May 9, 2007

Inpatient rehabilitation facilities (IRFs) are projected to receive approximately $6.3 billion in payments from the Medicare program in fiscal year (FY) 2008, under a proposed rule announced May 5 by the Centers for Medicare & Medicaid Services (CMS). The proposed rule would update payment rates and modify payment policies for services furnished to Medicare beneficiaries for discharges occurring on or after October 1, 2007 through September 30, 2008. The rule’s provisions are estimated to increase Medicare payments to approximately 1,234 IRFs in FY 2008 by approximately $150 million.

"Today’s proposed rule is designed to ensure accurate payments for intensive rehabilitation care provided to Medicare beneficiaries in IRFs," said Acting CMS Administrator Leslie V. Norwalk, Esq. "This continues Medicare’s commitment to support access to inpatient rehabilitation facility services while at the same time improving the appropriateness and consistency of payment for beneficiary care in all post acute settings." These settings include IRFs, skilled nursing facilities, home health care, and long-term care hospitals.

The proposed rule would increase the IRF payment rate by 3.3 percent, based on the rehabilitation, psychiatric, and long-term care hospital (RPL) market basket. The RPL market basket is designed to capture inflation in the costs of goods and services required to provide the specialized services offered by these facilities, similar to the market basket that applies to general acute care hospitals.

The IRF Prospective Payment System (PPS) was first implemented for cost reporting periods beginning on or after January 1, 2002. The objective of implementing a PPS for IRFs was to increase the accuracy of the payments made to the facilities for the resources they use to furnish care to Medicare beneficiaries, in addition to enhancing the efficient delivery of quality care. IRFs have received an increase in payment rates each Federal fiscal year since the IRF PPS was implemented.

The proposed rule would continue the existing phase-in to a 75 percent compliance threshold (75 Percent Rule), a requirement that when fully phased in requires that at least 75 percent of an IRF’s total inpatient population have one of the 13 designated medical conditions for which intensive inpatient rehabilitation services are medically necessary. The 75 percent rule was initially adopted in 1983 to distinguish those hospitals and hospital units which would be eligible for exemption from the inpatient prospective payment system (IPPS) and would continue to be reimbursed on a cost basis. Since the institution of the IRF PPS, CMS no longer reimburses IRFs on a cost basis. However, in general the IRF PPS provides higher payment levels than would be paid for these cases under the IPPS, thus the need to continue this important classification initiative.

CMS uses the start of a provider’s cost reporting period to determine which compliance threshold to apply to determine if a hospital should be classified as an IRF. For example, in accordance with Section 5005 of the Deficit Reduction Act of 2005 (DRA), the 60 percent threshold applies for cost reporting periods beginning during the 12-month period beginning on July 1, 2006. The compliance threshold increases to 65 percent for cost reporting periods beginning during the 12-month period beginning on July 1, 2007. For cost reporting periods beginning on and after July 1, 2008, of the compliance percentage is 75 percent.

Under the 75 percent rule, CMS regulations allow comorbidities that meet the regulatory criteria to be used to determine the compliance percentage for cost reporting periods that begin before July 1, 2008. This provision, adopted for IRFs with cost reports beginning on or after July 1, 2004 as part of a four year transition for the new provisions of the 75 percent rule, is scheduled to expire for cost reporting periods that will begin on or after July 1, 2008. Given the transitional nature of the provision, the proposed rule does not extend its application, but CMS is soliciting comments and research to support current policy or options to extend this provision for a specified time or to make it a permanent part of the IRF PPS policy.

 The proposed rule would increase the high-cost outlier threshold to $7,522 from $5,534 in FY 2007, based on an analysis of 2005 data which indicates that this threshold would maintain estimated outlier payments at 3 percent of total payments under the IRF PPS. Although the higher threshold would mean that fewer cases would qualify for outlier payments, a lower outlier threshold would require an across-the-board reduction in the base payment for an IRF stay in order to maintain budget neutrality. The high-cost outlier threshold may be updated for the final rule based on analysis of 2006 data. The proposed rule would also clarify that short-stay transfer cases that meet the criteria to qualify for outlier payments are eligible to receive the additional payments.

Finally, the proposed rule would modify the wage index methodology as it applies to IRFs in certain rural areas where no hospitals exist to generate wage index data. The proposed rule would provide for CMS to use an average wage index from all contiguous Core Based Statistical Areas as a reasonable proxy for the wage index in the rural area.

Comments on the proposed rule will be accepted until July 2, and a final rule will be issued later this year. Additional information about the IRF proposed rule is posted on the CMS web site at: