The Centers for Medicare and Medicaid Services (CMS) today issued the Long-term Care Hospital Prospective Payment System (PPS) proposed rule for the 2007 Rate Year, starting on July 1, 2006.  The proposed rule assures appropriate payment for services to severely ill or medically complex patients, while providing incentives to long-term care hospitals (LTCHs) for more efficient care of Medicare beneficiaries. 

Background

Long-term care hospitals, in general, are defined as hospitals that have an average Medicare inpatient length of stay greater than 25 days.  These hospitals typically provide extended medical and rehabilitative care for patients who are clinically complex and may suffer from multiple acute or chronic conditions.  Services typically include comprehensive rehabilitation, respiratory therapy, head trauma treatment and pain management.

The LTCH PPS, which now sets payments for approximately 375 long-term care hospitals, was designed to assure appropriate payment for services to the medically complex patients treated in these facilities, while providing incentives to hospitals to provide more efficient care to Medicare beneficiaries.  Payments under the LTCH PPS are updated annually. 

Update of the Standard Federal Rate for 2007 Rate Year

The proposed rule provides for no increase in the Medicare payment rates to LTCHs for patient discharges taking place on or after July 1, 2006, through June 30, 2007.  Therefore, CMS is proposing that the LTCH PPS federal rate remain at $38,086.04 for the 2007 rate year.

• This proposal is based on an analysis of LTCH case-mix index and margins before and after implementation of the LTCH Prospective Payment System (PPS), as well as the latest available LTCH cost reports.  
• The proposed Standard Federal rate is consistent with the recent update recommendation from the Medicare Payment Advisory Commission (MedPAC) for the LTCH PPS.
• An analysis of the latest available LTCH cost reports shows increasing Medicare margins among LTCHs since the implementation of the LTCH PPS in FY 2003. 
• MedPAC’s current estimates corroborate CMS findings indicating that LTCH Medicare margins have grown considerably since implementation of the prospective payment system in 2002, with such margins projected to reach 7.8 percent in 2006.
• CMS analysis of the latest available claims data indicates that a significant portion of the 6.75 percent increase in case mix between FY 2003 and FY 2004 is due to changes in coding practices and documentation rather than the treatment of more resource intensive patients. 
• This finding indicates that LTCH payments are increasing without a commensurate increase in case costs.  LTCH Medicare margins increased from  8.8 percent in FY 2003 to 11.7 percent in FY 2004. 
• Federal rate for RY 2007, which would be the same as the Federal rate for RY 2006, would reflect an adjustment to the market basket update to account for the increase in case mix due to changes in coding practices. 
• MedPAC similarly suggested during its January 2006 meeting that Medicare payments to LTCHs are more than adequate, recommending a zero update for LTCHs in 2007. 
• MedPAC determined that keeping payments at the same level as 2006 would increase program efficiency without affecting the ability of LTCHs to furnish high quality care to Medicare beneficiaries. 

Proposed Changes to the Standard Federal Rate Update

CMS is proposing to adopt the Rehabilitation, Psychiatric and Long-Term Care (RPL) market basket to replace the excluded hospital with capital market basket that is currently used as the measure of inflation for calculating the annual update to the LTCH PPS Federal rate.  The RPL market basket is based on the operating and capital costs of inpatient rehabilitation facilities (IRFs), inpatient psychiatric facilities (IPFs), and LTCHs. 

• In conjunction with this proposed policy, CMS proposed to revise the labor-related share based on the RPL market basket from 72.855% (based on the excluded hospital with capital market basket) to 75.923%.
• CMS is also presenting a preliminary model of an update framework for the LTCH PPS, which CMS intends to refine based on comments.  This presentation is the first step in developing a framework for determining Federal rate update proposals in future rulemaking.  CMS intends to consider comments in refining the framework and would propose a refined framework in a future regulation before using it to determine an update proposal.

Short Stay Outlier Payments

The proposed rule would revise the payment adjustment formula for short-stay outlier (SSO) cases, which comprise approximately 37 percent of LTCH PPS discharges.  These are cases where the patient is discharged early and the hospital’s costs are significantly below average.

• Presently, under the existing policy, payments for SSO cases are based on the lesser of 120 percent of patient costs, 120 percent of the per diem of the LTC-DRG, or the full LTC-DRG payment. 
• The proposed rule would reduce the part of the current payment formula that is based on costs, to ensure that payments do not substantially exceed costs, and would add a fourth component to the current formula that would allow payment based on an amount comparable to what would be paid under the inpatient prospective payment system (IPPS) for acute care hospitals. 
• CMS proposes that payments for SSO cases would be the lesser of:
  • 100 percent of patient costs,
  • 120 percent of the per diem of the LTC-DRG,
  • the full LTC-DRG payment, or
  • an amount comparable to what would be paid under the IPPS.
• CMS has continued to monitor the SSO policy since the implementation of the LTCH PPS in FY 2003.   CMS believes that 37 percent of LTCH discharges that are SSO cases is an inappropriate number of patients being treated in LTCHs who most likely do not require the full measure of resources available in that setting.   CMS is concerned that the existing SSO payment policy may unintentionally provide a financial incentive for LTCHs to admit a large number of short stay cases.   Under this proposed payment alternative, LTCHs, which are certified as acute care hospitals, could be paid by Medicare under the LTCH PPS at a rate that is more consistent with the rate paid to acute care hospitals when the LTCHs treat shorter stay patients.

Outlier Fixed-Loss Amount

In unusually costly cases, Medicare will pay a hospital an amount in addition to the payment under the LTCH PPS for the LTC Diagnosis Related Group (DRG).  To be eligible for this payment, the hospital’s estimated costs in treating the case must exceed the LTC-DRG payment by an outlier fixed-loss amount. 

• The proposed outlier fixed-loss amount for rate year 2007 is $18,489, compared with $10,501 in rate year 2006. 
• Aggregate outlier case payments are limited to 8 percent of total estimated LTCH payments.  Since the proposed changes to the short stay outlier policy would result in reduced total LTCH payments, it is necessary to increase the fixed loss amount in order to maintain the 8 percent limit on total LTCH outlier payments.

Surgical-DRG Exception to Interruption of Stay Policy

CMS is proposing to sunset the specific exception to the 3-day or less interruption of stay policy which applies to the treatment of patients grouped to a surgical DRG under the IPPS at an acute care hospital. 

• The 3-day or less interruption of stay policy is defined as “a stay at a long-term care hospital during which a Medicare inpatient is discharged from the long-term care hospital to an acute care hospital, IRF, skilled nursing facility (SNF), or the patient’s home and readmitted to the same long-term care hospital within 3 days of the discharge from the long-term care hospital.” 
• Presently, all other treatment and/or care (both inpatient and outpatient) delivered to LTCH patients by acute care hospitals, IRFs, and SNFs during such an interruption is the responsibility of the LTCH “under arrangements.”
• This proposal would require that the LTCH cover surgical care provided at an acute care hospital “under arrangements,” rather than allowing the acute care hospital to submit a separate bill to Medicare for such treatment.
• Analysis of CMS data from RateYear (RY) 2005 indicates that cases that were governed by the surgical-DRG exception represented 0.003 percent of total LTCH discharges and that the total covered charges for those surgical DRGs was $10,294,925, representing 0.1 percent of covered charges to LTCHs for RY 2005.
• CMS is proposing to discontinue this policy since, among other reasons, the data reveals that surgical cases that fell within this exception were present in only a small fraction of LTCH hospitalizations and were neither numerous nor significantly costly for LTCHs to cover “under arrangements.”
• CMS does not believe this policy will compromise beneficiary access to medically necessary services.

Additional concerns about LTCHs

CMS is monitoring and evaluating several behaviors that CMS believes are attempts to circumvent CMS’s Hospital-within-a-Hospital (HwH)/satellite 25 percent threshold payment adjustment. 

• CMS understands that in communities where there are several LTCHs, host hospitals are “patient-swapping” and admitting patients to each other’s co-located LTCH.
• CMS is aware that, following the implementation of the 25 percent threshold payment adjustment for co-located LTCHs, the significant growth in the LTCH industry has been in the development of free-standing LTCHs.  CMS data indicates that many free-standing LTCHs are receiving high percentages of their patients from specific acute care hospitals (often a sole acute care hospital) and therefore are, in effect, acting as units of the acute care hospital, functioning in a similar manner as a LTCH HwH or LTCH satellite.
• CMS is also evaluating the patient shifting patterns between free-standing LTCHs and their referring hospitals for purposes of determining whether these LTCHs are behaving as a step-down unit of the acute care hospitals.
• CMS is concerned about these developments and will continue to monitor the admission patterns of LTCHs to determine if future rulemaking is warranted.

Report from Research Triangle International, Inc. (RTI)

In September 2004, CMS awarded a contract to Research Triangle International, Inc (RTI) to evaluate and determine the feasibility of implementing recommendations made by MedPAC in its June 2004 Report to Congress.  MedPAC urged CMS to establish facility and patient criteria for LTCHs and to provide an expanded role for Quality Improvement Organizations in monitoring compliance with the newly-established criteria. 

• RTI’s project plan included extensive claims-level analyses to understand variations among LTCH patients as well as both clinical and payment distinctions between the type of patients at LTCHs and a similar population served at other Medicare hospital-level providers such as IRFs, IPFs, and high cost outliers at acute care hospitals.  RTI performed a comprehensive analysis of existing patient assessment tools currently used by QIOs and the LTCH industry.  Site visits to LTCHs are presently underway.
• The proposed rule presents a summary of the issues examined in RTI’s draft report, “Long Term Care Hospital (LTCH) Payment System Refinement/Evaluation.”  Although CMS will solicit comments on the report’s approach, CMS did not present RTI’s recommendations or propose policy initiatives based upon the report in this year’s LTCH PPS proposed rule.  

Revisions to the Long-term Care Diagnosis Related Groups (LTC-DRGs)

Because the LTC-DRGs and their relative weights are related to the inpatient hospital DRGs, CMS is not revising the LTC-DRGs and relative weights at this time.  Any changes will be made at the same time as the hospital IPPS update on October 1, 2006.

Timeline for the Proposed Rule

The proposed rule is on display today at the Office of the Federal Register and will be published in the January 27, 2006 Federal Register.  Public comments will be accepted until March 20, 2006.  For more information, see the CMS web site at www.cms.hhs.gov/providers/longterm/ .