United States: CMS Publishes Final Rule for Medicare Long-Term Care Hospital Prospective Payment System Annual Payment Rate Updates and Policy Changes, and Proposes Policy Changes for Hospitals-Within-Hospitals

The Centers for Medicare & Medicaid Services ("CMS") has recently published final regulations relating to Medicare payment to long-term care hospitals ("LTCHs"), and proposed regulations that would affect Medicare payment to LTCHs that are operated as hospitals-within-hospitals.

First, on May 7, 2004, CMS published a final rule (the "Final Rule") that updates payment rates for LTCHs reimbursed under the Medicare long-term care hospital prospective payment system ("LTCH PPS"). Under the Final Rule, Medicare LTCH payments will increase by 3.1 percent for the 2005 LTCH rate year, which begins July 1, 2004.¹ The Final Rule also includes certain policy changes related to LTCHs and the LTCH PPS. Among other things, the Final Rule:

• Sets the high cost outlier fixed loss amount (used to compute the high cost outlier threshold) at $17,864 for 2005, compared to the 2004 rate year amount of $19,590 and the January 30, 2004 proposed rule ("Proposed Rule")² amount of $21,864;

• Expands the existing "interrupted stay policy" to include a discharge to an acute care hospital, inpatient rehabilitation facility ("IRF"), skilled nursing facility ("SNF"), or to the patient’s home and readmission to the LTCH within three days. Under this policy, the entire LTCH hospitalization, both before and after the interruption, is considered to be one episode of care with one long-term care diagnosis-related group ("LTC-DRG") payment, and any covered services furnished by the other provider during the interruption would be the responsibility of the LTCH. Note, however, the Final Rule provides a oneyear exception to this general policy for certain acute care hospital surgical services.

• Revises the 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. The Final Rule provides, however, that LTCHs will be allowed to meet the existing definition for calculating average length of stay for one additional year if they fail to satisfy the new method.

• Clarifies that when an LTCH seeks to "spin off" a satellite or remote location as an independent LTCH, only data reflecting the average length of stay in the newlyestablished hospital will be utilized to determine whether the satellite or remote location satisfies the average length of stay requirement.

As part of a separate proposed rule, published on May 18, 2004, to update Medicare payments and policies under the Medicare inpatient hospital prospective payment system ("IPPS") for the 2005 IPPS Rate Year,³ CMS has proposed certain policy changes to the qualification requirements for hospitals-within-hospitals ("HIHs"). The proposed rule would:

• Revise the existing separateness and control regulations at 42 C.F.R. § 412.22(e) for HIHs and require that, in order to be excluded from the IPPS, all HIHs must admit at least 75 percent of their patients from sources other than the on-site host hospital or a third entity that controls both hospitals (i.e., no more than 25 percent of HIH patients can be referred from the host hospital).

• Implement one of three options presented if an LTCH HIH fails to meet the 75-percent criterion that would either: (i) pay the HIH at the IPPS rate applicable to non-excluded acute care hospitals for all patients; (ii) deny any payment to the HIH for patients admitted from the host hospital, but pay the HIH under the applicable PPS-excluded hospital rate for other patients; or (iii) pay the HIH at the lower of the IPPS rate or the applicable PPS-excluded hospital rate for patients admitted from the host hospital, but pay the HIH under applicable PPS-excluded hospital rate for other patients.

• Preclude common ownership of host hospitals and excluded hospitals, while grandfathering existing HIHs and host hospitals that are under common ownership as long as they comply with the proposed mandatory 75-percent criterion.

This memorandum summarizes the major provisions of the Final Rule, focusing on differences between the Final Rule and the Proposed Rule, and the HIH policy changes proposed in the IPPS proposed rule. If you require additional details regarding either of these rulemakings, please do not hesitate to contact us.

As noted in the Proposed Rule, CMS does not believe it is practical at this time to refine inpatient hospital DRGs based on severity, as recommended in MedPAC’s June 2000 Report to Congress, due to time and resource requirements. While the Final Rule does not, therefore, modify DRGs, CMS reserves the right to develop such an adjustment in the future, particularly if there are changes to the code sets underlying the DRG assignments.

Annual updates to the LTCH PPS rates are effective July 1 of each year, as mandated in CMS’s June 6, 2003 final LTCH PPS update rule.4 In accordance with this 2003 rule, however, changes for federal fiscal year 2005 (i.e., October 1, 2004 through September 30, 2005) ("FY 2005") to the CMSDRGs 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"). As indicated above, CMS published the IPPS proposed rule on May 18, 2004, and the final rule is expected to be issued in August. CMS will notify LTCHs of any revisions to the LTC-DRG relative weights once this information is available.

