposed revision of our determination to exclude these 11 providers will result in changes to the payment weighting factors. We are proposing to update the payment weighting factors accordingly. Therefore, we are proposing to distribute the remaining $250 million in FY 2012 to those qualifying hospitals proposed in this proposed rule based on payment weighting factors proposed in this proposed rule. In addition, in order to distribute the section 1109 payments for FY 2011 in as timely a manner as possible, we intend to make preliminary section 1109 payments for FY 2011 using this proposed list of qualifying providers and payment weighting factors using the payment method described above. If additional hospitals are deleted from the proposed list of qualifying hospitals for FY 2011 because they do not meet the statutory criteria, the payment weighting factors would need additional revision. If this situation occurs, we are proposing to further amend the payment weighting factors for payments to be made in FY 2012 so that each qualifying hospital receives its appropriate share of the total $400 million.

We refer readers to the CMS Web site at:http://www.cms.gov/AcuteInpatientPPS/TopOfPage for the tables listed below. The tables are included collectively as the “Section 1109 Files” for the FY 2012 IPPS/LTCH proposed rule.

• The final list of eligible counties that was published in the FY 2011 IPPS/LTCH PPS final rule. We note that we are not updating this table.

• The proposed list of qualifying hospitals, location, and payment weighting factors (based on the March 2010 update of the FY 2009 MedPAR); based on the clarifications proposed above.

• The distribution of the $400 million for FY 2011 and FY 2012 by State based on the proposed list of qualifying hospitals, location, and payment weighting factors.

We note that the Web address for this Web site is effective as of the date of publication of this proposed rule and that, in the future, these tables may be archived to the Web site at:http://www.cms.gov/AcuteInpatientPPS/FFD/list.asp#TopOfPage.

K. Proposed Changes in the Inpatient Hospital Update

1. FY 2012 Inpatient Hospital Update

In accordance with section 1886(b)(3)(B)(i) of the Act, each year we update the national standardized amount for inpatient operating costs by a factor called the “applicable percentage increase.” Prior to enactment of the Affordable Care Act, section 1886(b)(3)(B)(i)(XX) of the Act set the applicable percentage increase equal to the rate-of-increase in the hospital market basket for subsection (d) hospitals (hereafter referred to as “IPPS hospitals”) in all areas, subject to the hospital submitting quality information under rules established by the Secretary in accordance with section 1886(b)(3)(B)(viii) of the Act. For hospitals that did not provide these data, the update was equal to the market basket percentage increase less an additional 2.0 percentage points. The update for the hospital-specific rates for SCHs and MDHs is set by section 1886(b)(3)(B)(iv) of the Act as discussed further below.

As discussed below in section IV.K.3. of this preamble, section 1886(b)(3)(B)of the Act, as amended by sections 3401(a) and 10319(a) of the Affordable Care Act, sets the applicable percentage increase under the IPPS for FY 2012 as equal to the rate-of-increase in the hospital market basket for IPPS hospitals in all areas (which is currently based on the first quarter 2011 forecast of the FY 2006-based IPPS market basket), subject to a reduction of 2.0 percentage points if the hospital fails to submit quality information under rules established by the Secretary in accordance with section 1886(b)(3)(B)(viii) of the Act, and then subject to an adjustment based on changes in economy-wide productivity (the multifactor productivity (MFP) adjustment), and an additional reduction of 0.1 percentage point. Sections 1886(b)(3)(B)(xi) and (b)(3)(B)(xii) of the Act, as added by section 3401(a) of the Affordable Care Act, state that application of the MFP adjustment and the additional FY 2012 adjustment of 0.1 percentage point may result in the applicable percentage increase being less than zero.

In accordance with section 1886(b)(3)(B) of the Act, as amended by section 3401(a) of the Affordable Care Act, we are proposing an MFP adjustment (the 10-year moving average of MFP for the period ending FY 2012) of 1.2 percent, which is calculated as described below in section IV.K.3. of this preamble, based on IHS Global Insight, Inc.'s (IGI's) first quarter 2011 forecast.

Consistent with current law, and based on IGI's first quarter 2011 forecast of the FY 2012 market basket increase, we are proposing an applicable percentage increase to the FY 2012 operating standardized amount of 1.5 percent (that is, the FY 2012 estimate of the market basket rate-of-increase of 2.8 percent less an adjustment of 1.2 percentage points for economy-wide productivity and less 0.1 percentage point) for hospitals in all areas, provided the hospital submits quality data in accordance with our rules. For hospitals that do not submit quality data, we are proposing an applicable percentage increase to the operating standardized amount of −0.5 percent (that is, the FY 2012 estimate of the market basket rate-of-increase of 2.8 percent, less 2.0 percentage points for failure to submit quality data, less an adjustment of 1.2 percentage points for economy-wide productivity, and less an additional adjustment of 0.1 percentage point).

