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Rule2023-16050

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

August 2, 2023

Effective

October 1, 2023

Issuing agencies

Health and Human Services DepartmentCenters for Medicare & Medicaid Services

Abstract

This final rule updates the prospective payment rates for inpatient rehabilitation facilities (IRFs) for Federal fiscal year (FY) 2024. As required by statute, this final rule includes the 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 prospective payment rates for FY 2024. It also rebases and revises the IRF market basket to reflect a 2021 base year. It also confirms when IRF units can become excluded and paid under the IRF PPS. This rule also includes updates for the IRF Quality Reporting Program (QRP).

Full Text

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[Federal Register Volume 88, Number 147 (Wednesday, August 2, 2023)]
[Rules and Regulations]
[Pages 50956-51052]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-16050]

[[Page 50955]]

Vol. 88

Wednesday,

No. 147

August 2, 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; Final Rule

Federal Register / Vol. 88 , No. 147 / Wednesday, August 2, 2023 /
Rules and Regulations

[[Page 50956]]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412

[CMS-1781-F]
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: Final rule.

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SUMMARY: This final rule updates the prospective payment rates for
inpatient rehabilitation facilities (IRFs) for Federal fiscal year (FY)
2024. As required by statute, this final rule includes the
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 prospective payment rates for FY 2024. It
also rebases and revises the IRF market basket to reflect a 2021 base
year. It also confirms when IRF units can become excluded and paid
under the IRF PPS. This rule also includes updates for the IRF Quality
Reporting Program (QRP).

DATES:
Effective date: These regulations are effective on October 1, 2023.
Applicability dates: The updated IRF prospective payment rates are
applicable for IRF discharges occurring on or after October 1, 2023,
and on or before September 30, 2024 (FY 2024).

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

SUPPLEMENTARY INFORMATION:

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 final 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 final rule updates 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 final 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 rebases
and revises the IRF market basket to reflect a 2021 base year. It also
confirms when an IRF unit can be excluded and paid under the IRF PPS.
This final rule includes several updates to the IRF QRP for the FY 2025
IRF QRP and FY 2026 IRF QRP. This final rule will add two new measures
to the IRF QRP, remove three measures from the IRF QRP, and modify one
measure in the IRF QRP. This final rule also finalizes the public
reporting schedule of four measures. In addition, this final rule
includes a summary of the comments received on Centers for Medicare and
Medicaid Services' (CMS') update on our efforts to close the health
equity gap and on the request for information on principles CMS would
use to select and prioritize IRF QRP quality measures in future years.

B. Summary of Major Provisions

In this final 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 rebases and revises the IRF market basket to reflect a 2021
base year. It also modifies the regulation governing when an IRF unit
can be excluded and paid under the IRF PPS.
Beginning with the FY 2025 IRF QRP, IRFs will be required to submit
data on a modified version of the COVID-19 Vaccination Coverage among
Healthcare Personnel measure and the Discharge Function Score measure.
Beginning with the FY 2025 IRF QRP, IRFs will no longer be required to
submit data on the Application of Percent of Long-Term Care Hospital
Patients with an Admission and Discharge Functional Assessment and a
Care Plan That Addresses Function, the IRF Functional Outcome Measure:
Change in Self-Care Score for Medical Rehabilitation Patients (CBE
#2633), and the IRF Functional Outcome Measure: Change in Mobility
Score for Medical Rehabilitation Patients (CBE #2634) measures.
Beginning with the FY 2026 IRF QRP, IRFs will be required to submit
data on the COVID-19 Vaccine: Percent of Patients/Residents Who Are Up
to Date measure. This final rule also adopts policies 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 provide a summary of the comments received from interested
parties on principles for selecting and prioritizing IRF QRP quality
measures and concepts as well as a summary of the comments received on
our continued efforts to close the health equity gap.

C. Summary of Impact

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[GRAPHIC] [TIFF OMITTED] TR02AU23.048

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 2023, 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 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

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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 Sec. 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 final
rule, we refer to the two statutes collectively as the ``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 VI.D. of this final 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.
Section 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 the FY 2010 IRF PPS correction notice (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. 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.

[[Page 50959]]

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 to their MAC an
informational-only bill (type of bill (TOB) 111) that includes
Condition Code 04. 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 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,

[[Page 50960]]

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 invited 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 the FY 2024 IRF PPS proposed rule, we proposed 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 the FY 2024 IRF PPS proposed rule (88 FR 20954 through 20959).
<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 the FY 2024 IRF PPS proposed
rule (88 FR 20959, 20973 through 20974).
<bullet> Rebase and revise the IRF market basket to reflect a 2021
base year, as discussed in section V. of the FY 2024 IRF PPS proposed
rule (88 FR 20959 through 20973).
<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 the FY 2024 IRF PPS proposed rule (88 FR
20974 through 20977).
<bullet> Describe the calculation of the IRF standard payment
conversion factor for FY 2024, as discussed in section V. of the FY
2024 IRF PPS proposed rule (88 FR 20977).
<bullet> Update the outlier threshold amount for FY 2024, as
discussed in section VI. of the FY 2024 IRF PPS proposed rule (88 FR
20980 through 20981).
<bullet> Update the cost-to-charge ratio (CCR) ceiling and urban/
rural average CCRs for FY 2024, as discussed in section VI. of the FY
2024 IRF PPS proposed rule (88 FR 20981).
<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 the FY 2024 IRF PPS proposed rule (88 FR 20981 through
20984).
We also proposed updates to the IRF QRP and requested information
in section VIII. of the FY 2024 IRF PPS 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. Analysis of and Responses to Public Comments

We received 45 timely responses from the public, many of which
contained multiple comments on the FY 2024 IRF PPS proposed rule (88 FR
20950). We received comments from various trade associations, inpatient
rehabilitation facilities, individual physicians, therapists,
clinicians, health care industry organizations, and health care
consulting firms. The following sections, arranged by subject area,
include a summary of the public comments that we received, and our
responses.

[[Page 50961]]

A. General Comments on the FY 2024 IRF PPS Proposed Rule

In addition to the comments, we received on specific proposals
contained within the proposed rule (which we address later in this
final rule), commenters also submitted more general observations on the
IRF PPS and IRF care generally.
Comment: We received several comments that were outside the scope
of the FY 2024 IRF PPS proposed rule. Specifically, we received
comments regarding the inclusion of recreational therapy in the IRF
intensity of therapy requirement, disclosures of ownership and
additional disclosable parties' information in the skilled nursing
facility setting, the ``low wage index policy,'' Medicare Advantage
rules, waiving the ``three-hour rule,'' and the IRF Review Choice
Demonstration. We also received comments about making refinements to
our measures to address the impact of COVID-19 and social determinants
of health, to change the HCP COVID-19 measure specifications to annual
data submission, and concerns of being inappropriately penalized for
NHSN technical errors.
Response: We thank the commenters for bringing these issues to our
attention and will take these comments into consideration for potential
policy refinements or direct the comments to the appropriate subject
matter experts.

V. 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 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 the proposed rule, we proposed 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 ALOS values. For
FY 2024, we proposed 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 also
proposed that if more recent data became available after the
publication of the 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 proposed 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 final 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 proposed 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. We note that,
as we typically do, we updated our data between the FY 2024 IRF PPS
proposed and final rules to ensure that we use the most recent
available data in calculating IRF PPS payments. This updated data
reflects a more complete set of claims for FY 2022 and additional cost
report data for FY 2021. 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 changes to the CMG relative weights (as
discussed in this final rule).
Step 3. Divide the amount calculated in step 1 by the amount
calculated in step 2 to determine the budget neutrality factor of
1.0002 that would maintain the same total estimated aggregate payments
in FY 2024 with and without the 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 VI.G. of this final rule, we discuss the use of the
existing methodology to calculate the standard payment conversion
factor for FY 2024.
In Table 2, ``Relative Weights and Average Length of Stay Values
for Case-Mix Groups,'' we present the 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.