As in the Proposed Rule, the Final Rule’s preamble urges LTCHs to focus on improved coding practices. CMS states that it has asked the American Hospital Association ("AHA") to provide additional clarification or instruction on proper coding in the LTCH setting. Further, CMS raises concerns about the quality of medical record documentation under the LTCH PPS. Although the agency 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 practices.

Under the Final Rule, the standard Federal rate for LTCH PPS rate year 2005 (i.e., July 1, 2004 through June 30, 2005) will be $36,833.69, reflecting an increase factor of 1.031 (i.e., a 3.1 percent increase) over the 2004 rate year. This compares to the $36,762.24 Federal rate (a 2.9 percent increase) included in the Proposed Rule. CMS did not adopt a new update framework for the LTCH PPS in the Final Rule because of insufficient data. The agency indicated, however, that it may propose an update framework in the future "that would account for other appropriate factors that affect the efficient delivery of services and care provided to Medicare patients."

As in the Proposed Rule, the Final Rule uses the same data as in the fiscal year 2004 acute care hospital inpatient wage index to calculate wage index values under the LTCH PPS. The Final Rule does not adjust the phase-in of the wage index adjustment or change the labor-related share LTCH PPS payments.

For the 2005 LTCH PPS rate year, CMS is adjusting LTCH payments for facilities located in Alaska and Hawaii by multiplying the standard Federal payment rate by the following cost of living adjustment factors (which are the same adjustment factors used in the IPPS):

Under the LTCH PPS, CMS makes an increased LTCH PPS payment for outlier cases ("highcost 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 5/6thsof the geometric average length of stay for the LTC-DRG).

Using a methodology outlined in CMS’s June 2003 final rule, CMS is setting the fixed-loss amount for the 2005 LTCH PPS rate year at $17,864, compared to $21,864 in the Proposed Rule and $19,590 for the 2004 LTCH PPS rate year. The lower amount in the Final Rule compared to the Proposed Rule results from the availability of more recently updated MedPAR data. Under the Final Rule, CMS will pay high-cost outlier cases 80 percent of the difference between the estimated cost of the case and the outlier threshold (i.e., the sum of the adjusted federal LTCH payment for the case’s LTC-DRG and the fixed-loss amount of $17,864).

The Final Rule does not revise the short-stay outlier policy. If a case qualifies as both a shortstay and a high-cost outlier, CMS will continue to 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).

CMS is adopting policy changes to address concerns that LTCHs have discharged patients temporarily in order to avoid payment for specific tests and procedures "under arrangements." Specifically, as in the Proposed Rule, the Final Rule includes revisions to the definition of an interrupted stay to add instances in which a patient is discharged from an LTCH to an acute care hospital, an IRF, a SNF, or to home and readmitted within three days of discharge. Such a readmission generally will not constitute a new episode of care, and Medicare will make only one LTC-DRG payment to the LTCH. While the Proposed Rule would have prevented any payment from being made to intervening providers during a three-day or less interruption in stay, the Final Rule provides a one-year exception to this general rule for cases in which an LTCH patient receives treatment in an acute care hospital during the interruption that results in the case being grouped to a surgical DRG. In these limited instances, the acute hospital will be able to bill separately for the discharge that is grouped to a surgical DRG. CMS has added this provision in recognition that certain surgical procedures "may not be directly related to the patient’s principle or secondary diagnoses at the LTCH, but may arguably signify a distinct episode of care."

For situations that do not involve acute care hospital treatment involving surgical DRG, any services provided to the individual during the three-day (or less) absence from the LTCH will be included in the LTC-DRG payment for the original episode of care as services provided "under arrangements" by the LTCH. If the patient receives non-surgical 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 LTCH is required to pay for care during any days of the three-day (or less) interruption, all days of the interruption will be included in that patient’s day count at the LTCH. On the other hand, if no services were received during the absence, the days away from the LTCH would not be incorporated in the length of stay calculation.

The Final Rule includes a number of other clarifications to the Proposed Rule’s interrupted stay proposal. For instance, the Final Rule clarifies that a reference to outpatient services provided during an interruption does not apply to SNFs. CMS also has made numerous revisions to the regulatory text to describe the division of the original interrupted stay policy into a "3-days or less interruption of stay" and a "greater than 3-day interruption of stay," among other revisions. CMS also has more concisely outlined the method for determining the length of stay if a patient does not receive medical care during a 3-day or less interruption of stay. The revised text is not substantively different than the Proposed Rule text, however, except for the treatment of surgical care provided during the interruption (as outlined above).

