November 2002

Opportunity Knocks

By Frances J. Fowler, FAAHC, and Michelle Fisher, MHA

Frances J. Fowler, FAAHC

On August 30, 2002, the Centers for Medicare & Medicaid Services (CMS) released the final rule on the implementation and reimbursement methodology for the prospective payment system (PPS) for the long-term acute care hospital (LTACH). Similar to PPS for acute rehabilitation, this new payment system for LTAC hospitals translates into significant changes for this industry. The new PPS, along with the existing rules and regulations for LTACHs, can have significant implications for acute rehabilitation providers.

INDUSTRY OVERVIEW

LTACHs are fully licensed acute care hospitals with an average length of stay requirement of greater than 25 days to maintain Medicare certification. Such a facility can either be freestanding or operate as part of a larger acute medical/surgical facility—a hospital within a hospital.

The growth rate of LTACHs in the United States has been impressive. From 206 LTACHs in October 1998, the numbers have risen to 270 in 2002, a 33% rate of growth that exceeds all other postacute venues, such as rehabilitation units (7.1%), rehab hospitals (10.1%), and freestanding skilled nursing facilities (1.7%).¹ In the past year alone, from January 2001 to January 2002, the number of LTACHs jumped from 251 to 270, a rate of 7.5%.¹ One of the reasons for this proliferation is an increased demand for the services LTACHs provide that cannot be fully met by other levels of care.¹

The concept of the LTACH is to provide the most appropriate setting for long-term hospitalization of patients who have chronic or catastrophic care needs and/or who may be dependent on ventilators or life support. Defined as “long-stay cases” in hospitals (patients with length of stay in acute care of 15 days or longer), these patients typically have between nine and 10 comorbidities and are generally medical or surgical patients with major complications.

Studies by CMS found that patients in LTAC hospitals are more functionally impaired than patients in rehabilitation hospitals or units.² They often arrive from intensive care units with severe and complex conditions that require extensive medical and rehabilitation services and clinical expertise using high-tech equipment. Rehab facilities, by comparison, have a less acute population that must be able to tolerate at least 3 hours of therapy daily. The rehab facility is designed to rehabilitate and help patients compensate for loss of independent physical or mental functioning, while the LTAC hospital focuses on the patient’s medical recovery and then addresses functional recovery. The large majority of LTAC hospital cases, based on clinical profile and functional status, would not qualify for acute rehab at the time of acute care discharge.

However, both LTACHs and rehab facilities are designed to enhance the functional levels of patients and both discharge a large percentage of their patients home, indicating the overlapping process of healing patients to self-sustaining levels.

Other shared characteristics include:

• An interdisciplinary model of care, including integrated care planning and weekly team meetings.
• The use of therapies during the patient’s stay.
• A program design aimed at producing functional gains and high levels of discharges to the community.
• A PPS payment system built on similar principles. Although the methodologies between LTACH and acute rehab PPS system are vastly different, both systems are built on the concept of reimbursement based on severity of illness.
• Most LTACH and acute rehabilitation providers should perform well financially under PPS.

Finally, analyses of LTACH data released by CMS indicate that there is a definite overlap between these two levels of care.³ This is the case even when specialty rehab LTACHS are considered. Based on our experience, they account for only 6% to 8% of the LTACHs nationwide, but rehab-related diagnoses represent an estimated 17% of LTACH admissions.

Another 11% to 13% of LTAC hospital discharges were admitted under “non core” rehab related diagnosis related groups (DRGs), such as nervous system neoplasm with complications (DRG 10), certain spinal procedures (DRG 4), and other respiratory system diagnoses, such as DRG 102. In general, these populations are not as critical to the overall utilization rates of rehab providers, but if these cases were removed, it could still incrementally impact revenues and profitability.

Table 1. Distribution of LTACH admits with rehab diagnoses.

IMPLICATIONS FOR ACUTE REHAB PROVIDERS

PPS for LTACHs holds both opportunities and risks for acute rehab providers. Similar to acute rehab, LTACHs under PPS can now operate under a true business model. Assuming costs are lower than payments, the LTACH can retain net income. In addition, LTACHs are not penalized if they discharge patients to acute rehab as long as they do not try to reduce the length of stay below CMS length of stay parameters. The incentive will be greater for LTACH providers to refer discharges to acute rehabilitation than currently. For rehab providers, this means not only the potential for more referrals, but also referrals that meet the 3-hour therapy guideline. Rehab providers who link up with existing LTACHs can create a relationship to foster increased referrals for the future.

The favorable reimbursement for LTACHs under PPS can work for or against rehab providers. There is a significant demand for LTACH services nationwide and reimbursement for new LTACH providers will be better under PPS than it has been for the past several years. Therefore, as more LTACHs develop, the potential exists for a greater number of referrals to acute rehabilitation. However, in markets where LTACHs are overbuilt, LTACHs could siphon rehab patients to fill their beds.

With PPS, CMS is changing the requirement regarding the average length of stay criteria. As noted in the Final Rule, the over 25 day length-of-stay criterion applies solely to the Medicare population. Historically, the average required length-of-stay for all patients in LTAC hospitals was 25 days. With the length of stay adjustment passing through to the Final Rule, LTAC hospitals gain the ability to compete with other postacute providers, namely acute inpatient rehabilitation facilities (IRFs).

Acute care hospitals have been under constant and relentless pressure to reduce costs. To do so, hospitals must move patients to a lower cost setting as soon as the patient can tolerate the transfer and the associated clinical outcomes will not be compromised. With a greater number of LTACH beds coming into the market, acute care providers may accelerate earlier referrals to the LTACH rather than acute rehab.

SUCCESSFUL STRATEGIES

Rehab providers can take a number of steps to ensure future success as LTAC hospitals become a more visible source of rehabilitation referrals, including:

• Understand the phase of LTACH development in your market. Be certain to explore the certificate of need rules if appropriate for your state. In some states, LTACH development is simply not possible.
• Market to existing LTACHs now. Based on our experience, 33% of LTACH discharges could be referred to rehab if the right relationship is developed.
• Start discussions with existing LTACHs about how the acute rehab level of care could assist with their performance under PPS.
• Define your position regarding joint medical director roles with an LTACH. LTACHs usually have a medical director of rehabilitation for their clinical program. Sharing your medical director risks rehab referrals being funneled away from your organization and into the beds of potential competitors.
• Develop your “what if” strategy to determine the positive and negative impact of LTACHs under PPS on your rehab business. As an option, consider developing your own LTACH to complement your existing acute rehab business. It is easier to be joined than to compete with another force in the market.

PPS for LTACHs is creating new opportunities and risks for acute rehab. The right preparation now will ensure that rehab providers are best positioned to benefit as LTACHs transition to PPS.

REFERENCES

1. Zollar C. CMS publishes long-term care prospective payment system. American Medical Rehabilitation Providers Association Magazine. 2002;5(7):37-42.
2. Exploring the effect of post-acute care services on hospital length of stay in New Jersey’s Medicare population. Trenton, NJ: Department of Health and Senior Services; February 2001.
3. Centers for Medicare & Medicaid Services. LTC-PPS proposed rule. Federal Register. 2002;67(56):13215-13494.

Frances J. Fowler, FAAHC, is president and Michelle Fisher, MHA, is director, Fowler Healthcare Affiliates Inc, Atlanta.

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