Statement by
Herb Kuhn
Center for Medicare Management
Centers for Medicare and Medicaid Services

Long-Term Care Hospitals

Subcommittee on Health
Committee on Ways and Means
United States House of Representatives

Wednesday, March 15, 2006

Madam Chairman Johnson, Congressman Stark, distinguished Subcommittee members, thank you for inviting me to testify about long-term care hospitals (LTCHs). Long term care hospitals (LTCHs) typically provide post-acute medical and rehabilitative care for clinically complex patients including comprehensive rehabilitation, respiratory therapy, head trauma treatment and pain management. Despite the fact that their availability varies widely across the nation, the number of LTCHs has increased exponentially over the last 10 years. The number of LTCHs more than tripled between 1993 and March 2005. Although the two States with the largest number of LTCHs are Texas and Louisiana, substantial growth is also occurring in States with large numbers of elderly populations including Pennsylvania, Ohio, Michigan, Georgia, Indiana, and Oklahoma. LTCHs are the highest paid hospitals in the Medicare program; preliminary cost report data for FY 2004 indicate average Medicare margins of almost 12 percent.

CMS published the long-term care hospital prospective payment system (LTCH PPS) proposed rule on January 27, 2006. The rule is intended to assure appropriate payment for services to severely ill or medically complex patients, while providing incentives to LTCHs for more efficient care of Medicare beneficiaries. CMS believes the proposed rule promotes appropriate payment, efficient care, and the Agency is looking forward to receiving your feedback as well as comments from the public. I do want to note that the FY 2007 President's Budget proposal assumes a zero percent update for Rate Year (RY) 2007 and a modified LTCH PPS short stay outlier policy.

Most patients in LTCHs are clinically complex and have multiple co-morbidities-that is, they have secondary health conditions that can interact with and lead to an intensification of the primary diagnosis requiring hospital-level medical treatment. Medicare beneficiaries comprise, on average, 83 percent of LTCH patients and the distributions vary from 68 percent to 90 percent at the 25th and 75th percentiles. LTCHs also provide care to a disproportionately large number of beneficiaries who are Medicare eligible because of disability. To be classified as an LTCH, a hospital must have an average Medicare inpatient length of stay that is greater than 25 days. CMS is considering payment adjustments for LTCHs that are tied to specific patient classification criteria based recommendations from the Medicare Payment Advisory Commission (MedPAC) and the results from the research currently underway by RTI International (RTI).

The LTCH PPS was implemented October 1, 2002 to assure appropriate payment for services to the medically complex patients treated in LTCHs. The LTCH PPS currently sets payments for approximately 376 LTCHs, and payments under the LTCH PPS are updated annually.

CMS issued the LTCH Proposed Rule for Rate Year 2007
Public comments on the LTCH PPS Proposed Rule for Rate Year (RY) 2007 will be accepted until March 20, 2006. The proposed rule provides for no increase in Medicare payment rates to LTCHs for RY 2007, which means the LTCH PPS standard Federal rate would remain at $38,086.04. The standard Federal rate for RY 2007 would apply to LTCH patient discharges taking place on or after July 1, 2006, through June 30, 2007. Similarly, MedPAC stated in its March 2006 Report to Congress that Medicare payments to LTCHs are more than adequate, recommending a zero update for LTCHs in 2007. MedPAC determined that keeping payments at the same level as 2006 would increase program efficiency without affecting the ability of LTCHs to furnish high quality care to Medicare beneficiaries.

The CMS update proposal is based on analysis of the LTCH case-mix index before and after implementation of the LTCH PPS, analysis of LTCH margins based on the latest available cost report data, and recent update recommendations for the LTCH PPS from MedPAC in the Commission's March 2006 Report to the Congress. In analyzing LTCH data, CMS found that the case-mix index increased by 6.75 percent between fiscal years (FYs) 2003 and 2004, which is believed to be due in large part to changes in coding practices and documentation rather than the treatment of more resource intensive patients. This belief is based on an analysis of LTCH cost report data that shows LTCH payments are increasing without a commensurate increase in average case costs. The LTCH PPS Federal rate for RY 2007, which would be the same as the Federal rate for RY 2006, would reflect an adjustment to the market basket update to account for the increase in case mix due to changes in coding practices. In addition, cost report data show increasing Medicare margins among LTCHs since the implementation of the LTCH PPS. Specifically, in an analysis of LTCH cost report data, CMS found that LTCH Medicare payments for FY 2003 (the first year of the LTCH PPS) were 8.8 percent higher than LTCHs' Medicare costs. Preliminary cost report data for FY 2004 data reveal an even higher Medicare margin of 11.7 percent.

