[Federal Register: May 16, 2003 (Volume 68, Number 95)]
[Proposed Rules]               
[Page 26785-26837]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16my03-29]                         


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Part IV





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Part 412



Medicare Program; Inpatient Rehabilitation Facility Prospective Payment 
System for FY 2004; Proposed Rule


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412

[CMS-1474-P]
RIN 0938-AL95

 
Medicare Program; Inpatient Rehabilitation Facility Prospective 
Payment System for FY 2004

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule updates the prospective payment rates for 
inpatient rehabilitation facilities (IRFs) for Federal fiscal year 2004 
as required under section 1886(j)(3)(C) of the Social Security Act (the 
Act). Section 1886(j)(5) of the Act requires the Secretary of Health 
and Human Services (the Secretary) to publish in the Federal Register 
on or before August 1 before each fiscal year, the classification and 
weighting factors for the IRF case-mix groups and a description of the 
methodology and data used in computing the prospective payment rates 
for that fiscal year. In addition, in this proposed rule, we are 
proposing new policies, and changing or clarifying existing policies 
regarding the prospective payment system (PPS) within the authority 
granted under sections 1886(j) and 1886(d) of the Act.

DATES: We will consider comments if we receive them at the appropriate 
addresses, as provided below, no later than 5 p.m. on July 7, 2003.

ADDRESSES: In commenting, please refer to file code CMS-1474-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission or e-mail.
    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-1474-P, P.O. 
Box 8010, Baltimore, MD 21244-8010.
    Please allow sufficient time for mailed comments to be timely 
received in the event of delivery delays. If you prefer, you may 
deliver (by hand or courier) your written comments (one original and 
two copies) to one of the following addresses: Room 445-G, Hubert H. 
Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201, 
or Room C5-14-03, 7500 Security Boulevard, Baltimore, MD 21244-1850.
    (Because access to the interior of the HHH Building is not readily 
available to persons without Federal Government identification, 
commenters are encouraged to leave their comments in the CMS drop slots 
located in the main lobby of the building. A stamp-in clock is 
available for persons wishing to retain a proof of filing by stamping 
in and retaining an extra copy of the comments being filed.) Comments 
mailed to the addresses indicated as appropriate for hand or courier 
delivery may be delayed and could be considered late.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Robert Kuhl, (410) 786-4597, Pete Diaz 
(410) 786-1235 or Nora Hoban, (410) 786-0675.

SUPPLEMENTARY INFORMATION: Inspection of Public Comments: Comments 
received timely will 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 & 
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Table of Contents

I. Background
    A. Requirements for Updating the Prospective Payment Rates for 
Inpatient Rehabilitation Facilities (IRFs)
    B. General Overview of the Current IRF PPS
    C. Operational Overview of the Current IRF PPS
    D. Proposals for FY 2004
II. Requirements and Conditions for Payment Under the IRF PPS
    A. Background of Subpart B Provisions
    B. Regulatory Background of the 75 Percent Rule
    C. CMS Evaluation of the 75 Percent Rule
III. Research to Support Case-Mix Refinements to the IRF PPS
    A. Research on IRFs
    B. RAND Research Background
    C. Data for Continuing Research
    D. Staff Time Measurement Data
    E. Monitoring
    F. Need to Develop Quality Indicators for IRFs
IV. The IRF PPS Patient Assessment Process
    A. Background
    B. Patient Rights
    C. When the IRF-PAI Must Be Completed
    D. Transmission of IRF-PAI Data
    E. Proposed Revision of the Definition of Discharge
    F. Waiver of the Penalty for Transmitting the IRF-PAI Data Late
    G. General Information Regarding the IRF-PAI Assessment Process
V. Patient Classification System for the IRF PPS
VI. Proposed Fiscal Year 2004 Federal Prospective Payment Rates
    A. Expiration of the IRF PPS Transition Period
    B. Description of the Proposed IRF Standardized Payment Amount
    C. Proposed Adjustments to Determine the Proposed FY 2004 
Standard Payment Conversion Factor
    1. IRF Market Basket Index
    2. Proposed Area Wage Adjustment
    3. Updated Wage Data
    4. Proposed Updated Labor-Related Share
    5. Proposed Budget Neutral Wage Adjustment Update Methodology
    D. Proposed Update of Payment Rates Under the IRF PPS for FY 
2004
    E. Examples of Computing the Total Proposed Adjusted IRF 
Prospective Payments
    F. Computing Total Payments Under the IRF PPS for the Transition 
Period
    G. IRF-specific Wage Data
    H. Proposed Adjustment for High-Cost Outliers under the IRF 
Prospective Payment System
    1. Current Outlier Payment Provision under the IRF PPS
    2. Proposed Changes to the IRF Outlier Payment Methodology
    3. Proposed Adjustment to IRF Outlier Payments
    4. Proposed Change to the Methodology for Calculating the 
Federal Prospective Payment Rates
VII. Provisions of the Proposed Rule
VIII. Collection of Information Requirements
IX. Responses to Comments
X. Regulatory Impact Analysis Regulations Text

Addendum--Tables

1--Proposed Relative Weights for Case-Mix Groups (CMGs)

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2--Proposed Fiscal Year 2004 Federal Prospective Payments for Case-
Mix Groups (CMGs)
3A--Proposed Urban Wage Index
3B--Proposed Rural Wage Index
4--Acceptable Impairment Group Codes
5--Acceptable ICD-9-CM Codes

Addendum--Charts

1--Estimates on Compliance With the 75 Percent Rule (2002 Data)
2--Example of Applying The Patient Assessment Instrument Discharge 
Assessment and Transmission Dates
3--Excluded Hospital With Capital Input Price Index (FY 1992 and 
Proposed FY 1997) Structure and Weights
4--Proposed Excluded Hospital with Capital Input Price Index (FY 
1997) Vintage Weights
5--Percent Changes in the 1992-based and proposed 1997-based 
Excluded Hospital with Capital Market Baskets, FY 1999-2004
6--Proposed FY 2004 Labor-Related Share Relative Importance
7--Examples of Computing an IRF's Proposed Federal Prospective 
Payment
8--Projected Impact of Proposed FY 2004 Update

Appendix

Appendix A--Methodology to Determine Compliance With the 75 Percent 
Rule
Appendix B--Inpatient Rehabilitation Facility Patient Privacy Forms 
Privacy Act Statement--Health Care Records, Data Collection 
Information Summary for Patients in Inpatient Rehabilitation 
Facilities

I. Background

A. Requirements for Updating the Prospective Payment Rates for 
Inpatient Rehabilitation Facilities (IRFs)

    On August 7, 2001, we published a final rule entitled ``Medicare 
Program; Prospective Payment System for Inpatient Rehabilitation 
Facilities (CMS-1069-F)'' in the Federal Register (66 FR 41316), that 
established a PPS for IRFs as authorized under section 1886(j) of the 
Act and codified at subpart P of part 412 of the Medicare regulations. 
In the August 7, 2001 final rule, we set forth per discharge Federal 
prospective payment rates for fiscal year (FY) 2002 that provided 
payment for inpatient operating and capital costs of furnishing covered 
rehabilitation services (that is, routine, ancillary, and capital 
costs) but not costs of approved educational activities, bad debts, and 
other services or items that are outside the scope of the IRF PPS. The 
provisions of that final rule were effective for cost reporting periods 
beginning on or after January 1, 2002. (On July 1, 2002, we also 
published a correcting amendment to the final rule (CMS-1069-F2) in the 
Federal Register (67 FR 44073). Any reference to the August 7, 2001 
final rule in this proposed rule includes the provisions effective in 
the correcting amendment.)
    Section 1886(j)(5) of the Act and Sec.  412.628 of the regulations 
require the Secretary to publish in the Federal Register, on or before 
August 1 of the preceding fiscal year, the classifications and 
weighting factors for the IRF case-mix groups (CMGs) and a description 
of the methodology and data used in computing the prospective payment 
rates for the upcoming fiscal year. On August 1, 2002, we published a 
notice in the Federal Register (67 FR 49928) to update the IRF Federal 
prospective payment rates from FY 2002 to FY 2003 using the methodology 
described in Sec.  412.624 of the regulations. As stated in that 
notice, we used the same classifications and weighting factors for the 
IRF CMGs that were set forth in the August 7, 2001 final rule to update 
the IRF Federal prospective payment rates from FY 2002 to FY 2003. The 
FY 2003 Federal prospective payment rates are effective for discharges 
on or after October 1, 2002 and before October 1, 2003.
    In this proposed rule, we are proposing to update the IRF Federal 
prospective payment rates from FY 2003 to FY 2004 using the methodology 
described in Sec.  412.624 of the regulations. See section VI of this 
proposed rule for further discussion of the proposed FY 2004 Federal 
prospective payment rates. The proposed FY 2004 Federal prospective 
payment rates will be effective for discharges on or after October 1, 
2003 and before October 1, 2004.

B. General Overview of the Current IRF PPS

    Section 4421 of the Balanced Budget Act of 1997 (BBA) (Pub. L. 105-
33), as amended by section 125 of the Medicare, Medicaid, and SCHIP 
Balanced Budget Refinement Act of 1999 (BBRA) (Pub. L. 106-113), and by 
section 305 of the Medicare, Medicaid, and SCHIP Benefits Improvement 
and Protection Act of 2000 (BIPA) (Pub. L. 106-554), provides for the 
implementation of a per discharge PPS, through new section 1886(j) of 
the Act, for inpatient rehabilitation hospitals and inpatient 
rehabilitation units of a hospital (IRFs). Payments under the IRF PPS 
encompass inpatient operating and capital costs of furnishing covered 
rehabilitation services (that is, routine, ancillary, and capital 
costs) but not costs of approved educational activities, bad debts, and 
other services or items outside the scope of the IRF PPS. Although a 
complete discussion of the IRF PPS provisions appears in the August 7, 
2001 final rule (66 FR 41316), we provide below a general description 
of the IRF PPS.
    The IRF PPS, as described in the August 7, 2001 final rule, uses 
Federal prospective payment rates across 100 distinct CMGs. Ninety-five 
CMGs were constructed using rehabilitation impairment categories, 
functional status (both motor and cognitive), and age (in some cases, 
cognitive status and age may not be a factor in defining a CMG). Five 
special CMGs were constructed to account for very short stays and for 
patients who expire in the IRF.
    For each of the CMGs, we developed relative weighting factors to 
account for a patient's clinical characteristics and expected resource 
needs. Thus, the weighting factors account for the relative difference 
in resource use across all CMGs. Within each CMG, the weighting factors 
were ``tiered'' based on the estimated effect that the existence of 
certain comorbidities have on resource use.
    The Federal PPS rates were established using a standardized payment 
amount (also referred to as the budget neutral conversion factor in the 
August 7, 2001 final rule (66 FR 41364 through 41367)). For each of the 
tiers within a CMG, the relative weighting factors were applied to the 
budget neutral conversion factor to compute the unadjusted Federal 
prospective payment rates. Adjustments that account for geographic 
variations in wages (wage index), the percentage of low-income patients 
(LIPs), and location in a rural area would be applied to the IRF's 
unadjusted Federal prospective payment rates. In addition, adjustments 
would be made to account for the early transfer of a patient, 
interrupted stays, and high cost outliers.
    Lastly, the IRF's final prospective payment amount would be 
determined under the transition methodology prescribed in section 
1886(j) of the Act. Specifically, for cost reporting periods that began 
on or after January 1, 2002 and before October 1, 2002, section 
1886(j)(1) of the Act and Sec.  412.626 of the regulations provide that 
IRFs transition into the prospective payment systems receiving a 
``blended payment.'' For cost reporting periods that began on or after 
January 1, 2002 and before October 1, 2002, these blended payments 
consisted of 66\2/3\ percent of the Federal IRF PPS rate and 33\1/3\ 
percent of the payment that the IRF would have been paid had the IRF 
PPS not been implemented. However, during the transition period, an IRF 
with a cost reporting period beginning on or after January 1, 2002 and 
before October 1, 2002 could have elected to bypass this blended 
payment

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and be paid 100 percent of the Federal IRF PPS rate. For cost reporting 
periods beginning on or after October 1, 2002 (FY 2003), however, the 
transition methodology expired, and payments for all IRFs consist of 
100 percent of the Federal IRF PPS.
    We established a CMS website that contains useful information 
regarding the IRF PPS. The website URL is www.cms.hhs.gov/providers/irfpps/default.asp
 and may be accessed to download or view 
publications, software, and other information pertinent to the IRF PPS.

