Order Code RS22399
March 14, 2006
CRS Report for Congress
Received through the CRS Web
Recent Developments in Medicare
Affecting Long-Term Care Hospitals
Specialist in Social Legislation
Domestic Social Policy Division
Medicare pays about $36 billion annually for post-acute care in four separate
settings: long-term care hospitals (LTCHs), inpatient rehabilitation settings (IRFs),
skilled nursing facilities (SNFs), and in the home. Medicare pays for care in each setting
under a unique payment system that uses different patient assessment instruments (PAI)
to establish a patient’s level of care. LTCHs, often considered the most expensive postacute care setting, are not required to use any PAI. Generally, Medicare requires that
LTCHs be licensed as acute care hospitals and have an average length of stay of 25 days.
Although there is no prior hospitalization requirement in order for a Medicare
beneficiary to qualify for care in an LTCH, approximately 80% of beneficiaries
receiving such care are transferred from an acute care hospital. LTCHs provide
intensive care to patients who have multiple, coexisting conditions who may need
hospital level care for relatively extended periods. However, Medicare’s ability to
assess whether patients are being treated in the most appropriate setting is undermined
because there are no common patient assessment tools or outcome measures across postacute care settings. This report provides background information on several operational
issues affecting LTCHs that are currently attracting attention from Congress, specifically
efforts to develop a patient assessment tool, to develop qualification criteria that should
be imposed on LTCHs, and to change Medicare’s LTCH payment methods.
For all post-acute settings, the overarching policy concern is how to expedite the
development of methods that best identify the post-acute care setting that provides the
most appropriate, cost-effective care for a specific patient or a particular condition. For
LTCHs, the debate centers around (1) the standards that should be imposed in order to
qualify as an LTCH; and (2) the criteria that should define the level of care provided by
LTCHs. Specific rate setting proposals concerning appropriate adjustments within the
new prospective payment system (established in 2002) and the adequacy of Medicare
payments have generated animated discussion as well.
Recommendations from the Medicare Payment Advisory Commission (MedPAC)
regarding patient and facility criteria for LTCHs or, most recently, supporting a 0% update
Congressional Research Service ˜ The Library of Congress
to rate year (RY) 2007 Medicare payments have attracted attention. Also, past actions
from the Centers for Medicare and Medicaid Services (CMS) regarding requirements
imposed on LTCHs that are physically located as part of other providers (also known as
hospitals-within-hospitals, or HwHs), as well as RY2007 proposals for payments for
short-stay admissions, have elicited concern among providers and their advocates.
Identifying Appropriate Post-Acute Care Settings
The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of
2000 (BIPA) required the Secretary to submit a report to Congress by January 1, 2005, on
the development of standard instruments for the assessment of the health and functional
status of Medicare patients who receive hospital, rehabilitation, SNF, home health,
therapy, or other specified services. The report has not yet been received. The
Subcommittee on Health within the Committee on Ways and Means held a hearing on
June 16, 2005 to examine what progress had been made in that area and to discuss the
status of and solicit recommendations on Medicare’s current post-acute payment systems.
In that hearing, CMS presented an overview of several different agency initiatives
that may result in the development of a standard PAI, common health information
terminology, and consistent coding practices.1 MedPAC and industry representatives also
testified on different issues affecting LTCHs.2 MedPAC discussed the problems with
integrating the current post-acute patient assessment tools and indicated that a new PAI
is needed.3 As part of its testimony, MedPAC reiterated its recommendation (made in
2004) that LTCHs be defined by facility and patient criteria to ensure the patients
admitted to these facilities have medically complex conditions and a good chance for
improvement.4 MedPAC also recommended that quality improvement organizations
(QIOs) review LTCH admissions for medical necessity and monitor facilities’ compliance
with yet-to-be-determined LTCH criteria.5 Testimony from one group representing the
LTCH industry spoke to the critical yet distinct roles of each provider in the post acute
care sector, generally supported efforts to develop a comprehensive PAI, and supported
See [http://waysandmeans.house.gov/hearings.asp?formmode=view&id=2790] for testimony
delivered for CMS.
The Government Accountability Office also testified on its work with respect to the appropriate
classification criteria for IRFs.
See MedPAC, Report to the Congress: Issues in a Modernized Medicare Program, June 2005,
pp.114-119, for more information of the existing PAIs.
