[Federal Register: March 22, 2002 (Volume 67, Number 56)]
[Proposed Rules]
[Page 13415-13494]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22mr02-26]
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Part II
Department of Health and Human Services
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Centers for Medicare & Medicaid Services
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42 CFR Part 412 et al.
Medicare Program; Prospective Payment System for Long-Term Care
Hospitals: Proposed Implementation and FY 2003 Rates; Proposed Rule
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DEPARTMENT OF HEALTH AND HUMAN SERVICES
Centers for Medicare & Medicaid Services
42 CFR Parts 412, 413, and 476
[CMS-1177-P]
RIN 0938-AK69
Medicare Program; Prospective Payment System for Long-Term Care
Hospitals: Proposed Implementation and FY 2003 Rates
AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.
ACTION: Proposed rule.
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SUMMARY: This proposed rule would establish 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 proposed rule would
implement section 123 of the Medicare, Medicaid, and SCHIP [State
Children's Health Insurance Program] Balanced Budget Refinement Act
(BBRA) of 1999 and section 307(b) of the Medicare, Medicaid, and SCHIP
Benefits Improvement and Protection Act (BIPA) of 2000. 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 proposed rule would replace the reasonable cost-based payment
system under which the LTCHs are currently paid.
DATES: Comments will be considered if received at the appropriate
address, as provided below, no later than 5 p.m. on May 21, 2002.
ADDRESSES: Mail written comments (an original and three copies) to the
following address only: Centers for Medicare & Medicaid Services,
Department of Health and Human Services, Attention: CMS-1177-P, P.O.
Box 8013, Baltimore, MD 21244-8013.
To ensure that mailed comments are received in time for us to
consider them, please allow for possible delays in delivering them. If
you prefer, you may deliver (by hand or courier) your written comments
(an original and three copies) to one of the following addresses: Room
443-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW.,
Washington, DC 20201, or Room C5-16-03, Central Building, 7500 Security
Boulevard, Baltimore, MD 21244-1850.
(Because access to the interior building is not readily available to
persons without Federal Government identification, commenters are
encouraged to leave their comments in the CMS drop slots located in the
main lobby of the building. A stamp-in clock is available for
commenters wishing to retain proof of filing by stamping in and
retaining an extra copy of the comments being filed.)
Comments mailed to the addresses indicated as appropriate for hand
or courier delivery may be delayed and could be considered late.
Because of staff and resource limitations, we cannot accept
comments by facsimile (FAX) transmission. In commenting, please refer
to file code CMS-1177-P. For information on viewing public comments,
see the beginning of the SUPPLEMENTARY INFORMATION section.
FOR FURTHER INFORMATION CONTACT:
Tzvi Hefter, (410) 786-4487, or Judy Richter, (410) 786-2590 (General
information, transition payments, payment adjustments)
Michele Hudson, (410) 786-5490 (Calculation of the payment rates,
relative weights/case-mix index, update factors, payment adjustments)
Ann Fagan, (410) 786-5662 (Patient classification system)
SUPPLEMENTARY INFORMATION:
Inspection of Public Comment
Comments received timely will be available for public inspection as
they are received, generally beginning approximately 3 weeks after
publication of a document, at 7500 Security Boulevard, Baltimore, MD
21244, Monday through Friday of each week from 8:30 to 5 p.m. Please
call (phone: (410) 786-7197) to make an appointment to view the public
comments.
Availability of Copies and Electronic Access
Copies: To order copies of the Federal Register containing this
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This Federal Register document is also available from the Federal
Register online database through GPO Access, a service of the U.S.
Government Printing Office. The Web site address is: http://
www.access.gpo.gov/nara/index.html.
To assist readers in referencing sections contained in this
preamble, we are providing the following table of contents.
Table of Contents
I. Background
A. Overview of Current Payment System for LTCHs
1. Exclusion of Certain Facilities from the Acute Care Hospital
Inpatient Prospective Payment System
2. Requirements for LTCHs to be Excluded from the Acute Care
Hospital Inpatient Prospective Payment System
3. Payment System Requirements Prior to the BBA
4. Effect of the Current Payment System
5. Research and Discussion of a Prospective Payment System for
LTCHs Prior to the BBA
B. Requirements of the BBA, BBRA, and BIPA for LTCHs
1. Provisions of the Current Payment System
2. Provisions for a LTCH Prospective Payment System
C. Research Supporting the Establishment of the LTCH Prospective
Payment System: Legislative Requirements
D. Description of Sources of Research Data
E. 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 Post-Acute Care Facilities
F. Overview of System Analysis for the Proposed LTCH Prospective
Payment System
G. Evaluation of DRG-Based Patient Classification Systems
H. Recommendations by MedPAC for a LTCH Prospective Payment
System
I. Evaluated Options for the Proposed Prospective Payment System
for LTCHs
II. General Discussion of the Proposed LTCH Prospective Payment
System
A. Goals of the Proposed LTCH Prospective Payment System
B. Applicability of the Proposed LTCH Prospective Payment System
C. LTCHs Not Subject to the Proposed LTCH Prospective Payment
System
D. Summary Description of the Proposed LTCH Prospective Payment
System
1. Procedures
[[Page 13417]]
2. Patient Classification Provisions
3. Payment Rates
4. Limitation on Charges to Beneficiaries
5. Medical Review Requirements
6. Furnishing of Inpatient Hospital Services Directly or Under
Arrangements
7. Reporting and Recordkeeping Requirements
8. Implementation of the Proposed Prospective Payment System
III. 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. Proposed 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 ICD-9-CM System
4. Coding Rules and Use of ICD-9-CM in LTCHs
IV. Proposed Payment System for LTCHs
A. Development of the Proposed LTC-DRG Relative Weights
1. Overview of Development of the Proposed LTC-DRG Relative
Weights
2. Steps for Calculating the Proposed Relative Weights
B. Special Cases
1. Very Short-Stay Discharges
2. Short-Stay Outliers
3. Interrupted Stay
4. Other Special Cases
5. Onsite Discharges and Readmittances
6. Additional Issues for Onsite Facilities
7. Monitoring System
C. Payment Adjustments
1. Area Wage Adjustment
2. Adjustment for Geographic Reclassification
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
D. Calculation of the Proposed Standard Federal Payment Rate
1. Overview of the Development of the Proposed Standard Payment
Rate
2. Development of the Proposed Standard Federal Payment Rate
E. Development of the Proposed Federal Prospective Payments
F. Computing the Proposed Adjusted Federal Prospective Payments
G. Transition Period
H. Payments to New LTCHs
I. Method of Payment
V. Provisions of the Proposed Rule
VI. Regulatory Impact Analysis
A. Introduction
1. Executive Order 12866
2. Regulatory Flexibility Act (RFA)
3. Impact on Rural Hospitals
4. Unfunded Mandate
5. Federalism
B. Anticipated Effects
1. Budgetary Impact
2. Impact on Providers
3. Calculation of Current Payments
4. Calculation of Proposed 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
VII. Collection of Information Requirements
VIII. Response to Comments
Regulations Text
Appendix A--Proposed Market Basket for LTCHs
Appendix B--Proposed Update Framework
Acronyms
Because of the many terms to which we refer by acronym in this
proposed rule, we are listing the acronyms used and their corresponding
terms in alphabetical order below:
APR-DRGs All patient-defined, 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.
ProPAC Prospective Payment Assessment Commission.
SNF Skilled nursing facility.
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Public Law 97-
248.
I. 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. 97-248) 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
prospective payment system, certain specialty hospitals are excluded
from that system and continue to be paid their reasonable costs subject
to the cap established under TEFRA. 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.
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
(BBRA) (Pub. L. 106-113), and the Medicare, Medicaid, and SCHIP
Benefits Improvement and Protection Act (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 Congress by October 1, 1999,
for a case-mix adjusted LTCH prospective payment
[[Page 13418]]
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 inpatient hospital
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, annual per
discharge limit) for these hospitals until cost reporting periods
beginning on or after October 1, 2002. At the same time that Congress
modified the payment system based on limits on target amounts, it also
included in the BBA a provision 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,
Congress refined some policies of the BBA prior to the implementation
of 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 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 where feasible to account for resource use by LTCHs.
In this proposed rule, we set forth the proposed Medicare
prospective payment system for LTCHs as authorized under the BBRA and
BIPA. Below, we discuss the development, proposed policies, and
proposed implementation of the proposed LTCH prospective payment
system. These discussions include the following:
An overview of the current payment system for LTCHs.
A discussion of the statutory requirements for developing
and implementing a LTCH prospective payment system.
A discussion of research findings on LTCHs.
A detailed discussion of the proposed LTCH prospective
payment system, including the patient classification system, relative
weights, payment rates, additional payments, and the budget neutrality
requirements mandated by section 123 of Public Law 106-113.
An analysis of the estimated impact of the proposed LTCH
prospective payment system on the Federal budget and LTCHs.
Proposed changes to existing regulations and the
establishment of proposed regulations in 42 CFR Chapter IV to implement
the proposed LTCH prospective payment system.
A. Overview of Current Payment System for LTCHs
1. 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, cancer hospitals were added to this list by section 6004(a) of
the Omnibus Budget Reconciliation Act of 1989 (Pub. L. 101-239).
The 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 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 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 hospital inpatient prospective payment
system on October 1, 1983, including the initial publication in the
Federal Register of the rules and regulations for the 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 hospital inpatient
prospective payment system. The regulations concerning exclusion of
LTCHs from the hospital inpatient prospective payment system are found
in 42 CFR part 412, subpart B.
2. 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 defined in section 1886(d)(1)(B)(iv)(I) of
the Act as ``* * * a hospital which has an average
[[Page 13419]]
inpatient length of stay (as determined by the Secretary) of greater
than 25 days.'' Public Law 105-33 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 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.
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).)
3. Payment System Requirements Prior to the BBA
Hospitals that are excluded from the 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 prior to
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)).
