Medicare Program; Prospective Payment System for Long-Term Care Hospitals: Proposed 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-P]

RIN 0938-AK69

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

AGENCY:

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

ACTION:

Proposed rule.

SUMMARY:

This proposed rule would establish 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 proposed rule would implement section 123 of the Medicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Balanced Budget Refinement Act (BBRA) of 1999 and section 307(b) of the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act (BIPA) of 2000. 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 proposed rule would replace the reasonable cost-based payment system under which the LTCHs are currently paid.

DATES:

Comments will be considered if received at the appropriate address, as provided below, no later than 5 p.m. on May 21, 2002.

ADDRESSES:

Mail written comments (an original and three copies) to the following address only: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-1177-P, P.O. Box 8013, Baltimore, MD 21244-8013.

To ensure that mailed comments are received in time for us to consider them, please allow for possible delays in delivering them. If you prefer, you may deliver (by hand or courier) your written comments (an original and three copies) to one of the following addresses: Room 443-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201, or Room C5-16-03, Central Building, 7500 Security Boulevard, Baltimore, MD 21244-1850.

(Because access to the interior building is not readily available to persons without Federal Government identification, commenters are encouraged to leave their comments in the CMS drop slots located in the main lobby of the building. A stamp-in clock is available for commenters wishing to retain proof of filing by stamping in and retaining an extra copy of the comments being filed.)

Comments mailed to the addresses indicated as appropriate for hand or courier delivery may be delayed and could be considered late.

Because of staff and resource limitations, we cannot accept comments by facsimile (FAX) transmission. In commenting, please refer to file code CMS-1177-P. For information on viewing public comments, see the beginning of the

SUPPLEMENTARY INFORMATION

section.

FOR FURTHER INFORMATION CONTACT:

Tzvi Hefter, (410) 786-4487, or Judy Richter, (410) 786-2590 (General information, transition payments, payment adjustments)

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

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

SUPPLEMENTARY INFORMATION:

Inspection of Public Comment

Comments received timely will be available for public inspection as they are received, generally beginning approximately 3 weeks after publication of a document, at 7500 Security Boulevard, Baltimore, MD 21244, Monday through Friday of each week from 8:30 to 5 p.m. Please call (phone: (410) 786-7197) to make an appointment to view the public comments.

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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. Background

A. Overview of Current Payment System for LTCHs

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

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

3. Payment System Requirements Prior to the BBA

4. Effect of the Current Payment System

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

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

1. Provisions of the Current Payment System

2. Provisions for a LTCH Prospective Payment System

C. Research Supporting the Establishment of the LTCH Prospective Payment System: Legislative Requirements

D. Description of Sources of Research Data

E. 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 Post-Acute Care Facilities

F. Overview of System Analysis for the Proposed LTCH Prospective Payment System

G. Evaluation of DRG-Based Patient Classification Systems

H. Recommendations by MedPAC for a LTCH Prospective Payment System

I. Evaluated Options for the Proposed Prospective Payment System for LTCHs

II. General Discussion of the Proposed LTCH Prospective Payment System

A. Goals of the Proposed LTCH Prospective Payment System

B. Applicability of the Proposed LTCH Prospective Payment System

C. LTCHs Not Subject to the Proposed LTCH Prospective Payment System

D. Summary Description of the Proposed LTCH Prospective Payment System

1. Procedures

2. Patient Classification Provisions

3. Payment Rates

4. Limitation on Charges to Beneficiaries

5. Medical Review Requirements

6. Furnishing of Inpatient Hospital Services Directly or Under Arrangements

7. Reporting and Recordkeeping Requirements

8. Implementation of the Proposed Prospective Payment System

III. 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. Proposed 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 ICD-9-CM System

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

IV. Proposed Payment System for LTCHs

A. Development of the Proposed LTC-DRG Relative Weights

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

2. Steps for Calculating the Proposed Relative Weights

B. Special Cases

1. Very Short-Stay Discharges

2. Short-Stay Outliers

3. Interrupted Stay

4. Other Special Cases

5. Onsite Discharges and Readmittances

6. Additional Issues for Onsite Facilities

7. Monitoring System

C. 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

D. Calculation of the Proposed Standard Federal Payment Rate

1. Overview of the Development of the Proposed Standard Payment Rate

2. Development of the Proposed Standard Federal Payment Rate

E. Development of the Proposed Federal Prospective Payments

F. Computing the Proposed Adjusted Federal Prospective Payments

G. Transition Period

H. Payments to New LTCHs

I. Method of Payment

V. Provisions of the Proposed Rule

VI. Regulatory Impact Analysis

A. Introduction

1. Executive Order 12866

2. Regulatory Flexibility Act (RFA)

3. Impact on Rural Hospitals

4. Unfunded Mandate

5. Federalism

B. Anticipated Effects

1. Budgetary Impact

2. Impact on Providers

3. Calculation of Current Payments

4. Calculation of Proposed 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

VII. Collection of Information Requirements

VIII. Response to Comments

Regulations Text

Appendix A—Proposed Market Basket for LTCHs

Appendix B—Proposed Update Framework

Acronyms

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

APR-DRGs All patient-defined, 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.

ProPAC Prospective Payment Assessment Commission.

SNF Skilled nursing facility.

TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Public Law 97-248.

I. 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. 97-248) 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 prospective payment system, certain specialty hospitals are excluded from that system and continue to be paid their reasonable costs subject to the cap established under TEFRA. 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.

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 (BBRA) (Pub. L. 106-113), and the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act (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 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 inpatient hospital 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, annual per discharge limit) for these hospitals until cost reporting periods beginning on or after October 1, 2002. At the same time that Congress modified the payment system based on limits on target amounts, it also included in the BBA a provision 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, Congress refined some policies of the BBA prior to the implementation of 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 where feasible to account for resource use by LTCHs.

In this proposed rule, we set forth the proposed Medicare prospective payment system for LTCHs as authorized under the BBRA and BIPA. Below, we discuss the development, proposed policies, and proposed implementation of the proposed LTCH prospective payment system. These discussions include the following:

• An overview of the current payment system for LTCHs.

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

• A discussion of research findings on LTCHs.

• A detailed discussion of the proposed LTCH prospective payment system, including the patient classification system, relative weights, payment rates, additional payments, and the budget neutrality requirements mandated by section 123 of Public Law 106-113.

• An analysis of the estimated impact of the proposed LTCH prospective payment system on the Federal budget and LTCHs.

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

A. Overview of Current Payment System for LTCHs

1. 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 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 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 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 hospital inpatient prospective payment system on October 1, 1983, including the initial publication in the

Federal Register

of the rules and regulations for the 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 hospital inpatient prospective payment system. The regulations concerning exclusion of LTCHs from the hospital inpatient prospective payment system are found in 42 CFR part 412, subpart B.

2. 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 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.” Public Law 105-33 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 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.

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).)

3. Payment System Requirements Prior to the BBA

Hospitals that are excluded from the 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 prior to 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)).

4. Effect of the Current Payment System

Utilization of post-acute care services has grown rapidly in recent years since the implementation of the acute care hospital inpatient prospective payment system. Average length of stay in acute care hospitals has decreased, and patients are increasingly being discharged to post-acute 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 utilization of post-acute care providers, including hospitals excluded from the 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 post-acute 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). Furthermore, 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 is 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 the 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 I.B.1. of this preamble.

5. 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 the 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 the 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 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 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's] 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 post-acute 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 post-acute 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 post-acute 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 post-acute care providers: SNFs (section 4432(a)), IRFs (section 4421), and HHAs (section 4603(b)). In addition, Congress directed the Secretary to develop a legislative proposal to pay LTCHs prospectively as well (section 4422).

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

1. Provisions of the Current Payment System

a. 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 hospital inpatient prospective payment system (sections 4411, 4412, 4413, 4414, 4415, 4416, 4417, 4418, and 4419). Provisions of these amendments that related to the current payment system were explained in detail and implemented in our 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 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 Public Law 105-33 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 prospective payment system that meet specified criteria. If a hospital is eligible for the continuous improvement bonus, the bonus payment is equal to the lesser of: (1) 50 percent of the amount by which operating cost 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. Prior to 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 prior to 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.

b. BBRA. With the enactment of the BBRA of 1999, 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 our interim final rule published in the

Federal Register

on August 1, 2000 (65 FR 47026) and in our final rule also published on August 1, 2000 (65 FR 47054).

