MEDICARE PROSPECTIVE PAYMENT SYSTEM

Summary of Proposed FY 2001 PPS Rule

The Health Care Financing Administration (HCFA) published its proposed FY 2001 PPS rule in the Federal Register on May 5, 2000. The proposed rule includes changes in both the inpatient operating and the capital prospective payment systems, as well as changes applicable to PPS-excluded hospitals and units.

These changes are proposed for discharges occurring on or after October 1, 2000.

INPATIENT OPERATING PPS

Updates

In the proposed rule, HCFA's most recent forecast of the market basket increase for FY 2001 is 3.1 percent. Current law sets the FY 2001 update for hospitals at market basket less the Balanced Budget Act (BBA) reduction of 1.1 percentage points. Thus, the update for urban and rural hospitals is 2.0 percent (3.1-1.1 = 2.0). The standardized amounts must then be uniformly adjusted to ensure budget neutrality for wage index, geographic reclassification and DRG recalibration changes. As a result of these cumulative adjustments, the net increase in the standardized amounts for urban and rural hospitals will be 1.7 percent.

Operating Standardized Amounts

National	Large Urban Areas	Other Areas
Labor-Related	$2856.71	$2811.49
Non labor-Related	$1161.17	$1142.79
Puerto Rico/Labor-Related -National -Puerto Rico-specific	$2832.11 $1373.19	$2832.11 $1351.45
Puerto Rico/Non labor-Related -National -Puerto Rico-specific	$1151.16 $552.74	$1151.16 $543.99

Public Law 106-113, The Medicare, Medicaid and State Children's Health Insurance Program Balance Budget Refinement Act of 1999 (BBRA) provides the full market basket update (3.1%) to both the Federal and hospital-specific payment rates for sole community hospitals (SCHs). The BBRA increases the hospital-specific rate for Medicare Dependent, Small Rural Hospitals by 2.0%.

Prior to the BBRA, SCHs were paid based on whichever of the following rates yielded the greatest aggregate payment: the Federal national rate, the updated hospital-specific rate based on FY 1982 cost per discharge, or the updated hospital-specific rate based on FY 1987 cost per discharge. The BBRA revised this payment methodology to allow SCHs which, in 1999, were paid on either the FY 1982 cost per discharge or FY 1987 cost per discharge basis to use FY 1996 cost per discharge as their FY 2001 payment basis. HCFA has notified fiscal intermediaries to identify those SCHs that were paid on the hospital-specific basis. The FIs were directed to make the necessary payment calculations using the new base year and, if greater and unless the hospital specifically declines, to make the payment adjustment for FY 2001.

Wage Index

The proposed rule bases the FY 2001 wage index on data for hospital cost reporting periods beginning on or after October 1, 1996 and before September 30, 1997 (i.e., FY 1997 cost reports). To be reflected in the wage index included in the proposed rule, hospitals should have submitted any wage data corrections to their intermediaries by March 6, 2000. On May 5, 2000, HCFA released the final wage data (www.hcfa.gov/stats/pufiles.htm) [check this!!]. Changes can be made to the S-3 part of the cost report data to correct errors due to: 1) a tabulation or transmittal error by the FI or HCFA; or, 2) mistakes that could not have been detected by the hospital prior to the release of these data. All requests must be received by HCFA and the hospital's fiscal intermediary no later than June 5, 2000, and must include all necessary supporting documentation.

Beginning in FY 2000, HCFA began phasing-out the wages related to teaching physicians, residents and CRNAs from the wage index. The provision was based on a recommendation from an American Hospital Association convened workgroup of representatives of state, national and metropolitan associations. The phase-out will be in increments of 20 percent over 5 years. Thus, the proposed FY 2001 wage index is based on a blend of 60 percent of an average hourly wage including these costs for teaching physicians, residents and CRNAs, and 40 percent of an average hourly wage excluding these costs.

