FR Doc 07-1920

[Federal Register: May 3, 2007 (Volume 72, Number 85)]
[Proposed Rules]
[Page 24679-25135]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03my07-14]

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Part II

Department of Health and Human Services

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Centers for Medicare & Medicaid Services

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42 CFR Parts 411, 412, 413, and 489

Medicare Program; Proposed Changes to the Hospital Inpatient
Prospective Payment Systems and Fiscal Year 2008 Rates; Proposed Rule

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 411, 412, 413, and 489

[CMS-1533-P]
RIN 0938-AO70

Medicare Program; Proposed Changes to the Hospital Inpatient
Prospective Payment Systems and Fiscal Year 2008 Rates

AGENCY: Centers for Medicare and Medicaid Services (CMS), HHS.

ACTION: Proposed rule.

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SUMMARY: We are proposing to revise the Medicare hospital inpatient
prospective payment systems (IPPS) for operating and capital-related
costs to implement changes arising from our continuing experience with
these systems, and to implement certain provisions made by the Deficit
Reduction Act of 2005 (Pub. L. 109-171), the Medicare Improvements and
Extension Act under Division B, Title I of the Tax Relief and Health
Care Act of 2006 (Pub. L. 109-432), and the Pandemic and All-Hazards
Preparedness Act (Pub. L. 109-417). In addition, in the Addendum to
this proposed rule, we describe the proposed changes to the amounts and
factors used to determine the rates for Medicare hospital inpatient
services for operating costs and capital-related costs. We also are
setting forth proposed rate-of-increase limits for certain hospitals
and hospital units excluded from the IPPS that are paid in full or in
part on a reasonable cost basis subject to these limits or that have a
portion of a prospective payment system payment based on reasonable
cost principles. These proposed changes would be applicable to
discharges occurring on or after October 1, 2007.
In this proposed rule, we discuss our proposals to further refine
the diagnosis-related group (DRG) system under the IPPS to better
recognize severity of illness among patients--for FY 2008, we are
proposing to adopt a Medicare Severity DRG (MS-DRG) classification
system for the IPPS. We are also proposing to use the structure of the
proposed MS-DRG system for the LTCH prospective payment system
(referred to as MS-LTC-DRGs) for FY 2008.
Among the other policy changes that we are proposing to make are
changes related to: Limited revisions of the reclassification of cases
to proposed MS-DRGs, the proposed relative weights for the proposed MS-
LTC-DRGs; the wage data, including the occupational mix data, used to
compute the wage index; applications for new technologies and medical
services add-on payments; payments to hospitals for the indirect costs
of graduate medical education; submission of hospital quality data;
provisions governing application of sanctions relating to the Emergency
Medical Treatment and Labor Act of 1986 (EMTALA); provisions governing
disclosure of physician ownership in hospitals and patient safety
measures; and provisions relating to services furnished to
beneficiaries in custody of penal authorities.

DATES: To be assured consideration, comments must be received at one of
the addresses provided below, no later than 5 p.m. on June 12, 2007.

ADDRESSES: In commenting, please refer to file code CMS-1533-P. Because
of staff and resource limitations, we cannot accept comments by
facsimile (FAX) transmission.
You may submit comments in one of three ways (no duplicates,
please):
1. Electronically. You may submit electronic comments on specific
issues in this regulation to http://www.cms.hhs.gov/eRulemaking. Click

on the link ``Submit electronic comments on CMS regulations with an
open comment period''. (Attachments should be in Microsoft Word,
WordPerfect, or Excel; however, we prefer Microsoft Word.)
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-1533-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-1533-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 one of the following addresses. 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. Room 445-G, Hubert H. Humphrey Building,
200 Independence Avenue, SW., Washington, DC 20201, or 7500 Security
Boulevard, Baltimore, MD 21244-1850.
(Because access to the interior of the Hubert H. Humphrey Building
is not readily available to persons without Federal Government
identification, commenters are encouraged to leave their comments in
the CMS drop slots located in the main lobby of the building. A stamp-
in clock is available for persons wishing to retain proof of filing by
stamping in and retaining an extra copy of the comments being filed.)
Comments mailed to the addresses indicated as appropriate for hand
or courier delivery may be delayed and received after the comment
period.
Submission of comments on paperwork requirements. You may submit
comments on this document's paperwork requirements by mailing your
comments to the addresses provided at the end of the ``Collection of
Information Requirements'' section in this document.
For information on viewing public comments, see the beginning of
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT:
Marc Hartstein, (410) 786-4548, Operating Prospective Payment,
Diagnosis-Related Groups (DRGs), Wage Index, New Medical Services and
Technology Add-On Payments, and Hospital Geographic Reclassifications
Issues
Tzvi Hefter, (410) 786-4487, Capital Prospective Payment, Excluded
Hospitals, Graduate Medical Education, Critical Access Hospitals, and
Long-Term Care (LTC)-DRG Issues
Siddhartha Mazumdar, (410) 786-6673, Rural Community Hospital
Demonstration Issues
Sheila Blackstock, (410) 786-3502, Quality Data for Annual Payment
Update Issues
Thomas Valuck, (410) 786-7479, Hospital Value-Based Purchasing Issues
Jacqueline Proctor, (410) 786-8852, Disclosure of Physician Ownership
in Hospitals and Patient Safety Measures Issues
Fred Grabau, (410) 786-0206, Services to Beneficiaries in Custody of
Penal Authorities Issues

SUPPLEMENTARY INFORMATION:
Submitting Comments: We welcome comments from the public on all
issues set forth in this rule to assist us in fully considering issues
and developing policies. You can assist us by referencing the file code
CMS-1533-P

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and the specific ``issue identifier'' that precedes the section on
which you choose to comment.
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.cms.hhs.gov/eRulemaking.
Click on the link ``Electronic Comments on

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

Acronyms

AHA American Hospital Association
AHIMA American Health Information Management Association
AHRQ Agency for Health Care Research and Quality
AMI Acute myocardial infarction
AOA American Osteopathic Association
APR DRG All Patient Refined Diagnosis Related Group System
ASC Ambulatory surgical center
ASP Average sales price
AWP Average wholesale price
BBA Balanced Budget Act of 1997, Pub. L. 105-33
BBRA Medicare, Medicaid, and SCHIP [State Children's Health
Insurance Program] Balanced Budget Refinement Act of 1999, Pub. L.
106-113
BIPA Medicare, Medicaid, and SCHIP [State Children's Health
Insurance Program] Benefits Improvement and Protection Act of 2000,
Pub. L. 106-554
BLS Bureau of Labor Statistics
CAH Critical access hospital
CART CMS Abstraction & Reporting Tool
CBSAs Core-based statistical areas
CC Complication or comorbidity
CCR Cost-to-charge ratio
CDAC Clinical Data Abstraction Center
CIPI Capital input price index
CPI Consumer price index
CMI Case-mix index
CMS Centers for Medicare & Medicaid Services
CMSA Consolidated Metropolitan Statistical Area
COBRA Consolidated Omnibus Reconciliation Act of 1985, Pub. L. 99-
272
CPI Consumer price index
CY Calendar year
DRA Deficit Reduction Act of 2005, Pub. L. 109-171
DRG Diagnosis-related group
DSH Disproportionate share hospital
ECI Employment cost index
EMR Electronic medical record
EMTALA Emergency Medical Treatment and Labor Act of 1986, Pub. L.
99-272
FDA Food and Drug Administration
FFY Federal fiscal year
FIPS Federal information processing standards
FQHC Federally qualified health center
FTE Full-time equivalent
FY Fiscal year
GAAP Generally Accepted Accounting Principles
GAF Geographic Adjustment Factor
GME Graduate medical education
HCAHPS Hospital Consumer Assessment of Healthcare Providers and
Systems
HCFA Health Care Financing Administration
HCRIS Hospital Cost Report Information System
HHA Home health agency
HHS Department of Health and Human Services
HIC Health insurance card
HIPAA Health Insurance Portability and Accountability Act of 1996,
Pub. L. 104-191
HIPC Health Information Policy Council
HIS Health information system
HIT Health information technology
HMO Health maintenance organization
HSA Health savings account
HSCRC Maryland Health Services Cost Review Commission
HSRV Hospital-specific relative value
HSRVcc Hospital-specific relative value cost center
HQA Hospital Quality Alliance
HQI Hospital Quality Initiative
ICD-9-CM International Classification of Diseases, Ninth Revision,
Clinical Modification
ICD-10-PCS International Classification of Diseases, Tenth Edition,
Procedure Coding System
IHS Indian Health Service
IME Indirect medical education
IOM Institute of Medicine
IPF Inpatient psychiatric facility
IPPS Acute care hospital inpatient prospective payment system
IRF Inpatient rehabilitation facility
JCAHO Joint Commission on Accreditation of Healthcare Organizations
LAMCs Large area metropolitan counties
LTC-DRG Long-term care diagnosis-related group
LTCH Long-term care hospital
MAC Medicare Administrative Contractor
MCC Major complication or comorbidity
MCE Medicare Code Editor
MCO Managed care organization
MCV Major cardiovascular condition
MDC Major diagnostic category
MDH Medicare-dependent, small rural hospital
MedPAC Medicare Payment Advisory Commission
MedPAR Medicare Provider Analysis and Review File
MEI Medicare Economic Index
MGCRB Medicare Geographic Classification Review Board
MIEA-TRHCA Medicare Improvements and Extension Act, Division B of
the Tax Relief and Health Care Act of 2006, Pub. L. 109-432
MMA Medicare Prescription Drug, Improvement, and Modernization Act
of 2003, Pub. L. 108-173
MPN Medicare provider number
MRHFP Medicare Rural Hospital Flexibility Program
MSA Metropolitan Statistical Area
NAICS North American Industrial Classification System
NCD National coverage determination
NCHS National Center for Health Statistics
NCQA National Committee for Quality Assurance
NCVHS National Committee on Vital and Health Statistics
NECMA New England County Metropolitan Areas
NQF National Quality Forum
NTIS National Technical Information Service
NVHRI National Voluntary Hospital Reporting Initiative
OES Occupational employment statistics
OIG Office of the Inspector General
OMB Executive Office of Management and Budget
O.R. Operating room
OSCAR Online Survey Certification and Reporting (System)
PRM Provider Reimbursement Manual
PPI Producer price index
PMSAs Primary metropolitan statistical areas
PPS Prospective payment system
PRA Per resident amount
ProPAC Prospective Payment Assessment Commission
PRRB Provider Reimbursement Review Board
PS&R Provider Statistical and Reimbursement (System)
QIG Quality Improvement Group, CMS
QIO Quality Improvement Organization
RHC Rural health clinic
RHQDAPU Reporting hospital quality data for annual payment update
RNHCI Religious nonmedical health care institution

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RRC Rural referral center
RUCAs Rural-urban commuting area codes
RY Rate year
SAF Standard Analytic File
SCH Sole community hospital
SFY State fiscal year
SIC Standard Industrial Classification
SNF Skilled nursing facility
SOCs Standard occupational classifications
SOM State Operations Manual
SSA Social Security Administration
SSI Supplemental Security Income
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-
248
UHDDS Uniform hospital discharge data set
VBP Value-based purchasing

