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June 2003

By Cherilyn G. Murer, JD, CRA

Since the early 1980s, the long-term acute care hospital (LTACH) has been an integral part of the continuum of care for many hospitals and health care systems. Originally developed as tuberculosis hospitals or as settings focusing on ventilator patients, LTACHs today provide an ideal venue in which to treat patients with complex medical conditions requiring an extended stay in an acute setting. In addition to ventilator dependency, LTACHs now treat a variety of patients that require long lengths of stay with access to technologically advanced therapies, including respiratory care, stroke, general debilitation, wound management, and cardiac care. Until recently, payment for LTACHs was administered under the cost-based reimbursement system known as TEFRA. Although the limit on TEFRA payments—the “TEFRA Cap”—for most LTACHs was favorable when compared to payments under the acute care inpatient prospective payment system (Acute PPS), payment rates under the newly established prospective payment system for LTACHs (LTC-PPS), together with other features of the regulations establishing the LTC-PPS, mean that for most providers who serve patients in need of an extended stay in an acute venue, the LTACH is even more firmly established as a key venue within its comprehensive continuum of care.

From TEFRA to LTC-PPS

Prior to the passage of the Balanced Budget Act of 1997, LTACHs had extraordinarily high TEFRA caps, often ranging from $50,000 to $80,000 per patient discharge. Since the BBA, however, TEFRA caps for both existing and new providers have been significantly lower. Nevertheless, today most LTACHs have TEFRA payments in the low to mid $20,000 range. However, this remains a favorable reimbursement rate when the LTACH reimbursement is considered together with the fact that, without a LTACH, these same patients would remain in the short-term acute hospital and would generate no additional payment except for the original DRG payment. In most cases, the DRG payment covers only the first few days of inpatient care. Extended-stay patients would continue to occupy the hospital acute bed but no new monies would be available to cover their stay. Thus, TEFRA payments aside, LTACHs were a good idea under the TEFRA system because they provided significant reimbursement for patients who otherwise would have generated none while at the same time occupying an acute care bed that could have been occupied by a short-term patient for whom reimbursement was available.

With the Centers for Medicare & Medicaid Services (CMS) publication of the final rules on August 30, 2002, the importance of the LTACH in the continuum of care became even stronger. LTACHs with cost reports beginning on or after October 1, 2002, will be paid under the new LTC-PPS. Existing LTACHs may elect to be reimbursed under the full PPS immediately at the beginning of their cost reporting period. Otherwise, they will be phased into the LTC-PPS over a 5-year period (see Table 1).

Table 1. Example of LTACH reimbursement under PPS over a 5-year period.

The LTC-DRG

Although the LTC-DRG Payment System operates in a manner similar to the short-term acute DRG payment system, the LTC-DRGs have higher weights and payments to compensate for longer stay patients. For example, in the acute care hospital, DRG 87, pulmonary edema and respiratory failure has a geometric mean length of stay (GMLOS) of 4.8 days with a payment of $6,046. This is based on the 2003 DRG Payment with the standard Medicare Base Rate of $4,427. Under LTC-PPS, this DRG has a GMLOS of 32.3 days with a payment of $54,187 (based on the 2003 LTC-DRG Standard Federal Payment Rate of $32,649). Also, under the TEFRA payment system, an LTACH could anticipate a per diem of $800-$900 based on the hospital’s interim rate. Under the LTC-PPS, on the other hand, a typical diagnosis has an average per diem of $1,300-$1,700.

DRGs that are specific to LTACH patients also have quite favorable reimbursement. LTC-DRGs range from DRG 21, viral meningitis with a payment of $13,000, to DRG 483, trach with vent with a payment of $105,000. Many LTC-DRGs fall within an average range of $30,000-$60,000.

An additional positive reinforcement for LTACH reimbursement is contained in the addendum to the final rules published by CMS on March 7, 2003. This addendum calls for a 60-day commentary period in which CMS proposes to increase the standard Federal Base Rate for the LTACHs by approximately 2.2% from $34,956.15 to $35,726.64.

More LTACH Advantages

The new LTC-PPS also provides quite favorable treatment for high cost “outlier” cases. High cost outliers are defined as cases that have unusually high costs exceeding the LTC-DRG payment, plus a fixed cost amount. In FY 2003, this amount is set at $24,450. An outlier case will be paid 80% of the difference between the estimated cost of the case and the sum of the adjusted Federal PPS rate for the LTC-DRG plus the fixed amount of $24,450. By comparison, for fiscal year 2003, the fixed loss amount for acute care hospitals under the Acute PPS is $33,560, meaning that acute care bed patients must incur over $9,000 more in expenses than LTACH patients before the outlier threshold is reached. Furthermore, the CMS proposed amendment would reduce the threshold for the LTACH outlier to $19,978.

Another advantage of the final LTC-PPS rules is that they limit the 25-day average length of stay requirement for LTACH patients to Medicare patients only. Patients under other payment systems, such as commercial insurance or workers’ compensation, are not included in the average length of stay calculation for purposes of this Medicare condition of participation. This provides LTACHs more flexibility in determining length of stay for individual patients based on medical appropriateness rather than program directives. This aspect of the regulation, limiting the length of stay requirement to Medicare patients only, allows an LTACH to develop specialized programs such as bariatric surgery without putting in jeopardy its Medicare classification.

The final LTC-PPS rules also provide that certain expenses will continue to be paid on a Medicare reasonable cost basis, in addition to the LTC-DRG payments. These costs include:

Approved medical education
Bad debts of Medicare beneficiaries
Payment for blood clotting factor used by hemophilia patients
Anesthesia services furnished under arrangement or by a hospital-employed physician anesthetist
Cost of photocopying and mailing records requested by a quality improvement organization (QIO).

These reimbursement advantages provided by the new LTC-PPS only serve to enhance the advantages already offered by the LTACH venue of care. When properly established and managed, the LTACH reflects the patient diagnostic population of the short-term acute hospital in harmony with the mission and philosophy of the health system and its medical staff. Together, the long-term acute and short-term acute hospitals form the continuum of care with appropriate reimbursement reflective of each venue’s purpose and anticipated length of stay. Under this continuum short-term acute care beds are no longer filled with patients who have exhausted their acute DRG payment. Instead, these patients are treated in a venue allowing the patient and the institution to benefit both clinically and financially.

Because most LTACHs are established as hospitals within hospitals, and therefore located within an existing acute care hospital, start-up costs in terms of construction generally are minimal when compared to new, freestanding facilities. When coupled with the reimbursement benefits of the LTC-PPS, this cost saving provides the LTACH venue with a considerable financial advantage.

Conclusion

As a key element of the continuum of care that not only provided an appropriate venue for patients who needed acute services beyond those normally available in the general acute care hospital setting, the LTACH was always a good idea. With the advent of the LTC-PPS and its considerable reimbursement benefits, the LTACH is, indeed, a good idea that just got better. ®

Cherilyn G. Murer, JD, CRA, is CEO and founder of the Murer Group, a legal-based health care management consulting firm in Joliet, Ill, specializing in strategic analysis and business development. She may be reached at (815) 727-3355 or via the Web: www.murer.com.

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June 2003