This writing sample is an example of complex research and analysis that I have experience in

authoring. It is about a rule governing Medicare payment for a specific type of hospital and

incorporates analysis of the relevant statutes and regulations, as of July 2014. The purpose of

the piece is to educate the relevant hospitals how this rule applies to them. I am submitting it

because it contains no privileged client information and because it illustrates my ability to analyze

and explain complex federal regulatory schemes.

-Matthew Dunne

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The 25% Rule for LTACHs: A Detailed Analysis

By Matthew Dunne

Introduction

In Fiscal Year (FY) 2005, the Centers for Medicare & Medicaid Services (CMS) established a

special payment adjustment policy for long-term acute care hospitals (LTACHs) commonly

known as the 25% rule. The rule was originally established in order to adjust Medicare

payments for LTACHs located within another hospital (referred to as a hospital within hospital

or HwH). This adjustment was made when too many patients came from the host-hospital

(defined as those in excess of 25% of the LTACH’s discharges). Medicare reimbursement for

discharges in excess of that threshold was to be adjusted to the lesser of payment under the

LTACH Prospective Payment System (LTACH PPS) or the Inpatient Prospective Payment System

(IPPS).

The belief was that this would ensure that LTACHs were not being used as a department of

their host hospitals, but rather as a separate, independent facility providing inpatient care for

extended periods. Over the years, the rule has been rewritten many times, the result of which

is that it has become exceedingly complicated in its application to individual LTACHs. Indeed,

even under the current rule the relevant threshold for payment adjustments is scheduled to be

modified in the coming years. Further complicating matters is recent legislation that could

replace the rule entirely. This article will review the origin, subsequent modifications, and

currents status of the 25% rule. It will also explain, in detail, how the rule applies to various

types of LTACHs.

The Creation of the 25% Rule and Subsequent Modifications

At the inception of the 25% rule there was a special dispensation for (1) rural LTACHs and (2)

when the admissions to the LTACH came from either the only other hospital in the

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Metropolitan Statistical Area (MSA) or a MSA-dominant hospital.1 In these cases, the threshold

was set at 50%. Other LTACHs under the rule were subject to the standard 25% threshold.

Subsequent to its introduction, the rule was expanded beyond HwH LTACHs. Specifically it came

to include LTACHs that are freestanding (not co-located with another hospital) and

grandfathered (co-located with another hospital and classified as a LTACH before September

20, 1995).2 The threshold for these facilities was set at 25%.

The Medicare, Medicaid, and SCHIP Extension Act of 2007 (MMSEA) modified the 25% rule

further by delaying its full implementation. The MMSEA was itself subject to further

adjustments by Congress in the American Recovery and Reinvestment Act of 2009 (ARRA), and

the Affordable Care Act of 2010 (ACA). While these legislative actions made numerous

alterations to the rule,3 those of greatest importance include a higher threshold for some HwH

LTACHs and a moratorium on the application of any threshold to freestanding or grandfathered

LTACHs.

The most recent modification to the rule, specifically the Bipartisan Budget Act of 2013 (BBA)

extended the delay in the full application of the rule until cost reporting years beginning on or

after October 1, 2017 (previously October 1, 2013). This kept in place the higher thresholds for

some HwH LTACHs; extended the exemption for freestanding LTACHs; and made permanent

the exemption for grandfathered LTACHs.

The Rule as it Currently Stands

At present the 25% rule is, in fact, a collection of rules, only some of which use a threshold of

25%. As such, the use of the term “25% rule” is something of a misnomer, albeit a useful one.

1 Per the rules, a MSA-dominant hospital is one that was responsible for more than 25% of the total hospital Medicare discharges in the MSA. 2 See Section 114(c)(1)(B) of the Medicare, Medicaid, and SCHIP Extension Act of 2007, which refers to Section 4417(a) of the Balanced Budget Act of 1997. Section 4417(a) applies to “[a] hospital that was classified by the Secretary on or before September 30, 1995, as a hospital described in clause (iv)” meaning an LTACH as described under Section 1886(d)(1)(B)(iv) of the Social Security Act. 3 For example, there was a delay in application for LTACHs co-located with provider-based locations of an IPPS hospital that did not deliver services payable under the IPPS at those campuses where the LTCHs or LTCH satellites were located.

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This is because the particular threshold applied to an individual LTACH is not always 25%. The

threshold used depends on several factors, including where the hospital is located, where its

admissions come from, and which cost reporting year (CRY) is at issue.

As explained above, grandfathered facilities are now permanently exempt from the 25% rule

and so we will focus on the application of the rule to LTACHs that are (1) freestanding or (2)

HwHs.4 It is useful at the outset of this analysis to explain precisely how a LTACH’s percentage is

calculated for purposes of the rule. First, it only applies to the LTACH’s Medicare inpatients.5

Second, Medicare patients on whose behalf a high cost outlier payment was made to the

referring hospital are not included in the calculation.6 Third, adjustments are only made for

discharges that cause a LTACH to go over the threshold.

Furthermore, the precise date when a LTACH starts its CRY matters greatly for purposes of

knowing when the rule goes into full effect. In many cases, the rule only applies in its entirety

for CRYs beginning on or after October 1, 2017. It must be stressed that the rule does not,

strictly speaking, apply to discharges after that date, rather to CRYs that begin after that date.

For example, if the LTACH’s CRY begins July 1, the rule would only come into full effect for

discharges on or after July 1, 2018 because that would be the first CRY beginning on or after

October 1, 2017.7

Given the underlying purpose of the rule one must also consider other changes recently made

to the LTACH PPS, namely the introduction of site-neutral payment scheme as part of the BBA.

Congress has intimated that site-neutral payments could replace the 25% rule. Indeed, the

latter was always intended as a stop-gap until LTACH admission criteria could be developed -

which the former goes some way toward doing. However, until this actually occurs LTACHs

should plan on complying with both the 25% rule and the site-neutral payment system.

4 The rule also applies to the satellite facilities of LTACHs. 5 See, e.g. 42 CFR § 412.536(b)(1). 6 See, e.g. 42 CFR § 412.536(b)(3). 7 The text of the regulations, specifically 42 CFR §§ 412.534 and 412.536, has not necessarily been updated following the passage of the BBA. These regulations still say October 1, 2013 rather than October 1, 2017 for when the rule goes into full effect and so do not reflect the changes made by the BBA.

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Freestanding LTACHs

The application of the 25% rule is relatively straightforward for freestanding LTACHs. These

LTACHs are temporarily exempted and so there is no threshold for discharges that these

facilities can cross that will necessitate an adjustment in their payments, at least for purposes

of the rule.

This exception will lapse in a few years, however. In general, for cost reporting years beginning

on or after October 1, 20178 the threshold for most freestanding LTACHs will be 25%. If the

LTACH is in a rural area, then the threshold is 50%.9 The rule is slightly more complicated when

the relevant admission comes from the only other hospital in the MSA (referred to as “urban

single” in the regulations) or a MSA-dominant hospital.10

For admissions from these hospitals, the threshold is equal to the percentage of total Medicare

discharges in the MSA attributable to the referring hospital (not the LTACH), but in no case less

than 25% or more than 50%.11 For example, if the referring MSA-dominant hospital had 35% of

all Medicare discharges in the MSA, then the LTACH would have its payments adjusted when

more than 35% of its discharges were admissions from the MSA-dominant hospital. If the MSA-

dominant hospital had 55% of all Medicare discharges the threshold for the LTACH would still

be only 50%.

Table 1: The Payment Adjustment Threshold under the 25% Rule for Freestanding LTACHs

Freestanding LTACHs

Type of Freestanding LTACH Relevant Threshold

LTACHs (General Rule)

Currently: No threshold CRYs on or after 10/1/2017: 25%

Rural LTACH Currently: No threshold CRYs on or after 10/1/2017: 50%

The other hospital is an urban single/MSA-dominant hospital

Currently: No threshold CRYs on or after 10/1/2017: 25%-50%

8 Note: The relevant regulation, 42 CFR § 412.536, still says October 1, 2013 and so does not reflect the changes made by the Balanced Budget Act. 9 42 CFR § 412.536(c)(1). 10 The rule counts LTACH discharges of patients who were admitted from another hospital. 11 42 CFR § 412.536(d)(2).

