[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]




 
                     LONG-TERM ACUTE CARE HOSPITALS

=======================================================================

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 15, 2006

                               __________

                           Serial No. 109-70

                               __________

         Printed for the use of the Committee on Ways and Means



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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

E. CLAY SHAW, JR., Florida           CHARLES B. RANGEL, New York
NANCY L. JOHNSON, Connecticut        FORTNEY PETE STARK, California
WALLY HERGER, California             SANDER M. LEVIN, Michigan
JIM MCCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan                  JIM MCDERMOTT, Washington
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. MCNULTY, New York
PHIL ENGLISH, Pennsylvania           WILLIAM J. JEFFERSON, Louisiana
J.D. HAYWORTH, Arizona               JOHN S. TANNER, Tennessee
JERRY WELLER, Illinois               XAVIER BECERRA, California
KENNY C. HULSHOF, Missouri           LLOYD DOGGETT, Texas
RON LEWIS, Kentucky                  EARL POMEROY, North Dakota
MARK FOLEY, Florida                  STEPHANIE TUBBS JONES, Ohio
KEVIN BRADY, Texas                   MIKE THOMPSON, California
THOMAS M. REYNOLDS, New York         JOHN B. LARSON, Connecticut
PAUL RYAN, Wisconsin                 RAHM EMANUEL, Illinois
ERIC CANTOR, Virginia
JOHN LINDER, Georgia
BOB BEAUPREZ, Colorado
MELISSA A. HART, Pennsylvania
CHRIS CHOCOLA, Indiana
DEVIN NUNES, California

                    Allison H. Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                         SUBCOMMITTEE ON HEALTH

                NANCY L. JOHNSON, Connecticut, Chairman

JIM MCCRERY, Louisiana               FORTNEY PETE STARK, California
SAM JOHNSON, Texas                   JOHN LEWIS, Georgia
DAVE CAMP, Michigan                  LLOYD DOGGETT, Texas
JIM RAMSTAD, Minnesota               MIKE THOMPSON, California
PHIL ENGLISH, Pennsylvania           RAHM EMANUEL, Illinois
J.D. HAYWORTH, Arizona
KENNY C. HULSHOF, Missouri

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
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current publication process and should diminish as the process is 
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                            C O N T E N T S

                               __________

                                                                   Page

Advisory of March 8, 2006, announcing the hearing................     2

                               WITNESSES

Center for Medicare Management, Centers for Medicare and Medicaid 
  Services, U.S. Department of Health & Human Services, Herb 
  Kuhn, Director.................................................     6
Medicare Payment Advisory Commission, Mark E. Miller, Executive 
  Director.......................................................    11

                                 ______

Hospital for Special Care, John Votto............................    38
Kindred Healthcare, William M. Altman............................    26
MassPRO, Laura N. Moore..........................................    35


                     LONG-TERM ACUTE CARE HOSPITALS

                              ----------                              


                       WEDNESDAY, MARCH 15, 2006

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 3:15 p.m., in 
Room 1100, Longworth House Office Building, Hon. Nancy L. 
Johnson (Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE
March 8, 2006
No. HL-13

                      Johnson Announces Hearing on

                     Long-Term Acute Care Hospitals

    Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on 
Health of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on long-term acute care hospitals 
(LTCHs). The hearing will take place on Wednesday, March 15, 2006, in 
the main Committee hearing room, 1100 Longworth House Office Building, 
beginning at 3:00 p.m. or immediately following the Subcommittee on 
Human Resources hearing on unemployment, whichever time is later.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    Medicare patients currently account for more than 70 percent of 
discharges from LTCH facilities. Long-term acute care hospitals are 
required to meet all the conditions of participation for short-term 
acute care hospitals, and they must have an average length of stay for 
their patients greater than 25 days. Medicare currently does not 
require LTCHs to use assessment tools or patient criteria to evaluate 
whether beneficiaries being treated in these facilities specifically 
need the level of care that LTCHs provide.
      
    Spending for LTCH services has increased significantly in recent 
years. According to the Medicare Payment Advisory Commission (MedPAC), 
between 2001 and 2004 the number of LTCHs increased by 9 percent per 
year, while the volume of services increased by 12 percent annually. 
Medicare spending on LTCHs during 2001 to 2004 increased 25 percent per 
year during that period, and in 2004 alone Medicare spending for 
services in this setting increased by 38 percent. Long-term acute care 
hospitals, however, do not exist nationwide; patients who reside 
inareas without LTCHs often receive long-term care services in other 
hospitals or skilled nursing facilities.
      
    The Centers for Medicare and Medicaid Services (CMS) have proposed 
a payment rule for 2007 that would make several changes to the LTCH 
payment system. The rule would provide a zero update to the LTCH base 
rate of $38,086 for the 2007 rate year (for discharges occurring on or 
after July 1, 2006). The Medicare Payment Advisory Commission also 
recommended a zero update for LTCHs in its March 2006 payment policy 
report.
      
    The CMS also proposes a change in the short-stay outlier payment 
methodology. Currently, LTCHs are paid a reduced short-stay amount for 
patients whose length of stay in the facility is five-sixths or less of 
the average length of stay for that patient's long-term care-diagnosis 
related group (LTC-DRG). The CMS notes that 37 percent of LTCH cases 
are short-stays in institutions where the average length of stay must 
be more than 25 days. Under current rules, there is a special 
adjustment for short-stay cases so that payment is the lesser of 120 
percent of costs, 120 percent of the per diem amount multiplied by the 
length of stay for that discharge, or the full LTC-DRG payment amount. 
The CMS proposed rule would change the 120 percent of costs to 100 
percent of costs. The rule also adds a fourth option of paying the 
short-term acute care payment for that diagnosis related group.
      
