[Federal Register: August 29, 1997 (Rules and Regulations)] [Page 46116-46140] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr29au97-31] [[pp. 46116-46140]] Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 1998 Rates [[Continued from page 46115]] [[Page 46116]] The update factor for prospective payment system excluded hospitals for FY 1998 is 0 percent. The target amounts for psychiatric and rehabilitation hospitals and units, and long-term care hospitals are capped at the 75th percentile of target amounts for within the same class. The seven State EACH/RPCH program is being replaced by the Critical Access Hospital (CAH) program, a national program that allows States to designate specified rural hospitals as critical access hospitals. Payment to these hospitals is on the basis of reasonable costs. III. Limitations of Our Analysis As has been the case in previously published regulatory impact analyses, the following quantitative analysis presents the projected effects of our policy changes, as well as statutory changes effective for FY 1998, on various hospital groups. We estimate the effects of individual policy changes by estimating payments per case while holding all other payment policies constant. We use the best data available, but we do not attempt to predict behavioral responses to our policy changes, and we do not make adjustments for future changes in such variables as admissions, lengths of stay, or case mix. We received no comments on the methodology used for the impact analysis in the proposed rule. IV. Hospitals Included in and Excluded From the Prospective Payment System A. Included and Excluded Hospitals The prospective payment systems for hospital inpatient operating and capital-related costs encompass nearly all general, short-term, acute care hospitals that participate in the Medicare program. There were 46 Indian Health Service hospitals in our database, which we excluded from the analysis due to the special characteristics of the prospective payment method for these hospitals. Among other short-term, acute care hospitals, only the 50 such hospitals in Maryland remain excluded from the prospective payment system under the waiver at section 1814(b)(3) of the Act. Thus, as of August 1997, we have included 5,088 hospitals in our analysis. (This is 41 fewer hospitals than were included in the impact analysis in the FY 1997 final rule (61 FR 46305).) This represents about 82 percent of all Medicare- participating hospitals. The majority of this impact analysis focuses on this set of hospitals. The remaining 18 percent are specialty hospitals that are excluded from the prospective payment system and continue to be paid on the basis of their reasonable costs (subject to a rate-of-increase ceiling on their inpatient operating costs per discharge). These hospitals include psychiatric, rehabilitation, long-term care, children's, and cancer hospitals. B. Critical Access Hospitals (CAHs) (established by Pub. L. 105-33) As explained earlier in this preamble, section 4201 of Public Law 105-33 replaced the EACH program with a CAH program. The CAH program is not limited to seven States, but is available to any State that both submits the necessary assurances and complies with the other statutory requirements for designation of hospitals as CAHs. Facilities that participated in Medicare as RPCHs before the date of enactment of Public Law 105-33 (August 5, 1997), and that are otherwise eligible to be designated by the States as CAHs, are deemed to be CAHs. There are currently approximately 38 facilities participating as RPCHs. In addition, the 13 facilities currently operating under the Medical Assistance Facility (MAF) demonstration in Montana are deemed to have been certified by HCFA as CAHs, if otherwise eligible for designation by the State as CAHs. Because of the small number of facilities now participating as RPCHs or MAFs, we do not expect the interim final rule to have a significant impact on a substantial number of small rural hospitals. Moreover, in preparing the regulations applicable to CAHs, we have included only those changes that are required to implement the new legislation. Nonetheless, we are informing the public of our projections of the likely effects of the rules, for those hospitals and beneficiaries who may be affected. For the currently participating facilities, the primary effect will be greater flexibility, since these facilities will be able to maintain up to 15 inpatient beds, rather than 6, and will be able to keep patients for as long as 96 hours, rather than an average of 72 hours. Patients in these facilities should benefit from this, since there should be fewer cases requiring patient transfer to other facilities due to lack of beds or need for longer periods of care. However, with an expected increase in utilization due to an increase in numbers and lengths of stay, costs to the Medicare program for care in these facilities may be expected to rise. Some or all of this increase may be offset by savings from cases in which the changes make transfer to another hospital unnecessary. Changes in the swing-bed provisions will also increase facility flexibility and patient access to care. These new provisions are less complex than those imposed by prior law, and should simplify program administration. The changes in payment methodology may also increase Medicare spending for care in these facilities, since payment will now be based on reasonable costs. Fee schedules and blended rates for outpatient care will not apply. However, the elimination of the EACH designation may avoid many unnecessary costs and offset any added spending for CAH care. While the removal of the seven State limitation will undoubtedly lead to greater participation in the program, we are not able to estimate reliably how many additional States will establish limited- service hospital programs, or how many hospitals in those States will choose to participate in them. To the extent that there is increased participation, beneficiary convenience and access to care in remote rural areas would increase. Medicare spending, however, would also increase, since additional hospitals would be paid on a basis other than the prospective payment system. As noted above, some or all of these increases may be offset by prompt access to treatment in the local community, thus avoiding the need for care in full-service hospitals. V. Impact on Excluded Hospitals and Units As of August 1997, there were 1,102 specialty hospitals excluded from the prospective payment system and instead paid on a reasonable cost basis subject to the rate-of-increase ceiling under Sec. 413.40. This group included 631 psychiatric hospitals, 192 rehabilitation hospitals, 192 long-term care hospitals, 70 children's hospitals and 17 Christian Science sanitoria. In addition, there were 1,472 psychiatric units and 880 rehabilitation units in hospitals otherwise subject to the prospective payment system. These excluded units are also paid in accordance with Sec. 413.40. The market basket percentage increase for excluded hospitals and units for FY 1998 is 2.7 percent. However, as a result of section 4411 of Public Law 105-33 the update factor for FY 1998 is 0 percent. The impact on excluded hospitals and units of the update in the rate-of-increase limit depends on the cumulative cost increases experienced by each excluded hospital or unit since its applicable base period. For excluded hospitals and units that have maintained their cost increases at a level [[Page 46117]] below the percentage increases in the rate-of-increase limits since their base period, the major effect will be on the level of incentive payments these hospitals and units receive. Conversely, for excluded hospitals and units with per-case cost increases above the cumulative update in their rate-of-increase limits, the major effect will be the amount of excess costs that would not be reimbursed. In this context, we note that, under Sec. 413.40(d)(3) as revised, an excluded hospital or unit whose costs exceed 110 percent of the ceiling receives its ceiling plus 50 percent of the difference between its costs and 110 percent of the ceiling, not to exceed 110 percent of the ceiling. In addition, under the various provisions set forth in Sec. 413.40, certain excluded hospitals and units can obtain payment adjustments for justifiable increases in operating costs that exceed the limit. At the same time, however, by generally limiting payment increases, we continue to provide an incentive for excluded hospitals and units to restrain the growth in their spending for patient services. Section 4414 of Public Law 105-33 establishes a cap at the 75th percentile on the target amounts for psychiatric, rehabilitation, and long-term care hospitals. Because the cap is based on an estimate of the 75th percentile, we estimate that 25 percent of the providers will have target amounts in excess of the cap. We have broken down the estimated impact of that reduction as follows: Percent of Providers Above Cap ------------------------------------------------------------------------ Free- Type of hospital/unit standing Hospital- hospitals based units ------------------------------------------------------------------------ Rehabilitation................................ 23.2 76.8 Psychiatric................................... 42.5 57.5 Long-term care................................ 25.0 (1) ------------------------------------------------------------------------ \1\ Not applicable. Percent of Total Providers ------------------------------------------------------------------------ Large Other Type of hospital/unit urban urban Rural ------------------------------------------------------------------------ Rehabilitation............................... 48.8 38.7 12.5 Psychiatric.................................. 49.2 32.2 18.6 Long-term care............................... 74.3 17.8 7.9 ------------------------------------------------------------------------ Percent of Providers Above the Cap ------------------------------------------------------------------------ Large Other Type of hospital/unit urban urban Rural ------------------------------------------------------------------------ Rehabilitation............................... 54.4 35.5 10.1 Psychiatric.................................. 62.6 25.7 11.7 Long-term care............................... 95.8 4.2 0.0 ------------------------------------------------------------------------ These tables show, of those hospitals affected by the cap, the estimated percentage of each type of provider affected, and the proportion of these hospitals that are located in urban or rural areas. Although a higher percentage of hospital-based units may be affected by the cap than freestanding hospitals, there are many more units than hospitals. For instance, there are twice as many hospital-based psychiatric units than freestanding hospitals and five times as many hospital-based rehabilitation units as freestanding hospitals. With regard to the geographic impact of the provision on long-term care hospitals, hospitals in large urban areas are affected in greater proportion than hospitals in other areas. This is not unexpected because the target amount cap is not adjusted for differences in area wage levels. We also observed that long-term care hospitals certified before 1990 were less likely to be affected by the 75th percentile provision than older long-term care hospitals. Psychiatric and rehabilitation facilities appear slightly more likely to be affected by the limit on the target amount if they were certified after 1990 or are located in large urban areas. It is important to note that while these hospitals and units will have their target amounts reduced to the 75th percentile, the impact on a specific provider will depend on the level of its operating costs per discharge in relation to its reduced target amount. We are extending certain exclusion criteria that currently apply only to long-term care hospitals to all other categories of excluded facilities. These criteria define a minimum level of independence and separate control that a facility must have in order to be excluded as a ``hospital within a hospital.'' We expect that this provision will result in a very small decrease in aggregate payment levels (other things being equal) by, for example, preventing new hospital units from inappropriately qualifying for the exemption from the-rate-of-increase ceiling that is available only to new hospitals. To our knowledge, there are fewer than 50 facilities that would be affected by this proposal. VI. Quantitative Impact Analysis of the Policy Changes Under the Prospective Payment System for Operating Costs A. Basis and Methodology of Estimates In this final rule with comment period, we are announcing policy changes and payment rate updates for the prospective payment systems for operating and capital-related costs. We have prepared separate analyses of the changes to each system. This section deals with changes to the operating prospective payment system. The data used in developing the quantitative analyses presented below are taken from the FY 1996 MedPAR file and the most current provider-specific file that is used for payment purposes. Although the analyses of the changes to the operating prospective payment system do not incorporate cost data, the most recently available hospital cost report data were used to create some of the variables by which hospitals are categorized. Our analysis has several