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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 2
shows how we estimate that the application of the 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 implement the CMG relative weight revisions in a
budget-neutral manner (as previously described), total estimated
aggregate payments to IRFs for FY 2024 are not affected as a result of
the CMG relative weight revisions. However, the revisions affect the
distribution of payments within CMGs and tiers.
[GRAPHIC] [TIFF OMITTED] TR02AU23.053

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 revisions for FY 2024. The 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 invited public comment on our proposed updates to the CMG
relative weights and ALOS values for FY 2024.
The following is a summary of the public comments received on the
proposed revisions to update the CMG relative weights and ALOS values
for FY 2024 and our responses.
Comment: Commenters were generally supportive of the proposed
updates to the relative weights and ALOS values and encouraged CMS to
use the latest available data to update these values in the final rule.
A few commenters expressed concern regarding reductions in certain
relative weight values associated with traumatic spinal cord injury,
major multiple traumas with brain or spinal cord injury, and Guillain-
Barr[eacute]. A few commenters also expressed concerns related to the
increase of the ALOS for CMG 0404. These commenters noted that CMS did
not propose a similar increase in reimbursement for this CMG and
suggested the change may be due to distortions in the data rather than
actual care changes.
Response: We appreciate these commenters' support for updating the
relative weights and ALOS values for FY 2024. The CMG relative weights
are updated each year in a budget neutral manner, thus leading to
increases in some CMG relative weights and corresponding decreases in
other CMG relative weights. We note that, as we typically do, we have
updated our data between the FY 2024 IRF PPS proposed and this final
rule to ensure that we use the most recent available data in
calculating IRF PPS payments. The relative weights associated with
these CMGs include both increases and decreases, and the variation for
FY 2024 is similar to the typical year-to-year variation that we
observe. The relative weight values are updated each year to ensure
that the IRF case mix system is as reflective as possible of the
current IRF population, thereby ensuring that IRF payments
appropriately reflect the relative costs of caring for all types of IRF
patients.
Additionally, the ALOS values are updated annually to be as
reflective as possible of recent IRF utilization. The ALOS values are
only used to determine which cases qualify for the short-stay transfer
policy and are not used to determine payments for the non-short-stay
transfer cases.
Comment: A commenter expressed concern that decreases to the CMG
relative weights and ALOS values do not reflect the medical complexity
of the patients and suggested that CMS should revise the CMG relative
weights and ALOS values to ensure adequate coverage and reimbursement
for the services required to treat patients in IRF settings.
Response: We believe that these data accurately reflect the
severity of the IRF patient population and the associated costs of
caring for these patients in the IRF setting. The CMG relative weights
are updated each year based on the most recent available data for the
full population of IRF Medicare fee-for-service beneficiaries. This
ensures that the IRF case mix system is as reflective

[[Page 50966]]

as possible of changes in the IRF patient populations and the
associated coding practices.
After consideration of the comments we received, we are finalizing
our proposal to update the CMG relative weights and ALOS values for FY
2024, as shown in Table 2 of this final rule. These updates are
effective for FY 2024, that is, for discharges occurring on or after
October 1, 2023, and on or before September 30, 2024.

VI. 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 proposed to update
the IRF PPS payments for FY 2024 by a market basket increase percentage
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 proposed to rebase and revise the
IRF market basket to reflect a 2021 base year. In the following
discussion, we provide an overview of the market basket and describe
the methodologies used to determine the operating and capital portions
of the 2021-based IRF market basket.

B. Overview of the 2021-Based IRF Market Basket

The 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 the proposed
rule, we proposed 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. 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.
Beginning with FY 2024, we proposed 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 2021-based IRF market basket. This
proposed methodology is generally similar to the methodology used to
develop the 2016-based IRF market basket.
We invited public comment on our proposed methodology for
developing the 2021-based IRF market basket.
Comment: Many commenters supported the rebasing and revising of the
IRF market basket from a 2016 base year to a 2021 base year as
proposed. Some of these commenters encouraged CMS to focus greater
attention on the costs and data needed to support payment changes in
the future.
Several commenters, while supporting moving forward with a 2021
base year, requested that CMS consider rebasing the IRF market basket
to a later base year, such as 2022 or 2023, when the data become
available, to more fully incorporate changes to IRF cost structures.
One commenter stated that inflationary pressures and cost increases
seem to have moderated somewhat during FY 2023 and therefore, using FY
2023 in future rulemaking would better align permanent changes that
have occurred in more recent years. One commenter stated that they
believe that using FY 2023 data, when available, may more accurately
capture costs being incurred by IRFs and they requested that CMS update
the IRF market basket cost weights with the most recently available
data in the final rule.
Response: We appreciate the commenters' support to rebase and
revise the IRF market basket. As discussed in section VI.A of this
final rule, the market basket used to update IRF PPS payments has been
periodically rebased and revised over the history of the IRF PPS to
reflect more recent data on IRF cost structures. For the FY 2024 IRF
PPS proposed rule, we proposed to rebase and revise the IRF market
basket using 2021 Medicare cost reports, the most recent year of
complete data available at the time of rulemaking, which showed an
increase in the Compensation cost weight from 2016 to 2021. Data for
2022 and 2023 are incomplete at this time. Because complete 2022 IRF
cost report data are

[[Page 50967]]

currently unavailable, we believe it is more appropriate to update the
base year cost weights to 2021 to reflect changes over this period
rather than to delay the rebasing. It has been our longstanding
practice to rebase the market basket on a regular basis to ensure it
reflects the input cost structure of IRFs. As stated in the FY 2024 IRF
PPS proposed rule (88 FR 20960), given the potential impact of the PHE
on the Medicare cost report data, we will continue to monitor the
Medicare cost report data as they become available and, if appropriate,
propose any changes to the IRF market basket in future rulemaking.
We provide a summary of the more detailed public comments received
on our proposed methodology for developing the 2021-based IRF market
basket and our responses in the following sections.
1. Development of Cost Categories and Weights for the 2021-Based IRF
Market Basket
a. Use of Medicare Cost Report Data
We proposed 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
interested parties 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 proposed 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 proposed to limit the cost reports used to establish
the 2021-based IRF market basket to those from facilities that had a
Medicare ALOS that was relatively similar to their facility ALOS. 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 ALOS for
freestanding IRFs is calculated from data reported on line 14 of
Worksheet S-3, part I. The Medicare ALOS for hospital-based IRFs is
calculated from data reported on line 17 of Worksheet S-3, part I. We
proposed to include the cost report data from IRFs with a Medicare ALOS
within 15 percent (that is, 15 percent higher or lower) of the facility
ALOS to establish the sample of providers used to estimate the 2021-
based IRF market basket cost weights. We proposed to apply this ALOS
edit to the data for IRFs to exclude providers that serve a population
whose ALOS would indicate that the patients served are not consistent
with an ALOS of a typical Medicare patient. We note that this is the
same ALOS 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 proposed to use the cost reports for IRFs that met this
ALOS 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 the proposed rule, and as
done for the 2016-based IRF market basket, we also proposed 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 proposed 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 2021-based IRF market basket cost weights, we
proposed 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 2021-based IRF market basket.
(1) Total Medicare Allowable Costs
For freestanding IRFs, we proposed 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 proposed 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 proposed 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 prospective payment systems (PPS) [that is,
inpatient prospective payment

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system (IPPS), IRF PPS, inpatient psychiatric facilities (IPF) PPS and
skilled nursing facility (SNF) PPS]). 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 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 proposed
that this IRF ancillary ratio for each cost center also be used to
calculate Wages and Salaries and Capital costs, as described in section
VI.C.1.a.(2) of this final rule.
Then for each ancillary cost center, we proposed 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 proposed 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 proposed 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 proposed 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 proposed 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 proposed 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 proposed 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 proposed 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 proposed 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 the proposed rule.
The sum of these costs represents hospital-based IRF ancillary salary
costs.
(c) Overhead Salary Costs for Ancillary Cost Centers
We proposed 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 the
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
the 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 proposed 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
proposed to use the sum of Worksheet S-3, part II, lines 17, 18, 20,
and 22, to derive Employee Benefits costs.