Currently CMS uses the excluded hospital with capital market basket as the measure of inflation for calculating the annual update to the LTCH PPS Federal rate. CMS is proposing to adopt the Rehabilitation, Psychiatric and Long-Term Care (RPL) market basket to calculate the annual update to the LTCH PPS Federal Rate. The RPL market basket is based on the operating and capital costs of Inpatient Rehabilitation Facilities (IRFs), Inpatient Psychiatric Facilities (IPFs), and LTCHs. CMS would also revise the labor-related share of the Federal rate based on the RPL market basket. The revised labor-related share would increase from 72.855 percent (based on the excluded hospital with capital market basket) to 75.923 percent. Increasing the labor share will have a positive impact on payments to LTCHs in areas with a wage index of greater than 1.0.

The proposed rule also presents for comment a preliminary model of an update framework for possible future use under the LTCH PPS. The framework would account for other appropriate factors affecting the efficient delivery of services and care provided in LTCHs when determining future Federal rate update proposals. CMS intends to consider comments in refining the framework and would propose a refined framework in a future regulation before using it to determine an update proposal.

CMS' Proposed Rule Would Revise the Payment Adjustment Formula for Short-Stay Outlier Cases
The proposed rule would revise the payment adjustment formula for short-stay outlier (SSO) cases (i.e., cases with a length of stay less than or equal to 5/6 of the average length of stay of the LTC-DRG). SSOs are cases where the patient is discharged early and often the hospital's costs are significantly below average. Currently, under the LTCH PPS, SSO cases are paid the lesser of 120 percent of the estimated cost of the case; 120 percent of the LTC-DRG per diem amount; or the full LTC-DRG payment. Since the implementation of the LTCH PPS in FY 2003, CMS has continued to monitor the SSO policy. The most recent available LTCH data reveal that SSO cases comprise approximately 37 percent of LTCH PPS discharges (as compared to 48.4 percent based on the LTCH data used to develop the LTCH PPS prior to its implementation in FY 2003).

CMS believes that 37 percent of LTCH discharges that are SSO cases is an inappropriate number of patients being treated in LTCHs. The Agency is concerned that these patients may be more appropriately served in acute care hospitals and that the existing SSO payment policy may unintentionally provide a financial incentive for LTCHs to admit a large number of short stay cases.

The proposed rule would reduce the part of the current payment formula that is based on costs to ensure that payments for SSOs do not exceed costs. It would also add a fourth component to the current formula that would allow payment based on an amount comparable to what would be paid under the inpatient prospective payment system (IPPS) for acute care hospitals for patients that group to that DRG. CMS proposes that payments for SSO cases would be the lesser of 100 percent of the estimated cost of the case, 120 percent of the LTC-DRG per diem amount, the full LTC-DRG payment, or an amount comparable to what would be paid under the IPPS. CMS estimates that revising the current SSO policy by reducing the percentage of costs in the formula and including a fourth part of the formula would result in approximately $440 million in savings to the Medicare program in RY 2007. Under this proposed payment alternative, LTCHs, which are certified as acute care hospitals, would be paid by Medicare under the LTCH PPS at a rate that is more consistent with the rate paid to acute care hospitals when they treat shorter stay patients. Additionally, the proposed reduction in the percentage of costs to 100 percent would reduce what CMS perceives to be a financial incentive under the current policy for LTCHs to treat short stay cases.

Adding an amount comparable to what would be paid under the IPPS to the SSO payment formula is appropriate since the vast majority of LTCH patients are admitted directly from acute care hospitals. Thus, CMS believes that short stay patients at LTCHs may indicate premature and even inappropriate patient shifting from the referring acute care hospitals. CMS perceives that LTCHs are acting more like short-term acute care hospitals by admitting such a large percentage of short-stay patients. Therefore, CMS believes that a patient admitted to an acute care hospital for a short stay and a patient admitted to a LTCH (which is certified as an acute care hospital) for the same number of days, should be paid a comparable amount.

CMS Proposes Increasing the Outlier-Fixed Amount
Medicare will pay a hospital an amount in addition to the Federal rate payment under the LTCH PPS for the LTC-DRG for unusually costly cases. To be eligible for this additional high cost outlier payment, the hospital's estimated costs in treating the case must exceed the LTC-DRG payment by an outlier fixed-loss amount. Aggregate estimated outlier case payments are limited to 8 percent of total estimated LTCH payments. For RY 2006, the outlier fixed-loss amount is $10,501. The proposed rule would increase the outlier fixed-loss amount for RY 2007 to $18,489. Since the proposed changes to the short stay outlier policy would result in reduced total LTCH payments, it is necessary to increase the outlier fixed loss amount in order to maintain the 8 percent limit on total LTCH outlier payments. CMS established the outlier target at 8 percent of estimated total LTCH PPS payments when the Agency implemented the LTCH PPS to allow CMS to achieve a balance between the conflicting considerations of the need to protect hospitals with costly cases, while maintaining incentives to improve overall efficiency.

CMS Notes Continuing Issue of Hospitals within Hospitals
The IPPS for acute care hospitals was designed to provide one appropriate payment for hospitalized patients. The Standard Federal payment rate under the IPPS for FY 2005 is $4,555 whereas the Standard Federal payment rate under the LTCH PPS for RY 2005 was $38,086. Since LTCHs are certified by Medicare as acute care hospitals and in many parts of the country patients who could otherwise fit the typical profile of LTCH patients are treated in acute care hospitals as high cost outliers, CMS wants to ensure that the significantly higher Medicare payments made to LTCH facilities reflect treatment for patients who most need and can benefit from the specialized care they offer.

As of October 2005, there were 376 LTCHs in the CMS database, of which 176 were hospitals within hospitals (HwHs). In recent years, MedPAC as well as CMS, has been conducting a careful study of the rapid growth in LTCHs, particularly LTCH HwHs (which have been growing at a rate of 35 percent per year from 1993 to 2003-three times the overall rate of LTCH growth. Medicare regulations specify that an LTCH is an HwH when it is co-located with another Medicare hospital-level provider, its "host", generally an acute care hospital. Under present regulations, for an LTCH that occupies space in a building also used by another hospital, or in one or more separate buildings located on the same campus as buildings used by another hospital, to be considered a HwH, the entity must meet separateness and control criteria that demonstrate organizational and functional separateness from its host hospital. An LTCH may establish a satellite facility in another hospital, which must also demonstrate compliance with similar separateness and control criteria regarding its relationship to its host hospital.

These requirements are in place to ensure that host hospitals and HwHs or satellites are separate in medical and administrative governance and that a given LTCH HwH or satellite is not merely serving as a "step-down" unit of the acute care hospital. In such a case, Medicare would be paying under two payment systems, the IPPS and the LTCH PPS for what is essentially one episode of care. CMS recognizes that co-location of an acute care hospital and LTCH services may be an efficient way to deliver care and may be less disruptive for patients at the same time; however, co-location also leads to patient shifting from one part of a hospital to another, resulting in two Medicare payments for what is essentially one episode of patient care. Therefore, CMS believes that co-location creates incentives that can lead to patient admission, treatment, and discharge decisions that reflect maximization of Medicare payments, rather than provision of the most effective and efficient care based on patient need.

In order to ensure that Medicare avoids making two payments (one to the acute care and one to the onsite LTCH HwH or LTCH satellite) for a single episode of care, in addition to the "separateness and control" requirements, CMS implemented a payment adjustment for FY 2004 relating to the percentage of patients discharged from an HwH or satellite that were admitted from its co-located host hospital prior to receiving a full episode of treatment at the host hospital. This payment adjustment is commonly called the 25 percent payment threshold policy. Presently, CMS is monitoring and evaluating several identified behaviors that may be attempts to circumvent specifics of the implementation of this 25 percent threshold payment adjustment such as "patient-swapping," (that is hosts cross-discharging to one another's HwH or satellite).

