[Federal Register: August 30, 1996 (Volume 61, Number 170)]
[Rules and Regulations]               
[Page 46165-46215]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
 

 Table of Contents 

 Supplementary Information 

 Addendum 

 Appendix A 

 Appendix B: Technical Appendix on the Capital Acquisition
Model and Required Adjustments 
 Appendix C: Rebased Market Basket Data Sources 

 Appendix D: Recommendation of Update Factors for Opening Cost Rates of
Payment for Inpatient Hospital Services 


[[Page 46165]]
_______________________________________________________________________

Part V





Department of Health and Human Services





_______________________________________________________________________



Health Care Financing Administration



_______________________________________________________________________



42 CFR Part 412, et al.



Medicare Program; Changes to the Hospital Inpatient Prospective Payment 
Systems and Fiscal Year 1997 Rates; Final Rule


[[Page 46166]]



DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 412, 413, and 489

[BPD-847-F]
RIN 0938-AH34

 
Medicare Program; Changes to the Hospital Inpatient Prospective 
Payment Systems and Fiscal Year 1997 Rates

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Final rule.

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SUMMARY: We are revising the Medicare hospital inpatient prospective 
payment systems for operating costs and capital- related costs to 
implement necessary changes arising from our continuing experience with 
the systems. In addition, in the addendum to this final rule, we are 
describing changes in the amounts and factors necessary to determine 
prospective payment rates for Medicare hospital inpatient services for 
operating costs and capital-related costs. These changes are applicable 
to discharges occurring on or after October 1, 1996. We are also 
setting forth rate-of-increase limits as well as policy changes for 
hospitals and hospital units excluded from the prospective payment 
systems.

EFFECTIVE DATE: This rule is a major rule as defined in Title 5, United 
States Code, section 804(2). Pursuant to 5 U.S.C. section 801(a)(3), 
this rule may not take effect until 60 days after the report required 
by that section is submitted to the Congress, which is October 29, 
1996. However, for purposes of the policy discussions in this document, 
we have assumed that the effective date of this final rule will be 
October 1, 1996, the earliest date by which this rule could take effect 
under 5 U.S.C. section 801 and the Medicare statute.

ADDRESSES: Copies: To order copies of the Federal Register containing 
this document, send your request to: New Orders, Superintendent of 
Documents, P.O. Box 371954, Pittsburgh, PA 15250-7954. Specify the date 
of the issue requested and enclose a check or money order payable to 
the Superintendent of Documents, or enclose your Visa or Master Card 
number and expiration date. Credit card orders can also be placed by 
calling the order desk at (202) 512-1800 or by faxing to (202) 512-
2250. The cost for each copy is $8.00. As an alternative, you can view 
and photocopy the Federal Register document at most libraries 
designated as Federal Depository Libraries and at many other public and 
academic libraries throughout the country that receive the Federal 
Register.

FOR FURTHER INFORMATION CONTACT:

Nancy Edwards (410) 786-4531: Operating Prospective Payment, DRG, Wage 
Index Issues.
Tzvi Hefter (410) 786-4529: Capital Prospective Payment, Direct 
Graduate Medical Education, Excluded Hospitals.


SUPPLEMENTARY INFORMATION:

I. Background

A. Summary

    Under section 1886(d) of the Social Security Act (the Act), a 
system of payment for the operating costs of acute care hospital 
inpatient stays under Medicare Part A (Hospital Insurance) based on 
prospectively-set rates was established effective with hospital cost 
reporting periods beginning on or after October 1, 1983. Under this 
system, Medicare payment for hospital inpatient operating costs is made 
at a predetermined, specific rate for each hospital discharge. All 
discharges are classified according to a list of diagnosis-related 
groups (DRGs). The regulations governing the hospital inpatient 
prospective payment system are located in 42 CFR part 412.
    For cost reporting periods beginning before October 1, 1991, 
hospital inpatient operating costs were the only costs covered under 
the prospective payment system. Payment for capital-related costs had 
been made on a reasonable cost basis because, under sections 1886(a)(4) 
and (d)(1)(A) of the Act, those costs had been specifically excluded 
from the definition of inpatient operating costs. However, section 
4006(b) of the Omnibus Budget Reconciliation Act of 1987 (Public Law 
100-203) revised section 1886(g)(1) of the Act to require that, for 
hospitals paid under the prospective payment system for operating 
costs, capital-related costs would also be paid under a prospective 
payment system effective with cost reporting periods beginning on or 
after October 1, 1991. As required by section 1886(g) of the Act, we 
replaced the reasonable cost-based payment methodology with a 
prospective payment methodology for hospital inpatient capital-related 
costs. Under the new methodology, effective for cost reporting periods 
beginning on or after October 1, 1991, a predetermined payment amount 
per discharge is made for Medicare inpatient capital-related costs. 
(See subpart M of 42 CFR part 412, and the August 30, 1991 final rule 
(56 FR 43358) for a complete discussion of the prospective payment 
system for hospital inpatient capital-related costs.)

B. Major Contents of the Provisions of the May 31, 1996 Proposed Rule

    On May 31, 1996, we published a proposed rule in the Federal 
Register (61 FR 27444) setting forth proposed changes to the Medicare 
hospital inpatient prospective payment systems for both operating costs 
and capital-related costs which would be effective for discharges 
occurring on or after October 1, 1996. The following is a summary of 
the major issues addressed and changes that we proposed to make:
    <bullet> We proposed changes for FY 1997 DRG classifications and 
relative weighting factors as required by section 1886(d)(4)(c) of the 
Act.
    <bullet> We proposed to update the wage index for FY 1997. We also 
solicited comments on the possible expansion of the types of contract 
labor costs included in the wage index and on possible revisions in 
Puerto Rico labor market areas.
    <bullet> We proposed revisions to the regulations governing the 
composition of the Medicare Geographic Classification Review Board 
(MGCRB).
    <bullet> We proposed to use a rebased and revised hospital market 
basket in developing the FY 1997 update factor for the operating 
prospective payment rates, the capital prospective payment rates, and 
the excluded hospital rate-of-increase limits.
    <bullet> We discussed several provisions of the regulations in 42 
CFR parts 412, 413, and 489 and set forth proposed changes concerning 
the following:

--Sole community hospitals.
--Rural referral centers.
--Disproportionate share adjustment.
--Direct graduate medical education payments.
--Hospital distribution of "An Important Message from Medicare."

    <bullet> We discussed several provisions of the regulations in 42 
CFR part 412 concerning the prospective payment system for capital-
related costs, including possible adjustments to the capital Federal 
and hospital-specific rates, and set forth a proposed change concerning 
the use of simplified cost accounting.
    <bullet> We discussed clarifications concerning the calculation of 
payments to hospitals excluded from the prospective payment system.
    <bullet> In the addendum to the proposed rule, we set forth 
proposed changes to the amounts and factors for determining

[[Page 46167]]

the FY 1997 prospective payment rates for operating costs and capital-
related costs. We also proposed new update factors for determining the 
rate-of-increase limits for cost reporting periods beginning in FY 1997 
for hospitals and hospital units excluded from the prospective payment 
system.
    <bullet> In Appendix A to the proposed rule, we set forth an 
analysis of the impact that the proposed changes would have on affected 
entities.
    <bullet> In Appendix B to the proposed rule, we set forth our 
technical appendix on the proposed FY 1997 capital acquisition model.
    <bullet> In Appendix C to the proposed rule, we set forth the data 
sources used to determine the market basket relative weights and choice 
of price proxies.
    <bullet> In Appendix D to the proposed rule, we included our report 
to Congress on our initial estimate of an update factor for FY 1997 for 
both hospitals included in and hospitals excluded from the prospective 
payment systems as required by section 1886(e)(3)(B) of the Act.
    <bullet> As required by sections 1886(e)(4) and (e)(5) of the Act, 
in Appendix E we provided our recommendation of the appropriate 
percentage change for FY 1997 for the following:

--Large urban area and other area average standardized amounts (and 
hospital-specific rates applicable to sole community hospitals) for 
hospital inpatient services paid for under the prospective payment 
system for operating costs.
--Target rate-of-increase limits to the allowable operating costs of 
hospital inpatient services furnished by hospitals and hospital units 
excluded from the prospective payment system.

    <bullet> In the proposed rule, we discussed in detail the March 1, 
1996 recommendations made by the Prospective Payment Assessment 
Commission (ProPAC). ProPAC is directed by section 1886(e)(2)(A) of the 
Act to make recommendations on the appropriate percentage change factor 
to be used in updating the average standardized amounts. In addition, 
section 1886(e)(2)(B) of the Act directs ProPAC to make recommendations 
regarding changes in each of the Medicare payment policies under which 
payments to an institution are prospectively determined. In particular, 
the recommendations relating to the hospital inpatient prospective 
payment systems are to include recommendations concerning the number of 
DRGs used to classify patients, adjustments to the DRGs to reflect 
severity of illness, and changes in the methods under which hospitals 
are paid for capital-related costs. Under section 1886(e)(3)(A) of the 
Act, the recommendations required of ProPAC under sections 1886(e)(2) 
(A) and (B) of the Act are to be reported to Congress not later than 
March 1 of each year.
    We printed ProPAC's March 1, 1996 report, which included its 
recommendations, as Appendix F to the proposed rule. The 
recommendations, and the actions we proposed to take with regard to 
them (when an action is recommended), were discussed in detail in the 
appropriate sections of the preamble, the addendum, or the appendices 
to the proposed rule.
    Set forth below in this preamble, the addendum to this final rule, 
and the appendices are detailed discussions of the May 31 proposed 
rule, the public comments received in response to the proposed rule, 
and the responses to those comments, as well as the changes we are 
making. In addition, in section V.E.3 of this preamble, we address a 
recent statutory amendment to the Public Health Service Act that 
prohibits certain abortion-related discrimination by the Federal 
Government and State and local governments. The new statutory provision 
requires the Federal Government to deem accredited for certain purposes 
any postgraduate physician training program that would otherwise be 
accredited, except for the accrediting agency's reliance on certain 
standards concerning induced abortions.

C. Public Comments Received in Response to the May 31 Proposed Rule

    A total of 511 items of correspondence containing comments on the 
proposed rule were received timely. We received over 300 letters on 
payments for direct graduate medical education programs. The main other 
areas of concern addressed by the commenters were the following:
    <bullet> Requests for changes in DRG classification and relative 
weights.
    <bullet> Issues related to the wage index.
    <bullet> Disproportionate share adjustment.
    <bullet> Possible adjustments to the capital Federal and hospital-
specific rates.
Go to Top


II. Changes to DRG Classifications and Relative Weights

A. Background

    Under the prospective payment system, we pay for inpatient hospital 
services on the basis of a rate per discharge that varies by the DRG to 
which a beneficiary's stay is assigned. The formula used to calculate 
payment for a specific case takes an individual hospital's payment rate 
per case and multiplies it by the weight of the DRG to which the case 
is assigned. Each DRG weight represents the average resources required 
to care for cases in that particular DRG relative to the average 
resources used to treat cases in all DRGs.
    Congress recognized that it would be necessary to recalculate the 
DRG relative weights periodically to account for changes in resource 
consumption. Accordingly, section 1886(d)(4)(C) of the Act requires 
that the Secretary adjust the DRG classifications and relative weights 
annually. These adjustments are made to reflect changes in treatment 
patterns, technology, and any other factors that may change the 
relative use of hospital resources. The changes to the DRG 
classification system and the recalibration of the DRG weights for 
discharges occurring on or after October 1, 1996 are discussed below.

