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Testimony on Rehabilitation & Long-Term Care Hospital Payments by Barbara Wynn
Acting Director, Bureau of Policy Development
Health Care Financing Administration
U.S. Department of Health and Human Services

Before the House Committee on Ways and Means, Subcommittee on Health
April 10, 1997


Introduction

Good morning. My name is Barbara Wynn and I am the Acting Director of the Bureau of Policy Development at the Health Care Financing Administration, Department of Health and Human Services. I am pleased to be here today to speak to you about proposals included in the President's budget for hospitals and distinct-part hospital units that are excluded from the hospital inpatient prospective payment system (PPS). I would like to start by providing some background on the types of hospitals that are excluded from PPS, and how they are paid. I will also discuss some of the shortcomings of the current payment system for PPS excluded facilities, and how the Medicare proposals in the Administration's budget would improve this payment methodology and control spending growth. Finally, I will discuss HCFA's long- term plans for reforming payments to rehabilitation and long-term care hospitals by developing an integrated payment system for all post-acute care.

Background

Since October 1, 1983, most hospitals have been paid under the hospital inpatient prospective payment system (PPS). However, certain types of specialty hospitals and units are excluded from PPS because the PPS diagnosis related groups do not accurately account for the resource costs for the types of patients treated in those facilities. Facilities excluded from PPS include rehabilitation, psychiatric, children's, cancer, and long term care hospitals, rehabilitation and psychiatric hospital distinct part units, Christian Science sanatoriums, and hospitals located outside the 50 states and Puerto Rico. These providers continued to be paid according to Section 18 86(b) of the Social Security Act, as amended by Section 101 of the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982. They are frequently referred to as TEFRA facilities.

TEFRA facilities are paid on the basis of Medicare reasonable costs per case, limited by a hospital specific target amount per discharge. Each hospital has a separate payment limit or target amount which was calculated based on the hospital's cost per discharge in a base year. The base year target amount is adjusted annually by an update factor Hospitals whose costs are below their target amount are entitled to bonus payments equal to half of the difference between costs and the target amount, up to a maximum of five percent of the target amount. Medicare also makes additional payments to hospitals whose costs exceed their target amounts. For these hospitals, Medicare pays bonus payments equal to half of the amount by which the hospitals costs exceed the target amount up to 10 percent of the target amount. Hospitals that experience significant increase in patient acuity may also apply for additional Medicare exceptions payments.

There are 3,462 TEFRA facilities, including 1,117 hospitals and 2,345 units. Currently, the TEFRA facilities certified for Medicare include:

  • 1,063 rehabilitation facilities, of which 191 are hospitals and 872 are units;

  • 2,112 psychiatric facilities, of which 639 are hospitals and 1,473 are units;

  • 186 long term care hospitals;

  • 70 children's hospitals;

  • 9 cancer hospitals;

  • 17 Christian Science sanatoriums: and

  • 5 hospitals located in U.S. territories, including the Virgin Islands, American Samoa, Guam, and Saipan Mariana Island.

Total Medicare expenditures for TEFRA hospitals and units in FY 1994 were $6.8 billion, which is 8.4 percent of Medicare expenditures for all inpatient hospital care. Medicare expenditures for post acute care provided in TEFRA facilities include $3.3 billion for rehabilitation hospitals and units and $473 million for long term hospitals. By comparison, Medicare FY 1994 expenditures for skilled nursing home care were $6.97 billion and for home health agency services $12.7 billion.

Strengths and Weaknesses of the TEFRA Payment System

Since the inception of TEFRA, there have been changes in practice patterns that have weakened the effectiveness of TEFRA, and hindered its ability to control costs. First, since the implementation of PPS, more patients are being transferred to TEFRA hospitals and units. We believe this trend reflects a response by providers to the incentives in the current system. This increase in utilization of TEFRA facilities has fueled the rapid growth in TEFRA payments in recent years. In addition, the number of discharges from TEFRA facilities to other post-acute care settings has increased, while average length of stay in TEFRA facilities has declined. This also suggests an attempt by providers to maximize payments by discharging patients to other settings to avoid exceeding their TEFRA cost limits.