[[Page 50969]]

For hospital-based IRFs, we proposed 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 proposed inpatient unit 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 proposed 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 proposed 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 proposed 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 proposed 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 the proposed rule, hospital-based IRF ancillary
salaries as described in section V.C.1.a.(2)(b) of the proposed rule
and hospital-based IRF overhead salaries for ancillary cost centers as
described in section V.C.1.a.(2)(c) of the 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 the
proposed rule. To derive contract labor costs using Worksheet S-3, part
V, data, for freestanding IRFs, we proposed 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 proposed 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 proposed 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 proposed
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 proposed 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 proposed 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 proposed 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 proposed 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 proposed 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 proposed 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 proposed 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 proposed 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 proposed 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 proposed 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

[[Page 50970]]

same proportion of expenses are used among each unit of the hospital.
(8) Capital Costs
For freestanding IRFs, we proposed 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 proposed 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 the 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 proposed 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 proposed 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 5 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
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 previously in this final rule. For these cost
weights, since we are using total facility medical care costs rather
than Medicare allowable costs associated with IRF services, we proposed
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 proposed 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 5 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 then proposed 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 proposed 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
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 then proposed 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 then proposed 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 proposed 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
2021-based IRF market basket.
Finally, we proposed 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 50971]]

[GRAPHIC] [TIFF OMITTED] TR02AU23.054

As we did for the 2016-based IRF market basket, we proposed 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 the proposed rule,
the rounded percentage is 80 percent; therefore, we proposed 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 2021-based IRF market basket and 2016-based IRF market basket.
[GRAPHIC] [TIFF OMITTED] TR02AU23.055

The following is a summary of the public comments received on our
proposed methodology for developing the major cost weights of the 2021-
based IRF market basket and our responses.
Comment: A few commenters noted that their review of the market
basket cost categories shows only modest increases, including with
respect to labor and capital-related costs, despite their members
experiencing much more significant actual increases in expenditures
compared to 2016. One commenter requested that CMS consider increases
in wages, salaries, benefits, and contract labor, among other
categories, in its methodology.
One commenter supported the increase in proposed weights given the
sustained labor increases and market challenges. However, the commenter
stated that labor and supplies are significant stressors and requested
CMS review pharmaceuticals and capital-related costs more closely
before the final rule. The commenter stated that while they recognize
that not all categories can increase, these components have all
contributed to financial strain on the industry and stated that a
decrease in their cost weights in the market basket does not reflect
their current contribution to overall costs.
Response: As discussed previously, the major cost weights
calculated from the Medicare cost reports for the 2021-based IRF market
basket represent each cost category's share of total costs. Therefore,
any changes in the cost weight from a prior base period will reflect
the growth in the costs for that specific category relative to the
growth in the costs for other categories. As a result, while costs for
a particular category may have increased from 2016 to 2021 (such as
capital-related costs as stated by the commenters), the Capital-Related
cost weight would only increase if capital-related costs increased
faster than the increase in total costs from 2016 to 2021. In response
to the commenters' request that CMS consider increases in wages,
salaries, benefits, and contract labor, among other categories, in its
methodology, we believe that the proposed methodology to derive the
major cost categories is detailed and robust. To allow for interested
parties to evaluate this methodology, we have provided all of the
detailed calculations and Medicare cost report fields so that
commenters are able to replicate the methodology and provide specific
comments on the derivation of these cost weights. We will continue to
monitor the Medicare cost reports as new data becomes available for all
of the major cost weights, including the categories mentioned by the
commenter, and any changes to the IRF market basket will be proposed in
future rulemaking.
We appreciate the commenter's request to review the pharmaceuticals
and capital-related costs used in the proposed 2021-based IRF market
basket more closely. We note that each of the cost weights in the
market basket reflect a distribution and will change over time only
when costs grow differently (either

[[Page 50972]]

higher or lower) than other costs. The Pharmaceuticals cost weight in
the 2021-based IRF market basket is 4.7 percent compared to the 2016-
based IRF market basket with 5.1 percent. We examined the Medicare cost
report data in more detail and found that the Pharmaceuticals cost
weight decreased, in aggregate, for both urban and rural IRFs,
government and for-profit IRFs, and for freestanding and hospital-based
IRFs. The median Pharmaceuticals cost weight also decreased from 5.0
percent to 4.4 percent. Therefore, we believe that the proposed
Pharmaceuticals cost weight is appropriate and reflects its share of
overall costs.
The Capital-Related cost weight in the 2021-based IRF market basket
is 8.6 percent compared to the 2016-based IRF market basket with 9.0
percent. We examined the Medicare cost report data in more detail and
found that the Capital-Related cost weight decreased, in aggregate, for
both urban and rural IRFs and for all ownership-types. The median
Capital-Related cost weight also decreased from 8.8 percent to 8.1
percent. We note that both pharmaceuticals and capital-related costs
per day increased from 2016 to 2021; however, they increased at a
slower rate than total Medicare allowable costs per day (which is the
denominator in the cost weight calculation) resulting in slightly lower
cost weights in 2021 compared to 2016. Therefore, we believe that the
proposed Capital-Related cost weight is appropriate and reflects its
share of overall costs.
Comment: A few commenters requested that CMS educate interested
parties on the importance of reporting accurate and robust data on the
Medicare cost reports. One commenter recognized that CMS is relying on
the Medicare cost report data for the market basket cost weights, but
noted that such data may not always be adequately recorded or
prioritized for input. One commenter specifically noted that not all
IRFs are properly reporting data for Employee Benefits and Contract
Labor on the Medicare cost reports. The commenter stated that while all
of their hospitals have reported these cost report line items, they
urged CMS to emphasize their importance to ensure that the IRF sector
understands the importance of accurately and fully reporting these line
items to reduce data gaps for future updates.
Response: We recognize the commenters' concerns and reiterate that
accurate and complete reporting of all data on the Medicare cost
reports by IRFs help to ensure that the cost weights for the IRF market
basket are reflective of the cost structure of IRFs. We also note that
we analyze the Medicare cost report data to evaluate their
representativeness; for example, we reweight the data reported by
ownership type and urban/rural so that it reflects the universe of
providers and compare it to the proposed cost weights that are based on
reported data. Our analysis shows the proposed cost weights are
representative across these dimensions. In addition, we also trim the
data to eliminate outliers as described in section VI.C.1.b. of this
final rule. As stated in the FY 2024 IRF PPS proposed rule (88 FR
20961) and previous IRF PPS rules, we continue to encourage all
providers to report the Employee Benefits and Contract Labor data on
the Medicare cost report. Going forward, we will continue to work with
interested parties to communicate the importance of all providers
filling out the Medicare cost report with accurate and complete data.
After consideration of the public comments, we are finalizing our
methodology for developing the major cost weights and therefore, we are
finalizing these major cost weights as proposed.
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 proposed 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 proposed 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 proposed 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 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 2021-based IRF market
basket (0.05 * 20.4 percent = 1.0 percent).
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\16\ <a href="http://www.bea.gov/papers/pdf/IOmanual_092906.pdf">http://www.bea.gov/papers/pdf/IOmanual_092906.pdf</a>.
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Using this methodology, we proposed to derive seventeen detailed
IRF market basket cost category weights from the 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.
We did not receive any comments on our methodology to use the BEA
I-O data to derive the detailed operating cost weights. We are
finalizing this methodology as we proposed. We note that we did receive
one comment on the derivation of the Professional Fees: Labor-Related
cost weight which we discuss in section VI.E. of this final rule.
d. Derivation of the Detailed Capital Cost Weights
As described in section V.C.1.b. of the proposed rule, we proposed
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 proposed to

[[Page 50973]]

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 proposed 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 proposed 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 proposed
to derive these proportions using data reported on Worksheet A-7 for
the total facility. We assumed 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 2021-
based IRF market basket, we proposed 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 2021-based IRF market basket. Rather, we
proposed 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 proposed 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 proposed 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 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 proposed to further divide the Depreciation and
Interest cost categories. We proposed to separate Depreciation into the
following two categories: (1) Building and Fixed Equipment and (2)
Movable Equipment. We proposed 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 2021-based IRF market basket, we proposed
to use slightly different methods to obtain the fixed percentages for
hospital-based IRFs compared to freestanding IRFs.
For freestanding IRFs, we proposed 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 proposed 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 proposed to
weight these two fixed percentages (inpatient and ancillary) using the
proportion that each capital cost type represents of total capital
costs in the 2021-based IRF market basket. We proposed 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 proposed to use
interest costs data from Worksheet A-7 of the 2021 Medicare cost
reports for both freestanding and hospital-based IRFs. We proposed 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 proposed 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 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 the proposed rule.

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We did not receive any comments on our proposed methodology for
developing the detailed capital cost weights of the 2021-based IRF
market basket. We are finalizing these detailed capital cost weights as
proposed.
e. 2021-Based IRF Market Basket Cost Categories and Weights
Table 7 compares the cost categories and weights for the 2021-based
IRF market basket compared to the 2016-based IRF market basket.

[[Page 50975]]

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2. Selection of Price Proxies
After developing the cost weights for the 2021-based IRF market
basket, we proposed to 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

[[Page 50976]]

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 evaluated 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.
Below is a detailed explanation of the price proxies we proposed
for each cost category weight.
a. Price Proxies for the Operating Portion of the 2021-Based IRF Market
Basket
(1) Wages and Salaries
We proposed 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 proposed 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 proposed 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 proposed 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 proposed 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 proposed 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 proposed 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 proposed 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 proposed 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).
(8) Food: Contract Purchases
We proposed 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 proposed to use a
four-part blended PPI as the proxy for the chemical cost category in
the 2021-based IRF market basket. The 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 2021-based IRF market basket, we
proposed 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 blended Chemical proxy for the 2021 IRF market basket. This is the
same blend that was used for the 2016-based IRF market basket (84 FR
39080).

[[Page 50977]]

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(10) Medical Instruments
We proposed 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
proposed to use a blend of these two price proxies. To proxy the price
changes associated with NAICS 339112, we proposed 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 proposed 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
proposed 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.
[GRAPHIC] [TIFF OMITTED] TR02AU23.059

(11) Rubber and Plastics
We proposed 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 proposed 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 proposed 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 proposed 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 proposed 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 proposed to continue to use the ECI for Total Compensation for
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 proposed 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 proposed 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 proposed 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 proposed 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).

[[Page 50978]]

(21) All Other: Nonlabor-Related Services
We proposed 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).
The following is a summary of the public comments received on our
proposed price proxies for the operating portion of the 2021-based IRF
market basket and our responses.
Comment: A few commenters expressed concern that CMS's use of the
IHS Global Inc. (IGI) forecast for determining the market basket update
does not capture the specialized nature of IRF costs. The commenters
stated that IGI's general forecasts for hospital goods and services
likely are not accounting for the fact that IRFs are providing more
specialized services compared to other hospital settings such as
specialized staff, equipment, and drugs.
Response: As described previously, the IRF market basket measures
price changes (including changes in the prices for wages and salaries)
over time and would not reflect increases in costs associated with
changes in the volume or intensity of input goods and services until
the market basket is rebased. In this final rule, we are rebasing and
revising the current 2016-based IRF market basket to reflect a 2021
base year. As stated previously, we believe the 2021-based IRF market
basket appropriately reflects IRF cost structures. To reflect expected
price growth for each of the cost categories in the IRF market basket,
we rely on impartial economic forecasts of the price proxies used in
the market basket from IGI; as previously discussed, we use the best
available price proxies that would measure expected price growth of the
goods and services purchased by IRFs. We have consistently used the IGI
economic price proxy forecasts in the market baskets used to update the
IRF PPS payments since the implementation of the IRF PPS. For example,
to measure price growth for IRF wages and salaries costs in the IRF
market basket, since IRF-specific information is unavailable, we
proposed to use the ECI for Wages and Salaries for All Civilian workers
in Hospitals. We believe that this ECI is the best available price
proxy to account for the occupational skill mix within IRFs. We note
that we reviewed the Bureau of Labor Statistics Occupational Employment
and Wage Statistics (OEWS) data for NAICS 622100 (General Medical and
Surgical Hospitals)--one of the primary data sources used to derive the
weights for the ECI for Wages and Salaries for All Civilian workers in
Hospitals--and found that in 2021, the updated base year of the IRF
market basket, approximately 56 percent of total estimated salaries
(total employment multiplied by mean annual wage) for NAICS 622100 was
attributed to Health Professional and Technical occupations, and
approximately 20 percent was attributed to Health Service occupations.
Therefore, in the absence of an IRF-specific ECI, we believe that the
highly skilled hospital workforce captured by the ECI for Wages and
Salaries for All Civilian workers in Hospitals (inclusive of
therapists, nurses, other clinicians, etc.) is a reasonable proxy for
the compensation component of the IRF market basket. We would welcome
any publicly available IRF-specific data that the commenters could
provide regarding wage, benefits, or supplies prices.
Comment: One commenter encouraged CMS to explore other changes to
the composition of the market basket to better capture evolving
dynamics in the labor force. The commenter provided as an example that
the ECI may no longer accurately capture the changing composition and
cost structure of the hospital labor market given the large increases
in short-term contract labor use and its growing costs.
Response: The purpose of the market basket is to measure the
average change in the price of goods and services hospitals purchase in
order to provide IRF medical services. We believe the ECI is an
appropriate index to measure the price changes for Compensation costs
as it holds occupational distribution constant. We note that the 2021-
based IRF market basket cost weights show that contract labor costs
account for about 3 percent of total compensation costs (reflecting
employed and contract labor staff) for IRFs in 2021. In addition, an
analysis of Medicare cost report data for IPPS hospitals shows that
contract labor hours accounted for about 4 percent of total
compensation hours (reflecting employed and contract labor staff) in
2021. Therefore, while we acknowledge that the ECI measures only
reflect price changes for employed staff, we believe that the ECI for
hospital workers is accurately reflecting the price change associated
with the labor used to provide hospital care (as employed workers'
hours account for 97 percent of hospital compensation hours). We will
continue to monitor the trends in the ECI as well as the increased use
of contract labor as a result of the PHE. We welcome any additional
publicly available data that commenters can provide regarding
alternative price indexes.
After consideration of the public comments, we are finalizing the
price proxies for the operating portion of the 2021-based IRF market
basket as proposed.
Table 11 lists all price proxies that we are finalizing for the
2021-based IRF market basket.
b. Price Proxies for the Capital Portion of the 2021-Based IRF Market
Basket
(1) Capital Price Proxies Prior to Vintage Weighting
We proposed to continue to use the same price proxies for the
capital-related cost categories in the 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 proposed 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 also proposed 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 2021-based IRF market basket is intended
to capture the long-term