B. DRG Reclassification

1. General
    Cases are classified into DRGs for payment under the prospective 
payment system based on the principal diagnosis, up to eight additional 
diagnoses, and up to six procedures performed during the stay, as well 
as age, sex, and discharge status of the patient. The diagnosis and 
procedure information is reported by the hospital using codes from the 
International Classification of Diseases, Ninth Edition, Clinical 
Modification (ICD-9-CM). The Medicare fiscal intermediary enters the 
information into its claims system and subjects it to a series of 
automated screens called the Medicare Code Editor (MCE). These screens 
are designed to identify cases that require further review before 
classification into a DRG can be accomplished.
    After screening through the MCE and any further development of the 
claims, cases are classified by the GROUPER software program into the 
appropriate DRG. The GROUPER program was developed as a means of 
classifying each case into a DRG on the basis of the diagnosis and 
procedure codes and demographic information (that is, sex, age, and 
discharge status). It is used both to classify past cases in order to 
measure relative hospital resource consumption to establish the DRG 
weights and to classify current cases for purposes of determining 
payment. The records for all Medicare hospital inpatient discharges are 
maintained in the Medicare Provider Analysis and Review (MedPAR) file. 
The data in this file are used to evaluate possible DRG

[[Page 46168]]

classification changes and to recalibrate the DRG weights.
    Currently, cases are assigned to one of 492 DRGs in 25 major 
diagnostic categories (MDCs). Most MDCs are based on a particular organ 
system of the body (for example, MDC 6, Diseases and Disorders of the 
Digestive System); however, some MDCs are not constructed on this basis 
since they involve multiple organ systems (for example, MDC 22, Burns).
    In general, principal diagnosis determines MDC assignment. However, 
there are five DRGs to which cases are assigned on the basis of 
procedure codes rather than first assigning them to an MDC based on the 
principal diagnosis. These are the DRGs for liver, bone marrow, and 
lung transplant (DRGs 480, 481, and 495, respectively) and the two DRGs 
for tracheostomies (DRGs 482 and 483). Cases are assigned to these DRGs 
before classification to an MDC.
    Within most MDCs, cases are then divided into surgical DRGs (based 
on a surgical hierarchy that orders individual procedures or groups of 
procedures by resource intensity) and medical DRGs. Medical DRGs 
generally are differentiated on the basis of diagnosis and age. Some 
surgical and medical DRGs are further differentiated based on the 
presence or absence of complications or comorbidities (hereafter CC).
    Generally, GROUPER does not consider other procedures; that is, 
nonsurgical procedures or minor surgical procedures generally not 
performed in an operating room are not listed as operating room (OR) 
procedures in the GROUPER decision tables. However, there are a few 
non-OR procedures that do affect DRG assignment for certain principal 
diagnoses, such as extracorporeal shock wave lithotripsy for patients 
with a principal diagnosis of urinary stones.
    We proposed to make several changes to the DRG classification 
system for FY 1997 and other decisions concerning DRGs. These proposed 
changes and other revisions, the comments we received concerning them, 
our responses to those comments, and the final DRG changes are set 
forth below.
2. Pre-MDC DRGs
    Effective October 1, 1994, ICD-9-CM procedure code 41.04, 
Autologous hematopoietic stem cell transplant, was created to capture 
the transplantation of stem cells obtained from bone marrow or 
peripheral blood. At that time, we designated the code as non-OR. When 
we created this code, we received comments requesting that it be 
designated as an OR procedure and assigned to DRG 481 (Bone Marrow 
Transplant) based on the resource use associated with the type of 
transplant. However, as we stated in the September 1, 1994 final rule 
(59 FR 45340), when a new code is introduced, our longstanding practice 
is to assign it to the same DRG category as its predecessor code. 
Because we could not separately identify the stem cell transplant cases 
from the other cases coded with 99.73 (the code previously used for 
stem cell transplant) in order to reclassify them and their charges to 
a new DRG, we were unable to predict the new weights of both the DRGs 
in which this code currently is classified and the new DRG to which it 
would be assigned. Therefore, we were prevented from redesignating code 
41.04 as an OR procedure or assigning it to a DRG. However, we stated 
that we would analyze the stem cell cases as soon as the FY 1995 cases 
were available.
    This year, the FY 1995 MedPAR file is available for use in DRG 
analysis and weight setting for FY 1997. Since the average resource use 
associated with stem cell transplant is similar to that associated with 
bone marrow transplant, we proposed to assign procedure code 41.04 to 
DRG 481 effective with discharges occurring on or after October 1, 
1996. In addition, we proposed to designate stem cell transplant as an 
OR procedure. In the proposed rule, we noted that, as set forth in the 
Medicare Coverage Issues Manual at section 35-30.1 (see Transmittal No. 
84, April 1996), autologous stem cell transplants are not covered when 
performed for the following conditions:
    <bullet> Acute leukemia not in remission (diagnosis codes 204.00, 
205.00, 206.00, 207.00 and 208.00).
    <bullet> Chronic granulocytic leukemia (diagnosis codes 205.10 and 
205.11).
    <bullet> Solid tumors (other than neuroblastomas) (diagnosis codes 
140.0 through 199.1).
    <bullet> Multiple myeloma (diagnosis codes 203.00, 203.01, and 
238.6).
    We received five comments supporting our proposal to assign 
procedure code 41.04 to DRG 481, and we will include this change in the 
final DRG classifications. Two other commenters had specific questions 
concerning the assignment of cases to DRG 481.
    Comment: One commenter questioned the DRG assignment of cases in 
which an autologous hematopoietic stem cell transplant is performed for 
one of the noncovered conditions such as acute leukemia not in 
remission or multiple myeloma. The commenter is unsure whether those 
cases would be assigned to DRG 481 or retain their current DRG 
assignment.
    Response: When a stem cell transplant is performed for a noncovered 
condition, the case will not be assigned to DRG 481. If the only reason 
that the patient is admitted to the hospital is to receive the 
noncovered procedure, then the case receives no Medicare payment 
because the hospital stay is not covered. If a patient receives a 
noncovered stem cell transplant during an otherwise Medicare-covered 
stay, then the case is assigned to a DRG based on the patient's 
principal and secondary diagnoses as well as any other covered 
procedure the patient receives. The stem cell transplant will not be 
considered in the DRG assignment.
    Comment: One commenter was concerned about the assignment of a case 
in which a kidney transplant patient receives an allogeneic bone marrow 
transplant (procedure code 41.03) from the kidney donor to reduce the 
incidence and magnitude of organ rejection. The commenter believes it 
is inappropriate to assign such a case to DRG 481 rather than DRG 302 
(Kidney Transplant) and that we should therefore revise the pre-MDC 
surgical hierarchy.
    Response: Allogeneic bone marrow transplants performed for purposes 
of reducing rejection during a kidney transplant have not yet been 
subject to a national coverage decision. Therefore, under HCFA policy, 
the Medicare contractors (Part A fiscal intermediaries and Part B 
carriers) determine, on a case-by-case basis, whether or not to cover 
and pay for such claims. If a contractor did decide that one of these 
claims should be covered, then it would be paid under DRG 481. If the 
contractor determines that the bone marrow transplant is not covered, 
the claim would be assigned to a DRG without considering the bone 
marrow transplant. In most cases, this assignment would be DRG 302.
3. MDC 1 (Diseases and Disorders of the Nervous System)
    a. Sleep apnea. As discussed in the proposed rule, we have received 
correspondence requesting that we review the DRG assignment of cases in 
which surgery is performed to correct obstructive sleep apnea 
(diagnosis code 780.57). When coded as a principal diagnosis, sleep 
apnea is assigned to DRGS 34 and 35 (Other Disorders of the Nervous 
System) <SUP>1 in MDC 1.
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    \1\ A single title combined with two DRG numbers is used to 
signify pairs. Generally, the first DRG is for cases with CC and the 
second DRG is for cases without CC. If a third number is included, 
it represents cases of patients who are age 0-17. Occasionally, a 
pair of DRGs is split on age>17 and age 0-17.

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[[Page 46169]]

    Recently, new surgical interventions to correct sleep apnea have 
been introduced. The procedures most frequently performed for this 
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condition are the following:


------------------------------------------------------------------------
               Code                             Description             
------------------------------------------------------------------------
27.69............................  Other plastic repair of palate.      
29.4.............................  Plastic operation on pharynx.        
29.59............................  Other repair of pharynx.             
------------------------------------------------------------------------

    Since none of these surgical procedures is assigned to MDC 1, cases 
of sleep apnea treated with one of these surgeries are assigned to DRG 
468 (Extensive OR procedure Unrelated to Principal Diagnosis) or to DRG 
477 (Nonextensive OR Procedure Unrelated to Principal Diagnosis), 
depending on the procedure.
    We proposed to address this situation by assigning the three 
surgical procedures to MDC 1. Based on the charges associated with 
these cases and the fact that they are not clinically similar to the 
other surgical DRGs in MDC 1, we proposed to include them in DRGs 7 and 
8 (Peripheral and Cranial Nerve and Other Nervous System Procedures).
    We received two comments in support of the addition of codes 27.69, 
29.4 and 29.59 to DRGS 7 and 8. The commenters agree that these 
procedures are frequently used as surgical interventions to correct 
sleep apnea and are appropriately classified to DRGs 7 and 8. We also 
received two comments that disagreed, as discussed below.
    Comment: One commenter was opposed to moving the procedure codes to 
DRGS 7 and 8. The commenter stated that if the patient had obstructive 
sleep apnea, the more appropriate diagnosis code would be the 
underlying cause of the obstruction, such as upper airway blockage 
(diagnosis code 528.9, Other and Unspecified Diseases of the Oral Soft 
Tissues) or diagnosis code 478.29, Other Diseases of Pharynx for 
Redundant Pharyngeal Mucosa.
    Response: We agree that if the medical record provides a precise 
diagnosis for the obstruction, then that condition should be coded. 
However, information supporting these codes is not always provided in 
the medical record. Physicians frequently document obstructive sleep 
apnea as the reason for the surgery. In these cases, medical record 
coders are assigning code 780.57. As explained above, we believe that 
it is inappropriate to continue to assign these cases to DRGS 468 and 
477 and that the better policy is to assign the procedures to MDC 1.
    Comment: We received one comment suggesting that obstructive sleep 
apnea reported in conjunction with procedure codes 27.69, 29.4, or 
29.59 would be more appropriately classified to DRGs 76 and 77 (Other 
Respiratory System Procedures) in MDC 4 (Diseases of the Respiratory 
System). In addition, the commenter recommended that obstructive sleep 
apnea medical cases be assigned to DRGs 101 and 102 (Other Respiratory 
Diagnoses).
    Response: In order to properly classify each case, a diagnosis code 
may be assigned to only one MDC. Diagnoses in each MDC correspond to a 
single organ system or etiology and in general are associated with a 
particular medical specialty. In order to classify cases of obstructive 
sleep apnea to DRGs 76, 77, 101, and 102, code 780.57 would have to be 
reassigned from MDC 1 to MDC 4. We believe that obstructive sleep apnea 
is more appropriately classified to MDC 1; therefore, these cases 
cannot be assigned to a DRG in MDC 4.
    Comment: One commenter noted an error in the discussion of sleep 
apnea in the proposed rule. The second time we referred to the codes to 
be moved to MDC 1, we listed them as 25.59, 78.49, and 29.4 (see 61 FR 
27447).
    Response: In the proposed rule, we inadvertently referred to 
procedures codes 25.59 and 78.49. The codes that will be added to DRGs 
7 and 8 are 27.69, 29.4 and 29.59.
    b. Guillain-Barre Syndrome. Guillain-Barre syndrome (diagnosis code 
357.0) is a post-infectious polyneuropathy in which severely affected 
patients may require ventilatory assistance and long stays in intensive 
care. In recognition of the high resource consumption associated with 
this diagnosis, effective with FY 1991, we reassigned code 357.0 from 
DRGs 18 and 19 (Cranial and Peripheral Nerve Disorders) to DRG 20 
(Nervous System Infection Except Viral Meningitis). (See the September 
4, 1990 final rule (55 FR 36024).)
    We have recently received requests that we again review this 
assignment. These commenters stated that the treatment for these cases 
remains very costly and often entails long hospital stays. Therefore, 
we conducted an analysis of the cases assigned to DRG 20 using the 10 
percent random sample of the FY 1995 MedPAR file that we use for 
analyzing possible classification changes.
    Cases coded with 357.0 constitute approximately 20 percent of the 
cases assigned to DRG 20. The average standardized charges for these 
cases, approximately $22,400, was higher than the average charge for 
the DRG, approximately $17,100. However, the length of stay was 
virtually the same. Since we believe that DRG 20 is the appropriate 
assignment clinically for Guillain-Barre cases, we reviewed the other 
cases assigned to DRG 20 for possible change.
    We found that herpes zoster of the nervous system, NOS (diagnosis 
code 053.10) and herpes zoster of the nervous system, NEC (diagnosis 
code 053.19) had average charges of only $7,700 and $7,100, 
respectively. They also had lower average lengths of stay (6.2 and 6.1 
days, respectively). (In the proposed rule, we mistakenly cited these 
lengths of stay as 4.4 and 4.2, respectively (61 FR 27447).) Because 
these two diagnoses account for approximately 20 percent of the cases 
in DRG 20, their low average charge has the effect of significantly 
lowering the average charge for the DRG. We proposed to reassign these 
codes to DRGs 18 and 19.
    Comment: We received two comments regarding our proposal to assign 
diagnosis codes 053.10 and 053.19 to DRGs 18 and 19, both of which 
supported the change. However, one commenter noted that even though 
these cases obviously do not consume the amount of resources as other 
cases assigned to DRG 20, clinically, they are more closely related to 
cases in DRG 20 than those in DRGs 18 and 19. The commenter also 
expressed an interest in the length of stay and charges for geniculate 
herpes zoster (diagnosis code 053.11), which we did not propose to move 
from DRG 20.
    Response: We do not believe that reassigning these codes to DRGs 18 
and 19 is clinically unsound. There are currently two other herpes 
zoster diagnoses classified to those DRGs (Postherpetic trigeminal 
neuralgia (code 053.12) and postherpetic polyneuropathy (code 053.13)). 
Further, as the commenter noted, the charges and length of stay for 
053.10 and 053.19 are very close to those for the cases assigned to 
DRGs 18 and 19.
    We had considered moving all three herpes diagnosis codes (035.10, 
053.11, and 053.19) from DRG 20 to DRGs 18 and 19. However, the higher 
charges associated with geniculate herpes zoster ($11,000) and slightly 
higher length of stay (6.7 days) led us to decide instead to leave 
053.11 in DRG 20 and to closely monitor these cases in upcoming years.
4. MDC 5 (Diseases and Disorders of the Circulatory System)
    Effective for discharges occurring on or after October 1, 1995, we 
created a

