Medicare Program; Prospective Payment System for Long-Term Care Hospitals: Implementation and FY 2003 Rates

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 412, 413, and 476

[CMS-1177-F]

RIN 0938-AK69

Medicare Program; Prospective Payment System for Long-Term Care Hospitals: Implementation and FY 2003 Rates

AGENCY:

Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION:

Final rule.

SUMMARY:

This final rule establishes a prospective payment system for Medicare payment of inpatient hospital services furnished by long-term care hospitals (LTCHs) described in section 1886(d)(1)(B)(iv) of the Social Security Act (the Act). This final rule implements section 123 of the Medicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Balanced Budget Refinement Act of 1999 (BBRA) and section 307(b) of the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA). Section 123 of the BBRA directs the Secretary to develop and implement a prospective payment system for LTCHs. The prospective payment system described in this final rule replaces the reasonable cost-based payment system under which LTCHs are currently paid.

EFFECTIVE DATE:

The provisions of this final rule are effective on October 1, 2002.

FOR FURTHER INFORMATION CONTACT:

Tzvi Hefter, (410) 786-4487 (General information)

Judy Richter, (410) 786-2590 (General information, transition payments, payment adjustments, and onsite discharges and readmissions)

Michele Hudson, (410) 786-5490 (Calculation of the payment rates, relative weights and case-mix index, update factors, and payment adjustments)

Tiffany Eggers, (410) 786-0400 (Short-stay outliers, interrupted stays)

Ann Fagan, (410) 786-5662 (Patient classification system)

Miechal Lefkowitz, (410) 786-5316 (High-cost outliers, capital payments, budget neutrality, market basket, and data sources)

Linda McKenna, (410) 786-4537 (Payment adjustments and transition period)

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To assist readers in referencing sections contained in this preamble, we are providing the following table of contents.

Table of Contents

I. General Background

II. Publication of Proposed Rulemaking

III. Overview of the Current Payment System for LTCHs

A. Exclusion of Certain Facilities from the Acute Care Hospital Inpatient Prospective Payment System

B. Requirements for LTCHs to be Excluded from the Acute Care Hospital Inpatient Prospective Payment System

C. Payment System Requirements Prior to the BBA

D. Effects of the Current Payment System

E. Research and Discussion of a Prospective Payment System for LTCHs Prior to the BBA

IV. Requirements of the BBA, BBRA, and BIPA for LTCHs

A. Provisions of the Current Payment System

1. BBA

2. BBRA

3. BIPA

B. Provisions for a LTCH Prospective Payment System

1. BBA

2. BBRA

3. BIPA

V. Research and Data Supporting the Establishment of the LTCH Prospective Payment System‘

A. Legislative Requirements

B. Description of Sources of Research Data

C. The Universe of LTCHs

1. Background Issues

2. General Medicare Policies

3. Exclusion from the Acute Care Hospital Inpatient Prospective Payment System

4. Geographic Distribution

5. Characteristics by Date of Medicare Participation

6. Hospitals-Within-Hospitals and Satellite Facilities

7. Specialty Groups of LTCHs by Patient Mix

8. Sources and Destinations of LTCH Patients

9. LTCHs and Patterns Among Postacute Care Facilities

D. Overview of Systems Analysis for the LTCH Prospective Payment System

E. Evaluation of DRG-Based Patient Classification Systems

VI. Recommendations by MedPAC for a LTCH Prospective Payment System

VII. Evaluated Options for the Prospective Payment System for LTCHs

VIII. Elements of the LTCH Prospective Payment System

A. Overview of the System

B. Applicability

1. Criteria for Classification

2. Change in the Average 25-Day Total Inpatient Stay Requirement

3. LTCHs Not Subject to the LTCH Prospective Payment System

C. Limitation on Charges to Beneficiaries

D. Medical Review Requirements

E. Furnishing of Inpatient Hospital Services Directly or Under Arrangements

F. Reporting and Recordkeeping Requirements

G. Transition Period for Implementation of the LTCH Prospective Payment System

H. Implementation Procedures

IX. Long-Term Care Diagnosis-Related Group (LTC-DRG) Classifications

A. Background

B. Historical Exclusion of LTCHs

C. Patient Classifications by DRGs

1. Objectives of the Classification System

2. DRGs and Medicare Payments

D. LTC-DRG Classification System for LTCHs

E. ICD-9-CM Coding System

1. Historical Use of ICD-9-CM Codes

2. Uniform Hospital Discharge Data Set (UHDDS) Definitions

3. Maintenance of the ICD-9-CM Coding System

4. Coding Rules and Use of ICD-9-CM Codes in LTCHs

X. Payment System for LTCHs

A. Development of the LTC-DRG Relative Weights

1. Overview of Development of the LTC-DRG Relative Weights

2. Steps for Calculating the Relative Weights

B. Special Cases: General

C. Special Cases: Short-Stay Outliers

D. Discussion of Proposed Policy on Payment for Very Short-Stay Discharges

E. Special Cases: Interrupted Stay

F. Other Special Cases

G. Onsite Discharges and Readmittances

H. Additional Issues for Onsite Facilities

I. Monitoring System

J. Payment Adjustments

1. Area Wage Adjustment

2. Adjustment for Geographic Reclassification

3. Adjustment for Disproportionate Share of Low-Income Patients

4. Adjustment for Indirect Teaching Costs

5. Cost-of-Living Adjustment (COLA) for Alaska and Hawaii

6. Adjustment for High-Cost Outliers

K. Calculation of the Standard Federal Payment Rate

1. Overview of the Development of the Standard Payment Rate

2. Development of the Standard Federal Payment Rate

L. Development of the Federal Prospective Payments

M. Computing the Adjusted Federal Prospective Payments

N. Transition Period

O. Payments to New LTCHs

P. Method of Payment

XI. Provisions of the Final Rule

XII. Regulatory Impact Analysis

A. Introduction

1. Executive Order 12866

2. Regulatory Flexibility Act (RFA)

3. Impact on Rural Hospitals

4. Unfunded Mandates

5. Federalism

B. Anticipated Effects

1. Budgetary Impact

2. Impact on Providers

3. Calculation of Current Payments

4. Calculation of Prospective Payments

5. Results

6. Effect on the Medicare Program

7. Effect on Medicare Beneficiaries

8. Computer Hardware and Software

C. Alternatives Considered

D. Executive Order 12866

XIII. Collection of Information Requirements

Regulations Text

Addendum—Tables

Appendix A—Market Basket for LTCHs

Appendix B—Update Framework

Acronyms

Because of the many terms to which we refer by acronym in this final rule, we are listing the acronyms used and their corresponding terms in alphabetical order below:

APR-DRGs All patient-refined, diagnosis-related groups

BBA Balanced Budget Act of 1997, Public Law 105-33

BBRA Medicare, Medicaid and SCHIP [State Children's Health Insurance Program] Balanced Budget Refinement Act of 1999, Public Law 106-113

BIPA Medicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Benefits Improvement and Protection Act of 2000, Public Law 106-554

CMGs Case-mix groups

CMI Case-mix index

CMS Centers for Medicare & Medicaid Services

DRGs Diagnosis-related groups

FY Federal fiscal year

HCRIS Hospital Cost Report Information System

HHA Home health agency

HIPAA Health Insurance Portability and Accountability Act, Public Law 104-191

IRF Inpatient rehabilitation facility

LTC-DRG Long-term care diagnosis-related group

LTCH Long-term care hospital

MDCN Medicare Data Collection Network

MedPAC Medicare Payment Advisory Commission

MedPAR Medicare provider analysis and review file

OSCAR Online Survey Certification and Reporting (System)

ProPAC Prospective Payment Assessment Commission

QIO Quality Improvement Organization (formerly Peer Review organization (PRO))

SNF Skilled nursing facility

TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248

I. General Background

When the Medicare statute was originally enacted in 1965, Medicare payment for hospital inpatient services was based on the reasonable costs incurred in furnishing services to Medicare beneficiaries. Section 223 of the Social Security Act Amendments of 1972 (Pub. L. 92-603) amended section 1861(v)(1) of the Social Security Act (the Act) to set forth limits on reasonable costs for hospital inpatient services. Section 101(a) of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) (Pub. L. 97-48) amended the Medicare statute to limit payment by placing a cap on allowable costs per discharge. Section 601 of the Social Security Amendments of 1983 (Pub. L. 98-21) added section 1886(d) to the Act that replaced the reasonable cost-based payment system for most hospital inpatient services. Section 1886(d) of the Act provides for a prospective payment system for the operating costs of acute care hospital inpatient stays, effective with hospital cost reporting periods beginning on or after October 1, 1983.

Although most hospital inpatient services became subject to the acute care hospital inpatient prospective payment system, certain specialty hospitals are excluded from that system. These hospitals included long-term care hospitals (LTCHs), rehabilitation and psychiatric hospitals, rehabilitation and psychiatric units of acute care hospitals, and children's hospitals. Cancer hospitals were added to the list of excluded hospitals by section 6004(a) of the Omnibus Budget Reconciliation Act of 1989 (Pub. L. 101-239).

Subsequent to the implementation of the acute care hospital inpatient prospective payment system, both the number of excluded hospitals and Medicare payments to these hospitals grew rapidly. Consequently, Congress enacted various provisions in the Balanced Budget Act (BBA) (Pub. L. 105-33), the Medicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Balanced Budget Refinement Act of 1999 (BBRA) (Pub. L. 106-113), and the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) (Pub. L. 106-554) to provide for the development and implementation of a prospective payment system for the following excluded hospitals:

• Rehabilitation hospitals (including units in acute care hospitals).

• Psychiatric hospitals (including units in acute care hospitals.

• LTCHs.

Section 4422 of the BBA mandated that the Secretary develop a legislative proposal, for presentation to the Congress by October 1, 1999, for a case-mix adjusted LTCH prospective payment system under the Medicare program. This system was to include an adequate patient classification system that reflects the differences in patient resource use and costs among LTCHs. Furthermore, in developing the legislative proposal for the prospective payment system, the Secretary was to consider several payment methodologies, including the feasibility of an expansion of the acute care hospital inpatient prospective payment system (diagnosis-related group (DRG) based system) established under section 1886(d) of the Act.

In the interim, section 4414 of the BBA imposed national limits (or caps) on hospital-specific target amounts (that is, the annual per discharge limit) for these excluded hospitals until cost reporting periods beginning on or after October 1, 2002. At the same time that the Congress modified the payment system based on limits on target amounts, it also included a provision in the BBA to require the Secretary to develop a legislative proposal for establishing a prospective payment system for LTCHs.

With the passage of the BBRA in November 1999, in section 122, the Congress refined some policies of the BBA before the implementation of the prospective payment systems for LTCHs and psychiatric hospitals and units. Section 123 of the BBRA further requires that the Secretary develop a per discharge, DRG-based system for LTCHs and requires that this system be described in a report to the Congress by

October 1, 2001, and be in place by October 1, 2002. Section 307(b)(1) of BIPA modified the BBRA's requirements for the prospective payment system for LTCHs by mandating that the Secretary” * * * shall examine the feasibility and the impact of basing payment under such a system on the use of existing (or refined) hospital diagnosis-related groups (DRGs) that have been modified to account for different resource use of long-term care hospital patients as well as the use of the most recently available hospital discharge data.” Furthermore, section 307(b)(1) of BIPA provided that the Secretary” * * * shall examine and may provide for appropriate adjustments to the long-term hospital prospective payment system, including adjustments to DRG weights, area wage adjustments, geographic reclassification, outliers, updates, and a disproportionate share adjustment * * *.” In the event that the Secretary is unable to implement the LTCH prospective payment system by October 1, 2002, section 307(b)(2) of BIPA requires the Secretary to implement a prospective payment system using the existing hospital DRGs, modified when feasible, to account for resource use by LTCHs.

(We note that, even though the LTCH prospective payment system in this final rule is effective for cost reporting periods that begin on or after October 1, 2002, we will not have computer system changes in place that are necessary to accommodate claims processing and payment under the prospective payment system until after January 1, 2003. As of October 16, 2002, a LTCH that is required to comply with the HIPAA Administrative Simplification Standards must submit electronic claims to the fiscal intermediary in compliance with 42 CFR 162.1002 and 45 CFR 162.1102, using the ICD-9-CM coding system, unless the LTCH obtains an extension in compliance with the Administrative Compliance Act (Pub. L. 107-105). Beginning October 16, 2003, LTCHs that obtained an extension and that are required to comply with the HIPAA Administrative Simplification Standards must start submitting electronic claims in compliance with the HIPPA regulations cited above, among others. We intend that, as of January 1, 2003, the fiscal intermediary will reconcile the payment amounts that have been made to LTCHs for all covered inpatient hospital services furnished to Medicare beneficiaries from cost reporting periods that begin on or after October 1, 2002 until the date of the systems implementation, with the amounts that are payable under the LTCH prospective payment methodology. Since LTCHs will receive payment under the LTCH prospective payment system at the start of their first cost reporting periods that begin on or after October 1, 2002, only those LTCHs with cost reporting periods starting October 1, 2002 until the date of the systems implementation will experience the payment reconciliation necessitated by this differential period. We also emphasize that the claims submission procedure of using ICD-9-CM codes will not change following the systems implementation of the LTCH prospective payment system. A detailed discussion on the operational procedures for this differential period appears in sections VIII.H. and X.N. of this final rule.)

II. Publication of Proposed Rulemaking

On March 22, 2002, we published a proposed rule in the

Federal Register

(67 FR 13416) that set forth the proposed Medicare prospective payment system for LTCHs as authorized under Public Law 106-113 and Public Law 106-554. In accordance with the requirements of section 123 of Public Law 106-113, as modified by section 307(b) of Public Law 106-554, we proposed to implement a prospective payment system for LTCHs to replace the current reasonable cost-based payment system under TEFRA. The proposed prospective payment system used information from LTCH patient records to classify patients into distinct DRGs based on clinical characteristics and expected resource needs. Separate payments would be calculated for each DRG with additional adjustments applied.

In the proposed rule and in this final rule, we discuss the development, policies, and implementation of the LTCH prospective payment system. These discussions in this final rule include the following:

• An overview of the current payment system for LTCHs (section III.).

• A discussion of the statutory requirements for developing and implementing a LTCH prospective payment system (section IV.).

• A discussion of research findings on LTCHs (section V.).

• A detailed discussion of the LTCH prospective payment system, including the patient classification system (section IX.), relative weights (section X.A.), payment rates (section X.B.), additional payments (section X.C.), and the budget-neutrality requirements (section X.F.) mandated by section 123 of Pub. L. 106-113.

• An analysis of the estimated impact of the LTCH prospective payment system on the Federal budget and LTCHs (section XII.).

• Changes to existing regulations and the establishment of regulations in 42 CFR Chapter IV to implement the LTCH prospective payment system.

We designed the prospective payment system for LTCHs with the following objectives:

• To base the prospective payment system on an analysis of the best information and data available.

• To establish a payment model using our experience in implementing other prospective payment systems.

• To provide incentives to control costs and to furnish services as efficiently as possible.

• To base payment on clinically coherent categories and to appropriately reflect average resource needs across different categories.

• To minimize opportunities and incentives for inappropriately maximizing Medicare payments.

• To establish a system that is beneficiary centered by formulating procedures for quality monitoring.

• To develop a system that is administratively feasible.

We received a total of 52 timely items of correspondence containing multiple comments on the proposed rule. The major issues addressed by the commenters included: the criteria for determining the 25-day average length of stay for LTCHs; payment adjustments for area wage differences; payments for special cases of short stays and interrupted stays; and data sources used to compute the prospective payments. Summaries of the public comments received and our responses to those comments are set forth below under the appropriate subject heading.

III. Overview of the Current Payment System for LTCHs

A. Exclusion of Certain Facilities From the Acute Care Hospital Inpatient Prospective Payment System

Although payment for operating costs of most hospital inpatient services became subject to a prospective payment system under the Social Security Amendments of 1983 (Pub. L. 98-21), which added section 1886(d) to the Act, certain types of hospitals and units were excluded from that payment system. Section 1886(d)(1)(B) of the Act lists the following classes of excluded hospitals:

• Psychiatric hospitals and units.

• Rehabilitation hospitals and units.

• LTCHs.

• Children's hospitals.

Effective with cost reporting periods beginning on or after October 1, 1989,

cancer hospitals were added to this list by section 6004(a) of the Omnibus Budget Reconciliation Act of 1989 (Pub. L. 101-239).

The acute care hospital inpatient prospective payment system is a system of average-based payments that assumes that some patient stays will consume more resources than the typical stay, while others will demand fewer resources. Therefore, an efficiently operated hospital should be able to deliver care to its Medicare patients for an overall cost that is at or below the amount paid under the acute care hospital inpatient prospective payment system. In a report to the Congress, “Hospital Prospective Payment for Medicare (1982),” the Department of Health and Human Services stated that the “467 DRGs were not designed to account for these types of treatment” found in the four classes of excluded hospitals, and noted that “including these hospitals will result in criticism and their application to these hospitals would be inaccurate and unfair.”

The Congress excluded these hospitals from the acute care hospital inpatient prospective payment system because they typically treated cases that involved stays that were, on average, longer or more costly than would be predicted by the DRG system. The legislative history of the 1983 Social Security Amendments stated that the “DRG system was developed for short-term acute care general hospitals and as currently constructed does not adequately take into account special circumstances of diagnoses requiring long stays.” (Report of the Committee on Ways and Means, U.S. House of Representatives, to Accompany HR 1900, H.R. Rept. No. 98-25, at 141 (1983)). Therefore, these hospitals could be systemically underpaid if the same DRG system were applied to them.

Following enactment in April 1983 of the Social Security Amendments of 1983, we implemented the acute care hospital inpatient prospective payment system on October 1, 1983, including the initial publication in the

Federal Register

of the rules and regulations for the acute care hospital inpatient prospective payment system: the September 1, 1983 interim final rule (48 FR 39752) and the January 3, 1984 final rule (49 FR 234). Updates and modifications of the regulations have been published annually in the

Federal Register

. We also developed payment policy for hospitals that were seeking to be excluded from the acute care hospital inpatient prospective payment system. The regulations concerning exclusion of LTCHs from the acute care hospital inpatient prospective payment system are found in 42 CFR Part 412, Subpart B.

B. Requirements for LTCHs to be Excluded From the Acute Care Hospital Inpatient Prospective Payment System

Under section 1886(d)(1)(B) of the Act, the prospective payment system for hospital inpatient operating costs set forth in section 1886(d) of the Act does not apply to several specified types of hospitals, including LTCHs, which are defined in section 1886(d)(1)(B)(iv)(I) of the Act as “* * * a hospital which has an average inpatient length of stay (as determined by the Secretary) of greater than 25 days.” Section 4417(b)(1)(B) of the BBA added section 1886(d)(1)(B)(iv)(II) to the Act, which also provides another definition of LTCHs: specifically, a hospital that was first excluded in 1986 that has an average inpatient length of stay (as determined by the Secretary) of greater than 20 days and has 80 percent or more of its annual Medicare inpatient discharges with a principal diagnosis of neoplastic disease in the 12-month cost reporting period ending in FY 1997.

Implementing regulations at § 405.471(c)(5) (now § 412.23(e)) require the facility to have a provider agreement with Medicare to participate as a hospital, and an average inpatient length of stay greater than 25 days as calculated under the following formula: the average length of stay is calculated by dividing the total number of inpatient days (excluding leave of absence or pass days) for all patients by the total number of discharges for the hospital's most recent complete cost reporting period. The determination of whether or not a hospital qualifies as an LTCH is based on the hospital's most recently filed cost report, or if a change in the hospital's average length of stay is indicated, by the same method for the immediately preceding 6-month period (§ 412.23(e)(3)). (Requirements for hospitals seeking classification as LTCHs that have undergone a change in ownership, as described in § 489.18, are set forth in § 412.23(e)(3)(iii).)

C. Payment System Requirements Prior to the BBA

Hospitals that are excluded from the acute care hospital inpatient prospective payment system under section 1886(d)(1)(B) of the Act are paid for inpatient operating costs under the provisions of Public Law 97-248 (TEFRA) that are found in section 1886(b) of the Act and implemented in regulations at 42 CFR part 413. Public Law 97-248 established payments based on hospital-specific limits for inpatient operating costs. A ceiling on payments to hospitals excluded from the acute care hospital inpatient prospective payment system is determined by calculating the product of a facility's base year costs (the year on which its target reimbursement limit is based) per discharge, updated to the current year by a rate-of-increase percentage, and multiplied by the number of total current year discharges. (A detailed discussion of target amount payment limits under Public Law 97-248 can be found in the September 1, 1983 final rule published in the

Federal Register

(48 FR 39746).)

The base year for a facility varied, depending on when the facility was initially determined to be a prospective payment system-excluded provider. The base year for facilities that were established before the implementation of Public Law 97-248 was 1982, when Public Law 97-248 was enacted. For facilities established after implementation of Public Law 97-248 (section 1886(b) of the Act), we originally provided in the regulations for payment to these facilities for their full “reasonable” costs for their first 3 cost reporting years, and allowed the facilities to choose which of those years would be used in the future to determine their target limit. This “new provider” period was later shortened to 2 cost reporting years (§ 413.40(f)(1) (1992)), and we designated the second cost reporting year as the cost reporting year used to determine the hospital's per discharge target amount.

Excluded facilities whose costs were below their target amounts received bonus payments equal to the lesser of half of the difference between costs and the target amount, up to a maximum of 5 percent of the target amount, or the hospital's costs. For excluded facilities whose costs exceeded their target amounts, Medicare provided relief payments equal to half of the amount by which the hospital's costs exceeded the target amount up to 10 percent of the target amount. Excluded facilities that experienced a more significant increase in patient acuity could also apply for an additional amount under the regulations for Medicare exception payments (§ 413.40(d)).

D. Effects of the Current Payment System

Use of postacute care services has grown rapidly in recent years since the implementation of the acute care hospital inpatient prospective payment system. The average length of stay in acute care hospitals has decreased, and patients are increasingly being discharged to postacute care settings such as LTCHs, skilled nursing facilities

(SNFs), home health agencies (HHAs), and inpatient rehabilitation facilities (IRFs) to complete their course of treatment. The increased use of postacute care providers, including hospitals excluded from the acute care hospital inpatient prospective payment system, has resulted in the rapid growth in Medicare payments to these hospitals in recent years. In addition, there has been a significant increase in the number of LTCHs. In 1991, there were 91 LTCHs; in 1994, 155 LTCHs; in 1999, 225 LTCHs; in December 2000, 252 LTCHs; and in November 2001, 270 LTCHs. Payments to postacute care providers were among the fastest growing providers under the Medicare program throughout the 1990s. (Prospective Payment Assessment Commission (ProPAC) June 1996 Report to Congress, p. 91.)

LTCHs have experienced faster growth in the number of facilities and Medicare program payments than any other category of prospective payment system-excluded provider. In its June 1996 Report to Congress, ProPAC found that, from 1990 to 1993, payment to rehabilitation facilities rose about 25 percent per year, while payments to LTCHs increased 33 percent annually (p. 92). ProPAC also found that, from 1991 to 1995, the number of rehabilitation facilities increased 21 percent (from 852 in 1991 to 1,029 in 1995), while the number of LTCHs increased 93 percent (from 91 in 1991 to 176 in 1995) (p. 93). The best available Hospital Cost Report Information System (HCRIS) data indicate $398 million in payments for inpatient operating services to 105 LTCHs in FY 1993 and $1.05 billion in payments for inpatient operating services to 206 LTCHs in FY 1998. This amount represents more than a 96-percent increase in the number of LTCHs and a 164-percent increase in payments to LTCHs in 5 years.

In its March 1999 Report to Congress, the Medicare Payment Advisory Commission (MedPAC) (formerly ProPAC) stated that: “[The] TEFRA system has remained in effect longer than expected partly because of difficulties in accounting for the variation in resource use across patients in exempted facilities. The unintended consequences of sustaining that system have been a steady growth in the number of prospective payment system-exempt facilities and a substantial payment inequity between older and newer facilities. In particular, the payment system encouraged new exempt facilities to maximize their costs in the base year to establish high cost limits. Once subject to its relatively high limit, a recent entrant could reduce its costs below its limit, resulting in reimbursement of its full costs plus bonus payment. By contrast, facilities that existed before they became subject to TEFRA could not influence their cost limits. Given the relatively low limits of older facilities, they are more likely to incur costs above their limits and thus receive payments less than their costs.” (p. 72)

To address concerns regarding the historical growth in payments and the disparity in payments to existing and newly excluded hospitals and units, the BBA mandated several changes to the existing payment system. These changes are outlined in section IV. of this preamble.

E. Research and Discussion of a Prospective Payment System for LTCHs Prior to the BBA

Section 603(a)(2)(C)(ii) of Public Law 98-21 required the Secretary to include the results of research studies on whether and how excluded hospitals and units can be paid on a prospective basis, in the 1985 Report to Congress on the Impact of Prospective Payment Methodology. HCFA (now CMS) undertook and funded a wide range of research projects that resulted in 1987 in a Report to Congress entitled “Developing a Prospective Payment System for Excluded Hospitals.” In that report, the Secretary presented an examination of the then current state of the four classes of excluded hospitals and units and offered recommendations for the development of a prospective payment system. “Long-term” or “chronic disease” hospitals, the report noted, “are the least understood of the excluded hospital types” (p. 3-51).

The following information was clear—there were a relatively small number of facilities (94 at that time); LTCHs were not dispersed throughout the country and, therefore, potential long-term care patients were receiving necessary care elsewhere; LTCHs, as generally defined by the greater than 25-day average length of stay, constituted a diverse set that closely resembled other hospitals, both included (acute care) and excluded (psychiatric, rehabilitation, and children's) under the acute care hospital inpatient prospective payment system (pp. 3-51 through 3-63). The Report concluded with the following discussion: “Because this class of hospitals treats a very heterogeneous patient population and does not share a common set of facility characteristics, the development of a separate classification system for prospective payment purposes would appear to be both infeasible and undesirable. At the same time, as part of HCFA's [now CMS'] impact analysis, we were investigating the feasibility of including LTCHs under the current prospective payment system, where their cases would be expected to be paid predominantly under the prospective payment system outlier policy.” (pp. 3-63 through 3-64)

The 1987 report further noted that present and future research on LTCHs would focus on acquiring a broader understanding of LTCHs, long-term care patients, and other treatment settings and on the preliminary financial impact of a prospective payment system on both LTCHs and the Medicare system. An initial inquiry was also planned “into the role of those hospitals as a component of the continuum of care between acute care hospitals and skilled nursing facilities, as a general first step in developing a classification system for patients in these facilities * * *” (p. 3-54).

ProPAC's March 1996 Report to Congress endorsed the concept of prospective payment systems for all postacute services, emphasizing consistent payment methods across all classes of facilities in order to encourage provider efficiency (p. 75). ProPAC's extensive analysis of “patients using postacute care providers and in these providers’ treatment patterns” based on FY 1994 data discussed in the June 1996 Report to Congress, concluded that “[a]lthough there was significant overlap in the hospital assigned DRGs across settings, other patient characteristics, such as medical complexity or functional status, may influence which patients use a particular site” (p. 110).

In ProPAC's March 1, 1997 report, ProPAC's Recommendation 33, entitled “Coordinating Post-Acute Care Provider Payment Methods,” stated that “the Commission urges the Congress and the Secretary to consider the overlap in services and beneficiaries across postacute care providers as they modify Medicare payment policies” (p. 60).

The passage of Public Law 105-33 (the BBA) provided for the establishment of separate and distinct prospective payment systems for postacute care providers: SNFs (section 4432(a)), IRFs (section 4421), and HHAs (section 4603(b)). In addition, the Congress directed the Secretary to develop a legislative proposal to pay LTCHs prospectively as well (section 4422).

IV. Requirements of the BBA, BBRA, and BIPA for LTCHs

A. Provisions of the Current Payment System

1. BBA

The BBA amendments to section 1886(b) of the Act significantly altered the payment provisions for excluded hospitals and units and also added other qualifying criteria for certain hospitals excluded from the acute care hospital inpatient prospective payment system (sections 4411 to 4419). Provisions of these amendments that related to the current payment system were explained in detail and implemented in the acute care hospital inpatient prospective payment system final rule published in the

Federal Register

on August 29, 1997 (62 FR 45966).

Section 4411 of the BBA amended section 1886(b)(3)(B) of the Act and restricted the rate-of-increase percentages that are applied to each provider's target amount so that excluded hospitals and units experiencing lower inpatient operating costs relative to their target amounts receive lower rates of increase.

Section 4412 of the BBA amended section 1886(g) of the Act to establish a 15-percent reduction in capital payments for excluded psychiatric and rehabilitation hospitals and units and LTCHs, for portions of cost reporting periods occurring during the period of October 1, 1997, through September 30, 2002.

Section 4413(b) of the BBA amended section 1886(b)(3) of the Act to permit certain LTCHs to elect a rebasing of the target amount for the 12-month cost reporting period beginning during FY 1996.

Section 4414 of the BBA amended section 1886(b)(3) of the Act to establish caps on the target amounts for excluded hospitals and units at the 75th percentile of target amounts for similar facilities for cost reporting periods beginning on or after October 1, 1997, through September 30, 2002. These caps on the target amounts apply only to psychiatric and rehabilitation hospitals and units and LTCHs. Payments for these excluded hospitals and units are based on the lesser of a provider's cost per discharge or its hospital-specific cost per discharge, subject to this cap.

Section 4415 of the BBA amended section 1886(b)(1) of the Act by revising the percentage factors used to determine the amount of bonus and relief payments, and establishing continuous improvement bonus payments for cost reporting periods beginning on or after October 1, 1997 for hospitals and units excluded from the acute care hospital inpatient prospective payment system that meet specified criteria. If a hospital is eligible for the continuous improvement bonus, the continuous improvement bonus payment is equal to the lesser of: (1) 50 percent of the amount by which operating costs are less than expected costs; or (2) 1 percent of the target amount.

Sections 4416 and 4419 of the BBA amended section 1886(b) of the Act to establish a new framework for payments for new excluded providers. Section 4416 added a new section 1886(b)(7) to the Act that established a new statutory methodology for new psychiatric and rehabilitation hospitals and units and LTCHs. Before this change, new hospitals excluded from the acute care hospital inpatient prospective payment system were exempted from the target amount per discharge ceiling until the end of the first cost reporting period ending at least 2 years after they accepted their first patient. This new provider “exemption” was eliminated from all classes of excluded providers except children's hospitals for cost reporting periods beginning on or after October 1, 1997, by section 4419(a) of the BBA. Under section 4416, payment to these new excluded providers for their first two cost reporting periods is limited to the lesser of the operating costs per case, or 110 percent of the national median of target amounts, as adjusted for differences in wage levels, for the same class of hospital for cost reporting periods ending during FY 1996, updated to the applicable period.

It is important to note that before enactment of the BBA, the payment provisions for excluded hospitals and units applied consistently to all classes of excluded providers (that is, psychiatric, rehabilitation, long-term care, children's, and cancer). However, effective for cost reporting periods beginning on or after October 1, 1997, there are specific payment provisions for certain classes of excluded providers, as well as modifications for all excluded providers.

Section 4417 of the BBA specified that a hospital that was classified by the Secretary on or before September 30, 1995, as an excluded LTCH must continue to be so classified, notwithstanding that it is located in the same building, or on the same campus, as another hospital.

Section 4418 of the BBA amended section 1886(d)(1)(B)(v) of the Act, providing an additional category of hospitals that could qualify as cancer hospitals for purposes of exclusion from the acute care hospital inpatient prospective payment system.

2. BBRA

With the enactment of the BBRA of 1999, the Congress refined some of the policies mandated by the BBA for hospitals excluded from the acute care hospital inpatient prospective payment system. The provisions of the BBRA, which amended section 1886(b)(3)(H) of the Act relating to the current payment system for excluded hospitals, were explained in detail and implemented in the acute care hospital inpatient prospective payment system interim final rule published in the

Federal Register

on August 1, 2000 (65 FR 47026) and in the acute care hospital inpatient prospective payment system final rule also published on August 1, 2000 (65 FR 47054).

Section 4414 of the BBA provided for caps on target amounts for excluded hospitals and units for cost reporting periods beginning on or after October 1, 1997. Section 121 of the BBRA amended section 1886(b)(3)(H) of the Act to provide for an appropriate wage adjustment to these caps on the target amounts for existing psychiatric and rehabilitation hospitals and units and LTCHs, effective for cost reporting periods beginning on or after October 1, 1999 through September 30, 2002.

Section 122 of the BBRA provided for an increase in the continuous improvement bonus for eligible LTCHs and psychiatric hospitals and units for cost reporting periods beginning on or after October 1, 2000 and before September 30, 2002.

3. BIPA

Two provisions of the BIPA that amended section 1886(b)(3) of the Act were directed at LTCHs. Section 307(a) of the BIPA provided for a 2-percent increase to the wage-adjusted 75th percentile cap on the target amount for existing LTCHs, effective for cost reporting periods beginning during FY 2001. Section 307(a) of the BIPA also provided a 25-percent increase to the hospital-specific target amounts for existing LTCHs for cost reporting periods beginning in FY 2001, subject to the wage-adjusted national cap.

B. Provisions for a LTCH Prospective Payment System

1. BBA

In section 4422 of the BBA, the Congress mandated that the Secretary develop a legislative proposal for a case-mix adjusted prospective payment system for LTCHs under the Medicare program, for submission by October 1999 based on consideration of several payment methodologies, including the feasibility of expanding the current

DRGs and the prospective payment system currently in place for acute care hospitals.

2. BBRA

Section 123 of the BBRA specifically requires that the prospective payment system for LTCHs be designed as a per discharge system with a DRG-based patient classification system that reflects the differences in patient resources and costs in LTCHs while maintaining budget neutrality. Section 123 also requires that a report be submitted to the Congress describing the system design of the mandated LTCH prospective payment system no later than October 1, 2001, and that the system be implemented for cost reporting periods beginning on or after October 1, 2002.

3. BIPA

The BIPA reiterated the dates of implementation of the LTCH prospective payment system set forth in the BBRA. Section 307(b)(1) of the BIPA also directs the Secretary to examine the following specific payment adjustments: adjustments to DRG weights, area wage adjustments, geographic reclassification, outliers, updates, and a disproportionate share adjustment. Furthermore, if the Secretary is unable to implement the prospective payment system by October 1, 2002, section 307(b)(2) of the BIPA mandates that a default LTCH prospective payment system be implemented, based on existing DRGs, modified where feasible to account for the specific resource use of long-term care patients.

V. Research and Data Supporting the Establishment of the LTCH Prospective Payment System

A. Legislative Requirements

Section 4422 of the BBA required us to formulate a legislative proposal on the development of a prospective payment system for LTCHs for submission to the Congress by October 1, 1999. To prepare for this proposal, we awarded a contract to The Urban Institute (Urban) following the enactment of the BBA for a multifaceted analysis of LTCHs, including a description of facilities and patients, as well as exploration of a variety of classification and payment system options.

In section 123(a) of the BBRA, the Congress mandated a per discharge, DRG-based model for the prospective payment system for LTCHs. Our basic objective remained unchanged—to arrive at a clearer understanding of the universe of LTCHs in relation to facility characteristics, beneficiary utilization, and beneficiary characteristics such as diagnoses, treatment, and discharge patterns.

Under the terms of our original contract with Urban, 3M Health Information Systems (3M) was subcontracted to provide an analysis and assessment of alternative classification systems for use in LTCHs in keeping with variables such as treatment patterns, patient demographics, and diagnoses and procedure codes for patients at LTCHs and acute care hospitals.

After the enactment of section 123 of the BBRA, we instructed 3M to limit its analyses to several DRG-driven classification systems, using the database constructed by Urban describing LTCHs, patients at LTCHs, and patients with the same diagnoses as LTCH patients treated in other facilities. We also contracted with 3M to develop and analyze the data necessary for us to design and develop the Medicare LTCH prospective payment system based on DRGs.

B. Description of Sources of Research Data

The records for all Medicare hospital inpatient discharges (including discharges for LTCHs) are contained in the Medicare provider analysis and review file (MedPAR), which includes patient demographics (age, gender, race, and residence zip code), clinical characteristics (diagnoses and procedures), and hospitalization characteristics. (Beneficiary data were encrypted to prevent the identification of specific Medicare beneficiaries.) The Medicare cost report data constitute the HCRIS, and includes information on facility characteristics, utilization data, and cost and charge data by cost center.

The 1997 Online Survey Certification and Reporting (OSCAR) system data provided information from the State survey and certification process to identify and characterize providers that participate in Medicare and Medicaid and include a list of all hospitals that were designated as LTCHs by Medicare. OSCAR data included the number of employees of various types and the number of different types of beds and care units, as well as variables on certification date, type of control, geographic region, and hospital size.

C. The Universe of LTCHs

1. Background Issues

LTCHs typically furnish extended medical and rehabilitative care for patients who are clinically complex and have multiple acute or chronic conditions. Generally, Medicare patients in LTCHs have been transferred from acute care hospitals and receive a range of “postacute care” services at LTCHs, including comprehensive rehabilitation, cancer treatment, head trauma treatment, and pain management. (MedPAC March 1999 Report to Congress, p. 95.) A LTCH must be certified as an acute care hospital that meets criteria set forth in section 1861(e) of the Act in order to participate as a hospital in the Medicare program. Generally, under Medicare, hospitals are paid as LTCHs if they have an inpatient average length of stay greater than 25 days.

LTCHs are a heterogeneous group of facilities ranging from old tuberculosis and chronic disease hospitals to newer facilities designed primarily to care for ventilator-dependent patients. They are unevenly distributed across the United States, with one-third (72 of 203 in 1997) located in Massachusetts, Texas, and Louisiana. As of 1997, 203 facilities were determined by Medicare to be LTCHs; by early 2000, 239 facilities were determined by Medicare to be LTCHs; and as of November 2001, OSCAR had data on 270 LTCHs.

LTCHs constitute a relatively small provider group in the Medicare program and have not been widely studied. Only limited information has been published about their characteristics in terms of types of patients served and resources used. As stated earlier in section V.A. of this preamble, the primary goal of the initial research contract with Urban was to increase our knowledge about LTCHs and their patients. In addition to describing the providers and patients, the study was expected to provide insight into the ways in which LTCHs differ from other Medicare postacute care providers. In the following summary and tables, we provide a description of Urban's findings that formed the basis for the design of the prospective payment system for LTCHs presented in the March 2002 proposed rule and in this final rule.

2. General Medicare Policies

Inpatient stays at LTCHs are covered under the Medicare Part A hospital benefit and include room and board, medical and nursing services, laboratory tests, X-ray, pharmaceuticals, supplies, and other diagnostic or therapeutic services (§§ 409.10 and 412.50). LTCHs can offer specialized services (for example, physical rehabilitation or ventilator-dependent care) or can provide more generalized services (for example, chronic disease care).

Hospital services are covered for up to 90 days during a Medicare-defined

“benefit period,” which is a period that begins with admission of a Medicare beneficiary as an inpatient to an acute care or other hospital and ends when the beneficiary has spent 60 consecutive days outside of an inpatient facility (§ 409.60). There are 60 additional covered lifetime reserve days that may be used over a beneficiary's lifetime. One inpatient deductible payment ($792 in calendar year 2002) is required for each benefit period, so a beneficiary generally does not have to make a new deductible payment for a LTCH stay unless the LTCH stay is not preceded by another hospital stay. However, a beneficiary with a long LTCH stay is subject to a coinsurance payment ($198 in calendar year 2002) for days 61 through 90 of hospital use during a benefit period. For the lifetime reserve days, a Medicare beneficiary is subject to a daily coinsurance amount ($396 in calendar year 2002) (§ 409.61).

LTCHs must meet State licensure requirements for acute care hospitals and must have a provider agreement with Medicare in order to receive Medicare payment. Fiscal intermediaries verify that LTCHs meet the required average length of stay of greater than 25 days.

3. Exclusion From the Acute Care Hospital Inpatient Prospective Payment System

As discussed more fully in section III.B. of this preamble, LTCHs were excluded from the FY 1984 implementation of the acute care hospital inpatient prospective payment system and continued to be paid based on their cost per discharge, subject to per discharge limits.

4. Geographic Distribution

Overall, 203 LTCHs filed Medicare claims in 1997. This was the data set used by Urban for its analysis of the universe of LTCHs that formed the basis for policies we proposed in our proposed rule on March 22, 2002 (67 FR 13416). This number translates into an average of approximately one facility per 200,000 Medicare enrollees. As can be seen in Chart 1, LTCHs were not (and are still not) distributed across all States in proportion to the number of Medicare enrollees in those States. They were unevenly distributed across the United States, with one-third (72 of 203) located in Massachusetts, Texas, and Louisiana. These three States together accounted for 36 percent of the LTCHs, but only fewer than 10 percent of Medicare enrollees. Furthermore, 13 small States have no LTCHs, although they accounted for approximately 7 percent of Medicare enrollees. In contrast, the three largest Medicare States (California, Florida, and New York) accounted for 24.1 percent of Medicare enrollees together, but only 13.8 percent of LTCHs.

Chart 1.—Percentage Distribution of Number of Long-Term Care Hospitals (LTCHs), Medicare Enrollees, and Certified Beds, by State, 1997

State

Number of LTCHs

Percent of LTCHs

Number of medicare

enrollees

Percent of medicare

enrollees

Number of certified beds

Percent of

certified beds

Alabama

1

0.5

696,586

1.8

191

1.0

Alaska

0

0.0

38,570

0.1

0

0.0

Arizona

4

2.0

667,226

1.7

187

1.0

Arkansas

0

0.0

453,195

1.1

0

0.0

California

12

5.9

3,920,674

9.9

1,304

7.1

Colorado

4

2.0

464,299

1.2

277

1.5

Connecticut

4

2.0

531,805

1.3

716

3.9

Delaware

0

0.0

111,171

0.3

0

0.0

District of Columbia

1

0.5

80,028

0.2

23

0.1

Florida

11

5.4

2,853,420

7.2

805

4.4

Georgia

6

3.0

915,577

2.3

557

3.0

Hawaii

1

0.5

163,217

0.4

13

0.1

Idaho

0

0.0

163,303

0.4

0

0.0

Illinois

5

2.5

1,701,123

4.3

703

3.8

Indiana

11

5.4

877,656

2.2

434

2.4

Iowa

0

0.0

498,288

1.3

0

0.0

Kansas

3

1.5

406,752

1.0

74

0.4

Kentucky

1

0.5

633,802

1.6

337

1.8

Louisiana

19

9.4

622,805

1.6

1,288

7.0

Maine

0

0.0

218,265

0.6

0

0.0

Maryland

4

2.0

651,710

1.7

465

2.5

Massachusetts

17

8.4

991,641

2.5

3,077

16.8

Michigan

3

1.5

1,435,420

3.6

280

1.5

Minnesota

2

1.0

669,708

1.7

313

1.7

Mississippi

2

1.0

428,729

1.1

65

0.4

Missouri

3

1.5

888,959

2.3

317

1.7

Montana

0

0.0

139,392

0.4

0

0.0

Nebraska

1

0.5

263,287

0.7

25

0.1

Nevada

3

1.5

225,152

0.6

106

0.6

New Hampshire

0

0.0

170,031

0.4

0

0.0

New Jersey

3

1.5

1,239,890

3.1

212

1.2

New Mexico

2

1.0

231,517

0.6

86

0.5

New York

5

2.5

2,780,994

7.0

1,262

6.9

North Carolina

1

0.5

1,129,329

2.9

59

0.3

North Dakota

0

0.0

107,628

0.3

0

0.0

Ohio

7

3.4

1,766,266

4.5

653

3.6

Oklahoma

8

3.9

523,358

1.3

294

1.6

Oregon

0

0.0

500,035

1.3

0

0.0

Pennsylvania

6

3.0

2,183,850

5.5

412

2.3

Rhode Island

1

0.5

177,247

0.4

700

3.8

South Carolina

2

1.0

562,732

1.4

0

0.0

South Dakota

0

0.0

123,401

0.3

211

1.2

Tennessee

6

3.0

838,357

2.1

210

1.1

Texas

36

17.7

2,275,673

5.8

1,818

9.9

Utah

1

0.5

204,525

0.5

39

0.2

Vermont

0

0.0

89,821

0.2

0

0.0

Virginia

3

1.5

893,602

2.3

664

3.6

Washington

2

1.0

742,589

1.9

97

0.5

West Virginia

0

0.0

349,684

0.9

0

0.0

Wisconsin

1

0.5

806,951

2.0

34

0.2

Wyoming

1

0.5

65,699

0.2

3

0.0

Total

195

100.00

36,322,068

100.00

18,311

100.00

Source: 1997 Online Survey Certification and Reporting System (OSCAR).

Although the distribution of certified beds generally tracked the distribution of LTCHs across States, there is not always a direct relationship between the number of LTCHs and the bed capacity in a given State. For instance, Massachusetts had only 8.4 percent of LTCHs, but 16.8 percent of Medicare-certified beds. In contrast, Texas had 17.7 percent of LTCHs, but only 9.9 percent of the certified beds.

5. Characteristics by Date of Medicare Participation

The OSCAR system provided data captured by the State survey and certification process that can be used to identify and characterize providers participating in Medicare and Medicaid. The following analyses were based on LTCHs for which data were available. Eight facilities, which accounted for only 1 percent of all LTCH stays and 1.3 percent of certified beds, were excluded from the analysis since 1997 OSCAR records were not available for these facilities.

Given the known payment variations for old and new facilities that were excluded facilities paid under the target amount methodology, we divided the LTCHs by age (the date of the LTCH's first Medicare participation, as reported by OSCAR) to gain a sense of the variation among the existing LTCHs in 1997. A strong correlation was found between the age of a LTCH and other key characteristics, such as location and ownership control, as well as operating costs and Medicare payments. For analytical purposes, therefore, the total sample of LTCHs was stratified based on age (“old,” “middle,” or “new”). Of the 195 LTCHs in OSCAR in 1997, 20 percent were in existence before the acute care hospital inpatient prospective payment system and the acute care hospital inpatient prospective payment system exclusions went into effect in October 1983 (old LTCHs); 30 percent were determined to be LTCHs between October 1983 and September 1993 (middle LTCHs); and 50 percent were determined to be LTCHs between October 1993 and September 1997 (new LTCHs). This pattern is consistent with reports of the large growth in the number of LTCHs in recent years. (As of November 2001, OSCAR had data on 270 LTCHs, which indicate that the growth has continued.)

Old LTCHs were generally located in the northeast region of the United States, while newer LTCHs are typically located in the southern region. Most notably, the ownership of the LTCHs that began Medicare participation before and after the implementation of the acute care hospital inpatient prospective payment system was quite different. Old LTCHs were either government controlled (about 63 percent) or nonprofit (about 37 percent). In contrast, one-half of the LTCHs that began participation in Medicare between 1983 and 1993 and two-thirds of those that began participation in Medicare in FY 1994 or later were proprietary facilities. Virtually no new LTCHs were government controlled.

6. Hospitals-Within-Hospitals and Satellite Facilities

The Medicare statute does not contemplate the recognition of “LTCH units” of prospective payment system acute care hospitals; the statute does reference rehabilitation and psychiatric units. Long-term care units of prospective payment system hospitals are not allowed in part because of the concern that transfers of acute care patients into the LTCH units could inappropriately maximize prospective payments under the acute care hospital inpatient prospective payment system. The presence of a long-term care “unit”, excluded from the acute care hospital inpatient prospective payment system and co-located in an acute care hospital, could enable the acute care hospital to shift patients to the long-term care “unit” without completing the full course of treatment. These patient transfers could result in inappropriate payments under Medicare since the acute care hospital would make money in those cases where it received a full DRG payment without providing the full course of treatment to the beneficiary and could avoid losing any money for other more costly patients by prematurely discharging them to the LTCH. Since payments to hospitals under the acute care hospital inpatient prospective payment system were based on hospital costs that included the costs of patients with longer lengths of stay, such a patient shift would result in an “overpayment” to the acute care hospital and the LTCH would receive an additional payment for that same patient.

Nonetheless, in the mid-1990s, of the roughly 150 LTCHs in existence at the time, about 12 recently established LTCHs were, in fact, LTCHs located in the buildings or on the campuses of acute care hospitals. In order to prevent the shifting of costs within the Medicare payment system that would result from inappropriate transfers between the inpatient acute care hospital and the LTCH located within the acute care hospital, we have implemented additional qualifying criteria at § 412.22(e) for these entities. These criteria require that in order to be excluded from the acute care hospital inpatient prospective payment system, a hospital located in or on the campus of an acute care hospital (referred to as a “hospital-within-a-hospital”) must have a separate governing body, chief executive officer, chief medical officer, and medical staff. In addition, the hospital must perform basic functions independently from the host hospital, incur no more than 15 percent of its total inpatient operating costs for items and services supplied by the hospital in which it is located, and have an inpatient load of which at least 75 percent of patients are admitted from sources other than the host hospital. Originally, these regulations were effective as of October 1994. However, section 4417(a) of the BBA amended section 1886(d)(1)(B) of the Act to provide that a hospital that was excluded from the acute care hospital inpatient prospective payment system on or before September 30, 1995, as an LTCH, must continue to be so classified, notwithstanding that it is located in the same building or in one or more buildings located on the same campus as another hospital (§ 412.22(f)). This provision, codified in § 412.22(f), exempts certain LTCHs that are hospitals-within-hospitals from the ownership and control requirements discussed above.

In the late 1990s, we became aware of a newly developing entity that was physically similar, but legally unrelated, to a hospital-within-a-hospital. These entities were hospital-within-hospital type facilities (in the buildings or on the campuses of acute care hospitals) owned by a separate existing LTCH. We identified these facilities as “long-term care hospital satellites.”

In the July 30, 1999

Federal Register

(64 FR 41540), we revised § 412.22(h) to require that in order to be excluded from the acute care hospital inpatient prospective payment system, a satellite of a hospital: (1) Must maintain admission and discharge records that are separately identified from those of the hospital in which it is located; (2) cannot commingle beds with beds of the hospital in which it is located; (3) must be serviced by the same fiscal intermediary as the hospital of which it is a part; (4) must be treated as a separate cost center of the hospital of which it is a part; (5) for cost reporting purposes, must use an accounting system that properly allocates costs and maintains adequate data to support the basis of allocation; and (6) must report costs in the cost report of the hospital of which it is a part, covering the same fiscal period and using the same method of apportionment as that hospital. In

addition, the satellite facility must independently comply with the qualifying criteria for exclusion from the acute care hospital inpatient prospective payment system. The total number of State-licensed and Medicare-certified beds (including those of the satellite facility) for a hospital that was excluded from the acute care hospital inpatient prospective payment system for the most recent cost reporting period beginning before October 1, 1997, may not exceed the hospital's number of beds on the last day of that cost reporting period.

7. Specialty Groups of LTCHs by Patient Mix

There is a widely held view that the population of LTCHs is heterogeneous. We believe that understanding the composition of this population and identifying and classifying subgroups within it are fundamental to designing a prospective payment system for LTCHs.

Broad categories of conditions as defined by major diagnostic categories (MDCs), the principal diagnostic categorization tool used under the acute care hospital inpatient prospective payment system, were used to classify LTCHs according to the medical conditions of their patient caseloads. (MDCs were formed by dividing all possible principal diagnoses into 25 mutually exclusive categories. Most MDCs correspond to a major organ system, though a few correspond to etiology.)

We also explored the possibility of grouping patients by DRGs or by selected individual diagnoses. These attempts resulted in creating groups too small for any effective characterization. However, the analysis did reveal that while some LTCHs treat a wide range of conditions, others specialize in one or two types of conditions. In order to analyze a grouping based on patient mix, under its contract with us, Urban first examined the proportion of facilities' caseloads in specific MDCs. There were five MDCs in which at least one LTCH has a majority (that is, more than 50 percent) of its cases. Patients with respiratory system problems were the most common caseload concentration—in 1997, 13 percent of LTCHs had a caseload concentration of 50 percent to 75 percent, and another 7 percent of LTCHs had more than 75 percent of their cases in this MDC.

The other three MDCs that made up a majority of at least one LTCH's patient caseload (nervous system MDC, musculoskeletal and connective tissue disorders MDC, and factors influencing health status MDC) were all related to rehabilitation needs. (Because rehabilitation-related DRGs were common to LTCHs and fell into the “Factors Influencing Status” MDC, we are classifying all cases in this MDC as rehabilitation services for the purpose of this analysis.) Seven percent of LTCHs had a majority of their caseload in an MDC related to rehabilitation-related services. A significantly less common concentration was seen in the 2 percent of LTCHs that had a majority of their patients in the mental diseases and disorders MDC. All but two LTCHs in our analysis had some share of patients with respiratory system problems. Similarly, all but five LTCHs had some patients with circulatory problems.

Based on these findings, we developed a grouping that consists of four broad categories of LTCHs based on patient caseload. Facilities with greater than 50 percent of their cases in the respiratory MDC were assigned to a “respiratory specialty” group for the purpose of this analysis. Similarly, all facilities with over 50 percent of their caseload in the mental MDC were designated as “mental specialty” facilities. The three rehabilitation-related MDCs were combined into one “rehabilitation-related MDC” category and grouped into a “rehabilitation specialty” group. All remaining facilities (that did not have high concentrations of patients in the respiratory MDC, the mental MDC, or the rehabilitation-related MDCs category) were placed into a “multispecialty” facility group. LTCHs in this category provide care to a wider range of patient types than LTCHs in the first three categories.

To better understand the relatively large number of multispecialty LTCHs, we explored their MDC composition. Not unexpectedly, most of these facilities had high proportions of cases in the respiratory MDC and the rehabilitation-related MDCs category, although some LTCHs did not serve either of these populations in great numbers. Few LTCHs did have a significant share of their caseload in either the respiratory MDC or the rehabilitation-related MDCs category. Only 2 percent of multispecialty LTCHs had less than 25 percent of their caseload in either specialty group. Similarly, only 7 percent of multispecialty facilities had less than 35 percent of their caseload in either of the two groups. In contrast, about 60 percent of LTCHs had at least half of their caseload in either the respiratory MDC or the rehabilitation-related MDCs category. This high share demonstrated that, despite their assignment to the multispecialty category, most LTCHs served a high percentage of patients with respiratory or rehabilitation problems, or both.

Although respiratory and rehabilitation specialty facilities were prevalent in the LTCH population, there were also some “niche” LTCHs that have unique patient populations or provide uncommon services. These hospitals included, for example, a large hospital where most admitted individuals (90 percent) die in the facility.

Several LTCHs provided services for special populations. One facility provided services for a prison population. A large share of this facility's funding was through Medicaid; cost report data showed that Medicaid covers two-thirds of its patient stays.

Some other facilities worked with similarly specialized populations and have very small Medicare caseloads. In particular, two facilities that focused on developmentally disabled children and younger adults had fewer than 10 Medicare stays in 1997. Cost reports show that one of these facilities, which provides rehabilitation for its Medicare patients, has few discharges (under 100) regardless of payer source. The other, which provides mostly psychiatric services, relies on public funding for only a small share of its discharge payments.

Although there are a few niche facilities in the LTCH population, our analysis indicated that a preponderance of the LTCHs could be classified in distinct specialty groups that focused on adult rehabilitation and respiratory system care.

8. Sources and Destinations of LTCH Patients

Another useful perspective on LTCHs was the pattern of sources from which patients are admitted to LTCHs and destinations to which LTCH patients are discharged. This information showed how such transition patterns differ among the specialty groups. In general, the findings were consistent with the notion that LTCHs as a group were heterogeneous in terms of the patients they serve.

The vast majority (70 percent) of LTCH patients were admitted from acute care hospitals. Within this group, acute care patients whose stays were designated as “outlier” stays, as defined by section 1886(d)(5)(A)(i) of the Act and implemented in § 412.80, were identified separately. Sixteen percent of LTCH admissions were acute care hospital outlier patients, while 54 percent were admitted from acute care hospitals but did not have extraordinarily long acute care stays.

After acute care hospitals, direct admission from the community was the next most common source of admissions (14 percent) to LTCHs.

The admission patterns varied somewhat by LTCH specialty type. Notably, 85 percent of admissions to respiratory specialty LTCHs were from acute care hospitals, including 22 percent that were acute care hospital outlier cases. A very small percentage (7 percent) of admissions to respiratory specialty LTCHs were from the community. In contrast, the admission sources for the rehabilitation specialty LTCHs were more similar to that of the multispecialty LTCHs. Notably, a higher than average share of patients come from SNFs (8 percent) and HHAs (6 percent) and a lower percentage of patients transitioned from acute care hospital outlier stays (12 percent). A relatively large share (11 percent) of patients at rehabilitation specialty LTCHs were admitted directly from the community compared to patients at respiratory specialty LTCHs (7 percent). These findings suggest that patients admitted to rehabilitation specialty LTCHs might present a less medically intensive clinical picture than patients admitted to respiratory specialty LTCHs.

The admission pattern of patients admitted to the mental specialty LTCHs was quite different from those of the other specialties. Thirty one percent of patients are admitted from acute care hospitals, and only 2 percent of patients are admitted after being acute care hospital outlier cases. In contrast, 40 percent of patients were admitted directly from the community and 27 percent were admitted from some other type of Medicare provider.

An analysis of the pattern of discharge destinations for LTCHs shows that, overall, 38 percent of LTCH stays were discharged to the community without additional Medicare services. Almost equal percentages (18 percent) were discharged to SNFs and acute care hospitals, and 21 percent of patients were discharged to HHAs.

Some variations in discharge destination patterns existed among LTCHs by specialty. Relative to the overall sample, the respiratory specialty LTCHs had higher than average percentages of patients discharged to SNFs (24 percent versus 18 percent), and lower percentages discharged to HHAs (14 percent versus 21 percent). However, rehabilitation specialty facilities had a relatively high proportion of cases (34 percent) discharged to HHAs, and a lower than average proportion discharged to the community without additional Medicare services (28 percent versus 38 percent). Finally, mental specialty hospitals have an unusually high percent of cases (71 percent) discharged to the community without additional Medicare services. These findings suggest that patients served by respiratory specialty LTCHs are more likely to require extended care in institutional settings (for example, SNFs), while patients discharged from rehabilitation specialty facilities also require extended care, but not necessarily in institutional settings.

9. LTCHs and Patterns Among Postacute Care Facilities

Urban's research also produced data regarding a comparison of LTCHs with other postacute care settings in order to provide us with the broadest possible understanding of the universe of LTCHs. The findings were only preliminary comparisons of patients among and across postacute settings because of the nature of each category of postacute care providers. Even though data suggest substantial clinical differences among the providers with some areas of overlap, because of some similarities we found it useful to draw parallels and distinctions among postacute care providers. Moreover, findings from this research supported conclusions published in several reports to the Congress produced by ProPAC and MedPAC over the past decade.

Most patients in LTCHs had several diagnosis codes on their Medicare claims, indicating that they had multiple comorbidities and are probably less stable upon admission than patients admitted to other postacute care settings. Relative to IRFs, LTCHs had a higher proportion of patient costs attributable to ancillary services (for example, pharmacy, laboratory, and radiology charges) (MedPAC March 1999 Report to Congress, p. 95). LTCHs also provided care to a disproportionately large number of Medicare beneficiaries who are eligible because of disability. While individuals with disabilities make up about 10 percent of the Medicare population, they make up 17 percent of LTCH patients.

Urban's analysis also explored the demographic characteristics of LTCH patients compared to IRF patients. The proportion of LTCH patients who are under 65 years of age (18 percent) was twice that of IRF patients (9 percent). The share of LTCH patients over 85 years old was slightly higher (18 percent) compared to IRF patients (14 percent). LTCHs also had a higher proportion of male patients and a lower proportion of white patients than IRFs. LTCHs had long median lengths of stay: 21 days versus 16 days for IRFs. About one-third of the LTCH Medicare stays were by beneficiaries who are also eligible for Medicaid, compared to fewer Medicaid-eligible beneficiary stays at IRFs (17 percent). It has been widely documented that dually eligible beneficiaries are generally much sicker than non-Medicaid eligible Medicare beneficiaries.

Urban's analysis also included a description of the demographic characteristics of LTCH patient stays by admission sources—outlier acute care hospital, nonoutlier acute care hospital, and other. Those with prior outlier acute care hospital stays seem to be the most distinctive group in terms of length of stay, gender, race, and poverty: they had the highest mean and median length of stay in the LTCH, the highest male proportion, the highest white proportion, and the lowest proportion of Medicaid-eligible patients. However, in terms of age, those with prior hospital stays (whether outlier or nonoutlier) were quite different from those with other admission sources. Those without a prior acute care hospital stay were younger and about twice as many are under age 65, whose mean age was about 5 and 3 years lower than those with a prior outlier stay and those with a prior nonoutlier stay, respectively. Among those with an acute care hospital stay, the nonoutlier patients were slightly older on average, with higher percentages in the oldest groups (75 to 84 and 85 plus) and the highest median age of all three groups.

The policies in the March 22, 2002 proposed rule and in this final rule were determined in part based on analysis of the above data and information gathered on LTCHs and their Medicare patients.

D. Overview of Systems Analysis for the LTCH Prospective Payment System

For the systems analysis, 3M used the MedPAR (FY 1999 through FY 2000), OSCAR (FY 2000), and HCRIS (FYs 1998 and early 1999) files for the March 22, 2002 proposed rule. Specifically, 3M performed the following tasks:

• Construction of an updated data file, using the most recent data available from CMS.

• Analysis of issues, factors, or variables and presentation of options for possible use in the design and implementation of the prospective payment system.

• Data simulation of various system features to analyze their impact on the design of the prospective payment system.

A data file was constructed to serve as the basis of our patient classification system presented in the proposed rule

and the development of proposed payment weight rates and proposed payment adjustments. The analysis of this data file helped us regarding the structure of the prospective payment system in the proposed rule. We relied upon patient charge data from FY 2000 MedPAR for proposing LTC-DRG weights and upon costs data from FY 1998 and FY 1999 cost reports for proposed payment rates.

For this final rule, we used updated and expanded data from the FY 2000 MedPAR file to develop the payment weight rates and payment adjustments for FY 2003. Section X.K. of this final rule contains a detailed discussion of the data used to develop the FY 2003 payment rates and payment adjustments, the public comments received on the proposed rates and adjustments, and our responses to those comments.

E. Evaluation of DRG-Based Patient Classification Systems

Section 307(b)(1) of Public Law 106-554 modified the requirements of section 123 of Public Law 106-113 by specifically requiring that the Secretary examine “the feasibility and the impact of basing payment under such a system [the LTCH prospective payment system] on the use of existing (or refined) hospital diagnosis-related groups (DRGs) that have been modified to account for different resource use of long-term care hospital patients as well as the use of the most recently available hospital discharge data.”

In order to comply with statutory mandates, our evaluation of DRG-based patient classification systems focused on two models—the LTC-all patient-refined DRGs (LTC-APR-DRGs, Version 1.0), a severity-based case-mix classification system developed specifically for LTCHs; and the LTC-CMS-DRGs, a modification of the DRG system used in the acute care hospital inpatient prospective payment system.

The LTC-APR-DRGs, a condensed version of 3M's all-patient refined DRGs (APR-DRGs) for acute care hospitals, was developed by 3M Health Information Systems, for exclusive use in LTCHs. The LTC-APR-DRG system was designed to reflect the clinical characteristics of LTCH patients. This case-mix classification model contains 26 base LTC-APR-DRGs, subdivided by 4 severity of illness levels to yield 104 classification levels. In this system, the patient's secondary diagnoses, their interaction, and their clinical impact on the primary diagnosis determine the severity level assigned to each of the 26 LTC-APR-DRGs.

The LTC-CMS-DRGs are based on research done by The Lewin Group (Developing a Long-Term Hospital Prospective Payment System Using Currently Available Administrative Data for the National Association of Long-Term Hospitals (NALTH), July 1999). This model uses our existing hospital inpatient DRGs with weights that accounted for the difference in resource use by patients exhibiting the case complexity and multiple medical problems characteristic of LTCHs. In order to deal with the large number of low volume DRGs (all DRGs with fewer than 25 cases), the LTC-CMS-DRG model groups low volume DRGs into 5 quintiles based on average charge per discharge. The result was 184 classification groups (179 DRG-based and 5 charge-based payment groups) based on patient data from FYs 1994 and 1995. (CMS updated this analysis using patient data from FYs 1999 and 2000 for purposes of system evaluations.)

As discussed in the March 22, 2002 proposed rule (67 FR 13426), under either classification system, DRG weights would be based on data for the population of LTCH discharges, reflecting the fact that LTCH patients represent a different patient mix than patients in short-term acute care hospitals. GROUPER software programs enabled us to examine the most recent LTCH and acute care hospital inpatient prospective payment system patient discharge data in light of the features of each system. Using regression analyses and simulations, the impact of each patient classification system on potential adjustment features for the prospective payment system was assessed. (Data files used in these analyses are specified in section V.B. of this preamble.) Our medical staff as well as physicians involved in treatment of patients at LTCHs provided additional input from the standpoint of clinical coherence and practical applicability.

The system that we are adopting in this final rule for the LTCH prospective payment system is the LTC-CMS-DRG GROUPER based on the Lewin model that we proposed in the March 22, 2002 proposed rule (67 FR 13426). We believe this system accurately predicts costs without the problems that we believe could be inherent with the APR-DRG system. (In section IX. of this final rule, which describes the functioning of the classification system as a component of the LTCH prospective payment system, the LTC-CMS-DRGs are referred to as the LTC-DRGs.)

It is important to note that we have analyzed both systems based on MedPAR files generated by LTCH patient data, using the best available data. Since the TEFRA payment system, under which LTCHs are currently paid, is not tied to patient diagnoses, the coding data from LTCHs have not been used for payment. Nevertheless, data analyses indicated that there was a minimal difference in both systems' abilities to predict costs. (The difference in the R

2

, a statistical measure of how much variation in resource use among cases is explained by the models, was only 0.0313.)

In the March 22, 2002 proposed rule (67 FR 13426), we indicated that we believed that either classification system would result in more equitable payments for LTCHs compared to current payment methods. The LTCH prospective payment system would generally improve the accuracy of payments for more clinically complex patients. (See our discussion of the TEFRA payment system in section III.C. of this final rule.) As the Congress intended, the DRG weights under the LTCH prospective payment system would reflect the “* * * different resource use of long-term care hospital patients.” Patients requiring more intensive complex services would be classified in LTC-DRGs with higher relative weights and hospitals would receive appropriately higher payments for these patients. In the proposed rule, we solicited comments on the impact that one system may have over another as it applies to different kinds of LTCHs. Any public comments that we received on the impact of both systems are included in sections IX. and XII. of this final rule.

Although either system would result in more equitable payments to LTCHs, we have several interrelated concerns about adopting the LTC-APR-DRG system based upon its complexity, its clinical subjectivity, and its utility as it relates to other Medicare prospective payment systems. The LTC-APR-DRG model provides a clinical description of the population of LTCHs, patients exhibiting a range of severity of illness with multiple comorbidities as indicated by secondary diagnoses. The clinical interaction of the primary diagnosis with these comorbidities determines the severity level of the primary diagnoses, resulting in the final assignment to a LTC-APR-DRG by the GROUPER software designed for this system.

One aspect of our examination of the LTC-APR-DRG system included clinical review of actual case studies provided by physicians at several LTCHs and evaluations of the LTC-APR-DRG assignments that would have resulted based on the clinical logic of

the APR-DRG GROUPER. A review of a number of those cases by different medical professionals resulted in different possible classifications for the GROUPER program. Looking at the same case, different views were held as to which APR-DRG category or to which level of severity the case should be grouped. Given the array of specialization at different LTCHs reflecting a range of services and patient types, as described in section V.C.7. of this preamble, we believe that we lack sufficient data, at this point in time, to definitely determine the effect of particular comorbidities on patient resource needs in LTCHs. Furthermore, it appears that depending on how many of the diagnoses are coded, medical judgement suggests that it could be possible to classify the same patient in more than one group or level of severity. Because of these concerns, we believe that payments under such a policy could be insufficiently well-defined, given currently available data, to ensure consistently appropriate Medicare payments.

We note that the prospective payment system that we have adopted for IRFs is based on a patient classification system that includes a measure of comorbidities, the combination of the case-mix group (CMG) and comorbidity tier. In general, most IRF patients are treated for one primary rehabilitation condition (for example, a hip replacement) that is associated with functional measures and sometimes age. The CMGs constructed for IRF patients account for diagnostic, functional, and age variables. These variables are used to explain the variability in the cost among the various CMGs. Some of the remaining variability in cost could then be further explained by selected comorbidities which the inpatient rehabilitation data showed were statistically significant.

In contrast, determining whether particular comorbidities increase the cost of a case for a LTCH patient is complicated by the nature of the clinical characteristics of these patients. More specifically, many LTCH patients have numerous conditions that may not all be relevant to the cost of care for a particular discharge. Although the patient actually has a specific condition, including this condition among secondary diagnoses coded under the LTC-APR-DRG system may assign an inaccurate severity level to the primary diagnosis and result in inappropriate LTC-APR-DRG payment. We also believe that reliance on existing comorbidity information submitted on LTCH bills could result in significant variation in the assignment of the specific LTC-APR-DRGs.

The LTC-CMS-DRG system is a system that is familiar to hospitals because it is based on the current DRG system under the acute care hospital inpatient prospective payment system. We believe that the familiarity of the LTC-CMS-DRG model may best facilitate the transition from the reasonable cost-based system to the prospective payment system as well as providing continuity in payment methodology across related sites of care (for example, an acute care hospitalization for a patient with a chronic condition).

We further note that the adoption of severity-adjusted DRGs will be explored by CMS for use under the acute care hospital inpatient prospective payment system. In its June 2000 Report to Congress, MedPAC recommended that the Secretary ”* * * improve the hospital inpatient prospective payment system by adopting, as soon as practicable, diagnosis related group refinements that more fully capture differences in severity of illness among patients.” (Recommendation 3A, p. 63)

In the March 22, 2002 proposed rule, although we did not propose adopting the LTC-APR-DRGs in the LTCH prospective payment system, we did solicit comments on its possible use.

Even though we are using LTC-DRGs in the LTCH prospective payment system in this final rule, we may have the opportunity to propose a severity-adjusted patient classification for LTCHs in the future, particularly if the acute care hospital inpatient prospective payment system moves in this direction. Any public comments that we received on the possible use of LTC-APR-DRG or some other system in the future are addressed in section IX. of this final rule.

VI. Recommendations by MedPAC for a LTCH Prospective Payment System

As we noted in the section III.E. of this final rule, since the establishment of the acute care hospital inpatient prospective payment system in 1983, the topic of postacute care payments under Medicare has been addressed in reports to the Congress prepared by ProPAC and its successor, MedPAC. Recommendations in these reports encouraged modifications to Medicare payment policies, examined the differences among postacute care providers and within each category of providers, and reiterated the goal of eventually implementing prospective payment systems for providers being paid under the target amount payment methodology.

In its March 1, 1996 Report and Recommendations to the Congress, ProPAC recommended that “prospective payment systems should be implemented for all postacute services. The payment method for each service should be consistent across delivery sites. The Secretary should explore methods to control the volume of postacute service use, such as bundling services for a single payment.” (Recommendation 20, p. 75)

The following year, in its March 1, 1997 Report and Recommendations to the Congress, ProPAC recommended “* * * the Congress and the Secretary to consider the overlap in services and beneficiaries across postacute care providers as they modify Medicare payment policies. Changes to one provider's payment method could shift utilization to other sites and thus fail to curb overall spending. To this end, ProPAC commends HCFA's [now CMS'] efforts to identify elements common to the various facility-specific patient classification systems to use in comparing beneficiaries across settings.” Ultimately, Medicare should move towards more uniform payment policies across sites, the Report continued, and “payment amounts should vary depending on the intensity and nature of the services beneficiaries require, rather than on the setting. Further, providers should have incentives to coordinate services or an episode* * *.” (p. 60)

However, with enactment of the BBA, the Congress enacted legislation to provide for distinct prospective payment systems for HHAs (section 4603(b)), SNFs (section 4432(a)), and IRFs (section 4421). The BBA further required the development of a legislative proposal for the case-mix adjusted LTCH prospective payment system. Section 123 of the BBRA requires the Secretary to develop a per discharge DRG-based system for LTCHs, and section 307(b)(1) of the BIPA mandates that the Secretary examine the feasibility and impact of basing payments to LTCHs using the existing or refined DRGs, modified to account for the resource use of LTCH patients. Thus, the Congress mandated distinct systems that would result in different payments, depending on the type of Medicare provider, and not a system that is uniform across sites of care.

Notwithstanding the mandate to establish postacute care prospective payment systems, MedPAC continued to articulate concern regarding the overlap of services among postacute providers. In its June 1998 Report to Congress, MedPAC stated that “all of these policy changes, in combination with the fact

that similar services can be provided in multiple postacute settings, indicate the need for continued monitoring and analysis of postacute providers, policies, and service utilization.” (p. 90)

In its March 1999 Report to Congress, MedPAC encouraged the Secretary to “* * * collect a core set of patient assessment information across all postacute care settings.” (Recommendation 5A, p. 82)

Section 123 of the BBRA specifically mandated a per discharge, DRG-based prospective payment system for LTCHs and established a timetable for the presentation of the proposed system in a report to the Congress by October 1, 2001 and for implementation of the actual prospective payment system by October 1, 2002. Further direction for a distinct prospective payment system for LTCHs was indicated in section 307(b) of the BIPA, which directed the Secretary to examine a number of payment adjustment factors and established a default system if the Secretary is unable to meet the implementation timetable.

As we developed the prospective payment system for LTCHs described in this final rule, however, we wish to state that we do not believe that the establishment of distinct prospective payment systems for each postacute care provider group eliminates the need to monitor payments and services across all service settings. We endorse MedPAC's Recommendation 3G, in its March 2000 Report to Congress, that encourages the Secretary to “assess important aspects of the care uniquely provided in a particular setting, compare certain processes and outcomes of care provided in alternative settings, and evaluate the quality of care furnished in multiple-provider episodes of postacute care.” (p. 65) We intend to monitor the appropriateness of LTCH stays by tracking the number of LTCH patients and SNF patients and the frequency of subsequent admissions to an acute care hospital. We believe these data will be valuable in assessing the outcome of care provided in these settings.

Furthermore, we strongly support the additional research that will be required to choose or to develop an assessment instrument that will evaluate the quality of services delivered to beneficiaries in postacute settings.

VII. Evaluated Options for the Prospective Payment System for LTCHs

Section 123 of the BBRA and section 307(b) of the BIPA establish the statutory authority for the development of the prospective payment system for LTCHs that is discussed in this final rule. Under the BBRA, we are required to:

• Develop a per discharge prospective payment system for inpatient hospital services furnished by LTCHs described in section 1886(d)(1)(B)(iv) of the Act.

• Include an adequate patient classification system that is based on DRGs that reflect the differences in patient resource use and costs.

• Maintain budget neutrality.

• Submit a report to the Congress describing this system by October 1, 2001.

• Implement this system for cost reporting periods beginning on or after October 1, 2002.

Section 307(b) of the BIPA modified the requirements of section 123 of the BBRA by requiring the Secretary to—

• Examine the feasibility and the impact of basing payment under the prospective payment system on the use of existing (or refined) DRGs that have been modified to account for different resource use of LTCH patients, as well as the use of the most recently available hospital data.

• Examine appropriate adjustments to LTCH prospective payments, including adjustments to DRG weights, area wage adjustments, geographic reclassification, outliers, updates, and a disproportionate share adjustment.

Although the statutory mandate for development of the LTCH prospective payment system established in the BBRA and the BIPA requires a per discharge, DRG-based system, generally the statute gives the Secretary broad discretion in designing the prospective payment system. The design of any prospective payment system requires decisions on the following issues:

• The categories used to classify services such as DRGs.

• The methodology for calculating the relative weights that are assigned to each patient category to reflect the relative difference in resource use across DRGs (these are relative values in economic terminology).

• The methodology for calculating the base rate, which is the basis for determining the DRG-based Federal payment rates. It is a standardized payment amount that is based on average costs from a base period and also reflects the combined aggregate effects of the payment weights and various facility-level and case-level adjustments. Operating and capital-related costs may be combined in this base rate or may be treated separately.

• Adjustments to the base rate to reflect cost differences across providers, such as disproportionate share adjustments, indirect graduate medical education programs, and outliers.

• Finally, a procedure for the transition from the current system to the DRG-based prospective payment system must be established.

We pursued a two-pronged strategy as we developed the prospective payment system for LTCHs. First, we analyzed the data and empirical facts about LTCH patients and providers summarized in section V.C. of this preamble. Secondly, in light of this information, we analyzed each option based on regressions and simulations, using the data sets described in section V.B. of this preamble.

Both technical and policy considerations were important in these design proposals. We reviewed features of other recent prospective payment systems designed or implemented by CMS for other postacute care providers to determine the feasibility of including features in the LTCH prospective payment system and to identify modifications that might enhance their application for this system. In addition, we considered factors that were important to the development of Medicare's acute care hospital inpatient prospective payment system, such as urban and rural location and whether the hospital served a disproportionate share of low-income patients. We also analyzed clinical significance, administrative simplicity, availability of data, and consistency with other Medicare payment policies.

In addition to satisfying statutory requirements, the design of the prospective payment system for LTCHs presented in this final rule is the result of the following factors:

• Our empirical understanding of the “universe” of LTCHs and long-term care patients, as set forth in section V.C. of this preamble.

• Our experience with the acute care hospital inpatient prospective payment system.

• Consideration of recommendations in MedPAC's reports to Congress on postacute care.

• Our monitoring of the establishment and continuing development and refinement of prospective payment systems for IRFs, SNFs, and HHAs.

In addition, as we deliberated on the choice of the specific model of DRG-based system that was to be used for the LTCH prospective payment system, we gathered information from LTCH physicians and LTCH representatives.

