[Federal Register: May 12, 1998 (Volume 63, Number 91)] [Rules and Regulations] [Page 26317-26360] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr12my98-12] [[Page 26317]] _______________________________________________________________________ Part III Department of Health and Human Services _______________________________________________________________________ Health Care Financing Administration _______________________________________________________________________ 42 CFR Parts 410 et al. Medicare Program: Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 1998 Rates; Final Rule [[Page 26318]] DEPARTMENT OF HEALTH AND HUMAN SERVICES Health Care Financing Administration 42 CFR Parts 410, 412, 413, 415, and 485 [HCFA-1878-F, formerly BPD-878] RIN 0938-AH55 Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 1998 Rates AGENCY: Health Care Financing Administration (HCFA), HHS. ACTION: Final rule. ----------------------------------------------------------------------- SUMMARY: This final rule responds to public comments received on those portions of a final rule with comment period published in the Federal Register on August 29, 1997, that revised the Medicare hospital inpatient prospective payment systems for operating costs and capital- related costs to implement necessary changes resulting from the Balanced Budget Act (BBA) of 1997, Public Law 105-33. This rule also addresses public comments on other BBA changes relating to cost limits for hospitals and hospital units excluded from the prospective payment systems as well as direct graduate medical education payments that were included in the August 29, 1997 document. Generally, these BBA changes were applicable to hospital discharges occurring on or after October 1, 1997. EFFECTIVE DATE: This final rule is effective on June 11, 1998. FOR FURTHER INFORMATION CONTACT: Nancy Edwards, (410) 786-4531, Operating Prospective Payment and Wage Index Issues Tzvi Hefter, (410) 786-4487, Capital Prospective Payment, Excluded Hospitals Critical Access Hospitals, and Graduate Medical Education Issues Copies: To order copies of the Federal Register containing this document, send your request to: New Orders, Superintendent of Documents, P.O. Box 371954, Pittsburgh, PA 15250-7954. Specify the date of the issue requested and enclose a check or money order payable to the Superintendent of Documents, or enclose your Visa or Master Card number and expiration date. Credit card orders can also be placed by calling the order desk at (202) 512-1800 or by faxing to (202) 512- 2250. The cost for each copy is $8.00. As an alternative, you can view and photocopy the Federal Register document at most libraries designated as Federal Depository Libraries and at many other public and academic libraries throughout the country that receive the Federal Register. This Federal Register document is also available from the Federal Register online database through GPO Access, a service of the U.S. Government Printing Office. Free public access is available on a Wide Area Information Server (WAIS) through the Internet and via asynchronous dial-in. Internet users can access the database by using the World Wide Web; the Superintendent of Documents home page address is http://www.access.gpo.gov/su__docs/, by using local WAIS client software, or by telnet to swais.access.gpo.gov, then login as guest (no password required). Dial-in users should use communications software and modem to call (202) 512-1661; type swais, then login as guest (no password required). SUPPLEMENTARY INFORMATION: I. Background A. Summary Under section 1886(d) of the Social Security Act (the Act), payment for the operating costs of acute care hospital inpatient stays under Medicare Part A (Hospital Insurance) is based on prospectively-set rates. Under this system, which was established effective with hospital cost reporting periods beginning on or after October 1, 1983, Medicare payment for hospital inpatient operating costs is made at a predetermined, specific rate for each hospital discharge. All discharges are classified according to a list of diagnosis-related groups (DRGs). The regulations governing the hospital inpatient prospective payment system are located in 42 CFR Part 412. As required by section 1886(g) of the Act, effective with cost reporting periods beginning on or after October 1, 1991, we also use a prospective payment methodology for hospital inpatient capital-related costs. Under the capital-related cost methodology, a predetermined payment amount per discharge is made for Medicare inpatient capital- related costs. The prospectively set rates and methodologies are updated annually as required by law or as new legislation is enacted. B. Summary of the Provisions of the August 29, 1997 Final Rule with Comment Period Resulting from the Balanced Budget Act of 1997 On August 29, 1997, we published a final rule with comment period in the Federal Register (62 FR 45966) setting forth statutorily required changes to the Medicare hospital inpatient prospective payment systems for both operating costs and capital-related costs, which were effective for discharges occurring on or after October 1, 1997. This final rule with comment period followed a proposed rule published in the Federal Register on June 2, 1997 (62 FR 29902) that set forth proposed updates and changes. Following issuance of the June 2, 1997 proposed rule, the Balanced Budget Act (BBA) of 1997, Public Law 105- 33, was enacted on August 5, 1997. This new law made major changes to the hospital prospective payment systems, effective October 1, 1997. Therefore, a major part of the August 29, 1997 final rule with comment period incorporated changes made by the BBA. Because the BBA was enacted after we had issued the June 2 proposed rule and because most of the BBA changes were effective October 1, 1997, we issued the August 29, 1997 document as a final rule with comment period. The BBA made major changes that affected Medicare payments for inpatient hospital services under the prospective payment systems, and the cost limits applicable to excluded hospitals and hospital units as well as payment for the direct costs of graduate medical education. The provisions of the BBA that we implemented in the August 29, 1997 final rule with comment period related to the following: The hospital operating payment update factor. (Sections 4401(a) and (b)) The hospital capital rate reduction. (Section 4402) Reductions in payments to disproportionate share hospitals. (Section 4403) Elimination of payment of indirect medical education (IME) and disproportionate share adjustment on outlier payments. (Section 4405) Base payment rate to Puerto Rico hospitals. (Section 4406) Special reclassification of Stanly County, North Carolina for purposes of the prospective payment system. (Section 4408) New guidelines for geographic reclassification of certain hospitals for Federal fiscal year 1998 and subsequent fiscal years. (Sections 4409 and 4410(c)) Floor on area wage index. (Sections 4410(a) and (b)) Revision of the IME formula, limitations on full-time equivalent residents, and payment to teaching hospitals for IME costs associated with Medicare managed care discharges. (Sections 4621(a), 4621(b), and 4622) Classification of rural referral centers (RRC) for FY 1998 and [[Page 26319]] subsequent fiscal years. (Section 4202(b)) Special treatment of Medicare-dependent, small rural hospitals (MDHs). (Section 4204) Reinstatement of the add-on payment for blood clotting factor for inpatient beneficiaries with hemophilia. (Section 4452) Counting residents for direct graduate medical education. (Section 4623) Payments to managed care plans for graduate medical education. (Section 4624) Payment to nonhospital providers for the direct costs of medical education incurred in the operation of an approved medical residency training program. (Section 4625) Payment for combined medical residency training programs. (Section 4627) Payment update for excluded hospitals and hospital units. (Section 4411) Reductions in capital payment amounts for certain excluded hospitals and hospital units. (Section 4412) Rebasing target amounts for excluded hospitals. (Section 4413) Cap on target amounts for excluded hospitals and hospital units (psychiatric hospitals and units, rehabilitation hospitals and units, and long-term care hospitals) for FYs 1998 through 2002. (Section 4414) Bonus and relief payments to excluded hospitals and hospital units. (Section 4415) Change in payment and target amount for new providers. (Sections 4416 and 4419) Treatment of certain long-term care hospitals. (Sections 4417(a) and 4417(b)) Exclusion of certain cancer hospitals from the prospective payment system. (Section 4418) Establishment of a new ``Medicare Rural Hospital Flexibility Program'' to replace the existing Essential Access Community Hospital/Rural Primary Care Hospital (EACH/RPCH) program that operates in seven States. (Section 4201) Beginning with the FY 1999 update, a change in the publication dates for the DRG prospective payment rate methodology and the recommended hospital prospective payment updates as a proposed rule by April 1 and as a final rule by August 1 of each year. (Section 4644(a)(1) and (b)(1)) As a conforming change, the deadline for applications for geographic reclassification for years beginning with FY 2000 was moved from October 1 to September 1. Because the FY 1999 applications were due on October 1, 1997, we shortened the deadlines for decisionmaking by the Medicare Geographic Classification Review Board (MGCRB), so that a final decision for all applications is made by June 15, 1998. (Section 4644(c)) II. Summary of the BBA Provisions and Discussion of Public Comments A. General We received a total of 180 pieces of correspondence containing public comments on the BBA changes addressed in the August 29, 1997 final rule with comment period. Below we discuss the BBA provisions, the changes we made to implement these provisions, the public comments received on each provision, and our response to the public comments. B. Hospital Operating Payment Update Factor 1. General Provision The BBA made several revisions to the applicable percentage change (the update factor) to the Federal rates for prospective payment hospitals. Section 4401(a)(1) of the BBA amended section 1886(b)(3)(B)(i) of the Act to revise the update factors for the Federal rates for inpatient operating costs for FYs 1998 through 2002. The update factor for FY 1998 was set at 0 percent for hospitals in all areas. For FY 1999, the update for hospitals in all areas is the market basket rate of increase minus 1.9 percentage points. For FY 2000, the update for all areas is the market basket rate of increase minus 1.8 percentage points. For FY 2001 and FY 2002, the update for all areas is the market basket rate of increase minus 1.1 percentage points. For FY 2003 and subsequent years, the update for all areas is the market basket rate of increase. In the August 29 final rule with comment period, we made necessary changes to Sec. 412.63 of our regulations. Comment: One commenter asserted that while the 0 percent update of the prospective payment rates for FY 1998 is consistent with the requirements of section 4401(a)(2) of the BBA, it is inappropriate given circumstances in the real world. Response: As the commenter noted, HCFA is required by statute to implement the 0 percent update to the prospective payment rates for FY 1998. We believe that the 0 percent update is appropriate for the reasons discussed in both our update recommendation in the June 2 proposed rule (62 FR 30035) and our responses to comments on that recommendation in the August 29 final rule with comment period (62 FR 46139). 2. Special Update for Certain Nonteaching, Nondisproportionate Share Hospitals that do not Qualify as MDHs Section 4401(b) of the BBA provided a temporary special payment for FYs 1998 and 1999 for certain hospitals that do not receive any additional payment through the IME or DSH adjustment and do not meet the criteria to be classified as an MDH. As set forth in section 4401(b)(2), in order to qualify for the special payment, a hospital must be located in a State in which the aggregate operating prospective payment for hospitals that meet the special payment criteria (that is, non-IME, non-DSH, non-MDH hospitals) is less than the aggregate allowable operating costs of inpatient hospital services (referred to hereafter as a negative operating prospective payment margin) for those hospitals for their cost reporting periods that began during FY 1995. In addition, a hospital must have a negative operating prospective payment margin during the cost reporting period at issue (beginning in FY 1998 or 1999). Under the provisions of section 4401(b)(1), for these hospitals, the percentage increase otherwise applicable to the standardized amount for FY 1998 was increased by 0.5 percentage points and, for FY 1999, the applicable percentage increase will be increased by 0.3 percentage points. Based on current statutory provisions, this means that these hospitals will receive an update of 0.5 percent for FY 1998 (the update for all other hospitals is 0) and, for FY 1999, an update of the market basket increase minus 1.6 percentage points (1.9 for all other hospitals). Under section 4401(b)(1), in applying these updates, the increase provided in FY 1998 will not apply in computing the update for FY 1999 and neither update will affect the updates provided for discharges in fiscal years after FY 1999. In accordance with section 4401(b)(2) of the BBA, in determining whether a hospital qualifies for the special payment for a given cost reporting period, we looked first at statewide aggregate data for non- IME, non-DSH, non-MDH hospitals for cost reporting periods beginning during FY 1995, and second at hospital-specific characteristics for the cost reporting period at issue to determine whether the hospital has a negative operating prospective payment margin for that period, and whether the hospital received IME or DSH payments or qualified as an MDH for that period. Using the latest cost reporting data, we identified 17 States that met the criteria [[Page 26320]] set forth in section 4401(b)(2): Alaska, Connecticut, Delaware, Hawaii, Illinois, Indiana, Iowa, Louisiana, Maine, Missouri, New Hampshire, New Jersey, Ohio, Puerto Rica, Rhode Island, Vermont, and Wisconsin. The fiscal intermediaries will make interim payment to hospitals in these 17 designated States, beginning with discharges occurring on or after October 1, 1997, based on the higher standardized amount during the fiscal year. However, as noted above, the final decision as to a hospital's qualification for the additional payment is determined based on whether the hospital has a negative operating prospective payment margin during its FY 1998 or FY 1999 cost reporting period. Therefore, the final determination will be made at cost report settlement. In the August 29 final rule with comment period, we added a new Sec. 412.107 to the regulations and revised Sec. 412.90 to implement this provision. Comment: Two hospital associations commented that any hospital identified by its fiscal intermediary as likely to qualify for an update of 0.5 percentage points under the temporary special payment provision of section 4401(b) of the BBA should be given the option of declining the higher interim payments. The commenters were concerned that some hospitals that receive the additional money on an interim basis might have difficulty paying back the funds should the intermediary determine at cost report settlement that the hospital does not qualify for the update. Response: If a hospital that has been identified as eligible for the higher interim payment believes that ultimately it may not qualify for the higher update and