[Federal Register: August 30, 2002 (Volume 67, Number 169)]
[Rules and Regulations]
[Page 55953-56002]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30au02-21]
To assist readers in referencing sections contained in this
html document, we have provided a linked table of contents.
[[Page 55953]]
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Part III
Department of Health and Human Services
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Centers for Medicare & Medicaid Services
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42 CFR Parts 412, 413, and 476
Medicare Program; Prospective Payment System for Long-Term Care
Hospitals: Implementation and FY 2003 Rates; Final Rule
[[Page 55954]]
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DEPARTMENT OF HEALTH AND HUMAN SERVICES
Centers for Medicare & Medicaid Services
42 CFR Parts 412, 413, and 476
[CMS-1177-F]
RIN 0938-AK69
Medicare Program; Prospective Payment System for Long-Term Care
Hospitals: Implementation and FY 2003 Rates
AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.
ACTION: Final rule.
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SUMMARY: This final rule establishes a prospective payment system for
Medicare payment of inpatient hospital services furnished by long-term
care hospitals (LTCHs) described in section 1886(d)(1)(B)(iv) of the
Social Security Act (the Act). This final rule implements section 123
of the Medicare, Medicaid, and SCHIP [State Children's Health Insurance
Program] Balanced Budget Refinement Act of 1999 (BBRA) and section
307(b) of the Medicare, Medicaid, and SCHIP Benefits Improvement and
Protection Act of 2000 (BIPA). Section 123 of the BBRA directs the
Secretary to develop and implement a prospective payment system for
LTCHs. The prospective payment system described in this final rule
replaces the reasonable cost-based payment system under which LTCHs are
currently paid.
EFFECTIVE DATE: The provisions of this final rule are effective on
October 1, 2002.
FOR FURTHER INFORMATION CONTACT:
Tzvi Hefter, (410) 786-4487 (General information)
Judy Richter, (410) 786-2590 (General information, transition payments,
payment adjustments, and onsite discharges and readmissions)
Michele Hudson, (410) 786-5490 (Calculation of the payment rates,
relative weights and case-mix index, update factors, and payment
adjustments)
Tiffany Eggers, (410) 786-0400 (Short-stay outliers, interrupted stays)
Ann Fagan, (410) 786-5662 (Patient classification system)
Miechal Lefkowitz, (410) 786-5316 (High-cost outliers, capital
payments, budget neutrality, market basket, and data sources)
Linda McKenna, (410) 786-4537 (Payment adjustments and transition
period)
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To assist readers in referencing sections contained in this
preamble, we are providing the following table of contents.
Table of Contents
I. General Background
II. Publication of Proposed Rulemaking
III. Overview of the Current Payment System for LTCHs
A. Exclusion of Certain Facilities from the Acute Care Hospital
Inpatient Prospective Payment System
B. Requirements for LTCHs to be Excluded from the Acute Care
Hospital Inpatient Prospective Payment System
C. Payment System Requirements Prior to the BBA
D. Effects of the Current Payment System
E. Research and Discussion of a Prospective Payment System for
LTCHs Prior to the BBA
IV. Requirements of the BBA, BBRA, and BIPA for LTCHs
A. Provisions of the Current Payment System
1. BBA
2. BBRA
3. BIPA
B. Provisions for a LTCH Prospective Payment System
1. BBA
2. BBRA
3. BIPA
V. Research and Data Supporting the Establishment of the LTCH
Prospective Payment System
A. Legislative Requirements
B. Description of Sources of Research Data
C. The Universe of LTCHs
1. Background Issues
2. General Medicare Policies
3. Exclusion from the Acute Care Hospital Inpatient Prospective
Payment System
4. Geographic Distribution
5. Characteristics by Date of Medicare Participation
6. Hospitals-Within-Hospitals and Satellite Facilities
7. Specialty Groups of LTCHs by Patient Mix
8. Sources and Destinations of LTCH Patients
9. LTCHs and Patterns Among Postacute Care Facilities
D. Overview of Systems Analysis for the LTCH Prospective Payment
System
E. Evaluation of DRG-Based Patient Classification Systems
VI. Recommendations by MedPAC for a LTCH Prospective Payment System
VII. Evaluated Options for the Prospective Payment System for LTCHs
VIII. Elements of the LTCH Prospective Payment System
A. Overview of the System
B. Applicability
1. Criteria for Classification
2. Change in the Average 25-Day Total Inpatient Stay Requirement
3. LTCHs Not Subject to the LTCH Prospective Payment System
C. Limitation on Charges to Beneficiaries
D. Medical Review Requirements
E. Furnishing of Inpatient Hospital Services Directly or Under
Arrangements
F. Reporting and Recordkeeping Requirements
G. Transition Period for Implementation of the LTCH Prospective
Payment System
H. Implementation Procedures
IX. Long-Term Care Diagnosis-Related Group (LTC-DRG) Classifications
A. Background
B. Historical Exclusion of LTCHs
C. Patient Classifications by DRGs
1. Objectives of the Classification System
2. DRGs and Medicare Payments
D. LTC-DRG Classification System for LTCHs
E. ICD-9-CM Coding System
1. Historical Use of ICD-9-CM Codes
2. Uniform Hospital Discharge Data Set (UHDDS) Definitions
3. Maintenance of the ICD-9-CM Coding System
4. Coding Rules and Use of ICD-9-CM Codes in LTCHs
X. Payment System for LTCHs
A. Development of the LTC-DRG Relative Weights
1. Overview of Development of the LTC-DRG Relative Weights
2. Steps for Calculating the Relative Weights
B. Special Cases: General
C. Special Cases: Short-Stay Outliers
D. Discussion of Proposed Policy on Payment for Very Short-Stay
Discharges
E. Special Cases: Interrupted Stay
F. Other Special Cases
G. Onsite Discharges and Readmittances
H. Additional Issues for Onsite Facilities
I. Monitoring System
J. Payment Adjustments
1. Area Wage Adjustment
2. Adjustment for Geographic Reclassification
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3. Adjustment for Disproportionate Share of Low-Income Patients
4. Adjustment for Indirect Teaching Costs
5. Cost-of-Living Adjustment (COLA) for Alaska and Hawaii
6. Adjustment for High-Cost Outliers
K. Calculation of the Standard Federal Payment Rate
1. Overview of the Development of the Standard Payment Rate
2. Development of the Standard Federal Payment Rate
L. Development of the Federal Prospective Payments
M. Computing the Adjusted Federal Prospective Payments
N. Transition Period
O. Payments to New LTCHs
P. Method of Payment
XI. Provisions of the Final Rule
XII. Regulatory Impact Analysis
A. Introduction
1. Executive Order 12866
2. Regulatory Flexibility Act (RFA)
3. Impact on Rural Hospitals
4. Unfunded Mandates
5. Federalism
B. Anticipated Effects
1. Budgetary Impact
2. Impact on Providers
3. Calculation of Current Payments
4. Calculation of Prospective Payments
5. Results
6. Effect on the Medicare Program
7. Effect on Medicare Beneficiaries
8. Computer Hardware and Software
C. Alternatives Considered
D. Executive Order 12866
XIII. Collection of Information Requirements
Regulations Text
Addendum--Tables
Appendix A--Market Basket for LTCHs
Appendix B--Update Framework
Acronyms
Because of the many terms to which we refer by acronym in this
final rule, we are listing the acronyms used and their corresponding
terms in alphabetical order below:
APR-DRGs All patient-refined, diagnosis-related groups
BBA Balanced Budget Act of 1997, Public Law 105-33
BBRA Medicare, Medicaid and SCHIP [State Children's Health
Insurance Program] Balanced Budget Refinement Act of 1999, Public Law
106-113
BIPA Medicare, Medicaid, and SCHIP [State Children's Health
Insurance Program] Benefits Improvement and Protection Act of 2000,
Public Law 106-554
CMGs Case-mix groups
CMI Case-mix index
CMS Centers for Medicare & Medicaid Services
DRGs Diagnosis-related groups
FY Federal fiscal year
HCRIS Hospital Cost Report Information System
HHA Home health agency
HIPAA Health Insurance Portability and Accountability Act, Public
Law 104-191
IRF Inpatient rehabilitation facility
LTC-DRG Long-term care diagnosis-related group
LTCH Long-term care hospital
MDCN Medicare Data Collection Network
MedPAC Medicare Payment Advisory Commission
MedPAR Medicare provider analysis and review file
OSCAR Online Survey Certification and Reporting (System)
ProPAC Prospective Payment Assessment Commission
QIO Quality Improvement Organization (formerly Peer Review
organization (PRO))
SNF Skilled nursing facility
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248
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I. General Background
When the Medicare statute was originally enacted in 1965, Medicare
payment for hospital inpatient services was based on the reasonable
costs incurred in furnishing services to Medicare beneficiaries.
Section 223 of the Social Security Act Amendments of 1972 (Pub. L. 92-
603) amended section 1861(v)(1) of the Social Security Act (the Act) to
set forth limits on reasonable costs for hospital inpatient services.
Section 101(a) of the Tax Equity and Fiscal Responsibility Act of 1982
(TEFRA) (Pub. L. 97-48) amended the Medicare statute to limit payment
by placing a cap on allowable costs per discharge. Section 601 of the
Social Security Amendments of 1983 (Pub. L. 98-21) added section
1886(d) to the Act that replaced the reasonable cost-based payment
system for most hospital inpatient services. Section 1886(d) of the Act
provides for a prospective payment system for the operating costs of
acute care hospital inpatient stays, effective with hospital cost
reporting periods beginning on or after October 1, 1983.
Although most hospital inpatient services became subject to the
acute care hospital inpatient prospective payment system, certain
specialty hospitals are excluded from that system. These hospitals
included long-term care hospitals (LTCHs), rehabilitation and
psychiatric hospitals, rehabilitation and psychiatric units of acute
care hospitals, and children's hospitals. Cancer hospitals were added
to the list of excluded hospitals by section 6004(a) of the Omnibus
Budget Reconciliation Act of 1989 (Pub. L. 101-239).
Subsequent to the implementation of the acute care hospital
inpatient prospective payment system, both the number of excluded
hospitals and Medicare payments to these hospitals grew rapidly.
Consequently, Congress enacted various provisions in the Balanced
Budget Act (BBA) (Pub. L. 105-33), the Medicare, Medicaid, and SCHIP
[State Children's Health Insurance Program] Balanced Budget Refinement
Act of 1999 (BBRA) (Pub. L. 106-113), and the Medicare, Medicaid, and
SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) (Pub. L.
106-554) to provide for the development and implementation of a
prospective payment system for the following excluded hospitals:
Rehabilitation hospitals (including units in acute care
hospitals).
Psychiatric hospitals (including units in acute care
hospitals.
LTCHs.
Section 4422 of the BBA mandated that the Secretary develop a
legislative proposal, for presentation to the Congress by October 1,
1999, for a case-mix adjusted LTCH prospective payment system under the
Medicare program. This system was to include an adequate patient
classification system that reflects the differences in patient resource
use and costs among LTCHs. Furthermore, in developing the legislative
proposal for the prospective payment system, the Secretary was to
consider several payment methodologies, including the feasibility of an
expansion of the acute care hospital inpatient prospective payment
system (diagnosis-related group (DRG) based system) established under
section 1886(d) of the Act.
In the interim, section 4414 of the BBA imposed national limits (or
caps) on hospital-specific target amounts (that is, the annual per
discharge limit) for these excluded hospitals until cost reporting
periods beginning on or after October 1, 2002. At the same time that
the Congress modified the payment system based on limits on target
amounts, it also included a provision in the BBA to require the
Secretary to develop a legislative proposal for establishing a
prospective payment system for LTCHs.
With the passage of the BBRA in November 1999, in section 122, the
Congress refined some policies of the BBA before the implementation of
the prospective payment systems for LTCHs and psychiatric hospitals and
units. Section 123 of the BBRA further requires that the Secretary
develop a per discharge, DRG-based system for LTCHs and requires that
this system be described in a report to the Congress by
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October 1, 2001, and be in place by October 1, 2002. Section 307(b)(1)
of BIPA modified the BBRA's requirements for the prospective payment
system for LTCHs by mandating that the Secretary'' * * * shall examine
the feasibility and the impact of basing payment under such a system on
the use of existing (or refined) hospital diagnosis-related groups
(DRGs) that have been modified to account for different resource use of
long-term care hospital patients as well as the use of the most
recently available hospital discharge data.'' Furthermore, section
307(b)(1) of BIPA provided that the Secretary'' * * * shall examine and
may provide for appropriate adjustments to the long-term hospital
prospective payment system, including adjustments to DRG weights, area
wage adjustments, geographic reclassification, outliers, updates, and a
disproportionate share adjustment * * *.'' In the event that the
Secretary is unable to implement the LTCH prospective payment system by
October 1, 2002, section 307(b)(2) of BIPA requires the Secretary to
implement a prospective payment system using the existing hospital
DRGs, modified when feasible, to account for resource use by LTCHs.
(We note that, even though the LTCH prospective payment system in
this final rule is effective for cost reporting periods that begin on
or after October 1, 2002, we will not have computer system changes in
place that are necessary to accommodate claims processing and payment
under the prospective payment system until after January 1, 2003. As of
October 16, 2002, a LTCH that is required to comply with the HIPAA
Administrative Simplification Standards must submit electronic claims
to the fiscal intermediary in compliance with 42 CFR 162.1002 and 45
CFR 162.1102, using the ICD-9-CM coding system, unless the LTCH obtains
an extension in compliance with the Administrative Compliance Act (Pub.
L. 107-105). Beginning October 16, 2003, LTCHs that obtained an
extension and that are required to comply with the HIPAA Administrative
Simplification Standards must start submitting electronic claims in
compliance with the HIPPA regulations cited above, among others. We
intend that, as of January 1, 2003, the fiscal intermediary will
reconcile the payment amounts that have been made to LTCHs for all
covered inpatient hospital services furnished to Medicare beneficiaries
from cost reporting periods that begin on or after October 1, 2002
until the date of the systems implementation, with the amounts that are
payable under the LTCH prospective payment methodology. Since LTCHs
will receive payment under the LTCH prospective payment system at the
start of their first cost reporting periods that begin on or after
October 1, 2002, only those LTCHs with cost reporting periods starting
October 1, 2002 until the date of the systems implementation will
experience the payment reconciliation necessitated by this differential
period. We also emphasize that the claims submission procedure of using
ICD-9-CM codes will not change following the systems implementation of
the LTCH prospective payment system. A detailed discussion on the
operational procedures for this differential period appears in sections
VIII.H. and X.N. of this final rule.)
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II. Publication of Proposed Rulemaking
On March 22, 2002, we published a proposed rule in the Federal
Register (67 FR 13416) that set forth the proposed Medicare prospective
payment system for LTCHs as authorized under Public Law 106-113 and
Public Law 106-554. In accordance with the requirements of section 123
of Public Law 106-113, as modified by section 307(b) of Public Law 106-
554, we proposed to implement a prospective payment system for LTCHs to
replace the current reasonable cost-based payment system under TEFRA.
The proposed prospective payment system used information from LTCH
patient records to classify patients into distinct DRGs based on
clinical characteristics and expected resource needs. Separate payments
would be calculated for each DRG with additional adjustments applied.
In the proposed rule and in this final rule, we discuss the
development, policies, and implementation of the LTCH prospective
payment system. These discussions in this final rule include the
following:
An overview of the current payment system for LTCHs
(section III.).
A discussion of the statutory requirements for developing
and implementing a LTCH prospective payment system (section IV.).
A discussion of research findings on LTCHs (section V.).
A detailed discussion of the LTCH prospective payment
system, including the patient classification system (section IX.),
relative weights (section X.A.), payment rates (section X.B.),
additional payments (section X.C.), and the budget-neutrality
requirements (section X.F.) mandated by section 123 of Pub. L. 106-113.
An analysis of the estimated impact of the LTCH
prospective payment system on the Federal budget and LTCHs (section
XII.).
Changes to existing regulations and the establishment of
regulations in 42 CFR Chapter IV to implement the LTCH prospective
payment system.
We designed the prospective payment system for LTCHs with the
following objectives:
To base the prospective payment system on an analysis of
the best information and data available.
To establish a payment model using our experience in
implementing other prospective payment systems.
To provide incentives to control costs and to furnish
services as efficiently as possible.
To base payment on clinically coherent categories and to
appropriately reflect average resource needs across different
categories.
To minimize opportunities and incentives for
inappropriately maximizing Medicare payments.
To establish a system that is beneficiary centered by
formulating procedures for quality monitoring.
To develop a system that is administratively feasible.
We received a total of 52 timely items of correspondence containing
multiple comments on the proposed rule. The major issues addressed by
the commenters included: the criteria for determining the 25-day
average length of stay for LTCHs; payment adjustments for area wage
differences; payments for special cases of short stays and interrupted
stays; and data sources used to compute the prospective payments.
Summaries of the public comments received and our responses to those
comments are set forth below under the appropriate subject heading.
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III. Overview of the Current Payment System for LTCHs
A. Exclusion of Certain Facilities From the Acute Care Hospital
Inpatient Prospective Payment System
Although payment for operating costs of most hospital inpatient
services became subject to a prospective payment system under the
Social Security Amendments of 1983 (Pub. L. 98-21), which added section
1886(d) to the Act, certain types of hospitals and units were excluded
from that payment system. Section 1886(d)(1)(B) of the Act lists the
following classes of excluded hospitals:
Psychiatric hospitals and units.
Rehabilitation hospitals and units.
LTCHs.
Children's hospitals.
Effective with cost reporting periods beginning on or after October
1, 1989,
[[Page 55957]]
cancer hospitals were added to this list by section 6004(a) of the
Omnibus Budget Reconciliation Act of 1989 (Pub. L. 101-239).
The acute care hospital inpatient prospective payment system is a
system of average-based payments that assumes that some patient stays
will consume more resources than the typical stay, while others will
demand fewer resources. Therefore, an efficiently operated hospital
should be able to deliver care to its Medicare patients for an overall
cost that is at or below the amount paid under the acute care hospital
inpatient prospective payment system. In a report to the Congress,
``Hospital Prospective Payment for Medicare (1982),'' the Department of
Health and Human Services stated that the ``467 DRGs were not designed
to account for these types of treatment'' found in the four classes of
excluded hospitals, and noted that ``including these hospitals will
result in criticism and their application to these hospitals would be
inaccurate and unfair.''
The Congress excluded these hospitals from the acute care hospital
inpatient prospective payment system because they typically treated
cases that involved stays that were, on average, longer or more costly
than would be predicted by the DRG system. The legislative history of
the 1983 Social Security Amendments stated that the ``DRG system was
developed for short-term acute care general hospitals and as currently
constructed does not adequately take into account special circumstances
of diagnoses requiring long stays.'' (Report of the Committee on Ways
and Means, U.S. House of Representatives, to Accompany HR 1900, H.R.
Rept. No. 98-25, at 141 (1983)). Therefore, these hospitals could be
systemically underpaid if the same DRG system were applied to them.
Following enactment in April 1983 of the Social Security Amendments
of 1983, we implemented the acute care hospital inpatient prospective
payment system on October 1, 1983, including the initial publication in
the Federal Register of the rules and regulations for the acute care
hospital inpatient prospective payment system: the September 1, 1983
interim final rule (48 FR 39752) and the January 3, 1984 final rule (49
FR 234). Updates and modifications of the regulations have been
published annually in the Federal Register. We also developed payment
policy for hospitals that were seeking to be excluded from the acute
care hospital inpatient prospective payment system. The regulations
concerning exclusion of LTCHs from the acute care hospital inpatient
prospective payment system are found in 42 CFR Part 412, Subpart B.
B. Requirements for LTCHs to be Excluded From the Acute Care Hospital
Inpatient Prospective Payment System
Under section 1886(d)(1)(B) of the Act, the prospective payment
system for hospital inpatient operating costs set forth in section
1886(d) of the Act does not apply to several specified types of
hospitals, including LTCHs, which are defined in section
1886(d)(1)(B)(iv)(I) of the Act as ``* * * a hospital which has an
average inpatient length of stay (as determined by the Secretary) of
greater than 25 days.'' Section 4417(b)(1)(B) of the BBA added section
1886(d)(1)(B)(iv)(II) to the Act, which also provides another
definition of LTCHs: specifically, a hospital that was first excluded
in 1986 that has an average inpatient length of stay (as determined by
the Secretary) of greater than 20 days and has 80 percent or more of
its annual Medicare inpatient discharges with a principal diagnosis of
neoplastic disease in the 12-month cost reporting period ending in FY
1997.
Implementing regulations at Sec. 405.471(c)(5) (now Sec. 412.23(e))
require the facility to have a provider agreement with Medicare to
participate as a hospital, and an average inpatient length of stay
greater than 25 days as calculated under the following formula: the
average length of stay is calculated by dividing the total number of
inpatient days (excluding leave of absence or pass days) for all
patients by the total number of discharges for the hospital's most
recent complete cost reporting period. The determination of whether or
not a hospital qualifies as an LTCH is based on the hospital's most
recently filed cost report, or if a change in the hospital's average
length of stay is indicated, by the same method for the immediately
preceding 6-month period (Sec. 412.23(e)(3)). (Requirements for
hospitals seeking classification as LTCHs that have undergone a change
in ownership, as described in Sec. 489.18, are set forth in
Sec. 412.23(e)(3)(iii).)
C. Payment System Requirements Prior to the BBA
Hospitals that are excluded from the acute care hospital inpatient
prospective payment system under section 1886(d)(1)(B) of the Act are
paid for inpatient operating costs under the provisions of Public Law
97-248 (TEFRA) that are found in section 1886(b) of the Act and
implemented in regulations at 42 CFR part 413. Public Law 97-248
established payments based on hospital-specific limits for inpatient
operating costs. A ceiling on payments to hospitals excluded from the
acute care hospital inpatient prospective payment system is determined
by calculating the product of a facility's base year costs (the year on
which its target reimbursement limit is based) per discharge, updated
to the current year by a rate-of-increase percentage, and multiplied by
the number of total current year discharges. (A detailed discussion of
target amount payment limits under Public Law 97-248 can be found in
the September 1, 1983 final rule published in the Federal Register (48
FR 39746).)
The base year for a facility varied, depending on when the facility
was initially determined to be a prospective payment system-excluded
provider. The base year for facilities that were established before the
implementation of Public Law 97-248 was 1982, when Public Law 97-248
was enacted. For facilities established after implementation of Public
Law 97-248 (section 1886(b) of the Act), we originally provided in the
regulations for payment to these facilities for their full
``reasonable'' costs for their first 3 cost reporting years, and
allowed the facilities to choose which of those years would be used in
the future to determine their target limit. This ``new provider''
period was later shortened to 2 cost reporting years (Sec. 413.40(f)(1)
(1992)), and we designated the second cost reporting year as the cost
reporting year used to determine the hospital's per discharge target
amount.
Excluded facilities whose costs were below their target amounts
received bonus payments equal to the lesser of half of the difference
between costs and the target amount, up to a maximum of 5 percent of
the target amount, or the hospital's costs. For excluded facilities
whose costs exceeded their target amounts, Medicare provided relief
payments equal to half of the amount by which the hospital's costs
exceeded the target amount up to 10 percent of the target amount.
Excluded facilities that experienced a more significant increase in
patient acuity could also apply for an additional amount under the
regulations for Medicare exception payments (Sec. 413.40(d)).
D. Effects of the Current Payment System
Use of postacute care services has grown rapidly in recent years
since the implementation of the acute care hospital inpatient
prospective payment system. The average length of stay in acute care
hospitals has decreased, and patients are increasingly being discharged
to postacute care settings such as LTCHs, skilled nursing facilities
[[Page 55958]]
(SNFs), home health agencies (HHAs), and inpatient rehabilitation
facilities (IRFs) to complete their course of treatment. The increased
use of postacute care providers, including hospitals excluded from the
acute care hospital inpatient prospective payment system, has resulted
in the rapid growth in Medicare payments to these hospitals in recent
years. In addition, there has been a significant increase in the number
of LTCHs. In 1991, there were 91 LTCHs; in 1994, 155 LTCHs; in 1999,
225 LTCHs; in December 2000, 252 LTCHs; and in November 2001, 270
LTCHs. Payments to postacute care providers were among the fastest
growing providers under the Medicare program throughout the 1990s.
(Prospective Payment Assessment Commission (ProPAC) June 1996 Report to
Congress, p. 91.)
LTCHs have experienced faster growth in the number of facilities
and Medicare program payments than any other category of prospective
payment system-excluded provider. In its June 1996 Report to Congress,
ProPAC found that, from 1990 to 1993, payment to rehabilitation
facilities rose about 25 percent per year, while payments to LTCHs
increased 33 percent annually (p. 92). ProPAC also found that, from
1991 to 1995, the number of rehabilitation facilities increased 21
percent (from 852 in 1991 to 1,029 in 1995), while the number of LTCHs
increased 93 percent (from 91 in 1991 to 176 in 1995) (p. 93). The best
available Hospital Cost Report Information System (HCRIS) data indicate
$398 million in payments for inpatient operating services to 105 LTCHs
in FY 1993 and $1.05 billion in payments for inpatient operating
services to 206 LTCHs in FY 1998. This amount represents more than a
96-percent increase in the number of LTCHs and a 164-percent increase
in payments to LTCHs in 5 years.
In its March 1999 Report to Congress, the Medicare Payment Advisory
Commission (MedPAC) (formerly ProPAC) stated that: ``[The] TEFRA system
has remained in effect longer than expected partly because of
difficulties in accounting for the variation in resource use across
patients in exempted facilities. The unintended consequences of
sustaining that system have been a steady growth in the number of
prospective payment system-exempt facilities and a substantial payment
inequity between older and newer facilities. In particular, the payment
system encouraged new exempt facilities to maximize their costs in the
base year to establish high cost limits. Once subject to its relatively
high limit, a recent entrant could reduce its costs below its limit,
resulting in reimbursement of its full costs plus bonus payment. By
contrast, facilities that existed before they became subject to TEFRA
could not influence their cost limits. Given the relatively low limits
of older facilities, they are more likely to incur costs above their
limits and thus receive payments less than their costs.'' (p. 72)
To address concerns regarding the historical growth in payments and
the disparity in payments to existing and newly excluded hospitals and
units, the BBA mandated several changes to the existing payment system.
These changes are outlined in section IV. of this preamble.
E. Research and Discussion of a Prospective Payment System for LTCHs
Prior to the BBA
Section 603(a)(2)(C)(ii) of Public Law 98-21 required the Secretary
to include the results of research studies on whether and how excluded
hospitals and units can be paid on a prospective basis, in the 1985
Report to Congress on the Impact of Prospective Payment Methodology.
HCFA (now CMS) undertook and funded a wide range of research projects
that resulted in 1987 in a Report to Congress entitled ``Developing a
Prospective Payment System for Excluded Hospitals.'' In that report,
the Secretary presented an examination of the then current state of the
four classes of excluded hospitals and units and offered
recommendations for the development of a prospective payment system.
``Long-term'' or ``chronic disease'' hospitals, the report noted, ``are
the least understood of the excluded hospital types'' (p. 3-51).
The following information was clear--there were a relatively small
number of facilities (94 at that time); LTCHs were not dispersed
throughout the country and, therefore, potential long-term care
patients were receiving necessary care elsewhere; LTCHs, as generally
defined by the greater than 25-day average length of stay, constituted
a diverse set that closely resembled other hospitals, both included
(acute care) and excluded (psychiatric, rehabilitation, and children's)
under the acute care hospital inpatient prospective payment system (pp.
3-51 through 3-63). The Report concluded with the following discussion:
``Because this class of hospitals treats a very heterogeneous patient
population and does not share a common set of facility characteristics,
the development of a separate classification system for prospective
payment purposes would appear to be both infeasible and undesirable. At
the same time, as part of HCFA's [now CMS'] impact analysis, we were
investigating the feasibility of including LTCHs under the current
prospective payment system, where their cases would be expected to be
paid predominantly under the prospective payment system outlier
policy.'' (pp. 3-63 through 3-64)
The 1987 report further noted that present and future research on
LTCHs would focus on acquiring a broader understanding of LTCHs, long-
term care patients, and other treatment settings and on the preliminary
financial impact of a prospective payment system on both LTCHs and the
Medicare system. An initial inquiry was also planned ``into the role of
those hospitals as a component of the continuum of care between acute
care hospitals and skilled nursing facilities, as a general first step
in developing a classification system for patients in these facilities
* * *'' (p. 3-54).
ProPAC's March 1996 Report to Congress endorsed the concept of
prospective payment systems for all postacute services, emphasizing
consistent payment methods across all classes of facilities in order to
encourage provider efficiency (p. 75). ProPAC's extensive analysis of
``patients using postacute care providers and in these providers'
treatment patterns'' based on FY 1994 data discussed in the June 1996
Report to Congress, concluded that ``[a]lthough there was significant
overlap in the hospital assigned DRGs across settings, other patient
characteristics, such as medical complexity or functional status, may
influence which patients use a particular site'' (p. 110).
In ProPAC's March 1, 1997 report, ProPAC's Recommendation 33,
entitled ``Coordinating Post-Acute Care Provider Payment Methods,''
stated that ``the Commission urges the Congress and the Secretary to
consider the overlap in services and beneficiaries across postacute
care providers as they modify Medicare payment policies'' (p. 60).
The passage of Public Law 105-33 (the BBA) provided for the
establishment of separate and distinct prospective payment systems for
postacute care providers: SNFs (section 4432(a)), IRFs (section 4421),
and HHAs (section 4603(b)). In addition, the Congress directed the
Secretary to develop a legislative proposal to pay LTCHs prospectively
as well (section 4422).
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[[Page 55959]]
IV. Requirements of the BBA, BBRA, and BIPA for LTCHs
A. Provisions of the Current Payment System
1. BBA
The BBA amendments to section 1886(b) of the Act significantly
altered the payment provisions for excluded hospitals and units and
also added other qualifying criteria for certain hospitals excluded
from the acute care hospital inpatient prospective payment system
(sections 4411 to 4419). Provisions of these amendments that related to
the current payment system were explained in detail and implemented in
the acute care hospital inpatient prospective payment system final rule
published in the Federal Register on August 29, 1997 (62 FR 45966).
Section 4411 of the BBA amended section 1886(b)(3)(B) of the Act
and restricted the rate-of-increase percentages that are applied to
each provider's target amount so that excluded hospitals and units
experiencing lower inpatient operating costs relative to their target
amounts receive lower rates of increase.
Section 4412 of the BBA amended section 1886(g) of the Act to
establish a 15-percent reduction in capital payments for excluded
psychiatric and rehabilitation hospitals and units and LTCHs, for
portions of cost reporting periods occurring during the period of
October 1, 1997, through September 30, 2002.
Section 4413(b) of the BBA amended section 1886(b)(3) of the Act to
permit certain LTCHs to elect a rebasing of the target amount for the
12-month cost reporting period beginning during FY 1996.
Section 4414 of the BBA amended section 1886(b)(3) of the Act to
establish caps on the target amounts for excluded hospitals and units
at the 75th percentile of target amounts for similar facilities for
cost reporting periods beginning on or after October 1, 1997, through
September 30, 2002. These caps on the target amounts apply only to
psychiatric and rehabilitation hospitals and units and LTCHs. Payments
for these excluded hospitals and units are based on the lesser of a
provider's cost per discharge or its hospital-specific cost per
discharge, subject to this cap.
Section 4415 of the BBA amended section 1886(b)(1) of the Act by
revising the percentage factors used to determine the amount of bonus
and relief payments, and establishing continuous improvement bonus
payments for cost reporting periods beginning on or after October 1,
1997 for hospitals and units excluded from the acute care hospital
inpatient prospective payment system that meet specified criteria. If a
hospital is eligible for the continuous improvement bonus, the
continuous improvement bonus payment is equal to the lesser of: (1) 50
percent of the amount by which operating costs are less than expected
costs; or (2) 1 percent of the target amount.
Sections 4416 and 4419 of the BBA amended section 1886(b) of the
Act to establish a new framework for payments for new excluded
providers. Section 4416 added a new section 1886(b)(7) to the Act that
established a new statutory methodology for new psychiatric and
rehabilitation hospitals and units and LTCHs. Before this change, new
hospitals excluded from the acute care hospital inpatient prospective
payment system were exempted from the target amount per discharge
ceiling until the end of the first cost reporting period ending at
least 2 years after they accepted their first patient. This new
provider ``exemption'' was eliminated from all classes of excluded
providers except children's hospitals for cost reporting periods
beginning on or after October 1, 1997, by section 4419(a) of the BBA.
Under section 4416, payment to these new excluded providers for their
first two cost reporting periods is limited to the lesser of the
operating costs per case, or 110 percent of the national median of
target amounts, as adjusted for differences in wage levels, for the
same class of hospital for cost reporting periods ending during FY
1996, updated to the applicable period.
It is important to note that before enactment of the BBA, the
payment provisions for excluded hospitals and units applied
consistently to all classes of excluded providers (that is,
psychiatric, rehabilitation, long-term care, children's, and cancer).
However, effective for cost reporting periods beginning on or after
October 1, 1997, there are specific payment provisions for certain
classes of excluded providers, as well as modifications for all
excluded providers.
Section 4417 of the BBA specified that a hospital that was
classified by the Secretary on or before September 30, 1995, as an
excluded LTCH must continue to be so classified, notwithstanding that
it is located in the same building, or on the same campus, as another
hospital.
Section 4418 of the BBA amended section 1886(d)(1)(B)(v) of the
Act, providing an additional category of hospitals that could qualify
as cancer hospitals for purposes of exclusion from the acute care
hospital inpatient prospective payment system.
2. BBRA
With the enactment of the BBRA of 1999, the Congress refined some
of the policies mandated by the BBA for hospitals excluded from the
acute care hospital inpatient prospective payment system. The
provisions of the BBRA, which amended section 1886(b)(3)(H) of the Act
relating to the current payment system for excluded hospitals, were
explained in detail and implemented in the acute care hospital
inpatient prospective payment system interim final rule published in
the Federal Register on August 1, 2000 (65 FR 47026) and in the acute
care hospital inpatient prospective payment system final rule also
published on August 1, 2000 (65 FR 47054).
Section 4414 of the BBA provided for caps on target amounts for
excluded hospitals and units for cost reporting periods beginning on or
after October 1, 1997. Section 121 of the BBRA amended section
1886(b)(3)(H) of the Act to provide for an appropriate wage adjustment
to these caps on the target amounts for existing psychiatric and
rehabilitation hospitals and units and LTCHs, effective for cost
reporting periods beginning on or after October 1, 1999 through
September 30, 2002.
Section 122 of the BBRA provided for an increase in the continuous
improvement bonus for eligible LTCHs and psychiatric hospitals and
units for cost reporting periods beginning on or after October 1, 2000
and before September 30, 2002.
3. BIPA
Two provisions of the BIPA that amended section 1886(b)(3) of the
Act were directed at LTCHs. Section 307(a) of the BIPA provided for a
2-percent increase to the wage-adjusted 75th percentile cap on the
target amount for existing LTCHs, effective for cost reporting periods
beginning during FY 2001. Section 307(a) of the BIPA also provided a
25-percent increase to the hospital-specific target amounts for
existing LTCHs for cost reporting periods beginning in FY 2001, subject
to the wage-adjusted national cap.
B. Provisions for a LTCH Prospective Payment System
1. BBA
In section 4422 of the BBA, the Congress mandated that the
Secretary develop a legislative proposal for a case-mix adjusted
prospective payment system for LTCHs under the Medicare program, for
submission by October 1999 based on consideration of several payment
methodologies, including the feasibility of expanding the current
[[Page 55960]]
DRGs and the prospective payment system currently in place for acute
care hospitals.
2. BBRA
Section 123 of the BBRA specifically requires that the prospective
payment system for LTCHs be designed as a per discharge system with a
DRG-based patient classification system that reflects the differences
in patient resources and costs in LTCHs while maintaining budget
neutrality. Section 123 also requires that a report be submitted to the
Congress describing the system design of the mandated LTCH prospective
payment system no later than October 1, 2001, and that the system be
implemented for cost reporting periods beginning on or after October 1,
2002.
3. BIPA
The BIPA reiterated the dates of implementation of the LTCH
prospective payment system set forth in the BBRA. Section 307(b)(1) of
the BIPA also directs the Secretary to examine the following specific
payment adjustments: adjustments to DRG weights, area wage adjustments,
geographic reclassification, outliers, updates, and a disproportionate
share adjustment. Furthermore, if the Secretary is unable to implement
the prospective payment system by October 1, 2002, section 307(b)(2) of
the BIPA mandates that a default LTCH prospective payment system be
implemented, based on existing DRGs, modified where feasible to account
for the specific resource use of long-term care patients.
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V. Research and Data Supporting the Establishment of the LTCH
Prospective Payment System
A. Legislative Requirements
Section 4422 of the BBA required us to formulate a legislative
proposal on the development of a prospective payment system for LTCHs
for submission to the Congress by October 1, 1999. To prepare for this
proposal, we awarded a contract to The Urban Institute (Urban)
following the enactment of the BBA for a multifaceted analysis of
LTCHs, including a description of facilities and patients, as well as
exploration of a variety of classification and payment system options.
In section 123(a) of the BBRA, the Congress mandated a per
discharge, DRG-based model for the prospective payment system for
LTCHs. Our basic objective remained unchanged--to arrive at a clearer
understanding of the universe of LTCHs in relation to facility
characteristics, beneficiary utilization, and beneficiary
characteristics such as diagnoses, treatment, and discharge patterns.
Under the terms of our original contract with Urban, 3M Health
Information Systems (3M) was subcontracted to provide an analysis and
assessment of alternative classification systems for use in LTCHs in
keeping with variables such as treatment patterns, patient
demographics, and diagnoses and procedure codes for patients at LTCHs
and acute care hospitals.
After the enactment of section 123 of the BBRA, we instructed 3M to
limit its analyses to several DRG-driven classification systems, using
the database constructed by Urban describing LTCHs, patients at LTCHs,
and patients with the same diagnoses as LTCH patients treated in other
facilities. We also contracted with 3M to develop and analyze the data
necessary for us to design and develop the Medicare LTCH prospective
payment system based on DRGs.
B. Description of Sources of Research Data
The records for all Medicare hospital inpatient discharges
(including discharges for LTCHs) are contained in the Medicare provider
analysis and review file (MedPAR), which includes patient demographics
(age, gender, race, and residence zip code), clinical characteristics
(diagnoses and procedures), and hospitalization characteristics.
(Beneficiary data were encrypted to prevent the identification of
specific Medicare beneficiaries.) The Medicare cost report data
constitute the HCRIS, and includes information on facility
characteristics, utilization data, and cost and charge data by cost
center.
The 1997 Online Survey Certification and Reporting (OSCAR) system
data provided information from the State survey and certification
process to identify and characterize providers that participate in
Medicare and Medicaid and include a list of all hospitals that were
designated as LTCHs by Medicare. OSCAR data included the number of
employees of various types and the number of different types of beds
and care units, as well as variables on certification date, type of
control, geographic region, and hospital size.
C. The Universe of LTCHs
1. Background Issues
LTCHs typically furnish extended medical and rehabilitative care
for patients who are clinically complex and have multiple acute or
chronic conditions. Generally, Medicare patients in LTCHs have been
transferred from acute care hospitals and receive a range of
``postacute care'' services at LTCHs, including comprehensive
rehabilitation, cancer treatment, head trauma treatment, and pain
management. (MedPAC March 1999 Report to Congress, p. 95.) A LTCH must
be certified as an acute care hospital that meets criteria set forth in
section 1861(e) of the Act in order to participate as a hospital in the
Medicare program. Generally, under Medicare, hospitals are paid as
LTCHs if they have an inpatient average length of stay greater than 25
days.
LTCHs are a heterogeneous group of facilities ranging from old
tuberculosis and chronic disease hospitals to newer facilities designed
primarily to care for ventilator-dependent patients. They are unevenly
distributed across the United States, with one-third (72 of 203 in
1997) located in Massachusetts, Texas, and Louisiana. As of 1997, 203
facilities were determined by Medicare to be LTCHs; by early 2000, 239
facilities were determined by Medicare to be LTCHs; and as of November
2001, OSCAR had data on 270 LTCHs.
LTCHs constitute a relatively small provider group in the Medicare
program and have not been widely studied. Only limited information has
been published about their characteristics in terms of types of
patients served and resources used. As stated earlier in section V.A.
of this preamble, the primary goal of the initial research contract
with Urban was to increase our knowledge about LTCHs and their
patients. In addition to describing the providers and patients, the
study was expected to provide insight into the ways in which LTCHs
differ from other Medicare postacute care providers. In the following
summary and tables, we provide a description of Urban's findings that
formed the basis for the design of the prospective payment system for
LTCHs presented in the March 2002 proposed rule and in this final rule.
2. General Medicare Policies
Inpatient stays at LTCHs are covered under the Medicare Part A
hospital benefit and include room and board, medical and nursing
services, laboratory tests, X-ray, pharmaceuticals, supplies, and other
diagnostic or therapeutic services (Secs. 409.10 and 412.50). LTCHs can
offer specialized services (for example, physical rehabilitation or
ventilator-dependent care) or can provide more generalized services
(for example, chronic disease care).
Hospital services are covered for up to 90 days during a Medicare-
defined
[[Page 55961]]
``benefit period,'' which is a period that begins with admission of a
Medicare beneficiary as an inpatient to an acute care or other hospital
and ends when the beneficiary has spent 60 consecutive days outside of
an inpatient facility (Sec. 409.60). There are 60 additional covered
lifetime reserve days that may be used over a beneficiary's lifetime.
One inpatient deductible payment ($792 in calendar year 2002) is
required for each benefit period, so a beneficiary generally does not
have to make a new deductible payment for a LTCH stay unless the LTCH
stay is not preceded by another hospital stay. However, a beneficiary
with a long LTCH stay is subject to a coinsurance payment ($198 in
calendar year 2002) for days 61 through 90 of hospital use during a
benefit period. For the lifetime reserve days, a Medicare beneficiary
is subject to a daily coinsurance amount ($396 in calendar year 2002)
(Sec. 409.61).
LTCHs must meet State licensure requirements for acute care
hospitals and must have a provider agreement with Medicare in order to
receive Medicare payment. Fiscal intermediaries verify that LTCHs meet
the required average length of stay of greater than 25 days.
3. Exclusion From the Acute Care Hospital Inpatient Prospective Payment
System
As discussed more fully in section III.B. of this preamble, LTCHs
were excluded from the FY 1984 implementation of the acute care
hospital inpatient prospective payment system and continued to be paid
based on their cost per discharge, subject to per discharge limits.
4. Geographic Distribution
Overall, 203 LTCHs filed Medicare claims in 1997. This was the data
set used by Urban for its analysis of the universe of LTCHs that formed
the basis for policies we proposed in our proposed rule on March 22,
2002 (67 FR 13416). This number translates into an average of
approximately one facility per 200,000 Medicare enrollees. As can be
seen in Chart 1, LTCHs were not (and are still not) distributed across
all States in proportion to the number of Medicare enrollees in those
States. They were unevenly distributed across the United States, with
one-third (72 of 203) located in Massachusetts, Texas, and Louisiana.
These three States together accounted for 36 percent of the LTCHs, but
only fewer than 10 percent of Medicare enrollees. Furthermore, 13 small
States have no LTCHs, although they accounted for approximately 7
percent of Medicare enrollees. In contrast, the three largest Medicare
States (California, Florida, and New York) accounted for 24.1 percent
of Medicare enrollees together, but only 13.8 percent of LTCHs.
[[Page 55962]]
Chart 1.--Percentage Distribution of Number of Long-Term Care Hospitals (LTCHs), Medicare Enrollees, and Certified Beds, by State, 1997
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of Percent of
State Number of Percent of medicare medicare Number of Percent of
LTCHs LTCHs enrollees enrollees certified beds certified beds
--------------------------------------------------------------------------------------------------------------------------------------------------------
Alabama................................................. 1 0.5 696,586 1.8 191 1.0
Alaska.................................................. 0 0.0 38,570 0.1 0 0.0
Arizona................................................. 4 2.0 667,226 1.7 187 1.0
Arkansas................................................ 0 0.0 453,195 1.1 0 0.0
California.............................................. 12 5.9 3,920,674 9.9 1,304 7.1
Colorado................................................ 4 2.0 464,299 1.2 277 1.5
Connecticut............................................. 4 2.0 531,805 1.3 716 3.9
Delaware................................................ 0 0.0 111,171 0.3 0 0.0
District of Columbia.................................... 1 0.5 80,028 0.2 23 0.1
Florida................................................. 11 5.4 2,853,420 7.2 805 4.4
Georgia................................................. 6 3.0 915,577 2.3 557 3.0
Hawaii.................................................. 1 0.5 163,217 0.4 13 0.1
Idaho................................................... 0 0.0 163,303 0.4 0 0.0
Illinois................................................ 5 2.5 1,701,123 4.3 703 3.8
Indiana................................................. 11 5.4 877,656 2.2 434 2.4
Iowa.................................................... 0 0.0 498,288 1.3 0 0.0
Kansas.................................................. 3 1.5 406,752 1.0 74 0.4
Kentucky................................................ 1 0.5 633,802 1.6 337 1.8
Louisiana............................................... 19 9.4 622,805 1.6 1,288 7.0
Maine................................................... 0 0.0 218,265 0.6 0 0.0
Maryland................................................ 4 2.0 651,710 1.7 465 2.5
Massachusetts........................................... 17 8.4 991,641 2.5 3,077 16.8
Michigan................................................ 3 1.5 1,435,420 3.6 280 1.5
Minnesota............................................... 2 1.0 669,708 1.7 313 1.7
Mississippi............................................. 2 1.0 428,729 1.1 65 0.4
Missouri................................................ 3 1.5 888,959 2.3 317 1.7
Montana................................................. 0 0.0 139,392 0.4 0 0.0
Nebraska................................................ 1 0.5 263,287 0.7 25 0.1
Nevada.................................................. 3 1.5 225,152 0.6 106 0.6
New Hampshire........................................... 0 0.0 170,031 0.4 0 0.0
New Jersey.............................................. 3 1.5 1,239,890 3.1 212 1.2
New Mexico.............................................. 2 1.0 231,517 0.6 86 0.5
New York................................................ 5 2.5 2,780,994 7.0 1,262 6.9
North Carolina.......................................... 1 0.5 1,129,329 2.9 59 0.3
North Dakota............................................ 0 0.0 107,628 0.3 0 0.0
Ohio.................................................... 7 3.4 1,766,266 4.5 653 3.6
Oklahoma................................................ 8 3.9 523,358 1.3 294 1.6
Oregon.................................................. 0 0.0 500,035 1.3 0 0.0
Pennsylvania............................................ 6 3.0 2,183,850 5.5 412 2.3
Rhode Island............................................ 1 0.5 177,247 0.4 700 3.8
South Carolina.......................................... 2 1.0 562,732 1.4 0 0.0
South Dakota............................................ 0 0.0 123,401 0.3 211 1.2
Tennessee............................................... 6 3.0 838,357 2.1 210 1.1
Texas................................................... 36 17.7 2,275,673 5.8 1,818 9.9
Utah.................................................... 1 0.5 204,525 0.5 39 0.2
Vermont................................................. 0 0.0 89,821 0.2 0 0.0
Virginia................................................ 3 1.5 893,602 2.3 664 3.6
Washington.............................................. 2 1.0 742,589 1.9 97 0.5
West Virginia........................................... 0 0.0 349,684 0.9 0 0.0
Wisconsin............................................... 1 0.5 806,951 2.0 34 0.2
Wyoming................................................. 1 0.5 65,699 0.2 3 0.0
-----------------------------------------------------------------------------------------------
Total............................................... 195 100.00 36,322,068 100.00 18,311 100.00
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: 1997 Online Survey Certification and Reporting System (OSCAR).
[[Page 55963]]
Although the distribution of certified beds generally tracked the
distribution of LTCHs across States, there is not always a direct
relationship between the number of LTCHs and the bed capacity in a
given State. For instance, Massachusetts had only 8.4 percent of LTCHs,
but 16.8 percent of Medicare-certified beds. In contrast, Texas had
17.7 percent of LTCHs, but only 9.9 percent of the certified beds.
5. Characteristics by Date of Medicare Participation
The OSCAR system provided data captured by the State survey and
certification process that can be used to identify and characterize
providers participating in Medicare and Medicaid. The following
analyses were based on LTCHs for which data were available. Eight
facilities, which accounted for only 1 percent of all LTCH stays and
1.3 percent of certified beds, were excluded from the analysis since
1997 OSCAR records were not available for these facilities.
Given the known payment variations for old and new facilities that
were excluded facilities paid under the target amount methodology, we
divided the LTCHs by age (the date of the LTCH's first Medicare
participation, as reported by OSCAR) to gain a sense of the variation
among the existing LTCHs in 1997. A strong correlation was found
between the age of a LTCH and other key characteristics, such as
location and ownership control, as well as operating costs and Medicare
payments. For analytical purposes, therefore, the total sample of LTCHs
was stratified based on age (``old,'' ``middle,'' or ``new''). Of the
195 LTCHs in OSCAR in 1997, 20 percent were in existence before the
acute care hospital inpatient prospective payment system and the acute
care hospital inpatient prospective payment system exclusions went into
effect in October 1983 (old LTCHs); 30 percent were determined to be
LTCHs between October 1983 and September 1993 (middle LTCHs); and 50
percent were determined to be LTCHs between October 1993 and September
1997 (new LTCHs). This pattern is consistent with reports of the large
growth in the number of LTCHs in recent years. (As of November 2001,
OSCAR had data on 270 LTCHs, which indicate that the growth has
continued.)
Old LTCHs were generally located in the northeast region of the
United States, while newer LTCHs are typically located in the southern
region. Most notably, the ownership of the LTCHs that began Medicare
participation before and after the implementation of the acute care
hospital inpatient prospective payment system was quite different. Old
LTCHs were either government controlled (about 63 percent) or nonprofit
(about 37 percent). In contrast, one-half of the LTCHs that began
participation in Medicare between 1983 and 1993 and two-thirds of those
that began participation in Medicare in FY 1994 or later were
proprietary facilities. Virtually no new LTCHs were government
controlled.
6. Hospitals-Within-Hospitals and Satellite Facilities
The Medicare statute does not contemplate the recognition of ``LTCH
units'' of prospective payment system acute care hospitals; the statute
does reference rehabilitation and psychiatric units. Long-term care
units of prospective payment system hospitals are not allowed in part
because of the concern that transfers of acute care patients into the
LTCH units could inappropriately maximize prospective payments under
the acute care hospital inpatient prospective payment system. The
presence of a long-term care ``unit'', excluded from the acute care
hospital inpatient prospective payment system and co-located in an
acute care hospital, could enable the acute care hospital to shift
patients to the long-term care ``unit'' without completing the full
course of treatment. These patient transfers could result in
inappropriate payments under Medicare since the acute care hospital
would make money in those cases where it received a full DRG payment
without providing the full course of treatment to the beneficiary and
could avoid losing any money for other more costly patients by
prematurely discharging them to the LTCH. Since payments to hospitals
under the acute care hospital inpatient prospective payment system were
based on hospital costs that included the costs of patients with longer
lengths of stay, such a patient shift would result in an
``overpayment'' to the acute care hospital and the LTCH would receive
an additional payment for that same patient.
Nonetheless, in the mid-1990s, of the roughly 150 LTCHs in
existence at the time, about 12 recently established LTCHs were, in
fact, LTCHs located in the buildings or on the campuses of acute care
hospitals. In order to prevent the shifting of costs within the
Medicare payment system that would result from inappropriate transfers
between the inpatient acute care hospital and the LTCH located within
the acute care hospital, we have implemented additional qualifying
criteria at Sec. 412.22(e) for these entities. These criteria require
that in order to be excluded from the acute care hospital inpatient
prospective payment system, a hospital located in or on the campus of
an acute care hospital (referred to as a ``hospital-within-a-
hospital'') must have a separate governing body, chief executive
officer, chief medical officer, and medical staff. In addition, the
hospital must perform basic functions independently from the host
hospital, incur no more than 15 percent of its total inpatient
operating costs for items and services supplied by the hospital in
which it is located, and have an inpatient load of which at least 75
percent of patients are admitted from sources other than the host
hospital. Originally, these regulations were effective as of October
1994. However, section 4417(a) of the BBA amended section 1886(d)(1)(B)
of the Act to provide that a hospital that was excluded from the acute
care hospital inpatient prospective payment system on or before
September 30, 1995, as an LTCH, must continue to be so classified,
notwithstanding that it is located in the same building or in one or
more buildings located on the same campus as another hospital
(Sec. 412.22(f)). This provision, codified in Sec. 412.22(f), exempts
certain LTCHs that are hospitals-within-hospitals from the ownership
and control requirements discussed above.
In the late 1990s, we became aware of a newly developing entity
that was physically similar, but legally unrelated, to a hospital-
within-a-hospital. These entities were hospital-within-hospital type
facilities (in the buildings or on the campuses of acute care
hospitals) owned by a separate existing LTCH. We identified these
facilities as ``long-term care hospital satellites.''
In the July 30, 1999 Federal Register (64 FR 41540), we revised
Sec. 412.22(h) to require that in order to be excluded from the acute
care hospital inpatient prospective payment system, a satellite of a
hospital: (1) Must maintain admission and discharge records that are
separately identified from those of the hospital in which it is
located; (2) cannot commingle beds with beds of the hospital in which
it is located; (3) must be serviced by the same fiscal intermediary as
the hospital of which it is a part; (4) must be treated as a separate
cost center of the hospital of which it is a part; (5) for cost
reporting purposes, must use an accounting system that properly
allocates costs and maintains adequate data to support the basis of
allocation; and (6) must report costs in the cost report of the
hospital of which it is a part, covering the same fiscal period and
using the same method of apportionment as that hospital. In
[[Page 55964]]
addition, the satellite facility must independently comply with the
qualifying criteria for exclusion from the acute care hospital
inpatient prospective payment system. The total number of State-
licensed and Medicare-certified beds (including those of the satellite
facility) for a hospital that was excluded from the acute care hospital
inpatient prospective payment system for the most recent cost reporting
period beginning before October 1, 1997, may not exceed the hospital's
number of beds on the last day of that cost reporting period.
7. Specialty Groups of LTCHs by Patient Mix
There is a widely held view that the population of LTCHs is
heterogeneous. We believe that understanding the composition of this
population and identifying and classifying subgroups within it are
fundamental to designing a prospective payment system for LTCHs.
Broad categories of conditions as defined by major diagnostic
categories (MDCs), the principal diagnostic categorization tool used
under the acute care hospital inpatient prospective payment system,
were used to classify LTCHs according to the medical conditions of
their patient caseloads. (MDCs were formed by dividing all possible
principal diagnoses into 25 mutually exclusive categories. Most MDCs
correspond to a major organ system, though a few correspond to
etiology.)
We also explored the possibility of grouping patients by DRGs or by
selected individual diagnoses. These attempts resulted in creating
groups too small for any effective characterization. However, the
analysis did reveal that while some LTCHs treat a wide range of
conditions, others specialize in one or two types of conditions. In
order to analyze a grouping based on patient mix, under its contract
with us, Urban first examined the proportion of facilities' caseloads
in specific MDCs. There were five MDCs in which at least one LTCH has a
majority (that is, more than 50 percent) of its cases. Patients with
respiratory system problems were the most common caseload
concentration--in 1997, 13 percent of LTCHs had a caseload
concentration of 50 percent to 75 percent, and another 7 percent of
LTCHs had more than 75 percent of their cases in this MDC.
The other three MDCs that made up a majority of at least one LTCH's
patient caseload (nervous system MDC, musculoskeletal and connective
tissue disorders MDC, and factors influencing health status MDC) were
all related to rehabilitation needs. (Because rehabilitation-related
DRGs were common to LTCHs and fell into the ``Factors Influencing
Status'' MDC, we are classifying all cases in this MDC as
rehabilitation services for the purpose of this analysis.) Seven
percent of LTCHs had a majority of their caseload in an MDC related to
rehabilitation-related services. A significantly less common
concentration was seen in the 2 percent of LTCHs that had a majority of
their patients in the mental diseases and disorders MDC. All but two
LTCHs in our analysis had some share of patients with respiratory
system problems. Similarly, all but five LTCHs had some patients with
circulatory problems.
Based on these findings, we developed a grouping that consists of
four broad categories of LTCHs based on patient caseload. Facilities
with greater than 50 percent of their cases in the respiratory MDC were
assigned to a ``respiratory specialty'' group for the purpose of this
analysis. Similarly, all facilities with over 50 percent of their
caseload in the mental MDC were designated as ``mental specialty''
facilities. The three rehabilitation-related MDCs were combined into
one ``rehabilitation-related MDC'' category and grouped into a
``rehabilitation specialty'' group. All remaining facilities (that did
not have high concentrations of patients in the respiratory MDC, the
mental MDC, or the rehabilitation-related MDCs category) were placed
into a ``multispecialty'' facility group. LTCHs in this category
provide care to a wider range of patient types than LTCHs in the first
three categories.
To better understand the relatively large number of multispecialty
LTCHs, we explored their MDC composition. Not unexpectedly, most of
these facilities had high proportions of cases in the respiratory MDC
and the rehabilitation-related MDCs category, although some LTCHs did
not serve either of these populations in great numbers. Few LTCHs did
have a significant share of their caseload in either the respiratory
MDC or the rehabilitation-related MDCs category. Only 2 percent of
multispecialty LTCHs had less than 25 percent of their caseload in
either specialty group. Similarly, only 7 percent of multispecialty
facilities had less than 35 percent of their caseload in either of the
two groups. In contrast, about 60 percent of LTCHs had at least half of
their caseload in either the respiratory MDC or the rehabilitation-
related MDCs category. This high share demonstrated that, despite their
assignment to the multispecialty category, most LTCHs served a high
percentage of patients with respiratory or rehabilitation problems, or
both.
Although respiratory and rehabilitation specialty facilities were
prevalent in the LTCH population, there were also some ``niche'' LTCHs
that have unique patient populations or provide uncommon services.
These hospitals included, for example, a large hospital where most
admitted individuals (90 percent) die in the facility.
Several LTCHs provided services for special populations. One
facility provided services for a prison population. A large share of
this facility's funding was through Medicaid; cost report data showed
that Medicaid covers two-thirds of its patient stays.
Some other facilities worked with similarly specialized populations
and have very small Medicare caseloads. In particular, two facilities
that focused on developmentally disabled children and younger adults
had fewer than 10 Medicare stays in 1997. Cost reports show that one of
these facilities, which provides rehabilitation for its Medicare
patients, has few discharges (under 100) regardless of payer source.
The other, which provides mostly psychiatric services, relies on public
funding for only a small share of its discharge payments.
Although there are a few niche facilities in the LTCH population,
our analysis indicated that a preponderance of the LTCHs could be
classified in distinct specialty groups that focused on adult
rehabilitation and respiratory system care.
8. Sources and Destinations of LTCH Patients
Another useful perspective on LTCHs was the pattern of sources from
which patients are admitted to LTCHs and destinations to which LTCH
patients are discharged. This information showed how such transition
patterns differ among the specialty groups. In general, the findings
were consistent with the notion that LTCHs as a group were
heterogeneous in terms of the patients they serve.
The vast majority (70 percent) of LTCH patients were admitted from
acute care hospitals. Within this group, acute care patients whose
stays were designated as ``outlier'' stays, as defined by section
1886(d)(5)(A)(i) of the Act and implemented in Sec. 412.80, were
identified separately. Sixteen percent of LTCH admissions were acute
care hospital outlier patients, while 54 percent were admitted from
acute care hospitals but did not have extraordinarily long acute care
stays.