    In announcing the hearing, Chairman Johnson stated, ``This hearing 
will provide Committee Members valuable insight into the changing 
reimbursement world for long-term care hospitals. The Center for 
Medicare and Medicaid Services has proposed a seismic change in how 
these facilities are paid, so it is important to understand the current 
payment environment and the rationale for these reforms.''

FOCUS OF THE HEARING:

    Medicare payment policy as it relates to LTCHs, including the CMS 
proposed rule and MedPAC's March recommendations.

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    Chairman JOHNSON. The hearing will come to order. Mr. Stark 
is on his way, and he advises that we should begin, so we will 
do so.
    Welcome, Mr. Kuhn and Mr. Miller. I am pleased to chair 
this hearing on long-term care hospitals in the Medicare 
Program. Medicare patients currently account for more than 70 
percent of the discharges from long-term acute care hospitals, 
and Long-Term Care Hospitals (LTCH) are required to meet all 
the conditions of participation for short-term acute care 
hospitals, but also must have an average length of stay for 
their patients of greater than 25 days.
    Medicare currently does not require LTCHs to use assessment 
tools or patient criteria to evaluate whether beneficiaries 
being treated in these facilities specifically need the level 
of care that LTCHs provide. Furthermore, spending on LTCH 
services has increased significantly in recent years, although 
the total payments to LTCHs is less than 1 percent of total 
Medicare spending, and these hospitals are, as we know, 
returning people to life and independence that not very many 
years ago would have died or been permanently disabled.
    Between 2001 and 2004, the number of LTCH facilities 
increased 9 percent a year while the volume of services 
increased 12 percent annually. Medicare spending on LTCHs 
during 2001 to 2004 increased 25 percent per year during that 
period, and in 2004 alone Medicare spending for services in 
this setting increased by 38 percent. Needless to say, it is 
clear why this sector has caught our attention. Long-term acute 
care hospitals, however, do not exist nationwide, and patients 
who reside in areas without LTCHs often receive long-term care 
services in Intensive Care Units (ICU), as outliers in acute 
care hospitals, in other rehabilitation type hospitals, or in 
skilled nursing facilities; or they simply do not receive the 
care they need and die or are permanently disabled.
    The Medicare payment Advisory Commission recommended a zero 
update for LTCHs in its March 2006 payment report. In the past, 
it has proposed and I support establishing criteria for 
facilities and patients so that both have the comfort to know 
they are providing and receiving appropriate care at the right 
time and in the right place.
    This hearing will provide us with valuable insights into 
the changing reimbursement world for long-term care hospitals. 
Centers for Medicare and Medicaid Services (CMS) has proposed a 
significant change in how thee facilities are paid in its 2007 
payment rule, so it is important to understand the current 
payment environment and the rationale for these reforms.
    I am pleased to have with us today two distinguished panels 
of witnesses to help us explore the issues facing our long-term 
care hospitals. On our first panel, we will hear Mr. Herb Kuhn, 
the Director of the Center for Medicare Management at the CMS. 
Mr. Kuhn will describe for us the thinking behind CMS' proposed 
payment rule for long-term care hospitals, along with the 
ongoing work the agency is doing on developing patient criteria 
for LTCHs.
    We will also hear from Dr. Mark Miller, Executive Director 
of the Medicare Payment Advisory Commission. Dr. Miller will 
discuss the work of MedPAC done recently in evaluating the 
growth of long-term care hospitals in Medicare and their 
recommendations for the use of patient and facility criteria to 
ensure that beneficiaries are being admitted to these 
facilities appropriately.
    On our second panel, we will hear from William Altman, 
Senior Vice President of Kindred Healthcare, a nationwide 
provider of long-term care services. Mr. Altman will provide us 
with an industry response to the proposed CMS rule from the 
perspective of a diversified, for-profit provider of post-acute 
services ranging from skilled nursing facilities to LTCHs in 40 
States.
    We will then hear from Laura Moore, Vice President of 
Strategy and Operations at MassPRO, the QIO for the State of 
Massachusetts. MedPAC has recommended that Quality Improvement 
Organizations (QIO) be more involved in evaluating LTCH 
admissions for medical necessity, and Ms. Moore will discuss 
with us the process MassPRO uses for evaluating LTCH 
admissions.
    Finally, I am pleased to welcome to our second panel Dr. 
John Votto, President and Chief Executive Officer of the 
Hospital for Special Care, which is in my hometown of New 
Britain. Dr. Votto will provide us with an industry reaction to 
the CMS proposed rule from the perspective of a localized 
nonprofit long-term care facility, and also will comment on the 
issue of criteria-based admissions, an issue he has worked hard 
on as the chairman of a Committee of physician and other 
specialists from across the country looking at this issue.
    Long-term care hospitals provide critical services to 
medically complex patients, and it is essential that we 
preserve beneficiary access to these services while also 
protecting the interests of taxpayers and of the Medicare 
Program as a whole.
    I look forward to hearing from all of our witnesses on this 
issue, and Mr. Stark will submit his comments for the record 
and will be along shortly. Mr. Kuhn?
    [The prepared statement of Mr. Stark follows:]

  Opening Statement of The Honorable Pete Stark, a Representative in 
                 Congress from the State of California

    Madam Chair, the topic of today's hearing is one of those that can 
rightfully be described as being in the underbelly of Medicare payment 
policy. We've seen tremendous growth in long-term care hospitals and 
associated spending, and it's an area that deserves attention. Indeed, 
while I have generally supported past CMS efforts to reign in this 
burgeoning industry, I do think that the proposed rule needs to be 
revisited, and I look forward to today's testimony and discussion.
    However, I can't help but note, again, that we are fiddling while 
Rome burns. We have been asking for hearings, in writing, in private, 
and on the dais, on Part D for well over a year, yet the Committee on 
Ways and Means refuses to move forward. Every other authorizing 
committee and a few others have held hearings. Not us. We are 
apparently too busy.
    Let's put this in perspective. In 2004, Medicare paid for about 
122,000 cases in long-term care hospitals out of a Medicare population 
of almost 42 million Medicare beneficiaries. Iif every case were 
unique, which it might be for LTCHs, that would be less than 3/10ths of 
a percent. This rule was proposed January 27. My staff was first 
lobbied on this a week or two ago. The comment period closes at the end 
of this month. And here we are in a hearing on this very narrow issue.
    In contrast, the MMA was enacted in December, 2003. Medicare 
spending for the new private prescription drug program is projected to 
run between $23-37 billion this year (CBO versus Actuaries), and the 
program may affect up to 37 million beneficiaries. Regardless of the 
precise number, it's a lot of money and a lot of people. And no matter 
how optimistic Wall Street is about the potential for profit in the 
long-term care hospital industry, this sector is a long way from 
competing with Part D.
    I speak from experience when I say that it can be uncomfortable to 
review your own party's--much less your own--activities. But we are 
abrogating our Congressional and Constitutional responsibilities when 
we fail to do so. That said, I look forward to today's discussion, and 
hope we can get closer to a sensible approach that ensures appropriate 
access to care while minimizing the conditions that are clearly driving 
industry growth.

                                 

   STATEMENT OF HERB B. KUHN, DIRECTOR, CENTER FOR MEDICARE 
 MANAGEMENT, CENTERS FOR MEDICARE AND MEDICAID SERVICES, U.S. 
            DEPARTMENT OF HEALTH AND HUMAN SERVICES

    Mr. KUHN. Thank you, Madam Chairman Johnson, Congressman 
McCrery. I appreciate the time you have taken to invite me to 
testify about long-term care hospitals. Long-term care 
hospitals, also known as LTCHs, typically provide post-acute 
medical and rehabilitative care for clinically complex patients 
including comprehensive rehabilitation and respiratory 
services. To be classified as an LTCH, a hospital must have an 
average Medicare inpatient length of stay of greater than 25 
days. Despite the fact that their availability varies widely 
across the Nation, the number of LTCHs has increased 
exponentially over the last 10 years. In addition, LTCHs are 
the highest paid hospitals in the Medicare Program, with 
average Medicare margins of nearly 12 percent.
    CMS published the long-term care hospital prospective 
payment system proposed rule on January 27, 2006. The rule is 
intended to assure appropriate payment for services to severely 
ill or medically complex patients, while providing incentives 
for more efficient care of Medicare beneficiaries.
    The proposed rule provides for no increase in Medicare 
payment for LTCHs in 2007. MedPAC similarly, as you suggested 
in your opening statement, made this recommendation in their 
March 2006 report to Congress that Medicare payments to LTCHs 
are more than adequate, recommending a zero update for 2007. 
Again, their recommendation focused on efficiency without 
affecting the ability to furnish high-quality care to Medicare 
beneficiaries.
    The proposed rule also would revise the payment adjustment 
formula for short-stay outlier cases. Short-stay outliers are 
cases where the patient may be discharged early, and often the 
hospital's costs are significantly below average. The most 
recent available data show that short-stay outlier cases 
comprise approximately 37 percent of LTCH discharges, and CMS 
believes that is an inappropriately high number of patients 
treated in LTCHs. Existing payment policy may unintentionally 
provide a financial incentive for LTCHs to admit a large number 
of short-stay cases, including premature and even inappropriate 
patient shifting from the referring acute care hospitals. The 
proposed rule would ensure that payments for short-stay 
outliers do not exceed costs. It would also add a fourth 
component to the current formula that would allow payment based 
on an amount comparable to what would be paid under the 
inpatient prospective payment system. We estimate that these 
revisions would result in approximately $440 million in savings 
to the Medicare Program.
    CMS also discusses in the proposed regulation additional 
considerations of the hospital within a hospital criteria. As 
of October 2005, there were 376 LTCHs in the CMS database, of 
which 176 were hospitals within hospitals, and these facilities 
have been growing at a rate of 35 percent per year from 1993 to 
2003. CMS recognizes that collocation of an acute care hospital 
and LTCH services may be an efficient way to deliver care and 
may be less disruptive for patients at the same time. However, 
collocation also leads to patient shifting from one part of a 
hospital to another, resulting in two Medicare payments for 
what is essentially one episode of patient care.
    To ensure that Medicare avoids making two payments, CMS 
implemented a payment adjustment for fiscal year 2004 relating 
to the percentage of patients discharged from a hospital within 
a hospital or satellite that were admitted from its collocated 
host hospital before receiving a full episode of treatment at 
the host hospital. This payment adjustment is commonly called 
the 25-percent payment threshold policy. It is CMS' obligation 
to ensure that beneficiaries receive the right care in the 
appropriate setting at the appropriate payment for the 
services. Thus, CMS will continue to monitor the admission 
patterns of LTCHs to determine if further rulemaking is 
warranted.
    Finally, CMS wants to ensure that the criteria used to 
determine placement in an LTCH are appropriate. In June 2004, 
MedPAC did release a report providing recommendations that 
urged us to establish facility and patient criteria for LTCHs 
and provide an expanded role for quality improvement 
organizations (QIO) in monitoring compliance with the newly 
established criteria. Currently, CMS is pursuing MedPAC's 
recommendations. We have awarded a contract with Research 
International, Inc. (RTI) in 2004 for this purpose, and a final 
report is expected this spring.
    Since parts of the country lack LTCHs, LTCH-type patients 
may receive hospital-level treatment at acute care hospitals as 
outlier patients, or, for example, at an inpatient facility 
with significantly lower payments per beneficiary discharge 
than at LTCHs. RTI's research attempts to determine whether 
patient outcomes are equivalent across these sites. One 
specific area of evaluation will be whether there is a 
correlation between the higher payments of LTCHs and improved 
patient outcomes for the same types of patients in different 
treatment settings.
    The goal of the Medicare Program is to assure cost-
effective delivery of the highest quality of medical services 
to beneficiaries. CMS looks forward to receiving comments on 
the proposed rule--the comment period closes next Monday, March 
20--in order for us to be able to develop the final policy and 
guide the future of LTCHs appropriately. I look forward to your 
questions.
    Thank you.
    [The prepared statement of Mr. Kuhn follows:]

