On January 25, 2007, CMS proposed new rules that would result in significant changes to long-term care hospital (LTCH) payments if the rules are made final in their current form. Most significantly, this proposed rule would extend the “25 Percent Rule” to any LTCH for which more than 25 percent (or the applicable percentage for certain rural and Medicare dominant hospitals) of its discharges were admitted from a single hospital, regardless of whether the referral hospital and the LTCH are co-located. Below is a summary of this proposed expansion of the applicability of the 25 Percent Rule as well as other highlights from CMS’s latest proposed rulemaking.

Expansion of the 25 Percent Rule to All LTCHs

On August 11, 2004, CMS issued a final rule that made significant changes that affected LTCHs that operate as hospitals-within-hospitals. That rule created a 25 percent threshold limit on the number of admissions the LTCH could receive from its “host hospital” without having its Medicare payments adjusted downward. Citing its concern about the relationship between a receiving provider and any referring hospital, even in the absence of co-location, CMS is now proposing to expand the 25 percent rule to apply to all LTCHs, not just hospitals-within-hospitals. This proposed rule would limit to 25 percent (or the applicable percentage for rural, urban sole, or Medicare-dominant hospital) admissions from any single referring hospital, not just co-located (i.e., host) hospitals. Just like under the current rule being phased in for hospitals-within-hospitals, patients who reached outlier status at the referring hospital before being admitted to the LTCH would not be counted toward the threshold. Implementation of the new limitation would be synchronized with phase-in of the current 25 percent rule so that for the cost reporting period beginning on or after July 1, 2007 (and before October 1, 2007), the percent of Medicare discharges that may be admitted from a single, non-co-located acute care hospital is the lesser of the percent of admissions from that hospital during the FY 05 cost reporting period or 50 percent. For the cost reporting period beginning on or after October 1, 2007, the 25 percent threshold (or the applicable percentage) will apply.

Increase of the Fixed Loss Amount in High Cost-Outlier Cases

Under the Medicare program, before Medicare will pay an outlier payment to an LTCH for the unusually high cost of treating a particular patient, the LTCH must incur a specified amount of additional costs at its own expense. This amount is known as the fixed-loss amount. In the rulemaking published January 25, 2007, CMS proposed raising the fixed-loss amount that LTCHs must incur in high-cost outlier cases from $14,887 to $18,774, an increase of over 26 percent.

Adjustment to Short Stay Outlier Payments

In the January 25, 2007 rulemaking, CMS announced that it is considering further modifications to the way payments are determined for LTCH short stay outlier cases where the length of stay closely resembles cases typically treated at acute care hospitals. According to the announcement, CMS is considering proposing a rule that would pay the LTCH the lowest of: (1) 100 percent of estimated cost; (2) 120 percent of the LTC-DRG per diem multiplied by the length of stay; (3) the PPS for the patient’s LTC-DRG; or (4) an LTCH PPS amount comparable to the acute hospital PPS per diem amount, not to exceed the full acute inpatient PPS payment amount. (Alternative 4 is the new option.) This rule would apply to those short stay outlier cases where the patient’s LTCH length of stay was equal to or less than the average length of stay plus one standard deviation for the same DRG under the acute care hospital PPS.

Other Proposed Changes

* Proposes an update to the LTCH PPS federal rate of 0.71 percent, to $38,356.45 for rate year 2008. (This is higher than the zero percent increase recommended by MedPAC but lower than the Rehabilitation, Psychiatric, and Long-Term Care market basket increase of 3.2 percent that applies to LTCHs. According to CMS, the proposed rate update is less than the 3.2 percent market basket because CMS believes that some of the reported case mix increase resulted from changes in coding practices and documentation rather than increases in patient severity.)

* Proposes budget-neutrality for future annual updates to the LTC-DRG classifications and relative weights. (The stated intent of this proposal is to ensure that the LTC-DRG reclassification and recalibration process itself does not result in increased or decreased aggregate payments to LTCHs.)

These rules are not yet final. CMS is accepting comments on the proposed rule until March 26, 2007, and plans to publish a final rule later this spring.