Section 4414 of the BBA had 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 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.

c. BIPA. Two provisions of BIPA that amended section 1886(b)(3) of the Act were directed at LTCHs. Section 307(a) of 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) 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.

2. Provisions for a LTCH Prospective Payment System

a. 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 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.

b. 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.

c. BIPA. The BIPA reiterated the dates of implementation of the LTCH prospective payment system set forth in the BBRA. This statute 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, 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.

C. Research Supporting the Establishment of the LTCH Prospective Payment System: 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, 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 proposed Medicare LTCH prospective payment system based on DRGs.

D. 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 description of the universe of LTCHs in section I.E. of this proposed rule is based on calendar year (CY) 1997 MedPAR, the HCRIS file containing the best available cost data for cost reporting periods that began during FYs 1996 and 1997, and 1997 data from the Online Survey Certification and Reporting System (OSCAR).

The 1997 OSCAR data provided information from the State survey and certification process to identify and characterize providers that participate in Medicare and Medicaid and includes 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.

E. 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 “post-acute 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 I.C. 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 post-acute 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 proposed prospective payment system for LTCHs presented in this proposed rule.

2. General Medicare Policies

Inpatient stays at LTCHs are covered under the Part A hospital benefit and include room and board, medical and nursing services, laboratory tests, X-rays, 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 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 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. A patient with a long LTCH stay, however, is subject to a coinsurance payment ($198 in 2002) for days 61 through 90 of hospital use during a benefit period. For the lifetime reserve days, the Medicare beneficiary is subject to a daily coinsurance amount ($396 in 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. 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 I.A.2 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 number translates into an average of approximately one facility per 200,000 Medicare enrollees. As can be seen in Table 1, LTCHs are not distributed across all States in proportion to the number of Medicare enrollees in those States. They are unevenly distributed across the United States, with one-third (72 of 203) located in Massachusetts, Texas, and Louisiana. These three States together account for 36 percent of the LTCHs, but only fewer than 10 percent of Medicare enrollees. Furthermore, 13 small States have no LTCHs, although they account for approximately 7 percent of Medicare enrollees. In contrast, the three largest Medicare States (California, Florida, and New York) account for 24.1 percent of Medicare enrollees together, but only 13.8 percent of LTCHs.

Table 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 and Certification Reporting System (OSCAR).

Although the distribution of certified beds generally tracks 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 has only 8.4 percent of LTCHs, but 16.8 percent of Medicare-certified beds. In contrast, Texas has 17.7 percent of LTCHs, but only 9.9 percent of the certified beds.

5. Characteristics by Date of Medicare Participation

The OSCAR program 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 account 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 is 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 hospital inpatient prospective payment system and 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 are 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 is quite different. Old LTCHs are 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, are proprietary facilities. Virtually no new LTCHs are 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 hospital inpatient prospective payment system. The presence of a long-term care “unit”, excluded from the 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 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 gaming of the Medicare 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 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 prospective payment system on or before September 30, 1995, as an LTCH, shall 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. (See § 412.22(f).)

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 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 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 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 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 are 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 are the most common caseload concentration—in 1997, 13 percent of LTCHs have a caseload concentration of 50 percent to 75 percent, and another 7 percent of LTCHs have more than 75 percent of their cases in this MDC.

The other three MDCs that make 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) are all related to rehabilitation needs. (Because rehabilitation-related DRGs are common

to LTCHs and fall into the “Factors Influencing Status” MDC, we are proposing to classify all cases in this MDC as rehabilitation services for the purpose of this analysis.) Seven percent of LTCHs have a majority of their caseload in an MDC related to rehabilitation-related services. A significantly less common concentration is seen in the 2 percent of LTCHs that have a majority of their patients in the mental diseases and disorders MDC. All but two LTCHs in our analysis have some share of patients with respiratory system problems. Similarly, all but five LTCHs have 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 have high proportions of cases in the respiratory MDC and the rehabilitation-related MDCs category, although some LTCHs do not serve either of these populations in great numbers. Few LTCHs do not have a significant share of their caseload in either the respiratory MDC or the rehabilitation-related MDCs category. Only 2 percent of multispecialty LTCHs have less than 25 percent of their caseload in either specialty group. Similarly, only 7 percent of multispecialty facilities have less than 35 percent of their caseload in either of the two groups. In contrast, about 60 percent of LTCHs have at least half of their caseload in either the respiratory MDC or the rehabilitation-related MDCs category. This high share demonstrates that, despite their assignment to the multispecialty category, most LTCHs serve a high percentage of patients with respiratory or rehabilitation problems, or both.

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

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

Some other facilities work with similarly specialized populations and have very small Medicare caseloads. In particular, two facilities that focus 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 indicates that a preponderance of the LTCHs can be classified in distinct specialty groups that focus on adult rehabilitation and respiratory system care.

8. Sources and Destinations of LTCH Patients

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

The vast majority (70 percent) of LTCH patients are admitted from acute care hospitals. Within this group, acute care patients whose stays are 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 is the next most common source of admissions (14 percent) to LTCHs.

The admission patterns vary somewhat by LTCH specialty type. Notably, 85 percent of admissions to respiratory specialty LTCHs are from acute care hospitals, including 22 percent that are acute care hospital outlier cases. A very small percentage (7 percent) of admissions to respiratory specialty LTCHs are from the community. In contrast, the admission sources for the rehabilitation specialty LTCHs are 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 transition from acute care hospital outlier stays (12 percent). A relatively large share (11 percent) of patients at rehabilitation specialty LTCHs are 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 is quite different from those of the other specialties. A relatively small percentage (31 percent) of patients are admitted from acute care hospitals and only 2 percent are admitted after being acute care hospital outliers. In contrast, large proportions are admitted directly from the community (40 percent) or from some other type of Medicare provider (27 percent).

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

Some variations in discharge destination patterns exist among LTCHs by specialty. Relative to the overall sample, the respiratory specialty LTCHs have 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). Rehabilitation specialty facilities, however, have 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 Post-Acute Care Facilities

Urban's research also produced data regarding a comparison of LTCHs with other post-acute 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 post-acute settings because of the nature of each category of post-acute 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 post-acute 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 have several diagnosis codes on their Medicare claims, indicating that they have multiple comorbidities and are probably less stable upon admission than patients admitted to other post-acute care settings. Relative to IRFs, LTCHs have 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 provide 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) is twice that of IRF patients (9 percent). The share of LTCH patients over 85 years old is slightly higher (18 percent) compared to IRF patients (14 percent). LTCHs also have a higher proportion of male patients and a lower proportion of white patients than IRFs. LTCHs have long median lengths of stay: 21 days versus 16 days for IRFs. About one-third of the LTCH Medicare stays are 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 have the highest mean and median length of stay in the LTCH, the highest proportion male, the highest proportion white, and the lowest proportion of Medicaid-eligible patients. However, in terms of age, those with prior hospital stays (whether outlier or nonoutlier) are quite different from those with other admission sources. Those without a prior acute care hospital stay are younger and about twice as many are under age 65, whose mean age is 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 nonoutliers are 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 that we are proposing in this proposed rule were determined in part based on analysis of the above data and information gathered on LTCHs and their Medicare patients.

F. Overview of System Analysis for the Proposed 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. Specifically, for this proposed rule, 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 proposed prospective payment system.

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

A data file was constructed to serve as the basis of our proposed patient classification system 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 proposed prospective payment system in this proposed rule. We relied upon patient charge data from FY 2000 MedPAR for setting proposed LTC-DRG weights and upon costs data from FY 1998 and FY 1999 cost reports for proposed payment rates. We expect that the availability of updated FY 2000 MedPAR data and updated FY 1999 HCRIS data, further analysis of the data file, and review of the comments that we receive in response to this proposed rule may result in refinements to our proposed policies, particularly in the areas of weights and rates.

