C. Transition Period for Implementation of the LTCH PPS

In the August 30, 2002, final rule (67 FR 55954), we provided for a 5year transition period. During this 5year transition period, a LTCH's total payment under the PPS was based on an increasing percentage of the Federal rate with a corresponding decrease in the percentage of the LTCH PPS payment that is based on reasonable cost concepts. However, effective for cost reporting periods beginning on or after October 1, 2006, total LTCH PPS payments are based on 100 percent of the Federal rate.

D. Limitation on Charges to Beneficiaries

In the August 30, 2002, final rule, we presented an indepth discussion of beneficiary liability under the LTCH PPS (67 FR 55974 through 55975). In the RY 2005 LTCH PPS final rule (69 FR 25676), we clarified that the discussion of beneficiary liability in the August 30, 2002, final rule was not meant to establish rates or payments for, or define Medicareeligible expenses. Under Sec. 412.507, if the Medicare payment to the LTCH is the full LTCDRG payment amount, as consistent with other established hospital prospective payment systems, a LTCH may not bill a Medicare beneficiary for more than the deductible and coinsurance amounts as specified under Sec. 409.82, Sec. 409.83, and Sec. 409.87 and for items and services as specified under Sec. 489.30(a). However, under the LTCH PPS, Medicare will only pay for days for which the beneficiary has coverage until the SSO threshold is exceeded. Therefore, if the Medicare payment was for a SSO case (Sec. 412.529) that was less than the full LTCDRG payment amount because the beneficiary had insufficient remaining Medicare days, the LTCH could also charge the beneficiary for services delivered on those uncovered days (Sec. 412.507).
E. Administrative Simplification Compliance Act (ASCA) and Health Insurance Portability and Accountability Act (HIPAA) Compliance

Claims submitted to Medicare must comply with both the Administrative Simplification Compliance Act (ASCA) (Pub. L. 107105), and Health Insurance Portability and Accountability Act of 1996 (HIPAA) (Pub. L. 104191). Section 3 of the ASCA requires that the Medicare Program deny payment under Part A or Part B for any expenses incurred 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 (as added by section 3(a) of the ASCA) provides that the Secretary shall waive such denial in two specific types of cases and may also waive such denial ``in such unusual cases as the Secretary finds appropriate'' (68 FR 48805). Section 3 of the ASCA operates in the context of the HIPAA regulations, which include, among other provisions, the transactions and code sets standards requirements codified as 45 CFR parts 160 and 162, subparts A and I through R (generally known as the Transactions Rule). The Transactions Rule requires covered entities, including covered health care providers, to conduct certain electronic healthcare transactions according to the applicable transactions and code sets standards.

II. Summary of the Provisions of This Final Rule

The RY 2009 proposed rule appeared in the Federal Register (73 FR 5342) on January 29, 2008. We received 18 timely items of
correspondence on the proposed rule that we respond to in the appropriate sections of this final rule. We also received one comment that
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addressed our policy on satellites of LTCHs that is beyond the scope of this regulation. Also beyond the scope of this regulation was a comment directed to our interpretation of the ``25 percent threshold policy'' revisions, one of the requirements specified in 114 of the MMSEA, provisions of which will be addressed in a future rulemaking.

In this final rule, we are revising the LTCH PPS payment rate update cycle and making other policy changes and clarifications. The following is a summary of the major areas that we are addressing in this final rule.

In section III. of this final rule, we discuss the LTCH PPS patient classification and the relative weights which are linked to the annual adjustments of the acute care hospital inpatient DRG system, and are based on the annual revisions to the International Classification of Diseases, Ninth Revision, Clinical Modification (ICD9CM) codes effective each October 1. In this section, we also summarize the severity adjusted MSLTCDRGs and the development of the relative weights for FY 2008 as established in the FY 2008 IPPS final rule with comment period as well as the proposed update to the MSLTCDRGs and relative weights for FY 2009 presented in the FY 2009 IPPS proposed rule.

In section IV.B. of this final rule, we are extending the rate year cycle for RY 2009 to a 15month period, from July 1, 2008 through September 30, 2009. We will continue to have an update to the MSLTC DRG classifications and weights effective for October 1, 2008. We are consolidating the annual update to the payment rates and the update of the MSLTC classifications and weights beginning October 1, 2009.

As discussed in section IV.E.2. of this final rule, we are establishing a 2.7 percent update to the LTCH PPS Federal rate for the 2009 LTCH PPS rate year based on the most recent market basket estimate for the 15month 2009 LTCH PPS rate year and an adjustment to account for improvements in coding and documentation. Also in section IV. of this final rule, we discuss the prospective payment rate for RY 2009.

In section IV. D. of this final rule, we discuss the possible one time adjustment to the Federal payment rate under Sec. 412.523(d)(3). Consistent with section 114(c)(4) of MMSEA, we did not propose any adjustment under Sec. 412.523(d)(3). However, at this time, we are revising the regulations to clarify the objectives of the possible one time adjustment, to more precisely reflect the methodology, and to reflect the requirements of section 114(c)(4) of the MMSEA to the regulatory text.

In section V. of this final rule, we discuss the updates to the payment rates, including the revisions to the wage index, the labor related share, the costofliving adjustment (COLA) factors, and the outlier threshold, for the 2009 LTCH PPS rate year.

In section VI. of this final rule, we discuss our ongoing monitoring protocols under the LTCH PPS.

In section VIII. of this final rule, we discuss Research Triangle Institute's (RTI) analysis relating to the development of LTCH patient and facilitylevel criteria.

In section IX. of this final rule, we are finalizing the revision to the effective date of cost reporting periods for electronic submission of cost reports for certain entities.

In section XI. of this final rule, we analyze the impact of the changes established in this final rule on Medicare expenditures, Medicareparticipating LTCHs, and Medicare beneficiaries.
III. Medicare Severity LongTerm Care DiagnosisRelated Group (MSLTC DRG) Classifications and Relative Weights

A. Background

Section 123 of the BBRA requires that the Secretary implement a PPS for LTCHs (that is, a perdischarge system with a DRGbased patient classification system reflecting the differences in patient resources and costs). Section 307(b)(1) of the BIPA modified the requirements of section 123 of the BBRA by requiring that the Secretary examine ``the feasibility and the impact of basing payment under such a system (the LTCH PPS) on the use of existing (or refined) hospital DRGs that have been modified to account for different resource use of LTCH patients, as well as the use of the most recently available hospital discharge data.''

When the LTCH PPS was implemented for cost reporting periods beginning on or after October 1, 2002, we adopted the same DRG patient classification system (that is, the CMS DRGs) that was utilized at that time under the hospital inpatient prospective payment system (IPPS). As a component of the LTCH PPS, we refer to the patient classification system as the ``LTCDRGs.'' As discussed in greater detail below, although the patient classification system used under both the LTCH PPS and the IPPS are the same, the relative weights are different. The established relative weight methodology and data used under the LTCH PPS result in LTCDRG relative weights that reflect ``the different resource use of longterm care hospital patients consistent with the statute.''

As part of our efforts to better recognize severity of illness among patients, in the FY 2008 IPPS final rule with comment period (72 FR 47130), the Medicare Severity diagnosis related groups (MSDRGs) and the Medicare Severity longterm care diagnosis related groups (MSLTC DRGs) were adopted for the IPPS and the LTCH PPS, respectively, effective October 1, 2007 (FY 2008). For a full description of the development and implementation of the MSDRGs and MSLTCDRGs, see the FY 2008 IPPS final rule with comment period (72 FR 47141 through 47175 and 47277 through 47299). (We note that in that same final rule, we revised the regulations at Sec. 412.503 to specify that for LTCH discharges occurring on or after October 1, 2007, when applying the provisions of this subpart for policy descriptions and payment calculations, all references to LTCDRGs would be considered a reference to MSLTCDRGs. For the remainder of this section, we present the discussion in terms of the current MSLTCDRG patient
classification unless specifically referring to the previous LTCDRG patient classification system (that was in effect before October 1, 2007).) We believe the MSDRGs (and by extension, the MSLTCDRGs) represent a substantial improvement over the previous CMS DRGs in their ability to differentiate cases based on severity of illness and resource consumption.

The MSDRGs represent an increase in the number of DRGs by 207 (that is, from 538 to 745) (72 FR 47171). In addition to improving the DRG system's recognition of severity of illness, we believe the MSDRGs are responsive to the public comments that were made on the FY 2007 IPPS proposed rule with respect to how we should undertake further DRG reform. The MSDRGs use the CMS DRGs as the starting point for revising the DRG system to better recognize resource complexity and severity of illness. We have generally retained all of the refinements and improvements that have been made to the base DRGs over the years that recognize the significant advancements in medical technology and changes to medical practice.

In accordance with section 123 of the BBRA as amended by section 307(b)(1) of the BIPA and Sec. 412.515, we use information derived from LTCH PPS patient records to classify LTCH discharges into distinct MSLTCDRGs based on clinical characteristics and estimated resource needs. As stated above, the MSLTCDRGs used as the patient
classification component of the
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LTCH PPS correspond to the hospital inpatient MSDRGs in the IPPS. We assign an appropriate weight to the MSLTCDRGs to account for the difference in resource use by patients exhibiting the case complexity and multiple medical problems characteristic of LTCHs.

In a departure from the IPPS, we use lowvolume MSLTCDRGs (less than 25 LTCH cases) in determining the MSLTCDRG relative weights, since LTCHs do not typically treat the full range of diagnoses as do acute care hospitals. To manage the large number of lowvolume MSLTC DRGs (all MSLTCDRGs with fewer than 25 LTCH cases), for purposes of determining the relative weights, we group lowvolume MSLTCDRGs into 5 quintiles based on average charge per discharge. (A detailed discussion of the application of the Lewin Group ``quintile'' model that was used to develop the LTCDRGs appears in the August 30, 2002, LTCH PPS final rule (67 FR 55978).) We also account for adjustments to payments for shortstay outlier (SSO) cases (that is, cases where the covered length of stay (LOS) at the LTCH is less than or equal to five sixths of the geometric ALOS for the MSLTCDRG). Furthermore, we make adjustments to account for nonmonotonically increasing weights, when necessary (as described below in this section). That is, theoretically, cases under the MS LTC DRG system that are more severe require greater expenditure of medical care resources and will result in higher average charges. Therefore, in the three severity levels, weights should increase monotonically with severity, from the lowest to highest severity level.

B. Patient Classifications Into MSLTCDRGs

Generally, under the LTCH PPS, a Medicare payment is made at a predetermined specific rate for each discharge; that payment varies by the MSLTCDRG to which a beneficiary's stay is assigned. Cases are classified into MSLTCDRGs for payment based on the following six data elements:

Upon the discharge of the patient from a LTCH, the LTCH must assign appropriate diagnosis and procedure codes from the most current version of the International Classification of Diseases, Ninth Revision, Clinical Modification (ICD9CM). HIPAA Transactions and Code Sets Standards regulations at 45 CFR parts 160 and 162 require that no later than October 16, 2003, all covered entities must comply with the applicable requirements of subparts A and I through R of part 162. Among other requirements, those provisions direct covered entities to use the ASC X12N 837 Health Care Claim: Institutional, Volumes 1 and 2, version 4010, and the applicable standard medical data code sets for the institutional health care claim or equivalent encounter information transaction (see 45 CFR 162.1002 and 45 CFR 162.1102). For additional information on the ICD9CM Coding System, refer to the FY 2008 IPPS final rule with comment period (72 FR 47241 through 47243 and 47277 through 47281). We also refer readers to the detailed discussion on correct coding practices in the August 30, 2002, LTCH PPS final rule (67 FR 55981 through 55983). Additional coding instructions and examples are published in the Coding Clinic for ICD9CM.

Medicare contractors (that is, fiscal intermediaries (FIs), now called Medicare Administrative Contractors (MACs)) enter the clinical and demographic information into their claims processing systems and subject this information to a series of automated screening processes called the Medicare Code Editor (MCE). These screens are designed to identify cases that require further review before assignment into a MS LTCDRG can be made. During this process, the following types of cases are selected for further development:

After screening through the MCE, each claim is classified into the appropriate MSLTCDRG by the Medicare LTCH GROUPER software. The Medicare GROUPER software, which is used under the LTCH PPS, is specialized computer software, and is the same GROUPER software program used under the IPPS. The GROUPER software was developed as a means of classifying each case into a MSLTCDRG on the basis of diagnosis and procedure codes and other demographic information (age, sex, and discharge status). Following the MSLTCDRG assignment, the Medicare contractor (FI or MAC) determines the prospective payment amount by using the Medicare PRICER program, which accounts for hospitalspecific adjustments. Under the LTCH PPS, we provide an opportunity for the LTCH to review the MSLTCDRG assignments made by the Medicare contractor and to submit additional information within a specified timeframe as specified in Sec. 412.513(c).