[[Page 50979]]

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 proposed 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 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 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 proposed to use data from the AHA Panel Survey and the AHA Annual
Survey to obtain a time series of total expenses for hospitals. We then
proposed 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 proposed 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
2021-based IRF market basket. We proposed to calculate the expected
lives using Medicare cost report data from Worksheet A-7 part III for
freestanding and hospital-based IRFs. 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 proposed 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
proposed to apply a similar method for movable equipment. Using these
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 proposed 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 the proposed rule. For the interest vintage
weights, we proposed 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
proposed 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 46 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 2021-based IRF market basket and the
2016-based IRF market basket are presented in Table 10.
BILLING CODE 4120-01-P

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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.''
We did not receive any comments on our proposed price proxies for
the capital portion of the 2021-based IRF market basket. We are
finalizing these price proxies as proposed.
c. Summary of Price Proxies of the 2021-Based IRF Market Basket
Table 11 shows both the operating and capital price proxies that we
are finalizing for the 2021-based IRF market basket.

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[[Page 50982]]

BILLING CODE 4120-01-C
After consideration of public comments, we are finalizing the 2021-
based IRF market basket as proposed.

D. FY 2024 Market Basket Update and Productivity Adjustment

1. FY 2024 Market Basket Update
For FY 2024 (that is, beginning October 1, 2023, and ending
September 30, 2024), we proposed to use an estimate of the 2021-based
IRF market basket increase percentage 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 proposed 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 percentage increase for FY 2024 was 3.2 percent. Therefore,
consistent with our historical practice of estimating market basket
increases based on the best available data, we proposed a market basket
increase percentage of 3.2 percent for FY 2024. We also proposed that
if more recent data were 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.
Based on IGI's second quarter 2023 forecast with historical data
through the first quarter of 2023, the 2021-based IRF market basket
increase percentage for FY 2024 is 3.6 percent. Therefore, consistent
with our historical practice of estimating market basket increases
based on the best available data, we are finalizing a market basket
increase percentage of 3.6 percent for FY 2024. For comparison, the
current 2016-based IRF market basket is also projected to increase by
3.6 percent in FY 2024 based on IGI's second quarter 2023 forecast.
Table 12 compares the 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 2021-based IRF market basket
being equal to 3.2 percent compared to the 2016-based IRF market basket
with 3.1 percent.
[GRAPHIC] [TIFF OMITTED] TR02AU23.062

2. 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

[[Page 50983]]

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 was projected to be 0.2 percent.
Thus, in accordance with section 1886(j)(3)(C) of the Act, we proposed
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 proposed 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 was equal to 3.0 percent (3.2 percent
market basket update reduced by the 0.2 percentage point productivity
adjustment). Furthermore, we proposed that if more recent data became
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.
Using IGI's second quarter 2023 forecast, the 10-year moving
average growth of TFP for FY 2024 is projected to be 0.2 percent. Thus,
in accordance with section 1886(j)(3)(C) of the Act, we calculate the
FY 2024 market basket update, which is used to determine the applicable
percentage increase for the IRF payments, using IGI's second quarter
2023 forecast of the 2021-based IRF market basket. We 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 second quarter 2023
forecast). Therefore, the FY 2024 IRF update is equal to 3.4 percent
(3.6 percent market basket update reduced by the 0.2 percentage point
productivity adjustment).
For FY 2024, the Medicare Payment Advisory Commission (MedPAC)
recommends that we reduce IRF PPS payment rates by 3 percent. As
discussed, and in accordance with sections 1886(j)(3)(C) and
1886(j)(3)(D) of the Act, the Secretary proposed to update the IRF PPS
payment rates for FY 2024 by a productivity-adjusted IRF market basket
increase percentage 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 invited public comment on our proposals for the FY 2024 market
basket update and productivity adjustment.
The following is a summary of the public comments received on the
proposed FY 2024 market basket update and productivity adjustment:
Comment: Several commenters supported the proposed payment update
for FY 2024 and the use of the latest available data. Many commenters
expressed concern that the FY 2024 payment update does not adequately
factor in the effects of many challenges faced by IRFs such as the
impact of the PHE, inflationary pressure, higher patient acuity,
sequestration, increasing labor costs due to labor shortages, and other
increased costs such as PPE, drugs, and supplies. One commenter
expressed concern over the accuracy of the forecast underlying the
proposed 3.2 percent market basket update for FY 2024.
A few commenters requested that CMS reexamine the forecasting
approach or consider other methods and data sources to calculate the
final rule market basket update that better reflects the rapidly
increasing input prices and costs facing IRFs. One commenter requested
that CMS discuss in the final rule how the agency will account for the
increased costs to hospitals that are not reflected in the recent
market basket adjustments.
Response: We acknowledge and appreciate commenters' concerns
regarding recent trends in inflation. We are required to update IRF PPS
payments by the market basket update adjusted for productivity, as
directed by section 1886(j)(3)(C) of the Act. Specifically, section
1886(j)(3)(C)(i) states that the increase factor shall be based on an
appropriate percentage increase in a market basket of goods and
services comprising services for which payment is made. In the FY 2024
IRF PPS proposed rule, we proposed to rebase and revise the current
2016-based IRF market basket to reflect a 2021 base year. See section
VI.C. of this final rule for a description of this proposal, the
comments received, and the final 2021-based IRF market basket. We
believe the increase in the 2021-based IRF market basket adequately
reflects the average change in the price of goods and services
hospitals purchase in order to provide IRF medical services and is
technically appropriate to use as the IRF payment update factor. The
IRF market basket is a fixed-weight, Laspeyres-type index that measures
the change in price over time of the same mix of goods and services
purchased by IRFs in the base period. As we discussed in response to
similar comments in the FY 2023 IRF PPS final rule, the IRF market
basket update would reflect the prospective price pressures described
by the commenters as increasing during a high inflation period (such as
faster wage growth or higher energy prices) but would inherently not
reflect other factors that might increase the level of costs, such as
the quantity of labor used or any shifts between contract and staff
nurses. We note that cost changes (that is, the product of price and
quantities) would only be reflected when a market basket is rebased,
and the base year weights are updated to a more recent time period. As
stated previously, we are finalizing an IRF market basket that reflects
a 2021 base year and therefore, any change in the cost structure for
IRFs that occurred between 2016 and 2021 is now captured in the cost
weights for this rebased market basket.
In response to the commenter's request that we reexamine the
current forecasting approach for determining the IRF PPS market basket
update, we provide the following information. As stated previously, IGI
is a nationally recognized economic and financial forecasting firm with
which CMS contracts to forecast the components of the market baskets.
At the time of the FY 2024 IRF PPS proposed rule, based on IGI's fourth
quarter 2022 forecast with historical data through the third quarter of
2022, the 2021-based IRF market basket update was forecasted to be 3.2
percent for FY 2024, reflecting forecasted compensation price growth of
3.9 percent (by comparison, compensation price growth in the IRF market
basket averaged 2.4 percent from 2013-2022). In the FY 2024 IRF PPS
proposed rule, we proposed that if more recent data became available,
we would use such data, if appropriate, to derive the final FY 2024 IRF
market basket update for the final rule. For this final rule, we now
have an updated forecast of the price proxies underlying the market
basket that incorporates more recent historical data and reflects a
revised outlook regarding the U.S. economy and expected price inflation
for FY 2024. Based on IGI's second quarter 2023 forecast with
historical data through the first quarter of 2023, we are projecting a
FY 2024 IRF market basket update of 3.6 percent (reflecting forecasted
compensation price growth of 4.3 percent) and a productivity