[[Page 55965]]
After acute care hospitals, direct admission from the community was the
next most common source of admissions (14 percent) to LTCHs.
The admission patterns varied somewhat by LTCH specialty type.
Notably, 85 percent of admissions to respiratory specialty LTCHs were
from acute care hospitals, including 22 percent that were acute care
hospital outlier cases. A very small percentage (7 percent) of
admissions to respiratory specialty LTCHs were from the community. In
contrast, the admission sources for the rehabilitation specialty LTCHs
were more similar to that of the multispecialty LTCHs. Notably, a
higher than average share of patients come from SNFs (8 percent) and
HHAs (6 percent) and a lower percentage of patients transitioned from
acute care hospital outlier stays (12 percent). A relatively large
share (11 percent) of patients at rehabilitation specialty LTCHs were
admitted directly from the community compared to patients at
respiratory specialty LTCHs (7 percent). These findings suggest that
patients admitted to rehabilitation specialty LTCHs might present a
less medically intensive clinical picture than patients admitted to
respiratory specialty LTCHs.
The admission pattern of patients admitted to the mental specialty
LTCHs was quite different from those of the other specialties. Thirty
one percent of patients are admitted from acute care hospitals, and
only 2 percent of patients are admitted after being acute care hospital
outlier cases. In contrast, 40 percent of patients were admitted
directly from the community and 27 percent were admitted from some
other type of Medicare provider.
An analysis of the pattern of discharge destinations for LTCHs
shows that, overall, 38 percent of LTCH stays were discharged to the
community without additional Medicare services. Almost equal
percentages (18 percent) were discharged to SNFs and acute care
hospitals, and 21 percent of patients were discharged to HHAs.
Some variations in discharge destination patterns existed among
LTCHs by specialty. Relative to the overall sample, the respiratory
specialty LTCHs had higher than average percentages of patients
discharged to SNFs (24 percent versus 18 percent), and lower
percentages discharged to HHAs (14 percent versus 21 percent). However,
rehabilitation specialty facilities had a relatively high proportion of
cases (34 percent) discharged to HHAs, and a lower than average
proportion discharged to the community without additional Medicare
services (28 percent versus 38 percent). Finally, mental specialty
hospitals have an unusually high percent of cases (71 percent)
discharged to the community without additional Medicare services. These
findings suggest that patients served by respiratory specialty LTCHs
are more likely to require extended care in institutional settings (for
example, SNFs), while patients discharged from rehabilitation specialty
facilities also require extended care, but not necessarily in
institutional settings.
9. LTCHs and Patterns Among Postacute Care Facilities
Urban's research also produced data regarding a comparison of LTCHs
with other postacute care settings in order to provide us with the
broadest possible understanding of the universe of LTCHs. The findings
were only preliminary comparisons of patients among and across
postacute settings because of the nature of each category of postacute
care providers. Even though data suggest substantial clinical
differences among the providers with some areas of overlap, because of
some similarities we found it useful to draw parallels and distinctions
among postacute care providers. Moreover, findings from this research
supported conclusions published in several reports to the Congress
produced by ProPAC and MedPAC over the past decade.
Most patients in LTCHs had several diagnosis codes on their
Medicare claims, indicating that they had multiple comorbidities and
are probably less stable upon admission than patients admitted to other
postacute care settings. Relative to IRFs, LTCHs had a higher
proportion of patient costs attributable to ancillary services (for
example, pharmacy, laboratory, and radiology charges) (MedPAC March
1999 Report to Congress, p. 95). LTCHs also provided care to a
disproportionately large number of Medicare beneficiaries who are
eligible because of disability. While individuals with disabilities
make up about 10 percent of the Medicare population, they make up 17
percent of LTCH patients.
Urban's analysis also explored the demographic characteristics of
LTCH patients compared to IRF patients. The proportion of LTCH patients
who are under 65 years of age (18 percent) was twice that of IRF
patients (9 percent). The share of LTCH patients over 85 years old was
slightly higher (18 percent) compared to IRF patients (14 percent).
LTCHs also had a higher proportion of male patients and a lower
proportion of white patients than IRFs. LTCHs had long median lengths
of stay: 21 days versus 16 days for IRFs. About one-third of the LTCH
Medicare stays were by beneficiaries who are also eligible for
Medicaid, compared to fewer Medicaid-eligible beneficiary stays at IRFs
(17 percent). It has been widely documented that dually eligible
beneficiaries are generally much sicker than non-Medicaid eligible
Medicare beneficiaries.
Urban's analysis also included a description of the demographic
characteristics of LTCH patient stays by admission sources--outlier
acute care hospital, nonoutlier acute care hospital, and other. Those
with prior outlier acute care hospital stays seem to be the most
distinctive group in terms of length of stay, gender, race, and
poverty: they had the highest mean and median length of stay in the
LTCH, the highest male proportion, the highest white proportion, and
the lowest proportion of Medicaid-eligible patients. However, in terms
of age, those with prior hospital stays (whether outlier or nonoutlier)
were quite different from those with other admission sources. Those
without a prior acute care hospital stay were younger and about twice
as many are under age 65, whose mean age was about 5 and 3 years lower
than those with a prior outlier stay and those with a prior nonoutlier
stay, respectively. Among those with an acute care hospital stay, the
nonoutlier patients were slightly older on average, with higher
percentages in the oldest groups (75 to 84 and 85 plus) and the highest
median age of all three groups.
The policies in the March 22, 2002 proposed rule and in this final
rule were determined in part based on analysis of the above data and
information gathered on LTCHs and their Medicare patients.
D. Overview of Systems Analysis for the LTCH Prospective Payment System
For the systems analysis, 3M used the MedPAR (FY 1999 through FY
2000), OSCAR (FY 2000), and HCRIS (FYs 1998 and early 1999) files for
the March 22, 2002 proposed rule. Specifically, 3M performed the
following tasks:
Construction of an updated data file, using the most
recent data available from CMS.
Analysis of issues, factors, or variables and presentation
of options for possible use in the design and implementation of the
prospective payment system.
Data simulation of various system features to analyze
their impact on the design of the prospective payment system.
A data file was constructed to serve as the basis of our patient
classification system presented in the proposed rule
[[Page 55966]]
and the development of proposed payment weight rates and proposed
payment adjustments. The analysis of this data file helped us regarding
the structure of the prospective payment system in the proposed rule.
We relied upon patient charge data from FY 2000 MedPAR for proposing
LTC-DRG weights and upon costs data from FY 1998 and FY 1999 cost
reports for proposed payment rates.
For this final rule, we used updated and expanded data from the FY
2000 MedPAR file to develop the payment weight rates and payment
adjustments for FY 2003. Section X.K. of this final rule contains a
detailed discussion of the data used to develop the FY 2003 payment
rates and payment adjustments, the public comments received on the
proposed rates and adjustments, and our responses to those comments.
E. Evaluation of DRG-Based Patient Classification Systems
Section 307(b)(1) of Public Law 106-554 modified the requirements
of section 123 of Public Law 106-113 by specifically requiring that the
Secretary examine ``the feasibility and the impact of basing payment
under such a system [the LTCH prospective payment system] on the use of
existing (or refined) hospital diagnosis-related groups (DRGs) that
have been modified to account for different resource use of long-term
care hospital patients as well as the use of the most recently
available hospital discharge data.''
In order to comply with statutory mandates, our evaluation of DRG-
based patient classification systems focused on two models--the LTC-all
patient-refined DRGs (LTC-APR-DRGs, Version 1.0), a severity-based
case-mix classification system developed specifically for LTCHs; and
the LTC-CMS-DRGs, a modification of the DRG system used in the acute
care hospital inpatient prospective payment system.
The LTC-APR-DRGs, a condensed version of 3M's all-patient refined
DRGs (APR-DRGs) for acute care hospitals, was developed by 3M Health
Information Systems, for exclusive use in LTCHs. The LTC-APR-DRG system
was designed to reflect the clinical characteristics of LTCH patients.
This case-mix classification model contains 26 base LTC-APR-DRGs,
subdivided by 4 severity of illness levels to yield 104 classification
levels. In this system, the patient's secondary diagnoses, their
interaction, and their clinical impact on the primary diagnosis
determine the severity level assigned to each of the 26 LTC-APR-DRGs.
The LTC-CMS-DRGs are based on research done by The Lewin Group
(Developing a Long-Term Hospital Prospective Payment System Using
Currently Available Administrative Data for the National Association of
Long-Term Hospitals (NALTH), July 1999). This model uses our existing
hospital inpatient DRGs with weights that accounted for the difference
in resource use by patients exhibiting the case complexity and multiple
medical problems characteristic of LTCHs. In order to deal with the
large number of low volume DRGs (all DRGs with fewer than 25 cases),
the LTC-CMS-DRG model groups low volume DRGs into 5 quintiles based on
average charge per discharge. The result was 184 classification groups
(179 DRG-based and 5 charge-based payment groups) based on patient data
from FYs 1994 and 1995. (CMS updated this analysis using patient data
from FYs 1999 and 2000 for purposes of system evaluations.)
As discussed in the March 22, 2002 proposed rule (67 FR 13426),
under either classification system, DRG weights would be based on data
for the population of LTCH discharges, reflecting the fact that LTCH
patients represent a different patient mix than patients in short-term
acute care hospitals. GROUPER software programs enabled us to examine
the most recent LTCH and acute care hospital inpatient prospective
payment system patient discharge data in light of the features of each
system. Using regression analyses and simulations, the impact of each
patient classification system on potential adjustment features for the
prospective payment system was assessed. (Data files used in these
analyses are specified in section V.B. of this preamble.) Our medical
staff as well as physicians involved in treatment of patients at LTCHs
provided additional input from the standpoint of clinical coherence and
practical applicability.
The system that we are adopting in this final rule for the LTCH
prospective payment system is the LTC-CMS-DRG GROUPER based on the
Lewin model that we proposed in the March 22, 2002 proposed rule (67 FR
13426). We believe this system accurately predicts costs without the
problems that we believe could be inherent with the APR-DRG system. (In
section IX. of this final rule, which describes the functioning of the
classification system as a component of the LTCH prospective payment
system, the LTC-CMS-DRGs are referred to as the LTC-DRGs.)
It is important to note that we have analyzed both systems based on
MedPAR files generated by LTCH patient data, using the best available
data. Since the TEFRA payment system, under which LTCHs are currently
paid, is not tied to patient diagnoses, the coding data from LTCHs have
not been used for payment. Nevertheless, data analyses indicated that
there was a minimal difference in both systems' abilities to predict
costs. (The difference in the R2, a statistical measure of
how much variation in resource use among cases is explained by the
models, was only 0.0313.)
In the March 22, 2002 proposed rule (67 FR 13426), we indicated
that we believed that either classification system would result in more
equitable payments for LTCHs compared to current payment methods. The
LTCH prospective payment system would generally improve the accuracy of
payments for more clinically complex patients. (See our discussion of
the TEFRA payment system in section III.C. of this final rule.) As the
Congress intended, the DRG weights under the LTCH prospective payment
system would reflect the ``* * * different resource use of long-term
care hospital patients.'' Patients requiring more intensive complex
services would be classified in LTC-DRGs with higher relative weights
and hospitals would receive appropriately higher payments for these
patients. In the proposed rule, we solicited comments on the impact
that one system may have over another as it applies to different kinds
of LTCHs. Any public comments that we received on the impact of both
systems are included in sections IX. and XII. of this final rule.
Although either system would result in more equitable payments to
LTCHs, we have several interrelated concerns about adopting the LTC-
APR-DRG system based upon its complexity, its clinical subjectivity,
and its utility as it relates to other Medicare prospective payment
systems. The LTC-APR-DRG model provides a clinical description of the
population of LTCHs, patients exhibiting a range of severity of illness
with multiple comorbidities as indicated by secondary diagnoses. The
clinical interaction of the primary diagnosis with these comorbidities
determines the severity level of the primary diagnoses, resulting in
the final assignment to a LTC-APR-DRG by the GROUPER software designed
for this system.