[[Page 46170]]

new code for insertion of a coronary artery stent (procedure code 
36.06). Until creation of the new code, insertion of coronary artery 
stent had been included in the codes for percutaneous transluminal 
coronary angioplasty (PTCA) (procedure codes 36.01, 36.02, and 36.05).
    When a new code is introduced, our longstanding practice is to 
assign it to the same DRG category as its predecessor code or codes. 
Therefore, in the September 1, 1995 final rule (60 FR 45785), we 
assigned procedure code 36.06 to DRG 112 (Percutaneous Cardiovascular 
Procedures), the DRG to which PTCA is assigned. We also stated that the 
resource use and other data associated with procedure code 36.06 will 
be available in the FY 1996 Medicare cases which are used for analysis 
as part of FY 1998 DRG changes. We will evaluate the DRG assignment of 
coronary artery stent insertion at that time.
    Since publication of the September 1, 1995 final rule, we have 
received data on stent cases provided by the manufacturer of one of the 
two stent devices currently approved by the Food and Drug 
Administration (FDA). In addition, the manufacturer has provided us 
with an analysis of the charges and length of stay of approximately 
7,500 Medicare patients who received stents in FY 1995.
    The manufacturer's analysis found that the FY 1995 average charge 
for PTCA cases without stent is approximately $15,700 and the average 
charge for cases with stent is approximately $21,000. However, our 
analysis of the data shows that there is wide variation in the hospital 
standardized charges reported for cases with implant of coronary artery 
stent. Individual hospital average charges for these cases range from 
about $9,000 to over $45,000.
    This inconsistency in the data illustrates why our policy of not 
reassigning new codes until we have collected an entire year of coded 
Medicare data for analysis is prudent. The uncertainty associated with 
using incomplete data collected outside the Medicare program that 
cannot be verified remains a problem. Therefore, we did not propose any 
DRG assignment change for implant of coronary artery stent.
    Comment: We received five comments on this issue. One commenter 
agreed that the strategy of not assigning new codes into different DRGs 
until Medicare data have been collected and reviewed is appropriate. 
Four commenters requested that we take action this year. The commenters 
suggested various options for reassigning code 36.06: assign the code 
to its own DRG; move the code to a higher-weighted DRG (DRG 116, Other 
Permanent Cardiac Pacemaker Implant or AICD Lead or Generator Procedure 
was suggested); or increase the weight for DRG 112 to recognize that 
some of these cases involve stents.
    One commenter believes that if we delay action, hospitals will not 
be able to provide stent therapy to Medicare beneficiaries, thereby 
depriving them of state-of-the-art technology and better outcomes. The 
commenter noted that although the literature has reported higher costs 
(for example, cost of the device itself, increased anticoagulation 
therapy, more frequent monitoring) related to this procedure, there has 
also been some offset noted because of the reduction in followup 
medical costs. There is also the potential that further improvement in 
stent design, implantation techniques, and other anticoagulant therapy 
could further increase this offset by reducing vascular complications 
or length of stay.
    One commenter, the manufacturer of a coronary stent device, stated 
that the assignment of coronary stent implant to DRG 112 is 
inappropriate in light of the higher average lengths of stay and 
charges associated with this procedure compared to traditional 
angioplasty. The commenter argued that, given these differences, DRG 
reclassification of procedure code 36.06 would be consistent with the 
statutory mandate to adjust the DRG classifications and relative 
weights to "reflect changes in treatment patterns, technology, and 
other factors which may change the relative use of hospital 
resources." (Section 1886(d)(4)(C) of the Act.)
    The commenter also cited 1,200 peer-reviewed clinical publications 
that demonstrate superior clinical outcomes with coronary stent 
implant. Finally, the commenter stated that the variation in hospital 
standardized charges for coronary stent implant cases is less than the 
variation in charges for all PTCA cases without stent implant.
    Response: As we stated in the proposed rule (61 FR 27447) and in 
the September 1, 1995 final rule (60 FR 45785), our practice is to 
assign a new code to the same DRG or DRGs as its predecessor code. One 
compelling reason for this practice is our inability to move the cases 
associated with the new code to a new DRG assignment as part of the DRG 
reclassification and recalibration process. Because the code is new, we 
cannot identify the stent cases in DRG 112 to remove the charges from 
that DRG, revise the relative weight accordingly, and move those cases 
to another DRG and establish the revised weight of that DRG.
    We do not disagree with the commenters that the stent implant cases 
are more costly, on average, than other PTCA cases. We also do not 
dispute the clinical superiority of this treatment for certain 
patients. However, until we can review actual Medicare data to 
determine exactly what the difference in charges is, we cannot make a 
reasoned decision as to whether those cases should be moved to another 
DRG or be assigned to a new DRG. We believe that waiting for 
appropriate data is entirely consistent with our statutory duty to 
adjust DRG classifications.
    Regarding the comment on the variation in charges for stent versus 
nonstent PTCA cases, we note that the charges for a specific procedure 
should vary less than the charges for a set of cases that vary in 
severity and for which many different treatments may be performed. That 
is, the homogeneity of the patients who received a stent implant should 
reflect a lower degree of variation.
    Finally, analysis of data provided by the stent manufacturer 
convinced us that Medicare beneficiaries have access to stent implants 
that is at least equal to the general population. Moreover, we note 
that it is a violation of a hospital's Medicare provider agreement to 
place restrictions on the number of Medicare beneficiaries it will 
accept for treatment unless it places the same restrictions on all 
other patients. We will carefully examine the PTCA cases with and 
without stent implant in the FY 1996 claims data file as soon as it is 
available. Any DRG changes we determine are supported by the data will 
be addressed in the FY 1998 proposed rule.
5. MDC 8 (Diseases and Disorders of the Musculoskeletal System and 
Connective Tissue)
    In the proposed rule, we reviewed the DRG assignment in MDC 8 of 
bipolar hip replacement cases as a follow-up to a comment received last 
year. The commenter believed that the procedure for partial hip 
replacement (code 81.52), currently assigned to DRG 209 (Major Joint 
and Limb Reattachment Procedures of Lower Extremity), is very similar 
to the procedure for open reduction of fracture of the femur with 
internal fixation (code 79.35), which is assigned to DRGs 210, 211, and 
212 (Hip and Femur Procedures Except Major Joint). Further, the 
commenter noted that partial hip replacement patients are more frail 
individuals than the population that elects total hip replacement and 
need longer hospital stays to recover.

[[Page 46171]]

    After reviewing the FY 1995 MedPAR file, we concluded that the 
charges and lengths of stay for partial hip replacement cases assigned 
to DRG 209 were very similar to the other cases assigned to DRG 209. 
However, the average charge for cases in DRG 210 was significantly less 
than the partial hip replacement charges. We note that the length of 
stay for partial hip replacement cases was closer to the average length 
of stay for DRG 210. However, the higher charges of the partial hip 
replacement cases indicate that they are more resource-intensive than 
the cases in DRG 210 and similar to the cases in DRG 209. Therefore, we 
proposed to retain procedure code 81.52 in DRG 209.
    We received three comments, all of which supported our proposal, 
and we will continue to assign partial hip replacement cases to DRG 
209.
6. Surgical Hierarchies
    Some inpatient stays entail multiple surgical procedures, each one 
of which, occurring by itself, could result in assignment of the case 
to a different DRG within the MDC to which the principal diagnosis is 
assigned. It is, therefore, necessary to have a decision rule by which 
these cases are assigned to a single DRG. The surgical hierarchy, an 
ordering of surgical classes from most to least resource-intensive, 
performs that function. Its application ensures that cases involving 
multiple surgical procedures are assigned to the DRG associated with 
the most resource-intensive surgical class.
    Because the relative resource intensity of surgical classes can 
shift as a function of DRG reclassification and recalibration, we 
reviewed the surgical hierarchy of each MDC, as we have for previous 
reclassifications, to determine if the ordering of classes coincided 
with the intensity of resource utilization, as measured by the same 
billing data used to compute the DRG relative weights.
    A relative class can be composed of one or more DRGs. For example, 
in MDC 5, the surgical class "heart transplant" consists of a single 
DRG (DRG 103) and the class "coronary bypass" consists of two DRGs 
(DRGS 106 and 107). Consequently, in many cases, the surgical hierarchy 
has an impact on more than one DRG. The methodology for determining the 
most resource-intensive surgical class, therefore, involves weighting 
each DRG for frequency to determine the average resources for each 
surgical class. For example, assume surgical class A includes DRGs 1 
and 2 and surgical class B includes DRGs 3, 4, and 5, and that the 
average charge of DRG 1 is higher than that of DRG 3, but the average 
charges of DRGs 4 and 5 are higher than the average charge of DRG 2. To 
determine whether surgical class A should be higher or lower than 
surgical class B in the surgical hierarchy, we would weight the average 
charge of each DRG by frequency (that is, by the number of cases in the 
DRG) to determine average resource consumption for the surgical class. 
The surgical classes would then be ordered from the class with the 
highest average resource utilization to that with the lowest, with the 
exception of "other OR procedures" as discussed below.
    This methodology may occasionally result in a case involving 
multiple procedures being assigned to the lower- weighted DRG (in the 
highest, most resource-intensive surgical class) of the available 
alternatives. However, given that the logic underlying the surgical 
hierarchy provides that the GROUPER searches for the procedure in the 
most resource-intensive surgical class, which may sometimes occur in 
cases involving multiple procedures, this result is unavoidable.
    We note that, notwithstanding the foregoing discussion, there are a 
few instances when a surgical class with a lower average relative 
weight is ordered above a surgical class with a higher average relative 
weight. For example, the "other OR procedure" surgical class is 
uniformly ordered last in the surgical hierarchy of each MDC in which 
it occurs, regardless of the fact that the relative weights for the DRG 
or DRGS in that surgical class may be higher than that for other 
surgical classes in the MDC. The "other OR procedures" class is a 
group of procedures that are least likely to be related to the 
diagnosis in the MDC but are occasionally performed on patients with 
these diagnoses. Therefore, these procedures should only be considered 
if no other procedure more closely related to the diagnoses in the MDC 
has been performed.
    A second example occurs when the difference between the average 
weights for two surgical classes is very small. We have found that 
small differences generally do not warrant reordering of the hierarchy 
since, by virtue of the hierarchy change, the relative weights are 
likely to shift such that the higher-ordered surgical class has a lower 
average weight than the class ordered below it.
    Based on the preliminary recalibration of the DRGs, we proposed to 
modify the surgical hierarchy as set forth below. As we stated in the 
September 1, 1989 final rule (54 FR 36457), we are unable to test the 
effects of the proposed revisions to the surgical hierarchy and to 
reflect these changes in the proposed relative weights due to the 
unavailability of revised GROUPER software at the time the proposed 
rule is prepared. Rather, we simulate most major classification changes 
to approximate the placement of cases under the proposed 
reclassification and then determine the average charge for each DRG. 
These average charges then serve as our best estimate of relative 
resource use for each surgical class. We test the proposed surgical 
hierarchy changes after the revised GROUPER is received and reflect the 
final changes in the DRG relative weights in the final rule.
    We proposed to revise the surgical hierarchy for the Pre-MDC DRGs, 
MDC 3 (Diseases and Disorders of the Ear, Nose, Mouth, and Throat), and 
MDC 10 (Endocrine, Nutritional and Metabolic Diseases and Disorders) as 
follows:
    <bullet> In the Pre-MDC DRGs, we proposed to reorder Tracheostomy 
Except for Face, Mouth and Neck diagnoses (DRG 483) above Liver 
Transplant (DRG 480).
    <bullet> In MDC 3, we proposed to reorder Cleft Lip and Palate 
Repair (DRG 52) and Sinus and Mastoid Procedures (DRGs 53 and 54) above 
Tonsillectomy and Adenoidectomy, Except Tonsillectomy and/or 
Adenoidectomy Only (DRGs 57 and 58).
    <bullet> In MDC 10, we proposed to reorder Adrenal and Pituitary 
Procedures (DRG 286) above Amputation of Lower Limb for Endocrine, 
Nutritional, and Metabolic Disorders (DRG 285).
    We received two comments in support of the three surgical hierarchy 
changes. In addition, based on a test of the proposed changes using the 
most recent MedPAR file and the revised GROUPER software, we have found 
that the changes are still supported by the data and no additional 
changes are indicated. Therefore, we are incorporating these changes in 
this final rule.
7. Refinement of Complications and Comorbidities List
    a. Addition or Deletion of CCs. There is a standard list of 
diagnoses that are considered complications or comorbidities (CCs). We 
developed this list using physician panels to include those diagnoses 
that, when present as a secondary condition, would be considered a 
substantial complication or comorbidity. In previous years, we have 
made changes to the standard list of CCs, either by adding new CCs or 
deleting any of the diagnosis codes on the CC list.
    In the September 1, 1995 final rule (60 FR 45782), we added 
diagnosis code 008.49 (Bacterial enteritis) to the CC list.