We are proposing to revise the existing regulations at 42 CFR 412.64(d) to reflect the current law. Specifically, in accordance with section 1886(b)(3)(B) of the Act, as amended by sections 3401(a) and 10319(a) of the Affordable Care Act, we are proposing to add a new paragraph (iv) to § 412.64(d)(1) to set the applicable percentage increase to the FY 2012 operating standardized amount as the percentage increase in the market basket index, subject to a reduction of 2.0 percentage points if the hospital fails to submit quality information under rules established by the Secretary in accordance with section 1886(b)(3)(B)(viii) of the Act, and then subject to a multifactor productivity adjustment and, lastly, subject to the additional reduction of 0.1 percentage point.

Section 1886(b)(3)(B)(iv) of the Act provides that the applicable percentage increase to the hospital-specific rates for SCHs and MDHs equals the applicable percentage increase set forth in section 1886(b)(3)(B)(i) of the Act (that is, the same update factor as for all other hospitals subject to the IPPS). Therefore, the update to the hospital specific rates for SCHs and MDHs is also subject to section 1886(b)(3)(B)(i) of the Act, as amended by sections 3401(a) and 10319(a) of the Affordable Care Act. Accordingly, we are proposing an update to the hospital-specific rates applicable to SCHs and MDHs of 1.5 percent for hospitals that submit quality data or −0.5 percent for hospitals that fail to submit quality data. For FY 2012, the regulations in §§ 412.73(c)(16), 412.75(d), 412.77(e), 412.78(e), and 412.79(d) already contain provisions that set the update factor for SCHs and MDHs equal to the update factor applied to the national standardized amount for all IPPS hospitals. Therefore, we are not proposing to make further changes to these five regulatory provisions to reflect the FY 2012 update factor for SCHs and MDHs.

2. FY 2012 Puerto Rico Hospital Update

Puerto Rico hospitals are paid a blended rate for their inpatient operating costs based on 75 percent of the national standardized amount and 25 percent of the Puerto Rico-specific standardized amount. Section 1886(d)(9)(C)(i) of the Act is the basis for determining the applicable percentage increase applied to the Puerto Rico-specific standardized amount. Section 401(c) of Public Law 108-173 amended section 1886(d)(9)(C)(i) of the Act, which states that, for discharges occurring in a fiscal year (beginning with FY 2004), the Secretary shall compute an average standardized amount for hospitals located in any area of Puerto Rico that is equal to the average standardized amount computed under subclause (I) for fiscal year 2003 for hospitals in a large urban area (or, beginning with FY 2005, for all hospitals in the previous fiscal year) increased by the applicable percentage increase under subsection (b)(3)(B) for the fiscal year involved. Therefore, the update to the Puerto Rico-specific operating standardized amount equals the applicable percentage increase set forth in section 1886(b)(3)(B)(i) of the Act, as amended by sections 3401(a) and 10319(a) of the Affordable Care Act (that is, the same update factor as for all other hospitals subject to the IPPS). Accordingly, we are proposing an applicable percentage increase to the Puerto Rico-specific operating standardized amount of 1.5 percent. For FY 2012, under the authority of section 1886(d)(9)(C)(i) of the Act, as amended by section 401(c) of Public Law 108-173, we are proposing to revise the existing regulations at § 412.211(c) to set the update factor for the Puerto Rico-specific operating standardized amount equal to the update factor applied to the national standardized amount for all IPPS hospitals.

3. Productivity Adjustment

Section 3401(a) of the Affordable Care Act amends section 1886(b)(3)(B) of the Act to require certain adjustments to the “applicable percentage increase” to the operating IPPS. One such change is to require that, in FY 2012 (and in subsequent fiscal years), the applicable percentage increase be annually adjusted by changes in economy-wide productivity. Section 1886(b)(3)(B)(xi)(II) of the Act, as added by section 3401(a) of the Affordable Care Act, defines this productivity adjustment as 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 fiscal year, calendar year, cost reporting period, or other annual period) (the “MFP adjustment”). The Bureau of Labor Statistics (BLS) is the agency that publishes the official measure of private nonfarm business MFP. We refer readers to the BLS Web site at:http://www.bls.gov/mfp to obtain the BLS historical published MFP data.

