On May 1, 2007, CMS issued the final rule regarding the payment rates and certain policies applicable to long-term care hospitals (“LTCHs”) for the 2008 rate year. In the proposed rule issued on January 25, 2007, CMS proposed the following changes to the payment rates and policies applicable to LTCHs: (1) increasing the LTCH federal rate by 0.71 percent, to $38,356.45 for rate year 2008; (2) increasing the fixed-loss amount in high-cost outlier cases to $18,774; (3) modifying the policy for calculating short-stay outlier payments by adding a fourth alternative for determining payments to LTCHs that would result in an LTCH being paid the acute hospital PPS per diem amount (not to exceed the full acute inpatient PPS payment amount) for cases where the length of stay more closely resembles cases treated at acute care hospitals; (4) proposing budget neutrality for future annual updates to the LTC-DRG classifications and relative weights; and (5) expanding the “25 percent rule" to apply to all LTCHs, not just those that are co-located within a host hospital.

The final rule adopts the increase in the LTCH federal rate, the budget neutrality policy for future updates to the LTC-DRG classifications and weights, and the change in the short-stay outlier policy without modification. However, CMS modified both the fixed-loss amount for high-cost outlier cases and the proposed expansion of the "25 percent rule" as follows:

1) Fixed-Loss Amount—CMS further increased the fixed-loss amount for high-cost outlier cases. Using more recent LTCH data to estimate the cost of each LTCH case, CMS changed the fixed-loss amount for rate year (RY) 2008 to $20,738, compared with $18,477 in the proposed rule and $14,887 in RY 2007, an increase of over 54 percent over RY 2007. CMS projects that LTCH payments per discharge will decrease an estimated 2.5 percent from RY 2007 to RY 2008 due to this change in the fixed-loss amount. CMS's explanation for this change is that under the Medicare regulations, the amount paid to LTCHs for all high-cost outlier cases is projected to equal 8 percent of estimated total payments to LTCHs under the LTCH prospective payment system. The fixed-loss amount is adjusted annually to ensure that estimated high-cost outlier payments are projected to equal this target. According to CMS, the claims data from December 2006 (which was not available to CMS at the time that it issued the proposed rule) showed that the average cost per case has increased as compared to the FY 2005 claims data that CMS relied on in the proposed rule. Based on that information, CMS determined that keeping the fixed-loss amount at the RY 2007 amount of $14,887 would result in aggregate outlier payments of 10.3 percent, which exceeds the target. Thus, it was necessary to make further adjustments to the fixed-loss amount in order to maintain the estimated aggregate outlier payment amount at 8 percent.

2) Expansion of the 25 Percent Rule—CMS modified the proposed expansion of the “25 percent rule” to provide LTCHs with a 3-year transition period. The final rule extends the “25 percent rule” (which currently applies to LTCHs and satellite facilities of LTCHs that are co-located with a host hospital ("hospitals within hospitals")) to all LTCHs and now also applies to discharges of Medicare patients admitted from a referring hospital that is not co-located with it. Under the final rule, there is a 3-year transition period to permit LTCHs to adapt to the payment adjustment associated with the "25 percent rule." In the first year of the transition (for cost reporting periods beginning on or after July 1, 2007 and before July 1, 2008), the threshold is no less than the lesser of 75 percent or the percentage of Medicare discharges that had been admitted to the LTCH or LTCH satellite facility during its RY 2005 cost reporting period from the referring hospital. For cost reporting periods on or after July 1, 2008 and before July 1, 2009, the threshold will be no less than the lesser of 50 percent or the percentage that the LTCH or LTCH satellite discharged from the referring hospital, during its RY 2005 cost reporting period. For cost reporting periods beginning on or after July 1, 2009, all LTCHs and LTCH satellites will be subject to the 25 percent rule (or other applicable threshold).