 Statement of Herb B. Kuhn, Director, Center for Medicare Management, 
Centers for Medicare and Medicaid Services, U.S. Department of Health & 
                             Human Services

    Madam Chairman Johnson, Congressman Stark, distinguished 
Subcommittee members, thank you for inviting me to testify about long-
term care hospitals (LTCHs). Long term care hospitals (LTCHs) typically 
provide post-acute medical and rehabilitative care for clinically 
complex patients including comprehensive rehabilitation, respiratory 
therapy, head trauma treatment and pain management. Despite the fact 
that their availability varies widely across the nation, the number of 
LTCHs has increased exponentially over the last 10 years. The number of 
LTCHs more than tripled between 1993 and March 2005. Although the two 
States with the largest number of LTCHs are Texas and Louisiana, 
substantial growth is also occurring in States with large numbers of 
elderly populations including Pennsylvania, Ohio, Michigan, Georgia, 
Indiana, and Oklahoma. LTCHs are the highest paid hospitals in the 
Medicare program; preliminary cost report data for FY 2004 indicate 
average Medicare margins of almost 12 percent.
    CMS published the long-term care hospital prospective payment 
system (LTCH PPS) proposed rule on January 27, 2006. The rule is 
intended to assure appropriate payment for services to severely ill or 
medically complex patients, while providing incentives to LTCHs for 
more efficient care of Medicare beneficiaries. CMS believes the 
proposed rule promotes appropriate payment, efficient care, and the 
Agency is looking forward to receiving your feedback as well as 
comments from the public. I do want to note that the FY 2007 
President's Budget proposal assumes a zero percent update for Rate Year 
(RY) 2007 and a modified LTCH PPS short stay outlier policy.
Background
    Most patients in LTCHs are clinically complex and have multiple co-
morbidities--that is, they have secondary health conditions that can 
interact with and lead to an intensification of the primary diagnosis 
requiring hospital-level medical treatment. Medicare beneficiaries 
comprise, on average,83 percent of LTCH patients and the distributions 
vary from 68 percent to 90 percent at the 25th and 75th percentiles. 
LTCHs also provide care to a disproportionately large number of 
beneficiaries who are Medicare eligible because of disability. To be 
classified as an LTCH, a hospital must have an average Medicare 
inpatient length of stay that is greater than 25 days. CMS is 
considering payment adjustments for LTCHs that are tied to specific 
patient classification criteria based recommendations from the Medicare 
Payment Advisory Commission (MedPAC) and the results from the research 
currently underway by RTI International (RTI).
    The LTCH PPS was implemented October 1, 2002 to assure appropriate 
payment for services to the medically complex patients treated in 
LTCHs. The LTCH PPS currently sets payments for approximately 376 
LTCHs, and payments under the LTCH PPS are updated annually.
CMS issued the LTCH Proposed Rule for Rate Year 2007
    Public comments on the LTCH PPS Proposed Rule for Rate Year (RY) 
2007 will be accepted until March 20, 2006. The proposed rule provides 
for no increase in Medicare payment rates to LTCHs for RY 2007, which 
means the LTCH PPS standard Federal rate would remain at $38,086.04. 
The standard Federal rate for RY 2007 would apply to LTCH patient 
discharges taking place on or after July 1, 2006, through June 30, 
2007. Similarly, MedPAC stated in its March 2006 Report to Congress 
that Medicare payments to LTCHs are more than adequate, recommending a 
zero update for LTCHs in 2007. MedPAC determined that keeping payments 
at the same level as 2006 would increase program efficiency without 
affecting the ability of LTCHs to furnish high quality care to Medicare 
beneficiaries.
    The CMS update proposal is based on analysis of the LTCH case-mix 
index before and after implementation of the LTCH PPS, analysis of LTCH 
margins based on the latest available cost report data, and recent 
update recommendations for the LTCH PPS from MedPAC in the Commission's 
March 2006 Report to the Congress. In analyzing LTCH data, CMS found 
that the case-mix index increased by 6.75 percent between fiscal years 
(FYs) 2003 and 2004, which is believed to be due in large part to 
changes in coding practices and documentation rather than the treatment 
of more resource intensive patients. This belief is based on an 
analysis of LTCH cost report data that shows LTCH payments are 
increasing without a commensurate increase in average case costs. The 
LTCH PPS Federal rate for RY 2007, which would be the same as the 
Federal rate for RY 2006, would reflect an adjustment to the market 
basket update to account for the increase in case mix due to changes in 
coding practices. In addition, cost report data show increasing 
Medicare margins among LTCHs since the implementation of the LTCH PPS. 
Specifically, in an analysis of LTCH cost report data, CMS found that 
LTCH Medicare payments for FY 2003 (the first year of the LTCH PPS) 
were 8.8 percent higher than LTCHs' Medicare costs. Preliminary cost 
report data for FY 2004 data reveal an even higher Medicare margin of 
11.7 percent.
    Currently CMS uses the excluded hospital with capital market basket 
as the measure of inflation for calculating the annual update to the 
LTCH PPS Federal rate. CMS is proposing to adopt the Rehabilitation, 
Psychiatric and Long-Term Care (RPL) market basket to calculate the 
annual update to the LTCH PPS Federal Rate. The RPL market basket is 
based on the operating and capital costs of Inpatient Rehabilitation 
Facilities (IRFs), Inpatient Psychiatric Facilities (IPFs), and LTCHs. 
CMS would also revise the labor-related share of the Federal rate based 
on the RPL market basket. The revised labor-related share would 
increase from 72.855 percent (based on the excluded hospital with 
capital market basket) to 75.923 percent. Increasing the labor share 
will have a positive impact on payments to LTCHs in areas with a wage 
index of greater than 1.0.
    The proposed rule also presents for comment a preliminary model of 
an update framework for possible future use under the LTCH PPS. The 
framework would account for other appropriate factors affecting the 
efficient delivery of services and care provided in LTCHs when 
determining future Federal rate update proposals. CMS intends to 
consider comments in refining the framework and would propose a refined 
framework in a future regulation before using it to determine an update 