MedPAC considered facility-level criteria such as staffing, patient evaluation and review
processes, and mix of patients as characteristic of this level of care. Relevant patient-level
criteria include specific clinical characteristics (such as open wounds) and treatment modalities
(such as need for frequent intravenous fluid or medication). For more information, see MedPAC,
Report to the Congress: New Approaches in Medicare, June 2004, pp. 121-135.
MedPAC discussed interim measures that could be adopted until a common PAI is developed,
such as admission criteria for LTCHs, front-end assessments of acute care patients prior to postacute care admissions, or care coordination by a case manager. See [http://waysandmeans.
the principle that patients be cared and paid for in the appropriate setting.6 Although
generally supportive, another group representing LTCH providers focused on the
challenges inherent in creating appropriate patient assessment tools and using program
safeguard methods, including QIOs, to ensure cost-effective, appropriate care in safe
A post-acute care demonstration project mandated by the Deficit Reduction Act of
2005 (DRA) may eventually help address some of the broader changes necessary to
encourage the cost-effective provision of post-acute care in the most appropriate setting.
As mandated by DRA, the Secretary of Health and Human Services (HHS) is required to
establish a three-year demonstration program to better understand costs and outcomes
across different post-acute care sites. Under the program, individuals receiving treatment
for specified diagnoses will receive a comprehensive assessment on the date of discharge
from an acute care hospital (paid under Medicare’s inpatient prospective payment system,
or IPPS). The assessment will evaluate clinical characteristics and patients’ needs in
order to determine appropriate placement of the patient in a post-acute care site. The
same standardized patient assessment instrument will be used across all post-acute care
sites to measure functional status and other factors. The Secretary is required to submit
a report to Congress on results and recommendations no later than six months after the
end of the program. DRA authorized the transfer of $6 million from Medicare’s Hospital
Insurance Trust Fund to carry out the demonstration.
Defining Entities as LTCHs
In the meantime, certain operational issues have come to the forefront. A longsimmering issue concerns the establishment of an LTCH operating as part of another
provider.8 Although the Medicare statute does explicitly address the exclusion of distinctpart psychiatric and rehabilitation units of other hospitals from the inpatient prospective
payment system (IPPS) used to pay acute care hospitals, no comparable provision
excludes long-term care units in those hospitals from IPPS. Until recently, HwHs have
accounted for much of the growth in long-term care hospitals.9 In 2004, CMS acted to
tighten the requirements by which HwHs can be established to function as independent
LTCHs.10 As established in the final rule, Medicare will continue to provide LTCH
payments for patients referred from other than the host hospital. With certain exceptions,
See [http://waysandmeans.house.gov/hearings.asp?formmode=view&id=2795] for testimony
delivered on behalf of the Acute Long Term Hospital Association (ALTHA).
A medical record review performed by QIOs found that 29% of 1,400 randomly selected LTCH
Medicare admissions in 2004 did not need LTCH hospital-level care.
[http://waysandmeans.house.gov/hearings.asp?formmode=view&id=2794] for testimony
delivered on behalf of the National Association of Long Term Hospitals (NALTH).
The Prospective Payment Assessment Commission (ProPAC, a precursor to MedPAC)
recommended that growth in the number of HwHs should be monitored in order to evaluate
whether Medicare’s certification requirements should be changed. ProPAC, Report and
Recommendations to the Congress, March 1, 1997, p. 59.
As of October 2005, 175 of the 376 LTCs were HwHs. However, according to CMS, since
October 1, 2004, 22 of the 25 newly-established LTCHs are freestanding.
This policy applies to satellite LTCHs established on the same campus of other providers.
as long as the percentage of referrals from the host hospital is less than or equal to 25%
(or the otherwise applicable threshold), the LTCH will be paid under the LTCH-PPS for
the referrals from the host hospital.11 If the host hospital referrals exceed the applicable
transition threshold, LTCH will be paid the lower of the LTCH-PPS payment or the IPPS
payment for those cases that exceed that threshold. The policy would be phased in over
a four-year transition period for existing LTCHs and those LTCHs under formation.
