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Fiscal Year 1999 Medicare Prospective Payment System: Proposed Rule

			AAMC Documents Issue Brief

AAMC Summary and Analysis

On May 8, 1998, the Health Care Financing Administration (HCFA) published its proposal for changes to the hospital inpatient prospective payment systems (PPS) and PPS payment updates for Federal fiscal year (FY) 1999, which begins on October 1, 1998.  See Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 1999 Rates; Proposed Rule.  63 Fed. Reg. 25,575 (May 8, 1998).  Two of the proposals relate directly to Medicare graduate medical education (GME) payment policies:  

• A change in the requirements for hospitals to receive direct graduate medical education (DGME) and indirect medical education (IME) payments for residents training in nonhospital sites, and
• Medicare payments to nonhospital providers for direct teaching costs.

In addition, the proposed rule contains several other provisions that will affect payments to teaching hospitals.  These include the FY 1999 PPS payment update, changes to the hospital wage index, and a proposal to revise the definition of transfers for certain high volume diagnosis- related groups (DRGs).

AAMC staff have been analyzing the May 8 proposed regulations and formulating issues that will be raised in the Association's comments.  If finalized, these proposals will have important implications for COTH members.  We urge members submit comments that include institution- specific concerns.  Additionally, please inform us of your concerns and comments so that we may incorporate them into the Association's comments.

If you choose to submit comments, send the original letter and three copies to:

Health Care Financing Administration
Department of Health and Human Services
Attention:  HCFA-1003-P
P.O. Box 7517
Baltimore, MD 21207-0517
(Note:  HCFA does not accept faxes)

If you elect to send a comment letter please be sure to forward a copy to the AAMC, Attention: Robert Dickler.

I. Redefining "All or Substantially All" Resident Training Costs

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 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.  HCFA has traditionally interpreted the definition as the residents' salaries and fringe benefits.

May 8 Proposal

HCFA proposes to broaden the definition of "all or substantially all" resident training costs to include:

• Residents salaries and fringe benefits (including travel and lodging expenses where applicable), and
• The proportion of the costs of teaching physician salaries and fringe benefits that is related to the time spent in teaching and supervising residents.

This revised definition would be applicable to both IME and DGME payments for all nonhospital sites for which a hospital seeks teaching payments.  For IME payments, it would take effect with discharges on or after January 1, 1999.  For DGME payments, it would apply to the portions of hospital cost reporting periods occurring on or after the same date--January 1, 1999.

Analysis--This proposal greatly expands the definition of incurring "all or substantially all" resident training costs from what currently is in the regulations.  If this provision becomes final, hospitals may have to incur additional costs if they want to receive IME and DGME payments for residents training in nonhospital sites.

HCFA's proposal raises a myriad of concerns.  For example, HCFA does not address how residents' travel and lodging costs and supervisory costs in nonhospital sites will be determined, nor how hospitals will obtain the necessary data.  Are supervisory costs based on a percentage of  physicians' salaries?  How will this percentage be determined?  How would the provisions apply in situations where a physician volunteers to supervise residents?  What would be the implications of such costs being covered through related-party agreements and/or comprehensive multi-purpose financial and shared services relationships?

The AAMC will be analyzing this proposal closely and formulating issues that will be raised in the Association's comments.  We are seeking input from the AAMC membership to help us identify issues and concerns as they relate to your institutions.  We also urge members to submit comments. This proposal was not mandated by the BBA or any other law; therefore, HCFA has the discretion as to whether to make any changes to its current policy.  Consequently, hospitals' perspectives on the proposal's feasibility and potential impacts may play an important role in HCFA's decisions in finalizing the proposal.  Please share your concerns and comments with either Robert Dickler or Karen Fisher, both of whom may be reached at (202) 828-0490.  

II. Direct Teaching Payments to Nonhospital Providers

Balanced Budget Act Provision

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).  Nonhospital providers currently do not receive any direct Medicare payments associated with training residents.

The BBA states that the definition of a qualified nonhospital provider must include Federally Qualified Health Centers (FQHCs), Rural Health Clinics (RHCs), Medicare+Choice organizations, but may also include other nonhospital providers the Secretary designates.  The BBA also states that DGME payments to hospitals must be reduced to the extent that payments are made to nonhospital providers for the same resident to avoid "double payments."

May 8 Proposal

HCFA proposes to begin making direct payments available to certain nonhospital providers 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 same standard that applies to hospitals.  If the hospital incurs "all or substantially all" of these costs, the hospital will continue to receive direct payments for training in nonhospital sites.  Medicare will not pay both the hospital and nonhospital provider for training occurring in nonhospital settings.  Like hospitals, payments to nonhospital providers will be based on Medicare's share of the direct costs.

HCFA is soliciting comments on possible methods for allocating the GME payments for training in the nonhospital site when neither the hospital nor the nonhospital provider incurs "all or substantially all" of the training costs.

Analysis--Under this proposal, only the entity that incurs all or substantially all of the training costs--either the hospital or the qualified nonhospital provider-- would receive direct GME payments.  If the nonhospital provider meets this standard, it would receive direct but not indirect payments and the hospital would forgo both direct and indirect payments.  Conversely, if the hospital incurs all or substantially all of the training costs, it could receive both direct and indirect payments.

It also should be noted that, like hospitals, qualified nonhospital providers would have to comply with the revised definition of "all or substantially all" of resident training costs if that provision is finalized.

Qualified Nonhospital Providers

Under the May 8 proposal, HCFA would make payments to the entities specifically mentioned in the BBA:

• FQHCs,
• RHCs, and
• Medicare+Choice Organizations.

HCFA decided not to include other providers in this proposal, although the proposed rule preamble states that HCFA may expand the types of eligible providers in the future, after it has gained more experience in making these types of payments.

Reimbursable Costs

The types of direct costs that would be reimbursable mirror what is reimbursable under direct GME payments for hospitals.  According to the preamble of the proposed rule, direct costs are "those costs that are incurred by the nonhospital site for the education activities of the approved program and that are the proximate result of training medical residents in the nonhospital site." 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.

Under the proposed rule, three types of direct costs would be reimbursable:

1.   Residents' salaries and fringe benefits (including related 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 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 costs that are allocable to direct GME and that are not used 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.

HCFA is soliciting comments on other elements that may constitute direct GME costs in a nonhospital site that "can be identified, reported, and verified as directly attributable to GME activities through the cost reporting process."

Direct Teaching Payment Determinations

Payments to nonhospital providers would reflect an amount associated with the nonhospital provider's reimbursable direct costs and Medicare's share of those costs.

Unlike hospitals (which receive a prospective per resident payment amount based on their direct training costs in 1984), HCFA proposes that direct payments to nonhospital providers would equal Medicare's share of their direct costs associated with training programs, subject to Medicare's allowable costs principles and reasonable compensation equivalency limits. HCFA states that it is proposing this policy rather than a fixed payment rate because of a lack of data on residency training costs in nonhospital sites.  It is soliciting comments on how it might derive a fixed payment methodology, including empirical data on training costs in nonhospital sites.  HCFA also states in the preamble to the proposed rule that ultimately it might be appropriate to pay nonhospital providers a national average per resident payment amount, based on the national average direct costs of training medical residents in nonhospital sites.

HCFA proposes somewhat different payment policies, depending upon whether the nonhospital provider is an FQHC or RHC, or a Medicare+Organization.

1.   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

 2.   Medicare+Choice Organizations  

Under the proposal, Medicare+Choice organizations could be paid directly for their direct training costs associated with any nonhospital patient care site, including freestanding clinics, nursing homes, and physicians' offices in connection with approved programs. Reimbursement for training that occurs in the hospital, however, would continue to be made to the hospital.

Payment Amount--Cost-based reimbursement for resident salaries and benefits associated with the time the resident spends in nonhospital settings, and supervisory physician costs, but not GME overhead costs.  Like FQHCs and RHCs, the reimbursement is 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).

• HCFA stated that it was proposing not to pay Medicare+Choice organizations for their GME overhead costs because they have no data on these costs, nor the extent to which these costs are incurred under contracts between managed care plans and physician groups or other ambulatory providers.  In addition, since Medicare+Choice organizations do not complete Medicare cost reports, there is no mechanism to review and audit  overhead costs associated only with GME, especially since Medicare pays plans a capitated amount. HCFA is requesting comments on methodologies for allocating and reporting GME overhead costs. These comments should include mechanisms for reviewing and auditing these costs.

Medicare Share--Ratio of total Medicare+Choice enrollees to total enrollees in the organization.

Analysis-- Paying nonhospital providers their direct costs essentially without limits  would represent a significant departure from the fixed per resident payment rates that are paid to hospitals.  HCFA's discussion regarding basing future payments for nonhospital providers on a national average per resident payment amount may raise significant issues since the current system for hospitals provides hospital-specific rates.

III. PPS Update

The proposed rule sets forth the FY 1999 update required by the BBA.  For hospitals, this is the increase in the hospital market basket less 1.9 percentage points.  Since the most recent estimate of the market basket for FY 1999 is 2.6 percent, the update for hospitals will be 0.7 percent for hospital inpatient operating prospective payment rates.

IV. Hospital Wage Index

Currently the hospital wage index includes salaries and wage-related costs for medical residents and certified registered nurse anesthetists (CRNAs) employed by certain hospitals.  Because Medicare pays for these costs outside the prospective payment system, HCFA believes that these costs should be removed from the wage index calculation.  However, HCFA has been unable to obtain accurate data on these costs.  The agency is proposing to delay any decision regarding the exclusion of resident and CRNA costs from the wage index until at least next year.  When FY 1996 data become available, they will be reviewed and HCFA expects to present its analysis and any proposals in next year's proposed rule on changes to the inpatient prospective payment system.  The AAMC will monitor this issue closely.

V. Transfers

Under the current regulations, when a transfer is made the final discharging hospital receives full payment from Medicare. Each transferring hospital is paid a per diem rate for each day of the stay, not to exceed the full DRG payment that would have been made had the patient been discharged without being transferred.  Transferring hospitals also may receive outlier payments that meet the cost outlier criteria.

As required by the Balanced Budget Act, the proposed rule would change the transfer payment policy for 10 high volume DRGs if, upon discharge, the patient is:

(1) admitted to a hospital or hospital unit that is not a prospective payment system hospital;

(2)  admitted to a skilled nursing facility; or

(3) within 3 days of discharge is provided services by a home health agency if the services relate to the condition or diagnosis for which the patient received inpatient hospital services.  HCFA is proposing that home health services would be considered related to the hospital discharge if the patient is discharged from the hospital with a written plan of care for the provision of services from a home health agency.

The 10 DRGs to which the revised transfer policy would apply are as follows: