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Statement of Need: Annual updates to the hospital inpatient prospective payment system rates are required by section 1886 of the Social Security Act (the Act), as amended by the Medicare, Medicaid, and SCHIP Balanced Budged Refinement Act of 1999 (BBRA), and the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA), relating to Medicare payments for hospital inpatient prospective payment systems. We are proposing to revise the Medicare hospital inpatient prospective payment systems for operating and capital costs to: describe proposed changes to the amounts and factors used to determine the rates for Medicare hospital inpatient services for operating costs and capital-related costs. These changes would be applicable to discharges occurring on or after October 1, 2002. We also are setting forth proposed rate-of-increase limits as well as proposed policy changes for hospitals and hospital units excluded from the prospective payment systems.

Summary of the Legal Basis: Section 1886(d) of the Social Security Act sets forth a system of payment for the operating costs of the acute care hospital inpatient system under Medicare part A based on prospectively set rates. Section 1866(g) of the Act requires the Secretary to pay for the capital-related costs of hospital inpatient stays under a prospective payment system. Section 1886(e)(5)(B) requires that annual updates to the hospital inpatient prospective payment systems rates be published in the Federal Register before August 1 of each year, to be effective on the first day of the fiscal year (FY).

Alternatives: None.

Anticipated Costs and Benefits: The cost and benefits of this regulation will depend upon the market basket projection by the Office of the Actuary. Under current law, the update for FY 2003 will be market basket minus .55 percentage points. A one percent change in payments under the inpatient prospective payment system represents an approximately $760 million change.

Risks: Inadequately paying for the services hospitals furnish to Medicare beneficiaries has the potential to affect a beneficiary's access to care and the quality of care furnished to a beneficiary. Therefore, we will carefully assess the impacts of all of the changes we implement through this regulation to mitigate these risks. Failure to update the hospital inpatient prospective payment systems by October 1, 2003 would place us in violation of the Act. Moreover, failure to meet the publication deadline imposed by the Act would also constitute a violation.