proposal.
CMS's Proposed Ruke Would Revise the Payment Adjustment Formula for 
        Short-Stay Outlier Cases
    The proposed rule would revise the payment adjustment formula for 
short-stay outlier (SSO) cases (i.e., cases with a length of stay less 
than or equal to 5/6 of the average length of stay of the LTC-DRG). 
SSOs are cases where the patient is discharged early and often the 
hospital's costs are significantly below average. Currently, under the 
LTCH PPS, SSO cases are paid the lesser of 120 percent of the estimated 
cost of the case; 120 percent of the LTC-DRG per diem amount; or the 
full LTC-DRG payment. Since the implementation of the LTCH PPS in FY 
2003, CMS has continued to monitor the SSO policy. The most recent 
available LTCH data reveal that SSO cases comprise approximately 37 
percent of LTCH PPS discharges (as compared to 48.4 percent based on 
the LTCH data used to develop the LTCH PPS prior to its implementation 
in FY 2003).
    CMS believes that 37 percent of LTCH discharges that are SSO cases 
is an inappropriate number of patients being treated in LTCHs. The 
Agency is concerned that these patients may be more appropriately 
served in acute care hospitals and that the existing SSO payment policy 
may unintentionally provide a financial incentive for LTCHs to admit a 
large number of short stay cases.
    The proposed rule would reduce the part of the current payment 
formula that is based on costs to ensure that payments for SSOs do not 
exceed costs. It would also add a fourth component to the current 
formula that would allow payment based on an amount comparable to what 
would be paid under the inpatient prospective payment system (IPPS) for 
acute care hospitals for patients that group to that DRG. CMS proposes 
that payments for SSO cases would be the lesser of 100 percent of the 
estimated cost of the case, 120 percent of the LTC-DRG per diem amount, 
the full LTC-DRG payment, or an amount comparable to what would be paid 
under the IPPS. CMS estimates that revising the current SSO policy by 
reducing the percentage of costs in the formula and including a fourth 
part of the formula would result in approximately $440 million in 
savings to the Medicare program in RY 2007. Under this proposed payment 
alternative, LTCHs, which are certified as acute care hospitals, would 
be paid by Medicare under the LTCH PPS at a rate that is more 
consistent with the rate paid to acute care hospitals when they treat 
shorter stay patients. Additionally, the proposed reduction in the 
percentage of costs to 100 percent would reduce what CMS perceives to 
be a financial incentive under the current policy for LTCHs to treat 
short stay cases.
    Adding an amount comparable to what would be paid under the IPPS to 
the SSO payment formula is appropriate since the vast majority of LTCH 
patients are admitted directly from acute care hospitals. Thus, CMS 
believes that short stay patients at LTCHs may indicate premature and 
even inappropriate patient shifting from the referring acute care 
hospitals. CMS perceives that LTCHs are acting more like short-term 
acute care hospitals by admitting such a large percentage of short-stay 
patients. Therefore, CMS believes that a patient admitted to an acute 
care hospital for a short stay and a patient admitted to a LTCH (which 
is certified as an acute care hospital) for the same number of days, 
should be paid a comparable amount.
CMS Proposes Increasing the Outlier-Fixed Amount
    Medicare will pay a hospital an amount in addition to the Federal 
rate payment under the LTCH PPS for the LTC-DRG for unusually costly 
cases. To be eligible for this additional high cost outlier payment, 
the hospital's estimated costs in treating the case must exceed the 
LTC-DRG payment by an outlier fixed-loss amount. Aggregate estimated 
outlier case payments are limited to 8 percent of total estimated LTCH 
payments. For RY 2006, the outlier fixed-loss amount is $10,501. The 
proposed rule would increase the outlier fixed-loss amount for RY 2007 
to $18,489. Since the proposed changes to the short stay outlier policy 
would result in reduced total LTCH payments, it is necessary to 
increase the outlier fixed loss amount in order to maintain the 8 
percent limit on total LTCH outlier payments. CMS established the 
outlier target at 8 percent of estimated total LTCH PPS payments when 
the Agency implemented the LTCH PPS to allow CMS to achieve a balance 
between the conflicting considerations of the need to protect hospitals 
with costly cases, while maintaining incentives to improve overall 
efficiency.
CMS Notes Continuing Issue of Hospital within Hospitals
    The IPPS for acute care hospitals was designed to provide one 
appropriate payment for hospitalized patients. The Standard Federal 
payment rate under the IPPS for FY 2005 is $4,555 whereas the Standard 
Federal payment rate under the LTCH PPS for RY 2005 was $38,086. Since 
LTCHs are certified by Medicare as acute care hospitals and in many 
parts of the country patients who could otherwise fit the typical 
profile of LTCH patients are treated in acute care hospitals as high 
cost outliers, CMS wants to ensure that the significantly higher 
Medicare payments made to LTCH facilities reflect treatment for 
patients who most need and can benefit from the specialized care they 
offer.
    As of October 2005, there were 376 LTCHs in the CMS database, of 
which 176 were hospitals within hospitals (HwHs). In recent years, 
MedPAC as well as CMS, has been conducting a careful study of the rapid 
growth in LTCHs, particularly LTCH HwHs (which have been growing at a 
rate of 35 percent per year from 1993 to 2003--three times the overall 
rate of LTCH growth. Medicare regulations specify that an LTCH is an 
HwH when it is co-located with another Medicare hospital-level 
provider, its ``host'', generally an acute care hospital. Under present 
regulations, for an LTCH that occupies space in a building also used by 
another hospital, or in one or more separate buildings located on the 
same campus as buildings used by another hospital, to be considered a 
HwH, the entity must meet separateness and control criteria that 
demonstrate organizational and functional separateness from its host 
hospital. An LTCH may establish a satellite facility in another 
hospital, which must also demonstrate compliance with similar 
separateness and control criteria regarding its relationship to its 
host hospital.
    These requirements are in place to ensure that host hospitals and 
HwHs or satellites are separate in medical and administrative 