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
a. Inpatient Rehabilitation Facilities (IRFs)
b. Long-Term Care Hospitals (LTCHs)
c. Inpatient Psychiatric Facilities (IPFs)
3. Critical Access Hospitals (CAHs)
4. Payments for Graduate Medical Education (GME)
B. Provisions of the Deficit Reduction Act of 2005 (DRA)
C. Provisions of the Medicare Improvements and Extension Act
Under Division B of the Tax Relief and Health Care Act of 2006
D. Provisions of the Pandemic and All-Hazards Preparedness Act
E. Major Contents of this Proposed Rule
1. Proposed DRG Reclassifications and Recalibrations of Relative
Weights
2. Proposed Changes to the Hospital Wage Index
3. Other Decisions and Proposed Changes to the IPPS for
Operating Costs and GME Costs
4. Proposed Changes to the IPPS for Capital-Related Costs
5. Proposed Changes to the Payment Rate for Excluded Hospitals
and Hospital Units: Rate-of-Increase Percentages
6. Services Furnished to Beneficiaries in Custody of Penal
Authorities
7. Determining Proposed Prospective Payment Operating and
Capital Rates and Rate-of-Increase Limits
8. Impact Analysis
9. Recommendation of Update Factors for Operating Cost Rates of
Payment for Inpatient Hospital Services
10. Discussion of Medicare Payment Advisory Commission
Recommendations
II. Proposed Changes to DRG Classifications and Relative Weights
A. Background
B. DRG Reclassifications
1. General
2. Yearly Review for Making DRG Changes
C. MedPAC Recommendations for Revisions to the IPPS DRG System
D. Refinement of DRGs Based on Severity of Illness
1. Evaluation of Alternative Severity-Adjusted DRG Systems
a. Overview of Alternative DRG Classification Systems
b. Comparative Performance in Explaining Variation in Resource
Use
c. Payment Accuracy and Case-Mix Impact
d. Issues for Future Consideration
2. Development of Proposed Medicare Severity DRGs (MS-DRGs)
a. Comprehensive Review of the CC List
b. Chronic Diagnosis Codes
c. Acute Diagnosis Codes
d. Prior Research on Subdivisions of CCs Into Multiple
Categories
e. Proposed Medicare Severity DRGs (MS-DRGs)
3. Dividing Proposed MS-DRGs on the Basis of the CCs and MCCs
4. Conclusion
5. Impact of the Proposed MS-DRGs
6. Changes to Case-Mix Index (CMI) from the Proposed MS-DRGs
7. Effect of the Proposed MS-DRGs on the Outlier Threshold
8. Effect of the Proposed MS-DRGs on the Postacute Care Transfer
Policy
E. Refinement of the Relative Weight Calculation
1. Summary of RTI's Report on Charge Compression
2. RTI Recommendations
a. Short-Term Recommendations
b. Medium-Term Recommendations
c. Long-Term Recommendations
F. Hospital-Acquired Conditions, Including Infections
1. General
2. Legislative Requirements
3. Public Input
4. Collaborative Effort
5. Criteria for Selection of the Hospital-Acquired Conditions
6. Proposed Selection of Hospital-Acquired Conditions
7. Other Issues
G. Proposed Changes to the Specific DRG Classifications
1. Pre-MDC: Intestinal Transplantations
2. MDC 1 (Diseases and Disorders of the Nervous System)
a. Implantable Neurostimulators
b. Intracranial Stents
3. MDC 3 (Diseases and Disorders of the Ear, Nose, Mouth, and
Throat)--Cochler Implants
4. MDC 8 (Diseases and Disorders of the Musculoskeletal System
and Connective Tissue)
a. Hip and Knee Replacements
b. Spinal Fusions
c. Spinal Disc Devices
d. Other Spinal DRGs
5. MDC 17 (Myeloproliferative Diseases and Disorders, Poorly
Differentiated Neoplasm): Endoscopic Procedures
6. Medicare Code Editor (MCE) Changes
a. Non-Covered Procedure Edit: Code 00.62 (Percutaneous
Angioplasty or Atherectomy of Intracranial Vessel(s))
b. Non-Specific Principal Diagnosis Edit 7 and Non-Specific O.R.
Procedures Edit 10
c. Limited Coverage Edit 17
7. Surgical Hierarchies
8. CC Exclusion List Proposed for FY 2008
a. Background
b. Proposed CC Exclusions List for FY 2008
9. Review of Procedure Codes in CMS DRGs 468, 476, and 477
a. Moving Procedure Codes From CMS DRG 468 (Proposed MS-DRGs 981
Through 983) or CMS DRG 477 (Proposed MS-DRGs 987 Through 989) to
MDCs
b. Reassignment of Procedures Among CMS DRGs 468, 476, and 477
(Proposed MS-DRG 981 Through 983, 984 Through 986, and 987 Through
989)
c. Adding Diagnosis or Procedure Codes to MDCs
10. Changes to the ICD-9-CM Coding System
11. Other Issues
a. Seizures and Headaches
b. Devices That Are Replaced Without Cost or Where Credit for a
Replaced Device Is Furnished to the Hospital
H. Recalibration of DRG Weights
I. Proposed MS-LTC-DRG Reclassifications and Relative Weights
for LTCHs for FY 2008
1. Background
2. Proposed Changes in the LTC-DRG Classifications
a. Background
b. Patient Classifications Into DRGs
3. Development of the Proposed FY 2008 MS-LTC-DRG Relative
Weights
a. General Overview of Development of the Proposed MS-LTC-DRG
Relative Weights
b. Data
c. Hospital-Specific Relative Value Methodology
d. Proposed Treatment of Severity Levels in Developing Relative
Weights
e. Proposed Low-Volume MS-LTC-DRGs
4. Steps for Determining the Proposed FY 2008 MS-LTC-DRG
Relative Weights
J. 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 2008 Status of Technologies Approved for FY 2007 Add-On
Payments
a. Endovascular Graft Repair of the Thoracic Aorta
b. Restore^[reg] Rechargeable Implantable
Neurostimulators
c. X STOP Interspinous Process Decompression System
4. FY 2008 Application for New Technology Add-On Payments
5. Technical Correction
III. Proposed Changes to the Hospital Wage Index
A. Background
B. Core-Based Statistical Areas for the Hospital Wage Index
C. Proposed Occupational Mix Adjustment to the Proposed FY 2008
Wage Index
1. Development of Data for the Proposed FY 2008 Occupational Mix
Adjustment
2. Timeline for the Collection, Review, and Correction of the
Occupational Mix Data
3. Calculation of the Proposed Occupational Mix Adjustment for
FY 2008
4. Proposed 2007-2008 Occupational Mix Survey for the FY 2010
Wage Index
D. Worksheet S-3 Wage Data for the Proposed FY 2008 Wage Index
1. Included Categories of Costs

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2. Contract Labor for Indirect Patient Care Services
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. Wage Index for Multicampus Hospitals
G. Computation of the Proposed FY 2008 Unadjusted Wage Index
1. Method for Computing the Proposed FY 2008 Unadjusted Wage
Index
2. Expiration of the Imputed Floor
3. CAHs Reverting Back to IPPS Hospitals and Raising the Rural
Floor
4. Application of Rural Floor Budget Neutrality
H. Analysis and Implementation of the Proposed Occupational Mix
Adjustment and the Proposed FY 2008 Occupational Mix Adjusted Wage
Index
I. Revisions to the Proposed Wage Index Based on Hospital
Redesignations
1. General
2. Effects of Reclassification/Redesignation
3. FY 2008 MGCRB Reclassifications
4. Hospitals That Applied for Reclassification Effective in FY
2008 and Reinstating Reclassifications in FY 2008
5. Clarification of Policy on Reinstating Reclassifications
6. ``Fallback'' Reclassifications
7. Geographic Reclassification Issues for Multicampus Hospitals
8. Redesignations of Hospitals under Section 1886(d)(8)(B) of
the Act
9. Reclassifications Under Section 1886(d)(8)(B) of the Act
10. New England Deemed Counties
11. Reclassifications under Section 508 of Pub. L. 108-173
12. Other Issues
J. Proposed FY 2008 Wage Index Adjustment Based on Commuting
Patterns of Hospital Employees
K. Process for Requests for Wage Index Data Corrections
L. Labor-Related Share for the Proposed Wage Index for FY 2008
M. Wage Index Study Required Under Pub. L. 109-432
N. Proxy for the Hospital Market Basket
IV. Other Decisions and Proposed Changes to the IPPS for Operating
Costs and GME Costs
A. Reporting of Hospital Quality Data for Annual Hospital
Payment Update
1. Background
2. FY 2008 Quality Measures
3. New Quality Measures and Data Submission Requirements for FY
2009 and Subsequent Years
a. Proposed New Quality Measures for FY 2009 and Subsequent
Years
b. Data Submission
4. Retiring or Modifying RHQDAPU Program Quality Measures
5. Procedures for the RHQDAPU Program for FY 2008 and FY 2009
a. Procedures for Participating in the RHQDAPU Program
b. Chart Validation Requirements
c. Data Validation and Attestation
d. Public Display
e. Reconsideration and Appeal Procedures
f. RHQDAPU Program Withdrawal Requirements
6. Electronic Medical Records
7. New Hospitals
B. Development of the Medicare Hospital Value-Based Purchasing
Plan
C. Rural Referral Centers (RRCs)
1. Proposed Annual Update of RRC Status Criteria
a. Case-Mix Index
b. Discharges
2. Acquired Rural Status of RRCs
D. Indirect Medical Education (IME) Adjustment
1. Background
2. IME Adjustment Factor for FY 2008
3. Time Spent by Residents on Vacation or Sick Leave and in
Orientation
a. Background
b. Vacation and Sick Leave Time
c. Orientation Activities
d. Proposed Regulation Changes
E. Hospital Emergency Services Under EMTALA
1. Background
2. Recent Legislation Affecting EMTALA Implementation
a. Secretary's Authority to Waive Requirements During National
Emergencies
b. Provisions of the Pandemic and All-Hazards Preparedness Act
c. Proposed Revisions to the EMTALA Regulations
F. Disclosure of Physician Ownership in Hospitals and Patient
Safety Measures
1. Disclosure of Physician Ownership in Hospitals
2. Patient Safety Measures
G. Rural Community Hospital Demonstration Program
V. Proposed Changes to the IPPS for Capital-Related Costs
A. Background
B. Proposed Policy Change
VI. Proposed Changes for Hospitals and Hospital Units Excluded From
the IPPS
A. Payments to Existing and New Excluded Hospitals and Hospital
Units
B. Separate PPS for IRFs
C. Separate PPS for LTCHs
D. Separate PPS for IPFs
E. Determining Proposed LTCH Cost-to-Charge Ratios (CCRs) Under
the LTCH PPS
VII. Services Furnished to Beneficiaries in Custody of Penal
Authorities
VIII. MedPAC Recommendations
IX. Other Required Information
A. Requests for Data From the Public
B. Collection of Information Requirements
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, 2007