One aspect of our examination of the LTC-APR-DRG system included
clinical review of actual case studies provided by physicians at
several LTCHs and evaluations of the LTC-APR-DRG assignments that would
have resulted based on the clinical logic of
[[Page 55967]]
the APR-DRG GROUPER. A review of a number of those cases by different
medical professionals resulted in different possible classifications
for the GROUPER program. Looking at the same case, different views were
held as to which APR-DRG category or to which level of severity the
case should be grouped. Given the array of specialization at different
LTCHs reflecting a range of services and patient types, as described in
section V.C.7. of this preamble, we believe that we lack sufficient
data, at this point in time, to definitely determine the effect of
particular comorbidities on patient resource needs in LTCHs.
Furthermore, it appears that depending on how many of the diagnoses are
coded, medical judgement suggests that it could be possible to classify
the same patient in more than one group or level of severity. Because
of these concerns, we believe that payments under such a policy could
be insufficiently well-defined, given currently available data, to
ensure consistently appropriate Medicare payments.
We note that the prospective payment system that we have adopted
for IRFs is based on a patient classification system that includes a
measure of comorbidities, the combination of the case-mix group (CMG)
and comorbidity tier. In general, most IRF patients are treated for one
primary rehabilitation condition (for example, a hip replacement) that
is associated with functional measures and sometimes age. The CMGs
constructed for IRF patients account for diagnostic, functional, and
age variables. These variables are used to explain the variability in
the cost among the various CMGs. Some of the remaining variability in
cost could then be further explained by selected comorbidities which
the inpatient rehabilitation data showed were statistically
significant.
In contrast, determining whether particular comorbidities increase
the cost of a case for a LTCH patient is complicated by the nature of
the clinical characteristics of these patients. More specifically, many
LTCH patients have numerous conditions that may not all be relevant to
the cost of care for a particular discharge. Although the patient
actually has a specific condition, including this condition among
secondary diagnoses coded under the LTC-APR-DRG system may assign an
inaccurate severity level to the primary diagnosis and result in
inappropriate LTC-APR-DRG payment. We also believe that reliance on
existing comorbidity information submitted on LTCH bills could result
in significant variation in the assignment of the specific LTC-APR-
DRGs.
The LTC-CMS-DRG system is a system that is familiar to hospitals
because it is based on the current DRG system under the acute care
hospital inpatient prospective payment system. We believe that the
familiarity of the LTC-CMS-DRG model may best facilitate the transition
from the reasonable cost-based system to the prospective payment system
as well as providing continuity in payment methodology across related
sites of care (for example, an acute care hospitalization for a patient
with a chronic condition).
We further note that the adoption of severity-adjusted DRGs will be
explored by CMS for use under the acute care hospital inpatient
prospective payment system. In its June 2000 Report to Congress, MedPAC
recommended that the Secretary ''* * * improve the hospital inpatient
prospective payment system by adopting, as soon as practicable,
diagnosis related group refinements that more fully capture differences
in severity of illness among patients.'' (Recommendation 3A, p. 63)
In the March 22, 2002 proposed rule, although we did not propose
adopting the LTC-APR-DRGs in the LTCH prospective payment system, we
did solicit comments on its possible use.
Even though we are using LTC-DRGs in the LTCH prospective payment
system in this final rule, we may have the opportunity to propose a
severity-adjusted patient classification for LTCHs in the future,
particularly if the acute care hospital inpatient prospective payment
system moves in this direction. Any public comments that we received on
the possible use of LTC-APR-DRG or some other system in the future are
addressed in section IX. of this final rule.
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VI. Recommendations by MedPAC for a LTCH Prospective Payment System
As we noted in the section III.E. of this final rule, since the
establishment of the acute care hospital inpatient prospective payment
system in 1983, the topic of postacute care payments under Medicare has
been addressed in reports to the Congress prepared by ProPAC and its
successor, MedPAC. Recommendations in these reports encouraged
modifications to Medicare payment policies, examined the differences
among postacute care providers and within each category of providers,
and reiterated the goal of eventually implementing prospective payment
systems for providers being paid under the target amount payment
methodology.
In its March 1, 1996 Report and Recommendations to the Congress,
ProPAC recommended that ``prospective payment systems should be
implemented for all postacute services. The payment method for each
service should be consistent across delivery sites. The Secretary
should explore methods to control the volume of postacute service use,
such as bundling services for a single payment.'' (Recommendation 20,
p. 75)
The following year, in its March 1, 1997 Report and Recommendations
to the Congress, ProPAC recommended ``* * * the Congress and the
Secretary to consider the overlap in services and beneficiaries across
postacute care providers as they modify Medicare payment policies.
Changes to one provider's payment method could shift utilization to
other sites and thus fail to curb overall spending. To this end, ProPAC
commends HCFA's [now CMS'] efforts to identify elements common to the
various facility-specific patient classification systems to use in
comparing beneficiaries across settings.'' Ultimately, Medicare should
move towards more uniform payment policies across sites, the Report
continued, and ``payment amounts should vary depending on the intensity
and nature of the services beneficiaries require, rather than on the
setting. Further, providers should have incentives to coordinate
services or an episode* * *.'' (p. 60)
However, with enactment of the BBA, the Congress enacted
legislation to provide for distinct prospective payment systems for
HHAs (section 4603(b)), SNFs (section 4432(a)), and IRFs (section
4421). The BBA further required the development of a legislative
proposal for the case-mix adjusted LTCH prospective payment system.
Section 123 of the BBRA requires the Secretary to develop a per
discharge DRG-based system for LTCHs, and section 307(b)(1) of the BIPA
mandates that the Secretary examine the feasibility and impact of
basing payments to LTCHs using the existing or refined DRGs, modified
to account for the resource use of LTCH patients. Thus, the Congress
mandated distinct systems that would result in different payments,
depending on the type of Medicare provider, and not a system that is
uniform across sites of care.
Notwithstanding the mandate to establish postacute care prospective
payment systems, MedPAC continued to articulate concern regarding the
overlap of services among postacute providers. In its June 1998 Report
to Congress, MedPAC stated that ``all of these policy changes, in
combination with the fact
[[Page 55968]]
that similar services can be provided in multiple postacute settings,
indicate the need for continued monitoring and analysis of postacute
providers, policies, and service utilization.'' (p. 90)
In its March 1999 Report to Congress, MedPAC encouraged the
Secretary to ``* * * collect a core set of patient assessment
information across all postacute care settings.'' (Recommendation 5A,
p. 82)
Section 123 of the BBRA specifically mandated a per discharge, DRG-
based prospective payment system for LTCHs and established a timetable
for the presentation of the proposed system in a report to the Congress
by October 1, 2001 and for implementation of the actual prospective
payment system by October 1, 2002. Further direction for a distinct
prospective payment system for LTCHs was indicated in section 307(b) of
the BIPA, which directed the Secretary to examine a number of payment
adjustment factors and established a default system if the Secretary is
unable to meet the implementation timetable.
As we developed the prospective payment system for LTCHs described
in this final rule, however, we wish to state that we do not believe
that the establishment of distinct prospective payment systems for each
postacute care provider group eliminates the need to monitor payments
and services across all service settings. We endorse MedPAC's
Recommendation 3G, in its March 2000 Report to Congress, that
encourages the Secretary to ``assess important aspects of the care
uniquely provided in a particular setting, compare certain processes
and outcomes of care provided in alternative settings, and evaluate the
quality of care furnished in multiple-provider episodes of postacute
care.'' (p. 65) We intend to monitor the appropriateness of LTCH stays
by tracking the number of LTCH patients and SNF patients and the
frequency of subsequent admissions to an acute care hospital. We
believe these data will be valuable in assessing the outcome of care
provided in these settings.
Furthermore, we strongly support the additional research that will
be required to choose or to develop an assessment instrument that will
evaluate the quality of services delivered to beneficiaries in
postacute settings.
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VII. Evaluated Options for the Prospective Payment System for LTCHs
Section 123 of the BBRA and section 307(b) of the BIPA establish
the statutory authority for the development of the prospective payment
system for LTCHs that is discussed in this final rule. Under the BBRA,
we are required to:
Develop a per discharge prospective payment system for
inpatient hospital services furnished by LTCHs described in section
1886(d)(1)(B)(iv) of the Act.
Include an adequate patient classification system that is
based on DRGs that reflect the differences in patient resource use and
costs.
Maintain budget neutrality.
Submit a report to the Congress describing this system by
October 1, 2001.
Implement this system for cost reporting periods beginning
on or after October 1, 2002.
Section 307(b) of the BIPA modified the requirements of section 123
of the BBRA by requiring the Secretary to--
Examine the feasibility and the impact of basing payment
under the prospective payment system on the use of existing (or
refined) DRGs that have been modified to account for different resource
use of LTCH patients, as well as the use of the most recently available
hospital data.
Examine appropriate adjustments to LTCH prospective
payments, including adjustments to DRG weights, area wage adjustments,
geographic reclassification, outliers, updates, and a disproportionate
share adjustment.
Although the statutory mandate for development of the LTCH
prospective payment system established in the BBRA and the BIPA
requires a per discharge, DRG-based system, generally the statute gives
the Secretary broad discretion in designing the prospective payment
system. The design of any prospective payment system requires decisions
on the following issues:
The categories used to classify services such as DRGs.
The methodology for calculating the relative weights that
are assigned to each patient category to reflect the relative
difference in resource use across DRGs (these are relative values in
economic terminology).
The methodology for calculating the base rate, which is
the basis for determining the DRG-based Federal payment rates. It is a
standardized payment amount that is based on average costs from a base
period and also reflects the combined aggregate effects of the payment
weights and various facility-level and case-level adjustments.
Operating and capital-related costs may be combined in this base rate
or may be treated separately.
Adjustments to the base rate to reflect cost differences
across providers, such as disproportionate share adjustments, indirect
graduate medical education programs, and outliers.
Finally, a procedure for the transition from the current
system to the DRG-based prospective payment system must be established.
We pursued a two-pronged strategy as we developed the prospective
payment system for LTCHs. First, we analyzed the data and empirical
facts about LTCH patients and providers summarized in section V.C. of
this preamble. Secondly, in light of this information, we analyzed each
option based on regressions and simulations, using the data sets
described in section V.B. of this preamble.
Both technical and policy considerations were important in these
design proposals. We reviewed features of other recent prospective
payment systems designed or implemented by CMS for other postacute care
providers to determine the feasibility of including features in the
LTCH prospective payment system and to identify modifications that
might enhance their application for this system. In addition, we
considered factors that were important to the development of Medicare's
acute care hospital inpatient prospective payment system, such as urban
and rural location and whether the hospital served a disproportionate
share of low-income patients. We also analyzed clinical significance,
administrative simplicity, availability of data, and consistency with
other Medicare payment policies.
In addition to satisfying statutory requirements, the design of the
prospective payment system for LTCHs presented in this final rule is
the result of the following factors:
Our empirical understanding of the ``universe'' of LTCHs
and long-term care patients, as set forth in section V.C. of this
preamble.
Our experience with the acute care hospital inpatient
prospective payment system.
Consideration of recommendations in MedPAC's reports to
Congress on postacute care.
Our monitoring of the establishment and continuing
development and refinement of prospective payment systems for IRFs,
SNFs, and HHAs.
In addition, as we deliberated on the choice of the specific model
of DRG-based system that was to be used for the LTCH prospective
payment system, we gathered information from LTCH physicians and LTCH
representatives.
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VIII. Elements of the LTCH Prospective Payment System
A. Overview of the System
We are implementing a prospective payment system for LTCHs that
will use
[[Page 55969]]
information from LTCH patient records to classify patients into
distinct LTC-DRGs based on clinical characteristics and expected
resource needs. This patient classification system is discussed in
detail in section IX. of this final rule. The separate payments that
will be calculated for each LTC-DRG and any adjustments to these
payments are discussed in detail in section X.J. of this final rule.
Below we discuss the applicability of the requirements of the system
and other implementation provisions.