[[Page 46172]]

In response to a request from one commenter that we also add diagnosis 
code 008.45 (Clostridium difficile), we stated that we would review 
that request as part of our DRG analysis for FY 1997. We have 
reevaluated diagnosis code 008.45 as well as the remainder of the 
"family" of codes assigned to the category of Intestinal infections 
due to other specified bacteria (008.41, 008.42, 008.43, 008.44, 
008.46, and 008.47). Our analysis shows that all of these diagnoses, 
when present as a secondary condition, do lead to higher resource use. 
Therefore, we proposed to add the following diagnosis codes to the CC 
list:

008.41  Intestinal infections due to staphylococcus
008.42  Intestinal infections due to pseudomonas
008.43  Intestinal infections due to campylobacter
008.44  Intestinal infections due to yersinia enterocolitica
008.45  Intestinal infections due to clostridium difficile
008.46  Intestinal infections due to other anaerobes
008.47  Intestinal infections due to other gram-negative bacteria

    These diagnoses would be considered CCs for any principal diagnosis 
not shown in Table 6f, Additions to the CC Exclusions List (see 
discussion of CC Exclusions list in section V of the addendum below).
    This same commenter also requested that we add the following codes 
to the CC list:

331.0  Alzheimer's disease
423.9  Unspecified disease of the pericardium
348.5  Cerebral edema
333.4  Huntington's chorea
458.0  Orthostatic hypotension
458.9  Hypotension, not otherwise specified

    Our analysis of these codes demonstrated that their presence as a 
secondary diagnosis did not significantly add to the resource use of 
the case. Therefore, we did not propose to add them to the CC list.
    Finally, the commenter suggested that the following diagnoses be 
added as cardiovascular complications for DRG 121 (Circulatory 
Disorders with AMI and Cardiovascular Complications, Discharged Alive):

434.xx  Occlusion of cerebral arteries
436  Acute, but ill-defined, cerebrovascular disease

    Based on our analysis, charges associated with those cases were 
indeed comparable to the other cases assigned to DRG 121. However, when 
we sought the advice of our medical specialists (physicians who work 
directly for or under contract with HCFA), they strongly opposed adding 
these codes to the list of conditions for DRG 121 based on the fact 
that these are not cardiovascular complications. Therefore, they are 
not clinically similar to other cases assigned to this DRG.
    Our analysis of DRG 121 did reveal a large variation in the charges 
and lengths of stay within this DRG. We believe that a close 
examination of the list of complicating conditions assigned to DRG 121 
is needed. Therefore, we plan to perform a thorough analysis of the 
cases assigned to that DRG as part of our DRG analysis agenda for FY 
1998. In the meantime, we did not propose any change to DRG 121.
    We received three comments supporting the addition of the remainder 
of the "family" of codes for intestinal infection due to bacteria to 
the CC list. We received one comment in support of our decision not to 
add 331.0, 423.9, 348.5, 333.4, 458.0, and 458.9 to the CC list.
    Comment: Two commenters requested that we reconsider our decision 
not to add codes 434.xx (Occlusion of cerebral arteries) and 436 
(Acute, but ill-defined, cerebrovascular disease) to the list of 
conditions that are designated cardiovascular complications for 
assignment to DRG 121 (Circulatory Disorders with AMI and 
Cardiovascular Complications, Discharged Alive). One commenter noted 
that even though these diagnoses are not cardiac in nature, they are 
vascular complications. The other commenter stated that there are other 
conditions assigned to DRG 121, such as acute renal failure, that are 
not strictly cardiovascular conditions. The commenter supports our 
decisions to completely review DRG 121, but believes diagnosis codes 
434.xx and 436 should be added this year.
    Response: As explained in the proposed rule (61 FR 27449), in our 
initial analysis, cases assigned to DRG 121 that had these diagnoses 
coded as secondary conditions contained charges that were indeed 
comparable to the other cases assigned to DRG 121. However, our 
analysis of DRG 121 and the list of cardiovascular conditions revealed 
large variations in the charges and lengths of stay for cases within 
this DRG. Because the diagnoses associated with codes 434.xx and 436 
are not strictly cardiovascular in nature, we believe the better course 
would be to do a comprehensive review of DRG 121, including considering 
adding additional diagnosis as complicating conditions. We will address 
these issues as part of our DRG analysis agenda for FY 1998.
    b. CC Exclusions List. In the September 1, 1987 final notice 
concerning changes to the DRG classification system (52 FR 33143), we 
modified the GROUPER logic so that certain diagnoses included on the 
standard list of CCs would not be considered a valid CC in combination 
with a particular principal diagnosis. Thus, we created the CC 
Exclusions List. We made these changes to preclude duplicative coding 
or inconsistent coding from being treated as CCs, and to ensure that 
cases are appropriately classified between the complicated and 
uncomplicated DRGs in a pair.
    In the May 19, 1987 proposed notIce concerning changes to the DRG 
classification system (52 FR 18877), we explained that the excluded 
secondary diagnoses were established using the following five 
principles:
    <bullet> Chronic and acute manifestations of the same condition 
should not be considered CCs for one another (as subsequently corrected 
in the September 1, 1987 final notice (52 FR 33154)).
    <bullet> Specific and nonspecific (that is, not otherwise specified 
(NOS)) diagnosis codes for a condition should not be considered CCs for 
one another.
    <bullet> Conditions that may not co-exist, such as partial/total, 
unilateral/bilateral, obstructed/unobstructed, and benign/malignant, 
should not be considered CCs for one another.
    <bullet> The same condition in anatomically proximal sites should 
not be considered CCs for one another.
    <bullet> Closely related conditions should not be considered CCs 
for one another.
    The creation of the CC Exclusions List was a major project 
involving hundreds of codes. The FY 1988 revisions were intended to be 
only a first step toward refinement of the CC list in that the criteria 
used for eliminating certain diagnoses from consideration as CCS were 
intended to identify only the most obvious diagnoses that should not be 
considered complications or comorbidities of another diagnosis. For 
that reason, and in light of comments and questions on the CC list, we 
have continued to review the remaining CCs to identify additional 
exclusions and to remove diagnoses from the master list that have been 
shown not to meet the definition a CC. (See the September 30, 1988 
final rule for the revisions made for the discharges occurring in FY 
1989 (53 FR 38485); the September 1, 1989 final rule for the FY 1990 
revisions (54 FR 36552); the September 4, 1990 final rule for the FY 
1991 revisions (55 FR 36126); the August 30, 1991 final rule for the FY 
1992 revision (56 FR 43209); the September 1, 1992 final rule for the

[[Page 46173]]

FY 1993 revisions (57 FR 39753); the September 1, 1993 final rule for 
the FY 1994 revisions (58 FR 46278); the September 1, 1994 final rule 
for the FY 1995 revisions (59 FR 45334); and the September 1, 1995 rule 
for the FY 1996 revisions (60 FR 45782).)
    The proposed rule reflected a limited revision of the CC Exclusions 
List to take into account the changes that will be made in the ICD-9-CM 
diagnosis coding system effective October 1, 1996, as well as the 
proposed CC changes described above. (See section II.B.8, below, for a 
discussion of ICD-9-CM changes.) These changes are being made in 
accordance with the principles established when we created the CC 
Exclusions List in 1987.
    The changes discussed above have been added to Table 6g, Additions 
to the CC Exclusions List, in section V of the addendum to this final 
rule.
    Table 6g and 6h in section V of the addendum to this final rule 
contain the revisions to the CC Exclusions List that will be effective 
for discharges occurring on or after October 1, 1996. Each table shows 
the principal diagnoses with final changes to the excluded CCs. Each of 
these principal diagnoses is shown with an asterisk, and the additions 
or deletions to the CC Exclusions List are provided in an indented 
column immediately following the affected principal diagnosis.
    CCs that are added to the list are in Table 6g--Additions to the CC 
Exclusions List. Beginning with discharges on or after October 1, 1996, 
the indented diagnoses will not be recognized by the GROUPER as valid 
CCs for the asterisked principal diagnosis.
    CCs that are deleted from the list are in Table 6h--Deletions from 
the CC Exclusions List. Beginning with discharges on or after October 
1, 1996, the indented diagnoses will be recognized by the GROUPER as 
valid CCs for the asterisked principal diagnosis.
    Copies of the original CC Exclusions List applicable to FY 1988 can 
be obtained for the National Technical Information Service (NTIS) of 
the Department of Commerce. It is available in hard copy for $92.00 
plus $6.00 shipping and handling and on microfiche for $20.50, plus 
$4.00 for shipping and handling. A request for the FY 1988 CC 
Exclusions List (which should include the identification accession 
number, (PB) 88-133970) should be made to the following address: 
National Technical Information Service; United States Department of 
Commerce; 5285 Port Royal Road; Springfield, Virginia 22161; or by 
calling (703) 487-4650.
    Users should be aware of the fact that all revisions to the CC 
Exclusions List (FYs 1989, 1990, 1991, 1992, 1993, 1994, 1995, and 
1996) and those in Tables 6g and 6h of this document must be 
incorporated into the list purchased from NTIS in order to obtain the 
CC Exclusions List applicable for discharges occurring on or after 
October 1, 1996.
    Alternatively, the complete documentation of the GROUPER logic, 
including the current CC Exclusions List, is available from 3M/Health 
Information Systems (HIS), which under contract with HCFA, is 
responsible for updating and maintaining the GROUPER program. The 
current DRG Definitions Manual, Version 13.0, is available for $195.00, 
which includes $15.00 for shipping and handling. Version 14.0 of this 
manual, which will include the final FY 1997 DRG changes, will be 
available in October 1996 for $195.00. These manuals may be obtained by 
writing 3M/HIS at the following address: 100 Barnes Road; Wallingford, 
Connecticut 06492; or by calling (203) 949-0303. Please specify the 
revision or revisions requested.
8. Review of Procedure Codes in DRGs 468, 476, and 477
    Each year, we review cases assigned to DRG 468 (Extensive OR 
Procedure Unrelated to Principal Diagnosis), DRG 476 (Prostatic OR 
Procedure Unrelated to Principal Diagnosis), and DRG 477 (Nonextensive 
OR Procedure Unrelated to Principal Diagnosis) in order to determine 
whether it would be appropriate to change the procedures assigned among 
these DRGs.
    DRGs 468, 476, and 477 are reserved for those cases in which none 
of the OR procedures performed is related to the principal diagnosis. 
These DRGs are intended to capture atypical cases, that is, those cases 
not occurring with sufficient frequency to represent a distinct, 
recognizable clinical group. DRG 476 is assigned to those discharges in 
which one or more of the following prostatic procedures are performed 
and are unrelated to the principal diagnosis:

60.0  Incision of prostate
60.12  Open biopsy of prostate
60.15  Biopsy of periprostatic tissue
60.18  Other diagnostic procedures on prostate and periprostatic tissue
60.21  Transurethral prostatectomy
60.29  Other transurethral prostatectomy
60.61  Local excision of lesion of prostate
60.69  Prostatectomy NEC
60.81  Incision of periprostatic tissue
60.82  Excision of periprostatic tissue
60.93  Repair of prostate
60.94  Control of (postoperative) hemorrhage of prostate
60.95  Transurethral balloon dilation of the prostatic urethra
60.99  Other operations on prostate

    All remaining OR procedures are assigned to DRGs 468 and 477, with 
DRG 477 assigned to those discharges in which the only procedures 
performed are nonextensive procedures that are unrelated to the 
principal diagnosis. The original list of the ICD-9-CM procedure codes 
for the procedures we consider nonextensive procedures if performed 
with an unrelated principal diagnosis was published in Table 6c in 
section IV of the addendum to the September 30, 1988 final rule (53 FR 
38591). As part of the final rules published on September 4, 1990, 
August 30, 1991, September 1, 1992, September 1, 1993, September 1, 
1994, and September 1, 1995, we moved several other procedures from DRG 
468 to 477. (See 55 FR 36135, 56 FR 43212, 57 FR 23625, 58 FR 46279, 59 
FR 45336, and 60 FR 45783, respectively.)
    a. Adding Procedure Codes to MDCs. We annually conduct a review of 
procedures producing DRG 468 or 477 assignments on the basis of volume 
of cases in these DRGs with each procedure. Our medical consultants 
then identify those procedures occurring in conjunction with certain 
principal diagnoses with sufficient frequency to justify adding them to 
one of the surgical DRGs for the MDC in which the diagnosis falls. This 
year's review did not identify any necessary changes; therefore, we did 
not propose to move any procedures from DRG 468 or DRG 477 to one of 
the surgical DRGs.
    b. Reassignment of Procedures Among DRGs 468, 476, and 477. We also 
reviewed the list of procedures that produce assignments to DRGs 468, 
476, and 477 to ascertain if any of those procedures should be moved 
from one of these DRGs to another based on average charges and length 
of stay. Generally, we move only those procedures for which we have an 
adequate number of discharges to analyze the data. Based on our review 
this year, we moved one procedure from DRG 468 to DRG 477.
    In reviewing the list of OR procedures that produce DRG 468 
assignments, we analyzed the average charge and length of stay data for 
cases assigned to that DRG to identify those procedures that are more 
similar to the discharges that currently group to either DRG 476 or 
477. We identified one procedure, Closed endoscopic biopsy of lung 
(code

