42 C.F.R. Subpart D—Basic Methodology for Determining Prospective Payment Federal Rates for Inpatient Operating Costs
Title 42 - Public Health
(a) Diagnosis-related groups. CMS establishs a classification of inpatient hospital discharges by Diagnosis-Related Groups (DRGs). (b) DRG weighting factors. CMS assigns, for each DRG, an appropriate weighting factor that reflects the estimated relative cost of hospital resources used with respect to discharges classified within that group compared to discharges classified within other groups. (c) Assignment of discharges to DRGs. CMS establishs a methodology for classifying specific hospital discharges within DRGs which ensures that each hospital discharge is appropriately assigned to a single DRG based on essential data abstracted from the inpatient bill for that discharge. (1) The classification of a particular discharge is based, as appropriate, on the patient's age, sex, principal diagnosis (that is, the diagnosis established after study to be chiefly responsible for causing the patient's admission to the hospital), secondary diagnoses, procedures performed, and discharge status. (2) Each discharge is assigned to only one DRG (related, except as provided in paragraph (c)(3) of this section, to the patient's principal diagnosis) regardless of the number of conditions treated or services furnished during the patient's stay. (3) When the discharge data submitted by a hospital show a surgical procedure unrelated to a patient's principal diagnosis, the bill is returned to the hospital for validation and reverification. CMS's DRG classification system provides a DRG, and an appropriate weighting factor, for the group of cases for which the unrelated diagnosis and procedure are confirmed. (d) Review of DRG assignment. (1) A hospital has 60 days after the date of the notice of the initial assignment of a discharge to a DRG to request a review of that assignment. The hospital may submit additional information as a part of its request. (2) The intermediary reviews the hospital's request and any additional information and decides whether a change in the DRG assignment is appropriate. If the intermediary decides that a higher-weighted DRG should be assigned, the case will be reviewed by the appropriate QIO as specified in §466.71(c)(2) of this chapter. (3) Following the 60-day period described in paragraph (d)(1) of this section, the hospital may not submit additional information with respect to the DRG assignment or otherwise revise its claim. (e) Revision of DRG classification and weighting factors. Beginning with discharges in fiscal year 1988, CMS adjusts the classifications and weighting factors established under paragraphs (a) and (b) of this section at least annually to reflect changes in treatment patterns, technology, and other factors that may change the relative use of hospital resources. [50 FR 12741, Mar. 29, 1985, as amended at 52 FR 33057, Sept. 1, 1987; 57 FR 39821, Sept. 1, 1992; 59 FR 45397, Sept. 1, 1994] (a) General rule. CMS determines national adjusted DRG prospective payment rates for operating costs, for each inpatient hospital discharge in fiscal year 1984 involving inpatient hospital services of a hospital in the United States subject to the prospective payment system under subpart B of this part, and determines regional adjusted DRG prospective payment rates for inpatient operating costs for such discharges in each region, for which payment may be made under Medicare Part A. Such rates are determined for hospitals located in urban or rural areas within the United States and within each such region, respectively, as described in paragraphs (b) through (k) of this section. (b) Determining allowable individual hospital inpatient operating costs. CMS determines the Medicare allowable operating costs per discharge of inpatient hospital services for each hospital in the data base for the most recent cost reporting period for which data are available. (c) Updating for fiscal year 1984. CMS updates each amount determined under paragraph (b) of this section for fiscal year 1984 by— (1) Updating for fiscal year 1983 by the estimated average rate of change of hospital costs industry-wide between the cost reporting period used under paragraph (b) of this section and fiscal year 1983; and (2) Projecting for fiscal year 1984 by the applicable percentage increase in the hospital market basket for fiscal year 1984. (d) Standardizing amounts. CMS standardizes the amount updated under paragraph (c) of this section for each hospital by— (1) Adjusting for area variations in case mix among hospitals; (2) Excluding an estimate of indirect medical education costs; (3) Adjusting for area variations in hospital wage levels; and (4) Adjusting for the effects of a higher cost of living for hospitals located in Alaska and Hawaii. (e) Computing urban and rural averages. CMS computes an average of the standardized amounts determined under paragraph (d) of this section for urban and rural hospitals in the United States and for urban and rural hospitals in each region. (f) Geographic classifications. (1) For purposes of paragraph (e) of this section, the following definitions apply: (i) The term region means one of the nine census divisions, comprising the fifty States and the District of Columbia, established by the Bureau of the Census for statistical and reporting purposes. (ii) The term urban area means— (A) A Metropolitan Statistical Area (MSA) or New England County Metropolitan Area (NECMA), as defined by the Executive Office of Management and Budget; or (B) The following New England counties, which are deemed to be parts of urban areas under section 601(g) of the Social Security Amendments of 1983 (Pub. L. 98–21, 42 U.S.C. 1395ww (note)): Litchfield County, Connecticut; York County, Maine; Sagadahoc County, Maine; Merrimack County, New Hampshire; and Newport County, Rhode Island. (iii) The term rural area means any area outside an urban area. (iv) The phrase hospital reclassified as rural means a hospital located in a county that was part of an MSA or NECMA, as defined by the Executive Office of Management and Budget, but is not part of an MSA or NECMA as a result of an Executive Office of Management and Budget redesignation occurring after April 20, 1983. (2) For hospitals within an MSA or NECMA that crosses census division boundaries, the following provisions apply: (i) The MSA or NECMA is deemed to belong to the census division in which most of the hospitals within the MSA or NECMA are located. (ii) If a hospital would receive a lower Federal rate because most of the hospitals are located in a census division with a lower Federal rate than the rate applicable to the census division in which the hospital is located, the payment rate will not be reduced for the hospital's cost reporting period beginning before October 1, 1984. (iii) If an equal number of hospitals within the MSA or NECMA are located in each census division, such hospitals are deemed to be in the census division with the higher Federal rate. (g) Adjusting the average standardized amounts. CMS adjusts each of the average standardized amounts determined under paragraphs (c), (d), and (e) of this section by factors representing CMS's estimates of the following: (1) The amount of payment that would have been made under Medicare Part B for nonphysician services to hospital inpatients during the first cost reporting period subject to prospective payment were it not for the fact that such services must be furnished either directly by hospitals or under arrangements in order for any Medicare payment to be made after September 30, 1983 (the effective date of §405.310(m) of this chapter). (2) The amount of FICA taxes that would be incurred during the first cost reporting period subject to the prospective payment system, by hospitals that had not incurred such taxes for any or all of their employees during the base period described in paragraph (c) of this section. (h) Reducing for value of outlier payments. CMS reduces each of the adjusted average standardized amounts determined under paragraphs (c) through (g) of this section by a proportion equal to the proportion (estimated by CMS) of the total amount of payments based on DRG prospective payment rates that are additional payments for outlier cases under subpart F of this part. (i) Maintaining budget neutrality. (1) CMS adjusts each of the reduced standardized amounts determined under paragraphs (c) through (h) of this section as required for fiscal year 1984 so that the estimated amount of aggregate payments made, excluding the hospital-specific portion (that is, the total of the Federal portion of transition payments, plus any adjustments and special treatment of certain classes of hospitals for Federal fiscal year 1984) is not greater or less than 25 percent of the payment amounts that would have been payable for the inpatient operating costs for those same hospitals for fiscal year 1984 under the Social Security Act as in effect on April 19, 1983. (2) The aggregate payments considered under this paragraph exclude payments for per case review by a utilization and quality control quality improvement organization, as allowed under section 1866(a)(1)(F) of the Act. (j) Computing Federal rates for inpatient operating costs for urban and rural hospitals in the United States and in each region. For each discharge classified within a DRG, CMS establishes a national prospective payment rate for inpatient operating costs and a regional prospective payment rate for inpatient operating costs for each region, as follows: (1) For hospitals located in an urban area in the United States or in that region respectively, the rate equals the product of— (i) The adjusted average standardized amount (computed under paragraphs (c) through (i) of this section) for hospitals located in an urban area in the United States or in that region; and (ii) The weighting factor determined under §412.60(b) for that DRG. (2) For hospitals located in a rural area in the United States or in that region respectively, the rate equals the product of— (i) The adjusted average standardized amount (computed under paragraphs (c) through (i) of this section) for hospitals located in a rural area in the United States or that region; and (ii) The weighting factor determined under §412.60(b) for that DRG. (k) Adjusting for different area wage levels. CMS adjusts the proportion (as estimated by CMS from time to time) of Federal rates computed under paragraph (j) of this section that are attributable to wages and labor-related costs, for area differences in hospital wage levels by a factor (established by CMS) reflecting the relative hospital wage level in the geographic area (that is, urban or rural area as determined under the provisions of paragraph (f) of this section) of the hospital compared to the national average hospital wage level. [50 FR 12741, Mar. 29, 1985, as amended at 51 FR 34793, Sept. 30, 1986; 53 FR 38527, Sept. 30, 1988; 57 FR 39821, Sept. 1, 1992; 58 FR 46337, Sept. 1, 1993] (a) General rule. (1) CMS determines a national adjusted prospective payment rate for inpatient operating costs for each inpatient hospital discharge in Federal fiscal years 1985 through 2004 involving inpatient hospital service of a hospital in the United States, subject to the PPS, and determines a regional adjusted PPS rate for operating costs for such discharges in each region for which payment may be made under Medicare Part A. (2) Each such rate is determined for hospitals located in urban or rural areas within the United States and within each such region, respectively, as described under paragraphs (b) through (u) of this section. (b) Geographic classifications. Effective for fiscal years 1985 through 2004, the following rules apply. (1) For purposes of this section, the definitions set forth in §412.62(f) apply, except that, effective January 1, 2000, a hospital reclassified as rural may mean a reclassification that results from a geographic redesignation as set forth in §412.62(f)(1)(iv) or a reclassification that results from an urban hospital applying for reclassification as rural as set forth in §412.103. (2) For hospitals within an MSA or NECMA that crosses census division boundaries, the following provisions apply: (i) The MSA or NECMA is deemed to belong to the census division in which most of the hospitals within the MSA or NECMA are located. (ii) A hospital that met the conditions specified in §412.62(f)(2)(ii) and therefore did not receive a lower Federal rate that would have applied for cost reporting periods beginning before October 1, 1984, receives the lower Federal rate applicable to all hospitals in the MSA or NECMA in which it is located effective with the hospital's cost reporting period that begins on or after October 1, 1984. (iii) The higher Federal rate is payable to all hospitals in the MSA or NECMA if an equal number of hospitals within the MSA or NECMA are located in each census division. (3) For discharges occurring on or after October 1, 1988, a hospital located in a rural county adjacent to one or more urban areas is deemed to be located in an urban area and receives the Federal payment amount for the urban area to which the greater number of workers in the county commute if the rural county would otherwise be considered part of an urban area, under the standards for designating MSAs or NECMAs if the commuting rates used in determining outlying counties were determined on the basis of the aggregate number of resident workers who commute to (and, if applicable under the standards, from) the central county or central counties of all adjacent MSAs or NECMAs. These EOMB standards are set forth in the notice of final standards for classification of MSAs published in the (4) For purposes of this section, any change in an MSA or NECMA designation is recognized on the October 1 following the effective date of the change. (5) For discharges occurring on or after October 1, 1988, for hospitals that consist of two or more separately located inpatient hospital facilities the national adjusted prospective payment rate is based on the geographic location of the hospital facility at which the discharge occurs. (c) Updating previous standardized amounts. (1) For discharges occurring in fiscal year 1985 through fiscal year 2003, CMS computes average standardized amounts for hospitals in urban areas and rural areas within the United States, and in urban areas and rural areas within each region. For discharges occurring in fiscal year 2004, CMS computes an average standardized amount for hospitals located in all areas. (2) Each of those amounts is equal to the respective adjusted average standardized amount computed for fiscal year 1984 under §412.62(g)— (i) Increased for fiscal year 1985 by the applicable percentage increase in the hospital market basket; (ii) Adjusted by the estimated amount of Medicare payment for nonphysician services furnished to hospital inpatients that would have been paid under Part B were it not for the fact that such services must be furnished either directly by hospitals or under arrangements; (iii) Reduced by a proportion equal to the proportion (estimated by CMS) of the total amount of prospective payments that are additional payment amounts attributable to outlier cases under subpart F of this part; and (iv) Adjusted for budget neutrality under paragraph (h) of this section. (3) For fiscal year 1986 and thereafter. CMS computes, for urban and rural hospitals in the United States and for urban and rural hospitals in each region, average standardized amount equal to the respective adjusted average standardized amounts computed for the previous fiscal year— (i) Increased by the applicable percentage increase determined under paragraphs (d) through (g) of this section; (ii) Adjusted by the estimated amount of Medicare payment for nonphysician services furnished to hospital inpatients that would have been paid under Part B were it not for the fact that such services must be furnished either directly by hospitals or under arrangements; and (iii) For discharges occurring on or after October 1, 1985 and before October 1, 1986, reduced by a proportion (estimated by CMS) of the amount of payments based on the total amount of prospective payments that are additional payment amounts attributable to outlier cases under subpart F of this part, and for discharges occurring on or after October 1, 1986, reduced by a proportion (estimated by CMS) of the amount of payments that, based on the total amount of prospective payments for urban hospitals and the total amount of prospective payments for rural hospitals, are additional payments attributable to outlier cases in such hospitals under subpart F of this part. (4) For fiscal years 1987 through 1990 CMS standardizes the average standardized amounts by excluding an estimate of the payments for hospitals that serve a disproportionate share of low-income patients. (5) For fiscal years 1987 through 2004, CMS standardizes the average standardized amounts by excluding an estimate of indirect medical education payments. (6) For fiscal years 1988 through 2003, CMS computes average standardized amounts for hospitals located in large urban areas, other urban areas, and rural areas. The term large urban area means an MSA with a population of more than 1,000,000 or an NECMA, with a population of more than 970,000 based on the most recent available population data published by the Census Bureau. For fiscal year 2004, CMS computes an average standardized amount for hospitals located in all areas. (d) Applicable percentage change for fiscal year 1986. (1) The applicable percentage change for fiscal year 1986 is— (i) For discharges occurring on or after October 1, 1985 and before May 1. 1986, zero percent; and (ii) For discharges occurring on or after May 1, 1986, one-half of one percent. (2) For purposes of determining the standardized amounts for discharges occurring on or after October 1, 1986, the applicable percentage increase for fiscal year 1986 is deemed to have been one-half of one percent. (e) Applicable percentage change for fiscal year 1987. The applicable percentage change for fiscal year 1987 is 1.15 percent. (f) Applicable percentage change for fiscal year 1988. (1) The applicable percentage change for fiscal year 1988 is— (i) For discharges occurring on or after October 1, 1987 and before November 21, 1987, zero percent; (ii) For discharges occurring on or after November 21, 1987 and before April 1, 1988, 2.7 percent; and (iii) For discharges occurring on or after April 1, 1988 and before October 1, 1988— (A) 3.0 percent for hospitals located in rural areas; (B) 1.5 percent for hospitals located in large urban areas; and (C) 1.0 percent for hospitals located in other urban areas. (2) For purposes of determining the standardized amounts for discharges occurring on or after October 1, 1988 (for Federal fiscal year 1989), the applicable percentage change for fiscal year 1988 is deemed to have been— (i) 3.0 percent for hospitals located in rural areas; (ii) 1.5 percent for hospitals located in large urban areas; and (iii) 1.0 percent for hospitals located in other urban areas. (g) Applicable percentage change for fiscal year 1989. The applicable percentage change for fiscal year 1989 is the percentage increase in the market basket index (as defined in §413.40(a)(3) of this chapter)— (1) Minus 1.5 percentage points for hospitals located in rural areas; (2) Minus 2.0 percentage points for hospitals in large urban areas; and (3) Minus 2.5 percentage points for hospitals in other urban areas. (h) Applicable percentage change for fiscal year 1990. (1) The applicable percentage change for fiscal year 1990 is— (i) For discharges occurring on or after October 1, 1989 and before January 1, 1990, 5.5 percent; and (ii) For discharges occurring on or after January 1, 1990 and before October 1, 1990— (A) 9.72 percent for hospitals located in rural areas; (B) 5.62 percent for hospitals located in large urban areas; and (C) 4.97 percent for hospitals located in other urban areas. (2) For purposes of determining the standardized amounts for discharges occurring on or after October 1, 1990, the applicable percentage change for fiscal year 1990 is deemed to have been the percentage change provided for in paragraph (h)(1)(ii) of this section. (i) Applicable percentage change for fiscal year 1991. (1) The applicable percentage change for fiscal year 1991 is— (i) For discharges occurring on or after October 1, 1990 and before October 21, 1990, 5.2 percent; (ii) For discharges occurring on or after October 21, 1990 and before January 1, 1991, 0.0 percent; and (iii) For discharges occurring on or after January 1, 1991 and before October 1, 1991— (A) 4.5 percent for hospitals located in rural areas; and (B) 3.2 percent for hospitals located in large urban areas and other urban areas. (2) For purposes of determining the standardized amounts for discharges occurring on or after October 1, 1991, the applicable percentage change for fiscal year 1991 is deemed to have been the percentage change provided for in paragraph (i)(1)(iii) of this section. (j) Applicable percentage change for fiscal year 1992. The applicable percentage change for fiscal year 1992 is the percentage increase in the market basket index for prospective payment hospitals (as defined in §413.40(a)(3) of this chapter)— (1) Minus 0.6 percentage points for hospitals located in rural areas. (2) Minus 1.6 percentage points for hospitals located in large urban areas and other urban areas. (k) Applicable percentage change for fiscal year 1993. The applicable percentage change for fiscal year 1993 is the percentage increase in the market basket index for prospective payment hospitals (as defined in §413.40(a)(3) of this chapter)— (1) Minus 0.55 percentage points for hospitals located in rural areas. (2) Minus 1.55 percentage points for hospitals located in large urban areas and other urban areas. (l) Applicable percentage change for fiscal year 1994. The applicable percentage change for fiscal year 1994 is the percentage increase in the market basket index for prospective payment hospitals (as defined in §413.40(a) of this chapter)— (1) Minus 1.0 percentage point for hospitals located in rural areas. (2) Minus 2.5 percentage points for hospitals located in large urban areas and other urban areas. (m) Applicable percentage change for fiscal year 1995. The applicable percentage change for fiscal year 1995 is the percentage increase in the market basket index for prospective payment hospitals (as defined in §413.40(a) of this chapter)— (1) Plus, for hospitals located in rural areas, the percentage increase necessary so that the average standardized amounts computed under paragraph (c) through (i) of this section are equal to the average standardized amounts for hospitals located in an urban area other than a large urban area. (2) Minus 2.5 percentage points for hospitals located in large urban areas and other urban areas. (n) Applicable percentage change for fiscal year 1996. The applicable percentage change for fiscal year 1996 is the percentage increase in the market basket index for prospective payment hospitals (as defined in §413.40(a) of this chapter) minus 2.0 percentage points for all areas. (o) Applicable percentage change for fiscal year 1997. The applicable percentage change for fiscal year 1997 is the percentage increase in the market basket index for prospective payment hospitals (as defined in §413.40(a) of this chapter) minus 0.5 percentage point for all areas. (p) Applicable percentage change for fiscal year 1998. The applicable percentage change for fiscal year 1998 is 0 percent for hospitals in all areas. (q) Applicable percentage change for fiscal year 1999. The applicable percentage change for fiscal year 1999 is the percentage increase in the market basket index for prospective payment hospitals (as defined in §413.40(a) of this subchapter) minus 1.9 percentage points for hospitals in all areas. (r) Applicable percentage change for fiscal year 2000. The applicable percentage change for fiscal year 2000 is the percentage increase in the market basket index for prospective payment hospitals (as defined in §413.40(a) of this chapter) minus 1.8 percentage points for hospitals in all areas. (s) Applicable percentage change for fiscal year 2001. The applicable percentage change for discharges occurring in fiscal year 2001 is the percentage increase in the market basket index for prospective payment hospitals (as defined in §413.40(a) of this subchapter) for hospitals in all areas as follows: (1) For discharges occurring on October 1, 2000 or before April 1, 2001 the percentage increase in the market basket index for prospective payment hospitals (as defined in §41340(a) of this subchapter) for sole community hospitals and the increase in the market basket index minus 1.1 percentage points for other hospitals in all areas; and (2) For discharges occurring on April 1, 2001 or before October 1, 2001 the percentage increase in the market basket index for prospective payment hospitals (as defined in §413.40(a) of this subchapter) for sole community hospitals and the increase in the market basket index plus 1.1 percentage points for other hospitals in all areas. (t) Applicable percentage change for fiscal years 2002 and 2003. The applicable percentage change for fiscal years 2002 and 2003 is the percentage increase in the market basket index for prospective payment hospitals (as defined in §413.40(a) of this subchapter) minus 0.55 percentage points for hospitals in all areas. (u) Applicable percentage change for fiscal year 2004. The applicable percentage change for fiscal year 2004 is the percentage increase in the market basket index for prospective payment hospitals (as defined in §413.40(a) of this subchapter) for hospitals in all areas. (v) Maintaining budget neutrality for fiscal year 1985. (1) For fiscal year 1985, CMS will adjust each of the reduced standardized amounts determined under paragraph (c) of this section as required for fiscal year 1985 to ensure that the estimated amount of aggregate payments made, excluding the hospital-specific portion (that is, the total of the Federal portion of transition payments, plus any adjustments and special treatment of certain classes of hospitals for fiscal year 1985) is not greater or less than 50 percent of the payment amounts that would have been payable for the inpatient operating costs for those same hospitals for fiscal year 1985 under the law as in effect on April 19, 1983. (2) The aggregate payments considered under this paragraph exclude payments for per case review by a utilization and quality control quality improvement organization, as allowed under section 1866(a)(1)(F) of the Act. (w) Computing Federal rates for inpatient operating costs for hospitals located in large urban and other areas. For each discharge classified within a DRG, CMS establishes for the fiscal year a national prospective payment rate and a regional prospective payment rate for inpatient operating costs, for each region, as follows: (1) For hospitals located in a large urban area in the United States or that region respectively, the rate equals the product of— (i) The adjusted average standardized amount (computed under paragraph (c) of this section) for the fiscal year for hospitals located in a large urban area in the United States or in that region; and (ii) The weighting factor determined under §412.60(b) for that DRG. (2) For hospitals located in an other area in the United States or that region respectively, the rate equals the product of— (i) The adjusted average standardized amount (computed under paragraph (c) of this section) for the fiscal year for hospitals located in an other area in the United States or that region; and (ii) The weighting factor (determined under §412.60(b)) for that DRG. (x) Adjusting for different area wage levels. (1) CMS adjusts the proportion (as estimated by CMS from time to time) of Federal rates for inpatient operating costs computed under paragraph (j) of this section that are attributable to wages and labor-related costs for area differences in hospital wage levels by a factor (established by CMS based on survey data) reflecting the relative level of hospital wages and wage-related costs in the geographic area (that is, urban or rural area as determined under the provisions of paragraph (b) of this section) of the hospital compared to the national average level of hospital wages and wage-related costs. The wage index is updated annually. (2)(i) CMS makes a midyear correction to the wage index for an area only if a hospital can show that— (A) The intermediary or CMS made an error in tabulating its data; and (B) The hospital could not have known about the error, or did not have the opportunity to correct the error, before the beginning of the Federal fiscal year. (ii) A midyear correction to the wage index is effective prospectively from the date the change is made to the wage index. (3) If a judicial decision reverses a CMS denial of a hospital's wage data revision request, CMS pays the hospital by applying a revised wage index that reflects the revised wage data as if CMS's decision had been favorable rather than unfavorable. [50 FR 12741, Mar. 29, 1985] Editorial Note: For
Link to an amendment published at 71 FR 48137, Aug. 18, 2006. (a) General rule. CMS determines a national adjusted prospective payment rate for inpatient operating costs for each inpatient hospital discharge in Federal fiscal year 2005 and subsequent fiscal years involving inpatient hospital services of a hospital in the United States subject to the prospective payment system for which payment may be made under Medicare Part A. (b) Geographic classifications. (1) For purposes of this section, the following definitions apply: (i) The term region means one of the 9 metropolitan divisions comprising the 50 States and the District of Columbia, established by the Executive Office of Management and Budget for statistical and reporting purposes. (ii) The term urban area means— (A) A Metropolitan Statistical Area, as defined by the Executive Office of Management and Budget; or (B) The following New England counties, which are deemed to be parts of urban areas under section 601(g) of the Social Security Amendments of 1983 (Public Law 98–21, 42 U.S.S. 1395ww (note)): Litchfield County, Connecticut; York County, Maine; Sagadahoc County, Maine; Merrimack County, New Hampshire; and Newport County, Rhode Island. (C) The term rural area means any area outside an urban area. (D) The phrase hospital reclassified as rural means a hospital located in a county that, in FY 2004, was part of an MSA, but was redesignated as rural after September 30, 2004, as a result of the most recent census data and implementation of the new MSA definitions announced by OMB on June 6, 2003. (2) For hospitals within an MSA that crosses census division boundaries, the MSA is deemed to belong to the census division in which most of the hospitals within the MSA are located. (3) For discharges occurring on or after October 1, 2004, a hospital located in a rural county adjacent to one or more urban areas is deemed to be located in an urban area and receives the Federal payment amount for the urban area to which the greater number of workers in the county commute if the rural county would otherwise be considered part of an urban area, under the standards for designating MSAs if the commuting rates used in determining outlying counties were determined on the basis of the aggregate number of resident workers who commute to (and, if applicable under the standards, from) the central county or central counties of all adjacent MSAs. These EOMB standards are set forth in the notice of final revised standards for classification of MSAs published in the (4) For purposes of this section, any change in an MSA designation is recognized on October 1 following the effective date of the change. Such a change in MSA designation may occur as a result of redesignation of an MSA by the Executive Office of Management and Budget. (5) For hospitals that consist of two or more separately located inpatient hospital facilities, the national adjusted prospective payment rate is based on the geographic location of the hospital facility at which the discharge occurred. (c) Computing the standardized amount. CMS computes an average standardized amount that is applicable to all hospitals located in all areas, updated by the applicable percentage increase specified in paragraph (d) of this section. (d) Applicable percentage change for fiscal year 2005 and for subsequent fiscal years. (1) Subject to the provisions of paragraph (d)(2) of this section, the applicable percentage change for fiscal year 2005 and for subsequent years for updating the standardized amount is the percentage increase in the market basket index for prospective payment hospitals (as defined in §413.40(a) of this subchapter) for hospitals in all areas. (2) For fiscal years 2005, 2006, and 2007, the applicable percentage change specified in paragraph (d)(1) of this section is reduced by 0.4 percentage points in the case of a “subsection (d) hospital,” as defined under section 1886(d)(1)(B) of the Act, that does not submit quality data on a quarterly basis to CMS, as specified by CMS. Any reduction of the percentage change will apply only to the fiscal year involved and will not be taken into account in computing the applicable percentage increase for a subsequent fiscal year. (e) Maintaining budget neutrality. (1) CMS makes an adjustment to the standardized amount to ensure that— (i) Changes to the DRG classifications and recalibrations of the DRG relative weights are made in a manner so that aggregate payments to hospitals are not affected; and (ii) The annual updates and adjustments to the wage index under paragraph (h) of this section are made in a manner that ensures that aggregate payments to hospitals are not affected. (2) CMS also makes an adjustment to the rates to ensure that aggregate payments after implementation of reclassifications under subpart L of this part are equal to the aggregate prospective payments that would have been made in the absence of these provisions. (f) Adjustment for outlier payments. CMS reduces the adjusted average standardized amount determined under paragraph (c) through (e) of this section by a proportion equal to the proportion (estimated by CMS) to the total amount of payments based on DRG prospective payment rates that are additional payments for outlier cases under subpart F of this part. (g) Computing Federal rates for inpatient operating costs for hospitals located in all areas. For each discharge classified within a DRG, CMS establishes for the fiscal year a national prospective payment rate for inpatient operating costs based on the standardized amount for the fiscal year and the weighting factor determined under §412.60(b) for that DRG. (h) Adjusting for different area wage levels. CMS adjusts the proportion of the Federal rate for inpatient operating costs that are attributable to wages and labor-related costs for area differences in hospital wage levels by a factor (established by CMS based on survey data) reflecting the relative level of hospital wages and wage-related costs in the geographic area (that is, urban or rural area as determined under the provisions of paragraph (b) of this section) of the hospital compared to the national average level of hospital wages and wage-related costs. The adjustment described in this paragraph (h) also takes into account the earnings and paid hours of employment by occupational category. (1) The wage index is updated annually. (2) CMS determines the proportion of the Federal rate that is attributable to wages and labor-related costs from time to time, employing a methodology that is described in the annual regulation updating the system of payment for inpatient hospital operating costs. (3) For discharges occurring on or after October 1, 2004, CMS employs 62 percent as the proportion of the rate that is adjusted for the relative level of hospital wages and wage-related costs, unless employing that percentage would result in lower payments for the hospital than employing the proportion determined under the methodology described in paragraph (h)(2) of this section. (4) For discharges on or after October 1, 2004 and before September 30, 2007, CMS establishes a minimum wage index for each all-urban State, as defined in paragraph (h)(5) of this section. This minimum wage index value is computed using the following methodology: (i) CMS computes the ratio of the lowest-to-highest wage index for each all-urban State; (ii) CMS computes the average of the ratios of the lowest-to-highest wage indexes of all the all-urban States; (iii) For each all-urban State, CMS determines the higher of the State's own lowest-to-highest rate (as determined under paragraph (h)(4)(i) of this section) or the average lowest-to-highest rate (as determined under paragraph (h)(4)(ii) of this section); (iv) For each State, CMS multiplies the rate determined under paragraph (h)(4)(iii) of this section by the highest wage index value in the State; (v) The product determined under paragraph (h)(4)(iv) of this section is the minimum wage index value for the State. (5) An all-urban State is a State with no rural areas, as defined in this section, or a State in which there are no hospitals classified as rural. A State with rural areas and with hospitals reclassified as rural under §412.103 in not an all-urban State. (i) Adjusting the wage index to account for commuting patterns of hospital workers. (1) General criteria. For discharges occurring on or after October 1, 2004, CMS adjusts the hospital wage index for hospitals located in qualifying counties to recognize the commuting patterns of hospital employees. A qualifying county is a county that meets all of the following criteria: (i) Hospital employees in the county commute to work in an MSA (or MSAs) with a wage index (or wage indices) higher than the wage index of the MSA or rural statewide area in which the county is located. (ii) At least 10 percent of the county's hospital employees commute to an MSA (or MSAs) with a higher wage index (or wage indices). (iii) The 3-year average hourly wage of the hospital(s) in the county equals or exceeds the 3-year average hourly wage of all hospitals in the MSA or rural statewide area in which the county is located. (2) Amount of adjustment. A hospital located in a county that meets the criteria under paragraphs (i)(1)(i) through (i)(1)(iii) of this section will receive an increase in its wage index that is equal to a weighted average of the difference between the prereclassified wage index of the MSA (or MSAs) with the higher wage index (or wage indices) and the prereclasssified wage index of the MSA or rural statewide area in which the qualifying county is located, weighted by the overall percentage of the hospital employees residing in the qualifying county who are employed in any MSA with a higher wage index. (3) Process for determining the adjustment. (i) CMS will use the most accurate data available, as determined by CMS, to determine the out-migration percentage for each county. (ii) CMS will include, in its annual proposed and final notices of updates to the hospital inpatient prospective payment system, a listing of qualifying counties and the hospitals that are eligible to receive the adjustment to their wage indexes for commuting hospital employees, and the wage index increase applicable to each qualifying county. (iii) Any wage index adjustment made under this paragraph (i) is effective for a period of 3 fiscal years, except that hospitals in a qualifying county may elect to waive the application of the wage index adjustment. A hospital may waive the application of the wage index adjustment by notifying CMS in writing within 45 days after the publication of the annual notice of proposed rulemaking for the hospital inpatient prospective payment system. (iv) A hospital in a qualifying county that receives a wage index adjustment under this paragraph (i) is not eligible for reclassification under subpart L of this part or section 1886(d)(8) of the Act. (j) Wage index assignment for rural referral centers for FY 2005. (1) CMS makes an exception to the wage index assignment of a rural referral center for FY 2005 if the rural referral center meets the following conditions: (i) The rural referral center was reclassified for FY 2004 by the MGCRB to another MSA, but, upon applying to the MGCRB for FY 2005, was found to be ineligible for reclassification because its average hourly wage was less than 84 percent (but greater than 82 percent) of the average hourly wage of the hospitals geographically located in the MSA to which the rural referral center applied for reclassification for FY 2005. (ii) The hospital may not qualify for any geographic reclassification under subpart L of this part, effective for discharges occurring on or after October 1, 2004. (2) CMS will assign a rural referral center that meets the conditions of paragraph (j)(1) of this section the wage index value of the MSA to which it was reclassified by the MGCRB in FY 2004. The wage index assignment is applicable for discharges occurring during the 3-year period beginning October 1, 2004 and ending September 30, 2007. (k) Midyear corrections to the wage index. (1) CMS makes a midyear correction to the wage index for an area only if a hospital can show that— (i) The intermediary or CMS made an error in tabulating its data; and (ii) The hospital could not have known about the error, or did not have the opportunity to correct the error, before the beginning of the Federal fiscal year. (2)(i) Except as provided in paragraph (k)(2)(ii) of this section, a midyear correction to the wage index is effective prospectively from the date the change is made to the wage index. (ii) Effective October 1, 2005, a change to the wage index may be made retroactively to the beginning of the Federal fiscal year, if, for the fiscal year in question, CMS determines all of the following— (A) The fiscal intermediary or CMS made an error in tabulating data used for the wage index calculation; (B) The hospital knew about the error in its wage data and requested the fiscal intermediary and CMS to correct the error both within the established schedule for requesting corrections to the wage data (which is at least before the beginning of the fiscal year for the applicable update to the hospital inpatient prospective payment system) and using the established process; and (C) CMS agreed before October 1 that the fiscal intermediary or CMS made an error in tabulating the hospital's wage data and the wage index should be corrected. (l) Judicial decision. If a judicial decision reverses a CMS denial of a hospital's wage data revision request, CMS pays the hospital by applying a revised wage index that reflects the revised wage data as if CMS's decision had been favorable rather than unfavorable. [69 FR 49242, Aug. 11, 2004, as amended at 70 FR 47485, Aug. 12, 2005]
Title 42: Public Health
PART 412—PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL SERVICES
Subpart D—Basic Methodology for Determining Prospective Payment Federal Rates for Inpatient Operating Costs
§ 412.60 DRG classification and weighting factors.
§ 412.62 Federal rates for inpatient operating costs for fiscal year 1984.
§ 412.63 Federal rates for inpatient operating costs for Federal fiscal years 1984 through 2004.
§ 412.64 Federal rates for inpatient operating costs for Federal fiscal year 2005 and subsequent fiscal years.
