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Proposed Rule2023-06968

Medicare Program; Inpatient Rehabilitation Facility Prospective Payment System for Federal Fiscal Year 2024 and Updates to the IRF Quality Reporting Program

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Published

April 7, 2023

Issuing agencies

Health and Human Services DepartmentCenters for Medicare & Medicaid Services

Abstract

This proposed rule proposes updates to the prospective payment rates for inpatient rehabilitation facilities (IRFs) for Federal fiscal year (FY) 2024. As required by statute, this proposed rule includes the proposed classification and weighting factors for the IRF prospective payment system's case-mix groups and a description of the methodologies and data used in computing the proposed prospective payment rates for FY 2024. It also proposes to rebase and revise the IRF market basket to reflect a 2021 base year. It also would modify the regulation regarding when IRF units can become excluded and paid under the IRF PPS. This proposed rule also includes updates for the IRF Quality Reporting Program (QRP).

Full Text

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[Federal Register Volume 88, Number 67 (Friday, April 7, 2023)]
[Proposed Rules]
[Pages 20950-21014]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-06968]

[[Page 20949]]

Vol. 88

Friday,

No. 67

April 7, 2023

Part II

Department of Health and Human Services

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Centers for Medicare & Medicaid Services

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42 CFR Part 412

Medicare Program; Inpatient Rehabilitation Facility Prospective Payment
System for Federal Fiscal Year 2024 and Updates to the IRF Quality
Reporting Program; Proposed Rule

Federal Register / Vol. 88 , No. 67 / Friday, April 7, 2023 /
Proposed Rules

[[Page 20950]]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412

[CMS-1781-P]
RIN 0938-AV04

Medicare Program; Inpatient Rehabilitation Facility Prospective
Payment System for Federal Fiscal Year 2024 and Updates to the IRF
Quality Reporting Program

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Proposed rule.

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SUMMARY: This proposed rule proposes updates to the prospective payment
rates for inpatient rehabilitation facilities (IRFs) for Federal fiscal
year (FY) 2024. As required by statute, this proposed rule includes the
proposed classification and weighting factors for the IRF prospective
payment system's case-mix groups and a description of the methodologies
and data used in computing the proposed prospective payment rates for
FY 2024. It also proposes to rebase and revise the IRF market basket to
reflect a 2021 base year. It also would modify the regulation regarding
when IRF units can become excluded and paid under the IRF PPS. This
proposed rule also includes updates for the IRF Quality Reporting
Program (QRP).

DATES: To be assured consideration, comments must be received at one of
the addresses provided below, no later than 5 p.m. on June 2, 2023.

ADDRESSES: In commenting, please refer to file code CMS-1781-P.
Comments, including mass comment submissions, must be submitted in
one of the following three ways (please choose only one of the ways
listed):
1. Electronically. You may submit electronic comments on this
regulation to <a href="http://www.regulations.gov">http://www.regulations.gov</a>. Follow the ``Submit a
comment'' instructions.
2. By regular mail. You may mail written comments to the following
address ONLY: Centers for Medicare & Medicaid Services, Department of
Health and Human Services, Attention: CMS-1781-P, P.O. Box 8016,
Baltimore, MD 21244-8016.
Please allow sufficient time for mailed comments to be received
before the close of the comment period.
3. By express or overnight mail. You may send written comments to
the following address ONLY: Centers for Medicare & Medicaid Services,
Department of Health and Human Services, Attention: CMS-1781-P, Mail
Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.
For information on viewing public comments, see the beginning of
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT:
Gwendolyn Johnson, (410) 786-6954, for general information.
Catie Cooksey, (410) 786-0179, for information about the IRF
payment policies and payment rates.
Kim Schwartz, (410) 786-2571, and Gwendolyn Johnson, (410) 786-
6954, for information about the IRF coverage policies.
Ariel Cress, (410) 786-8571, for information about the IRF quality
reporting program.

SUPPLEMENTARY INFORMATION:
Inspection of Public Comments: All comments received before the
close of the comment period are available for viewing by the public,
including any personally identifiable or confidential business
information that is included in a comment. We post all comments
received before the close of the comment period on the following
website as soon as possible after they have been received: <a href="http://www.regulations.gov">http://www.regulations.gov</a>. Follow the search instructions on that website to
view public comments. CMS will not post on <a href="http://Regulations.gov">Regulations.gov</a> public
comments that make threats to individuals or institutions or suggest
that the individual will take actions to harm the individual. CMS
continues to encourage individuals not to submit duplicative comments.
We will post acceptable comments from multiple unique commenters even
if the content is identical or nearly identical to other comments.

Availability of Certain Information Through the Internet on the CMS
Website

The IRF prospective payment system (IRF PPS) Addenda along with
other supporting documents and tables referenced in this proposed rule
are available through the internet on the CMS website at <a href="https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientRehabFacPPS">https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientRehabFacPPS</a>.
We note that prior to 2020, each rule or notice issued under the
IRF PPS has included a detailed reiteration of the various regulatory
provisions that have affected the IRF PPS over the years. That
discussion, along with detailed background information for various
other aspects of the IRF PPS, is now available on the CMS website at
<a href="https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientRehabFacPPS">https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientRehabFacPPS</a>.

I. Executive Summary

A. Purpose

This rulemaking proposes updates to the prospective payment rates
for IRFs for FY 2024 (that is, for discharges occurring on or after
October 1, 2023, and on or before September 30, 2024) as required under
section 1886(j)(3)(C) of the Social Security Act (the Act). As required
by section 1886(j)(5) of the Act, this proposed rule includes the
classification and weighting factors for the IRF PPS's case-mix groups
(CMGs) and a description of the methodologies and data used in
computing the prospective payment rates for FY 2024. It also proposes
to rebase and revise the IRF market basket to reflect a 2021 base year.
It also proposes to modify the regulation governing when an IRF unit
can be excluded and paid under the IRF PPS. This proposed rule includes
IRF QRP proposals for the FY 2025 IRF QRP and FY 2026 IRF QRP. This
proposed rule would add two new measures to the IRF QRP, remove three
measures from the IRF QRP, and modify one measure in the IRF QRP. This
proposed rule also proposes to begin public reporting of four measures.
In addition, this proposed rule includes an update on the Centers for
Medicare and Medicaid Services' (CMS') efforts to close the health
equity gap and requests information on principles CMS would use to
select and prioritize IRF QRP quality measures in future years.

B. Summary of Major Provisions

In this proposed rule, we use the methods described in the FY 2023
IRF PPS final rule (87 FR 47038) to update the prospective payment
rates for FY 2024 using updated FY 2022 IRF claims and the most recent
available IRF cost report data, which is FY 2021 IRF cost report data.
It also proposes to rebase and revise the IRF market basket to reflect
a 2021 base year. It also proposes to modify the regulation governing
when an IRF unit can be excluded and paid under the IRF PPS.
Beginning with the FY 2025 IRF QRP, we propose to modify the COVID-
19 Vaccination Coverage among Healthcare Personnel measure, adopt the
Discharge Function Score measure, and remove the Application of Percent
of Long-Term Care Hospital Patients with an Admission and Discharge
Functional Assessment and a Care Plan That Addresses Function measure,
the IRF Functional Outcome Measure: Change in Self-Care Score for
Medical Rehabilitation Patients (NQF #2633) and

[[Page 20951]]

the Functional Outcome Measure: Change in Mobility Score for Medical
Rehabilitation Patients (NQF #2634) measures. Beginning with the FY
2026 IRF QRP, we propose to adopt the COVID-19 Vaccine: Percent of
Patients/Residents Who Are Up to Date measure. This proposed rule also
proposes to begin public reporting of the Transfer of Health
Information to the Patient-Post-Acute Care (PAC) and Transfer of Health
Information to the Provider-PAC measures, the Discharge Function Score
measure, and the COVID-19 Vaccine: Percent of Patients/Residents Who
Are Up to Date measure. Finally, we are seeking input from interested
parties on principles for selecting and prioritizing IRF QRP quality
measures and concepts, and we provide an update on our continued
efforts to close the health equity gap.

C. Summary of Impact

Table 1--Cost and Benefit
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Provision description Transfers/costs
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FY 2024 IRF PPS payment rate The overall economic impact of this final
update. rule is an estimated $335 million in
increased payments from the Federal
Government to IRFs during FY 2024.
FY 2025 through FY 2026 IRF The overall economic impact of this final
QRP changes. rule is an estimated increase in cost to
IRFs of $31,412.56 beginning with the FY
2025 IRF QRP.
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II. Background

A. Statutory Basis and Scope for IRF PPS Provisions

Section 1886(j) of the Act provides for the implementation of a
per-discharge PPS for inpatient rehabilitation hospitals and inpatient
rehabilitation units of a hospital (collectively, hereinafter referred
to as IRFs). Payments under the IRF PPS encompass inpatient operating
and capital costs of furnishing covered rehabilitation services (that
is, routine, ancillary, and capital costs), but not direct graduate
medical education costs, costs of approved nursing and allied health
education activities, bad debts, and other services or items outside
the scope of the IRF PPS. A complete discussion of the IRF PPS
provisions appears in the original FY 2002 IRF PPS final rule (66 FR
41316) and the FY 2006 IRF PPS final rule (70 FR 47880) and we provided
a general description of the IRF PPS for FYs 2007 through 2019 in the
FY 2020 IRF PPS final rule (84 FR 39055 through 39057). A general
description of the IRF PPS for FYs 2020 through 2022, along with
detailed background information for various other aspects of the IRF
PPS, is now available on the CMS website at <a href="https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientRehabFacPPS">https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientRehabFacPPS</a>.
Under the IRF PPS from FY 2002 through FY 2005, the prospective
payment rates were computed across 100 distinct CMGs, as described in
the FY 2002 IRF PPS final rule (66 FR 41316). We constructed 95 CMGs
using rehabilitation impairment categories (RICs), functional status
(both motor and cognitive), and age (in some cases, cognitive status
and age may not be a factor in defining a CMG). In addition, we
constructed five special CMGs to account for very short stays and for
patients who expire in the IRF.
For each of the CMGs, we developed relative weighting factors to
account for a patient's clinical characteristics and expected resource
needs. Thus, the weighting factors accounted for the relative
difference in resource use across all CMGs. Within each CMG, we created
tiers based on the estimated effects that certain comorbidities would
have on resource use.
We established the Federal PPS rates using a standardized payment
conversion factor (formerly referred to as the budget-neutral
conversion factor). For a detailed discussion of the budget-neutral
conversion factor, please refer to our FY 2004 IRF PPS final rule (68
FR 45684 through 45685). In the FY 2006 IRF PPS final rule (70 FR
47880), we discussed in detail the methodology for determining the
standard payment conversion factor.
We applied the relative weighting factors to the standard payment
conversion factor to compute the unadjusted prospective payment rates
under the IRF PPS from FYs 2002 through 2005. Within the structure of
the payment system, we then made adjustments to account for interrupted
stays, transfers, short stays, and deaths. Finally, we applied the
applicable adjustments to account for geographic variations in wages
(wage index), the percentage of low-income patients, location in a
rural area (if applicable), and outlier payments (if applicable) to the
IRFs' unadjusted prospective payment rates.
For cost reporting periods that began on or after January 1, 2002,
and before October 1, 2002, we determined the final prospective payment
amounts using the transition methodology prescribed in section
1886(j)(1) of the Act. Under this provision, IRFs transitioning into
the PPS were paid a blend of the Federal IRF PPS rate and the payment
that the IRFs would have received had the IRF PPS not been implemented.
This provision also allowed IRFs to elect to bypass this blended
payment and immediately be paid 100 percent of the Federal IRF PPS
rate. The transition methodology expired as of cost reporting periods
beginning on or after October 1, 2002 (FY 2003), and payments for all
IRFs now consist of 100 percent of the Federal IRF PPS rate.
Section 1886(j) of the Act confers broad statutory authority upon
the Secretary to propose refinements to the IRF PPS. In the FY 2006 IRF
PPS final rule (70 FR 47880) and in correcting amendments to the FY
2006 IRF PPS final rule (70 FR 57166), we finalized a number of
refinements to the IRF PPS case-mix classification system (the CMGs and
the corresponding relative weights) and the case-level and facility-
level adjustments. These refinements included the adoption of the
Office of Management and Budget's (OMB's) Core-Based Statistical Area
(CBSA) market definitions; modifications to the CMGs, tier
comorbidities; and CMG relative weights, implementation of a new
teaching status adjustment for IRFs; rebasing and revising the market
basket used to update IRF payments, and updates to the rural, low-
income percentage (LIP), and high-cost outlier adjustments. Beginning
with the FY 2006 IRF PPS final rule (70 FR 47908 through 47917), the
market basket used to update IRF payments was a market basket
reflecting the operating and capital cost structures for freestanding
IRFs, freestanding inpatient psychiatric facilities (IPFs), and long-
term care hospitals (LTCHs) (hereinafter referred to as the
rehabilitation, psychiatric, and long-term care (RPL) market basket).
Any reference to the FY 2006 IRF PPS final rule in this final rule also
includes the provisions effective in the correcting amendments. For a
detailed discussion of the final key policy changes for FY

[[Page 20952]]

2006, please refer to the FY 2006 IRF PPS final rule.
The regulatory history previously included in each rule or notice
issued under the IRF PPS, including a general description of the IRF
PPS for FYs 2007 through 2020, is available on the CMS website at
<a href="https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientRehabFacPPS">https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientRehabFacPPS</a>.
In late 2019,\1\ the United States began responding to an outbreak
of a virus named ``SARS-CoV-2'' and the disease it causes, which is
named ``coronavirus disease 2019'' (abbreviated ``COVID-19''). Due to
our prioritizing efforts in support of containing and combatting the
Public Health Emergency (PHE) for COVID-19, and devoting significant
resources to that end, we published two interim final rules with
comment period affecting IRF payment and conditions for participation.
The interim final rule with comment period (IFC) entitled, ``Medicare
and Medicaid Programs; Policy and Regulatory Revisions in Response to
the COVID-19 Public Health Emergency,'' published on April 6, 2020 (85
FR 19230) (hereinafter referred to as the April 6, 2020 IFC), included
certain changes to the IRF PPS medical supervision requirements at 42
CFR 412.622(a)(3)(iv) and 412.29(e) during the PHE for COVID-19. In
addition, in the April 6, 2020 IFC, we removed the post-admission
physician evaluation requirement at Sec. 412.622(a)(4)(ii) for all
IRFs during the PHE for COVID-19. In the FY 2021 IRF PPS final rule, to
ease documentation and administrative burden, we also removed the post-
admission physician evaluation documentation requirement at 42 CFR
412.622(a)(4)(ii) permanently beginning in FY 2021.
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\1\ Patel A, Jernigan DB. Initial Public Health Response and
Interim Clinical Guidance for the 2019 Novel Coronavirus Outbreak--
United States, December 31, 2019-February 4, 2020. MMWR Morb Mortal
Wkly Rep 2020;69:140-146. DOI <a href="http://dx.doi.org/10.15585/mmwr.mm6905e1">http://dx.doi.org/10.15585/mmwr.mm6905e1</a>.
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A second IFC entitled, ``Medicare and Medicaid Programs, Basic
Health Program, and Exchanges; Additional Policy and Regulatory
Revisions in Response to the COVID-19 Public Health Emergency and Delay
of Certain Reporting Requirements for the Skilled Nursing Facility
Quality Reporting Program'' was published on May 8, 2020 (85 FR 27550)
(hereinafter referred to as the May 8, 2020 IFC). Among other changes,
the May 8, 2020 IFC included a waiver of the ``3-hour rule'' at Sec.
412.622(a)(3)(ii) to reflect the waiver required by section 3711(a) of
the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
(Pub. L. 116-136, enacted on March 27, 2020). In the May 8, 2020 IFC,
we also modified certain IRF coverage and classification requirements
for freestanding IRF hospitals to relieve acute care hospital capacity
concerns in States (or regions, as applicable) experiencing a surge
during the PHE for COVID-19. In addition to the policies adopted in our
IFCs, we responded to the PHE with numerous blanket waivers \2\ and
other flexibilities,\3\ some of which are applicable to the IRF PPS.
CMS finalized these policies in the Calendar Year 2023 Hospital
Outpatient Prospective Payment and Ambulatory Surgical Center Payment
Systems final rule with comment period (87 FR 71748).
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\2\ CMS, ``COVID-19 Emergency Declaration Blanket Waivers for
Health Care Providers,'' (updated Feb. 19 2021) (available at
<a href="https://www.cms.gov/files/document/summary-covid-19-emergency-declaration-waivers.pdf">https://www.cms.gov/files/document/summary-covid-19-emergency-declaration-waivers.pdf</a>).
\3\ CMS, ``COVID-19 Frequently Asked Questions (FAQs) on
Medicare Fee-for-Service (FFS) Billing,'' (updated March 5, 2021)
(available at <a href="https://www.cms.gov/files/document/03092020-covid-19-faqs-508.pdf">https://www.cms.gov/files/document/03092020-covid-19-faqs-508.pdf</a>).
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B. Provisions of the Patient Protection and the Affordable Care Act and
the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA)
Affecting the IRF PPS in FY 2012 and Beyond

The Patient Protection and the Affordable Care Act (the Affordable
Care Act or ACA) (Pub. L. 111-148) was enacted on March 23, 2010. The
Health Care and Education Reconciliation Act of 2010 (Pub. L. 111-152),
which amended and revised several provisions of the Patient Protection
and Affordable Care Act, was enacted on March 30, 2010. In this
proposed rule, we refer to the two statutes collectively as the
``Patient Protection and Affordable Care Act'' or ``ACA''.
The ACA included several provisions that affect the IRF PPS in FYs
2012 and beyond. In addition to what was previously discussed, section
3401(d) of the ACA also added section 1886(j)(3)(C)(ii)(I) of the Act
(providing for a ``productivity adjustment'' for FY 2012 and each
subsequent FY). The productivity adjustment for FY 2024 is discussed in
section V.D. of this proposed rule. Section 1886(j)(3)(C)(ii)(II) of
the Act provides that the application of the productivity adjustment to
the market basket update may result in an update that is less than 0.0
for a FY and in payment rates for a FY being less than such payment
rates for the preceding FY.
Sections 3004(b) of the ACA and section 411(b) of the MACRA (Pub.
L. 114-10, enacted on April 16, 2015) also addressed the IRF PPS.
Section 3004(b) of ACA reassigned the previously designated section
1886(j)(7) of the Act to section 1886(j)(8) of the Act and inserted a
new section 1886(j)(7) of the Act, which contains requirements for the
Secretary to establish a QRP for IRFs. Under that program, data must be
submitted in a form and manner and at a time specified by the
Secretary. Beginning in FY 2014, section 1886(j)(7)(A)(i) of the Act
requires the application of a 2-percentage point reduction to the
market basket increase factor otherwise applicable to an IRF (after
application of paragraphs (C)(iii) and (D) of section 1886(j)(3) of the
Act) for a FY if the IRF does not comply with the requirements of the
IRF QRP for that FY. Application of the 2-percentage point reduction
may result in an update that is less than 0.0 for a FY and in payment
rates for a FY being less than such payment rates for the preceding FY.
Reporting-based reductions to the market basket increase factor are not
cumulative; they only apply for the FY involved. Section 411(b) of the
MACRA amended section 1886(j)(3)(C) of the Act by adding paragraph
(iii), which required us to apply for FY 2018, after the application of
section 1886(j)(3)(C)(ii) of the Act, an increase factor of 1.0 percent
to update the IRF prospective payment rates.

C. Operational Overview of the Current IRF PPS

As described in the FY 2002 IRF PPS final rule (66 FR 41316), upon
the admission and discharge of a Medicare Part A fee-for-service (FFS)
patient, the IRF is required to complete the appropriate sections of a
Patient Assessment Instrument (PAI), designated as the IRF-PAI. In
addition, beginning with IRF discharges occurring on or after October
1, 2009, the IRF is also required to complete the appropriate sections
of the IRF-PAI upon the admission and discharge of each Medicare
Advantage (MA) patient, as described in the FY 2010 IRF PPS final rule
(74 FR 39762 and 74 FR 50712). All required data must be electronically
encoded into the IRF-PAI software product. Generally, the software
product includes patient classification programming called the Grouper
software. The Grouper software uses specific IRF-PAI data elements to
classify (or group) patients into distinct CMGs and account for the
existence of any relevant comorbidities.
The Grouper software produces a five-character CMG number. The
first character is an alphabetic character that indicates the
comorbidity tier. The last four characters are numeric characters that
represent the distinct CMG number.