wishes to decline the higher interim payments, it should notify its intermediary. C. Hospital Capital Rate Reduction Section 4402 of the BBA amended section 1886(g)(1)(A) of the Act to require that, for discharges occurring on or after October 1, 1997, the Secretary must apply the budget neutrality adjustment factor used to determine the Federal capital payment rate in effect on September 30, 1995 (as described in Sec. 412.352) to the unadjusted standard Federal capital payment rate (as described in Sec. 412.308(c)) effective September 30, 1997, and the unadjusted hospital-specific rate (as described in Sec. 412.328(e)(1)) effective September 30, 1997. For discharges occurring on or after October 1, 1997, and before September 30, 2002, the Secretary must reduce the same rates an additional 2.1 percent. The budget neutrality adjustment factor effective September 30, 1995 was 0.8432 (59 FR 45416), which is equivalent to a 15.68 percent ((1.0-0.8432) * 100) reduction in the unadjusted standard Federal capital payment rate and the unadjusted hospital-specific rate in effect on September 30, 1997. The additional 2.1 percent reduction to the rates reduces the rates in effect on September 30, 1997 by a total of 17.78 percent. The unadjusted standard Federal rate must be distinguished from the annual Federal rate actually used in making payment under the capital PPS system. The unadjusted standard Federal rate is the underlying or base rate used to determine the Federal rate for each Federal fiscal year by applying the formula described in Sec. 412.308(c). The annual Federal rate is the result of that determination process in Sec. 412.308(c). In accordance with the broad authority conferred in section 1886(g) of the Act, to implement a capital prospective payment system, we extended the reduction to the capital rates to the Puerto Rico capital rates and incorporated it in Sec. 412.374(a). Under the statute, the additional 2.1 percent reduction applies to discharges occurring ``before September 30, 2002''. This provision would have required us to calculate special rates that would be in effect for only one day. Because we believed that the Congress intended to apply the reduction to discharges occurring through September 30, 2002, we indicated in the August 29 final rule with comment period that we plan to seek a technical correction to change the date that the 2.1 percent reduction expires from September 29, 2002, to September 30, 2002. Since we assumed this technical error would be corrected, we used the September 30, 2002 expiration date in our regulations. When we restore the 2.1 percent reduction to the Federal rate after September 30, 2002, we plan to restore the rate to the level that it would have been without the reduction. We determined the adjustment factor for FY 1998 by deducting both cuts (0.1568 and 0.021) from 1 (1-0.1568-0.021 =0.8222). We then applied 0.8222 to the unadjusted standard Federal rate. The adjustment factor to restore the 2.1 percent cut would be the adjustment without the 2.1 percent cut (0.8432) divided by the adjustment with the 2.1 percent cut (0.8222). (0.8432/ 0.8222=1.02554). To restore the 2.1 percent reduction, we will apply 1.02554 to the unadjusted standard Federal capital payment rate in setting rates for discharges after September 30, 2002. Section 412.328(e) of the regulations provides that the hospital- specific rate for each fiscal year is determined by adjusting the previous fiscal year's hospital specific rate by the hospital specific rate update factor and the exceptions payment adjustment factor. After these two adjustments are applied, a net adjustment to the rate is determined. The previous year's hospital specific rate is analogous to the standard Federal rate, which is updated each year to become the annual Federal rate. When the 2.1 percent reduction is restored, most hospitals will have completed the transition to a fully prospective payment system for capital related costs. However, new hospitals might be eligible for hold harmless payments beyond the transition, so we may need to continue to compute a hospital specific rate. If we need to restore the 2.1 percent reduction to the hospital specific rates, we will do so in a manner similar to that described above with respect to the unadjusted standard Federal capital payment rate. In the August 29 final rule with comment period, we revised two sections of the capital prospective payment system regulations to implement these statutory requirements. Specifically, we revised Secs. 412.308(c) and 412.328(e) to provide for the required 15.68 and 2.1 percent reduction to the rates. The 2.1 percent reduction will be restored after September 30, 2002. Comment: One commenter noted that as a result of the high capital rate paid in FY 1997, many hold-harmless hospitals switched from being paid based on a blend of their old and new capital to being paid based on 100 percent of the Federal rate, because the Federal rate was higher than their old and new capital payment would have been. The commenter also stated that when Congress reduced the capital rate as part of the provisions of the BBA, many hospitals' payments would have been higher had they been allowed to return to their previous old capital and new capital payment methodology. The commenter suggested deleting the requirement at Sec. 412.344(b) that once a hospital is paid based on 100 percent of the Federal rate, it cannot return to payments based on a blend of its old and new capital costs. The commenter also noted that when the Federal capital rate was reduced under the provisions of OBRA 1993, fiscal intermediaries were given specific authority to redetermine each hospital's payment methodology. [[Page 26321]] Response: In section 13501(a)(3) of the Omnibus Budget Reconciliation Act of 1993 (Public Law 103-66), Congress reduced the Federal capital rate and not the hospital-specific rate. Hospital payment methodology redeterminations were expressly provided for in that section of the statute. However, in 1997, when Congress reduced both the hospital-specific rate and the Federal capital rate as part of the BBA, hospital payment methodology redeterminations were not provided for by the legislation and we do not believe that it would be appropriate to provide for redeterminations by regulation. In addition, we do not believe it would be appropriate to allow hospitals to return to payment based on their ratio of old and new capital once they have been paid based on 100 percent of the Federal rate. We are in the seventh year of the 10 year transition to a fully prospective capital payment system. By October 1, 2002, all hospitals will be paid based on 100 percent of the Federal rate. It would not be appropriate to allow hospitals to return to cost-based payment this point in the transition. D. Disproportionate Share Hospital (DSH) Payments Section 4403(a) of the BBA reduced the payment for hospitals that treat a disproportionately large number of low-income patients. The payment a hospital would otherwise receive under the disproportionate share formula is reduced by 1 percent for FY 1998, 2 percent for FY 1999, 3 percent for FY 2000, 4 percent for FY 2001, 5 percent for FY 2002, and 0 percent for FY 2003 and each subsequent fiscal year. In the August 29 final rule with comment period, we added a new paragraph (e) to Sec. 412.106 to implement this provision. Comment: One commenter asked that we clarify the applicability of the provisions of section 4403(a) of the BBA, which relate to disproportionate share operating payments, to the prospective payment system for capital related costs. Specifically, the commenter requested that we verify that the phased-in 5 percent reduction of operating DSH payments does not apply to capital DSH payments. The commenter also asked us to codify our decision as to the applicability of this provision in the appropriate section of the capital regulations governing DSH. Response: The commenter is correct. Section 4403 amended section 1886(d)(5)(F) of the Act to reduce the amount otherwise payable for operating DSH. The capital DSH adjustment set forth at Sec. 412.320 references the operating DSH definition of low income patients at Sec. 412.106(b) and uses the definition of the disproportionate patient percentage at Sec. 412.106(c)(2), but section 4403 does not affect capital DSH payments. In response to the commenter's request that we codify in the regulations the applicability of the BBA operating provisions to capital payments, we do not believe that it is necessary to do so. The capital regulations that are affected will be automatically included by their reference to the appropriate section of the operating regulations. The capital regulations that are not affected (regarding the reduction to DSH payments need not be revised. E. Outlier Payments Section 4405 of the BBA amended sections 1886(d)(5)(B)(i)(I) and (d)(5)(F)(ii)(I) of the Act to provide that, in determining the payment for hospitals that receive indirect medical education or disproportionate share payments, the IME and DSH adjustment factors are applied only to the base DRG payment, not the sum of the base DRG payment and any cost outlier payments, effective with discharges occurring on or after October 1, 1997. The same section of the BBA also amended section 1886(d)(5)(A)(ii) of the Act to require that the fixed loss cost outlier threshold is based on the sum of DRG payments and IME and DSH payments for purposes of comparing costs to payments. Therefore, in the August 29 final rule with comment period, we revised our regulations at Sec. 412.84(g) to remove the provision that costs be reduced by the IME and DSH adjustment factors for purposes of comparing costs to payments to determine if costs exceed the fixed loss cost outlier threshold, as well as to delete Sec. 412.80(c). Conforming changes were made to Sec. 412.105(a) (IME adjustment) and Sec. 412.106(a)(2) (DSH adjustment). We also made a corresponding change to the capital cost outlier methodology. We received two comments on this provision, both of which concurred with HCFA's interpretation of section 4405 of the BBA. F. Payment Rate for Puerto Rico Hospitals 1. Operating Payment Rate Section 4406 of the BBA amended section 1886(d)(9)(A) of the Act to revise the Puerto Rico and national shares of the Puerto Rico payment rate. Beginning with discharges occurring on or after October 1, 1997, the Puerto Rico payment rate will be a blend of 50 percent of the Puerto Rico standardized amount and 50 percent of a national standardized amount (compared to a blend of 75 and 25 percent, respectively, prior to enactment of the BBA). In the August 29 final rule with comment period, we revised Sec. 412.204 of the regulations to conform with this amendment. 2. Capital Payment Rate Under the broad authority of section 1886(g) of the Act, in the August 29 final rule with comment period, we revised the calculation of capital payments to Puerto Rico to parallel the change that was made in the calculation of operating payments to Puerto Rico. Effective October 1, 1997, we will base capital payments to hospitals in Puerto Rico on a blend of 50 percent of the national rate and 50 percent of the Puerto Rico-specific rate. This change will increase payments to Puerto Rico hospitals since the national rate is higher than the Puerto Rico rate. We did not receive any public comments on either of these provisions. G. Special County Designation In the August 29 final rule with comment period, the Secretary exercised the authority granted to her by section 4408 of the BBA to include Stanly County in the Charlotte-Gastonia-Rock Hill, North Carolina-South Carolina MSA for purposes of the prospective payment system. This change was reflected in the final wage index included in that document. We did not receive any public comments on this provision. H. Changes to the Medicare Geographic Classification Review Board (MGCRB) Guidelines and Timeframes Various provisions of the BBA addressed the guidelines the MGCRB uses to reclassify hospitals to other geographic areas as well as the timetable under which hospitals must submit applications for reclassification and when the MGCRB and the Secretary must make decisions on those applications. 1. Revised Application and MGCRB Timeframes Prior to the enactment of the BBA, a hospital had to submit an application to the MGCRB for geographic reclassification for a fiscal year by the first day of the preceding fiscal year (that is, October 1, 1997 for reclassification effective in FY 1999). The MGCRB had 180 days to make a decision on that application (no later than March 31 of the fiscal year), the hospital has 15 days to request a review of that decision by the Administrator of HCFA (by April 15), and the [[Page 26322]] Administrator had up to 90 days to issue a final decision (July 15). The July 15 deadline allowed the final geographic reclassification decisions to be incorporated in the wage index and payment rates that were published in the final rule (on or about September 1). Sections 4644(a)(1) and (b)(1) of the BBA amended section 1886(d)(6) and (e) of the Act to provide that the prospective payment system final rule setting the payment rates for years beginning with FY 1999 must be published by August 1. Because this change in publication date would conflict with the timetable for geographic reclassification decisions, section 4644(c) of the BBA amended section 1886(d)(10)(C)(ii) of the Act to require a hospital, beginning with applications filed for reclassification for FY 2000, to submit its application for reclassification no later than the first day of the month preceding the beginning of the Federal fiscal year (that is, by September 1). Under this timetable, the amount of time the MGCRB and the Administrator have to make decisions will not change from the existing schedule. In addition, because applications filed for reclassification effective in FY 1999 were not due until October 1, 1997, section 4644(c)(2) required us to shorten the deadlines under section 1886(d)(10)(C) of the Act so that all final decisions on MGCRB applications will be completed by June 15, 1998. In the August 29 final rule with comment period, we revised Secs. 412.256 and 412.274 to implement the change in the application deadline. 2. Alternative Wage Index Reclassification Guidelines for Individual Hospitals Effective for FY 1998 reclassification, sections 4409 and 4410 of the BBA required the Secretary to establish alternative wage index guidelines for geographic reclassification for certain disproportionately large hospitals. In the case of a hospital that is owned by a municipality and that was reclassified as an urban hospital for FY 1996, in calculating the hospital's average hourly wage for the purposes of geographic reclassification for FY 1998 only, section 4410(c) of the BBA required the exclusion of general service wages and hours of personnel associated with a skilled nursing facility that is owned by the hospital of the same municipality and that is physically separated from the hospital to the extent that such wages and hours of such personnel are not shared with the hospital and are separately documented. Because the application and decisionmaking processes for FY 1998 reclassification were already completed, we had to provide special guidelines for hospitals to apply for reclassification under these provisions for FY 1998. A hospital seeking reclassification for FY 1998 under either section 4409 or 4410(c) had to submit its application to the MGCRB (7 copies) by September 15, 1997. If the MGCRB rendered a favorable decision on a hospital's application, the hospital was reclassified for purposes of the wage index for FY 1998 as if that decision had been made under the usual guidelines and timetable. We also extended the existing appeal rights for decisions on requests for reclassification to decisions made under sections 4409 and 4410. Therefore, for such appeals, in the August 29 final rule with comment period, we incorporated the existing appeals and review process (including the timetables for a hospital to request review and for the Administrator to complete review) even though that process was not finalized until after the beginning of the fiscal year. We revised the regulations at Sec. 412.230(e) to implement section 4409. However, because the provision of section 4410(c) applied for only one year, we did not revise the codified regulations text to reflect that provision. 