qualifications. First, we do not make adjustments for behavioral changes that hospitals may adopt in response to these policy changes. Second, due to the interdependent nature of the prospective payment system, it is very difficult to precisely quantify the impact associated with each change. Third, we draw upon various sources for the data used to categorize hospitals in the tables. In some cases, particularly the number of beds, there is a fair degree of variation in the data from different sources. We have attempted to construct these variables with the best available source overall. For individual hospitals, however, some miscategorizations are possible. Using cases in the FY 1996 MedPAR file, we simulated payments under the operating prospective payment system given various combinations of payment parameters. Any short-term, acute care hospitals not paid under the general prospective payment systems (Indian Health Service hospitals and hospitals in Maryland) are excluded from the simulations. Payments under the capital prospective payment system, or payments for costs other than inpatient operating costs, are not analyzed here. Estimated payment impacts of the FY 1998 changes to the capital prospective payment system are discussed below in section VII of this Appendix. The changes discussed separately below are the following: The effects of the changes enacted by Public Law 105-33. Although we are not able to precisely simulate the effect of every provision of this legislation that may influence hospital payment, we have simulated the payment effects of [[Page 46118]] each of the significant provisions noted above. The effects of the annual reclassification of diagnoses and procedures and the recalibration of the DRG relative weights required by section 1886(d)(4)(C) of the Act. The effects of changes in hospitals' wage index values reflecting the FY 1998 wage index update (using FY 1994 data). The effects of implementing the Puerto Rico-specific wage index to be applied to the Puerto Rico standardized amounts. The effects of completing the phase-out of payments for extraordinarily lengthy cases (day outlier cases) with a corresponding increase in payments for extraordinarily costly cases (cost outliers), in accordance with section 1886(d)(5)(A)(v) of the Act. The effects of geographic reclassifications by the MGCRB that will be effective in FY 1998. The total change in payments based on FY 1998 policies relative to payments based on FY 1997 policies. To illustrate the impacts of the changes resulting from Pub. L. 105-33, our analysis begins with a FY 1998 baseline simulation model using the policies as they existed before enactment of Public Law 105- 33 including a 2.7 percent (full market basket) update to the standardized amounts; the FY 1997 GROUPER (version 14.0); the FY 1997 wage index; national wage index values applied to the Puerto Rico standardized amounts; FY 1997 outlier policy (75 percent phase-out of day outlier payments); and no MGCRB reclassifications. Outlier payments are set at 5.1 percent of total DRG payments. From this baseline, we move to a simulation model reflecting the policies enacted by Public Law 105-33. For operating payments, these are: zero update to the standardized amounts and the hospital-specific rate, except for temporary relief hospitals which receive a 0.5 percent update; an increase in payments to Puerto Rico by changing the portion of their payments based on the higher national standardized amount from 25 percent to 50 percent; reductions in IME and DSH payments; the elimination of IME and DSH payments attributable to outliers and the corresponding change of no longer standardizing charges for IME and DSH when identifying outlier cases; reinstating the MDH provision; and the reinstatement of RRCs that lost their status due to the triennial review or MGCRB reclassification. One change enacted by Public Law 105- 33 that is not included in this simulation is the floor on the area wage index for urban hospitals. This change is required to be budget neutral so we did not introduce it into the simulation model until we calculated the wage index and DRG budget neutrality factor. Therefore, in our impact analysis, this change is introduced when we bring the new (FY 1994) wage data into the model. Each additional policy change is then added incrementally to this baseline model, finally arriving at an FY 1998 model incorporating all of the changes. This allows us to isolate the effects of each change. Our final comparison illustrates the percent change in payments per case from FY 1997 to FY 1998. Three factors have significant impacts here. First is the changes enacted by Public Law 105-33, with the exception of the impact of the zero updates for FY 1998 (which results in a zero change from FY 1997). A second significant factor that has an impact on hospitals' payments per case from FY 1997 to FY 1998 is a change in MGCRB reclassification status from one year to the next. That is, hospitals reclassified for FY 1997 that are no longer reclassified for FY 1998 may have a negative payment impact going from FY 1997 to FY 1998; conversely, hospitals not reclassified for FY 1997 that are reclassified for FY 1998 may have a positive impact. In some cases these impacts can be quite substantial, so if a relatively small number of hospitals in a particular category lose their reclassification status, the percentage increase in payments for the category may be below the national mean. A third significant factor is that we currently estimate actual outlier payments during FY 1997 will be 4.8 percent of actual total DRG payments. When the FY 1997 final rule was published, we projected FY 1997 outlier payments would be 5.1 percent of total DRG payments, and the standardized amounts were reduced correspondingly. The effects of the slightly lower than expected outlier payments during FY 1997 (as discussed in the Addendum to this proposed rule) are reflected in the analyses below comparing our current estimates of FY 1997 payments per case to estimated FY 1998 payments per case. Table I demonstrates the results of our analysis. The table categorizes hospitals by various geographic and special payment consideration groups to illustrate the varying impacts on different types of hospitals. The top row of the table shows the overall estimated impact on the 5,088 hospitals included in the analysis. The next four rows of Table I contain hospitals categorized according to their geographic location (all urban, which is further divided into large urban and other urban, or rural). There are 2,858 hospitals located in urban areas (MSAs or NECMAs) included in our analysis. Among these, there are 1,630 hospitals located in large urban areas (populations over 1 million), and 1,228 hospitals in other urban areas (populations of 1 million or fewer). The analysis includes 49 hospitals classified as large urban hospitals that were classified as other urban hospitals in the proposed rule. These hospitals are in four MSAs that have become large urban areas since publication of the proposed rule. There are 2,230 hospitals in rural areas. The next two groupings are by bed-size categories, shown separately for urban and rural hospitals. The final groupings by geographic location are by census divisions, also shown separately for urban and rural hospitals. The second part of Table I shows hospital groups based on hospitals' FY 1998 payment classifications, including any reclassifications under section 1886(d)(10) of the Act. For example, the rows labeled urban, large urban, other urban, and rural show the numbers of hospitals being paid based on these categorizations (after consideration of geographic reclassifications) are 2,948, 1,776, 1,172, and 2,140, respectively. The next three groupings examine the impacts of the proposed changes on hospitals grouped by whether or not they have residency programs (teaching hospitals that receive an IME adjustment), receive DSH payments, or some combination of these two adjustments. There are 3,993 nonteaching hospitals in our analysis, 856 teaching hospitals with fewer than 100 residents, and 239 teaching hospitals with 100 or more residents. In the DSH categories, hospitals are grouped according to their DSH payment status, and whether they are considered urban or rural after MGCRB reclassifications. Hospitals in the rural DSH categories, therefore, represent hospitals that were not reclassified for purposes of the standardized amount. (They may, however, have been reclassified for purposes of the wage index.) The next category groups hospitals considered urban after geographic reclassification, in terms of whether they receive the IME adjustment, the DSH adjustment, both, or neither. The next row separately examines hospitals that available data show may qualify for the provision granting a 0.5 percent update to the standardized amounts for FY 1998 (section 4401(b) of [[Page 46119]] Pub. L. 105-33). To be eligible, a hospital must not receive either IME or DSH, nor may it be an MDH. It must also experience a negative margin on its operating prospective payments during FY 1998. We estimated eligible hospitals based on whether they had a negative operating margin on their FY 1995 cost report. Finally, to qualify, a hospital must be located in a State where the aggregate FY 1995 operating prospective payments were less than the aggregate associated costs for all of the non-IME, non-DSH, non-MDH hospitals in the State. There are 360 hospitals in this row. The next five rows examine the impacts of the proposed changes on rural hospitals by special payment groups (SCHs, RRCs, MDHs, and EACHs), as well as rural hospitals not receiving a special payment designation. The RRCs (158), SCH/EACHs (642), MDHs (368), and SCH/EACH and RRCs (57) shown here were not reclassified for purposes of the standardized amount. Section 4202(b)(1) of Public Law 105-33 allowed for reinstatement of RRCs that lost their status since FY 1991. As a result, there are 63 more hospitals in this row than were included in the proposed rule. Similarly, there are 16 more hospitals in the SCH/ RRC row than appeared in that row in the proposed rule. There are three SCHs that will be reclassified for the standardized amount in FY 1998 that, therefore, are not included in these rows. There are seven EACHs included in our analysis and three EACH/RRCs. The next two groupings are based on type of ownership and the hospital's Medicare utilization expressed as a percent of total patient days. These data are taken primarily from the FY 1995 Medicare cost report files, if available (otherwise FY 1994 data are used). Data needed to determine ownership status or Medicare utilization percentages were unavailable for 117 hospitals. For the most part, these are either new hospitals or hospitals filing manual cost reports that are not yet entered into the database. The next series of groupings concern the geographic reclassification status of hospitals. The first three groupings display hospitals that were reclassified by the MGCRB for both FY 1997 and FY 1998, or for either of those 2 years, by urban/rural status. The next rows illustrate the overall number of FY 1998 reclassifications, as well as the numbers of reclassified hospitals grouped by urban and rural location. The final row in Table I contains hospitals located in rural counties but deemed to be urban under section 1886(d)(8)(B) of the Act. Table I.--Impact Analysis of Changes for FY 1998 Operating Prospective Payment System [Percent changes in payments per case] -------------------------------------------------------------------------------------------------------------------------------------------------------- Puerto Balanced Combined Rico Day Number of Budget DRG New wage wage & specific outlier MGCRB All FY 98 hosps.\1\ Act \2\ recalibration data \4\ recal.\5\ wage phase-out reclassification changes \3\ index \6\ \7\ \8\ \9\ (0) (1) (2) (3) (4) (5) (6) (7) (8) -------------------------------------------------------------------------------------------------------------------------------------------------------- (BY GEOGRAPHIC LOCATION): ALL HOSPITALS.................. 5,088 -3.9 0.1 0.1 0.0 0.0 0.0 0.0 0.9 URBAN HOSPITALS................ 2,858 -3.9 0.1 0.1 0.0 0.0 0.0 -0.4 -1.0 LARGE URBAN............... 1,630 -4.0 0.1 0.0 -0.1 0.0 -0.1 -0.4 -1.2 OTHER URBAN............... 1,228 -3.8 0.2 0.2 0.2 0.0 0.1 -0.3 -0.7 RURAL HOSPITALS................ 2,230 -3.4 -0.3 0.4 -0.1 0.0 0.1 2.2 -0.4 BED SIZE (URBAN): 0-99 BEDS.................. 724 -3.6 -0.3 0.1 -0.4 0.0 0.1 -0.5 -0.9 100-199 BEDS............... 954 -3.7 -0.1 0.1 -0.2 0.0 0.1 -0.4 -0.7 200-299 BEDS............... 570 -3.8 0.1 0.1 -0.1 0.0 0.1 -0.3 -0.8 300-499 BEDS............... 457 -4.0 0.2 0.2 0.2 0.0 0.0 -0.4 -1.0 500 OR MORE BEDS........... 153 -4.3 0.4 0.0 0.2 0.0 -0.2 -0.3 -1.3 BED SIZE (RURAL): 0-49 BEDS.................. 1,170 -3.0 -0.6 0.4 -0.4 0.0 0.1 0.1 -0.3 50-99 BEDS................. 657 -3.1 -0.4 0.4 -0.2 0.0 0.1 1.1 -0.3 100-149 BEDS............... 235 -3.4 -0.3 0.4 -0.1 0.0 0.1 3.2 -0.5 150-199 BEDS............... 93 -3.7 -0.2 0.4 0.0 0.0 0.1 2.6 -0.4 200 OR MORE BEDS........... 75 -3.6 0.0 0.3 0.1 0.0 0.2 4.2 -0.8 URBAN BY CENSUS DIVISION: NEW ENGLAND................ 159 -4.2 0.1 -0.3 -0.4 0.0 0.1 -0.3 -1.9 MIDDLE ATLANTIC............ 431 -4.4 0.1 0.3 0.1 0.0 -0.7 -0.4 -2.0 SOUTH ATLANTIC............. 420 -3.8 0.2 -0.2 -0.2 0.0 0.2 -0.3 -0.8 EAST NORTH CENTRAL......... 475 -4.0 0.1 0.3 0.2 0.0 0.2 -0.3 -0.7 EAST SOUTH CENTRAL......... 