[[Page 20953]]

A free download of the Grouper software is available on the CMS website
at <a href="http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientRehabFacPPS/Software.html">http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientRehabFacPPS/Software.html</a>. The Grouper software is also
embedded in the internet Quality Improvement and Evaluation System
(iQIES) User tool available in iQIES at <a href="https://www.cms.gov/medicare/quality-safety-oversight-general-information/iqies">https://www.cms.gov/medicare/quality-safety-oversight-general-information/iqies</a>.
Once a Medicare Part A FFS patient is discharged, the IRF submits a
Medicare claim as a Health Insurance Portability and Accountability Act
of 1996 (HIPAA) (Pub. L. 104-191, enacted on August 21, 1996)--
compliant electronic claim or, if the Administrative Simplification
Compliance Act of 2002 (ASCA) (Pub. L. 107-105, enacted on December 27,
2002) permits, a paper claim (a UB-04 or a CMS-1450 as appropriate)
using the five-character CMG number and sends it to the appropriate
Medicare Administrative Contractor (MAC). In addition, once a MA
patient is discharged, in accordance with the Medicare Claims
Processing Manual, chapter 3, section 20.3 (Pub. 100-04), hospitals
(including IRFs) must submit an informational-only bill (type of bill
(TOB) 111), which includes Condition Code 04 to their MAC. This will
ensure that the MA days are included in the hospital's Supplemental
Security Income (SSI) ratio (used in calculating the IRF LIP
adjustment) for FY 2007 and beyond. Claims submitted to Medicare must
comply with both ASCA and HIPAA.
Section 3 of the ASCA amended section 1862(a) of the Act by adding
paragraph (22), which requires the Medicare program, subject to section
1862(h) of the Act, to deny payment under Part A or Part B for any
expenses for items or services for which a claim is submitted other
than in an electronic form specified by the Secretary. Section 1862(h)
of the Act, in turn, provides that the Secretary shall waive such
denial in situations in which there is no method available for the
submission of claims in an electronic form or the entity submitting the
claim is a small provider. In addition, the Secretary also has the
authority to waive such denial in such unusual cases as the Secretary
finds appropriate. For more information, see the ``Medicare Program;
Electronic Submission of Medicare Claims'' final rule (70 FR 71008).
Our instructions for the limited number of Medicare claims submitted on
paper are available at <a href="http://www.cms.gov/manuals/downloads/clm104c25.pdf">http://www.cms.gov/manuals/downloads/clm104c25.pdf</a>.
Section 3 of the ASCA operates in the context of the administrative
simplification provisions of HIPAA, which include, among others, the
requirements for transaction standards and code sets codified in 45 CFR
part 160 and part 162, subparts A and I through R (generally known as
the Transactions Rule). The Transactions Rule requires covered
entities, including covered healthcare providers, to conduct covered
electronic transactions according to the applicable transaction
standards. (See the CMS program claim memoranda at <a href="http://www.cms.gov/ElectronicBillingEDITrans/">http://www.cms.gov/ElectronicBillingEDITrans/</a> and listed in the addenda to the Medicare
Intermediary Manual, Part 3, section 3600).
The MAC processes the claim through its software system. This
software system includes pricing programming called the ``Pricer''
software. The Pricer software uses the CMG number, along with other
specific claim data elements and provider-specific data, to adjust the
IRF's prospective payment for interrupted stays, transfers, short
stays, and deaths, and then applies the applicable adjustments to
account for the IRF's wage index, percentage of low-income patients,
rural location, and outlier payments. For discharges occurring on or
after October 1, 2005, the IRF PPS payment also reflects the teaching
status adjustment that became effective as of FY 2006, as discussed in
the FY 2006 IRF PPS final rule (70 FR 47880).

D. Advancing Health Information Exchange

The Department of Health and Human Services (HHS) has a number of
initiatives designed to encourage and support the adoption of
interoperable health information technology and to promote nationwide
health information exchange to improve health care and patient access
to their digital health information.
To further interoperability in post-acute care settings, CMS and
the Office of the National Coordinator for Health Information
Technology (ONC) participate in the Post-Acute Care Interoperability
Workgroup (PACIO) to facilitate collaboration with interested parties
to develop Health Level Seven International[supreg] (HL7) Fast
Healthcare Interoperability Resource[supreg] (FHIR) standards. These
standards could support the exchange and reuse of patient assessment
data derived from the post-acute care (PAC) setting assessment tools,
such as the minimum data set (MDS), inpatient rehabilitation facility-
patient assessment instrument (IRF-PAI), Long-Term Care Hospital (LTCH)
continuity assessment record and evaluation (CARE) Data Set (LCDS),
outcome and assessment information set (OASIS), and other
sources.<SUP>4 5</SUP> The PACIO Project has focused on HL7 FHIR
implementation guides for: functional status, cognitive status and new
use cases on advance directives, re-assessment timepoints, and Speech,
language, swallowing, cognitive communication and hearing (SPLASCH)
pathology.\6\ We encourage PAC provider and health IT vendor
participation as the efforts advance.
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\4\ HL7 FHIR Release 4. Available at <a href="https://www.hl7.org/fhir/">https://www.hl7.org/fhir/</a>.
\5\ HL7 FHIR. PACIO Functional Status Implementation Guide.
Available at <a href="https://paciowg.github.io/functional-status-ig/">https://paciowg.github.io/functional-status-ig/</a>.
\6\ PACIO Project. Available at <a href="http://pacioproject.org/about/">http://pacioproject.org/about/</a>.
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The CMS Data Element Library (DEL) continues to be updated and
serves as a resource for PAC assessment data elements and their
associated mappings to health IT standards such as Logical Observation
Identifiers Names and Codes (LOINC) and Systematized Nomenclature of
Medicine Clinical Terms (SNOMED).\7\ The DEL furthers CMS' goal of data
standardization and interoperability. Standards in the DEL can be
referenced on the CMS website and in the ONC Interoperability Standards
Advisory (ISA). The 2023 ISA is available at <a href="https://www.healthit.gov/sites/isa/files/inline-files/2023%20Reference%20Edition_ISA_508.pdf">https://www.healthit.gov/sites/isa/files/inline-files/2023%20Reference%20Edition_ISA_508.pdf</a>.
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\7\ Centers for Medicare & Medicaid Services. Newsroom. Fact
sheet: CMS Data Element Library Fact Sheet. June 21, 2018. Available
at <a href="https://www.cms.gov/newsroom/fact-sheets/cms-data-element-library-fact-sheet">https://www.cms.gov/newsroom/fact-sheets/cms-data-element-library-fact-sheet</a>.
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We are also working with ONC to advance the United States Core Data
for Interoperability (USCDI), a standardized set of health data classes
and constituent data elements for nationwide, interoperable health
information exchange.\8\ We are collaborating with ONC and other
federal agencies to define and prioritize additional data
standardization needs and develop consensus on recommendations for
future versions of the USCDI. We are also directly collaborating with
ONC to build requirements to support data standardization and alignment
with requirements for quality measurement. ONC has launched the USCDI+
initiative to support the identification and establishment of domain
specific datasets that build on the core USCDI foundation.\9\ The
USCDI+ quality

[[Page 20954]]

measurement domain currently being developed aims to support defining
additional data specifications for quality measurement that harmonize,
where possible, with other Federal agency data needs and inform
supplemental standards necessary to support quality measurement,
including the needs of programs supporting quality measurement for
long-term and post-acute care.
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\8\ USCDI. Available at <a href="https://www.healthit.gov/isa/united-states-core-data-interoperability-uscdi">https://www.healthit.gov/isa/united-states-core-data-interoperability-uscdi</a>.
\9\ USCDI+. Available at <a href="https://www.healthit.gov/topic/interoperability/uscdi-plus">https://www.healthit.gov/topic/interoperability/uscdi-plus</a>.
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The 21st Century Cures Act (Cures Act) (Pub. L. 114-255, enacted
December 13, 2016) required HHS and ONC to take steps to promote
adoption and use of electronic health record (EHR) technology.\10\
Specifically, section 4003(b) of the Cures Act required ONC to take
steps to advance interoperability through the development of a Trusted
Exchange Framework and Common Agreement aimed at establishing full
network-to network exchange of health information nationally. On
January 18, 2022, ONC announced a significant milestone by releasing
the Trusted Exchange Framework \11\ and Common Agreement Version 1.\12\
The Trusted Exchange Framework is a set of non-binding principles for
health information exchange, and the Common Agreement is a contract
that advances those principles. The Common Agreement and the Qualified
Health Information Network Technical Framework Version 1 (incorporated
by reference into the Common Agreement) establish the technical
infrastructure model and governing approach for different health
information networks and their users to securely share clinical
information with each other, all under commonly agreed to terms. The
technical and policy architecture of how exchange occurs under the
Common Agreement follows a network-of-networks structure, which allows
for connections at different levels and is inclusive of many different
types of entities at those different levels, such as health information
networks, healthcare practices, hospitals, public health agencies, and
Individual Access Services (IAS) Providers.\13\ On February 13, 2023,
HHS marked a new milestone during an event at HHS headquarters,\14\
which recognized the first set of applicants accepted for onboarding to
the Common Agreement as Qualified Health Information Networks (QHINs).
QHINs will be entities that will connect directly to each other to
serve as the core for nationwide interoperability.\15\ For more
information, we refer readers to <a href="https://www.healthit.gov/topic/interoperability/trusted-exchange-framework-and-common-agreement">https://www.healthit.gov/topic/interoperability/trusted-exchange-framework-and-common-agreement</a>.
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\10\ Sections 4001 through 4008 of Public Law 114-255. Available
at <a href="https://www.govinfo.gov/content/pkg/PLAW-114publ255/html/PLAW-114publ255.htm">https://www.govinfo.gov/content/pkg/PLAW-114publ255/html/PLAW-114publ255.htm</a>.
\11\ The Trusted Exchange Framework (TEF): Principles for
Trusted Exchange (Jan. 2022). Available at <a href="https://www.healthit.gov/sites/default/files/page/2022-01/Trusted_Exchange_Framework_0122.pdf">https://www.healthit.gov/sites/default/files/page/2022-01/Trusted_Exchange_Framework_0122.pdf</a>.
\12\ Common Agreement for Nationwide Health Information
Interoperability Version 1 (Jan. 2022). Available at <a href="https://www.healthit.gov/sites/default/files/page/2022-01/Common_Agreement_for_Nationwide_Health_Information_Interoperability_Version_1.pdf">https://www.healthit.gov/sites/default/files/page/2022-01/Common_Agreement_for_Nationwide_Health_Information_Interoperability_Version_1.pdf</a>.
\13\ The Common Agreement defines Individual Access Services
(IAS) as ``with respect to the Exchange Purposes definition, the
services provided utilizing the Connectivity Services, to the extent
consistent with Applicable Law, to an Individual with whom the QHIN,
Participant, or Subparticipant has a Direct Relationship to satisfy
that Individual's ability to access, inspect, or obtain a copy of
that Individual's Required Information that is then maintained by or
for any QHIN, Participant, or Subparticipant.'' The Common Agreement
defines ``IAS Provider'' as: ``Each QHIN, Participant, and
Subparticipant that offers Individual Access Services.'' See Common
Agreement for Nationwide Health Information Interoperability Version
1, at 7 (Jan. 2022), <a href="https://www.healthit.gov/sites/default/files/page/2022-01/Common_Agreement_for_Nationwide_Health_Information_Interoperability_Version_1.pdf">https://www.healthit.gov/sites/default/files/page/2022-01/Common_Agreement_for_Nationwide_Health_Information_Interoperability_Version_1.pdf</a>.
\14\ ``Building TEFCA,'' Micky Tripathi and Mariann Yeager,
Health IT Buzz Blog. February 13, 2023. <a href="https://www.healthit.gov/buzz-blog/electronic-health-and-medical-records/interoperability-electronic-health-and-medical-records/building-tefca">https://www.healthit.gov/buzz-blog/electronic-health-and-medical-records/interoperability-electronic-health-and-medical-records/building-tefca</a>.
\15\ The Common Agreement defines a QHIN as ``to the extent
permitted by applicable SOP(s), a Health Information Network that is
a U.S. Entity that has been Designated by the RCE and is a party to
the Common Agreement countersigned by the RCE.'' See Common
Agreement for Nationwide Health Information Interoperability Version
1, at 10 (Jan. 2022), <a href="https://www.healthit.gov/sites/default/files/page/2022-01/Common_Agreement_for_Nationwide_Health_Information_Interoperability_Version_1.pdf">https://www.healthit.gov/sites/default/files/page/2022-01/Common_Agreement_for_Nationwide_Health_Information_Interoperability_Version_1.pdf</a>.
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We invite providers to learn more about these important
developments and how they are likely to affect IRFs.

III. Summary of Provisions of the Proposed Rule

In this proposed rule, we are proposing to update the IRF PPS for
FY 2024 and the IRF QRP for FY 2025 and FY 2026.
The proposed policy changes and updates to the IRF prospective
payment rates for FY 2024 are as follows:
<bullet> Update the CMG relative weights and average length of stay
values for FY 2024, in a budget neutral manner, as discussed in section
IV. of this proposed rule.
<bullet> Update the IRF PPS payment rates for FY 2024 by the market
basket increase factor, based upon the most current data available,
with a productivity adjustment required by section 1886(j)(3)(C)(ii)(I)
of the Act, as described in section V. of this proposed rule.
<bullet> Rebase and revise the IRF market basket to reflect a 2021
base year, as discussed in section V. of this proposed rule.
<bullet> Update the FY 2024 IRF PPS payment rates by the FY 2024
wage index and the labor-related share in a budget-neutral manner, as
discussed in section V. of this proposed rule.
<bullet> Describe the calculation of the IRF standard payment
conversion factor for FY 2024, as discussed in section V. of this
proposed rule.
<bullet> Update the outlier threshold amount for FY 2024, as
discussed in section VI. of this proposed rule.
<bullet> Update the cost-to-charge ratio (CCR) ceiling and urban/
rural average CCRs for FY 2024, as discussed in section VI. of this
proposed rule.
<bullet> Describe the proposed modification to the regulation for
IRF units to become excluded and paid under the IRF PPS as discussed in
section VII. of this proposed rule.
We also propose updates to the IRF QRP and request information in
section VIII. of the proposed rule as follows:
<bullet> Modify the COVID-19 Vaccination Coverage among Healthcare
Personnel measure beginning with the FY 2025 IRF QRP.
<bullet> Adopt the Discharge Function Score measure beginning with
the FY 2025 IRF QRP.
<bullet> Remove the Application of Percent of Long-Term Care
Hospital Patients with an Admission and Discharge Functional Assessment
and a Care Plan That Addresses Function measure beginning with the FY
2025 IRF QRP.
<bullet> Remove the IRF Functional Outcome Measure: Change in Self-
Care Score for Medical Rehabilitation Patients (NQF #2633) measure
beginning with the FY 2025 IRF QRP.
<bullet> Remove the IRF Functional Outcome Measure: Change in
Mobility Score for Medical Rehabilitation Patients (NQF #2634) measure
beginning with the FY 2025 IRF QRP.
<bullet> Adopt the COVID-19 Vaccine: Percent of Patients/Residents
Who Are Up to Date measure beginning with the FY 2026 IRF QRP.
<bullet> Request information on principles for selecting and
prioritizing IRF QRP quality measures and concepts.
<bullet> Provide an update on our continued efforts to close the
health equity gap.

IV. Proposed Update to the Case-Mix Group (CMG) Relative Weights and
Average Length of Stay (ALOS) Values for FY 2024

As specified in Sec. 412.620(b)(1), we calculate a relative weight
for each CMG that is proportional to the resources needed by an average
inpatient rehabilitation case in that CMG. For example, cases in a CMG
with a relative

[[Page 20955]]

weight of 2, on average, will cost twice as much as cases in a CMG with
a relative weight of 1. Relative weights account for the variance in
cost per discharge due to the variance in resource utilization among
the payment groups, and their use helps to ensure that IRF PPS payments
support beneficiary access to care, as well as provider efficiency.
In this proposed rule, we propose to update the CMG relative
weights and ALOS values for FY 2024. Typically, we use the most recent
available data to update the CMG relative weights and average lengths
of stay. For FY 2024, we are proposing to use the FY 2022 IRF claims
and FY 2021 IRF cost report data. These data are the most current and
complete data available at this time. Currently, only a small portion
of the FY 2022 IRF cost report data are available for analysis, but the
majority of the FY 2022 IRF claims data are available for analysis. We
are proposing that if more recent data became available after the
publication of this proposed rule and before the publication of the
final rule, we would use such data to determine the FY 2024 CMG
relative weights and ALOS values in the final rule.
We are proposing to apply these data using the same methodologies
that we have used to update the CMG relative weights and ALOS values
each FY since we implemented an update to the methodology. The detailed
CCR data from the cost reports of IRF provider units of primary acute
care hospitals is used for this methodology, instead of CCR data from
the associated primary care hospitals, to calculate IRFs' average costs
per case, as discussed in the FY 2009 IRF PPS final rule (73 FR 46372).
In calculating the CMG relative weights, we use a hospital-specific
relative value method to estimate operating (routine and ancillary
services) and capital costs of IRFs. The process to calculate the CMG
relative weights for this proposed rule is as follows:
Step 1. We estimate the effects that comorbidities have on costs.
Step 2. We adjust the cost of each Medicare discharge (case) to
reflect the effects found in the first step.
Step 3. We use the adjusted costs from the second step to calculate
CMG relative weights, using the hospital-specific relative value
method.
Step 4. We normalize the FY 2024 CMG relative weights to the same
average CMG relative weight from the CMG relative weights implemented
in the FY 2023 IRF PPS final rule (87 FR 47038).
Consistent with the methodology that we have used to update the IRF
classification system in each instance in the past, we are proposing to
update the CMG relative weights for FY 2024 in such a way that total
estimated aggregate payments to IRFs for FY 2024 are the same with or
without the changes (that is, in a budget-neutral manner) by applying a
budget neutrality factor to the standard payment amount. To calculate
the appropriate budget neutrality factor for use in updating the FY
2024 CMG relative weights, we use the following steps:
Step 1. Calculate the estimated total amount of IRF PPS payments
for FY 2024 (with no changes to the CMG relative weights).
Step 2. Calculate the estimated total amount of IRF PPS payments
for FY 2024 by applying the proposed changes to the CMG relative
weights (as discussed in this proposed rule).
Step 3. Divide the amount calculated in step 1 by the amount
calculated in step 2 to determine the budget neutrality factor of
0.9999 that would maintain the same total estimated aggregate payments
in FY 2024 with and without the proposed changes to the CMG relative
weights.
Step 4. Apply the budget neutrality factor from step 3 to the FY
2024 IRF PPS standard payment amount after the application of the
budget-neutral wage adjustment factor.
In section V.G. of this proposed rule, we discuss the proposed use
of the existing methodology to calculate the proposed standard payment
conversion factor for FY 2024.
In Table 2, ``Proposed Relative Weights and Average Length of Stay
Values for Case-Mix Groups,'' we present the proposed CMGs, the
comorbidity tiers, the corresponding relative weights, and the ALOS
values for each CMG and tier for FY 2024. The ALOS for each CMG is used
to determine when an IRF discharge meets the definition of a short-stay
transfer, which results in a per diem case level adjustment.
BILLING CODE 4120-01-C

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[GRAPHIC] [TIFF OMITTED] TP07AP23.000

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[GRAPHIC] [TIFF OMITTED] TP07AP23.001

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[GRAPHIC] [TIFF OMITTED] TP07AP23.002

BILLING CODE 4120-01-P

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Generally, updates to the CMG relative weights result in some
increases and some decreases to the CMG relative weight values. Table 3
shows how we estimate that the application of the proposed revisions
for FY 2024 would affect particular CMG relative weight values, which
would affect the overall distribution of payments within CMGs and
tiers. We note that, because we propose to implement the CMG relative
weight revisions in a budget-neutral manner (as previously described),
total estimated aggregate payments to IRFs for FY 2024 would not be
affected as a result of the proposed CMG relative weight revisions.
However, the proposed revisions would affect the distribution of
payments within CMGs and tiers.

Table 3--Distributional Effects of the Changes to the CMG Relative
Weights
------------------------------------------------------------------------
Percentage of
Percentage change in CMG relative Number of cases affected
weights cases affected (percent)
------------------------------------------------------------------------
Increased by 15% or more................ 81 0.0
Increased by between 5% and 15%......... 1,263 0.3
Changed by less than 5%................. 375,622 99.4
Decreased by between 5% and 15%......... 843 0.2
Decreased by 15% or more................ 0 0.0
------------------------------------------------------------------------

As shown in Table 3, 99.4 percent of all IRF cases are in CMGs and
tiers that would experience less than a 5 percent change (either
increase or decrease) in the CMG relative weight value as a result of
the proposed revisions for FY 2024. The proposed changes in the ALOS
values for FY 2024, compared with the FY 2023 ALOS values, are small
and do not show any particular trends in IRF length of stay patterns.
We invite public comment on our proposed updates to the CMG
relative weights and ALOS values for FY 2024.

V. Proposed FY 2024 IRF PPS Payment Update

A. Background

Section 1886(j)(3)(C) of the Act requires the Secretary to
establish an increase factor that reflects changes over time in the
prices of an appropriate mix of goods and services for which payment is
made under the IRF PPS. According to section 1886(j)(3)(A)(i) of the
Act, the increase factor shall be used to update the IRF prospective
payment rates for each FY. Section 1886(j)(3)(C)(ii)(I) of the Act
requires the application of a productivity adjustment described in
section 1886(b)(3)(B)(xi)(II) of the Act. Thus, we propose to update
the IRF PPS payments for FY 2024 by a market basket increase factor as
required by section 1886(j)(3)(C) of the Act based upon the most
current data available, with a productivity adjustment as required by
section 1886(j)(3)(C)(ii)(I) of the Act.
We have utilized various market baskets through the years in the
IRF PPS. For a discussion of these market baskets, we refer readers to
the FY 2016 IRF PPS final rule (80 FR 47046).
In FY 2016, we finalized the use of a 2012-based IRF market basket,
using Medicare cost report data for both freestanding and hospital-
based IRFs (80 FR 47049 through 47068). In FY 2020, we finalized a
rebased and revised IRF market basket to reflect a 2016 base year. The
FY 2020 IRF PPS final rule (84 FR 39071 through 39086) contains a
complete discussion of the development of the 2016-based IRF market
basket. Beginning with FY 2024, we are proposing to rebase and revise
the IRF market basket to reflect a 2021 base year. In the following
discussion, we provide an overview of the proposed market basket and
describe the methodologies used to determine the operating and capital
portions of the proposed 2021-based IRF market basket.

B. Overview of the Proposed 2021-Based IRF Market Basket

The proposed 2021-based IRF market basket is a fixed-weight,
Laspeyres-type price index. A Laspeyres price index measures the change
in price, over time, of the same mix of goods and services purchased in
the base period. Any changes in the quantity or mix of goods and
services (that is, intensity) purchased over time relative to the base
period are not measured.
The index itself is constructed in three steps. First, a base
period is selected (for the proposed IRF market basket in this proposed
rule, we propose to use 2021 as the base period) and total base period
costs are estimated for a set of mutually exclusive and exhaustive cost
categories. Each category is calculated as a proportion of total costs.
These proportions are called cost weights. Second, each cost category
is matched to an appropriate price or wage variable, referred to as a
price proxy. In almost every instance, these price proxies are derived
from publicly available statistical series that are published on a
consistent schedule (preferably at least on a quarterly basis).
Finally, the cost weight for each cost category is multiplied by the
level of its respective price proxy. The sum of these products (that
is, the cost weights multiplied by their price index levels) for all
cost categories yields the composite index level of the market basket
in a given time period. Repeating this step for other periods produces
a series of market basket levels over time. Dividing an index level for
a given period by an index level for an earlier period produces a rate
of growth in the input price index over that timeframe.
As noted, the market basket is described as a fixed-weight index
because it represents the change in price over time of a constant mix
(quantity and intensity) of goods and services needed to provide IRF
services. The effects on total costs resulting from changes in the mix
of goods and services purchased subsequent to the base period are not
measured. For example, an IRF hiring more nurses after the base period
to accommodate the needs of patients would increase the volume of goods
and services purchased by the IRF, but would not be factored into the
price change measured by a fixed-weight IRF market basket. Only when
the index is rebased would changes in the quantity and intensity be
captured, with those changes being reflected in the cost weights.
Therefore, we rebase the market basket periodically so that the cost
weights reflect recent changes in the mix of goods and services that
IRFs purchase to furnish inpatient care between base periods.

C. Proposed Rebasing and Revising of the IRF PPS Market Basket

As discussed in the FY 2020 IRF PPS final rule (84 FR 39071 through
39086), the 2016-based IRF market basket cost weights reflect the 2016
Medicare cost report data submitted by both freestanding and hospital-
based facilities.

[[Page 20960]]

Beginning with FY 2024, we are proposing to rebase and revise the
2016-based IRF market basket cost weights to a 2021 base year
reflecting the 2021 Medicare cost report data submitted by both
freestanding and hospital-based IRFs. Below we provide a detailed
description of our methodology used to develop the proposed 2021-based
IRF market basket. This proposed methodology is generally similar to
the methodology used to develop the 2016-based IRF market basket.
We invite public comment on our proposed methodology for developing
the 2021-based IRF market basket.
1. Development of Cost Categories and Weights for the Proposed 2021-
Based IRF Market Basket
a. Use of Medicare Cost Report Data
We are proposing a 2021-based IRF market basket that consists of
seven major cost categories and a residual derived from the 2021
Medicare cost reports (CMS Form 2552-10, OMB No. 0938-0050) for
freestanding and hospital-based IRFs. The seven major cost categories
are Wages and Salaries, Employee Benefits, Contract Labor,
Pharmaceuticals, Professional Liability Insurance (PLI), Home Office/
Related Organization Contract Labor, and Capital. The residual category
reflects all remaining costs not captured in the seven cost categories.
The 2021 cost reports include providers whose cost reporting period
began on or after October 1, 2020, and before October 1, 2021. As noted
previously, the current IRF market basket is based on 2016 Medicare
cost reports and, therefore, reflects the 2016 cost structure for IRFs.
As described in the FY 2023 IRF PPS final rule (87 FR 47049 through
47050), we received comments on the FY 2023 IRF PPS proposed rule where
stakeholders expressed concern that the proposed market basket update
was inadequate relative to input price inflation experienced by IRFs,
particularly as a result of the COVID-19 PHE. These commenters stated
that the PHE, along with inflation, has significantly driven up
operating costs. Specifically, some commenters noted changes to the
labor markets that led to the use of more contract labor, a trend that
we verified in analyzing the Medicare cost reports through 2021.
Therefore, we believe it is appropriate to incorporate more recent data
to reflect updated cost structures for IRFs and so we are proposing to
use 2021 as the base year because we believe that the Medicare cost
reports for this year represent the most recent, complete set of
Medicare cost report data available for developing the proposed IRF
market basket at the time of this rulemaking. Given the potential
impact of the PHE on the Medicare cost report data, we will continue to
monitor these data going forward and any changes to the IRF market
basket will be proposed in future rulemaking.
Since our goal is to establish cost weights that are reflective of
case mix and practice patterns associated with the services IRFs
provide to Medicare beneficiaries, as we did for the 2016-based IRF
market basket, we are proposing to limit the cost reports used to
establish the 2021-based IRF market basket to those from facilities
that had a Medicare average length of stay (LOS) that was relatively
similar to their facility average LOS. We believe that this requirement
eliminates statistical outliers and ensures a more accurate market
basket that reflects the costs generally incurred during a Medicare-
covered stay. The Medicare average LOS for freestanding IRFs is
calculated from data reported on line 14 of Worksheet S-3, part I. The
Medicare average LOS for hospital-based IRFs is calculated from data
reported on line 17 of Worksheet S-3, part I. We propose to include the
cost report data from IRFs with a Medicare average LOS within 15
percent (that is, 15 percent higher or lower) of the facility average
LOS to establish the sample of providers used to estimate the 2021-
based IRF market basket cost weights. We are proposing to apply this
LOS edit to the data for IRFs to exclude providers that serve a
population whose LOS would indicate that the patients served are not
consistent with a LOS of a typical Medicare patient. We note that this
is the same LOS edit that we applied to develop the 2016-based IRF
market basket. This process resulted in the exclusion of about nine
percent of the freestanding and hospital-based IRF Medicare cost
reports. Of those excluded, about 15 percent were freestanding IRFs and
85 percent were hospital-based IRFs. This ratio is relatively
consistent with the universe of freestanding and hospital-based IRF
cost reports where freestanding IRFs represent about 30 percent of the
total.
We then propose to use the cost reports for IRFs that met this LOS
edit requirement to calculate the costs for the seven major cost
categories (Wages and Salaries, Employee Benefits, Contract Labor,
Professional Liability Insurance, Pharmaceuticals, Home Office/Related
Organization Contract Labor, and Capital) for the market basket. These
are the same categories used for the 2016-based IRF market basket.
Also, as described in section V.C.1.d. of this proposed rule, and as
done for the 2016-based IRF market basket, we are also proposing to use
the Medicare cost report data to calculate the detailed capital cost
weights for the Depreciation, Interest, Lease, and Other Capital-
related cost categories. We note that we are proposing to rename the
Home Office Contract Labor cost category to the Home Office/Related
Organization Contract Labor cost category to be more consistent with
the Medicare cost report instructions.
Similar to the 2016-based IRF market basket major cost weights, for
the majority of the proposed 2021-based IRF market basket cost weights,
we are proposing to divide the 2021 costs for each cost category by the
2021 total Medicare allowable costs (routine, ancillary and capital)
that are eligible for reimbursement through the IRF PPS (we note that
we use total facility medical care costs as the denominator to derive
both the PLI and Home Office/Related Organization Contract Labor cost
weights). We next describe our proposed methodology for deriving the
cost levels used to derive the proposed 2021-based IRF market basket.
(1) Total Medicare Allowable Costs
For freestanding IRFs, we propose that total Medicare allowable
costs would be equal to the sum of total costs for the Medicare
allowable cost centers as reported on Worksheet B, part I, column 26,
lines 30 through 35, 50 through 76 (excluding 52 and 75), 90 through
91, and 93.
For hospital-based IRFs, we propose that total Medicare allowable
costs would be equal to the total costs for the IRF inpatient unit
after the allocation of overhead costs (Worksheet B, part I, column 26,
line 41) and a proportion of total ancillary costs reported on
Worksheet B, part I, column 26, lines 50 through 76 (excluding 52 and
75), 90 through 91, and 93.
We propose to calculate total ancillary costs attributable to the
hospital-based IRF by first deriving an ``IRF ancillary ratio'' for
each ancillary cost center. The IRF ancillary ratio is defined as the
ratio of IRF Medicare ancillary costs for the cost center (as reported
on Worksheet D-3, column 3 for hospital-based IRFs) to total Medicare
ancillary costs for the cost center (equal to the sum of Worksheet D-3,
column 3 for all relevant PPSs [that is, inpatient prospective payment
system (IPPS), IRF, IPF and skilled nursing facility (SNF)]). For
example, if hospital-based IRF Medicare physical therapy costs
represent about 30 percent of the total Medicare physical therapy costs
for the entire facility, then the IRF ancillary

[[Page 20961]]

ratio for physical therapy costs would be 30 percent. We believe it is
appropriate to use only a portion of the ancillary costs in the market
basket cost weight calculations since the hospital-based IRF only
utilizes a portion of the facility's ancillary services. We believe the
ratio of reported IRF Medicare costs to reported total Medicare costs
provides a reasonable estimate of the ancillary services utilized, and
costs incurred, by the hospital-based IRF. We propose that this IRF
ancillary ratio for each cost center is also used to calculate Wages
and Salaries and Capital costs as described below.
Then for each ancillary cost center, we propose to multiply the IRF
ancillary ratio for the given cost center by the total facility
ancillary costs for that specific cost center (as reported on Worksheet
B, part I, column 26) to derive IRF ancillary costs. For example, the
30 percent IRF ancillary ratio for physical therapy cost center would
be multiplied by the total ancillary costs for physical therapy
(Worksheet B, part I, column 26, line 66). The IRF ancillary costs for
each cost center are then added to total costs for the IRF inpatient
unit after the allocation of overhead costs (Worksheet B, part I,
column 26, line 41) to derive total Medicare allowable costs.
We propose to use these methods to derive levels of total Medicare
allowable costs for IRF providers. This is the same methodology used
for the 2016-based IRF market basket. We propose that these total
Medicare allowable costs for the IRF will be the denominator for the
cost weight calculations for the Wages and Salaries, Employee Benefits,
Contract Labor, Pharmaceuticals, and Capital cost weights. With this
work complete, we then set about deriving cost levels for the seven
major cost categories and then derive a residual cost weight reflecting
all other costs not classified.
(2) Wages and Salaries Costs
For freestanding IRFs, we are proposing to derive Wages and
Salaries costs as the sum of routine inpatient salaries (Worksheet A,
column 1, lines 30 through 35), ancillary salaries (Worksheet A, column
1, lines 50 through 76 (excluding 52 and 75), 90 through 91, and 93),
and a proportion of overhead (or general service cost centers in the
Medicare cost reports) salaries. Since overhead salary costs are
attributable to the entire IRF, we only include the proportion
attributable to the Medicare allowable cost centers. We are proposing
to estimate the proportion of overhead salaries that are attributed to
Medicare allowable costs centers by multiplying the ratio of Medicare
allowable area salaries (Worksheet A, column 1, lines 30 through 35, 50
through 76 (excluding 52 and 75), 90 through 91, and 93) to total non-
overhead salaries (Worksheet A, column 1, line 200 less Worksheet A,
column 1, lines 4 through 18) times total overhead salaries (Worksheet
A, column 1, lines 4 through 18). This is a similar methodology as used
in the 2016-based IRF market basket.
For hospital-based IRFs, we are proposing to derive Wages and
Salaries costs as the sum of the following salaries attributable to the
hospital-based IRF: inpatient routine salary costs (Worksheet A, column
1, line 41); overhead salary costs; ancillary salary costs; and a
portion of overhead salary costs attributable to the ancillary
departments.
(a) Overhead Salary Costs
We are proposing to calculate the portion of overhead salary costs
attributable to hospital-based IRFs by first calculating an IRF
overhead salary ratio, which is equal to the ratio of total facility
overhead salaries (as reported on Worksheet A, column 1, lines 4-18) to
total facility noncapital overhead costs (as reported on Worksheet A,
column 1 and 2, lines 4-18). We then are proposing to multiply this IRF
overhead salary ratio by total noncapital overhead costs (sum of
Worksheet B, part I, columns 4 through 18, line 41, less Worksheet B,
part II, columns 4 through 18, line 41). This methodology assumes the
proportion of total costs related to salaries for the overhead cost
center is similar for all inpatient units (that is, acute inpatient or
inpatient rehabilitation).
(b) Ancillary Salary Costs
We are proposing to calculate hospital-based IRF ancillary salary
costs for a specific cost center (Worksheet A, column 1, lines 50
through 76 (excluding 52 and 75), 90 through 91, and 93) as salary
costs from Worksheet A, column 1, multiplied by the IRF ancillary ratio
for each cost center as described in section V.C.1.a.(1) of this
proposed rule. The sum of these costs represents hospital-based IRF
ancillary salary costs.
(c) Overhead Salary Costs for Ancillary Cost Centers
We are proposing to calculate the portion of overhead salaries
attributable to each ancillary department (lines 50 through 76
(excluding 52 and 75), 90 through 91, and 93) by first calculating
total noncapital overhead costs attributable to each specific ancillary
department (sum of Worksheet B, part I, columns 4-18 less, Worksheet B,
part II, column 26). We then identify the portion of these total
noncapital overhead costs for each ancillary department that is
attributable to the hospital-based IRF by multiplying these costs by
the IRF ancillary ratio as described in section V.C.1.a.(1) of this
proposed rule. We then sum these estimated IRF Medicare allowable
noncapital overhead costs for all ancillary departments (cost centers
50 through 76, 90 through 91, and 93). Finally, we then identify the
portion of these IRF Medicare allowable noncapital overhead costs that
are attributable to Wages and Salaries by multiplying these costs by
the IRF overhead salary ratio as described in section V.C.1.a.(2)(a) of
this proposed rule. This is the same methodology used to derive the
2016-based IRF market basket.
(3) Employee Benefits Costs
Effective with the implementation of CMS Form 2552-10, we began
collecting Employee Benefits and Contract Labor data on Worksheet S-3,
part V.
For the 2021 Medicare cost report data, 54 percent of providers
reported Employee Benefits data on Worksheet S-3, part V; particularly,
approximately 57 percent of freestanding IRFs and 53 percent of
hospital-based IRFs reported Employee Benefits data on Worksheet S-3,
part V. For comparison, for 2016, about 45 percent of providers
reported Employee Benefits data on Worksheet S-3, part V. Again, we
continue to encourage all providers to report these data on the
Medicare cost report.
For freestanding IRFs, we are proposing Employee Benefits costs
would be equal to the data reported on Worksheet S-3, part V, column 2,
line 2. We note that while not required to do so, freestanding IRFs
also may report Employee Benefits data on Worksheet S-3, part II, which
is applicable to only IPPS providers. Similar to the method for the
2016-based IRF market basket, for those freestanding IRFs that report
Worksheet S-3, part II, data, but not Worksheet S-3, part V, we are
proposing to use the sum of Worksheet S-3, part II, lines 17, 18, 20,
and 22, to derive Employee Benefits costs.
For hospital-based IRFs, we are proposing to calculate total
benefit costs as the sum of inpatient unit benefit costs, a portion of
ancillary departments benefit costs, and a portion of overhead benefits
attributable to both the routine inpatient unit and the ancillary
departments. For those hospital-based IRFs that report Worksheet S-3,
part V data, we are proposing inpatient unit

[[Page 20962]]

benefit costs be equal to Worksheet S-3, part V, column 2, line 4.
Given the limited reporting on Worksheet S-3, part V, we are proposing
that for those hospital-based IRFs that do not report these data, we
calculate inpatient unit benefits costs using a portion of benefits
costs reported for Excluded areas on Worksheet S-3, part II. We are
proposing to calculate the ratio of inpatient unit salaries (Worksheet
A, column 1, line 41) to total excluded area salaries (sum of Worksheet
A, column 1, lines 20, 23, 40 through 42, 44, 45, 46, 94, 95, 98
through 101, 105 through 112, 114, 115 through 117, 190 through 194).
We then propose to apply this ratio to Excluded area benefits
(Worksheet S-3, part II, column 4, line 19) to derive inpatient unit
benefits costs for those providers that do not report benefit costs on
Worksheet S-3, part V.
We are proposing the ancillary departments benefits and overhead
benefits (attributable to both the inpatient unit and ancillary
departments) costs are derived by first calculating the sum of
hospital-based IRF overhead salaries as described in section
V.C.1.a.(2)(a) of this proposed rule, hospital-based IRF ancillary
salaries as described in section V.C.1.a.(2)(b) of this proposed rule
and hospital-based IRF overhead salaries for ancillary cost centers as
described in section V.C.1.a.(2)(c) of this proposed rule. This sum is
then multiplied by the ratio of total facility benefits to total
facility salaries, where total facility benefits is equal to the sum of
Worksheet S-3, part II, column 4, lines 17-25, and total facility
salaries is equal to Worksheet S-3, part II, column 4, line 1.
(4) Contract Labor Costs
Contract Labor costs are primarily associated with direct patient
care services. Contract labor costs for other services such as
accounting, billing, and legal are calculated separately using other
government data sources as described in section V.C.1.c. of this
proposed rule. To derive contract labor costs using Worksheet S-3, part
V, data, for freestanding IRFs, we are proposing Contract Labor costs
be equal to Worksheet S-3, part V, column 1, line 2. As we noted for
Employee Benefits, freestanding IRFs also may report Contract Labor
data on Worksheet S-3, part II, which is applicable to only IPPS
providers. For those freestanding IRFs that report Worksheet S-3, part
II data, but not Worksheet S-3, part V, we are proposing to use the sum
of Worksheet S-3, part II, column 4, lines 11 and 13, to derive
Contract Labor costs.
For hospital-based IRFs, we are proposing that Contract Labor costs
would be equal to Worksheet S-3, part V, column 1, line 4. For 2021
Medicare cost report data, 30 percent of providers reported Contract
Labor data on Worksheet S-3, part V; particularly, approximately 56
percent of freestanding IRFs and 18 percent of hospital-based IRFs
reported data on Worksheet S-3, part V. For comparison, for the 2016-
based IRF market basket, about 26 percent of providers reported
Contract Labor data on Worksheet S-3, part V. We continue to encourage
all providers to report these data on the Medicare cost report.
Given the limited reporting on Worksheet S-3, part V, we are
proposing that for those hospital-based IRFs that do not report these
data, we calculate Contract Labor costs using a portion of contract
labor costs reported on Worksheet S-3, part II. We are proposing to
calculate the ratio of contract labor costs (Worksheet S-3, part II,
column 4, lines 11 and 13) to PPS salaries (Worksheet S-3, part II,
column 4, line 1 less the sum of Worksheet S-3, part II, column 4,
lines 3, 401, 5, 6, 7, 701, 8, 9, 10 less Worksheet A, column 1, line
20 and 23). We then propose to apply this ratio to total inpatient
routine salary costs (Worksheet A, column 1, line 41) to derive
contract labor costs for those providers that do not report contract
labor costs on Worksheet S-3, part V.
(5) Pharmaceuticals Costs
For freestanding IRFs, we are proposing to calculate
pharmaceuticals costs using non-salary costs reported on Worksheet A,
column 7, less Worksheet A, column 1, for the pharmacy cost center
(line 15) and drugs charged to patients cost center (line 73).
For hospital-based IRFs, we are proposing to calculate
pharmaceuticals costs as the sum of a portion of the non-salary
pharmacy costs and a portion of the non-salary drugs charged to patient
costs reported for the total facility. We propose that non-salary
pharmacy costs attributable to the hospital-based IRF would be
calculated by multiplying total pharmacy costs attributable to the
hospital-based IRF (as reported on Worksheet B, part I, column 15, line
41) by the ratio of total non-salary pharmacy costs (Worksheet A,
column 2, line 15) to total pharmacy costs (sum of Worksheet A, columns
1 and 2 for line 15) for the total facility. We propose that non-salary
drugs charged to patient costs attributable to the hospital-based IRF
would be calculated by multiplying total non-salary drugs charged to
patient costs (Worksheet B, part I, column 0, line 73 plus Worksheet B,
part I, column 15, line 73 less Worksheet A, column 1, line 73) for the
total facility by the ratio of Medicare drugs charged to patient
ancillary costs for the IRF unit (as reported on Worksheet D-3 for
hospital-based IRFs, column 3, line 73) to total Medicare drugs charged
to patient ancillary costs for the total facility (equal to the sum of
Worksheet D-3, column 3, line 73 for all relevant PPS (that is, IPPS,
IRF, IPF and SNF).
(6) Professional Liability Insurance Costs
For freestanding and hospital-based IRFs, we are proposing that
Professional Liability Insurance (PLI) costs (often referred to as
malpractice costs) would be equal to premiums, paid losses and self-
insurance costs reported on Worksheet S-2, columns 1 through 3, line
118--the same data used for the 2016-based IRF market basket. For
hospital-based IRFs, we are proposing to assume that the PLI weight for
the total facility is similar to the hospital-based IRF unit since the
only data reported on this worksheet is for the entire facility, as we
currently have no means to identify the proportion of total PLI costs
that are only attributable to the hospital-based IRF. However, when we
derive the cost weight for PLI for both hospital-based and freestanding
IRFs, we use the total facility medical care costs as the denominator
as opposed to total Medicare allowable costs. For freestanding IRFs and
hospital-based IRFs, we are proposing to derive total facility medical
care costs as the sum of total costs (Worksheet B, part I, column 26,
line 202) less non-reimbursable costs (Worksheet B, part I, column 26,
lines 190 through 201).
(7) Home Office/Related Organization Contract Labor Costs
For freestanding and hospital-based IRFs, we are proposing to
calculate the home office/related organization contract labor costs
using data reported on Worksheet S-3, part II, column 4, lines 1401,
1402, 2550, and 2551. Similar to the PLI costs, these costs are for the
entire facility. Therefore, when we derive the cost weight for Home
Office/Related Organization Contract Labor costs, we use the total
facility medical care costs as the denominator (reflecting the total
facility costs less the non-reimbursable costs reported on lines 190
through 201). Our assumption is that the same proportion of expenses
are used among each unit of the hospital.

[[Page 20963]]

(8) Capital Costs
For freestanding IRFs, we are proposing that capital costs would be
equal to Medicare allowable capital costs as reported on Worksheet B,
part II, column 26, lines 30 through 35, 50 through 76 (excluding 52
and 75), 90 through 91, and 93.
For hospital-based IRFs, we are proposing that capital costs would
be equal to IRF inpatient capital costs (as reported on Worksheet B,
part II, column 26, line 41) and a portion of IRF ancillary capital
costs. We calculate the portion of ancillary capital costs attributable
to the hospital-based IRF for a given cost center by multiplying total
facility ancillary capital costs for the specific ancillary cost center
(as reported on Worksheet B, part II, column 26) by the IRF ancillary
ratio as described in section V.C.1.a.(1) of this proposed rule. For
example, if hospital-based IRF Medicare physical therapy costs
represent 30 percent of the total Medicare physical therapy costs for
the entire facility, then 30 percent of total facility physical therapy
capital costs (as reported in Worksheet B, part II, column 26, line 66)
would be attributable to the hospital-based IRF.
b. Final Major Cost Category Computation
After we derive costs for each of the major cost categories and
total Medicare allowable costs for each provider using the Medicare
cost report data as previously described, we propose to address data
outliers using the following steps. First, for the Wages and Salaries,
Employee Benefits, Contract Labor, Pharmaceuticals, and Capital cost
weights, we first divide the costs for each of these five categories by
total Medicare allowable costs calculated for the provider to obtain
cost weights for the universe of IRF providers. We then propose to trim
the data to remove outliers (a standard statistical process) by: (1)
requiring that major expenses (such as Wages and Salaries costs) and
total Medicare allowable operating costs be greater than zero; and (2)
excluding the top and bottom five percent of the major cost weight (for
example, Wages and Salaries costs as a percent of total Medicare
allowable operating costs). We note that missing values are assumed to
be zero consistent with the methodology for how missing values were
treated in the 2016-based IRF market basket. After these outliers have
been excluded, we sum the costs for each category across all remaining
providers. We then divide this by the sum of total Medicare allowable
costs across all remaining providers to obtain a cost weight for the
proposed 2021-based IRF market basket for the given category.
The proposed trimming methodology for the Home Office/Related
Organization Contract Labor and PLI cost weights is slightly different
than the proposed trimming methodology for the other five cost
categories as described above. For these cost weights, since we are
using total facility medical care costs rather than Medicare allowable
costs associated with IRF services, we are proposing to trim the
freestanding and hospital-based IRF cost weights separately.
For the PLI cost weight, for each of the providers, we first divide
the PLI costs by total facility medical care costs to obtain a PLI cost
weight for the universe of IRF providers. We then propose to trim the
data to remove outliers by: (1) requiring that PLI costs are greater
than zero and are less than total facility medical care costs; and (2)
excluding the top and bottom five percent of the major cost weight
trimming freestanding and hospital-based providers separately. After
removing these outliers, we are left with a trimmed data set for both
freestanding and hospital-based providers. We are then proposing to
separately sum the costs for each category (freestanding and hospital-
based) across all remaining providers. We next divide this by the sum
of total facility medical care costs across all remaining providers to
obtain both a freestanding cost weight and hospital-based cost weight.
Lastly, we are proposing to weight these two cost weights together
using the Medicare allowable costs from the sample of freestanding and
hospital-based IRFs that passed the PLI trim (59 percent for hospital-
based and 41 percent for freestanding IRFs) to derive a PLI cost weight
for the proposed 2021-based IRF market basket.
For the Home Office/Related Organization Contract Labor cost
weight, for each of the providers, we first divide the home office/
related organization contract labor costs by total facility medical
care costs to obtain a Home Office/Related Organization Contract Labor
cost weight for the universe of IRF providers. We are then proposing to
trim only the top 1 percent of providers to exclude outliers while also
allowing providers who have reported zero home office costs to remain
in the Home Office/Related Organization Contract Labor cost weight
calculations as not all providers will incur home office/relation
organization contract labor costs. After removing these outliers, we
are left with a trimmed data set for both freestanding and hospital-
based providers. We are then proposing to separately sum the costs for
each category (freestanding and hospital-based) across all remaining
providers. We next divide this by the sum of total facility medical
care costs across all remaining providers to obtain a freestanding cost
weight and hospital-based cost weight. Lastly, we are proposing to
weight these two cost weights together using the Medicare allowable
costs from the sample of freestanding and hospital-based IRFs that
passed the Home Office/Related Organization Contract Labor cost weight
trim (68 percent for hospital-based and 32 percent for freestanding
IRFs) to derive a Home Office/Related Organization Contract Labor cost
weight for the proposed 2021-based IRF market basket.
Finally, we propose to calculate the residual ``All Other'' cost
weight that reflects all remaining costs that are not captured in the
seven cost categories listed. See Table 4 for the resulting cost
weights for these major cost categories that we obtain from the
Medicare cost reports.

[[Page 20964]]

Table 4--Major Cost Categories as Derived From Medicare Cost Reports
------------------------------------------------------------------------
Proposed 2021-
based IRF 2016-based IRF
Major cost categories market basket market basket
(percent) (percent)
------------------------------------------------------------------------
Wages and Salaries...................... 46.6 47.1
Employee Benefits....................... 11.6 11.3
Contract Labor.......................... 2.0 1.0
Professional Liability Insurance 0.8 0.7
(Malpractice)..........................
Pharmaceuticals......................... 4.7 5.1
Home Office/Related Organization 5.4 3.7
Contract Labor.........................
Capital................................. 8.6 9.0
All Other............................... 20.4 22.2
------------------------------------------------------------------------
* Total may not sum to 100 due to rounding.

As we did for the 2016-based IRF market basket, we are proposing to
allocate the Contract Labor cost weight to the Wages and Salaries and
Employee Benefits cost weights based on their relative proportions
under the assumption that contract labor costs are comprised of both
wages and salaries and employee benefits. The Contract Labor allocation
proportion for Wages and Salaries is equal to the Wages and Salaries
cost weight as a percent of the sum of the Wages and Salaries cost
weight and the Employee Benefits cost weight. For this proposed rule,
this rounded percentage is 80 percent; therefore, we are proposing to
allocate 80 percent of the Contract Labor cost weight to the Wages and
Salaries cost weight and 20 percent to the Employee Benefits cost
weight. This allocation was 81/19 in the 2016-based IRF market basket
(84 FR 39076). Table 5 shows the Wages and Salaries and Employee
Benefit cost weights after Contract Labor cost weight allocation for
both the proposed 2021-based IRF market basket and 2016-based IRF
market basket.

Table 5--Wages and Salaries and Employee Benefits Cost Weights After
Contract Labor Allocation
------------------------------------------------------------------------
Proposed 2021-
Major cost categories based IRF 2016-based IRF
market basket market basket
------------------------------------------------------------------------
Wages and Salaries...................... 48.2 47.9
Employee Benefits....................... 11.9 11.4
------------------------------------------------------------------------

c. Derivation of the Detailed Operating Cost Weights
To further divide the ``All Other'' residual cost weight estimated
from the 2021 Medicare cost report data into more detailed cost
categories, we propose to use the 2012 Benchmark Input-Output (I-O)
``Use Tables/Before Redefinitions/Purchaser Value'' for North American
Industry Classification System (NAICS) 622000, Hospitals, published by
the Bureau of Economic Analysis (BEA). This data is publicly available
at <a href="http://www.bea.gov/industry/io_annual.htm">http://www.bea.gov/industry/io_annual.htm</a>. For the 2016-based IRF
market basket, we also used the 2012 Benchmark I-O data, the most
recent data available at the time (84 FR 39076).
The BEA Benchmark I-O data are scheduled for publication every 5
years with the most recent data available for 2012. The 2012 Benchmark
I-O data are derived from the 2012 Economic Census and are the building
blocks for BEA's economic accounts. Thus, they represent the most
comprehensive and complete set of data on the economic processes or
mechanisms by which output is produced and distributed.\16\ BEA also
produces Annual I-O estimates; however, while based on a similar
methodology, these estimates reflect less comprehensive and less
detailed data sources and are subject to revision when benchmark data
becomes available. Instead of using the less detailed Annual I-O data,
we propose to inflate the 2012 Benchmark I-O data forward to 2021 by
applying the annual price changes from the respective price proxies to
the appropriate market basket cost categories that are obtained from
the 2012 Benchmark I-O data. We repeat this practice for each year. We
then propose to calculate the cost shares that each cost category
represents of the inflated 2012 data. These resulting 2021 cost shares
are applied to the All Other residual cost weight to obtain the
detailed cost weights for the proposed 2021-based IRF market basket.
For example, the cost for Food: Direct Purchases represents 5.0 percent
of the sum of the ``All Other'' 2012 Benchmark I-O Hospital
Expenditures inflated to 2021; therefore, the Food: Direct Purchases
cost weight represents 5.0 percent of the 2021-based IRF market
basket's ``All Other'' cost category (20.4 percent), yielding a
``final'' Food: Direct Purchases cost weight of 1.0 percent in the
proposed 2021-based IRF market basket (0.05 * 20.4 percent = 1.0
percent).
---------------------------------------------------------------------------

\16\ <a href="http://www.bea.gov/papers/pdf/IOmanual_092906.pdf">http://www.bea.gov/papers/pdf/IOmanual_092906.pdf</a>.
---------------------------------------------------------------------------

Using this methodology, we propose to derive seventeen detailed IRF
market basket cost category weights from the proposed 2021-based IRF
market basket residual cost weight (20.4 percent). These categories
are: (1) Electricity and Other Non-Fuel Utilities, (2) Fuel: Oil and
Gas (3) Food: Direct Purchases, (4) Food: Contract Services, (5)
Chemicals, (6) Medical Instruments, (7) Rubber and Plastics, (8) Paper
and Printing Products, (9) Miscellaneous Products, (10) Professional
Fees: Labor-related, (11) Administrative and Facilities Support
Services, (12) Installation, Maintenance, and Repair Services, (13) All
Other Labor-related Services, (14) Professional Fees: Nonlabor-related,
(15) Financial Services, (16) Telephone Services, and (17) All Other
Nonlabor-related Services.

[[Page 20965]]

d. Derivation of the Detailed Capital Cost Weights
As described in section V.C.1.b. of this proposed rule, we are
proposing a Capital-Related cost weight of 8.6 percent as obtained from
the 2021 Medicare cost reports for freestanding and hospital-based IRF
providers. We are proposing to then separate this total Capital-Related
cost weight into more detailed cost categories.
Using 2021 Medicare cost reports, we are able to group Capital-
Related costs into the following categories: Depreciation, Interest,
Lease, and Other Capital-Related costs. For each of these categories,
we are proposing to determine separately for hospital-based IRFs and
freestanding IRFs what proportion of total capital-related costs the
category represents.
For freestanding IRFs, using Medicare cost report data on Worksheet
A-7 part III, we are proposing to derive the proportions for
Depreciation (column 9), Interest (column 11), Lease (column 10), and
Other Capital-related costs (column 12 through 14), which is similar to
the methodology used for the 2016-based IRF market basket.
For hospital-based IRFs, data for these four categories are not
reported separately for the hospital-based IRF; therefore, we are
proposing to derive these proportions using data reported on Worksheet
A-7 for the total facility. We are assuming the cost shares for the
overall hospital are representative for the hospital-based IRF unit.
For example, if depreciation costs make up 60 percent of total capital
costs for the entire facility, we believe it is reasonable to assume
that the hospital-based IRF would also have a 60 percent proportion
because it is a unit contained within the total facility. This is the
same methodology used for the 2016-based IRF market basket (84 FR
39077).
To combine each detailed capital cost weight for freestanding and
hospital-based IRFs into a single capital cost weight for the proposed
2021-based IRF market basket, we are proposing to weight together the
shares for each of the categories (Depreciation, Interest, Lease, and
Other Capital-related costs) based on the share of total capital costs
each provider type represents of the total capital costs for all IRFs
for 2021. Applying this methodology results in proportions of total
capital-related costs for Depreciation, Interest, Lease and Other
Capital-related costs that are representative of the universe of IRF
providers. This is the same methodology used for the 2016-based IRF
market basket (84 FR 39077).
Lease costs are unique in that they are not broken out as a
separate cost category in the proposed 2021-based IRF market basket.
Rather, we are proposing to proportionally distribute these costs among
the cost categories of Depreciation, Interest, and Other Capital-
Related costs, reflecting the assumption that the underlying cost
structure of leases is similar to that of capital-related costs in
general. As was done under the 2016-based IRF market basket, we are
proposing to assume that 10 percent of the lease costs as a proportion
of total capital-related costs represents overhead and assign those
costs to the Other Capital-Related cost category accordingly. We
propose to distribute the remaining lease costs proportionally across
the three cost categories (Depreciation, Interest, and Other Capital-
Related) based on the proportion that these categories comprise of the
sum of the Depreciation, Interest, and Other Capital-related cost
categories (excluding lease expenses). This would result in three
primary capital-related cost categories in the proposed 2021-based IRF
market basket: Depreciation, Interest, and Other Capital-Related costs.
This is the same methodology used for the 2016-based IRF market basket
(84 FR 39077). The allocation of these lease expenses is shown in Table
6.
Finally, we are proposing to further divide the Depreciation and
Interest cost categories. We are proposing to separate Depreciation
into the following two categories: (1) Building and Fixed Equipment and
(2) Movable Equipment. We are proposing to separate Interest into the
following two categories: (1) Government/Nonprofit and (2) For-profit.
To disaggregate the Depreciation cost weight, we need to determine
the percent of total Depreciation costs for IRFs that is attributable
to Building and Fixed Equipment, which we hereafter refer to as the
``fixed percentage.'' For the proposed 2021-based IRF market basket, we
are proposing to use slightly different methods to obtain the fixed
percentages for hospital-based IRFs compared to freestanding IRFs.
For freestanding IRFs, we are proposing to use depreciation data
from Worksheet A-7 of the 2021 Medicare cost reports. However, for
hospital-based IRFs, we determined that the fixed percentage for the
entire facility may not be representative of the hospital-based IRF
unit due to the entire facility likely employing more sophisticated
movable assets that are not utilized by the hospital-based IRF.
Therefore, for hospital-based IRFs, we are proposing to calculate a
fixed percentage using: (1) building and fixture capital costs
allocated to the hospital-based IRF unit as reported on Worksheet B,
part I, column 1, line 41, and (2) building and fixture capital costs
for the top five ancillary cost centers utilized by hospital-based IRFs
accounting for 78 percent of hospital-based IRF ancillary total costs:
Physical Therapy (Worksheet B, part I, column 1, line 66), Drugs
Charged to Patients (Worksheet B, part I, column 1, line 73),
Occupational Therapy (Worksheet B, part I, column 1, line 67),
Laboratory (Worksheet B, part I, column 1, line 60) and Clinic
(Worksheet B, part I, column 1, line 90). We propose to weight these
two fixed percentages (inpatient and ancillary) using the proportion
that each capital cost type represents of total capital costs in the
proposed 2021-based IRF market basket. We are proposing to then weight
the fixed percentages for hospital-based and freestanding IRFs together
using the proportion of total capital costs each provider type
represents. For both freestanding and hospital-based IRFs, this is the
same methodology used for the 2016-based IRF market basket (84 FR
39077).
To disaggregate the Interest cost weight, we determined the percent
of total interest costs for IRFs that are attributable to government
and nonprofit facilities, which is hereafter referred to as the
``nonprofit percentage,'' as price pressures associated with these
types of interest costs tend to differ from those for for-profit
facilities. For the 2021-based IRF market basket, we are proposing to
use interest costs data from Worksheet A-7 of the 2021 Medicare cost
reports for both freestanding and hospital-based IRFs. We are proposing
to determine the percent of total interest costs that are attributed to
government and nonprofit IRFs separately for hospital-based and
freestanding IRFs. We then are proposing to weight the nonprofit
percentages for hospital-based and freestanding IRFs together using the
proportion of total capital costs that each provider type represents.
Table 6 provides the proposed detailed capital cost share
composition estimated from the 2021 IRF Medicare cost reports. These
detailed capital cost share composition percentages are applied to the
total Capital-Related cost weight of 8.6 percent calculated using the
methodology described in section V.C.1.a.(8) of this proposed rule.

[[Page 20966]]

Table 6--Capital Cost Share Composition for the Proposed 2021-Based IRF
Market Basket
------------------------------------------------------------------------
Capital cost Capital cost
share composition share composition
before lease after lease
expense expense
allocation allocation
(percent) (percent)
------------------------------------------------------------------------
Depreciation...................... 48 70
Building and Fixed Equipment.. 30 44
Movable Equipment............. 18 26
Interest.......................... 10 14
Government/Nonprofit.......... 5 7
For Profit.................... 5 7
Lease......................... 34 .................
Other Capital-related costs....... 8 16
------------------------------------------------------------------------
* Detail may not add to total due to rounding.

e. Proposed 2021-Based IRF Market Basket Cost Categories and Weights

Table 7 compares the cost categories and weights for the proposed
2021-based IRF market basket compared to the 2016-based IRF market
basket.
BILLING CODE 4120-01-P
[GRAPHIC] [TIFF OMITTED] TP07AP23.003

[[Page 20967]]

BILLING CODE 4120-01-C
2. Selection of Price Proxies
After developing the cost weights for the proposed 2021-based IRF
market basket, we select the most appropriate wage and price proxies
currently available to represent the rate of price change for each
expenditure category. For the majority of the cost weights, we base the
price proxies on U.S. Bureau of Labor Statistics (BLS) data and group
them into one of the following BLS categories:
<bullet> Employment Cost Indexes. Employment Cost Indexes (ECIs)
measure the rate of change in employment wage rates and employer costs
for employee benefits per hour worked. These indexes are fixed-weight
indexes and strictly measure the change in wage rates and employee
benefits per hour. ECIs are superior to Average Hourly Earnings (AHE)
as price proxies for input price indexes because they are not affected
by shifts in occupation or industry mix, and because they measure pure
price change and are available by both occupational group and by
industry. The industry ECIs are based on the NAICS and the occupational
ECIs are based on the Standard Occupational Classification System
(SOC).
<bullet> Producer Price Indexes. Producer Price Indexes (PPIs)
measure the average change over time in the selling prices received by
domestic producers for their output. The prices included in the PPI are
from the first commercial transaction for many products and some
services (<a href="https://www.bls.gov/ppi/">https://www.bls.gov/ppi/</a>).
<bullet> Consumer Price Indexes. Consumer Price Indexes (CPIs)
measure the average change over time in the prices paid by urban
consumers for a market basket of consumer goods and services (<a href="https://www.bls.gov/cpi/">https://www.bls.gov/cpi/</a>). CPIs are only used when the purchases are similar to
those of retail consumers rather than purchases at the producer level,
or if no appropriate PPIs are available.
We evaluate the price proxies using the criteria of reliability,
timeliness, availability, and relevance:
<bullet> Reliability. Reliability indicates that the index is based
on valid statistical methods and has low sampling variability. Widely
accepted statistical methods ensure that the data were collected and
aggregated in a way that can be replicated. Low sampling variability is
desirable because it indicates that the sample reflects the typical
members of the population. (Sampling variability is variation that
occurs by chance because only a sample was surveyed rather than the
entire population.)
<bullet> Timeliness. Timeliness implies that the proxy is published
regularly, preferably at least once a quarter. The market baskets are
updated quarterly, and therefore, it is important for the underlying
price proxies to be up-to-date, reflecting the most recent data
available. We believe that using proxies that are published regularly
(at least quarterly, whenever possible) helps to ensure that we are
using the most recent data available to update the market basket. We
strive to use publications that are disseminated frequently, because we
believe that this is an optimal way to stay abreast of the most current
data available.
<bullet> Availability. Availability means that the proxy is
publicly available. We prefer that our proxies are publicly available
because this will help ensure that our market basket updates are as
transparent to the public as possible. In addition, this enables the
public to be able to obtain the price proxy data on a regular basis.
<bullet> Relevance. Relevance means that the proxy is applicable
and representative of the cost category weight to which it is applied.
The CPIs, PPIs, and ECIs that we have selected to propose in this
regulation meet these criteria. Therefore, we believe that they
continue to be the best measure of price changes for the cost
categories to which they would be applied.
Table 11 lists all price proxies that we propose to use for the
proposed 2021-based IRF market basket. Below is a detailed explanation
of the price proxies we are proposing for each cost category weight.
a. Price Proxies for the Operating Portion of the Proposed 2021-Based
IRF Market Basket
(1) Wages and Salaries
We are proposing to continue to use the ECI for Wages and Salaries
for All Civilian workers in Hospitals (BLS series code
CIU1026220000000I) to measure the wage rate growth of this cost
category. This is the same price proxy used in the 2016-based IRF
market basket (84 FR 39080).
(2) Benefits
We are proposing to continue to use the ECI for Total Benefits for
All Civilian workers in Hospitals to measure price growth of this
category. This ECI is calculated using the ECI for Total Compensation
for All Civilian workers in Hospitals (BLS series code
CIU1016220000000I) and the relative importance of wages and salaries
within total compensation. This is the same price proxy used in the
2016-based IRF market basket (84 FR 39080).
(3) Electricity and Other Non-Fuel Utilities
We are proposing to continue to use the PPI Commodity Index for
Commercial Electric Power (BLS series code WPU0542) to measure the
price growth of this cost category (which we are proposing to rename
from Electricity to Electricity and Other Non-Fuel Utilities). This is
the same price proxy used in the 2016-based IRF market basket (84 FR
39080).
(4) Fuel: Oil and Gas
Similar to the 2016-based IRF market basket, for the 2021-based IRF
market basket, we are proposing to use a blend of the PPI for Petroleum
Refineries and the PPI Commodity for Natural Gas. Our analysis of the
Bureau of Economic Analysis' 2012 Benchmark Input-Output data (use
table before redefinitions, purchaser's value for NAICS 622000
[Hospitals]), shows that Petroleum Refineries expenses account for
approximately 90 percent and Natural Gas expenses account for
approximately 10 percent of Hospitals' (NAICS 622000) total Fuel: Oil
and Gas expenses. Therefore, we propose to use a blend of 90 percent of
the PPI for Petroleum Refineries (BLS series code PCU324110324110) and
10 percent of the PPI Commodity Index for Natural Gas (BLS series code
WPU0531) as the price proxy for this cost category. This is the same
blend that was used for the 2016-based IRF market basket (84 FR 39080).
(5) Professional Liability Insurance
We are proposing to continue to use the CMS Hospital Professional
Liability Index to measure changes in PLI premiums. To generate this
index, we collect commercial insurance premiums for a fixed level of
coverage while holding non-price factors constant (such as a change in
the level of coverage). This is the same proxy used in the 2016-based
IRF market basket (84 FR 39080).
(6) Pharmaceuticals
We are proposing to continue to use the PPI for Pharmaceuticals for
Human Use, Prescription (BLS series code WPUSI07003) to measure the
price growth of this cost category. This is the same proxy used in the
2016-based IRF market basket (84 FR 39080).
(7) Food: Direct Purchases
We are proposing to continue to use the PPI for Processed Foods and
Feeds (BLS series code WPU02) to measure the price growth of this cost
category. This is the same proxy used in the 2016-based IRF market
basket (84 FR 39080).

[[Page 20968]]

(8) Food: Contract Purchases
We are proposing to continue to use the CPI for Food Away From Home
(BLS series code CUUR0000SEFV) to measure the price growth of this cost
category. This is the same proxy used in the 2016-based IRF market
basket (84 FR 39080).
(9) Chemicals
Similar to the 2016-based IRF market basket, we are proposing to
use a four-part blended PPI as the proxy for the chemical cost category
in the proposed 2021-based IRF market basket. The proposed blend is
composed of the PPI for Industrial Gas Manufacturing, Primary Products
(BLS series code PCU325120325120P), the PPI for Other Basic Inorganic
Chemical Manufacturing (BLS series code PCU32518-32518-), the PPI for
Other Basic Organic Chemical Manufacturing (BLS series code PCU32519-
32519-), and the PPI for Other Miscellaneous Chemical Product
Manufacturing (BLS series code PCU325998325998). For the proposed 2021-
based IRF market basket, we are proposing to derive the weights for the
PPIs using the 2012 Benchmark I-O data.
Table 8 shows the weights for each of the four PPIs used to create
the proposed blended Chemical proxy for the proposed 2021 IRF market
basket. This is the same blend that was used for the 2016-based IRF
market basket (84 FR 39080).

Table 8--Blended Chemical PPI Weights
------------------------------------------------------------------------
Proposed 2021-
based IRF
Name weights NAICS
(percent)
------------------------------------------------------------------------
PPI for Industrial Gas Manufacturing.... 19 325120
PPI for Other Basic Inorganic Chemical 13 325180
Manufacturing..........................
PPI for Other Basic Organic Chemical 60 325190
Manufacturing..........................
PPI for Other Miscellaneous Chemical 8 325998
Product Manufacturing..................
------------------------------------------------------------------------

(10) Medical Instruments
We are proposing to use a blended price proxy for the Medical
Instruments category, as shown in Table 9. The 2012 Benchmark I-O data
shows the majority of medical instruments and supply costs are for
NAICS 339112--Surgical and medical instrument manufacturing costs
(approximately 56 percent) and NAICS 339113--Surgical appliance and
supplies manufacturing costs (approximately 43 percent). Therefore, we
are proposing to use a blend of these two price proxies. To proxy the
price changes associated with NAICS 339112, we are proposing using the
PPI for Surgical and medical instruments (BLS series code WPU1562).
This is the same price proxy we used in the 2016-based IRF market
basket. To proxy the price changes associated with NAICS 339113, we are
proposing to use a 50/50 blend of the PPI for Medical and surgical
appliances and supplies (BLS series code WPU1563) and the PPI for
Miscellaneous products, Personal safety equipment and clothing (BLS
series code WPU1571). We are proposing to include the latter price
proxy as it would reflect personal protective equipment including but
not limited to face shields and protective clothing. The 2012 Benchmark
I-O data does not provide specific expenses for these products;
however, we recognize that this category reflects costs faced by IRFs.

Table 9--Blended Medical Instruments PPI Weights
------------------------------------------------------------------------
Proposed 2021-
based IRF
Name weights NAICS
(percent)
------------------------------------------------------------------------
PPI--Commodity--Surgical and medical 56 339112
instruments............................
PPI--Commodity--Medical and surgical 22 339113
appliances and supplies................
PPI--Commodity--Miscellaneous products- 22
Personal safety equipment and clothing.
------------------------------------------------------------------------

(11) Rubber and Plastics
We are proposing to continue to use the PPI for Rubber and Plastic
Products (BLS series code WPU07) to measure price growth of this cost
category. This is the same proxy used in the 2016-based IRF market
basket (84 FR 39081).
(12) Paper and Printing Products
We are proposing to continue to use the PPI for Converted Paper and
Paperboard Products (BLS series code WPU0915) to measure the price
growth of this cost category. This is the same proxy used in the 2016-
based IRF market basket (84 FR 39081).
(13) Miscellaneous Products
We are proposing to continue to use the PPI for Finished Goods Less
Food and Energy (BLS series code WPUFD4131) to measure the price growth
of this cost category. This is the same proxy used in the 2016-based
IRF market basket (84 FR 39081).
(14) Professional Fees: Labor-Related
We are proposing to continue to use the ECI for Total Compensation
for Private Industry workers in Professional and Related (BLS series
code CIU2010000120000I) to measure the price growth of this category.
This is the same proxy used in the 2016-based IRF market basket (84 FR
39081).
(15) Administrative and Facilities Support Services
We are proposing to continue to use the ECI for Total Compensation
for Private Industry workers in Office and Administrative Support (BLS
series code CIU2010000220000I) to measure the price growth of this
category. This is the same proxy used in the 2016-based IRF market
basket (84 FR 39081).
(16) Installation, Maintenance, and Repair Services
We are proposing to continue to use the ECI for Total Compensation
for

[[Page 20969]]

Civilian workers in Installation, Maintenance, and Repair (BLS series
code CIU1010000430000I) to measure the price growth of this cost
category. This is the same proxy used in the 2016-based IRF market
basket (84 FR 39081).
(17) All Other: Labor-Related Services
We are proposing to continue to use the ECI for Total Compensation
for Private Industry workers in Service Occupations (BLS series code
CIU2010000300000I) to measure the price growth of this cost category.
This is the same proxy used in the 2016-based IRF market basket (84 FR
39081).
(18) Professional Fees: Nonlabor-Related
We are proposing to continue to use the ECI for Total Compensation
for Private Industry workers in Professional and Related (BLS series
code CIU2010000120000I) to measure the price growth of this category.
This is the same proxy used in the 2016-based IRF market basket (84 FR
39081).
(19) Financial Services
We are proposing to continue to use the ECI for Total Compensation
for Private Industry workers in Financial Activities (BLS series code
CIU201520A000000I) to measure the price growth of this cost category.
This is the same proxy used in the 2016-based IRF market basket (84 FR
39081).
(20) Telephone Services
We are proposing to continue to use the CPI for Telephone Services
(BLS series code CUUR0000SEED) to measure the price growth of this cost
category. This is the same proxy used in the 2016-based IRF market
basket (84 FR 39081).
(21) All Other: Nonlabor-Related Services
We are proposing to continue to use the CPI for All Items Less Food
and Energy (BLS series code CUUR0000SA0L1E) to measure the price growth
of this cost category. This is the same proxy used in the 2016-based
IRF market basket (84 FR 39081).
b. Price Proxies for the Capital Portion of the Proposed 2021-Based IRF
Market Basket
(1) Capital Price Proxies Prior to Vintage Weighting
We are proposing to continue to use the same price proxies for the
capital-related cost categories in the proposed 2021-based IRF market
basket as were used in the 2016-based IRF market basket, which are
provided in Table 11 and described below. Specifically, we are
proposing to proxy:
<bullet> Depreciation: Building and Fixed Equipment cost category
by BEA's Chained Price Index for Nonresidential Construction for
Hospitals and Special Care Facilities (BEA Table 5.4.4. Price Indexes
for Private Fixed Investment in Structures by Type).
<bullet> Depreciation: Movable Equipment cost category by the PPI
for Machinery and Equipment (BLS series code WPU11).
<bullet> Nonprofit Interest cost category by the average yield on
domestic municipal bonds (Bond Buyer 20-bond index).
<bullet> For-profit Interest cost category by the iBoxx AAA
Corporate Bond Yield index.
<bullet> Other Capital-Related cost category by the CPI-U for Rent
of Primary Residence (BLS series code CUUS0000SEHA).
We believe these are the most appropriate proxies for IRF capital-
related costs that meet our selection criteria of relevance,
timeliness, availability, and reliability. We are also proposing to
continue to vintage weight the capital price proxies for Depreciation
and Interest to capture the long-term consumption of capital. This
vintage weighting method is similar to the method used for the 2016-
based IRF market basket (84 FR 39082) and is described below.
(2) Vintage Weights for Price Proxies
Because capital is acquired and paid for over time, capital-related
expenses in any given year are determined by both past and present
purchases of physical and financial capital. The vintage-weighted
capital-related portion of the proposed 2021-based IRF market basket is
intended to capture the long-term consumption of capital, using vintage
weights for depreciation (physical capital) and interest (financial
capital). These vintage weights reflect the proportion of capital-
related purchases attributable to each year of the expected life of
building and fixed equipment, movable equipment, and interest. We are
proposing to use vintage weights to compute vintage-weighted price
changes associated with depreciation and interest expenses.
Capital-related costs are inherently complicated and are determined
by complex capital-related purchasing decisions, over time, based on
such factors as interest rates and debt financing. In addition, capital
is depreciated over time instead of being consumed in the same period
it is purchased. By accounting for the vintage nature of capital, we
are able to provide an accurate and stable annual measure of price
changes. Annual non-vintage price changes for capital are unstable due
to the volatility of interest rate changes, and therefore, do not
reflect the actual annual price changes for IRF capital-related costs.
The capital-related component of the proposed 2021-based IRF market
basket reflects the underlying stability of the capital-related
acquisition process.
The methodology used to calculate the vintage weights for the
proposed 2021-based IRF market basket is the same as that used for the
2016-based IRF market basket (84 FR 39082 through 39083) with the only
difference being the inclusion of more recent data. To calculate the
vintage weights for depreciation and interest expenses, we first need a
time series of capital-related purchases for building and fixed
equipment and movable equipment. We found no single source that
provides an appropriate time series of capital-related purchases by
hospitals for all of the above components of capital purchases. The
early Medicare cost reports did not have sufficient capital-related
data to meet this need. Data we obtained from the American Hospital
Association (AHA) do not include annual capital-related purchases.
However, we are able to obtain data on total expenses back to 1963 from
the AHA. Consequently, we are proposing to use data from the AHA Panel
Survey and the AHA Annual Survey to obtain a time series of total
expenses for hospitals. We are then proposing to use data from the AHA
Panel Survey supplemented with the ratio of depreciation to total
hospital expenses obtained from the Medicare cost reports to derive a
trend of annual depreciation expenses for 1963 through 2020, which is
the latest year of AHA data available. We propose to separate these
depreciation expenses into annual amounts of building and fixed
equipment depreciation and movable equipment depreciation as determined
earlier. From these annual depreciation amounts, we derive annual end-
of-year book values for building and fixed equipment and movable
equipment using the expected life for each type of asset category.
While data is not available that is specific to IRFs, we believe this
information for all hospitals serves as a reasonable alternative for
the pattern of depreciation for IRFs.
To continue to calculate the vintage weights for depreciation and
interest expenses, we also need to account for the expected lives for
Building and Fixed Equipment, Movable Equipment, and Interest for the
proposed 2021-based IRF market basket. We are proposing to calculate
the expected lives using Medicare cost report data from Worksheet A-7
part III for freestanding and hospital-based IRFs.

[[Page 20970]]

The expected life of any asset can be determined by dividing the value
of the asset (excluding fully depreciated assets) by its current year
depreciation amount. This calculation yields the estimated expected
life of an asset if the rates of depreciation were to continue at
current year levels, assuming straight-line depreciation. We are
proposing to determine the expected life of building and fixed
equipment separately for hospital-based IRFs and freestanding IRFs, and
then weight these expected lives using the percent of total capital
costs each provider type represents. We are proposing to apply a
similar method for movable equipment. Using these proposed methods, we
determined the average expected life of building and fixed equipment to
be equal to 25 years, and the average expected life of movable
equipment to be equal to 12 years. For the expected life of interest,
we believe vintage weights for interest should represent the average
expected life of building and fixed equipment because, based on
previous research described in the FY 1997 IPPS final rule (61 FR
46198), the expected life of hospital debt instruments and the expected
life of buildings and fixed equipment are similar. We note that for the
2016-based IRF market basket, the expected life of building and fixed
equipment is 22 years, and the expected life of movable equipment is 11
years (84 FR 39082) using the 2016 Medicare cost report data for
freestanding and hospital-based IRFs.
Multiplying these expected lives by the annual depreciation amounts
results in annual year-end asset costs for building and fixed equipment
and movable equipment. We then calculate a time series, beginning in
1964, of annual capital purchases by subtracting the previous year's
asset costs from the current year's asset costs.
For the building and fixed equipment and movable equipment vintage
weights, we are proposing to use the real annual capital-related
purchase amounts for each asset type to capture the actual amount of
the physical acquisition, net of the effect of price inflation. These
real annual capital-related purchase amounts are produced by deflating
the nominal annual purchase amount by the associated price proxy as
provided earlier in this proposed rule. For the interest vintage
weights, we are proposing to use the total nominal annual capital-
related purchase amounts to capture the value of the debt instrument
(including, but not limited to, mortgages and bonds). Using these
capital-related purchase time series specific to each asset type, we
are proposing to calculate the vintage weights for building and fixed
equipment, for movable equipment, and for interest.
The vintage weights for each asset type are deemed to represent the
average purchase pattern of the asset over its expected life (in the
case of building and fixed equipment and interest, 25 years, and in the
case of movable equipment, 12 years). For each asset type, we used the
time series of annual capital-related purchase amounts available from
2020 back to 1964. These data allow us to derive thirty-three 25-year
periods of capital-related purchases for building and fixed equipment
and interest, and forty-six 12-year periods of capital-related
purchases for movable equipment. For each 25-year period for building
and fixed equipment and interest, or 12-year period for movable
equipment, we calculate annual vintage weights by dividing the capital-
related purchase amount in any given year by the total amount of
purchases over the entire 25-year or 12-year period. This calculation
is done for each year in the 25-year or 12-year period and for each of
the periods for which we have data. We then calculate the average
vintage weight for a given year of the expected life by taking the
average of these vintage weights across the multiple periods of data.
The vintage weights for the capital-related portion of the proposed
2021-based IRF market basket and the 2016-based IRF market basket are
presented in Table 10.

[[Page 20971]]

[GRAPHIC] [TIFF OMITTED] TP07AP23.004

The process of creating vintage-weighted price proxies requires
applying the vintage weights to the price proxy index where the last
applied vintage weight in Table 10 is applied to the most recent data
point. We have provided on the CMS website an example of how the
vintage weighting price proxies are calculated, using example vintage
weights and example price indices. The example can be found at <a href="http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/MedicareProgramRatesStats/MarketBasketResearch.html">http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/MedicareProgramRatesStats/MarketBasketResearch.html</a> in the zip
file titled ``Weight Calculations as described in the IPPS FY 2010
Proposed Rule.''
c. Summary of Price Proxies of the Proposed 2021-Based IRF Market
Basket
Table 11 shows both the operating and capital price proxies for the
proposed 2021-based IRF market base.
BILLING CODE 4120-01-C

[[Page 20972]]

[GRAPHIC] [TIFF OMITTED] TP07AP23.005

BILLING CODE 4120-01-D
We invite public comment on our proposal to rebase and revise the
IRF market basket to reflect a 2021 base year.

[[Page 20973]]

D. Proposed FY 2024 Market Basket Update and Productivity Adjustment

1. Proposed FY 2024 Market Basket Update
For FY 2024 (that is, beginning October 1, 2023 and ending
September 30, 2024), we are proposing to use an estimate of the
proposed 2021-based IRF market basket increase factor to update the IRF
PPS base payment rate as required by section 1886(j)(3)(C)(i) of the
Act. Consistent with historical practice, we are proposing to estimate
the market basket update for the IRF PPS based on IHS Global Inc.'s
(IGI's) forecast using the most recent available data. IGI is a
nationally recognized economic and financial forecasting firm with
which CMS contracts to forecast the components of the market baskets.
Based on IGI's fourth quarter 2022 forecast with historical data
through the third quarter of 2022, the proposed 2021-based IRF market
basket increase factor for FY 2024 is 3.2 percent. Therefore,
consistent with our historical practice of estimating market basket
increases based on the best available data, we are proposing a market
basket increase factor of 3.2 percent for FY 2024. We are also
proposing that if more recent data are subsequently available (for
example, a more recent estimate of the market basket) we would use such
data, if appropriate, to determine the FY 2024 update in the final
rule. For comparison, the current 2016-based IRF market basket is also
projected to increase by 3.2 percent in FY 2024 based on IGI's fourth
quarter 2022 forecast. Table 12 compares the proposed 2021-based IRF
market basket and the 2016-based IRF market basket percent changes. On
average, the two indexes produce similar updates to one another, with
the 4-year average historical growth rates (for FY 2019-FY 2022) of the
proposed 2021-based IRF market basket being equal to 3.2 percent
compared to the 2016-based IRF market basket with 3.1 percent.

Table 12--Proposed 2021-Based IRF Market Basket and 2016-Based IRF
Market Basket Percent Changes, FY 2019 Through FY 2026
------------------------------------------------------------------------
Proposed 2021-
based IRF 2016-based IRF
Fiscal year (FY) market basket market basket
index percent index percent
change change
------------------------------------------------------------------------
Historical data
------------------------------------------------------------------------
FY 2019................................. 2.4 2.3
FY 2020................................. 2.1 2.1
FY 2021................................. 2.8 2.7
FY 2022................................. 5.3 5.3
-------------------------------
Average 2019-2022................... 3.2 3.1
------------------------------------------------------------------------
Forecast
------------------------------------------------------------------------
FY 2023................................. 4.6 4.6
FY 2024................................. 3.2 3.2
FY 2025................................. 2.9 2.9
FY 2026................................. 2.8 2.8
-------------------------------
Average 2023-2026................... 3.4 3.4
------------------------------------------------------------------------
Note that these market basket percent changes do not include any further
adjustments as may be statutorily required.
Source: IHS Global Inc. 4th quarter 2022 forecast.

2. Proposed Productivity Adjustment
According to section 1886(j)(3)(C)(i) of the Act, the Secretary
shall establish an increase factor based on an appropriate percentage
increase in a market basket of goods and services. Section
1886(j)(3)(C)(ii) of the Act then requires that, after establishing the
increase factor for a FY, the Secretary shall reduce such increase
factor for FY 2012 and each subsequent FY, by the productivity
adjustment described in section 1886(b)(3)(B)(xi)(II) of the Act.
Section 1886(b)(3)(B)(xi)(II) of the Act sets forth the definition of
this productivity adjustment. The statute defines the productivity
adjustment to be equal to the 10-year moving average of changes in
annual economy-wide, private nonfarm business multifactor productivity
(as projected by the Secretary for the 10-year period ending with the
applicable FY, year, cost reporting period, or other annual period)
(the ``productivity adjustment''). The U.S. Department of Labor's
Bureau of Labor Statistics (BLS) publishes the official measures of
productivity for the U.S. economy. We note that previously the
productivity measure referenced in section 1886(b)(3)(B)(xi)(II) of the
Act, was published by BLS as private nonfarm business multifactor
productivity. Beginning with the November 18, 2021 release of
productivity data, BLS replaced the term multifactor productivity (MFP)
with total factor productivity (TFP). BLS noted that this is a change
in terminology only and will not affect the data or methodology. As a
result of the BLS name change, the productivity measure referenced in
section 1886(b)(3)(B)(xi)(II) is now published by BLS as private
nonfarm business total factor productivity. However, as mentioned
above, the data and methods are unchanged. Please see <a href="http://www.bls.gov">www.bls.gov</a> for
the BLS historical published TFP data. A complete description of IGI's
TFP projection methodology is available on the CMS website at <a href="https://www.cms.gov/Research-Statistics-Dataand-Systems/Statistics-Trends-andReports/MedicareProgramRatesStats/MarketBasketResearch">https://www.cms.gov/Research-Statistics-Dataand-Systems/Statistics-Trends-andReports/MedicareProgramRatesStats/MarketBasketResearch</a>. In addition,
in the FY 2022 IRF final rule (86 FR 42374), we noted that effective
with FY 2022 and forward, CMS changed the name of this adjustment to
refer to it as the productivity adjustment rather than the MFP
adjustment.
Using IGI's fourth quarter 2022 forecast, the 10-year moving
average growth of TFP for FY 2024 is projected

[[Page 20974]]

to be 0.2 percent. Thus, in accordance with section 1886(j)(3)(C) of
the Act, we are proposing to calculate the FY 2024 market basket
update, which is used to determine the applicable percentage increase
for the IRF payments, using IGI's fourth quarter 2022 forecast of the
proposed 2021-based IRF market basket. We are proposing to then reduce
this percentage increase by the estimated productivity adjustment for
FY 2024 of 0.2 percentage point (the 10-year moving average growth of
TFP for the period ending FY 2024 based on IGI's fourth quarter 2022
forecast). Therefore, the proposed FY 2024 IRF update is equal to 3.0
percent (3.2 percent market basket update reduced by the 0.2 percentage
point productivity adjustment). Furthermore, we are proposing that if
more recent data become available after the publication of the proposed
rule and before the publication of the final rule (for example, a more
recent estimate of the market basket and/or productivity adjustment),
we would use such data, if appropriate, to determine the FY 2024 market
basket update and productivity adjustment in the final rule.
For FY 2024, the Medicare Payment Advisory Commission (MedPAC)
recommends that we reduce IRF PPS payment rates by 5 percent. As
discussed, and in accordance with sections 1886(j)(3)(C) and
1886(j)(3)(D) of the Act, the Secretary is proposing to update the IRF
PPS payment rates for FY 2024 by a productivity-adjusted IRF market
basket increase factor of 3.0 percent. Section 1886(j)(3)(C) of the Act
does not provide the Secretary with the authority to apply a different
update factor to IRF PPS payment rates for FY 2024.
We invite public comment on our proposals for the FY 2024 market
basket update and productivity adjustment.

E. Proposed Labor-Related Share for FY 2024

Section 1886(j)(6) of the Act specifies that the Secretary is to
adjust the proportion (as estimated by the Secretary from time to time)
of inpatient rehabilitation facilities' costs that are attributable to
wages and wage-related costs, of the prospective payment rates computed
under section 1886(j)(3) of the Act for area differences in wage levels
by a factor (established by the Secretary) reflecting the relative
hospital wage level in the geographic area of the rehabilitation
facility compared to the national average wage level for such
facilities. The labor-related share is determined by identifying the
national average proportion of total costs that are related to,
influenced by, or vary with the local labor market. We propose to
continue to classify a cost category as labor-related if the costs are
labor-intensive and vary with the local labor market. As stated in the
FY 2020 IRF PPS final rule (84 FR 39087), the labor-related share was
defined as the sum of the relative importance of Wages and Salaries,
Employee Benefits, Professional Fees: Labor-related Services,
Administrative and Facilities Support Services, Installation,
Maintenance, and Repair Services, All Other: Labor-related Services,
and a portion of the Capital Costs from the 2016-based IRF market
basket.
Based on our definition of the labor-related share and the cost
categories in the proposed 2021-based IRF market basket, we are
proposing to include in the labor-related share for FY 2024 the sum of
the FY 2024 relative importance of Wages and Salaries, Employee
Benefits, Professional Fees: Labor-related, Administrative and
Facilities Support Services, Installation, Maintenance, and Repair
Services, All Other: Labor-related Services, and a portion of the
Capital-Related cost weight from the proposed 2021-based IRF market
basket.
Similar to the 2016-based IRF market basket (84 FR 39087), the
proposed 2021-based IRF market basket includes two cost categories for
nonmedical Professional Fees (including, but not limited to, expenses
for legal, accounting, and engineering services). These are
Professional Fees: Labor-related and Professional Fees: Nonlabor-
related. For the proposed 2021-based IRF market basket, we propose to
estimate the labor-related percentage of non-medical professional fees
(and assign these expenses to the Professional Fees: Labor-related
services cost category) based on the same method that was used to
determine the labor-related percentage of professional fees in the
2016-based IRF market basket.
As was done in the 2016-based IRF market basket (84 FR 39087), we
propose to determine the proportion of legal, accounting and auditing,
engineering, and management consulting services that meet our
definition of labor-related services based on a survey of hospitals
conducted by us in 2008, a discussion of which can be found in the FY
2010 IPPS/LTCH PPS final rule (74 FR 43850 through 43856). Based on the
weighted results of the survey, we determined that hospitals purchase,
on average, the following portions of contracted professional services
outside of their local labor market:
<bullet> 34 percent of accounting and auditing services.
<bullet> 30 percent of engineering services.
<bullet> 33 percent of legal services.
<bullet> 42 percent of management consulting services.
We are proposing to apply each of these percentages to the
respective Benchmark I-O cost category underlying the professional fees
cost category to determine the Professional Fees: Nonlabor-related
costs. The Professional Fees: Labor-related costs were determined to be
the difference between the total costs for each Benchmark I-O category
and the Professional Fees: Nonlabor-related costs. This is the same
methodology that we used to separate the 2016-based IRF market basket
professional fees category into Professional Fees: Labor-related and
Professional Fees: Nonlabor-related cost categories (84 FR 39087).
Effective for transmittal 18 (<a href="https://www.cms.gov/Regulations-and-Guidance/Guidance/Transmittals/Transmittals/r18p240i">https://www.cms.gov/Regulations-and-Guidance/Guidance/Transmittals/Transmittals/r18p240i</a>), the hospital
Medicare Cost Report (CMS Form 2552-10, OMB No. 0938-0050) is
collecting information on whether a hospital purchased professional
services (for example, legal, accounting, tax preparation, bookkeeping,
payroll, advertising, and/or management/consulting services) from an
unrelated organization and if the majority of these expenses were
purchased from unrelated organizations located outside of the main
hospital's local area labor market. We encourage all providers to
provide this information so we can potentially use in future rulemaking
to determine the labor-related share.
In the proposed 2021-based IRF market basket, nonmedical
professional fees that are subject to allocation based on these survey
results represent 4.0 percent of total costs (and are limited to those
fees related to Accounting & Auditing, Legal, Engineering, and
Management Consulting services). Based on our survey results, we
propose to apportion approximately 2.6 percentage points of the 4.0
percentage point figure into the Professional Fees: Labor-related share
cost category and designate the remaining 1.4 percentage point into the
Professional Fees: Nonlabor-related cost category.
In addition to the professional services listed, for the 2021-based
IRF market basket, we are proposing to allocate a proportion of the
Home Office/Related Organization Contract Labor cost weight, calculated
using the Medicare cost reports as stated above, into the Professional
Fees: Labor-related and Professional Fees: Nonlabor-related cost
categories. We are proposing to

[[Page 20975]]

classify these expenses as labor-related and nonlabor-related as many
facilities are not located in the same geographic area as their home
office, and therefore, do not meet our definition for the labor-related
share that requires the services to be purchased in the local labor
market.
Similar to the 2016-based IRF market basket, we are proposing for
the 2021-based IRF market basket to use the Medicare cost reports for
both freestanding IRF providers and hospital-based IRF providers to
determine the home office labor-related percentages. The Medicare cost
report requires a hospital to report information regarding their home
office provider. For the proposed 2021-based IRF market basket, we are
proposing to start with the sample of IRF providers that passed the top
1 percent trim used to derive the Home Office/Related Organization
Contract Labor cost weight as described in section V.C.1.b. of this
proposed rule. Using information on the Medicare cost report, for
freestanding and hospital-based providers separately, we first compare
the location of the IRF with the location of the IRF's home office and
classify an IRF based on whether their home office is located in the
hospital facility's same Metropolitan Statistical Area. For both
freestanding and hospital-based providers, we are proposing to multiply
each provider's Home Office/Related Organization Contract Labor cost
weight (calculated using data from the total facility) by Medicare
allowable total costs. We then calculate the proportion of Medicare
allowable home office compensation costs that these IRFs represent of
total Medicare allowable home office compensation costs. We propose to
multiply this percentage (45 percent) by the Home Office/Related
Organization Contract Labor cost weight (5.4 percent) to determine the
proportion of costs that should be allocated to the labor-related
share. Therefore, we are allocating 2.4 percentage points of the Home
Office/Related Organization Contract Labor cost weight (5.4 percent
times 45 percent) to the Professional Fees: Labor-related cost weight
and 3.0 percentage points of the Home Office/Related Organization
Contract Labor cost weight to the Professional Fees: Nonlabor-related
cost weight (5.4 percent times 55 percent). For the 2016-based IRF
market basket, we used a similar methodology (84 FR 39088) and
determined that 42 percent of the 2016-based Home Office/Related
Organization Contract Labor cost weight should be allocated to the
labor-related share.
In summary, we apportioned 2.6 percentage points of the non-medical
professional fees and 2.4 percentage points of the Home Office/Related
Organization Contract Labor cost weight into the Professional Fees:
Labor-related cost category. This amount was added to the portion of
professional fees that was identified to be labor-related using the I-O
data such as contracted advertising and marketing costs (approximately
0.6 percentage point of total costs) resulting in a Professional Fees:
Labor-related cost weight of 5.6 percent.
As stated previously, we are proposing to include in the labor-
related share the sum of the relative importance of Wages and Salaries,
Employee Benefits, Professional Fees: Labor-Related, Administrative and
Facilities Support Services, Installation, Maintenance, and Repair
Services, All Other: Labor-related Services, and a portion of the
Capital-Related cost weight from the proposed 2021-based IRF market
basket. The relative importance reflects the different rates of price
change for these cost categories between the base year (2021) and FY
2024. Based on IGI's fourth quarter 2022 forecast for the proposed
2021-based IRF market basket, the sum of the FY 2024 relative
importance for Wages and Salaries, Employee Benefits, Professional
Fees: Labor-related, Administrative and Facilities Support Services,
Installation Maintenance & Repair Services, and All Other: Labor-
related Services is 70.3 percent. The portion of Capital costs that is
influenced by the local labor market is estimated to be 46 percent,
which is the same percentage applied to the 2016-based IRF market
basket (84 FR 39088 through 39089). Since the relative importance for
Capital is 8.2 percent of the proposed 2021-based IRF market basket in
FY 2024, we took 46 percent of 8.2 percent to determine the proposed
labor-related share of Capital for FY 2024 of 3.8 percent. Therefore,
we are proposing a total labor-related share for FY 2024 of 74.1
percent (the sum of 70.3 percent for the operating costs and 3.8
percent for the labor-related share of Capital). Table 13 shows the FY
2024 labor-related share using the proposed 2021-based IRF market
basket relative importance and the FY 2023 labor-related share using
the 2016-based IRF market basket relative importance.

Table 13--Proposed FY 2024 IRF Labor-Related Share and FY 2023 IRF Labor-
Related Share
------------------------------------------------------------------------
FY 2024
proposed labor- FY 2023 final
related share labor related
\1\ share \2\
------------------------------------------------------------------------
Wages and Salaries...................... 48.9 48.7
Employee Benefits....................... 11.9 11.3
Professional Fees: Labor-related \3\.... 5.5 4.9
Administrative and Facilities Support 0.7 0.8
Services...............................
Installation, Maintenance, and Repair 1.5 1.6
Services...............................
All Other: Labor-related Services....... 1.8 1.9
-------------------------------
Subtotal............................ 70.3 69.2
------------------------------------------------------------------------
Labor-related portion of capital (46%).. 3.8 3.7
-------------------------------
Total Labor-Related Share........... 74.1 72.9
------------------------------------------------------------------------
\1\ Based on the proposed 2021-based IRF Market Basket, IHS Global, Inc.
4th quarter 2022 forecast.
\2\ Based on the 2016-based IRF market basket as published in the
Federal Register (87 FR 47052).
\3\ Includes all contract advertising and marketing costs and a portion
of accounting, architectural, engineering, legal, management
consulting, and home office/related organization contract labor costs.

The FY 2024 labor-related share using the proposed 2021-based IRF
market basket is 1.2 percentage point higher than the FY 2023 labor-
related share using the 2016-based IRF market basket. This higher
labor-related share is

[[Page 20976]]

primarily due to the incorporation of the 2021 Medicare cost report
data, which increased the Compensation cost weight by approximately 0.8
percentage point compared to the 2016-based IRF market basket as shown
in Table 4 and Table 5 in section V.C.1.b. of this proposed rule.
We invite public comment on the proposed labor-related share for FY
2024.

F. Proposed Wage Adjustment for FY 2024

1. Background
Section 1886(j)(6) of the Act requires the Secretary to adjust the
proportion of rehabilitation facilities' costs attributable to wages
and wage-related costs (as estimated by the Secretary from time to
time) by a factor (established by the Secretary) reflecting the
relative hospital wage level in the geographic area of the
rehabilitation facility compared to the national average wage level for
those facilities. The Secretary is required to update the IRF PPS wage
index on the basis of information available to the Secretary on the
wages and wage-related costs to furnish rehabilitation services. Any
adjustment or updates made under section 1886(j)(6) of the Act for a FY
are made in a budget-neutral manner.
In the FY 2023 IRF PPS final rule (87 FR 47054 through 47056) we
finalized a policy to apply a 5-percent cap on any decrease to a
provider's wage index from its wage index in the prior year, regardless
of the circumstances causing the decline. Additionally, we finalized a
policy that a new IRF would be paid the wage index for the area in
which it is geographically located for its first full or partial FY
with no cap applied because a new IRF would not have a wage index in
the prior FY. Also, in the FY 2023 IRF PPS final rule, we amended the
regulations at Sec. 412.624(e)(1)(ii) to reflect this permanent cap on
wage index decreases. A full discussion of the adoption of this policy
is found in the FY 2023 IRF PPS final rule.
For FY 2024, we propose to maintain the policies and methodologies
described in the FY 2023 IRF PPS final rule (87 FR 47038) related to
the labor market area definitions and the wage index methodology for
areas with wage data. Thus, we propose to use the core based
statistical areas (CBSAs) labor market area definitions and the FY 2024
pre-reclassification and pre-floor hospital wage index data. In
accordance with section 1886(d)(3)(E) of the Act, the FY 2024 pre-
reclassification and pre-floor hospital wage index is based on data
submitted for hospital cost reporting periods beginning on or after
October 1, 2019, and before October 1, 2020 (that is, FY 2020 cost
report data).
The labor market designations made by the OMB include some
geographic areas where there are no hospitals and, thus, no hospital
wage index data on which to base the calculation of the IRF PPS wage
index. We propose to continue to use the same methodology discussed in
the FY 2008 IRF PPS final rule (72 FR 44299) to address those
geographic areas where there are no hospitals and, thus, no hospital
wage index data on which to base the calculation for the FY 2024 IRF
PPS wage index.
We invite public comment on our proposals regarding the Wage
Adjustment for FY 2024.
2. Core-Based Statistical Areas (CBSAs) for the FY 2024 IRF Wage Index
The wage index used for the IRF PPS is calculated using the pre-
reclassification and pre-floor inpatient PPS (IPPS) wage index data and
is assigned to the IRF on the basis of the labor market area in which
the IRF is geographically located. IRF labor market areas are
delineated based on the CBSAs established by the OMB. The CBSA
delineations (which were implemented for the IRF PPS beginning with FY
2016) are based on revised OMB delineations issued on February 28,
2013, in OMB Bulletin No. 13-01. OMB Bulletin No. 13-01 established
revised delineations for Metropolitan Statistical Areas, Micropolitan
Statistical Areas, and Combined Statistical Areas in the United States
and Puerto Rico based on the 2010 Census, and provided guidance on the
use of the delineations of these statistical areas using standards
published in the June 28, 2010 Federal Register (75 FR 37246 through
37252). We refer readers to the FY 2016 IRF PPS final rule (80 FR 47068
through 47076) for a full discussion of our implementation of the OMB
labor market area delineations beginning with the FY 2016 wage index.
Generally, OMB issues major revisions to statistical areas every 10
years, based on the results of the decennial census. Additionally, OMB
occasionally issues updates and revisions to the statistical areas in
between decennial censuses to reflect the recognition of new areas or
the addition of counties to existing areas. In some instances, these
updates merge formerly separate areas, transfer components of an area
from one area to another, or drop components from an area. On July 15,
2015, OMB issued OMB Bulletin No. 15-01, which provides minor updates
to and supersedes OMB Bulletin No. 13-01 that was issued on February
28, 2013. The attachment to OMB Bulletin No. 15-01 provides detailed
information on the update to statistical areas since February 28, 2013.
The updates provided in OMB Bulletin No. 15-01 are based on the
application of the 2010 Standards for Delineating Metropolitan and
Micropolitan Statistical Areas to Census Bureau population estimates
for July 1, 2012 and July 1, 2013.
In the FY 2018 IRF PPS final rule (82 FR 36250 through 36251), we
adopted the updates set forth in OMB Bulletin No. 15-01 effective
October 1, 2017, beginning with the FY 2018 IRF wage index. For a
complete discussion of the adoption of the updates set forth in OMB
Bulletin No. 15-01, we refer readers to the FY 2018 IRF PPS final rule.
In the FY 2019 IRF PPS final rule (83 FR 38527), we continued to use
the OMB delineations that were adopted beginning with FY 2016 to
calculate the area wage indexes, with updates set forth in OMB Bulletin
No. 15-01 that we adopted beginning with the FY 2018 wage index.
On August 15, 2017, OMB issued OMB Bulletin No. 17-01, which
provided updates to and superseded OMB Bulletin No. 15-01 that was
issued on July 15, 2015. The attachments to OMB Bulletin No. 17-01
provide detailed information on the update to statistical areas since
July 15, 2015, and are based on the application of the 2010 Standards
for Delineating Metropolitan and Micropolitan Statistical Areas to
Census Bureau population estimates for July 1, 2014 and July 1, 2015.
In the FY 2020 IRF PPS final rule (84 FR 39090 through 39091), we
adopted the updates set forth in OMB Bulletin No. 17-01 effective
October 1, 2019, beginning with the FY 2020 IRF wage index.
On April 10, 2018, OMB issued OMB Bulletin No. 18-03, which
superseded the August 15, 2017 OMB Bulletin No. 17-01, and on September
14, 2018, OMB issued OMB Bulletin No. 18-04, which superseded the April
10, 2018 OMB Bulletin No. 18-03. These bulletins established revised
delineations for Metropolitan Statistical Areas, Micropolitan
Statistical Areas, and Combined Statistical Areas, and provided
guidance on the use of the delineations of these statistical areas. A
copy of this bulletin may be obtained at <a href="https://www.whitehouse.gov/wp-content/uploads/2018/09/Bulletin-18-04.pdf">https://www.whitehouse.gov/wp-content/uploads/2018/09/Bulletin-18-04.pdf</a>.
To this end, as discussed in the FY 2021 IRF PPS proposed (85 FR
22075 through 22079) and final (85 FR 48434 through 48440) rules, we
adopted the revised OMB delineations identified in

[[Page 20977]]

OMB Bulletin No. 18-04 (available at <a href="https://www.whitehouse.gov/wp-content/uploads/2018/09/Bulletin-18-04.pdf">https://www.whitehouse.gov/wp-content/uploads/2018/09/Bulletin-18-04.pdf</a>) beginning October 1, 2020,
including a 1-year transition for FY 2021 under which we applied a 5
percent cap on any decrease in an IRF's wage index compared to its wage
index for the prior fiscal year (FY 2020). The updated OMB delineations
more accurately reflect the contemporary urban and rural nature of
areas across the country, and the use of such delineations allows us to
determine more accurately the appropriate wage index and rate tables to
apply under the IRF PPS. OMB issued further revised CBSA delineations
in OMB Bulletin No. 20-01, on March 6, 2020 (available on the web at
<a href="https://www.whitehouse.gov/wp-content/uploads/2020/03/Bulletin-20-01.pdf">https://www.whitehouse.gov/wp-content/uploads/2020/03/Bulletin-20-01.pdf</a>). However, we determined that the changes in OMB Bulletin No.
20-01 do not impact the CBSA-based labor market area delineations
adopted in FY 2021. Therefore, CMS did not propose to adopt the revised
OMB delineations identified in OMB Bulletin No. 20-01 for FY 2022 or
2023, and for these reasons CMS is likewise not making such a proposal
for FY 2024.
3. IRF Budget-Neutral Wage Adjustment Factor Methodology
To calculate the wage-adjusted facility payment for the payment
rates set forth in this proposed rule, we multiply the proposed
unadjusted Federal payment rate for IRFs by the FY 2024 labor-related
share based on the proposed 2021-based IRF market basket relative
importance (74.1 percent) to determine the labor-related portion of the
standard payment amount. A full discussion of the calculation of the
labor-related share is located in section V.E. of this proposed rule.
We would then multiply the labor-related portion by the applicable IRF
wage index. The wage index tables are available on the CMS website at
<a href="https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientRehabFacPPS/IRF-Rules-and-Related-Files.html">https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientRehabFacPPS/IRF-Rules-and-Related-Files.html</a>.
Adjustments or updates to the IRF wage index made under section
1886(j)(6) of the Act must be made in a budget-neutral manner. We
propose to calculate a budget-neutral wage adjustment factor as
established in the FY 2004 IRF PPS final rule (68 FR 45689) and
codified at Sec. 412.624(e)(1), as described in the steps below. We
propose to use the listed steps to ensure that the FY 2024 IRF standard
payment conversion factor reflects the proposed update to the wage
indexes (based on the FY 2020 hospital cost report data) and the
proposed update to the labor-related share, in a budget-neutral manner:
Step 1. Calculate the total amount of estimated IRF PPS payments
using the labor-related share and the wage indexes from FY 2023 (as
published in the FY 2023 IRF PPS final rule (87 FR 47038)).
Step 2. Calculate the total amount of estimated IRF PPS payments
using the FY 2024 wage index values (based on updated hospital wage
data and considering the permanent cap on wage index decreases policy)
and the proposed FY 2024 labor-related share of 74.1 percent.
Step 3. Divide the amount calculated in step 1 by the amount
calculated in step 2. The resulting quotient is the proposed FY 2024
budget-neutral wage adjustment factor of 1.0032.
Step 4. Apply the budget neutrality factor from step 3 to the FY
2024 IRF PPS standard payment amount after the application of the
increase factor to determine the proposed FY 2024 standard payment
conversion factor.
We discuss the calculation of the standard payment conversion
factor for FY 2024 in section V.G. of this proposed rule.
We invite public comment on the proposed IRF wage adjustment for FY
2024.

G. Description of the Proposed IRF Standard Payment Conversion Factor
and Payment Rates for FY 2024

To calculate the proposed standard payment conversion factor for FY
2024, as illustrated in Table 14, we begin by applying the proposed
increase factor for FY 2024, as adjusted in accordance with sections
1886(j)(3)(C) of the Act, to the standard payment conversion factor for
FY 2023 ($17,878). Applying the proposed 3.0 percent increase factor
for FY 2024 to the standard payment conversion factor for FY 2023 of
$17,878 yields a standard payment amount of $18,414. Then, we apply the
proposed budget neutrality factor for the FY 2024 wage index (taking
into account the permanent cap on wage index decreases policy), and
labor-related share of 1.0032, which results in a standard payment
amount of $18,473. We next apply the proposed budget neutrality factor
for the CMG relative weights of 0.9999, which results in the standard
payment conversion factor of $18,471 for FY 2024.
We invite public comment on the proposed FY 2024 standard payment
conversion factor.

Table 14--Calculations To Determine the Proposed FY 2024 Standard
Payment Conversion Factor
------------------------------------------------------------------------
Explanation for adjustment Calculations
------------------------------------------------------------------------
Standard Payment Conversion Factor for FY 2023.......... $17,878
Proposed Market Basket Increase Factor for FY 2024 x 1.030
(3.2%), reduced by 0.2 percentage point for the
productivity adjustment as required by section
1886(j)(3)(C)(ii)(I) of the Act........................
Budget Neutrality Factor for the Updates to the Wage x 1.0032
Index and Labor-Related Share..........................
Budget Neutrality Factor for the Revisions to the CMG x 0.9999
Relative Weights.......................................
---------------
Proposed FY 2024 Standard Payment Conversion Factor..... = 18,471
------------------------------------------------------------------------

After the application of the proposed CMG relative weights
described in section IV. of this proposed rule to the FY 2024 standard
payment conversion factor ($18,471), the resulting unadjusted IRF
prospective payment rates for FY 2024 are shown in Table 15.

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BILLING CODE 4120-01-C

H. Example of the Methodology for Adjusting the Proposed Prospective
Payment Rates

Table 16 illustrates the methodology for adjusting the proposed
prospective payments (as described in section V. of this proposed
rule). The following examples are based on two hypothetical Medicare
beneficiaries, both classified into CMG 0104 (without comorbidities).
The proposed unadjusted prospective payment rate for CMG 0104 (without
comorbidities) appears in Table 16.
Example: One beneficiary is in Facility A, an IRF located in rural
Spencer County, Indiana, and another beneficiary is in Facility B, an
IRF located in urban Harrison County, Indiana. Facility A, a rural non-
teaching hospital has a Disproportionate Share Hospital (DSH)
percentage of 5 percent (which would result in a LIP adjustment of
1.0156), a wage index of 0.8353, and a rural adjustment of 14.9
percent. Facility B, an urban teaching hospital, has a DSH percentage
of 15 percent

[[Page 20980]]

(which would result in a LIP adjustment of 1.0454 percent), a wage
index of 0.8804, and a teaching status adjustment of 0.0784.
To calculate each IRF's labor and non-labor portion of the proposed
prospective payment, we begin by taking the unadjusted prospective
payment rate for CMG 0104 (without comorbidities) from Table 16. Then,
we multiply the proposed labor-related share for FY 2024 (74.1 percent)
described in section V.E. of this proposed rule by the unadjusted
prospective payment rate. To determine the non-labor portion of the
proposed prospective payment rate, we subtract the labor portion of the
Federal payment from the proposed unadjusted prospective payment.
To compute the proposed wage-adjusted prospective payment, we
multiply the labor portion of the proposed Federal payment by the
appropriate wage index located in the applicable wage index table. This
table is available on the CMS website at <a href="https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientRehabFacPPS/IRF-Rules-and-Related-Files.html">https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientRehabFacPPS/IRF-Rules-and-Related-Files.html</a>.
The resulting figure is the wage-adjusted labor amount. Next, we
compute the proposed wage-adjusted Federal payment by adding the wage-
adjusted labor amount to the non-labor portion of the proposed Federal
payment.
Adjusting the proposed wage-adjusted Federal payment by the
facility-level adjustments involves several steps. First, we take the
wage-adjusted prospective payment and multiply it by the appropriate
rural and LIP adjustments (if applicable). Second, to determine the
appropriate amount of additional payment for the teaching status
adjustment (if applicable), we multiply the teaching status adjustment
(0.0784, in this example) by the wage-adjusted and rural-adjusted
amount (if applicable). Finally, we add the additional teaching status
payments (if applicable) to the wage, rural, and LIP-adjusted
prospective payment rates. Table 16 illustrates the components of the
adjusted payment calculation.

Table 16--Example of Computing the FY 2024 IRF Prospective Payment
------------------------------------------------------------------------

------------------------------------------------------------------------
Steps Rural Facility A
(Spencer Co., IN)
Urban Facility B
(Harrison Co., IN)
------------------------------------------------------------------------
1 Unadjusted Payment............ ...... $28,870.17 ...... $28,870.17
2 Labor-Related Share........... x 0.741 x 0.741
3 Labor Portion of Payment...... = $21,392.80 = $21,392.80
4 CBSA-Based Wage Index......... x 0.8353 x 0.8804
5 Wage-Adjusted Amount.......... = $17,869.40 = $18,834.22
6 Non-Labor Amount.............. + $7,477.37 + $7,477.37
7 Wage-Adjusted Payment......... = $25,346.78 = $26,311.59
8 Rural Adjustment.............. x 1.149 x 1.000
9 Wage- and Rural-Adjusted = $29,123.45 = $26,311.59
Payment.
10 LIP Adjustment............... x 1.0156 x 1.0454
11 Wage-, Rural- and LIP- = $29,577.77 = $27,506.14
Adjusted Payment.
12 Wage- and Rural-Adjusted ...... $29,123.45 ...... $26,311.59
Payment.
13 Teaching Status Adjustment... x 0 x 0.0784
14 Teaching Status Adjustment = $0.00 = $2,062.83
Amount.
15 Wage-, Rural-, and LIP- + $29,577.77 + $27,506.14
Adjusted Payment.
16 Total Adjusted Payment....... = $29,577.77 = $29,568.97
------------------------------------------------------------------------

Thus, the proposed adjusted payment for Facility A would be
$29,577.77, and the proposed adjusted payment for Facility B would be
$29,568.97.

VI. Proposed Update to Payments for High-Cost Outliers Under the IRF
PPS for FY 2024

A. Update to the Outlier Threshold Amount for FY 2024

Section 1886(j)(4) of the Act provides the Secretary with the
authority to make payments in addition to the basic IRF prospective
payments for cases incurring extraordinarily high costs. A case
qualifies for an outlier payment if the estimated cost of the case
exceeds the adjusted outlier threshold. We calculate the adjusted
outlier threshold by adding the IRF PPS payment for the case (that is,
the CMG payment adjusted by all of the relevant facility-level
adjustments) and the adjusted threshold amount (also adjusted by all of
the relevant facility-level adjustments). Then, we calculate the
estimated cost of a case by multiplying the IRF's overall CCR by the
Medicare allowable covered charge. If the estimated cost of the case is
higher than the adjusted outlier threshold, we make an outlier payment
for the case equal to 80 percent of the difference between the
estimated cost of the case and the outlier threshold.
In the FY 2002 IRF PPS final rule (66 FR 41362 through 41363), we
discussed our rationale for setting the outlier threshold amount for
the IRF PPS so that estimated outlier payments would equal 3 percent of
total estimated payments. For the FY 2002 IRF PPS final rule, we
analyzed various outlier policies using 3, 4, and 5 percent of the
total estimated payments, and we concluded that an outlier policy set
at 3 percent of total estimated payments would optimize the extent to
which we could reduce the financial risk to IRFs of caring for high-
cost patients, while still providing for adequate payments for all
other (non-high cost outlier) cases.
Subsequently, we updated the IRF outlier threshold amount in the
FYs 2006 through 2023 IRF PPS final rules and the FY 2011 and FY 2013
notices (70 FR 47880, 71 FR 48354, 72 FR 44284, 73 FR 46370, 74 FR
39762, 75 FR 42836, 76 FR 47836, 76 FR 59256, 77 FR 44618, 78 FR 47860,
79 FR 45872, 80 FR 47036, 81 FR 52056, 82 FR 36238, 83 FR 38514, 84 FR
39054, 85 FR 48444, 86 FR 42362, and 87 FR 47038, respectively) to
maintain estimated outlier payments at 3 percent of total estimated
payments. We also stated in the FY 2009 final rule (73 FR 46370 at
46385) that we would continue to analyze the estimated outlier payments
for subsequent years and adjust the outlier threshold amount as
appropriate to maintain the 3 percent target.
To update the IRF outlier threshold amount for FY 2024, we propose
to use FY 2022 claims data and the same methodology that we used to set
the initial outlier threshold amount in the FY 2002 IRF PPS final rule
(66 FR 41362 through 41363), which is also the same methodology that we
used to update the outlier threshold amounts for FYs 2006

[[Page 20981]]

through 2023. The outlier threshold is calculated by simulating
aggregate payments and using an iterative process to determine a
threshold that results in outlier payments being equal to 3 percent of
total payments under the simulation. To determine the outlier threshold
for FY 2024, we estimated the amount of FY 2024 IRF PPS aggregate and
outlier payments using the most recent claims available (FY 2022) and
the proposed FY 2024 standard payment conversion factor, labor-related
share, and wage indexes, incorporating any applicable budget-neutrality
adjustment factors. The outlier threshold is adjusted either up or down
in this simulation until the estimated outlier payments equal 3 percent
of the estimated aggregate payments. Based on an analysis of the
preliminary data used for the proposed rule, we estimated that IRF
outlier payments as a percentage of total estimated payments would be
approximately 2.3 percent in FY 2023. Therefore, we propose to update
the outlier threshold amount from $12,526 for FY 2023 to $9,690 for FY
2024 to maintain estimated outlier payments at approximately 3 percent
of total estimated aggregate IRF payments for FY 2024. Furthermore, we
are proposing that if more recent data become available after the
publication of the proposed rule and before the publication of the
final rule, we would use such data, if appropriate, to determine the FY
2024 outlier threshold amount in the final rule.

B. Proposed Update to the IRF Cost-to-Charge Ratio Ceiling and Urban/
Rural Averages for FY 2024

CCRs are used to adjust charges from Medicare claims to costs and
are computed annually from facility-specific data obtained from MCRs.
IRF specific CCRs are used in the development of the CMG relative
weights and the calculation of outlier payments under the IRF PPS. In
accordance with the methodology stated in the FY 2004 IRF PPS final
rule (68 FR45692 through 45694), we propose to apply a ceiling to IRFs'
CCRs. Using the methodology described in that final rule, we propose to
update the national urban and rural CCRs for IRFs, as well as the
national CCR ceiling for FY 2024, based on analysis of the most recent
data available. We apply the national urban and rural CCRs in the
following situations:
<bullet> New IRFs that have not yet submitted their first MCR.
<bullet> IRFs whose overall CCR is in excess of the national CCR
ceiling for FY 2024, as discussed below in this section.
<bullet> Other IRFs for which accurate data to calculate an overall
CCR are not available.
Specifically, for FY 2024, we propose to estimate a national
average CCR of 0.487 for rural IRFs, which we calculated by taking an
average of the CCRs for all rural IRFs using their most recently
submitted cost report data. Similarly, we propose to estimate a
national average CCR of 0.398 for urban IRFs, which we calculated by
taking an average of the CCRs for all urban IRFs using their most
recently submitted cost report data. We apply weights to both of these
averages using the IRFs' estimated costs, meaning that the CCRs of IRFs
with higher total costs factor more heavily into the averages than the
CCRs of IRFs with lower total costs. For this proposed rule, we have
used the most recent available cost report data (FY 2021). This
includes all IRFs whose cost reporting periods begin on or after
October 1, 2020, and before October 1, 2021. If, for any IRF, the FY
2021 cost report was missing or had an ``as submitted'' status, we used
data from a previous FY's (that is, FY 2004 through FY 2020) settled
cost report for that IRF. We do not use cost report data from before FY
2004 for any IRF because changes in IRF utilization since FY 2004
resulting from the 60 percent rule and IRF medical review activities
suggest that these older data do not adequately reflect the current
cost of care. Using updated FY 2021 cost report data for this proposed
rule, we estimate a national average CCR of 0.487 for rural IRFs, and a
national average CCR of 0.398 for urban IRFs.
In accordance with past practice, we propose to set the national
CCR ceiling at 3 standard deviations above the mean CCR. Using this
method, we propose a national CCR ceiling of 1.45 for FY 2024. This
means that, if an individual IRF's CCR were to exceed this ceiling of
1.45 for FY 2024, we will replace the IRF's CCR with the appropriate
proposed national average CCR (either rural or urban, depending on the
geographic location of the IRF). We calculated the proposed national
CCR ceiling by:
Step 1. Taking the national average CCR (weighted by each IRF's
total costs, as previously discussed) of all IRFs for which we have
sufficient cost report data (both rural and urban IRFs combined).
Step 2. Estimating the standard deviation of the national average
CCR computed in step 1.
Step 3. Multiplying the standard deviation of the national average
CCR computed in step 2 by a factor of 3 to compute a statistically
significant reliable ceiling.
Step 4. Adding the result from step 3 to the national average CCR
of all IRFs for which we have sufficient cost report data, from step 1.
We are also proposing that if more recent data become available
after the publication of this proposed rule and before the publication
of the final rule, we would use such data to determine the FY 2024
national average rural and urban CCRs and the national CCR ceiling in
the final rule.
We invite public comment on the proposed update to the IRF CCR
ceiling and the urban/rural averages for FY 2024.

VII. Proposed Modification to the Regulation for Excluded Inpatient
Rehabilitation Facility Units Paid Under the IRF PPS

A. Background

Under current regulation, to be excluded from the IPPS, and to be
paid under the IRF PPS or the IPF PPS, an IRF or IPF unit of a hospital
must meet a number of requirements under Sec. 412.25. Both this
regulation and the policies applying to excluded units (which include
excluded IRF units and excluded IPF units) have been in effect since
before both the IRF PPS and IPF PPS were established, as discussed in
the following paragraphs of this section. Before the IRF PPS and the
IPF PPS were established, excluded units were paid based on their
costs, as reported on their Medicare cost reports, subject to certain
facility-specific cost limits. These cost-based payments were
determined separately for operating and capital costs. Thus, under
cost-based payments, the process of allocating costs to an IRF or IPF
unit for reimbursement created significant administrative complexity.
This administrative complexity necessitated strict regulations that
allowed hospitals to open a new IPPS-excluded unit only at the start of
a cost reporting period.
In the January 3, 1984 final rule (49 FR 235), CMS (then known as
the Health Care Financing Administration) established policies and
regulations for hospitals and units subject to and excluded from the
IPPS. In that rule, we explained that section 1886(d) of the Act
requires that the prospective payment system apply to inpatient
hospital services furnished by all hospitals participating in the
Medicare program except those hospitals or units specifically excluded
by the law. We further explained our expectation that a hospital's
status (that is, whether it is subject to, or excluded from, the

[[Page 20982]]

prospective payment system) would generally be determined at the
beginning of each cost reporting period. We also stated that this
status would continue throughout the period, which is normally 1 year.
Accordingly, we stated that changes in a hospital's (or unit's) status
that result from meeting or failing to meet the criteria for exclusion
would be implemented only at the start of a cost reporting period.
However, we also acknowledged that under some circumstances involving
factors external to the hospital, status changes could be made at times
other than the beginning of the cost reporting period. For example, a
change in status could occur if a hospital is first included under the
prospective payment system and, after the start of its cost reporting
period, is excluded because of its participation in an approved
demonstration project or State reimbursement control program that
begins after the hospital's cost reporting period has begun.
In the FY 1993 IPPS final rule (57 FR 39798 through 39799), we
codified our longstanding policies regarding when a hospital unit can
change its status from not excluded to excluded. We explained in that
final rule that since the inception of the prospective payment system
for operating costs of hospital inpatient services in October 1983,
certain types of specialty-care hospitals and hospital units have been
excluded from that system under section 1888(d)(1)(B) of the Act. We
noted that these currently include psychiatric and rehabilitation
hospitals and distinct part units, children's hospitals, and long-term
care hospitals. We further explained that section 6004(a)(1) of the
Omnibus Budget Reconciliation Act of 1989, (Pub. L. 101-239, enacted
December 19, 1989) amended section 1886(d)(1)(B) of the Act to provide
that certain cancer hospitals are also excluded. We noted that the
preamble to the January 3,1984 final rule implementing the prospective
payment system for operating costs (49 FR 235) stated that the status
of a hospital or unit (that is, whether it is subject to, or excluded
from, the prospective payment system) will be determined at the
beginning of each cost reporting period. We noted that that same 1984
final rule also provided that changes in a hospital's or unit's status
that result from meeting or failing to meet the criteria for exclusion
will be implemented prospectively only at the start of a cost reporting
period, that is, starting with the beginning date of the next cost
reporting period (49 FR 243). However, we noted that this policy was
not set forth in the regulations. In the FY 1993 final rule, we stated
that we proposed revising Sec. Sec. 412.22 and 412.25 to specify that
changes in the status of each hospital or hospital unit would be
recognized only at the start of a cost reporting period. We stated that
except in the case of retroactive payment adjustments for excluded
rehabilitation units described in Sec. 412.30(c), any change in a
hospital's or unit's compliance with the exclusion criteria that occurs
after the start of a cost reporting period would not be considered
until the start of the following period. We noted that this policy
would also apply to any unit that is added to a hospital during the
hospital's cost reporting period. We also stated that we proposed
revising Sec. 412.25(a) to specify that as a requirement for
exclusion, a hospital unit must be fully equipped and staffed, and be
capable of providing inpatient psychiatric or rehabilitation care, as
of the first day of the first cost reporting period for which all other
exclusion requirements are met. We explained that a unit that meets
this requirement would be considered open regardless of whether there
are any inpatients in the unit.
In the same FY 1993 IPPS final rule, we responded to commenters who
objected to this policy, stating that it unnecessarily penalizes
hospitals for factors beyond their control, such as construction
delays, that it discourages hospitals from making changes in their
programs to meet community needs, or that it can place undue workload
demands on regulatory agencies during certain time periods. In
response, we explained that we believed that regulatory agencies,
hospitals, and the public generally would benefit from policies that
are clearly stated, can be easily understood by both hospitals and
intermediaries, and can be simply administered. We stated that
recognizing changes in status only at the beginning of cost reporting
periods is consistent with these goals, while recognizing changes in
the middle of cost reporting periods would introduce added complexity
to the administration of the exclusion provisions. Therefore, we did
not revise the proposed changes based on these comments.
In the FY 2000 IPPS final rule (64 FR 41531 through 41532), we
amended the regulations at Sec. 412.25(c) to allow a hospital unit to
change from excluded to not excluded at any time during the cost
reporting period. We explained the statutory basis and rationale for
this change in the FY 2000 IPPS proposed rule (64 FR 24740), and noted
that a number of hospitals suggested that we consider a change in our
policy to recognize, for purposes of exclusion from the IPPS,
reductions in number of beds in, or entire closure of, units at any
time during a cost reporting period. In that FY 2000 IPPS proposed
rule, we explained that hospitals indicated that the bed capacity made
available as a result of these changes could be used, as they need
them, to provide additional services to meet patient needs in the acute
care part of the hospital that is paid under the IPPS. We further
explained that we evaluated the concerns of the hospitals and the
effect on the administration of the Medicare program and the health
care of beneficiaries of making these payment changes. As a result of
that evaluation, we stated that we believed it was reasonable to adopt
a more flexible policy in recognition of hospitals' changes in the use
of their facilities. However, we noted that whenever a hospital
establishes an excluded unit within the hospital, our Medicare fiscal
intermediary would need to be able to determine costs of the unit
separately from costs of the part of the hospital paid under the
prospective payment system. At that time, we stated that the proper
determination of costs ensured that the hospital was paid the correct
amount for services in each part of the facility, and that payments
under the IPPS did not duplicate payments made under the rules that
were applicable to excluded hospitals and units, or vice versa. For
this reason, we stated that we did not believe it would be appropriate
to recognize, for purposes of exclusion from the IPPS, changes in the
bed size or status of an excluded unit that are so frequent that they
interfere with the ability of the intermediary to accurately determine
costs. Moreover, we explained that section 1886(d)(1)(B) of the Act
authorizes exclusion from the IPPS of specific types of hospitals and
units, but not of specific admissions or stays, such as admissions for
rehabilitation or psychiatric care, in a hospital paid under the IPPS.
We stated that without limits on the frequency of changes in excluded
units for purposes of proper Medicare payment, there was the potential
for some hospitals to adjust the status or size of their excluded units
so frequently that the units would no longer be distinct entities and
the exclusion would effectively apply only to certain types of care.
In the FY 2012 IRF PPS final rule (76 FR 47870), we began further
efforts to increase flexibilities for excluded IPF and IRF units. In
that rule, we explained that cost-based reimbursement methodologies
that were in place before the IPF PPS and IRF PPS meant that the

[[Page 20983]]

facilities' capital costs were determined, in part, by their bed size
and square footage. Changes in the bed size and square footage would
complicate the facilities' capital cost allocation. Thus, the
regulations at Sec. 412.25 limited the situations under which an IRF
or IPF could change its bed size and square footage. In the FY 2012 IRF
PPS final rule, we revised Sec. 412.25(b) to enable IRFs and IPFs to
more easily adjust to beneficiary changes in demand for IRF or IPF
services, and improve beneficiary access to these services. We believed
that the first requirement (that beds can only be added at the start of
a cost reporting period) was difficult, and potentially costly, for
IRFs and IPFs that were expanding through new construction because the
exact timing of the end of a construction project is often difficult to
predict.
In that same FY 2012 IRF PPS final rule, commenters suggested that
CMS allow new IRF units or new IPF units to open and begin being paid
under their respective IRF PPS or IPF PPS at any time during a cost
reporting period, rather than requiring that they could only begin
being paid under the IRF PPS or the IPF PPS at the start of a cost
reporting period. In response, we stated that we believed that this
suggestion was outside the scope of the FY 2012 IRF PPS proposed rule
(76 FR 24214) because we did not propose any changes to the regulations
in Sec. 412.25(c). However, we stated that we would consider this
suggestion for possible inclusion in future rulemaking. Within the FY
2018 IRF PPS proposed rule (82 FR 20690, 20742 through 20743), CMS
published a request for information (RFI) on ways to reduce burden for
hospitals, physicians, and patients; improve the quality of care;
decrease costs; and ensure that patients and their providers and
physicians are making the best health care choices possible. In
response to the RFI, we received comments from IRF industry
associations, state and national hospital associations, industry groups
representing hospitals, and individual IRF providers. One of the
comments we received in response to the RFI suggested allowing new IRF
units to become excluded and be paid under the IRF PPS at any time
during the cost reporting period, rather than only at the start of a
cost reporting period, which the commenter believed would increase
flexibility and eliminate a policy that may impose higher costs for
providers while harmonizing an IRF payment system versus the IPPS
payment system across all new IRF units.

B. Current Challenges Related To Excluded Hospital Units (Sec.
412.25(c)(1) and (c)(2))

Currently, under Sec. 412.25(c)(1), a hospital can only start
being paid under the IRF PPS or the IPF PPS for services provided in an
excluded unit at the start of a cost reporting period. Specifically,
Sec. 412.25(c) limits when the status of hospital units may change for
purposes of exclusion from the IPPS, as specified in Sec. 412.25(c)(1)
and Sec. 412.25(c)(2). Section 412.25(c)(1) states that the status of
a hospital unit may be changed from not excluded to excluded only at
the start of the cost reporting period. If a unit is added to a
hospital after the start of a cost reporting period, it cannot be
excluded from the IPPS before the start of a hospital's next cost
reporting period. Under Sec. 412.25(c)(2), the status of a hospital
unit may be changed from excluded to not excluded at any time during a
cost reporting period, but only if the hospital notifies the fiscal
intermediary and the CMS Regional Office in writing of the change at
least 30 days before the date of the change, and maintains the
information needed to accurately determine costs that are or are not
attributable to the excluded unit. A change in the status of a unit
from excluded to not excluded that is made during a cost reporting
period must remain in effect for the rest of that cost reporting
period.
In recent years, interested parties, such as hospitals, have
written to CMS to express concerns about what they see as the
unnecessary restrictiveness of the requirements of Sec. 412.25(c).
Based on this feedback, we continued to explore opportunities to reduce
burden for providers and clinicians, while keeping patient-centered
care a priority. For instance, we considered whether this regulation
might create unnecessary burden for hospitals and could potentially
delay necessary rehabilitation beds from opening and being paid under
the IRF PPS. As we continued to review and reconsider regulations to
identify ways to improve policy, we recognized that the requirement at
Sec. 412.25(c)(1) that hospital units can only be excluded at the
start of a cost reporting period, may be challenging to meet and
potentially costly for facilities under some circumstances, for
example, those that are expanding through new construction. Hospitals
have indicated it is often difficult to predict the exact timing of the
end of a construction project and construction delays may hamper a
hospital's ability to have the construction of an excluded unit
completed exactly at the start of a cost reporting period, which
hospitals said can lead to significant revenue loss if they are unable
to be paid under the IRF PPS or IPF PPS until the start of the next
cost reporting period.
As discussed, the requirements of Sec. 412.25(c) were established
to manage the administrative complexity associated with cost-based
reimbursement for excluded IRF and IPF units. Today, however, because
IRF units are paid under the IRF PPS, and IPF units are paid under the
IPF PPS, cost allocation is not used for payment purposes. Because
advancements in technology since the inception of the IRF PPS and IPF
PPS have simplified the cost reporting process and enhanced
communication between providers, CMS, and Medicare contractors, we are
reconsidering whether it is necessary to continue to allow hospital
units to become excluded only at the start of a cost reporting period.

C. Proposed Changes To Excluded Hospital Units (Sec. 412.25(c)(1) and
(c)(2))

We are committed to continuing to transform the health care
delivery system--and the Medicare program--by putting additional focus
on patient-centered care and working with providers, physicians, and
patients to improve outcomes, while meeting relevant health care
priorities and reducing burden.
In response to the need for availability of inpatient
rehabilitation beds we are proposing changes to Sec. 412.25(c) to
allow greater flexibility for hospitals to open excluded units, while
minimizing the amount of effort Medicare contractors would need to
spend administering the regulatory requirements. Although we are
cognizant that there is a need for rehabilitative health services and
support for providers along a continuum of care, including a robust
investment in community-based rehabilitative services, this rule is
focused on inpatient rehabilitation facility settings.
We note that Sec. 412.25(c) applies to both IRFs and IPFs;
therefore, revisions to Sec. 412.25(c) would also affect IPFs in
similar ways. Readers should refer to the FY 2024 IPF PPS proposed rule
for discussion of proposed revisions to Sec. 412.25(c) and unique
considerations applicable to IPF units.
As discussed, the current requirements of Sec. 412.25(c)(1) were
originally established to manage the administrative complexity
associated with cost-based reimbursement for excluded IPF and IRF
units. Because IPF and IRF units are no longer paid under cost-based
reimbursement, but rather under the IPF PPS and IRF PPS

[[Page 20984]]

respectively, we believe that the restriction that limits an IPF or IRF
unit to being excluded only at the start of a cost reporting period is
no longer necessary.
We amended our regulations in the FY 2012 IRF PPS final rule to
address a regulation that similarly was previously necessary for cost-
based reimbursement, but was not material to payment under the IRF PPS
and IPF PPS. In that final rule, we explained that under cost-based
payments, the facilities' capital costs were determined, in part, by
their bed size and square footage. Changes in the bed size and square
footage would complicate the facilities' capital cost allocation. We
explained that under the IRF PPS and IPF PPS, however, a facility's bed
size and square footage were not relevant for determining the
individual facility's Medicare payment. Therefore, we believed it was
appropriate to modify some of the restrictions on a facility's ability
to change its bed size and square footage. Accordingly, we relaxed the
restrictions on a facility's ability to increase its bed size and
square footage. Under the revised requirements that we adopted in the
FY 2012, IRF PPS final rule in Sec. 412.25(b), an IRF or IPF can
change (either increase or decrease) its bed size or square footage one
time at any point in a given cost reporting period as long as it
notifies the CMS RO at least 30 days before the date of the proposed
change, and maintains the information needed to accurately determine
costs that are attributable to the excluded units.
Similarly, in the case of the establishment of a new excluded IPF
and IRF units, we do not believe that the timing of the establishment
of the new unit is material for determining the individual facility's
level of Medicare payment under the IRF PPS or IPF PPS. We believe it
would be appropriate to allow a unit to become excluded at any time in
the cost reporting year. However, we also believe it is important to
minimize the potential administrative complexity associated with units
changing their excluded status.
Accordingly, we propose to amend the requirements currently in
regulation at Sec. 412.25(c)(1) to allow a hospital to open a new IRF
unit anytime within the cost reporting year, as long as the hospital
notifies the CMS Regional Office and Medicare Administrative Contractor
(MAC) in writing of the change at least 30 days before the date of the
change. Additionally, we are proposing that if a unit becomes excluded
during a cost reporting year, this change would remain in effect for
the rest of that cost reporting year. We also propose to maintain the
current requirements of Sec. 412.25(c)(2), which specify that, if an
excluded unit becomes not excluded during a cost reporting year, the
hospital must notify the MAC and the CMS Regional Office in writing of
the change at least 30 days before the change, and this change would
remain in effect for the rest of that cost reporting year. Finally, we
propose to consolidate the requirements for Sec. 412.25(c)(1) and
Sec. 412.25(c)(2) into a new Sec. 412.25(c)(1) that would apply to
IRF units and specify the requirements for an IRF unit to become
excluded or not excluded.
We believe this proposal would provide IRFs greater flexibility
when establishing an excluded unit at a time other than the start of a
cost reporting period.
As noted, we are proposing an identical policy for inpatient
psychiatric units of hospitals in Sec. 412.25(c)(2) in the FY 2024 IPF
PPS proposed rule.
We are proposing discrete regulation text for each of the hospital
unit types (that is, IRF units and IPF units) to solicit comment on
issues that might affect one hospital unit type and not the other.
However, we may consider adopting one consolidated regulation text for
both IRF and IPF units in either the IRF or IPF final rules for both
unit types if we finalize both of our proposals. We request public
comments on finalizing a consolidated provision that would pertain to
both IRF and IPF units.

VIII. Inpatient Rehabilitation Facility (IRF) Quality Reporting Program
(QRP)

A. Background and Statutory Authority

The Inpatient Rehabilitation Facility Quality Reporting Program
(IRF QRP) is authorized by section 1886(j)(7) of the Act, and it
applies to freestanding IRFs, as well as inpatient rehabilitation units
of hospitals or Critical Access Hospitals (CAHs) paid by Medicare under
the IRF PPS. Section 1886(j)(7)(A)(i) of the Act requires the Secretary
to reduce by 2 percentage points the annual increase factor for
discharges occurring during a fiscal year (FY) for any IRF that does
not submit data in accordance with the IRF QRP requirements set forth
in subparagraphs (C) and (F) of section 1886(j)(7) of the Act. Section
1890A of the Act requires that the Secretary establish and follow a
pre-rulemaking process, in coordination with the consensus-based entity
(CBE) with a contract under section 1890 of the Act, to solicit input
from certain groups regarding he selection of quality and efficiency
measures for the IRF QRP. We have codified our program requirements in
our regulations at Sec. 412.634.
In this proposed rule, we are proposing to adopt two new measures,
remove three existing measures, and modify one existing measure.
Second, we are seeking information on principles we could use to select
and prioritize IRF QRP quality measures in future years. Third, we are
providing an update on our efforts to close the health equity gap.
Finally, we are proposing to begin public reporting of four measures.
These proposals are further specified below.

B. General Considerations Used for the Selection of Measures for the
IRF QRP

For a detailed discussion of the considerations we use for the
selection of IRF QRP quality, resource use, or other measures, we refer
readers to the FY 2016 IRF PPS final rule (80 FR 47083 through 47084).
1. Quality Measures Currently Adopted for the FY 2024 IRF QRP
The IRF QRP currently has 18 measures for the FY 2024 IRF QRP,
which are listed in Table 17. For a discussion of the factors used to
evaluate whether a measure should be removed from the IRF QRP, we refer
readers to Sec. 412.634(b)(2).

[[Page 20985]]

[GRAPHIC] [TIFF OMITTED] TP07AP23.008

C. Overview of IRF QRP Quality Measure Proposals

In this proposed rule, we propose to adopt two new measures, remove
three existing measures, and modify one existing measure for the FY
2025 IRF QRP and the FY 2026 IRF QRP. Beginning with the FY 2025 IRF
QRP we are proposing to (1) modify the COVID-19 Vaccination Coverage
among Healthcare Personnel (HCP) measure, (2) adopt the Discharge
Function Score measure,\17\ which we are specifying under sections
1886(j)(7)(F) and 1899B(c)(1) of the Act, and (3) remove three current
measures: (i) the Application of Percent of Long-Term Care Hospital
(LTCH) Patients with an Admission and Discharge Functional Assessment
and a Care Plan That Addresses Function measure, (ii) IRF Functional
Outcome Measure: Change in Self-Care Score for Medical Rehabilitation
Patients measure, and (iii) IRF Functional Outcome Measure: Change in
Mobility Score for Medical Rehabilitation Patients measure.
---------------------------------------------------------------------------

\17\ This measure was submitted to the Measures Under
Consideration (MUC) List as the Cross-Setting Discharge Function
Score. Subsequent to the MAP Workgroup meetings, the measure
developer modified the name.
---------------------------------------------------------------------------

We are proposing to add one new measure beginning with the FY 2026
IRF QRP, the COVID-19 Vaccine: Percent of Patients/Residents Who Are Up
to Date measure which we are specifying under sections 1886(j)(7)(F)
and 1899B(d)(1) of the Act.
1. IRF QRP Quality Measure Proposals Beginning With the FY 2025 IRF QRP
a. Proposed Modification of the COVID-19 Vaccination Coverage Among
Healthcare Personnel (HCP) Measure Beginning With the FY 2025 IRF QRP
(1) Background
On January 31, 2020, the Secretary declared a public health
emergency (PHE) for the United States in response to the global
outbreak of SARS-COV-2, a novel (new) coronavirus that causes
``coronavirus disease 2019'' (COVID-19).\18\ Subsequently, in the FY
2022 IRF PPS final rule (86 FR 42385 through 42396), we adopted the
COVID-19

[[Page 20986]]

Vaccination Coverage among Healthcare Personnel (HCP COVID-19 Vaccine)
measure for the IRF QRP. The HCP COVID-19 Vaccine measure requires each
IRF to submit data on the number of healthcare personnel (HCP) eligible
to work in the IRF for at least one day during the reporting period,
excluding persons with contraindications to the COVID-19 vaccine, who
have received a complete vaccination course against SARS-CoV-2 (86 FR
42389 through 42396).
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\18\ U.S. Department of Health and Human Services, Office of the
Assistant Secretary for Preparedness and Response. Determination
that a Public Health Emergency Exists. Available at <a href="https://aspr.hhs.gov/legal/PHE/Pages/2019-nCoV.aspx">https://aspr.hhs.gov/legal/PHE/Pages/2019-nCoV.aspx</a>.
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