governance and that a given LTCH HwH or satellite is not merely serving 
as a ``step-down'' unit of the acute care hospital. In such a case, 
Medicare would be paying under two payment systems, the IPPS and the 
LTCH PPS for what is essentially one episode of care. CMS recognizes 
that co-location of an acute care hospital and LTCH services may be an 
efficient way to deliver care and may be less disruptive for patients 
at the same time; however, co-location also leads to patient shifting 
from one part of a hospital to another, resulting in two Medicare 
payments for what is essentially one episode of patient care. 
Therefore, CMS believes that co-location creates incentives that can 
lead to patient admission, treatment, and discharge decisions that 
reflect maximization of Medicare payments, rather than provision of the 
most effective and efficient care based on patient need.
    In order to ensure that Medicare avoids making two payments (one to 
the acute care and one to the onsite LTCH HwH or LTCH satellite) for a 
single episode of care, in addition to the ``separateness and control'' 
requirements, CMS implemented a payment adjustment for FY 2004 relating 
to the percentage of patients discharged from an HwH or satellite that 
were admitted from its co-located host hospital prior to receiving a 
full episode of treatment at the host hospital. This payment adjustment 
is commonly called the 25 percent payment threshold policy. Presently, 
CMS is monitoring and evaluating several identified behaviors that may 
be attempts to circumvent specifics of the implementation of this 25 
percent threshold payment adjustment such as ``patient-swapping,'' 
(that is hosts cross-discharging to one another's HwH or satellite).
    CMS is aware that, following the implementation of the 25 percent 
threshold payment adjustment for co-located LTCHs, the significant 
growth in the LTCH industry has been in the development of free-
standing LTCHs. CMS data indicate that many free-standing LTCHs are 
receiving high percentages of their patients from specific acute care 
hospitals (often a sole acute care hospital) and therefore are, in 
effect, acting as units of the acute care hospital, thereby replicating 
the concerns CMS has with LTCH HwHs or LTCH satellites.
    As stewards of the Medicare trust fund, it is CMS' obligation to 
ensure that beneficiaries receive the right care, in the appropriate 
setting, at the appropriate payment for the services. Thus, CMS is 
concerned about the developments in LTCH HwHs and satellites and will 
continue to monitor the admission patterns of LTCHs to determine if 
further rulemaking is warranted.
CMS is Evaluating the Criteria Used to Define LTCHs
    Since 1994, CMS has been studying the relationships between 
treatment at acute care hospitals and LTCHs, as well as the linkage 
between payment policies and substitution of services, especially among 
acute care hospitals, LTCHs, IRFs, and some skilled nursing facilities 
(SNFs). Many similar services are provided in an LTCH as are provided 
in an acute care hospital. In both cases, patients need a high level of 
care from nurses, technicians, and other health professionals. There 
are many existing acute care hospitals that treat as patients with the 
same profile as those typical of LTCHs. These acute care hospitals, 
paid under the IPPS, treat many, if not more, outlier (i.e., long 
length of stay) cases than do most LTCH HwHs. Furthermore, given that 
many acute care hospitals, IRFs, IPFs, and SNFs may serve as settings 
for potential LTCH patients, CMS wants to ensure that the criteria used 
to determine placement in an LTCH are appropriate. For example, CMS 
data reveal that one of the most frequent LTC-DRGs found in LTCHs is 
462--Rehabilitation, a diagnosis that could receive appropriate 
treatment at IRFs. Another of the most common LTC-DRGs is 430, 
Psychoses, a diagnosis which could also be treated at IRFs. Many SNFs 
also offer a high-level of post-acute care including access to 
rehabilitation services and therapies.
    In June of 2004, MedPAC released a report providing recommendations 
urging CMS to establish facility and patient criteria for LTCHs and 
provide an expanded role for Quality Improvement Organizations (QIOs) 
in monitoring compliance with the newly-established criteria. 
Currently, CMS is pursuing MedPAC's recommendations to develop patient 
and facility-level criteria and to determine the feasibility of 
developing a more clinically sophisticated admissions policy in order 
to distinguish Medicare patients who could most benefit from LTCH 
treatment. CMS awarded a contract to Research Triangle Institute, 
International (RTI) in 2004 for this purpose and a final report is 
expected in late Spring.
    Since in parts of the country that lack LTCHs, LTCH-type patients 
may receive hospital-level treatment at acute hospitals as outlier 
patients, at IRFs, or in some cases, IPFs with significantly lower 
payments per beneficiary discharge than at LTCHs. RTI's research 
attempts to determine whether patient outcomes are equivalent across 
these sites. One specific area of evaluation will be whether there is a 
correlation between the higher payments at LTCHs and improved patient 
outcomes for the same types of patients in different treatment 
settings. Since there is wide variation in the range of post-acute care 
facilities available throughout the country, if payments are equivalent 
per case and patient outcomes are generally equal in different areas of 
the country, the variations may be explained as a reflection of 
variations in regional practices. However, if outcomes differ 
substantially for certain types of patients, indicating that LTCH 
patients have better outcomes, the recent growth of the LTCH industry 
could result in the availability of a better level of care for Medicare 
beneficiaries nationwide. Alternatively, if payments differ among 
provider types but patient outcomes are equivalent, one could question 
whether higher cost LTCH services are needed for all types of cases 
currently treated, or more specifically, which types of patients 
benefit from the higher cost LTCH services.
Conclusion
    Madam Chairman Johnson, Congressman Stark, distinguished 
Subcommittee members, thank you for inviting me to testify about long-
term care hospitals today. The goal of the Medicare program is to 
ensure the cost-effective delivery of the highest quality of medical 
services to beneficiaries. CMS looks forward to receiving comments on 
the proposed rule in order to develop final policy and guide the future 
of LTCHs appropriately. I will be happy to answer your questions.

                                 

    Chairman JOHNSON. Thank you, Mr. Kuhn. Mr. Miller?

    STATEMENT OF MARK E. MILLER, PH.D., EXECUTIVE DIRECTOR, 
              MEDICARE PAYMENT ADVISORY COMMISSION

    Mr. MILLER. Chairman Johnson, Congressman McCrery, I am 
Mark Miller, Executive Director of the Medicare Payment 
Advisory Commission. The facts that Chairman Johnson went 
through are the same facts that got the attention of the 
Commission and drove us to look more intensively at long-term 
care hospitals. As you noted, these are very rapidly growing 
facilities, 9 percent per year, expenditures in the 25 and 35 
percent growth rate. A decade ago, we spent about $400 million 
on long-term care hospitals, and in 2007 we are expected to 
spend about $5 billion on long-term care hospitals.
    The other points that you made which also drew our 
attention is that they are not uniformly distributed across the 
country, and so Medicare beneficiaries receive post-acute care 
services in certain communities without using long-term care 
hospitals. All of these facts at least raise questions in the 
mind of the Commission.
    Before I talk about the studies, you both know that there 
is a prospective payment system that started in 2003. The 
payment rates for long-term care hospitals are very high 
relative to inpatient hospitals and relative to skilled nursing 
facilities, and I will make a point about that in just a 
second. Under Prospective Payment System (PPS), both the 
payments and the costs of care have been increasing rapidly 
since the implementation. However, payments have grown faster 
than costs; hence, long-term care hospitals are a profitable 
Medicare service, and we are estimating margins in 2006 of 
about 8 percent for this industry.
    As I mentioned, about a year and a half ago, we did 
intensive analysis of long-term care hospitals. We did our 
usual very intensive analysis of data--claims, costs, that type 
of thing. We did structured interviews of providers in 
communities to see what role long-term care hospitals played. 
We also made site visits to the long-term care hospitals and 
met with the medical staffs of the long-term care hospitals. We 
took our own physicians along for these discussions so we could 
have clinically meaningful conversation.
    There are a couple of things from that study that I want 
you both to understand. The first is that in markets where 
long-term care hospitals are present, you have a shorter 
hospital length of stay and less use of skilled nursing 
facilities. Long-term care hospitals substitute for part of the 
hospital stay and for skilled nursing facility services.
    The second thing I want you to get is that if you look at 
the episode of care, the acute care hospital stay and the post-
acute care associated with that for the beneficiary. Just look 
at expenditures for the Medicare Program, you find that when 
long-term care hospitals are present, it costs the Medicare 
Program more. This is an important caveat; if you instead focus 
on the patients who are most likely to need those services, 
select a diagnosis and the most severe patients in that 
diagnosis, you find that long-term care hospitals for that 
episode of care, when you include long-term care hospitals, it 
is not significantly different than alternative settings of 
care.
    That fact, coupled with some of the things that we learned 
in the site visits, the long-term care hospitals told us how 
they conducted their business, how they conducted the care of 
the patient. They said things like they have more intensive 
nursing services, higher presence of physicians on the floor, 
multidisciplinary teams, things like that. With that 
information, coupled with what we felt was the need to target 
the services to the patients who most need that level of care--
we made the recommendations that you are referring, the 
patient-level characteristics and the facility-level 
characteristics. The objective is to define the patients who 
most need this care and to improve the value of the long-term 
care hospital services to the Medicare Program.
    I am not going to go through those criteria in detail, but 
I am willing to do it in questions if you are interested.
    In closing, I just want to say a couple of things. One is 
that you should not take these recommendations as a blanket 
endorsement of long-term care hospitals. We see rapid growth in 
a setting where there are high payments and poorly defined 
criteria, and any policy analyst is going to look at that and 
it is going to raise questions in their mind.
    The Commission is concerned that the long-term care 
hospitals not be used solely to reduce the inpatient length of 
stay, and then, as I have tried to stress throughout all my 
comments, with these payment rates, to assure that the patient 
who arrives there truly needs that level of care, and that is 
the objective of the criteria.
    I look forward to your questions.
    [The prepared statement of Mr. Miller follows:]

   Statement of Mark E. Miller, Ph.D., Executive Director, Medicare 
                      Payment Advisory Commission