3. Reclassification for Rural Referral Centers and the Disproportionate Share Adjustment Currently, under section 1886(d)(10)(D) of the Act, rural referral centers (RRCs) are allowed to apply to the MGCRB to be reclassified for purposes of the wage index adjustment. To be reclassified, RRCs must meet the following criteria: The hospital's average hourly wage must be at least 108 percent of the Statewide rural hourly wage. The hospital's average hourly wage must be at least 84 percent of the average hourly wage of the target urban area to which the RRC is applying. Section 4202 of the BBA prohibits the MGCRB from rejecting a hospital's request for reclassification on the basis of any comparison between the hospital's own average hourly wage and the average hourly wage of hospitals in the area in which the hospital is located if the hospital was ever classified as an RRC. However, RRCs will continue to be required to have an average hourly wage that is at least 84 percent of the average hourly wage of the target urban area to which the RRC is applying. In addition, while RRCs do not have to meet the proximity requirements for reclassification, they continue to be required to seek reclassification to the nearest urban area. In the August 29 final rule with comment period, we revised Sec. 412.230(a)(3) to implement this provision. Section 4203 of the BBA provided that, for a limited time, a rural hospital may apply and qualify for reclassification to another area for purposes of disproportionate share adjustment payments whether or not the standardized amount is the same for both areas. For 30 months after the date of enactment of the BBA, the MGCRB will consider the application under section 1886(d)(10)(C)(i) of the Act from a hospital requesting a change in the hospital's geographic classification for purposes of determining, for a fiscal year, eligibility for and additional payment amounts under section 1886(d)(5)(F) of the Act. The MGCRB will apply the guidelines for standardized amount reclassification (Sec. 412.230(d)) until the Secretary establishes separate guidelines. Therefore, hospitals seeking such reclassification for FY 1999 must have submitted a reclassification application to the MGCRB by October 1, 1997. Decisions based on these applications will be effective for FY 1999 (beginning on October 1, 1998). Section 4203 of the BBA is effective for the 30-month period beginning on the date of enactment. Accordingly, hospitals may seek reclassification for purposes of DSH for FY 1999, FY 2000, and FY 2001. In the August 29 final rule with comment period, we revised Sec. 412.230(a)(5)(ii) of the regulations to implement this provision. Comment: One commenter questioned the effective date of sections 4202 and 4203 of the BBA, which exempt RRCs from the 108 percent criterion in applying for wage index reclassification and allow a hospital to reclassify to another area for purposes of the disproportionate share adjustment even if the standardized amount of both areas is the same, respectively. The commenter asserted that the conference report accompanying the statute clearly states that the effective date of these provisions is ``enactment'' of the BBA, that is, August 5, 1997. Therefore, the commenter believes that hospitals should have been allowed to apply to the MGCRB and reclassify under these provisions for FY 1998 reclassifications, which were effective beginning October 1, 1997. The August 29 final rule with comment period limited the effect of these provisions to reclassifications beginning in FY 1999. Response: We agree that the provisions of sections 4202 and 4203 of the BBA are effective August 5, 1997. However, the statutory language contains no [[Page 26323]] directive to apply these provisions to hospital reclassifications effective for FY 1998 (compare sections 4409 and 4410(c) of the BBA, both of which specifically stated that their provisions were effective for FY 1998 reclassifications). Section 4202 amends section 1886(d)(10)(D) of the Act to provide that the MGCRB ``may not reject the application'' of a hospital on the basis of a comparison specified in the statute. Accordingly, if the MGCRB considers an application on or after August 5, 1997, it will not reject the application on the basis specified in the statute. Section 4202 does not require the MGCRB to re-evaluate applications that the MGCRB rejected before August 5, 1997. Similarly, section 4203 provides that, for the 30-month period beginning on August 5, 1997, the MGCRB ``shall consider'' a hospital's application for reclassification for purposes of DSH payments. Accordingly, if a hospital submits an application to be reclassified for purposes of DSH on or after August 5, 1997, the MGCRB will consider the application. Generally, the deadline for FY 1998 reclassifications was October 1, 1996. Section 4203, unlike other provisions of the BBA, does not require the MGCRB to grant reclassifications for FY 1998 notwithstanding this deadline. Thus, hospitals may apply for reclassification under the provisions of sections 4202 and 4203 after August 5, 1997. The first such applications would be those for FY 1999 reclassification beginning on October 1, 1998, which were due by October 1, 1997. We note that, although the provisions of section 4202 are permanent, section 4203 is effective for 30 months and applies only to those reclassifications effective for FY 1999, 2000, and 2001. I. Floor on Area Wage Index As provided by section 4410(a) of the BBA, for discharges on or after October 1, 1997, the area wage index applicable to any hospital that is not located in a rural area may not be less than the area wage index applicable to hospitals located in rural areas in the State in which the hospital is located. For FY 1998, this change affected 128 hospitals in 32 MSAs. Furthermore, this wage index floor is to be implemented in such a manner as to assure that aggregate prospective payment system payments are not greater or less than those which would have been made in the year if this section did not apply. We did not receive any public comments on this provision. J. Indirect Medical Education (IME) Adjustment 1. Operating IME Adjustment In the August 29 final rule with comment period, we revised our regulations to incorporate the provisions of section 4621 of the BBA, which amended section 1886(d)(5)(B) of the Act in several ways. First, it gradually reduces the current level of the IME adjustment (approximately a 7.7 percent increase for every 10 percent increase in the resident-to-bed ratio) over the next several years according to the following schedule: 7.0 percent for discharges during FY 1998; 6.5 percent during FY 1999; 6.0 percent during FY 2000; and 5.5 percent during FY 2001 and thereafter. Second, section 4621 established certain limits both on the full- time equivalent (FTE) number of residents counted by each hospital and on the resident-to-bed ratio. Effective for discharges on or after October 1, 1997, section 4621(b)(1) added a new section 1886(d)(5)(B)(v) to the Act to require that a hospital's total number of resident FTEs in the fields of allopathic and osteopathic medicine may not exceed the total number of such resident FTEs counted by the hospital during its most recent cost reporting period ending on or before December 31, 1996. Furthermore, section 1886(d)(5)(B)(vi)(I) provides that the ratio of residents-to-beds may not exceed the ratio calculated during the prior cost reporting period (after accounting for the cap on the number of resident FTEs). Third, for cost reporting periods beginning on or after October 1, 1997, and subject to the new limit on counting residents described above (as well as the expansion of allowable settings to off-site services, as described below), section 1886(d)(5)(B)(vi)(II) provides that ``the total number of full-time equivalent residents for payment purposes shall equal the average of the actual full-time equivalent resident count for the cost reporting period and the preceding two cost reporting periods.'' For the first cost reporting period beginning on or after October 1, 1997, this provision ``shall be applied using the average for such period and the preceding cost reporting period.'' For purposes of this provision, section 1886(d)(5)(B)(vii) requires the Secretary to make appropriate modifications in the event of a cost reporting period other than 12 months. With respect to medical residency training programs established on or after January 1, 1995, section 1886(d)(5)(B)(viii) provides that the Secretary must develop rules to apply these limits to such new programs, giving special consideration to ``facilities that meet the needs of underserved areas,'' and to facilitate the application of aggregate limits in the case of affiliated groups (as defined by the Secretary). Finally, ``(t)he Secretary may require any entity that operates a medical residency training program . . . to submit to the Secretary such additional information as the Secretary considers necessary to carry out such (limits).'' We revised the regulations at Sec. 413.86(g)(6) to comply with these directions for both the indirect and direct GME FTE counts. Finally, section 4621(b)(2) amended section 1886(d)(5)(B)(iv) of the Act to allow all the time spent by a resident in patient care activities under an approved medical residency training program at an entity in a nonhospital setting to be counted towards the determination of full-time equivalency if the hospital incurs all, or substantially all, of the costs for the training program in the setting. Therefore, in the August 29 final rule with comment period, we revised Sec. 412.105(g)(1)(ii)(C), which allowed hospitals to include the time residents spent in patient care activities in nonhospital settings, for purposes of IME. The eligibility criteria for this provision is similar to a provision regarding direct graduate medical education payments at section 1886(h)(4)(E) of the Act, and implemented at Sec. 413.86(f)(iii). For IME purposes, we intend to rely upon the same criteria as are applied for the direct GME to identify eligible situations under this new provision. In the August 29 final rule with comment period, we revised Sec. 412.105 to reflect these changes, and issued instructions to fiscal intermediaries to implement these changes prior to October 1, 1997. In response to our discussion of the changes enacted by the BBA, we received numerous comments seeking clarification on many of these issues. Comment: Several commenters noted a discrepancy in the preamble of the August 29 document concerning the effective date of the cap on allopathic and osteopathic FTEs: In the preamble summary of the BBA changes at 62 FR 45968, the effective date of the provision is stated as ``cost reporting periods beginning on or after October 1, 1997.'' In the full discussion of the provision in the preamble at 62 FR 46003, the provision is made effective for ``discharges on or after October 1, 1997.'' Response: The effective date for applying the cap on allopathic and osteopathic FTEs, as set forth in section [[Page 26324]] 1886(d)(5)(B)(v) of the Act, is for ``discharges on or after October 1, 1997.'' This effective date citation in the preamble summary at 62 FR 45968 was a typographic error. Comment: Commenters noted that the requirements set forth in section 1886(h)(4)(H) of the Act concerning special rules for applying the FTE limits for direct graduate medical education for new programs and affiliated groups also apply to IME payments. The commenters requested that they be added to the regulations at Sec. 412.105. Response: The commenters are correct. Under section 1886(d)(5)(B)(viii) of the Act, as added by section 4621(b)(1) of the BBA, rules similar to the rules set forth at section 1886(h)(4)(H) of the Act apply for purposes of implementing: the cap on resident FTEs; the cap on the resident-to-bed ratio; and the 3-year rolling average resident count. We are revising Sec. 412.105(f)(1)(vi) and (vii) accordingly. The count of residents in accordance with the rules for special circumstances (new programs and affiliated groups) under section 1886(d)(5)(B)(viii) of the Act is described in sections II.N.3 and 4 of this final rule. We note that this section of the Act applies only to the limits set forth in sections 1886(d)(5)(B)(v) and (vi) of the Act. Comment: Several commenters objected to our interpretation of the language of section 1886(d)(5)(B)(vi) of the Act, which describes the cap on the resident-to-bed ratio. In the August 29 final rule with comment period, we stated that this is a cap on the total resident FTE count including dental and podiatry residents. The commenters believe the Congress intended that dental and podiatry residents should be exempt from this cap in addition to their exemption from the cap established for resident FTEs. In support of their interpretation, the commenters noted the reference to the FTE cap in establishing the cap on the ratio (section 1886(d)(5)(B)(vi) of the Act). One commenter stated that including dental and podiatry residents in the FTE calculation before applying the ratio cap leads to a nonsensical result since the Congress established a cap on allopathic and osteopathic residents but explicitly did not include dental and podiatry residents under this cap. Another commenter supported applying the cap to total FTEs, including dentists and podiatrists. This commenter noted that the ratio could increase after a one-year lag to reflect additional dental or podiatry residents. Response: Section 1886(d)(5)(B)(vi) of the Act, as amended by the BBA, establishes a cap on the value of ``r,'' which is defined in section 1886(d)(5)(B)(ii) of the Act as ``the ratio of the hospital's full-time equivalent interns and residents to beds.'' The IME formula defined in this section of the Act explicitly includes the value `r' in the IME calculation. Therefore, `r' has a very precise and significant value. Section 1886(d)(5)(B)(v) of the Act (as amended) states that ``the total number of full-time equivalent interns and residents in the fields of allopathic and osteopathic medicine'' may not exceed the number of such residents in either a hospital or nonhospital setting with respect to the hospital's most recent cost reporting period ending on or before December 31, 1996. This section sets a cap on a subset (allopathic and osteopathic medical residents) of the total number of residents. The numerator of the ratio is the total number of residents including the effect of the cap; the Congress did not provide that `r' would be computed using only a subset of residents. In fact, one could argue that under such an interpretation, there would be no explicit methodology in the Act for including dental and podiatry residents in the IME calculation. The reference in section 1886(d)(5)(B)(vi)(I) of the Act to ``the limit under clause (v)'' means that the numerator includes the effect of the cap on allopathic and osteopathic residents, not that the numerator is limited to those residents. Thus, the statutory language requires that we apply the cap on the ratio after including all residents, dental