I. Summary and Background
II. Proposed Changes to the Prospective Payment Rates for Hospital
Inpatient Operating Costs for FY 2008
A. Calculation of the Proposed Adjusted Standardized Amount
1. Standardization of Base-Year Costs or Target Amounts
2. Computing the Proposed Average Standardized Amount
3. Updating the Proposed Average Standardized Amount
4. Other Adjustments to the Average Standardized Amount
a. Proposed Recalibration of DRG Weights and Updated Wage
Index--Budget Neutrality Adjustment
b. Reclassified Hospitals--Budget Neutrality Adjustment
c. Case-Mix Budget Neutrality Adjustment
d. Outliers
e. Proposed Rural Community Hospital Demonstration Program
Adjustment (Section 410A of Pub. L. 108-173)
5. Proposed FY 2008 Standardized Amount
B. Proposed Adjustments for Area Wage Levels and Cost-of-Living
1. Proposed Adjustment for Area Wage Levels
2. Proposed Adjustment for Cost-of-Living in Alaska and Hawaii
C. Proposed DRG Relative Weights
D. Calculation of the Proposed Prospective Payment Rates for FY
2008
1. Federal Rate
2. Hospital-Specific Rate (Applicable Only to SCHs and MDHs)
a. Calculation of Hospital-Specific Rate
b. Updating the FY 1982, FY 1987, FY 1996, and FY 2002 Hospital-
Specific Rates for FY 2008
3. General Formula for Calculation of Proposed Prospective
Payment Rates for Hospitals Located in Puerto Rico Beginning On or
After October 1, 2007 and Before October 1, 2008
a. Puerto Rico Rate
b. National Rate
III. Proposed Changes to Payment Rates for Acute Care Hospital
Inpatient Capital-Related Costs for FY 2008
A. Determination of Proposed Federal Hospital Inpatient Capital-
Related Prospective Payment Rate Update
1. Projected Capital Standard Federal Rate Update
a. Description of the Update Framework
b. Comparison of CMS and MedPAC Update Recommendation
2. Proposed Outlier Payment Adjustment Factor
3. Proposed Budget Neutrality Adjustment Factor for Changes in
DRG Classifications and Weights and the GAF
4. Proposed Exceptions Payment Adjustment Factor
5. Proposed Capital Standard Federal Rate for FY 2008
6. Proposed Special Capital Rate for Puerto Rico Hospitals
B. Calculation of the Proposed Inpatient Capital-Related
Prospective Payments for FY 2008
C. Capital Input Price Index
1. Background
2. Forecast of the CIPI for FY 2008
IV. Proposed Changes to Payment Rates for Excluded Hospitals and
Hospital Units: Rate-of-Increase Percentages
A. Payments to Existing Excluded Hospitals and Units
B. New Excluded Hospitals and Units

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V. Tables
Table 1A--National Adjusted Operating Standardized Amounts,
Labor/Nonlabor (69.7 Percent Labor Share/30.3 Percent Nonlabor Share
If Wage Index Is Greater Than 1)
Table 1B--National Adjusted Operating Standardized Amounts,
Labor/Nonlabor (62 Percent Labor Share/38 Percent Nonlabor Share If
Wage Index Is Less Than or Equal to 1)
Table 1C--Adjusted Operating Standardized Amounts for Puerto
Rico, Labor/Nonlabor
Table 1D--Capital Standard Federal Payment Rate
Table 2--Hospital Case-Mix Indexes for Discharges Occurring in
Federal Fiscal Year 2006; Hospital Wage Indexes for Federal Fiscal
Year 2008; Hospital Average Hourly Wages for Federal Fiscal Years
2006 (2002 Wage Data), 2007 (2003 Wage Data), and 2008 (2004 Wage
Data); and 3-Year Average of Hospital Average Hourly Wages
Table 3A--FY 2008 and 3-Year Average Hourly Wage for Urban Areas
by CBSA
Table 3B--FY 2008 and 3-Year Average Hourly Wage for Rural Areas
by CBSA
Table 4A--Wage Index and Capital Geographic Adjustment Factor
(GAF) for Urban Areas by CBSA--FY 2008
Table 4B--Wage Index and Capital Geographic Adjustment Factor
(GAF) for Rural Areas by CBSA--FY 2008
Table 4C--Wage Index and Capital Geographic Adjustment Factor
(GAF) for Hospitals That Are Reclassified by CBSA--FY 2008
Table 4F--Puerto Rico Wage Index and Capital Geographic
Adjustment Factor (GAF) by CBSA--FY 2008
Table 4J--Out-Migration Wage Adjustment--FY 2008
Table 5--List of Proposed Medicare Severity Diagnosis-Related
Groups (MS-DRGs), Relative Weighting Factors, and Geometric and
Arithmetic Mean Length of Stay
Table 6A--New Diagnosis Codes
Table 6B--New Procedure Codes
Table 6C--Invalid Diagnosis Codes
Table 6D--Invalid Procedure Codes
Table 6E--Revised Diagnosis Code Titles
Table 6F--Revised Procedure Code Titles
Table 6G--Additions to the CC Exclusion List (Available only
through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/
)

Table 6H--Deletions from the CC Exclusion List (Available only
through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/
)

Table 6I--Complete List of Complication and Comorbidity (CC)
Exclusions (Available only through the Internet on the CMS Web site
at: http://www.cms.hhs.gov/AcuteInpatientPPS/)

Table 6J--Major Complication and Comorbidity (MCC) List
Table 6K--Complications and Comorbidity (CC) List
Table 7A--Medicare Prospective Payment System Selected
Percentile Lengths of Stay: FY 2006 MedPAR Update--December 2006
GROUPER V24.0 CMS-DRGs
Table 7B--Medicare Prospective Payment System Selected
Percentile Lengths of Stay: FY 2006 MedPAR Update--December 2006
GROUPER V25.0 CMS DRGs
Table 8A--Proposed Statewide Average Operating Cost-to-Charge
Ratios--March 2007
Table 8B--Proposed Statewide Average Capital Cost-to-Charge
Ratios--March 2007
Table 8C--Proposed Statewide Average Total Cost-to-Charge Ratios
for LTCHs--March 2007
Table 9A--Hospital Reclassifications and Redesignations--FY 2008
Table 9C--Hospitals Redesignated as Rural under Section
1886(d)(8)(E) of the Act--FY 2008
Table 10--Geometric Mean Plus the Lesser of .75 of the National
Adjusted Operating Standardized Payment Amount (Increased to Reflect
the Difference Between Costs and Charges) or .75 of One Standard
Deviation of Mean Charges by Proposed Medicare Severity Diagnosis-
Related Groups (MS-DRGs)--March 2007
Table 11--Proposed FY 2008 MS-LTC-DRGs, Relative Weights,
Geometric Average Length of Stay, and 5/6ths of the Geometric
Average Length of Stay

Appendix A--Regulatory Impact Analysis

I. Overall Impact
II. Objectives
III. Limitations on Our Analysis
IV. Hospitals Included In and Excluded From the IPPS
V. Effects on Excluded Hospitals and Hospital Units
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. Effects of the Proposed Changes to the DRG Reclassifications
and Relative Cost-Based Weights (Column 2)
D. Effects of Proposed Wage Index Changes (Column 3)
E. Combined Effects of Proposed DRG and Wage Index Changes
(Column 4)
F. Effects of the Expiration of the 3-Year Provision Allowing
Urban Hospitals That Were Converted to Rural as a Result of the FY
2005 Labor Market Area Changes to Maintain the Wage Index of the
Urban Labor Market Area in Which They Were Formerly Located (Column
5)
G. Effects of MGCRB Reclassifications (Column 6)
H. Effects of the Adjustment to the Application of the Rural
Floor (Column 7)
I. Effects of Expiration of the Imputed Rural Floor (Column 8)
J. Effects of the Expiration of Section 508 of Pub. L. 108-173
(Column 9)
K. Effects of the Proposed Wage Index Adjustment for Out-
Migration (Column 10)
L. Effects of All Proposed Changes With CMI Adjustment Prior to
Assumed Growth (Column 11)
M. Effects of All Proposed Changes With CMI Adjustment and
Assumed Growth (Column 12)
N. Effects of Proposed Policy on Payment Adjustment for Low-
Volume Hospitals
O. Impact Analysis of Table II
VII. Effects of Other Proposed Policy Changes
A. Effects of Proposed Policy on Hospital-Acquired Conditions,
Including Infections
B. Effects of Proposed MS-LTC-DRG Reclassifications and Relative
Weights for LTCHs
C. Effects of Proposed New Technology Add-On Payments
D. Effects of Requirements for Hospital Reporting of Quality
Data for Annual Hospital Payment Update
E. Effects of Proposed Policy on Cancellation of Classification
of Acquired Rural Status and Rural Referral Centers
F. Effects of Proposed Policy Change on Payment for Indirect
Graduate Medical Education
G. Effects of Proposed Policy Changes Relating to Emergency
Services Under EMTALA
H. Effects of Proposed Policy on Disclosure of Physician
Ownership in Hospitals and Patient Safety Measures
I. Effects of Implementation of Rural Community Hospital
Demonstration Program
J. Effects of Proposed Policy Changes on Services Furnished to
Beneficiaries in Custody of Penal Authorities
VIII. Effects of Proposed Changes in the Capital IPPS
A. General Considerations
B. Results
IX. Alternatives Considered
X. Overall Conclusion
XI. Accounting Statement
XII. 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 2008
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 payment for hospital inpatient operating and capital-related
costs is made at

[[Page 24685]]

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; and 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 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 may vary 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 outlier payment due 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 the higher of a hospital-specific rate based on their costs in a
base year (the higher of FY 1982, FY 1987, FY 1996, or FY 2002) or the
IPPS rate based on the standardized amount. For example, sole community
hospitals (SCHs) are the sole source of care in their areas, and
Medicare-dependent, small rural hospitals (MDHs) are a major source of
care for Medicare beneficiaries in their areas. Both of these
categories of hospitals are afforded this special payment protection in
order to maintain access to services for beneficiaries. (Until FY 2007,
an MDH has received the IPPS rate plus 50 percent of the difference
between the IPPS rate and its hospital-specific rate if the hospital-
specific rate is higher than the IPPS rate. In addition, an MDH does
not have the option of using FY 1996 as the base year for its hospital-
specific rate. As discussed below, for discharges occurring on or after
October 1, 2007, but before October 1, 2011, an MDH will receive the
IPPS rate plus 75 percent of the difference between the IPPS rate and
its hospital-specific rate, if the hospital-specific rate is higher
than the IPPS rate.)
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
specialty 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 (Pub. L. 105-33), the
Medicare, Medicaid and SCHIP [State Children's Health Insurance
Program] Balanced Budget Refinement Act of 1999 (Pub. L. 106-113), and
the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection
Act of 2000 (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)), as
discussed below. Children's hospitals, cancer hospitals, and RNHCIs
continue to be paid solely under a reasonable cost-based system.
The existing regulations governing payments to excluded hospitals
and hospital units are located in 42 CFR parts 412 and 413.
a. Inpatient Rehabilitation Facilities (IRFs)
Under section 1886(j) of the Act, as amended, rehabilitation
hospitals and units (IRFs) have been transitioned from payment based on
a blend of reasonable cost reimbursement subject to a hospital-specific
annual limit under section 1886(b) of the Act and the adjusted facility
Federal prospective payment rate for cost reporting periods beginning
on or after January 1, 2002 through September 30, 2002, to payment at
100 percent of the Federal rate effective for cost reporting periods
beginning on or after October 1, 2002. IRFs subject to the blend were
also permitted to elect payment based on 100 percent of the Federal
rate. The existing regulations governing payments under the IRF PPS are
located in 42 CFR part 412, subpart P.
b. Long-Term Care Hospitals (LTCHs)
Under the authority of sections 123(a) and (c) of Pub. L. 106-113
and section 307(b)(1) of Pub. L. 106-554, the LTCH PPS was effective
for a LTCH's first cost reporting period beginning on or after October
1, 2002. LTCHs that do not meet the definition of ``new'' under Sec.
412.23(e)(4) are paid, during a 5-year transition period, a LTCH
prospective payment that is comprised of an increasing proportion of
the LTCH Federal rate and a decreasing proportion based on reasonable
cost principles. Those LTCHs that did not meet the definition of
``new'' could elect to be paid based on 100 percent of the Federal
prospective payment rate instead of a blended payment in any year
during the 5-year transition. 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.
c. Inpatient Psychiatric Facilities (IPFs)
Under the authority of sections 124(a) and (c) of Pub. L. 106-113,
inpatient

[[Page 24686]]

psychiatric facilities (IPFs) (formerly psychiatric hospitals and
psychiatric units of acute care hospitals) are paid under the IPF PPS.
Under the IPF PPS, some IPFs are transitioning from being paid for
inpatient hospital services based on a blend of reasonable cost-based
payment and a Federal per diem payment rate, effective for cost
reporting periods beginning on or after January 1, 2005. For cost
reporting periods beginning on or after January 1, 2008, all IPFs will
be paid 100 percent of the Federal per diem payment amount. The
existing regulations governing payment under the IPF PPS are located in
42 CFR 412, subpart N.
3. Critical Access Hospitals (CAHs)
Under sections 1814, 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 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.
4. 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 Deficit Reduction Act of 2005 (DRA)

The Deficit Reduction Act of 2005 (DRA), Pub. L. 109-171, made a
number of changes to the Act relating to prospective payments to
hospitals and other providers for inpatient services. This proposed
rule would implement amendments made by (1) section 5001(a), which,
effective for FY 2007 and subsequent years, expands the requirements
for hospital quality data reporting; and (2) section 5001(c), which
requires the Secretary to select, by October 1, 2007, at least two
hospital-acquired conditions that meet certain specified criteria that
will be subject to a quality adjustment in DRG payments during FY 2008.
In this proposed rule, we also discuss our development of a plan to
implement, beginning with FY 2009, a value-based purchasing plan for
section 1886(d) hospitals, in accordance with the requirements of
section 5001(b) of Pub. L. 109-171.

C. Provisions of the Medicare Improvements and Extension Act Under
Division B of the Tax Relief and Health Care Act of 2006

In this proposed rule, we discuss the provisions of section
106(b)(1) of the Medicare Improvements and Extensions Act under
Division B, Title I of the Tax Relief and Health Care Act of 2006
(MIEA-TRHCA), Pub. L. 109-432, which requires MedPAC to submit to
Congress, not later than June 30, 2007, a report on the Medicare wage
index classification system applied under the Medicare Prospective
Payment System. Section 106(b) of the MIEA-TRHCA requires the report to
include any alternatives that MedPAC recommends to the method to
compute the wage index under section 1886(d)(3)(E) of the Act.
In addition, we discuss the provisions of section 106(b)(2) of the
MIEA-TRHCA, which instructs the Secretary of Health and Human Services,
taking into account MedPAC's recommendations on the Medicare wage index
classification system, to include in the FY 2009 IPPS proposed rule one
or more proposals to revise the wage index adjustment applied under
section 1886(d)(3)(E) of the Act for purposes of the IPPS.
We note that we published a notice in the Federal Register on March
23, 2007 (72 FR 13799) that addressed the provisions of section 106(a)
of the MIEA-TRHCA relating to the extension of geographic
reclassifications of hospitals under section 508 of Pub. L. 108-173
(that expired on March 31, 2007) through September 30, 2007.

D. Provisions of the Pandemic and All-Hazards Preparedness Act

On December 19, 2006, Congress enacted the Pandemic and All-Hazards
Preparedness Act, Pub. L. 109-417. Section 302(b) of Pub. L. 109-417
makes two specific changes that affect EMTALA implementation in
emergency areas during an emergency period. Specifically section
302(b)(1)(A) of Pub. L. 109-417 amended section 1135(b)(3)(B) of the
Act to state that sanctions may be waived for the direction or
relocation of an individual for screening where, in the case of a
public health emergency that involves a pandemic infections disease,
that direction or relocation occurs pursuant to a State pandemic
preparedness plan. In addition, sections 302(b)(1)(B) and (b)(1)(C) of
Pub. L. 109-417 amended section 1135(b)(3)(B) of the Act to state that,
if a public health emergency involves a pandemic infectious disease
(such as pandemic influenza), the duration of a waiver or modification
under section 1135(b)(3) of the Act (relating to EMTALA) shall be
determined in accordance with section 1135(e) of the Act as that
subsection applies to public health emergencies.
In this proposed rule, we are proposing to make changes to the
EMTALA regulations to conform them to the sanction waiver provisions of
section 302(b) of Pub. L. 109-417.

E. 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 in FY
2008. We also are setting forth proposed changes relating to payments
for IME costs and payments to certain hospitals and units that continue
to be excluded from the IPPS and paid on a reasonable cost basis. The
changes being proposed would be effective for discharges occurring on
or after October 1, 2007, unless otherwise noted.
The following is a summary of the major changes that we are
proposing to make:
1. Proposed DRG Reclassifications and Recalibrations of Relative
Weights
We are proposing to adopt a Medicare Severity DRG (MS-DRG)
classification system for the IPPS to better recognize severity of
illness. We present the methodology we used to establish the proposed
MS-DRGs and discuss our efforts to further analyze alternative
severity-adjusted DRG systems and to refine the relative weight
calculations for DRGs.
We present a proposed listing and discussion of hospital-acquired
conditions, including infections, which we have evaluated and are
considering for selection to be subject to the statutorily required
quality adjustment in DRG payments for FY 2008.
We are proposing limited annual revisions to the DRG classification
system in the following areas: intestinal transplants,
neurostimulators, intracranial stents, cochlear implants, knee and hip
replacements, spinal fusions and spinal disc devices, and endoscopic
procedures.
We are presenting our reevaluation of certain FY 2007 applicants
for add-on payments for high-cost new medical services and
technologies, and our analysis of the FY 2008 applicant

[[Page 24687]]

(including public input, as directed by Pub. L. 108-173, obtained in a
town hall meeting).
We are proposing the annual update of the long-term care diagnosis-
related group (LTC-DRG) classifications and relative weights for use
under the LTCH PPS for FY 2008. We are proposing that the LTC-DRGs
would be revised to mirror the proposed MS-DRGs for the IPPS.
2. Proposed Changes to the Hospital Wage Index
In section III. of the preamble to this proposed rule, we are
proposing revisions to the wage index and the annual update of the wage
data. Specific issues addressed include the following:
The FY 2008 wage index update, using wage data from cost
reporting periods that began during FY 2004.
Analysis and implementation of the proposed FY 2008
occupational mix adjustment to the wage index.
Proposed changes relating to expiration of the imputed
floor for the wage index and application of budget neutrality for the
rural floor.
Proposed changes in determining the wage index for
multicampus hospitals.
The proposed revisions to the wage index based on hospital
redesignations and reclassifications, including reclassifications for
multicampus hospitals.
The proposed adjustment to the wage index for FY 2008
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
that will be in effect for the proposed FY 2008 wage index.
The labor-related share for the FY 2008 wage index,
including the labor-related share for Puerto Rico.
3. Other Decisions and Proposed Changes to the IPPS for Operating Costs
and GME Costs
In section IV. of the preamble to this proposed rule, we discuss a
number of provisions of the regulations in 42 CFR Parts 412, 413, and
489, including the following:
The reporting of hospital quality data as a condition for
receiving the full annual payment update increase.
Development of the Medicare value-based purchasing plan
and scheduled ``listening sessions.''
The proposed updated national and regional case-mix values
and discharges for purposes of determining RRC status and a proposed
policy change relating to the acquired rural status of RRCs.
The statutorily-required IME adjustment factor for FY 2008
and a proposed policy change relating to determining counts of
residents on vacation or sick leave and in orientation for IME and
direct GME purposes.
Proposed changes relating to waiver of sanctions for
requirements for emergency services for hospitals under EMTALA during
national emergency.
Proposed policy changes relating to disclosure to patients
of physician ownership of hospitals and patient safety measures.
Discussion of the fourth year of implementation of the
Rural Community Hospital Demonstration Program.
4. Proposed Changes to the IPPS for Capital-Related Costs
In section V. of the preamble to this proposed rule, we discuss the
payment policy requirements for capital-related costs and capital
payments to hospitals and propose changes relating to adjustments to
the Federal capital rate to address continuous large positive margins.
5. Proposed Changes to the Payment Rates for Excluded Hospitals and
Hospital Units: Rate-of-Increase Percentages
In section VI. of the preamble to this proposed rule, we discuss
payments to excluded hospitals and hospital units, and proposed changes
for determining LTCH CCRs under the LTCH PPS.
6. Services Furnished to Beneficiaries in Custody of Penal Authorities
In section VII. of the preamble to this proposed rule, we clarify
when individuals are considered to be in ``custody'' for purposes of
Medicare payment for services furnished to beneficiaries who are under
penal authorities.
7. Determining Proposed Prospective Payment Operating and Capital Rates
and Rate-of-Increase Limits
In the Addendum to this proposed rule, we set forth proposed
changes to the amounts and factors for determining the FY 2008
prospective payment rates for operating costs and capital-related
costs. We also establish the proposed 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 2008 for hospitals and hospital units excluded from the
PPS.
8. 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 hospitals.
9. Recommendation of Update Factors for Operating Cost Rates of Payment
for Inpatient Hospital Services
In Appendix B of this proposed rule, as required by sections
1886(e)(4) and (e)(5) of the Act, we provided our recommendations of
the appropriate percentage changes for FY 2008 for the following:
A single average standardized amount for all areas for
hospital inpatient services paid under the IPPS for operating costs
(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 hospitals and
hospital units excluded from the IPPS.
10. 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 2007 recommendation concerning hospital inpatient
payment policies addressed the update factor for inpatient hospital
operating costs and capital-related costs under the IPPS and for
hospitals and distinct part hospital units excluded from the IPPS. This
recommendation is addressed in Appendix B of this proposed rule. For
further information relating specifically to the MedPAC March 2007
reports or to obtain a copy of the reports, contact MedPAC at (202)
220-3700 or visit MedPAC's Web site at: http://www.medpac.gov.

II. Proposed Changes to DRG Classifications and Relative Weights

(If you choose to comment on issues in this section, please include
the caption ``DRG Reclassifications'' at the beginning of your
comment.)

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, we
pay for inpatient hospital services on a rate per discharge basis that
varies according to the DRG to

[[Page 24688]]

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. DRG Reclassifications

1. General
As discussed in the preamble to the FY 2007 IPPS final rule (71 FR
47881 through 47971), we are focusing 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 into account severity
of illness 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 others across 13 different clinical areas involving nearly
1.7 million cases. As described below in more detail, these refinements
are intermediate steps towards comprehensive reform of both the
relative weights and the DRG system that is occurring as we undertake
further study.
---------------------------------------------------------------------------

\1\ Medicare Payment Advisory Commission: Report to the
Congress, Physician-Owned Specialty Hospitals, March 2005, page
viii.
---------------------------------------------------------------------------

Currently, cases are classified into CMS DRGs for payment under the
IPPS based on the principal diagnosis, up to eight additional
diagnoses, and up to six procedures performed during the stay. In a
small number of 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).
The process of forming the 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 formed
by physician panels as the first step toward ensuring 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 DRG could contain patients
in different MDCs. Most MDCs are based on a particular organ system of
the body. 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 2007, cases are
assigned to one of 538 DRGs in 25 MDCs. The table below lists the 25
MDCs.

Major Diagnostic Categories (MDCs)
------------------------------------------------------------------------

------------------------------------------------------------------------
1................. Diseases and Disorders of the Nervous System.
2................. Diseases and Disorders of the Eye.
3................. Diseases and Disorders of the Ear, Nose, Mouth, and
Throat.
4................. Diseases and Disorders of the Respiratory System.
5................. Diseases and Disorders of the Circulatory System.
6................. Diseases and Disorders of the Digestive System.
7................. Diseases and Disorders of the Hepatobiliary System
and Pancreas.
8................. Diseases and Disorders of the Musculoskeletal System
and Connective Tissue.
9................. Diseases and Disorders of the Skin, Subcutaneous
Tissue and Breast.
10................ Endocrine, Nutritional and Metabolic Diseases and
Disorders.
11................ Diseases and Disorders of the Kidney and Urinary
Tract.
12................ Diseases and Disorders of the Male Reproductive
System.
13................ Diseases and Disorders of the Female Reproductive
System.
14................ Pregnancy, Childbirth, and the Puerperium.
15................ Newborns and Other Neonates with Conditions
Originating in the Perinatal Period.
16................ Diseases and Disorders of the Blood and Blood
Forming Organs and Immunological Disorders.
17................ Myeloproliferative Diseases and Disorders and Poorly
Differentiated Neoplasms.
18................ Infectious and Parasitic Diseases (Systemic or
Unspecified Sites).
19................ Mental Diseases and Disorders.
20................ Alcohol/Drug Use and Alcohol/Drug Induced Organic
Mental Disorders.
21................ Injuries, Poisonings, and Toxic Effects of Drugs.
22................ Burns.
23................ Factors Influencing Health Status and Other Contacts
with Health Services.
24................ Multiple Significant Trauma.
25................ Human Immunodeficiency Virus Infections.
------------------------------------------------------------------------

In general, cases are assigned to an MDC based on the patient's
principal diagnosis before assignment to a DRG. However, for FY 2007,
there are 9 DRGs to which cases are directly assigned on the basis of
ICD-9-CM procedure codes. These 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

[[Page 24689]]

for tracheostomies. Cases are assigned to these DRGs before they are
classified to an MDC. The table below lists the nine current pre-MDCs.

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

------------------------------------------------------------------------
DRG 103.............. Heart Transplant or Implant of Heart Assist
System.
DRG 480.............. Liver Transplant and/or Intestinal Transplant.
DRG 481.............. Bone Marrow Transplant.
DRG 482.............. Tracheostomy for Face, Mouth, and Neck Diagnoses.
DRG 495.............. Lung Transplant.
DRG 512.............. Simultaneous Pancreas/Kidney Transplant.
DRG 513.............. Pancreas Transplant.
DRG 541.............. ECMO or Tracheostomy with Mechanical Ventilation
96+ Hours or Principal Diagnosis Except for
Face, Mouth, and Neck Diagnosis with Major O.R.
DRG 542.............. Tracheostomy with Mechanical Ventilation 96+
Hours or Principal Diagnosis Except for Face,
Mouth, and Neck Diagnosis without Major O.R.
------------------------------------------------------------------------

Once the MDCs were defined, each MDC was evaluated to identify
those additional patient characteristics that would have a consistent
effect on the consumption of hospital resources. 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).
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 DRG assignment for certain principal diagnoses. An example is
extracorporeal shock wave lithotripsy for patients with a principal
diagnosis of urinary stones.
Once the medical and surgical classes for an MDC were formed, each
diagnosis class was evaluated to determine if complications,
comorbidities, or the patient's age would consistently affect the
consumption of hospital resources. Physician panels classified each
diagnosis code based on whether the diagnosis, when present as a
secondary condition, would be considered a substantial CC. A
substantial CC was defined as a condition which, because of its
presence with a specific principal diagnosis, would cause an increase
in the length of stay by at least one day in at least 75 percent of the
patients. Each medical and surgical class within an MDC was tested to
determine if the presence of any substantial CC would consistently
affect the consumption of hospital resources.
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 a DRG.
After patient information is screened through the MCE and any
further development of the claim is conducted, the cases are classified
into the appropriate DRG by the Medicare GROUPER software program. The
GROUPER program was developed as a means of classifying each case into
a DRG on the basis of the diagnosis and procedure codes and, for a
limited number of DRGs, demographic information (that is, sex, age, and
discharge status).
After cases are screened through the MCE and assigned to a DRG by
the GROUPER, the PRICER software calculates a base DRG payment. The
PRICER calculates the payment for each case covered by the IPPS based
on the DRG relative weight and additional factors associated with each
hospital, such as IME and DSH adjustments. These additional factors
increase the payment amount to hospitals above the base 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 DRG classification
changes and to recalibrate the DRG weights. However, in the FY 2000
IPPS final rule (64 FR 41500), we discussed a process for considering
non-MedPAR data in the recalibration process. 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 depends 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 database should be submitted by early December
for consideration in conjunction with the next year's proposed rule.
In this IPPS proposed rule for FY 2008, we are proposing to adopt
significant changes to the current DRGs. As described in detail below,
we are proposing significant improvement in the DRG system to recognize
severity of illness and resource usage by proposing to adopt Medicare
Severity DRGs (MS-DRGs). The changes we are proposing in this proposed
rule would be reflected in the FY 2008 GROUPER, Version 25.0, and would
be effective for discharges occurring on or after October 1, 2007.
Unless otherwise noted in this proposed rule, our DRG analysis is based
on data from the December 2006 update of the FY 2006 MedPAR file, which
contains hospital bills received through December 31, 2006, for
discharges occurring in FY 2006.
2. Yearly Review for Making DRG Changes
Many of the changes to the DRG classifications we make annually are
the result of specific issues brought to our attention by interested
parties. We encourage individuals with concerns about DRG
classifications to bring those concerns to our attention in a timely
manner 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

[[Page 24690]]

the DRG recalibration process, concerns about DRG classification issues
should be brought to our attention 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 DRGs was, and will likely
continue to be, highly iterative, involving a combination of
statistical results from test data combined with clinical judgment. We
describe in detail below the process we used to develop the proposed
MS-DRGs. In addition, in deciding whether to make further modification
to the proposed MS-DRGs for particular circumstances brought to our
attention, we would consider 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 proposed
MS-DRG. We would evaluate patient care costs using average charges and
lengths of stay as proxies for costs and rely on the judgment of our
medical officers to decide whether patients are clinically distinct or
similar to other patients in the MS-DRG. In evaluating resource costs,
we would consider both the absolute and percentage differences in
average charges between the cases we would select for review and the
remainder of cases in the MS-DRG. We also would consider 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 also would consider the number of patients who will have a
given set of characteristics and generally would prefer not to create a
new DRG unless it would include a substantial number of cases.

C. MedPAC Recommendations for Revisions to the IPPS DRG System

In the FY 2006 and FY 2007 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 and 71 FR 47881 through
47939).
In Recommendations 1-3 in the 2005 Report to Congress on Physician-
Owned Specialty Hospitals, MedPAC recommended that CMS:
Refine the current DRGs to more fully capture differences
in severity of illness among patients.
Base the DRG relative weights on the estimated cost of
providing care.
Base the weights on the national average of the hospital-
specific relative values (HSRVs) for each DRG (using hospital-specific
costs to derive the HSRVs).
Adjust the DRG relative weights to account for differences
in the prevalence of high-cost outlier cases.
Implement the case-mix measurement and outlier policies
over a transitional period.
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). However, based on public comments received on
the FY 2007 IPPS proposed rule, we decided not to adopt the CS DRGs.
Rather, 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 contain 1,666,476 cases and represent a number
of body systems. In creating these 20 new DRGs, we deleted 8 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, 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 CS 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 based on the work that CMS (then HCFA) did in the mid-1990's to
adopt severity DRGs. We describe in detail below the progress we have
made on these two initiatives, our proposed actions for FY 2008, and
our plans for continued analysis of reform of the DRG system for FY
2009. We note that revising the 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 the DSH adjustments. We
discuss these implications in more detail in the following sections.
In the FY 2007 IPPS proposed rule, we discussed MedPAC's
recommendations to move to a cost-based HSRV weighting methodology
beginning with the FY 2007 IPPS proposed rule. Although we proposed to
adopt HSRV weights for FY 2007, we decided not to adopt the proposed
methodology in the final rule after considering the public comments.
Instead, in the FY 2007 IPPS final rule, we adopted a cost-based
weighting methodology without the hospital-specific portion of the
methodology. The cost weights are being adopted over a 3-year
transition period in 1/3 increments between FY 2007 and FY 2009. In
addition, in the FY 2007 IPPS final rule, we indicated our intent to
further study the hospital-specific methodology as well as other issues
brought to our attention with respect to the cost weights. There was
significant concern in the public comments that we account for charge
compression or the practice of applying a higher charge markup over
costs to lower cost than higher cost items and services, if we are to
develop relative weights based on cost. 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 report to determine departmental level cost-to-
charge ratios (CCRs) to apply to charges on the Medicare claims to
determine the cost weights. The commenters were concerned about
potential distortions to the cost 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 to study both charge compression
and to what extent our methodology for calculating DRG relative weights
is affected by inconsistencies between how hospitals report costs and
charges on the cost report and how hospitals report charges on
individual claims. Further, as part of its study of alternative DRG
systems, the

[[Page 24691]]

RAND Corporation is analyzing the HSRV cost-weighting methodology.
As we present below, 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
system that groups cases will always present some opportunities for
providers to specialize in cases they believe to have higher margins,
we believe that the changes we have adopted and the continuing reforms
we are proposing to adopt for FY 2008 will improve payment accuracy and
reduce financial incentives to create specialty hospitals.

D. Refinement of DRGs Based on Severity of Illness

(If you choose to comment on issues in this section, please include
the caption ``DRG Reform and Proposed MS-DRGs'' at the beginning of
your comment.)
For purposes of the following discussions, the term ``CMS DRGs''
means the DRG system we currently use under the IPPS; the term
``Medicare-Severity DRGs (MS-DRGs)'' means the revisions that we are
proposing to make to the current CMS DRGs to better recognize severity
of illness and resource use based on case complexity. Although we have
found the terms ``CMS DRGs'' and ``MS-DRGs'' useful to distinguish the
current DRG system from the DRGs that we are proposing to adopt for FY
2008, we are interested in public comments on how to best refer to both
the current DRGs and the proposed DRGs to avoid confusion and improve
clarity.
1. Evaluation of Alternative Severity-Adjusted DRG Systems
In the FY 2007 IPPS final rule, we stated our intent to engage a
contractor to assist us with an evaluation of alternative DRG systems
that may better recognize severity than the current CMS DRGs. We noted
it was possible that some of the alternative systems would better
recognize severity of illness and are based on the current CMS DRGs. We
further stated that if we were to develop a clinical severity concept
using the current CMS DRGs as the starting point, it was possible that
several of the issues raised by commenters (in response to the CS DRGs,
which, in the FY 2007 IPPS proposed rule, we proposed to adopt for FY
2008 or earlier) would no longer be a concern. We noted that if we were
to propose adoption of severity DRGs for FY 2008, we would consider the
issues raised by commenters on last year's proposed rule as we
continued to make further refinements to account for complexity as well
as severity to better reflect relative resource use. We stated that we
believed it was likely that at least one of several alternative
severity-adjusted DRG systems suggested for review (or potentially a
system we would develop ourselves) would be suitable to achieve our
goal of improving payment accuracy beginning in FY 2008.
On September 1, 2006, we awarded a contract to the RAND Corporation
to perform an evaluation of alternative severity-adjusted DRG
classification systems. RAND is evaluating several alternative DRG
systems based on how well they are suited to classifying and making
payments for inpatient hospital services provided to Medicare patients.
Each system is being assessed on its ability to differentiate among
severity of illness. A final report is due on or before September 1,
2007.
RAND's draft interim report focused on the following criteria:
Severity-adjusted DRG classification systems: --How well
does each classification system explain variation in resource use? --
How would the classification system affect a hospital's patient mix? --
Are the groupings manageable, administratively feasible and
understandable?
Payment accuracy--What are the payment implications of
selected models?
In response to our request, several vendors of DRG systems
submitted their products for evaluation. The following products are
currently being evaluated by RAND:

3M/Health Information Systems (HIS)

CMS DRGs modified for AP-DRG Logic (CMS + AP-DRGs)
Consolidated Severity-Adjusted DRGs (CS DRGs)

Health Systems Consultants (HSC)

Refined DRGs (HSC-DRGs)

HSS/Ingenix

All-Payer Severity DRGs with Medicare modifications (MM-
APS-DRGs)

Solucient

Solucient Refined DRGs (Sol-DRGs)
Vendors submitted their commercial (off-the-shelf) software to RAND
in late September 2006. The five systems were compared to the CMS DRGs
that were in effect as of October 1, 2006 (FY 2007). RAND assigned FY
2004 and FY 2005 Medicare discharges from acute care hospitals to the
FY 2007 CMS DRGs and to each of the alternative severity-adjusted DRG
systems. RAND's initial analysis provided an overview of each
alternative DRG classification system, their comparative performance in
explaining variation in resource use, differences in DRG grouping
logic, and case-mix change.
A Technical Expert Panel comprised of individuals representing
academic institutions, hospital associations, and MedPAC was formed in
October 2006. The members received the preliminary draft report of
RAND's alternative severity-adjusted DRG systems evaluation in early
January 2007. The panel met with RAND and CMS on January 18, 2007, to
discuss the preliminary draft report and to provide additional
comments. RAND incorporated items raised by the panel into its
preliminary draft report and submitted a revised interim report to CMS
in mid-March 2007. CMS posted RAND's interim report on the CMS Web site
in late March 2007. Interested individuals can view RAND's interim
report on the CMS Web site at: http://www.cms.hhs.gov/Reports/downloads/Wynn0307.pdf
.

At this time, RAND has not completed its final evaluation. RAND's
interim report reflects its preliminary evaluation of the alternative
DRG systems using the criteria described above. In the project's second
phase, RAND will continue to evaluate alternative DRG systems as well
as to compare performance using HSRVs. As RAND has not completed its
evaluation of alternative DRG systems, we are not ready at this time to
propose use of one of the alternative DRG systems being evaluated for
Medicare in FY 2008. Further, even if RAND had completed its
evaluation, we would need to explore whether any transition issues
would need to be resolved before we are ready to propose adopting an
alternative DRG system. Among other issues, we would need to evaluate
the legal and contractual issues associated with adopting a proprietary
DRG product. Although vendors for four of the five systems have
indicated a willingness to make their products available in the public
domain, we believe it is likely there would need to be some discussion
as to whether there would be any limitations (such as the source code
as well as the DRG logic) on the availability of the DRG systems to
hospitals or competing vendors. Further, we would need to resolve
contractual issues for updates and maintenance of an alternative DRG
system and consider how they interact with our current ongoing contract
to maintain the CMS DRGs. There may be further system conversion issues
that we have not yet considered. The RAND

[[Page 24692]]

contract will be complete by September 1, 2007. Once RAND completes its
work, we believe we will be in a better position to evaluate whether it
would be appropriate to propose to adopt one of the five alternative
DRG systems for purposes of the IPPS.
As discussed later in this proposed rule, we are proposing to adopt
MS-DRGs beginning with FY 2008. The MS-DRGs are the result of
modifications to the CMS DRGs to better account for severity. While we
are proposing to implement the MS-DRGs on October 1, 2007, we believe
the MS-DRGs should be evaluated by RAND. We have instructed RAND to
evaluate the proposed MS-DRGs using the same criteria that it is
applying to the other DRG systems. As described below, we believe the
proposed MS-DRGs represent a substantial improvement in the recognition
of severity of illness and resource consumption. For this reason, we
are proposing to adopt MS-DRGs for FY 2008.
As stated earlier, a final report is expected from RAND by
September 1, 2007. This report will include further analysis of the
five alternative DRG systems and the additional evaluation of the MS-
DRGs. We look forward to reviewing RAND's final report that will
provide a comprehensive evaluation of each severity DRG system that has
been examined. We anticipate that after this process is completed, we
will have the necessary information to decide our next steps in the
reform of the IPPS. Meanwhile, we are proposing to adopt the MS-DRGs
for FY 2008 and are providing the following update on RAND's progress
in evaluating alternative DRG systems.
We invite public comment regarding RAND's preliminary analysis of
each vendor-supplied alternative severity-adjusted DRG system described
below.
a. Overview of Alternative DRG Classification Systems
Analysis of how each of the five severity-adjusted DRG systems
performs began by using the current CMS DRGs as a baseline. Two of the
five systems (CS DRGs and MM-APS-DRGs) are derivatives of all-patient
severity-adjusted DRG systems that have been modified by their
developers for the Medicare population and two of the systems (HSC-DRGs
and Sol-DRGs) are all-patient systems that incorporate severity levels
into the CMS DRGs. The CMS-AP-DRGs are a combination of CMS DRGs and a
modification for the Medicare population of the major CC severity
groupings used in the AP-DRG system. (The AP-DRG system was developed
by 3M/HIS specifically for the State of New York to capture the non-
Medicare population.)
Table A below shows how each of the five alternative severity-
adjusted systems classifies patients into base DRGs and their
corresponding severity levels.

Table A.--Logic of CMS and Alternative DRG Systems
--------------------------------------------------------------------------------------------------------------------------------------------------------
Classification element CMS DRG CMS+AP-DRG HSC-DRG Sol--DRG MM-APS-DRG Con-APR-DRG
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of MDCs.................. 25................ 25................ 25................ 25................ 25................ 25
Number of Pre-MDC base DRGs..... 9................. 9................. 9................. 9................. 9................. 7
Number of base DRGs............. 379............... 379............... 215 ADRGs......... 248 ADRGs......... 361............... 379
Total number of Pre-MDC DRGs.... 9................. 9................. 30................ 27................ 27................ 9
Total number of DRGs............ 538............... 602............... 1,274............. 1,261............. 915............... 859
Number of CC (severity) 2................. 3................. 3 (medical) or 4 3 (medical) or 4 3................. 4
subclasses. (surgical). (surgical).
CC subclasses................... With CC without CC Without CC With CC No CC, Class C CC, Minor/no Without CC, with Minor, moderate,
for selected base for selected base Class B CC, Class substantial CCs, CC with MCC with major, severe
DRGs. DRGs and With MCC A CC (surgical moderate CCs, some collapsing with some
across DRGs only). MCCs, at base DRG level. collapsing at DRG
within MDC. catastrophic CCs level.
(surgical only).
Multiple CCs recognized......... No................ No................ No................ No................ Yes (in Yes.
computation of
weights.
CC assignment specific to base Mostly no......... Mostly no......... Mostly no......... Mostly no......... No................ Yes.
DRG.
Logic of CC subdivision......... Presence/absence.. Presence/absence.. Presence/absence.. Presence/absence.. Presence/absence.. 18-step process.
Logic of MDC assignment......... Principal Principal Principal Principal Principal Principal
diagnosis. diagnosis. diagnosis. diagnosis. diagnosis. diagnosis with
rerouting.
Death used in DRG assignment.... Yes (in selected Yes (in selected Yes (includes Yes (includes Yes (in selected No.
DRGs). DRGs). ``early death'' ``early death'' DRGs).
DRGs). DRGs).
Complications of care are CCs... Yes............... Yes............... Yes............... Yes............... Yes, when Few.
recognized as a
CC No, when CC
represents ``poor
medical care''.
--------------------------------------------------------------------------------------------------------------------------------------------------------

RAND's preliminary evaluation of the logic for each system
demonstrated the following:
Four systems add severity levels to the base CMS DRGs; the
CS DRGs add severity levels to base APR-DRGs, which are comparable but
not identical to the base CMS DRGs. Both the CS DRGs and MM-APS-DRGs
collapse some base DRGs with low Medicare volume.

[[Page 24693]]

The HSC-DRGs and the Sol-DRGs use uniform severity levels
for each base DRG (three for medical and four for surgical). The
general structure of the MM-APS-DRG logic includes three severity
levels for each base DRG, but some severity levels for the same base
DRG are consolidated to address Medicare low-volume DRGs and
monotonicity issues. Monotonicity is when the average costs for a
severity group consistently rise as the severity level of the group
increases. For example, in a monotonic system, if within a base DRG
there are three severity groups and level 1 severity is less than level
2 severity and level 2 severity is less than level 3 severity, the
average costs for a level 3 case would be greater than the average
costs for a level 2 case, which would be greater than the average costs
for a level 1 case. The general structure of the CS DRGs includes four
severity levels for each base DRG. However, severity level
consolidations occur to address Medicare low-volume DRGs and
monotonicity. The CS DRGs consolidate both adjacent severity levels for
the same base DRG and the same severity level across multiple base DRGs
(especially for severity level 4).
Under the CMS+AP-DRGs and MM-APS-DRGs, each diagnosis is
assigned a uniform CC-severity level across all base DRGs (other than
CCs on the exclusion list for specific principal diagnoses). The
remaining systems assign diagnoses to CC-severity level classifications
by groups of DRGs.
Under the grouping logic used by all systems other than
the CS DRGs, each discharge is assigned to the highest severity level
of any secondary diagnosis. The CS DRGs adjust the initial severity
level assignment based on other factors, including the presence of
additional CCs. None of the other systems adjust the severity level
classification for additional factors or CCs. However, the MM-APS-DRG
system handles additional CCs through an enhanced relative weight.
The HSC-DRGs and the Sol-DRGs have a medical ``early
death'' DRG within each MDC.
The CS DRGs do not use death in the grouping logic. In
addition, most complications of care do not affect the DRG assignment.
b. Comparative Performance in Explaining Variation in Resource Use
In evaluating the comparative performance of each alternative DRG
system, RAND used MedPAR data from FY 2004 and FY 2005. RAND excluded
data from CAHs, Indian Health Service (IHS) hospitals, and hospitals
that have all-inclusive rate charging practices. Consistent with CMS
practice, RAND did not exclude data from Maryland hospitals, which
operate under an IPPS waiver. Records that failed edits for data
consistency or that had missing variables that were needed to determine
standardized costs were also excluded.
RAND reported that evaluation of each alternative severity-adjusted
DRG system is a complex process due to differences in how each of the
severity levels are applied, the number of severity-adjusted DRGs in
each system, and the average number of discharges assigned to each DRG.
In addition, the manner in which the DRGs for patients 0-17 years of
age are assigned in the severity-adjusted systems affects the number of
low-volume DRGs using Medicare discharges.
Low-volume, severity-adjusted DRGs can affect the relative
performance of a classification system. However, the percentage of
Medicare discharges assigned to these DRGs is small--approximately 0.7
percent in the HSC-DRG and Sol-DRG systems compared to 0.1 percent in
the CMS DRGs.
In determining how much within-DRG variation exists for each
alternative severity-adjusted DRG system, RAND calculated the mean
standardized cost, standard deviation, and coefficient of variation for
each DRG among the systems. The coefficient of variation (CV) is the
standard deviation divided by the mean. The CV allowed RAND to compare
the variation of populations that contain significantly different mean
values. Preliminary results of the comparison demonstrate that all five
severity-adjusted systems reduce the amount of variation within DRGs.
The HSC-DRGs and Sol-DRGs have a slightly higher proportion of patients
assigned to DRGs with a CV< 76 percent but also have a higher proportion
of patients assigned to DRGs with a CV>=100 percent. The CS DRGs had a
slightly lower percentage of patients assigned to DRGs with a CV< 76
percent than the other severity-adjusted systems. The MM-APS-DRGs, CS
DRGs, and CMS+AP-DRGs all have fewer than 2 percent of patients
assigned to DRGs with a CV>=100 percent.
RAND utilized a general linear regression model to evaluate how
well each severity-adjusted DRG system explains variation in costs per
case. The initial results demonstrate that all five severity-adjusted
DRG systems predict cost better than the CMS DRGs. The CS DRGs have
higher adjusted R\2\ values (explanatory power) than the other
severity-adjusted systems in nearly every MDC. In general, the adjusted
R\2\ value for the CS DRGs is 0.4458, a 13-percent improvement over the
adjusted R\2\ value for the CMS DRGs. The HSC-DRGs demonstrate an 11-
percent improvement, while the adjusted R\2\ values for the MM-APS-DRGs
and Sol-DRGs are 10.0 percent and 9.7 percent higher respectively, than
the CMS DRG R\2\ value. The CMS+AP-DRGs show the smallest improvement,
nearly 8 percent.
Another aspect of RAND's evaluation was to identify the validity of
each alternative DRG system as a measurement for resource costs. For a
base DRG, the severity levels should be monotonic; that is, the mean
cost per discharge should increase simultaneously with an increase in
the severity level. A distinction between patient groups and varying
treatment costs should be accomplished by the severity levels. RAND
studied the percentage differences and absolute differences in cost
between the severity levels within the base DRGs for each system under
evaluation. For the two systems (CMS+AP-DRGs and CS DRGs) that include
several base DRGs, RAND assigned those discharges to the lower severity
level base DRG. Following that methodology, RAND was able to calculate
how much more costly the discharges assigned to the consolidated or
lower severity levels were than the discharges in the base DRG assigned
to the next higher severity level. Preliminary results demonstrate
that, overall, monotonicity is not a factor across the alternative DRG
systems. There are only a small percentage of discharges that are
assigned to nonmonotonic DRGs. When a DRG is nonmonotonic, the mean
cost in the higher severity level is less than the mean cost in the
lower severity level.
Using the data from severity of illness levels 1 through 3 (except
for the MM-APS-DRGs, which do not have a severity of illness level 3),
RAND calculated the discharge-weighted mean cost difference between
severity levels and the mean ratio of the cost per discharge for the
higher severity level to the adjacent lower severity level. The
greatest cost discrimination was present in the higher severity levels
versus the lower severity levels across all the systems. The mean cost
difference between severity of illness level 1 and severity of illness
level 0 was reported to be less than $2,000 for all the severity-
adjusted systems. The CMS+AP DRGs have the least amount of cost
discrimination between severity levels ($2,117), while the MM-APS-DRG
system has the highest mean cost difference ($2,385). The remaining
systems demonstrated equivalent percentage cost differences between the