CMS intends to gather data during the 2005 LTCH PPS rate year on the impact of surgical DRG exception in order to evaluate, among other effects, the frequency of this scenario during a 3-day interrupted stay at a LTCH, as well as what surgical DRGs actually are represented. Depending upon these findings, CMS may decide to propose to continue or revise this exception. Moreover, CMS will study relevant claims data in order to evaluate whether further proposed refinements to the interrupted stay policy would be warranted in next year’s rule. Specifically, CMS will: (1) analyze new data to determine whether problems associated with LTCH interrupted stays equally affected all settings to which LTCH patients may have been discharged and subsequently readmitted; and (2) monitor patterns of discharges and readmissions to determine whether further proposed changes to the policy are required to ensure that beneficiary access to medically necessary services are not compromised by creating disincentives for other providers to accept patients discharged from LTCHs. CMS also notes that it will monitor the effects of this policy on services involving new technologies, and it will monitor patient movements during an episode of care among closely-located LTCHs owned by the same corporation. In addition, CMS points out in the preamble that it has "every intention of working with [Quality Improvement Organizations], the [Office of Inspector General], and if necessary, pursuing fraud and abuse actions against individual LTCHs, if appropriate" to address non-compliance issues.

The Final Rule, like the Proposed Rule, does not include adjustments for geographic reclassification, rural location, disproportionate share, or indirect medical education. CMS will continue to collect and interpret data in these areas as they become available, however, to determine whether they support future additional payment adjustments.

In the Proposed Rule, CMS proposed a 3.0 percent reduction to all LTCH payments for the 2005 LTCH PPS rate year to account for the estimated cost of the transition methodology, based on the agency’s estimate that 69 percent of facilities would be paid based on 100 percent of the Federal rate (rather than the transitional blend methodology) during the 2005 LTCH PPS rate year. In light of updated projections showing that approximately 93 percent of LTCHs will be paid based on full Federal rate during this period, however, the Final Rule calls for only a 0.5 percent transition period budget neutrality offset. At this time, CMS also is anticipating budget neutrality offsets of 0.4 percent for 2006 (down from 2.2 percent in the Proposed Rule), 0.1 percent for 2007 (compared to 1.1 percent), and no adjustment for 2008 (down from 0.1 percent). This translates into the following estimated total Medicare payments for LTCH services for the next five years (each of which would represent an increase in payments compared levels expected under the Proposed Rule):

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 for certification purposes 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 Final Rule, like the Proposed Rule, revises the 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 will be reported in the cost reporting period in which the patient is discharged. In response to a commenter’s concerns, however, the Final Rule provides a one-year grandfathering of LTCH status for all existing LTCHs that will give each hospital an additional cost reporting period to adjust to the new methodology. Therefore, for cost reporting periods beginning on or after July 1, 2004, but before July 1, 2005, no LTCH would lose its designation if it could not demonstrate compliance with the average length of stay requirement during its first cost reporting period under the new procedure.

Under Medicare regulations, a satellite arrangement exists when an LTCH (or other IPPSexcluded 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 regarding whether a satellite facility interested in establishing itself as an LTCH independent of its main hospital must independently meet the requirements of an LTCH.

The Final Rule, like the Proposed Rule, clarifies 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. Thus an LTCH satellite is prohibited 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 must undergo a qualifying period after it becomes 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 has adopted an exception for such facilities, which allows 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. CMS declined to adopt commenters’ suggestions to broaden this exception.

The Final Rule does not modify the transition period for the LTCH-PPS. For cost reporting periods beginning in FY 2004 (i.e., October 1, 2003 through September 30, 2004), the total payments to LTCHs that are not classified as "new" and existing LTCHs that do not elect to transition immediately to full Federal prospective payment 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.

On May 18, 2004, CMS published a proposed rule that contains the annual payment rate updates and policy changes for general short-term care hospitals reimbursed under IPPS for the 2005 IPPS Rate Year. The proposed rule includes two significant proposed changes to the classification criteria for HIHs.

Currently, HIHs must comply with one of three criteria for the performance of basic hospital functions. CMS states that most HIHs comply with the second criterion at 42 C.F.R. § 412.22(e)(5)(ii): that the HIH limit the services it purchases from the hospital occupying space in the same building (the "host hospital") or a third entity that controls both hospitals to 15 percent of the HIH’s inpatient operating costs. The first criterion at 42 C.F.R. § 412.22(e)(5)(i) requires that the HIH perform the basic hospital functions through the use of its own employees or under agreements with entities other than the host hospital or a third entity that controls both hospitals. The third criterion at 42 C.F.R. § 412.22(e)(5)(iii) requires that at least 75 percent of the patients admitted to the HIH be referred from a source other than the host hospital or a third entity that controls both hospitals.

CMS is proposing to eliminate the 15-percent criterion at 42 C.F.R. § 412.22(e)(5)(ii) and the first criterion at 42 C.F.R. § 412.22(e)(5)(i), and to require that all HIHs comply with the 75-percent referral criterion at 42 C.F.R. § 412.22(e)(5)(iii). CMS states that, by choosing to meet the 15-percent criterion, LTCH HIHs have been able to rely upon affiliated entities both for their operations and for their patient referrals. According to CMS, this results in a situation very similar to the HIH serving as a LTCH unit of the host acute care hospital, which is precluded by statute. Other reasons for this proposed change in policy include the rapid growth in LTCH HIHs, separate prospective payment systems for LTCHs and inpatient rehabilitation facilities ("IRFs") that could result in two full Medicare payments for one episode of care (one under IPPS and a second under LTCH PPS or IRF PPS), and the burden upon Medicare fiscal intermediaries to monitor HIH compliance with the 15-percent criterion on an ongoing basis.

CMS is presenting for public comment three payment options for HIHs that do not meet the 75- percent criterion. Under the first option, an HIH would be paid under IPPS for all of its patients if it admits more than 25 percent of its patients from the host hospital. The second option would reimburse an HIH as a PPS-excluded hospital (e.g., under LTCH PPS or IRF PPS) for the patients referred from sources other than the host hospital, but the HIH would receive no reimbursement from Medicare for patients referred from the host hospital. Medicare payments for patients referred from the host hospital would only be paid to the host hospital under IPPS, and would be treated as services provided by the HIH "under arrangement" with the host hospital, pursuant to 42 C.F.R. § 411.15(m). Presumably, the HIH would be paid by the host hospital for these services at negotiated rates under contracts or other agreements. Under the third option, Medicare would pay an HIH as a PPS-excluded hospital for the patients referred from sources other than the host hospital, and the HIH would receive reimbursement from Medicare for patients referred from the host hospital at the lesser of the IPPS rate or the applicable PPS-excluded hospital rate.

CMS also is proposing to revise the HIH regulation with new section 42 C.F.R. § 412.22(e)(2)(ii), which would preclude common ownership, in whole or in part, of HIHs and host hospitals. The change would be effective October 1, 2004. CMS would "grandfather" HIHs under common ownership with their host hospitals prior to June 30, 2004, and continue to pay them as hospitals excluded from IPPS, as long as they comply with the existing control criteria at 42 C.F.R. § 412.22(e)(1) through (4) (to be re-designated as 42 C.F.R. § 412.22(e)(2)(i)) and with the proposed mandatory 75-percent criterion (proposed new section 42 C.F.R. § 412.22(e)(2)(iii)).

CMS is accepting comments to the three proposed payment options and any other aspect of the proposed HIH policy changes until July 12, 2004. We anticipate that these proposed changes will have a significant impact, in some cases, on HIH operations and reimbursement, particularly for LTCH HIH operators. Please let us know if we can assist you with comments or any other issues related to the proposed rule by contacting a Reed Smith attorney listed below.

The Final Rule includes a number of positive changes for LTCHs compared to the Proposed Rule, including higher payment levels and increased flexibility in meeting new interrupted stay and average length of stay policies. Nevertheless, the underlying policies adopted in the Final Rule indicate CMS’s determination to prevent LTCHs from "gaming 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. Moreover, certain statements in the preamble to the Final Rule signal that CMS remains concerned about several other developments within the LTCH industry, which could result in additional regulatory restrictions in the future. For instance, CMS states that it is "particularly concerned with the recent significant growth in the number of LTCHs." The number of LTCHs has grown almost 50 percent since the implementation of the LTCH PPS, almost exclusively comprised of LTCHs that are hospitals within hospitals. CMS therefore intends "to focus our monitoring on this growth and the potential for gaming the IPPS by the co-located acute care hospital; and gaming the LTCH PPS by the LTC hospital within a hospital." CMS is now acting to address these issues with respect to HIHs by proposing significant changes to the qualification criteria for HIHs in the most recent IPPS proposed rule. CMS also is monitoring the extent to which LTCH services and patients differ from those services and patients treated in other Medicare covered settings (for example, SNFs and IRFs), along with how the LTCH PPS generally affects access, quality, and costs. Likewise, CMS is collecting data on LTCH patients staying for periods of 6 months to evaluate whether such LTCH patients could be more appropriately served at a SNF. Although it is too early to predict the ultimate results of CMS’s monitoring efforts, the LTCH industry can expect continued CMS vigilance in this area for years to come.

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