United States: CMS Publishes Proposed Rule for Medicare Long-Term Care Hospital Prospective Payment System Annual Payment Rate Updates and Policy Changes

On January 30, 2004, the Department of Health and Human Services ("HHS"), Centers for Medicare & Medicaid Services ("CMS") published a proposed rule (the "Proposed Rule") that sets forth the proposed annual update to the payment rates for long-term care hospitals ("LTCHs") reimbursed under the long-term care hospital prospective payment system ("LTCH PPS").¹ CMS also proposed certain policy changes related to LTCHs and the LTCH PPS. This is the second update to the LTCH PPS following its implementation in August 30, 2002. ²

In addition to updating LTCH PPS payment rates and the outlier threshold, the Proposed Rule recommends several policy changes to the payment and classification of LTCHs under the LTCH PPS:

CMS is proposing to alter existing interrupted stay policy by providing that, in any instance in which a patient is discharged from an LTCH and readmitted within three days of discharge, the readmission would not constitute a new episode of care, and any services provided in that period would be included in the long-term care diagnosis-related group ("LTC-DRG") payment for the original episode of care. CMS also is proposing to revise the existing process by which a hospital calculates its average length of stay for certification purposes, so that all days will be counted in the cost reporting period of discharge. Where an LTCH seeks to "spin off" a satellite or remote location as an independent LTCH, CMS is proposing to clarify that only data reflecting the average length of stay in the newly established hospital will be utilized to determine whether the satellite or remote location satisfies the average length of stay requirement.

This memorandum summarizes the major provisions of the Proposed Rule to update the LTCH PPS. If you require additional details regarding the proposal, please do not hesitate to contact us.

1. Organization of DRGs

DRGs are organized into 25 Major Diagnostic Categories ("MDCs"), and the principal diagnosis determines MDC assignment. Most MDCs are then divided into surgical or medical categories and are further differentiated by various characteristics that help determine resource intensity. CMS continues to believe that it is not practical at this time to develop a refinement to inpatient hospital DRGs based on severity, as recommended in MedPAC’s June 2000 Report to Congress, due to time and resource requirements. CMS does reserve the right to develop such an adjustment in the future, particularly if there are changes to the code sets underlying the DRG assignments.

2. Update of LTC-DRGs

Pursuant to the June 2003 Final Rule, the effective date of annual updates to the LTCH PPS rates is July 1 of each year. Consistent with the process described in the June 2003 Final Rule, however, changes for federal fiscal year 2005 (i.e., October 1, 2004 through September 30, 2005) ("FY 2005") to the CMS-DRGs on which the LTC-DRGs are based and to the LTC-DRGs themselves, as well as to the relative weights of each, will be presented in the proposed rule for the inpatient PPS ("IPPS"). The IPPS proposed rule will be published in the Federal Register in the Spring of 2004; the final rule will follow in August. CMS will notify LTCHs of any revisions to the LTC-DRG relative weights once this information is available.

3. Coding Rules and Use of ICD-9-CM Codes in LTCHs

In the preamble to the Proposed Rule, CMS urges LTCHs to focus on improved coding practices. The agency has asked the American Hospital Association ("AHA") to provide additional clarification or instruction on proper coding in the LTCH setting. Further, CMS notes its concern about the quality of medical record documentation under the LTCH PPS. Although it believes the quality will improve, as it did under the IPPS, CMS identifies organizations (i.e., the AHA, the American Health Information Management Association, and the National Center for Health Statistics) that plan to assist members in improving documentation and coding.

1. Update to the Standard Federal Rate

Under the Proposed Rule, the standard Federal rate for LTCH PPS rate year 2005 (i.e., July 1, 2004 through June 30, 2005) would be $36,762.24, reflecting an increase factor of 1.029 (i.e., a 2.9 percent increase) over the 2004 rate year. CMS did not recommend a new update framework for the LTCH PPS at this time. The agency indicated that it may, at a later date, propose an update framework that goes beyond the current market basket-based approach and considers other factors affecting the "efficient delivery" of health care services to Medicare beneficiaries.

CMS used the 1997-based excluded hospital with capital market basket for determining the proposed update to the LTCH PPS standard Federal rate.

2. Calculation of LTCH Prospective Payments for the 2005 LTCH PPS Rate Year

(a) Adjustment for Area Wage Levels

CMS proposes to calculate wage index values under the LTCH PPS using the same data as the fiscal year 2004 acute care hospital inpatient wage index, on the basis that these represent the most recent data that are available and complete. The Proposed Rule does not recommend any adjustments to the phase-in of the wage index adjustment or any changes to the labor-related share LTCH PPS payments.

(b) Adjustment for Cost-of-Living in Alaska and Hawaii

For the 2005 LTCH PPS rate year, CMS is proposing to adjust LTCH payments for facilities located in Alaska and Hawaii by multiplying the standard Federal payment rate by the following adjustment factors:

Alaska: All areas 1.23 Hawaii: Honolulu County 1.25 Hawaii County 1.165 Kauai County 1.2325 Maui County 1.2375 Kalawao County 1.2375 These are the same adjustment factors issued by the Office of Personnel Management ("OPM") and used in the IPPS. If OPM releases revised factors before March 1, 2004, CMS will use the revised information to develop payments for the LTCH PPS final rule.

(c) Adjustment for Special Cases

(1) High-Cost and Short-Stay Outliers

Under the LTCH PPS, CMS makes an increased LTCH PPS payment for outlier cases ("high-cost outliers") that have extraordinarily high costs relative to the costs of most discharges (i.e., where the estimated cost of the case exceeds the adjusted LTCH PPS payment for the LTC-DRG plus a fixed loss amount), and pays a decreased LTCH PPS payment for outlier cases ("short-stay outliers") where the beneficiary receives less than the full course of treatment at the LTCH before being discharged (i.e., where the length of stay is less than 5/6 ths of the geometric average length of stay for the LTC-DRG).

In June 2003, CMS decided that, beginning with the 2004 LTCH PPS rate year, it would calculate a single fixed-loss amount for high-cost outliers for each LTCH PPS rate year based on the version of GROUPER, specialized software designed to classify cases into DRGs, in effect at the beginning of the rate year. Using this method, CMS is proposing to set the fixed-loss amount for the 2005 LTCH PPS rate year at $21,864. As a result, CMS would pay high-cost outlier cases 80 percent of the difference between the estimated cost of the case and the proposed outlier threshold (i.e., the sum of the adjusted federal LTCH payment for the case’s LTC-DRG and the fixed-loss amount).

No changes are proposed to the short-stay outlier policy in the Proposed Rule. If a case qualifies as both a short-stay and a high-cost outlier, CMS would pay 80 percent of the difference between the estimated cost of the case and the outlier threshold (i.e., the sum of the proposed fixed-loss amount and the amount paid under the short-stay outlier policy).

(2) Extension of the Interrupted Stay Policy

CMS is proposing to revise the definition of an interrupted stay to add instances in which a patient is discharged from an LTCH and readmitted within three days of discharge. Such a readmission would not constitute a new episode of care. Any services provided to the individual during the three-day (or less) absence from the LTCH would be included in the LTC-DRG payment for the original episode of care as services provided "under arrangements" by the LTCH. If the patient received services from another facility or provider during that period, the services could not be billed to Medicare (or the beneficiary) separately by the other provider; the LTCH would bear responsibility for payment out of its LTCH-PPS payment. If the patient were to receive services during the three-day absence, the days of the absence would be included in determining the total length of stay; however, if no services were received during the absence, the days away from the LTCH would not be incorporated in the length of stay calculation. CMS developed this proposal to address concerns that LTCHs were discharging patients in order to avoid payment for specific tests and procedures "under arrangements."

(d) Other Payment Adjustments

At this time, CMS is not proposing adjustments for geographic reclassification, rural location, disproportionate share, or indirect medical education. The agency will continue to collect and interpret data in these areas as they become available, however, to determine whether they support future additional payment adjustments.