and podiatry as well as allopathic and osteopathic, in the calculation of the numerator. Comment: Other commenters believe that it is inappropriate not to allow exceptions to the ratio cap when hospitals are voluntarily closing inpatient beds. In addition, commenters requested that the cap be adjusted to include the residents' time spent in nonprovider settings. Response: Section 4621 of the BBA addresses the application of the cap, specific situations where special rules are appropriate, and the allowance of residents' time spent in nonprovider settings. In addition, we note that the ratio could increase after a one-year delay for legitimate changes in either the numerator or the denominator. That is, the ratio is capped based on its value during the prior cost reporting period. An increase in the ratio thereby establishes a higher cap for the following cost reporting period. Comment: One commenter requested clarification of the term ``the prior cost reporting period'' as used in the preamble of the final rule with comment period when describing the application of the cap on the ratio of residents-to-beds (62 FR 46003). Response: The phrase ``prior cost reporting period'' refers to the immediately preceding period. A hospital's cost reporting period beginning July 1, 1998 would have its ratio capped at the value of its ratio for its cost reporting period ending June 30, 1998. In determining a hospital's resident-to-bed ratio for a cost reporting period that begins before October 1, 1997 (the effective date of the cap on allopathic and osteopathic FTEs) and ends after that date, the ratio for that period will reflect a prorated resident FTE count. That is, the numerator is determined through averaging the uncapped and capped FTE amounts based on the number of months in the cost reporting period before and after October 1, 1997. This FTE count will also be used to determine the rolling average amount for subsequent years. Comment: Commenters requested an explanation of how the ratio cap would be determined under the special rules implemented pursuant to section 1886(d)(5)(B)(viii) of the Act (that is, the new program and affiliated group provisions). Response: The ratio is first determined by calculating the resident FTE count taking into account all of the relevant limitations and applicable rolling averages, and the denominator in the ratio is the hospital's available bed count during the current cost reporting period. If this results in a ratio in excess of the previous cost reporting period's ratio, the hospital's IME adjustment is based on the ratio from the previous cost reporting period. Special rules apply for the special circumstances at section 1886(d)(5)(B)(viii) of the Act. In the event that the application of section 1886(d)(5)(B)(viii) results in a higher resident-to-bed ratio for a hospital compared to its most recently completed cost reporting period, the special rule will be applicable only for the portion of the higher ratio due to the increase in residents. In such instances, the ratio during the prior cost reporting period is similarly applicable, but it is adjusted for the additional residents allowed by the special circumstances rule. In practice, this is accomplished by adding the additional residents to the resident FTE count used in the prior cost reporting period's resident-to-bed ratio. It should be noted that this adjustment is the result of a special rule for applying the cap on `r' for new programs and affiliated groups as set forth in section 1886(d)(5)(B)(viii) of the Act. Therefore, no adjustment to the ratio is made for an increase in dental [[Page 26325]] or podiatry residents during the cost reporting period in which an increase occurs. In the case of recognized affiliation arrangements, each hospital will be paid on the basis of its individual resident-to-bed ratio. Under such an arrangement, the ratio is the number of residents counted by the hospital in accordance with the special FTE counting rules for these arrangements, over the hospital's bed count during the current cost reporting period. As described above, the ratio may increase during a particular cost reporting period due to an increase in the number of residents allowed under the special affiliation arrangement. Any such exemption from the ratio cap will be limited to the increase in residents and will not reflect changes in hospital bed size. Comment: Commenters were concerned about the language establishing the resident FTE cap (section 1886(d)(5)(B)(v) of the Act) that the number of allopathic and osteopathic residents may not exceed ``the number of such full-time equivalent interns and residents in the hospital'' during the most recent cost reporting period ending on or before December 31, 1996. The commenters believed that this disadvantages the programs that have already been training residents in nonprovider settings. Commenters suggested that we support the effort to delete the phrase ``in the hospital'' from this section. Response: As is indicated by the comments, residents in nonhospital settings during the most recent cost reporting period ending on or before December 31, 1996, are excluded by the Act from the determination of the allopathic and osteopathic cap. Furthermore, although we recognize that many of these arrangements that were in existence during 1996 reflected the demand for more primary care physicians, we would note that the purpose of allowing hospitals to count this time in the future is to create an incentive for even more primary care training. In that regard, hospitals that had previously established residency training in nonhospital settings did so in response to the existing incentives at that time. Comment: Several commenters suggested that the reduction in the IME adjustment factor (from approximately a 7.7 percent increase for every 10 percent increase in the ratio of residents to beds to 7.0 percent for discharges during FY 1998, and gradually reducing further for 3 years beyond that) places a disproportionate share of the cost-cutting burden on teaching hospitals, especially academic medical centers. Response: The reduction to the IME adjustment factor is set forth in the statute. However, given the gradual reduction in the factor and the recent very high Medicare operating margins for teaching hospitals (especially major teaching hospitals), we disagree that the reductions to the IME adjustment unfairly burden these hospitals. We note that HCFA and the Prospective Payment Assessment Commission (ProPAC) have both supported a reduction in the IME adjustment for several years based on our analysis of the indirect effect of graduate medical education programs on total hospital costs. 2. Capital IME Adjustment Comment: One commenter asked us to clarify whether the following conclusions are correct in applying the IME provisions of the BBA to the capital prospective payment system: (1) The cap on the number of residents training in the fields of allopathic and osteopathic medicine for purposes of computing the operating IME adjustment does pertain to the capital IME adjustment; (2) The rolling average resident count for purposes of computing the operating IME adjustment does pertain to the capital IME adjustment; and (3) The cap on the ratio of interns and residents to beds for purposes of computing the operating IME adjustment does not pertain to the ratio of interns and residents to the average daily census for purposes of computing the capital IME adjustment. As with the DSH provisions, the commenter also asked us to codify our policy on the applicability of these operating provisions in the appropriate sections of the capital regulations governing the IME adjustment. Response: Cap on Number of Residents in Allopathic and Osteopathic Medicine--The regulations at Sec. 412.322 describe the capital IME adjustment. Section 412.322(a)(1) provides that the hospital's number of full-time equivalent (FTE) residents is determined in accordance with Sec. 412.105(f) of the operating regulation. Since the BBA provisions affected Sec. 412.105(f)(iv) by capping the number of allopathic and osteopathic interns and residents at the number of interns and residents reported on a hospital's cost report for the period ending December 31, 1996, the capital IME intern and resident count for allopathic and osteopathic residents is also capped automatically. Rolling Average Resident Count--The BBA provision implementing a rolling average resident count (section 4623) is also included in Sec. 412.105(f) of the operating IME regulations. Since the capital IME regulations reference the operating IME regulation at Sec. 412.105(f), the capital IME FTE count is affected by the rolling average resident count as well. Cap on Ratio of Interns to Beds--The cap on the number of interns and residents to beds (section 4621) does not have an impact on the capital IME payments because we use the ratio of hospital FTEs to average daily census to determine the capital IME adjustment factor. In response to the commenter's request that we codify in the regulations the applicability of these BBA operating IME provisions to capital payments, we do not believe that it is necessary to do so. The capital regulations that are affected (regarding the cap on the number of residents in allopathic and osteopathic medicine, and the rolling average resident count) will be automatically included by their reference to the appropriate section of the operating regulations. The capital regulations that are not affected (regarding the cap on the ratio of interns to beds) need not be revised. It has come to our attention that there has also been some question raised about the applicability of sections 4001 and 4622 of the BBA-- Payment to Hospitals of Indirect Medical Education Costs for Medicare+Choice Enrollees to capital IME payments. Section 4001 of the BBA instructs the Secretary to exclude from the Medicare+Choice capitation rate payment adjustments for the indirect costs of medical education under section 1886(d)(5)(B) of the Act. Section 4622 of the BBA provides for payments to teaching hospitals for discharges associated with Medicare managed care beneficiaries for portions of cost reporting periods beginning on or after January 1, 1998. Section 4001 of the BBA refers only to the indirect costs of medical education as defined in section 1886(d)(5)(B) of the Act. This section refers to operating IME payments and not capital IME payments, which were established by regulation. Thus, section 4001 affects only operating IME payments. K. Rural Referral Centers Based on section 1886(d)(5)(C)(i) of the Act and the Conference Committee Report accompanying Public Law 98-21 (the original legislation implementing the prospective payment system), we established qualifying criteria for referral center status to identify those rural hospitals that, because of bed size, [[Page 26326]] a large number of complicated cases, a high number of discharges, or a large number of referrals from other hospitals or from physicians outside the hospital's service area, were likely to have operating costs more similar to urban hospitals than to the average smaller community hospitals. The regulations implementing the referral center provision are codified at Sec. 412.96. In 1984, after a year's experience with the referral center criteria, we determined that once approved for the referral center adjustment, a hospital would retain its status for a 3-year period. At the end of the 3-year period, we would review the hospital's performance to determine whether it should be requalified for an additional 3-year period. The requirement for triennial review was added to the regulations in 1984 (Sec. 412.96(f)) to be effective for cost reporting periods beginning on or after October 1, 1987 (the end of the first 3 years of the referral center adjustment). However, since then, three statutory moratoria on the performance of the triennial reviews were enacted by Congress. When the third of these moratoria expired at the end of cost reporting periods that began during FY 1994, we implemented the triennial review requirements and some hospitals lost their referral center status. (See the September 1, 1993 final rule (58 FR 46310) for a detailed explanation of the moratoria and the implementation of the triennial reviews.) Hospitals could lose rural referral center status in other ways. With the creation of the MGCRB and a hospital's ability, beginning in FY 1992, to request that it be reclassified from one geographic location to another, we stated that if a referral center was reclassified to an urban area for purposes of the standardized amount, it would, in most instances, be voluntarily terminating its referral center status. (See the June 4, 1991 final rule with comment period (56 FR 25482).) This was true because, in most instances, a hospital's ability to qualify as a ``rural referral center'' was contingent upon (among other criteria) its status as a rural hospital. In addition, rural referral centers located in areas that were redesignated as urban by the Office of Management and Budget (OMB) lost their referral center status. These hospitals had qualified for referral center status under criteria applicable only to hospitals located in rural areas. OMB's designation of the areas to urban status meant that such hospitals were urban for all purposes and thus could no longer qualify as rural referral centers. Section 4202(b)(1) of the BBA states that, ``Any hospital classified as a rural referral center by the Secretary . . . for fiscal year 1991 shall be classified as such a rural referral center for fiscal year 1998 and each subsequent fiscal year.'' Thus, many of the hospitals that lost their referral center status for the reasons listed above must be reinstated. For the purpose of implementing this provision, we consider that a hospital that was classified as a referral center for any day during FY 1991 (October 1, 1990 through September 30, 1991) meets the reinstatement criterion. In the August 29 final rule with comment period, we reinstated rural referral center status for all hospitals that lost the status due to triennial review or MGCRB reclassification regardless of whether it was classified as an RRC during FY 1991. We did not reinstate rural referral center status to hospitals in areas redesignated as urban by OMB because they are no longer rural hospitals. We also did not reinstate the status of the six hospitals that voluntarily requested termination of their RRC status. However, we would allow any of these six hospitals to requalify if they so desire. In addition, we terminated the requirement for triennial reviews of referral center status. Thus, Secs. 412.96(f) and (g) (1) and (2) were deleted in the August 29 final rule with comment period. If we later discover some hospital or class of hospitals that we believe should not be allowed to retain referral center status because they fail to meet some basic requirement we believe is essential to receiving this special designation, we will consider reinstating some type of annual or periodic qualifying criteria. Finally, we eliminated our policy that terminated RRC status for any hospital that is reclassified as urban by the MGCRB. Comment: One commenter expressed agreement with our decision to reinstate hospitals that lost their RRC status as a result of failure to meet triennial review requirements or due to MGCRB reclassification to an urban area for purposes of the standardized amount. The commenter further commended HCFA for terminating triennial reviews and eliminating the policy that a hospital loses its RRC status if it is reclassified as urban by the MGCRB. However, the commenter disagreed with our decision to not restore the RRC status of hospitals that are in areas redesignated as urban by