[[Page 46174]]

33.27), a needle biopsy, that is significantly less resource-intensive 
than the other procedures assigned to DRG 468. Therefore, we proposed 
to move procedure code 33.27 to the list of procedures that result in 
assignment to DRG 477.
    In reviewing the list of procedures assigned to DRG 477, we did not 
identify any procedures that should be assigned to either DRG 468 or 
476. We did, however, identify the following procedures that we believe 
should be reassigned from an OR to a non-OR designation:

08.81  Linear repair of laceration of eyelid or eyebrow
08.82  Repair of laceration involving lid margin, partial-thickness
08.83  Other repair of laceration of eyelid, partial-thickness
08.84  Repair of laceration involving lid margin, full-thickness
08.85  Other repair of laceration of eyelid, full-thickness
08.86  Lower eyelid rhytidectomy
08.87  Upper eyelid rhytidectomy
08.89  Other eyelid repair

    Our analysis of the data associated with these eyelid repair 
procedures leads us to conclude that the procedures are performed 
following accidental injury or falls, incurred while the patient is in 
the hospital. These procedures, which are normally performed at bedside 
and do not necessitate a trip to the operating room, are significantly 
less resource-intensive than other procedures designated as OR 
procedures. Therefore, we proposed to change the procedures from OR to 
non-OR procedures. We noted that these procedures are assigned to 
surgical DRGs in MDCs 2, 9, 21, 22, and 24. With this change, cases in 
which procedure codes 08.81 through 08.89 are the only OR procedure 
codes listed would no longer be assigned to a surgical DRG.
    Comment: We received two comments that generally supported our 
proposal to move procedure code 33.27 to the list of procedures that 
result in assignment to DRG 477. However, one of the commenters was 
concerned because this code also includes transbronchial lung biopsy. 
The commenter believes that transbronchial lung biopsy is a high-risk 
procedure and questions whether this would be considered a nonextensive 
procedure.
    Response: In analyzing the procedures that produce assignments to 
each of DRG 468, 476, and 477 for possible reassignment, we evaluate 
average charges and lengths of stay. The cases in DRG 468 with 
procedure code 33.27 are significantly less resource-intensive than the 
other procedures assigned to DRG 468, and more closely resemble the 
average charge and length of stay for procedures classified to DRG 477. 
Although transbronchial lung biopsy may be a more difficult procedure 
to perform than other procedures assigned to 33.27, we do not know how 
many of these cases are actually assigned to DRG 468, that is, how many 
times this procedure is performed for an unrelated principal diagnosis. 
It is possible that the lower charges associated with closed endoscopic 
biopsy of lung cases in DRG 468 do not include many transbronchial lung 
biopsy cases. We also note that in MDC 4, procedure code 33.27 is not 
assigned to the major procedures DRG (DRG 75). In any case, our data 
support the reclassification of these procedures to DRG 477. Therefore, 
we are reassigning procedure code 33.27 from DRG 468 to DRG 477, as 
proposed.
    Comment: We received four comments regarding our proposal to 
designate procedure code category "other repair of eyelid" (codes 
08.81 through 08.89) as non-OR. Two commenters supported our decision, 
although one of those commenters stated that even though these 
procedures may not require an operating room, they may require a 
specialist. One commenter requested that we consider designating these 
eyelid repair codes as non-OR procedures that affect DRG assignment 
when the procedure is the only one performed in connection with a 
related principal diagnosis. The fourth commenter understood that our 
reason for making this change had to do with our belief that many of 
these injuries are sustained during hospital stays. That commenter 
believes that the causes surrounding the injury are not necessarily 
indicative of the nature of the services furnished or the procedures 
performed and that we should not make this change unless we reviewed 
the resources consumed delivering these services.
    Response: Our proposal to change the OR designation for these 
procedures was not based on where the injuries were incurred. Rather, 
we based the decision on our analysis of claims data as part of our 
annual review of procedures that result in assignment to DRGs 468, 476, 
and 477, and on the clinical opinions of our physician consultants. 
Cases in which 08.81 was coded as the only OR procedure, unrelated to 
the principal diagnosis, were the second most frequently assigned to 
DRG 477. Our evaluation of the average charges and length of stay for 
these cases was the deciding factor in our proposal. Both of these 
statistics were much lower for the eyelid repair cases than the average 
case assigned to DRG 477. In addition, the opinion of our medical staff 
was that these repairs would not normally necessitate a trip to the OR, 
even if they are performed by a specialist. Because there are so many 
cases of eyelid repair performed for unrelated diagnoses, we speculated 
that they were the result of injuries sustained while the patient was 
in the hospital.
    Regarding the request to designate codes 08.81 through 08.89 as 
non-OR procedures that affect DRG assignment in the MDCs to which they 
were previously assigned, we analyzed the FY 1995 MedPAR file cases in 
which one of these codes is assigned to DRG 40 and 41 (Extraocular 
Procedures Except Orbit) in MDC 2 (Diseases and Disorders of the Eye) 
and DRG 268 (Skin, Subcutaneous Tissue and Breast Plastic Procedures) 
in MDC 9 (Disease and Disorders of the Skin, Subcutaneous Tissue and 
Breast). In both DRGs 40 and 268 (no cases were assigned to DRG 41 in 
FY 1995), there were no cases in which an eyelid repair was the only 
related procedure coded. That is, in every case, there was another OR 
procedure code present on the claim that would cause it to be assigned 
to either DRG 40 or 268. This means that assignment of cases to these 
DRGs will not be affected by changing the OR designation for the eyelid 
repair codes.
9. Changes to the ICD-9-CM Coding System
    As discussed above in section II.B.1 of this preamble, the ICD-9-CM 
is a coding system that is used for the reporting of diagnoses and 
procedures performed on a patient. In September 1985, the ICD-9-CM 
Coordination and Maintenance Committee was formed. This is a Federal 
interdepartmental committee charged with the mission of maintaining and 
updating the ICD-9-CM. That mission includes approving coding changes, 
and developing errata, addenda, and other modifications to the ICD-9-CM 
to reflect newly developed procedures and technologies and newly 
identified diseases. The Committee is also responsible for promoting 
the use of Federal and non-Federal educational programs and other 
communication techniques with a view toward standardizing coding 
applications and upgrading the quality of the system.
    The Committee is co-chaired by the National Center for Health 
Statistics (NCHS) and HCFA. The NCHS has lead responsibility for the 
ICD-9-CM diagnosis codes included in Volume 1--Diseases: Tabular List 
and Volume 2--Diseases: Alphabetic Index, while HCFA has lead 
responsibility for the ICD-9-CM procedure codes included in

[[Page 46175]]

Volume 3--Procedures: Tabular List and Alphabetic Index.
    The Committee encourages participation in the above process by 
health-related organizations. In this regard, the Committee holds 
public meetings for discussion of educational issues and proposed 
coding changes. These meetings provide an opportunity for 
representatives of recognized organizations in the coding field, such 
as the American Health Information Management Association (AHIMA) 
(formerly American Medical Record Association (AMRA)), the American 
Hospital Association (AHA), and various physician specialty groups as 
well as physicians, medical record administrators, health information 
management professionals, and other members of the public to contribute 
ideas on coding matters. After considering the opinions expressed at 
the public meetings and in writing, the Committee formulates 
recommendations, which then must be approved by the agencies.
    The Committee presented proposals for coding changes at public 
meetings held on May 5 and November 30, 1995, and finalized the coding 
changes after consideration of comments received at the meetings and in 
writing within 30 days following the November 1995 meeting. The initial 
meeting for consideration of coding issues for implementation in FY 
1998 was held on June 6, 1996. Copies of the minutes of these meetings 
may be obtained by writing to one of the co-chairpersons representing 
NCHS and HCFA. We encourage commenters to address suggestions on coding 
issues involving diagnosis codes to: Donna Pickett, Co-Chairperson; 
ICD-9-CM Coordination and Maintenance Committee; NCHS; Room 1100; 6525 
Belcrest Road; Hyattsville, Maryland 20782. Comments may be sent by E-
mail to: dfp4@nch11a.em.cdc.gov.
    Questions and comments concerning the procedure codes should be 
addressed to: Patricia E. Brooks, Co-Chairperson; ICD-9-CM Coordination 
and Maintenance Committee; HCFA, Office of Hospital Policy; Division of 
Prospective Payment System; C5-06-27; 7500 Security Boulevard; 
Baltimore, Maryland 21244-1850. Comments may be sent by E-mail to: 
pbrooks@hcfa.gov.
    The ICD-9-CM codes changes that have been approved will become 
effective October 1, 1996. The new ICD-9-CM codes are listed, along 
with their DRG classifications, in Tables 6a and 6b (New Diagnosis 
Codes and New Procedure Codes, respectively) in section V of the 
addendum to this final rule. As we stated above, the code numbers and 
their titles were presented for public comment in the ICD-9-CM 
Coordination and Maintenance Committee meetings. Both oral and written 
comments were considered before the codes were approved.
    Further, the Committee has approved the expansion of certain ICD-9-
CM codes to require an additional digit for valid code assignment. 
Diagnosis codes that have been replaced by expanded codes, and other 
codes, or have been deleted, are in Table 6c (Invalid Diagnosis Codes). 
The procedure codes that have been replaced by expanded codes or have 
been deleted are in Table 6d (Invalid Procedure Codes). These invalid 
diagnosis and procedure codes will not be recognized by the GROUPER 
beginning with discharges occurring on or after October 1, 1996. The 
corresponding new or expanded codes are included in Tables 6a and 6b. 
Revisions to diagnosis and procedure code titles are in Tables 6e 
(Revised Diagnosis Code Titles) and 6f (Revised Procedure Code Titles), 
which also include the DRG assignments for these revised codes.
    Based on the comments received and our own review, we have 
corrected a code title and added omitted secondary DRG assignments to 
several codes in Tables 6a and 6b. The code title corrected is 995.59, 
Other child abuse and neglect. The codes for which DRG changes have 
been made are as follows:
    <bullet> In Table 6a, MDC 15 and DRG 391 were added to 752.51 and 
752.52 because they are considered "major problems" in this DRG; 
922.31, 922.32, and 922.33 were modified to add MDC 24 and DRGs 484, 
485, 486, and 487; and MDC 15 and DRGs 387 and 389 were added to 
998.11, 998.12, 998.13, 998.51 and 998.59 because they are considered 
"major problems" in these DRGs.
    <bullet> In Table 6b, DRG 303 was added to code 59.03.
    Comment: One commenter supported the creation of new procedure 
codes for partial cholecystectomies; however, the commenter disagreed 
with their assignment to DRGs 193 and 194 (Biliary Tract Procedures 
except only Cholecystectomy with or without C.D.E.). The commenter 
believes that partial cholecystectomy (code 51.21) is similar to 
cholecystectomy (code 51.22) and laparoscopic partial cholecystectomy 
(51.23) is similar to laparoscopic cholecystectomy (51.24). Therefore, 
procedure codes 51.21 and 51.23 should be assigned to the same DRGs as 
51.22 and 51.24, respectively.
    Response: We agree with the commenter. Partial cholecystectomies 
are clinically similar to cholecystectomies and laparoscopic partial 
cholecystectomies are clinically similar to laparoscopic 
cholecystectomies, as well as being similar in terms of resource use. 
Therefore, we have revised Table 6b to indicate that procedure code 
51.21 is assigned to DRGs 195 and 196 (Cholecystectomy with C.D.E.) and 
DRGs 197 and 198 (Cholecystectomy except by Laparoscope) and 51.23 is 
assigned to DRGs 195 and 196 and DRGs 493 and 494 (Laparoscopic 
Cholecystectomy).
    Comment: We received one comment on modifications made to the ICD-
9-CM codes involving psychiatric diagnoses. The commenter had 
participated in the ICD-9-CM Coordination and Maintenance Committee 
meetings and had submitted written proposals for revisions. The 
commenter stated that although the proposed rule listed all final code 
revisions, it did not explain the final action on specific proposals or 
why that action was taken. The commenter suggested that this 
information be included in the final rule. The commenter also objected 
to changing the title of category V61.1 from "Marital Problems" to 
"Counseling for Marital and Partner Problems" because it narrows the 
use of the category.
    Response: The National Center for Health Statistics (NCHS) has the 
lead responsibility for maintaining the diagnosis part of ICD-9-CM. As 
explained above, after receiving comments at the public meetings held 
by the Coordination and Maintenance Committee and reviewing subsequent 
written comments, NCHS proposes final revisions to ICD-9-CM diagnosis 
codes. These revisions are then jointly approved by NCHS and HCFA. The 
purpose of printing the final codes in the Federal Register is simply 
to notify the public and solicit comment on the proposed DRG 
classifications. We recommend that the commenter, or any other 
interested party, contact NCHS directly to discuss the final codes. If 
further revisions are sought, then these can be handled through future 
meetings of the Coordination and Maintenance Committee. We will forward 
the commenter's concerns on category V61.1 to NCHS for review.
    Comment: One commenter supported the ICD-9-CM code revisions for 
October 1, 1996, but suggested that rules relating to the sequencing of 
the new code V66.7, Encounter for palliative care, should be developed 
prior to its use beginning on October 1, 1996.
    Response: We agree with the commenter that medical records 
technicians and administrators will

[[Page 46176]]

need advice on coding this diagnosis. Specific directions in the form 
of a note within the tabular section of the ICD-9-CM will direct the 
coder to "code first underlying disease" when coding V66.7. The NCHS 
has also developed an extensive set of V code guidelines that will also 
clarify that V66.7 should be sequenced second. In addition, AHA 
routinely includes advice on the use of new and modified codes in the 
fourth quarter issue of their publication, Coding Clinic for ICD-9-CM 
Coding. This year's issue will clarify that V66.7 will be used only as 
a secondary diagnosis. The coding advice in Coding Clinic is a 
collaborative effort among HCFA, NCHS, AHA, and AHIMA. Information on 
ordering Coding Clinic can be obtained from the following: American 
Hospital Association, Central Office on ICD-9-CM, One North Franklin, 
Chicago, IL 60606, (312) 422-3366.
    Comment: Although the Committee made no revisions to the pacemaker 
codes, a commenter noted that there have been advances in pacemaker 
technology that may have an effect on coding and DRG classification. 
One new pacemaker device functions as a dual-chamber pacemaker 
(procedure code 37.83) but has only a single lead (procedure code 37.71 
or 37.73). If these pairs of codes are reported on a claim, the case is 
assigned to a medical DRG rather than DRG 115 or 116 (Permanent Cardiac 
Pacemaker Implant).
    Response: This coding issue was addressed recently by the Editorial 
Advisory Board of the Coding Clinic for ICD-9-CM. After consultation 
with the manufacturer of the new pacemaker device, the Board decided 
that, although this pacemaker has a single lead, it functions as dual 
electrodes. Therefore, the insertion of this pacemaker should be coded 
with procedure codes 37.83 and 37.72 (dual lead insertion). If a 
hospital follows this coding advice, the case will be classified to DRG 
115 or 116. This advice will be included in an upcoming issue of Coding 
Clinic. We will monitor this situation to determine if hospitals are 
following this coding advice or if a change in the DRG software is 
necessary.

C. Recalibration of DRG Weights

    We used the same basic methodology for the FY 1997 recalibration as 
we did for FY 1996. (See the September 1, 1995 final rule (60 FR 
45791).) That is, we recalibrated the weights based on charge data for 
Medicare discharges. However, we used the most current charge 
information available, the FY 1995 MedPAR file, rather than the FY 1994 
MedPAR file. The MedPAR file is based on fully-coded diagnostic and 
surgical procedure data for all Medicare inpatient hospital bills.
    The recalibrated DRG relative weights are constructed from FY 1995 
MedPAR data, based on bills received by HCFA through June 1996, from 
all hospitals subject to the prospective payment system and short-term 
acute care hospitals in waiver States. The FY 1995 MedPAR file includes 
data for approximately 11.1 million Medicare discharges.
    The methodology used to calculate the DRG relative weights from the 
FY 1995 MedPAR file is as follows:
    <bullet> All the claims were regrouped using the final DRG 
classification revisions discussed above in section II.B of this 
preamble.
    <bullet> Charges were standardized to remove the effects of 
differences in area wage levels, indirect medical education costs, 
disproportionate share payments, and for hospitals in Alaska and 
Hawaii, the applicable cost-of-living adjustment.
    <bullet> The average standardized charge per DRG was calculated by 
summing the standardized charges for all cases in the DRG and dividing 
that amount by the number of cases classified in the DRG.
    <bullet> We then eliminated statistical outliers, using the same 
criteria as were used in computing the current weights. That is, we 
eliminated all cases that are outside of 3.0 standard deviations from 
the mean of the log distribution of both the charges per case and the 
charges per day for each DRG.
    <bullet> The average charge for each DRG was then recomputed 
(excluding the statistical outliers) and divided by the national 
average standardized charge per case to determine the relative weight. 
A transfer case is counted as a fraction of a case based on the ratio 
of its length of stay to the geometric mean length of stay of the cases 
assigned to the DRG. That is, a 5-day length of stay transfer case 
assigned to a DRG with a geometric mean length of stay of 10 days is 
counted as 0.5 of a total case.
    <bullet> We established the relative weight for heart and heart-
lung, liver, and lung transplants (DRGs 103, 480, and 495) in a manner 
consistent with the methodology for all other DRGs except that the 
transplant cases that were used to establish the weights were limited 
to those Medicare-approved heart, heart-lung, liver, and lung 
transplant centers that have cases in the FY 1995 MedPAR file. 
(Medicare coverage for heart, heart-lung, liver, and lung transplants 
is limited to those facilities that have received approval from HCFA as 
transplant centers.)
    <bullet> Acquisition cost for kidney, heart, heart-lung, liver, and 
lung transplants continue to be paid on a reasonable cost basis. Unlike 
other excluded costs, the acquisition costs are concentrated in 
specific DRGs (DRG 302 (Kidney Transplant); DRG 103 (Heart Transplant 
for heart and heart-lung transplants); DRG 480 (Liver Transplant); and 
DRG 495 (Lung Transplant)). Because these costs are paid separately 
from the prospective payment rate, it is necessary to make an 
adjustment to prevent the relative weights for these DRGs from 
including the effect of the acquisition costs. Therefore, we subtracted 
the acquisition charges from the total charges on each transplant bill 
that showed acquisition charges before computing the average charge for 
the DRG and before eliminating statistical outliers.
    When we recalibrated the DRG weights for previous years, we set a 
threshold of 10 cases as the minimum number of cases required to 
compute a reasonable weight. We proposed to use that same case 
threshold in recalibrating the DRG weights for FY 1997. For this final 
rule, using the June 1996 FY 1995 MedPAR data set, there are 37 DRGs 
that contain fewer than 10 cases. We computed the weights for the 37 
low-volume DRGs by adjusting the FY 1996 weights of these DRGs by the 
percentage change in the average weight of the cases in the other DRGs. 
We note that the FY 1996 weights for the low-volume DRGs were 
recalculated based on non-Medicare data we acquired from 19 States. 
This was the first update of the weights since they were initially 
calculated for FY 1984 based on data from Maryland and Michigan. For a 
complete description of this process, see the September 1, 1995 final 
rule (60 FR 45781).
    The weights developed according to the methodology described above, 
using the DRG classification changes, result in an average case weight 
that is different from the average case weight before recalibration. 
Therefore, the new weights are normalized by an adjustment factor, so 
that the average case weight after recalibration is equal to the 
average case weight before recalibration. This adjustment is intended 
to ensure that recalibration by itself neither increases nor decreases 
total payments under the prospective payment system.
    Section 1886(d)(4)(C)(iii) of the Act requires that beginning with 
FY 1991, reclassification and recalibration changes be made in a manner 
that assures that the aggregate payments are neither greater than nor 
less than the aggregate payments that would have been made without the 
changes. Although normalization is intended to

[[Page 46177]]

achieve this effect, equating the average case weight after 
recalibration to the average case weight before recalibration does not 
necessarily achieve budget neutrality with respect to aggregate 
payments to hospitals because payment to hospitals is affected by 
factors other than average case weight. Therefore, as we have done in 
past years and as discussed in section II.A.4.b. of the addendum to 
this final rule, we are making a budget neutrality adjustment to assure 
that the requirement of section 1886(d)(4)(C)(iii) of the Act is met.
Go to Top


III. Changes to the Hospital Wage Index

A. Background

    Section 1886(d)(3)(E) of the Act requires that, as part of the 
methodology for determining prospective payments to hospitals, the 
Secretary must adjust the standardized amounts "for area differences 
in hospital wage levels by a factor (established by the Secretary) 
reflecting the relative hospital wage level in the geographic area of 
the hospital compared to the national average hospital wage level." In 
accordance with the broad discretion conferred by this provision, we 
currently define hospital labor market areas based on the definitions 
of Metropolitan Statistical Areas (MSAs) (and New England County 
Metropolitan Areas), issued by the Office of Management and Budget 
(OMB). In addition, as discussed below, we adjust the wage index to 
take into account the geographic reclassification of hospitals in 
accordance with sections 1886(d)(8)(B) and 1886(d)(10) of the Act.
    Section 1886(d)(3)(E) of the Act requires that the wage index be 
updated annually beginning October 1, 1993. Furthermore, this section 
provides that the Secretary base the update on a survey of wages and 
wage-related costs of short-term, acute care hospitals. The survey 
should measure, to the extent feasible, the earnings and paid hours of 
employment by occupational category, and must exclude the wages and 
wage-related costs incurred in furnishing skilled nursing services.

B. FY 1997 Wage Index Update

    The final FY 1997 wage index (effective for hospital discharges 
occurring on or after October 1, 1996 and before October 1, 1997) is 
based on the data collected from the Medicare cost reports submitted by 
hospitals for cost reporting periods beginning in FY 1993 (the FY 1996 
wage index is based on FY 1992 wage data). We used the same categories 
of data that were used in the FY 1996 wage index. Therefore, the FY 
1997 wage index reflects the following:
    <bullet> Total salaries and hours from short-term, acute care 
hospitals.
    <bullet> Home office costs and hours.
    <bullet> Fringe benefits associated with hospital and home office 
salaries.
    <bullet> Direct patient care contract labor costs and hours.
    <bullet> The exclusion of salaries and hours for nonhospital type 
services such as skilled nursing facility services, home health 
services, or other subprovider components that are not subject to the 
prospective payment system.
    Finally, we are making a minor revision to Sec. 412.63(s)(1) to 
state clearly that we update the wage index annually as required by 
section 1886(d)(3)(E) of the Act.
    Although we did not propose any changes in the reporting of 
hospital wage index data, we received comments regarding our current 
policies. (Comments specifically related to our policy on contract 
labor are addressed below in section III.D of this preamble.)
    Comment: We received several comments concerning the treatment of 
Medicare Part A physician salaries in the wage index calculation. One 
commenter stated that we should immediately exclude all of these costs, 
using Worksheet A-8-2 of the Medicare cost report to identify physician 
Part A costs. Alternatively, the commenter suggested that we should 
include contracted Part A physician salaries in those States where 
hospitals are prohibited from employing physicians. Two other 
commenters suggested we should prepare an impact analysis of the 
effects of the exclusion of Part A physician salaries.
    Response: As stated in the September 1, 1994 final rule (59 FR 
45355), effective with cost reporting periods beginning on or after 
October 1, 1994, we revised the Medicare cost report to provide for the 
separate reporting of all salary costs for physicians (including 
teaching physicians), interns and residents, and certified registered 
nurse anesthetists. After evaluating these data, we will consider 
appropriate changes in developing the FY 1999 wage index update.
    In response to the suggestion that we should use Worksheet A-8-2 to 
expedite our evaluation of excluding physician Part A salaries, we will 
explore the technical feasibility of using the data from that 
worksheet. Regarding the suggestion that we should allow contracted 
Part A physician salaries to be included in the wage index calculation 
in those States that do not allow hospitals to employ physicians 
directly, we note that, if we were to adopt such a policy it would not 
be effective until hospitals' FY 1997 cost reporting periods. 
Therefore, the data would not be available until the FY 2001 wage 
index. Because we are already collecting data that would allow us to 
exclude all physician Part A salaries by the FY 1999 wage index, we are 
not adopting this comment.
    With respect to the comments that we should prepare an analysis of 
the impact on the wage index of excluding Part A physician salaries, 
any such analysis is, of course, contingent upon having reliable data 
to analyze. At this point, we do not foresee having such data prior to 
the availability of hospitals' FY 1995 cost reports.
    Comment: A commenter stated that the wage index value of rural 
hospitals with swing-bed programs is unfairly deflated by the inclusion 
of the lower salaries related to skilled nursing level care provided to 
patients in swing-beds. The commenter indicated that since hospitals 
can separately identify these salaries, they should be excluded from 
total salaries to be consistent with the way salaries are reported for 
hospitals without a swing-bed program.
    Response: Salaries related to skilled nursing level care provided 
to patients in swing-beds are not reported separately on the Medicare 
cost report. Salary costs for swing-beds are combined with those for 
general adult and pediatric care on the cost report at line 25 of 
Worksheet A. Therefore, it would not be possible under the current cost 
report format to remove from the wage index calculation these costs as 
we do for direct salaries associated with distinct part skilled nursing 
facilities and units. Furthermore, given the nature of the swing-bed 
program, we do not believe it would be appropriate to impose on 
hospitals the additional recordkeeping requirements that would be 
necessary to report these salaries.
1. Verification of Wage Data from the Medicare Cost Report
    The data for the FY 1997 wage index were obtained from Worksheet S-
3, Part II of the Medicare cost report. The data file used to construct 
the wage index includes FY 1993 data submitted to the Hospital Cost 
Report Information System (HCRIS). As in past years, we performed an 
intensive review of the wage data, mostly through the use of edits 
designed to identify aberrant data.
    In the proposed rule, we discussed in detail our review of the wage 
data as well as the process that hospitals could use to verify their 
wage data and submit requests for corrections if necessary (61 FR 
27455). To be reflected in the final wage index, wage data corrections 
had

[[Page 46178]]

to be reviewed, verified, and transmitted to HCFA through HCRIS by June 
17, 1996 (any changes after this date are limited to errors related to 
handling the data, as described below in section III.C of this 
preamble). All data elements that failed edits have been resolved and 
are reflected in this final rule.
2. Computation of the Wage Index
    As noted above, we are basing the FY 1997 wage index on wage data 
reported on the FY 1993 cost reports. The final wage index is based on 
data from 5,231 hospitals paid under the prospective payment system and 
short-term acute care hospitals in waiver States. The method used to 
compute the final wage index is as follows:
    Step 1--We gathered data from each of the non-Federal short-term, 
acute care hospitals for which data were reported on the Worksheet S-3, 
Part II of the Medicare cost report for the hospital's cost reporting 
periods beginning on or after October 1, 1992 and before October 1, 
1993. In addition, we included data from a few hospitals that had cost 
reporting periods beginning in September 1992 and reported a cost 
reporting period exceeding 52 weeks. The data were included because no 
other data from these hospitals would be available for the cost 
reporting period described above, and particular labor market areas 
might be affected due to the omission of these hospitals. However, we 
generally describe these wage data as FY 1993 data.
    Step 2--For each hospital, we subtracted the excluded salaries 
(that is, direct salaries attributable to skilled nursing facility 
services, home health services, and other subprovider components not 
subject to the prospective payment system) from gross hospital salaries 
to determine net hospital salaries. To determine total salaries plus 
fringe benefits, we added direct patient care contract labor costs, 
hospital fringe benefits, and any home office salaries and fringe 
benefits reported by the hospital, to the net hospital salaries.
    Step 3--For each hospital, we adjusted the total salaries plus 
fringe benefits resulting from Step 2 to a common period to determine 
total adjusted wages. To make the wage inflation adjustment, we used 
the percentage change in average hourly earnings for each 30-day 
increment from October 14, 1992 through September 15, 1994, for 
hospital industry workers from Standard Industry Classification 806, 
Bureau of Labor Statistics Employment and Earnings Bulletin. The annual 
inflation rates used were 4.8 percent for FY 1992, 3.6 percent for FY 
1993, and 2.7 percent for FY 1994. The inflation factors used to 
inflate the hospital's data were based on the midpoint of the cost 
reporting period as indicated below.

                    Midpoint of Cost Reporting Period                   
------------------------------------------------------------------------
         After                    Before             Adjustment factor  
------------------------------------------------------------------------
10/14/92...............  11/15/92...............  1.044482              
11/14/92...............  12/15/92...............  1.041408              
12/14/92...............  01/15/93...............  1.038343              
01/14/93...............  02/15/93...............  1.035287              
02/14/93...............  03/15/93...............  1.032240              
03/14/93...............  04/15/93...............  1.029203              
04/14/93...............  05/15/93...............  1.026174              
05/14/93...............  06/15/93...............  1.023154              
06/14/93...............  07/15/93...............  1.020143              
07/14/93...............  08/15/93...............  1.017141              
08/14/93...............  09/15/93...............  1.014147              
09/14/93...............  10/15/93...............  1.011163              
10/14/93...............  11/15/93...............  1.008920              
11/14/93...............  12/15/93...............  1.006683              
12/14/93...............  01/15/94...............  1.004450              
01/14/94...............  02/15/94...............  1.002223              
02/14/94...............  03/15/94...............  1.000000              
03/14/94...............  04/15/94...............  0.997782              
04/14/94...............  05/15/94...............  0.995570              
05/14/94...............  06/15/94...............  0.993362              
06/14/94...............  07/15/94...............  0.991159              
07/14/94...............  08/15/94...............  0.988961              
08/14/94...............  09/15/94...............  0.986767              
------------------------------------------------------------------------

    For example, the midpoint of a cost reporting period beginning 
January 1, 1993 and ending December 31, 1993 is June 30, 1993. An 
inflation adjustment factor of 1.020143 would be applied to the wages 
of a hospital with such a cost reporting period. In addition, for the 
data for any cost reporting period that began in FY 1993 and covers a 
period of less than 360 days or greater than 370 days, we annualized 
the data to reflect a 1-year cost report. Annualization is accomplished 
by dividing the data by the number of days in the cost report and then 
multiplying the results by 365.
    Step 4--For each hospital, we subtracted the reported excluded 
hours from the gross hospital hours to determine net hospital hours. We 
increased the net hours by the addition of any direct patient care 
contract labor hours and home office hours to determine total hours.
    Step 5--As part of our editing process, we deleted data for eight 
hospitals for which we lacked sufficient documentation to verify data 
that failed edits because the hospitals are no longer participating in 
the Medicare program or are in bankruptcy status. We retained the data 
for other hospitals that are no longer participating in the Medicare 
program because these hospitals reflected the relative wage levels in 
their labor market areas during their FY 1993 cost reporting period.
    Step 6--Each hospital was assigned to its appropriate urban or 
rural labor market area prior to any reclassifications under sections 
1886(d)(8)(B) or 1886(d)(10) of the Act. Within each urban or rural 
labor market area, we added the total adjusted wages obtained in Step 3 
for all hospitals in that area to determine the total adjusted wages 
for the labor market area.
    Step 7--We divided the total adjusted wages obtained in Step 6 by 
the sum of the total hours (from Step 4) for all hospitals in each 
labor market area to determine an average hourly wage for the area.
    Step 8--We added the total adjusted wages obtained in Step 3 for 
all hospitals in the nation and then divided the sum by the national 
sum of total hours from Step 4 to arrive at a national average hourly 
wage. Using the data as described above, the national average hourly 
wage is $19.5533.
    Step 9--For each urban or rural labor market area, we calculated 
the hospital wage index value by dividing the area average hourly wage 
obtained in Step 7 by the national average hourly wage computed in Step 
8.
    We note that on June 28, 1996, OMB announced the designation of the 
Pocatello, Idaho MSA comprising Bannock County, Idaho and the 
Jonesboro, Arkansas MSA comprising Craighead County, Arkansas and the 
addition of Chester County, Tennessee to the Jackson, Tennessee MSA. 
These changes are reflected in the final wage index.
3. Revisions to the Wage Index Based on Hospital Redesignation
    Under section 1886(d)(8)(B) of the Act, hospitals in certain rural 
counties adjacent to one or more MSAs are considered to be located in 
one of the adjacent MSAs if certain standards are met. Under section 
1886(d)(10) of the Act, the Medicare Geographic Classification Review 
Board (MGCRB) considers applications by hospitals for geographic 
reclassification for purposes of payment under the prospective payment 
system.
    The methodology for determining the wage index values for 
redesignated hospitals is applied jointly to the hospitals located in 
those rural counties that were deemed urban under section 1886(d)(8)(B) 
of the Act and those hospitals that were reclassified as a result of 
the MGCRB decisions under section 1886(d)(10) of the Act. Section 
1886(d)(8)(C) of the Act provides that the application of the wage 
index to redesignated hospitals is dependent on the hypothetical impact 
that the wage data from these hospitals would have on

[[Page 46179]]

the wage index value for the area to which they have been redesignated. 
Therefore, as provided in section 1886(d)(8)(C) of the Act, the wage 
index values were determined by considering the following:
    <bullet> If including the wage data for the redesignated hospitals 
reduces the MSA wage index value by 1 percentage point or less, the MSA 
wage index value determined exclusive of the wage data for the 
redesignated hospitals applies to the redesignated hospitals.
    <bullet> If including the wage data for the redesignated hospitals 
reduces the wage index value for the area to which the hospitals are 
redesignated by more than 1 percentage point, the hospitals that are 
redesignated are subject to the wage index value of the area that 
results from including the wage data of the redesignated hospitals (the 
"combined" wage index value). However, the wage index value for the 
redesignated hospitals cannot be reduced below the wage index value for 
the rural areas of the State in which the hospitals are located.
    <bullet> If including the wage data for the redesignated hospitals 
increases the MSA wage index value, the MSA and the redesignated 
hospitals receive the combined wage index value.
    <bullet> Rural areas whose wage index values would be reduced by 
excluding the data for hospitals that have been redesignated to another 
area continue to have their wage index calculated as if no 
redesignation had occurred. Those rural areas whose wage index values 
increase as a result of excluding the wage data for the hospitals that 
have been redesignated to another area have their wage indexes 
calculated exclusive of the redesignated hospitals.
    <bullet> The wage index value for an urban area is calculated 
exclusive of the wage data for hospitals that have been reclassified to 
another area. However, geographic reclassification may not reduce the 
wage index for an urban area below the Statewide rural average, 
provided the wage index prior to reclassification was greater than the 
Statewide rural wage index value.
    <bullet> A change in classification of hospitals from one area to 
another may not result in the reduction in the wage index for any urban 
area whose wage index is below the rural wage index for the State. This 
provision also applies to any urban area that encompasses an entire 
State.
    We note that, except for those rural areas where redesignation 
would reduce the rural wage index value, and those urban areas whose 
wage index values are already below the rural wage index and would be 
reduced by redesignations, the wage index value for each area is 
computed exclusive of the data for hospitals that have been 
redesignated from the area for purposes of their wage index. As a 
result, several MSAs listed in Table 4a have no hospitals remaining in 
the MSA. This is because all the hospitals originally in these MSAs 
have been reclassified to another area by the MGCRB. These areas 
receive the prereclassified wage index value. The prereclassified wage 
index value will apply as long as the MSA remains empty.
    The final wage index values for FY 1997 are shown in Tables 4a, 4b, 
and 4c in the Addendum to this final rule. The FY 1997 wage index 
values incorporate all hospital redesignations for FY 1997, withdrawals 
of requests for reclassification, wage index corrections, appeals, and 
the Administrator's review process. For FY 1997, 385 hospitals are 
redesignated for purposes of the wage index (hospitals redesignated 
under section 1886(d)(8)(B) or 1886(d)(10) of the Act). For hospitals 
that are redesignated, the wage index values are shown in Table 4c. For 
some areas, Table 4c shows more than one wage index value. This occurs 
when hospitals from more than one State are included in the group of 
redesignated hospitals, and one State has a higher Statewide rural wage 
index value than the wage index value otherwise applicable to the 
redesignated hospitals.
    Tables 4d and 4e list the average hourly wage for each labor market 
area, prior to the redesignation of hospitals, based on the FY 1993 
wage data. In addition, Table 3C in the addendum to this final rule 
includes the adjusted average hourly wage for each hospital based on 
the FY 1993 data. Hospitals should use the average hourly wage 
published in this final rule in applying to the MGCRB for wage index 
reclassifications that would be effective for FY 1998. The MGCRB will 
use the average hourly wage published in the final rule to evaluate a 
hospital's application for reclassification, unless that average hourly 
wage is later revised in accordance with the wage data correction 
policy described in Sec. 412.63(s)(2). In such cases, the MGCRB will 
use the most recent revised data used for purposes of the hospital wage 
index.

