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“(8) For additional requirements applicable to deter2 mination of reasonable cost for services provided by hos3 pitals, see subsection (aa).”.

(1) Section 186:1 of the Act is amended by adding 5 after subsection (2) the following subsection:

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"CRITERIA FOR DETERMINING REASONABLE COST OF

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IIOSPITAL SERVICES

8 “ (aa) (1) To more fairly and effectively determine 9 reasonable costs incurred in providing hospital services, the 10 Secretary shall, not later than April 1, 1978, after consult11 ing with appropriate national organizations, establish-12

“(A) an accounting and uniform functional cost

reporting system (including uniform procedures for al14 location of costs) for determining operating and capi15 tal costs of hospitals providing services, and

“ (B) a system of hospital classification under which hospitals furnishing services will initially he clas

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“(i) by size, with each of the following groups of hospitals being classified in separate categories:

(I) those having more than 5, but fewer than 25, beds, (II) those having more than 24, but fewer than 50, beds, (III) those having more than 49, but fewer than 100, beds, (IV) those having

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more than 99, but fewer than 200, beds, (V)

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those having more than 199, but fewer than 300,

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beds, (VI) those having more than 299, but fewer

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than 400, beds, (VII) those having more than 399, but fewer than 500, beds, and (VIII) those

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having more than 499 bed

“ (ii) by type of hospital, with (I) short

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term general hospitals being in a separate category, (II) hospitals which are the primary affiliates of accredited medical schools (with one hospital to be nominated by each accredited medical school) being in one separate category (without regard to bed size), and (III) psychiatric, geriatric, maternity, pediatric, or other specialty hospitals being in

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the same or separate categories, as the Secretary may determine appropriate, in light of any differences in specialty which significantly affect the rou

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tine costs of the different types of hospitals, and

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but the system of hospital classification shall not differ-
entiate between hospitals on the basis of ownership.
" (2) The term froutine operating costs' used in this

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“ (B) direct personnel and supply costs of hospital

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

“(D) energy costs associated with heating and

cooling the hospital plant, and 7

“(E) malpractice insurance expense, or,

“ (F) ancillary service costs.

“ (3) (A) During tlie 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 annount which shall (except

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14 as otherwise provided in this subsection) be used in deter15 mining payments to hospitals.

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“ (B) The determination shall be based upon the amount 17 of the hospitals' routine operating costs for the preceding

18 fiscal year.

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“(C) In making a determination, the routine operating costs of each hospital shall be divided into personnel and 21 nonpersormel components. 22

“(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

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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.

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

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. 11 “(E) There shall be determined for each hospital in 12 cach category a per diem payment rate for routine operating

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,

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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 bene

fit costs) in that area (relative to the relationship between

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25 hospital wages and general wages in other areas), then

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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 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

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6 for routine operating costs plus the average percentage

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7 increase in prices determined under succeeding provisions 8 of this subparagraph.

“ (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.

16 “ (iii) At the end of the fiscal year, the amounts paid 17 under clause (ii) shall be adjusted to reflect the lesser of 18 (1) the actual cost increase experienced by the hospital

or (II) the actual increase in costs which occurred in the

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20 mix of goods and services in the area. Adjustments shall also

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be made to take account of unexpected changes in the hos

22 pital's classification.

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

25 equal