4. Effect of the Current Payment System
Utilization of post-acute care services has grown rapidly in recent
years since the implementation of the acute care hospital inpatient
prospective payment system. Average length of stay in acute care
hospitals has decreased, and patients are increasingly being discharged
to post-acute care settings such as LTCHs, skilled nursing facilities
(SNFs), home health agencies (HHAs), and inpatient rehabilitation
facilities (IRFs) to complete their course of treatment. The increased
utilization of post-acute care providers, including hospitals excluded
from the 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
post-acute 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).
Furthermore, 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 is 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 the 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
[[Page 13420]]
are outlined in section I.B.1. of this preamble.
5. 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 the 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 the 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 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
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's] 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 post-acute 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 post-acute 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 post-acute
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
post-acute care providers: SNFs (section 4432(a)), IRFs (section 4421),
and HHAs (section 4603(b)). In addition, Congress directed the
Secretary to develop a legislative proposal to pay LTCHs prospectively
as well (section 4422).
B. Requirements of the BBA, BBRA, and BIPA for LTCHs
1. Provisions of the Current Payment System
a. 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 hospital inpatient prospective payment system
(sections 4411, 4412, 4413, 4414, 4415, 4416, 4417, 4418, and 4419).
Provisions of these amendments that related to the current payment
system were explained in detail and implemented in our 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 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 Public Law 105-33 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 prospective payment
system that meet specified criteria. If a hospital is eligible for the
continuous improvement bonus, the bonus payment is equal to the lesser
of: (1) 50 percent of the amount by which operating cost 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. Prior to 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
[[Page 13421]]
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 prior to 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.
b. BBRA. With the enactment of the BBRA of 1999, 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 our interim final rule published
in the Federal Register on August 1, 2000 (65 FR 47026) and in our
final rule also published on August 1, 2000 (65 FR 47054).
Section 4414 of the BBA had 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 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.
c. BIPA. Two provisions of BIPA that amended section 1886(b)(3) of
the Act were directed at LTCHs. Section 307(a) of 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) 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.
2. Provisions for a LTCH Prospective Payment System
a. 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 under the Medicare program, for submission
by October 1999 based on consideration of several payment
methodologies, including the feasibility of expanding the current DRGs
and the prospective payment system currently in place for acute care
hospitals.
b. 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.
c. BIPA. The BIPA reiterated the dates of implementation of the
LTCH prospective payment system set forth in the BBRA. This statute
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, 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.
C. Research Supporting the Establishment of the LTCH Prospective
Payment System: 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, 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 proposed Medicare LTCH
prospective payment system based on DRGs.
D. 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 description of the universe of LTCHs in section I.E. of this
proposed rule is based on calendar year (CY) 1997 MedPAR, the HCRIS
file containing the best available cost data for cost reporting periods
that began during FYs 1996 and 1997, and 1997 data from the Online
Survey Certification and Reporting System (OSCAR).
[[Page 13422]]
The 1997 OSCAR data provided information from the State survey and
certification process to identify and characterize providers that
participate in Medicare and Medicaid and includes 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.
E. 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 ``post-
acute 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 I.C.
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 post-acute 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 proposed prospective payment
system for LTCHs presented in this proposed rule.
2. General Medicare Policies
Inpatient stays at LTCHs are covered under the Part A hospital
benefit and include room and board, medical and nursing services,
laboratory tests, X-rays, 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 ``benefit period,'' which is a period that begins with
admission 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 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. A patient with a long LTCH stay, however, is
subject to a coinsurance payment ($198 in 2002) for days 61 through 90
of hospital use during a benefit period. For the lifetime reserve days,
the Medicare beneficiary is subject to a daily coinsurance amount ($396
in 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. 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 I.A.2 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 number
translates into an average of approximately one facility per 200,000
Medicare enrollees. As can be seen in Table 1, LTCHs are not
distributed across all States in proportion to the number of Medicare
enrollees in those States. They are unevenly distributed across the
United States, with one-third (72 of 203) located in Massachusetts,
Texas, and Louisiana. These three States together account for 36
percent of the LTCHs, but only fewer than 10 percent of Medicare
enrollees. Furthermore, 13 small States have no LTCHs, although they
account for approximately 7 percent of Medicare enrollees. In contrast,
the three largest Medicare States (California, Florida, and New York)
account for 24.1 percent of Medicare enrollees together, but only 13.8
percent of LTCHs.
Table 1.--Percentage Distribution of Number of Long-Term Care Hospitals (LTCHs), Medicare Enrollees, and
Certified Beds, by State, 1997
----------------------------------------------------------------------------------------------------------------
Number of Percent of Number of Percent of
State Number of Percent of medicare medicare certified certified
LTCHs LTCHs enrollees enrollees beds 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
[[Page 13423]]
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 and Certification Reporting System (OSCAR).
Although the distribution of certified beds generally tracks 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 has only 8.4 percent of LTCHs,
but 16.8 percent of Medicare-certified beds. In contrast, Texas has
17.7 percent of LTCHs, but only 9.9 percent of the certified beds.
5. Characteristics by Date of Medicare Participation
The OSCAR program 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 account 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 is 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
hospital inpatient prospective payment system and 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.)
[[Page 13424]]
Old LTCHs are 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 is quite different. Old
LTCHs are 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, are
proprietary facilities. Virtually no new LTCHs are 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 hospital inpatient prospective payment system. The presence of a
long-term care ``unit'', excluded from the 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 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 gaming of the Medicare 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 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
prospective payment system on or before September 30, 1995, as an LTCH,
shall 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. (See Sec. 412.22(f).)
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
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 addition,
the satellite facility must independently comply with the qualifying
criteria for exclusion from the 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 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 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 are 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 are the most common caseload
concentration--in 1997, 13 percent of LTCHs have a caseload
concentration of 50 percent to 75 percent, and another 7 percent of
LTCHs have more than 75 percent of their cases in this MDC.
The other three MDCs that make 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) are
all related to rehabilitation needs. (Because rehabilitation-related
DRGs are common
[[Page 13425]]
to LTCHs and fall into the ``Factors Influencing Status'' MDC, we are
proposing to classify all cases in this MDC as rehabilitation services
for the purpose of this analysis.) Seven percent of LTCHs have a
majority of their caseload in an MDC related to rehabilitation-related
services. A significantly less common concentration is seen in the 2
percent of LTCHs that have a majority of their patients in the mental
diseases and disorders MDC. All but two LTCHs in our analysis have some
share of patients with respiratory system problems. Similarly, all but
five LTCHs have 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 have high proportions of cases in the respiratory MDC
and the rehabilitation-related MDCs category, although some LTCHs do
not serve either of these populations in great numbers. Few LTCHs do
not have a significant share of their caseload in either the
respiratory MDC or the rehabilitation-related MDCs category. Only 2
percent of multispecialty LTCHs have less than 25 percent of their
caseload in either specialty group. Similarly, only 7 percent of
multispecialty facilities have less than 35 percent of their caseload
in either of the two groups. In contrast, about 60 percent of LTCHs
have at least half of their caseload in either the respiratory MDC or
the rehabilitation-related MDCs category. This high share demonstrates
that, despite their assignment to the multispecialty category, most
LTCHs serve a high percentage of patients with respiratory or
rehabilitation problems, or both.
Although respiratory and rehabilitation specialty facilities are
prevalent in the LTCH population, there are also some ``niche'' LTCHs
that have unique patient populations or provide uncommon services.
These hospitals include, for example, a large hospital where most
admitted individuals (90 percent) die in the facility.
Several LTCHs provide services for special populations. One
facility provides services for a prison population. A large share of
this facility's funding is through Medicaid; cost report data show
Medicaid covers two-thirds of its patient stays.
Some other facilities work with similarly specialized populations
and have very small Medicare caseloads. In particular, two facilities
that focus 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 indicates that a preponderance of the LTCHs can be
classified in distinct specialty groups that focus on adult
rehabilitation and respiratory system care.
8. Sources and Destinations of LTCH Patients
Another useful perspective on LTCHs is the pattern of sources from
which patients are admitted to LTCHs and destinations to which LTCH
patients are discharged. This information shows how such transition
patterns differ among the specialty groups. In general, the findings
are consistent with the notion that LTCHs as a group are heterogeneous
in terms of the patients they serve.
The vast majority (70 percent) of LTCH patients are admitted from
acute care hospitals. Within this group, acute care patients whose
stays are 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. After acute care hospitals, direct admission from the community
is the next most common source of admissions (14 percent) to LTCHs.
The admission patterns vary somewhat by LTCH specialty type.
Notably, 85 percent of admissions to respiratory specialty LTCHs are
from acute care hospitals, including 22 percent that are acute care
hospital outlier cases. A very small percentage (7 percent) of
admissions to respiratory specialty LTCHs are from the community. In
contrast, the admission sources for the rehabilitation specialty LTCHs
are 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 transition from acute care
hospital outlier stays (12 percent). A relatively large share (11
percent) of patients at rehabilitation specialty LTCHs are 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 is quite different from those of the other specialties. A
relatively small percentage (31 percent) of patients are admitted from
acute care hospitals and only 2 percent are admitted after being acute
care hospital outliers. In contrast, large proportions are admitted
directly from the community (40 percent) or from some other type of
Medicare provider (27 percent).
An analysis of the pattern of discharge destinations for LTCHs
shows that, overall, 38 percent of LTCH stays are discharged to the
community without additional Medicare services. Equal percentages (18
percent) are discharged to SNFs and acute care hospitals, and 21
percent of patients are discharged to HHAs.
Some variations in discharge destination patterns exist among LTCHs
by specialty. Relative to the overall sample, the respiratory specialty
LTCHs have 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). Rehabilitation specialty
facilities, however, have 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
[[Page 13426]]
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 Post-Acute Care Facilities
Urban's research also produced data regarding a comparison of LTCHs
with other post-acute 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 post-
acute settings because of the nature of each category of post-acute
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 post-acute 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 have several diagnosis codes on their
Medicare claims, indicating that they have multiple comorbidities and
are probably less stable upon admission than patients admitted to other
post-acute care settings. Relative to IRFs, LTCHs have 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 provide 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) is twice that of IRF
patients (9 percent). The share of LTCH patients over 85 years old is
slightly higher (18 percent) compared to IRF patients (14 percent).
LTCHs also have a higher proportion of male patients and a lower
proportion of white patients than IRFs. LTCHs have long median lengths
of stay: 21 days versus 16 days for IRFs. About one-third of the LTCH
Medicare stays are 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 have the highest mean and median length of stay in the
LTCH, the highest proportion male, the highest proportion white, and
the lowest proportion of Medicaid-eligible patients. However, in terms
of age, those with prior hospital stays (whether outlier or nonoutlier)
are quite different from those with other admission sources. Those
without a prior acute care hospital stay are younger and about twice as
many are under age 65, whose mean age is 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
nonoutliers are 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 that we are proposing in this proposed rule were
determined in part based on analysis of the above data and information
gathered on LTCHs and their Medicare patients.
F. Overview of System Analysis for the Proposed 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.
Specifically, for this proposed rule, 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
proposed prospective payment system.
Data simulation of various system features to analyze
their impact on the design of the proposed prospective payment system.
A data file was constructed to serve as the basis of our proposed
patient classification system 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 proposed prospective
payment system in this proposed rule. We relied upon patient charge
data from FY 2000 MedPAR for setting proposed LTC-DRG weights and upon
costs data from FY 1998 and FY 1999 cost reports for proposed payment
rates. We expect that the availability of updated FY 2000 MedPAR data
and updated FY 1999 HCRIS data, further analysis of the data file, and
review of the comments that we receive in response to this proposed
rule may result in refinements to our proposed policies, particularly
in the areas of weights and rates.
G. Evaluation of DRG-Based Patient Classification Systems
Section 307(b) 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 Dr. Norbert
Goldfield, Clinical Director of 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-
[[Page 13427]]
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.)
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 I.C.2.) 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 proposing for the LTCH prospective payment
system is the LTC-CMS-DRG GROUPER that is based on the Lewin model
because we believe it accurately predicts costs without the problems
that we believe could be inherent with the APR-DRG system. (In section
III. of this proposed rule, which describes the functioning of the
classification system as a component of the proposed LTCH prospective
payment system, the LTC-CMS-DRGs are referred to as the proposed 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.)
We believe that either classification system would result in more
equitable payments for LTCHs compared to current payment methods. The
proposed 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 I.A. of this proposed
rule.) As the Congress intended, the DRG weights under the proposed
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. We solicit comments on the impact
one system may have over another as it applies to different kinds of
LTCHs.
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 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 I.E.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 are aware that the forthcoming prospective payment system 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 cost-based system to the prospective payment system as well as
providing continuity in payment methodology across related sites of
care (for example,
[[Page 13428]]
an acute care hospitalization for a patient with a chronic condition.).
We further wish to note that the adoption of severity-adjusted DRGs
will be explored by CMS for use under the 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.)
Although we are not proposing LTC-APR-DRGs in this proposed rule, we
are interested in receiving comments on this issue. We also wish to
note that in the event the LTCH prospective payment system is
implemented using LTC-DRGs, we could 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.
H. Recommendations by MedPAC for a LTCH Prospective Payment System
As we noted in the section I.A.5. of this proposed rule, since the
establishment of the acute care hospital inpatient prospective payment
system in 1983, the topic of post-acute 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 post-acute 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 post-acute services. The payment method for each
service should be consistent across delivery sites. The Secretary
should explore methods to control the volume of post-acute 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
post-acute 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's) 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(a) of BIPA
mandates that the Secretary examine the feasibility and impact of
basing payments to LTCHs using the existing DRGs, modified to account
for the resource use of LTCH patients. Thus, Congress mandated systems
that would result in different payments, depending on the site of
service, and not a system that is uniform across sites.
Notwithstanding the mandate to establish post-acute care
prospective payment systems, MedPAC continued to articulate concern
regarding the overlap of services among post-acute providers. In its
June 1998 Report to Congress, MedPAC stated that ``all of these policy
changes, in combination with the fact that similar services can be
provided in multiple post-acute settings, indicate the need for
continued monitoring and analysis of post-acute 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 post-acute care settings.'' (Recommendation 5A,
p. 82)
Section 123 of 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
BIPA, which directed the Secretary to examine a number of payment
adjustment factors and establishes a default system if the Secretary is
unable to meet the implementation timetable.
As we develop the prospective payment system for LTCHs described in
this proposed rule, however, we wish to state that we do not believe
that the establishment of distinct prospective payment systems for each
post-acute 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 post-acute
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 this 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 post-
acute settings.
I. Evaluated Options for the Proposed Prospective Payment System for
LTCHs
Section 123 of BBRA and section 307(b) of BIPA establish the
statutory authority for the development of the proposed prospective
payment system for LTCHs that is discussed in this proposed 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 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
[[Page 13429]]
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.
In the event that we are unable to meet the implementation deadline
of October 1, 2002, a default system will be implemented in which the
payment is based on existing hospital DRGs, modified where feasible to
account for resource use of LTCH patients. This default system would be
based on the most recently available hospital discharge data for such
services furnished on or after that date.
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 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 proposed
prospective payment system for LTCHs. First, we analyzed the data and
empirical facts about LTCH patients and providers summarized in section
I.E. of this proposed rule. Secondly, in light of this information, we
analyzed each option based on regressions and simulations, using the
data sets described in section I.D. of this preamble.