C. Operational Overview of the Current IRF PPS

    As described in the August 7, 2001 final rule, upon the admission 
and discharge of a Medicare Part A fee-for-service patient, the IRF is 
required to complete the appropriate sections of a patient assessment 
instrument, the Inpatient Rehabilitation Facility--Patient Assessment 
Instrument (IRF-PAI). All required data must be electronically encoded 
into the IRF's PAI software product. Generally, the software product 
includes patient grouping programming called the GROUPER software. The 
GROUPER software uses specific PAI data elements to classify (or group) 
the patient into a distinct CMG and account for the existence of any 
relevant comorbidities. The GROUPER software produces a 5-digit CMG 
number. The first digit is an alpha-character that indicates the 
comorbidity tier. The last 4 digits represent the distinct CMG number. 
(Free downloads of the Inpatient Rehabilitation Validation and Entry 
(IRVEN) software product, including the GROUPER software, are available 
at the CMS website at www.cms.hhs.gov/providers/irfpps/default.asp).
    Once the patient is discharged, the IRF completes the Medicare 
claim (UB-92 or its equivalent) using the 5-digit CMG number and sends 
it to the appropriate Medicare fiscal intermediary (FI). (Claims 
submitted to Medicare must comply with the electronic claim 
requirements contained at www.cms.hhs.gov/providers/edi/default.asp, as 
reported in the Health Insurance Portability and Accountability Act 
(HIPAA) program claim memoranda issued by CMS and also published at 
that web site, and as listed in the addenda to the Medicare 
Intermediary Manual, Part 3, section 3600. Instructions for the limited 
number of claims submitted to Medicare on paper are located in section 
3604 of Part 3 of the Medicare Intermediary Manual.) The Medicare FI 
processes the claim through its software system. This software system 
includes pricing programming called the PRICER software. The PRICER 
software uses the CMG number, along with other specific claim data 
elements and provider-specific data, to adjust the IRF's prospective 
payment for interrupted stays, transfers, short stays, and deaths and 
then applies the applicable adjustments to account for the IRF's wage 
index, percentage of LIPs, rural location, and outlier payments.

D. Proposals for FY 2004

    In this proposed rule, we are proposing to update the data used to 
compute the IRF wage indices. In the August 7, 2001 final rule, we used 
FY 1997 acute care hospital wage data to compute the IRF wage indices 
for FY 2002. The August 1, 2002 notice that set forth the updated FY 
2003 IRF Federal prospective payment rates also used 1997 acute care 
hospital wage data to compute the FY 2003 IRF wage indices.
    In this proposed rule, we are proposing to update the IRF wage 
indices for FY 2004 by using FY 1999 acute care hospital data. We 
believe that the FY 1999 acute care hospital data are the best 
available because they are currently the most recent complete final 
data. However, any adjustments or updates made under section 1886(j)(6) 
of the Act must be made in a budget neutral manner. Therefore, in 
section VI of this proposed rule, we are proposing a methodology to 
update the wage indices for FY 2004 using 1999 acute care hospital data 
in a budget neutral manner.
    In this proposed rule, we are also proposing to update the 
underlying data used to compute the IRF market basket index. As 
explained in Appendix D of the August 7, 2001 final rule, we used 1992 
cost report data as the underlying data to develop the excluded 
hospital with capital market basket that formed the basis of the FY 
2002 and FY 2003 IRF market basket index. In section VI of this 
proposed rule, we are proposing to use 1997 cost report data, the most 
recent data available, to form the basis of the FY 2004 IRF market 
basket index.
    In section II of this proposed rule, we are proposing to modify or 
clarify certain criteria for a hospital or a hospital unit to be 
classified as an IRF. As stated in the August 7, 2001 final rule, we 
did not change the survey and certification procedures applicable to 
entities seeking classification as an IRF. Currently, to be paid under 
the IRF PPS, a hospital or unit of a hospital must first be deemed to 
be excluded from the diagnosis-related group (DRG)-based acute care 
hospital PPS under the general requirements in subpart B of part 412 of 
the regulations. Second, the excluded hospital or unit must meet the 
conditions for payment under the IRF PPS at Sec.  412.604 of the 
regulations.
    Lastly, we are proposing, in various sections of this proposed 
rule, to modify or clarify existing provisions of the IRF PPS. However, 
we are not proposing refinements to the FY 2002 case-mix classification 
system (the CMGs and the corresponding relative weights) and the case-
level and facility-level adjustments, due to the lack of available data 
to make such changes.

II. Requirements and Conditions for Payment Under the IRF PPS

    As issued in the August 7, 2001 final rule, Sec.  412.604 
``Conditions for payment under the prospective payment system for 
inpatient rehabilitation facilities'' describes the conditions that 
must be met for an IRF to be paid under the IRF PPS. Section 412.604(a) 
states the general requirements for payment to be made under the IRF 
PPS and the effects on Medicare payment if the conditions described 
therein are not met. Section 412.604(b) states the existing regulatory 
provisions that must be met for a hospital or unit of a hospital to be 
excluded from the acute care inpatient hospital PPS and to be 
classified as an IRF. Section 412.604(c) requires an IRF to complete a 
patient assessment instrument for each Medicare Part A fee-for-service 
patient admitted. Section 412.604(d) describes the limitations on IRFs 
for charging beneficiaries that receive Medicare covered services. 
Section 412.604(e) describes the requirements associated with 
furnishing inpatient hospital services directly or under arrangement. 
Section 412.604(f) states the reporting and recordkeeping requirements 
that IRFs must meet.
    In this section of the proposed rule, we describe proposed changes, 
if any, to the conditions or underlying requirements of Sec.  412.604.

Section 412.604(a) General Requirements

    Under paragraph (a)(2), we propose to change the word ``we'' to 
``CMS or its Medicare fiscal intermediary'' to read as follows:
    ``If an inpatient rehabilitation facility fails to comply fully 
with these conditions with respect to inpatient hospital services 
furnished to one or more Medicare Part A fee-for-service beneficiaries, 
CMS or its Medicare fiscal intermediary may, as appropriate--
    (i) Withhold (in full or in part) or reduce Medicare payment to the 
inpatient rehabilitation facility until the facility provides adequate 
assurances of compliance; or

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    (ii) Classify the inpatient rehabilitation facility as an inpatient 
hospital that is subject to the conditions of subpart C of this part 
and is paid under the prospective payment systems specified in Sec.  
412.1(a)(1).''

Section 412.604(b) Inpatient Rehabilitation Facilities Subject to the 
Prospective Payment System

    Section 412.604(b) states that, ``subject to the special payment 
provisions of Sec.  412.22(c), an inpatient rehabilitation facility 
must meet the general criteria set forth in Sec.  412.22 and the 
criteria to be classified as a rehabilitation hospital or 
rehabilitation unit set forth in Sec.  412.23(b), Sec.  412.25, and 
Sec.  412.29 for exclusion from the inpatient hospital prospective 
payment systems specified in Sec.  412.1(a)(1).'' The general criteria 
set forth in Sec.  412.22 and the criteria to be classified as a 
rehabilitation hospital or rehabilitation unit set forth in Sec.  
412.23(b), Sec.  412.25, and Sec.  412.29 are under subpart B of part 
412 of the regulations. In the August 7, 2001 final rule implementing 
the IRF PPS, we did not make any changes to the exclusion criteria and 
requirements to be classified as an IRF under subpart B of part 412. 
Since the implementation of the IRF PPS, a number of questions have 
been raised on the application of some of these requirements and the 
necessity of other criteria. Below, we will discuss each requirement as 
it relates to the classification of an IRF.

A. Background of Subpart B Provisions

    Section 601 of the Social Security Amendments of 1983 (Pub. L. 98-
21) added section 1886 to the Act that established a PPS for acute care 
inpatient hospital services for cost reporting periods beginning on or 
after October 1, 1983. Under section 1886(d)(1)(B) of the Act, several 
types of hospitals and units of hospitals are excluded from the 
inpatient hospital PPS. Sections 1886(d)(1)(B)(ii) and 1886(d)(1)(B) of 
the Act specify that rehabilitation hospitals and rehabilitation units 
of hospitals (as defined by the Secretary) are excluded from the 
inpatient PPS.
    Extensive discussion and public comments on developing the criteria 
under which a hospital or unit of a hospital can be excluded from the 
inpatient PPS as an IRF began with the September 1, 1983 publication of 
the interim final rule with comment period in the Federal Register (48 
FR 39752). (That interim final rule discussed the provisions necessary 
to implement section 1886 of the Act.) On January 3, 1984, we published 
a final rule (49 FR 234) that responded to public comments on the 
provisions of the September 1, 1983 interim final rule and established 
the initial set of criteria that must be met by a hospital or unit of a 
hospital seeking exclusion from the inpatient hospital PPS as an IRF. 
Since the publication of these earlier rules, the criteria to be an IRF 
have been revised and codified at subpart B of part 412 of the current 
Medicare regulations.

Section 412.20 Hospital Services Subject to the Prospective Payment 
Systems

    In the August 7, 2001 final rule, we added Sec.  412.20(b) stating 
that covered inpatient hospital services furnished to Medicare 
beneficiaries by a rehabilitation hospital or rehabilitation unit that 
meet the conditions of Sec.  412.604 are paid under the PPS described 
in subpart P of this part.
    In this proposed rule, we are proposing to redesignate current 
Sec.  412.20(b) as paragraph (b)(1) of Sec.  412.20 and add paragraph 
(b)(2) to ensure that inpatient hospital services will not be paid 
under the IRF PPS if the services are paid by a health maintenance 
organization (HMO) or competitive medical plan (CMP) that elects not to 
have CMS make payments to an IRF for services, which are inpatient 
hospital services, furnished to the HMO's or CMP's Medicare enrollees 
under part 417 of this chapter. This proposed provision is similar to 
the provision at Sec.  412.20(b)(3) that prohibits payments under the 
acute care hospital PPS for similar HMO or CMP services.

Section 412.22 Excluded Hospitals and Hospital Units: General Rules

    Section 412.22(h) describes the requirements to be a satellite 
facility that is excluded from the acute care hospital PPS. The 
following describes our proposal to eliminate the provision that limits 
the bed size of a satellite IRF.
    In the July 30, 1999 Federal Register (64 FR 41540), we revised 
Sec.  412.22(h) to require that in order to be excluded from the acute 
care hospital inpatient PPS, a satellite of a hospital: (1) Effective 
for cost reporting periods beginning on or after October 1, 2002, is 
not under the control of the governing body or chief executive officer 
of the hospital in which it is located, and furnishes inpatient care 
through the use of medical personnel who are not under the control of 
the medical staff or chief medical officer of the hospital in which it 
is located; (2) must maintain admission and discharge records that are 
separately identified from those of the hospital in which it is located 
and are readily available; (3) cannot commingle beds with beds of the 
hospital in which it is located; (4) must be serviced by the same FI as 
the hospital of which it is a part; (5) must be treated as a separate 
cost center of the hospital of which it is a part; (6) for cost 
reporting and apportionment purposes, must use an accounting system 
that properly allocates costs and maintains adequate data to support 
the basis of allocation; and (7) must report costs in the cost report 
of the hospital of which it is a part, covering the same fiscal period 
and using the same method of apportionment as the hospital of which it 
is a part. In addition, the satellite facility must independently 
comply with the qualifying criteria for exclusion from the acute care 
hospital inpatient PPS. Lastly, the total number of State-licensed and 
Medicare-certified beds (including those of the satellite facility) for 
a hospital (other than a children's hospital) that was excluded from 
the acute care hospital inpatient PPS for the most recent cost 
reporting period beginning before October 1, 1997, may not exceed the 
hospital's number of beds on the last day of that cost reporting 
period.
    In Sec.  412.22(h)(1), we define a satellite as ``a part of a 
hospital that provides inpatient services in a building also used by 
another hospital, or in one or more entire buildings located on the 
same campus as buildings used by another hospital.'' Satellite 
arrangements exist when an existing hospital that is excluded from the 
acute care hospital inpatient PPS and that is either a freestanding 
hospital or a hospital-within-a-hospital under Sec.  412.22(e) shares 
space in a building or on a campus occupied by another hospital in 
order to establish an additional location for the excluded hospital. 
The July 30, 1999 acute care hospital inpatient PPS final rule (64 FR 
41532-41534) includes a detailed discussion of our policies regarding 
Medicare payments for satellite facilities of hospitals excluded from 
the acute care hospital inpatient PPS.
    In accordance with section 1886(b) of the Act, as amended by 
sections 4414 and 4416 of Pub. L. 105-33, we established two different 
target limits on payments to excluded hospitals, depending upon when 
the IRF was established. The target amount limit for an IRF with a cost 
reporting period beginning before October 1, 1997 was set at the 75th 
percentile of the target amounts of IRFs, as specified in Sec.  
413.40(c)(4)(iii), updated to the applicable cost reporting period. For 
IRFs with a cost reporting period beginning on or after October 1, 
1997, under section 4416 of Pub. L. 105-33, the payment amount for the 
hospital's