OMB. The commenter believes that this policy unfairly disadvantages those hospitals when applying for reclassification for the wage index. That is, they will be unable to reclassify under the special provisions of section 1886(d)(10)(D)(iii) of the Act as amended by section 4202(a) of the BBA if they meet all requirements except the 108 percent rule. Response: The language of section 4202(b)(1) states that any hospital classified as a rural referral center for FY 1991, `` * * * shall be classified as such a rural referral center for fiscal year 1998 and each subsequent year.'' (Emphasis added.) Hospitals located in areas redesignated as urban by OMB are no longer physically located in a rural area. Designation by OMB of an area to urban status means that any hospital located in that area becomes urban for all purposes and thus could no longer qualify as rural referral centers. In reinstating referral center status, section 4202(b) of the BBA did not revise the qualifying criteria for these hospitals. Thus, we believe that our decision to not reinstate hospitals located in urban areas as rural referral centers is appropriate. We note, however, that these hospitals are not precluded from taking advantage of the provisions of section 1886(d)(10)(D)(iii) of the Act, which state that the MGCRB is prohibited from rejecting a hospital's application for reclassification on the basis of any comparison between its hourly wage and the average hourly wage of the hospitals in the area in which the hospital is located if the hospital ``has ever been classified by the Secretary as a rural referral center.'' (Emphasis added.) This means that the hospital need not currently be classified as an RRC in order to take advantage of this provision. L. Medicare-Dependent Small, Rural Hospitals Section 4204 of the BBA amended section 1886(d)(5)(G) of the Act to reinstate the classification of Medicare-dependent, small rural hospitals (MDHs) for cost reporting periods beginning on or after October 1, 1997 and before October 1, 2001. This category of hospitals was originally created by section 6003(f) of the Omnibus Budget Reconciliation Act of 1989 (Public Law 101-239), enacted on December 19, 1989, which added a new section 1886(d)(5)(G) of the Act. The statute provides that the special payment for MDHs was to be available for cost reporting periods beginning on or after April 1, 1990 and ending on or before March 31, 1993. Hospitals classified as MDHs were paid using the same methodology applicable to sole community hospitals. [[Page 26327]] Section 13501(e)(1) of the Omnibus Budget Reconciliation Act of 1993 (Public Law 103-66), enacted on August 10, 1993, extended the MDH provision through discharges occurring before October 1, 1994. Under this revised provision, after the hospital's first three 12-month cost reporting periods beginning on or after April 1, 1990, the additional payment to an MDH whose applicable hospital-specific rate exceeded the Federal rate was limited to 50 percent of the amount by which that hospital-specific rate exceeded the Federal rate. In reinstating the MDH special payment for discharges occurring on or after October 1, 1997 and before October 1, 2001, section 4204 of the BBA did not revise either the qualifying criteria for these hospitals nor the most recent payment methodology. Therefore, the criteria a hospital must meet in order to be classified as an MDH are the same as before. Since classification as an MDH is not optional, we reinstated all qualifying hospitals as of October 1, 1997. In the August 29 final rule with comment period, we revised Secs. 412.90 and 412.108 to reflect the reinstatement of the MDH special payment. Section 4204(a)(3) of the BBA permits those hospitals that qualify as an MDH and that applied and were approved for reclassification to a large urban area for purposes of receiving the large urban rates through the MGCRB to decline that reclassification for FY 1998. Normally, hospitals approved for reclassification have only 45 days from the date of the proposed rule to withdraw their request for reclassification. However, the statute provides that, in this situation, hospitals may withdraw their request for FY 1998 reclassification to a large urban area for purposes of the standardized amount. Any hospital that does not requalify for MDH reinstatement for FY 1998 because of a reclassification to an urban area by the MGCRB for FY 1998 will be notified and given the opportunity to decline that reclassification. Comment: Three commenters support the reinstatement of the special payment for MDHs. However, the commenters recommended that HCFA establish a process for identifying those hospitals that did not qualify previously but now meet the criteria for classification as an MDH. Response: Since section 4204 of the BBA did not revise the criteria for classification as an MDH, it is unlikely that there will be new hospitals that qualify except for those hospitals that met all of the original criteria except bed size. We have instructed our fiscal intermediaries to review their records to determine if there are any hospitals that did not meet the criteria in 1994 and that do now; for example, a hospital that had more than 100 beds in 1994 and now has 100 or fewer beds. In addition, as discussed in the August 29, 1997 final rule (62 FR 46000), at the time of a hospital's year-end cost report settlement, the fiscal intermediary will determine if the hospital met the criteria to qualify as an MDH. Although the fiscal intermediaries are making every effort to identify and notify all affected hospitals, any hospital that believes it meets the criteria for MDH status but has not received notification should contact its fiscal intermediary. M. Reinstatement of the Add-On Payment for Blood Clotting Factor for Hemophilia Inpatients Section 4452 of the BBA amended section 6011(d) of Public Law 101- 239 to reinstate the add-on payment for the costs of administering blood clotting factor to Medicare beneficiaries who have hemophilia (which was previously in effect from June 19, 1990 through September 30, 1994) and who are hospital inpatients for discharges occurring on or after October 1, 1997. The payment is based on a predetermined price per unit of clotting factor multiplied by the number of units provided. In our August 29, 1997 final rule with comment period, we stated that we would calculate the add-on payment for FY 1998 using the same methodology we have used in the past (62 FR 46002). Thus, we established a price per unit of clotting factor based on the current price listing available from the 1997 Drug Topics Red Book, the publication of pharmaceutical average wholesale prices (AWP). We set separate add-on amounts for the following clotting factors, as described by HCFA's Common Procedure Coding System (HCPCS). The add-on payment amount for each HCPCS code is based on the median AWP of the several products available in that category of factor, discounted by 15 percent. Based on this methodology, we established the following prices per unit of factor for discharges occurring on or after October 1, 1997: J7190 Factor VIII (antihemophilic factor-human)................. $0.76 J7192 Factor VIII (antihemophilic factor-recombinant)........... 1.00 J7194 Factor IX (complex)....................................... 0.32 J7196 Other hemophilia clotting factors (e.g., anti-inhibitors). 1.10 In the August 29 final rule with comment period, we solicited comments on the appropriateness of the add-on payment amount and suggestions for the best methodology to calculate this amount. Comment: We received five comments on this issue. The commenters indicated that the payment add-ons for blood clotting factors were appropriate with the exception of the payment amount under HCPCS code J7194, Factor IX (complex). The commenters asserted that ``purified'' Factor IX products (that is, products that contained Factor IX only) constituted a distinctly different and much more costly group of products than Factor IX (complex); thus, it was inappropriate to group all ``Factor IX'' products together under one HCPCS code. They recommended that HCFA either allow the purified Factor IX products to be billed under HCPCS code J7196 (Other hemophilia clotting factors) or establish a separate HCPCS code (or codes) for the purified Factor IX products. Response: We agree that there is a need for further distinctions among the Factor IX products. Therefore, as suggested by the commenters, we are establishing the following two new HCPCS billing codes for purified Factor IX products: Q0160 Factor IX (antihemophilic factor, purified, nonrecombinant)................................................ $0.93 Q0161 Factor IX (antihemophilic factor, purified, recombinant).. 1.00 (Note that ``Q-codes'' are national temporary HCPCS codes that HCFA establishes unilaterally. We will request approval for permanent HCPCS codes at the next session of the national HCPCS panel.) We will issue instructions to Medicare hospitals and fiscal intermediaries stating that payment should be made under these codes for all applicable discharges occurring on or after the effective date of this rule (that is, June 11, 1998). As discussed in the August 29 document, payment will be made for blood clotting factor only if there is an ICD-9-CM diagnosis code for hemophilia included on the bill. N. Counting Residents for Direct Graduate Medical Education 1. Limit on the Count of Residents Section 4623 of the BBA added section 1886(h)(4)(F) of the Act to establish a limit on the number of allopathic and osteopathic residents that a hospital can include in its full time equivalent (FTE) count for direct GME payment. Residents in dentistry and podiatry are exempt from the cap. For cost reporting periods beginning on or after October 1, 1997, a hospital's [[Page 26328]] unweighted direct medical education FTE count may not exceed the hospital's unweighted FTE count for its most recent cost reporting period ending on or before December 31, 1996. Section 1886(h)(4)(H)(iii) of the Act gives the Secretary authority to collect whatever data are necessary to implement this provision. Hospitals have been required to report resident-specific information to their fiscal intermediaries under longstanding requirements of Sec. 413.86, and we believe it is possible to implement section 1886(h)(4)(F) without mandating significant additional reporting. We expect to amend the Medicare cost report in light of all of the provisions of the BBA addressing indirect and direct GME payments. We believe that the data, for the most recent cost reporting periods ending on or before December 31, 1996, necessary to implement the indirect and direct GME provisions is already available to fiscal intermediaries through the intern and resident information system. We believe the hospital's unweighted FTE limit for its most recent cost reporting period ending on or before December 31, 1996 should be based on a 12 month cost reporting period. If the hospital's most recent cost reporting period ending on or before December 31, 1996 is a short period report, the fiscal intermediaries shall make adjustments so that the hospital's unweighted FTE limit corresponds to the equivalent of a 12-month cost reporting period. In the August 29 final rule with comment period, we revised Sec. 413.86(g)(4) accordingly. Comment: We received comments that many hospitals received approval from the Accreditation Council on Graduate Medical Education (ACGME) to expand existing medical residency training programs prior to enactment of the BBA. The additional residents associated with these program expansions may not have been included in the hospital's most recent cost reporting period ending on or before December 31, 1996. Some commenters felt that it was not the intent of the Congress to ``unduly burden residency programs and hospitals by putting into effect regulations which retroactively punish programs attempting to expand.'' These commenters stated that even if it was Congressional intent to halt program expansion, programs serving rural and rural underserved areas should be exempt. Some commenters urged that the cap be adjusted to allow for situations where documented expansion plans were approved by national credentialing bodies or state regulatory agencies prior to August 5, 1997, or where hospitals made commitments to residents for the 1997/1998 academic year. Other commenters stated that HCFA should allow all residents training before August 5, 1997, to be included in hospital FTE caps. One commenter suggested that HCFA consider the number of approved slots rather than the actual number of residents on December 31, 1996, for purposes of calculating the FTE cap. This commenter did not believe that Congress intended to punish well- established programs that happened to have an open slot on a particular date, nor to force programs with significant activity in the training of rural physicians to reduce their number of residency slots. Some commenters recognized that the statute requires the Secretary to establish hospital specific FTE caps from the hospitals' most recent cost reporting period ending on or before December 31, 1996, even in situations where hospitals made commitments to training additional residents after their cost reporting period ending during 1996 and before the enactment of the BBA. The commenters urged HCFA to recommend a statutory change to the 1996 cost report year provision to ameliorate the retrospective nature of this provision. Response: Under sections 1886(d)(5)(B)(v) and 1886(h)(4)(F), as amended by the BBA, the number of a hospital's residents in allopathic medicine and osteopathic medicine may not exceed the number of such residents for the hospital's most recent cost reporting period ending on or before December 31, 1996. The limit applies to discharges occurring on or after October 1, 1997, for indirect medical education and to cost reporting periods beginning on or after October 1, 1997, for direct GME. Thus, for an individual hospital, the amount of Medicare payment for direct and indirect GME is limited by the number of residents in a base year specified by the statute. Many of the comments we received indicated that hospitals made commitments to expand existing residency programs between their most recent cost reporting periods ending on or before December 31, 1996, and their first cost reporting period in which the caps apply. As a result, the hospital may have more residents in its current cost reporting period than its FTE cap. If we adjusted the caps for these hospitals we would effectively give them a base year contrary to the one specified by the statute. Similarly, establishing FTE caps based on the number of residents training on August 5, 1997 or in the 1997-1998 program year would be inconsistent with the statutory base year. In response to the comment that we establish FTE caps based on approved slots rather than the actual number of residents in training, the statute specifically establishes that the cap equals the number of allopathic and osteopathic FTE residents (before the application of the initial residency period weighting factors) in the hospital's most recent cost reporting period ending on or before December 31, 1996. The Conference Report for the BBA states that ``the conference agreement provides for a `cap' or limit on the number of residents that may be reimbursed by the Secretary, on a national and a facility level.'' Section 1886(h)(5)(H) states that the Secretary shall give special consideration to facilities that meet the needs of underserved areas but only in the context of prescribing rules for medical residency training programs created on or after January 1, 1995. Thus, we disagree with these commenters that hospitals that meet the needs of rural underserved