Both technical and proposed policy considerations were important in
these design proposals. We reviewed features of other recent
prospective payment systems designed or implemented by CMS for other
post-acute 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
proposed prospective payment system for LTCHs presented in this
proposed 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 I.E. of this
preamble.
Our experience with the acute care hospital inpatient
prospective payment system.
Consideration of recommendations in MedPAC's reports to
Congress on post-acute care.
Our monitoring of the establishment and continuing
development and refinement of prospective payment systems for IRFs,
SNFs, and HHAs.
Additionally, as we deliberated on the choice of the specific model
of DRG-based system we are proposing to use for the LTCH prospective
payment system, we consulted with LTCH physicians and LTCH
representatives.
II. General Discussion of the Proposed LTCH Prospective Payment
System
A. Goals of the Proposed LTCH Prospective Payment System
We have designed the proposed prospective payment system for LTCHs
in this proposed rule 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.
B. Applicability of the Proposed LTCH Prospective Payment System
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 as a LTCH for purposes of payment are
set forth in existing Sec. 412.23(e), which 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 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.
Results of our research on LTCHs, as set forth in section I.D. of
this preamble, have suggested the following particular issue that we
have evaluated and are proposing to address concurrent with the
proposed implementation of the proposed LTCH prospective payment
system:
[[Page 13430]]
Proposed 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 extremely broad discretion in determining
the average inpatient length of stay for hospitals for purposes of
determining whether a hospital warrants exclusion from the prospective
payment system in section 1886(d) of the Act. Existing Medicare
regulations at Sec. 412.23(e)(1) and (e)(2) include all hospital
inpatients in this calculation of the average inpatient length of stay.
Our data have revealed that approximately 52 percent of Medicare
patients at LTCHs have lengths of stay of less than \2/3\ of the
average length of stay for the proposed LTC-DRGs in this proposed rule,
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 furnish ``long-term care'' on average 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 proposed LTCH prospective
payment system, the proposed LTC-DRG weights and proposed standard
Federal payment rate are based on the charges and costs of LTCH
patients, which are typically more medically complex and more costly
than acute care hospital patients.
Since the proposed LTCH prospective payment system would result in
higher per discharge payments for LTCHs than payments under the acute
care hospital inpatient prospective payment system for patients that
would group into identical DRGs under each system, we believe that
under 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
since if the average length of stay of patients at a hospital would not
reach the mandatory 25-days threshold for designation as a LTCH unless
non-Medicare patients are included in the calculation, the hospital
would be paid for its Medicare patients under the acute care hospital
inpatient prospective payment system. Therefore, if a hospital is not
treating Medicare patients that, on average, require the more costly
services offered at LTCHs that differentiate these hospitals from acute
care hospitals, we believe that Medicare payments should be determined
under the acute care hospital inpatient prospective payment system.
Such payments would be lower for each DRG than would be paid for under
the LTC-DRG system, reflecting the lower costs of acute care hospitals.
Under the current TEFRA 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 proposed LTCH prospective payment
system, which is based on average costs of treatment for particular
diagnosis, the hospital would receive prospective payments based on
such average costs for these much shorter length of stay patients. Even
under our proposed short-stay outlier policy, as described in section
IV.B.2. of this proposed rule, the hospital would have the opportunity
to be paid 150 percent of its costs.
Therefore, under our broad authority in the statute to determine
the average inpatient length of stay, we are proposing to specify that
we would include the hospital's Medicare patients, but not non-Medicare
patients, in determining the average inpatient length of stay (proposed
Sec. 412.23(e)(2)) for purposes of section 1886(d)(1)(B)(iv)(I) of the
Act. In proposing this change in policy, we believe 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 would be paid under the hospital inpatient
prospective payment system. Furthermore, changing the methodology for
determining the average inpatient length of stay to be based only on
Medicare patients is consistent with the intent of our proposed very
short-stay discharge policy (described in section IV.B.1. of this
proposed rule) and our proposed short-stay outlier policy (described in
section IV.B.2. of this proposed rule), which are also intended to
discourage LTCHs under the proposed prospective payment system from
treating Medicare patients that do not require the more costly
resources of LTCHs and who could reasonably be treated in acute care
hospitals.
We would monitor the types of hospitals that would qualify as LTCHs
based on this proposed definition. It is possible that hospitals that
currently qualify as either rehabilitation hospitals or psychiatric
hospitals would also qualify as LTCHs under this proposed revised
criteria, and could be paid as LTCHs in order to maximize Medicare
payments. We also would monitor whether the proposed change in
methodology for measuring the average length of stay in LTCHs would
result in unanticipated shifts of patients to those settings. If a
pattern of these behaviors is observed, we believe it may be
appropriate that Congress address the issues raised through a
legislative change.