The GROUPER software is used both to classify past cases to measure relative hospital resource consumption to establish the DRG weights and to classify current cases for purposes of determining payment. The records for all Medicare hospital inpatient discharges are maintained in the MedPAR file. The data in this file are used to evaluate possible MSDRG classification changes and to recalibrate the MSDRG and MSLTC DRG relative weights during CMS' annual update under both the IPPS (Sec. 412.60(e)) and the LTCH PPS (Sec. 412.517), respectively. As discussed in greater detail in section III.D. of this preamble, with the implementation of section 503(a) of the MMA, there is the possibility that one feature of the GROUPER software program may be updated twice during a Federal FY (FFY) (October 1 and April 1) as required by the statute for the IPPS (69 FR 48954 through 48957). The use of the ICD9CM code set is also compliant with the current requirements of the Transactions and Code Sets Standards regulations at 45 CFR parts 160 and 162, published in accordance with HIPAA. C. Organization of the MSLTCDRGs

The MSDRGs (used under the IPPS) and the MSLTCDRGs (used under the LTCH PPS) are based on the CMS DRG structure. As noted above in this section, we refer to the DRGs under the LTCH PPS as MSLTCDRGs although they are structurally identical to the DRGs used under the IPPS. The MSDRGs are organized into 25 major diagnostic categories (MDCs), most of which are based on a particular organ system of the body; the remainder involve multiple organ systems (such as MDC 22, Burns). Within most MDCs, cases are then divided into surgical DRGs and medical DRGs. Surgical DRGs are assigned based on a surgical hierarchy that orders operating room (O.R.) procedures or groups of O.R. procedures by resource intensity. The
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GROUPER software program does not recognize all ICD9CM procedure codes as procedures affecting DRG assignment, that is, procedures which are not surgical (for example, EKG), or minor surgical procedures (for example, 86.11, Biopsy of skin and subcutaneous tissue).

In developing Version 25.0 of the GROUPER program (the FY 2008 MS DRGs), the diagnoses comprising the CC list were completely redefined. The revised CC list is primarily comprised of significant acute disease, acute exacerbations of significant chronic diseases, advanced or end stage chronic diseases, and chronic diseases associated with extensive debility. In general, most chronic diseases were not included on the revised CC list. For a patient with a chronic disease, a significant acute manifestation of the chronic disease was required to be present and coded for the patient to be assigned a CC.

In addition to the revision of the CC list, each CC was also categorized as a major CC (MCC) or a CC based on relative resource use. Approximately 12 percent of all diagnoses codes were classified as a major CC (MCC), 24 percent as a CC, and 64 percent as a non CC. Diagnoses closely associated with mortality (ventricular fibrillation, cardiac arrest, shock, and respiratory arrest) were assigned as an MCC if the patient lived but as a non CC if the patient died.

The MCC, CC, and non CC categorization was used to subdivide the surgical and medical DRGs into up to three levels, with a case being assigned to the most resource intensive level (for example, a case with two secondary diagnoses that are categorized as an MCC and a CC is assigned to the MCC level). To create the MSDRGs (and by extension, the MSLTCDRGs) individual DRGs were subdivided into three, two, or one level, depending on the CC impact on resources used for those cases.

As noted above in this section, further information on the development and implementation of the MSDRGs and MSLTCDRGs can be found in the FY 2008 IPPS final rule with comment period (72 FR 47138 through 47175 and 47277 through 47299).
D. Method for Updating the MSLTCDRG Classifications and Relative Weights

1. Background

Under the LTCH PPS, relative weights for each MSLTCDRG are a primary element used to account for the variations in cost per discharge and resource utilization among the payment groups (that is, the MSLTCDRGs). To ensure that Medicare patients classified to each MSLTCDRG have access to an appropriate level of services and to encourage efficiency, each year based on the best available data, we calculate a relative weight for each MSLTCDRG that represents the resources needed by an average inpatient LTCH case in that MSLTCDRG. For example, cases in a MSLTCDRG with a relative weight of 2 will, on average, cost twice as much as cases in a MSLTCDRG with a relative weight of 1. Under Sec. 412.517, the MSLTCDRG classifications and weighting factors (that is, relative weights) are adjusted annually to reflect changes in factors affecting the relative use of LTCH resources, including treatment patterns, technology and number of discharges.