(e) Budget Neutrality Offset to Account for the Transition Methodology

For the 2005 LTCH PPS rate year, CMS is proposing a 3.0 percent reduction to all LTCH payments to account for the estimated cost of the transition methodology. This payment offset is three percentage points lower than the budget neutrality factor for the 2004 LTCH PPS rate year, and it contributes to greater LTCH payment increases between these two rate years than has been seen previously. At this time, CMS is also proposing budget neutrality offsets of 2.2 percent for 2006, 1.1 percent for 2007, and 0.1 percent for 2008. This translates into the following estimated total Medicare payments for LTCH services for the next five years: 

Under the existing LTCH PPS, all days of a Medicare beneficiary’s stay at an LTCH are counted for payment purposes as occurring in the cost reporting period of discharge, even if a portion of the stay occurred during a prior cost reporting period. Determinations as to whether a hospital meets the greater than 25 day average Medicare length of stay requirement do not follow this process; for certification purposes, days are counted in the cost reporting period in which they occur, regardless of the date of discharge. The Proposed Rule would revise the existing methodology by which a hospital calculates its average length of stay to determine whether it qualifies as an LTCH to conform with the method for calculating lengths of stay for purposes of payment. That is, in determining the average length of stay, days would be reported in the cost reporting period in which the patient is discharged.

Under Medicare regulations, a satellite arrange ment exists when an LTCH (or other IPPS-excluded hospital) establishes an additional location by sharing space in another hospital (or in an entire building located on the campus of another hospital). Similarly, a remote location operates as part of the main provider but is not co-located with another hospital. Satellite facilities and remote locations are not considered separate hospitals but they are required to satisfy independently the criteria for the IPPS exemption of their main provider. Consequently, uncertainty has existed where a satellite facility is interested in establishing itself as an LTCH independent of its main hospital with regard to whether it must independently meet the requirements of an LTCH. The Proposed Rule would amend existing regulations to clarify that if a satellite or remote hospital location seeks to become an independent LTCH, only data reflecting the average length of stay for Medicare patients in the newly established hospital will be utilized to determine whether the satellite facility meets the length of stay requirement to qualify as an LTCH. The effect of this change would be to prohibit an LTCH satellite from relying on the length of stay data it generated while operating as a satellite to serve as the basis for its qualification as an independent LTCH. Such a facility would be required to undergo a qualifying period after it became an independent provider.

CMS acknowledged that this change would affect satellites that are required to seek independent LTCH status as a result of their failure to comply with the "common service area" requirement under the provider-based standards at 42 C.F.R. § 413.65. To moderate this effect, CMS is proposing an exception for such facilities, to allow them to utilize length of stay data from five of the previous six months prior to their compulsory separation in order to demonstrate their qualification for independent LTCH status.

The transition period, which applies to LTCHs that are not classified as "new" and existing LTCHs that do not elect to transition immediately to full federal prospective payment, will remain a five-year period. For cost reporting periods in FY 2004 (i.e., October 1, 2003 through September 30, 2004), the total payment to an LTCH will be 40 percent of the Federal prospective payment amount and 60 percent of the amount calculated under reasonable cost principles for the particular LTCH. For FY 2005, the payment will be 60 percent of the Federal amount and 40 percent of the LTCH reasonable cost-based payment.

In this second annual update to the LTCH PPS, there are relatively few areas of the payment system for which alterations are proposed. Of these, the most significant is the revision to the interrupted stay policy. In the preamble to the Proposed Rule, CMS indicated that this change was developed in response to concerns that certain LTCHs are attempting to game the system by transferring patients during the course of treatment for the express purpose of avoiding responsibility for the costs of particular tests or procedures. According to CMS, the net result of such behavior is an inappropriate increase in Medicare costs as a result of the failure of these LTCHs to fulfill their statutory obligation to provide all necessary covered services to Medicare beneficiaries. In the Proposed Rule, CMS does acknowledge the difficulty of devising appropriate unbundling requirements, however, and the necessity of detailed instructions for their implementation. In an era of ever-increasing cost-consciousness, it is not surprising that CMS is focused on methods of cost containment. Whether this measure proves to be a successful means of doing so, however, remains to be seen, as does its impact on beneficiary services and LTCH operations.

Footnotes

This article is presented for informational purposes only and is not intended to constitute legal advice.