Summary and Analysis of Fiscal Year 2002 Medicare Inpatient
Prospective Payment System Proposed Rule
On May 4, 2001, the Health Care Financing Administration
(HCFA) published its annual proposed rule containing changes
to the Medicare hospital inpatient prospective payment system
(PPS) and the PPS payment update for Federal fiscal year (FFY)
2002. See Medicare Program; Changes to the Hospital Inpatient
Prospective Payment Systems and Fiscal Year 2002 Rates; Proposed
Rule. 66 Fed. Reg. 22646. The proposed rule can be obtained
by accessing the AAMC's issue brief on this topic.
Among other items, the proposed rule includes the update
factor for inpatient PPS base payment rate, and changes related
to diagnosis-related groups (DRGs), Medicare disproportionate
share (DSH) payments, the wage index, and the outlier payment
threshold. Of particular importance to the academic medical
community, however, are the proposed changes related to Medicare
direct graduate medical education (DGME) payments and the
indirect medical education (IME) payment adjustment, as well
as a new methodology for recognizing the costs of cutting-edge
technologies.
The financial impact analysis included in the proposed rule
estimates that, in aggregate, average per case payments in
FFY 2002 for all hospitals will increase by 1.9 percent compared
to FFY 2000 payments. Teaching hospitals with 100 or more
residents will see average per case increases of only 1.3
percent, compared to 1.9 percent and 2.2 percent for other
teaching and nonteaching hospitals, respectively.
Comments on the proposed rule are due July 3, 2001.
I. PPS Payment Rate Update
The proposed rule would implement an increase to the standardized
payment amount for hospitals' per case payments under the
PPS of 2.55 percent in FFY 2002. This update reflects the
requirement in the Medicare, Medicaid, and SCHIP Benefits
Improvement and Protection Act of 2000 (BIPA) that the Medicare
payment update equal the increase in the hospital market basket
less 0.55 percentage points. As of the publication of the
proposed rule, the estimate of the market basket increase
was 3.1 percent.
Analysis-The actual update will reflect the most recent
estimate of the market basket increase at the time the final
rule is published in early August. The AAMC, along with other
associations, is seeking legislation to increase the update.
Two bills have been introduced, H.R. 1556 and S. 839, that
would set the payment update equal to the full market basket
increase for FFY 2002.
II. Changes Associated with Indirect Medical Education
(IME) Payments
A. Level of the IME Adjustment
The proposed rule increases the IME adjustment factor to
implement the BIPA requirement that the adjustment for FFY
2002 be equal to a 6.5 percentage payment increase for every
10 percent increase in the resident-to-bed ratio. Specifically,
for purposes of the IME calculation, the multiplier will be
1.6.
Analysis-The Balanced Budget Act of 1997 (BBA) had
mandated that the IME adjustment for FFY 2002 be set such
that the IME percentage add-on would equal 5.5 percent. BIPA
increased it to 6.5 percent-which maintains the 2001 IME level.
Two bills have been introduced, HR 1556 and S. 839, that would
permanently maintain Medicare IME payments at the 6.5 percent
level.
B. Clarification Regarding Intern and Resident-to-Bed
(IRB) Ratio Limit
In addition to mandating a resident limit for purposes of
IME payments, the BBA also imposed a cap on the intern and
resident-to-bed ratio (IRB). Specifically, the IRB may not
exceed the ratio calculated during the prior cost reporting
period. The proposed rule would add a provision to 42 C.F.R.
§412.105(a)(1) to state that the IRB in the current year
may not exceed the ratio in the prior cost reporting period
after accounting for the cap on the number of FTE residents
(italics indicates new wording).
The preamble to the proposed rule also reiterates HCFA's
rules regarding dental and podiatry residents. Under the BBA,
these residents are excluded from the resident limit; however,
they are included in the calculation of the IRB limit, as
well as in the three-year rolling average resident count.
