Medicare Program; Inpatient Psychiatric Facilities Prospective Payment System-Update for Fiscal Year Beginning October 1, 2012 (FY 2013)

AGENCY:

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

ACTION:

Notice.

SUMMARY:

This notice updates the prospective payment rates for Medicare inpatient hospital services provided by inpatient psychiatric facilities (IPFs). These changes are applicable to IPF discharges occurring during the fiscal year (FY) beginning October 1, 2012 through September 30, 2013.

DATES:

Effective Date: The updated IPF prospective payment rates are effective for discharges occurring on or after October 1, 2012 through September 30, 2013.

FOR FURTHER INFORMATION CONTACT:

Dorothy Myrick or Jana Lindquist, (410) 786-4533 (for general information). Mary Carol Barron, (410) 786-7943, or Bridget Dickensheets, (410) 786-8670, (for information regarding the market basket and labor-related share).

Theresa Bean, (410) 786-2287 (for information regarding the regulatory impact analysis).

SUPPLEMENTARY INFORMATION:

I. Executive Summary

A. Purpose

This notice updates the prospective payment rates for Medicare inpatient hospital services provided by inpatient psychiatric facilitates for discharges occurring during the fiscal year (FY) beginning October 1, 2012 through September 30, 2013.

Section 124 of the Medicare, Medicaid and SCHIP (State Children's Health Insurance Program) Balanced Budget Refinement Act of the 1999 (BBRA) (Pub. L. 106-113) required implementation of the inpatient psychiatric facilities (IPF) prospective payment system (PPS). Specifically, section 124 of the BBRA mandated that the Secretary develop a per diem PPS for inpatient hospital services furnished in psychiatric hospitals and psychiatric units that includes an adequate patient classification system that reflects the differences in patient resource use and costs among psychiatric hospitals and psychiatric units.

Section 405(g)(2) of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) (Pub. L. 108-173) extended the IPF PPS to distinct part psychiatric units of critical access hospitals (CAHs).

To implement these provisions, we published various notices, and proposed and final rules in the Federal Register.

B. Summary of the Major Provisions

In this notice, we update the IPF PPS, as specified in 42 CFR 412.428. The updates include the following:

• The FY 2008-based Rehabilitation, Psychiatric, and Long Term Care (RPL) market basket update of 2.7 percent adjusted by a 0.1 percentage point reduction as required by section 1886(s)(2)(A)(ii) of the Social Security Act (the Act) and a 0.7 percentage point reduction as required by 1886(s)(2)(A)(i) of the Act.
• The fixed dollar loss threshold amount in order to maintain the appropriate outlier percentage.
• The electroconvulsive therapy payment by a factor specified by CMS.
• The national urban and rural cost-to-charge ratio medians and ceilings.
• The cost of living adjustment factors for IPFs located in Alaska and Hawaii, if appropriate.
• Description of the ICD-9-CM and MS-DRG classification changes discussed in the annual update to the hospital inpatient PPS regulations.
• Use of the best available hospital wage index and information regarding whether an adjustment to the Federal per diem base rate is needed to maintain budget neutrality.
• The MS-DRG listing and comorbidity categories to reflect the ICD-9-CM revisions effective October 1, 2012.
• Retaining the 17 percent adjustment for IPFs located in rural areas, the 1.31 adjustment for IPFs with a qualifying emergency department, the 0.5150 teaching adjustment to the Federal per diem rate, the MS-DRG adjustment factors and comorbidity adjustment factors currently being paid to IPFs for RY 2012

C. Summary of Costs and Benefits

Table of Contents

To assist readers in referencing sections contained in this document, we are providing the following table of contents.

I. Executive Summary

A. Purpose

B. Summary of Major Provisions

C. Summary of Costs and Benefits

II. Background

A. Annual Requirements for Updating the IPF PPS

B. Overview of the Legislative Requirements of the IPF PPS

C. General Overview of the IPF PPS

III. Transition Period for Implementation of the IPF PPS

IV. Changing the IPF PPS Payment Rate Update Period From a Rate Year to a Fiscal Year

V. Market Basket for the IPF PPS

A. Background

B. FY 2013 Market Basket Update

C. Labor-Related Share

VI. Updates to the IPF PPS for FY Beginning October 1, 2012

A. Determining the Standardized Budget-Neutral Federal Per Diem Base Rate

1. Standardization of the Federal Per Diem Base Rate and Electroconvulsive Therapy (ECT) Rate

2. Calculation of the Budget Neutrality Adjustment

a. Outlier Adjustment

b. Stop-Loss Provision Adjustment

c. Behavioral Offset

B. Update of the Federal Per Diem Base Rate and Electroconvulsive Therapy Rate

VII. Update of the IPF PPS Adjustment Factors

A. Overview of the IPF PPS Adjustment Factors

B. Patient-Level Adjustments

1. Adjustment for MS-DRG Assignment

2. Payment for Comorbid Conditions

3. Patient Age Adjustments

4. Variable Per Diem Adjustments

C. Facility-Level Adjustments

1. Wage Index Adjustment

a. Background

b. Wage Index for FY 2013

c. OMB Bulletins

2. Adjustment for Rural Location

3. Teaching Adjustment

a. FTE Intern and Resident Cap Adjustment

b. Temporary Adjustment to FTE Cap To Reflect Residents Added Due to Hospital Closure

c. Temporary Adjustment to FTE Cap To Reflect Residents Affected by Residency Program Closure

i. Receiving IPF

ii. IPF That Closed Its Program

4. Cost of Living Adjustment for IPFs Located in Alaska and Hawaii

5. Adjustment for IPFs With a Qualifying Emergency Department (ED)

D. Other Payment Adjustments and Policies

1. Outlier Payments

a. Update to the Outlier Fixed Dollar Loss Threshold Amount

b. Update to IPF Cost-to-Charge Ratio Ceilings

2. Expiration of the Stop-Loss Provision

3. Future Refinements

VIII. Secretary's Recommendations

IX. Waiver of Proposed Rulemaking

X. Collection of Information Requirements

XI. Regulatory Impact Analysis

Addenda

Acronyms

Because of the many terms to which we refer by acronym in this notice, we are listing the acronyms used and their corresponding meanings in alphabetical order below:

BBRA Medicare, Medicaid and SCHIP [State Children's Health Insurance Program] Balanced Budget Refinement Act of 1999, (Pub. L. 106-113)

CBSA Core-Based Statistical Area

CCR Cost-to-charge ratio

CAH Critical access hospital

DSM-IV-TR Diagnostic and Statistical Manual of Mental Disorders Fourth Edition—Text Revision

DRGs Diagnosis-related groups

FY Federal fiscal year (October 1 through September 30)

ICD-9-CM International Classification of Diseases, 9th Revision, Clinical Modification

IPFs Inpatient psychiatric facilities

IRFs Inpatient rehabilitation facilities

LTCHs Long-term care hospitals

MedPAR Medicare provider analysis and review file

RPL Rehabilitation, Psychiatric, and Long-Term Care

RY Rate Year (July 1 through June 30)

TEFRA Tax Equity and Fiscal Responsibility Act of 1982, (Pub. L. 97-248)

II. Background

A. Annual Requirements for Updating the IPF PPS

In November 2004, we implemented the inpatient psychiatric facilities (IPF) prospective payment system (PPS) in a final rule that appeared in the November 15, 2004 Federal Register (69 FR 66922). In developing the IPF PPS, in order to ensure that the IPF PPS is able to account adequately for each IPF's case-mix, we performed an extensive regression analysis of the relationship between the per diem costs and certain patient and facility characteristics to determine those characteristics associated with statistically significant cost differences on a per diem basis. For characteristics with statistically significant cost differences, we used the regression coefficients of those variables to determine the size of the corresponding payment adjustments.

In that final rule, we explained that we believe it is important to delay updating the adjustment factors derived from the regression analysis until we have IPF PPS data that includes as much information as possible regarding the patient-level characteristics of the population that each IPF serves. Therefore, we indicated that we did not intend to update the regression analysis and recalculate the Federal per diem base rate and the patient-and facility-level adjustments until we complete that analysis. Until that analysis is complete, we stated our intention to publish a notice in the Federal Register each spring to update the IPF PPS (71 FR 27041). In the May 6, 2011 IPF PPS final rule (76 FR 26432), we changed the payment rate update period to a rate year (RY) that coincides with a fiscal year (FY) update. Therefore, future update notices will be published in the Federal Register in the summer to be effective on October 1. For further discussion on changing the IPF PPS payment rate update period from a RY to a FY, see the IPF PPS final rule published in the Federal Register on May 6, 2011 (76 FR 26434 through 26435).

Updates to the IPF PPS, as specified in 42 CFR § 412.428, include the following:

• A description of the methodology and data used to calculate the updated Federal per diem base payment amount.
• The rate of increase factor as described in § 412.424(a)(2)(iii), which is based on the Excluded Hospital with Capital market basket under the update methodology of section 1886(b)(3)(B)(ii) of the Act for each year (effective from the implementation period until June 30, 2006).
• For discharges occurring on or after July 1, 2006, the rate of increase factor for the Federal portion of the IPF's payment, which is based on the Rehabilitation, Psychiatric, and Long-Term Care (RPL) market basket.
• The best available hospital wage index and information regarding whether an adjustment to the Federal per diem base rate is needed to maintain budget neutrality.
• Updates to the fixed dollar loss threshold amount in order to maintain the appropriate outlier percentage.
• Description of the International Classification of Diseases, 9th Revision, Clinical Modification (ICD-9-CM) coding and diagnosis-related groups (DRGs) classification changes discussed in the annual update to the hospital inpatient prospective payment system (IPPS) regulations.
• Update to the electroconvulsive therapy (ECT) payment by a factor specified by CMS.
• Update to the national urban and rural cost-to-charge ratio medians and ceilings.
• Update to the cost of living adjustment factors for IPFs located in Alaska and Hawaii, if appropriate.

Our most recent IPF PPS annual update occurred in the May 6, 2011 Federal Register final rule (76 FR 26432) (hereinafter referred to as the May 2011 IPF PPS final rule) that set forth updates to the IPF PPS payment rates for RY 2012. That final rule updated the IPF PPS per diem payment rates that were published in the April 2010 IPF PPS notice in accordance with our established policies.

Since implementation of the IPF PPS, we have explained that we believe it is important to delay updating the adjustment factors derived from the regression analysis until we have IPF PPS data that include as much information as possible regarding the patient-level characteristics of the population that each IPF serves. Because we are now approximately 7 years into the system, we believe that we have enough data to begin that process. Therefore, we have begun the necessary analysis to make future refinements. While we do not propose to make refinements in this notice, as explained in section V.D.3 below, we expect that in the future rulemaking, for FY 2014, we will be ready to propose potential refinements.

B. Overview of the Legislative Requirements of the IPF PPS

Section 124 of the Medicare, Medicaid, and SCHIP (State Children's Health Insurance Program) Balanced Budget Refinement Act of 1999 (BBRA) (Pub. L. 106-113) required implementation of the IPF PPS. Specifically, section 124 of the BBRA mandated that the Secretary develop a per diem PPS for inpatient hospital services furnished in psychiatric hospitals and psychiatric units that includes an adequate patient classification system that reflects the differences in patient resource use and costs among psychiatric hospitals and psychiatric units.

Section 405(g)(2) of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) (Pub. L. 108-173) extended the IPF PPS to distinct part psychiatric units of critical access hospitals (CAHs).

To implement these provisions, we published various proposed and final rules in the Federal Register. For more information regarding these rules, see the CMS Web site http://www.cms.hhs.gov/InpatientPsychFacilPPS/.

Section 3401(f) of the Patient Protection and Affordable Care Act (Pub. L. 111-148) as amended by section 10319(e) of that Act and by section 1105(d) of the Health Care and Education Reconciliation Act of 2010 (Pub. L. 111-152) (hereafter referred to as “the Affordable Care Act”) added subsection (s) to section 1886 of the Act.

Section 1886(s)(1) is titled “Reference to Establishment and Implementation of System” and it refers to section 124 of the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999, which relates to the establishment of the IPF PPS.

Section 1886(s)(2)(A)(i) of the Act requires the application of the productivity adjustment described in section 1886(b)(3)(B)(xi)(II) of the Act to the IPF PPS for the RY beginning in 2012 (that is, a RY that coincides with a FY) and each subsequent RY. For the RY beginning in 2012 (that is, FY 2013), the reduction is equal to 0.7 percentage point, which we are implementing in this notice. Section 1886(s)(2)(A)(ii) of the Act requires the application of an “other adjustment” that reduces any update to an IPF PPS base rate by percentages specified in section 1886(s)(3) of the Act for RY beginning in 2010 through the RY beginning in 2019. For the RY beginning in 2012 (that is, FY 2013), section 1886(s)(3)(B) of the Act requires the reduction to be 0.1 percentage point. We are implementing that provision in this FY 2013 IPF PPS notice.

Section 1886(s)(4) of the Act requires the establishment of a quality data reporting program for the IPF PPS beginning in RY 2014. We proposed new requirements for quality reporting for IPFs in the “Hospital Inpatient Prospective Payment System for Acute Care Hospitals and the Long Term Care Hospital Prospective Payment System and Fiscal Year 2013 Rates” proposed rule (May 11, 2012) (77 FR 27870, 28105 through 28116).

C. General Overview of the IPF PPS

The November 2004 IPF PPS final rule (69 FR 66922) established the IPF PPS, as authorized under section 124 of the BBRA and codified at subpart N of part 412 of the Medicare regulations. The November 2004 IPF PPS final rule set forth the per diem Federal rates for the implementation year (the 18-month period from January 1, 2005 through June 30, 2006), and it provided payment for the inpatient operating and capital costs to IPFs for covered psychiatric services they furnish (that is, routine, ancillary, and capital costs, but not costs of approved educational activities, bad debts, and other services or items that are outside the scope of the IPF PPS). Covered psychiatric services include services for which benefits are provided under the fee-for-service Part A (Hospital Insurance Program) Medicare program.

The IPF PPS established the Federal per diem base rate for each patient day in an IPF derived from the national average daily routine operating, ancillary, and capital costs in IPFs in FY 2002. The average per diem cost was updated to the midpoint of the first year under the IPF PPS, standardized to account for the overall positive effects of the IPF PPS payment adjustments, and adjusted for budget neutrality.

The Federal per diem payment under the IPF PPS is comprised of the Federal per diem base rate described above and certain patient- and facility-level payment adjustments that were found in the regression analysis to be associated with statistically significant per diem cost differences.

The patient-level adjustments include age, DRG assignment, comorbidities, and variable per diem adjustments to reflect higher per diem costs in the early days of an IPF stay. Facility-level adjustments include adjustments for the IPF's wage index, rural location, teaching status, a cost of living adjustment for IPFs located in Alaska and Hawaii, and presence of a qualifying emergency department (ED).

The IPF PPS provides additional payment policies for: outlier cases; stop-loss protection (which was applicable only during the IPF PPS transition period); interrupted stays; and a per treatment adjustment for patients who undergo ECT.

A complete discussion of the regression analysis appears in the November 2004 IPF PPS final rule (69 FR 66933 through 66936).

Section 124 of BBRA does not specify an annual update rate strategy for the IPF PPS and is broadly written to give the Secretary discretion in establishing an update methodology. Therefore, in the November 2004 IPF PPS final rule, we implemented the IPF PPS using the following update strategy:

• Calculate the final Federal per diem base rate to be budget neutral for the 18-month period of January 1, 2005 through June 30, 2006.
• Use a July 1 through June 30 annual update cycle.
• Allow the IPF PPS first update to be effective for discharges on or after July 1, 2006 through June 30, 2007.

III. Transition Period for Implementation of the IPF PPS

In the November 2004 IPF PPS final rule, we provided for a 3-year transition period. During this 3-year transition period, an IPF's total payment under the PPS was based on an increasing percentage of the Federal rate with a corresponding decreasing percentage of the IPF PPS payment that is based on reasonable cost concepts. However, effective for cost reporting periods beginning on or after January 1, 2008, IPF PPS payments are based on 100 percent of the Federal rate.

IV. Changing the IPF PPS Payment Rate Update Period From a Rate Year to a Fiscal Year

In the RY 2012 IPF PPS proposed rule (76 FR 4998) and final rule (76 FR 26432), we revised the IPF PPS payment rate update period by switching from a RY (that is July 1 through June 30) to a period that coincides with a FY (that is, October 1 through September 30). Beginning with the update period that begins in 2012, that is, FY 2013, we now refer to update periods as FY. We specified that this change in the annual update period would allow us to consolidate Medicare publications by aligning the IPF PPS update with the annual update of the ICD-9-CM codes, which are effective on October 1 of each year. In addition to our annual proposed and final rulemaking documents, we publish a change request transmittal every August updating the ICD-9-CM codes related to the DRG and comorbidity adjustments. By aligning the IPF PPS with the same update period as the ICD-9-CM codes, we eliminated the need to publish a transmittal off-cycle.

We maintain the same diagnostic coding and DRG classification for IPFs that are used under the IPPS for providing the psychiatric care. When the IPF PPS was implemented, we adopted the same diagnostic code set and DRG patient classification systems (that is, the CMS DRGs) that was used at the time under the hospital prospective payment system (IPPS). Every year, changes to the ICD-9-CM coding system are addressed in the IPPS proposed and final rules. These changes are effective October 1 of each year and must be used by acute care hospitals as well as other providers to report diagnostic and procedure information. The IPF PPS has always incorporated ICD-9-CM coding changes made in the annual IPPS update. This change to the annual payment rate update period allows the annual update to the rates and the ICD-9-CM coding update to occur on the same schedule and appear in the same Federal Register document.

Our intent in making the change in the payment rate update schedule was to place the IPF PPS on the same update cycle as other PPSs, making it administratively efficient. To smoothly transition into a payment update period that runs from October 1 through September 30, we proposed and finalized that the RY 2012 period run from July 1, 2011 through September 30, 2012, so that the RY 2012 would be 15 months. As proposed and finalized, after RY 2012, the rate update period for the IPF PPS payment rates and other policy changes begin on October 1 through September 30. Therefore, the update cycle for FY 2013 will be October 1, 2012 through September 30, 2013. In the May 2011 final rule, we changed the regulations at § 412.402 to add the term “Inpatient Psychiatric Facilities prospective payment system rate year” which means October 1 through September 30. We proposed and finalized that the RY would be referred to as a FY. For further discussion of the 15-month market basket update for RY 2012 and changing the payment rate update period from a RY to a FY, we refer readers to the RY 2012 IPF PPS proposed rule (76 FR 4998) and the RY 2012 IPF PPS final rule (76 FR 26432).

V. Market Basket for the IPF PPS

A. Background

The input price index (that is, the market basket) that was used to develop the IPF PPS was the Excluded Hospital with Capital market basket. This market basket was based on 1997 Medicare cost report data and included data for Medicare participating IPFs, inpatient rehabilitation facilities (IRFs), long-term care hospitals (LTCHs), cancer hospitals, and children's hospitals. Although “market basket” technically describes the mix of goods and services used in providing hospital care, this term is also commonly used to denote the input price index (that is, cost category weights and price proxies combined) derived from that market basket. Accordingly, the term “market basket” as used in this document refers to a hospital input price index.

Beginning with the May 2006 IPF PPS final rule (71 FR 27046 through 27054), IPF PPS payments were updated using a FY 2002-based market basket reflecting the operating and capital cost structures for IRFs, IPFs, and LTCHs (hereafter referred to as the Rehabilitation, Psychiatric, and Long-Term Care (RPL) market basket).

We excluded cancer and children's hospitals from the RPL market basket because these hospitals are not reimbursed through a PPS; rather, their payments are based entirely on reasonable costs subject to rate-of-increase limits established under the authority of section 1886(b) of the Act, which are implemented in regulations at § 413.40. Moreover, the FY 2002 cost structures for cancer and children's hospitals are noticeably different than the cost structures of the IRFs, IPFs, and LTCHs. A complete discussion of the FY 2002-based RPL market basket appears in the May 2006 IPF PPS final rule (71 FR 27046 through 27054).

In the May 1, 2009 IPF PPS notice (74 FR 20362), we expressed our interest in exploring the possibility of creating a stand-alone IPF market basket that reflects the cost structures of only IPF providers. We noted that, of the available options, one would be to join the Medicare cost report data from freestanding IPF providers (presently incorporated into the FY 2002-based RPL market basket) with data from hospital-based IPF providers (not currently incorporated in any market basket cost weights). We indicated that an examination of the Medicare cost report data comparing freestanding and hospital-based IPFs revealed considerable differences between the two with respect to cost levels and cost structures. At that time, we were unable to fully understand the differences between these two types of IPF providers. As a result, we felt that further research was required, therefore we solicited public comment for additional information that might help us to better understand the reasons for the variations in costs and cost structures, as indicated by the cost report data, between freestanding and hospital-based IPFs (74 FR 20376).

We summarized the public comments received and our responses in the April 2010 IPF PPS notice (75 FR 23111 through 23113). Despite receiving comments from the public on this issue, we remain unable to understand the observed differences in costs and cost structures between hospital-based and freestanding IPFs. Therefore, we do not believe it is appropriate, at this time, to incorporate data from hospital-based IPFs with those of freestanding IPFs to create a stand-alone IPF market basket.

We continue to explore the viability of creating two separate market baskets from the current RPL, one which may include freestanding IPFs and freestanding IRFs and be used to update payments under both the IPF and IRF payment systems. We also are still considering the possibility of creating a stand-alone IPF market basket. We recently proposed a stand-alone LTCH market basket, in the May 11, 2012 FY 2013 IPPS/LTCH proposed rule (77 FR 27870 at 28019). In the RY 2012 IPF PPS proposed rule (76 FR 5001), we welcomed public comment on the possibility of using a rehabilitation and psychiatric (RP) market basket to update IPF payments in the future. Comments received and our responses are summarized in the RY 2012 final rule (76 FR 26436). We note that comments received were in support of our efforts, and we are continuing to investigate the viability of alternative market baskets. Any possible changes to the market basket used to update IPF payments would appear in a future rulemaking and be subject to public comment.

In the RY 2012 IPF PPS proposed rule (76 FR 4998) and final rule (76 FR 26432), we rebased and revised the RPL market basket to reflect a 2008 base year. We also proposed and finalized the use of the 2008-based RPL market basket to update IPF payments. Therefore, for the FY 2013 IPF PPS update, we are using the percentage increase in the 2008-based RPL market basket to determine the IPF PPS market basket update.

B. FY 2013 Market Basket Update

The FY 2013 update for the IPF PPS using the FY 2008-based RPL market basket and Information Handling Services (IHS) Global Insight's second quarter 2012 forecast for the market basket components is 2.7 percent (prior to the application of any statutory adjustments). This includes increases in both the operating and the capital components for FY 2013 (that is, October 1, 2012 through September 30, 2013). IHS Global Insight, Inc. is a nationally recognized economic and financial forecasting firm that contracts with CMS to forecast the components of the market baskets.

As previously described in section I.B, section 1886(s)(2)(A)(i) of the Affordable Care Act requires the application of the productivity adjustment described in section 1886(b)(3)(B)(xi)(II) of the Act to the IPF PPS for the RY beginning in 2012 and each subsequent RY. The statute defines the productivity adjustment to be equal to the 10-year moving average of changes in annual economy-wide private nonfarm business multifactor productivity (MFP) (as projected by the Secretary for the 10-year period ending with the applicable FY, year, cost reporting period, or other annual period) (the “MFP adjustment”).

The Bureau of Labor Statistics (BLS) is the agency that publishes the official measure of private non-farm business MFP. We refer readers to the BLS Web site at http://www.bls.gov/mfp to obtain the BLS historical published MFP data. The MFP adjustment for FY 2013 applicable to the IPF PPS is derived using a projection of MFP that is currently produced by IHS Global Insight, Inc. For a detailed description of the model currently used by IHS Global Insight, Inc. to project MFP, as well as a description of how the MFP adjustment is calculated, we refer readers to the FY 2012 IPPS/LTCH final rule (76 FR 51690 through 51692). Based on IHS Global Insight, Inc 2012 second quarter forecast, the productivity adjustment for the RY beginning in 2012 (that is FY 2013) is 0.7 percentage point. Section 1886(s)(2)(A)(ii) of the Act requires the application of an “other adjustment” that reduces any update to an IPF PPS base rate by percentages specified in section 1886(s)(3) of the Act for rate years beginning in 2010 through the RY beginning in 2019. For the RY beginning in 2012 (that is, FY 2013), the reduction is 0.1 percentage point. We are implementing the productivity adjustment and “other adjustment” for FY 2013 in this FY 2013 IPF PPS notice.

C. Labor-Related Share

Due to the variations in costs and geographic wage levels, we believe that payment rates under the IPF PPS should continue to be adjusted by a geographic wage index. This wage index would apply to the labor-related portion of the Federal per diem base rate, hereafter referred to as the labor-related share.

The labor-related share is determined by identifying the national average proportion of total costs that are related to, influenced by, or vary with the local labor market. We classify a cost category as labor-related if the costs are labor-intensive and vary with the local labor market. Based on our definition of the labor-related share, we include in the labor-related share the sum of the relative importance of Wages and Salaries, Employee Benefits, Professional Fees: Labor-related, Administrative and Business Support Services, All Other: Labor-related Services, and a portion of the Capital-Related cost weight.

Therefore, to determine the labor-related share for the IPF PPS for FY 2013, we used the FY 2008-based RPL market basket cost weights relative importance to determine the labor-related share for the IPF PPS. This estimate of the FY 2013 labor-related share is based on IHS Global Insight Inc.'s second quarter 2012 forecast, which is the same forecast used to derive the FY 2013 market basket update.

Table 1 below shows the FY 2013 relative importance labor-related share using the FY 2008-based RPL market basket along with the FY 2012 relative importance labor-related share.

The labor-related share for FY 2013 is the sum of the FY 2013 relative importance of each labor-related cost category, and would reflect the different rates of price change for these cost categories between the base year (FY 2008) and FY 2013. The sum of the relative importance for FY 2013 for operating costs (Wages and Salaries, Employee Benefits, Professional Fees: Labor-Related, Administrative and Business Support Services, and All Other: Labor-related Services) is 66.381 percent, as shown in Table 1 above. The portion of Capital-related cost that is influenced by the local labor market is estimated to be 46 percent, which is the same percentage that was applied to the FY 2002-based RPL market basket. Since the relative importance for Capital-Related Costs is 7.825 percent of the FY 2008-based RPL market basket in FY 2013, we take 46 percent of 7.825 percent to determine the labor-related share of Capital-related cost for FY 2013. The result is 3.600 percent, which we add to 66.381 percent for the operating cost amount to determine the total labor-related share for FY 2013. Therefore, the labor-related share for the IPF PPS in FY 2013 is 69.981 percent. This labor-related share is determined using the same methodology as employed in calculating all previous IPF labor-related shares (69 FR 66952). The wage index and the labor-related share are reflected in budget neutrality adjustments.

VI. Updates to the IPF PPS for FY Beginning October 1, 2012

The IPF PPS is based on a standardized Federal per diem base rate calculated from the IPF average per diem costs and adjusted for budget-neutrality in the implementation year. The Federal per diem base rate is used as the standard payment per day under the IPF PPS and is adjusted by the patient- and facility-level adjustments that are applicable to the IPF stay. A detailed explanation of how we calculated the average per diem cost appears in the November 2004 IPF PPS final rule (69 FR 66926).

A. Determining the Standardized Budget-Neutral Federal Per Diem Base Rate

Section 124(a)(1) of the BBRA required that we implement the IPF PPS in a budget neutral manner. In other words, the amount of total payments under the IPF PPS, including any payment adjustments, must be projected to be equal to the amount of total payments that would have been made if the IPF PPS were not implemented. Therefore, we calculated the budget-neutrality factor by setting the total estimated IPF PPS payments to be equal to the total estimated payments that would have been made under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) (Pub. L. 97-248) methodology had the IPF PPS not been implemented.

Under the IPF PPS methodology, we calculated the final Federal per diem base rate to be budget neutral during the IPF PPS implementation period (that is, the 18-month period from January 1, 2005 through June 30, 2006) using a July 1 update cycle. We updated the average cost per day to the midpoint of the IPF PPS implementation period (that is, October 1, 2005), and this amount was used in the payment model to establish the budget-neutrality adjustment.

A step-by-step description of the methodology used to estimate payments under the TEFRA payment system appears in the November 2004 IPF PPS final rule (69 FR 66926).

1. Standardization of the Federal Per Diem Base Rate and Electroconvulsive Therapy (ECT) Rate

In the November 2004 IPF PPS final rule, we describe how we standardized the IPF PPS Federal per diem base rate to account for the overall positive effects of the IPF PPS payment adjustment factors. To standardize the IPF PPS payments, we compared the IPF PPS payment amounts calculated from the FY 2002 Medicare Provider Analysis and Review (MedPAR) file to the projected TEFRA payments from the FY 2002 cost report file updated to the midpoint of the IPF PPS implementation period (that is, October 2005). The standardization factor was calculated by dividing total estimated payments under the TEFRA payment system by estimated payments under the IPF PPS. The standardization factor was calculated to be 0.8367.

As described in detail in the May 2006 IPF PPS final rule (71 FR 27045), in reviewing the methodology used to simulate the IPF PPS payments used for the November 2004 IPF PPS final rule, we discovered that due to a computer code error, total IPF PPS payments were underestimated by about 1.36 percent. Since the IPF PPS payment total should have been larger than the estimated figure, the standardization factor should have been smaller (0.8254 vs. 0.8367). In turn, the Federal per diem base rate and the ECT rate should have been reduced by 0.8254 instead of 0.8367.

To resolve this issue, in RY 2007, we amended the Federal per diem base rate and the ECT payment rate prospectively. Using the standardization factor of 0.8254, the average cost per day was effectively reduced by 17.46 percent (100 percent minus 82.54 percent = 17.46 percent).

2. Calculation of the Budget Neutrality Adjustment

To compute the budget neutrality adjustment for the IPF PPS, we separately identified each component of the adjustment, that is, the outlier adjustment, stop-loss adjustment, and behavioral offset.

A complete discussion of how we calculate each component of the budget neutrality adjustment appears in the November 2004 IPF PPS final rule (69 FR 66932 through 66933) and in the May 2006 IPF PPS final rule (71 FR 27044 through 27046).

a. Outlier Adjustment

Since the IPF PPS payment amount for each IPF includes applicable outlier amounts, we reduced the standardized Federal per diem base rate to account for aggregate IPF PPS payments estimated to be made as outlier payments. The outlier adjustment was calculated to be 2 percent. As a result, the standardized Federal per diem base rate was reduced by 2 percent to account for projected outlier payments.

b. Stop-Loss Provision Adjustment

As explained in the November 2004 IPF PPS final rule, we provided a stop-loss payment during the transition from cost-based reimbursement to the per diem payment system to ensure that an IPF's total PPS payments were no less than a minimum percentage of their TEFRA payment, had the IPF PPS not been implemented. We reduced the standardized Federal per diem base rate by the percentage of aggregate IPF PPS payments estimated to be made for stop-loss payments. As a result, the standardized Federal per diem base rate was reduced by 0.39 percent to account for stop-loss payments. Since the transition was completed in RY 2009, the stop-loss provision is no longer applicable, and for cost reporting periods beginning on or after January 1, 2008, IPFs were paid 100 percent PPS.

c. Behavioral Offset

As explained in the November 2004 IPF PPS final rule, implementation of the IPF PPS may result in certain changes in IPF practices, especially with respect to coding for comorbid medical conditions. As a result, Medicare may make higher payments than assumed in our calculations. Accounting for these effects through an adjustment is commonly known as a behavioral offset.

Based on accepted actuarial practices and consistent with the assumptions made in other PPSs, we assumed in determining the behavioral offset that IPFs would regain 15 percent of potential “losses” and augment payment increases by 5 percent. We applied this actuarial assumption, which is based on our historical experience with new payment systems, to the estimated “losses” and “gains” among the IPFs. The behavioral offset for the IPF PPS was calculated to be 2.66 percent. As a result, we reduced the standardized Federal per diem base rate by 2.66 percent to account for behavioral changes. As indicated in the November 2004 IPF PPS final rule, we do not plan to change adjustment factors or projections until we analyze IPF PPS data.

If we find that an adjustment is warranted, the percent difference may be applied prospectively to the established PPS rates to ensure the rates accurately reflect the payment level intended by the statute. In conducting this analysis, we will be interested in the extent to which improved coding of patients' principal and other diagnoses, which may not reflect real increases in underlying resource demands, has occurred under the PPS.

B. Update of the Federal Per Diem Base Rate and Electroconvulsive Therapy Rate

As described in the November 2004 IPF PPS final rule (69 FR 66931), the average per diem cost was updated to the midpoint of the implementation year. This updated average per diem cost of $724.43 was reduced by—(1) 17.46 percent to account for standardization to projected TEFRA payments for the implementation period; (2) 2 percent to account for outlier payments; (3) 0.39 percent to account for stop-loss payments; and (4) 2.66 percent to account for the behavioral offset. The Federal per diem base rate in the implementation year was $575.95. The increase in the per diem base rate for RY 2009 included the 0.39 percent increase due to the removal of the stop-loss provision. We indicated in the November 2004 IPF PPS final rule (69 FR 66932) that we would remove this 0.39 percent reduction to the Federal per diem base rate after the transition. As discussed in section IV.D.2. of the May 2008 IPF PPS notice, we increased the Federal per diem base rate and the ECT base rate by 0.39 percent in RY 2009. Therefore for RY 2009 and beyond, the stop-loss provision has ended and is no longer a part of budget neutrality.

In accordance with section 1886(s)(2)(A)(ii) of the Act, which requires the application of an “other adjustment,” described in section 1886(s)(3) of the Act (specifically, section 1886(s)(3)(B)) for RYs 2013 and 2014 that reduces the update to the IPF PPS base rate for the FY beginning in Calendar Year (CY) 2012, we are adjusting the IPF PPS update by a 0.1 percentage point reduction for FY 2013. In addition, in accordance with section 1886(s)(2)(A)(i) of the Act, which requires the application of the productivity adjustment that reduces the update to the IPF PPS base rate for the FY beginning in CY 2012, we are adjusting the IPF PPS update by a 0.7 percentage point reduction for FY 2013.

For this notice, we are applying the 2008-based RPL market basket increase for FY 2013 of 2.7 percent, as adjusted by the “other adjustment” of minus 0.1 percentage point, the productivity adjustment of minus 0.7 percentage point, and the wage index budget neutrality factor of 1.0007 to the RY 2012 Federal per diem base rate of $685.01, yielding a Federal per diem base rate of $698.51 for FY 2013. Similarly, we are applying the market basket increase, as adjusted by the “other adjustment,” the productivity adjustment, and the wage index budget neutrality factor to the RY 2012 ECT base rate, yielding an ECT base rate of $300.72 for FY 2013.