163 -3.8 0.2 1.0 1.0 0.0 0.2 -0.5 0.2 WEST NORTH CENTRAL......... 191 -4.0 0.2 0.2 0.2 0.0 0.2 -0.4 -0.6 WEST SOUTH CENTRAL......... 367 -3.8 0.2 0.2 0.1 0.0 0.2 -0.5 -0.5 MOUNTAIN................... 129 -3.7 0.3 -0.2 -0.1 0.0 0.2 -0.4 -0.6 PACIFIC.................... 475 -3.6 0.1 -0.3 -0.4 0.0 0.2 -0.3 -0.9 PUERTO RICO................ 48 3.1 -0.2 0.3 -0.1 3.7 -0.1 -0.4 12.2 RURAL BY CENSUS DIVISION: NEW ENGLAND................ 53 -3.9 -0.2 0.6 0.1 0.0 0.2 2.1 -0.6 MIDDLE ATLANTIC............ 85 -3.3 -0.3 -0.4 -0.9 0.0 -0.1 1.1 -0.9 SOUTH ATLANTIC............. 297 -3.6 -0.2 0.4 0.0 0.0 0.1 2.4 -1.0 EAST NORTH CENTRAL......... 302 -3.3 -0.2 0.5 0.0 0.0 0.2 1.4 -0.7 EAST SOUTH CENTRAL......... 275 -3.4 -0.3 0.6 0.1 0.0 0.2 2.5 0.0 WEST NORTH CENTRAL......... 512 -3.2 -0.4 0.2 -0.4 0.0 0.1 2.5 0.0 [[Page 46120]] WEST SOUTH CENTRAL......... 347 -3.2 -0.4 0.3 -0.3 0.0 0.1 3.3 -0.3 MOUNTAIN................... 213 -3.1 -0.2 0.3 -0.2 0.0 0.1 1.6 0.3 PACIFIC.................... 141 -3.3 -0.2 1.1 0.6 0.0 0.1 2.1 -0.1 PUERTO RICO................ 5 4.9 -0.6 2.4 1.5 4.4 0.1 1.5 15.3 BY PAYMENT CATEGORIES: URBAN HOSPITALS................ 2,948 -3.9 0.1 0.1 0.0 0.0 0.0 -0.3 -1.0 LARGE URBAN................ 1,776 -4.0 0.1 0.0 -0.1 0.0 -0.1 -0.2 -1.1 OTHER URBAN................ 1,172 -3.8 0.2 0.2 0.2 0.0 0.1 -0.4 -0.6 RURAL HOSPITALS................ 2,140 -3.3 -0.3 0.4 -0.1 0.0 0.1 1.9 -0.5 TEACHING STATUS: NON-TEACHING............... 3,993 -3.6 -0.1 0.2 -0.1 0.0 0.1 0.3 -0.6 LESS THAN 100 RES.......... 856 -3.9 0.2 0.1 0.1 0.0 0.1 -0.3 -0.8 100+ RESIDENTS............. 239 -4.4 0.3 0.0 0.2 0.0 -0.3 -0.2 -1.6 DISPROPORTIONATE SHARE HOSPITALS (DSH): NON-DSH.................... 3,185 -3.8 0.0 0.2 0.0 0.0 0.1 0.2 -0.8 URBAN DSH: 100 BEDS OR MORE....... 1,413 -3.9 0.2 0.1 0.0 0.0 -0.1 -0.3 -1.0 FEWER THAN 100 BEDS.... 89 -3.7 -0.4 0.3 -0.4 0.0 0.2 -0.4 -0.8 RURAL DSH: SOLE COMMUNITY (SCH)... 155 -3.1 -0.5 0.3 -0.4 0.0 0.0 0.2 -0.4 REFERRAL CENTERS (RRC). 50 -2.8 -0.1 0.5 0.2 0.0 0.1 3.4 0.6 OTHER RURAL DSH HOSP.: 100 BEDS OR MORE....... 66 -3.6 -0.3 0.7 0.1 0.0 0.2 2.3 -1.4 FEWER THAN 100 BEDS.... 130 -3.4 -0.6 0.7 -0.1 0.0 0.1 0.8 -0.2 URBAN TEACHING AND DSH: BOTH TEACHING AND DSH...... 708 -4.1 0.2 0.0 0.1 0.0 -0.2 -0.4 -1.2 TEACHING AND NO DSH........ 330 -4.2 0.3 0.3 0.3 0.0 0.1 -0.2 -1.0 NO TEACHING AND DSH........ 794 -3.6 0.0 0.1 -0.1 0.0 0.1 -0.1 -0.5 NO TEACHING AND NO DSH..... 1,116 -3.7 0.0 0.0 -0.2 0.0 0.2 -0.3 -0.8 SPECIAL UPDATE HOSPITALS (UNDER SEC. 4401(b) OF PUBLIC LAW 105- 33)........................... 360 -3.8 -0.1 0.6 0.2 0.1 0.2 0.2 -0.6 RURAL HOSPITAL TYPES: NONSPECIAL STATUS HOSPITALS 915 -3.5 -0.4 0.5 -0.1 0.0 0.1 1.5 -0.8 RRC........................ 158 -3.7 -0.1 0.5 0.2 0.0 0.2 4.3 -0.5 SCH/EACH................... 642 -3.0 -0.4 0.2 -0.5 0.0 0.0 0.6 -0.4 MDH........................ 368 -2.0 -0.5 0.4 -0.3 0.0 0.1 0.5 0.8 SCH/EACH AND RRC........... 57 -3.2 -0.2 0.2 -0.2 0.0 0.0 0.8 -0.5 TYPE OF OWNERSHIP: VOLUNTARY.................. 2,924 -3.9 0.1 0.1 0.0 0.0 0.0 -0.1 -1.0 PROPRIETARY................ 701 -3.6 0.0 0.0 -0.2 0.1 0.2 0.3 -0.6 GOVERNMENT................. 1,346 -3.7 0.0 0.4 0.2 0.0 0.1 0.2 -0.4 UNKNOWN.................... 117 -4.0 0.0 -0.5 -0.7 0.2 -1.5 -0.5 -2.4 MEDICARE UTILIZATION AS A PERCENT OF INPATIENT DAYS: 0-25....................... 266 -3.6 0.1 -0.3 -0.5 0.0 -0.1 -0.3 -1.2 25-50...................... 1,307 -4.0 0.2 0.0 0.0 0.0 0.0 -0.2 -1.0 50-65...................... 1,988 -3.8 0.1 0.3 0.1 0.0 0.1 0.2 -0.8 OVER 65.................... 1,410 -3.7 -0.1 0.2 -0.2 0.0 0.1 0.1 -0.9 [[Page 46121]] UNKNOWN.................... 117 -4.0 0.0 -0.5 -0.7 0.2 -1.5 -0.5 -2.4 HOSPITALS RECLASSIFIED BY THE MEDICARE GEOGRAPHIC REVIEW BOARD: RECLASSIFICATION STATUS DURING FY97 AND FY98: RECLASSIFIED DURING BOTH FY97 AND FY98............. 333 -3.9 0.0 0.5 0.3 0.0 0.2 6.2 -0.9 URBAN.................. 96 -4.2 0.1 0.5 0.4 0.0 0.1 3.6 -1.1 RURAL.................. 237 -3.7 -0.1 0.4 0.1 0.0 0.2 9.0 -0.6 RECLASSIFIED DURING FY98 ONLY...................... 89 -3.6 0.0 0.5 0.3 0.1 0.2 4.0 5.3 URBAN.................. 13 -3.7 0.4 0.7 0.9 0.2 0.2 0.0 2.8 RURAL.................. 76 -3.4 -0.3 0.3 -0.2 0.0 0.2 7.3 7.3 RECLASSIFIED DURING FY97 ONLY...................... 211 -4.0 0.0 0.6 0.3 0.0 0.0 -0.9 -4.2 URBAN.................. 94 -4.2 0.1 0.6 0.5 0.0 -0.1 -1.0 -4.0 RURAL.................. 117 -3.6 -0.2 0.5 0.0 0.0 0.2 -0.2 -4.7 FY 98 RECLASSIFICATIONS: ALL RECLASSIFIED HOSP...... 423 -3.9 0.0 0.5 0.3 0.0 0.2 5.8 -0.1 STAND. AMOUNT ONLY..... 94 -4.1 0.0 0.4 0.2 0.0 0.1 1.3 -0.9 WAGE INDEX ONLY........ 282 -3.7 0.0 0.5 0.3 0.0 0.2 7.9 0.2 BOTH................... 47 -4.2 0.0 0.3 0.1 0.0 0.3 5.5 0.2 NONRECLASSIFIED........ 4,638 -3.9 0.1 0.1 0.0 0.0 0.0 -0.5 -1.0 ALL URBAN RECLASS.......... 109 -4.1 0.1 0.5 0.4 0.0 0.1 3.2 -0.7 STAND. AMOUNT ONLY..... 45 -4.0 0.1 0.4 0.3 0.0 0.0 0.6 -0.9 WAGE INDEX ONLY........ 31 -4.2 0.3 0.8 0.8 0.0 0.2 6.0 -0.8 BOTH................... 33 -4.2 0.1 0.4 0.2 0.0 0.2 3.3 -0.1 NONRECLASSIFIED........ 2,749 -3.9 0.1 0.1 0.0 0.0 0.0 -0.5 -1.0 ALL RURAL RECLASS.......... 314 -3.6 -0.1 0.4 0.1 0.0 0.2 8.7 0.6 STAND. AMOUNT ONLY..... 49 -4.2 -0.3 0.3 -0.2 0.0 0.3 4.3 -1.1 WAGE INDEX ONLY........ 251 -3.5 -0.1 0.4 0.1 0.0 0.2 8.6 0.6 BOTH................... 14 -4.4 -0.1 0.2 -0.1 0.0 0.4 18.0 2.2 NONRECLASSIFIED........ 1,889 -3.2 -0.3 0.4 -0.2 0.0 0.1 -0.4 -0.9 OTHER RECLASSIFIED HOSPITALS (SECTION 1886(d)(8)(B))....... 27 -3.6 -0.3 0.7 0.2 0.0 0.1 0.7 0.1 -------------------------------------------------------------------------------------------------------------------------------------------------------- \1\ Because data necessary to classify some hospitals by category were missing, the total number of hospitals in each category may not equal the national total. Discharge data are from FY 1996, and hospital cost report data are from reporting periods beginning in FY 1994 and FY 1995. \2\ This column displays the impact of the changes enacted by Public Law 105-33. The most significant of those in terms of their impacts here are the zero update, the reduction to the IME adjustment, and no longer paying an IME and DSH adjustment for outliers. \3\ This column displays the payment impact of the recalibration of the DRG weights, based on FY 1996 MedPAR data and the DRG classification changes, in accordance with section 1886(d)(4)(C) of the Act. \4\ This column shows the payment effects of updating the data used to calculate the wage index with data from the FY 1994 cost reports and the Public Law 105-33 provision establishing a floor on the area wage index for urban hospitals. \5\ This column displays the combined impact of the reclassification and recalibration of the DRGs, the updated wage data used to calculate the wage index, and the budget neutrality adjustment factor for these two changes, in accordance with sections 1886(d)(4)(C)(iii) and 1886(d)(3)(E) of the Act. Thus, it represents the combined impacts shown in columns 2 and 3, and the FY 1998 budget neutrality factor of 0.997731. \6\ This column illustrates the payment impact of the Puerto Rico-specific wage index, applied to the Puerto Rico-specific standardized amounts. \7\ This column illustrates the payment impact of completing the phase-out of day outlier payments, and increasing cost outlier payments, in accordance with section 1886(d)(5) of the Act. \8\ Shown here are the combined effects of geographic reclassification by the Medicare Geographic Classification Review Board (MGCRB). The effects shown here demonstrate the FY 1998 payment impact of going from no reclassifications to the reclassifications scheduled to be in effect for FY 1998. Reclassification for prior years has no bearing on the payment impact shown here. \9\ This column shows changes in payments from FY 1997 to FY 1998. It incorporates all of the changes displayed in columns 4 through 7 (the changes displayed in columns 2 and 3 are included in column 4). It also displays the impact of the changes shown in column 1, less the 2.7 percent negative impact of the zero update. Finally, it shows the impact of changes in hospitals' reclassification status in FY 1998 compared to FY 1997, and the difference in outlier payments from FY 1997 to FY 1998. The sum of these columns may be different from the percentage changes shown here due to rounding and interactive effects. [[Page 46122]] B. Impact of Changes Enacted by Public Law 105-33 (Column 1) Public Law 105-33 contained several provisions that significantly impact hospitals' payments under the operating prospective payment system during FY 1998, relative to payments if Public Law 105-33 had not been enacted. Certainly the largest single impact is the zero update for the standardized amounts and the hospital-specific rate. Prior to this change, the law provided that hospitals were to receive the full market basket of 2.7 percent. As indicated above, temporary relief hospitals do receive an update of 0.5 percent. Freezing the standardized amounts and the hospital-specific rates at their FY 1997 levels (prior to any budget neutrality calculations) is the largest impact evident in column 1. As discussed previously, to illustrate the impacts of the changes resulting from Public Law 105-33, we begin with a FY 1998 baseline payment model using a 2.7 percent update; the FY 1997 GROUPER; the FY 1997 wage index; no MGCRB reclassifications; outlier payments based on 25 percent day outliers and factoring IME and DSH into DRG payments plus outlier payments; no MDHs; and Puerto Rico hospitals receive 25 percent of the national Puerto Rico amount and 75 percent of the Puerto Rico amount. From this baseline we moved to a payment simulation model incorporating all but one of the changes enacted by Public Law 105-33; we did not include the floor on the wage index for urban hospitals because that change was required to be budget neutral. Therefore, this change is included in the new (FY 1994) wage data column. The overall impact on hospital operating payments per case due to Public Law 105-33 is a 3.9 percent reduction in payments. As pointed out above, 2.7 percent of this decline relates to the freeze in the update. This negative impact is evident across all hospital categories, although it is offset to a small degree among those hospitals that receive the special 0.5 percent update. However, this update provision has an insignificant impact overall. In fact, the 360 temporary relief hospitals that qualify for this special update have only a slightly smaller decrease in payments (3.8 percent) than the national average. This is largely due to the change that eliminated the IME and DSH adjustments attributable to outlier payments. Although these hospitals by definition do not receive IME or DSH payments, they are negatively impacted by the redistribution of outlier payments that result from the change. Because we no longer standardize the charges of cases by hospitals' IME and DSH factors, the outlier thresholds are higher and there is a substantial redistribution of outlier payments toward hospitals that also receive IME and DSH and away from non-IME, non-DSH hospitals. The negative impact of this change on the latter group of hospitals is approximately 1.8 percent. The change in outlier policy also affects overall payments. Because IME and DSH are now based only on the base DRG amount, total payments are less than they would be before this change. The net impact of this change is to reduce the overall average payment per case by approximately 0.6 percent. The reduction in the IME adjustment also reduces payments by approximately 0.6 percent overall. The combined impacts of these changes and the other, less significant changes result in an overall decrease in hospitals' average payment per case due to Public Law 105-33 of 3.9 percent. The only hospital categories demonstrating a net increase in payments in column 1 are urban and rural Puerto Rico hospitals (3.1 percent and 4.9 percent, respectively). This is due to the change in the formula for calculating payments for Puerto Rico hospitals from 25 percent of the national amount and 75 percent of the Puerto Rico amount, to a 50/50 blend of the two amounts. Because the national amount is more than twice the Puerto Rico amount, the change in the blend more than offsets the 2.7 percent decrease in the amounts after Public Law 105-33. The smaller increase among urban Puerto Rico hospitals is explained at least in part by the fact that, because the national Puerto Rico amount is the same for large urban and other area hospitals while the large urban Puerto Rico amount is greater than the other area Puerto Rico amount, large urban Puerto Rico hospitals gain slightly less than other Puerto Rican hospitals from the formula change. The hospital category with the smallest negative impact in this column is MDHs. Their payments overall drop by only 2.0 percent. Over 30 hospitals in this category have payment increases after being reinstated as an MDH, despite the zero update and the fact that they receive only 50 percent of the difference between their hospital- specific rate and the Federal rate. The greatest negative impact in this column is a 4.4 percent drop in payments among teaching hospitals with more than 100 residents and urban hospitals in the Middle Atlantic census division (due to the concentration of teaching hospitals in this census division). This effect is due to the reduction in the IME adjustment, although the decrease in the IME adjustment factor is offset for these hospitals to some extent by the outlier changes which result in higher outlier payments to teaching and disproportionate share hospitals. Without the change to remove the IME and DSH adjustments from the outlier calculation, payments to major teaching hospitals would have fallen by approximately 1.0 percent more. Finally, the decline in payments shown here among rural hospitals is generally not as great as the decline among urban hospitals. Overall, rural hospitals' payments decline by 3.4 percent, compared to 3.9 percent for urban hospitals. This result is attributable to those rural hospitals paid on the basis of their hospital-specific rate, particularly SCHs. Because hospitals receiving their hospital-specific rate do not receive outliers, IME, or DSH, they are unaffected by the policy changes related to these additional payments. Therefore, their net change in payments after Pub. L. 105-33 is generally limited to the 2.7 percent reduction in the update for FY 1998 (from full market basket percentage increase to 0). C. Impact of the Changes to the DRG Classifications and Relative Weights (Column 2) In column 2 of Table I, we present the combined effects of the DRG reclassifications and recalibration, as discussed in section II of the preamble to this final rule with comment period. Section 1886(d)(4)(C)(i) of the Act requires us each year to make appropriate classification changes and to recalibrate the DRG weights in order to reflect changes in treatment patterns, technology, and any other factors that may change the relative use of hospital resources. We compared aggregate payments using the FY 1997 DRG relative weights (GROUPER version 14) to aggregate payments using the FY 1998 DRG relative weights (GROUPER version 15). Overall, payments increase by 0.1 percent due to the DRG changes, although this is prior to applying the budget neutrality factor for DRG and wage index changes (see column 4). Consistent with the minor changes we are implementing for the FY 1998 GROUPER, the redistributional impacts of DRG reclassifications and recalibration across hospital groups are small (a 0.1 percent increase for large urban hospitals; a 0.2 percent increase for other urban hospitals; and a 0.3 percent decrease among rural hospitals). [[Page 46123]] Within hospital categories, the net effects for urban hospitals are small positive changes for larger hospitals (200 or more beds), and slightly negative changes for urban hospitals with fewer than 200 beds. Among rural hospitals, the smallest rural hospitals (fewer than 50 beds) experience a decrease of 0.6 percent. For other rural bed size categories, slight negative impacts prevail. Only the largest rural hospitals (200 or more beds) avoid any negative impact from the changes. The breakdowns by urban census division show that the increase among urban hospitals is spread across all census categories except Puerto Rico, with the largest increase (0.3 percent) for hospitals in the Mountain census division. For rural hospitals, the largest decrease is 0.4 percent for hospitals in the West North Central and West South Central census divisions and 0.6 percent for the five rural hospitals in Puerto Rico. Rural hospitals in all other census regions experience decreases of 0.2 or 0.3 percent. This pattern of negative impacts upon small and rural hospitals is also apparent when examining the effects of DRG changes on hospitals according to special payment categories, with the largest decreases (0.5 percent) among MDHs, rural DSH SCHs, and rural DSH hospitals with fewer than 100 beds (0.6 percent decrease). Overall, we attribute the changes associated with DRG recalibration to the increasing gap between the relative weights for medical, diagnostic, and less complicated surgical DRGs and the weights for the more complicated surgical DRGs. Since the cases associated with the former DRGs tend to be treated more often in smaller hospitals with fewer resources available, lower relative weights associated with those cases would disproportionately affect these hospitals. In general, small hospitals that serve a disproportionate share of low-income patients fit this definition. In contrast, larger hospitals in both urban and rural areas, which tend to treat the latter group of DRGs, would experience small payment increases. Teaching hospitals, which also treat the more complicated cases, experience similar effects. We note, however, that both the positive and negative impacts are relatively minor, in almost all categories they are 0.5 percent or less. D. Impact of Updating the Wage Data (Column 3) Section 1886(d)(3)(E) of the Act requires that, beginning October 1, 1993, we annually update the wage data used to calculate the wage index. In accordance with this requirement, the final wage index for FY 1998 is based on data submitted for hospital cost reporting periods beginning on or after October 1, 1993 and before October 1, 1994. As with the previous column, the impact of the new data on hospital payments is isolated by holding the other payment parameters constant in the two simulations. That is, column 3 shows the percentage changes in payments when going from a model using the FY 1997 wage index based on FY 1993 wage data before geographic reclassifications to a model using the FY 1998 prereclassification wage index based on FY 1994 wage data. Also included in the model using the FY 1994 wage data are the effects of the provision of Public Law 105-33 that urban hospitals' wage indexes may not be below the wage index of the rural areas in the State in which the urban hospital is located. The results indicate that the impact of the new wage data is a 0.1 percent increase overall in hospital payments (prior to applying the budget neutrality factor, see column 4). Rural and other urban hospitals generally appear to benefit from the update with payments increasing 0.4 and 0.2 percent, respectively. The increases for rural hospitals are attributable to relatively large increases in the wage index values for the rural areas of particular States (although none increased by more than 5 percent). The increases for other urban hospitals, 0.2 percent compared to 0.1 percent in FY 1997 and in the FY 1998 proposed wage index, appear to be attributable in large part to the requirement that the wage index values for urban hospitals be at least equal to the rural wage index values for the States in which they are located. Hospitals in 32 urban areas experienced increases in their wage index values as a result of that provision. Hospitals in nine of the urban areas experienced increases of more than 5 percent as a result of the provision for a Statewide rural wage index floor for urban hospitals. Some of the largest changes in payments are found among both urban and rural hospitals grouped by census division, although in almost all cases payments change by less than 1 percent. Our review of the wage data indicates that the changes are attributable to improved reporting, as well as relative changes in labor costs. Among the urban census divisions, payments change by 0.3 percent or less in all census divisions except one. The East South Central census division experiences an increase of 1.0 percent which stems largely from wage index increases of 5.9 and 5.2 percent in the Mobile, Alabama and the Tuscaloosa, Alabama MSAs. Among the rural hospitals, all census divisions experience increases except for the Middle Atlantic census division which experiences a slight decrease of 0.4 percent. The largest increase occurs in the Pacific (and Puerto Rico, discussed separately below) census division which experiences an increase of 1.1 percent. Here, Oregon's rural wage index value rises by 3.2 percent, and Washington's rural wage index value increases by 2.9 percent. The next largest increase (0.6 percent) occurs in the rural New England and the East South Central census divisions. In the New England census division, the rural Vermont wage index value increases by 4.4 percent, and the rural Maine wage index value increases by 1.8 percent. In the East South Central census division, the rural Alabama wage index value increases by 1.9 percent, and the rural Mississippi wage index value increases by 1.7 percent. In Puerto Rico, payments increase by 0.3 percent for the urban hospitals and by 2.4 percent for the five rural hospitals. Although column 5 shows the isolated effects of introducing the Puerto Rico- specific wage index, it is also included in the payment simulations here showing the impacts of the new wage data. Of the six urban areas in Puerto Rico, two experience increases in their national wage index values, including the San Juan-Bayamon area (2.5 percent), which contains the majority of the urban Puerto Rico hospitals (29 of 48), and the Mayaguez area (6.2 percent). The rural Puerto Rico area experiences an increase in its national wage index value of 4.9 percent. The following chart compares the shifts in wage index values for labor market areas for FY 1998 with those from FY 1997. The majority of labor market areas (334) experience less than a 5 percent change. A total of 33 labor market areas experience a change between 5 and 10 percent; 24 of those experience increases. Still fewer labor markets experience a change of more than 10 percent; two experience increases, and one experiences a decrease. In two urban labor market areas which include both West Virginia and Ohio hospitals, the Ohio hospitals receive their State's rural wage index value. In one of those labor market areas, the Ohio hospitals experience an increase of more than 10 percent. In the other labor market area, the Ohio hospitals experience an increase between 5 and 10 percent. We reviewed the data for any area that experienced a wage index change of 5 [[Page 46124]] percent or more to determine the reason for the fluctuation. ------------------------------------------------------------------------ No. of labor market areas Percentage change in area wage index ------------------------------- values FY 1998 FY 1997 ------------------------------------------------------------------------ Increase more than 10 percent........... 2 0 Increase between 5 and 10 percent (inclusive)............................ 24 14 Increase or decrease less than 5 percent 334 341 Decrease between 5 and 10 percent (inclusive)............................ 9 11 Decrease more than 10 percent........... 1 2 ------------------------------------------------------------------------ Under the FY 1998 wage index, 95.3 percent of urban hospitals and 99.9 percent of rural hospitals will experience a change in their wage index value of less than 5 percent. Among urban hospitals, 128 will experience a change of between 5 and 10 percent (97 increasing and 31 decreasing), while only 3 rural hospitals fall into this category, all decreasing. Eight urban hospitals and no rural hospitals will experience a change of more than 10 percent. The following chart shows the projected impact for urban and rural hospitals. ------------------------------------------------------------------------ No. of hospitals Percentage change in area wage index values ----------------- Urban Rural ------------------------------------------------------------------------ Increase more than 10 percent......................... 4 0 Increase between 5 and 10 percent (inclusive)......... 97 0 Increase or decrease less than 5 percent.............. 2763 2236 Decrease between 5 and 10 percent (inclusive)......... 31 3 Decrease more than 10 percent......................... 