As the number of TEFRA discharges has increased, so has the number of new TEFRA facilities. The TEFRA per discharge target rate payment methodology creates an incentive for newly established TEFRA hospitals to inflate base period costs in order to create a higher target rate. Thus, base period costs for new TEFRA hospitals and units may not reflect the costs of efficient operations. In this way, the existing TEFRA payment methodology may give an unfair advantage to newer hospitals and units with more recent base periods, in comparison to older TEFRA providers.

The President's FY 1998 budget includes a variety of modifications that would help alleviate the inequities and inappropriate incentives created by the current TEFRA payment system, which I will discuss in more detail below.

Administration Legislative Proposals

We strongly believe that improvements must be made to the current TEFRA payment system. The President's FY 1998 budget includes several legislative proposals to strengthen the TEFRA payment system. These include:

  • Encouraging efficient provision of services by
    • Reducing the update factor for FY 1998 through FY 2002 to the percentage increase in the excluded hospital market basket minus 1.5 percentage points, and

    • Reducing reasonable cost capital payments to PPS-exempt providers by 15 percent;


  • Reducing the disparities between costs and payments for certain hospitals by rebasing every TEFRA hospital per case rate using costs from the facility's two most recent cost reporting periods, and then limiting the per case rates to not less than 70 percent but not more than 150 percent of a national mean rate for each type of hospital (e.g., separate means for psychiatric hospitals, rehabilitation hospitals, and the other types of facilities).

  • Reducing the incentive for new providers to maximize base year costs, by limiting the cost based reimbursement for a new TEFRA provider to 150 percent of the national mean for that type of provider.

  • Eliminating incentive payments for hospitals with costs below their target amount and modifying the cost sharing formula for hospitals with costs in excess of their target amount. Medicare will not make additional cost-sharing payments to providers whose costs are less than or equal to 110 percent of the target amount. Medicare will pay half of the excess costs, up to 20 percent of the target amount, for hospitals with costs between 110 and 150 percent of the target amount.

  • Providing a safety net for hospitals whose costs exceed 150 percent of their target amount by providing, after rebasing, additional payments for significant changes in patient acuity.

In addition to these improvements to the current system, the President's budget would help control payments to TEFRA hospitals, curtailing the rapid increase in the establishment of new long term care hospitals by subjecting all new long-term care hospitals to Medicare's inpatient PPS. Under current law, the only characteristic long-term care hospitals have in common is an average length of stay greater than 25 days. Patients that are currently using long-term care hospitals are receiving services that are comparable to those provided by other types of providers: rehabilitation hospitals, psychiatric hospitals, and skilled nursing facilities that serve medically complex patients. As we modify our payment systems for these provider types, we believe that newly certified facilities should be classified by the nature of the services they provider rather than their average length of stay. Otherwise, we will be establishing different methodologies for similar services and allowing facilities to choose the provider classification which will result in the most favorable payment. The moratorium on exemption from the inpatient PPS would not affect any current providers.

Finally, the President's budget includes a provision granting the Secretary authority to collect patient assessment data from all providers of post-acute care, including rehabilitation hospitals and units, and long term care hospitals. HCFC intends to use this data to continue developing an integrated payment system for post acute services.

Long Term Goal for Post Acute Services

Utilization of post-acute services has grown rapidly in recent years. As average length of stay in acute care hospitals has declined with the implementation of PPS, more and more patients are being discharged to post acute settings. In addition, we have found an increase in the number of transfers from one post acute setting to another. The current TEFRA payment system, which establishes payment limits on a per discharge basis and provides bonus payment to hospitals with costs below their target rate gives providers an incentive to move patients out of these hospitals quickly. A recent HCFA study found that the number of discharges from rehabilitation hospitals to SNFs increased by 48 percent from 1992 to 1994. In addition, average length of stay in rehabilitation hospitals has been declining in recent years, from 22.2 days in 1992 to 18.5 days in 1996.