[[Page 26790]]

first two 12-month cost reporting periods, as specified at Sec.  
413.40(f)(2)(ii)(A) and (B), could not exceed 110 percent of the 
national median of target amounts of IRFs for cost reporting periods 
ending during FY 1996, updated by the hospital market basket increase 
percentage to the first cost reporting period in which the IRF receives 
payment.
    Because we were concerned that a number of pre-1997 excluded 
hospitals (including IRFs), governed by Sec.  413.40(c)(4)(iii), would 
seek to create satellite arrangements in order to avoid the effect of 
the lower payment caps that would apply to new hospitals under Sec.  
413.40(f)(2)(ii), we established rules regarding the exclusion of and 
payments to satellites of existing facilities. If the number of beds in 
the hospital or unit (including both the base hospital or unit and the 
satellite location) exceeds the number of State-licensed and Medicare-
certified beds in the hospital or unit on the last day of the 
hospital's or unit's last cost reporting period beginning before 
October 1, 1997, the facility would be paid under the acute care 
hospital inpatient DRG system. Therefore, while an excluded hospital or 
unit could ``transfer'' bed capacity from a base facility to a 
satellite, if it increased total bed capacity beyond the level it had 
in the most recent cost reporting period before October 1, 1997 (see 64 
FR 41532-41533, July 30, 1999), the hospital will not be paid as a 
hospital excluded from the acute care hospital inpatient PPS. However, 
no similar limitation was imposed with respect to the number of total 
beds in excluded hospitals and units and satellite facilities of those 
excluded hospitals and units established after October 1, 1997, since 
those excluded hospitals and units were subject to the lower payment 
limits of section 4416 of Pub. L. 105-33, and would, therefore, not 
benefit from the higher payment cap on target amounts under Sec.  
413.40(c)(4) by creating a satellite facility.
    On March 22, 2002, we published a proposed rule in the Federal 
Register (67 FR 13416) that set forth the proposed Medicare PPS for 
long-term care hospitals (LTCHs). Discussion of the comments received 
on that LTCH proposed rule and our responses were published in a final 
rule on August 30, 2002 Federal Register (67 FR 55954). Specific 
comments received were discussed on page 56013 of the LTCH final rule 
that urged us to eliminate the bed-number criteria in Sec.  
412.22(h)(2)(i) for pre-1997 IRFs since the applicable PPS is fully 
phased in. The rationale for the bed-number criteria provision at Sec.  
412.22(h)(2)(i) was the potential for circumventing the PPS by creating 
a satellite location that could have their payment based on a higher 
TEFRA target amount cap. However, once an IRF's payment under the IRF 
PPS does not include a TEFRA-based payment (referred to as the 
facility-specific payment under the transition period described in 
Sec.  412.626) and is based on 100 percent of the Federal prospective 
payment rate, we believe that the need for the bed-number criteria does 
not exist because IRF prospective payments will be the same regardless 
of when the IRF was established. Because all IRFs will be paid 100 
percent of the proposed FY 2004 Federal prospective payment rates, we 
are proposing to eliminate the bed-number criteria by amending Sec.  
412.22(h) for freestanding satellite IRFs. We are also proposing to 
eliminate the bed-number criteria for IRF satellite units of a hospital 
by amending Sec.  412.25(e) to conform with the proposed change in 
Sec.  412.22(h).

Section 412.23 Excluded Hospitals: Classifications

Classification as an IRF--``The 75 Percent Rule''
    Under the Sec.  412.23(b)(2) of the regulations, a facility may be 
classified as an IRF if it can show that during its most recent 12-
month cost reporting period it served an inpatient population of whom 
at least 75 percent required intensive rehabilitation services for the 
treatment of one or more of the following conditions:
    1. Stroke.
    2. Spinal cord injury.
    3. Congenital deformity.
    4. Amputation.
    5. Major multiple trauma.
    6. Fracture of femur (hip fracture).
    7. Brain injury.
    8. Polyarthritis, including rheumatoid arthritis.
    9. Neurological disorders, including multiple sclerosis, motor 
neuron diseases, polyneuropathy, muscular dystrophy, and Parkinson's 
disease.
    10. Burns.
    Under Sec.  412.604(b), the requirement at Sec.  412.23(b)(2) must 
be met as one of the conditions for payment under the IRF PPS. However, 
even before the implementation of the IRF PPS, the rehabilitation 
industry expressed an interest in having CMS re-examine the regulatory 
criteria used to determine the classification of a unit or hospital as 
an IRF. Recently this interest has focused on the regulatory 
requirement at Sec.  412.23(b)(2) commonly known as the ``75 Percent 
Rule.''

B. Regulatory Background of the 75 Percent Rule

    We initially stipulated the ``75 percent'' requirement in the 
September 1, 1983, interim final rule with comment period entitled 
``Medicare Program; Prospective Payments for Medicare Inpatient 
Hospital Services'' (48 FR 39752). That rule implemented the Social 
Security Amendments of 1983 (Pub. L. 98-21), changing the method of 
payment for inpatient hospital services from a cost-based, 
retrospective reimbursement system to a diagnosis specific PPS. 
However, the rule stipulated that in accordance with sections 
1886(d)(1)(B) and 1886(d)(1)(B)(ii) of the Act both a rehabilitation 
unit, which is a distinct part of a hospital, and a rehabilitation 
hospital were excluded from the inpatient hospital PPS. We noted that 
sections 1886(d)(1)(B) and 1886(d)(1)(B)(ii) of the Act also gave the 
Secretary discretion in defining what is a ``rehabilitation unit'' and 
a ``rehabilitation hospital.''
    In order to define a rehabilitation hospital we consulted with the 
Joint Commission on Accreditation of Hospitals (JCAH), and other 
accrediting organizations. (JCAH is currently known as the Joint 
Commission on Accreditation of Hospital Organizations.) The criteria we 
included in our definition of a rehabilitation hospital incorporated 
some of the accreditation requirements of these organizations. The 
definition also included other criteria, which we believed 
distinguished a rehabilitation hospital from a hospital that furnished 
general medical and surgical services as well as some rehabilitation 
services. One criterion was that ``The hospital must be primarily 
engaged in furnishing intensive rehabilitation services as demonstrated 
by patient medical records showing that, during the hospital's most 
recently completed 12-month cost reporting period, at least 75 percent 
of the hospital's inpatients were treated for one or more conditions 
specified in these regulations that typically require intensive 
inpatient rehabilitation.'' (48 FR 39756) This requirement was 
originally specified in Sec.  405.471(c)(2)(ii) of the regulations. We 
included this requirement, as a defining feature of a rehabilitation 
hospital, because we believed ``that examining the types of conditions 
for which a hospital's inpatients are treated, and the proportion of 
patients treated for conditions that typically require intensive 
inpatient rehabilitation, will help distinguish those hospitals in 
which the provisions of rehabilitation

[[Page 26791]]

services is a primary, rather than a secondary, goal.'' (48 FR 39756) 
Using a similar line of reasoning, we made compliance with the 75 
percent rule one of the characteristics that defined a rehabilitation 
unit.
    The original medical conditions specified in Sec.  
405.471(c)(2)(ii) were stroke, spinal cord injury, congenital 
deformity, amputation, major multiple trauma, fracture of femur (hip 
fracture), brain injury, and polyarthritis, including rheumatoid 
arthritis. This list of 8 medical conditions was partly based upon the 
information contained in a document entitled ``Sample Screening 
Criteria for Review of Admissions to Comprehensive Medical 
Rehabilitation Hospitals/Units.'' This document was a product of the 
Committee on Rehabilitation Criteria for PSRO of the American Academy 
of Physical Medicine and Rehabilitation and the American Congress of 
Rehabilitation Medicine. In addition, we received input from with the 
National Association of Rehabilitation Facilities, and the American 
Hospital Association.
    On January 3, 1984, we published a final rule entitled ``Medicare 
Program; Prospective Payment for Medicare Inpatient Hospital Services'' 
(49 FR 234). On page 240 of that final rule, we summarized comments 
that requested inclusion of neurological disorders, burns, chronic 
pain, pulmonary disorders, and cardiac disorders in the 75 percent 
rule's list of medical conditions. Our analysis of these comments led 
us to agree that neurological disorders (including multiple sclerosis, 
motor neuron diseases, polyneuropathy, muscular dystrophy, and 
Parkinson's disease) and burns should be added to the 75 percent rule's 
original list of 8 medical conditions. (49 FR 240) We did not agree 
with comments that we lower from 75 to 60 the percentage of patients 
that must meet one of the medical conditions. Nor did we agree with 
comments urging us to use IRF resource consumption, instead of a 
percentage of patients that must have one or more of the specified 
medical conditions, to help define what is an IRF. (49 FR 239-240) We 
also rejected suggestions, which proposed that when an IRF could not 
meet the 75 percent rule the facility could still be defined as an IRF 
based on the types of services it furnished.
    On August 31, 1984, we published a final rule entitled ``Medicare 
Program; Changes to the Inpatient Hospital Prospective Payment System 
and Fiscal Year 1985 Rates'' (49 FR 34728). In that rule we explained 
how the 75 percent rule applied to a new rehabilitation unit or 
rehabilitation hospital, or when a rehabilitation unit wanted to expand 
its size by adding beds.
    On March 29, 1985, we published a final rule entitled ``Medicare 
Program; Prospective Payment System for Hospital Inpatient Services; 
Redesignation of Rules'' (50 FR 12740). That rule redesignated 
provisions of Sec.  405.471 that addressed the 75 percent rule into 
Sec.  412.23.
    On August 30, 1991, we published a final rule entitled ``Medicare 
Program; Changes to the Inpatient Hospital Prospective Payment System 
and Fiscal Year 1992 Rates'' (56 FR 43196). Since October 1, 1983, the 
regulations allowed a new rehabilitation hospital or new rehabilitation 
unit, or an existing excluded rehabilitation unit which was to be 
expanded by the addition of new beds, to be excluded from the acute 
care PPS if, in addition to meeting other requirements, it submitted a 
written certification that during its first cost reporting period it 
would be in compliance with the 75 percent rule. The August 30, 1991, 
rule specified that if these facilities were later found to have not 
complied with the 75 percent rule CMS would determine the amount of 
actual payment under the exclusion, compute what we would have paid for 
the facility's services to Medicare patients under the acute care 
hospital PPS, and recover any difference in accordance with the rules 
on the recoupment of overpayments.
    On September 1, 1992, we published a final rule entitled ``Medicare 
Program; Changes to Hospital Inpatient Prospective Payment Systems and 
Fiscal Year 1993 Rates'' (57 FR 39746). In the rule we acknowledged 
that, for various reasons, a new rehabilitation hospital or a new 
rehabilitation unit might need to begin operations at some time other 
than at the start of its regular cost reporting period. Therefore, we 
specified such an IRF could submit a written certification that it 
would comply with the 75 percent rule for both a partial cost reporting 
period of up to 11 months, as well as the subsequent full 12-month cost 
reporting period.
    On September 1, 1994, we published a final rule entitled ``Medicare 
Program; Changes to the Hospital Inpatient Prospective Payment Systems 
and FY 1995 Rates'' (59 FR 45330). In that rule, we stated that we had 
miscellaneous comments requesting that oncology cases, pulmonary 
disorders, cardiac disorders, and chronic pain be added to the 75 
percent rule's list of medical conditions. (59 FR 45393) We responded 
that although the 75 percent rule had not been addressed in the 
associated May 27, 1994, proposed rule we would take these 
miscellaneous comments into consideration if we decided to make changes 
to the 75 percent rule.
    When we published the August 7, 2001 final rule (66 FR 41316), we 
acknowledged we had received comments requesting that we update the 75 
percent rule's list of medical conditions, or eliminate the 75 percent 
rule. (66 FR 41321) We responded that in our IRF PPS proposed rule we 
had not proposed changing the 75 percent rule, believed that the 
existing 75 percent rule was appropriate, and, therefore, would not be 
revising the 75 percent rule. However, we also stated that data 
obtained after we implemented the IRF PPS could lead us to reconsider 
revising the 75 percent rule.

C. CMS Evaluation of the 75 Percent Rule

    In the spring of 2002 we surveyed the fiscal intermediaries (FIs) 
in order to ascertain what methods were being used to verify if IRFs 
were complying with the 75 percent rule. Analysis of the survey data 
made us aware that inconsistent methods were being used to determine if 
an IRF was in compliance with the 75 percent rule, and that some IRFs 
were not being reviewed to determine if they were in compliance with 
the 75 percent rule. These survey results led us to become concerned 
that some IRFs may be out of compliance with the regulations. In 
addition, we were concerned that some FIs might be using methods to 
verify compliance with the 75 percent rule, which may cause an IRF to 
incorrectly be found out of compliance with the rule; this would thus 
cause an IRF to inappropriately lose its classification as an IRF. 
Therefore, on June 7, 2002, we suspended enforcement of the 75 percent 
rule until we conducted a careful examination of this area and 
determined whether changes were needed to the regulation, and the 
operating procedures that govern how compliance with the regulation is 
verified.
    In addition to our review of FI administrative procedures, we 
conducted an analysis of CMS administrative data to attempt to estimate 
overall compliance with the regulation. We examined both IRF-PAI data 
and claims from the years 1998, 1999, and 2002. Before discussing the 
results of this analysis, we note that the data does have some 
limitations. First, it is not possible to discern from the diagnosis 
data on the IRF-PAI or the claim whether or not there was a medical 
need to furnish the patient ``intensive rehabilitation.'' The diagnosis 
is a determination of a

[[Page 26792]]

patient's clinical status, but that is different from determining that 
there is a medical necessity to furnish treatment to a patient in an 
IRF as opposed to another type of treatment setting. In addition, it 
was not possible in many cases to map the diagnosis code on the claim 
data to one of the ten medical conditions listed in Sec.  412.23(b) 
because a large percentage of claims have an ICD-9-CM diagnosis code 
that is a general code indicating only care involving the use of 
rehabilitation procedures instead of a specific diagnosis.
    Chart 1 ``Estimates of Compliance with the 75 Percent Rule'' below 
shows the estimated percent of facilities with 75 percent of cases 
falling into the 10 conditions (13.35 percent) using 2002 available 
patient assessment data. Appendix A provides the technical detail 
regarding the method used to determine the percent of IRFs in calendar 
year 2002 that complied with the 75 percent rule. We believe our 
findings may tend to undercount cases falling within the 10 conditions 
because the IRF-PAI assessment process was first implemented during 
2002. We believe that learning the IRF-PAI assessment process probably 
resulted in IRFs erring when coding the impairment group on the IRF-PAI 
assessment form. Nevertheless, we believe the analysis is useful for 
providing an estimate of the overall compliance with this regulatory 
requirement. Our findings showed that overall about 50 percent of cases 
fall within the 10 conditions specified in the rule and the number of 
facilities meeting the requirement based upon Medicare discharges 
rather than all discharges is very low. In addition, it shows the 
estimated percent of facilities that meet lower thresholds. Finally, 
our analysis also found that a facility's Medicare case mix was a good 
predictor of case mix for non-Medicare IRF patients.