B. Applicability
1. Criteria for Classification
Our existing regulations at 42 CFR Part 482, Subparts A through D,
set forth the general conditions that hospitals must meet to qualify to
participate in Medicare. There are no additional conditions for LTCHs
as there are for psychiatric facilities.
Criteria for classification of a hospital as a LTCH for purposes of
payment are set forth in existing Sec. 412.23(e). Section 412.23(e)
provides that a LTCH must--
Have a provider agreement to participate as a hospital and
an average inpatient length of stay greater than 25 days; or for cost
reporting periods beginning on or after August 5, 1997, for a hospital
that was first excluded from the acute care hospital inpatient
prospective payment system in 1986, have an average inpatient length of
stay of greater than 20 days and demonstrate that at least 80 percent
of its annual Medicare inpatient discharges in the 12-month cost
reporting period ending in FY 1997 have a principal diagnosis that
reflects a finding of neoplastic disease, as defined in regulations.
The calculation of the average inpatient length of stay is calculated
by dividing the number of total inpatient days (less leave or pass
days) by the number of total discharges for the hospital's most recent
complete cost reporting period.
Meet the additional criteria specified in Sec. 412.22(e)
if it is to be classified as a hospital-within-a-hospital and to be
excluded from the acute care hospital inpatient prospective payment
system.
Meet the additional criteria specified in Sec. 412.22(h)
if it is to be classified as a satellite facility and to be excluded
from the acute care hospital inpatient prospective payment system.
In the March 22, 2002 proposed rule, we proposed that we would
apply the existing criteria described above for classification as a
LTCH under the LTCH prospective payment system with one exception
relating to the average length of stay requirement discussed in section
VIII.B.2. below.
Comment: One commenter described a specific LTCH that specializes
in end-of-life palliative care for advanced stage cancer patients.
Because of the costs associated with this LTCH's case-mix, the
commenter was concerned that the LTCH would be unable to continue to
offer this type of care based on the payments it expected to receive
under the LTCH prospective payment system. Therefore, the commenter
requested that CMS allow the hospital to qualify as either a critical
access hospital (CAH) or a cancer hospital and continue to be exempted
from the acute care hospital inpatient prospective payment system and
be paid on a reasonable cost basis.
Response: In order for a hospital to be classified as a CAH and not
as a LTCH, the hospital would have to meet the statutory criteria for
classification as a CAH in section 1820(c)(1)(B) of the Act. Similarly,
a hospital would have to meet the statutory criteria for classification
as a cancer hospital in section 1886(d)(1)(B)(v) of the Act to be
classified as such. To the extent that a hospital does not satisfy the
statutory criteria to be classified as a CAH or a cancer hospital and
continues to satisfy the statutory criteria to be classified as a LTCH,
the hospital will continue to be classified as a LTCH as required by
the statute. Any changes in either of these criteria and the
accompanying requirements would require legislative action.
Comment: Several commenters referenced existing provisions at
Sec. 412.22(f) that ``grandfather'' certain LTCHs for participation in
the Medicare program and questioned how this status would be affected
by the implementation of the LTCH prospective payment system.
Response: We interpret section 4417 of the BBA, codified as section
1886(d)(1)(B) of the Act and implemented under in Sec. 412.22(f), to
permit existing LTCHs that were designated LTCHs on or before September
30, 1995, and were co-located with acute care hospitals as hospitals-
within-hospitals, to be exempt from compliance with Sec. 412.22(e)
concerning the ownership and control requirements for hospital-within-
hospital status without losing their status as hospitals excluded from
the acute care hospital inpatient prospective payment system. The
``grandfathered'' status conferred by the statute, which allowed these
particular LTCHs to retain the preexisting relationships with their
host hospitals, will be unaffected by the implementation of the
prospective payment system for LTCHs. However, we emphasize that, for
these ``grandfathered'' LTCHs to receive payment under the LTCH
prospective payment system, they must still satisfy the new
requirements established under the LTCH prospective payment system for
the average length of stay for Medicare patients of greater than 25
days under revised Sec. 412.23(e)(2) discussed below. Moreover, since
we believe that the intent of the statute was to only exempt those pre-
FY 1996 LTCHs that are hospitals-within-hospitals from the requirements
of Sec. 412.23(e), these ``grandfathered'' LTCHs will be subject to the
onsite discharge and readmission policies set forth in Sec. 412.532, in
the same way that they were under the 5-percent threshold established
by the TEFRA system (64 FR 41537, July 30, 1999).
Comment: Two commenters responded to the description of the
universe of LTCHs in the proposed rule by suggesting that CMS require
LTCHs that treat large percentages of rehabilitation patients to seek
certification as IRFs. Another commenter urged CMS to require LTCHs to
monitor their admission criteria to require evaluation of
rehabilitation needs and that patients who predominantly need
rehabilitation, without complex acute medical needs, should be excluded
from admission to a LTCH. The commenter also suggested that CMS enforce
an equivalence of payment between LTCHs and IRFs for patients with
acute rehabilitation needs. An additional commenter suggested that
LTCHs specializing in treating patients with psychiatric LTC-DRGs be
required to seek certification as psychiatric facilities.
Response: Under section 1886(d)(1)(B) of the Act, the prospective
payment system for acute care hospital inpatient operating costs set
forth in section 1886(d) of the Act does not apply to several specified
types of hospitals, including LTCHs which are defined in section
1886(d)(1)(B)(iv)(I) of the Act as ``* * * a hospital which has an
average inpatient length of stay (as determined by the Secretary) of
greater than 25 days.'' Section 1886(d)(1)(B)(iv)(II) of the Act also
provides another definition of LTCHs: specifically, a hospital that
first received payment under this subsection in 1986 which has an
average inpatient length of stay (as determined by the Secretary) of
greater than 20 days and has 80 percent or more of its annual Medicare
inpatient discharges with a principal diagnosis of neoplastic disease
in the 12-month cost reporting period ending in FY 1997. Accordingly,
the statute does not provide any exclusions from payment as
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a LTCH based on any other criteria, such as treating rehabilitation
patients or psychiatric patients. As required by the BBRA and the BIPA,
we designed a prospective payment system for LTCHs, effective October
1, 2002, as a distinct classification of hospitals excluded from the
acute care hospital inpatient prospective payment system. Congressional
action would be required for any additional requirements or
restrictions for classification as LTCHs. After a hospital qualifies as
a LTCH and meets the conditions of participation set forth in existing
regulations at 42 CFR 482, Subparts A through D, the hospital is free
to determine the type of services it will provide. If a LTCH chooses to
be treated as a particular type of hospital for Medicare payment
purposes, it would have to meet the statutory criteria for that
particular type of hospital.
Comment: Two commenters questioned specific aspects of the Medicare
requirements for hospitals to be paid under the LTCH prospective
payment system. One of the commenters suggested using the collection of
information requirements established under the Paperwork Reduction Act
of 1995 as a rationale for urging CMS to gather more information on
LTCH patients so that CMS could develop a mandatory functional status
measure for LTCH patients falling into three LTC-DRGs that the
commenter identified as reflecting rehabilitation needs. The other
commenter urged CMS to require the development and use of a patient
assessment tool for LTCH patients classified in rehabilitation LTC-DRGs
similar to the IRF patient assessment instrument (PAI).
Response: Section 123 of the BBRA and section 307 of the BIPA
confers broad authority on the Secretary to design and implement a
prospective payment system for LTCHs. In particular, although section
123(a)(2) of the BBRA provides that the Secretary may require LTCHs to
submit such information as the Secretary requires to develop a LTCH
prospective payment system, the statute contains no requirement for
LTCHs to collect information on measuring an individual patient's
functional status. Section 123 of the BBRA provided the Secretary with
the authority to collect such information from LTCHs that may be
necessary to develop the LTCH prospective payment system. The system we
have developed incorporates all of the DRGs used in the acute care
hospital inpatient prospective payment system. While many patients
admitted to LTCHs are rehabilitation patients, most of the patients
treated by LTCHs are not rehabilitation patients. Accordingly, since
the IRF prospective payment system, which was developed for
rehabilitation patients, incorporates functional status as an integral
part of the classification system, it was necessary to collect patient
functional status information. However, since, for LTCHs, we have
adopted the same DRGs used for inpatient acute care hospitals,
functional status is not a part of that system and, therefore, that
information is not necessary to collect.
2. Change in the Average 25-Day Total Inpatient Stay Requirement
Section 1886(d)(1)(B)(iv)(I) of the Act describes a LTCH generally
as ``a hospital which has an average inpatient length of stay (as
determined by the Secretary) of greater than 25 days.'' Thus, the
statute gives the Secretary broad discretion in determining the average
inpatient length of stay for hospitals for purposes of determining
whether a hospital warrants exclusion from the acute care hospital
inpatient prospective payment system under section 1886(d) of the Act.
Existing Medicare regulations at Secs. 412.23(e)(1) and (e)(2) include
all hospital inpatients in this calculation of the average inpatient
length of stay.
As we indicated in the March 22, 2002 proposed rule (67 FR 13430),
our data revealed that approximately 52 percent of Medicare patients at
LTCHs have lengths of stay of less than two-thirds of the average
length of stay for the LTC-DRGs, and 20 percent have a length of stay
of even less than 8 days. This means that some hospitals, while
currently qualifying as LTCH by averaging non-Medicare long-stay
patients to maintain a length of stay of over 25 days, do not generally
furnish ``long-term care'' to their Medicare patients. In these
situations, many of the hospitals' short-stay Medicare patients could
be receiving appropriate services as patients at acute care hospitals.
Under the LTCH prospective payment system, the LTC-DRG weights and
standard Federal payment rate are based on the charges and costs of
services furnished to LTCH patients, which are typically more medically
complex and more costly than those furnished to acute care hospital
patients.
The LTCH prospective payment system will result in higher per
discharge payments for LTCHs than payments under the acute care
hospital inpatient prospective payment system for patients that will
group into identical DRGs under each system. Therefore, we stated that
we believed that application of current policy, which factors in non-
Medicare patients' lengths of stay in determining LTCH status, could
result in inappropriately higher payments for those Medicare short-stay
patients who happen to be treated in a LTCH instead of an acute care
hospital. This is the case when a hospital does not reach the mandatory
25-day average length of stay for designation as a LTCH without non-
Medicare patients included in the calculation. Therefore, we proposed
that if a hospital were not treating Medicare patients that, on
average, require the more costly services offered at LTCHs that
differentiate these hospitals from acute care hospitals, Medicare
payments would be determined under the acute care hospital inpatient
prospective payment system. Such payments would be lower for each acute
care DRG than for each LTC-DRG, reflecting the lower costs of acute
care hospitals.
Under the current reasonable cost-based reimbursement system,
Medicare payments to LTCHs are commensurate with the actual reasonable
costs incurred by the hospital. Therefore, under that system, Medicare
payments for shorter lengths of stay patients reflect the lower costs
of those patients. However, under the LTCH prospective payment system,
which is based on average costs of treatment for particular diagnosis,
the hospital will receive prospective payments based on the average
costs for these much shorter length of stay patients. Even under our
short-stay outlier policy, as described in section X.C. of this final
rule, the hospital will have the opportunity to be paid 120 percent of
its costs.
Therefore, in the March 22, 2002 proposed rule, we proposed to
include the hospital's Medicare patients, but not non-Medicare
patients, in determining the average inpatient length of stay
(Sec. 412.23(e)(2)) for purposes of section 1886(d)(1)(B)(iv)(I) of the
Act.
Our proposal was based on a belief that there would be a strong
incentive for LTCHs not to admit many short-stay Medicare patients
since doing so could jeopardize their status as a LTCH. Instead, those
patients could receive appropriate care at an acute care hospital and
the care will be paid under the acute care hospital inpatient
prospective payment system. Furthermore, our proposal to change the
methodology for determining the average inpatient length of stay to be
based only on Medicare patients was consistent with the intent of our
proposed policies to make different payments for cases of very short-
short stay discharge and short-stay outliers. These proposed policies
also were intended to discourage LTCHs under the prospective payment
system from treating Medicare patients who do not
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require the more costly resources of LTCHs and who could reasonably be
treated in acute care hospitals.
We received a substantial number of comments on the proposed change
to the average 25-day length of stay requirement.
Comment