[[Page 50984]]

adjustment of 0.2 percentage point. Therefore, for FY 2024 a final IRF
productivity-adjusted market basket update of 3.4 percent (3.6 percent
less 0.2 percentage point) will be applicable, compared to the 3.0
percent market basket update that was proposed.
We do acknowledge that FY 2022 compensation price growth for the
2016-based IRF market basket was higher (5.3 percent) than was
forecasted at the time of the FY 2022 IRF PPS final rule (2.7 percent).
We note that the lower projected FY 2024 IRF market basket percent
increase relative to the FY 2022 historical increase and the FY 2023
projected increase reflects the expectation that wage and price
pressures will lessen in FY 2024 relative to recent history.
Comment: Several commenters expressed concern about the continued
application of the productivity adjustment to IRFs. The commenters
noted that the PHE has resulted in further productivity challenges for
IRFs and other healthcare providers. One commenter cited an article and
data reporting declines in overall productivity in the economy and
requested that CMS consider these developments in the update to the
productivity adjustment in the IRF PPS final rule. A few commenters
requested that CMS carefully monitor the impact that these productivity
adjustments will have on the rehabilitation hospital sector, provide
feedback to Congress as appropriate, and reduce the productivity
adjustment. One commenter requested that CMS explore ways to use its
authority to offset or waive these adjustments. One commenter requested
that CMS suspend at least temporarily the productivity adjustment that
reduces the market basket update due to recent declines in hospital
productivity. One commenter requested that CMS use its exceptions and
adjustments authority under section 1886(j)(3)(A)(v) of the Act to
remove the productivity adjustment for any fiscal year that was covered
under PHE determination, that is, 2020 (0.4 percent), 2021 (0.0
percent), 2022 (0.7 percent), and 2023 (0.3 percent), from the
calculation of the market basket for FY 2024 and any year thereafter.
Response: Section 1886(j)(3)(C)(ii)(I) of the Act requires the
application of the productivity adjustment, described in section
1886(b)(3)(xi)(II), to the IRF PPS market basket increase factor. As
required by statute, the FY 2024 productivity adjustment is derived
based on the 10-year moving average growth in economy-wide productivity
for the period ending FY 2024. We recognize the concerns of the
commenters regarding the appropriateness of the productivity
adjustment; however, we are required pursuant to section
1886(j)(3)(C)(ii)(I) to apply the specific productivity adjustment
described here. In addition, with respect to providing feedback to
Congress, we note that MedPAC annually monitors various factors for
Medicare providers in terms of profitability and beneficiary access to
care and reports the findings to Congress on an annual basis. MedPAC
did a full analysis of payment adequacy for IRF providers in its March
2023 Report to Congress (<a href="https://www.medpac.gov/document/march-2023-report-to-the-congress-medicare-payment-policy/">https://www.medpac.gov/document/march-2023-report-to-the-congress-medicare-payment-policy/</a>). MedPAC stated that
given the positive payment adequacy indicators for IRFs, they
recommended that the IRF base payment rate be reduced by 3 percent for
FY 2024. Additionally, we note that we did not propose to use our
authority under section 1886(d)(5)(I)(i) of the Act to remove or offset
the application of the productivity adjustment for FY 2024. As
previously noted, we are required pursuant to section
1886(j)(3)(C)(ii)(I) of the Act to apply the productivity adjustment to
the IRF PPS market basket increase factor.
Comment: A number of commenters requested that CMS deviate from its
usual update and consider making one-time adjustments to the market
basket update or applying a forecast error adjustment. One commenter
stated CMS should apply a temporary payment adjustment or add-on
payment to the IRF PPS in FY 2024 of 10 to 20 percent per discharge.
Another commenter requested an adjustment to account for what the
commenter described as CMS' ``underpayment'' of IRFs since 2020.
Response: As most recently discussed in the FY 2023 IRF PPS final
rule, the IRF PPS market basket updates are set prospectively, which
means that the market basket update relies on a mix of both historical
data for part of the period for which the update is calculated and
forecasted data for the remainder. For instance, the FY 2024 market
basket update in this final rule reflects historical data through the
first quarter of CY 2023 and forecasted data through the third quarter
of CY 2024. While there is currently no mechanism to adjust for market
basket forecast error in the IRF payment update, the forecast error for
a market basket update is calculated as the actual market basket
increase for a given year less the forecasted market basket increase.
Due to the uncertainty regarding future price trends, forecast errors
can be both positive and negative. In evaluating the difference between
the forecast increase and later acquired actual data for the period
from FY 2012 through FY 2020, we found the forecasted market basket
updates for each payment year for IRFs were higher than the actual
market basket updates. Therefore, we disagree with the suggestion that
the FY 2024 base rates are too low based solely on the calculation of a
forecast error over a short period of time (instead of considering
forecast errors over longer periods). For this final rule, we have
incorporated more recent historical data and forecasts to capture the
price and wage pressures facing IRFs and believe it is the best
available projection of inflation to determine the applicable
percentage increase for the IRF payments in FY 2024.
After consideration of public comments, we are finalizing a FY 2024
IRF productivity-adjusted market basket increase of 3.4 percent based
on the most recent data available.

E. 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 proposed 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-Related Costs from the 2016-based IRF
market basket.
Based on our definition of the labor-related share and the cost
categories in the 2021-based IRF market basket, we proposed 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,

[[Page 50985]]

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 2021-based
IRF market basket.
Similar to the 2016-based IRF market basket (84 FR 39087), the
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 2021-based IRF market basket, we proposed 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
proposed 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 proposed 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 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 proposed to apportion
approximately 2.6 percentage points of the 4.0 percentage point figure
into the Professional Fees: Labor-Related share cost category and 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 proposed to allocate a proportion of the Home
Office/Related Organization Contract Labor cost weight, calculated
using the Medicare cost reports as stated previously in this final
rule, into the Professional Fees: Labor-Related and Professional Fees:
Nonlabor-Related cost categories. We proposed to 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,
which requires the services to be purchased in the local labor market.
Similar to the 2016-based IRF market basket, we proposed 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 its home
office provider. For the 2021-based IRF market basket, we proposed 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 the 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 its home office is located in the hospital facility's
same Metropolitan Statistical Area. For both freestanding and hospital-
based providers, we proposed 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 proposed 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 proposed to
allocate 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.
Comment: A few commenters supported the proposal to increase the
labor-related share using data that better reflects increased labor
costs as a percentage of IRFs' overall cost structure.
One commenter disagreed with CMS' proposal to exclude from the
labor-related share the proportion of non-medical professional services
fees presumed to have been purchased outside of the hospital's labor
market. The commenter disagreed with CMS' assumption that services
purchased