The projection of MFP is currently produced by IHS Global Insight, Inc. (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 its U.S. macroeconomic models. These models take into account a 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 IV.K.1 below, 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 by IGI and CMS to be the best available proxies for the BLS series.

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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, we refer readers to the BLS Web site at:http://www.bls.gov/mfp/mprtech.pdf.

At the time of the development of this proposed rule, the BLS had 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, the IGI had 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, nonfarm, real GDP,” “hours of all persons in private non-farm 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 nonfarm 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 “nongovernment total compensation” and “flow of capital services from the total private nonresidential 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. In order 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.

As described in section I. of the Addendum to this proposed rule, we are proposing to determine the IPPS marketbasket percentage increase for FY 2012, which is used to determine the FY 2012 applicable percentage increase, based on the FY 2006-based IPPS market basket. The FY 2006-based IPPS market basket was finalized and adopted in the FY 2010 IPPS/LTCH PPS final rule (74 FR 43843). Section 3401(a) of the Affordable Care Act amended section 1886(b)(3)(B) of the Act in part by adding a new clause (xi) which requires that, after determining the applicable percentage increase for a fiscal year, “such percentage increase shall be reduced by the productivity adjustment described in subclause (II)” (which we refer to as the “MFP adjustment”). Section 1886(b)(3)(B)(i)(XX) of the Act establishes the applicable percentage increase for FY 2007 and each subsequent fiscal year as equal to the rate-of-increase (that is, the percentage increase) in the hospital market basket for IPPS hospitals, subject to the hospital submitting quality data under rules established by the Secretary in accordance with section 1886(b)(3)(B)(viii) of the Act and to other statutory adjustments, including the productivity adjustment.

We are proposing that the MFP adjustment be subtracted from the FY 2012 operating applicable percentage increase. We are proposing 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. Because the applicable percentage increase is reduced by the MFP adjustment, we believe it is appropriate for the numbers associated with both components of the calculation (the underlying market basket percentage increase used to determine the applicable percentage increase 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 are proposing to round the final annual adjustment to the one-tenth of one 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 would round the number up; if the number we are rounding is followed by 0, 1, 2, 3, or 4, we would round the number down).

In accordance with section 1886(b)(3)(B) of the Act, as amended by section 3401(a) of the Affordable Care Act, we are proposing to base the FY 2012 market basket update used to determine the applicable percentage increase for the IPPS on the first quarter 2011 forecast of the FY 2006-based IPPS market basket, which is estimated to be 2.8 percent. This percentage increase, subject to the hospital submitting quality data under rules established by the Secretary in accordance with section 1886(b)(3)(B)(viii) of the Act, is then reduced by the proposed MFP adjustment (the 10-year moving average of MFP for the period ending FY 2012) of 1.2 percent, which is calculated as described above and based on IGI's first quarter 2011 forecast. We are proposing that if more recent data are subsequently available (for example, a more recent estimate of the market basket and MFP adjustment), we would use such data, if appropriate, to determine the FY 2012 market basket update and MFP adjustment in the final rule. Following application of the productivity adjustment, the applicable percentage increase is then reduced by 0.1 percentage point, as required by section 1886(b)(3)(B)(xii) of the Act, as added and amended by sections 3401 and 10319(a) of the Affordable Care Act (as discussed in section I. of the Addendum to this proposed rule).

L. Additional Payments to Hospitals With High Percentage of End-Stage Renal Disease (ESRD) Discharges (§ 412.104)

Under existing regulations at § 412.104(a), we provide additional Medicare payments to a hospital for inpatient services provided to Medicare beneficiaries with end-stage renal disease (ESRD) who receive dialysis during a hospital stay if the hospital's ESRD Medicare beneficiary discharges, excluding certain MS-DRGs noted below, where the beneficiary receives dialysis during the inpatient stay, are 10 percent or more of its total Medicare discharges. These additional payments are intended to lessen the impact of the added costs for hospitals that deliver inpatient dialysis services to a high concentration of ESRD Medicare beneficiaries. The regulation provides that discharges classified into MS-DRG 652 (Renal Failure), MS-DRG 682 (Renal Failure with MCC), MS-DRG 683 (Renal Failure with CC), MS-DRG 684 (Renal Failure without CC/MCC), and MS-DRG 685 (Admit for Renal Dialysis) are excluded from the calculation of ESRD Medicare beneficiary discharges for purposes of determining a hospital's eligibility for these additional payments. We excluded these MS-DRGs because they include payment for the cost of inpatient dialysis treatments.

