Fiscal Year 1999 Medicare PPS Inpatient Final Rule: Changes
Affecting Residents Training in Nonhospital Sites and Other
Provisions of Interest to Teaching Institutions
AAMC Summary and Analysis
On July 31, 1998, the Health Care Financing Administration
(HCFA) published its final rule containing changes to the
Medicare hospital inpatient prospective payment system (PPS)
and the PPS payment update for Federal fiscal year (FY) 1999.
[Medicare Program; Changes to the Hospital Inpatient Prospective
Payment Systems and Fiscal Year 1999 Rates; Final Rule. 63
Fed. Reg. 40,954 (July 31, 1998.] Two of the provisions in
the final rule relate to Medicare graduate medical education
(GME) payment policies:
- A change in the criteria that hospitals must meet to receive
direct graduate medical education (DGME) and indirect medical
education (IME) payments for residents training in nonhospital
sites, and
- A new provision to permit certain nonhospital providers
to receive Medicare payments for their direct teaching costs.
NOTE: Both of these changes are effective January 1, 1999.
In addition, the final rule contains several other provisions
that will affect payments to teaching hospitals that are effective
October 1, 1998. These include the FY 1999 PPS payment update,
issues related to the hospital wage index, and a change in
the definition of transfers for certain high volume diagnosis-related
groups (DRGs).
These changes were initially published as a proposed rule.
[63 Fed. Reg. 25576 (May 8, 1998).] The AAMC and others submitted
comments suggesting modifications to the proposed rule, but
the final rule contains very few changes from what was initially
proposed.
I. Redefining "All or Substantially Sll" Resident
Training Costs in Nonhospital Settings
July 31, 1998 Final Rule Highlights:
Definition of "all or substantially all" resident
training costs in nonhospital settings is changed to require
hospitals seeking teaching payments to pay for residents'
travel and lodging expenses, where applicable, and physician
supervisory and teaching costs, in addition to residents'
salaries and benefits.
The revised definition of "all or substantially all"
resident training costs applies to both DGME and IME payments
for residents training in nonhospital sites.
This change is effective January 1, 1999.
Background
Prior to the Balanced Budget Act of 1997 (BBA), the Medicare
statute provided that a hospital may receive DGME payments
for residents training in nonhospital sites if the hospital
incurs "all or substantially all" the training costs.
The BBA broadened this provision to include IME payments,
so long as the hospital's IME resident limit is not exceeded.
Neither the law nor the Medicare regulations define "nonhospital
sites," but the regulations indicate examples of such
sites to include freestanding clinics, nursing homes, and
physicians' offices (see 42 C.F.R. 413.86(f)(iii)).
In addition, neither the Medicare statute nor the BBA defines
what constitutes "all or substantially all" resident
training costs. Prior to the July 31 final rule, there also
had been no definition of this phrase set forth in the regulations;
HCFA had previously interpreted it to mean residents' salaries
and fringe benefits.
In order for a hospital to be reimbursed for residents training
in nonhospital sites, a written agreement was, and continues
to be, required between the hospital and nonhospital setting
stating that the resident is spending his or her time in patient
care activities. Prior to the change in the final rule, the
written agreement also had to indicate that the hospital was
responsible only for paying the residents' salaries and benefits.
July 31 Final Rule
The final rule establishes a regulatory definition for the
phrase "all or substantially all of the costs for the
training program in the nonhospital setting," as follows:
"residents' salaries and fringe benefits (including
travel and lodging where applicable) and the portion of the
cost of teaching physicians' salaries and fringe benefits
attributable to direct graduate medical education." 42
C.F.R. 413.86(b).
In conjunction with the definitional change, the final rule
also changes the information that must be included in the
written agreement between the hospital and nonhospital site.
Specifically, the final rule requires the written agreement
between the hospital and nonhospital site to indicate:
- the resident spends his or her time in patient care activities;
- the hospital is incurring the cost of the resident's salary
and fringe benefits while the resident is training in the
nonhospital site;
- the hospital is providing "reasonable compensation"
to the nonhospital site for supervisory teaching activities;
and
- how much compensation the hospital is providing to the
nonhospital site for supervisory teaching activities. 42
C.F.R. 413.86(f)(4).
These changes in the final rule are applicable to both IME
and DGME payments for all nonhospital sites for which a hospital
seeks teaching payments. For IME payments, they would take
effect with discharges on or after January 1, 1999. For DGME
payments, they would apply to the portions of hospital cost
reporting periods occurring on or after the same date--January
1, 1999.
Analysis--The final rule greatly expands the definition
of "all or substantially all" resident training
costs. In response to comments from the AAMC and others that
this provision was overly burdensome, HCFA modified the documentation
requirements for the written agreement from what was specified
in the proposed rule. The proposed rule had required the agreement
to state that the hospital was incurring "all or substantially
all" of the direct GME costs (including supervisory costs)
as well as indicate how much time the teaching physician spends
teaching residents. The final rule omitted the physician time
requirement and replaced the language about incurring "all
or substantially all costs" with a statement that the
hospital must provide "reasonable compensation"
to the nonhospital site for supervisory costs.
The regulations do not define the phrase "reasonable
compensation." The preamble to the regulation provides
some guidance, but there is still ambiguity. For example,
one section of the preamble states:
"The written agreement must indicate that the hospital
is incurring the cost of the resident salaries and providing
compensation for supervisory teaching costs. The agreement
must also specify the amounts paid to the nonhospital site.
These agreements and amounts paid by the hospital to the nonhospital
site may be the product of negotiation between the hospital
and nonhospital site. The hospital does not have to report
the nonhospital site's GME costs. We anticipate that in the
course of any negotiation between the hospital and nonhospital
site, the nonhospital site may need to identify its training
costs. However, this is a matter between the hospital and
nonhospital." 63 Fed. Reg. at 40,993.
In response to the AAMC's comment that, in many situations,
physicians volunteer their time to supervise residents, the
preamble states:
"for purposes of satisfying the requirement of a written
agreement, the written agreement between a hospital and nonhospital
site may specify that there is no payment to the clinic for
supervisory activities because the clinic does not have these
costs." 63 Fed. Reg. at 40,996.
In response to comments that physicians may be remunerated
in a variety of ways for supervisory activities, including
"in kind" compensation such as continuing education,
HCFA says:
"We recognize that there could be a variety of financial
arrangements between hospitals and nonhospital sites with
regard to training. The hospital and nonhospital site can
take into account those types of arrangements in negotiating
an agreement." 63 Fed. Reg. at 40,993.
Even with the change in the regulatory language and the guidance
provided in the preamble, a number of questions remain. For
example:
- If supervisory physicians are compensated through "in
kind" arrangements, how do they document these arrangements?
In addition, must they determine a value for these arrangements
in order to meet the requirement that the supervisory compensation
amount be included in the written agreement?
- Will the supervisory payment negotiated between the hospital
and nonhospital site be deemed "reasonable compensation"
regardless of the amount?
- How should the agreement be structured if the medical
school incurs the supervisory costs?
- What impact will this change have, if any, on the exchange
of resources between related parties?
On a related topic, the AAMC had commented that the proposal
to require hospitals to incur residents' travel and lodging
costs "where applicable" was unclear. HCFA responded
in the preamble that the written agreement must indicate that
hospitals are responsible for these costs in those situations
where the nonhospital provider would have otherwise incurred
them. The
requirement to include this in the written agreement, however,
was not included in the regulatory language. In addition,
the preamble states that if the hospital has an agreement
with an FQHC or RHC that states the hospital will incur "all
or substantially all" the resident training costs, the
written agreement must contain an acknowledgment that the
FQHC or RHC will report its GME costs on its Medicare cost
report in a nonreimbursable GME cost center. But, again, this
was not included in the regulatory language pertaining to
the contents of the written agreement.
The AAMC is attempting to gain clarification on these issues
with HCFA, and we will distribute any information we obtain.
It would be extremely helpful if you would communicate to
us any concerns you have about complying with these new requirements,
including whether and how they will affect your relationships
with ambulatory sites where residents currently train.
Remember: Hospitals must modify any agreements they currently
have with nonhospital sites by January 1, 1999.
II. Direct Teaching Payments to Nonhospital Providers
July 31, 1998 Final Rule Highlights:
Only Federally Qualified Health Centers (FQHCs), Rural Health
Centers (RHCs), and Medicare+Choice organizations are considered
"qualified nonhospital providers" that are eligible
to receive direct teaching payments from Medicare.
To receive payments, the nonhospital provider must incur
"all or substantially all" of the resident training
costs, the same standard that is applicable to hospitals.
Direct teaching payments will be made either to the hospital
or the qualified nonhospital provider, but not both.
Like its payments to hospitals, Medicare will only pay its
share of the nonhospital providers's direct GME costs.
This provision is effective January 1, 1999.
Background
The BBA includes a provision permitting, but not requiring,
the Secretary of Health and Human Services to make Medicare
payments directly to "qualified nonhospital providers"
who incur direct teaching costs in the operation of an approved
medical residency training program (indirect costs are not
included in the provision). Prior to this final rule, only
hospitals could receive Medicare teaching payments for residents
training in nonhospital sites.
The BBA states that the definition of a qualified nonhospital
provider must include Federally Qualified Health Centers (FQHCs),
Rural Health Centers (RHCs), Medicare+Choice organizations
and "other such entities as the Secretary deems to be
appropriate."
July 31 Final Rule
The final rule designates the following providers as "qualified
nonhospital providers" that are eligible to receive direct
teaching payments: FQHCs, RHCs, and Medicare+Choice organizations.
For the present time, no other nonhospital entities may receive
Medicare direct teaching payments. HCFA will make these payments
effective for portions of cost reporting periods occurring
on or after January 1, 1999. The payments will be made only
if the nonhospital provider incurs "all or substantially
all" of the costs of the training program in the nonhospital
setting. The definition of "all or substantially all"
is the same as used for determining when a hospital is eligible
for payment.
Under the regulations, Medicare+Choice providers are eligible
to receive payments only for costs associated with the time
that residents spend in nonhospital provider settings, such
as freestanding clinics, nursing homes, and physicians' offices.
Like hospitals, the Medicare+Choice organization must have
a written agreement with the nonhospital site indicating that
the Medicare+Choice organization is incurring the costs of
the residents' salaries and fringe benefits and is providing
"reasonable compensation to the nonhospital site for
teaching activities." [42 C.F.R. 413.85(h)(2)(iii).]
Analysis--Medicare will make direct teaching payments
to either the hospital or the qualified nonhospital provider,
but not both entities. If the hospital incurs "all or
substantially all" of the training costs, the hospital
will receive both the direct and indirect payments associated
with the residents training in nonhospital sites. If the nonhospital
site incurs "all or substantially all" of these
costs, it will receive payment for its direct teaching costs
only.
If they meet the "all or substantially all" standard,
Medicare+Choice organizations will be paid for their direct
training costs but only for residency training programs in
nonhospital sites, including freestanding clinics, nursing
homes, and physicians' offices in connection with approved
programs. Reimbursement for training that occurs in the hospital
would continue to be made to the hospital, regardless of the
entity that incurs those costs. For reasons that remain puzzling,
the regulations stipulate that the written agreement between
a Medicare+Choice organization and a nonhospital site, unlike
that involving hospitals, does not have to document the compensation
amount for supervisory teaching services.
HCFA decided not to make other types of nonhospital sites
eligible for these payments, although the preamble states
that HCFA may expand the types of eligible providers after
it has gained sufficient experience in making these types
of payments.
Direct Teaching Costs that Will be Reimbursable
The types of direct costs that would be reimbursable for
nonhospital providers mirror what is reimbursable under direct
GME payments for hospitals. HCFA noted that direct costs do
not include decreases in productivity and/or increases in
intensity of treatment patterns due to having a residency
training program. In addition, to be reimbursable, the costs
must be incurred in the course of training that is related
to the delivery of patient care services.
The regulations differ somewhat on what direct costs are
reimbursable depending upon whether the nonhospital site is
an FQHC or RHC, or a Medicare+Choice organization:
A. FQHCs and RHCs (42 C.F.R. 405.2468(f)(6))
Three types of direct costs are reimbursable:
1. Residents' salaries and fringe benefits (including travel
and lodging expenses where applicable)
2. The portion of teaching physician salaries and fringe
benefits related to the time spent in teaching and supervising
residents.
-- These costs would include time spent developing in resident
schedules and evaluating residents.
-- These costs would not include: teaching physician's time
spent treating patients which results in billable services;
activities relating to the education of other health professionals;
administrative and supervisory services unrelated to approved
educational activities; and research and other medical school
activities that are not related to patient care in the nonhospital
setting.
3. Facility overhead costs that are allocated to direct GME.
-- These costs include only those that are allocable to direct
GME and that are not incurred in patient care. For example,
a teaching physician's office costs allocated to GME, or a
conference room dedicated specifically for resident training,
would be considered direct teaching costs. However, new patient
care rooms would not be considered direct GME costs.
B. Medicare+Choice Organizations (42 C.F.R. 413.85(h)(3))
1. Residents' salaries and fringe benefits (including related
travel and lodging expenses where applicable)
2. "Reasonable compensation to the nonhospital site
for teaching activities related to the training of medical
residents."
-- The proposed rule had initially indicated that Medicare
would reimburse Medicare+Choice organizations their direct
costs associated with residents' salaries and fringe benefits,
as well as supervisory costs, but not associated GME overhead
costs. In response to comments, HCFA agreed to change the
regulations so that Medicare will allow other direct costs
that the Medicare+Choice organization can document relate
to a training program.
Analysis--It is important to remember that, hospital
pursuant to the BBA, qualified nonhospital providers may receive
teaching payments associated only with their direct cost;
indirect costs are not reimbursable. Moreover, the phrase
"reasonable compensation to the nonhospital site for
activities related to the training program," which is
used in defining costs eligible for reimbursement to Medicare+Choice
organizations, remains vague.
Payment Methodologies
Payments to nonhospital providers would reflect an amount
associated with the nonhospital provider's reimbursable direct
costs and Medicare's share of those costs.
HCFA proposes somewhat different payment policies, depending
upon whether the nonhospital provider is an FQHC or RHC, or
a Medicare+Choice Organization.
A. FQHCs and RHCs
Payment Amount--Cost-based reimbursement for resident
and supervisory costs as well as GME overhead costs. These
costs would be subject to Medicare's reasonable cost principles
(42 C.F.R. Part 413) and Reasonable Compensation Equivalency
Limits (42 C.F.R. 415.60 and 415.70).
Medicare Share--Ratio of Medicare visits to total
visits.
B. Medicare+Choice Organizations
Payment Amount--The lower of: allowable direct GME
costs per resident or the hospital national average per resident
amount.
Medicare Share--Ratio of total Medicare+Choice enrollees
to total enrollees in the organization.
Analysis-- Unlike hospitals (which receive a prospective
per resident payment amount based on their direct training
costs in 1984), nonhospital providers will be paid their allowable
direct costs essentially without limits.
Medicare+Choice organizations will receive the lower of their
own costs or the hospital national average per resident payment
amount. The national average amount was not published and
it is unclear how it will be calculated, including whether
it will be wage-adjusted. Given that the Medicare+Choice organization
can only claim costs related to training in nonhospital sites,
and that hospitals' per resident payment amounts reflect total
resident costs, including costs incurred in the inpatient
setting, it is difficult to imagine a situation in which the
national average per resident amount is lower than a Medicare+Choice
organization's actual direct costs associated with training
in the nonhospital site.
III. FY 1999 Payment Updates
The FY payment update to hospitals' PPS operating standardized
amounts is 0.5 percent. This figure reflects the requirement
in the BBA that payments be updated by an amount equal to
the increase in the hospital market basket (which is 2.4 percent
this year) minus 1.9 percentage points. The update for PPS-excluded
facilities (rehabilitation hospitals and units, psychiatric
hospitals and units, cancer hospitals, long-term care hospitals,
and childrens' hospitals) ranges from 0 to 2.4 percent, depending
on the facility's costs in relation to its cost limit. The
capital standard Federal rate will be $378.05.
Note: The nonlabor-related portion of the update for large
urban areas published in Table 1A of the Federal Register
was incorrect. The correct number is $1,131.38
IV. Cap on Capital IME Adjustment
For purposes of the capital IME adjustment, the final rule
places a limit of 1.5 on the ratio of a hospital's full time
equivalent residents to average daily census.
The preamble states that the cap was necessary because eight
hospitals had a ratio greater than 1.5, which translated into
a capital IME adjustment equivalent to 53 percent, which HCFA
thought was excessive.
V. Hospital Wage Index
The FY 1999 wage index is based on data submitted in FY 1995.
It includes total salaries and hours from short-term; acute
care hospitals; home office costs and hours; and direct patient
care contract labor costs and hours. In the final rule, HCFA
adopted two relatively minor changes in the wage index:
- Contract labor costs and hours for top management positions
(CEO/hospital administrator, chief operating officer, chief
financial officer and nursing administrator) were added,
and
- The fringe benefit category is replaced with the wage-related
costs associated with hospital and home office salaries.
These two changes will be reflected in the wage index for
the first time in FY 1999.
Of particular interest to teaching hospitals is a possible
change in the wage index that HCFA discussed in the preamble
to the final rule. HCFA noted that "as a conceptual matter,
we believe that physician Part A costs [for directly employed
and contract physicians] other than teaching physician
costs should be included in the wage index because these
costs are paid under the prospective payment system"
(emphasis added). In other words, there is concern that because
teaching hospitals are paid for these costs under the direct
graduate medical education payment, also including them in
the wage index represents a double payment. HCFA will instruct
fiscal intermediaries to separate teaching physician Part
A costs from hospitals in the FY 1996 wage data (the most
current data available). Following analysis of the data, HCFA
will decide whether to propose changes in the FY 2000 proposed
rule.
VI. Transfer Cases
The final rule also implements a provision of the Balanced
Budget Act under which any patient with a diagnosis from one
of 10 diagnosis-related groups (DRGs) who is discharged to
a post acute provider will be treated as a transfer case.
This change is effective beginning with discharges on or after
October 1, 1998. The result of this change is that hospitals
will be paid a graduated per diem rate for each day of the
patient's stay, not to exceed the prospective payment rate.
Outliers will be recognized for extraordinarily high cost
cases.
As required by law, HCFA selected the 10 DRGs because they
are high volume DRGs with a disproportionate percentage of
discharges to postacute care settings.
The 10 DRGs to which the revised transfer policy applies
are as follows:
- DRG 14 Specific Cerebrovascular Disorders Except Transient
Ischemic Attack
- DRG 113 Amputation for Circulatory System Disorders Excluding
Upper Limb and Toe
- DRG 209 Major Joint Limb Reattachment Procedures of Lower
Extremity
- DRG 210 Hip and Femur Procedures Except Major Joint Age
>17 with CC
- DRG 211 Hip and Femur Procedures Except Major Joint Age
>17 without CC
- DRG 236 Fractures of Hip and Pelvis
- DRG 263 Skin Graft and/or Debridement for Skin Ulcer or
Cellulitis with CC
- DRG 264 Skin Graft and/or Debridement for Skin Ulcer of
Cellulitis w/o CC
- DRG 429 Organic Disturbances and Mental Retardation
- DRG 483 Tracheostomy Except for Face, Mouth and Neck Diagnoses
HCFA has defined the following as a post acute care setting:
- a hospital or distinct part unit excluded from the prospective
payment system;
- skilled nursing facility; or
- home under a written plan of care for the provision of
home health services from a home health agency) if the services
begin within 3 days of discharge.
HCFA had proposed that swing beds be included in the definition
of a post acute care setting, but in the final rule decided
to exclude them due to a possible adverse impact on small
rural hospitals.
HCFA clarified that if a transfer occurs before the average
length of stay, the applicable IME or disproportionate share
factor is applied to the DRG revenue.
For more information contact:
Karen Fisher, Senior Associate Vice President
AAMC Health Care Affairs
kfisher@aamc.org
(202) 862-6140
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