To address the rapid growth in post acute spending and eliminate the financial incentive for providers to discharge patients from one post acute setting to another based on financial considerations rather than an assessment of patient needs, HCFA intends to develop a single, integrated payment system for all post-acute care services Currently, the payment methodology for post-acute care depends on the treatment setting. In the existing fragmented system, payments for the same clinical services vary depending on the treatment setting. This variation in payments across settings may create incentives that inappropriately affect treatment decisions. HCFA's long term goal is to develop an integrated, beneficiary-centered system of paying for post-acute services that would avoid these inappropriate incentives.

To the extent our research confirms it is feasible and appropriate, the integrated post-acute care payment system would encompass care provided in rehabilitation hospitals and units, long- term care hospitals, skilled nursing faciluld need legislative authority to implement an integrated payment system that would apply to post-acute services in SNFs, HHAs, long term care hospitals, rehabilitation hospitals and units, and other facilities. HCFA still needs to undertake development and assessment of a core patient assessment instrument with common elements that can be used across various treatment settings. An equitable payment system based on a single prospective rate or limit would have to allow for recognition of appropriate cost differences, due for example to geographical price differences, practice pattern variations, and other appropriate factors. Thus the cost data would be employed to determine a basic rate or payment limit structure, and to establish appropriate adjustments for cost variations within that structure and payment policies when multiple providers furnish services within the same episode of care. Decisions would also need to be made regarding recognition and payment for outlier cases. Thus, although HCFA has already put substantial thought and effort into the development of an integrated post-acute care payment system, implementation of such a system would require, at a minimum, several years of additional work.

PPS for Rehabilitation

HCFA's long term goal of developing an integrated payment system for post acute care represents a shift in thinking from previous years. For several years, HCFA has been researching possible patient classification systems for rehabilitation cases in ordeuld need legislative authority to implement an integrated payment system that would apply to post-acute services in SNFs, HHAs, long term care hospitals, rehabilitation hospitals and units, and other facilities. HCFA still needs to undertake development and assessment of a core patient assessment instrument with common elements that can be used across various treatment settings. An equitable payment system based on a single prospective rate or limit would have to allow for recognition of appropriate cost differences, due for example to geographical price differences, practice pattern variations, and other appropriate factors. Thus the cost data would be employed to determine a basic rate or payment limit structure, and to establish appropriate adjustments for cost variations within that structure and payment policies when multiple providers furnish services within the same episode of care. Decisions would also need to be made regarding recognition and payment for outlier cases. Thus, although HCFA has already put substantial thought and effort into the development of an integrated post-acute care payment system, implementation of such a system would require, at a minimum, several years of additional work.

PPS for Rehabilitation

HCFA's long term goal of developing an integrated payment system for post acute care represents a shift in thinking from previous years. For several years, HCFA has been researching possible patient classification systems for rehabilitation cases in order to implement a prospective payment system for rehabilitation hospitals and units. The most promising system we found was the Functional-Related Groups (FRGs) system developed by Margaret Stineman and colleagues at the University of Pennsylvania and SUNY-Buffalo. This system is based on a rehabilitation coding system known as the Functional Independence Measure (FIM), a scoring system developed and owned by Uniform Data System for Medical Rehabilitation (UDSMR) that measures the degree of functional independence in rehabilitation patients. Over a year ago, we contracted with the RAND Corporation to evaluate the FIM/FRG and the feasibility of a PPS-type system based on these measures. RAND has prepared a draft report that finds, in general, that this system provides a reasonable and feasible approach for classification of hospital inpatient rehabilitation services. However, considerable work would be needed before a PPS can be implemented.