The current Medicare cost reporting instructions in the Provider Reimbursement Manual, Part II (PRM-II), at section 3630.1, require hospitals to enter as the denominator of the calculation on Line 5 “total Medicare discharges as reported on Worksheet S-3, Part I,” excluding discharges for the dialysis MS-DRGs. As drafted, this instruction includes only discharges for beneficiaries enrolled in original fee-for-service Medicare in the denominator of the calculation. We are proposing to clarify that our policy is that the term “Medicare discharges” used in § 412.104(a) refers to discharges of all beneficiaries entitled to Medicare Part A. Discharges associated with individuals entitled to Medicare Part A include discharges of individuals receiving benefits under original Medicare, discharges of individuals whose inpatient benefits are exhausted or whose stay was not covered by Medicare, and discharges for individuals enrolled in Medicare Advantage Plans, cost contracts under section 1876 of the Act (health maintenance organizations (HMOs)) and competitive medical plans (CMPs). Consistent with this proposed clarification, these discharges would be included in the denominator of the calculation for the purpose of determining eligibility for the ESRD additional payment to hospitals. Similarly, for the numerator of this calculation, all discharges of ESRD beneficiaries who are entitled to Medicare Part A and who receive inpatient dialysis, subject to the exclusions of certain discharges classified into MS-DRGs 652, 682, 683, 684, and 685, would be included in the determination of eligibility for the additional payment to hospitals. We intend to revise the instructions under section 3630.1 of the Provider Reimbursement Manual to reflect this clarification.

M. Proposal for Changes to the Reporting Requirements for Pension Costs for Medicare Cost-Finding Purposes

1. Background

Currently, certain pension costs may be allowable costs under Medicare to the extent such costs are related to the reasonable and necessary cost of providing patient care and represent costs actually incurred. Reasonable cost reimbursement is addressed in section 1861(v)(1)(A) of the Act. Section 1861(v)(1)(A) of the Act defines “reasonable cost,” in part, as the cost actually incurred, excluding costs found to be unnecessary in the efficient delivery of needed health services. Section 1861(v)(1)(A) of the Act does not specifically address the determination of reasonable costs, butauthorizes the Secretary to promulgate regulations and principles to be applied in determining reasonable costs.

We have issued regulations implementing this provision of the Act, including 42 CFR 413.9(a), which provide that the determination of reasonable cost “must be based on the reasonable cost of services covered under Medicare and related to the care of beneficiaries.” In addition, § 413.9(c) requires that the provision for payment of reasonable cost of services is intended to meet the actual costs incurred in providing services. Therefore, in accordance with the statute, the regulations include two principles that help guide the determination of which expenses may be considered allowable reasonable costs that can be paid under Medicare; that is, such costs must be “related” to the care of Medicare beneficiaries, and such costs must actually be “incurred.”

Consistent with these provisions, we have issued instructions in section 2142 of the Provider Reimbursement Manual, Part I (PRM-I) for determining and reporting defined benefit pension costs on the cost report for Medicare cost-finding purposes. For Medicare wage index purposes, the cost reporting instructions in section 3605.2 of the Provider Reimbursement Manual, Part II (PRM-II) for Worksheet S-3, Part II, Lines 13 through 20, require hospitals to comply with the requirements in section 2142 of the PRM-I.

Specifically, section 2142.5 of the PRM-I defines the current period liability for pension cost (that is, the maximum allowable pension cost) based on the actuarial accrued liability, normal cost, and unfunded actuarial liability. Under section 2142.4(A) of PRM-I, these liability measurements are to be computed in accordance with the Employee Retirement Income Security Act of 1974 (ERISA), regardless of whether or not the pension plan is subject to ERISA. Also, section 2142.6(A) of the PRM-I requires the current period liability for pension cost to be funded in order to be allowable. In addition, section 2142.6(C) of the PRM-I allows for funding in excess of the current period liability to be carried forward and recognized in future periods. We note that, on March 28, 2008, CMS published Revision 436, a technical clarification to section 2142 of the PRM-I.

Actuarial accrued liability and normal cost are typically determined on an ongoing plan basis using long-term, best-estimate assumptions. The interest assumption reflects the average rates of return expected over the period during which benefits were payable, taking into account the investment mix of plan assets. Pension costs for plans not subject to ERISA (such as church plans and plans sponsored by public sector employers) also are typically based on the actuarial accrued liability and normal cost using long-term, best estimate assumptions.

