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AAMC Summary and Analysis: Fiscal Year 2002 Medicare Inpatient PPS Final Rule

			Related Resources CMS Inpatient PPS Site AAMC Documents Final Rule AAMC Comment Letter on May 4, 2001 Proposed Rule

On August 1, 2001, the Centers for Medicare and Medicaid Services (CMS) (formerly HCFA) published in the Federal Register the final rule containing changes to the Medicare hospital inpatient prospective payment system (PPS) and the PPS payment update for Federal fiscal year (FFY) 2002. This rule finalizes proposed and interim final regulations published on May 4, 2001 (the FFY 2002 Inpatient PPS Proposed Rule) as well as August 1, 2000 (BBRA interim final regulation) and June 13, 2001 (BIPA interim final regulation), respectively. See Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Rates and Costs of Graduate Medical Education: Fiscal Year 2002 Rates; Provisions of the Balanced Budget Refinement Act of 1999; and Provisions of the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000. Final Rules. 66 Fed. Reg. 39828.

Among other items, the final rule includes the update factor for the inpatient PPS base payment rate, 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 changes related to Medicare direct graduate medical education (DGME) payments and the indirect medical education (IME) payment adjustment.

The May 4 proposed rule (published May 4, 2001) also contained a methodology for recognizing the costs of cutting-edge technologies. However, this topic is not addressed in the final rule; CMS decided to publish final regulations on this issue in a separate Federal Register (see 66 Fed. Reg. 46902 (Sept. 7, 2001)).

I. PPS Payment Rate Update (page 39940)

For FFY 2002, the inpatient standardized payment rate will be increased by 2.75 percent. 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 final rule, the estimate of the market basket increase was 3.3 percent.

Analysis-It is important to remember that the payment update does not necessarily mean that hospitals' overall inpatient payments will increase by that amount; in fact, they usually do not. This is because a number of other items in the final rule, including issues related to the wage index and outlier payments, for example, also affect providers' payments. The financial impacts analysis included in the final rule estimates that, in aggregate, average per case payments in FFY 2002 for all hospitals will increase 2.1 percent, compared to FFY 2001 payments. Teaching hospitals with 100 or more residents will see average per case increases of only 1.7 percent, compared to 2.0 percent and 2.4 percent for other teaching and nonteaching hospitals, respectively.

The AAMC, along with other associations, is seeking legislation to increase the FFY 2002 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.

II. Changes Associated with Indirect Medical Education (IME) Payments

A. Level of the IME Adjustment (page 39878)

The final rule sets forth 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 the Intern and Resident-to-Bed (IRB) Ratio Limit (page 39878 - 39882)

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 final rule added language to 42 C.F.R. §412.105(a)(1) to state that the IRB in the current year "may not exceed the ratio for the hospital's most recent prior cost reporting period after accounting for the cap on the number of allopathic and osteopathic full-time equivalent residents as described in paragraph (f)(1)(iv) of this section, and adding to the capped numerator any dental and podiatric full-time equivalent residents." (italics indicates new wording).

The final rule language differs from the proposed rule by specifically identifying allopathic and osteopathic residents and noting that dental and podiatry residents are included in the IRB cap calculation, even though they are excluded from the resident limits.

Analysis-The new regulatory language is not new policy; it is just clarification of CMS' existing policy that the allopathic and osteopathic resident limits and dental and podiatry residents 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, and other provisions, on the computation of the IRB ratio is becoming increasingly complex. To better understand these calculations, hospitals should review pages 39878-39882 of the August 1 Federal Register because they contain several examples of IRB limit calculations. Providers with dental and podiatry residents, in particular, should review this section of the final rule preamble.

III. Changes to Direct Graduate Medical Education (DGME) Payments

A. Increasing the DGME Per Resident Amount Floor (pages 39891-96)

The final rule implements 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 (FFYs 2001 and 2002)and receive reduced inflationary increases for three subsequent years; hospitals with PRAs between 70 percent and 140 percent of the national average were unaffected by the BBRA provisions. BIPA increased the floor to 85 percent effective in FFY 2002, 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 final rule (65 Fed. Reg. 47090 (August 1, 2000)). The foundation of the methodology is the 1997 national average PRA, which CMS has calculated to be $68,464. This amount is then updated to the midpoint of each hospital's cost reporting period beginning in FY 2001 using the relevant CPI-U inflation factor. These factors, published on page 39893 of the Final Rule, are reprinted below.

* Source: Forecast by Standard and Poor's DRI; Historical Data through August 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. There is no change in the provisions affecting the ceiling amount.

Analysis -- The preamble to the final 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 39893-96)

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.

The final rule modifies 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. In other words, hospitals training both primary care and nonprimary care residents will determine two separate rolling averages--one for primary care and one for nonprimary care residents when calculating DGME payments. The methodology is explained more fully on pages 39893-39895 of the August 1 Federal Register. The change is effective for cost reporting periods beginning on or after October 1, 2001.

Analysis-According to the final rule preamble, the payment impact of this change'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.

This modification does not affect the 3-year rolling average computations for IME payments because there are no distinctions in that payment methodology between primary care and non-primary care residents.

IV. Changes Affecting Both IME and DGME Payments

A. Counting Resident Time Spent in Research (Pages 39896-39899)

The final rule modifies the IME regulations at 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."

The final rule preamble states that this is not a new policy change, but rather only an incorporation of the Agency's "longstanding" policy into regulations. For DGME, CMS' 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. No modifications were made to the 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, and modified the IME regulations accordingly.

Analysis- CMS' rationale for its 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.

In response to comments, CMS rejected suggestions by the AAMC and others that the use of the intern and resident-to-bed ratio (IRB) is merely a proxy to identify patient care cost differences between teaching and non-teaching hospitals; thus, whether a resident is engaging in research or patient care within the hospital complex is irrelevant.

On a related issue, the final 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. Resident Limit Issues

1. Temporary Adjustments to DGME and IME Resident Limits Associated With Program Closures (pages 39899-39901)

The final rule provides 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. (42 C.F.R. §413.86(g)(8)).

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 the residents are transferring once the program closes, and
• Specify the resident limit reduction for the applicable program years.

In response to comments, the final rule was modified from what was proposed to provide that the additional residents that hospitals take on either because of a residency program closure, or the closure of another hospital, are excluded from the 3-year rolling average calculation for both IME and DGME payment purposes.

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. Page 39900 of the August 1 Federal Register provides an example of how this provision might be implemented. This regulation 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.

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.

It also is a helpful development that the additional residents are added into the DGME and IME resident count after the three-year rolling average calculation.² However, CMS decided not to make a comparable decision regarding the IRB cap (the IRB ratio cap is not adjusted to reflect the additional residents). This decision will result in IME payments that are lower than would otherwise be the case if the IRB ratio cap factored in the displaced residents. The AAMC will be pursuing this issue with CMS.

[NOTE: The Remaining Sections Under IV.B, were initially published in the August 1, 2000 BBRA Interim Final Rule and finalized in the August 1, 2001 PPS Final Rule]

2. Residents on Approved Leave of Absence During Resident Limit Base Year (page 39901)

The BBRA provided that hospitals' 1996 resident limits could be adjusted to reflect primary care residents that would have been included in the 1996 limit but for the fact that the individual had been on maternity, disability, or a similar approved leave of absence, up to a maximum of three residents.

The final rule implements this provision at 42 C.F.R. §412.105(f)(1)(xi) (IME) and 413.86(g)(9) (DGME). In order for the hospital to receive this adjustment, the leave of absence must have been approved by the residency program director, and within 6 months after August 1, 2000, the hospital must have submitted to its fiscal intermediary a request for an adjustment to its resident limit.

3. 30 Percent Upward Adjustment for Rural Hospitals' Resident Limits (page 39902)

The final rule implements the provision in the BBRA that provides for a 30 percent expansion of rural hospitals' resident limits. See 42 C.F.R. §412.105(f)(iv) (IME) and 413.86(g)(4) (DGME). Specifically, beginning April 1, 2000, the resident limits for rural hospitals will equal 130 percent of the number of unweighted residents the rural hospitals counted in their most recent cost reporting periods ending on or before December 31, 1996.

4. Resident Limit Adjustments for Urban Hospitals that Establish Separately Accredited Approved Medical Residency Programs in a Rural Area (pages 39902-08)

The BBRA provided that urban hospitals may receive an adjustment to their resident limits if they have "separately accredited approved medical residency training programs (or rural tracks)" or have "an accredited training program with an integrated rural track."

The final rule permits adjustments to resident limits for "1-2" rural track programs³ , and for other programs that are not "1-2" programs, but which include rural training portions. The legislation did not define "rural tracks" or an "integrated rural track." Consequently, these terms are defined synonymously in the regulations as:

"an approved medical residency training program established by an urban hospital in which residents train for a portion of the program at the urban hospital and then rotate for a portion of the program to a rural hospital(s) or a rural nonhospital site(s)." 42 C.F.R. §412.86(b)

The requirements for the resident limit adjustments vary for urban and rural hospitals, and also vary depending upon whether the rural training occurs at a hospital or nonhospital site:

A. Rural Track Programs with Residency Training at Urban and Rural Hospitals

Adjustment for the urban hospital--if the urban hospital rotates residents to a rural hospital(s) for at least two-thirds of the duration of the program, the urban hospital may include in its resident limit the time the rural track residents spend at the urban hospital. If the residents train at the rural hospital for less than two-thirds of the duration of the program, the resident limit for the urban hospital may not be adjusted.

Adjustment for the rural hospital(s)-The rural hospital's resident limit may be adjusted for the time residents spend training at the rural hospital, regardless of the length of time the resident trains at the urban hospital, if either a) the program is new (413.86(g)(12), or b) the inclusion of the residents is within 130 percent of the rural hospital's 1996 resident limit (413.86(g)(4).

B. Rural Training Programs with Residency Training at an Urban Hospital and Rural Nonhospital Site.

Adjustment for the Urban Hospital-- if the urban hospital rotates residents to the rural nonhospital site for at least two-thirds of the duration of the program, the urban hospital's resident limit may be adjusted to reflect the time the residents spend training at both the urban and rural nonhospital site if the urban hospital incurs "all or substantially all" of the training costs in the nonhospital site.⁴

If the residents train at the rural nonhospital site for less than two-thirds of the duration of the program, the resident limit for the urban hospital may not be adjusted for the resident time at the urban hospital. However, the urban hospital could have its resident limit adjusted for the resident time at the rural nonhospital site if it incurs "all or substantially all" of the nonhospital site training costs.

Adjustment for the Rural Hospital-Does not apply because scenario does not involve rural hospitals.

The rural track provisions apply to both existing and newly established rural track programs. However, the effective date in terms of Medicare payment is cost reporting periods beginning on or after April 1, 2000 for DGME and discharges occurring on or after April 1, 2000 for IME payments.

This provision is codified at 42 C.F.R. §412.105(f)(1)(x) (IME) and 42 C.F.R. §412.86(g)(11) (DGME)

Analysis-Congress enacted this provision to encourage additional residency training in rural areas. Resident limits for rural hospitals currently are adjusted for any new program established by the rural hospital. Prior to these regulations, however, urban hospitals could not have their limits adjusted if they started new programs. This provision would permit adjustments to the resident limits for urban hospitals for new programs, but only if they involve training in a rural area for at least two-thirds of the training period.

This is a complex area. Persons with specific interest in this provision should review the discussion in the final rule preamble at pages 39902-39908.

5. Increase in the Initial Residency Period for Child Neurology Residency Programs (page 39908-09)

The final rule provides that, effective July 1, 2000, the initial residency period (IRP) for residents enrolled in child neurology programs will be the period of board eligibility for pediatrics plus two years; in other words 5 years.

This change is codified at 42 C.F.R. §413.86(g)(1).

Analysis-The IRP determination is important because during that period residents are weighted at 1.0 FTE for purposes of Medicare DGME payments. Residents in approved programs that are beyond their IRP are weighted at 0.5 for DGME payments.

6. Resident Transfer When VA Residency Program Loses Accreditation (page 39908)

A non-Veterans Affairs (VA) hospital may receive a temporary adjustment to its resident limit to reflect residents who had previously trained at a VA hospital and were subsequently transferred to the non-VA hospital if: a) the residency program in which the affected residents had been training would have lost its accreditation if the residents continued to train at the VA hospital, and b) the residents were transferred from the VA hospital between January 1, 1997 and July 31, 1998.

This provision is codified at 42 C.F.R. §412.105(f)(1)(xii) (IME) and 42 C.F.R. §412.86(g)(10) (DGME)

Analysis-CMS is aware of only one hospital that is affected by this provision.

V. Nursing and Allied Health Education Payments (pages 39909-10)

[NOTE: This section was initially published in the August 1, 2000 BBRA Interim Final Rule and revised in the June 13, 2001 BIPA Interim Final Rule. It was finalized in the August 1, 2001 PPS Final Rule.]

The BBRA provided additional payments associated with Medicare+Choice enrollees for hospitals that receive Medicare pass-through payments associated with nursing and allied health professional training programs under section 1861(v)(1) of the Social Security Act. The additional payments will be financed through reductions to the Medicare+Choice DGME payments that teaching hospitals receive. BIPA amended this provision to provide that the calculation of the amount of nursing and allied health Medicare+Choice payments must specifically account for each hospital's Medicare Medicare+Choice utilization.

The methodology for distributing and financing the nursing and allied health Medicare+Choice payments is set forth at 42 C.F.R. §413.87. Under the rule, the total amount of Medicare+Choice nursing and allied payments distributed to all hospitals is determined by the ratio of total Medicare nursing and allied health payments under the Medicare fee-for-service program for the cost reporting periods ending 2 years prior to the current year to the total of all inpatient days from those same cost reporting periods. This ratio will then be multiplied by the total of all Medicare+Choice inpatient days for those same cost reporting periods. Pursuant to the BBRA, in any given year, the amount expended for these payments cannot exceed $60 million. The final rule does not give a payment figure for how much will be expended in 2001. Instead, CMS will publish a program memoranda in the near future that specificies the level.

At the individual hospital level, each hospital that operates a nursing and/or allied health training program will receive a share of the total amount, based on a complex formula that involves a hospital's level of nursing and allied health payments under the Medicare fee-for-service program, it's Medicare+Choice utilization, and the national amount available for these amounts. A more complete discussion of the formula, including an example, is provided on pages 32178-32180 of the June 13, 2001 BIPA interim final rule.

The Medicare+Choice nursing and allied health payments will be financed by an across- the-board percentage reduction in hospitals' Medicare+Choice DGME payments. The reduction level for CY 2001 payments has not yet been announced. CMS stated in the August 1, 2001 PPS final rule that it will publish this amount in a Medicare Program Memorandum that will be released shortly.

Analysis-Hospitals that operate approved nursing or allied health education programs have always been eligible for reasonable cost reimbursement ("pass-through payments') under the Medicare fee-for-service program. This provision would now provide them with additional payments--the rationale being that they currently do not receive any nursing and allied health payments associated with treating Medicare+Choice enrollees. As set forth under the BBRA, however, the provision did not link the level of additional payments with the volume of Medicare+Choice patients treated by the hospital. This was changed by BIPA.

Hospitals that operate nursing and/or allied health programs may see overall increases in GME payments to the extent the amount of Medicare+Choice nursing and allied health payments offset their corresponding reduction in Medicare+Choice DGME payments. Teaching hospitals that do not operate nursing and/or allied health programs will see their overall Medicare DGME payments reduced because of the mandated reduction.

VI. Payments for New Technologies (page 39829)

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. The May 4 proposed rule contained mechanisms to implement these requirements. The proposals, however were not addressed in the August 1, Final Rule. Instead, CMS published a separate Final Rule on this topic that was published September 7, 2001.

For a discussion of the proposals, see pages 22667-72, and 22693-96 of the proposed rule, 66 Fed. Reg. 22646 (May 4, 2001), and the AAMC's summary and analysis of the proposed rule.

VII. Changes to the Disproportionate Share (DSH) Adjustment (page 39882-39884)

The final rule implements the BIPA requirement to reduce the Medicare DSH payment that a hospital would otherwise receive in FFY 2002 by 3 percent.

The final rule also implements the provision in BIPA lowering the DSH patient percentage⁵ threshold that small urban and rural hospitals must meet to qualify for DSH payments to 15 percent and modifies Medicare DSH payments for these institutions.

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.

The threshold changes will result in more small urban and rural hospitals qualifying for Medicare DSH payments. This provision was funded with new money under BIPA.

VIII. Changes to the Hospital Wage Index

A. General (pages 39858-59)

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 were 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 39860-63)

BIPA requires CMS 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.

The FFY 2005 wage index will be based on wage data from hospitals' 2001 cost reports. Since these cost reports do not currently require information on occupational mix, CMS is going to conduct a special survey to collect occupational mix data that will coincide with hospitals' FY 2001 cost reports. The final rule preamble indicated that CMS will work with the hospital community to develop the survey instrument. CMS hopes to have the instrument completed by January 1, 2002 so that can hospitals can use it during 2002.

The final rule preamble also indicates that CMS has not yet settled on a methodology for using the occupational mix data in the calculation of the wage index.

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.

The AAMC will be participating, along with other hospital organizations, in meetings with CMS concerning the development of the survey instrument. If you, or someone in your organization, has special expertise in this area and/or suggestions regarding the survey instrument, please contact Karen Fisher, kfisher@aamc.org, AAMC Division of Health Care Affairs, at 202-862-6140.

IX. Proposed Change in the Outlier Payment Threshold (pages 39941 to 39942)

For FFY 2002, the fixed loss cost threshold for outlier payments will be equal to a case's DRG payment plus any IME and DSH payments, plus $21,025. As in past years, hospitals will receive 80 percent of the costs that exceed the threshold levels.

Analysis-The FFY 2002 cost threshold in the final rule is $25 higher than what was proposed and 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, CMS 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, CMS estimates that outlier payments represented 7.6 percent of total payments in FFY 2000, and 6.2 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, CMS believes it must increase the outlier threshold.

X. New Pancreas/Kidney Transplant DRGs (pages 39855-39858)

Among other changes to the DRG classifications, the final 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 final 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). CMS 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. [Back]

2 - If the additional residents were included in the rolling average calculations, the result would be that a hospital would not receive the full payment associated with them until the third year-if they were still in the training program then. [Back]

3 - The final rule preamble states that "1-2" rural track programs are identified as such by the Accreditation Council for Graduate Medical Education (ACGME) and are predominantly 3-year primary care residency programs in which residents train for 1 year at an urban hospital and are then rotated to a rural facility for the remaining two years. [Back]

4 - The "all or substantially all" requirement is consistent with current regulations regarding Medicare teaching payments for residents training at nonhospital sites. See 42 C.F.R. §413.86(f)(4). [Back]

5 - The DSH patient percentage reflects the sum of two ratios: Medicaid patient days as a share of total patient days, and patient days for Medicare beneficiaries who receive Supplemental Security Income payments as a percentage of total Medicare patient days. For additional information on the Medicare DSH adjustment, see the Medicare Payment Advisory Commission's March 2001 Report. [Back]