4 0 ------------------------------------------------------------------------ E. Combined Impact of DRG and Wage Index Changes-- Including Budget Neutrality Adjustment (Column 4) The impact of DRG reclassifications and recalibration on aggregate payments is required by section 1886(d)(4)(C)(iii) of the Act to be budget neutral. In addition, section 1886(d)(3)(E) of the Act specifies that any updates or adjustments to the wage index are to be budget neutral. Furthermore, as noted above, section 4410 of Pub. L. 105-33 required the implementation of the wage index floor to be budget neutral. We compared aggregate payments using the FY 1997 DRG relative weights and wage index to aggregate payments using the FY 1998 DRG relative weights and wage index, including the wage index floor. Based on this comparison, we computed a wage and recalibration budget neutrality factor of 0.997731. In Table I, the combined overall impacts of the effects of both the DRG reclassifications and recalibration and the updated wage index are shown in column 4. The 0.0 percent impact for all hospitals demonstrates that these changes, in combination with the budget neutrality factor, are budget neutral. For the most part, the changes in this column are the sum of the changes in columns 2 and 3, minus the approximately 0.2 percent decrease attributable to the budget neutrality factor. There may be some variation of plus or minus 0.1 percent due to rounding. F. Puerto Rico-Specific Wage Index (Column 5) As described in section III. of the preamble to this final rule with comment period, we are adopting a Puerto Rico-specific wage index for FY 1998. These wage index values will be applied to the Puerto Rico standardized amounts. Column 5 shows the effect of implementing this change results in no payment impact for all hospitals. In Puerto Rico, payments increase by 3.7 percent among urban hospitals, and 4.4 percent among rural hospitals. As shown in Table 4F of the Addendum, the Puerto Rico-specific wage index values are considerably higher than Puerto Rico's national wage index values (shown in Table 4A of the Addendum). This results in the increases shown in this column. However, these increases are less than those shown in the proposed rule as a result of the change to the Puerto Rico payment formula. The amount attributable to the Puerto Rico payment amount (and which is adjusted by the Puerto Rico-specific wage index) is now 50 percent instead of 75 percent. As indicated above, this change is shown in isolation here for ease in reading Table I. To actually calculate the national DRG and wage index budget neutrality factors, the Puerto Rico-specific wage index was included. As described in the Addendum, we also computed a DRG reclassification and recalibration budget neutrality adjustment for the Puerto Rico standardized amounts equal to 0.999117. G. Outlier Changes (Column 6) Currently, Medicare provides extra payment in addition to the basic DRG payment amount for extremely costly or extraordinarily lengthy cases (cost outliers and day outliers, respectively). Beginning with FY 1995, section 1886(d)(5)(A) of the Act requires the Secretary to phase- out payments for day outliers. Under the requirements of section 1886(d)(5)(A)(v), the proportion of day outlier payments to total outlier payments is reduced from FY 1994 levels as follows: 75 percent of FY 1994 levels in FY 1995, 50 percent of FY 1994 levels in FY 1996, and 25 percent of FY 1994 levels in FY 1997. For discharges occurring after September 30, 1997, the Secretary will no longer pay for day outliers under the provisions of section 1886(d)(5)(A)(I) of the Act. This reduction in day outlier payments will be offset by an increase in cost outlier payments. As discussed in the Addendum, for FY 1998, a case would receive cost outlier payments if its costs exceed the DRG payment amount plus any IME and DSH payments by at least $11,050. We are also maintaining the marginal cost factor for cost outliers at 80 percent. The payment impacts of these changes are minimal. Hospital categories negatively affected by phasing-out day outliers are consistent with the categories negatively affected in previous years: urban Middle Atlantic census division (0.7 percent decline); urban hospitals with 500 or more beds (0.2 percent decline); teaching hospitals with 100 or more residents (0.3 percent decline); and hospitals for which data were unavailable to calculate Medicare utilization rates (1.5 percent decline). This last category contains a number of New York City public hospitals that file manual cost reports. Because the changes to the outlier policy result in a shift in payments from cases paid as day outliers to cases paid as cost outliers, this indicates that these categories have higher percentages of day outliers. [[Page 46125]] H. Impact of MGCRB Reclassifications (Column 7) Our impact analysis to this point has assumed hospitals are paid on the basis of their actual geographic location (with the exception of ongoing policies that provide that certain hospitals receive payments on bases other than where they are geographically located, such as hospitals in rural counties that are deemed urban under section 1886(d)(8)(B) of the Act). The changes in column 7 reflect the per case payment impact of moving from this baseline to a simulation incorporating the MGCRB decisions for FY 1998. As noted below, these decisions affect hospitals' standardized amount and wage index area assignments. In addition, rural hospitals reclassified for purposes of the standardized amount qualify to be treated as urban for purposes of the DSH adjustment. By March 30 of each year, the MGCRB makes reclassification determinations that will be effective for the next fiscal year, which begins on October 1. The MGCRB may approve a hospital's reclassification request for the purpose of using the other area's standardized amount, wage index value, or both. The FY 1998 wage index values incorporate all of the MGCRB's reclassification decisions for FY 1998 as of the publication of this final rule with comment period. The wage index values also reflect any decisions made by the HCFA Administrator through the appeals and review process for MGCRB decisions for FY 1998. The overall effect of geographic reclassification is required to be budget neutral by section 1886(d)(8)(D) of the Act. Therefore, we applied an adjustment of 0.994720 to ensure that the effects of reclassification are budget neutral. (See section II.A.4 of the Addendum to this final rule with comment period.) As a group, rural hospitals benefit from geographic reclassification. Their payments rise 2.2 percent, while payments to urban hospitals decline 0.4 percent. Large urban hospitals lose 0.4 percent because, as a group, they have the smallest percentage of hospitals that are reclassified (fewer than 2 percent of large urban hospitals are reclassified). There are enough hospitals in other urban areas that are reclassified to limit the decrease in payments to urban hospitals stemming from the budget neutrality offset to 0.3 percent. Among urban hospital groups generally (that is, bed size, census division, and special payment status), payments fall by between 0.3 and 0.5 percent. A positive impact is evident among all rural hospital groups. The smallest effect among the rural census divisions is 1.1 percent for the Middle Atlantic division. The largest impact is for the West South Central division, with an increase of 3.3 percent. Among rural hospitals designated as RRCs, 65 hospitals are reclassified for purposes of the wage index only, leading to the 4.3 percent increase in payments among RRCs overall. This positive impact on RRCs is also reflected in the category of rural hospitals with 200 or more beds, which has a 4.2 percent increase in payments. Rural hospitals reclassified for FY 1997 and FY 1998 experience a 9.0 percent increase in payments. This may be due to the fact that these hospitals have the most to gain from reclassification and have been reclassified for a period of years. Rural hospitals reclassified for FY 1998 only experience a 7.3 percent increase in payments, while rural hospitals reclassified for FY 1997 only experience a 0.2 decrease in payments. Urban hospitals reclassified for FY 1997 but not FY 1998 experience a 1.0 percent decline in payments overall. This appears to be due to the combined impacts of the budget neutrality adjustment, and a number of Bergen-Passaic, New Jersey hospitals in this category that experience a 4.8 percent drop in their wage index after reclassification. Urban hospitals reclassified for FY 1998 but not for FY 1997 experience no overall change in their payments. The FY 1998 Reclassification rows of Table I show the changes in payments per case for all FY 1998 reclassified and nonreclassified hospitals in urban and rural locations for each of the three reclassification categories (standardized amount only, wage index only, or both). The table illustrates that the largest impact for reclassified rural hospitals is for those hospitals reclassified for both the standardized amount and the wage index. These hospitals receive an 18.0 percent increase in payments. In addition, rural hospitals reclassified just for the wage index receive an 8.6 percent payment increase. The overall impact on reclassified hospitals is to increase their payments per case by an average of 5.8 percent for FY 1998. Among the 27 rural hospitals deemed to be urban under section 1886(d)(8)(B) of the Act, payments increase 0.7 percent due to MGCRB reclassification. This is because, although these hospitals are treated as being attached to an urban area in our baseline (their redesignation is ongoing, rather than annual like the MGCRB reclassifications), they are eligible for MGCRB reclassification. For FY 1998, one hospital in this category reclassified to a large urban area. The reclassification of hospitals primarily affects payment to nonreclassified hospitals through changes in the wage index and the geographic reclassification budget neutrality adjustment required by section 1886(d)(8)(D) of the Act. Among hospitals that are not reclassified, the overall impact of hospital reclassifications is an average decrease in payments per case of about 0.5 percent, which corresponds closely with the geographic reclassification budget neutrality factor. Rural nonreclassified hospitals decrease slightly less, experiencing a 0.4 percent decrease. This occurs because the wage index values in some rural areas increase after reclassified hospitals are excluded from the calculation of those indexes. The foregoing analysis was based on MGCRB and HCFA Administrator decisions made by March 29, 1997. In addition, changes to some MGCRB decisions through the appeals, review, and applicant withdrawal process are also included. I. All Changes (Column 8) Column 8 compares our estimate of payments per case, incorporating all changes reflected in this final rule with comment period for FY 1998 (including statutory changes), to our estimate of payments per case in FY 1997. It includes the effects of the changes enacted by Public Law 105-33, and reflects the 0.3 percentage point difference between the projected outlier payments in FY 1998 (5.1 percent of total DRG payments) and the current estimate of the percentage of actual outlier payments in FY 1997 (4.8 percent), as described in the introduction to this Appendix and the Addendum. Column 8 also includes the impacts of FY 1998 MGCRB reclassifications compared to the payment impacts of FY 1997 reclassifications. (Column 7 shows the impact of going from no MGCRB reclassifications to the FY 1998 reclassifications.) When comparing FY 1998 payments to FY 1997 payments, the percent changes due to FY 1998 reclassifications shown in column 7 need to be offset by the effects of reclassification on hospitals' FY 1997 payments (column 4 of Table 1, September 1, 1996 final rule; 61 FR 46306). For example, the impact of MGCRB reclassifications on rural hospitals' FY 1997 payments was approximately a 2.3 percent increase, offsetting the 2.2 percent increase in column 7. Therefore, the net change in FY 1998 payments due to [[Page 46126]] reclassification for rural hospitals is actually closer to a decrease of 0.1 percent relative to FY 1997. However, last year's analysis contained a somewhat different set of hospitals, so this might affect the numbers slightly. To factor in the effects of the changes from Public Law 105-33 from column 1 into the overall changes shown in this column, it is first necessary to deduct the impact of the zero update included in column 1. Because column 1 compares a FY 1998 baseline after Public Law 105-33 to a FY 1998 baseline before this law was enacted, it includes the impact of going from a FY 1998 update of 2.7 percent to a zero update. Of course, this 2.7 percent update for FY 1998 does not affect FY 1997 payments, so it does not show up in column 8. The impacts of the other changes, however, such as reducing the IME factor and eliminating the IME and DSH adjustments from outlier payments, are reflected in this column. Finally, there might also be interactive effects among the various factors comprising the payment system that we are not able to isolate. For these reasons, the values in column 8 may not equal the sum of the changes in column 1, minus 2.7, plus the changes in columns 4 through 7 (plus the other impacts that we are able to identify). The overall payment change from FY 1998 to FY 1997 for all hospitals is a 0.9 percent decrease. This reflects the 0.0 percent net change in total payments due to the proposed changes for FY 1998 shown in columns 4 through 7, the zero update for FY 1998, the 0.3 percent higher outlier payments in FY 1998 compared to FY 1997, as discussed above, and the 1.2 percent decline in payments due to Public Law 105-33 (3.9 percent decrease in column 1 minus 2.7 percent for the FY 1998 update). This 1.2 percent decline is attributable largely to reducing IME and eliminating IME and DSH from outlier payments. Hospitals in urban areas experience a 1.0 percent drop in payments per case from FY 1997. Similar to all hospitals nationally, this is primarily due to the factors discussed above. Urban hospitals' 0.4 negative impact in FY 1998 due to reclassification is offset by a similar impact from FY 1997 reclassifications. Hospitals in large and other urban areas experience 1.2 percent and 0.7 percent decreases, respectively. The larger decrease for large urban hospitals is primarily due to the reduction in IME payments. Overall payments per case among this group of hospitals would be approximately 0.8 percent higher without this reduction. Hospitals in rural areas generally fare better during FY 1998 than do urban hospitals. Overall, rural hospitals experience a decrease of 0.4 percent. This smaller decrease for rural hospitals appears to be primarily attributable to the special category rural hospitals. In particular, the 368 rural hospitals categorized as MDHs experience a 0.8 percent average payment increase. As noted previously, hospitals paid on the basis of the hospital-specific rate generally see less negative impact due to the changes in Public Law 105-33 because they do not receive IME, DSH, or outliers. Puerto Rico stands out as having large payment increases for FY 1998, with urban Puerto Rico hospitals' payments increasing by 12.2 percent, and rural Puerto Rico hospitals' payments increasing by 15.3 percent. As noted above, this is largely due to the implementation of the