The Pension Protection Act (PPA) of 2006 (Pub. L. 109-280) amended ERISA. Under the PPA amendments to ERISA, the actuarial accrued liability and normal cost are no longer used as a basis for determining ERISA minimum required or maximum tax deductible contributions. ERISA contribution limits are now based on a “funding target” and “target normal cost” measured on a settlement basis using the current market interest rates for investment grade corporate bonds that match the duration of the benefit payouts. The Internal Revenue Service (IRS) publishes the applicable interest rate tables on a monthly basis. Because pension liabilities are very sensitive to changes in the interest rate used to discount future benefit payouts, pension costs based on the PPA “funding target” and “target normal cost” values are expected to be less stable than those based on the pre-PPA traditional long-term, best-estimate assumptions, which change infrequently. Furthermore, plans not subject to the ERISA requirements, as amended by the PPA, are not likely to use the new “funding target” and “target normal cost” basis for determining pension costs, and ERISA plans are not likely to continue to report costs developed using the actuarial accrued liability and normal cost based on long-term basis, best estimate assumptions. Accordingly, there is no longer a standard actuarial basis used by all plans.

In response to the PPA amendments to ERISA, we began a review of the rules for determining pension costs for Medicare cost-finding and wage index purposes. As an interim measure, we issued a Joint Signature Memorandum (JSM) in November 2009 that contained instructions and a spreadsheet to assist hospitals and Medicare contractors in determining the annual allowable defined benefit pension cost for the FY 2011 wage index (JSM/TDL-10061, 11-20-09, December 3, 2009). Although these instructions were released for purposes of the wage index, these instructions also serve as interim guidance for Medicare cost-finding purposes.

In this proposed rule, we are proposing to revise our policy for determining pension cost for Medicare purposes. As mentioned above, due to the ERISA rules, as amended by the PPA, there is no longer a standard actuarial cost basis to be used by all types of plans. Therefore, we are proposing to no longer rely on actuarial computation to determine the maximum annual cost limitation for Medicare. Instead, the general parameters of our proposal would maintain the current requirement that pension costs must be funded to be reportable, and would require all hospitals to report the actual pension contributions funded during the reporting period, on a cash basis.

In addition, under this cash basis approach, we are proposing separate methodologies for measuring pension costs for Medicare cost-finding purposes (discussed below under section IV.M.2. of this preamble) and for purposes of updating the wage index (discussed in section III.D.2. of this preamble). We believe it is necessary to have two distinct proposals in order to address the different goals of determining a hospital's payments and updating the average hourly wage to establish the geographic area wage index. The function of the wage index is to measure relative hospital labor costs across areas. This function is distinct from Medicare payment determinations, where the goal is to measure the actual costs incurred by individual hospitals. These two distinct proposals would require separate updated instructions to section 2142 of the PRM-I for Medicare cost-finding purposes and section 3605.2 of the PRM-II for purposes of the wage index. Below is a detailed discussion of our proposal of a new methodology for reporting pension costs for Medicare cost-finding purposes. A full discussion of our proposal for reporting pension costs under the wage index is discussed in section III.D.2. of this preamble.

The proposal below reflects our commitment to the general principles of the President's Executive Order released January 18, 2011, entitled “Improving Regulation and Regulatory Review.”

2. Proposal for Allowable Defined Benefit Pension Plan Cost for Medicare Cost-Finding Purposes

As mentioned above, the defined benefit pension plan costs (hereafter referred to as “pension costs”) reported for Medicare payment purposes should reflect the actual costs incurred by an individual provider. We are proposing to retain the policy in the current manual requiring pension costs to be funded in order to be reportable. We believe funding is an appropriate basis because it measures the actual expenditure towards the current period liability for pensions. We also are proposing to continue to limit the current period liability for pension costs(that is, maximum annual allowable pension costs). However, we are proposing to change the methodology for calculating the limit on the current period liability. We are proposing that this methodology would be effective for cost reporting periods beginning on or after October 1, 2011.

Specifically, we are proposing a limit on the current period liability equal to 150 percent of the three consecutive reporting periods out of the recent reporting which produce the highest average. We believe a threshold of 150 percent is appropriate for the following reasons: First, the proposed threshold should be adequate to allow for typical fluctuations in contributions and for inflation. Second, we believe a threshold is necessary to limit the current period liability in order to ensure that reported pension costs are reasonable and do not reflect excessive or advance funding in any particular year. In addition, the proposed limit would help ensure that pension costs in the current year are reasonable because we expect the limit to capture pens