C. Requests for Wage Data Corrections

    In the proposed rule, we noted that we would make a diskette 
available in mid-August that contained the wage data used to construct 
the wage index values in this final rule. As with the diskette made 
available in March 1996, HCFA made the August diskette available to 
hospital associations and the public. (Please note that this data file 
is also available on HCFA's World-Wide Web page, public use files 
address (http://www.hcfa.gov/stats/stats.html).) This file is made 
available only for the purpose of identifying any potential errors made 
by HCFA or the intermediary in the handling of the final wage data that 
result from the process described above, not for the initiation of new 
wage data correction requests.
    In addition, as noted above, Table 3C in the Addendum to this final 
rule contains each hospital's adjusted average hourly wage used to 
construct the wage index values. A hospital can verify its average 
hourly wage as reflected on its cost report (after taking into account 
any adjustments made by the intermediary), by dividing the adjusted 
average hourly wage in Table 3C by the applicable wage inflation 
adjustment factors as set forth above in Step 3 of the computation of 
the wage index.
    As noted in the proposed rule, after mid-August, we will make 
changes to the hospital wage data only in those very limited situations 
involving an error by the intermediary or HCFA that the hospital could 
not have known about before its review of the August diskette. 
Specifically, after that point, neither the intermediary nor HCFA will 
accept the following types of requests in conjunction with this 
process:
    <bullet> Requests for wage data corrections that were submitted too 
late to be included in the data transmitted to the HCRIS system on or 
before June 17, 1996.
    <bullet> Requests for correction of errors made by the hospital 
that were not, but could have been, identified during the hospital's 
review of the March 1996 data.
    <bullet> Requests to revisit factual determinations or policy 
interpretations made by the intermediary or HCFA during the wage data 
correction process.
    If, after reviewing the data in the August diskette or this final 
rule, a hospital believes that its wage data are incorrect due to a 
fiscal intermediary or HCFA error in the entry or tabulation of the 
final wage data, it should send a letter to both its fiscal 
intermediary and HCFA. The letters should outline why the hospital 
believes an error exists and provide all supporting information. These 
requests must be received by HCFA and the intermediaries no later than 
September 16, 1996. We have set this year's deadline one week earlier 
than last year's deadline because we found the later deadline made it 
difficult to evaluate the requests and recalculate the wage index 
values before

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the start of FY 1997 (that is, October 1, 1996). Requests sent to HCFA 
should be sent to: Health Care Financing Administration, Office of 
Hospital Policy, Attention: Stephen Phillips, Technical Advisor, 
Division of Prospective Payment System; C5-06-27, 7500 Security 
Boulevard, Baltimore, Maryland 21244-1850. Each request must also be 
sent to the hospital's fiscal intermediary. The intermediary will 
review requests upon receipt, and, if it is determined that an 
intermediary or HCFA error exists, the fiscal intermediary will notify 
HCFA immediately.
    We believe the wage data correction process described above and in 
the proposed rule provides hospitals with sufficient opportunity to 
bring errors made during the preparation of the Worksheet S-3 to the 
intermediary's attention. Moreover, because hospitals had access to the 
wage data in mid-August, they will have had the opportunity to detect 
any data entry or tabulation errors made by the intermediary or HCFA 
before the implementation of the FY 1997 wage index on October 1, 1996. 
If hospitals avail themselves of this opportunity, the wage index 
implemented on October 1 should be free of such errors. Nevertheless, 
in the unlikely event that such errors should occur, we retain the 
right to make midyear changes to the wage index under very limited 
circumstances.
    Specifically, in accordance with Sec. 412.63(s)(2), we may make 
midyear corrections to the wage index only in those limited 
circumstances where a hospital can show: (1) That the intermediary or 
HCFA made an error in tabulating its data, and (2) that the hospital 
could not have known about the error, or did not have an opportunity to 
correct the error, before the beginning of FY 1997 (that is, by the 
September 16, 1996 deadline). As indicated earlier, since a hospital 
will have had the opportunity to verify its data, and the intermediary 
will notify the hospital of any changes, we do not foresee any specific 
circumstances under which midyear corrections would be made. However, 
should a midyear correction be necessary, the wage index change for the 
affected area will be effective prospectively from the date the 
correction is made.
    Comment: One commenter commended us for making the wage data file 
available on the HCFA home page. The commenter also suggested that the 
file be updated frequently and include such additional information as 
the MSA name where the hospital is located, the applicable inflation 
adjustment factors, and the MSA to which each hospital has been 
reclassified by the MGCRB, if applicable.
    Response: The wage data file is currently updated twice a year, in 
mid-March and mid-August, in conjunction with the issuances of the 
proposed and final rules for the hospital inpatient prospective payment 
systems. This effort is very labor intensive, and since hospitals are 
able to submit cost reports throughout the year, it is impractical to 
update the wage data file more frequently. In addition, we would point 
out that the intent of making these data available is primarily to 
provide hospitals the opportunity to verify the data used in the 
calculation of their wage index. Updating this file more frequently is 
not necessary to fulfill this primary objective.
    Regarding the suggestion to include additional information on the 
wage data file that we make available to the public, we note that the 
suggested data elements are not necessary for the purpose of allowing 
an opportunity for providers to verify the accuracy of their wage data. 
We note that we publish the MSA names and inflation adjustment factors 
in the proposed and final rules, and the MSAs to which hospitals are 
reclassified can be found on the PPS Payment Impact Public Use File, 
available shortly after publication of the proposed and final rules.

D. Contract Labor--Costs Included in the Hospital Wage Index

    Our policy concerning inclusion of contract labor costs for 
purposes of calculating the wage index has evolved over the past 
several years. Primarily, this has occurred as we recognized the role 
of contract labor in meeting special personnel needs of many hospitals. 
In addition, improvements in the wage data have allowed us to more 
accurately identify contract labor costs and hours. As a result, 
effective with the FY 1994 wage index, we included the costs of direct 
patient care contract services in the wage index calculation. Effective 
with the FY 1999 wage index, which will use data from FY 1995 cost 
reports, we will begin to include the costs and hours of certain 
management contract services.
    In the proposed rule, we provided a general overview of the issues 
related to including contract labor costs in the wage index calculation 
and solicited comments from the public regarding further expansion of 
the types of contract labor costs included in the wage index. We also 
listed nine specific issues on which we were seeking public comment. 
The following background material is identical to the overview included 
in the proposed rule, but we believe it is useful as a reference for 
responding to many of the comments we received.
1. Background
    In the May 9, 1990 proposed rule (55 FR 19442), we reported the 
results of the 1988 wage index survey which collected, among other 
information, data on the costs and hours associated with direct patient 
care contract labor. All prospective payment hospitals completed the 
wage survey for their cost reporting periods ending in calendar year 
1988. The survey data indicated that hospitals had difficulty in 
tracking and recording the actual hours worked associated with the 
contract labor. In addition, there were reporting inconsistencies. For 
example, some hospitals inappropriately reported patient care services 
furnished directly by physicians, which are not included in the wage 
data because they are paid under Medicare Part B rather than Part A.
    In the May 9, 1990 proposed rule, we also discussed public comments 
we received in response to issues we raised related to including 
contract labor costs in the wage index. Specifically, in the May 8, 
1989 proposed rule (54 FR 19647), we requested comment on the following 
issues:
    <bullet> Should the wage index include data on contract labor?
    <bullet> Should the definition of contract services in the wage 
index survey be expanded to include services indirectly related to 
patient care, such as billing or housekeeping services?
    A majority of the commenters supported the inclusion of contract 
services, and many argued for the expansion of contract labor services 
to include indirect patient care services. Those opposed to including 
contract services, in addition to some commenters who supported 
including contract service costs, were concerned about the difficulty 
of accurately tracking and recording hours worked for all types of 
contract labor. Other commenters were also concerned that if a hospital 
contracts for services from outside its labor market area, the contract 
wages could artificially increase or decrease the hospital's area wage 
index. Based on the comments and the overall poor quality of the 1988 
survey data, we decided to exclude all contract labor from the FY 1991 
wage index.
    We stated that we would continue our analysis of contract labor. In 
addition, we announced that we would develop a new wage index survey 
with improved

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instructions and auditing criteria to facilitate the inclusion of 
contract labor in future wage index updates. The new survey, Worksheet 
S-3, Part II, was included in the hospital cost report effective with 
cost reporting periods beginning on or after October 1, 1989.
    The Worksheet S-3, Part II consists of detailed information for use 
in the hospital wage index including contract labor for direct patient 
care services. In the instructions for completing this worksheet, 
contract labor costs and hours were limited to labor-related payments 
and hours attributable to direct patient care contract services, such 
as nursing services. Specifically, we instructed hospitals to exclude 
indirect patient care contract services (for example, management and 
housekeeping services), nonlabor-related expenses (for example, 
equipment and supplies), and any contract services for which labor-
related payments and hours could not be accurately determined.
    In the September 4, 1990 final rule (55 FR 36036), we discussed 
additional comments we received on the contract labor issue. Those 
commenters who supported the inclusion of contract labor stated that 
some hospitals, especially rural hospitals, are dependent on contract 
labor for nursing services, and it would be unfair not to include these 
wage data. Other commenters requested that the definition of contract 
labor be expanded to include indirect patient care services.
    We also received several comments requesting that we continue to 
exclude contract labor from the wage index. These commenters stated 
that the contract labor data are not reliable because of the difficulty 
in tracking and reporting hours and the lack of consistency in the 
reporting of contract labor. In addition, inclusion of nonlabor 
contract costs would inappropriately drive up labor costs, and contract 
labor brought in from outside the labor market area would artificially 
increase or decrease the area wage index value. Finally, commenters 
were concerned that contract labor costs are too variable, temporary, 
and not reflective of true wage costs. Therefore, some suggested that 
contract labor should not be included in the wage index.
    The FY 1994 wage index, which was based on the data collected on 
the Worksheet S-3, Part II, was the first to include direct patient 
care contract labor costs. In making the decision to include these 
costs, we analyzed hospitals' FY 1990 data to determine if it was 
sufficiently complete for inclusion in the wage index calculation (see 
the May 26, 1993 proposed rule (58 FR 30236)). We noted that, in most 
labor market areas, including contract labor in the wage index 
computation had little effect on the average hourly wage. We further 
stated that, based on our analysis of the data, including direct 
patient care contract labor would more accurately and fairly reflect 
wage levels across hospitals and MSAs. In the September 1, 1993 final 
rule, we also responded to comments from the hospital industry 
expressing concern that we did not recognize the costs of certain 
contract management services (58 FR 46296). In particular, many rural 
hospitals stated they were either unable to recruit or afford top 
managers such as hospital administrators and must contract for these 
services.
    In the September 1, 1994 final rule (59 FR 45355), we expanded the 
definition of contract labor for purposes of determining the hospital 
wage index to include the personnel costs and hours associated with 
certain contract management personnel. Contract management services 
would be limited to individuals working in the top four positions in 
the hospital: the Chief Executive Officer/Hospital Administrator, Chief 
Operating Officer, Chief Financial Officer, and Nursing Administrator. 
We noted that while exact titles may vary, individuals should be 
performing essentially the same duties as customarily assigned these 
management positions.
    We further noted that, since the cost report did not provide at 
that time for the collection of management contract data, this revised 
definition would not be effective until cost reporting periods 
beginning on or after October 1, 1994 (FY 1995). Hospitals were 
instructed to continue to exclude all management contract costs and 
hours until the FY 1995 data were reported (these data will be used to 
compute the FY 1999 wage index). In addition, we began requiring 
hospitals to provide descriptions and aggregate totals for all 
management contracts and complete details on all direct patient care 
contracts on the Form HCFA-339 (the Provider Cost Report Reimbursement 
Questionnaire). A hospital must file this form with its corresponding 
cost report.
    We continue to receive requests that we expand our contract labor 
definition to include more types of contract services in the wage 
index. In particular, we have been asked to include the costs for 
pharmacy and laboratory services on the basis that these services are 
consistent with our definition of direct patient care (see the 
September 1, 1995 final rule (60 FR 45792)). Others have asked that we 
expand our definition to include all contracted services, both direct 
and indirect patient care services, in order to more appropriately 
calculate relative hospital wage costs.
    We have limited the contract services that are included in the wage 
index to direct patient care services and specific management services 
for several reasons. First, hospitals reported difficulty in accurately 
tracking the hours associated with contract services, especially for 
off-site facilities that serve more than one hospital. Second, we are 
concerned about the contractor's ability to separate nonlabor costs 
from labor costs. We believe that the generally higher costs for 
contract labor compared to salaried labor, due at least in part to the 
added costs of overhead and supplies not separately identified in most 
contracts, may distort the wage index. Finally, we are concerned that 
it is difficult to remove the costs and hours for services such as 
legal and accounting from total management contracts.
    Our goal is to ensure that our wage index policy continues to be 
responsive to the changing need for contract labor, allowing those 
hospitals that must depend on contract labor to supply needed services 
to reflect those costs in their wage data. At the same time, however, 
we wish to avoid providing an opportunity for hospitals to inflate 
their average hourly wage inappropriately by including nonlabor 
contract costs. The advantage of our approach of including only 
contract labor costs and hours associated with direct patient care and 
specific management services is that it minimizes distortions in the 
wage index that are due to a hospital's inability to identify and 
exclude nonlabor costs. While changes to the wage index values are made 
in a budget neutral manner and are not expected to affect aggregate 
payments, we strive for policies that are equitable for all hospitals.
    Finally, due to the 4-year time lag between the cost reporting 
period itself and the fiscal year when data for that period are used in 
calculating the wage index, it is important that we anticipate any need 
to change our policy on contract labor. Therefore, in order to 
formulate the most responsive and responsible policy, we solicited 
comments on the following issues:
    <bullet> To what extent do hospitals rely on the use of contract 
services?
    <bullet> For which services are contracts typically used?
    <bullet> Can hospitals accurately determine hours related to 
contract services?
    <bullet> Can hospitals accurately isolate labor-related costs from 
nonlabor- related costs?
    <bullet> Should the contract labor definition be expanded to 
include contract

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services indirectly related to patient care?
    <bullet> If contract labor remains limited to direct patient care, 
what categories of services, if any, in addition to those identified 
above, should be included?
    <bullet> Would the wage index more accurately reflect relative wage 
levels if we did not limit contract labor to direct patient care 
(generally high wage) services?
    <bullet> Would expanding the types of contract labor that are 
included in the wage index provide less incentive to hospitals to keep 
their labor costs low, as higher labor costs may result in a higher 
wage index value for that hospital or allow it to reclassify to a labor 
market with a higher wage index?
    <bullet> What other issues should be considered in revising the 
policy for including contract labor in the wage index?
2. Discussion of Comments
    We received 27 individual letters addressing the issue of contract 
labor in the wage index. We