Both industry advocates and members of Congress have expressed reservations with
respect to the wisdom of this policy. Generally, their concerns are framed in terms of its
effect on beneficiaries’ access to needed LTCH care. MedPAC (among others) has
expressed concern that the HwH policy could lead to an inequitable situation for colocated LTCHs. Freestanding LTCHs also have strong relationships with acute care
hospitals. Although, on average, LTCH HwHs receive 61% of their patients from their
host hospitals, on average, freestanding LTCHs receive 42% of their patients from their
primary referring acute care hospital. Yet the 25% threshold applies only to LTCH
HwHs. As mentioned in the proposed LTCH rule concerning rate year (RY) 2007
changes, CMS remains concerned about monitoring the “functional separateness”
between LTCHs and referring acute care hospitals. According to CMS, analyses of recent
LTCH claims appear to confirm concerns (attributed to MedPAC) that the industry may
be circumventing the intent of the 25% payment threshold by creating freestanding instead
of colocated LTCHs.12 CMS is considering, but has not proposed, appropriate payment
adjustments to address this issue. Moreover, CMS warned of potentially fraudulent
referral arrangements between acute care hospitals and LTCHs (HwH, satellite, and
freestanding entities) that could warrant an investigation by the Office of the Inspector
Changing Rate-Setting Methods
Other issues have been raised about changes that have been proposed for the
RY2007 Medicare LTCH payment methodology.13 As part of the prospective payment
system for LTCHs (LTCH-PPS), CMS has established a special payment policy for shortstay outlier cases (SSO cases). These are cases that have a length of stay less than or
equal to five-sixths of the geometric average length of stay (ALOS) of the patient category
to which the case is assigned.14 Under the existing SSO policy, the per-discharge payment
The alternative payment methodology would apply to HwHs within rural acute care hospitals
that have a majority (51%) of host hospital referrals. The threshold for single urban or dominant
urban HwHs (those with one-quarter or more of all acute care cases) would be set between 25%
and 50%, depending upon the host’s percentage of total Medicare discharges for like hospitals
in the metropolitan statistical area (MSA). Patients transferred from the host hospital who have
already qualified as IPPS outliers would not be considered as host hospital referrals.
FY2004 and FY2005 Medicare data indicate that the 63.7% of the 201 freestanding LTCHs
receive at least 25% of their Medicare discharges from a single IPPS hospital; 23.9% of those
freestanding LTCHs receive at least 50% of their admissions from one IPPS hospital; 6.7% of
the freestanding LTCHs receive 75% or more of their Medicare discharges from one IPPS
hospital — 71 Federal Register 4698, January 27, 2006.
71 Federal Register 4647, January 27, 2006.
The LTCH-PPS uses long-term care diagnosis-related groups (LTC-DRGs) as its patient
under the LTCH PPS is the lesser of 120% of the estimated cost of the case, 120% of the
LTC-DRG specific per diem amount multiplied by the LOS of that discharge, or the full
LTC-DRG payment.15 CMS is proposing two changes to the current policy: (1) to reduce
the current adjustment from 120% of the costs of the case to 100% of the costs of the case
for discharges occurring on or after July 1, 2006, and (2) to add a fourth payment method
whereby an LTCH would receive a payment comparable to that in IPPS. A key fact is
that CMS projects a decline of 11.4% for all LTCH payments (or a savings of
approximately $440 million in RY2007) as a result of the SSO change.
CMS believes that many of the SSO cases could have been treated more
appropriately in an acute care or IPPS hospital. In FY2003, 80% of all LTCH FY2003
admissions came from acute care hospitals. CMS analysis of FY2004 LTCH claims data
indicates that approximately 37% of LTCH discharges are paid as SSOs. Although this
represents a decline from 48.4% found at the outset of the LTCH PPS, the current
percentage is seen as inappropriately high. Also, the current payment adjustment for SSO
cases is seen as providing a financial incentive to inappropriately admit short-stay
patients. Because many of these cases are paid as SSOs, CMS believes that the LTCH
patients who still need acute-level care may indicate a premature and inappropriate
discharge from the acute care hospital, an inappropriate admission to the LTCH, and a
second, unnecessary Medicare payment to the LTCH.16
Among other changes, in the proposed rule, CMS discussed the use of a different
market basket (MB) as part of deciding the rate increase for the following year. This MB
is based on FY2002 cost reports from IRFs, psychiatric hospitals, and LTCHs (RPL-MB),
and is now used as part of the IRF payment system. Rather than proposing the 3.6%
increase in payments currently indicated by the RPL-MB, CMS has recommended a 0%
update to the LTCH base rate for RY2007. This recommendation is attributed to certain
trends such as recent growth in the number of LTCHs,17 growth in Medicare payments per
discharge relative to costs per discharge,18 and changes in coding and reported case-mix.19
The regulation affecting the majority of LTCHs is included at 42 Code of Federal Regulation
(CFR) 412.529. Generally, most LTCHs are defined by statute as having an ALOS of greater
than 25 days as specified by Section 1886(d)(1)(B)(iv)(I) of the Social Security Act (the Act).