In the June 6, 2003 LTCH PPS final rule (68 FR 34122 through 34125), we changed the LTCH PPS annual payment rate update cycle to be effective July 1 through June 30 instead of October 1 through September 30. In addition, because the patient classification system utilized under the LTCH PPS is the same DRG system that is used under the IPPS, in that same final rule, we explained that the annual update of the LTCDRG classifications and relative weights will continue to remain linked to the annual reclassification and recalibration of the CMS DRGs used under the IPPS (as is the case with the MSDRGs effective for discharges occurring on or after October 1, 2007 (see Sec. 412.503)). Therefore, we specified that we will continue to update the LTCDRG classifications and relative weights to be effective for discharges occurring on or after October 1 through September 30 each year. We further stated at that time that we will publish the annual proposed and final update of the LTCDRGs in the same notice as the proposed and final update for the IPPS (69 FR 34125). (We note that in section IV.B. of this preamble, we are proposing to revise Sec. 412.535 in order to consolidate the annual July 1 and October 1 LTCH PPS update cycles, so that beginning with FY 2010, both the annual update to the standard Federal rate (and other rate and policy changes) and the annual update to the MSLTCDRGs would be presented in a single Federal Register publication to be effective on October 1 each year.) Under existing Sec. 412.535(b), the FY 2008 update of the LTCH PPS patient classification system and relative weights was presented in the FY 2008 IPPS final rule with comment (72 FR 47277 through 47299). For the reader's benefit, we are providing a summary of the discussion presented in that final rule with comment in section III.D.2. of this preamble.

For FY 2008, the MSLTCDRG classifications and relative weights were updated based on LTCH data from the FY 2006 MedPAR file, which contained hospital bills data from the March 2007 update. The MSLTC DRG patient classification system for FY 2008 consists of 745 DRGs that formed the basis of the Version 25.0 GROUPER program utilized under the LTCH PPS. The 745 MSLTCDRGs included two ``error DRGs.'' As in the IPPS, we included two error DRGs in which cases that cannot be assigned to valid DRGs will be grouped. These two error DRGs are MSLTCDRG 998 (Principal Diagnosis Invalid as a Discharge Diagnosis) and MSLTCDRG 999 (Ungroupable). The other 743 MSLTCDRGs are the same DRGs used in the IPPS GROUPER program for FY 2008 (Version 25.0).

In the past, the annual update to the CMS DRGs was based on the annual revisions to the ICD9CM codes and was effective each October 1. The ICD9CM coding update process was revised as discussed in greater detail in the FY 2005 IPPS final rule (69 FR 48953 through 48957). Specifically, section 503(a) of the MMA includes a requirement for updating diagnosis and procedure codes twice a year instead of the former process of annual updates on October 1 of each year. This requirement is included as part of the amendments to the Act relating to recognition of new medical technology under the IPPS. (For additional information on this provision, including its implementation and its impact on the LTCH PPS, refer to the FY 2005 IPPS final rule (69 FR 48953 through 48957) and the RY 2006 LTCH PPS final rule (70 FR 24172 through 24177).) As noted above in this section, with the implementation of section 503(a) of the MMA, there is the possibility that one feature of the GROUPER software program may be updated twice during a FFY (October 1 and April 1) as required by the statute for the IPPS. Specifically, diagnosis and procedure codes for new medical technology may be created and added to existing DRGs in the middle of the FFY on April 1. No new MSLTCDRGs will be created or deleted. Consistent with our current practice, any changes to the MSDRGs or relative weights will be made at the beginning of the next FFY (October 1). Therefore, there will not be any impact on MSLTCDRG payments under the LTCH PPS until the following October 1 (although the new ICD 9CM diagnosis
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and procedure codes would be recognized April 1).

As we explained in the FY 2008 IPPS final rule with comment period (72 FR 47277), annual changes to the ICD9CM codes historically were effective for discharges occurring on or after October 1 each year. Thus, the manual and electronic versions of the GROUPER software, which are based on the ICD9CM codes, were also revised annually and effective for discharges occurring on or after October 1 each year. The patient classification system used under the LTCH PPS (MSLTCDRGs) is the same DRG patient classification system used under the IPPS, which historically had been updated annually and was effective for discharges occurring on or after October 1 through September 30 each year. We have also explained that since we do not publish a midyear IPPS rule, we will assign any new diagnosis or procedure codes implemented on April 1 to the same DRG in which its predecessor code was assigned, so that there will be no impact on the DRG assignments until the following October 1. Any coding updates will be available through the Web sites provided in section II.G.10. of the preamble of the FY 2008 IPPS final rule with comment period (72 FR 47241 through 47243) and through the Coding Clinic for ICD9CM. Publishers and software vendors currently obtain code changes through these sources to update their code books and software system. If new codes are implemented on April 1, revised code books and software systems, including the GROUPER software program, will be necessary because we must use current ICD9CM codes. Therefore, for purposes of the LTCH PPS, because each ICD9CM code must be included in the GROUPER algorithm to classify each case into a MSLTCDRG, the GROUPER software program used under the LTCH PPS would need to be revised to accommodate any new codes.

At the September 2007 ICD9CM C&M Committee meeting, there were no compelling requests for an April 1, 2008 implementation of new ICD9CM codes, and therefore, we expect that the next update to the ICD9CM coding system will not occur until October 1, 2008 (FY 2009). Therefore, we expect that the ICD9CM coding set implemented on October 1, 2007, will continue through September 30, 2008 (FY 2008). The next update to the MSLTCDRGs and relative weights for FY 2009 will be presented in the FY 2009 IPPS proposed and final rules. 2. FY 2008 MSLTCDRG Relative Weights

In accordance with Sec. 412.523(c), we adjust the LTCH PPS standard Federal rate by the MSLTCDRG relative weights in determining payment to LTCHs for each case. Relative weights for each MSLTCDRG are a primary element used to account for the variations in cost per discharge and resource utilization among the payment groups as described in Sec. 412.515. To ensure that Medicare patients who are classified to each MSLTCDRG have access to services and to encourage efficiency, we calculate a relative weight for each MSLTCDRG that represents the resources needed by an average inpatient LTCH case in that MSLTCDRG. For example, cases in a MSLTCDRG with a relative weight of 2 will, on average, cost twice as much as cases in a MSLTC DRG with a weight of 1.

As we discussed in the FY 2008 IPPS final rule with comment period (72 FR 47282), the MSLTCDRG relative weights effective under the LTCH PPS for Federal FY 2008 were calculated using the March 2007 update of FY 2006 MedPAR data which contains hospital bills received through March 31, 2007, and Version 25.0 of the GROUPER software.

LTCHs often specialize in certain areas, such as ventilator dependent patients and rehabilitation or wound care. Some case types (DRGs) may be treated, to a large extent, in hospitals that have relatively high or relatively low charges. Distribution of cases with relatively high (or low) charges in specific MSLTCDRGs has the potential to inappropriately distort the measure of average charges. To account for the fact that cases may not be randomly distributed across LTCHs, we use a hospitalspecific relative value (HSRV) method to calculate relative weights. We believe this method removes this hospitalspecific source of bias in measuring average charges. Specifically, we reduce the impact of the variation in charges across providers on any particular MSLTCDRG relative weight by converting each LTCH's charge for a case to a relative value based on that LTCH's average charge. (See the FY 2008 IPPS final rule with comment period for further information on the application of the HSRV methodology under the LTCH PPS (72 FR 47282).)

To account for MSLTCDRGs with low volume (that is, with fewer than 25 LTCH cases), we grouped those ``low volume'' MSLTCDRGs into 1 of 5 categories (quintiles) based on average charges for the purposes of determining relative weights. Each of the low volume MSLTCDRGs grouped to a specific quintile received the same relative weight and ALOS using the formula applied to the regular MSLTCDRGs (25 or more cases). (See the FY 2008 IPPS final rule with comment period for further explanation of the development and composition of each of the 5 low volume quintiles for FY 2008 (72 FR 47283 through 47288).)

After grouping the cases in the appropriate MSLTCDRG, generally, we calculated the relative weights by first removing statistical outliers and cases with a LOS of 7 days or less. Next, we adjusted the number of cases remaining in each MSLTCDRG for the effect of SSO cases under Sec. 412.529. The shortstay adjusted discharges and corresponding charges were used to calculate ``relative adjusted weights'' in each MSLTCDRG using the HSRV method. In determining the FY 2008 MSLTCDRG relative weights, we also made adjustments, as necessary, to adjust for nonmonotonicity for the severity levels within a specific base MSLTCDRG. (Refer to the FY 2008 IPPS final rule with comment period for further information on the treatment of severity levels and adjustments for nonmonotonically increasing relative weights for FY 2008 (72 FR 47282 through 47283 and 47293 through 47295).) Furthermore, we determined FY 2008 MSLTCDRG relative weights for the 185 MSLTCDRGs for which there were no LTCH cases in the database (that is, LTCH claims from the FY 2006 LTCH MedPAR files). (A list of the FY 2008 ``novolume'' MSLTCDRGs and further explanation of their FY 2008 relative weight assignment can be found in the FY 2008 IPPS final rule with comment period (72 FR 47289 through 47293).)

In adopting the MSLTCDRGs beginning in FY 2008, we established a 2year transition. Specifically, for FY 2008, the first year of the transition, 50 percent of the relative weight for a MSLTCDRG is based on the average LTCDRG relative weight under Version 24.0 of the LTC DRG GROUPER. The remaining 50 percent of the relative weight is based on the MSLTCDRG relative weight under Version 25.0 of the MSLTCDRG GROUPER. (See the FY 2008 IPPS final rule with comment period (72 FR 47295) for additional details on the methodology used to determine the transition blended MSLTCDRG relative weights for FY 2008.)

In the RY 2008 LTCH PPS final rule (72 FR 26882), under the broad authority conferred upon the Secretary under section 123 of Pub. L. 106113 as amended by section 307(b) of Pub. L.
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106554 to develop the LTCH PPS, we established that beginning with the update for FY 2008, the annual update to the MSLTCDRG classifications and relative weights will be done in a budget neutral manner such that estimated aggregate LTCH PPS payments would be unaffected, that is, would be neither greater than nor less than the estimated aggregate LTCH PPS payments that would have been made without the MSLTCDRG classification and relative weight changes. Historically, we had not updated the LTCDRGs in a budget neutral manner because we believed that past fluctuations in the relative weights were primarily due to changes in LTCH coding practices rather than changes in patient severity. In light of the most recently available LTCH claims data at that time, which indicated that LTCH claims data no longer appeared to significantly reflect changes in LTCH coding practices in response to the implementation of the LTCH PPS, we believed that, beginning with FY 2008, it is appropriate to update the MSLTCDRGs in a budget neutral manner (that is, so that estimated aggregate LTCH PPS payments will neither increase nor decrease). Accordingly, in that same final rule with comment period, we established under Sec. 412.517(b) that the annual update to the MSLTCDRG classifications and relative weights be done in a budget neutral manner. (As noted above in section III.A. of this preamble, we revised the regulations at Sec. 412.503 to specify that ``MSLTCDRG'' is used in place of ``LTCDRG'' for discharges occurring on or after October 1, 2007.) Consistent with that provision, we updated the MSLTCDRG classifications and relative weights for FY 2008 based on the most recent available data and included a budget neutrality adjustment. For further details on the methodology and calculation of the FY 2008 MSLTCDRG budget neutrality factor, refer to the FY 2008 IPPS final rule with comment period (72 FR 47295 through 47296).

Table 11 of the Addendum to the FY 2008 IPPS final rule with comment period lists the MSLTCDRGs and their respective transition blended budget neutral relative weights, geometric mean LOS, ``short stay outlier threshold'' (that is, fivesixths of the geometric mean LOS), and the ``IPPS Comparable Threshold'' (that is, the IPPS geometric average length of stay plus one standard deviation) for each MSLTCDRG for FY 2008 (see (72 FR 48143 through 48157), and the technical correction made in the October 10, 2007 correction notice (72 FR 57733), which has been reprinted in Table 3 of the Addendum of this final rule for convenience).

As we noted previously in this section, there were no new ICD9CM code requests for an April 1, 2008 update. Therefore, Version 25.0 of the MSDRG GROUPER software established in the FY 2008 IPPS final rule with comment period will continue to be effective until October 1, 2008. Moreover, the MSLTCDRGs and relative weights for FY 2008 established in Table 11 of that same IPPS final rule with comment period (78 FR 48143 through 48157) will continue to be effective until October 1, 2008 (just as they would have been even if there had been any new ICD9CM code requests for an April 1, 2008 update). We note that Table 11 was corrected in the FY 2008 IPPS correction notice that appeared in the October 10, 2007 Federal Register (72 FR 57733) and is hereinafter referred to as the second FY 2008 IPPS correction notice. Accordingly, Table 3 in the Addendum of this final rule lists the MS LTCDRGs and their respective relative weights, geometric ALOS and ``ShortStay Outlier Threshold'' that we will continue to use for the period of July 1, 2008 through September 30, 2009. (As noted above, this table is the same as Table 11 of the Addendum to the FY 2008 IPPS final rule with comment period, including the technical correction made in the second FY 2008 IPPS correction notice (72 FR 57733), which has been reprinted in Table 3 of the Addendum of this final rule for the reader's convenience.)