Puerto Rico-specific wage index during FY 1998 and the change to the payment formula for Puerto Rico hospitals in Public Law 105-33. Among census divisions, East South Central displays the only increase among urban hospitals, 0.2 percent. This is related to the 1.0 percent overall increase due to the new wage data. On the other hand, the urban Middle Atlantic and New England hospitals lose 2.0 percent and 1.9 percent per case, respectively. This is largely related to the concentration of teaching hospitals in these census areas. In addition, the Middle Atlantic hospitals lose 0.7 percent due to the elimination of day outlier payments, and the New England hospitals lose 0.3 percent as a result of the new wage data. Among rural census divisions, the Mountain division displays an overall increase of 0.3 percent. This positive impact is largely due to hospitals reclassified during FY 1998 that were not reclassified during FY 1997. Hospitals in the South Atlantic are the biggest losers among the rural census divisions, with FY 1998 average payments per case falling by 1.0 percent from FY 1997. Twenty hospitals reclassified here during FY 1997 are no longer reclassified during FY 1998. Rural Middle Atlantic hospitals are negatively impacted by the DRG recalibration, new wage data, and eliminating the day outlier payments, all leading to their 0.9 percent decrease in FY 1998 payments. As expected, large teaching hospitals as a group experience the largest payment reductions. Those with more than 100 residents see payments per case decrease by 1.6 percent. Urban hospitals receiving both IME and DSH experience 1.2 percent payment reductions. Hospitals for which we were unable to determine ownership designation or Medicare utilization due to a lack of cost report data, lose 2.4 percent in payments. As indicated previously, this category contains a number of public New York City hospitals, many of which have large teaching programs. The largest negative payment impacts from FY 1997 to FY 1998 are among hospitals that were reclassified for FY 1997 and are not reclassified for FY 1998. Overall, these hospitals lose 4.2 percent. On the other hand, hospitals reclassified for FY 1998 that were not reclassified for FY 1997 would experience the greatest payment increases (aside from Puerto Rico hospitals): 7.3 percent for 76 rural hospitals in this category and 2.8 percent for 13 urban hospitals. Table II.--Impact Analysis of Changes for FY 1998 Operating Prospective Payment System [Payments per case] ---------------------------------------------------------------------------------------------------------------- Average FY Average FY No. of 1997 1998 hospitals payment per payment per All changes case case (1) (2) \1\ (3) \1\ (4) ---------------------------------------------------------------------------------------------------------------- (BY GEOGRAPHIC LOCATION): ALL HOSPITALS........................................... 5,088 6,771 6,711 -0.9 URBAN HOSPITALS......................................... 2,858 7,347 7,276 -1.0 LARGE URBAN AREAS....................................... 1,630 7,899 7,808 -1.2 OTHER URBAN AREAS....................................... 1,228 6,588 6,545 -0.7 [[Page 46127]] RURAL AREAS............................................. 2,230 4,451 4,432 -0.4 BED SIZE (URBAN): 0-99 BEDS............................................... 724 4,921 4,878 -0.9 100-199 BEDS............................................ 954 6,159 6,115 -0.7 200-299 BEDS............................................ 570 6,926 6,868 -0.8 300-499 BEDS............................................ 457 7,874 7,794 -1.0 500 OR MORE BEDS........................................ 153 9,660 9,535 -1.3 BED SIZE (RURAL): 0-49 BEDS............................................... 1,170 3,650 3,639 -0.3 50-99 BEDS.............................................. 657 4,152 4,141 -0.3 100-149 BEDS............................................ 235 4,615 4,594 -0.5 150-199 BEDS............................................ 93 4,794 4,775 -0.4 200 OR MORE BEDS........................................ 75 5,612 5,570 -0.8 URBAN BY CENSUS DIV.: NEW ENGLAND............................................ 159 7,913 7,766 -1.9 MIDDLE ATLANTIC......................................... 431 8,137 7,971 -2.0 SOUTH ATLANTIC.......................................... 420 7,008 6,953 -0.8 EAST NORTH CENTRAL...................................... 475 7,057 7,004 -0.7 EAST SOUTH CENTRAL...................................... 163 6,518 6,530 0.2 WEST NORTH CENTRAL...................................... 191 6,948 6,905 -0.6 WEST SOUTH CENTRAL...................................... 367 6,830 6,797 -0.5 MOUNTAIN................................................ 129 7,084 7,041 -0.6 PACIFIC................................................. 475 8,422 8,343 -0.9 PUERTO RICO............................................. 48 2,694 3,022 12.2 RURAL BY CENSUS DIV.: NEW ENGLAND............................................. 53 5,283 5,249 -0.6 MIDDLE ATLANTIC......................................... 85 4,752 4,708 -0.9 SOUTH ATLANTIC.......................................... 297 4,631 4,582 -1.0 EAST NORTH CENTRAL...................................... 302 4,502 4,470 -0.7 EAST SOUTH CENTRAL...................................... 275 4,115 4,116 0.0 WEST NORTH CENTRAL...................................... 512 4,140 4,138 0.0 WEST SOUTH CENTRAL...................................... 347 4,005 3,994 -0.3 MOUNTAIN................................................ 213 4,772 4,787 0.3 PACIFIC................................................. 141 5,582 5,578 -0.1 PUERTO RICO............................................. 5 2,072 2,390 15.3 (BY PAYMENT CATEGORIES): URBAN HOSPITALS......................................... 2,948 7,309 7,239 -1.0 LARGE URBAN AREAS....................................... 1,776 7,763 7,675 -1.1 OTHER URBAN AREAS....................................... 1,172 6,590 6,548 -0.6 RURAL AREAS............................................. 2,140 4,429 4,409 -0.5 TEACHING STATUS: NON-TEACHING............................................ 3,993 5,494 5,462 -0.6 FEWER THAN 100 RESIDENTS................................ 856 7,216 7,158 -0.8 100 OR MORE RESIDENTS................................... 239 11,051 10,869 -1.6 DISPROPORTIONATE SHARE HOSPITALS (DSH): NON-DSH................................................. 3,185 5,801 5,755 -0.8 URBAN DSH--100 BEDS OR MORE............................. 1,413 7,997 7,917 -1.0 FEWER THAN 100 BEDS..................................... 89 5,081 5,041 -0.8 RURAL DSH SOLE COMMUNITY (SCH).......................... 155 4,229 4,211 -0.4 REFERRAL CENTERS (RRC).................................. 50 5,203 5,232 0.6 OTHER RURAL DSH HOSP.--100 BEDS OR MORE................. 66 4,198 4,138 -1.4 FEWER THAN 100 BEDS..................................... 130 3,565 3,557 -0.2 URBAN TEACHING AND DSH: BOTH TEACHING AND DSH................................... 708 8,994 8,884 -1.2 TEACHING AND NO DSH..................................... 330 7,377 7,301 -1.0 NO TEACHING AND DSH..................................... 794 6,413 6,381 -0.5 NO TEACHING AND NO DSH.................................. 1,116 5,664 5,621 -0.8 SPECIAL UPDATE HOSPITALS (UNDER SEC. 4401(b) OF PUBLIC LAW 105-33..................................................... 360 5,276 5,247 -0.6 RURAL HOSPITAL TYPES: NONSPECIAL STATUS HOSPITALS............................. 915 3,945 3,915 -0.8 RRC..................................................... 158 5,132 5,107 -0.5 SCH/EACH................................................ 642 4,533 4,514 -0.4 MDH..................................................... 368 3,511 3,540 0.8 SCH/EACH AND RRC........................................ 57 5,315 5,291 -0.5 TYPE OF OWNERSHIP: VOLUNTARY............................................... 2,924 6,945 6,876 -1.0 [[Page 46128]] PROPRIETARY............................................. 701 6,154 6,120 -0.6 GOVERNMENT.............................................. 1,346 6,278 6,250 -0.4 UNKNOWN................................................. 117 8,176 7,979 -2.4 MEDICARE UTILIZATION AS A PERCENT OF INPATIENT DAYS: 0-25.................................................... 266 8,955 8,850 -1.2 25-50................................................... 1,307 8,229 8,148 -1.0 50-65................................................... 1,988 6,180 6,133 -0.8 OVER 65................................................. 1,410 5,243 5,196 -0.9 UNKNOWN................................................. 117 8,176 7,979 -2.4 HOSPITALS RECLASSIFIED BY THE MEDICARE GEOGRAPHIC REVIEW BOARD RECLASSIFICATION STATUS DURING FY97 AND FY98: RECLASSIFIED DURING BOTH FY97 AND FY98: 333 6,137 6,083 -0.9 URBAN............................................... 96 7,297 7,215 -1.1 RURAL............................................... 237 5,253 5,221 -0.6 RECLASSIFIED DURING FY98 ONLY 89 5,199 5,475 5.3 URBAN............................................... 13 6,729 6,920 2.8 RURAL............................................... 76 4,389 4,710 7.3 RECLASSIFIED DURING FY97 ONLY 211 6,047 5,793 -4.2 URBAN............................................... 94 6,981 6,704 -4.0 RURAL............................................... 117 4,726 4,504 -4.7 FY 98 RECLASSIFICATIONS: ALL RECLASSIFIED HOSP.: 423 5,994 5,990 -0.1 STAND. AMT. ONLY.................................... 94 5,941 5,885 -0.9 WAGE INDEX ONLY..................................... 282 5,923 5,936 0.2 BOTH................................................ 47 6,333 6,348 0.2 NONRECLASS.......................................... 4,638 6,855 6,788 -1.0 ALL URBAN RECLASS.: 109 7,226 7,178 -0.7 STAND. AMT. ONLY.................................... 45 6,449 6,390 -0.9 WAGE INDEX ONLY..................................... 31 9,160 9,085 -0.8 BOTH................................................ 33 6,578 6,568 -0.1 NONRECLASS.......................................... 2,749 7,353 7,281 -1.0 ALL RURAL RECLASS.: 314 5,104 5,133 0.6 STAND. AMT. ONLY.................................... 49 4,530 4,480 -1.1 WAGE INDEX ONLY..................................... 251 5,162 5,195 0.6 BOTH................................................ 14 5,356 5,472 2.2 NONRECLASS.......................................... 1,889 4,212 4,175 -0.9 OTHER RECLASSIFIED HOSPITALS (SECTION 1886(d)(8)(B))........ 27 4,740 4,744 0.1 ---------------------------------------------------------------------------------------------------------------- \1\ These payment amounts per case do not reflect any estimates of annual case-mix increase. Table II presents the projected impact of the changes for FY 1998 for urban and rural hospitals and for the different categories of hospitals shown in Table I. It compares the projected payments per case for FY 1998 with the average estimated per case payments for FY 1997, as calculated under our models. Thus, this table presents, in terms of the average dollar amounts paid per discharge, the combined effects of the changes presented in Table I. The percentage changes shown in the last column of Table II equal the percentage changes in average payments from column 8 of Table I. VII. Impact of Changes in the Capital Prospective Payment System A. General Considerations We now have data that were unavailable in previous impact analyses for the capital prospective payment system. Specifically, we have cost report data for the fourth year of the capital prospective payment system (cost reports beginning in FY 1995) available through the June 13, 1997 update of the Health Care Provider Cost Report Information System (HCRIS). We also have updated information on the projected aggregate amount of obligated capital approved by the fiscal intermediaries. However, our impact analysis of payment changes for capital-related costs is still limited by the lack of hospital-specific data on several items. These are the hospital's projected new capital costs for each year and its projected old capital costs for each year. The lack of this information affects our impact analysis in the following ways: Major investment in hospital capital assets (for example in building and major fixed equipment) occurs at irregular intervals. As a result, there can be significant variation in the growth rates of Medicare capital-related costs per case among hospitals. We do not have the necessary hospital-specific budget data to project the hospital capital growth rate for individual hospitals. Moreover, our policy of recognizing certain obligated capital as old capital makes it difficult to project future capital- related costs for individual hospitals. Under Sec. 412.302(c), a hospital [[Page 46129]] is required to notify its intermediary that it has obligated capital by the later of October 1, 1992, or 90 days after the beginning of the hospital's first cost reporting period under the capital prospective payment system. The intermediary must then notify the hospital of its determination whether the criteria for recognition of obligated capital have been met by the later of the end of the hospital's first cost reporting period subject to the capital prospective payment system or 9 months after the receipt of the hospital's notification. The amount that is recognized as old capital is limited to the lesser of the actual allowable costs when the asset is put in use for patient care or the estimated costs of the capital expenditure at the time it was obligated. We have substantial information regarding intermediary determinations of projected aggregate obligated capital amounts. However, we still do not know when these projects will actually be put into use for patient care, the actual amount that will be recognized as obligated capital when the project is put into use, or the Medicare share of the recognized costs. Therefore, we do not know actual obligated capital commitments for purposes of the FY 1998 capital cost projections. We discuss in Appendix B the assumptions and computations we employ to generate the amount of obligated capital commitments for use in the FY 1998 capital cost projections. In Table III of this appendix, we present the redistributive effects that are expected to occur between ``hold-harmless'' hospitals and ``fully prospective'' hospitals in FY 1998. In addition, we have integrated sufficient hospital-specific information into our actuarial model to project the impact of the FY 1998 capital payment policies by the standard prospective payment system hospital groupings. We caution that while we now have actual information on the effects of the transition payment methodology and interim payments under the capital prospective payment system and cost report data for most hospitals, we need to randomly generate numbers for the change in old capital costs, new capital costs for each year, and obligated amounts that will be put in use for patient care services and recognized as old capital each year. We continue to be unable to predict accurately FY 1998 capital costs for individual hospitals, but with the more recent data on the experience to date under the capital prospective payment system, there is adequate information to estimate the aggregate impact on most hospital groupings. We have revised Table III since the publication of the proposed rule to provide some information on the effects of the Balanced Budget Act of 1997. Section 4402 of Public Law 105-33 requires a 17.78 percent reduction to the unadjusted standard Federal rate for discharges occurring on or after October 1, 1997. Specifically, we are presenting separate blocks in Table III to show (1) what the effects on FY 1998 payments would have been in the absence of the 17.78 percent reduction to the standard Federal rate, and (2) the effects of all changes, including the 17.78 percent reduction to the standard rate, on payments in FY 1998. In Table III, we used the same outlier effects that we used in conjunction with setting the final rate for FY 1998 (that is, the rate with the effects of the 17.78 percent reduction to the standard rate). If we had recalibrated outliers for the unreduced Federal rate, the estimated rate might have been slightly different. However, the estimates in Table III of the effects without the reduction to the standard Federal rate are adequate for the purpose of evaluating the relative impact of the Balanced Budget Act of 1997. We present the transition payment methodology by hospital grouping in Table IV. In Table V we present the results of the cross-sectional analysis using the results of our actuarial model. This table presents the aggregate impact of the FY 1998 payment policies. We have also revised Table V to provide information on the effects of the Balanced Budget Act of 1997. Specifically, we have added two additional columns to Table V. The first additional column presents the average FY 1998 payments per case without the effects of the Balanced Budget Act of 1997. The second column presents changes attributable solely to the Balanced Budget Act of 1997. B. Projected Impact Based on the FY 1998 Actuarial Model 1. Assumptions In this impact analysis, we model dynamically the impact of the capital prospective payment system from FY 1997 to FY 1998 using a capital cost model. The FY 1998 model, described in Appendix B of this final rule with comment period, integrates actual data from individual hospitals with randomly generated capital cost amounts. We have capital cost data from cost reports beginning in FY 1989 through FY 1995 received through the June 13, 1997 update of HCRIS, interim payment data for hospitals already receiving capital prospective payments through PRICER, and data reported by the intermediaries that include the hospital-specific rate determinations that have been made through July 1, 1997 in the provider-specific file. We used these data to determine the FY 1998 capital rates. However, we do not have individual hospital data on old capital changes, new capital formation, and actual obligated capital costs. We have data on costs for capital in use in FY 1995, and we age that capital by a formula described in Appendix B. We therefore need to randomly generate only new capital acquisitions for any year after FY 1995. All Federal rate payment parameters are assigned to the applicable hospital. Recently available cost report data indicate that old capital costs are declining faster than we previously projected. Consequently, for FY 1998 we are projecting faster declines in old capital. To make up for the larger declines in old capital, we are projecting faster growth in new capital. The combination of these two factors will make the 100- percent Federal rate higher than the hold-harmless rate for some hold- harmless hospitals. Therefore, we are now projecting that more hospitals will move to the 100-percent Federal rate than previously projected. For purposes of this impact analysis, the FY 1998 actuarial model includes the following assumptions: Medicare inpatient capital costs per discharge are projected to change at the following rates during these periods: ------------------------------------------------------------------------ Average percentage change in capital costs per discharge ------------------------------------------------------------------------- Percentage Fiscal year change ------------------------------------------------------------------------ 1996....................................................... -2.84 1997....................................................... 4.46 1998....................................................... 4.50 ------------------------------------------------------------------------ The Medicare case-mix index will increase by 0.5 percent in FY 1997 and by 1.0 in FY 1998. Beginning in FY 1996 (with the expiration of budget neutrality), the Federal capital rate and hospital-specific rate were updated by an analytical framework that considers changes in the prices associated with capital-related costs, and adjustments to account for forecast error, changes in the case-mix index, allowable changes in intensity, and other factors. The final FY 1998 update for inflation is 0.90 percent (see section III of the Addendum). [[Page 46130]] 2. Results We have used the actuarial model to estimate the change in payment for capital-related costs from FY 1997 to FY 1998. Table III shows the effect of the capital prospective payment system on low capital cost hospitals and high capital cost hospitals. We consider a hospital to be a low capital cost hospital if, based on a comparison of its initial hospital-specific rate and the applicable Federal rate, it will be paid under the fully prospective payment methodology. A high capital cost hospital is a hospital that, based on its initial hospital-specific rate, will be paid under the hold-harmless payment methodology. Based on our actuarial model, the breakdown of hospitals is as follows: ---------------------------------------------------------------------------------------------------------------- Capital transition payment methodology ----------------------------------------------------------------------------------------------------------------- FY 1998 FY 1998 Percent of FY 1998 percent of percent of Type of hospital hospitals percent of capital capital discharges costs payments ---------------------------------------------------------------------------------------------------------------- Low Cost Hospital........................................... 66 62 56 58 High Cost Hospital.......................................... 34 38 44 42 ---------------------------------------------------------------------------------------------------------------- A low capital cost hospital may request to have its hospital- specific rate redetermined based on old capital costs in the current year, through the later of the hospital's cost reporting period beginning in FY 1994 or the first cost reporting period beginning after obligated capital comes into use (within the limits established in Sec. 412.302(e) for putting obligated capital in use for patient care). If the redetermined hospital-specific rate is greater than the adjusted Federal rate, these hospitals will be paid under the hold-harmless payment methodology. Regardless of whether the hospital became a hold- harmless payment hospital as a result of a redetermination, we have continued to show these hospitals as low capital cost hospitals in Table III. Assuming no behavioral changes in capital expenditures, Table III displays the percentage change in payments from FY 1997 to FY 1998 using the above described actuarial model. With the final FY 1998 Federal rate, we estimate aggregate Medicare capital payments will decrease by 6.74 percent in FY 1998. The main reason for this decrease is the impact of the 17.78 percent reduction to the Federal rate and the hospital-specific rate. Table III.--Impact of Final Changes for FY 1998 on Payments per Discharge -------------------------------------------------------------------------------------------------------------------------------------------------------- Percent No. of Adjusted Average Hospital Hold Exceptions Total change hospitals Discharges Federal Federal specific harmless payment payment over FY payment percent payment payment 1997 -------------------------------------------------------------------------------------------------------------------------------------------------------- FY 1997 Payments per Discharge Low Cost Hospitals...................................... 3,331 6,898,994 464.25 63.57 135.71 3.07 11.79 614.82 ........ Fully Prospective................................... 3,078 6,246,888 436.83 60.00 149.88 ........ 12.52 599.23 ........ 100% Federal Rate................................... 235 609,412 752.47 100.00 ........ ........ 3.30 755.77 ........ Hold Harmless....................................... 18 42,693 362.22 48.77 ........ 496.62 25.67 884.51 ........ High Cost Hospitals..................................... 1,684 4,226,709 733.06 97.27 ........ 26.00 8.63 767.69 ........ 100% Federal Rate................................... 1,522 3,963,050 757.10 100.00 ........ ........ 6.29 763.39 ........ Hold Harmless....................................... 162 263,659 371.65 52.95 ........ 416.84 43.77 832.26 ........ ----------------------------------------------------------------------------------------------- Total Hospitals................................... 5,015 11,125,703 566.37 76.62 84.15 11.78 10.59 672.90 ........ =============================================================================================== FY 1998 Payments per Discharge Before Effects of the Balanced Budget Act of 1997 Low Cost Hospitals...................................... 3,331 7,064,036 568.02 72.69 108.16 2.43 10.80 689.41 12.13 Fully Prospective................................... 3,078 6,396,330 545.02 70.00 119.46 ........ 11.49 675.96 12.81 100% Federal Rate................................... 241 632,394 806.40 100.00 ........ ........ 2.75 809.15 7.06 Hold Harmless....................................... 12 35,312 464.85 54.94 ........ 486.07 30.35 981.26 10.94 High Cost Hospitals..................................... 1,684 4,327,823 808.62 98.86 ........ 11.55 10.34 830.51 8.18 100% Federal Rate................................... 1,591 4,191,128 819.68 100.00 ........ ........ 8.26 827.95 8.46 Hold Harmless....................................... 93 136,695 469.57 61.33 ........ 365.62 73.98 909.17 9.24 ----------------------------------------------------------------------------------------------- Total Hospitals................................... 5,015 11,391,859 659.42 82.91 67.07 5.89 10.63 743.02 10.42 =============================================================================================== FY 1998 Payments per Discharge After Effects of the Balanced Budget Act of 1997 Low Cost Hospitals...................................... 3,331 7,064,036 458.51 72.64 87.16 2.73 22.08 570.48 -7.21 Fully Prospective................................... 3,078 6,396,330 440.41 70.00 96.25 ........ 23.19 559.85 -6.57 100% Federal Rate................................... 238 626,061 650.85 100.00 ........ ........ 7.55 658.40 -12.88 Hold Harmless....................................... 15 41,645 348.31 53.30 ........ 462.72 69.84 880.87 -0.41 High Cost Hospitals..................................... 1,684 4,327,823 643.55 97.70 ........ 20.40 18.16 682.10 -11.15 100% Federal Rate................................... 1,528 4,070,204 662.07 100.00 ........ ........ 15.37 677.44 -11.26 Hold Harmless....................................... 156 257,620 351.00 57.92 ........ 342.67 62.11 755.78 -9.19 ----------------------------------------------------------------------------------------------- Total Hospitals................................... 