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BILLING CODE 4120-01-C
    While our estimate of compliance with the 75 percent rule is 
somewhat limited by the data available, we do believe it clearly 
demonstrates low compliance of the 75 percent rule by IRFs. Though IRFs 
are now paid under a PPS, the 75 percent rule still serves the relevant 
function of distinguishing IRFs from other types of inpatient 
facilities, thus facilitating compliance with sections 1886(d)(1)(B) 
and 1886(d)(1)(B)(ii) of the Act. Making this distinction is also 
critical to fulfilling the requirements of section

[[Page 26794]]

1886(j)(1)(A), which requires Medicare to make payments to IRFs under a 
PPS specifically designed for the services they furnish. Specifically, 
the 75 percent rule has the effect of limiting the type of patient that 
can be cared for in facilities identified as IRFs. This limitation 
serves to ensure that only patients requiring this type of specialized 
and more expensive care receive it. The medical conditions listed in 
the 75 percent rule are conditions in which patients require the 
services of rehabilitation professionals with specialized skills and 
experiences that may not be available in other settings.
    The largest group of patients treated in rehabilitation hospitals 
but not considered in this analysis to meet the 75 percent rule is 
patients with major joint replacements, specifically knee and hip 
replacements. Joint replacement patients have been more commonly 
admitted to rehabilitation hospitals in some areas of the country, and 
nationally, less than one quarter of Medicare beneficiaries are 
admitted to IRFs after surgery. Although some joint replacement 
patients may have ``polyarthritis,'' or another of the ten conditions 
specified in the 75 percent rule requiring intensive inpatient 
rehabilitation, these cases were generally not counted towards a 
facility's compliance with the 75 percent rule. Provider 
representatives also have requested that conditions classified into the 
cardiac and pulmonary RICs be added to the list of conditions in the 75 
percent rule. These two RICs currently represent about 8 percent of 
beneficiaries serviced in IRFs using the 2002 patient assessment data. 
We note that many private insurers do not cover acute inpatient 
rehabilitation care (in IRFs) for many of these patients whose 
rehabilitation needs can be met in an alternative setting such as a 
skilled nursing facility. We request comments on any conditions that 
necessitate the intensive, multidisciplinary care that IRFs are 
required to provide.
    As mentioned previously, we surveyed the FIs to determine the 
methods they were using to verify compliance with the 75 percent rule. 
Our analysis of that survey data led us to suspend enforcement of the 
75 percent rule. The process for determining compliance with the 75 
percent rule needs to be improved. However, we believe that currently 
there is no need to amend the regulation because it still appropriately 
functions to help distinguish an IRF from other types of inpatient 
treatment settings. We will instead be improving the method FIs use to 
verify compliance with the 75 percent rule, and ensuring that FIs are 
consistent in how they verify compliance with the 75 percent rule.
    When we suspended enforcement of the 75 percent rule we specified 
that the suspension of enforcement was not applicable to a facility 
that was first seeking classification as an IRF in accordance with 
Sec.  412.23(b)(8) or Sec.  412.30(b)(2). A facility first seeking 
classification as an IRF in accordance with Sec.  412.23(b)(8) or Sec.  
412.30(b)(2) only has to self-attest that during its next full 12-month 
cost reporting period it will meet the 75 percent rule. Accordingly, a 
facility first seeking classification as an IRF in accordance with 
Sec.  412.23(b)(8) or Sec.  412.30(b)(2) has never had an FI verify 
that its patient population actually met the 75 percent rule. Until the 
medical conditions of this facility's patient population have been 
evaluated this facility has not proven that for at least one full 12-
month cost reporting period it complied with the 75 percent rule and 
was appropriately classified as an IRF. Therefore, until a facility had 
proven that it qualified to be classified as an IRF because its patient 
population actually met the 75 percent rule it could not be eligible 
for suspension of enforcement of the 75 percent rule.
    We will be instructing FIs to re-institute appropriate enforcement 
action if a FI determines that an IRF has not met the 75 percent rule. 
We realize that an IRF may need time to come into compliance with the 
75 percent rule. An IRF's cost reporting period is the time period used 
to ascertain compliance with the 75 percent rule. Therefore, we will be 
instructing the FIs that the FI must use cost reporting periods that 
begin on or after October 1, 2003, as the time period to ascertain an 
IRF's compliance with the 75 percent rule.
    While this proposed rule does not propose changes to the 
regulations related to the 75 percent rule, we expect that improved 
enforcement and compliance with the existing rule will have varying 
impacts on providers and beneficiaries.
    Our analysis, detailed earlier in this section, indicates that 
approximately 50 percent of cases being cared for in IRFs fall outside 
of the ten conditions listed in the regulations. In addition, it 
estimates that potentially 86 percent of IRFs may currently be out of 
compliance. We again note that this analysis is based on Medicare 
administrative data (claims and patient assessments) rather than 
detailed medical record data and, thus, is limited in its ability to 
accurately classify all patients into one or more of the ten conditions 
cited in the regulations. Thus, we would expect our estimates of 
compliance to be higher if more detailed information from the medical 
records were available to perform the analysis.
    We also know from the data that cases observed in IRFs that do not 
fall in one of the ten conditions have, on the average, lower lengths 
of stay than those cases that fall into one of the ten conditions. 
Specifically, the cases that do not fall into one of the ten conditions 
(approximately 50 percent) account for approximately 40 percent of the 
Medicare covered days. Conversely, 60 percent of the Medicare covered 
days fall into one of the ten conditions.
    While it is difficult to predict the aggregate impact of improved 
compliance on provider revenues, we expect that IRFs and/or their 
parent hospitals (80 percent of IRFs are units of acute care hospitals) 
will change their behavior in a variety of ways. IRFs may change 
admission practices to alter their case mix, either Medicare or total 
patient population, by admitting patients with more intensive 
rehabilitative needs that fall into the ten conditions. This could have 
the effect of elevating the facility's revenues because cases requiring 
more intensive rehabilitation care generally receive higher Medicare 
payments than less complex cases.
    For example, in each of the three years of data examined, lower 
extremity joint replacements contained by far the largest number of 
cases not in the ten conditions (44 percent in 2002). Other conditions 
included cardiac (10.3 percent), pulmonary (4.8 percent) and pain (4.1 
percent). IRFs specializing in or treating a significant number of such 
cases may have to alter their admissions practice to achieve 
compliance. Treating fewer joint replacement cases (that result in 
relatively low payments under the IRF PPS) with cases requiring more 
intensive treatment could actually increase a facility's revenues.
    Conversely, some IRFs may not be able to find such cases and may be 
required to reduce capacity and serve fewer patients in order to 
achieve compliance, an action that may have the effect of lowering a 
facility's revenues. Since compliance with the 75 percent rule could be 
achieved with changes in admission practices for Medicare as well as 
non-Medicare patients, the impact on Medicare revenues may vary.
    The current regulation reflects the fact that a significant number 
(up to 25 percent) of medically necessary admissions may fall outside 
of the ten conditions. These cases can continue to be admitted and 
treated under the regulation. Other cases may appropriately receive 
rehabilitative care in alternative settings. For certain medically 
complex cases, it may be

[[Page 26795]]

appropriate to lengthen the patient's stay in an acute care setting in 
order to stabilize their condition to prepare the patient to 
participate in rehabilitation. Alternative settings for rehabilitative 
care could include the acute care hospital, skilled nursing facilities, 
long-term care hospitals, outpatient rehabilitation, and home health 
care. For this reason, we do not expect to see reduced access to care 
for Medicare beneficiaries as a result of improved compliance. In 
addition, because many hospitals having a Medicare certified IRF unit 
also have one or more other subunits that provide rehabilitation, 
revenues from these cases may be generated elsewhere within the same 
hospital.
    We have developed a case study (below) to illustrate the 
differences in Medicare payment for cases that do not fall into one of 
the ten conditions included in the 75 percent rule. As discussed above, 
this type of case could be treated in an alternative setting. For this 
example, we detail Medicare payment amounts for rehabilitation care in 
four alternative settings (skilled nursing facility, home health, long 
term care hospital, and outpatient rehabilitation). As noted above, 80 
percent of IRFs are units of hospitals. These hospitals may now choose 
to direct some patients to other settings. As explained above, it is 
difficult to predict the approach any individual or group of IRFs will 
follow in achieving compliance with this regulation, however, the case 
study illustrates some of the potential Medicare payment effects 
associated with providing similar levels of rehabilitation in different 
settings.
Case Example
    The following case example has been developed to illustrate the 
payments under Medicare for levels of rehabilitative care received in 
the various settings that may be a part of a hospital complex for a 
patient that has a primary diagnosis of a lower extremity joint 
replacement. The following case example describes one of the most 
common patient conditions (not included in the 75 percent rule) but is 
not meant to describe all possible conditions and their related payment 
effects. The payments for each PPS described in the example are based 
on case weights and standardized payment rates for 2003.
    The clinical description of the case example is as follows:

    A 74-year-old woman status post a right total knee arthroplasty 
(TKA), with a wound infection, fever, and high white blood count are 
noted on her second postoperative day. A work-up indicates the 
existence of staphylococcus aureus septicemia. Patient lacks full 
extension and has only 65 degrees of flexion on her third post-
operative day. The management options for this patient include: 
extension of acute care length of stay; transfer to a long term care 
hospital; admission to a skilled nursing facility; possibly home 
health services or outpatient services.

    Under the IRF PPS, this patient would be classified into case-mix 
group 804 (lower extremity joint replacement with some functional 
capabilities) with an average length of stay of 14 days. Furthermore, 
the existence of staphylococcus aureus septicemia, a comorbid condition 
(ICD-9-CM code 038.11), would place this patient into the tier 2 
payment category. The corresponding 2003 unadjusted payment amount for 
this patient would be $10,828.60.
    Under the skilled nursing facility (SNF) PPS, this patient is 
classified into either the very high (RVB) or ultra high (RUB) 
rehabilitation group based on the hours of therapy she receives per 
week. We believe that this patient would have a length of stay in the 
SNF of either 14 days or 20 days. The corresponding 2003 unadjusted 
payment amount for this patient would be $4,446.82 for RVB and 14 days, 
$6,670.23 for RVB and 20 days, $6,352.60 for RUB and 14 days, or 
$7,672.40 for RUB and 20 days.
    Under the long-term care hospital PPS, this patient would be 
classified into patient group 238 and would have a length of stay of 
either 14 days or 24 or more days. The corresponding 2003 unadjusted 
payment amount for this patient would be $17,671.22 for 14 days or 
$28,296.21 for 24 or more days.
    Under the home health PPS, this patient would be placed into the 
High/High/Moderate group. The corresponding 2003 unadjusted payment 
amount for this patient would be $5,165.26 for home health services 
delivered for a 60-day period.
    Under outpatient therapy, assuming 2 hours of physical therapy and 
1 hour of occupational therapy given during 12 days, payment for this 
patient would be $4,108.16
    If the patient remained in the original surgical acute care 
hospital stay, under the inpatient acute care hospital PPS this patient 
would be classified in to DRG 209 and payment at the 50th percentile 
would be $9,047.36. This illustrative example shows that this facility 
may have lower payments for the care of this patient relative to the 
IRF PPS payment if this patient is cared for in an SNF or receives home 
health or outpatient services. However, the facility may have higher 
payments relative to the IRF PPS payment if this patient is placed in a 
long-term care hospital unit. Overall, the example does show that this 
facility could continue to receive Medicare payments for this type of 
patient in a setting other than their IRF unit, and have the option of 
changing its IRF admitting practices without any potential negative 
effect on patient access to rehabilitative care. However, we invite 
public comment of this issue.

Section 412.29 Excluded Rehabilitation Units: Additional Requirements

    Under Sec.  412.29(a), an IRF unit must have met either the 
requirements for new units or converted units under Sec.  412.30. 
Section 412.29(a)(2) contains an incorrect reference to the 
requirements for converted units as ``Sec.  412.30(b).'' The correct 
reference to the requirements for converted units is Sec.  412.30(c). 
Accordingly, we are proposing to make a technical correction by 
changing the reference in paragraph (a)(2) to state ``Converted units 
under Sec.  412.30(c).''

Section 412.30 Exclusion of New Rehabilitation Units and Expansion of 
Units Already Excluded

    Under Sec.  412.30(b)(2), a hospital that seeks exclusion of a new 
IRF unit may provide written certification that the inpatient 
population the hospital intends the unit to serve meets the 
requirements of Sec.  412.23(b)(2). Section 412.30(b)(3) contains an 
incorrect reference to the required written certification described in 
``(a)(2)'' of this section. The correct reference to the written 
certification is described in paragraph (2) of Sec.  412.30(b). 
Accordingly, we are proposing to make a technical correction by 
changing the current reference to Sec.  412.23(a)(2) in Sec.  
412.23(b)(3) to state ``The written certification described in 
paragraph (b)(2) * * *''.
    Section 412.30(d)(1) defines new bed capacity for the purposes of 
expanding an existing excluded IRF unit. Section 412.30(d)(2)(i) 
contains an incorrect reference to the definition of new bed capacity 
under paragraph ``(c)(1)'' of this section. The correct reference to 
the definition of new bed capacity is paragraph (d)(1). Accordingly, we 
are proposing a technical correction to change the current reference to 
paragraph (c)(1) in paragraph (d)(2)(i) to state ``* * * under 
paragraph (d)(1) of this section.''

[[Page 26796]]

III. Research To Support Case-Mix Refinements to the IRF PPS

A. Research on IRFs

    As described in the August 7, 2001 final rule, we contracted with 
the RAND Corporation (RAND) to analyze IRF data to support our efforts 
in developing the CMG patient classification system and the IRF PPS. As 
discussed below, we are continuing our contract with RAND to support us 
in developing refinements to the classification and PPS, and in 
developing a system to monitor the effects of the IRF PPS. In addition, 
under a separate contract, we are developing and defining measures to 
monitor the quality of care and services provided to Medicare 
beneficiaries receiving care in an IRF.

B. RAND Research Background

    In 1995, the RAND Corporation (RAND) began extensive CMS-sponsored 
research to assist us in developing a per-discharge based inpatient 
rehabilitation PPS model using patient classification system known as 
Functional Independence Measures-Functional Related Groups (FIM-FRGs) 
using 1994 data. Initial results of RAND's earliest research were 
revealed in September 1997 and are contained in two reports available 
through the National Technical Information Service (NTIS). The reports 
are entitled ``Classification System for Inpatient Rehabilitation 
Patients--A Review and Proposed Revisions to the Functional 
Independence Measure-Function Related Groups,'' NTIS order number PB98-
105992INZ; and ``Prospective Payment System for Inpatient 
Rehabilitation,'' NTIS order number PB98-106024INZ.
    In summarizing these reports, RAND found in the research based on 
1994 data that, with limitations, the FIM-FRGs were effective 
predictors of resource use based on the proxy measurement: length of 
stay. FRGs based upon FIM motor score, cognitive scores, and age 
remained stable over time. Researchers at RAND developed, examined, and 
evaluated a model payment system based upon FIM-FRG classifications 
that explains approximately 50 percent of patient costs and 
approximately 60 percent to 65 percent of the costs at the facility 
level. Based on this earlier analysis, RAND concluded that an IRF PPS 
using this model is feasible.
    In July 1999, we contracted with RAND to update the earlier study. 
The update used their earlier research and included an analysis of FIM 
data, the FRGs, and the model rehabilitation PPS using more recent data 
from a greater number of IRFs. The purpose of updating the earlier 
research was to develop the underlying data necessary to support the 
Medicare IRF PPS based on case-mix groups for the proposed rule. RAND 
expanded the scope of their earlier research to include the examination 
of several payment elements, such as comorbidities, facility-level 
adjustments, and implementation issues, including evaluation and 
monitoring. This research was used in our development of the IRF PPS. 
RAND issued a report on its research which can be found on our Web site 
at http:cms.hhs.gov/providers/irfpps/research.asp.

C. Continuing Research

    RAND's data efforts over the past year were concentrated on 
archiving data from the first phase of the project, constructing the 
analytic files for monitoring special studies, and preparing for post-
IRF data that will be used for monitoring and for refinement. RAND's 
monitoring effort seeks to measure changes in IRF, post-IRF, and post-
acute care after implementation of the IRF PPS. The refinement effort 
necessitates that the methods used to create the initial set of CMGs 
weights, and facility adjustments be applied to more recent IRF data.
    Section 125(b) of the BBRA provides that the Secretary shall 
conduct a study of the impact on utilization and beneficiary access to 
services of the implementation of the IRF prospective payment system. A 
report on the study must be submitted to the Congress not later than 3 
years after the date the IRF prospective payment system is first 
implemented. Accordingly, to continue RAND's research, data from other 
health care settings are needed to assess the impact on utilization and 
beneficiary access to services because the IRF PPS can have an impact 
among other settings that deliver rehabilitative services. If we only 
analyzed data from IRFs, our assessment of utilization and access would 
not be complete. In addition to the data obtained from the IRF Medicare 
claims, functional measures from the IRF PAI, and cost reports, other 
data are required that shows the utilization and access of 
rehabilitative services delivered in other settings, such as skilled 
nursing facilities, long-term care facilities, home health agencies, 
and outpatient rehabilitation facilities. Analysis of these data may 
show changes in utilization of inpatient rehabilitation services and if 
the types or severity of patients treated in IRFs differs significantly 
from the data used to create the CMGs, case-mix refinements may be 
needed.
    In the next phase of their research, RAND will be developing and 
testing possible improvements to the payment system using existing 
data. This analysis will focus on potential improvements to the methods 
used to establish the CMGs, facility adjustments (such as teaching, 
rural, and low-income adjustments), and comorbidities.
    In constructing the CMGs for the IRF PPS, one of our primary goals 
was to create payments that would match payment to resource use as 
closely as possible. It is important to continue to examine the IRF PPS 
to ensure that the system remains a good predictor of resource use over 
time. Further, more complete data will be available in which we can 
assess the reliability and validity of the IRF PPS. We also expect 
improvements with certain data elements. For example, prior to 
implementation of the IRF PPS, IRFs were not required to code 
comorbidities. As a result of implementing the IRF PPS, we expect that 
IRFs will improve coding comorbidities because they may affect their 
payment amount. These improved data will allow us to determine the 
effects various conditions have on the cost of a case.
    RAND will use post-IRF PPS data when it becomes available, as well 
as existing data to support their research. RAND research includes: 
analyses of methodological improvements in the creation of CMGs, 
methodological improvements to the statistical approaches used to 
derive payment adjustments and characterizing IRFs into groups based on 
their case mix. As mentioned in Section I of this proposed rule, 
currently, RAND does not have enough post-IRF PPS data to analyze 
potential modifications to the classification and payment systems. 
Further, we will need a sufficient amount of these data to be able to 
determine our future refinements, if any are needed. Because IRFs began 
to be paid under the IRF PPS based on their cost report start date that 
occurred on or after January 1, 2002, sufficient data will not be 
available for those facilities whose cost report start date occurs 
later in the calendar year. Therefore, in this proposed rule, we are 
not proposing to change the CMG classification system or the facility 
level and case level adjustments, other than the wage adjustment. The 
proposed changes for the wage adjustment are discussed in detail in 
Section VI of this proposed rule.

D. Staff Time Measurement Data

    As described in the August 7, 2001 final rule, we contracted with 
Aspen Systems Corporation (ASPEN) to collect

[[Page 26797]]

actual resource use or staff time measurement (STM) data in a sample of 
IRFs. Data were collected using the MDS-PAC patient assessment 
instrument. FIM data were collected at the same time. We believe that 
these data that measure actual nursing and therapy time spent on 
patient care may be used to enhance our ability to refine the CMGs.
    RAND received ASPEN's analytical database in early spring 2002. 
After a brief period of working with the data, RAND discovered that 
their study required details that were not in this summary database. 
Specifically, about half of the cases within the analytic database had 
data for only the first part of the patient's stay. RAND needed to have 
data on how staff time use changed during the stay and the analytic 
database contained only the averages of the observed portions of the 
patient's stay. RAND needed data on patients during the second part of 
their stay.
    In late July 2002, RAND received the backup data, but did not 
assess it until late August 2002. Further technical questions about the 
data still exist and must be answered before the modeling of the data 
can occur.

E. Monitoring

    A greater part of the ongoing work to be performed by RAND is an 
analysis to develop a potential system of indicators to monitor the 
impact and performance of the IRF PPS. As part of their analysis, RAND 
will case-mix adjust these measures and distinguish between those that 
will track the direct impact of PPS on IRFs and IRF patients, and those 
that will track changes in the pool of potential IRF patients. We 
anticipate that RAND will develop a set of possible indicators needed 
to monitor the IRF PPS, develop potential access to care models and 
measures, and define a possible measure of outcomes.

F. Need To Develop Quality Indicators for IRFs

    The IRF-PAI is the data collection instrument for IRFs. It contains 
a blend of FIM items and proposed quality and medical needs questions. 
These quality and medical needs questions (which are currently 
collected on a voluntary basis) may need to be modified to encapsulate 
those data necessary for calculation of a quality indicator. One of the 
primary tasks of the RAND contract is to identify quality indicators 
pertinent to the inpatient rehabilitation setting and determine what 
information is necessary to calculate those quality indicators. These 
tasks include reviewing literature and other sources for existing 
rehabilitation quality indicators. It also involves identifying 
organizations involved in measuring or monitoring quality of care in 
the inpatient rehabilitation setting. RAND will convene a technical 
expert panel to identify a series of quality indicators that can be 
measured using the IRF-PAI. In addition, quality indicators and data 
elements must be developed for calculation as well as the independent 
testing of the developed indicators.

IV. The IRF PPS Patient Assessment Process

A. Background

    On August 7, 2001, we published the IRF PPS final rule (66 FR 
41316), which described how the IRF would use the IRF Patient 
Assessment Instrument (PAI) to assess an IRF patient. During the fall 
of 2001, we conducted training on the IRF-PAI assessment process. The 
training was held in the cities of Baltimore, Maryland, Chicago, 
Illinois, San Francisco, California, and Atlanta, Georgia. The training 
was videotaped. During the training sessions we stated that any IRF 
could obtain the videotapes free of charge. In addition, we stated on 
the CMS IRF PPS website that any IRF could obtain copies of the 
videotapes. The IRS-PAI manual, which contains detailed instructions 
regarding the completion of the IRS-PAI, is also available on the CMS 
IRF PPS website.

B. Patient Rights

    Section 412.608 specifies that prior to performing the IRS-PAI 
assessment, the IRF must inform the patient of the rights contained in 
this section. The rights specified in Sec.  412.608 are as follows:
    (1) The right to be informed of the purpose of the collection of 
the patient assessment data;
    (2) The right to have the patient assessment information collected 
be kept confidential and secure;
    (3) The right to be informed that the patient assessment 
information will not be disclosed to others, except for legitimate 
purposes allowed by the Federal Privacy Act and Federal and State 
regulations;
    (4) The right to refuse to answer patient assessment questions; and
    (5) The right to see, review, and request changes on his or her 
patient assessment.
    In addition to the rights specified in Sec.  412.608, a patient has 
privacy rights under the Privacy Act of 1974 (5 U.S.C. Sec.  
552a(e)(3)), and 45 CFR 5b.4(a)(3). The Privacy Act and 45 CFR 
5b.4(a)(3) require that an individual be informed under what authority, 
and for what purpose, individually identifiable information is being 
collected by a Federal agency and maintained in a system of records. In 
order to ensure compliance with the Privacy Act of 1974, and 45 CFR 
5b.4(a)(3), we are proposing that prior to performing the IRS-PAI 
assessment an IRF clinician must give to each Medicare inpatient two 
forms. We have published these forms in Appendix B of this proposed 
rule. In addition, we are proposing that the form entitled ``Privacy 
Act Statement--Health Care Records'' is a detailed description of the 
patient's privacy rights under the Privacy Act of 1974. Also, we are 
proposing that the form entitled ``Data Collection Information Summary 
for Patients in Inpatient Rehabilitation Facilities'' is the simplified 
plain language description of the Privacy Act Statement--Health Care 
Records. Additionally, we are proposing that by giving both of these 
forms to the patient before beginning the IRS-PAI assessment, the IRF 
would fulfill the requirement that the patient be informed of the five 
rights specified in Sec.  412.608. Accordingly we are proposing to 
amend Sec.  412.608 to read as follows:
    Patient's rights regarding the collection of patient assessment 
data.
    (a) Before performing an assessment using the inpatient 
rehabilitation facility patient assessment instrument, a clinician of 
the inpatient rehabilitation facility must give a Medicare inpatient 
each of these forms--
    (1) The form entitled ``Privacy Act Statement--Health Care 
Records;'' and
    (2) The simplified plain language description of the Privacy Act 
Statement--Health Care Records which is a form entitled ``Data 
Collection Information Summary for Patients in Inpatient Rehabilitation 
Facilities.''
    (b) The inpatient rehabilitation facility must document in the 
Medicare inpatient's clinical record that the Medicare inpatient has 
been given the documents specified in paragraph (a) of this section.
    (c) The Data Collection Information Summary for Patients in 
Inpatient Rehabilitation Facilities is the simplified plain language 
description of the Privacy Act Statement--Health Care Records.
    (d) By giving the Medicare inpatient the forms specified in 
paragraph (a) of this section the inpatient rehabilitation facility 
will inform the Medicare patient of--
    (1) Their privacy rights under the Privacy Act of 1974 and 45 CFR 
5b.4(a)(3); and
    (2) The following rights:

[[Page 26798]]

    (i) The right to be informed of the purpose of the collection of 
the patient assessment data;
    (ii) The right to have the patient assessment information collected 
be kept confidential and secure;
    (iii) The right to be informed that the patient assessment 
information will not be disclosed to others, except for legitimate 
purposes allowed by the Federal Privacy Act and Federal and State 
regulations;
    (iv) The right to refuse to answer patient assessment questions; 
and
    (v) The right to see, review, and request changes on his or her 
patient assessment.
    (e) The patient rights specified in this section are in addition to 
the patient rights specified in Sec.  482.13 of this chapter.
    It should be noted that when the IRF clinician gives the patient 
the forms entitled ``Data Collection Information Summary for Patients 
in Inpatient Rehabilitation Facilities'' and the ``Privacy Act 
Statement--Health Care Records'' prior to performing an assessment, 
these forms do not satisfy the privacy provisions contained in the 
HIPAA Privacy Rule (65 FR 82462 as modified by 67 FR 53182). For 
example, these forms do not meet the privacy notice requirements of the 
HIPAA Privacy Rule (see 45 CFR Sec.  164.520). Health plans and health 
care providers must meet the notice requirements of the HIPAA Privacy 
Rule by giving a Notice of Privacy Practices to their patients. The 
Notice of Privacy Practices describes a health plan or health care 
provider's uses and disclosures of protected health information and the 
individual rights that patients have with respect to their protected 
health information.

C. When the IRF-PAI Must Be Completed

    According to Sec.  412.606(b), an IRF must use the IRF-PAI to 
assess Medicare Part A fee-for-service inpatients. According to Sec.  
412.610(c)(1)(i)(A), the admission assessment covers the first 3 
calendar days of the inpatient's current IRF Medicare Part A fee-for-
service hospitalization. According to Sec.  412.610(c)(1)(i)(B), the 
admission assessment reference date is the third day of the 3-day 
admission assessment time period. Section 412.610(c)(1)(i)(C) specifies 
that the IRF-PAI for the admission assessment ``Must be completed on 
the calendar day that follows the admission assessment reference day.''
    We are concerned IRFs believe Sec.  412.610(c)(1)(i)(C) means that 
they may not start to record data on the IRF-PAI before the calendar 
day that follows the admission assessment reference day, which is not 
our intent. The ``completion requirement'' of the IRF-PAI means when 
the IRF's staff must have finished recording on the IRF-PAI the 
assessment data that the IRF's clinical staff obtained during an 
assessment of the inpatient that was performed during the admission 
assessment time period. In other words, the date when the IRF-PAI must 
be completed is a deadline date when the process of recording data on 
the IRF-PAI must be finished. The IRF's staff is permitted to enter 
assessment data on the IRF-PAI prior to the deadline date.
    How data are recorded on the IRF-PAI is specified in the IRF-PAI 
item-by-item guide, which is entitled the ``IRF-PAI Training Manual 
Revised 01/16/02.'' The instructions contained in the IRF-PAI item-by-
item guide are, when possible, very similar to the rules for coding the 
patient assessment instrument that we used as the model for the IRF-
PAI. The model for the IRF-PAI was the patient assessment instrument 
published by Uniform Data System for Medical Rehabilitation (UDSmr). 
The UDSmr rules for coding their assessment instrument specified that 
an item's score should reflect the inpatient's lowest level of 
functioning. Consequently, in order to be consistent with how an 
inpatient's functional performance was scored on the UDSmr patient 
assessment instrument, the IRF-PAI item-by-item guide likewise 
specifies that a patient's assessment must indicate the patient's 
lowest level of functioning.
    During the admission assessment, an IRF clinician records different 
types of data on the IRF-PAI. We believe that the sources of the data 
recorded in the categories of the IRF-PAI entitled ``Identification 
Information,'' ``Admission Information,'' and ``Payer Information'' 
makes these data easy and quick to obtain and record. For these 
categories of data the source of the data may be the patient, the 
patient's medical record, other patient documents, the patient's 
family, or a person that has personal knowledge of the patient. In 
contrast, in order to complete the data for the IRF-PAI categories 
entitled ``Function Modifiers'' and ``FIMTM Instrument,'' 
the clinician observes the patient's functional performance over the 
admission assessment time period, and makes clinical judgments 
regarding the patient's performance. Consequently, due to how the data 
for the Function Modifiers and FIMTM categories are 
obtained, we believe it is the time span that it takes to assess the 
patient's functional performance that will usually determine how long 
it takes to complete the admission assessment.
    Page III-3 of the IRF-PAI manual states that when determining the 
level of the patient's functional performance the clinician is to 
``record the lowest (most dependent) score.'' We believe that in the 
time span between the patient's admission to and discharge from the 
IRF, the patient's functional performance improves. We believe that on 
the patient's admission day and the next few days a patient's 
functional performance is poor in comparison to functional performance 
on subsequent days of the patient's current IRF hospitalization. 
Therefore, during the part of the admission assessment that is the 
first or second day of the patient's current IRF hospitalization, we 
believe that a patient's functional performance will usually be scored 
as indicating the most dependence.
    As stated previously, the IRF's clinical staff is permitted to 
record assessment data on the IRF-PAI at any time during the admission 
assessment process. Also, as stated previously, we believe it is the 
scoring of the patient's functional performance that will determine how 
long it takes to complete the admission assessment. The combination of: 
(1) Being able to record assessment data at any time during the 
admission assessment, (2) the requirement that the lowest level of 
functional performance be recorded, and (3) that the lowest level of 
functional performance will usually occur on the first or second day of 
the admission assessment, makes it possible to finish obtaining and 
recording all the assessment data before the day that follows the 
admission assessment reference date. However, in accordance with Sec.  
412.610(c)(1)(i)(C), an IRF has until the day following the admission 
assessment reference day to complete the IRF-PAI.
    In order to clarify that Sec.  412.610(c)(1)(i)(C) does not 
prohibit the IRF from recording any or all of the data on the IRF-PAI 
before the day that follows the admission assessment reference day, we 
are proposing to amend Sec.  412.610(c)(1)(i)(C) to read as follows: 
Must be completed by the calendar day that follows the admission 
assessment reference day.

D. Transmission of IRF-PAI Data

    As specified in Sec.  412.606(b), ``Patient assessment 
instrument,'' an IRF must use the IRF-PAI to assess Medicare Part A 
fee-for-service inpatients. There are nine categories of IRF-PAI 
assessment data. The nine categories are entitled ``identification 
information, admission

[[Page 26799]]

information, payer information, medical information, medical needs, 
function modifiers, the FIMTM instrument, discharge 
information, and quality indicators''. The data from some of these 
categories are used to classify a patient into a CMG. It is the CMG 
classification code, not the IRF-PAI raw data itself, that is part of 
the claim data the IRF submits to its FI when the IRF submits data in 
order to be paid for the services it furnished to the inpatient. We 
believe that an IRF's clinical staff will initially use the paper 
version of the IRF-PAI to record its assessment data. Then, in 
accordance with Sec.  412.610(d), the IRF would use the data that it 
recorded on the paper version of the IRF-PAI to enter the IRF-PAI data 
into an electronic version of the document. The electronic version of 
the IRF-PAI uses the patient assessment data to classify a patient into 
a CMG. Under the IRF PPS, it is the CMG payment code, along with other 
information that the IRF submits to the fiscal intermediary (FI), that 
will determine the payment the IRF receives for the services the IRF 
furnished to a Medicare Part A fee-for-service beneficiary.
    Section 412.614, ``Transmission of patient assessment data,'' 
specifies that an IRF must transmit to us the IRF-PAI assessment data 
for each Medicare Part A fee-for-service inpatient. It is the 
electronic version of the IRF-PAI that enables an IRF to transmit the 
IRF-PAI data to us. We require that IRFs transmit IRF-PAI data so that 
we have the IRF-PAI data that are associated with the CMG payment code 
that the IRF submitted to its FI.
    In most cases an IRF will submit claims data, including the 
patient's CMG, to the FI in order to be paid for the services it 
furnished to a Medicare Part A fee-for-service inpatient. However, 
there are situations when the IRF would submit claim data to its FI, 
but the submission of the claim data is not for the purpose of being 
paid for any of the services the IRF furnished to a Medicare Part A 
fee-for-service inpatient.
    In these situations, Medicare operational procedures that were in 
effect before implementation of the IRF PPS requires an IRF to send 
claim data to the FI. The purpose of the IRF sending claim data to the 
FI in these situations is to enable Medicare to monitor a beneficiary's 
period of entitlement. For instance, an IRF must still send the FI 
claim data even if the inpatient's non-Medicare primary payer paid for 
all of the IRF services the IRF furnished to the Medicare Part A fee-
for-service inpatient. Another instance when the IRF must still send 
the FI claim data is when any of the services that an inpatient's non-
Medicare primary payer did not pay for also do not qualify for payment 
under the IRF PPS.
    We want to relieve the IRF of the burden of transmitting IRF-PAI 
data to us when the IRF is not requesting that Medicare pay for any of 
the services the IRF furnished to a Medicare Part A fee-for-service 
inpatient. Accordingly, we are proposing to amend Sec.  412.614 by 
specifying that Sec.  412.614(a) is a general rule that would read as 
follows:
    (a) Data format. General rule. The inpatient rehabilitation 
facility must encode and transmit data for each Medicare Part A fee-
for-service inpatient--
    We are also proposing to further amend Sec.  412.614 by adding a 
new Sec.  412.614(a)(3), which would relieve the IRF of the burden of 
having to transmit the IRF-PAI data for a Medicare Part A fee-for-
service inpatient when Medicare will not be paying the IRF for any of 
the services the IRF furnished to that inpatient. New Sec.  
412.614(a)(3) would read as follows:
    Exception to the general rule. When the inpatient rehabilitation 
facility does not submit claim data to Medicare in order to be paid for 
any of the services it furnished to a Medicare Part A fee-for-service 
inpatient, the inpatient rehabilitation facility is not required to, 
but may, transmit to Medicare the inpatient rehabilitation facility 
patient assessment data associated with the services furnished to that 
same Medicare Part A fee-for-service inpatient.

E. Proposed Revision of the Definition of Discharge

    According to Sec.  412.602, a discharge has occurred when the 
patient has been formally released from the hospital, or has died in 
the hospital, or when the patient stops receiving Medicare-covered Part 
A inpatient rehabilitation services. Our intent in specifying this 
definition of when a discharge has occurred under the IRF PPS was to 
try to ensure that Medicare paid an IRF only for furnishing an IRF 
level of services to the Medicare Part A fee-for-service inpatient. 
However, in contrast to when a patient is formally released from the 
IRF or dies, the time when a patient stops receiving Medicare-covered 
Part A IRF services may be subject to different interpretations 
resulting in different determinations of when a discharge has occurred. 
The result of different determinations of when a discharge has occurred 
is inconsistency in determining the discharge date. This inconsistency 
could result in different IRFs furnishing the same services for the 
same period of time, but being paid differently, because the discharge 
date determines a patient's length-of-stay, and the patient's length-
of-stay is one of the factors that determines the amount of the CMG 
payment. For example, according to Sec.  412.624(f), a patient's 
length-of-stay as determined by the inpatient's discharge date may 
affect the amount of the IRF's CMG payment when a patient is 
transferred from an IRF to another site of care.
    In addition, there may be cases when an IRF believes an inpatient 
no longer has a medical need for Medicare-covered Part A inpatient 
rehabilitation services, but the IRF believes that the inpatient has a 
medical need for a SNF level of services. However, due to circumstances 
beyond the IRF's control, the IRF is unable to formally release the 
patient, because the IRF cannot place the patient in a SNF setting. In 
that situation, according to section 1861(v)(1)(G)(i) of the Act and 
Sec.  424.13(b), a physician may certify or recertify that the patient 
needs to continue to be hospitalized in the IRF. The effect of the 
physician's certification or recertification is that under Medicare the 
patient is not considered discharged until the patient is formally 
released from the IRF.
    In consideration of what can occur when discharge is defined as 
being when the inpatient stops receiving Medicare-covered Part A 
inpatient rehabilitation services, we are proposing to amend Sec.  
412.602 by revising the definition of ``discharge'' by removing the 
phrase ``(2) The patient stops receiving Medicare-covered Part A 
inpatient rehabilitation services, unless the patient qualifies for 
continued hospitalization under Sec.  424.13(b) of this chapter; or''. 
The proposed revised definition would read as follows:
    Discharge. A Medicare patient in an inpatient rehabilitation 
facility is considered discharged when--
    (1) The patient is formally released from the inpatient 
rehabilitation facility; or
    (2) The patient dies in the inpatient rehabilitation facility.

