Press Releases

MEDICARE PROPOSES PAYMENT CHANGES FOR LONG-TERM CARE HOSPITALS FOR RATE YEAR 2007

The Centers for Medicare & Medicaid Services (CMS) today issued a proposed rule to assure 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.

“Our goal is to ensure that the Medicare beneficiaries who need   long-term care hospital services receive high quality care, while promoting the efficient delivery of services to all of our seriously ill beneficiaries,” said CMS Administrator Mark B. McClellan, M.D., Ph.D.   “We believe the proposed rule promotes high-quality, efficient care, and we are looking forward to comments from the public.”

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 the LTCH case-mix index and margins before and after implementation of the LTCH Prospective Payment System (PPS) and the latest available LTCH cost reports, which indicate that LTCH Medicare margins were 8.8 percent for FY 2003 and 11.7 percent for FY 2004.  The proposed Federal rate is consistent with MedPAC’s recent update recommendation for the LTCH PPS.

In addition, 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.  This proposal to adopt the RPL market basket would also result in an increase in the labor share, from 72.885 percent to 75.923 percent, which is used in the adjustment for area wages.

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.   Payments under the LTCH PPS are updated annually.  Since the implementation of the LTCH PPS in FY 2003 (when there were approximately 280 LTCHs), the number of LTCHs has increased by about 32 percent.  Based on CMS projections, Medicare payments under the LTCH PPS will be $5.27 billion for 2007, an increase of approximately 70 percent since FY 2003.

The proposed rule would also make the LTCH payment system more efficient and consistent with Medicare’s other payment systems for similar patients by revising the payment adjustment formula for short-stay outlier (SSO) patients, who 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.  Currently, payment for these patients is based on the least of (1) 120 percent of patient costs; (2) 120 percent of the per diem of the Long Term Care Diagnosis Related Group (LTC-DRG); or (3) 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 would not substantially exceed costs.   It would also add a fourth component to the current formula that would allow payment under the LTCH PPS based on an amount comparable to what would be paid to an acute care hospital under the inpatient prospective payment system (IPPS).  Under this proposed policy, 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.

Medicare will pay a hospital an additional amount for unusually high cost cases under the high-cost outlier policy.  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 would be $18,489, compared with $10,501 in rate year 2006.  The primary reason for this proposed increase is because estimated aggregate outlier case payments are limited to 8 percent of total estimated LTCH payment.  Since CMS believes the proposed revisions 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 estimated LTCH payments.

The proposed rule would also eliminate the surgical DRG exception to the three-day or less interrupted stay policy.  The three-day or less interrupted stay policy provides that where a LTCH patient is discharged to an acute care hospital, inpatient rehabilitation facility (IRF), skilled nursing facility (SNF) or to the patient’s home and is readmitted to the long-term care hospital within three days Medicare does not provide for a separate payment for services provided during the three day or less period.  The surgical DRG exception allowed Medicare to make a separate payment to the acute care hospital if the care delivered during a 3-day or less interruption was for inpatient surgery.  Based on analysis of claims data from cases which fell under the surgical DRG exception during RY 2005, it was determined that many of the surgical procedures performed during the 3-day or less interruption were related to the patient’s principle diagnosis at the LTCH.  Furthermore, CMS data indicates that the cases that were eligible for payment under the surgical-DRG exception represented only 0.003 percent of total LTCH discharges during RY 2005, a small fraction of LTCH hospitalizations.   Therefore, these cases were neither numerous nor would they be significantly costly for LTCHs to cover “under arrangements.” For these reasons, among others, CMS has proposed to sunset this exception.  Under this proposed policy, the LTCH would be required to provide such inpatient surgical services during a 3-day or less interrupted stay either directly or “under arrangements” with the facility that actually provides the service, and no separate payment would be made by Medicare.

The LTCH PPS was implemented for cost reporting periods beginning on or after October 1, 2002, to replace the previous cost-based payment methodology.  The new system was based on the hospital IPPS, but modified to reflect the relatively higher costs experienced by LTCHs in treating the most severely ill beneficiaries.  During a five-year transition period which began with an LTCH’s cost reporting periods beginning on or after October 1, 2002, CMS pays existing LTCHs under a blend methodology in which a percentage of the payment is based on cost-based reimbursement and a percentage is based on the standard federal payment rate.   Existing LTCHs, however, have the option to elect payment based on 100 percent of the adjusted standard federal payment rate. 

Because the base standard federal rate was determined as if all LTCHs are paid based on 100 percent of the federal rate, in order to maintain budget neutrality during the transition period, CMS reduces all LTCH payments to account for the additional costs of the transition period methodology.  At this time, CMS estimates that 97 percent of LTCHs will be paid at 100 percent of the federal rate. Based on CMS estimates of the cost to the Medicare program as a result of the transition methodology, the proposed budget neutrality adjustment for the 2007 rate year is 0.999.

In September, 2004, CMS awarded a contract to Research Triangle International, Inc (RTI) to evaluate and determine the feasibility of implementing recommendations made by the Medicare Payment Advisory Commission (MedPAC) in its June 2004 Report to Congress.  The 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.

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 is not proposing policy initiatives based upon the report in this year’s LTCH PPS proposed rule.  

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.

The proposed rule will appear in the January 27, 2006, Federal Register.  Comments will be accepted until March 20, 2006.  The final rule, which will be effective for discharges occurring on or after July 1, 2006 through June 30, 2007, will be published later this spring.

Note: For more information, see the CMS web site at: www.cms.hhs.gov/LongTermCareHospitalPPS/