Cherilyn G. Murer, JD, CRA

In May 2010, the Centers for Medicare and Medicaid Services (CMS) issued its proposed rule to update Medicare inpatient prospective payment system (IPPS) hospital and LTACH payment and other policies for FY 2011. Also, in June 2010, a supplemental proposed rule was published, which implements changes in payments for inpatient stays in long-term care hospitals that were required by the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively known as the health reform law).

Under the proposed rule, as revised by the supplemental proposed rule, LTACH payments will increase by an estimated 0.3% in FY 2011. This increase includes a 2.4% market basket update, a 2.5% reduction for documentation and coding changes, and other policy changes, including a payment cut authorized by the Patient Protection and Affordable Care Act, and payment increases for high-cost outlier and short-stay outlier cases.

In other words, the supplemental proposed rule proposes that LTACHs receive a 2.4% inflation update, offset by an adjustment of -2.5% for the estimated increase in spending in FYs 2008 and 2009 due to documentation and coding that, according to CMS, did not reflect increases in patients’ severity of illness.

Despite this overall proposed 0.1% decrease in the standard federal rate, CMS estimates that the proposed rule will result in an overall increase in estimated payments of approximately $41 million (or about 0.8%). The increase is attributable to proposed changes to the area wage adjustment and estimated increases in high-cost outlier and short-stay outlier payments.

Specifically in regard to LTACHs, the supplemental proposed rule extends for an additional 2 years provisions of the Medicare, Medicaid, and SCHIP Extension Act of 2007 (MMSEA) affecting certain LTCHs and LTCH satellite facilities, including relief from payment adjustments for LTCHs whose admissions from co-located or non-co-located hospitals exceed a certain threshold (commonly referred to as the “25% Rule”).

Additionally, the moratorium on establishing new LTCHs and LTCH satellite facilities or expanding bed capacity in existing facilities is extended for another 2 years.


Details of Supplemental Proposed Rule for LTACH

Among other things, the supplemental proposed rule implements Affordable Care Act provisions that include the following provisions:

  • Reduces the FY 2011 LTCH PPS annual update by 0.5 percentage points;
  • Provides additional payments for hospitals in counties with low per-enrollee Medicare spending;
  • Revises the hospital wage index for hospitals in frontier states;
  • Expands eligibility for certain low-volume payment adjustments;
  • Revises geographic reclassification eligibility standards;
  • Establishes a national (rather than statewide) budget neutrality adjustment to the calculation of the rural floor for the hospital wage index;
  • Extends the Medicare Dependent Hospitals program; and
  • Adjusts payments to critical access hospitals for certain outpatient facility and ambulance services.

In addition to the supplemental proposed rule changes published in June 2010, on June 2, 2010, CMS published final wage indices, hospital reclassifications, payment rates, impacts, and other related tables effective for the fiscal year 2010 LTCH PPS, reflecting changes mandated by the Affordable Care Act applicable to rates during the remainder of FY 2010 (April 1, 2010, to September 30, 2010).

These provisions require the extension of the expiration date for certain geographic reclassifications and special exception wage indices through September 30, 2010, and certain market basket updates for the LTACH PPS.

The standard federal rate for discharges under LTCH PPS occurring on or after April 1, 2010, is revised to $39,794.95. This change reflects a decrease from $39,896.65 established in the original LTCH PPS rule for FY 2010. The revised standard federal rates described in the notice are effective for payment years beginning October 1, 2009, although hospitals will experience payment based only on the revised rate for discharges on or after April 1, 2010.


There has been some strong commentary to CMS on the proposed 2.5% reduction for documentation and coding changes by the medical community. In a letter to CMS, on June 18, 2010, the American Medical Association stated: “We believe CMS’ proposed documentation and coding adjustment is overstated and should be recalculated to address several key flaws. The methodology used to calculate the 2.5 percent reduction inflates the impact of provider documentation and coding on LTACH case-mix by failing to account for real increases in the acuity level of LTACH patients. Further, CMS’ methodology inappropriately fails to look at more than one set of patient claims in order to capture change in case-mix over time.”

Historically, CMS has incorporated changes in patient severity, or real case-mix change, into LTACH PPS adjustments for documentation and coding. CMS has imposed annual payment reductions for alleged LTACH coding and documentation since FY 2007. The rationale provided by CMS for the cuts in FYs 2007, 2008, and 2009 was the general need to “account for changes in coding practices that do not reflect increased patient severity.”

Key Points in 2011 Proposed LTACH Rules

  • A rate update for 2011 of 2.4%.
  • An offset or adjustment to the update of (negative) 2.5% to reflect an estimated increase in spending in FYs 08 and 09 due to documentation and coding that did not accurately reflect an increase in patient acuity or severity of illness (CMS stating that they essentially overpaid for a presumed higher level of care that did not occur). CMS also notes that it is holding off on a negative 3.9% adjustment to rates; an amount required by law for a full recoupment of funds paid out due to documentation and coding. This amount may be phased-in for future years or taken all at once.
  • Net effect of the rate update and the negative adjustment for recoupment is a negative .1%.
  • CMS proposes to increase the outlier threshold to $18,692 (last year’s was 7.5% or .5% below the target maximum of 8% of projected PPS payments).
  • The proposed rule calls for a partial freeze to any code updates for ICD-9 and ICD-10 (set to go into effect October 1, 2013). The freeze is intended to eliminate problems associated with coding software updates. Any new updates that are applied would occur after October 1, 2011, to reflect only new technologies or diseases.
  • CMS is estimating that the net effect of the above rate changes is an increase in payment to LTACHs of .8% or $41 million.

For FY 2007 through 2009 documentation and coding reduction calculations, CMS also used the results of its review of LTACH margins as justification for documentation and coding-related payment reductions. In the final rules for each of the 3 years, CMS quantified overall case-mix change and also estimated and subtracted the portion of total case mix that was attributable to real changes in patient severity. By subtracting real case-mix change, CMS applied a payment reduction for only the portion of overall case-mix change that the agency claimed was due to documentation and coding behavior.

For FY 2010, CMS introduced a new methodology for measuring LTACH case-mix change; it applied this method to the inpatient PPS as well. CMS’ justification for the FY 2010 documentation and coding reduction remained the same as in prior years; ie, to ensure that payments “accurately reflect changes in LTACHs’ true cost of treating patients, and should not be influenced by changes in documentation and coding that do not reflect increase in patients’ severity of illness.” The final rule also notes that the transition from the LTC-DRGs to the MS-LTC-DRGs, which began in FY 2008, was “a relevant factor” when determining the appropriate adjustment for documentation and coding.

According to the AMA, for FY 2011, CMS used flawed methodology to calculate a cumulative 2.5% LTACH case-mix change for FYs 2008 and 2009. The AMA argues that CMS’ calculation fails to quantify and adjust for the portion of overall case-mix change that is attributable to real case-mix change. The AMA believes the result is an inflated documentation and coding cut being proposed for FY 2011.

The AMA summarizes its commentary and criticism by stating: “The 2.5 percent reduction for documentation and coding imposes an excessive and unwarranted payment cut to LTACHs. The rule proposes a reduction in the LTACH standard payment below the FY 2010 level that will prevent LTACH payments from keeping up with inflation and increasing costs. Furthermore, the cumulative LTACH payment reductions for documentation and coding since rate year 2007, including the proposed FY 2011 cut, total 10.39 percent–an excessive reduction that is particularly unjustified when considering the stated methodology concerns. Cuts of this magnitude are creating an unsustainable environment for LTACHs and the patients they serve. We encourage CMS to adopt an alternative methodology that acknowledges historical trends in case-mix change and decreases this excessive documentation and coding-related reduction.”

As health care reform continues to take shape, providers must continue to monitor and evaluate financial and regulatory changes. While these changes are proposed rules and will be finalized in the August-September time frame, it is critical to prepare for the possibility of these changes for the 2011 fiscal year, starting on October 1, 2010. The fiscal management of hospital operations for LTACHs and all hospitals is more important than ever as the American health care delivery system evolves through the reform efforts.

Cherilyn G. Murer, JD, CRA, is CEO and founder of the Murer Group, a legal-based health care management consulting firm in Joliet, Ill, specializing in strategic analysis and business development. Murer is also a member of the editorial advisory board of Rehab Management. She can be reached at (815) 727-3355, or at