VII. Update of the IPF PPS Adjustment Factors

A. Overview of the IPF PPS Adjustment Factors

The IPF PPS payment adjustments were derived from a regression analysis of 100 percent of the FY 2002 MedPAR data file, which contained 483,038 cases. For this notice, we used the same results of the regression analysis used to implement the November 2004 IPF PPS final rule. For a more detailed description of the data file used for the regression analysis, see the November 2004 IPF PPS final rule (69 FR 66935 through 66936). While we have since used more recent claims data to set the fixed dollar loss threshold amount, we used the same results of this regression analysis to update the IPF PPS for RY 2012 and for FY 2013. Now that we are approximately 7 years into the IPF PPS, we believe that we have enough data to begin looking at the process of refining the IPF PPS as appropriate. We expect that in future rulemaking, we may propose potential refinements to the system.

As we stated previously, we do not plan to update the regression analysis until we are able to analyze IPF PPS claims and cost report data. However, we continue to monitor claims and payment data independently from cost report data to assess issues, to determine whether changes in case-mix or payment shifts have occurred among freestanding governmental, non-profit and private psychiatric hospitals, and psychiatric units of general hospitals, and CAHs and other issues of importance to IPFs.

B. Patient-Level Adjustments

In the May 2011 IPF PPS final rule (76 FR 26440 through 26453), we announced payment adjustments for the following patient-level characteristics: Medicare Severity diagnosis related groups (MS-DRGs) assignment of the patient's principal diagnosis, selected comorbidities, patient age, and the variable per diem adjustments.

1. Adjustment for MS-DRG Assignment

The IPF PPS includes payment adjustments for the psychiatric DRG assigned to the claim based on each patient's principal diagnosis. The IPF PPS recognizes the MS-DRGs. The DRG adjustment factors were expressed relative to the most frequently reported psychiatric DRG in FY 2002, that is, DRG 430 (psychoses). The coefficient values and adjustment factors were derived from the regression analysis.

In accordance with § 412.27(a), payment under the IPF PPS is conditioned on IPFs admitting “only patients whose admission to the unit is required for active treatment, of an intensity that can be provided appropriately only in an inpatient hospital setting, of a psychiatric principal diagnosis that is listed in Chapter Five (“Mental Disorders”) of the International Classification of Diseases, Ninth Revision, Clinical Modification (ICD-9-CM)” or in the Fourth Edition, Text Revision of the American Psychiatric Association's Diagnostic and Statistical Manual, (DSM-IV-TR). IPF claims with a principal diagnosis included in Chapter Five of the ICD-9-CM or the DSM-IV-TR are paid the Federal per diem base rate under the IPF PPS and all other applicable adjustments, including any applicable DRG adjustment. Psychiatric principal diagnoses that do not group to one of the designated DRGs will still receive the Federal per diem base rate and all other applicable adjustments, but the payment will not include a DRG adjustment.

The Standards for Electronic Transaction final rule published in the Federal Register on August 17, 2000 (65 FR 50312), adopted the ICD-9-CM as the designated code set for reporting diseases, injuries, impairments, other health related problems, their manifestations, and causes of injury, disease, impairment, or other health related problems. Therefore, we use the ICD-9-CM as the designated code set for the IPF PPS.

We believe that it is important to maintain the same diagnostic coding and DRG classification for IPFs that are used under the IPPS for providing psychiatric care. Therefore, when the IPF PPS was implemented for cost reporting periods beginning on or after January 1, 2005, we adopted the same diagnostic code set and DRG patient classification system (that is, the CMS DRGs) that were utilized at the time under the hospital inpatient IPPS. Since the inception of the IPF PPS, the DRGs used as the patient classification system under the IPF PPS have corresponded exactly with the CMS DRGs applicable under the IPPS for acute care hospitals.

Every year, changes to the ICD-9-CM coding system are addressed in the IPPS proposed and final rules. The changes to the codes are effective October 1 of each year and must be used by acute care hospitals as well as other providers to report diagnostic and procedure information. The IPF PPS has always incorporated ICD-9-CM coding changes made in the annual IPPS update. We publish coding changes in a Transmittal/Change Request, similar to how coding changes are announced by the IPPS and LTCH PPS. Those ICD-9-CM coding changes are also published in the following IPF PPS FY update, in either the IPF PPS proposed and final rules, or in an IPF PPS update notice.

In the May 2008 IPF PPS notice (73 FR 25709), we discussed CMS' effort to better recognize resource use and the severity of illness among patients. CMS adopted the new MS-DRGs for the IPPS in the FY 2008 IPPS final rule with comment period (72 FR 47130). A crosswalk, to reflect changes that were made to the DRGs under the IPF PPS to the new MS-DRGs was provided (73 FR 25716). We believe by better accounting for patients' severity of illness in Medicare payment rates, the MS-DRGs encourage hospitals to improve their coding and documentation of patient diagnoses. The MS-DRGs, which are based on the IPPS MS-DRGs, represent a significant increase in the number of DRGs (from 538 to 745, an increase of 207). For a full description of the development and implementation of the MS-DRGs, see the FY 2008 IPPS final rule with comment period (72 FR 47141 through 47175).

All of the ICD-9-CM coding changes are reflected in the FY 2013 GROUPER, Version 30.0, effective for IPPS discharges occurring on or after October 1, 2012 through September 30, 2013. The GROUPER Version 30.0 software package assigns each case to an MS-DRG on the basis of the diagnosis and procedure codes and demographic information (that is, age, sex, and discharge status). The Medicare Code Editor (MCE) 30.0 uses the new ICD-9-CM codes to validate coding for IPPS discharges on or after October 1, 2012. For additional information on the GROUPER Version 30.0 and MCE 30.0, see Transmittal 2289 (Change Request 7506), dated August 26, 2011. The IPF PPS has always used the same GROUPER and Code Editor as the IPPS. Therefore, the ICD-9-CM changes, which were reflected in the GROUPER Version 30.0 and MCE 30.0 on October 1, 2012, also became effective for the IPF PPS for discharges occurring on or after October 1, 2012.

The impact of the new MS-DRGs on the IPF PPS was negligible. Mapping to the MS-DRGs resulted in the current 17 MS-DRGs, instead of the original 15, for which the IPF PPS provides an adjustment. Although the code set is updated, the same associated adjustment factors apply now that have been in place since implementation of the IPF PPS, with one exception that is unrelated to the update to the codes. When DRGs 521 and 522 were consolidated into MS-DRG 895, we carried over the adjustment factor of 1.02 from DRG 521 to the newly consolidated MS-DRG. This was done to reflect the higher claims volume under DRG 521, with more than eight times the number of claims than billed under DRG 522. For a detailed description of the mapping changes from the original DRG adjustment categories to the current MS-DRG adjustment categories, we refer readers to the May 2008 IPF PPS notice (73 FR 25714).

The official version of the ICD-9-CM is available on CD-ROM from the U.S. Government Printing Office. The FY 2012 version can be ordered by contacting the Superintendent of Documents, U.S. Government Printing Office, Department 50, Washington, DC 20402-9329, telephone number (202) 512-1800. Questions concerning the ICD-9-CM should be directed to Patricia E. Brooks, Co-Chairperson, ICD-9-CM Coordination and Maintenance Committee, CMS, Center for Medicare Management, Hospital and Ambulatory Policy Group, Division of Acute Care, Mailstop C4-08-06, 7500 Security Boulevard, Baltimore, Maryland 21244-1850. The Web site for the CD-ROM which contains the complete official version of the International Classification of Diseases, Ninth Revision, Clinical Modification is located at: http://www.cms.gov/Medicare/Coding/ICD9ProviderDiagnosticCodes/CDROM.html.

Further information concerning the official version of the ICD-9-CM can be found on the IPPS Web site at: http://cms.hhs.gov/medicare/coding/icd9providerdiagnosticcodes/addendum.html.

The MS-IPF-DRG adjustment factors (as shown in Table 2) will continue to be paid for discharges occurring in FY 2013.

2. Payment for Comorbid Conditions

The intent of the comorbidity adjustments is to recognize the increased costs associated with comorbid conditions by providing additional payments for certain concurrent medical or psychiatric conditions that are expensive to treat. In the May 2011 IPF PPS final rule (76 FR 26451 through 26452), we explained that the IPF PPS includes 17 comorbidity categories and identified the new, revised, and deleted ICD-9-CM diagnosis codes that generate a comorbid condition payment adjustment under the IPF PPS for RY 2012 (76 FR 26451).

Comorbidities are specific patient conditions that are secondary to the patient's principal diagnosis and that require treatment during the stay. Diagnoses that relate to an earlier episode of care and have no bearing on the current hospital stay are excluded and must not be reported on IPF claims. Comorbid conditions must exist at the time of admission or develop subsequently, and affect the treatment received, length of stay (LOS), or both treatment and LOS.

For each claim, an IPF may receive only one comorbidity adjustment within a comorbidity category, but it may receive an adjustment for more than one comorbidity category. Billing instructions require that IPFs must enter the full ICD-9-CM codes for up to 8 additional diagnoses if they co-exist at the time of admission or develop subsequently and impact the treatment provided.

The comorbidity adjustments were determined based on the regression analysis using the diagnoses reported by IPFs in FY 2002. The principal diagnoses were used to establish the DRG adjustments and were not accounted for in establishing the comorbidity category adjustments, except where ICD-9-CM “code first” instructions apply. As we explained in the May 2011 IPF PPS final rule (76 FR 265451), the code first rule applies when a condition has both an underlying etiology and a manifestation due to the underlying etiology. For these conditions, the ICD-9-CM has a coding convention that requires the underlying conditions to be sequenced first followed by the manifestation. Whenever a combination exists, there is a “use additional code” note at the etiology code and a code first note at the manifestation code.

As discussed in the MS-DRG section, it is our policy to maintain the same diagnostic coding set for IPFs that is used under the IPPS for providing the same psychiatric care.

For FY 2013, we are applying the seventeen comorbidity categories for which we are providing an adjustment, their respective codes, and their respective adjustment factors in Table 3 below.

3. Patient Age Adjustments

As explained in the November 2004 IPF PPS final rule (69 FR 66922), we analyzed the impact of age on per diem cost by examining the age variable (that is, the range of ages) for payment adjustments.

In general, we found that the cost per day increases with age. The older age groups are more costly than the under 45 age group, the differences in per diem cost increase for each successive age group, and the differences are statistically significant.

We do not plan to update the regression analysis until we are able to analyze IPF PPS data. Therefore, for FY 2013, we are continuing to use the patient age adjustments currently in effect as shown in Table 4 below.

4. Variable per Diem Adjustments

We explained in the November 2004 IPF PPS final rule (69 FR 66946) that the regression analysis indicated that per diem cost declines as the LOS increases. The variable per diem adjustments to the Federal per diem base rate account for ancillary and administrative costs that occur disproportionately in the first days after admission to an IPF.

We used a regression analysis to estimate the average differences in per diem cost among stays of different lengths. As a result of this analysis, we established variable per diem adjustments that begin on day 1 and decline gradually until day 21 of a patient's stay. For day 22 and thereafter, the variable per diem adjustment remains the same each day for the remainder of the stay. However, the adjustment applied to day 1 depends upon whether the IPF has a qualifying ED. If an IPF has a qualifying ED, it receives a 1.31 adjustment factor for day 1 of each stay. If an IPF does not have a qualifying ED, it receives a 1.19 adjustment factor for day 1 of the stay. The ED adjustment is explained in more detail in section VII.C.5 of this notice.

For FY 2013, we are continuing to use the variable per diem adjustment factors currently in effect as shown in Table 5 below. A complete discussion of the variable per diem adjustments appears in the November 2004 IPF PPS final rule (69 FR 66946).

C. Facility-Level Adjustments

The IPF PPS includes facility-level adjustments for the wage index, IPFs located in rural areas, teaching IPFs, cost of living adjustments for IPFs located in Alaska and Hawaii, and IPFs with a qualifying ED.