For example, the Technical Advisory Panel on the project questioned the reliability of the FIM and the breadth of the cognitive measures it includes. Further analysis of the FIM would be needed before a system based on the FIM could be implemented. In addition, RAND developed their model system based on data from a limited sample of rehabilitation facilities, that significantly under-represents rehabilitation units. In fact, Medicare pays for nearly twice as many discharges from rehabilitation units as it does from freestanding rehabilitation hospitals. In order to ensure that the system accurately predicts costs across all facilities, HCFA would need to collect data from all rehabilitation hospitals and units in order to determine appropriate payment weights. RAND also identified potential coding problems that could undermine the effectiveness of their PPS model at controlling costs. Uncorrected, these problems could lead to case-mix "creep" after implementation of an FRG-based PPS. RAND expanded the original FRGs to account for complications and comorbidities (CCs). Although rehabilitation facilities are supposed to code CCs on the Medicare bill, this information is not currently used for payment or any other purpose; therefore, it is likely to be subject to error In fact, RAND found that the rehabilitation units recorded CCs in approximately 26% of cases, while freestanding facilities did in only 16% of cases. The high level of error in coding could lead to case-mix creep, which would threaten the validity of the payment system.

The limitations of the FRG-based system developed by RAND probably could be resolved with careful analysis, additional data collection, refinement of the FIM descriptors and training of coders. The question, then, is whether we should devote significant resources toward refining this system rather than to the task of developing an integrated payment approach. Our best estimate is that we could be ready to implement a FRG-based PPS in 2 years after enactment of legislation. This time frame includes 6 months to develop the data elements and 2 years for data collection and development of the final system.

However, recent study findings have caused a shift In our thinking about methods for reforming payments to rehabilitation facilities, and we no longer believe that developing a separate PPS for rehabilitation hospitals is the best approach. Rehabilitation patients are treated in several different settings with similar outcomes. Therefore, we believe that an integrated post-acute payment system offers the best approach. If we were to establish individual payment systems for each type of setting, we are concerned that potentially different incentives inherent in each of the payment systems would influence clinical decisions about the appropriate treatment settings for some patients. For example, if we were to implement an episodic PPS for rehabilitation facilities (like the FIM/FRG system) and a per them system for SNFs (as we proposed in the FY 1998 President's budget), rehabilitation facilities would have an Incentive to discharge patients as quickly as possible to a SNF. In that way, the rehabilitation hospital could collect the full Medicare payment, and the SNF could continue to bill Medicare on a per day basis. The incentive for maximizing Medicare payments in this way is even greater in cases where an acute care hospital owns both the rehabilitation unit and the SNF. Moreover, we are concerned that an episodic payment system for rehabilitation hospitals, by creating incentives for early discharge, may not encourage optimum outcomes. The RAND study for example, found a correlation between length of stay and improvement in functional status.

In order to avoid creating these incentives, we would like to pay rehabilitation facilities as part of an integrated payment system for non-acute inpatient care, that is, a "service-specific" rather than a "provider-specific" system. HCFA has already taken initial steps toward development of the integrated payment system described above. For example, we have prospective payment demonstrations underway for both SNFs and HHAs, and are proposing national implementation of PPS for SNFs (in FY 1998) and HHAs (in FY 2000) in the FY 1998 President's budget. Currently, we are modifying the patient assessment instrument used in the SNF demonstration so it can also be applied to the services furnished by rehabilitation facilities. A single patient assessment instrument would give us a meaningful comparison of a patient's severity and functional limitations across settings. This will allow for better coordination of patient care as well as a consistent measure of case-mix.

If we continue to devote our effort to developing a system that can be used across all post-acute settings, we could be ready for implementation as early as 2002, We believe that the benefit of having a more comprehensive system where the incentives are to place the patient in the appropriate post-acute care setting rather than where the payment is more advantageous is worth the additional wait. Without such a comprehensive system, a per discharge FRG system for rehabilitation facilities will further encourage short lengths of stay and discharges to SNF facilities in order to maximize Medicare payment. In contrast, the integrated post acute payment system will reduce transfers of patients from one setting to another simply to maximize payments, and will ultimately, allow us to gain control of the rapid growth in post-acute care.

Conclusion

In summary, our immediate goal is to improve the TEFRA payment system through the reforms included in the President's budget. Our long-term goal is to create a beneficiary-centered system of post- acute services that promotes quality of care, access to care, and continuity of care while adequately controlling costs. Our preference to seek legislation that allows us to establish an integrated post acute care payment system with a single core data assessment too and patient classification system, and a coordinated set of payments that encourages appropriate care for patients regardless of the setting in which they are treated.


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