December/January 2001

Regulatory Report

By Stuart S. Kurlander, JD, MHA

Exposing the Fine Print

HCFA unveils the per discharge PPS for inpatient rehab hospitals and rehab units.

On November 2, 2000, the Health Care Financing Administration (HCFA) released its long anticipated proposal (HCFA-1069-P) on the implementation of a per discharge prospective payment system (PPS) for inpatient rehabilitation hospitals and rehabilitation units, also referred to as inpatient rehabilitation facilities (IRFs). The new payment system will use information from a patient assessment instrument to classify patients into distinct groups based on clinical characteristics and expected resource needs. Payments, including the application of case and facility level adjustments, are calculated separately for each group. The PPS will be implemented over 2 years, beginning April 1, 2001.

Implementation of the new PPS was originally scheduled for October 1, 2000. Due to the number of changes needed by the claims processing systems before implementation, HCFA has delayed the effective date for the new PPS. The PPS for IRFs will become effective on or after April 1, 2001, making the implementation effective for cost reporting periods beginning on or after that date.

Currently, rehabilitation hospitals are paid under a cost-based system. The new PPS will provide payments at a rate of 2% less than payments would have been under the current system. HCFA projects that the new PPS will save $1.54 billion over 7 years.

DISCUSSION

HCFA’s proposal will directly affect the 1,100-plus rehabilitation facilities that participate in Medicare. It will indirectly impact other players in the field of rehabilitation. Payment under the proposal will depend on IRFs meeting the regulatory requirements to be classified as a rehabilitation hospital or rehabilitation unit that is excluded from the PPS for inpatient hospital services (acute care).

Major elements of the proposed IRF PPS include:

Patient assessment instrument. To implement and administer the IRF PPS, HCFA will use data from the Minimum Data Set for Post Acute Care (MDS-PAC) patient assessment instrument for all Medicare patients. The MDS-PAC is a patient-centered assessment instrument that places the emphasis on a patient’s care needs, instead of the characteristics of the provider.

Patient classification system. HCFA proposes to gather data elements from the MDS-PAC and to classify discharges into case-mix groups called CMGs that are predictive of the resources needed to furnish care to various types of patients. The data used to construct the CMGs include rehabilitation impairment categories, functional status (both motor and cognitive), age, comorbidities, and other factors that were deemed appropriate to improve the explanatory power of the groups.

CMG relative weights. Payment for each case will be set using a national formula that adjusts for case-mix. In this payment system, relative weights are a primary element to account for the variance in cost per discharge and resource utilization among the CMGs. To ensure that beneficiaries in all CMGs will have access to care and to encourage efficiency, HCFA calculates relative weights that are proportional to the resources needed by a typical case in a CMG.

Payment rates. The payment for a Medicare patient will be made at a predetermined, per discharge amount for each CMG. Payments under the IRF PPS will encompass all inpatient operating and capital costs of furnishing covered rehabilitation services (routine, ancillary, and capital costs) but not costs associated with bad debts, approved educational activities, and other costs not paid for under PPS.

The proposed IRF PPS utilizes federal prospective payment rates across 97 distinct CMGs. The federal payment rates are established using a standard payment amount (referred to as the budget neutral conversion factor). A set of relative payment weights, which account for the relative difference in resource use across the CMGs, are applied to the budget neutral conversion factor. Finally, a number of facility level and case level adjustments may apply. The facility level adjustments include those that account for geographic variation in wages (wage index), disproportionate share (DSH), and location in a rural area. Case level adjustments include those that apply for transfer, short-stay, interrupted stay, and outlier cases.

Payments under transition period. The law requires a 2-year payment transition period. During that time, an IRF’s payment under the PPS will consist of a blend of the federal prospective payment and the IRF’s payment under the current (reasonable cost) system. For a cost reporting period beginning on or after April 1, 2001, and before October 1, 2001, the total prospective payment will consist of 66.6% of the amount based on the current payment system and 33.3% of the proposed federal prospective payment. For a cost reporting period beginning during FY 2002, the total prospective payment will consist of 33.3% of the amount based on the current payment system and 66.6% of the proposed federal prospective payment. For cost reporting periods beginning on or after October 1, 2002, Medicare payment for IRFs will be determined entirely under the proposed federal prospective payment methodology.

Adjustments to the budget neutral conversion factor. The budget neutral conversion factor will be adjusted for:

1. The estimated proportion of additional outlier payments;
2. 2. A reduction of aggregate payments under the PPS for FYs 2001 and 2002 that are estimated to be equal to 98% of the amount that would have been made to IRFs without regard to the PPS; and
3. 3. Changes in the coding and classification of patients that do not reflect real changes in case-mix.

HCFA will take comments on the proposal from interested parties until January 2. Comments should be sent to: HCFA, Department of Health and Human Services, Attention: HCFA-1069-P, PO Box 8010, Baltimore, MD 21244-8010.

Stuart S. Kurlander, JD, MHA, is a health care partner at Latham & Watkins, Washington, DC.

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