Analysis-The new regulatory language is not new policy; it
is just clarification of HCFA's existing policy that resident
limits must be accounted for in the IRB ratio calculation.
On another issue, the proposed rule preamble notes that the
calculation of the IRB ratio for the prior cost reporting
year should not reflect the 3-year rolling average
resident count, but that the 3-year rolling average should
be reflected in the IRB calculation for the current year.
The interaction of the resident limits, 3-year rolling averages,
as well as other provisions on the computation of the IRB
ratio is becoming increasingly complex at the technical level.
To better understand these calculations, hospitals should
review pages 22688-89 of the proposed rule because they contain
several examples of IRB limit calculations. Providers with
dental and podiatry residents, in particular, should review
this section of the proposed rule preamble.
III. Changes to Direct Graduate Medical Education (DGME)
Payments
A. Increasing the DGME Per Resident Amount Floor (pages
22696-97)
The proposed rule would implement the BIPA requirement that
the floor for the "per resident amount (PRA)" for
purposes of determining Medicare DGME payments be increased
from 70 percent of a locality-adjusted national average to
85 percent.
Analysis-The BBRA had modified the methodology for
determining hospitals' PRAs, which form the basis for Medicare
DGME payments. The methodology centers around a "locality-adjusted"
national average PRA, and the calculation of a "floor"
PRA and a "ceiling" PRA. The locality-adjusted national
average is a national average per resident amount, adjusted
for individual areas by the geographic adjustment factor that
is used under the Medicare physician fee schedule ("locality
adjustment").
The BBRA had set the floor at 70 percent of a hospital's
locality-adjusted national average PRA-thus, any hospitals
with PRAs below this level would have those amounts raised
to the 70 percent level. The BBRA also mandated that hospitals
with PRAs above 140 percent of their locality-adjusted national
average ("ceiling") would have their PRA amounts
frozen for 2 years and receive reduced inflationary increases
for three subsequent years. BIPA increased the floor to 85
percent and made no changes to the ceiling amount.
The complete methodology regarding the calculation of PRA
floor and ceilings amounts was set forth in the 2001 Medicare
inpatient PPS rule (65 Fed. Reg. 47090 (August 1, 2000)).
To determine whether the BIPA provision applies, the individual
PRA amounts (both primary care and nonprimary care1
) of hospitals will be compared to 85 percent of their corresponding
locality-adjusted national average PRA. PRAs that are below
the 85 percent floor will have the PRA replaced by the floor
amount.
The preamble to the proposed rule points out that the BIPA
provision is applicable only for hospitals that have existing
PRAs in FFY 2002 or that establish PRAs in FFY 2002 (this
is how the BIPA legislation was written). If a nonteaching
hospital decides to become a teaching hospital after 2002,
the BIPA floor provision will not apply. Instead, its PRA
will be the lower of its actual costs in connection with GME
programs or an average of the PRAs of other teaching hospitals
located in the same area (see 42 C.F.R. §413.86(e)(5)).
B. Modifying the 3-Year Rolling Average Methodology (pages
22697-99)
The BBA mandates that the weighted resident count for purposes
of DGME payments is equal to the average of the weighted resident
count for the current year and the preceding two cost reporting
periods ("three-year rolling average"), subject
to the resident limit restrictions.
HCFA proposes to modify the methodology for computing the
three-year rolling average. The modification involves separate
computations for primary care resident counts and PRAs and
non-primary care resident counts and PRAs (see footnote 1,
below for an explanation as to the difference between these
two categories). The precise proposed DGME methodology is
attached as an appendix (PDF,
2 pages - 509KB) to this summary.
Analysis-According to the proposed rule preamble,
the payment impact of HCFA's proposed modification will vary
depending on a hospital's mix of primary care versus non-primary
care residents. In some instances, the proposed modification
would result in higher payments; in other situations, the
payments may be lower. Hospitals should review the revised
methodology carefully to assess the possible impact on your
institution and comment where appropriate.
IV. Changes Affecting Both IME and DGME Payments
A. Counting Resident Time Spent in Research (Pages
22699-22700)
The proposed rule preamble includes a discussion about HCFA's
policy regarding resident time spent performing research for
purposes of calculating the FTE resident count used for DGME
and IME payments. For DGME, HCFA's policy is that the time
residents spend performing research as part of an approved
residency program anywhere in the hospital complex may be
counted for direct GME payments. HCFA does not plan to make
any modifications to its current DGME regulations on this
issue.
By contrast, HCFA states that for purposes of counting resident
time for IME payments, only research time that is associated
with delivering patient care is countable. HCFA proposes to
modify 42 C.F.R. §412.105(f)(1)(iii) to add a new subsection
(b) that states that for IME purposes, "the time spent
by a resident in research that is not associated with the
treatment or diagnosis of a particular patient of the hospital
is not countable."
Analysis-HCFA notes that the proposed rule provisions
are merely reiterating long-standing HCFA policy. The rationale
behind HCFA's policy is that the IME adjustment is intended
to compensate teaching hospitals for their higher patient
care costs; therefore, HCFA believes that resident time associated
with this payment should involve patient care. By contrast,
DGME payments are intended to compensate for educational activities.
Consequently, to the extent that bench research is part of
the residency program requirements, HCFA would recognize resident
time spent in those rotations.
It also is worth noting that the proposed rule preamble reiterates
that in order for residency training to be counted for purposes
of DGME and IME payments, the training must be part of an
approved program. Residents who continue training after they
have completed the residency program requirements are not
countable for DGME or IME reimbursement, but rather the patient
care services provided by these residents should be reimbursed
as Part B services if all other licensure and regulatory requirements
are met.
B. Temporary Adjustments to DGME and IME Resident Limits
Associated With Program Closure
HCFA proposes that if a hospital that closes a residency
training program agrees to temporarily reduce its total resident
limit, another hospital(s) ("receiving hospital(s)")
may receive a temporary increase to its FTE limit to reflect
the residents added because of the closure of the former hospital's
residency training program. The temporary increase is only
available to the extent the hospital would exceed its resident
limit by training the displaced residents.
In order for the receiving hospital(s) to receive the temporary
adjustment, it must, no later than 60 days after it begins
training the additional residents, submit a request to its
fiscal intermediary (FI). This request must:
- Identify the residents who have come from another hospital's
closed program and have caused the hospital to exceed its
cap, and
- Specify the length of time the adjustment is needed.
In addition, the receiving hospital must give its FI a copy
of the resident cap reduction statement that was executed
by the hospital that closed the residency program. This statement
of the hospital that has closed the program must:
- Indicate that the hospital agrees to a temporary reduction
in its total resident limit to allow the receiving hospital
to receive a temporary increase in its limit,
- Identify the residents who were training at the time of
the program's closure,
- Identify the hospitals to which are the residents are
transferring once the program closes, and
- Specify the resident limit reduction for the applicable
program years.
Analysis-The AAMC had advocated for this provision.
It would provide some flexibility for hospitals that take
on and complete the training of residents from hospitals that
have closed a training program. This provision is modeled
somewhat after a provision in the FY 2000 inpatient PPS final
rule that permitted a temporary adjustment to hospitals that
take on and complete the training of residents from hospitals
that closed entirely. Page 22701 of the May 4 Federal Register
provides an example of how this provision might be implemented.
It is important to recognize that in order for the receiving
hospital to receive a temporary increase to its resident limit,
the other hospital must agree to temporarily reduce its resident
limit. Some hospitals may choose to close training programs
because they are currently over their resident limits and
are reducing resident programs to achieve a resident count
that is below their limit. Hospitals in these situations may
be reluctant to reduce their resident limit, even if it is
only for a temporary time period.
Hospitals, and in particular persons responsible for graduate
medical education programs, should review this provision carefully
and provide comments to HCFA as to whether the proposed provision
is feasible and/or whether there might be easier ways to accomplish
HCFA's objective.
V. Payments for New Technologies (pages 22667-72, and
22693-96)
BIPA requires that HCFA develop a process to a) more rapidly
incorporate new medical services and technologies into the
DRGs, and b) ensure adequate payment for new medical services
and technologies under Medicare.
A. Proposed Method for Expeditiously Incorporating New
Medical Services and Technologies into the Coding System
When a new technology is developed, it must be assigned a
code so that it can be subsequently recognized in the Medicare
payment system. The current coding system in use is the International
Classification of Diseases, Ninth Revision, Clinical Modification
(ICD-9-CM). The process of assigning a code and incorporating
it into the ICD-9-CM system can take as long as a year and
a half.
To help expedite this process, HCFA would a) shorten the
timeframe for implementing new ICD-9-CM procedure codes to
permit an earlier identification of new technologies, and
b) make more codes available to identify new technologies.
As a longer-term solution, HCFA is contemplating moving to
an ICD-10-PCS system to replace the ICD-9-CM system. Such
a change, however, would not occur without going through a
public rulemaking process. Consequently, HCFA believes any
such change, if it were to happen, would occur no earlier
than October, 2003.
Analysis-The ICD-9-CM coding system has been in existence
since the late 1970s. Thus, the premises for coding decisions
under that system are quite dated. In addition, the procedure
codes are made up of only 4 digits. As a result, there are
few new codes that are available for new technologies. After
much effort, HCFA has been able to identify a series of 100
codes that could be used for new technologies within the ICD-9-CM
system. Some observers, however, believe 100 codes are not
enough to accommodate all of the new technologies that might
require codes.
The ICD-10-PCS system is a possible longer-term solution.
This system provides greater code capacity. However, it could
involve significant systems changes for hospitals.
This issue is discussed comprehensively in the proposed rule
preamble, starting on page 22667.
B. Additional Payments for New Technologies (pages 22693-96)
BIPA requires HCFA to establish a mechanism to recognize
the costs of new services and technologies under the Medicare
inpatient PPS. Any additional payments must be budget neutral;
that is, they would be financed by reducing the DRG standardized
payment amount.
1. Identifying the Applicable New Technologies
In the proposed rule, HCFA sets forth a process for complying
with the BIPA requirements. First, in order for a technology
to be considered "new" and thus eligible for an
additional payment, it must meet the following conditions:
- Be a new, rather than existing, technology,
- Represent "an advance that substantially improves,
relative to technologies previously available, the diagnosis
or treatment of Medicare beneficiaries." (proposed
42 C.F.R. §412.87(b)(1)), and
- Result in standardized charges for a case that are at
least one standard deviation beyond the mean standardized
charge for all cases in the DRG to which the new technology
is assigned.
HCFA proposes to use a panel of experts to determine whether
the technology meets the "substantial improvement"
criteria.
2. Calculating the Additional Payment
HCFA believes the most appropriate mechanism for paying for
new technologies is to assign the new technology to the most
appropriate DRG and adjust payments for individual cases that
involve the new technology when the costs of those cases exceed
a threshold amount. That is, HCFA would not pay an additional
amount for every case that involves the new technology, but
only for those where the costs of the entire case exceed the
DRG amount by a certain amount.
Under HCFA's proposed methodology, for cases that utilize
a new technology and that have costs that exceed the DRG payment
amount, the hospital would receive an additional payment equal
to one-half of the amount by which the costs of the case exceed
the DRG payment, up to a ceiling of 50 percent of the cost
of the new technology.
HCFA provides the following example in the proposed rule
preamble (page 22695):
Cost of new technology = $3,000 DRG payment = $20,000 (includes
IME and DSH payments, if applicable)
A hospital submits three claims for cases involving the new
technology. The costs of these cases and the resultant additional
payments are as follows:
Case 1: Cost = $19,000; additional payment = $0 (the costs
of the case are below the DRG payment amount).
Case 2: Cost = $22,000
Additional Payment = $1,000 (50% of the difference between
the case costs and the DRG payment amount)
Case 3: Cost = $25,000 Additional Payment = $1,500 (additional
payment limited to 50 percent of the cost of the new technology,
which is $3,000).
As mentioned above, the additional payments will be budget
neutral. Therefore, HCFA proposes that each year in the annual
inpatient PPS proposed rule, it will announce the new technologies
that qualify for payment adjustments and the DRG(s) to which
they are assigned, along with the proposed reduction to the
standardized amounts necessary to meet the budget neutrality
requirement.
Analysis-Pursuant to a discussion with HCFA staff,
the DRG payment to which a case's costs will be compared includes
any IME or DSH payments that a hospital receives. This point
was not explicit in the proposed rule or preamble. According
to the proposed rule preamble, HCFA's philosophy is to preserve
some of the incentives and "averaging" concepts
under the DRG system. Thus, in the event that using a new
technology would actually result in a lowering of the overall
per case costs, HCFA believes it should not make an additional
payment for the new technology.
This issue is important to AAMC teaching hospitals because
these institutions often are harbingers for the use of new
and cutting-edge technologies. The costs of these new technologies
are not recognized in the DRG payment rates for several years
after their introduction. This is because HCFA will not adjust
the DRG relative weights until claims data indicate that the
cost of treating a case has increase.
The AAMC is concerned that the level of payment for new technologies
proposed by HCFA would not reflect the costs of the new technologies.
Under HCFA's example, hospitals that use expensive technologies
would still sustain payment losses, even though the BIPA legislation
requires that the additional payment "adequately reflects
the estimated average cost of the service or technology."
BIPA section 533. We do not believe that a methodology that
limits additional payments to 50 percent of a technology's
costs meets the legislative mandate that the payments equal
the "average cost" of the technology.
VI. Changes to the Disproportionate Share (DSH) Adjustment
(page 22690)
The proposed rule implements the BIPA requirement to reduce
the Medicare DSH payment that a hospital would otherwise receive
in FFY 2002 by 3 percent.
Analysis-The BIPA provision results in less DSH payment
reductions than originally set forth in the BBA. Under the
BBA, DSH payments would have been reduced 5 percent in FY
2002. The BBRA had reduced this amount to 4 percent in FY
2002. In FFY 2003 and beyond, there will no longer be any
DSH reductions.
Note that BIPA also lessened the DSH payment reduction for
FFY 2001 to 2 percent (under BBRA, the reduction was 3 percent).
This change will be set forth in the BIPA interim regulation
that will be published late spring/early summer.
VII. Changes to the Hospital Wage Index
A. General (pages 22673-74)
The FFY 2002 Medicare hospital wage index will be based on
data submitted by hospitals for cost reporting periods that
began in FFY 1998. The wage index will also reflect the third
year of a five-year phase-out of costs related to teaching
physicians, residents, and certified registered nurse anesthetists
(CRNAs); other physician costs, such as those associated with
hospital administrative functions, will be retained in the
wage index calculation. For FFY 2002, the wage index will
be based on a blend of 40 percent of an average hourly wage
including the teaching physician, resident, and CRNA costs,
and 60 percent of an average hourly wage excluding these costs.
Analysis-HCFA revised the FY 1998 Medicare cost reports
so that hospitals could separately identify teaching physician
costs. These data will be used to determine this portion of
the wage index calculation for FFY 2002. Prior to this year,
HCFA had conducted a survey to identify teaching physician
costs.
B. Collection of Occupational Mix Data (pages 22674-75)
BIPA requires HCFA to collect data every three years on the
occupational mix of short-term acute care hospital employees
for purposes of constructing an occupational mix adjustment
to the wage index that would be effective beginning in FFY
2005.
HCFA historically has not collected wage data by occupational
category. In the proposed rule preamble, HCFA proposes an
occupation data collection effort that is modeled after a
survey conducted by the Bureau of Labor Statistics under a
program entitled "Occupational Employment Statistics
(OES)." HCFA proposes to collect wage data for 11 different
categories of employees (for example, registered nurses, practical
nurses, pharmacists, and physical therapists). The wage data
would be collected according to the number of employees that
had hourly wage rates within specified wage ranges or intervals.
Since the FFY 2005 wage index will be based on wage data
from hospitals' 2001 cost reports, HCFA is planning to conduct
a special survey of hospitals to obtain these data so that
they coincide with hospitals' 2001 cost reports. More information
about this survey will be provided in the FY 2002 PPS final
rule, which will be published by August 1 of this year.
Analysis-The inclusion of an occupational mix adjustment
into the Medicare wage index could have important implications
for teaching hospitals. Many teaching hospitals tend to have
a more expensive "mix" of employees, which under
the current wage index methodology can result in a higher
wage index for the area where the hospital is located. The
inclusion of an occupational mix adjustment would essentially
only recognize differences across geographic areas in terms
of the price hospitals must pay for a particular labor category-the
fact that a hospital might have a larger quantity of higher-priced
employers (i.e., a richer "mix") would no longer
be reflected in the index. Consequently, it is possible that
wage indices for areas where teaching hospitals are located
could be reduced.
Hospitals should review HCFA's proposed data collection methodology
closely and comment accordingly. In particular, the administrative
burden of complying with HCFA's proposal, if any, should be
assessed and commented upon.
VIII. Proposed Change in the Outlier Payment Threshold
(pages 22726-77)
Under the proposed rule, HCFA plans to increase the fixed
loss cost threshold for outlier payments to be equal to a
case's DRG payment plus any IME and DSH payments, plus $21,000.
66 Fed. Reg. at 22727. In FFY 2001, the threshold was the
DRG payment plus any IME and DSH payments, plus $17,550. As
in past years, hospitals will receive 80 percent of the costs
that exceed the threshold levels.
Analysis-The FFY 2002 cost threshold is almost 20
percent higher than in FFY 2001-continuing a series of outlier
threshold increases that have occurred over the past several
years. A primary reason for the increase is due to higher
than expected outlier payments made in recent years. Outlier
payments are funded through a 5.1 percent reduction in the
PPS standardized payment amount. Consequently, HCFA sets the
outlier cost threshold at a level that it believes will result
in outlier payments that equal 5.1 percent of total DRG payments.
However, HCFA estimates that outlier payments represented
7.4 percent of total payments in FFY 2000, and 5.9 percent
for FFY 2001-amounts significantly more than the 5.1 percent
payment "pool." Thus, in order to reduce future
outlier payments to the projected 5.1 percent, HCFA believes
it must increase the outlier threshold.
IX. New Pancreas/Kidney Transplant DRGs
Among other changes to the DRG classifications, the proposed
rule creates 2 new DRGs associated with pancreas and pancreas/kidney
transplants: DRG 512 (Simultaneous Pancreas/Kidney Transplant),
and DRG 513 (Pancreas Transplants).
Analysis-The AAMC had advocated for new DRGs for these
transplant cases. The proposed rule also notes effective April
1, 2001, Medicare covers intestinal transplantation for the
purpose of restoring intestinal function in patients with
irreversible intestinal failure (Medicare Program Memorandum
No. AB-00-130). These cases are currently assigned to DRG
148 or 149 (Major Small and Large Bowel Procedures with and
without CC, respectively). HCFA will be monitoring the intestinal
transplantation cases to determine whether these DRGs are
sufficient, both clinically and in terms of resource use,
or whether a new DRG should be created.
1. Hospitals may have
different PRAs for primary care residents and nonprimary care
residents. This is because the PRAs for nonprimary care residents
were frozen in FFYs 1994 and 1995, while the primary care
PRAs received inflationary updates during that period.
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