[[Page 24694]]

severity levels as shown in Table B below.
BILLING CODE 4120-01-P
[GRAPHIC] [TIFF OMITTED] TP03MY07.000

BILLING CODE 4120-01-C
In examining whether each of the alternative DRG systems provided
stability in the relative weights from year to year, RAND compared the
relative weights derived from the MedPAR data in FY 2004 to the
relative weights data from FY 2005. RAND's preliminary results
demonstrate that generally, across all the systems, only a small
percentage of DRGs had greater than a 5 percent change in relative
weights. The HSC-DRGs and Sol-DRGs had a higher proportion of DRGs with
a greater than 5 percent change in relative weights than the other
systems. Fewer than 10 percent of the DRGs in the remaining systems had
relative weight changes greater than 10 percent. In addition to
differences in the number of DRGs and the methodology of assigning the
severity levels, RAND noted additional factors that may affect the
comparative performance of each alternative severity-adjusted DRG
system. For further details and discussion, we encourage readers to
view RAND's full interim report on the CMS Web site at: http://www.cms.hhs.gov/Reports/downloads/Wynn0307.pdf
.

c. Payment Accuracy and Case-Mix Impact
Similar to how CMS established the relative weights in the FY 2007
IPPS final rule, RAND used standardized costs as determined by the
national CCR and the FY 2005 MedPAR data to construct relative weights
for each of the DRG systems being evaluated. RAND analyzed the effect
of variations in the

[[Page 24695]]

explanatory power on the distribution of Medicare payments for each
system under evaluation. The preliminary findings indicate payment
accuracy is improved by each severity-adjusted system by redistributing
payment from lower-cost discharges to higher-cost discharges. However,
the total payment redistribution across systems differs and reflects
the payment impact of improved explanatory power. Although these
findings are estimates, the percent of total payment redistributed was
the least under the CMS+AP-DRGs (7.1 percent) and the most under the CS
DRGs (11.9 percent).
Table C shows changes in case-mix index (CMI) by hospital category
across alternative severity-adjusted DRG systems. Preliminary results
demonstrate that under the severity-adjusted systems, urban hospitals
have a higher average CMI than under the CMS DRGs, and rural hospitals
have a lower CMI. The analysis suggests that any system adopted to
better recognize severity of illness with a budget neutrality
constraint will result in payment redistribution that can be expected
to benefit urban hospitals at the expense of rural hospitals. This
impact occurs because patients treated in urban hospitals are generally
more severely ill than patients in rural hospitals and the CMS DRGs are
not currently recognizing the full extent of these differences. For
purposes of the study, RAND assumed no behavioral changes in coding
practice or the types of patients treated.
The shift in case-mix (CMI) is greatest with the CS DRGs. The CMI
for rural hospitals is 2.4 percent lower than under the CMS DRGs. The
CMI for large urban (hospitals located in CBSAs with greater than 1
million population) and other urban hospitals is 0.6 percent and 0.1
percent higher, respectively, for the CS DRGs. The CMI generally
increases for larger hospitals and decreases for smaller hospitals.
Under the CMS+AP-DRG, HSC-DRG, and Sol-DRG systems, greater than 70
percent of hospitals would experience less than a 2.5 percent change in
their CMI. Under the MM-APS-DRG and Con-APR-DRG systems, 65 and 45
percent of hospitals, respectively, would experience less than a 2.5
percent change. The percentage of hospitals experiencing less than a 5
percent change is significant across all of the CMS-based DRG systems.
Teaching hospitals commonly treat a higher number of complex cases.
However, depending on the severity-adjusted DRG system being analyzed,
the impact will vary. In the CMS+AP-DRG, HSC-DRG, and MM-APS-DRG
systems, facilities with large teaching programs (100 or more
residents) demonstrated a larger increase than those facilities with
smaller teaching programs. Under the Sol-DRG system, facilities with
large teaching programs would experience a 0.1 percent increase, while
facilities with the smaller teaching programs would experience a 0.2
percent increase. The CS DRGs showed similar results for hospitals with
large teaching programs, but hospitals with the smaller teaching
programs would experience an increase of 0.7 percent, relative to the
CMS DRGs. RAND found that CMI would decline for nonteaching hospitals
from severity adjusted DRGs, from a 0.2 percent decrease under the HSC-
DRGs and Sol-DRGs compared to a 0.5 percent decrease under the CS DRGs.

Table C.--CMI Change in Alternative DRG Systems Relative to the CMS DRG CMI
--------------------------------------------------------------------------------------------------------------------------------------------------------
Percentage change from CMS-DRG-CMI
N N CMS DRG ---------------------------------------------------------
hospitals discharges CMI CMS + AP-
DRG HSC-DRG Sol-DRG MM-APS-DRG Con-APR-DRG
--------------------------------------------------------------------------------------------------------------------------------------------------------
ALL...................................................... 3,890 12,165,763 1.00 0.0 0.0 0.0 0.0 0.0
By Geographic Location:
Large urban areas (pop>1 million).................... 1,485 5,715,356 1.02 0.5 0.4 0.3 0.6 0.6
Other urban areas (pop< 1 million).................... 1,186 4,578,447 1.04 -0.2 -0.2 -0.1 -0.2 0.1
Rural hospitals...................................... 1,219 1,871,960 0.84 -1.3 -0.9 -1.0 -1.4 -2.4
Bed Size (Urban):
0-99 beds............................................ 685 611,139 0.91 -1.0 -1.1 -1.1 -1.3 -1.6
100-199 beds......................................... 875 2,346,922 0.93 0.0 0.1 0.0 0.1 0.0
200-299 beds......................................... 511 2,446,737 1.00 0.1 0.2 0.3 0.3 0.6
300-499 beds......................................... 433 2,965,216 1.08 0.3 0.3 0.3 0.4 0.8
500 or more beds..................................... 167 1,923,789 1.17 0.6 0.3 0.2 0.4 0.4
Bed Size (Rural):
0-49 beds............................................ 543 330,242 0.73 -2.5 -2.1 -2.2 -2.7 -5.0
50-99 beds........................................... 398 595,599 0.80 -1.4 -1.0 -1.1 -1.6 -2.7
100-149 beds......................................... 160 415,367 0.85 -1.1 -0.7 -0.8 -1.2 -2.0
150-199 beds......................................... 69 260,910 0.91 -0.8 -0.6 -0.7 -0.8 -1.5
200 or more beds..................................... 49 269,842 0.99 -0.6 -0.1 -0.1 -0.6 -0.5
Urban by Region:
New England.......................................... 129 541,471 0.99 0.1 -0.2 -0.5 -0.5 -0.6
Middle Atlantic...................................... 370 1,621,488 1.00 0.0 -0.4 -0.5 -0.3 -1.5
South Atlantic....................................... 432 2,208,336 1.04 0.5 0.7 0.7 0.7 1.4
East North Central................................... 410 1,856,164 1.03 0.6 0.7 0.6 0.8 1.5
East South Central................................... 168 696,943 1.06 -0.2 -0.2 -0.2 -0.2 -0.3
West North Central................................... 164 657,322 1.08 -0.3 -0.3 0.0 -0.3 0.3
West South Central................................... 369 1,115,411 1.05 0.1 0.0 0.1 0.3 0.5
Mountain............................................. 153 465,093 1.08 0.4 0.2 0.5 0.4 1.0
Pacific.............................................. 423 1,016,135 1.03 0.0 -0.2 -0.1 -0.1 0.2
Puerto Rico.......................................... 53 115,440 0.87 -1.1 -1.4 -0.1 -1.2 -5.1
Rural by Region:
New England.......................................... 34 49,842 0.90 -0.6 -0.6 -0.5 -1.1 -0.6
Middle Atlantic...................................... 68 139,639 0.85 -1.1 -0.7 -0.7 -1.3 -1.5
South Atlantic....................................... 191 409,116 0.82 -0.8 -0.4 -0.5 -0.9 -1.8
East North Central................................... 163 290,069 0.87 -1.1 -0.7 -0.9 -1.3 -1.8
East South Central................................... 201 328,326 0.82 -1.5 -0.9 -1.1 -1.4 -3.2

[[Page 24696]]

West North Central................................... 184 240,449 0.87 -1.6 -1.2 -1.1 -1.8 -2.5
West South Central................................... 227 266,419 0.80 -2.1 -1.8 -1.9 -2.0 -4.3
Mountain............................................. 91 80,219 0.85 -1.2 -1.0 -0.4 -1.3 -1.2
Pacific.............................................. 60 67,881 0.86 -0.9 -1.0 -1.1 -1.4 -1.6
Teaching Status:
Non-teaching......................................... 2,791 6,115,193 0.92 -0.4 -0.2 -0.2 -0.4 -0.5
Fewer than 100 Residents............................. 853 4,061,451 1.04 0.1 0.2 0.2 0.2 0.7
100 or more Residents................................ 246 1,989,119 1.16 0.8 0.3 0.1 0.5 0.0
Urban DSH:
Non-DSH.............................................. 778 2,574,640 1.02 -0.1 0.0 0.1 -0.2 0.5
100 or more beds..................................... 1,541 7,378,095 1.05 0.3 0.2 0.2 0.4 0.4
Less than 100 beds................................... 352 341,068 0.82 -0.9 -0.8 -1.0 -1.1 -2.0
Rural DSH:
Non-DSH.............................................. 238 300,747 0.87 -1.4 -1.0 -0.9 -1.7 -1.9
SCH.................................................. 402 599,823 0.83 -1.3 -1.0 -1.0 -1.4 -2.4
RRC.................................................. 132 466,395 0.92 -0.8 -0.3 -0.5 -0.7 -1.4
Other Rural:
100 or more beds..................................... 60 135,146 0.80 -0.9 -0.8 -1.2 -1.3 -2.0
Less than 100 beds................................... 387 369,849 0.74 -2.1 -1.6 -1.7 -2.2 -4.3
Urban teaching and DSH:
Both teaching and DSH................................ 829 4,705,476 1.09 0.5 0.3 0.3 0.5 0.5
Teaching and no DSH.................................. 204 1,108,092 1.06 0.0 0.1 0.0 -0.1 0.4
No teaching and DSH.................................. 1,064 3,013,687 0.95 -0.1 0.1 0.0 0.1 0.1
No teaching and no DSH............................... 574 1,466,548 1.00 -0.2 -0.1 0.1 -0.3 0.5
Rural Hospital Types:
RRC.................................................. 145 519,808 0.92 -0.8 -0.4 -0.5 -0.7 -1.4
SCH.................................................. 423 457,119 0.79 -1.6 -1.2 -1.2 -1.7 -3.0
MDH.................................................. 180 164,453 0.75 -2.1 -1.7 -1.7 -2.3 -4.1
SCH and RRC.......................................... 76 266,027 0.92 -0.9 -0.7 -0.7 -1.1 -1.3
MDH and RRC.......................................... 8 19,746 0.85 -1.4 -0.6 -0.8 -1.6 -1.9
Other Rural.......................................... 387 444,807 0.77 -1.6 -1.2 -1.4 -1.8 -3.3
--------------------------------------------------------------------------------------------------------------------------------------------------------

RAND also noted that changes in coding patterns or behaviors could
improve payments with each severity adjusted DRG system. Increases in
CMI after adopting the system could be the result of improved coding
rather than increases in actual patient severity. Although the State of
Maryland's experience using the APR-DRG system is an indicator, coding
behaviors are expected to vary under alternative systems according to
RAND. Therefore, the risk of case-mix growth due to improved
documentation and coding exists with any system. However, RAND advises
that the amount of risk can be assessed based on the logic of the DRG
system and result in anticipated changes in coding behavior. RAND found
that the CMS+AP-DRG system may have the lowest risk of case-mix
increase, while the CS DRGs present the greatest risk. The remaining
systems under evaluation demonstrated equivalent risk, based on the DRG
logic and other features specific to each system.
In section II.D.2.c. of the preamble of this proposed rule, the CMI
impact under the proposed MS-DRGs using the State of Maryland's
experience and data is described in detail. RAND's final report will
include a comparison of the CMI impact under the proposed MS-DRG system
with the CMI impact of the other alternative severity-adjusted DRG
systems.
d. Other Issues for Consideration
RAND was asked to examine whether each of the alternative severity-
adjusted DRG systems under evaluation appear to contain logic that is
manageable, administratively feasible, and understandable. Although its
evaluation is not yet complete, RAND's preliminary results describe the
extent to which those features are present in the grouping logic of
each system. A brief summary of these findings and other discussion
points follow. For more complete details of the grouping logic for each
system evaluated, we encourage readers to review RAND's interim report
at the following Web site: http://www.cms.hhs.gov/Reports/downloads/Wynn0307.pdf
.

To increase and promote understanding of a DRG classification
system, the grouping logic should include a uniform structure. With the
exception of the CS DRGs, RAND found that there is uniformity in the
hierarchical structure for assigning discharges to MDCs, DRGs, and
severity levels for each system evaluated. The CS DRGs utilize a
complex rerouting logic and severity of illness level assignment.
However, the result is a higher explanatory power that accounts for
limitations in the current system. Therefore, due to the complexities
associated with that system, it may not easily be understood. However,
if the results yield clinically coherent groups of patients with
comparable costs, RAND concluded that the system may be worth exploring
further. The HSC-DRG and Sol-DRG grouping logic uses a standard number
of severity levels for each base DRG, although the result is an
increase in the number of low-volume DRGs. The standard severity level
structure provides increased understanding, although as mentioned
previously, low-volume, severity-adjusted DRGs can affect the relative
performance of a classification system. The MM-APS-DRGs and CS DRGs use
standard DRG severity levels. However, the method of collapsing DRGs
varies due to the modifications made for Medicare use. By only
collapsing DRGs to determine relative weights, RAND

[[Page 24697]]

notes it is possible to preserve the underlying DRG structure, which
perhaps would lead to a more understandable system.
As stated earlier, there are also several transition issues that
require attention when evaluating alternative severity-adjusted DRG
systems. In determining how manageable, administratively feasible, and
understandable the systems being evaluated are, consideration should be
given to how they crosswalk or map to the current CMS DRGs. Because
four of the systems under evaluation are based on the underlying CMS
DRG grouping logic to establish their base DRGs (CMS+AP-DRGs, HSC-DRGs,
Sol-DRGs, and MM-APS-DRGs), the CMS DRGs are able to crosswalk smoothly
to these severity-adjusted DRGs. Conversely, crosswalking in reverse or
backward mapping from the CMS+AP DRGs to the CMS DRGs is problematic
due to the discharges in one severity level of the CMS+AP-DRG system
compared to several base CMS DRGs. As expected, the CS DRGs do not
crosswalk easily to the CMS DRGs due to the complex grouping logic. The
MM-APS-DRGs pose unique complications as well due to the large number
(over 1,000) of DRGs.
System updates are another important factor that may have serious
implications. All of the DRG systems RAND evaluated were reported to
make annual updates to reflect ICD-9-CM coding changes. However, the CC
severity level assignments for each system have not routinely been
reviewed and revised. The review of the CC exclusion list and severity
level assignments should be reviewed where appropriate to reflect
current patterns of care, according to RAND.
Accessibility to each of the severity-adjusted DRG system's logic
and software is also a concern. Each system RAND analyzed is currently
maintained as a proprietary product. In general, all of the vendors
indicated a willingness to place their product in the public domain,
under certain terms. As such, we believe it is likely there would need
to be discussion as to whether there would be any limitations (such as
the source code as well as the DRG logic) on the availability of the
DRG systems to hospitals or competing vendors. The intent of each
vendor to provide public access to its grouper logic and software is
described in further detail in RAND's interim report.
The RAND contract will be complete by September 1, 2007. The final
report will include evaluation of the proposed MS-DRGs, with further
analysis of the five alternative severity-adjusted DRG classification
systems. RAND will also study various approaches to estimating costs
and developing relative weights, as well as the payment impacts of
alternative methodologies. Again, we invite public comment on RAND's
preliminary analysis of the alternative severity-adjusted DRG systems.
The interim report can be viewed on the CMS Web site at: http://www.cms.hhs.gov/Reports/downloads/Wynn0307.pdf
.

2. Development of Proposed Medicare Severity DRGs (MS-DRGs)
As discussed previously, we are committed to continuing our efforts
of making refinements to the current CMS DRGs to better recognize
severity of illness. In the FY 2007 final rule, we stated that we had
begun a comprehensive review of over 13,000 diagnosis codes to
determine which codes should be classified as CCs when present as a
secondary diagnosis. We stated that we would also build on the severity
DRG work we performed in the mid-1990's. We received a number of public
comments on last year's proposed rule that supported the refinement of
the current CMS DRGs so that they better capture severity.
We also committed to performing a more broad based analysis of the
entire DRG system to better recognize severity of illness. As a result
of this broad based analysis, we developed the proposed MS-DRGs. The
proposed MS-DRGs represent a comprehensive approach to applying a
severity of illness stratification for Medicare patients throughout the
DRGs. As discussed in section II.D.5. of the preamble of this proposed
rule, the proposed MS-DRGs maintain the significant advancements in
identifying medical technology made to the DRGs in past years. At the
same time, they greatly improve our ability to identify groups of
patients with varying levels of severity using secondary diagnoses.
Further, they improve our ability to assign patients to different DRG
severity levels based on resource use that is independent of the
patient's secondary diagnosis--referred to in this discussion as
``complexity.'' We are proposing to adopt the MS-DRGs for FY 2008 and
submit the system to RAND as part of its evaluation of alternative DRG
systems. We encourage comments on both our proposed methodology as well
as on the resulting proposed DRG structure.
a. Comprehensive Review of the CC List
Our efforts to better recognize severity of illness began with a
comprehensive review of the CC list. Currently, 115 DRGs are split
based on the presence or absence of a CC. For these DRGs, the presence
of a CC assigns the discharge to a higher weighted DRG. The list of
diagnoses designated as a CC was initially created at Yale University
in 1980-1981 as part of the project to develop an ICD-9-CM version of
the DRGs. The researchers at Yale University developed the ICD-9-CM
DRGs using national hospital data with diagnoses and procedures coded
in ICD-9-CM from the second half of 1979. Because hospitals only began
reporting ICD-9-CM codes in 1979, discharge abstracts at that time were
much less likely to fully report all secondary diagnoses. As a result,
the Yale University researchers developed a liberal definition of a CC
as any secondary diagnosis that ``would cause an increase in length of
stay by at least 1 day in at least 75 percent of the patients.''
Because of the likely underreporting of secondary diagnoses in the 1979
data, the Yale University researchers also used age as a surrogate for
identifying patients with a CC. The original version of the ICD-9-CM
DRGs assigned patients to a CC DRG if they had a secondary diagnosis on
the CC list or if the patient was 70 years or older.
With the implementation of the IPPS in FY 1984, the coding of
secondary diagnoses by hospitals dramatically improved. During the
first 4 years of the IPPS, the CC definition included the age 70
criterion. With the improved coding and reporting of diagnoses
associated with the implementation of the IPPS, the use of age as a
surrogate for CCs was no longer necessary. Thus, beginning in FY 1988,
the age 70 criterion was removed from the CC definition and a CC DRG
was defined exclusively by the presence of a secondary diagnosis on the
CC list.
Except for new diagnosis codes that were added to ICD-9-CM after FY
1984 (for example, HIV), the CC list of diagnoses currently used in the
CMS DRGs is virtually identical to the CC list created at Yale
University. However, there have been dramatic changes not only in the
accuracy and completeness of the coding of secondary diagnoses but also
in the characteristics of patients admitted to hospitals and the
practice patterns within hospitals as well.
Since the implementation of the IPPS, Medicare average length of
stay has dropped dramatically from 9.8 days in 1983 to 5.7 days in
2005. The economic incentives inherent in DRGs motivated a change in
practice patterns to discharge patients earlier from the hospital.
These changes were facilitated by the increased av