There is one subclause (II) LTCH, authorized by Section 1886(d)(1)(B)(iv)(II) of the Act, which
is subject to different qualification criteria in that it must have first been excluded as an LTCH
in calendar year (CY) 1986, have an average inpatient LOS of greater than 20 days, and
demonstrate that 80% or more of its annual Medicare inpatient discharges in the 12-month costreporting period ending in FY1997 had a principal diagnosis that reflects a finding of neoplastic
disease. The subclause II LTCH is treated differently, and receives higher payments for SSO
cases during the transition period.
Estimated outlier payments are limited to 8% of total projected LTCH spending. Since the
SSO proposal will lower total payments, CMS proposed to increase the outlier threshold from
$10,501 in FY2005 to $18,489 in RY2006 to limit outlier payments to 8% of total spending.
The number of LTCHs has almost doubled over the past three years, from 200 in FY2003 to
378 in FY2005.
According to CMS, payments to LTCHs increased more than two times as much as the costs
Moreover, according to CMS, Medicare margins were at 8.8% in 2003 (the first year of
LTCH-PPS), and increased to a preliminary estimate of 11.7% in FY2004. In the period
prior to the implementation of LTCH PPS (from FY1996 through FY2002), Medicare
margins ranged from between a minimum of -2.2% in FY2002 to a maximum of 2.9% in
In March 2006, for the first time, MedPAC examined the adequacy of LTCH
payment rates in order to recommend an update for the upcoming year. MedPAC found
that Medicare payments for LTCH services are more than adequate, and recommended
that the update to LTCH payment rates be eliminated for 2007.20 The MedPAC
conclusion was based on the following factors:
Increased access to care as indirectly established by the 13% annual
increase in Medicare beneficiaries who use an LTCH each year from
2001 to 2004;
Increased number of LTCHs as measured by the 9% annual increase
in LTCHs from 2001 to 200421;
Increased provision of Medicare services as measured by the 12%
annual increase in services from 2001 to 2004 while Medicare spending
increased at more than double that rate (25% per year);
Mixed evidence on the current quality of LTCH care as indicated by
the decrease in LTCH deaths and acute care hospital readmissions from
2001 to 2004 countered by a worsening of patient safety measures over
the same period22;
Adequate access to capital, as demonstrated by for-profit LTCHs’
ability to borrow, and the rapid entry of both for-profit and nonprofit
LTCHs into Medicare;
Adequate Medicare margins as indicated by the 9% Medicare margin
in 2004 and the projected 7.8% margin for 2006 (which does not include
proposed changes in the RY2007 payments).
increased from FY2002 to FY2003. Medicare payments per discharge increased about 17%,
while costs increased by only 8% from FY2002 to FY2003, the first year of LTCH PPS.
Using certain assumptions, CMS estimates that 4% of the LTCH payments received from
FY2001 to FY2003 could be attributed to improvements to documentation and coding rather than
to the increase in patients’ severity of illness.
MedPAC, Report to the Congress: Medicare Payment Policy, March 2006, p. 207.
During the same years the LTCH HwH increased more than twice as fast (14% per year) as
freestanding LTCHs (6% per year).
MedPAC looks at certain Agency for Healthcare Research and Quality (AHRQ) patient safety
indicators for acute care hospitals, such as the incidence of decubitus ulcers, infection due to
medical care, postoperative pulmonary embolism or deep vein thrombosis, and postoperative
sepsis to identify potential preventable adverse events that might suggest compromised quality
of care. Incidence of three of the four measures increased significantly from 2003 to 2004.