As indicated above, pursuant to our broad authority in the statute,
we are proposing to change the methodology for determining the average
inpatient length of stay for purposes of section 1886(d)(1)(B)(iv)(I)
of the Act, but we are not proposing to change the methodology for
purposes of section 1886(d)(1)(B)(iv)(II) of the Act (proposed
Sec. 412.23(e)). For purposes of the latter provision (subclause (II)),
we are proposing to retain the current methodology (which includes non-
Medicare as well as Medicare patients) because we believe that the
considerations underlying the proposed change in methodology for
subclause (I) are not present under subclause (II). As discussed above,
we are proposing to revise the methodology for purposes of the general
definition of LTCH under subclause (I) because it has come to our
attention that some hospitals that might not warrant exclusion from the
prospective payment system have nevertheless obtained status as
excluded hospitals under the current methodology. We believe that
excluding non-Medicare patients in determining the average inpatient
length of stay for purposes of subclause (I) would be more appropriate
in identifying the hospitals that warrant exclusion under the general
definition of LTCH in subclause (I). However, in enacting subclause
(II), Congress provided an exception to the general definition of LTCH
under subclause (I), and we have no reason to believe that the proposed
change in methodology for determining the average inpatient length of
stay would better identify the hospitals that Congress intended to
exclude under subclause (II). Therefore, at this time, we are proposing
to retain the current methodology for purposes of subclause (II).
C. LTCHs Not Subject to the Proposed LTCH Prospective Payment System
We are proposing that only hospitals qualifying as LTCHs under the
proposed revised criteria described in section II.B.
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of this proposed rule and in proposed revised Sec. 412.23(e) by October
1, 2002, would be subject to the proposed LTCH prospective payment
system. (This proposed system is summarized below in section II.D. and
described in detail in section IV. of this proposed rule.) Our proposed
treatment of hospitals first qualifying as LTCHs after October 1, 2002,
is addressed in section IV.H. of this proposed rule.
The following hospitals are paid under special payment provisions,
as described in existing Sec. 412.22(c) and, therefore, would not be
subject to the proposed LTCH prospective payment system rules:
Veterans Administration hospitals.
Hospitals that are reimbursed under State cost control
systems approved under 42 CFR part 403.
Hospitals that are reimbursed in accordance with
demonstration projects authorized under section 402(a) of Public Law
90-248 (42 U.S.C. 1395b-1) or section 222(a) of Public Law 92-603 (42
U.S.C. 1395b-1 (note)).
Nonparticipating hospitals furnishing emergency services
to Medicare beneficiaries.
D. Summary Description of the Proposed LTCH Prospective Payment System
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 are
proposing to implement a prospective payment system for LTCHs that
would replace the current reasonable cost-based payment system under
TEFRA. The proposed prospective payment system would utilize
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, as described below.
1. Procedures
We are proposing that, upon the discharge of the patient from a
LTCH, the LTCH would assign appropriate diagnosis and procedure codes
from the International Classification of Diseases, Ninth Revision,
Clinical Modification (ICD-9-CM). The LTCH would then enter these codes
on the current Medicare claims form and submit the completed claims
form to its Medicare fiscal intermediary. At present, the standard
Medicare claims form is the UB-92. Under a requirement of the Health
Insurance Portability and Accountability Act of 1996 (HIPAA), Public
Law 104-191, electronic health care claims, including Medicare claims,
will be required to be in the new national standard claims format and
medical data code sets in accordance with regulations at 45 CFR Parts
160 and 162. The Medicare fiscal intermediary would enter the
information into its claims processing systems and subject it to a
series of edits called the Medicare Code Editor (MCE). This editor is
designed to identify cases that would require further review before
classification into a proposed LTC-DRG (described in sections II.D.2.
and III. of this proposed rule).
After screening through the MCE, each claim would be classified
into the appropriate LTC-DRG by the Medicare LTCH GROUPER. The LTCH
GROUPER is specialized computer software based on the GROUPER utilized
by the acute care hospital inpatient prospective payment system, which
was developed as a means of classifying each case into a DRG on the
basis of diagnosis and procedure codes and other demographic
information (age, sex, and discharge status). Following the LTC-DRG
assignment, the Medicare fiscal intermediary would determine the
prospective payment by using the Medicare PRICER program, which
accounts for hospital-specific adjustments.
As provided for under the acute care hospital inpatient prospective
payment system, we are proposing to provide opportunity for the LTCH to
review the LTC-DRG assignments made by the fiscal intermediary
(proposed Sec. 412.513(c)). A hospital would have 60 days after the
date of the notice of the initial assignment of a discharge to a LTC-
DRG to request a review of that assignment. The hospital would be
allowed to submit additional information as part of its request. The
fiscal intermediary would review that hospital's request and any
additional information and would decide whether a change in the LTC-DRG
assignment is appropriate. If the intermediary decides that a different
LTC-DRG should be assigned, the case would be reviewed by the
appropriate Peer Review Organization (PRO) as specified in
Sec. 476.71(c)(2). Following this 60-day period, the hospital would not
be able to submit additional information with respect to the LTC-DRG
assignment or otherwise revise its claim.
The operational aspects and instructions for completing and
submitting Medicare claims under the LTCH prospective payment system
will be addressed in a Medicare Program Memorandum once the final
system requirements are developed and implemented.
2. Patient Classification Provisions
We are proposing a patient classification system called long-term
care diagnosis-related groups (LTC-DRGs). The LTC-DRGs would classify
patient discharges based on the principal diagnosis, up to eight
additional diagnoses, and up to six procedures performed during the
stay, as well as age, sex, and discharge status of the patient. We
began the development of the proposed LTC-DRGs by using the CMS DRGs
under the acute care hospital inpatient prospective payment system with
the most recent data available. We address the issue of the use of
proposed low volume LTC-DRGs (less than 25 LTCH cases) in determining
the LTC-DRG weights. Further details of the proposed LTC-DRG
classification system are discussed in section III. of this proposed
rule.
3. Payment Rates
In accordance with section 123(a)(1) of Public Law 106-113, we are
proposing to use a discharge as the payment unit for the proposed LTCH
prospective payment system for Medicare patients. We would update these
per discharge payment amounts annually. The proposed payment rates
would encompass both inpatient operating and capital-related costs of
furnishing covered inpatient LTCH services, including routine and
ancillary costs, but not the costs of bad debts, approved educational
activities, blood clotting factors, anesthesia services furnished by
hospital-employed nonphysician anesthetists or obtained under
arrangement, or the costs of photocopying and mailing medical records
requested by a PRO, which are costs paid outside the prospective
payment system. Consistent with current policy, beneficiaries may be
charged only for deductibles, coinsurance, and noncovered services (for
example, telephone and television). They may not be charged for the
differences between the hospital's cost of providing covered care and
the proposed Medicare LTCH prospective payment amount.
We are proposing to determine the LTCH prospective payment rates
using relative weights to account for the variation in resource use
among LTC-DRGs. During FY 2003, the LTCH prospective payment system
would be ``budget neutral'' in accordance with section 123(a)(1) of
Public Law 106-113. That is, total payments for LTCHs during FY 2003
would be projected to equal payments that would have been paid for
operating and capital-related costs of LTCHs had this proposed new
[[Page 13432]]
payment system not been enacted. Budget neutrality is discussed in
detail in section IV. of this preamble.
Based on our analysis of the data, we are proposing to make
additional payments to LTCHs for discharges meeting specified criteria
as ``outliers.'' For purposes of this proposed rule, outliers are cases
that have unusually high costs, exceeding the LTC-DRG payment plus the
fixed loss amount as discussed in section IV.D. of this proposed rule.
In conjunction with a high cost outlier policy, we are proposing
payment policies regarding very short-stay discharges, short-stay
outliers, and interrupted stays. A detailed description of these
proposed policies appears in section IV.B. of this preamble.
4. Limitation on Charges to Beneficiaries
In accordance with existing regulations and for consistency with
other established hospital prospective payment systems policies, we are
proposing to specify that a LTCH may not charge a beneficiary for any
services for which payment is made by Medicare, even if the hospital's
costs of furnishing services to that beneficiary are greater than the
amount the hospital would be paid under the proposed LTCH prospective
payment system (proposed Sec. 412.507). We also are proposing to
specify under proposed Sec. 412.507 that a LTCH receiving a prospective
payment for a covered hospital stay (that is, a stay that includes at
least one covered day) may charge the Medicare beneficiary or other
person only for the applicable deductible and coinsurance amounts under
Secs. 409.82, 409.83, and 409.87 of the existing regulations, and for
items or services specified under Sec. 489.20(a) of the existing
regulations.
5. Medical Review Requirements
In accordance with existing regulations at Secs. 412.44, 412.46,
and 412.48 and for consistency with other established hospital
prospective payment systems policies, we are proposing to specify that
a LTCH must have an agreement with a PRO to have the PRO review, on an
ongoing basis, the medical necessity, reasonableness, and
appropriateness of hospital admissions and discharges and of inpatient
hospital care for which outlier payments are sought; the validity of
the hospital's diagnostic and procedural information; the completeness,
adequacy, and quality of the services furnished in the hospital; and
other medical or other practices with respect to beneficiaries or
billing for services furnished to beneficiaries (proposed
Sec. 412.508(a)). In addition, we are proposing to require that,
because payment under the proposed prospective payment system is based
in part on each patient's principal and secondary diagnoses and major
procedures performed, as evidenced by the physician's entries in the
patient's medical record, physicians must complete an acknowledgement
statement to that effect. We are proposing to apply the existing
hospital requirements for the contents and filing of the physician
acknowledgment statement (proposed Sec. 412.508(b)).
Also, consistent with existing established hospital prospective
payment system policies, we are proposing that if CMS determines, on
the basis of information supplied by the PRO, that a hospital has
misrepresented admissions, discharges, or billing information or has
taken an action that results in the unnecessary admission or multiple
admission of individuals entitled to Part A benefits or other
inappropriate medical or other practices, CMS may deny payment (in
whole or in part) for inpatient hospital services related to the
unnecessary or subsequent readmission of an individual or require the
hospital to take actions necessary to prevent or correct the
inappropriate practice. Notice and appeal of a denial of payment would
be provided under procedures established to implement section 1155 of
the Act. In addition, a determination of a pattern of inappropriate
admissions and billing practices that has the effect of circumventing
the prospective payment system would be referred to the Department's
Office of Inspector General, for handling in accordance with 42 CFR
1001.301.
6. Furnishing of Inpatient Hospital Services Directly or Under
Arrangements
In accordance 