G. Evaluation of DRG-Based Patient Classification Systems

Section 307(b) 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 Dr. Norbert Goldfield, Clinical Director of 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.)

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 I.C.2.) 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 proposing for the LTCH prospective payment system is the LTC-CMS-DRG GROUPER that is based on the Lewin model because we believe it accurately predicts costs without the problems that we believe could be inherent with the APR-DRG system. (In section III. of this proposed rule, which describes the functioning of the classification system as a component of the proposed LTCH prospective payment system, the LTC-CMS-DRGs are referred to as the proposed 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.)

We believe that either classification system would result in more equitable payments for LTCHs compared to current payment methods. The proposed 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 I.A. of this proposed rule.) As the Congress intended, the DRG weights under the proposed 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. We solicit comments on the impact one system may have over another as it applies to different kinds of LTCHs.

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 I.E.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 are aware that the forthcoming prospective payment system 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 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 wish to note that the adoption of severity-adjusted DRGs will be explored by CMS for use under the 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.) Although we are not proposing LTC-APR-DRGs in this proposed rule, we are interested in receiving comments on this issue. We also wish to note that in the event the LTCH prospective payment system is implemented using LTC-DRGs, we could 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.

H. Recommendations by MedPAC for a LTCH Prospective Payment System

As we noted in the section I.A.5. of this proposed rule, since the establishment of the acute care hospital inpatient prospective payment system in 1983, the topic of post-acute 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 post-acute 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 post-acute services. The payment method for each service should be consistent across delivery sites. The Secretary should explore methods to control the volume of post-acute 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 post-acute 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's) 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(a) of BIPA mandates that the Secretary examine the feasibility and impact of basing payments to LTCHs using the existing DRGs, modified to account for the resource use of LTCH patients. Thus, Congress mandated systems that would result in different payments, depending on the site of service, and not a system that is uniform across sites.

Notwithstanding the mandate to establish post-acute care prospective payment systems, MedPAC continued to articulate concern regarding the overlap of services among post-acute 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 post-acute settings, indicate the need for continued monitoring and analysis of post-acute 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 post-acute care settings.” (Recommendation 5A, p. 82)

Section 123 of 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 BIPA, which directed the Secretary to examine a number of payment adjustment factors and establishes a default system if the Secretary is unable to meet the implementation timetable.

As we develop the prospective payment system for LTCHs described in this proposed rule, however, we wish to state that we do not believe that the establishment of distinct prospective payment systems for each post-acute 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 post-acute 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 this 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 post-acute settings.

I. Evaluated Options for the Proposed Prospective Payment System for LTCHs

Section 123 of BBRA and section 307(b) of BIPA establish the statutory authority for the development of the proposed prospective payment system for LTCHs that is discussed in this proposed 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 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.

In the event that we are unable to meet the implementation deadline of October 1, 2002, a default system will be implemented in which the payment is based on existing hospital DRGs, modified where feasible to account for resource use of LTCH patients. This default system would be based on the most recently available hospital discharge data for such services furnished on or after that date.

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 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 proposed prospective payment system for LTCHs. First, we analyzed the data and empirical facts about LTCH patients and providers summarized in section I.E. of this proposed rule. Secondly, in light of this information, we analyzed each option based on regressions and simulations, using the data sets described in section I.D. of this preamble.

Both technical and proposed policy considerations were important in these design proposals. We reviewed features of other recent prospective payment systems designed or implemented by CMS for other post-acute 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 proposed prospective payment system for LTCHs presented in this proposed 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 I.E. of this preamble.

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

• Consideration of recommendations in MedPAC's reports to Congress on post-acute care.

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

Additionally, as we deliberated on the choice of the specific model of DRG-based system we are proposing to use for the LTCH prospective payment system, we consulted with LTCH physicians and LTCH representatives.

II. General Discussion of the Proposed LTCH Prospective Payment System

A. Goals of the Proposed LTCH Prospective Payment System

We have designed the proposed prospective payment system for LTCHs in this proposed rule 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.

B. Applicability of the Proposed LTCH Prospective Payment System

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 as a LTCH for purposes of payment are set forth in existing § 412.23(e), which 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 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.

Results of our research on LTCHs, as set forth in section I.D. of this preamble, have suggested the following particular issue that we have evaluated and are proposing to address concurrent with the proposed implementation of the proposed LTCH prospective payment system:

Proposed 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 extremely broad discretion in determining the average inpatient length of stay for hospitals for purposes of determining whether a hospital warrants exclusion from the prospective payment system in 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.

Our data have revealed that approximately 52 percent of Medicare patients at LTCHs have lengths of stay of less than

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of the average length of stay for the proposed LTC-DRGs in this proposed rule, 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 furnish “long-term care” on average 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 proposed LTCH prospective payment system, the proposed LTC-DRG weights and proposed standard Federal payment rate are based on the charges and costs of LTCH patients, which are typically more medically complex and more costly than acute care hospital patients.

Since the proposed LTCH prospective payment system would result in higher per discharge payments for LTCHs than payments under the acute care hospital inpatient prospective payment system for patients that would group into identical DRGs under each system, we believe that under 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 since if the average length of stay of patients at a hospital would not reach the mandatory 25-days threshold for designation as a LTCH unless non-Medicare patients are included in the calculation, the hospital would be paid for its Medicare patients under the acute care hospital inpatient prospective payment system. Therefore, if a hospital is not treating Medicare patients that, on average, require the more costly services offered at LTCHs that differentiate these hospitals from acute care hospitals, we believe that Medicare payments should be determined under the acute care hospital inpatient prospective payment system. Such payments would be lower for each DRG than would be paid for under the LTC-DRG system, reflecting the lower costs of acute care hospitals.

Under the current TEFRA 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 proposed LTCH prospective payment system, which is based on average costs of treatment for particular diagnosis, the hospital would receive prospective payments based on such average costs for these much shorter length of stay patients. Even under our proposed short-stay outlier policy, as described in section IV.B.2. of this proposed rule, the hospital would have the opportunity to be paid 150 percent of its costs.

Therefore, under our broad authority in the statute to determine the average inpatient length of stay, we are proposing to specify that we would include the hospital's Medicare patients, but not non-Medicare patients, in determining the average inpatient length of stay (proposed § 412.23(e)(2)) for purposes of section 1886(d)(1)(B)(iv)(I) of the Act. In proposing this change in policy, we believe 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 would be paid under the hospital inpatient prospective payment system. Furthermore, changing the methodology for determining the average inpatient length of stay to be based only on Medicare patients is consistent with the intent of our proposed very short-stay discharge policy (described in section IV.B.1. of this proposed rule) and our proposed short-stay outlier policy (described in section IV.B.2. of this proposed rule), which are also intended to discourage LTCHs under the proposed prospective payment system from treating Medicare patients that do not require the more costly resources of LTCHs and who could reasonably be treated in acute care hospitals.

We would monitor the types of hospitals that would qualify as LTCHs based on this proposed definition. It is possible that hospitals that currently qualify as either rehabilitation hospitals or psychiatric hospitals would also qualify as LTCHs under this proposed revised criteria, and could be paid as LTCHs in order to maximize Medicare payments. We also would monitor whether the proposed change in methodology for measuring the average length of stay in LTCHs would result in unanticipated shifts of patients to those settings. If a pattern of these behaviors is observed, we believe it may be appropriate that Congress address the issues raised through a legislative change.

As indicated above, pursuant to our broad authority in the statute, we are proposing to change 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 proposing to change the methodology for purposes of section 1886(d)(1)(B)(iv)(II) of the Act (proposed § 412.23(e)). For purposes of the latter provision (subclause (II)), we are proposing to retain the current methodology (which includes non-Medicare as well as Medicare patients) because we believe that the considerations underlying the proposed change in methodology for subclause (I) are not present under subclause (II). As discussed above, we are proposing to revise the methodology for purposes of the general definition of LTCH under subclause (I) because it has come to our attention that some hospitals that might not warrant exclusion from the prospective payment system have nevertheless obtained status as excluded hospitals under the current methodology. 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 proposed change in methodology for determining the average inpatient length of stay would better identify the hospitals that Congress intended to exclude under subclause (II). Therefore, at this time, we are proposing to retain the current methodology for purposes of subclause (II).