5,015 11,391,859 528.81 82.41 54.04 9.44 20.59 612.88 -8.92 -------------------------------------------------------------------------------------------------------------------------------------------------------- [[Page 46131]] We project that low capital cost hospitals paid under the fully prospective payment methodology will experience an average decrease in payments per case of 6.57 percent, and that high capital cost hospitals will experience an average decrease of 11.15 percent. For hospitals paid under the fully prospective payment methodology, the Federal rate payment percentage will increase from 60 percent to 70 percent and the hospital-specific rate payment percentage will decrease from 40 to 30 percent in FY 1998. The Federal rate payment percentage for hospitals paid under the hold-harmless payment methodology is based on the hospital's ratio of new capital costs to total capital costs. The average Federal rate payment percentage for high cost hospitals receiving a hold-harmless payment for old capital will increase from 52.95 percent to 57.92 percent. Without the effects of the Balanced Budget Act of 1997, we estimate that this figure would have increased to 61.33 percent. We estimate the percentage of hold-harmless hospitals paid based on 100 percent of the Federal rate will increase from 90.7 percent to 91.2 percent. Excluding the effects of the Balanced Budget Act of 1997, we estimate that the percentage of hold-harmless hospitals paid based on 100 percent of the Federal rate would have increased to 94.6 percent. We expect that the average hospital-specific rate payment per discharge will decrease from $84.15 in FY 1997 to $54.04 in FY 1998. This is partly due to the decrease in the hospital-specific rate payment percentage from 40 percent in FY 1997 to 30 percent in FY 1998. Excluding the effects of the Balanced Budget Act of 1997, we estimate that the average hospital-specific payment per discharge would have decreased less dramatically to $67.07 in FY 1998. For FY 1998, the minimum payment levels are: 90 percent for sole community hospitals; 80 percent for urban hospitals with 100 or more beds and a disproportionate share patient percentage of 20.2 percent or more; or 70 percent for all other hospitals. We estimate that exceptions payments will increase from 1.57 percent of total capital payments in FY 1997 to 3.36 percent of payments in FY 1998. These figures are lower than prior estimates due to refinements to our actuarial model. For a further explanation of these refinements, refer to Section B of this Appendix. The projected distribution of the payments is shown in the table below: ------------------------------------------------------------------------ Estimated FY 1998 exceptions payments ------------------------------------------------------------------------- Percent of Type of hospital No. of exceptions hospitals payments ------------------------------------------------------------------------ Low Capital Cost.............................. 314 67 High Capital Cost............................. 198 33 ------------------------- Total................................... 512 100 ------------------------------------------------------------------------ C. Cross-Sectional Comparison of Capital Prospective Payment Methodologies Table IV presents a cross-sectional summary of hospital groupings by capital prospective payment methodology. This distribution is generated by our actuarial model. Table IV.--Distribution by Method of Payment (Hold-Harmless/Fully Prospective) of Hospitals Receiving Capital Payments ---------------------------------------------------------------------------------------------------------------- (2) Hold-harmless -------------------------- (3) (1) Total Percentage Percentage Percentage No. of paid hold- paid fully paid fully hospitals harmless federal prospective (A) (B) rate ---------------------------------------------------------------------------------------------------------------- By Geographic Location: All hospitals........................................... 5,015 3.4 35.2 61.4 Large urban areas (populations over 1 million).......... 1,590 3.9 42.7 53.4 Other urban areas (populations of 1 million or fewer)... 1,209 4.2 43.4 52.4 Rural areas............................................. 2,216 2.6 25.4 72.0 Urban hospitals......................................... 2,799 4.0 43.0 52.9 0-99 beds........................................... 674 4.7 36.8 58.5 100-199 beds........................................ 946 5.6 48.9 45.5 200-299 beds........................................ 569 3.3 43.8 52.9 300-499 beds........................................ 457 1.8 40.3 58.0 500 or more beds.................................... 153 0.7 39.2 60.1 Rural hospitals......................................... 2,216 2.6 25.4 72.0 0-49 beds........................................... 1,158 2.2 17.6 80.1 50-99 beds.......................................... 655 3.4 30.1 66.6 100-149 beds........................................ 235 2.1 40.4 57.4 150-199 beds........................................ 93 4.3 31.2 64.5 200 or more beds.................................... 75 1.3 49.3 49.3 By Region: Urban by Region......................................... 2,799 4.0 43.0 52.9 New England......................................... 158 0.0 27.8 72.2 Middle Atlantic..................................... 426 1.6 36.9 61.5 South Atlantic...................................... 414 4.1 55.1 40.8 East North Central.................................. 471 3.8 33.5 62.6 East South Central.................................. 159 5.7 52.8 41.5 West North Central.................................. 188 4.8 38.3 56.9 West South Central.................................. 344 10.2 58.4 31.4 Mountain............................................ 124 3.2 51.6 45.2 Pacific............................................. 467 2.6 39.4 58.0 Puerto Rico......................................... 48 4.2 25.0 70.8 Rural by Region......................................... 2,216 2.6 25.4 72.0 New England......................................... 53 0.0 22.6 77.4 [[Page 46132]] Middle Atlantic..................................... 84 2.4 29.8 67.9 South Atlantic...................................... 293 2.0 33.4 64.5 East North Central.................................. 301 1.3 20.9 77.7 East South Central.................................. 273 2.2 34.8 63.0 West North Central.................................. 511 2.7 17.8 79.5 West South Central.................................. 345 2.6 28.7 68.7 Mountain............................................ 211 6.2 19.9 73.9 Pacific............................................. 140 2.9 25.7 71.4 Large urban areas (populations over 1 million).............. 1,735 3.6 42.6 53.8 Other urban areas (populations of 1 million or fewer)....... 1,153 4.3 42.8 52.9 Rural areas................................................. 2,127 2.7 25.1 72.2 Teaching Status: Non-teaching............................................ 3,922 3.5 34.9 61.6 Fewer than 100 Residents................................ 855 3.9 37.5 58.6 100 or more Residents................................... 238 0.4 31.9 67.6 Disproportionate share hospitals (DSH): Non-DSH................................................. 3,129 3.6 31.3 65.2 Urban DSH: 100 or more beds.................................... 1,408 3.3 45.7 51.0 Less than 100 beds.................................. 81 2.5 34.6 63.0 Rural DSH: Sole Community (SCH/EACH)........................... 154 4.5 20.8 74.7 Referral Center (RRC/EACH).......................... 50 2.0 52.0 46.0 Other Rural: 100 or more beds................................ 66 1.5 39.4 59.1 Less than 100 beds.............................. 127 0.8 26.0 73.2 Urban teaching and DSH: Both teaching and DSH................................... 707 2.3 38.0 59.7 Teaching and no DSH..................................... 329 4.6 32.8 62.6 No teaching and DSH..................................... 782 4.2 51.4 44.4 No teaching and no DSH.................................. 1,070 4.6 42.3 53.1 Rural Hospital Types: Non special status hospitals............................ 905 1.3 26.5 72.2 RRC/EACH................................................ 158 1.3 41.8 57.0 SCH/EACH................................................ 641 5.8 22.5 71.8 Medicare-dependent hospitals (MDH)...................... 366 0.8 17.8 81.4 SCH, RRC and EACH....................................... 57 7.0 33.3 59.6 Type of Ownership: Voluntary............................................... 2,912 3.1 34.9 62.1 Proprietary............................................. 684 8.2 60.4 31.4 Government.............................................. 1,344 1.8 22.8 75.4 Medicare Utilization as a Percent of Inpatient Days: 0-25.................................................... 254 3.5 33.5 63.0 25-50................................................... 1,300 4.4 42.3 53.3 50-65................................................... 1,982 3.3 35.3 61.5 Over 65................................................. 1,404 2.8 28.5 68.7 ---------------------------------------------------------------------------------------------------------------- As we explain in Appendix B, we were not able to determine a hospital-specific rate for 73 of the 5,088 hospitals in our database. Consequently, the payment methodology distribution is based on 5,015 hospitals. These data should be fully representative of the payment methodologies that will be applicable to hospitals. The cross-sectional distribution of hospital by payment methodology is presented by: (1) Geographic location, (2) region, and (3) payment classification. This provides an indication of the percentage of hospitals within a particular hospital grouping that will be paid under the fully prospective payment methodology and under the hold-harmless methodology. The percentage of hospitals paid fully Federal (100 percent of the Federal rate) as hold-harmless hospitals is expected to increase to 35.2 percent in FY 1998. Table IV indicates that 61.4 percent of hospitals will be paid under the fully prospective payment methodology. (This figure, unlike the figure of 66 percent for low cost capital hospitals in the previous section, takes account of the effects of redeterminations. In other words, this figure does not include low cost hospitals that, following a hospital-specific rate redetermination, are now paid under the hold- harmless methodology.) As expected, a relatively higher percentage of rural and governmental hospitals (72.0 percent and 75.4 percent, respectively by payment classification) are being paid under the fully prospective methodology. This is a reflection of their lower than average capital costs [[Page 46133]] per case. In contrast, only 31.4 percent of proprietary hospitals are being paid under the fully prospective methodology. This is a reflection of their higher than average capital costs per case. (We found at the time of the August 30, 1991 final rule (56 FR 43430) that 62.7 percent of proprietary hospitals had a capital cost per case above the national average cost per case.) D. Cross-Sectional Analysis of Changes in Aggregate Payments We used our FY 1998 actuarial model to estimate the potential impact of changes for FY 1998 on total capital payments per case, using a universe of 5,015 hospitals. The individual hospital payment parameters are taken from the best available data, including: The July 1, 1997 update to the provider-specific file, cost report data, and audit information supplied by intermediaries. Table V presents estimates of payments per case under our model for FY 1997 (column 2). For FY 1998, we present estimates of payments per case both before and after the effects of the 17.78 percent reduction to the standard Federal and hospital-specific rates. Column 5 shows the total percentage change in payments from FY 1997 to FY 1998 (after the effects of the Balanced Budget Act of 1997). Column 6 presents the percentage change that can be attributed to the Balanced Budget Act of 1997 (the 17.78 percent reduction). Column 7 presents the percentage change in payments that can be attributed to Federal rate changes. Federal rate changes represented in Column 7 include the 15.36 percent decrease in the Federal rate which includes the Balanced Budget Act reduction, a 1.0 percent increase in case mix, changes in the adjustments to the Federal rate (for example, the effect of the new hospital wage index on the geographic adjustment factor), and reclassifications by the MGCRB. Column 5 includes the effects of the Federal rate changes represented in column 7. Column 5 also reflects the effects of all other changes, including: the change from 60 percent to 70 percent in the portion of the Federal rate for fully prospective hospitals, the hospital-specific rate update, changes in the proportion of new to total capital for hold-harmless hospitals, changes in old capital (for example, obligated capital put in use), hospital-specific rate redeterminations, and exceptions. The comparisons are provided by: (1) Geographic location, (2) region, and (3) payment classification. The simulation results show that, on average, capital payments per case can be expected to decrease 8.9 percent in FY 1998. The results show that the effect of the Balanced Budget Act of 1997 is to decrease payments by 17.5 percent. The results show that the effect of the Federal rate changes is to decrease payments by 11.0 percent. (This figure includes the effects of the Balanced Budget Act of 1997, but also includes the other payment adjustments which offset the magnitude of the 17.78 percent reduction.) In addition to the 11.0 percent decrease attributable to the Federal rate changes, a 2.1 percent increase is attributable to the effects of all other changes.