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LTACHs that are Hospitals within Hospitals

Like their freestanding counterparts, LTACHs that are HwHs have different thresholds

depending on whether they are rural or receive admissions from a MSA-dominant hospital.

Additionally, their payment adjustments will also be influenced by the October 1, 2017 date

which will, in many cases, require a lowering of their current thresholds.

Unlike freestanding LTACHs (which by definition are not co-located with another hospital), it

makes a significant difference to HwHs whether or not the admission comes from the hospital

with which it is co-located.

If the admission comes from a hospital other than the one with which it is co-located

then the LTACH is essentially treated as freestanding, except that the relevant thresholds

are in effect now, rather than having to wait for CRYs beginning on or after October 1,

2017 as would be the case for a true, free-standing LTACH.12

If the admission comes from the co-located hospital, the October 1, 2017 date does

matter. This is because a lower threshold than is currently in effect will apply for CRYs

beginning on or October 1, 2017.13

It is necessary to make further distinctions when the admission to the HwH LTACH comes from

the co-located hospital. For these admissions, the threshold for rural LTACHs and those co-

located with a MSA-dominant hospital is currently 75%. For CRYs beginning on or after October

1, 2017, the threshold will be lowered to 50% in the case of former and 25%-50% for the latter,

depending on the level of the host-hospital’s MSA dominance.14 In essence, the rules will be the

same as for freestanding LTACHs as of that date.

The rule is slightly more complicated for HwH LTACHs that are neither rural nor co-located with

a MSA-dominant hospital. For these hospitals the relevant question is when they became

12 42 CFR § 412.534(b)(2) makes clear that when the patient is admitted from a hospital not in the same building or campus, then 42 CFR § 412.536 applies, even if the LTACH in question is a HwH. 13 42 CFR § 412.534(b). 14 42 CFR § 412.534(d), (e).

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LTACHs. For those that were governed under the original 25% rule as passed in FY 200515 the

payment adjustment threshold is 50% now and will be 25% for CRYs beginning on or after

October 1, 2017.16 For those hospitals that were never subject to the original rule, i.e. became a

LTACH after October 1, 2004, the threshold is already 25%.17

Table 2: The Payment Adjustment Threshold under the 25% Rule for LTACH Hospital within Hospital

LTACH Hospital within Hospital

Where was the patient admitted from?

A co-located hospital Not a co-located hospital*

The other hospital is an urban single/MSA-dominant hospital

Currently: 75% CRYs on or after 10/1/2017: 25%-50%

25%-50%

The LTACH is rural Currently: 75% CRYs on or after 10/1/2017: 50%

50%

LTACH on or before 10/1/2004 Currently: 50% CRYs on or after 10/1/2017: 25%

25%

Not a LTACH on or before 10/1/2004

Currently: 25% CRYs on or after 10/1/2017: 25%

25%

* For admissions to a HwH LTACH from a hospital with which it is not co-located the relevant threshold does not

change for CRYs beginning on or after October 1, 2017.

Conclusion

The 25% rule has been modified to such an extent over the years that it hardly resembles its

original form although its original intent still holds. At present the rule is, in actuality, a

collection of rules that apply to various types of LTACHs based on the nature of the LTACH, the

source of the original admission, and the cost reporting year in question. Furthermore, one

should anticipate additional changes to the rule. For all these reasons, the application of the

25% rule is a complex process, heavily dependent on the facts of a given situation.

15 This means that they were paid under the LTACH PPS or began their 6-month qualifying period to become a LTACH on or before October 1, 2004 per 42 CFR § 412.534(g). 16 42 CFR § 412.534(c), (g). 17 42 CFR § 412.534(c)(2)(i).