VIII. Elements of the LTCH Prospective Payment System

A. Overview of the System

We are implementing a prospective payment system for LTCHs that will use

information from LTCH patient records to classify patients into distinct LTC-DRGs based on clinical characteristics and expected resource needs. This patient classification system is discussed in detail in section IX. of this final rule. The separate payments that will be calculated for each LTC-DRG and any adjustments to these payments are discussed in detail in section X.J. of this final rule. Below we discuss the applicability of the requirements of the system and other implementation provisions.

B. Applicability

1. Criteria for Classification

Our existing regulations at 42 CFR Part 482, Subparts A through D, set forth the general conditions that hospitals must meet to qualify to participate in Medicare. There are no additional conditions for LTCHs as there are for psychiatric facilities.

Criteria for classification of a hospital as a LTCH for purposes of payment are set forth in existing § 412.23(e). Section 412.23(e) provides that a LTCH must—

• Have a provider agreement to participate as a hospital and an average inpatient length of stay greater than 25 days; or for cost reporting periods beginning on or after August 5, 1997, for a hospital that was first excluded from the acute care hospital inpatient prospective payment system in 1986, have an average inpatient length of stay of greater than 20 days and demonstrate that at least 80 percent of its annual Medicare inpatient discharges in the 12-month cost reporting period ending in FY 1997 have a principal diagnosis that reflects a finding of neoplastic disease, as defined in regulations. The calculation of the average inpatient length of stay is calculated by dividing the number of total inpatient days (less leave or pass days) by the number of total discharges for the hospital's most recent complete cost reporting period.

• Meet the additional criteria specified in § 412.22(e) if it is to be classified as a hospital-within-a-hospital and to be excluded from the acute care hospital inpatient prospective payment system.

• Meet the additional criteria specified in § 412.22(h) if it is to be classified as a satellite facility and to be excluded from the acute care hospital inpatient prospective payment system.

In the March 22, 2002 proposed rule, we proposed that we would apply the existing criteria described above for classification as a LTCH under the LTCH prospective payment system with one exception relating to the average length of stay requirement discussed in section VIII.B.2. below.

Comment:

One commenter described a specific LTCH that specializes in end-of-life palliative care for advanced stage cancer patients. Because of the costs associated with this LTCH's case-mix, the commenter was concerned that the LTCH would be unable to continue to offer this type of care based on the payments it expected to receive under the LTCH prospective payment system. Therefore, the commenter requested that CMS allow the hospital to qualify as either a critical access hospital (CAH) or a cancer hospital and continue to be exempted from the acute care hospital inpatient prospective payment system and be paid on a reasonable cost basis.

Response:

In order for a hospital to be classified as a CAH and not as a LTCH, the hospital would have to meet the statutory criteria for classification as a CAH in section 1820(c)(1)(B) of the Act. Similarly, a hospital would have to meet the statutory criteria for classification as a cancer hospital in section 1886(d)(1)(B)(v) of the Act to be classified as such. To the extent that a hospital does not satisfy the statutory criteria to be classified as a CAH or a cancer hospital and continues to satisfy the statutory criteria to be classified as a LTCH, the hospital will continue to be classified as a LTCH as required by the statute. Any changes in either of these criteria and the accompanying requirements would require legislative action.

Comment:

Several commenters referenced existing provisions at § 412.22(f) that “grandfather” certain LTCHs for participation in the Medicare program and questioned how this status would be affected by the implementation of the LTCH prospective payment system.

Response:

We interpret section 4417 of the BBA, codified as section 1886(d)(1)(B) of the Act and implemented under in § 412.22(f), to permit existing LTCHs that were designated LTCHs on or before September 30, 1995, and were co-located with acute care hospitals as hospitals-within-hospitals, to be exempt from compliance with § 412.22(e) concerning the ownership and control requirements for hospital-within-hospital status without losing their status as hospitals excluded from the acute care hospital inpatient prospective payment system. The “grandfathered” status conferred by the statute, which allowed these particular LTCHs to retain the preexisting relationships with their host hospitals, will be unaffected by the implementation of the prospective payment system for LTCHs. However, we emphasize that, for these “grandfathered” LTCHs to receive payment under the LTCH prospective payment system, they must still satisfy the new requirements established under the LTCH prospective payment system for the average length of stay for Medicare patients of greater than 25 days under revised § 412.23(e)(2) discussed below. Moreover, since we believe that the intent of the statute was to only exempt those pre-FY 1996 LTCHs that are hospitals-within-hospitals from the requirements of § 412.23(e), these “grandfathered” LTCHs will be subject to the onsite discharge and readmission policies set forth in § 412.532, in the same way that they were under the 5-percent threshold established by the TEFRA system (64 FR 41537, July 30, 1999).

Comment:

Two commenters responded to the description of the universe of LTCHs in the proposed rule by suggesting that CMS require LTCHs that treat large percentages of rehabilitation patients to seek certification as IRFs. Another commenter urged CMS to require LTCHs to monitor their admission criteria to require evaluation of rehabilitation needs and that patients who predominantly need rehabilitation, without complex acute medical needs, should be excluded from admission to a LTCH. The commenter also suggested that CMS enforce an equivalence of payment between LTCHs and IRFs for patients with acute rehabilitation needs. An additional commenter suggested that LTCHs specializing in treating patients with psychiatric LTC-DRGs be required to seek certification as psychiatric facilities.

Response:

Under section 1886(d)(1)(B) of the Act, the prospective payment system for acute care hospital inpatient operating costs set forth in section 1886(d) of the Act does not apply to several specified types of hospitals, including LTCHs which are defined in section 1886(d)(1)(B)(iv)(I) of the Act as “* * * a hospital which has an average inpatient length of stay (as determined by the Secretary) of greater than 25 days.” Section 1886(d)(1)(B)(iv)(II) of the Act also provides another definition of LTCHs: specifically, a hospital that first received payment under this subsection in 1986 which has an average inpatient length of stay (as determined by the Secretary) of greater than 20 days and has 80 percent or more of its annual Medicare inpatient discharges with a principal diagnosis of neoplastic disease in the 12-month cost reporting period ending in FY 1997. Accordingly, the statute does not provide any exclusions from payment as

a LTCH based on any other criteria, such as treating rehabilitation patients or psychiatric patients. As required by the BBRA and the BIPA, we designed a prospective payment system for LTCHs, effective October 1, 2002, as a distinct classification of hospitals excluded from the acute care hospital inpatient prospective payment system. Congressional action would be required for any additional requirements or restrictions for classification as LTCHs. After a hospital qualifies as a LTCH and meets the conditions of participation set forth in existing regulations at 42 CFR 482, Subparts A through D, the hospital is free to determine the type of services it will provide. If a LTCH chooses to be treated as a particular type of hospital for Medicare payment purposes, it would have to meet the statutory criteria for that particular type of hospital.

Comment:

Two commenters questioned specific aspects of the Medicare requirements for hospitals to be paid under the LTCH prospective payment system. One of the commenters suggested using the collection of information requirements established under the Paperwork Reduction Act of 1995 as a rationale for urging CMS to gather more information on LTCH patients so that CMS could develop a mandatory functional status measure for LTCH patients falling into three LTC-DRGs that the commenter identified as reflecting rehabilitation needs. The other commenter urged CMS to require the development and use of a patient assessment tool for LTCH patients classified in rehabilitation LTC-DRGs similar to the IRF patient assessment instrument (PAI).

Response:

Section 123 of the BBRA and section 307 of the BIPA confers broad authority on the Secretary to design and implement a prospective payment system for LTCHs. In particular, although section 123(a)(2) of the BBRA provides that the Secretary may require LTCHs to submit such information as the Secretary requires to develop a LTCH prospective payment system, the statute contains no requirement for LTCHs to collect information on measuring an individual patient's functional status. Section 123 of the BBRA provided the Secretary with the authority to collect such information from LTCHs that may be necessary to develop the LTCH prospective payment system. The system we have developed incorporates all of the DRGs used in the acute care hospital inpatient prospective payment system. While many patients admitted to LTCHs are rehabilitation patients, most of the patients treated by LTCHs are not rehabilitation patients. Accordingly, since the IRF prospective payment system, which was developed for rehabilitation patients, incorporates functional status as an integral part of the classification system, it was necessary to collect patient functional status information. However, since, for LTCHs, we have adopted the same DRGs used for inpatient acute care hospitals, functional status is not a part of that system and, therefore, that information is not necessary to collect.

2. Change in the Average 25-Day Total Inpatient Stay Requirement

Section 1886(d)(1)(B)(iv)(I) of the Act describes a LTCH generally as “a hospital which has an average inpatient length of stay (as determined by the Secretary) of greater than 25 days.” Thus, the statute gives the Secretary broad discretion in determining the average inpatient length of stay for hospitals for purposes of determining whether a hospital warrants exclusion from the acute care hospital inpatient prospective payment system under section 1886(d) of the Act. Existing Medicare regulations at §§ 412.23(e)(1) and (e)(2) include all hospital inpatients in this calculation of the average inpatient length of stay.

As we indicated in the March 22, 2002 proposed rule (67 FR 13430), our data revealed that approximately 52 percent of Medicare patients at LTCHs have lengths of stay of less than two-thirds of the average length of stay for the LTC-DRGs, and 20 percent have a length of stay of even less than 8 days. This means that some hospitals, while currently qualifying as LTCH by averaging non-Medicare long-stay patients to maintain a length of stay of over 25 days, do not generally furnish “long-term care” to their Medicare patients. In these situations, many of the hospitals' short-stay Medicare patients could be receiving appropriate services as patients at acute care hospitals. Under the LTCH prospective payment system, the LTC-DRG weights and standard Federal payment rate are based on the charges and costs of services furnished to LTCH patients, which are typically more medically complex and more costly than those furnished to acute care hospital patients.

The LTCH prospective payment system will result in higher per discharge payments for LTCHs than payments under the acute care hospital inpatient prospective payment system for patients that will group into identical DRGs under each system. Therefore, we stated that we believed that application of current policy, which factors in non-Medicare patients' lengths of stay in determining LTCH status, could result in inappropriately higher payments for those Medicare short-stay patients who happen to be treated in a LTCH instead of an acute care hospital. This is the case when a hospital does not reach the mandatory 25-day average length of stay for designation as a LTCH without non-Medicare patients included in the calculation. Therefore, we proposed that if a hospital were not treating Medicare patients that, on average, require the more costly services offered at LTCHs that differentiate these hospitals from acute care hospitals, Medicare payments would be determined under the acute care hospital inpatient prospective payment system. Such payments would be lower for each acute care DRG than for each LTC-DRG, reflecting the lower costs of acute care hospitals.

Under the current reasonable cost-based reimbursement system, Medicare payments to LTCHs are commensurate with the actual reasonable costs incurred by the hospital. Therefore, under that system, Medicare payments for shorter lengths of stay patients reflect the lower costs of those patients. However, under the LTCH prospective payment system, which is based on average costs of treatment for particular diagnosis, the hospital will receive prospective payments based on the average costs for these much shorter length of stay patients. Even under our short-stay outlier policy, as described in section X.C. of this final rule, the hospital will have the opportunity to be paid 120 percent of its costs.

Therefore, in the March 22, 2002 proposed rule, we proposed to include the hospital's Medicare patients, but not non-Medicare patients, in determining the average inpatient length of stay (§ 412.23(e)(2)) for purposes of section 1886(d)(1)(B)(iv)(I) of the Act.

Our proposal was based on a belief that there would be a strong incentive for LTCHs not to admit many short-stay Medicare patients since doing so could jeopardize their status as a LTCH. Instead, those patients could receive appropriate care at an acute care hospital and the care will be paid under the acute care hospital inpatient prospective payment system. Furthermore, our proposal to change the methodology for determining the average inpatient length of stay to be based only on Medicare patients was consistent with the intent of our proposed policies to make different payments for cases of very short-short stay discharge and short-stay outliers. These proposed policies also were intended to discourage LTCHs under the prospective payment system from treating Medicare patients who do not

require the more costly resources of LTCHs and who could reasonably be treated in acute care hospitals.

We received a substantial number of comments on the proposed change to the average 25-day length of stay requirement.

Comment:

The majority of the commenters endorsed the proposed policy of counting only Medicare patients in determining the 25-day average length of stay. However, the commenters believed that the calculation should be based on total days that a Medicare patient received care in the LTCH rather than just the days for which the cost of care was covered by Medicare (that is, “covered days”).

Since a high percentage of LTCH patients are admitted following inpatient stays at acute care hospitals, the commenters expressed concern that some patients could exhaust their Medicare coverage before it was clinically appropriate for them to be discharged from the LTCH. The commenters were concerned that if only Medicare-covered days were counted in the average length of stay calculation for qualification as a LTCH, it would behoove a hospital to treat only those Medicare patients who were far from exhausting their Part A benefits and, concomitantly, to refuse admittance to patients with limited or no remaining Medicare days, regardless of the clinical appropriateness of such an admission in order to retain (or attain) LTCH status. The commenters gave the following as an example: If only covered days were counted in the qualification formula, a Medicare patient who was actually in the LTCH for 30 days but only had 4 days of Medicare Part A coverage remaining upon admittance to the LTCH, for purposes of the formula, would count as a patient stay of 4 days. Thus, the commenters pointed out, while the hospital would be treating Medicare patients who have an average length of stay of over 25 days, a number of these admissions could jeopardize the hospital's payment under Medicare as a LTCH.

Two commenters also noted that, under existing policy which counted all patient days, Medicare noncovered days were not excluded from the 25-day average length of stay calculations. They urged us to continue this policy while restricting the actual patient count to Medicare patients.

Response:

As noted above, our data analyses disclosed that a significant number of Medicare patients at LTCHs were treated for considerably less time than the average length of stay. In many cases, in order to maintain the current 25-day length of stay requirement, these shorter Medicare stays were being offset by much longer stays of non-Medicare patients. Given the Secretary's broad discretion under section 1886(d)(1)(B)(iv)(I) of the Act to define the 25-day average length of stay, we proposed to revise § 412.23(e)(1) to limit the average inpatient length of stay calculation solely to Medicare patients. Our purpose was to ensure that payments under the LTCH prospective payment system are based on the charges and costs of treating Medicare patients with the high medical complexity associated with LTCHs, and not the costs of providing highly complex care to non-Medicare patients.

We do not wish to create any barriers for LTCHs to treat Medicare patients who require long-term hospitalization and who could benefit from the particular treatment modalities available in some LTCHs. LTCHs exist as a provider-type in order to treat Medicare patients requiring complex long-term, hospital-level care. We believe that a hospital's right to qualify for payments under the prospective payment system for LTCHs should result from the actual provision of clinically appropriate care to Medicare LTCH patients rather than on the number of Medicare covered days remaining for any of their patients during any particular cost reporting period. Accordingly, in this final rule, we are maintaining our current policy of counting all patient stays and revising §§ 412.23(e)(2) and (e)(3) to specify that we will count

all

the days in a Medicare patient's stay (covered and noncovered days), that is, total days, in the LTCH in calculating whether a LTCH meets the average 25-day length of stay requirement.

Comment:

Two commenters disagreed with the proposed policy change and requested CMS to retain the policy of counting all patient days in the calculation. One of the commenters noted that, based on its experience, its non-Medicare patients required more complicated treatment than its Medicare patients and, therefore, for a hospital's status to hinge on the shorter length of stay of Medicare patients contradicted the purpose of a LTCH.

Response:

We reiterate that section 1886(d)(1)(B)(iv)(I) of the Act confers broad authority on the Secretary to determine the parameters of the “average inpatient length of stay of greater than 25 days.” We interpret the provisions to apply to payment for patients who are provided care under Medicare. We believe that the redefinition of the average length-of-stay criterion as limited solely to Medicare patients at LTCHs conforms to the requirements of section 123 of the BBRA for the development of a prospective payment system for payment of inpatient hospital services furnished by LTCHs “under the [M]edicare program.” Furthermore, nothing in this revised criterion prevents or discourages LTCHs from accepting non-Medicare patients. Should a LTCH be unable to retain its status within this payment category because a significant number of its Medicare patients do not require long-term hospital-level care, we believe that it is reasonable for the facility to reevaluate the appropriateness of its admission policies. Notwithstanding any changes in the type of patients treated at the hospital, the hospital will still be able to admit and be paid by Medicare as an acute care hospital.

Comment:

Several commenters expressed concern about the length of time an existing LTCH would have to comply with the proposed revised average 25-day length of stay requirement before its ability to participate in Medicare as an LTCH would be jeopardized and questioned compliance monitoring. The commenters suggested that CMS institute a “grace period” for LTCHs to comply with the new requirement.

Response:

The revised definition for an average length of stay, which is determined on Medicare inpatients only, is effective for LTCH hospitals starting with their first cost reporting period that begins on or after October 1, 2002. We have directed our fiscal intermediaries to determine whether existing LTCHs qualify for payments under the LTCH prospective payment system according to the revised criteria after October 1, 2002. In addition, we have directed our fiscal intermediaries to notify LTCHs about whether a LTCH qualifies for payment under the LTCH prospective payment system before the start of the LTCH's next cost reporting period.

Under existing policy at § 412.22(d), changes in a hospital's status are effective at the beginning of the next cost reporting period and are effective for the entire cost reporting period. Therefore, for example, in the case of an existing LTCH with a cost reporting period beginning on October 1, 2002, for which a LTCH's fiscal intermediary determined on January 15, 2003, that the LTCH did not meet the new 25-day average length of stay criterion for the 12-month period for which the fiscal intermediary or CMS has the most recent cost report data, the LTCH would be paid as a LTCH until September 30, 2003. The LTCH would then lose its LTCH status as of October 1, 2003 unless for the 6 months prior to

September 30, 2003, the LTCH demonstrated that it had an average length of stay of greater than 25 days for its Medicare inpatients under existing § 412.23(e)(3)(ii), which we are not revising. If the hospital was able to demonstrate that during the 6 months prior to September 30, 2003, that it had an average Medicare length of stay of greater than 25 days, the hospital would continue to be paid as a LTCH even after October 1, 2003 (§ 412.23(e)(3)(ii)). Therefore, notification by the LTCH's fiscal intermediary following the effective date of the LTCH prospective payment system on October 1, 2002, will permit LTCHs that would not qualify based on their most recent cost report data to adapt to the revised length of stay criterion before reaching the actual point where they would cease to be paid as LTCHs.

As a further example, a LTCH that begins its next cost reporting period on January 1, 2003 will be notified about whether it satisfies the revised average length of stay criterion effective on October 1, 2002, for the 12-month period for which the fiscal intermediary or CMS has the most recent cost report data, by its fiscal intermediary after the start of its fiscal year on January 1, 2003. In the event that a LTCH's most recent cost report indicates that it would not qualify, the LTCH would still be paid as a LTCH from January 1, 2003 through December 31, 2003. The hospital would lose its LTCH status as of January 1, 2004, and be paid under the acute care hospital inpatient prospective payment system unless it provides data to its fiscal intermediary for the 6-month period immediately preceding December 31, 2003, which demonstrate that it satisfies the average length of stay criterion (§ 412.23(e)(3)(ii)).

Through application of the existing regulations described above, we believe that LTCHs are granted sufficient time to adapt to the new length of stay requirements for payment under the LTCH prospective payment system and we do not believe that it is necessary or appropriate to grant an additional “grace period” for this purpose.

Comment:

One commenter noted that juxtaposing the proposed interrupted stay policy with the revised average 25-day length of stay criterion could be problematic in determining whether a hospital continued to qualify for Medicare payments as a LTCH. The commenter described the following scenario: a patient, after a 100-day stay at a LTCH, is discharged to an acute care hospital 5 days before the end of a Medicare fiscal year that resulted in an average length of stay of 25.01 days. The patient is then readmitted at the start of the next Medicare fiscal year to the LTCH as an interrupted stay from the acute care hospital. Under our proposed interrupted stay policy, we would treat both stays as one discharge from the LTCH. Therefore, the patient's 100-day stay from the prior Medicare cost reporting period would be counted in the following year's cost reporting period and the LTCH's average Medicare inpatient length of stay for the prior cost reporting period would drop below 25 days. The commenter questioned whether, for purposes of calculating the average 25-day length of stay, the LTCH be at risk of losing LTCH status if the average length of stay for the previous Medicare fiscal year fell below the 25 days.

Response:

Under our proposed interrupted stay policy, a LTCH patient who is discharged to an acute care inpatient hospital, an IRF, or a SNF and then returns to the same LTCH would be treated as an interrupted stay (with one LTC-DRG payment) or as a new admission (with two separate LTC-DRG payments) depending on the patient's length of stay compared to the average length of stay and the standard deviation for the acute care hospital inpatient prospective payment system DRG, the IRF combination of the CMG and the comorbidity tier, or 45 days for all Medicare SNF cases.

We have revised the proposed interrupted stay policy in this final rule. The interrupted stay policy set forth in section X.E. of this final rule provides that the lengths of stay at acute care hospitals and IRFs are based on one standard deviation from the average length of stay for all patients in acute hospitals and IRFs, respectively. Therefore, in this final rule, the interrupted stay policy for acute care hospitals, IRFs, and SNFs are based on the same formula. Under this revised policy, the patient stay described by the commenter would be an interrupted stay if the patient returned to the LTCH from the acute care hospital before reaching the 9-day threshold for acute care hospitals. The readmission to the LTCH would be considered as a resumption of the treatment from the original admission rather than as a second admission. Therefore, the patient's original discharge from the LTCH at the end of the fiscal year would not count as a discharge for length of stay calculations for that fiscal year because the discharge to the acute care hospital is merely the point at which the stay was interrupted, and the patient ultimately returned to the same LTCH within a specified fixed day period. For both Medicare payment determinations under the interrupted stay policy and length of stay calculations, the discharge for that patient would occur when the patient is discharged from the LTCH during the next fiscal year. This is the case since the calculation of a LTCH's average length of stay for purposes of qualifying as a LTCH is based on discharges during a cost reporting period. Consequently, in accordance with the requirements at § 412.23(e), while the days of care provided to this patient would be included in the length of stay calculation in the first year, the discharge for that patient with the 100-day stay would be counted in the length of stay calculation for the subsequent fiscal year.

We understand the commenter's concern that such a scenario could jeopardize the hospital's ability to participate in the Medicare program as a LTCH. We emphasize that, under the policy described in the previous response, this is not the case.

The procedure by which a LTCH will be evaluated by its fiscal intermediary to determine whether it will qualify as a LTCH under the revised 25-day average length of stay criterion is the same procedure presently employed under the TEFRA system. Following the review of the LTCH's most recent cost report by the fiscal intermediary, which for FY 2003 will occur following the effective date of the LTCH prospective payment system, the LTCH will be notified whether, based on that cost report, it satisfies the greater than 25-day average length of stay requirement for its Medicare patients for payment as a LTCH under the LTCH prospective payment system. As noted above, the LTCH will become subject to this revised criterion for its first cost reporting period beginning on or after October 1, 2002.

A LTCH with a cost reporting year of October 1, 2002 through September 30, 2003 that does not qualify as a LTCH under the new criterion based on its FY 2001 cost report will continue to be paid as a LTCH until October 1, 2003. The hospital will then be paid as an acute care hospital unless it demonstrates that, during the 6 months prior to October 1, 2003, it had an average Medicare inpatient length of stay of greater than 25 days (§ 412.23(e)(3)(ii)). Therefore, under the scenario presented by the commenter in which the LTCH that failed the 25-day average length of stay requirement for its Medicare patients during one fiscal year because the pivotal discharge for that year was forced into the next year by the interrupted stay policy, the LTCH would not lose its designation if it could present 6 months of data indicating compliance with the new requirement

for the period preceding the cost reporting period for which it would lose its designation.

Comment:

Three commenters recommended that CMS change the day requirement in the average length of stay criterion. One commenter recommended lowering the 25 days to 20 days. Another commenter recommended requiring that only 95 percent of all LTCHs meet the 25-day requirement. The third commenter recommended changing the length of stay criterion so that it is computed based on the median length of stay rather than the average length of stay.

Response:

Section 1886(d)(1)(B)(iv)(I) of the Act defines a LTCH as “* * * a hospital which has an

average

inpatient length of stay (as determined by the Secretary) of greater than

25

days” (emphasis added). Although the Secretary has been granted broad authority in defining how the statute is implemented, section 1886(d)(1)(B)(iv)(I) of the Act clearly and unambiguously establishes the 25-day standard and the use of the average in the computation. The changes suggested by the commenters would require legislative action.

Comment:

One commenter questioned why CMS decided to limit the average 25-day length of stay criterion to Medicare patients only, but in establishing the prospective payment system for IRFs, the “75 percent rule” was applied to all patients, regardless of payer source.

Response:

The only requirement imposed by section 1886(d)(1)(B)(iv)(I) of the Act that differentiates a LTCH from another acute hospital is the average length of stay requirement. In addition, as stated earlier, our data revealed that a considerable proportion of Medicare patients are not receiving “long-term care” at LTCHs. The revision was proposed on the basis of the calculation of the greater than 25-day length of stay requirement, but did not restrict the patient census of the LTCH. Notwithstanding the proposed revision, a LTCH is free to admit and treat any patient it believes is clinically appropriate. Should that LTCH admit a short-stay Medicare patient, under this final rule the stay will be paid for under the short-stay outlier policy (section X.C. of this preamble and § 412.529 of the final regulations).

The objective of our revised policy is to establish a payment system for the care of Medicare patients at LTCHs that truly require the type of care and resources available at LTCHs and, therefore, incur costs to the Medicare system in accordance with such treatment. Should a LTCH admit many short-stay Medicare patients, it could well jeopardize its ability to participate under Medicare as a LTCH.

We are currently reviewing criteria for qualifying as an IRF, including the 75-percent rule, to determine whether any changes to the policy or administrative procedures for enforcing it are appropriate. Accordingly, rather than making changes to the types of patients used in calculating the 75 percent criterion at this time, we intend to address this issue as it affects IRFs when we address all of the qualifying criteria.

Comment:

One commenter pointed out that as a LTCH improves its efficiency under the LTCH prospective payment system, the result could be shorter lengths of stay for Medicare patients, an outcome that would jeopardize the hospital's status as a LTCH.

Response:

We agree with the commenter that as a LTCH becomes more efficient, its average length of stay may be reduced. Our experience with implementing other prospective payment systems under Medicare encourages us to believe that, even under circumstances of providing treatment for the most severely ill patient, quality of care can be preserved and even be improved once hospitals adapt to such a payment system. Our data, reflecting LTCHs throughout the country as well as acute care hospitals that treat patients who could also be treated in LTCHs, reveal a range of lengths of stay for the same diagnoses. If this reduction brings the hospital's average length of stay to 25 days or less, the hospital would lose its LTCH status. However, the requirements for both the DRG-based prospective payment system and the greater than 25-day average length of stay criterion are statutory. Any changes in these requirements must be pursued at the legislative level.

Comment:

One commenter suggested that, since the proposed systems design for the LTCH prospective payment system was based on data gathered from all hospitals identified in our provider files as LTCHs, if CMS changed the criteria for payment under Medicare from a consideration of average lengths of stay for all patients to those of only Medicare patients, data from LTCHs that would lose their designation under this change should be excluded from payment modeling.

Response:

Payment modeling for the LTCH prospective payment system was based on an analysis of data from existing LTCHs on their Medicare patients, costs, charges, and payments. The commenter appears to presume the following: That as of October 1, 2002, existing LTCHs not qualifying under the revised average length of stay requirement would lose their designation as LTCHS and that data from these hospitals should therefore not be included in payment simulations and policy determinations. We disagree with the commenter's points. The revised length of stay policy is a requirement of the prospective payment system for LTCHs and will become effective for any LTCH when that hospital becomes subject to the prospective payment system, that is, when the LTCH starts its first cost reporting period that begins on or after October 1, 2002. It is not appropriate to determine whether a hospital meets the new length of stay criterion for our modeling purposes. Changes in a hospital's status are effective only at the beginning of a cost reporting period and are effective for the entire cost reporting period under existing § 412.22(d). For example, if an existing LTCH with a cost reporting period that begins on October 1, 2002, does not meet the 25-day average length of stay criterion according to its fiscal intermediary's determination, the LTCH would not lose its LTCH status earlier than October 1, 2003, the beginning of its next cost reporting period. If in the 6 months prior to October 1, 2003, the hospital demonstrated an average length of stay of greater than 25 days for its Medicare patients, the hospital would continue to be paid as a LTCH even after October 1, 2003. We believe that LTCHs have a strong incentive to reevaluate their admission policies based on this new criterion, and that many of the LTCHs that presently may not meet the new requirement may achieve compliance when required and not lose their LTCH status. In addition, including the data from those hospitals that currently treat Medicare patients with an average length of stay of 25 days or less is appropriate. As explained in section X.A.2. of this preamble, in calculating the relative weights for each LTC-DRG, we adjusted the weight for short-stay outlier cases based on the average costs for that LTC-DRG. This adjustment allowed us to appropriately include more cases in the calculation of the LTC-DRG relative weight. Accordingly, we disagree with the commenter and did not remove data from those hospitals in developing the LTCH prospective payment system.

After consideration of public comments received on the proposed change in the average 25-day length of stay requirement for LTCHs, in this final rule we are adopting the proposed change as final with one clarification. Under this final rule, we will determine

the average inpatient length of stay in a LTCH, for purposes of section 1886(d)(1)(B)(iv)(I) of the Act, for the hospital's Medicare patients, but not non-Medicare patients. In addition, we are clarifying that the hospital's 25-day average Medicare inpatient length of stay includes all inpatient days (covered and noncovered) of Medicare patients' stays at the LTCH.

In addition, as we indicated in the proposed rule and as authorized under the statute, we are changing the methodology for determining the average inpatient length of stay for purposes of section 1886(d)(1)(B)(iv)(I) of the Act, but we are not changing the methodology for purposes of section 1886(d)(1)(B)(iv)(II) of the Act (§ 412.23(e)). For purposes of the latter provision (subclause (II)), we are retaining the current methodology (which includes non-Medicare as well as Medicare patients) because we believe that the considerations underlying the change in methodology for subclause (I) are not present under subclause (II). As discussed above, we are revising the methodology for purposes of the general definition of LTCH under subclause (I) because under the current methodology some hospitals that might not warrant exclusion from the acute care hospital inpatient prospective payment system have nevertheless obtained status as excluded hospitals. We believe that excluding non-Medicare patients in determining the average inpatient length of stay for purposes of subclause (I) would be more appropriate in identifying the hospitals that warrant exclusion under the general definition of LTCH in subclause (I). However, in enacting subclause (II), Congress provided an exception to the general definition of LTCH under subclause (I), and we have no reason to believe that the change in methodology for determining the average inpatient length of stay would better identify the hospitals that Congress intended to exclude under subclause (II).

We will monitor the types of hospitals that will qualify as LTCHs based on the revised 25-day length of stay criterion. It is possible that hospitals that currently qualify as either rehabilitation hospitals or psychiatric hospitals will now also qualify as LTCHs under the revised criterion and will choose to be LTCHs and be paid as LTCHs. We also will monitor whether the change in methodology for measuring the average length of stay in LTCHs will result in unanticipated shifts of patients to IRFs and psychiatric facilities. If this pattern of behavior is observed, we will address it at that time.

3. LTCHs Not Subject to the LTCH Prospective Payment System

In this final rule, we are specifying that only hospitals qualifying as LTCHs under the revised criteria described in section VIII.B.1. and 2. of this preamble and in revised § 412.23(e) by October 1, 2002, will be subject to the LTCH prospective payment system. Our treatment of new hospitals first qualifying as LTCHs on or after October 1, 2002, is addressed in section X.O. of this final rule.