1. Wage Index Adjustment

a. Background

As discussed in the May 2006 IPF PPS final rule and in the May 2008 and May 2009 IPF PPS notices, in providing an adjustment for geographic wage levels, the labor-related portion of an IPF's payment is adjusted using an appropriate wage index. Currently, an IPF's geographic wage index value is determined based on the actual location of the IPF in an urban or rural area as defined in § 412.64(b)(1)(ii)(A) through (C).

b. Wage Index for FY 2013

Since the inception of the IPF PPS, we have used hospital wage data in developing a wage index to be applied to IPFs. We are continuing that practice for FY 2013. We apply the wage index adjustment to the labor-related portion of the Federal rate, which is 69.981 percent. This percentage reflects the labor-related relative importance of the FY 2008-based RPL market basket for FY 2013 (see section V.C. of this notice). The IPF PPS uses the pre-floor, pre-reclassified hospital wage index. Changes to the wage index are made in a budget neutral manner so that updates do not increase expenditures.

For FY 2013, we are applying the most recent hospital wage index (that is, the FY 2012 pre-floor, pre-reclassified hospital wage index because this is the most appropriate index as it best reflects the variation in local labor costs of IPFs in the various geographic areas) using the most recent hospital wage data (that is, data from hospital cost reports for the cost reporting period beginning during FY 2008), and applying an adjustment in accordance with our budget neutrality policy. This policy requires us to estimate the total amount of IPF PPS payments in RY 2012 using the applicable wage index value divided by the total estimated IPF PPS payments in FY 2013 using the most recent wage index. The estimated payments are based on FY 2011 IPF claims, inflated to the appropriate FY. This quotient is the wage index budget neutrality factor, and it is applied in the update of the Federal per diem base rate for FY 2013 in addition to the market basket described in section VI.B. of this notice. The wage index budget neutrality factor for FY 2013 is 1.0007.

The wage index applicable for FY 2013 appears in Table 1 and Table 2 in Addendum B of this notice. As explained in the May 2006 IPF PPS final rule for RY 2007 (71 FR 27061), the IPF PPS applies the hospital wage index without a hold-harmless policy, and without an out-commuting adjustment or out-migration adjustment because the statutory authority for these policies applies only to the IPPS.

Also in the May 2006 IPF PPS final rule for RY 2007 (71 FR 27061), we adopted the changes discussed in the Office of Management and Budget (OMB) Bulletin No. 03-04 (June 6, 2003), which announced revised definitions for Metropolitan Statistical Areas (MSAs), and the creation of Micropolitan Statistical Areas and Combined Statistical Areas. In adopting the OMB Core-Based Statistical Area (CBSA) geographic designations, since the IPF PPS was already in a transition period from TEFRA payments to PPS payments, we did not provide a separate transition for the CBSA-based wage index.

As was the case in RY 2012, for FY 2013, we will continue to use the CBSA-based wage index values as presented in Tables 1 and 2 in Addendum B of this notice. A complete discussion of the CBSA labor market definitions appears in the May 2006 IPF PPS final rule (71 FR 27061 through 27067).

In summary, for FY 2013, we will use the FY 2012 wage index data (collected from cost reports submitted by hospitals for cost reporting periods beginning during FY 2008) to adjust IPF PPS payments beginning October 1, 2012.

c. OMB Bulletins

OMB publishes bulletins regarding CBSA changes, including changes to CBSA numbers and titles. In the May 2008 IPF PPS notice, we incorporated the CBSA nomenclature changes published in the most recent OMB bulletin that applies to the hospital wage data used to determine the current IPF PPS wage index (73 FR 25721). We will continue to do the same for all the OMB CBSA nomenclature changes in future IPF PPS rules and notices, as necessary. The OMB bulletins may be accessed online at http://www.whitehouse.gov/omb/bulletins/index.html.

2. Adjustment for Rural Location

In the November 2004 IPF PPS final rule, we provided a 17 percent payment adjustment for IPFs located in a rural area. This adjustment was based on the regression analysis, which indicated that the per diem cost of rural facilities was 17 percent higher than that of urban facilities after accounting for the influence of the other variables included in the regression. For FY 2013, we are applying a 17 percent payment adjustment for IPFs located in a rural area as defined at § 412.64(b)(1)(ii)(C). As stated in the November 2004 IPF PPS final rule, we do not intend to update the adjustment factors derived from the regression analysis until we are able to analyze IPF PPS data. A complete discussion of the adjustment for rural locations appears in the November 2004 IPF PPS final rule (69 FR 66954).

3. Teaching Adjustment

In the November 2004 IPF PPS final rule, we implemented regulations at § 412.424(d)(1)(iii) to establish a facility-level adjustment for IPFs that are, or are part of, teaching hospitals. The teaching adjustment accounts for the higher indirect operating costs experienced by hospitals that participate in graduate medical education (GME) programs. The payment adjustments are made based on the number of full-time equivalent (FTE) interns and residents training in the IPF and the IPF's average daily census.

Medicare makes direct GME payments (for direct costs such as resident and teaching physician salaries, and other direct teaching costs) to all teaching hospitals including those paid under a PPS, and those paid under the TEFRA rate-of-increase limits. These direct GME payments are made separately from payments for hospital operating costs and are not part of the PPSs. The direct GME payments do not address the estimated higher indirect operating costs teaching hospitals may face.

For teaching hospitals paid under the TEFRA rate-of-increase limits, Medicare does not make separate payments for indirect medical education costs because payments to these hospitals are based on the hospitals' reasonable costs which already include these higher indirect costs that may be associated with teaching programs.

The results of the regression analysis of FY 2002 IPF data established the basis for the payment adjustments included in the November 2004 IPF PPS final rule. The results showed that the indirect teaching cost variable is significant in explaining the higher costs of IPFs that have teaching programs. We calculated the teaching adjustment based on the IPF's “teaching variable,” which is one plus the ratio of the number of FTE residents training in the IPF (subject to limitations described below) to the IPF's average daily census (ADC).

We established the teaching adjustment in a manner that limited the incentives for IPFs to add FTE residents for the purpose of increasing their teaching adjustment. We imposed a cap on the number of FTE residents that may be counted for purposes of calculating the teaching adjustment. The cap limits the number of FTE residents that teaching IPFs may count for the purpose of calculating the IPF PPS teaching adjustment, not the number of residents teaching institutions can hire or train. We calculated the number of FTE residents that trained in the IPF during a “base year” and used that FTE resident number as the cap. An IPF's FTE resident cap is ultimately determined based on the final settlement of the IPF's most recent cost report filed before November 15, 2004 (that is, the publication date of the IPF PPS final rule).

In the regression analysis, the logarithm of the teaching variable had a coefficient value of 0.5150. We converted this cost effect to a teaching payment adjustment by treating the regression coefficient as an exponent and raising the teaching variable to a power equal to the coefficient value. We note that the coefficient value of 0.5150 was based on the regression analysis holding all other components of the payment system constant.

As with other adjustment factors derived through the regression analysis, we do not plan to rerun the regression analysis until we analyze IPF PPS data. Therefore, in this notice, for FY 2013, we are retaining the coefficient value of 0.5150 for the teaching adjustment to the Federal per diem base rate.

A complete discussion of how the teaching adjustment was calculated appears in the November 2004 IPF PPS final rule (69 FR 66954 through 66957) and the May 2008 IPF PPS notice (73 FR 25721).

a. FTE Intern and Resident Cap Adjustment

CMS had been asked to reconsider the original IPF teaching policy and permit a temporary increase in the FTE resident cap when an IPF increases the number of FTE residents it trains due to the acceptance of displaced residents (residents that are training in an IPF or a program before the IPF or program closed) when another IPF closes or closes its medical residency training program.

To help us assess how many IPFs had been, or were expected to be adversely affected by their inability to adjust their caps under § 412.424(d)(1) and under these situations, we specifically requested public comment from IPFs in the May 1, 2009 IPF PPS notice (74 FR 20376 through 20377). A summary of the comments and our response can be reviewed in the April 30, 2010 IPF PPS notice (75 FR 23106, 23117). All of the commenters recommended that CMS modify the IPF PPS teaching adjustment policy, supporting a policy change that would permit the IPF PPS residency cap to be temporarily adjusted when that IPF trains displaced residents due to closure of an IPF or closure of an IPF's medical residency training program(s). The commenters recommended a temporary resident cap adjustment policy similar to the policies applied in similar contexts for acute care hospitals.

We agreed with the commenters that, when a hospital temporarily takes on residents because another hospital closes or discontinues its program, a temporary adjustment to the cap would be appropriate for rotation that occurs in an IPF setting (freestanding or units). In these situations, residents may have partially completed a medical residency training program at the hospital that has closed its training program and may be unable to complete their training at another hospital that is already training residents up to or in excess of its cap. We believe that it is appropriate to allow temporary adjustments to the FTE caps for an IPF that provides residency training to medical residents who have partially completed a residency training program at an IPF that closes or at an IPF that discontinues training residents in a residency training program(s) (also referred to as a “closed” program throughout this preamble). For this reason, we adopted the following temporary resident cap adjustment policies, similar to the temporary adjustments to the FTE cap used for acute care hospitals. We proposed and finalized that the cap adjustment would be temporary because it is resident specific and would only apply to the displaced resident(s) until the resident(s) completes training in that specialty. As under the IPPS policy for displaced residents, the IPF PPS temporary cap adjustment would apply only to residents that were still training at the IPF at the time the IPF closed or at the time the IPF ceased training residents in the residency training program(s). Residents who leave the IPF, for whatever reason, before the closure of the IPF hospital or medical residency training program would not be considered displaced residents for purposes of the IPF temporary cap adjustment policy. Similarly, as under the IPPS policy, medical students who match to a program at an IPF but the IPF or medical residency training program closes before the individual begins training at that IPF are also not considered displaced residents for purposes of the IPF temporary cap adjustments. For detailed information on these acute care hospital GME/IME payment policies, we refer the reader to the (66 FR 39899) August 1, 2001 final rule, (64 FR 41522) July 30, 1999 final rule, and (64 FR 24736) May 7, 1999 proposed rule. We note that although we adopted a policy under the IPF PPS that is consistent with the policy applicable under the IPPS, the actual caps under the two payment systems may not be commingled.

b. Temporary Adjustment to the FTE Cap To Reflect Residents Added Due to Hospital Closure

In the May 6, 2011 IPF PPS final rule, we indicated that we would allow an IPF to receive a temporary adjustment to the FTE cap to reflect residents added because of another IPF's closure. This adjustment is intended to account for medical residents who would have partially completed a medical residency training program at the hospital that has closed and may be unable to complete their training at another hospital because that hospital is already training residents up to or in excess of its cap. We made this change because IPFs have indicated a reluctance to accept additional residents from a closed IPF without a temporary adjustment to their caps. For purposes of this policy on IPF closure, we adopted the IPPS definition of “closure of a hospital” in 42 CFR 413.79(h) to mean the IPF terminates its Medicare provider agreement as specified in 42 CFR 489.52. Therefore, we added a new § 412.424(d)(1)(iii)(F)(1) to allow a temporary adjustment to an IPF's FTE cap to reflect residents added because of an IPF's closure on or after July 1, 2011, to be effective for cost reporting periods beginning on or after July 1, 2011. Under this policy, we allow an adjustment to an IPF's FTE cap if the IPF meets the following criteria: (1) The IPF is training displaced residents from an IPF that closed on or after July 1, 2011; and (2) the IPF that is training the displaced residents from the closed IPF submits a request for a temporary adjustment to its FTE cap to its Medicare contractor no later than 60 days after the hospital first begins training the displaced residents, and documents that the IPF is eligible for this temporary adjustment to its FTE cap by identifying the residents who have come from the closed IPF and have caused the IPF to exceed its cap, (or the IPF may already be over its cap), and specifies the length of time that the adjustment is needed. After the displaced residents leave the IPF's training program or complete their residency program, the IPF's cap would revert to its original level. This means that the temporary adjustment to the FTE cap would be available to the IPF only for the period of time necessary for the displaced residents to complete their training. Further, as under the IPPS policy, we also indicated that the total amount of temporary cap adjustment that can be distributed to all receiving hospitals cannot exceed the cap amount of the IPF that closed.

c. Temporary Adjustment to FTE Cap to Reflect Residents Affected by Residency Program Closure

In the May 6, 2011 final rule (76 FR 26455), we indicated that if an IPF that ceases training residents in a residency training program(s) agrees to temporarily reduce its FTE cap, we would allow another IPF to receive a temporary adjustment to its FTE cap to reflect residents added because of the closure of another IPF's residency training program. For purposes of this policy on closed residency programs, we adopted the IPPS definition of “closure of a hospital residency training program” to mean that the hospital ceases to offer training for residents in a particular approved medical residency training program as specified in § 413.79(h). The methodology for adjusting the caps for the “receiving IPF” and the “IPF that closed its program” is described below.

i. Receiving IPF

We proposed and finalized that an IPF(s) may receive a temporary adjustment to its FTE cap to reflect residents added because of the closure of another IPF's residency training program for cost reporting periods beginning on or after July 1, 2011 if —

• The IPF is training additional residents from the residency training program of an IPF that closed its program on or after July 1, 2011.
• No later than 60 days after the IPF begins to train the residents, the IPF submits to its Medicare Contractor a request for a temporary adjustment to its FTE cap, documents that the IPF is eligible for this temporary adjustment by identifying the residents who have come from another IPF's closed program and have caused the IPF to exceed its cap, (or the IPF may already be in excess of its cap), specifies the length of time the adjustment is needed, and, submits to its Medicare contractor a copy of the FTE cap reduction statement by the IPF closing the residency training program.

In general, the temporary adjustment criteria established for closed medical residency training programs at IPFs is similar to the criteria established for closed IPFs. More than one IPF may be eligible to apply for the temporary adjustment because residents from one closed program may complete their training at one IPF, or at several IPFs. Also, an IPF would be eligible for the temporary adjustment only to the extent that the displaced residents would cause the IPF to exceed its FTE cap.

Finally, we proposed and finalized that IPFs meeting the proposed criteria would be eligible to receive temporary adjustments to their FTE caps for cost reporting periods beginning on or after July 1, 2011.

ii. IPF That Closed Its Program

We indicated that an IPF that agrees to train residents who have been displaced by the closure of another IPF's resident teaching program, may receive a temporary FTE cap adjustment only if the IPF that closed a program:

• Temporarily reduces its FTE cap by the number of FTE residents in each program year, training in the program at the time of the program's closure. The yearly reduction would be determined by deducting the number of those residents who would have been training in the program during the year of the closure, had the program not closed.
• No later than 60 days after the residents who were in the closed program begin training at another IPF, submits to its Medicare contractor a statement signed and dated by its representative that specifies that it agrees to the temporary reduction in its FTE cap to allow the IPF training the displaced residents to obtain a temporary adjustment to its cap; identifies the residents who were training at the time of the program's closure; identifies the IPFs to which the residents are transferring once the program closes; and specifies the reduction for the applicable program years.

We proposed and finalized that the cap reduction for the IPF with the closed program would be based on the number of FTE residents in each program year who were in the program at the IPF at the time of the program's closure, and who begin training at another IPF.

In summary, we added § 412.424(d)(1)(iii)(F)(1) and § 412.424(d)(1)(iii)(F)(2) to implement policies related to temporary adjustments to FTE caps to reflect residents added due to closure of an IPF or an IPFs medical residency training program respectfully.

A complete discussion on the Temporary adjustment to the FTE cap to reflect residents added due to hospital closure and by residency program appears in the January 27, 2011 IPF PPS proposed rule (76 FR 5018 through 5020) and the May 6, 2011 IPF PPS final rule (76 FR 26453 through 26456).

4. Cost of Living Adjustment for IPFs Located in Alaska and Hawaii

The IPF PPS includes a payment adjustment for IPFs located in Alaska and Hawaii based upon the county in which the IPF is located. As we explained in the November 2004 IPF PPS final rule, the FY 2002 data demonstrated that IPFs in Alaska and Hawaii had per diem costs that were disproportionately higher than other IPFs. Other Medicare PPSs (for example, the IPPS and LTCH PPS) have adopted a cost of living adjustment (COLA) to account for the cost differential of care furnished in Alaska and Hawaii.

We analyzed the effect of applying a COLA to payments for IPFs located in Alaska and Hawaii. The results of our analysis demonstrated that a COLA for IPFs located in Alaska and Hawaii would improve payment equity for these facilities. As a result of this analysis, we provided a COLA in the November 2004 IPF PPS final rule.

A COLA adjustment for IPFs located in Alaska and Hawaii is made by multiplying the nonlabor-related portion of the Federal per diem base rate by the applicable COLA factor based on the COLA area in which the IPF is located.

The COLA factors are published on the Office of Personnel Management (OPM) Web site at (http://www.opm.gov/oca/cola/rates.asp).

We note that the COLA areas for Alaska are not defined by county as are the COLA areas for Hawaii. In 5 CFR 591.207, the OPM established the following COLA areas:

• City of Anchorage, and 80-kilometer (50-mile) radius by road, as measured from the Federal courthouse;
• City of Fairbanks, and 80-kilometer (50-mile) radius by road, as measured from the Federal courthouse;
• City of Juneau, and 80-kilometer (50-mile) radius by road, as measured from the Federal courthouse;
• Rest of the State of Alaska.

As previously stated in the November 2004 IPF PPS final rule, we update the COLA factors according to updates established by the OPM. Sections 1911 through 1919 of the Nonforeign Area Retirement Equity Assurance Act, as contained in subtitle B of title XIX of the National Defense Authorization Act (NDAA) for Fiscal Year 2010 (Pub. L. 111-84, October 28, 2009), transitions the Alaska and Hawaii COLAs to locality pay. Under section 1914 of Pubic Law 111-84, locality pay is being phased in over a 3-year period beginning in January 2010, with COLA rates frozen as of the date of enactment, October 28, 2009, and then proportionately reduced to reflect the phase-in of locality pay.

When we published the proposed COLA adjustment factors in the January 2011 IPF proposed rule (76 FR 4998), we inadvertently selected the FY 2010 COLA rates. The FY 2010 COLA rates were reduced rates to account for the phase-in of locality pay. We did not intend to propose reduced COLA rates, and we do not believe it is appropriate to finalize the reduced COLAs that we showed in our January 2011 proposed rule. The 2009 COLA rates do not reflect the phase-in of locality pay. Therefore, we finalized the FY 2009 COLA rates, which are the same rates that were in effect for both RY 2010, through RY 2012. We plan to address COLA in the future refinement process in FY 2014. For FY 2013, IPFs located in Alaska and Hawaii will continue to receive the updated COLA factors based on the COLA area in which the IPF is located as shown in Table 6 below.

5. Adjustment for IPFs With a Qualifying Emergency Department (ED)

Currently, the IPF PPS includes a facility-level adjustment for IPFs with qualifying EDs. We provide an adjustment to the Federal per diem base rate to account for the costs associated with maintaining a full-service ED. The adjustment is intended to account for ED costs incurred by a freestanding psychiatric hospital with a qualifying ED or a distinct part psychiatric unit of an acute hospital or a CAH for preadmission services otherwise payable under the Medicare Outpatient Prospective Payment System (OPPS) furnished to a beneficiary during the day immediately preceding the date of admission to the IPF (see § 413.40(c)(2)) and the overhead cost of maintaining the ED. This payment is a facility-level adjustment that applies to all IPF admissions (with one exception described below), regardless of whether a particular patient receives preadmission services in the hospital's ED.

The ED adjustment is incorporated into the variable per diem adjustment for the first day of each stay for IPFs with a qualifying ED. That is, IPFs with a qualifying ED receive an adjustment factor of 1.31 as the variable per diem adjustment for day 1 of each stay. If an IPF does not have a qualifying ED, it receives an adjustment factor of 1.19 as the variable per diem adjustment for day 1 of each patient stay.

The ED adjustment is made on every qualifying claim except as described below. As specified in § 412.424(d)(1)(v)(B), the ED adjustment is not made where a patient is discharged from an acute care hospital or CAH and admitted to the same hospital's or CAH's psychiatric unit. An ED adjustment is not made in this case because the costs associated with ED services are reflected in the DRG payment to the acute care hospital or through the reasonable cost payment made to the CAH. If we provided the ED adjustment in these cases, the hospital would be paid twice for the overhead costs of the ED, as stated in the November 2004 IPF PPS final rule (69 FR 66960).

Therefore, when patients are discharged from an acute care hospital or CAH and admitted to the same hospital's or CAH's psychiatric unit, the IPF receives the 1.19 adjustment factor as the variable per diem adjustment for the first day of the patient's stay in the IPF.

For FY 2013, we are retaining the 1.31 adjustment factor for IPFs with qualifying EDs. A complete discussion of the steps involved in the calculation of the ED adjustment factor appears in the November 2004 IPF PPS final rule (69 FR 66959 through 66960) and the May 2006 IPF PPS final rule (71 FR 27070 through 27072).

D. Other Payment Adjustments and Policies

For FY 2013, the IPF PPS includes an outlier adjustment to promote access to IPF care for those patients who require expensive care and to limit the financial risk of IPFs treating unusually costly patients. In this section, we also explain the reason for ending the stop-loss provision that was applicable during the transition period.

1. Outlier Payments

In the November 2004 IPF PPS final rule, we implemented regulations at § 412.424(d)(3)(i) to provide a per-case payment for IPF stays that are extraordinarily costly. Providing additional payments to IPFs for extremely costly cases strongly improves the accuracy of the IPF PPS in determining resource costs at the patient and facility level. These additional payments reduce the financial losses that would otherwise be incurred in treating patients who require more costly care and, therefore, reduce the incentives for IPFs to under-serve these patients.

We make outlier payments for discharges in which an IPF's estimated total cost for a case exceeds a fixed dollar loss threshold amount (multiplied by the IPF's facility-level adjustments) plus the Federal per diem payment amount for the case.

In instances when the case qualifies for an outlier payment, we pay 80 percent of the difference between the estimated cost for the case and the adjusted threshold amount for days 1 through 9 of the stay (consistent with the median LOS for IPFs in FY 2002), and 60 percent of the difference for day 10 and thereafter. We established the 80 percent and 60 percent loss sharing ratios because we were concerned that a single ratio established at 80 percent (like other Medicare PPSs) might provide an incentive under the IPF per diem payment system to increase LOS in order to receive additional payments. After establishing the loss sharing ratios, we determined the current fixed dollar loss threshold amount of $7,340 through payment simulations designed to compute a dollar loss beyond which payments are estimated to meet the 2 percent outlier spending target.

a. Update to the Outlier Fixed Dollar Loss Threshold Amount

In accordance with the update methodology described in § 412.428(d), we are updating the fixed dollar loss threshold amount used under the IPF PPS outlier policy. Based on the regression analysis and payment simulations used to develop the IPF PPS, we established a 2 percent outlier policy which strikes an appropriate balance between protecting IPFs from extraordinarily costly cases while ensuring the adequacy of the Federal per diem base rate for all other cases that are not outlier cases.

We believe it is necessary to update the fixed dollar loss threshold amount because an analysis of the latest available data (that is, FY 2011 IPF claims) and rate increases indicate that adjusting the fixed dollar loss amount is necessary in order to maintain an outlier percentage that equals 2 percent of total estimated IPF PPS payments.

In the May 2006 IPF PPS final rule (71 FR 27072), we describe the process by which we calculate the outlier fixed dollar loss threshold amount. We will continue to use this process for FY 2013. We begin by simulating aggregate payments with and without an outlier policy, and applying an iterative process to determine an outlier fixed dollar loss threshold amount that will result in estimated outlier payments being equal to 2 percent of total estimated payments under the simulation. Based on this process, using the FY 2011 claims data, we estimate that IPF outlier payments as a percentage of total estimated payments are approximately 3.1 percent in RY 2012. Thus, for this notice, we are updating the FY 2013 IPF outlier threshold amount to ensure that estimated FY 2013 outlier payments are approximately 2 percent of total estimated IPF payments. The outlier fixed dollar loss threshold amount of $7,340 for RY 2012 will be changed to $11,600 for FY 2013 to reduce estimated outlier payments and thereby maintain estimated outlier payments at 2 percent of total estimated aggregate IPF payments for FY 2013.

b. Update to IPF Cost-to-Charge Ratio Ceilings

As previously stated, under the IPF PPS, an outlier payment is made if an IPF's cost for a stay exceeds a fixed dollar loss threshold amount. In order to establish an IPF's cost for a particular case, we multiply the IPF's reported charges on the discharge bill by its overall cost-to-charge ratio (CCR). This approach to determining an IPF's cost is consistent with the approach used under the IPPS and other PPSs. In the June 2003 IPPS final rule (68 FR 34494), we implemented changes to the IPPS policy used to determine CCRs for acute care hospitals because we became aware that payment vulnerabilities resulted in inappropriate outlier payments. Under the IPPS, we established a statistical measure of accuracy for CCRs in order to ensure that aberrant CCR data did not result in inappropriate outlier payments.

As we indicated in the November 2004 IPF PPS final rule, because we believe that the IPF outlier policy is susceptible to the same payment vulnerabilities as the IPPS, we adopted an approach to ensure the statistical accuracy of CCRs under the IPF PPS (69 FR 66961). Therefore, we adopted the following procedure in the November 2004 IPF PPS final rule:

• We calculated two national ceilings, one for IPFs located in rural areas and one for IPFs located in urban areas. We computed the ceilings by first calculating the national average and the standard deviation of the CCR for both urban and rural IPFs using the most recent CCRs entered in the CY 2012 Provider Specific File.

To determine the rural and urban ceilings, we multiplied each of the standard deviations by 3 and added the result to the appropriate national CCR average (either rural or urban). The upper threshold CCR for IPFs in FY 2013 is 1.9155 for rural IPFs, and 1.7072 for urban IPFs, based on CBSA-based geographic designations. If an IPF's CCR is above the applicable ceiling, the ratio is considered statistically inaccurate and we assign the appropriate national (either rural or urban) median CCR to the IPF.

We apply the national CCRs to the following situations:

++ New IPFs that have not yet submitted their first Medicare cost report.

++ IPFs whose overall CCR is in excess of 3 standard deviations above the corresponding national geometric mean (that is, above the ceiling).

++ Other IPFs for which the Medicare contractor obtains inaccurate or incomplete data with which to calculate a CCR.

For new IPFs, we are using these national CCRs until the facility's actual CCR can be computed using the first tentatively or final settled cost report.

We are not making any changes to the procedures for updating the CCR ceilings in FY 2013. However, we are updating the FY 2013 national median and ceiling CCRs for urban and rural IPFs based on the CCRs entered in the latest available IPF PPS Provider Specific File. Specifically, for FY 2013, and to be used in each of the three situations listed above, using the most recent CCRs entered in the CY 2012 Provider Specific File we estimate the national median CCR of 0.622 for rural IPFs and the national median CCR of 0.496 for urban IPFs. These calculations are based on the IPF's location (either urban or rural) using the CBSA-based geographic designations.

A complete discussion regarding the national median CCRs appears in the November 2004 IPF PPS final rule (69 FR 66961 through 66964).

2. Expiration of the Stop-Loss Provision

In the November 2004 IPF PPS final rule, we implemented a stop-loss policy that reduced financial risk to IPFs projected to experience substantial reductions in Medicare payments during the period of transition to the IPF PPS. This stop-loss policy guaranteed that each facility received total IPF PPS payments that were no less than 70 percent of its TEFRA payments had the IPF PPS not been implemented. This policy was applied to the IPF PPS portion of Medicare payments during the 3-year transition.

In the implementation year, the 70 percent of TEFRA payment stop-loss policy required a reduction in the standardized Federal per diem and ECT base rates of 0.39 percent in order to make the stop-loss payments budget neutral. As described in the May 2008 IPF PPS notice for RY 2009, we increased the Federal per diem base rate and ECT rate by 0.39 percent because these rates were reduced by 0.39 percent in the implementation year to ensure stop-loss payments were budget neutral.

The stop-loss provision ended during RY 2009 (that is for discharges occurring on or after July 1, 2008 through June 30, 2009). The stop-loss policy is no longer applicable under the IPF PPS.

3. Future Refinements

As we have indicated throughout this notice, we have delayed making refinements to the IPF PPS until we have adequate IPF PPS data to base those decisions. Specifically, we explained that we will delay updating the adjustment factors derived from regression analysis until we have IPF PPS data that includes as much information as possible regarding the patient-level characteristics of the population that each IPF serves. Now that we are approximately 7 years into the system, we believe that we have enough data to begin that process. We have begun the necessary analysis to better understand IPF industry practices so that we may refine the IPF PPS as appropriate. Using more recent data, we plan to re-run the regression analyses and recalculate the Federal per diem base rate and the patient- and facility-level adjustments. While we are not making these refinements in this notice, we expect that in the rulemaking for FY 2014 we will be ready to present the results of our analysis.

For RY 2012, we published several areas of concern for future refinement and we invited comments on these issues in our RY 2012 proposed and final rules. For further discussion of these issues and to review public comments, we refer readers to the RY 2012 IPF PPS proposed rule (76 FR 4998) and final rule (76 FR 26432).

VIII. Secretary's Recommendations

Section 1886(e)(4)(A) of the Act requires the Secretary, taking into consideration the recommendations of MedPAC, to recommend update factors for inpatient hospital services (including IPFs) for each FY that take into account the amounts necessary for the efficient and effective delivery of medically appropriate and necessary care of high quality. Section 1886(e)(5) of the Act requires the Secretary to publish the recommended and final update factors in the Federal Register.

In the past, the Secretary's recommendations and a discussion about the MedPAC recommendations for the IPF PPS were included in the IPPS proposed and final rules. The market basket update for the IPF PPS was also included in the IPPS proposed and final rules, as well as in the IPF PPS annual update.

Beginning FY 2013, however, we will only publish the market basket update for the IPF PPS in the annual IPF PPS FY update and not in the IPPS proposed and final rules. Furthermore, for any years which MedPAC makes recommendations for the IPF PPS, those recommendations will be noted and considered in the IPF PPS update.

MedPAC did not make any recommendations for the IPF PPS for FY 2013. For the update to the IPF PPS standard Federal rate for FY 2013, see section IV B. of this notice.

IX. Waiver of Notice and Comment

We ordinarily publish a notice of proposed rulemaking in the Federal Register to provide a period for public comment before the provisions of a rule take effect. We can waive this procedure, however, if we find good cause that notice and comment procedures are impracticable, unnecessary, or contrary to the public interest and we incorporate a statement of finding and its reasons in the notice.

We find it is unnecessary to undertake notice and comment rulemaking for this action because the updates in this notice do not reflect any substantive changes in policy, but merely reflect the application of previously established methodologies. Therefore, under 5 U.S.C. 553(b)(3)(B), for good cause, we waive notice and comment procedures.

X. Collection of Information Requirements

This notice does not impose any new or revised information collection or recordkeeping requirements. Consequently, it does not need Office of Management and Budget review under the authority of the Paperwork Reduction Act of 1995 (44 U.S.C. 35).

XI. Regulatory Impact Analysis

A. Statement of Need

This notice will update the prospective payment rates for Medicare inpatient hospital services provided by IPF for discharges occurring during the FY beginning October 1, 2012 through September 30, 2013. We are applying the FY 2008-based RPL market basket increase of 2.7 percent, less the 0.1 percentage point required by sections 1886(s)(2)(A)(ii) and 1886(s)(3)(B) of the Act and less the productivity adjustment of 0.7 percentage point as required by 1886(s)(2)(A)(i) of the Act.

B. Overall Impact

We have examined the impact of this notice as required by Executive Order 12866 on Regulatory Planning and Review (September 30, 1993), Executive Order 13563 on Improving Regulation and Regulatory Review (January 18, 2011), the Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), section 1102(b) of the Social Security Act, section 202 of the Unfunded Mandates Reform Act of 1995 (March 22, 1995; Pub. L. 104-4), Executive Order 13132 on Federalism (August 4, 1999) and the Congressional Review Act (5 U.S.C. 804(2)).

Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). A regulatory impact analysis (RIA) must be prepared for major rules with economically significant effects ($100 million or more in any 1 year). This notice is not designated as economically “significant” under section 3(f)(1) of Executive Order 12866.

We estimate that the total impact of these changes for FY 2013 payments compared to RY 2012 payments would be a net increase of approximately $36 million (this reflects a $86 million increase from the update to the payment rates and a $50 million decrease due to the update to the outlier threshold amount to decrease outlier payments from approximately 3.1 percent in RY 2012 to 2.0 percent in FY 2013).

The RFA requires agencies to analyze options for regulatory relief of small entities, if a rule has a significant impact on a substantial number of small entities. For purposes of the RFA, small entities include small businesses, nonprofit organizations, and small governmental jurisdictions. Most IPFs and most other providers and suppliers are small entities, either by nonprofit status or by having revenues of $7 million to $34.5 million in any 1 year (for details, refer to the SBA Small Business Size Standards found at http://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf), or being nonprofit organizations that are not dominant in their markets.

Because we lack data on individual hospital receipts, we cannot determine the number of small proprietary IPFs or the proportion of IPFs' revenue that is derived from Medicare payments. Therefore, we assume that all IPFs are considered small entities. The Department of Health and Human Services generally uses a revenue impact of 3 to 5 percent as a significance threshold under the RFA.

As shown in Table 7, we estimate the revenue impact of this notice on all IPFs is to increase Medicare payments by approximately 0.8 percent, with rural IPFs receiving an increase of 1.2 percent in Medicare payments. As a result, the Secretary has determined that this notice will not have a significant impact on a substantial number of small entities. Medicare fiscal intermediaries, Medicare Administrative Contractors, and Carriers are not considered to be small entities. Individuals and States are not included in the definition of a small entity.

In addition, section 1102(b) of the Social Security Act requires us to prepare a regulatory impact analysis, if a rule may have a significant impact on the operations of a substantial number of small rural hospitals. This analysis must conform to the provisions of section 604 of the RFA. For purposes of section 1102(b) of the Act, we define a small rural hospital as a hospital that is located outside of a metropolitan statistical area and has fewer than 100 beds. As discussed in detail below, the rates and policies set forth in this notice will not have an adverse impact on the rural hospitals based on the data of the 311 rural units and 71 rural hospitals in our database of 1,627 IPFs for which data were available. Therefore, the Secretary has determined that this notice will not have a significant impact on the operations of a substantial number of small rural hospitals.

Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) also requires that agencies assess anticipated costs and benefits before issuing any rule whose mandates require spending in any 1 year of $100 million in 1995 dollars, updated annually for inflation. In 2013, that threshold is approximately $139 million. This notice will not impose spending costs on State, local, or tribal governments in the aggregate, or by the private sector, of $139 million.

Executive Order 13132 establishes certain requirements that an agency must meet when it promulgates a proposed rule (and subsequent final rule) that imposes substantial direct requirement costs on State and local governments, preempts State law, or otherwise has Federalism implications. As stated above, this notice would not have a substantial effect on State and local governments.