[[Page 50986]]

from national firms are not affected by the local labor market. The
commenter stated that when hospitals seek professional services, the
services they are seeking (for example accounting, engineering,
management consulting) typically are not so unique that they could only
be provided by regional or national firms. The commenter stated that
CMS' own survey data support this conclusion, as approximately 65
percent of these services are sourced from firms in the local market.
The commenter stated that costs of services purchased from firms
outside the hospital's labor market should be included with the labor-
related share of costs.
The commenter requested that CMS provide evidence that pricing for
professional services provided by regional and national firms to
hospitals is offered in a national market that is not subject to
geographic cost variation. The commenter requested that CMS restore the
1.4 percentage points it proposes to reclassify to Professional
Services: Nonlabor-Related to the Professional Services: Labor-Related
category, if the agency cannot produce strong evidence that prices for
professional services provided by firms outside of a hospital's local
labor market are homogenous.
Response: We disagree with the commenter and believe it is
appropriate that a proportion of Accounting & Auditing, Legal,
Engineering, and Management Consulting services costs purchased by
hospitals should be excluded from the labor-related share. 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 IRFs'
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 purpose of the labor-related share is to reflect the proportion
of the national PPS base payment rate that is adjusted by the
hospital's wage index (representing the relative costs of their local
labor market to the national average). Therefore, we include a cost
category in the labor-related share if the costs are labor intensive
and vary with the local labor market.
As acknowledged by the commenter and confirmed by the survey of
hospitals conducted by CMS in 2008 (as stated previously in this final
rule), professional services can be purchased from local firms as well
as national and regional professional services firms. It is not
necessarily the case, as asserted by the commenter, that these national
and regional firms have fees that match those in the local labor market
even though providers have the option to utilize those firms. That is,
fees for services purchased from firms outside the local labor market
may differ from those that would be purchased in the local labor market
for any number of reasons (including but not limited to, the skill
level of the contracted personnel, higher capital costs, etc.). As
noted earlier in this section of this final rule, the definition for
the labor-related share requires the services to be purchased in the
local labor market; therefore, CMS' allocation of approximately 65
percent (2.6 percentage points of 4.0 percentage points) of the
Professional Fees cost weight to Professional Fees: Labor-Related costs
based on the 2008 survey results \17\ is consistent with the
commenter's assertion that not all Professional Fees services are
purchased in the local labor market. We believe it is reasonable to
conclude that the costs of those Professional Fees services purchased
directly within the local labor market are directly related to local
labor market conditions and, thus, should be included in the labor-
related share. The remaining approximately 35 percent of Professional
Fees costs, which are purchased outside the local labor market, reflect
different and additional factors outside the local labor market and,
thus, should be excluded from the labor-related share. In addition, we
note the compensation costs of professional services provided by
hospital employees (which would reflect the local labor market) are
included in the labor-related share as they are included in the Wages
and Salaries and Employee Benefits cost weights.
---------------------------------------------------------------------------

\17\ The 65 percent is based on a survey conducted by CMS in
2008 as detailed in the FY 2010 IPPS/LTCH PPS final rule (74 FR
43850 through 43856). This was also used to determine the
Professional Fees: Labor-related cost weight in the 2016-based IRF
market basket.
---------------------------------------------------------------------------

Therefore, for the reasons discussed, we believe our proposed
methodology of continuing to allocate only a portion of Professional
Fees to the Professional Fees: Labor-Related cost category is
appropriate. As stated previously, 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.
Comment: One commenter disagreed with the assumption that home
office compensation costs that occur outside of a hospital's labor
market are not subject to geographic wage variation and stated that
they do not believe that the proposed reclassification to the
Professional Fees: Non-Labor-Related cost category is justified. The
commenters stated that the proposed methodology fails to consider that
the home office is essentially a part of the hospital, and thus the
hospital, along with its home office, is operating in multiple labor
markets. The commenters stated that the home office's portion of the
hospital's labor costs should not be excluded from the labor-related
share simply because they are not in the same labor market as the
hospital.
The commenter conducted their own analysis of the Medicare cost
report data showing that providers with a home office outside of their
local labor market had a wage index both below 1 as well as greater
than 1. The commenter stated that those hospitals in a labor market
with a wage index greater than 1 had mean home office average hourly
wage costs that were greater than the mean home office average hourly
wage costs of those hospitals in a labor market with a wage index less
than 1. The commenter claimed that these data indicate that, contrary
to CMS' assertion, home office salary, wage, and benefit costs for
hospitals with home offices outside of their labor market are subject
to geographic wage variation.
The commenter requested that CMS allocate the full 5.4 percentage
points of the Home Office/Related Organization cost weight to the
labor-related share.
Response: As previously stated, the purpose of the labor-related
share is to determine the proportion of the national PPS base payment
rate that is adjusted by the hospital's wage index (representing the
relative costs of their local labor market to the national average).
Therefore, we include a cost category in the labor-related share if the
costs are labor intensive and vary with the local labor market.
As the commenter stated and as validated with the Medicare cost
report, a hospital's home office can be located

[[Page 50987]]

outside the hospital's local labor market. The proposed methodology for
allocating 45 percent of the Home Office/Related Organization cost
weight (reflecting compensation costs) is consistent with the intent of
the statute to identify the proportion of costs likely to directly vary
with the hospital's local labor market. Our methodology relies on the
Medicare cost report data for hospitals reporting home office
information to determine whether their home office is located in the
same local labor market (which we define as the hospital's Metropolitan
Statistical Area). As with professional services, we believe it is
reasonable to conclude that costs of those home office services
purchased directly within the local labor market are directly related
to local labor market conditions while the remaining 55 percent of home
office costs which are purchased outside the local labor market would
reflect different and additional factors and, thus, should be excluded
from the labor-related share.
Therefore, we believe our proposed methodology of continuing to
allocate only a portion of the Home Office/Related Organization cost
weight into the Professional Fees: Labor-Related cost weight is
appropriate. In addition, we would note that the compensation costs for
hospital employees (which would reflect the local labor market)
performing the same tasks as home office personnel are included in the
labor-related share as they are included in the Wages and Salaries and
Employee Benefits cost weights.
As stated previously, we proposed 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 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-Related 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 of Capital-Related
costs 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-Related costs for FY 2024 of 3.8
percent. Therefore, we proposed 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-Related costs).
After consideration of public comments, we are finalizing the 2021-
based IRF market basket labor-related cost categories and base year
cost weights as proposed.
Based on IGI's second quarter 2023 forecast for the 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-Related 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 2021-based IRF market basket in FY 2024, we took 46
percent of 8.2 percent to determine the labor-related share of Capital-
Related costs for FY 2024 of 3.8 percent. Therefore, the total labor-
related share for FY 2024 based on more recent data is 74.1 percent
(the sum of 70.3 percent for the operating costs and 3.8 percent for
the labor-related share of Capital-Related costs).
Table 13 shows the FY 2024 labor-related share using the 2021-based
IRF market basket relative importance and the FY 2023 labor-related
share using the 2016-based IRF market basket relative importance.
[GRAPHIC] [TIFF OMITTED] TR02AU23.063

[[Page 50988]]

The FY 2024 labor-related share using the 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 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 Tables 4 and 5.

