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"(E) malpractice insurance expense, or,

"(F) ancillary service costs.


"(3) (A) During the calendar quarter beginning on 10 January 1 of each year, beginning with 1979, the Secretary 11 shall determine, for the hospitals in each category of the 12 system established under paragraph (1) (B), an average 13 per diem routine operating cost amount which shall (except 14 as otherwise provided in this subsection) be used in deter15 mining payments to hospitals.


"(B) The determination shall be based upon the amount 17 of the hospitals' routine operating costs for the preceding 18 fiscal year.


"(B) direct personnel and supply costs of hospital

education and training programs,

"(C) costs of interns, residents, and non-administrative physicians,


"(D) energy costs associated with heating and

cooling the hospital plant, and

19 "(C) In making a determination, the routine operating 20 costs of each hospital shall be divided into personnel and 21 nonpersonnel components.

"(D) (i) The personnel and nonpersonnel components 23 of routine operating costs for each of the hospitals (other 24 than for those excluded under clause (ii)) in each 25 category shall be added for all hospitals and then divided


1 by the total number of days of routine care provided by the 2 hospitals in the category to determine the average per diem 3 routine operating cost for each category.

4 "(ii) In making the calculations required by clause 5 (i), the Secretary shall exclude any hospital which has sig6 nificant understaffing problems or which otherwise experi


ences significant cost differentials resulting from failure of 8 the hospital to fully meet the standards and conditions of 9 participation as a provider of services as determined by the 10 Secretary.


"(E) There shall be determined for each hospital in 12 each category a per diem payment rate for routine operating 13 costs. That payment rate shall equal the average per diem 14 routine operating cost amount for the category in which 15 the hospital is expected to be classified during the subsequent 16 fiscal year, except that the personnel component shall be 17 adjusted using a wage index based upon general wage levels 18 (including fringe benefit costs) in the areas in which the 19 hospitals are located. If the Secretary finds that, in an area 20 where one or more hospitals in any category are located, 21 for the fiscal year ending June 30, 1977, the wage level 22 (including fringe benefit costs) for hospitals is significantly 23 higher than the general wage level (including fringe bene24 fit costs) in that area (relative to the relationship between 25 hospital wages and general wages in other areas), then


1 the general wage level in the area shall be deemed equal 2 to the wage level for hospitals in that area, but only during 3 fiscal year 1979.


"(4) (A) (i) The term 'adjusted per diem payment rate 5 for routine operating costs', means the per diem payment rate 6 for routine operating costs plus the average percentage 7 increase in prices determined under succeeding provisions 8 of this subparagraph.

9 "(ii) In making payments for services, the Secretary 10 shall add a semiannual average percentage increase in the 11 cost of the mix of goods and services (including personnel 12 and nonpersonnel costs) comprising routine operating costs, 13 equal to the lesser of: (I) the average percentage increase 14 estimated by the hospital, or (II) the average percentage 15 increase in the area estimated by the Secretary.


"(iii) At the end of the fiscal year, the amounts paid 17 under clause (ii) shall be adjusted to reflect the lesser of 18 (I) the actual cost increase experienced by the hospital 19 or (II) the actual increase in costs which occurred in the 20 mix of goods and services in the area. Adjustments shall also 21 be made to take account of unexpected changes in the hos22 pital's classification.


"(B) For purposes of payment the amount of routine 24 operating cost incurred by a hospital shall be deemed to

25 equal

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“(i) for a hospital which has actual routine operating costs equal to or greater than that hospital's adjusted per diem payment rate for routine operating costs, an amount equal to the greater of:

"(I) The hospital's actual routine operating costs, but not exceeding 120 percent of the hospital's adjusted per diem payment rate for routine operating costs, or

"(II) the amounts determined for the hospital under clause (I) if it had been classified in the bed-size category nearest to the category in which the hospital was classified, but not exceeding the

hospital's actual routine operating costs; and "(ii) for a hospital which has actual routine operating costs less than that hospital's adjusted per diem payment rate for routine operating costs, an amount equal to (I) the amount of the hospital's actual routine operating costs, plus (II) whichever is smaller: (a) 5 percent of the hospital's adjusted per diem payment rate for routine operating costs, or (b) 50 percent of the amount by which the hospital's adjusted per diem payment rate for routine operating costs exceeds the hospital's actual routine operating costs.

"(C) Any hospital excluded by the Secretary under paragraph (3) (D) (ii), shall be reimbursed for routine


1 operating costs the lesser of (i) actual costs or (ii) the

2 reimbursement determined under this subsection.


"(D) April 1 of the year in which the Secretary deter4 mines the amount of the average per diem operating cost for 5 each hospital category and the adjusted per diem payment 6 rate for each hospital, the determinations shall be published 7 by the Secretary; and the Secretary shall notify the hospital 8 administrator and the administrative governing body of each 9 hospital with respect to all aspects of the determination 10 which affect the hospital.

"(E) If a hospital is determined by the Secretary to


12 be


"(i) located in an underserved area where hospital services are not otherwise available,

"(ii) certified as being currently necessary by an appropriate planning agency, and



“(iii) underutilized,

18 the adjusted per diem payment rate shall not apply to 19 that portion of the hospital's routine operating costs attrib20 utable to the underutilized capacity.


"(F) If a hospital satisfactorily demonstrates to the 22 Secretary that, in the aggregate, its patients require a sub23 stantially greater intensity of care than is generally provided 24 by the other hospitals in the same category, resulting in



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