As part of calculating the index, HCFA collected separate wage data for both employed and contract physician Part A services on the FY 1997 cost report but the cost reports did not identify teaching physician salaries and hours separately from physician Part A costs. (The FY 1998 cost report form was revised to allow the separate reporting of teaching physician Part A costs.) Subsequently, HCFA instructed the fiscal intermediaries to collect, through a survey, teaching physician costs and hours that are payable under the per resident amounts and reported on Worksheet A, Line 23 of the hospital's cost report. In recognition of the extraordinary effort to collect this data, HCFA gave hospitals until March 6, 2000 to file requests to revise the teaching survey data. The AHA workgroup also recommended that if the data collected by HCFA on physician salaries were not accurate, 80 percent of physician wages be considered to represent teaching physician wage costs. HCFA used this approach in FY 2000, but proposes a revision for FY 2001. In FY 2001, HCFA will remove 100 percent of the physician Part A costs and hours in the FY 2001 wage index calculation for those hospitals where the FI verifies that the hospital has otherwise unidentified teaching physician costs included in physician Part A costs and hours.

HCFA announced that beginning FY 2004 Part B costs for nurse practitioners and clinical nurse specialists would be removed from the wage index cost calculation. In addition, HCFA said that it would evaluate the removal of wage costs associated with Rural Health Clinics and Federally Qualified Health Center beginning FY 2004.

The aggregate impact of the update and other changes to the wage index is summarized in the table below:

Percent change in wage index values	Number of Urban Hospitals	Number of Rural Hospitals
Decrease greater than 10 percent	19	0
Decrease between 5 and 10 percent	125	401
Between -5 percent and +5 percent	2,499	1,725
Increase between 5 and 10 percent	55	0
Increase greater than 10 percent	12	0

Geographic Reclassification

The proposed wage index incorporates all reclassification decisions made by the Medicare Geographic Classification Review Board (MGCRB) for FY 2001, except changes that result from the Administrator's review or a request by a hospital to withdraw its application. The board reclassified 586 hospitals (compared to 504 for FY 2000) for the wage index, the standardized amount, or both the wage index and the standardized amount. The payments of rural hospitals are 2.4 percent higher and because the overall effect of geographic reclassification must be budget neutral, the payments of urban hospitals are 0.4 percent lower.

The proposed rule includes a BBRA provision that provided that hospitals in certain counties were deemed located in specific Metropolitan Statistical Areas for purposes of PPS payment, i.e., standardized amount and wage index. Further, the proposed rule included the BBRA provision that gave certain rural hospitals during FY 2001 and FY 2002 the option of using either 1980 or 1990 (new) data for evaluation of resident workers commuting rates.

HCFA, noting that "some rural hospitals continue to struggle financially," proposed to ease the thresholds applicable to rural hospitals for wage index reclassification. Currently, hospitals may obtain reclassification to another area for purposed of the wage index if the hospital's average hourly wages are at least 108 percent of the average hourly wages in the area where it is physically located, and at least 84 percent of the average hourly wages in a proximate area to which the hospital seeks reclassification. HCFA proposes to lower the upper threshold to 106 percent and lower the lower threshold to 82 percent. While HCFA acknowledged that it is difficult estimating how many additional hospitals might qualify by lowering these thresholds, in the end, HCFA thought it would likely benefit about 50 hospitals.

DRG Reclassification and Coding Changes

The proposed rule would revise the surgical hierarchy for the pre-MDC DRGs, MDC 8 (Diseases and Disorders of the Musculoskeletal System and Connective Tissue), and MDC 10 (Endocrine, Nutritional, and Metabolic Diseases and Disorders). Further the proposed rule would make a limited revision of the Complications and Comorbidites (CC) Exclusion List to take into account the changes that will be made in the ICD-9-CM diagnosis coding system effective October 1, 2000.

The proposed rule reported approved changes to the ICD-9-CM codes that will become effective October 1, 2000. HCFA is soliciting comments only on the proposed DRG classification for these new codes.

HCFA noted that it is using the same basic methodology for recalibrating the DRG weights as they did for FY 2000.

Outliers

Currently, Medicare provides extra payment in addition to the basic DRG amount for extremely costly cases. HCFA set the fixed loss cost outlier threshold in FY 2000 equal to the PPS rate plus the IME and DSH payments plus $17,250 ($15,763 for hospitals that have not yet entered the prospective payments system for capital-related costs). HCFA will also maintain the marginal cost factor -- that is, the percent of costs paid after the costs of the case exceed the outlier threshold -- at 80 percent.

HCFA projects that the proposed threshold for FY 2000 will result in outlier payments equal to 5.1 percent of operating and 5.8 percent of capital payments based on the federal rate. In FY 1999, HCFA estimates that actual outlier payments were 7.5 percent of actual total DRG payments. For FY 2000, actual outlier payments are estimated to be 6.1 percent of actual total DRG payments.

