Elements of LTCHPPS

Elements of LTCHPPS

LTCHs which have been excluded from the inpatient prospective payment system under section 1886(d)((1)(B)(iv) of the Social Security Act, are certified under Medicare as short-term acute-care hospitals and, for the purpose of Medicare payments in general, are defined as having an average inpatient length of stay of greater than 25 days. This new prospective payment system will replace the existing reasonable cost-based payment system under which LTCHs are currently paid.

Major elements of the LTCH PPS include:

Patient Classification System

The PPS for LTCHs classifies patients into distinct diagnostic groups based on clinical characteristics and expected resource needs. The patient classification system groupings are called LTC-DRGs, which are the same CMS diagnosis-related groups (DRGs) used under the hospital inpatient PPS that have been weighted to reflect the resources required to treat the medically complex patients treated at LTCHs.

Effective for discharges occurring on or after October 1, 2007, significant changes were made to the CMS DRGs.  Significant improvement in the DRG system to recognize severity of illness and resource usage by adopting Medicare Severity DRGs (MS-DRGs). 

Relative Weights

Relative weights for the MS-LTC-DRGs are a primary element to account for the variation in cost per discharge because they reflect resource utilization for each diagnosis. In the LTCH PPS, the MS-LTC-DRG relative weights are updated annually using the most recently available claims data.

Payment Rate:

Under the LTCH PPS, payment for a Medicare patient will be made at a predetermined, per discharge amount for each MS-LTC-DRG. The system includes payment for all inpatient operating and capital costs of furnishing covered services (including routine and ancillary services), but not certain pass through costs (i.e. bad debts, direct medical education, and blood clotting factors). The formula for an unadjusted LTCH PPS prospective payment is: Federal Prospective Payment = MS-LTC-DRG Relative Weight * Standard Federal Rate.


Under the BIPA, broad authority was conferred on the Secretary to examine the most recent LTCH data to determine whether to include specific facility level and/or case level adjustments to the payment rate for the LTCH PPS. Case level adjustments have been for short stay cases, interrupted stay cases, cases discharged and readmitted to co-located providers, and high-cost outlier cases. 

The LTCH PPS provides for an adjustment for differences in area wages and a cost-of living adjustment (COLA) for LTCHs located in Alaska and Hawaii. Based on analyses of the best available data, no adjustments for geographic reclassification, disproportionate share of low-income patients (DSH), rural location, or indirect medical education (IME) are being implemented.

Annual Updates:

Updates to the prospective payment rates for each Federal fiscal year will be published in a Federal Register Notice.  Beginning July 1, 2003, we changed the LTCH PPS annual payment rate update cycle to be effective July 1 through June 30 instead of October 1 through September 30. The update to the LTCH PPS rates, including the Federal rate, outlier threshold, wage index and budget neutrality factor, and other policy changes to be effective for discharges occurring on or after July 1 through June 30 each year is published in the annual LTCH PPS rate year proposed and final rules. Because the patient classification system used under the LTCH PPS is based directly on the MS-DRGs used under the IPPS for acute care hospitals, the annual update of the MS-LTC-DRG classifications and relative weights remains linked to the annual reclassification and recalibration of the MS-DRGs used under the IPPS. The update to the MS-LTC-DRG classifications and relative weights to be effective for discharges occurring on or after October 1 through September 30 each year is published in the annual IPPS fiscal year proposed and final rules.

Transition Period:

A 5-year transition period was implemented to phase-in the PPS for LTCHs from cost-based reimbursement to 100 percent Federal prospective payment. Payment was based on an increasing percentage of the LTCH PPS payment and a decreasing percentage of its cost-based reimbursement rate for each discharge.  However, effective for cost reporting periods beginning on or after October 1, 2006, total LTCH PPS payments are based on 100 percent of the Federal rate.

Budget Neutrality:

The law requires that the LTCH PPS be budget neutral, which means that total payments under the system must equal the amount that would have been paid if the PPS had not been implemented. 

Page Last Modified:
09/06/2023 04:51 PM