F. 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 proposed 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 proposed 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 proposed 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 invited public comment on our proposals regarding the Wage
Adjustment for FY 2024.
The following is a summary of the public comments received on the
proposals regarding the Wage Adjustment for FY 2024, with our
responses:
Comment: Commenters stated support of the permanent 5-percent cap
on wage index decreases. One commenter encouraged CMS to implement
these caps in a non-budget neutral manner to mitigate volatility caused
by wage index shifts.
Response: We appreciate the commenters' support of the permanent
cap on wage index decreases. As for budget neutrality, we do not
believe that the permanent 5-percent cap policy for the IRF wage index
should be applied in a non-budget-neutral manner. Any adjustment or
updates made under section 1886(j)(6) of the Act for a FY must be made
in a manner that assures that the aggregated payments under this
subsection in the FY are not greater or less than those that would have
been made in the year without such adjustments. In accordance with
section 1186(j)(6) of the Act, our longstanding historical practice has
been to implement updates to the wage index under the IRF PPS in a
budget neutral manner. We refer readers to the FY 2023 IRF PPS final
rule (87 FR 47054 through 47056) for a detailed discussion and for
responses to these and other comments relating to the wage index cap
policy.
Comment: One commenter encouraged CMS to release provider-level
wage index tables in the final rule that would indicate what wage index
value each IRF would receive, including whether or not the IRF would
receive a capped wage index value, in order to avoid errors in the
payment rates established by the MACs. Commenters also requested that
CMS release the necessary wage index tables and data to enable IRFs to
crosswalk the IPPS values after application of the low-wage index
adjustment to the IRF PPS wage indices. These commenters also requested
that CMS detail what data it believes is necessary to enable use of the
post-reclassification and post-floor IPPS wage index data in the IRF
PPS.
Response: The wage index tables for IRF PPS are provided at the
CBSA level. The 5-percent cap policy is applied at the provider level.
Hence, when the 5-percent cap is applicable, each IRF should work
directly with its MAC to understand how the 5-percent cap is applied.
MACs have more detailed information about the location of each IRF and
the applicability of the 5-percent cap to each IRF's situation, and CMS
has provided careful instructions to the MACs on applying the 5-percent
cap policy (see publication 100-04 Medicare Claims Processing Manual,
chapter 3). Further, we are unable to provide crosswalk tables or data
related to IPPS wage index policies. Data pertaining to the FY 2024
IPPS proposed rule is available at <a href="https://www.cms.gov/medicare/medicare-fee-for-service-payment/acuteinpatientpps">https://www.cms.gov/medicare/medicare-fee-for-service-payment/acuteinpatientpps</a>. We do not have any
additional data on this for the IRF PPS.
Comment: Commenters encouraged CMS to continue to reform the wage
index policies. Commenters suggested that CMS revise the IRF wage index
to adopt the IPPS policies such as geographic reclassification, rural
floor, low wage adjustment, and the Outpatient PPS (OPPS) outmigration
adjustments.
Response: We appreciate the commenters' suggestion to adopt the
IPPS reclassification and rural floor policies, low wage, and the OPPS
outmigration adjustments for the IRF wage index. The OPPS outmigration
adjustment policy is a longstanding policy for that setting, and it
should be noted that the wage index applied to the OPPS also includes
the rural floor and any policies and adjustments applied to the IPPS
wage index. As we do not have an IRF-specific wage index, we are unable
to determine the degree, if any, to which these IPPS/OPPS policies
under the IRF PPS would be appropriate. Data pertaining to any IPPS
policies that are applied to the pre-reclassification/pre-floor wage
index is available in the FY 2024 IPPS proposed rule at <a href="https://www.cms.gov/medicare/medicare-fee-for-service-payment/acuteinpatientpps">https://www.cms.gov/medicare/medicare-fee-for-service-payment/acuteinpatientpps</a>. The rationale for our current wage index policies
was most recently published in the FY 2022 IRF PPS final rule (86 FR
42377 through 42378) and fully described in the FY 2006 IRF PPS final
rule (70 FR 47880, 47926 through 47928).

[[Page 50989]]

After consideration of the comments we received, we are finalizing
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 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 final rule, we multiply the unadjusted Federal
payment rate for IRFs by the FY 2024 labor-related share based on the
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 appears
in section VI.E. of this final 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
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 use the listed steps
to ensure that the FY 2024 IRF standard payment conversion factor
reflects the update to the wage indexes (based on the FY 2020 hospital
cost report data) and the 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 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 FY

[[Page 50990]]

2024 budget-neutral wage adjustment factor of 1.0028.
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 FY 2024 standard payment conversion
factor.
We discuss the calculation of the standard payment conversion
factor for FY 2024 in section VI.G. of this final rule.
We invited public comment on the proposed IRF wage adjustment for
FY 2024.
We did not receive any comments on the proposed IRF budget-neutral
wage adjustment factor methodology for FY 2024. Comments related to the
budget neutral wage index cap policy are addressed in the Wage
Adjustment section (VI.F) above.
We are finalizing our proposals regarding the IRF budget neutral
wage adjustment factor methodology for FY 2024.

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

To calculate the standard payment conversion factor for FY 2024, as
illustrated in Table 14, we begin by applying the 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 3.4 percent increase factor for FY 2024 to the standard
payment conversion factor for FY 2023 of $17,878 yields a standard
payment amount of $18,486. Then, we apply the 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 1.0028, which
results in a standard payment amount of $18,538. We next apply the
budget neutrality factor for the CMG relative weights of 1.0002, which
results in the standard payment conversion factor of $18,541 for FY
2024.
We invited public comment on the proposed FY 2024 standard payment
conversion factor.
We did not receive any comments on the FY 2024 standard payment
conversion factor, and therefore, we are finalizing the revisions as
proposed.
BILLING CODE 4120-01-P
[GRAPHIC] [TIFF OMITTED] TR02AU23.064

After the application of the CMG relative weights described in
section V. of this final rule to the FY 2024 standard payment
conversion factor ($18,541), the resulting unadjusted IRF prospective
payment rates for FY 2024 are shown in Table 15.

[[Page 50991]]

[GRAPHIC] [TIFF OMITTED] TR02AU23.065

[[Page 50992]]

[GRAPHIC] [TIFF OMITTED] TR02AU23.066

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

Table 16 illustrates the methodology for adjusting the prospective
payments (as described in section VI. of this final rule). The
following examples are based on two hypothetical Medicare
beneficiaries, both classified into CMG 0104 (without comorbidities).
The 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 0.8347, and a rural adjustment of 14.9
percent. Facility B, an urban teaching hospital, has a DSH percentage
of 15 percent (which would result in a LIP adjustment of 1.0454
percent), a wage index of 0.8793, and a teaching status adjustment of
0.0784.
To calculate each IRF's labor and non-labor portion of the
prospective

[[Page 50993]]

payment, we begin by taking the unadjusted prospective payment rate for
CMG 0104 (without comorbidities) from Table 16. Then, we multiply the
labor-related share for FY 2024 (74.1 percent) described in section
VI.E. of this final rule by the unadjusted prospective payment rate. To
determine the non-labor portion of the prospective payment rate, we
subtract the labor portion of the Federal payment from the unadjusted
prospective payment.
To compute the wage-adjusted prospective payment, we multiply the
labor portion of the 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 wage-adjusted Federal payment by adding the wage-adjusted
labor amount to the non-labor portion of the Federal payment.
Adjusting the 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.
[GRAPHIC] [TIFF OMITTED] TR02AU23.067

BILLING CODE 4120-01-C
Thus, the adjusted payment for Facility A would be $29,568.51, and
the adjusted payment for Facility B would be $29,548.23.

VII. 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.

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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.