CMS published the proposed rules on March 22, 2002. As the October implementation deadline approaches, LTAC hospitals, as well as acute care hospitals considering LTAC development, will now be able to better plan for the future. This article will attempt to:

• Provide a historical perspective of the evolution of LTAC facilities

• Summarize the new PPS methodology under which LTACs will be paid

• Evaluate the effect the proposed rules will have on the development of LTACs and the industry.

The evolution of Long Term Acute Care (LTAC) facilities actually began prior to the establishment of the DRG based acute care hospital Prospective Payment System. Many communities had limited options for patients that continued to need high acuity medical care for months at a time. Many of these hospitals were originally TB sanatoriums or polio hospitals; later they focused on "chronic" acute care patients thereby continuing to be valuable community resources.

In the 1980s, most exempt LTACs were "free-standing" hospitals that essentially functioned as chronic care, psychiatric or rehabilitation facilities; sometimes all three services were provided under one roof. Some facilities evolved to manage a mix of patients including ventilator dependent, rehabilitation, psychiatry, and even end of life care. In the early 1990's a small number of proprietary healthcare companies capitalized on the LTAC concept and built a number of freestanding, high cost (high TEFRA capped) hospitals. These facilities broadened their acuity base from chronic care to include a high acuity patient, including long-term intensive care patients. Although the patient base was largely Medicare, these hospitals could negotiate favorable reimbursement contracts for catastrophic insurance cases.

Hospital Within A Hospital

Unlike the exempt rehabilitation or psychiatric facility that could be either a hospital or a hospital unit, HCFA requires that an LTAC facility be a hospital. They also created unique ownership and control requirements that make it difficult for a traditional acute care hospital to own and operate its own exempt LTAC facility. Therefore, several companies emerged that provide LTAC services by means of a "hospital within a hospital" business model. These companies create licensed hospitals that are separate organizations from the host (acute care) hospital. Using a leaser - lessee relationship, the LTAC company leases square footage (or beds) and purchases services from the "host" hospital. However, the LTAC must continue to meet the 25-day length of stay criteria as well as the "separate and non-related" status requirement in relation to the host hospital. The latter requires that if more than 25% of the LTACs patients come from that host hospital, the LTAC cannot purchase more than 15% of its allowable operating costs from the host.

Clinically these hospitals within hospitals are able to move high acuity patients from acute care once they can demonstrate to the host medical staff that the LTAC can care for a medically complex t population. Many LTAC providers recruit ICU experienced nurses and other ancillary staff and "purchase" emergency response services from the host hospital.

These arrangements result in a win-win relationship between both parties. The host hospital receives lease payments for space that is otherwise not in use, as well as incremental revenue on ancillary services provided to the LTAC. The host also benefits from their ability to discharge patients that represent potentially large financial losses.

The LTAC is able to operate with low facility and overhead costs since there is little need to invest in the full array of acute care services. Additionally, capital costs related to building and equipment are minimal. Finally, the LTAC has faster access to critical care response and other clinical/diagnostic services than its freestanding counterparts do.

The New PPS for LTAC

With the publication of the proposed rules, the methodology for reimbursement is a compromise between traditional acute care PPS and other post-acute service PPS models such as rehabilitation and skilled nursing. Inherent in the model are two key variables, which drive reimbursement. These are the facility rate and the acuity (case) weight.

CMS developed a national base rate of $27,649 for LTAC prospective reimbursement. In determining the rate CMS conducted extensive regression analyses of the relationship between LTCH costs, including both operating and capital-related costs, and several other factors such as the percent of Medicaid patients treated, the percent of Supplemental Security Income (SSI) patients treated, geographic location, and the presence of medical education programs.

After considering all of these factors, only the cost of living adjustments for Hawaii and Alaska were recommended as adjustments for the facility rates. The proposed facility rate presented by CMS is the base of $27,649 adjusted downward by 5.1% to $26,239 in 2003. Only LTACs in Hawaii and Alaska will receive cost of living adjustments. Thus, under the proposed rules, with the exception of LTACs in two states, every LTAC will receive the same base payment. It is anticipated that this component will attract strong criticism during the current 60-day comment period.

The second key variable in the reimbursement calculation is the case weight (relative value) for each LTC-DRG. CMS used MedPAR (1999 and 2000); OSCAR (2000); and HCRIS (1998 and 1999) data of over 250 LTACs and 89,000 cases for its analysis. Proposed case weights range from 0.0827 (very short stay) to 3.2118 (Tracheostomy). Facilities will be paid (by Medicare) on a per discharge basis. For each discharge, the patient's LTC-DRG case weight will be applied to the facility rate. In order to avoid premature discharges, each LTC-DRG will have an "expected" length of stay associated with it.

CMS proposes three "outlier" situations for patients who do not meet the arithmetic mean length of stay requirements, each having a specific formula to calculate the payment. These outliers include very short stay outliers (length of stay less than 7 days), short stay outliers (length of stay 8 days to 2/3 the arithmetic mean), and short stay transfers (patients who are transferred to other Medicare certified beds and who return to the LTAC). The following table presents some common LTC-DRG's, along with their case weights, ALOS, minimum length of stay, and prospective payment amount. As shown, the payment amounts range from $21,572 for rehabilitation to $63,712 for respiratory patients requiring ventilators.

Table 1Common LTC-DRGs

Note: A complete listing of all cases by DRG that includes case weight and arithmetic mean length of stay can be found in Table 4 of the Federal Register of Friday, March 22, 2002.

The impact that PPS has on each LTAC facility will be based on how those individual hospitals manage patients. Fundamentally, those facilities that have low overhead costs per discharge and that manage patient costs to patient acuity will be the financial winners. The financial incentives in cost-based reimbursement were to manage direct and overhead costs close to the facility's TEFRA cap. Prospective Payment changes this strategy. Understanding each patient's medical needs and predicting the direct cost of the resources needed to treat the patient will be extremely important. Managing the patient resources and length of stay will drive financial success.

Should healthcare facilities consider LTAC?

Now that the proposed LTAC PPS rules have been promulgated, the time is right for hospitals and health systems to question if they should develop a Long Term Acute Care facility for their hospital/system. Hospitals should evaluate their potential need for LTAC services in light of the following:

• Their existing continuum of acute and post acute services
• The volume and diagnostic mix of patients staying longer than expected (greater than the geometric mean LOS per DRG)
• The potential impact of reducing these "excess" patient days
• ICU patient flows and bottlenecks
• The potential to profit from the use of existing unused space
• The obstacles for discharging patients to other levels of care within the continuum

The new PPS will allow providers to more accurately evaluate their markets for the type and volume of patients who would be candidates for an LTAC level of care. The shift from cost based TEFRA reimbursement to a method that more rationally matches patient resource needs with Medicare reimbursement will, in the end, create greater efficiency in the delivery system.

Once an organization determines that an LTAC makes sense for them, the make vs. buy decisions will typically be the first question. Depending on the corporate structure and ownership of the acute care hospital, some circumstances allow a hospital to develop an LTAC without the need for a third party. Determining this option should be the first step. In addition, a new LTAC must demonstrate a 25-day average length of stay for six months prior to receiving a Medicare exemption as an LTAC. During the six-month period, Medicare payment is the acute DRG. Thus, if an acute care hospital or health system decides to open its own LTAC, it must be able to assure a cost-effective 25 day demonstration period. Opening the LTAC as a rehabilitation hospital to minimize financial losses and then converting it to an LTAC after the 25 day LOS is demonstrated may be one option.

If an acute care hospital or health system does not wish to develop an LTAC itself, considering a partner is the next step. The partnership may be with a proprietary or a not-for-profit company. Structuring the partnership is also critical to its success both from a regulatory standpoint as well as from the operating structure within the health system of hospital. The solutions to these critical issues should be fully considered from the perspective of the organization's mission, values, clinical needs, medical staff preferences, and financial position.

LTAC is not a panacea for all post acute care needs. However, for some hospitals and health systems LTAC under PPS will make clinical and financial sense.