areas should be exempt from the FTE caps. Comment: We received several comments on the need for flexibility in the FTE caps. These comments stated that an institution-specific cap does not allow training to move from one hospital to another even if those sites become undesirable. One commenter suggested that a hospital's FTE resident count should be allowed to increase if the residents are moved from another teaching hospital because that hospital no longer provides a desirable training site. Another commenter stated that program sponsors are responsible for ensuring that residency program sites meet accreditation requirements, and that a program sponsor is required to move residency slots if an affiliated hospital cannot or does not want to continue to support residency program changes. These commenters noted that if the sponsor of a residency program moves residents from one hospital to another, the receiving hospital will not be paid for those residents above its cap even though there is no net growth in the number of residents. These commenters requested that the regulations be modified to allow a hospital's FTE cap to increase if the residents are moved from one teaching hospital to another by the program sponsor if there is no net growth in residency slots. One comment proposed setting the cap at the number of residents included in an institution's sponsored programs as an alternative to the unweighted cap based on the time a resident works at a facility. Rotating residents would be counted outside the [[Page 26329]] cap since the increase in FTEs at one institution due to rotations is balanced by a decrease in the FTEs at the originating institution. One commenter stated that since hospitals now ``own'' residency slots, program sponsors are put at a disadvantage in negotiating with affiliated hospitals for reimbursement of resident salaries and faculty supervision costs, and an affiliated hospital may choose to ``sell its residency slots to the highest bidder.'' Response: The statute does not prohibit program sponsors from restructuring a residency training program or resident rotation schedules. Sections 1886(d)(5)(B)(v) and 1886(h)(4)(F) only provide for hospital-specific FTE caps for purposes of determining Medicare payment for indirect and direct GME. We believe the concerns of these commenters may be addressed by our rules for affiliated groups, which permit hospitals to elect to apply the caps on an aggregate basis. As discussed later, if two or more hospitals are members of the same affiliated group, they can, by mutual agreement, adjust each respective hospital's FTE cap under an aggregate FTE cap. Absent this mutual agreement, we do not believe it is appropriate for the Secretary to establish rules that allow adjustments to hospital-specific FTE caps based on unilateral decisions by the residency training program director. With regard to the comment that the hospital's FTE caps should be based on the hospital's sponsored programs, sections 1886(d)(5)(B)(v) and 1886(h)(4)(F) specifically limit the hospital's FTEs for determining Medicare payment to the number included in the hospital's most recent cost reporting period ending on or before December 31, 1996. We would further note that medical residency training programs may also be sponsored by medical schools. If we were to adopt this commenter's suggestion that the FTE cap be equal to the number of residents in a hospital's sponsored programs, residents in programs sponsored by medical schools would not be included in any hospital's FTE cap. We recognize the concern of the commenter who stated that the FTE caps may result in changes in financial relationships between program sponsors and affiliated training sites to the disadvantage of program sponsors. If, indeed, program sponsors are at a disadvantage in negotiating financial arrangements, it is a result of the BBA statutory requirement that Medicare payment for direct and indirect GME be limited by hospital specific FTE caps and not a result of any regulations promulgated by the Secretary. Comment: One commenter stated that because of osteopathic medicine's commitment to primary care and work in underserved communities, HCFA should create an exemption to the residency cap for osteopathic residency programs. Other commenters stated concerns about the adequacy of postgraduate medical education training positions for osteopathic medicine residents. One commenter stated that the osteopathic medical profession is currently 3,000-3,500 positions in deficit, based on the postdoctoral needs of all students who are currently and will register in colleges of osteopathic medicine over the next 3 years. The commenter argues that, since the allopathic positions total approximately 143 percent of U.S. allopathic medical graduates, a similar restriction on U.S. osteopathic positions does not seem warranted. This commenter stated that a mechanism should be permitted to allow the osteopathic profession the flexibility to enhance osteopathic training positions by approximately 3,000-4,000 positions. Another commenter noted that osteopathic physicians serve disproportionately in rural areas and appear to fulfill physician workforce objectives, which represents an additional justification for maintaining osteopathic residency slots. One commenter noted that it is important that a GME FTE cap not adversely affect training osteopathic surgical subspecialty physicians. According to this commenter, osteopathic medical graduates do not have access to allopathic surgical subspecialty programs. Response: Section 1886(h)(4)(F) provides for a cap on the total number of FTE residents in a hospital's ``approved medical residency training programs in the fields of allopathic and osteopathic medicine.'' The statutory limit on the number of residents paid for by Medicare specifically encompasses residents in osteopathic medicine. Comment: Several commenters asked about application of the cap for hospitals that merged after December 31, 1996 but before the BBA, where only one hospital maintains its provider number and participation agreement. Another commenter stated that the law and regulations do not address application of the resident cap for hospital mergers and acquisitions. These commenters do not believe that it was the intent of the BBA to eliminate funding for residents when hospitals merge. Another commenter stated that applying the limits based on cost reports ending on or before December 31, 1996, does not allow for the long-term plans of providers attempting to reduce medical education costs and consolidate programs. The commenters recommended that HCFA interpret the BBA provisions to allow hospitals that merged after the base year to include the count of both hospitals. Some commenters suggested that another approach would be to redefine an affiliated group to include hospitals that merged after the December 31, 1996, cost reporting period. Another commenter stated that where there is a merger involving two hospitals, the merged cap should reflect a 12-month cost reporting period. This commenter suggested we amend the regulations specifically to ensure that the FTE cap is based on the equivalent of a 12-month cost report in the context of a merger. Response: We agree with the commenters that when there is a merger, the cap for the hospital should reflect the base year FTE counts for the hospitals that merged. This is consistent with the principle of limiting payments based on the base year specified in the statute. Also, in implementing the COBRA 1985 provision establishing a hospital- specific per resident amount in the situation of a merger, we have calculated the revised per resident amount for the merged hospital using an FTE weighted average of each of the respective hospital's per resident amount which is part of the merger. We believe that it would be appropriate to address the FTE caps using the same principle. For purposes of this final rule, where two or more or more hospitals merge after each hospital's cost reporting period ending during FY 1996, the merged hospital's FTE cap will be an aggregation of the FTE cap for each hospital participating in the merger. We are modifying Sec. 413.86(g)(6) to reflect this change. With regard to the comment that we modify the regulations to ensure that the FTE caps are applied on the basis of a 12-month cost reporting period specifically in the context of mergers and acquisitions, the existing regulations state that the fiscal intermediary may make appropriate modifications to apply the FTE cap based on the equivalent of a 12-month cost reporting period. We do not believe that additional regulatory revisions are warranted. Comment: Several commenters argued that we should adjust the caps when a hospital began training additional residents after its cost reporting period ending during 1996 because another hospital closed or discontinued its [[Page 26330]] teaching programs during the July 1996-June 1997 residency year. One commenter stated that there should be a mechanism for allowing FTE positions from merged or closed osteopathic residency programs to be used by other programs. One commenter suggested that we allow an adjustment to the FTE cap if the hospital met the following criteria: (1) During the July 1996-June 1997 residency year the hospital assumed additional medical residents from a hospital that was closing or discontinuing its training programs; (2) The hospital added the residents with the intent of allowing them to complete their education program; and (3) The hospital that closed does not seek reimbursement for the residents. If a hospital meets these three criteria, this commenter stated that it should have an unweighted FTE count which equals its unweighted FTE count for its most recent cost reporting period ending on or before December 31, 1996, adjusted for the additional residents added from residency programs at the closed hospital. Response: Similar to the situation of a merger, we agree that, when a hospital takes on residents because another hospital closes or discontinues its program, a temporary adjustment to the cap is appropriate and consistent with the base year system. In these situations, residents may have partially completed a medical residency training program and would be unable to complete their training without a residency position at another hospital. We believe that it is appropriate to allow temporary adjustments to the FTE caps for a hospital that provides residency positions to medical residents who have partially completed a residency training program at a hospital which closed. For purposes of this final rule, we will allow for temporary adjustments to a hospital's FTE cap to reflect residents affected by a hospital closure. That is, we will allow an adjustment to a hospital's FTE cap if the hospital meets the following criteria: (1) During the July 1996-June 1997 residency year the hospital assumed additional medical residents from a hospital that was closing; (2) The hospital added the residents with the intent of allowing them to complete their education program; and (3) The hospital that closed does not seek reimbursement for the residents. As stated above, this adjustment will be temporary to allow Medicare payment for those residents from the closed hospital. After this period, the hospital's cap will be based solely on the statutory base year. Hospitals seeking an adjustment for this situation must document to their intermediary that an adjustment is warranted for this purpose and the length of time that the adjustment is needed. Comment: One commenter stated that an appeals process must be established for providers to present cases when they believe their particular medical education programs have been unfairly penalized. Response: Since the direct and indirect medical education FTE counts are used in determining hospital payments on the basis of a cost reporting period and the hospital has appeal rights on the settlement of the cost report under 42 CFR Part 405, we do not believe that a new appeals process needs to be established. 2. Counting Residents Based on a 3-Year Average Section 1886(h)(4)(G)(iii) of the Act, as added by section 4623 of the BBA, provides that for the hospital's first cost reporting period beginning on or after October 1, 1997, the hospital's weighted FTE count for payment purposes equals the average of the weighted FTE count for that cost reporting period and the preceding cost reporting period. For cost reporting periods beginning on or after October 1, 1998, section 1886(h)(4)(G) of the Act requires that hospitals' direct medical education weighted FTE count for payment purposes equal the average of the actual weighted FTE count for the payment year cost reporting period and the preceding 2 cost reporting periods. This provision provides incentives for hospitals to reduce the number of residents in training by phasing in the associated reduction in payment over a 3-year period. In the August 29 final rule with comment period, we revised Sec. 413.86(g)(5) accordingly. For cost reporting periods beginning on or after October 1, 1997, we indicated in the August 29 final rule with comment period how we would determine direct GME payments. To address situations in which a hospital increases the number of FTE residents over the cap, notwithstanding the limit established under section 1886(h)(4)(F), in the August 29 final rule with comment period we established the following policy for determining the hospital's weighted direct GME FTE count for cost reporting periods beginning on or after October 1, 1997. Determine the ratio of the hospital's weighted FTE count for residents in allopathic and osteopathic medicine to the hospital's unweighted number of FTE residents without application of the cap for the cost reporting period at issue. Multiply the ratio determined above by the hospital's FTE cap. Add the weighted count of residents in dentistry and podiatry to determine the weighted FTEs for the cost reporting period. This methodology should be used for purposes of determining payment for cost reporting periods beginning on or after October 1, 1997. The hospital's unweighted count of interns and residents for a cost reporting period beginning before October 1, 1997 will not be subject to the FTE limit. If a hospital's unweighted count of residents in specialties other than dentistry and podiatry does not exceed the limit, the weighted FTE count equals the actual weighted FTE count for the cost reporting period. The weighted FTE count in either instance will be used to determine a hospital's payment under the 3-year rolling average payment rules. We believe this proportional reduction in the hospital's unweighted FTE count is an equitable mechanism for implementing the statutory provision. Section 1886(h)(4)(G)(ii) of the Act provides that the Secretary makes appropriate modifications to ensure that the average FTE resident counts are based on the equivalent of full 12 month cost reporting periods. In the August 29 final rule with comment period, we revised Sec. 413.86(g)(5) to allow the fiscal intermediaries to make the appropriate adjustments to ensure that 3-year and 2-year average FTE counts are based on the equivalent of 12-month periods. Comment: Some commenters stated that application of the 3-year rolling average rule penalizes hospitals that participate in an affiliated group and increase residents under an aggregate FTE cap. We received comments stating that the 3-year rolling average may penalize hospitals that legitimately qualify for an increase in their FTE count because they established a medical residency training program on or after January 1, 1995. The commenters argue that, in these cases, hospitals should be able to choose to have IME or direct GME payments based on the current year count of FTE residents or the 3-year rolling average. One commenter stated that the rolling average methodology arbitrarily penalizes areas of the country undergoing substantial growth. Response: Section 1886(h)(4)(H)(i) states that ``the Secretary shall, consistent with the principles of subparagraphs (F) and (G), prescribe rules for the application'' of the FTE caps and the 3-year rolling average in the case of medical residency programs established after January 1, 1995. We agree with these commenters that FTE [[Page 26331]] residents participating in new medical residency training programs should be included in the direct and indirect GME FTE counts after application of the 3-year averaging methodology. Accordingly, we are revising Sec. 413.86(g)(5) to determine a hospital's 3-year average FTE count prior to adding residents participating in new medical residency training programs consistent with section 1886(h)(4)(H)(i). However, section 1886(h)(4)(H)(ii) states that ``the Secretary may prescribe rules which allow institutions which are members of the same affiliated group (as defined by the Secretary) to elect to apply the limitation of subparagraph (F) on an aggregate basis.'' Since the statute provides that the Secretary's rules regarding affiliated groups should only apply to the FTE cap, we believe the 3-year rolling average should be applied for affiliated groups. That is, we will apply the 3-year rolling average for hospitals that are part of an affiliated group, subject to application of the aggregate cap. Comment: We received some comments asking HCFA to clarify that dental and podiatric residents are not included in the rolling average resident count. Several other commenters suggested that we modify the regulations so that dental and podiatric residents are not included in the 3-year averaging of FTE counts. The commenters asserted that the intent of the provision was that the count of dental and podiatric positions be made separately. Response: Although the FTE caps established under sections 1886(d)(5)(B)(v) and (h)(4)(F) are limited to residents in allopathic and osteopathic medicine, there is no similar limitation in section 1886(d)(5)(B)(vi) and (h)(4)(G) when determining indirect and direct GME payments based on a 3-year average. These provisions state that the Secretary shall determine payment based on an ``average of the actual full-time equivalent resident count for the cost reporting period and the preceding two cost reporting periods.'' There is no statutory distinction between dental, podiatric and other residents in determining payment based on the 3-year averaging rules. Comment: One commenter stated that capping FTEs for individual cost reporting periods in calculating the 3-year average is not the intention of the statute. This commenter stated that capping the FTEs in the individual years depreciates the FTE count for that year, misrepresenting the total number of FTEs during that year. This commenter recommended that in calculating the 3-year rolling average, the gross number of FTEs should be used in the calculation. Response: Section 1886(h)(4)(G), as added by the BBA, provides that the computation of the rolling average is ``subject to the limit described in subparagraph (F)''. The 3-year rolling average must reflect application of the FTE cap. 3. Special Rules for Applying the Direct GME FTE Limit and Rolling Average Under section 1886(h)(4)(H)(i) of the Act, as added by the BBA, the Secretary is required, consistent with the principles of establishing a limitation on the number of residents paid for by Medicare and the 3- year rolling average, to establish rules with respect to the counting of residents in medical residency training programs established on or after January 1, 1995. Such rules must give special consideration to facilities that meet the needs of underserved rural areas. Language in the Conference Report for the BBA indicates concern that there be proper flexibility to respond to changing needs given the sizeable number of hospitals that elect to initiate new (or terminate existing) training programs. Pursuant to the statute, in the August 29 final rule with comment period, we established the following rules for applying the FTE limit and determining the FTE count for hospitals that established new medical residency training programs on or after January 1, 1995. For purposes of this provision, a ``program'' would be considered newly established if it is accredited for the first time, including provisional accreditation, on or after January 1, 1995, by the appropriate accrediting body. The Secretary has broad authority to prescribe rules for counting residents in new programs, but the Conference Report for the BBA indicates concern that the aggregate number of FTE residents should not increase over current levels. Accordingly, we indicated that we would continue to monitor growth in the aggregate number of residency positions and may consider changes to the policies described below if there continues to be growth in the number of residency positions. Comment: One commenter believed that the Congress intended to create exceptions for circumstances where commitments to begin new training programs had been made prior to enactment of the cap, including situations where programs had begun prior to enactment but were not filled in 1996 and situations where a new facility opens after enactment, and had no residents in the base year. Response: The regulations published on August 29, 1997 provide for adjustments to hospital FTE caps for hospitals that previously did not participate in GME training and hospitals that established new medical residency training programs on or after January 1, 1995 and on or before the August 5, 1997 enactment of the BBA. Comment: Some commenters questioned the definition of ``new medical residency training program'' established for purposes of section 1886(h)(4)(H) of the Act. The regulation defines a new program as one that receives initial accreditation on or after July 1, 1995. Several commenters stated that the definition of new program should recognize programs that have not yet received accreditation but are approved GME programs eligible for payment. The commenter suggested that the current definition of ``new medical residency training program'' would not recognize programs leading to an American Board of Medical Specialties certification since they are not accredited by an accreditation body, even though such programs qualify as approved GME programs and are eligible for payment. Some commenters suggested that the new program definition be based on the date the residents begin training rather than the date of an accreditation letter. These commenters noted that the majority of programs starting July 1, 1995, received their accreditation letters prior to January 1, 1995, and would not qualify as new programs. Other commenters believed that a new medical residency program should be determined based on the date a program received approval from the accrediting body. One commenter stated that programs which receive ``provisional accreditation'' should be included in the regulatory definition of a new program. One commenter stated that the new program definition should include programs for which hospitals submitted a formal application before August 5, 1997. The commenter noted that it takes from 8-12 months before accreditation action is taken. Another comment requested clarification that the documentation required under this section (42 CFR 413.86(g)(6)(iv)) related solely to justifying the existence of a new program. Response: We inadvertently used the date ``July 1, 1995'' when we added Sec. 413.86(g)(7) in the final rule with comment published August 29, 1997. We are correcting the date to January 1, 1995 in this final rule. As the comments reflect, establishing a newly accredited medical residency training program can be a costly and [[Page 26332]] time consuming process. We recognize that hospitals that either received accreditation for a new medical residency training program or began training residents in the new program may have expended substantial resources during the accreditation process. We also recognize that hospitals usually do not begin training residents immediately upon receiving an accreditation letter. For these reasons, we believe it is appropriate to consider a medical residency training program to be newly established if the program received initial accreditation or began training residents on or after January 1, 1995. We are modifying the regulation accordingly. A hospital seeking to qualify as a new program must provide documentation to the intermediary indicating the date a program received accreditation and/or the date the residents begin training for the hospital to receive an adjustment to its FTE cap. We are not allowing programs to be considered newly established based on the date the sponsor began seeking accreditation since the date of an accreditation application is not indicative of a substantial commitment of resources that warrant an adjustment to FTE caps. Comment: Some commenters requested that the example in the August 29 final rule with comment period at 62 FR 46006, on programs that received direct GME before January 1, 1995, clearly state that dentistry and podiatry positions are not subject to the cap and that hospitals may add new programs in dentistry and podiatry without being subject to the Secretary's rules for establishment of new programs. The commenter would also like the statement on page 46006 that HCFA ``will continue to monitor growth in the aggregate number of residency positions and may consider changes to the policies described below if there continues to be growth in the number of residency positions' modified to indicate that it applies only to allopathic and osteopathic residency positions. Response: The regulations and preamble published on August 29, 1997, clearly stated that hospitals may include dental and podiatric residents in their FTE counts for purposes of direct and indirect medical education payment without limit, regardless of whether it is an expansion of an existing program or the establishment of a new program. We do not believe modification of the regulation is necessary. Comment: Several commenters requested clarification about adjustments to the FTE cap for new osteopathic rotating internships. Another commenter suggested that the osteopathic rotating internship should be exempt from the cap as are residents in dentistry and podiatry. One commenter noted that the rules call for counting the number of first year residents in the third year of the residency program. The commenter proposed that a consistent rule for internships would adjust the FTE cap for a new internship program based on the number of internship positions filled in the third year. One commenter expressed concern that our rules should recognize that specialty training in osteopathic medical specialties occurs subsequent to the osteopathic rotating internship in the second postgraduate year and that we should separately make adjustments to the FTE caps for new osteopathic internships and new osteopathic specialty training programs. Response: The osteopathic rotating internship is the first postgraduate year of training for osteopathic medical graduates and precedes all subsequent specialty training. Since osteopathic rotation internship programs are individually accredited, we are applying the same rules for new osteopathic rotating internships that we apply for all other new medical residency training programs. That is, if a hospital qualifies for an adjustment to its FTE cap for a new osteopathic rotating internship, the adjustment will be equal to the product of the minimum accredited length for the osteopathic rotating internship (that is, one year) and the number of FTEs participating in the internship in its third year of existence. Since osteopathic rotating internships are one year in length, the minimum accredited length is equal to one year. We will allow adjustments to FTE caps for new osteopathic specialty programs based on the product of the minimum length for the accredited program and the highest number of residents in any program year subsequent to the osteopathic rotating internship (that is, program year 2, program year 3 or program year 4) in the third year of the program's existence. We are applying the same rule for new allopathic training programs (that is, the adjustment for the new medical residency program is based on the highest number of residents in any program year in the third year of the program's existence). The adjustment to the hospital's FTE cap may not exceed the number of accredited resident slots for the new medical residency training program. In response to the comment that the osteopathic rotating internship be exempt from FTE caps, as stated earlier, the FTE caps under sections 1886(d)(5)(B)(v) and (h)(4)(F) specifically encompass residents participating in allopathic and osteopathic training programs. a. Hospitals with no residents prior to January 1, 1995. Section 1886(h)(4)(H) of the Act allows the Secretary to prescribe special rules for the application of the FTE caps and 3-year averaging for medical residency training programs established on or after January 1, 1995. In the August 29, 1997 final rule with comment period (62 FR 46005), we provided a special rule for application of the FTE resident cap for hospitals which did not participate in GME training prior to January 1, 1995. Under this special rule, we allowed hospitals to establish their FTE cap based on the product of the number of first year residents participating in accredited GME training programs in the third year that the hospital received payment for GME and the minimum accredited length for the type of program. Comment: Some commenters stated that hospitals that did not receive GME payments prior to January 1, 1995, and subsequently become teaching hospitals by affiliating with an existing training program, should be eligible for GME payments if they incur substantially all of the costs of the resident training and the overall number of residents does not increase. In this situation, the location of settings in which residents receive training changes but there is no net increase in the number of residents. One commenter stated that the limit on resident growth in new hospitals to those from ``newly accredited programs'' severely limits flexibility of moving residents and requires a duplicative administrative burden to start new programs when sharing residents would work just as well. Another commenter asked whether new hospitals may include residents transferred from other hospitals if all parties concur. To ensure that this does not increase the number of resident slots, hospitals transferring residents would have their caps correspondingly reduced. Several commenters asked how the cap would apply to hospitals that decide to become teaching institutions and will have residency programs that will be a mix of new programs and programs currently running in another hospital. Response: Under Sec. 413.86(g)(4), hospitals that are part of the same affiliated group may elect to apply the FTE cap under section 1886(h)(4)(F) on an aggregate basis. If a hospital that did not receive direct or indirect GME payment prior to January 1, 1995, qualifies to be part of the same affiliated group with another hospital that [[Page 26333]] participates in residency training, these hospitals can, by mutual agreement, provide for adjustments to each respective hospital's FTE cap under an aggregate cap for the affiliated hospitals. With regard to application of the cap for hospitals that become teaching institutions on or after January 1, 1995, and on or before August 5, 1997, our policy is that