C. LTCHs Not Subject to the Proposed LTCH Prospective Payment System

We are proposing that only hospitals qualifying as LTCHs under the proposed revised criteria described in section II.B.

of this proposed rule and in proposed revised § 412.23(e) by October 1, 2002, would be subject to the proposed LTCH prospective payment system. (This proposed system is summarized below in section II.D. and described in detail in section IV. of this proposed rule.) Our proposed treatment of hospitals first qualifying as LTCHs after October 1, 2002, is addressed in section IV.H. of this proposed rule.

The following hospitals are paid under special payment provisions, as described in existing § 412.22(c) and, therefore, would not be subject to the proposed 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)).

• Nonparticipating hospitals furnishing emergency services to Medicare beneficiaries.

D. Summary Description of the Proposed LTCH Prospective Payment System

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 are proposing to implement a prospective payment system for LTCHs that would replace the current reasonable cost-based payment system under TEFRA. The proposed prospective payment system would utilize 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, as described below.

1. Procedures

We are proposing that, upon the discharge of the patient from a LTCH, the LTCH would assign appropriate diagnosis and procedure codes from the International Classification of Diseases, Ninth Revision, Clinical Modification (ICD-9-CM). The LTCH would then enter these codes on the current Medicare claims form and submit the completed claims form to its Medicare fiscal intermediary. At present, the standard Medicare claims form is the UB-92. 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. The Medicare fiscal intermediary would 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 would require further review before classification into a proposed LTC-DRG (described in sections II.D.2. and III. of this proposed rule).

After screening through the MCE, each claim would 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 would 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 proposing to provide opportunity for the LTCH to review the LTC-DRG assignments made by the fiscal intermediary (proposed § 412.513(c)). A hospital would 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 would be allowed to submit additional information as part of its request. The fiscal intermediary would review that hospital's request and any additional information and would decide whether a change in the LTC-DRG assignment is appropriate. If the intermediary decides that a different LTC-DRG should be assigned, the case would be reviewed by the appropriate Peer Review Organization (PRO) as specified in § 476.71(c)(2). Following this 60-day period, the hospital would not be able to submit additional information with respect to the LTC-DRG assignment or otherwise revise its claim.

The operational aspects and instructions for completing and submitting Medicare claims under the LTCH prospective payment system will be addressed in a Medicare Program Memorandum once the final system requirements are developed and implemented.

2. Patient Classification Provisions

We are proposing a patient classification system called long-term care diagnosis-related groups (LTC-DRGs). The LTC-DRGs would classify patient discharges based on the principal diagnosis, up to eight additional diagnoses, and up to six procedures performed during the stay, as well as age, sex, and discharge status of the patient. We began the development of the proposed LTC-DRGs by using the CMS DRGs under the acute care hospital inpatient prospective payment system with the most recent data available. We address the issue of the use of proposed low volume LTC-DRGs (less than 25 LTCH cases) in determining the LTC-DRG weights. Further details of the proposed LTC-DRG classification system are discussed in section III. of this proposed rule.

3. Payment Rates

In accordance with section 123(a)(1) of Public Law 106-113, we are proposing to use a discharge as the payment unit for the proposed LTCH prospective payment system for Medicare patients. We would update these per discharge payment amounts annually. The proposed payment rates would encompass both inpatient operating and capital-related costs of furnishing covered inpatient LTCH services, including routine and ancillary costs, but not the costs of bad debts, approved educational activities, blood clotting factors, anesthesia services furnished by hospital-employed nonphysician anesthetists or obtained under arrangement, or the costs of photocopying and mailing medical records requested by a PRO, which are costs paid outside the prospective payment system. Consistent with current policy, beneficiaries may be charged only for deductibles, coinsurance, and noncovered services (for example, telephone and television). They may not be charged for the differences between the hospital's cost of providing covered care and the proposed Medicare LTCH prospective payment amount.

We are proposing to determine the LTCH prospective payment rates using relative weights to account for the variation in resource use among LTC-DRGs. During FY 2003, the LTCH prospective payment system would be “budget neutral” in accordance with section 123(a)(1) of Public Law 106-113. That is, total payments for LTCHs during FY 2003 would be projected to equal payments that would have been paid for operating and capital-related costs of LTCHs had this proposed new

payment system not been enacted. Budget neutrality is discussed in detail in section IV. of this preamble.

Based on our analysis of the data, we are proposing to make additional payments to LTCHs for discharges meeting specified criteria as “outliers.” For purposes of this proposed rule, outliers are cases that have unusually high costs, exceeding the LTC-DRG payment plus the fixed loss amount as discussed in section IV.D. of this proposed rule. In conjunction with a high cost outlier policy, we are proposing payment policies regarding very short-stay discharges, short-stay outliers, and interrupted stays. A detailed description of these proposed policies appears in section IV.B. of this preamble.

4. Limitation on Charges to Beneficiaries

In accordance with existing regulations and for consistency with other established hospital prospective payment systems policies, we are proposing to specify that a LTCH may not charge a beneficiary for any services for which payment is made by Medicare, even if the hospital's costs of furnishing services to that beneficiary are greater than the amount the hospital would be paid under the proposed LTCH prospective payment system (proposed § 412.507). We also are proposing to specify under proposed § 412.507 that a LTCH receiving a prospective 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 the existing regulations, and for items or services specified under § 489.20(a) of the existing regulations.

5. 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 are proposing to specify that a LTCH must have an agreement with a PRO to have the PRO 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 (proposed § 412.508(a)). In addition, we are proposing to require that, because payment under the proposed 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 proposing to apply the existing hospital requirements for the contents and filing of the physician acknowledgment statement (proposed § 412.508(b)).

Also, consistent with existing established hospital prospective payment system policies, we are proposing that if CMS determines, on the basis of information supplied by the PRO, 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 inpatient 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 would 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 would be referred to the Department's Office of Inspector General, for handling in accordance with 42 CFR 1001.301.

6. 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, we are proposing that a LTCH must furnish covered services to Medicare beneficiaries either directly or under arrangements. Under proposed § 412.509, we are proposing that the LTCH prospective payment would be payment in full for all inpatient hospital services, as defined in § 409.10 of the existing regulations. We also are proposing that we would 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).

7. Reporting and Recordkeeping Requirements

We are proposing to impose the same recordkeeping and cost reporting requirements of §§ 413.20 and 413.24 of the existing regulations on all LTCHs that would participate in the proposed LTCH prospective payment system (proposed § 412.511).

8. Implementation of the Proposed Prospective Payment System

We are proposing a 5-year transition period from cost-based reimbursement to prospective payment for LTCHs as discussed in section IV.G. of this proposed rule. During this period, two payment percentages would be used to determine a LTCH's total payment under the prospective payment system. The proposed blend percentages are as follows:

Cost reporting periods beginning on or after

Prospective payment federal rate percentage

Cost-based reimbursement 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 would consist of 80 percent of the amount based on the current cost-based reimbursement system and 20 percent of the proposed Federal prospective payment rate. The percentage of payment based on the LTCH prospective payment Federal rate would increase by 20 percent and the cost-based reimbursement rate percentage would 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 would be determined entirely under the proposed Federal prospective payment system methodology. Furthermore, we are proposing that

LTCHs would have the option to elect to be paid 100 percent of the Federal rate and not be subject to the 5-year transition. (See section IV.G. of this proposed rule.)

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

Section 307(b) of Public Law 106-554 requires 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.” The DRG-based patient classification system described in this section for the proposed LTCH prospective payment system would be based on the existing CMS DRG system used in the acute care hospital inpatient prospective payment system, modified where feasible to reflect the fact that LTCH patients represent a different patient mix from patients in short-term acute care hospitals, as required by section 307(b) of Public Law 106-554. Therefore, an understanding of pertinent facts about the CMS DRG system is essential to an understanding of the proposed LTC-DRGs that would be employed in the proposed LTCH prospective payment system.