The next proposed update to the ICD9CM coding system was presented in the FY 2009 IPPS proposed rule (and there were no April 1, 2008 updates to the ICD9CM coding system). In addition, the proposed MSDRGs and GROUPER for FY 2009 that would be used for the IPPS and the LTCH PPS, effective October 1, 2008, and the proposed update to the MS LTCDRG relative weights for FY 2009 were presented in the recently published IPPS FY 2009 proposed rule (see 73 FR 23590 through 23608). The proposed MSLTCDRGs and their respective proposed relative weights, geometric ALOS and ``ShortStay Outlier Threshold'' that would be effective October 1, 2008 through September 30, 2009 are presented in Table 11 to the Addendum of the FY 2009 IPPS proposed rule (73 FR 23891 through 23905).
IV. Changes to the LTCH PPS Payment Rates and Other Changes for the 2009 LTCH PPS Rate Year

A. Overview of the Development of the Payment Rates

The LTCH PPS was effective beginning with a LTCH's first cost reporting period beginning on or after October 1, 2002. Effective with that cost reporting period, LTCHs are paid, during a 5year transition period, a total LTCH prospective payment that is comprised of an increasing proportion of the LTCH PPS Federal rate and a decreasing proportion based on reasonable costbased principles, unless the hospital makes a onetime election to receive payment based on 100 percent of the Federal rate, as specified in Sec. 412.533. New LTCHs (as defined at Sec. 412.23(e)(4)) are paid based on 100 percent of the Federal rate, with no phasein transition payments.

The basic methodology for determining LTCH PPS Federal prospective payment rates is set forth at Sec. 412.515 through Sec. 412.536. In this section, we discuss the factors that would be used to update the LTCH PPS standard Federal rate for the 2009 LTCH PPS rate year that would be effective for LTCH discharges occurring on or after July 1, 2008 through September 30, 2009. When we implemented the LTCH PPS in the August 30, 2002 LTCH PPS final rule (67 FR 56029 through 56031), we computed the LTCH PPS standard Federal payment rate for FY 2003 by updating the latest available (FY 1998 or FY 1999) Medicare inpatient operating and capital cost data, using the excluded hospital market basket.

Section 123(a)(1) of the BBRA requires that the PPS developed for LTCHs be budget neutral for the initial year of implementation. Therefore, in calculating the standard Federal rate under Sec. 412.523(d)(2), we set total estimated LTCH PPS payments equal to estimated payments that would have been made under the reasonable cost based payment methodology had the LTCH PPS not been implemented. Section 307(a)(2) of the BIPA specified that the increases to the target amounts and the cap on the target amounts for LTCHs for FY 2002 provided for by section 307(a)(1) of the BIPA shall not be considered in the development and implementation of the LTCH PPS. Section 307(a)(2) of the BIPA also specified that enhanced bonus payments for LTCHs provided for by section 122 of BBRA were not to be taken into account in the development and implementation of the LTCH PPS.

Furthermore, as specified at Sec. 412.523(d)(1), the initial standard
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Federal rate was reduced by an adjustment factor to account for the estimated proportion of outlier payments under the LTCH PPS to total estimated LTCH PPS payments (8 percent). For further details on the development of the FY 2003 standard Federal rate, see the August 30, 2002 LTCH PPS final rule (67 FR 56027 through 56037), and for subsequent updates to the LTCH PPS Federal rate, refer to the following final rules: RY 2004 LTCH PPS final rule (68 FR 34134 through 34140), RY 2005 LTCH PPS final rule (69 FR 25682 through 25684), RY 2006 LTCH PPS final rule (70 FR 24179 through 24180), RY 2007 LTCH PPS final rule (71 FR 27819 through 27827), and RY 2008 LTCH PPS final rule (72 FR 26870 through 27029).
B. Consolidation of the Annual Updates for Payment and MSLTCDRG Relative Weights to One Annual Update

In the August 30, 2002 final rule implementing the LTCH PPS, we established a schedule at Sec. 412.535 for publishing information pertaining to the LTCH PPS. That schedule set a publication date of ``on or before August 1 prior to the beginning of each Federal Fiscal Year (FFY),'' which coincided with the statutorily mandated publication schedule for the IPPS (67 FR 55954). In the June 6, 2003 LTCH PPS final rule, we revised this schedule in Sec. 412.535 to provide that ``(a) Information on the unadjusted Federal payment rates and a description of the methodology and data used to calculate the payment rates are published on or before May 1 prior to the start of each longterm care hospital prospective payment system rate year which begins July 1, unless for good cause it is published after May 1, but before June 1.
(b) Information on the LTCDRG classification and associated weighting factors is published on or before August 1 prior to the beginning of each Federal fiscal year.''

At the time, we explained that the LTCDRG patient cla