Determination of Rural Referral Center (RRC) Status

Based on the latest data available, HCFA has updated the national and regional case-mix index and discharge standards for RRCs. Although RRCs no longer receive a different payment rate from other rural hospitals, RRCs continue to receive special treatment under both the disproportionate share hospital payment adjustment and the criteria for geographic reclassification. If the hospital does not meet the bed size criterion (275 or more beds available for use), the hospital can qualify by two other mandatory criteria (number of discharges and case-mix index) and at least one of three optional criteria (medical staff, source of inpatients or volume of referrals) To qualify for FY 2001, a hospital's FY 1996 case-mix index must be at least 1.3401 or the median case-mix index for urban hospitals (excluding teaching hospitals) in its region, whichever is lower. Median case-mix index values are:

Region		Case-Mix Index
1 New England 2 Middle Atlantic 3 South Atlantic 4 East North Central 5 East South Central 6 West North Central 7 West South Central 8 Mountain 9 Pacific		1.2291 1.2387 1.3116 1.2602 1.2692 1.1881 1.2800 1.3302 1.3076

A hospital must also have at least 5,000 discharges (3,000 for osteopathic hospitals) or the median number of discharges for urban hospitals in its region, whichever is lower. No region has a level below the national median. Thus, the national standard is the minimum criterion for all hospitals.

CAPITAL PPS

FY 2001 is the last year of the 10-year transition period established to phase in the prospective payment system for hospital capital costs. Hospitals paid under the fully prospective methodology would receive payments based on 100 percent of the adjusted federal rate and zero percent of their HSR. Hospitals paid under the hold-harmless methodology would receive the higher of:

• 100 percent of the adjusted federal rate, or

• an old capital payment equal to 85 percent of their allowable old capital costs plus a payment for new capital based on a percentage of the adjusted federal rate, which is computed by calculating the ratio of their new capital costs to their total capital costs.

FY 2001 will be the last year for which a portion of a hold harmless hospital's capital costs per discharge will be paid on a cost basis (except for new hospitals). Beginning in FY 2002, payment for capital related costs will be determined based solely on the Federal rate.

Rate Updates

Under the proposed rule, the federal rate would increase from $377.03 in FY 2000 to $383.06. This reflects the 0.9 percent capital payment update, which is consists of a projected 0.9 percent increase in the CIPI (the capital market basket), a 0 percent adjustment for the FY 1999 DRG reclassification and recalibration, and a forecast error correction of 0 percent. In addition, the federal rate is subject to a series of adjustments required to maintain budget neutrality, such as the GAF/DRG adjustment factor, outlier payment adjustment, and an adjustment for the level of exception payments.

IMPACT

HCFA predicts that operating and capital payments per case will increase 1.2 percent between FY 2000 and FY 2001. HCFA finds that the significant factors are first, the update to the standardized amount - estimated to be 2.0 percent. Another major factor is the 1.0 percentage point difference between the initial and current estimate of the FY 2000 outlier payments. A third factor includes the revisions to the IME and DSH payment transitions.

OTHER CHANGES

PPS-Exempt Hospitals

HCFA estimates that the FY 2000 market basket increase for PPS-excluded hospitals and units will be 3.1 percent. The update will range between 0 and 3.1 percent depending on the relationship of each unit=s costs to its ceiling. Under the BBA, caps on the target amounts were established for psychiatric hospitals and units, rehabilitation hospitals and units, and long-term care hospitals. The proposed caps for established and new hospitals for FY 2000 are:

		Established		New
Psychiatric hospitals and units		$11,329		$9,215
Rehabilitation hospitals and units		$21,115		$18,118
Long-term care hospitals		$40.966		$23,351

Before October 1, 1999, only payment amounts for "new" PPS-Exempt facilities are subject to a wage index adjustment (HCFA uses the hospital wage index), however, the BBRA provided, effective on or after October 1, 1999, that the target amount for "established" PPS-Exempt facilities would also be subject to such an adjustment. HFCA proposes to apply the same methodology used for "new" PPS-Exempt facilities for this purpose. The proposed rule only addresses the application of wage index for established PPS-Exempt facilities on or after October 1, 2000. HFCA noted that it would publish a separate interim final rule for the period October 1, 1999 through September 30, 2000 later.

The proposed rule incorporates the BBRA provision that increased the continuous improvement bonus payment for long-term care and psychiatric hospitals and units for cost reporting periods beginning on or after October 1, 2000 and before September 30, 2002.

Beginning FY 2000, HCFA denied exclusion to an excluded hospital located within a PPS hospital for a cost reporting period, if the excluded hospital transferred more than 5 percent of its inpatients to the prospective payment hospital. The proposed rule clarified that this threshold is based on only the Medicare inpatient discharges from the hospital in a given cost reporting period.

Disproportionate Share Hospitals

The proposed rule incorporates the BBRA provision that modified the amount of disproportionate share hospital payment reductions mandated by the BBA. Consequently, DSH payments will be reduced 3 percent (instead of 4 percent) in FY 2001 and 4 percent (instead of 5 percent) in FY 2002. There are no reductions for FY 2003 and beyond.

HCFA noted that it would begin BBRA mandated hospital data collection of uncompensated care costs for cost reporting periods beginning on or after October 1, 2001.

Indirect Medical Education

HCFA reported that the BBRA modified the transition for the indirect medical education (IME) adjustment and that it will publish these changes in a separate interim final rule with comment period. However, HCFA said that for discharges occurring during FY 2001 the adjustment formula equation will be 1.54 x [(1 + r)^.405 - 1] with the variable r representing the hospital's resident-to-bed ratio.

Direct Graduate Medical Education

The BBRA established a new methodology for the use of a national average per resident amount (PRA) in computing direct GME payments for FY 2001 and beyond. Essentially the new methodology establishes a "floor" and a "ceiling" based on a locality-adjusted, updated, weighted average PRA. Each hospital's PRA is compared to the floor and ceiling to determine whether its PRA should be revised. The proposed rule includes a description of the methodology that HCFA would use for calculation of the weighted average PRA. Based on this methodology, HCFA determined the proposed national weighted average PRA (for the base year - FY 1997 as provided by the BBRA) to be $68,475. This amount will then be updated for inflation and adjusted for locality differences for FY 2001 through FY 2005. Based on the respective floors and ceilings as specified by the BBRA for the respective fiscal years, each hospital's PRA is review for possible revisions.

The floor is set by law at 70 percent of the locality-adjusted national weighted average PRA, i.e., if a hospital's unique PRA is less than the floor, its PRA would be replaced with the floor amount and be updated in future years for inflation by the CPI-U.

The ceiling is set by law at 140 percent of the locality-adjusted national weighted average PRA, i.e., if a hospital's unique PRA for the prior year (FY 2000) is greater than the ceiling amount for the payment year (FY 2001), the hospital's PRA is frozen and not updated. This approach is applicable for FY 2001 and FY 2002. For FY 2003 through FY 2005, in such situations, a hospital's PRA would be updated for inflation less 2.0 percentage points, but in no case could the "update" be less than zero. Noted that these comparisons are made before a hospital's unique PRA is updated for inflation in the current payment year.

Critical Access Hospitals

The proposed rule incorporates the provision of the BBRA that allows CAH to elect to be paid on a reasonable cost basis for facility services and on a fee schedule basis for professional services.

The rule would add a Condition of Participation for CAHs for organ, tissue and eye procurement that generally parallels the CoP requirement for all Medicare hospitals. Given the extent of the requirement, HCFA expressed sensitivity to the possible burden of this proposal and asked for comments.

To Be Published Interim Final Rules

HCFA announced that it intended to publish an interim final rule with comment period to address various provisions of the BBRA that are effective prior to October 1, 2000. This interim final rule will be published before the publication of the final PPS rule for FY 2001 by August 1, 2000. This interim final rule will include such matters as revisions to the IME payment transition, PPS-Exempt payment wage adjustments, extension of the Medicare-dependent hospital program, certain CAH designations and conditions, etc.

PUBLIC COMMENT

Comments (an original and three copies) on this proposed rule must be filed no later than 5 p.m. on July 5, 2000. The Contract with America Advancement Act of 1996 requires the implementation of any regulations to be no sooner than 60 days after any final regulation. Therefore, the final rule must be published by August 1 to take effect October 1. Given the late publication of the proposed rule, we recommend sending in comments as early as possible to HCFA. We will be sending out an Opportunity for Regulatory Comment listing the issues and the AHA=s views later this month. Comments may be mailed to:

Should you have any questions about this proposed rule or this summary, please e-mail Deborah Williams at dwillia1@aha.org.

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