A. Background

The design and development of DRGs began in the late 1960s at Yale University. The initial motivation for developing the DRGs was the creation of an effective framework for monitoring the quality of care and the utilization of services in a hospital setting. The first large-scale application of the DRGs as a basis for payments was in the late 1970s in New Jersey. New Jersey's State Department of Health used DRGs as the basis of a prospective payment system in which hospitals were reimbursed a fixed DRG-specific amount for each patient treated. In 1972, section 223 of Public Law 92-603 originally authorized the Secretary to set limits on costs reimbursed under Medicare for inpatient hospital services. In 1982, section 101(b)(3) of Public Law 97-248 required the Secretary to develop a legislative proposal for Medicare payments to hospitals, SNFs, and, to the extent feasible, other providers on a prospective basis. (See the September 1, 1983

Federal Register

(48 FR 39754).) In 1983, Title VI of Public Law 98-21 added section 1886(d) to the Act, which established a national DRG-based hospital prospective payment system for Medicare inpatient acute care services. (See the January 3, 1984

Federal Register

(49 FR 234).)

B. Historical Exclusion of LTCHs

Since the hospital inpatient DRG system had been developed from the cost and utilization experience of general acute care hospitals, it did not account for the resource costs for the types of patients treated in hospitals such as rehabilitation, psychiatric, and children's hospitals, as well as LTCHs and rehabilitation and psychiatric units of acute care hospitals. Therefore, the statute (section 1886(d)(1)(B) of the Act) excluded these classes of hospitals and units from the prospective payment system for general acute care hospitals. The excluded hospitals and units continued to receive payments based on costs subject to a cap on each facility's per discharge costs during a base year, with a yearly update as set forth in Public Law 97-248. (Cancer hospitals were added to the list of excluded hospitals by section 6004(a) of Pub. L. 101-239.)

C. Patient Classifications by DRGs

1. Objectives of the Classification System

The DRGs are a patient classification system that provides a means of relating the type of patients treated by a hospital (that is, its case-mix) to the costs incurred by the hospital. In other words, DRGs relate a hospital's case-mix to the resource demands and associated costs experienced by the hospital. Therefore, a hospital that has a more complex case-mix treats patients who require more hospital resources.

While each patient is unique, groups of patients have demographic, diagnostic, and therapeutic attributes in common that determine their level of resource intensity. Given that the purpose of DRGs is to relate a hospital's case-mix to its resource intensity, it was necessary to develop a way of determining the types of patients treated and to relate each patient type to the resources they consumed. In the development of the existing CMS DRGs, in order to aggregate patients into meaningful patient classes, it was essential to develop clinically similar groups of patients with similar resource intensity. The characteristics of a practical and meaningful DRG system were distilled into the following objectives:

• The patient characteristics should be limited to information routinely collected on hospital abstract systems.

• There should be a manageable number of DRGs encompassing all patients.

• Each DRG should contain patients with a similar pattern of resource intensity.

• DRGs should be clinically coherent, that is, containing patients who are similar from a clinical perspective.

Under a DRG-based system, patient information routinely collected include the following six data items: principal diagnosis, secondary or additional diagnoses, procedures, age, gender, and discharge status. All hospitals routinely collect this information; therefore, a classification system based on these elements could be applied uniformly across hospitals.

Limiting the number of DRGs to a manageable total (that is, hundreds of patient classes instead of thousands) ensures that, for most of the DRGs, hospital discharge data would allow for meaningful comparative analysis to be performed. If a hospital has a sufficient number of cases in particular DRGs, this will allow for evaluations and comparisons of resource consumption by patients grouped to those DRGs as compared to resources consumed by patients grouped to other DRGs. A large number of DRGs with only a few patients in each group would not provide useful patterns of case-mix complexity and cost performance.

The resource intensity of the patients in each DRG must be similar in order to establish a relationship between the case-mix of a hospital and the resources it consumes. (Similar resource intensity means that the resources used are relatively consistent across the patients in each DRG.) In implementing the original DRGs for the acute care hospital inpatient prospective payment system, we recognized that some variation in resource intensity would be present among the patients in each DRG, but the level of variation would be identifiable and predictable.

The last characteristic for an effective patient classification system is that the patients in a DRG are similar from a clinical perspective; that is, the definition of a DRG has to be clinically coherent. This objective requires that the patient characteristics included in the definition of each DRG be related to a common organ system or etiology, and that a specific medical specialty should typically provide care to the patients in a particular DRG.

2. DRGs and Medicare Payments

The LTC-DRGs that we are proposing as the patient classification component of the proposed LTCH prospective payment system would correspond to

the DRGs in the acute care hospital inpatient prospective payment system. As discussed in section IV.A.2. of this proposed rule, we are proposing to modify the CMS DRGs for the proposed LTCH prospective payment system by developing LTCH-specific relative weights to account for the fact that LTCHs generally treat patients with multiple medical problems. Therefore, we are presenting a brief review of the DRG patient classification system in the acute care hospital inpatient prospective payment system.

Generally, under the prospective payment system for short-term acute care hospital inpatient services, Medicare payment is made at a predetermined, specific rate for each discharge; that payment varies by the DRG to which a beneficiary's stay is assigned. Cases are classified into DRGs for payment based on the following six data elements:

(1) Principal diagnosis.

(2) Up to eight additional diagnoses.

(3) Up to six procedures performed.

(4) Age.

(5) Sex.

(6) Discharge status of the patient.

The diagnostic and procedure information from the patient's hospital record is reported by the hospital using ICD-9-CM codes on the uniform billing form currently in use.

Medicare fiscal intermediaries enter the clinical and demographic information into their claims processing systems and subject it to a front-end automated screening process called the Medicare Code Editor (MCE). These screens are designed to identify cases that require further review before assignment into a DRG can be made. During this process, cases such as the following are selected for further development:

• Cases that are improperly coded (for example, diagnoses are shown that are inappropriate, given the sex of the patient. Code 68.6, Radical abdominal hysterectomy, would be an inappropriate code for a male.).

• Cases including surgical procedures not covered under Medicare (for example, organ transplant in a nonapproved transplant center).

• Cases requiring more information. (For example, ICD-9-CM codes are required to be entered at their highest level of specificity. There are valid 3-digit, 4-digit, and 5-digit codes. That is, code 136.3, Pneumocystosis, contains all appropriate digits, but if it is reported with either fewer or more than 4 digits, it will be rejected by the MCE as invalid.)

• Cases with principal diagnoses that do not usually justify admission to the hospital. (For example, 437.9, Unspecified cerebrovascular disease. While this code is valid according to the ICD-9-CM coding scheme, a more precise code should be used for the principal diagnosis.)

After screening through the MCE and any further development of the claims, cases are classified into the appropriate DRG by a software program called the GROUPER using the six data elements noted above.

The GROUPER is used both to classify past cases in order to measure relative hospital resource consumption to establish the DRG weights and to classify current cases for purposes of determining payment. The records for all Medicare hospital inpatient discharges are maintained in the MedPAR file. The data in this file are used to evaluate possible DRG classification changes and to recalibrate the DRG weights during our annual update.

The DRGs are organized into 25 Major Diagnostic Categories (MDCs), most of which are based on a particular organ system of the body; the remainder involve multiple organ systems (such as MDC 22, Burns). Accordingly, the principal diagnosis determines MDC assignment. Within most MDCs, cases are then divided into surgical DRGs and medical DRGs. While we do not anticipate large numbers of surgical cases in LTCHs, surgical DRGs are assigned based on a surgical hierarchy that orders individual procedures or groups of procedures by resource intensity. Generally, the GROUPER does not recognize certain other procedures; that is, those procedures not surgical (for example, EKG), or minor surgical procedures generally not performed in an operating room and, therefore, not considered as surgical by the GROUPER (for example, 86.11, Biopsy of skin and subcutaneous tissue).

The medical DRGs are generally differentiated on the basis of diagnosis. Both medical and surgical DRGs may be further differentiated based on age, discharge status, and presence or absence of complications or comorbidities (CC). It should be noted that CCs are defined by certain secondary diagnoses not related to or inherently a part of the disease process identified by the principal diagnosis (for example, the GROUPER would not recognize a code from the 800.0x series, Skull fracture, as a comorbidity or complication when combined with principal diagnosis 850.4, Concussion with prolonged loss of consciousness, without return to pre-existing conscious level). Additionally, we would note that the presence of additional diagnoses does not automatically generate a CC, as not all DRGs recognize a comorbid or complicating condition in their definition. (For example, DRG 466, Aftercare without History of Malignancy as Secondary Diagnosis, is based solely on the principal diagnosis, without consideration of additional diagnoses for DRG determination.)

D. Proposed LTC-DRG Classification System for LTCHs

Unless otherwise noted, our analysis of a per discharge DRG-based patient classification system is based on LTCH data from the FY 2000 MedPAR file which contains hospital bills received through May 31, 2001, for discharges in FY 2000.

The proposed patient classification system for the proposed LTCH prospective payment system would be based on the hospital inpatient prospective payment system currently used for Medicare beneficiaries, as described in section III.C. of this proposed rule. Within the LTCH data set, as identified by provider number, we would classify all cases to the CMS DRGs. We identified individual LTCH cases with a length of stay equal to or less than 7 days (see section IV.B.1. of this preamble for a discussion of the proposed very short-stay discharge policy under § 412.527) and grouped them into two proposed very short-stay LTC-DRGs; one for psychiatric cases and one for all other cases. Therefore, the proposed patient classification system would consist of 501 DRGs that would form the basis of the proposed FY 2003 LTCH prospective payment system GROUPER. The 501 proposed LTC-DRGs include two DRGs for very short-stay discharges (

see

section IV.B.1.) and two error DRGs. The other 497 proposed LTC-DRGs are the same DRGs used in the hospital inpatient prospective payment system GROUPER for FY 2002 (version 18). Cases submitted to the fiscal intermediaries would be processed using the data elements, MCE, and the GROUPER system already in place for the acute care hospital inpatient prospective payment system as described above.

There is one significant difference in this proposed system that sets it apart from the concept of DRG definition based on clinical coherence. As noted above, cases with a length of stay equal to or less than 7 days (referred to hereafter as “very short-stay”) were identified and grouped together in two separate LTC-DRGs.

We are proposing to group cases that stayed 7 days or fewer that would otherwise be grouped into DRGs 424 through 432 in MDC 19 (Mental

Diseases and Disorders) or DRGs 433 through 437 in MDC 20 (Alcohol/Drug Use and Alcohol/Drug-Induced Organic Mental Disorders) into a new proposed psychiatric very short-stay group. We are proposing to classify all other cases that stayed 7 days or fewer, that is, very short-stay cases not classified into MDC 19 or 20, into the second new proposed very short-stay, nonpsychiatric group. Additionally, as in the acute care hospital inpatient prospective payment system, we are proposing to include two “error DRGs” in the LTC-DRG system where cases that cannot be assigned to valid DRGs will be grouped. These are DRG 469 (Principal diagnosis invalid as a discharge diagnosis) and DRG 470 (Ungroupable). (

See

66 FR 40062, August 1, 2001.) Therefore, the LTC-DRG system that we are proposing would include 4 nonclinical categories into which LTCH patients can be grouped.

E. ICD-9-CM Coding System

1. Historical Use of ICD-9-CM Codes

The Ninth Revision of the International Classification of Diseases, Clinical Modification, was adapted for use in the United States in 1979. This coding system is the basis for the CMS DRGs, upon which the proposed LTC-DRGs would be based. Additionally, the Standards for Electronic Transactions (65 FR 50312) designates the ICD-9-CM volumes 1 and 2 (including the official ICD-9-CM Guidelines for Coding and Reporting) as the standard medical data code set for capturing diseases, injuries, impairments, other health-related problems and their manifestations and causes. The ICD-9-CM volume 3 procedures (including the Official ICD-9-CM Guidelines for Coding and Reporting) have been adopted as the HIPAA standard code set for prevention, diagnosis, treatment, and management of actions taken for diseases, injuries, and impairments on hospital inpatients. These guidelines are available through a number of sources, including the following Web site:

http://www.cdc.gov/nchs/data/icdguide.pdf.

(We note that should the Secretary, in the future, adopt a different medical data code set for capturing diseases, injuries, or impairments, hospitals participating in the Medicare program would be required to use those codes.)

2. Uniform Hospital Discharge Data Set (UHDDS) Definitions

Because the assignment of a case to a particular proposed LTC-DRG would determine the amount that would be paid for the case, it is important that the coding is accurate. We are proposing that classifications and terminology used in the proposed LTCH prospective payment system would be consistent with the ICD-9-CM and the UHDDS, as recommended to the Secretary by the National Committee on Vital and Health Statistics (Uniform Hospital Discharge Data: Minimum Data Set, National Center for Health Statistics, April 1980) and as revised in 1984 by the Health Information Policy Council (HIPC) of the U.S. Department of Health and Human Services.

We wish to point out that the ICD-9-CM coding terminology and the definitions of principal and other diagnoses of the UHDDS are consistent with the requirements of the HIPPA Administrative Simplification Act of 1996 (see 45 CFR part 162). Furthermore, the UHDDS has been used as a standard for the development of policies and programs related to hospital discharge statistics by both governmental and nongovernmental sectors for over 30 years. Additionally, the following definitions (as described in the 1984 Revision of the Uniform Hospital Discharge Data Set, approved by the Secretary of Health and Human Services for use starting January 1986) are requirements of the ICD-9-CM coding system, and have been used as a standard for the development of the CMS DRGs:

• Diagnoses include all diagnoses that affect the current hospital stay.

• Principal diagnosis is defined as the condition established after study to be chiefly responsible for occasioning the admission of the patient to the hospital for care.

• Other diagnoses (also called secondary diagnoses or additional diagnoses) are defined as all conditions that coexist at the time of admission, that develop subsequently, or that affect the treatment received or the length of stay or both. Diagnoses that relate to an earlier episode of care that have no bearing on the current hospital stay are excluded.

All procedures performed would be reported. This includes those that are surgical in nature, carry a procedural risk, carry an anesthetic risk, or require specialized training.

As discussed in section II.D.l. of this proposed rule and consistent with the procedures for review of CMS DRGs under the acute care hospital inpatient prospective payment system, we are proposing to provide LTCHs with a 60-day window after the date of the notice of the initial LTC-DRG assignment to request review of that assignment. Additional information may be provided by the LTCH to the fiscal intermediary as part of that review.

3. Maintenance of ICD-9-CM System

In September 1985, the ICD-9-CM Coordination and Maintenance Committee was formed. This is a Federal interdepartmental committee, co-chaired by the National Center for Health Statistics (NCHS) and CMS, charged with maintaining and updating the ICD-9-CM system. The committee is jointly responsible for approving coding changes, and developing errata, addenda, and other modifications to the ICD-9-CM to reflect newly developed procedures and technologies and newly identified diseases. The committee is also responsible for promoting the use of Federal and non-Federal educational programs and other communication techniques with a view toward standardizing coding applications and upgrading the quality of the classification system.

The NCHS has lead responsibility for the ICD-9-CM diagnosis codes included in the Tabular List and Alphabetic Index for Diseases, while CMS has lead responsibility for the ICD-9-CM procedure codes included in the Tabular List and Alphabetic Index for Procedures.

The committee encourages participation in the above process by health-related organizations. In this regard, the committee holds public meetings for discussion of educational issues and proposed coding changes. These meetings provide an opportunity for representatives of recognized organizations in the coding field, such as the American Health Information Management Association (AHIMA) (formerly American Medical Record Association (AMRA)), the American Hospital Association (AHA), and various physician specialty groups, as well as physicians, medical record administrators, health information management professionals, and other members of the public to contribute ideas on coding matters. After considering the opinions expressed at the public meetings and in writing, the committee formulates recommendations, which then must be approved by the agencies.

The committee presents proposals for coding changes at two public meetings per year held at the CMS Central Office located in Baltimore, Maryland. The agenda and date of the meeting can be accessed on the CMS Web site at:

http://www.cms.gov/medicare/icd9cm.htm.

After consideration of public comments received at both meetings, as well as in writing, coding changes are published by CMS in the annual proposed and final rules in the

Federal

Register

on Medicare program changes to the short-term acute care hospital inpatient prospective payment systems. For example, new codes effective for discharges on or after October 1, 2001, can be found in Tables 6A through 6F of the August 1, 2001 hospital inpatient prospective payment system and rates for FY 2002 final rule (66 FR 40063 through 40066).

All changes to the ICD-9-CM coding system that affect DRG assignment are addressed annually in the acute care hospital inpatient prospective payment system proposed and final rules. Since the proposed DRG-based patient classification system for the proposed LTCH prospective payments system is based on the acute care hospital inpatient prospective payment system DRGs, these changes would also affect the proposed LTCH prospective payment system DRG patient classification system. As coding changes may have an impact on DRG assignment, LTCHs would be encouraged to obtain and correctly use the most current edition of the ICD-9-CM codes. The official version of the ICD-9-CM is available on CD-ROM from the U.S. Government Printing Office. The FY 2002 version can be ordered by contacting the Superintendent of Documents, U.S. Government Printing Office, Dept. 50, Washington, DC 20402-9329, telephone: (202) 512-1800. The stock number is 017-022-01510-2, and the price is $22.00. In addition, private vendors also publish the ICD-9-CM.

Copies of the Coordination and Maintenance Committee minutes can be obtained from the CMS Web site at:

http://www.cms.gov/medicare/icd9cm.htm.

We encourage commenters to address suggestions on coding issues involving diagnosis codes to: Donna Pickett, Co-Chairperson, ICD-9-CM Coordination and Maintenance Committee, NCHS Room 1100, 6525 Belcrest Road, Hyattsville, MD 20782. Comments may be sent by e-mail to:

dfp4@cdc.gov.

Questions and comments concerning the procedure codes should be addressed to: Patricia E. Brooks, Co-Chairperson, ICD-9-CM Coordination and Maintenance Committee, CMS, Center for Medicare Management, Purchasing Policy Group, Division of Acute Care, Mail Stop C4-08-06, 7500 Security Boulevard, Baltimore, MD 21244-1850. Comments may be sent by e-mail to:

pbrooks@cms.hhs.gov.

As noted above, the ICD-9-CM code changes that have been approved would become effective at the beginning of the Federal fiscal year, October 1. Of particular note to LTCHs would be the invalid diagnosis codes (Table 6C) and the invalid procedure codes (Table 6D). Use of invalid codes would cause claims to fail the MCE screens.

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

The emphasis on the need for proper coding cannot be overstated. Inappropriate coding of cases can adversely affect the uniformity of cases in each LTC-DRG and produce inappropriate weighting factors at recalibration.

Because of our concern with correct coding practice, we have been working with the AHA editorial advisory board for its publication “Coding Clinic for ICD-9-CM” since 1984. Coding Clinic was developed to improve the accuracy and uniformity of medical record coding and is recognized in the industry as the definitive source of coding instruction. In 1987, the AHA created the cooperating parties, who have final approval of the coding advice provided in Coding Clinic. The cooperating parties consist of the AHA, the AHIMA (formerly the AMRA), CMS (formerly HCFA), and NCHS. As we participate on the editorial advisory board and are one of the cooperating parties, we support the use of Coding Clinic for coding advice for LTCHs. Information about Coding Clinic can be obtained from the American Hospital Association, Central Office on ICD-9-CM, One North Franklin, Chicago, IL 60606, or at its Web site at

http://www.ahacentraloffice.org.

Even though we recognize that the

Federal Register

may not be the most efficient vehicle for coding instruction, we believe it is important to briefly review some of the basic instructions for coding. Our compelling need is based on the review of the data submitted by LTCHs. We note that the logic of the care patterns or place of treatment should not be considered in reviewing the following scenarios. Rather, we are attempting to present simplistic examples to illustrate correct coding practice.

• Principal diagnosis—As noted above, the specific definition for principal diagnosis established by the 1984 Revision of the Uniform Hospital Discharge Data Set is “the condition established after study to be chiefly responsible for occasioning the admission of the patient to the hospital for care.” When a patient is discharged from an acute care facility and admitted to a LTCH, the appropriate principal diagnosis at the LTCH is not necessarily the same diagnosis for which the patient received care at the acute care hospital. For example, a patient who suffers a stroke (code 436, Acute, but ill-defined, cerebrovascular disease) is admitted to an acute hospital for diagnosis and treatment. The patient is then transferred to a LTCH for further treatment of left-sided hemiparesis and dysphasia. The appropriate principal diagnosis at the LTCH would be a code from section 438 (Late effects of cerebrovascular disease), such as 438.20 (Late effects of cerebrovascular disease, Hemiplegia affecting unspecified side) or 438.12 (Late effects of cerebrovascular disease, Dysphasia).

Coding guidelines state that the residual condition is sequenced first followed by the cause of the late effect. In the case of cerebrovascular disease, the combination code describes both the residual of the stroke (for example, speech or language deficits or paralysis), and the cause of the residual (the stroke)). Code 436 would only be used for the first (initial) episode of care for the stroke that was in the acute care setting.

• Other diagnoses—Secondary diagnoses that have no bearing on the LTCH stay would not be coded. For example, a patient who has recovered from pneumonia during a previous episode of care would not have a diagnosis code for pneumonia included in his or her list of discharge diagnoses. The pneumonia was not treated during this LTCH admission and, therefore, has no bearing on this case.

• Procedures—Codes reflecting procedures provided during a previous acute care hospital stay would not be included because the procedure was not performed during this LTCH admission. For example, a patient with several chronic illnesses is admitted to an acute care hospital with a diagnosis of appendicitis for which he or she receives an appendectomy. The patient subsequently is transferred to a LTCH for medical treatment following surgery, and as a result of the multiple secondary conditions, the patient needs a higher level of care than he or she could receive at a SNF or at home with an HHA. In this situation, appendicitis would not be coded because this condition was resolved with the removal of the appendix. The procedure code for appendectomy would not be used on the LTCH record, as the procedure was performed in the acute care setting, not during the LTCH admission.

We would train fiscal intermediaries and providers on the new system prior to its implementation. We also would issue manuals containing procedures as well as coding instructions to LTCHs and fiscal intermediaries following the publication of the final rule.

IV. Proposed Payment System for LTCHs

The LTCH prospective payment system proposed in this rule would use Federal prospective payment rates across 501 proposed distinct LTC-DRGs. We are proposing to establish a standard Federal payment rate based on the best available LTCH cost data. LTC-DRG relative weights would be applied to the standard Federal rate to account for the relative differences in resource use across the LTC-DRGs. The proposed system would also include an adjustment for very short-stay discharges, short-stay outliers, and high-cost outlier cases, as described in section IV.B. of this preamble.

The proposed standard Federal prospective payment rate, which is the basis for determining proposed Federal payment rates for each proposed LTC-DRG, would be determined based on average costs from a base period, and also would reflect the combined aggregate effects of the proposed payment weights and other proposed policies discussed in this section. In discussing the proposed methodology, we begin by describing the various adjustments and factors that would serve as the input used in establishing the proposed standard Federal prospective payment rate. Accordingly, we are proposing to develop prospective payments for LTCHs using the following major steps:

• Develop the LTC-DRG relative weights.

• Determine appropriate payment system adjustments.

• Calculate the budget neutral standard Federal prospective payment rate.

• Calculate the Federal LTC-DRG prospective payments.

A detailed description of each step and a discussion of our proposed policies for special cases, phase-in implementation, and other policies follows.

A. Development of the Proposed LTC-DRG Relative Weights

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

As previously stated, one of the primary goals for the implementation of the proposed LTCH prospective payment system would be to pay each LTCH an appropriate amount for the efficient delivery of care to Medicare patients. The system must be able to account adequately for each LTCH's case-mix in order to ensure both fair distribution of Medicare payments and access to adequate care for beneficiaries whose care is more costly. To accomplish these goals, we are proposing to adjust the standard Federal prospective payment system rate by the LTC-DRG relative weights in determining payment to LTCHs for each case.