C. Anticipated Effects

As discussed earlier in the preamble, in the RY 2012 IPF PPS proposed rule (76 FR 4998) and final rule (76 FR 26432), we revised the IPF PPS payment rate update period by switching from a RY (that is July 1 through June 30) to a period that coincides with a FY (that is, October 1 through September 30). Beginning with the update period that starts in 2012, that is, FY 2013, we now refer to update periods as FY. This change, in the annual update period, is reflected in the quantitative analysis presented in this Regulatory Impact Analysis section. Furthermore, this change allows us to consolidate Medicare publications by aligning the IPF PPS update with the annual update of the ICD-9-CM codes, which are effective on October 1 of each year. Below, we discuss the historical background of the IPF PPS and the impact of this notice on the Federal Medicare budget and on IPFs.

1. Budgetary Impact

As discussed in the November 2004 and May 2006 IPF PPS final rules, we applied a budget neutrality factor to the Federal per diem and ECT base rates to ensure that total estimated payments under the IPF PPS in the implementation period would equal the amount that would have been paid if the IPF PPS had not been implemented. The budget neutrality factor includes the following components: Outlier adjustment, stop-loss adjustment, and the behavioral offset. As discussed in the May 2008 IPF PPS notice (73 FR 25711), the stop-loss adjustment is no longer applicable under the IPF PPS.

In accordance with § 412.424(c)(3)(ii), we indicated that we will evaluate the accuracy of the budget neutrality adjustment within the first 5 years after implementation of the payment system. We may make a one-time prospective adjustment to the Federal per diem and ECT base rates to account for differences between the historical data on cost-based TEFRA payments (the basis of the budget neutrality adjustment) and estimates of TEFRA payments based on actual data from the first year of the IPF PPS. As part of that process, we will reassess the accuracy of all of the factors impacting budget neutrality. In addition, as discussed in section VII.C.1 of this notice, we are using the wage index and labor-related share in a budget neutral manner by applying a wage index budget neutrality factor to the Federal per diem and ECT base rates. Therefore, the budgetary impact to the Medicare program of this notice will be due to the market basket update for FY 2013 of 2.7 percent (see section V.B. of this notice) less the “other adjustment” of 0.1 percentage point according to sections 1886(s)(2)(A)(ii) and 1886(s)(3)(B) of the Act, less the productivity adjustment of 0.7 percentage point required by section 1886(s)(2)(A)(i) of the Act, and the update to the outlier fixed dollar loss threshold amount.

We estimate that the FY 2013 impact will be a net increase of $36 million in payments to IPF providers. This reflects an estimated $86 million increase from the update to the payment rates and a $50 million decrease due to the update to the outlier threshold amount to decrease outlier payments from approximately 3.1 percent in RY 2012 to 2.0 percent in FY 2013.

2. Impact on Providers

To understand the impact of the changes to the IPF PPS on providers, discussed in this notice, it is necessary to compare estimated payments under the IPF PPS rates and factors for FY 2013 versus those under RY 2012. The estimated payments for RY 2012 and FY 2013 will be 100 percent of the IPF PPS payment, since the transition period has ended and stop-loss payments are no longer paid. We determined the percent change of estimated FY 2013 IPF PPS payments to RY 2012 IPF PPS payments for each category of IPFs. In addition, for each category of IPFs, we have included the estimated percent change in payments resulting from the update to the outlier fixed dollar loss threshold amount, the labor-related share and wage index changes for the FY 2013 IPF PPS, and the market basket update for FY 2013, as adjusted by the “other adjustment” according to sections 1886(s)(2)(A)(ii) and 1886(s)(3)(B) of the Act and the productivity adjustment according to section 1886(s)(2)(A)(i).

To illustrate the impacts of the FY 2013 changes in this notice, our analysis begins with a RY 2012 baseline simulation model based on FY 2011 IPF payments inflated to the midpoint of RY 2012 using IHS Global Insight's most recent forecast of the market basket update (see section V.B. of this notice); the estimated outlier payments in RY 2012; the CBSA designations for IPFs based on OMB's MSA definitions after June 2003; the FY 2011 pre-floor, pre-reclassified hospital wage index; the RY 2012 labor-related share; and the RY 2012 percentage amount of the rural adjustment. During the simulation, the total estimated outlier payments are maintained at 2 percent of total IPF PPS payments.

Each of the following changes is added incrementally to this baseline model in order for us to isolate the effects of each change:

• The update to the outlier fixed dollar loss threshold amount.
• The FY 2012 pre-floor, pre-reclassified hospital wage index and FY 2013 labor-related share.
• The market basket update for FY 2013 of 2.7 percent less the “other adjustment” of 0.1 percentage point in accordance with sections 1886(s)(2)(A)(ii) and 1886(s)(3)(B) of the Act and less the productivity adjustment of 0.7 percentage point reduction in accordance with section 1886(s)(2)(A)(i) of the Act.

Our final comparison illustrates the percent change in payments from RY 2012 (that is, July 1, 2011 to September 30, 2012) to FY 2013 (that is, October 1, 2012 to September 30, 2013) including all the changes in this notice.

3. Results

Table 7 above displays the results of our analysis. The table groups IPFs into the categories listed below based on characteristics provided in the Provider of Services (POS) file, the IPF provider specific file, and cost report data from HCRIS:

• Facility Type
• Location
• Teaching Status Adjustment
• Census Region
• Size

The top row of the table shows the overall impact on the 1,627 IPFs included in this analysis.

In column 3, we present the effects of the update to the outlier fixed dollar loss threshold amount. We estimate that IPF outlier payments as a percentage of total IPF payments are 3.1 percent in RY 2012. Thus, we are adjusting the outlier threshold amount in this notice to set total estimated outlier payments equal to 2 percent of total payments in FY 2013. The estimated change in total IPF payments for FY 2013, therefore, includes an approximate 1.1 percent decrease in payments because the outlier portion of total payments is expected to decrease from approximately 3.1 percent to 2 percent.

The overall impact of this outlier adjustment update (as shown in column 3 of table 7), across all hospital groups, is to decrease total estimated payments to IPFs by 1.1 percent. We do not estimate that any group of IPFs will experience an increase in payments from this update. The largest decrease in payments is estimated to reflect a 2.7 percent decrease in payments for IPFs located in teaching hospitals with an intern and resident ADC ratio greater than or equal to 10 percent and less than or equal to 30 percent. This is due to the high volume of outlier payments made to the IPFs in this category.

In column 4, we present the effects of the budget-neutral update to the labor-related share and the wage index adjustment under the CBSA geographic area definitions announced by OMB in June 2003. This is a comparison of the simulated FY 2013 payments under the FY 2012 hospital wage index under CBSA classification and associated labor-related share to the simulated RY 2012 payments under the FY 2011 hospital wage index under CBSA classifications and associated labor-related share. We note that there is no projected change in aggregate payments to IPFs, as indicated in the first row of column 4. However, there will be small distributional effects among different categories of IPFs. For example, we estimate the largest increase in payments to be a 0.5 percent increase for rural, non-profit freestanding psychiatric hospitals and the largest decrease in payments to be a 0.4 percent decrease for IPFs in the East North Central region and freestanding IPFs in the 50 to 75 bed size category.

Column 5 shows the estimated effect of the update to the IPF PPS payment rates, which includes a 2.7 percent market basket update less the 0.1 percentage point in accordance with section 1886(s)(2)(A)(ii) and 1886(s)(3)(B) and less the 0.7 percentage point in accordance with section 1886(s)(2)(A)(i).

Column 6 compares our estimates of the changes reflected in this notice for FY 2013, to our payments for RY 2012 (without these changes). This column reflects all FY 2013 changes relative to RY 2012. The average estimated increase for all IPFs is approximately 0.8 percent. This estimated net increase includes the effects of the 2.7 percent market basket update adjusted by the “other adjustment” of minus 0.1 percentage point, as required by sections 1886(s)(2)(A)(ii) and 1886(s)(3)(B) of the Act and the productivity adjustment of minus 0.7 percentage point, as required by section 1886(s)(2)(A)(i) of the Act. It also includes the overall estimated 1.1 percent decrease in estimated IPF outlier payments from the update to the outlier fixed dollar loss threshold amount. Since we are making the updates to the IPF labor-related share and wage index in a budget-neutral manner, they will not affect total estimated IPF payments in the aggregate. However, they will affect the estimated distribution of payments among providers.

Overall, the estimated payments to IPFs in FY 2013 are projected to increase by 0.8 percent, compared with the payments in RY 2012. IPF payments are estimated to increase 0.7 percent in urban areas and 1.2 percent in rural areas, compared with RY 2012 payments. The largest payment increase is estimated at 2.3 percent for rural, non-profit freestanding psychiatric hospitals and the largest payment decrease is estimated at 0.7 percent for urban government IPF units and IPFs located in teaching hospitals with an intern and resident ADC ratio greater than or equal to 10 percent and less than or equal to 30 percent.

4. Effect on the Medicare Program

Based on actuarial projections resulting from our experience with other PPSs, we estimate that Medicare spending (total Medicare program payments) for IPF services over the next 5 years would be as shown in Table 8 below.

These estimates are based on the current forecast of the increases in the RPL market basket, including an adjustment for productivity, for the RY beginning in 2012 and each subsequent RY, as required by section 1886(s)(2)(A)(i) of the Act, as follows:

• 2.0 percent for FY 2013.
• 2.3 percent for FY 2014.
• 2.7 percent for FY 2015.
• 2.8 percent for FY 2016.
• 2.6 percent for FY 2017.

The estimates in Table 8 also include the application of the “other adjustment,” as required by sections 1886(s)(2)(A)(ii) and 1886(s)(3)(B) of the Act, as follows:

• −0.1 percentage point for rate years beginning in 2012.
• −0.1 percentage point for rate years beginning in 2013.
• −0.3 percentage point for rate years beginning in 2014.
• −0.2 percentage point for rate years beginning in 2015.
• −0.2 percentage point for rate years beginning in 2016.

We estimate that there would be a change in fee-for-service Medicare beneficiary enrollment as follows:

• 3.8 percent in FY 2013.
• 5.7 percent in FY 2014.
• 6.8 percent in FY 2015.
• 7.0 percent in FY 2016.
• 5.1 percent in FY 2017.

5. Effect on Beneficiaries

Under the IPF PPS, IPFs will receive payment based on the average resources consumed by patients for each day. We do not expect changes in the quality of care or access to services for Medicare beneficiaries under the FY 2013 IPF PPS. In fact, we believe that access to IPF services will be enhanced due to the patient- and facility-level adjustment factors, all which are intended to adequately reimburse IPFs for expensive cases. Finally, the outlier policy is intended to assist IPFs that experience high-cost cases.

D. Alternatives Considered

The statute does not specify an update strategy for the IPF PPS and is broadly written to give the Secretary discretion in establishing an update methodology. Therefore, we are updating the IPF PPS using the methodology published in the November 2004 IPF PPS final rule. Lastly, no alternative policy options were considered in this notice, since this notice does not initiate policy changes with regard to the IPF PPS. This notice simply provides an update to the rates for FY 2013.

(Catalog of Federal Domestic Assistance Program No. 93.773, Medicare—Hospital Insurance; and Program No. 93.774, Medicare—Supplementary Medical Insurance Program)

Addendum A—Rate and Adjustment Factors

Fixed Dollar Loss Threshold Amount: $11,600.

Wage Index Budget Neutrality Factor: 1.0007.

Addendum B—FY 2013 CBSA Wage Index Tables

In this addendum, we provide the wage index tables referred to in the preamble to this notice. The tables presented below are as follows:

Table 1—FY 2013 Wage Index For Urban Areas Based On CBSA Labor Market Areas.

Table 2—FY 2013 Wage Index Based On CBSA Labor Market Areas For Rural Areas.