The following hospitals are paid under special payment provisions, as described in existing § 412.22(c) and, therefore, will not be subject to the LTCH prospective payment system rules:

• Veterans Administration hospitals.

• Hospitals that are reimbursed under State cost control systems approved under 42 CFR Part 403.

• Hospitals that are reimbursed in accordance with demonstration projects authorized under section 402(a) of Public Law 90-248 (42 U.S.C. 1395b-1) or section 222(a) of Public Law 92-603 (42 U.S.C. 1395b-1 (note)) (statewide all-payer systems, subject to the rate-of-increase test at section 1814(b) of the Act).

• Nonparticipating hospitals furnishing emergency services to Medicare beneficiaries.

C. Limitation on Charges to Beneficiaries

In accordance with existing regulations and for consistency with other established hospital prospective payment systems policies, we are specifying in this final rule that a LTCH may not charge a beneficiary for any services for which a full DRG payment is made by Medicare, even if the hospital's costs of furnishing services to that beneficiary are greater than the amount the hospital will be paid for those services under the LTCH prospective payment system (§ 412.507).

In the proposed rule under § 412.507(b), we specified that a LTCH receiving a prospective payment for a covered hospital stay may charge the Medicare beneficiary or other person only for the applicable deductible and coinsurance amounts under §§ 409.82, 409.83, and 409.87 of the existing regulations, and for items or services specified under § 489.20(a) of the existing regulations.

Comment:

Some commenters expressed concern with the interaction of the proposed reduced per discharge payments for both very short-stay discharges and short-stay outliers and the requirements at proposed § 412.507 of the regulations which limit the amount the LTCH may bill the beneficiary and the effect this will have on Medigap payments.

Response:

We have reviewed our proposed policy and have concluded that the language in proposed § 412.507 requires clarification. We proposed that beneficiaries who had exhausted their Part A coverage prior to two-thirds of the average length of stay (changed in this final rule to five-sixths of the geometric average length of stay) for each LTC-DRG to receive payments as short-stay outliers. The commenters' questions regarding the interaction of the short-stay outlier payment policy and Medigap indicate that the commenters also understood the intent of our short-stay policy. However, because the regulation text may not clearly indicate our intent, we are revising it to reflect this intended policy.

We are revising the language at § 412.507(b) to state that a LTCH may not bill the patient for more than the deductible and coinsurance amounts if the Medicare payment to the LTCH is the full LTC-DRG payment amount. However, if the Medicare payment is for a short-stay outlier case that is less than the full LTC-DRG payment amount, the LTCH may also charge the beneficiary for services for which the costs of those services or the days those services were provided were not a basis for calculating the Medicare short-stay outlier payment.

Proposed § 412.507(b) had stated that “A long-term care hospital that receives payment * * * for a covered hospital stay (that is, a stay that includes at least one covered day) may charge the Medicare beneficiary or other person only for the applicable deductible and coinsurance amounts under §§ 409.82, 409.83, and 409.87 of this subchapter, and for items and services as specified under § 489.20(a) of this chapter.” We are revising the language in the regulation, since that language could appear to have provided for payment of the

full

LTC-DRG payment (with no adjustment for a short-stay outlier) as long as the Medicare beneficiary had a stay that included at least one covered day. However, payments to LTCHs are adjusted for short-stay outliers. By revising § 412.507(b) in this final rule, we are clarifying the provision so that Medigap will be responsible for payment for the costs of those “services provided during the stay that were not the basis for the short-stay payment.”

Comment:

Several commenters have expressed concern that if Medigap insurers are only required to pay outlier rates once a patient has exhausted the Medicare-covered days (as is the case

under the existing acute care hospital inpatient prospective payment system and the IRF prospective payment system), LTCHs will most likely be seriously underpaid. The commenters asked for clarification that, under the LTCH prospective payment system, Medigap insurers are required to pay more than a mere continuation of the outlier rate since the full DRG payment will not be made in the case of an admission that occurs near the point at which the patient would exhaust his or her lifetime reserve days.

Specifically, the commenters asked that CMS issue a program memorandum to State insurance commissioners and issuers (commonly referred to as a Medigap bulletin) clarifying Medigap insurers' payment responsibilities under the new LTCH prospective payment system.

Response:

During any covered Medicare Part A hospital benefit period, from days 61 through 90, every Medigap policy must pay the hospital coinsurance amount of one-fourth of the hospital deductible per day. For every lifetime reserve day (91st to the 150th day) that the policyholder uses, the Medigap insurer must pay the coinsurance amount of one-half of the hospital deductible. If the policyholder exhausts his or her lifetime reserve days, the Medigap insurer is required to provide “coverage of the Medicare Part A eligible expenses for hospitalization paid at the DRG day outlier per diem or other appropriate standard of payment, subject to a lifetime maximum benefit of an additional 365 days.” (Section 8.B(3) of the Model Regulation for Medicare Supplement Policies developed by the National Association of Insurance Commissioners (NAIC), which is incorporated by reference into section 1882 of the Act.) The term “Medicare eligible expenses” is defined in the NAIC Model Regulation as expenses of the kinds covered by Medicare, to the extent recognized as reasonable and medically necessary by Medicare.

We have consistently interpreted this language to require that the Medigap insurer make payments at the rate Medicare would have paid, had Medicare Part A hospital days not been exhausted. Under the acute care hospital inpatient prospective payment system, even if a patient has only one day of Medicare coverage remaining at the time of admission, Medicare pays the full DRG payment amount. A Medigap insurer would simply be responsible for outliers, if any. Similarly, since patients who exhaust their Medicare covered days are frequently in outlier status already, the Medigap insurer's responsibility is simply to continue paying what Medicare had been paying on the last day of coverage (that is, the outlier amount).

However, under the LTCH prospective payment system, the payment methodology is more complex. The LTC-DRG payment amount is based, in part, on how long the patient is expected to stay in the LTCH. The payment to the LTCH is determined after the patient is discharged, and will be reduced if the patient is discharged significantly earlier than the expected length of stay. Such stays are referred to as “short-stay outliers.” The fiscal intermediary follows the formulas specified in section X.C. of this preamble to determine the actual payment amount, which is expressed in terms of an adjustment to the LTC-DRG payment.

Accordingly, if a patient with a Medigap policy exhausts Medicare covered days before being discharged from a LTCH, the only way to determine the “appropriate standard of payment” for which the Medigap insurer is responsible is to use the same methodology used by Medicare. If the beneficiary exhausted Medicare benefits while he or she is still within the period of time considered to be a “short-stay outlier,” Medicare will make payment to the LTCH as if it were a short-stay, regardless of the length of stay. This means that the payment that happens to be attributed to the last day of Medicare coverage is not an accurate basis for calculating the Medigap insurer's responsibility. It may be more, or less, than the appropriate LTC-DRG payment ultimately applicable to the full stay. The Medigap insurer should use the LTCH methodology to calculate the amount Medicare would have paid for the full hospital stay, and deduct the amount paid by Medicare for the days prior to the exhaustion of benefits.

Comment:

One commenter expressed concern that State Medicaid programs might determine the amount of Medicaid payment based on what Medicare would pay under the very short-stay policy. The existing regulations at § 447.205(b)(1) allows a State to use Medicare level of reimbursement without public notice. The commenter was concerned that very short-stay rates of payment could migrate to the Medicaid program and be used to pay hospitals without regard to the Medicaid average length of stay of a patient.

Response:

Medicaid is a joint Federal and State program that assists with medical costs for people with low incomes and limited resources. Under the Medicaid program, States have the option to pay based on Medicare's payment principles or other alternative methodologies, subject to the overall Medicare upper payment limitation. While, for example, some State Medicaid programs may adopt the Medicare payment policy for short-stay cases, the Medicare program has no authority to dictate payment policy to State Medicaid programs. The commenter raised a concern with the proposed very short-stay discharge payment policy. As discussed earlier in this final rule, we have eliminated the very short-stay policy and included those stays in our short-stay policy in this final rule. The final short-stay policy will pay for those cases with lengths of stay at or below five-sixths of the geometric average length of stay for the LTC-DRG at the least of: (1) 120 percent of the LTC-DRG specific per diem; (2) 120 percent of the cost of the case; or (3) the full LTC-DRG payment.

In accordance with existing regulations and for consistency with other established hospital prospective payment systems policies, we are specifying in this final rule that a LTCH may not charge a beneficiary for any services for which a full LTC-DRG payment is made by Medicare, even if the hospital's costs of furnishing services to that beneficiary are greater than the amount the hospital will be paid under the LTCH prospective payment system (§ 412.507).

D. Medical Review Requirements

In accordance with existing regulations at §§ 412.44, 412.46, and 412.48 and for consistency with other established hospital prospective payment systems policies, we proposed and are specifying in this final rule that a LTCH must have an agreement with a Quality Improvement Organization (QIO) (formerly, a Peer Review Organization (PRO)) to have the QIO review, on an ongoing basis, the medical necessity, reasonableness, and appropriateness of hospital admissions and discharges and of inpatient hospital care for which outlier payments are sought; the validity of the hospital's diagnostic and procedural information; the completeness, adequacy, and quality of the services furnished in the hospital; and other medical or other practices with respect to beneficiaries or billing for services furnished to beneficiaries (§ 412.508(a)). In addition, we are requiring that, because payment under the prospective payment system is based in part on each patient's principal and secondary diagnoses and major procedures performed, as evidenced by the physician's entries in the patient's medical record, physicians must

complete an acknowledgement statement to that effect. We are applying the existing hospital requirements for the contents and filing of the physician acknowledgment statement (§ 412.508(b)).

Also, as proposed and now codified in this final rule, consistent with existing established hospital prospective payment system policies, if CMS determines, on the basis of information supplied by the QIO, that a hospital has misrepresented admissions, discharges, or billing information or has taken an action that results in the unnecessary admission or multiple admission of individuals entitled to Part A benefits or other inappropriate medical or other practices, CMS may deny payment (in whole or in part) for LTCH hospital services related to the unnecessary or subsequent readmission of an individual or require the hospital to take actions necessary to prevent or correct the inappropriate practice. Notice and appeal of a denial of payment will be provided under procedures established to implement section 1155 of the Act. In addition, a determination of a pattern of inappropriate admissions and billing practices that has the effect of circumventing the prospective payment system will be referred to the Department's Office of Inspector General, for handling in accordance with 42 CFR 1001.301.

E. Furnishing of Inpatient Hospital Services Directly or Under Arrangements

In accordance with existing regulations at § 414.15(m) and for consistency with other established hospital prospective payment systems policies, a LTCH must furnish covered services to Medicare beneficiaries either directly or under arrangements. Under § 412.509, the LTCH prospective payment will be payment in full for all covered inpatient hospital services, as defined in § 409.10 of the existing regulations. We will not pay any provider or supplier other than the LTCH for services furnished to a Medicare beneficiary who is an inpatient of the LTCH, except for those services that are not included as inpatient hospital services that are listed under existing § 412.50 (that is, physicians' services that meet the requirements of § 415.102(a) for payment on a fee schedule basis; physician assistant services as defined in section 1861(s)(2)(K)(i) of the Act; nurse practitioners and clinical nurse specialist services, as defined in section 1861(s)(2)(K)(ii) of the Act; certified nurse midwife services, as defined in section 1861(gg) of the Act; qualified psychologist services, as defined in section 1861(ii) of the Act; and services of an anesthetist, as defined in § 410.69).

F. Reporting and Recordkeeping Requirements

In this final rule, we are imposing the same recordkeeping and cost reporting requirements of §§ 413.20 and 413.24 of the existing regulations on all LTCHs that will participate in the LTCH prospective payment system (§ 412.511).

G. Transition Period for Implementation of the LTCH Prospective Payment System

In this final rule, we are providing for a 5-year transition period from cost-based reimbursement to fully Federal prospective payment for LTCHs as discussed in section X.N. of this preamble. During this period, two payment percentages will be used to determine a LTCH's total payment under the prospective payment system. The blend percentages are as follows:

Cost reporting periods beginning on or after

Prospective payment Federal rate percentage

Cost-based reimbursement rate percentage

October 1, 2002

20

80

October 1, 2003

40

60

October 1, 2004

60

40

October 1, 2005

80

20

October 1, 2006

100

0

Therefore, for a cost reporting period beginning on or after October 1, 2002, and before October 1, 2003, the total prospective payment will consist of 80 percent of the amount based on the current reasonable cost-based reimbursement system and 20 percent of the Federal prospective payment rate. The percentage of payment based on the LTCH prospective payment Federal rate will increase by 20 percent and the reasonable cost-based reimbursement rate percentage will decrease by 20 percent for each of the remaining 4 fiscal years in the transition period. For cost reporting periods beginning on or after October 1, 2006, Medicare payment to LTCHs will be determined entirely under the Federal prospective payment system methodology. Furthermore, LTCHs subject to the blend have the option to elect to be paid 100 percent of the Federal rate and not be subject to the 5-year transition.

Section X.N. of this final rule contains a detailed description of our payment policies during the 5-year transition period, the public comments received on our proposal and our responses to those comments, and a discussion of changes in the claims processing procedures for an interim period of October 1, 2002 until the date of the systems implementation, because of a delay in system changes necessary for us to accommodate claims processing under the LTCH prospective payment system.

H. Implementation Procedures

In the March 22, 2002 proposed rule, we proposed procedures for implementing the LTCH prospective payment system. Section X. of this final rule contains more details on the application of these procedures. In summary, upon the discharge of the patient from a LTCH, the LTCH must assign appropriate diagnosis and procedure codes from the International Classification of Diseases, Ninth Revision, Clinical Modification (ICD-9-CM). Under a requirement of the Health Insurance Portability and Accountability Act of 1996 (HIPAA), Public Law 104-191, electronic health care claims, including Medicare claims, will be required to be in the new national standard claims format and medical data code sets in accordance with regulations at 45 CFR Parts 160 and 162. Beginning on October 16, 2002, a LTCH that is required to comply with the HIPAA Administrative Simplification Standards and that has not obtained an extension in compliance with the Administrative Compliance Act (Public Law 107-105) must comply with the standards at 42 CFR 162.1002 and 45 CFR 162.1102 and submit the completed claims form to its Medicare fiscal intermediary. The Medicare fiscal intermediary will enter the information into its claims

processing systems and subject it to a series of edits called the Medicare Code Editor (MCE). This editor is designed to identify cases that will require further review before classification into a LTC-DRG (described in section X. of this final rule).

After screening through the MCE, each claim will be classified into the appropriate LTC-DRG by the Medicare LTCH GROUPER. The LTCH GROUPER is specialized computer software based on the GROUPER utilized by the acute care hospital inpatient prospective payment system, which was developed as a means of classifying each case into a DRG on the basis of diagnosis and procedure codes and other demographic information (age, sex, and discharge status). Following the LTC-DRG assignment, the Medicare fiscal intermediary will determine the prospective payment by using the Medicare PRICER program, which accounts for hospital-specific adjustments.

As provided for under the acute care hospital inpatient prospective payment system, we are providing an opportunity for the LTCH to review the LTC-DRG assignments made by the fiscal intermediary (§ 412.513(c)). A hospital will have 60 days after the date of the notice of the initial assignment of a discharge to a LTC-DRG to request a review of that assignment. The hospital will be allowed to submit additional information as part of its request. The fiscal intermediary will review that hospital's request and any additional information and will decide whether a change in the LTC-DRG assignment is appropriate. If the intermediary decides that a different LTC-DRG should be assigned, the appropriate QIO, as specified in § 476.71(c)(2), will review the case. Following this 60-day period, the hospital will not be able to submit additional information with respect to the LTC-DRG assignment or otherwise revise its claim.

Comment:

One commenter requested that we allow a LTCH 90 days instead of 60 days following the date of the notice of the initial assig

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