F. Waiver of the Penalty for Transmitting the IRF-PAI Data Late

    Section 412.614(c) ``Transmission dates'' states that the admission 
and discharge assessment data must be transmitted together. The 
discharge assessment is completed after the admission assessment has 
been completed. Therefore, the date when the IRF-PAI data must be 
transmitted is

[[Page 26800]]

determined by when the IRF-PAI discharge assessment is completed.
    After the discharge assessment has been completed, Sec.  412.610(d) 
``Encoding dates'' specifies that the data must be entered into the 
electronic version of the IRF-PAI, a process which Sec.  412.602 
defines as encoding the data. As specified in Sec.  412.610(d) the IRF 
has 7 calendar days to encode the discharge assessment. In order for 
the IRF-PAI data not to be considered as having been transmitted late, 
Sec.  412.614(d)(2) specifies that the IRF-PAI data must be transmitted 
to us no later than 10 calendar days from the date specified in Sec.  
412.614(c). The date specified in Sec.  412.614(c) is the 7th calendar 
day of the applicable encoding time period specified in Sec.  
412.610(d). The 7th calendar day of the applicable encoding date 
specified in Sec.  412.610(d) is the end of the discharge assessment 
encoding time period because none of the data can be transmitted until 
the discharge assessment has been encoded. The following example, which 
is very similar to the Chart 3 on page 41332 of the August 7, 2001 
final rule (66 FR 41316), is intended to clarify when CMS will 
determine that the IRF-PAI data was transmitted late.

  Chart 2.-- Example of Applying the Patient Assessment Instrument Discharge Assessment and Transmission Dates
----------------------------------------------------------------------------------------------------------------
                                                                                         IRF-PAI      Date when
                                                 Assessment    IRF-PAI      IRF-PAI        data     IRF-PAI data
        Assessment Type         Discharge date   reference    completed    encoded by  transmitted  transmission
                                                    date          by                        by         is late
----------------------------------------------------------------------------------------------------------------
Discharge Assessment..........        10/16/03     10/16/03     10/20/03     10/26/03     11/01/03   11/12/03 *
----------------------------------------------------------------------------------------------------------------
* Or any day after 11/12/03.

    If IRF-PAI data are transmitted later than 10 calendar days from 
the transmission date specified in Sec.  412.614(c), Sec.  
412.614(d)(2) specifies that we will assess a penalty by deducting 25 
percent from the CMG payment that is associated with the IRF-PAI data 
that were transmitted late. However, we believe that an IRF may 
encounter an extraordinary situation, which is beyond its control, and 
that extraordinary situation could render the IRF unable to comply with 
Sec.  412.614(c). The IRF must fully describe in the appropriate 
inpatient's clinical record, or by use of another documentation method 
as selected by the IRF, the extraordinary situation which the IRF 
encountered that resulted in the IRF being unable to comply with Sec.  
412.614(c). Although an IRF may believe that the facility has 
encountered an extraordinary situation, the IRF's belief does not mean 
that CMS is obligated to also automatically determine that the 
situation was of an extraordinary nature. CMS has the discretion to 
determine whether the situation described by the IRF is extraordinary.
    The extraordinary situation may be, but does not have to be, due to 
the occurrence of an unusual event. Examples of unusual events include, 
but are not limited to, fire, flood, earthquake, or other similar 
incidents that inflict extensive damage to an IRF. Another example of 
an extraordinary situation is the inability of an IRF to transmit any 
IRF-PAI data for an extended time period, because during that entire 
time period there was a problem with the data transmission system that 
was beyond the control of the IRF. An example of a data transmission 
system problem that is beyond the control of the IRF is the inability 
of an IRF to transmit its IRF-PAI data because the computer used by CMS 
to receive and process the data is malfunctioning. A further example of 
a data transmission system problem that is beyond the control of the 
IRF is the existence of a flaw in the software that was distributed by 
CMS to IRFs, or a flaw in the software specifications made available by 
CMS to vendors that prevent the IRF from transmitting its IRF-PAI data. 
In addition, an extraordinary situation may include a situation in 
which a facility has correctly followed CMS policies and procedures in 
order to be classified as an IRF and obtain an IRF provider number, but 
has experienced a delay in attaining an IRF provider number. In light 
of these possibilities, we are proposing a new Sec.  412.614(e) to read 
as follows: ``Exemption to being assessed a penalty for transmitting 
the IRF-PAI data late.'' CMS may waive the penalty specified in 
paragraph (d) of this section when, due to an extraordinary situation 
that is beyond the control of an inpatient rehabilitation facility, the 
inpatient rehabilitation facility is unable to transmit the patient 
assessment data in accordance with paragraph (c) of this section. Only 
CMS can determine if a situation encountered by an inpatient 
rehabilitation facility is extraordinary and qualifies as a situation 
for waiver of the penalty specified in paragraph (d)(2) of this 
section. An extraordinary situation may be due to, but is not limited 
to, fires, floods, earthquakes, or similar unusual events that inflict 
extensive damage to an inpatient rehabilitation facility. An 
extraordinary situation may be one that produces a data transmission 
problem that is beyond the control of the inpatient rehabilitation 
facility, as well as other situations determined by CMS to be beyond 
the control of the inpatient rehabilitation facility. An extraordinary 
situation must be fully documented by the inpatient rehabilitation 
facility.''

G. General Information Regarding the IRF-PAI Assessment Process

    We have received many questions regarding the IRF-PAI assessment 
process policies. We have posted the answers to most of these questions 
on the IRF PPS website.
1. The IRF PPS Website Address
    The current internet address for the IRF PPS website is http://www.cms.hhs.gov/providers/irfpps/.
 Due to changes in CMS internet 
policies during 2002, the current website address is different from the 
one we published in the August 7, 2001 final rule.
2. Exceptions to the IRF-PAI Admission and Discharge Assessment Time 
Period General Rules
    Section 412.610(c)(1)(i) states the general rule that the time span 
covered during the admission assessment is calendar days 1 through 3 of 
the patient's current Medicare Part A fee-for-service IRF 
hospitalization. Section 412.610(c)(2)(i) states the general rule that 
the discharge assessment time period is a span of time that covers 3 
calendar days, which includes the inpatient's discharge date, which is 
the same date as the discharge assessment reference date, and the 2 
calendar days

[[Page 26801]]

before the discharge date. We want to remind IRFs that, as specified in 
Sec.  412.610(c)(1)(ii) and Sec.  412.610(c)(2)(iii), we may use the 
IRF-PAI item-by-item guide and other instructions to identify items 
that have a different admission or discharge assessment time period. We 
may specify different admission and discharge assessment time periods 
in order to capture patient information for payment and quality of care 
monitoring objectives appropriately.

V. Patient Classification System for the IRF PPS

    As previously stated, in this proposed rule we are proposing to use 
the same case-mix classification system that was set forth in the 
August 7, 2001 final rule. It is our intention to pursue the 
development of possible refinements to the case-mix classification 
system that will continue to improve the ability of the PPS to 
accurately pay IRFs. We have awarded a contract to the RAND Corporation 
(RAND) to conduct additional research that will, in the initial stages, 
provide us with the data necessary to address the feasibility of 
developing and proposing refinements. When the study has been 
completed, we plan to review various approaches so that we can propose 
an appropriate methodology to develop and apply refinements. Any 
specific refinement proposal resulting from this research will be 
published in the Federal Register.
    Table 1, Proposed Relative Weights for Case-Mix Groups (CMGs), 
presents the proposed CMGs, comorbidity tiers, and corresponding 
Federal relative weights. We also present the average length of stay 
for each CMG. As we discussed in the August 7, 2001 final rule (66 FR 
41353), the average length of stay for each CMG, along with the 
discharge destination, is used to determine when an IRF discharge meets 
the definition of a transfer, which results in a per diem case level 
adjustment (66 FR 41354). Because these data elements are not changing 
as a result of this proposed rule, Table 1 is identical to Table 1 that 
was published in the August 7, 2001 final rule (66 FR 41394 through 
41396). The proposed relative weights reflect the inclusion of cases 
with an interruption of stay (patient returns on day of discharge or 
either of the next 2 days). The methodology we used to construct the 
data elements in Table 1 is described in detail in the August 7, 2001 
final rule (66 FR 41350 through 41353).

VI. Proposed Fiscal Year 2004 Federal Prospective Payment Rates

A. Expiration of the IRF PPS Transition Period

    The transition period provision under section 1886(j)(1) of the Act 
and Sec.  412.626 of the regulations expired for cost reporting periods 
beginning on or after October 1, 2002 (FY 2003 and beyond). 
Accordingly, the payment for discharges during FY 2004 will be based 
entirely on the proposed adjusted FY 2004 IRF Federal PPS rates.

B. Description of the IRF Standardized Payment Amount

    In the August 7, 2001 final rule, we established a standard payment 
amount referred to as the budget neutral conversion factor under Sec.  
412.624(c). In accordance with the methodology described in Sec.  
412.624(c)(3)(i), the budget neutral conversion factor for FY 2002, as 
published in the August 7, 2001 final rule, was $11,838.00. Under Sec.  
412.624(c)(3)(i), this amount reflects, as appropriate, any adjustments 
for outlier payments, budget neutrality, and coding and classification 
changes as described in Sec.  412.624(d).
    The budget neutral conversion factor is a standardized payment 
amount and the amount reflects the budget neutrality adjustment for FY 
2002, as described in Sec.  412.624(d)(2). The statute requires a 
budget neutrality adjustment only for fiscal years 2001 and 2002. 
Accordingly, we believe it is more consistent with the statute to refer 
to the standardized payment as the standardized payment conversion 
factor, rather than refer to it as a budget neutral conversion factor. 
Thus, after careful consideration, we are proposing to change all 
references to the budget neutral conversion factor in Sec. Sec.  
412.624(c) and 412.624(d) to the ``standard payment conversion 
factor.'' We believe that the standard payment conversion factor better 
describes the standardized payment amount especially in those fiscal 
years where a budget neutrality adjustment is not made.
    Thus, under Sec.  412.624(c)(3)(i), the standard payment conversion 
factor for FY 2002 of $11,838.00 reflected the budget neutrality 
adjustment described in Sec.  412.624(d)(2). Under current revised 
Sec.  412.624(c)(3)(ii), we updated the FY 2002 standard payment 
conversion factor ($11,838.00) to FY 2003 by applying an increase 
factor (the IRF market basket index) of 3.0 percent, as described in 
the August 1, 2002 update notice (67 FR 49931). This yielded the FY 
2003 standard payment conversion factor of $12,193.00 that was 
published in the August 1, 2002 update notice (67 FR 49931). The FY 
2003 standard payment conversion factor will be the basis of the 
updated FY 2004 standard payment conversion factor that will also 
reflect the adjustments described below.