CMS is aware that, following the implementation of the 25 percent threshold payment adjustment for co-located LTCHs, the significant growth in the LTCH industry has been in the development of free-standing LTCHs. CMS data indicate that many free-standing LTCHs are receiving high percentages of their patients from specific acute care hospitals (often a sole acute care hospital) and therefore are, in effect, acting as units of the acute care hospital, thereby replicating the concerns CMS has with LTCH HwHs or LTCH satellites.

As stewards of the Medicare trust fund, it is CMS' obligation to ensure that beneficiaries receive the right care, in the appropriate setting, at the appropriate payment for the services. Thus, CMS is concerned about the developments in LTCH HwHs and satellites and will continue to monitor the admission patterns of LTCHs to determine if further rulemaking is warranted.

CMS is Evaluating the Criteria Used to Define LTCHs
Since 1994, CMS has been studying the relationships between treatment at acute care hospitals and LTCHs, as well as the linkage between payment policies and substitution of services, especially among acute care hospitals, LTCHs, IRFs, and some skilled nursing facilities (SNFs). Many similar services are provided in an LTCH as are provided in an acute care hospital. In both cases, patients need a high level of care from nurses, technicians, and other health professionals. There are many existing acute care hospitals that treat as patients with the same profile as those typical of LTCHs. These acute care hospitals, paid under the IPPS, treat many, if not more, outlier (i.e., long length of stay) cases than do most LTCH HwHs. Furthermore, given that many acute care hospitals, IRFs, IPFs, and SNFs may serve as settings for potential LTCH patients, CMS wants to ensure that the criteria used to determine placement in an LTCH are appropriate. For example, CMS data reveal that one of the most frequent LTC-DRGs found in LTCHs is 462-Rehabilitation, a diagnosis that could receive appropriate treatment at IRFs. Another of the most common LTC-DRGs is 430, Psychoses, a diagnosis which could also be treated at IRFs. Many SNFs also offer a high-level of post-acute care including access to rehabilitation services and therapies.

In June of 2004, MedPAC released a report providing recommendations urging CMS to establish facility and patient criteria for LTCHs and provide an expanded role for Quality Improvement Organizations (QIOs) in monitoring compliance with the newly-established criteria. Currently, CMS is pursuing MedPAC's recommendations to develop patient and facility-level criteria and to determine the feasibility of developing a more clinically sophisticated admissions policy in order to distinguish Medicare patients who could most benefit from LTCH treatment. CMS awarded a contract to Research Triangle Institute, International (RTI) in 2004 for this purpose and a final report is expected in late Spring.

Since in parts of the country that lack LTCHs, LTCH-type patients may receive hospital-level treatment at acute hospitals as outlier patients, at IRFs, or in some cases, IPFs with significantly lower payments per beneficiary discharge than at LTCHs. RTI's research attempts to determine whether patient outcomes are equivalent across these sites. One specific area of evaluation will be whether there is a correlation between the higher payments at LTCHs and improved patient outcomes for the same types of patients in different treatment settings. Since there is wide variation in the range of post-acute care facilities available throughout the country, if payments are equivalent per case and patient outcomes are generally equal in different areas of the country, the variations may be explained as a reflection of variations in regional practices. However, if outcomes differ substantially for certain types of patients, indicating that LTCH patients have better outcomes, the recent growth of the LTCH industry could result in the availability of a better level of care for Medicare beneficiaries nationwide. Alternatively, if payments differ among provider types but patient outcomes are equivalent, one could question whether higher cost LTCH services are needed for all types of cases currently treated, or more specifically, which types of patients benefit from the higher cost LTCH services.

Madam Chairman Johnson, Congressman Stark, distinguished Subcommittee members, thank you for inviting me to testify about long-term care hospitals today. The goal of the Medicare program is to ensure the cost-effective delivery of the highest quality of medical services to beneficiaries. CMS looks forward to receiving comments on the proposed rule in order to develop final policy and guide the future of LTCHs appropriately. I will be happy to answer your questions.

Last Revised: March 15, 2006