In this proposed payment system, relative weights for each LTC-DRG would be a primary element used to account for the variations in cost per discharge and resource utilization among the payment groups (proposed § 412.515). To ensure that Medicare patients classified to each proposed LTC-DRG would have access to an appropriate level of services and to encourage efficiency, we are proposing to calculate a relative weight for each LTC-DRG that represents the resources needed by an average inpatient LTCH case in that LTC-DRG. For example, cases in a LTC-DRG with a relative weight of 2 would, on average, cost twice as much as cases in a LTC-DRG with a weight of 1.

To calculate the proposed relative weights, we obtained charges from FY 2000 Medicare bill data in the June 2001 update of the MedPAR and we used version 18.0 of the CMS GROUPER (used under the hospital inpatient prospective payment system for FY 2001). In the final rule, we would recalculate the relative weights based on the most recent MedPAR data and version 19.0 of the CMS GROUPER (used under the hospital inpatient prospective payment system for FY 2002). By nature LTCHs often specialize in certain areas, such as ventilator-dependent patients and rehabilitation and wound care. Some case types (DRGs) may be treated, to a large extent, in hospitals that have, from a perspective of charges, relatively high (or low) charges. Such nonarbitrary distribution of cases with relatively high (or low) charges in specific LTC-DRGs has the potential to inappropriately distort the measure of average charges. To account for the fact that cases may not be randomly distributed across LTCHs, we are proposing to use a hospital-specific relative value method to calculate relative weights. We believe this method would remove this hospital-specific source of bias in measuring average charges. Specifically, we would reduce the impact of the variation in charges across providers on any particular LTC-DRG relative weight by converting each LTCH's charge for a case to a relative value based on that LTCH's average charge. As MedPAC noted in its June 2000 Report to Congress, the hospital-specific relative value method eliminates distortion in the weights due to systematic differences among hospitals in the level of charge markups or costs (p. 58). The case-mix index is the average case weight (adjusted to eliminate the effect of short-stay outliers that are described in section IV.B.2. of this preamble) for cases at each LTCH.

Under the hospital-specific relative value method, we would standardize charges for each LTCH by converting its charges for each case to hospital-specific relative charge values and then adjusting those values for the LTCH's case-mix. The adjustment for case-mix is needed to rescale the hospital-specific relative charge values (which average 1.0 for each LTCH by definition). The average relative weight for a LTCH is its case-mix, so it is reasonable to scale each LTCH's average relative charge value by its case-mix. In this way, each LTCH's relative charge values will be adjusted by its case-mix to an average that reflects the complexity of the cases it treats relative to the complexity of the cases treated by all other LTCHs (the average case-mix of all LTCHs).

We would standardize charges for each case by first dividing the adjusted charge for the case (adjusted for short-stay outliers as described in section IV.B.2. of this proposed rule) by the average adjusted charge for all cases at the LTCH in which the case was treated. The average adjusted charge would reflect the average intensity of the health care services delivered by a particular LTCH and the average cost level of that LTCH. The resulting ratio would be multiplied by that LTCH's case-mix index to determine the standardized charge for the case.

Multiplying by the LTCH's case-mix index accounts for the fact that the same relative charges are given greater weight in a hospital with higher average costs than they would at a LTCH with low average costs in order to adjust each LTCH's relative charge value to reflect its case-mix relative to the average case-mix for all LTCHs. Because we are proposing to standardize charges in this manner, we would count charges for a Medicare patient at a LTCH with high average charges as less resource intensive than they would be at a LTCH with low average charges. For example, a $10,000 charge for a case in a LTCH with an average adjusted charge of $17,500 reflects a higher level of relative resource use than a $10,000 charge for a case in a LTCH with the same case-mix, but an average adjusted charge of $35,000. We believe that the adjusted charge of an individual case would more accurately reflect actual resource use for an individual LTCH because the variation in charges due to systematic differences in the markup of charges among LTCHs is taken into account.

As explained in section III. of this proposed rule, we would group cases with a 7-day or fewer length of stay (very short-stay discharges under proposed § 412.527 described in section IV.B.1. of this preamble) into one of two proposed groups. We are proposing that discharges with a 7-day or fewer length of stay that would otherwise be grouped into DRGs 424 through 432 in MDC 19 (Mental Diseases and Disorders) or DRGs 433 through 437 in MDC 20 (Alcohol/Drug Use and Alcohol/Drug Induced Organic Mental Disorders) would be grouped into a proposed psychiatric very short-stay discharge group. All other very short-stay discharges would be grouped into the second very short-stay discharge, nonpsychiatric group. Each of these very short-stay discharge groups would have its own relative weight and an average length of stay computed using the same methodology used to determine the relative weights for the “regular” (length of stay greater than 7 days) LTC-DRGs.

In addition, in order to account for LTC-DRGs with low volume (that is, with fewer than 25 LTCH cases), we would group those low volume LTC-DRGs into one of five categories (quintiles) based on average charges, for the purposes of determining relative weights. Using LTCH cases from the June 2001 update of the FY 2000 MedPAR, we identified 188 LTC-DRGs that contained between 1 and 24 cases. This list of LTC-DRGs was then divided into one of the five low volume quintiles, each containing a minimum of 37 LTC-DRGs (188/5 = 37 with 3 LTC-DRGs as a remainder). We made an assignment to a specific quintile by sorting the 188 low volume DRGs in ascending order by average charge. Since the number of LTC-DRGs with less than 25 LTCH cases is not evenly divisible by five, the average charge of the low volume LTC-DRG was used to determine which quintiles received an additional LTC-DRG. After sorting the 188 volume LTC-DRGs in ascending order, the first fifth of low volume (37) LTC-DRGs with the lowest average charge are grouped into Quintile 1. Since the average charge of the next LTC-DRG (38th in the sorted list) is closer to the previous LTC-DRG's average charge (assigned to Quintile 1) than to the average charge of the 39th LTC-DRG on the sorted list (to be assigned to Quintile 2), it is placed into Quintile 1. This process was repeated through the remaining low volume LTC-DRGs so that 3 quintiles contained 38 LTC-DRGs and 2 quintiles contained 37 LTC-DRGs. The highest average charge cases would be grouped into Quintile 5. In order to determine the proposed relative weights for the 188 LTC-DRGs with low volume, we used the five low volume quintiles described above. The composition of each of the five low volume quintiles shown below in Table 2 would be used in determining the proposed LTC-DRG relative weights. We would determine a proposed relative weight and average length of stay for each of the proposed five low volume quintiles using the formula applied to the regular LTC-DRGs (25 or more cases), as described in section IV.A.2 of this proposed rule. We would assign the same relative weight and average length of stay to each of the proposed LTC-DRGs that make up that proposed low volume quintile. We note that as this proposed system is dynamic, it is entirely possible that the number and specific type of LTC-DRGs with a low volume of LTCH cases would vary in the future. We would use the best available claims data in the MedPAR to identify low volume LTC-DRGs and to calculate the relative weights based on our proposed methodology.

Table 2.—Composition of Proposed Low Volume Quintiles

LTC-DRG

Description

Proposed Quintile 1

45

NEUROLOGICAL EYE DISORDERS

47

OTHER DISORDERS OF THE EYE AGE >17 W/O CC

53

SINUS & MASTOID PROCEDURES AGE >17

55

MISCELLANEOUS EAR, NOSE, MOUTH & THROAT PROCEDURES

69

OTITIS MEDIA & URI AGE >17 W/O CC

149

MAJOR SMALL & LARGE BOWEL PROCEDURES W/O CC

158

ANAL & STOMAL PROCEDURES W/O CC

160

HERNIA PROCEDURES EXCEPT INGUINAL & FEMORAL AGE >17 W/O CC

161

INGUINAL & FEMORAL HERNIA PROCEDURES AGE >17 W CC

171

OTHER DIGESTIVE SYSTEM O.R. PROCEDURES W/O CC

178

UNCOMPLICATED PEPTIC ULCER W/O CC

219

LOWER EXTREM & HUMER PROC EXCEPT HIP, FOOT, FEMUR AGE >17 W/O CC

252

FX, SPRN, STRN & DISL OF FOREARM, HAND, FOOT AGE 0-17

257

T

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