C. Proposed Adjustments To Determine the Proposed FY 2004 Standard 
Payment Conversion Factor

1. IRF Market Basket Index
    Section 1886(j)(3)(C) of the Act requires the Secretary to 
establish an increase factor that reflects changes over time in the 
prices of an appropriate mix of goods and services included in IRF 
services paid for under the IRF PPS, which is referred to as the IRF 
market basket index. Accordingly, in updating the FY 2004 payment rates 
set forth in this proposed rule, we propose to apply an appropriate 
increase factor, that is equal to the IRF market basket, to the FY 2003 
IRF standardized payment amount.
    Beginning with the implementation of the IRF PPS in FY 2002 and 
with the FY 2003 IRF PPS update, the 1992-based excluded hospital with 
capital market basket has been used to determine the IRF market basket 
factor for updating payments to rehabilitation facilities. The 1992-
based market basket reflected the distribution of costs in 1992 for 
Medicare-participating freestanding rehabilitation, long-term care, 
psychiatric, cancer, and children's hospitals. This information was 
derived from the 1992 Medicare cost reports. A full discussion of the 
methodology and data sources used to construct the 1992-based excluded 
hospital with capital market basket is available in Appendix D of the 
IRF PPS August 7, 2001 final rule Federal Register (66 FR 41427).
    In this proposed rule, we propose to revise and rebase the excluded 
hospital with capital market basket to a 1997 base year. We believe 
that proposing to use 1997 data, rather than 1992 data, to construct 
the IRF market basket will allow us to more appropriately estimate 
increases in the costs of IRF goods and services from year to year.
    The operating portion of the 1997-based excluded hospital with 
capital market basket is derived from the 1997-based excluded hospital 
market basket. The methodology used to develop the excluded hospital 
market basket operating portion was described in the August 1, 2002 
Federal Register (67 FR 50042-50044). In brief, the operating cost 
category weights in the 1997-based excluded market basket added to 
100.0. These weights were determined from the Medicare cost reports, 
the 1997 Business Expenditure Survey from the

[[Page 26802]]

Bureau of the Census, and the 1997 Annual Input-Output data from the 
Bureau of Economic Analysis. In using the 1997 data, we made two 
methodological revisions to the 1997-based excluded hospital market 
basket: (1) Changing the wage and benefit price proxies to use the 
Employment Cost Index (ECI) wage and benefit data for hospital workers, 
and (2) adding a cost category for blood and blood products.
    Previously we used a combination of several ECIs, a great part of 
which are listed in the 1992-based index such as the hospital, 
professional, and technical workers ECIs. However, the ECI for hospital 
workers better represents the movement of hospital wages, salaries, and 
benefits and it is more reflective of current labor market conditions. 
For the 1992-based market baskets we were unable to find an adequate 
data source for the blood cost category. For the 1997-based excluded 
hospital market basket, we were able to obtain this data from Medicare 
cost reports. As discussed in the IPPS August 1, 2002 final rule (67 FR 
50035), BIPA required that we adequately reflect the price of blood and 
blood products in the hospital market basket when it was rebased and 
revised, which was done for the FY 2003 IPPS payment rates.
    We believe this revision is also appropriate for the excluded 
hospital with capital market basket because it results in a more 
precise measure of the cost category for blood and blood products.
    When we add the weight for capital costs to the excluded hospital 
market basket, the sum of the operating and capital weights must still 
equal 100.0. Because capital costs account for 8.968 percent of total 
costs for excluded hospitals in 1997, it holds that operating costs 
must account for 91.032 percent. Each operating cost category weight 
from the August 1, 2002 Federal Register (67 FR 50442-50444) was 
rebased to the 1997-based excluded hospital market basket by 
multiplying by 0.91032 to determine its weight in the 1997-based 
excluded hospital with capital market basket.
    The aggregate capital component of the 1997-based excluded hospital 
market basket (8.968 percent) was determined from the same set of 
Medicare cost reports used to derive the operating component. The 
detailed capital cost categories of depreciation, interest, and other 
capital expenses were also determined using the Medicare cost reports. 
As explained below, two sets of weights for the capital portion of the 
revised and rebased market basket needed to be determined. The first 
set of weights identifies the proportion of capital expenditures 
attributable to each capital cost category, while the second set 
represents relative vintage weights for depreciation and interest. The 
vintage weights identify the proportion of capital expenditures that is 
attributable to each year over the useful life of capital assets within 
a cost category (see IPPS final rule published in the August 1, 2002 
Federal Register (67 FR 50046-50047)) for a discussion of how vintage 
weights are determined).
    The cost categories, price proxies, and base-year FY 1992 and 
proposed FY 1997 weights for the excluded hospital with capital market 
basket are presented in Chart 3 ``Excluded Hospital With Capital Input 
Price Index (FY 1992 and Proposed FY 1997) Structure and Weights.'' 
Chart 4 ``Proposed Excluded Hospital with Capital Input Price Index (FY 
1997) Vintage Weights'' presents the vintage weights for the proposed 
1997-based excluded hospital with capital market basket.

   Chart 3.--Excluded Hospital With Capital Input Price Index 1 2 (FY 1992 and Proposed FY 1997) Structure and
                                                     Weights
----------------------------------------------------------------------------------------------------------------
                                                                                                     Proposed
               Cost category                         Price wage variable            Weights (%)     weights (%)
                                                                                  base-year 1992  base-year 1997
----------------------------------------------------------------------------------------------------------------
    TOTAL..................................  ...................................         100.000         100.000
                                            --------------------------------------
Compensation...............................  ...................................          57.935          57.579
Wages and Salaries.........................  ECI--Wages and Salaries, Civilian            47.417          47.335
                                              Hospital Workers.
Employee Benefits..........................  ECI--Benefits, Civilian Hospital             10.519          10.244
                                              Workers to capture total costs
                                              (operating and capital), In order
                                              to capture total costs (operating
                                              and capital), HCFA Occupational
                                              Benefit Proxy.
Professional fees: Non-Medical.............  ECI--Compensation: Prof. &                    1.908           4.423
                                              Technical Technical.
Utilities..................................  ...................................           1.524           1.180
Electricity................................  WPI--Commercial Electric Power.....           0.916           0.726
Fuel Oil, Coal, etc........................  WPI--Commercial Natural Gas........           0.365           0.248
Water and Sewerage.........................  CPI-U--Water & Sewage..............           0.243           0.206
Professional Liability.....................  HCFA--Professional Liability                  0.983           0.733
                                              Premiums.
All Other Products and Services............  ...................................          28.571          27.117
All Other Products.........................  ...................................          22.027          17.914
Pharmaceuticals............................  WPI--Prescription Drugs............           2.791           6.318
Food: Direct Purchase......................  WPI--Processed Foods...............           2.155           1.122
Food: Contract Service.....................  CPI-U--Food Away from Home.........           0.998           1.043
Chemicals..................................  WPI--Industrial Chemicals..........           3.413           2.133
Blood and Blood Products...................  WPI--Blood and Derivatives.........                           0.748
Medical Instruments........................  WPI--Med. Inst. & Equipment........           2.868           1.795
Photographic Supplies......................  WPI--Photo Supplies................           0.364           0.167
Rubber and Plastics........................  WPI--Rubber & Plastic Products.....           4.423           1.366
Paper Products.............................  WPI--Convert. Paper and Paperboard.           1.984           1.110
Apparel....................................  WPI--Apparel.......................           0.809           0.478
Machinery and Equipment....................  WPI--Machinery & Equipment.........           0.193           0.852
Miscellaneous Products.....................  WPI--Finished Goods excluding Food            2.029           0.783
                                              and Energy.
All Other Services.........................  ...................................           6.544           9.203
Telephone..................................  CPI-U--Telephone Services..........           0.574           0.348
Postage....................................  CPI-U--Postage.....................           0.268           0.702
All Other: Labor...........................  ECI--Compensation: Service Workers.           4.945           4.453
All Other: Non-Labor Intensive.............  CPI-U--All Items (Urban)...........           0.757           3.700

[[Page 26803]]


Capital-Related Costs......................  ...................................           9.080           8.968
Depreciation...............................  ...................................           5.611           5.586
Fixed Assets...............................  Boeckh-Institutional Construction:.           3.570           3.503
Movable Equipment..........................  WPI--Machinery & Equipment: 11 Year           2.041           2.083
                                              Useful Life.
Interest Costs.............................  ...................................           3.212           2.682
Non-profit.................................  Avg. Yield Municipal Bonds: 23 Year           2.730           2.280
                                              Useful Life.
For-profit.................................  Avg. Yield AAA Bonds: 23 Year                 0.482           0.402
                                              Useful Life.
Other Capital-Related Costs................  CPI-U--Residential Rent............           0.257          0.699
----------------------------------------------------------------------------------------------------------------
\1\ The operating cost category weights in the excluded hospital market basket described in the August 1, 2002
  Federal Register (67 FR 50442 through 50444) add to 100.0.
\2\ Due to rounding, weights sum to 1.000.

    When we add an additional set of cost category weights (total 
capital weight = 8.968 percent) to this original group, the sum of the 
weights in the new index must still add to 100.0. Because capital costs 
account for 8.968 percent of the market basket, then operating costs 
account for 91.032 percent. Each weight in the 1997-based excluded 
hospital market basket from the IPPS final rule published in the August 
1, 2002 Federal Register (67 FR 50442-50444) was multiplied by 0.91032 
to determine its weight in the 1997-based excluded hospital with 
capital market basket.

          Chart 4.--Proposed Excluded Hospital With Capital Input Price Index (FY 1997) Vintage Weights
----------------------------------------------------------------------------------------------------------------
                                                                                                     Interest:
                                                                   Fixed assets   Movable assets     capital-
                Year from farthest to most recent                    (23-year        (11-year      related (23-
                                                                     weights)        weights)      year weights)
----------------------------------------------------------------------------------------------------------------
1...............................................................           0.018           0.063           0.007
2...............................................................           0.021           0.068           0.009
3...............................................................           0.023           0.074           0.011
4...............................................................           0.025           0.080           0.012
5...............................................................           0.026           0.085           0.014
6...............................................................           0.028           0.091           0.016
7...............................................................           0.030           0.096           0.019
8...............................................................           0.032           0.101           0.022
9...............................................................           0.035           0.108           0.026
10..............................................................           0.039           0.114           0.030
11..............................................................           0.042           0.119           0.035
12..............................................................           0.044  ..............           0.039
13..............................................................           0.047  ..............           0.045
14..............................................................           0.049  ..............           0.049
15..............................................................           0.051  ..............           0.053
16..............................................................           0.053  ..............           0.059
17..............................................................           0.057  ..............           0.065
18..............................................................           0.060  ..............           0.072
19..............................................................           0.062  ..............           0.077
20..............................................................           0.063  ..............           0.081
21..............................................................           0.065  ..............           0.085
22..............................................................           0.064  ..............           0.087
23..............................................................           0.065  ..............           0.090
                                                                 -----------------
    Total*......................................................          1.0000          1.0000         1.0000
----------------------------------------------------------------------------------------------------------------
* Due to rounding, weights sum to 1.000.

    Chart 5 ``Percent Changes in the 1992-based and proposed 1997-based 
Excluded Hospital with Capital Market Baskets, FY 1999-2004'' compares 
the 1992-based excluded hospital with capital market basket to the 
proposed 1997-based excluded hospital with capital market basket. As is 
shown, the rebased and revised market basket grows slightly faster over 
the 1999-2001 period than the 1992-based market basket. The major 
reason for this was the switching of the wage and benefit proxy to the 
ECI for hospital workers from the previous occupational blend. We 
believe that the ECI is the most appropriate price proxy for measuring 
changes in wage data facing IRFs. This wage series reflects actual wage 
data reported by civilian hospitals to the Bureau of Labor Statistics. 
The ECIs are fixed-weight indexes and strictly measure the change in 
wage rates and employee benefits per hour. They are appropriately not 
affected by shifts in skill mix. This differs from the proxy used in 
the FY 1992-based index in which a blended occupational wage index was 
used. The blended occupational wage proxy used in the FY 1992-based 
index and the ECI for wages and salaries for hospitals both reflect a 
fixed distribution of occupations within

[[Page 26804]]

a hospital. The major difference between the two proxies is in the 
treatment of professional and technical wages (legal, accounting, 
management, and consulting services from outside the facility). In the 
blended occupational wage proxy, the professional and technical 
category was blended evenly between the ECI for wages and salaries for 
hospitals and the ECI for wages and salaries for professional and 
technical occupations in the overall economy. The ECI for hospitals 
reflects hospital-specific occupations. This revision had a similar 
impact on the hospital PPS and excluded market baskets, as described in 
the IPPS final rule published in the August 1, 2001 Federal Register. 
The proposed FY 2004 increase in the 1997-based excluded hospital with 
capital market basket is 3.3 percent.

    Chart 5.--Percent Changes in the 1992-Based and Proposed 1997-Based Excluded Hospital With Capital Market
                                              Baskets, FY 1999-2004
----------------------------------------------------------------------------------------------------------------
                                                                                                Percent Change,
                                                                             Percent Change,   Proposed FY 1997-
                                Fiscal Year                                   FY 1992-based       based Market
                                                                              Market Basket          Basket
----------------------------------------------------------------------------------------------------------------
                                   Actual Historical % Increase (FY 1999-2001)
----------------------------------------------------------------------------------------------------------------
1999......................................................................                2.3                2.7
2000......................................................................                3.4                3.1
2001......................................................................                3.9                4.0
                                                                           --------------------
    Average historical....................................................                3.2                3.3
---------------------------------------------------------------------------
                                            Forecasts (FY 2002-2004)
----------------------------------------------------------------------------------------------------------------
2002......................................................................                2.7                3.6
2003......................................................................                3.0                3.5
2004......................................................................                3.0                3.3
                                                                           --------------------
    Average forecast......................................................                2.9                3.5
----------------------------------------------------------------------------------------------------------------

    Section 1886(j)(3)(c) requires that the increase in the IRF PPS 
payment rate be based on an ``appropriate percentage increase in a 
market basket of goods and services comprising services for which 
payment is made under this subsection, which may be the market basket 
percentage increase described in subsection (b)(3)(B)(iii).'' To date, 
we have used a market basket based on the cost structure of all 
excluded hospitals to satisfy this requirement, and have discussed in 
prior rules why we feel this market basket provides a reasonable 
measure of the price changes facing exempt hospitals.
    In its March 2002 Report, the Medicare Payment Advisory Commission 
(MedPAC) recommended the development of a market basket specific to IRF 
services. As we mentioned in last year's final rule, we have been 
researching the feasibility of developing such a market basket. This 
research included analyzing data sources for cost category weights, 
specifically the Medicare cost reports, and investigating other data 
sources on cost, expenditure, and price information specific to IRFs. 
As described in greater detail below, based on this research, we are 
not proposing at this time to develop a market basket specific to IRF 
services.
    Our analysis of the Medicare cost reports indicates that the 
distrib