a hospital can receive an adjustment to its FTE cap for a new medical residency training program and can affiliate with hospitals that have existing medical residency training programs. Hospitals in urban areas that participate in medical residency training programs for the first time, after the August 5, 1997 enactment date of the BBA may receive an adjustment only for new medical residency training programs; they cannot affiliate with hospitals that have existing medical residency training programs. We are establishing this policy because of our concern that hospitals with existing medical residency training programs may affiliate with hospitals that establish new medical residency programs solely for the purpose of moving the new residency program to its own hospital and receiving an upward adjustment to its FTE cap under an affiliation agreement. We will allow hospitals in rural areas that qualify for an adjustment to its FTE cap for new medical residency training programs to affiliate with hospitals in urban areas. However, we will only allow a rural hospital that qualifies for an adjustment to its FTE cap for a new medical residency training program to be a member of the same affiliated group with an urban hospital if the rural hospital provides training for the FTE equivalent of at least one third of the residents participating in the joint programs of the affiliated hospitals. We are allowing these affiliations between rural and urban hospitals to recognize that rural hospitals may not have sufficient patient care utilization to be able to establish a training program within the rural area to meet accreditation standards. However, we remain concerned that there needs to be a sizeable component of training in the rural area for the policy to provide appropriate consideration for hospitals meeting the needs of underserved rural areas. We believe that providing for at least one third of the training in rural area will allow programs which focus on, but are not exclusively limited to training in those areas. Comment: One commenter argued that there is an inconsistency between the rules for teaching hospitals that had residents prior to January 1, 1995, and nonteaching hospitals that became teaching hospitals between January 1, 1995, and August 5, 1997. Hospitals in the former category may have their limits adjusted upward for all new programs established prior to August 5, 1997, while hospitals in the latter category are allowed an adjustment only for residents in the first program created even though additional programs may have been created prior to August 5, 1997. This commenter recommended that all hospitals be entitled to cap adjustment for programs created before August 5, 1997. Response: We agree and will establish the FTE cap for a hospital which did not participate in residency training prior to January 1, 1995, based on the product of the minimum length for the type of program and highest number of residents in any program year for all residency programs created in the 3rd year after residents first begin training (Sec. 413.86(g)(60)(i) and (ii)). This policy addresses adjustments for all new medical residency programs established prior to August 5, 1997. Comment: One commenter suggested (1) allowing a new hospital 5 years to build its residency programs, and not differentiating between new and established programs, (2) using the 3-year methodology outlined in the rule but not differentiating between new and established programs, or (3) allowing the cap to move with the residents when programs are transferred from one hospital to another. Another commenter suggested that permitting hospitals to transfer residency programs to other hospitals by mutual agreement is necessary to provide cooperating hospitals, or hospitals within networks, the necessary flexibility to determine requirements for a quality training program and how they will meet them. Response: One of these commenters is suggesting three alternatives for establishing the FTE cap for a new hospital that establishes a medical residency training program. Under the first two options, the commenter is suggesting that we should not distinguish between whether the hospital's resident count is adjusted for new medical residency training programs or previously established programs where some or all of the residents are transferred to the new hospital. As stated earlier, hospitals that did not participate in a medical residency training program prior to August 5, 1997, and establish a new medical residency training program for the first time after the enactment date of BBA will have their FTE caps established in the third year in which they participate in residency training. We are not allowing hospitals that first participate in medical residency training programs to affiliate with hospitals that already have an established FTE cap because of our concern that hospitals with existing medical residency training programs would affiliate with hospitals that do not currently train residents solely for purposes of establishing a higher FTE cap, which is inconsistent with sections 1886(d)(5)(B)(v) and (h)(4)(F) of the Act. As a result of this concern, we are reluctant to adopt the first two approaches suggested by this commenter for adjusting the FTE cap for a hospital which participates in medical residency training for the first time after August 5, 1997. This commenter has also suggested allowing the FTE cap to move between hospitals when programs are transferred. Hospitals that qualify to be members of the same affiliated group can mutually agree to adjustments in their respective FTE caps. Comment: One commenter stated that the requirement that all new programs begin at the same time in new hospitals is contradictory to the Accreditation Council on Graduate Medical Education requirement that certain new programs be started in hospitals that already have other programs. Under HCFA's regulations, a new hospital must start all new programs at once in order to receive an adjustment to the FTE cap based on the number of residents participating in all of the hospital's accredited programs in the third year that the hospital participates in training. The commenter suggested that HCFA provide an adequate time period for new hospitals to build complementary residency programs that do not conflict with Accreditation Council on Graduate Medical Education requirements. One commenter stated that basing the resident cap for new residency programs on the first program(s) will inhibit growth of other primary care programs or the introduction of new primary care programs. One commenter stated that nothing in the statute suggests that recognition of new programs should be limited to the first program. This commenter stated that if an internal medicine program is accredited in April 1996 with its first residents in July and a specialty program is developed in 1997 with residents beginning in 1998, the cap should be adjusted to account for the additional residents in the second program. One commenter recommended that the cap for new programs be adjusted based on all programs established in the hospital's first year rather than the first programs simultaneously established. One [[Page 26334]] commenter suggested that the cap adjustment for new programs in hospitals should be available without a cut-off date. Another commenter recommended allowing hospitals a period of time, no less than 5 years, to establish their GME training programs. One commenter stated that the resident count should be determined in the third year of the program based on the number of residents in either the first, second, or third residency year, whichever is the highest. In addition, the regulations should allow the limits to be adjusted upward for each of the first two years of the program to permit payments for residents present during that period. Response: We agree that hospitals that establish new medical residency programs will need time to establish complementary residency programs. Additionally, we are concerned that hospitals may be disadvantaged by basing the adjustment on the number of first year residents in the third year of the program's existence. Therefore, we are revising Sec. 413.86(g)(6)(i) to state that the hospital's cap adjustment is based on the product of the minimum accredited length for the specialty program and the highest number of residents training in any program year during the 3rd year of the program's existence. For purposes of determining the FTE cap for hospitals which first participate in GME training on or after January 1, 1995, we will establish the hospital's FTE cap 3 years after the first medical residency program is established. The hospital's cap will reflect an adjustment based on the product of the minimum accredited length for the program and the highest number of residents in any program year for each new medical residency program in existence at the time the cap is established. The hospital's FTE cap may not exceed the number of accredited resident slots available to the hospital. b. Hospitals with residents rrior to January 1, 1995 not located in rural areas. In the August 29, 1997 final rule with comment period, we also provided a special rule for the application of the FTE cap for hospitals that participated in GME training before January 1, 1995 and established medical residency training programs on or after January 1, 1995. Under this special rule, we allowed hospitals with new medical residency training programs established on or after January 1, 1995 and on or before August 5, 1997 to adjust their FTE caps. The hospital's FTE caps are adjusted for the incremental increase in residents participating in the new medical residency training program which are not reflected in the hospital's cost reporting period ending during calendar year 1996. Comment: We received comments stating that an adjustment should be made to the FTE cap for programs established prior to January 1, 1995, that had not reached their third year or minimum accredited length for the type of program during the cost reporting period ending on or before December 31, 1996. Response: Section 1886(h)(4)(H) states that the Secretary shall prescribe rules for application of the FTE cap and 3-year rolling average ``in the case of medical residency training programs established on or after January 1, 1995.'' Our policy of limiting adjustments to FTE caps for medical residency training programs established on or after January 1, 1995 is consistent with this statutory requirement. Comment: We received comments stating that HCFA should allow adjustments to the FTE cap for new residency programs established on or after August 5, 1997 in hospitals with existing residency programs. Many commenters believed that the August 5, 1997 date was unfair to primary care programs since several new family practice programs were accredited in September 1997 and there are a number of additional programs that will be established in the next 1 to 2 years. According to these commenters, if a public policy goal is to increase the number of primary care physicians, HCFA should allow for adjustments for programs created before September, 1999. One comment stated that urban hospitals will be deterred from opening new, desirable residency programs such as ambulatory care training programs if they cannot receive an adjustment for programs established after August 5, 1997. If HCFA does not allow hospitals in urban areas to create additional programs after August 5, 1997, this commenter suggested that HCFA allow adjustments for primary care programs where the majority of training is in ambulatory care. One commenter requested that the Secretary consider the needs of elderly beneficiaries in rural areas and allow adjustments to a hospital's FTE cap for new medical residency training in geriatric medicine. Another commenter stated that the Secretary should be required to give special consideration to facilities that establish residency training programs on or after January 1, 1995 ``which meet the needs of geriatric populations, including mental health needs of the aged.'' Response: As we have stated earlier, sections 1886(d)(5)(B)(v) and 1886(h)(4)(F) limit the number of allopathic and osteopathic residents that a hospital may include in its FTE count for purposes of indirect and direct GME payments. The Conference Report further states that ``a facility limit on the number of residents was provided, rather than any direction on payments according to specialty of physicians in training, to specifically avoid the involvement by the Secretary in decision making about workforce matters. The Conferees emphatically believe that such decisions should remain within each facility, which is best able to respond to clinical needs and opportunities.'' Since sections 1886(d)(5)(B)(v) and 1886(h)(4)(F) provide for an FTE cap for medical residents in all allopathic and osteopathic specialties and the Conference Report states that the Secretary should not be involved in workforce matters, we disagree with these commenters that we should allow for adjustments to FTE caps for programs that train primary care residents, programs that focus on ambulatory training or geriatric training programs. We believe the statute anticipates that each facility, within its FTE cap, will make decisions about training programs based on the needs of its own institution. c. Rural underserved areas. Consistent with section 1886(h)(4)(H), we provided a special rule for the application of the FTE cap to give special consideration to hospitals that meet the needs of underserved rural areas. Under this special rule, we provide adjustments to FTE caps for hospitals located in rural areas that established medical residency training programs on or after January 1, 1995. The caps can be adjusted for all programs created on or after January 1, 1995 including programs created after the enactment of BBA. The adjustment to an individual hospital's FTE cap is based on the product of the number of first year residents participating in the newly established program in the program's third year of existence and the minimum accredited length for the program. Comment: Many commenters recommended that an exception to the FTE caps should be permitted to encourage existing programs to expand to meet the needs of rural, underserved areas. Several commenters also suggested providing an exception to the cap that would allow a geographic area with substantial population growth to expand existing medical residency training programs to hospitals which previously have not participated in residency training. Some commenters suggested that the needs of rural (and other underserved) areas are frequently met by facilities that do not exist within [[Page 26335]] those areas, but whose graduates subsequently practice there. This commenter requested that HCFA redesignate certain urban MSAs as rural for residency training purposes. One commenter suggested that the designation of programs in underserved areas receiving special consideration might better be phrased as ``programs whose graduates serve underserved areas,'' in order to be consistent with the purpose of this language. Many commenters stated that Congress' intent that special consideration be given to facilities that meet the needs of underserved rural areas was meant to include entire States that have low ``per population'' ratios of both physicians and residents. This commenter suggested that this special rule could be limited to the five States with lowest physician to population ratios. One commenter stated that without an exception, the FTE cap could have a ``chilling'' effect on urban hospitals sending residents to rural settings. This commenter stated that there have been several recent expansions in family practice reside