    Chairman Johnson, Ranking Member Stark, distinguished Subcommittee 
members. I am Mark Miller, executive director of the Medicare Payment 
Advisory Commission (MedPAC). I appreciate the opportunity to be here 
with you this afternoon to discuss Medicare payment policy for long-
term care hospitals.
    Medicare beneficiaries can seek care after a hospitalization in 
four different post-acute settings: skilled nursing facilities (SNFs), 
home health agencies (HHAs), long-term care hospitals (LTCHs), and 
inpatient rehabilitation facilities (IRFs). In addition, in three of 
these settings patients can be referred directly from the community. 
Use and spending for these services have grown rapidly since the 
introduction of new prospective payment systems for them. About 3.7 
million beneficiaries used post acute care in 2002. In 2004 Medicare 
spending for these settings was about $36 billion, accounting for more 
than 12 percent of total Medicare spending.
    The overarching issue in Medicare post-acute care (PAC) is that 
there are no clear and comprehensive criteria for which of these 
settings are best for patients with particular characteristics or 
needs. The recuperation and rehabilitation services provided are 
important for Medicare beneficiaries. Yet, these settings and their 
payment systems have developed separately over the years, and it is not 
clear that together they form an integrated whole that provides the 
highest quality, most appropriate care for beneficiaries or the best 
value for the Medicare program and the taxpayers who support it. There 
is a need for comprehensive payment system reform across all PAC 
settings. Aligning Medicare payment systems with the patient's needs 
and characteristics and the quality of the care provided, rather than 
by type of facility, remains a challenge that will have to be met to 
get the best value for the Medicare program.
    The Commission maintains that in the post-acute care sector, just 
as for the other sectors of Medicare, the services provided should meet 
the needs of the beneficiaries, Medicare payments should cover the 
costs of an efficient provider of those services, and higher quality 
services should be rewarded. Currently in post-acute care, none of 
these conditions is fully satisfied.
    Long-term care hospitals, the subject of this hearing, illustrate 
the larger problem in the Medicare post acute care payment systems. 
Medicare payments to LTCHs have increased rapidly--from $398 million in 
1993 to about $3.3 billion in 2004--and continue to rise. CMS estimates 
LTCH payments will be $5.2 billion in 2007. As shown in Table 1, along 
with the increase in Medicare spending there has been an increase in 
the number of LTCHs, the number of cases, and the payment per case. The 
average length of stay has fallen. Growth has been particularly rapid 
since the start of the new LTCH prospective payment system (PPS) in 
2003. From 2002 to 2004, 71 new facilities entered the program and 
Medicare payments increased 38 percent in 2004 alone. Medicare is very 
important to these hospitals, accounting for 73 percent of discharges, 
on average, in 2004.


What are long-term care hospitals?
    The characteristics of long-term care hospitals vary. Some are 
converted from former public health hospitals; these tend to be the 
largest and are concentrated in New England. Others are freestanding 
but have entered the program more recently. The newest entrants, called 
``hospitals within hospitals,'' are collocated with an acute care 
hospital but have separate ownership and financial arrangements. 
Hospitals within hospitals (HWHs) are smaller than the older LTCHs. The 
numbers of HWHs and freestanding LTCHs both increased following 
implementation of the LTCH PPS in 2003, but the rate of growth in HWHs 
was more than twice the rate for freestanding LTCHs. Both nonprofit and 
for-profit long-term care hospitals increased from 2001 to 2004, but 
nonprofits grew more slowly than for profits. Almost 60 percent of 
LTCHs are for profit, two-thirds of which are owned by just two chains.
    LTCHs are unevenly distributed across the country (Figure 1). Some 
areas have many LTCHs; other areas have none. As shown in Table 2, the 
5 states with the greatest number of LTCH beds per thousand Medicare 
beneficiaries account for 39 percent of the available beds but only 12 
percent of the Medicare beneficiary population. Long-term care 
hospitals serve a wide mix of patients including ventilator patients, 
those requiring wound care, and those with respiratory and other 
infections.



    The regulatory distinction between long-term care hospitals and 
acute care inpatient hospitals is the length of stay. Long-term care 
hospitals are certified as hospitals and are intended to treat 
medically complex patients with long lengths of stay. Medicare requires 
that the average Medicare length of stay be more than 25 days (the 
average length of stay in hospitals under the acute care inpatient PPS 
is approximately 5 days). Cost sharing and coverage follow the acute 
care hospital rules.



Medicare payments to LTCHs
    Before October 2002, long-term care hospitals were paid on the 
basis of their average costs per discharge, subject to an annually 
adjusted limit calculated for each facility. Since then, under the new 
PPS, Medicare has paid LTCHs under a prospective payment system based 
primarily on the patient's diagnosis. Payment rates range from $15,665 
to $121,376 for a LTCH in an average wage area. These rates are higher 
than those hospitals receive under the inpatient PPS and they are also 
higher than rates for SNFs. In fiscal year 2004, for patients with the 
most common LTCH diagnoses, Medicare rates for LTCHs ranged from about 
3 to almost 12 times as much as estimated rates for SNFs.
    Under the previous payment system, the change in payment per case 
was at or below the change in cost per case (Figure 2). After PPS 
implementation, payment per case rose rapidly: it increased 5.5 percent 
in 2003 and 13.2 percent in 2004. The case-mix index (CMI) also appears 
to be increasing for LTCH patients, but CMS points out that CMI 
increases are at least partially due to coding improvement with a 
comparatively larger number of cases being assigned to LTC--DRGs with 
higher relative weights.


    There was little change (less than--0.1 percent) in the reported 
cost per case from 2001 to 2003, the first year of PPS. It then 
increased substantially in the second year of the PPS (by 8.9 percent). 
More complicated LTCH patients could account for at least part of this 
increase in cost per case. However, the average length of stay 
decreased in 2004, which generally would decrease costs. The rapid rate 
of growth in costs could also be attributable to the rapid rate of 
increase in payments under the PPS which would have allowed LTCHs to 
spend more than under the old system.
    Even though cost rose after the PPS started, payments outstripped 
them. Margins rose rapidly as suggested by the increasing difference 
between payments and costs in Figure 2. Margins reached 9.0 percent in 
2004 and we project a margin of 7.8 percent in 2006. The Medicare 
margin is the difference between Medicare payments and providers' 
costs, as a percentage of Medicare payments.
    In our March 2006 report to the Congress, the Commission assessed 
the adequacy of payment for long-term care hospitals. We found Medicare 
payments for LTCH services are more than adequate. The supply of LTCHs, 
the volume of services, and the number of beneficiaries admitted to 
LTCHs have all increased rapidly since 2001and access to capital is 
good. Moreover, Medicare spending for these facilities increased twice 
as fast as volume. As mentioned, margins are high.
    The Commission concluded that long-term care hospitals should be 
able to accommodate increases in the cost of care in 2007 and 
recommended that the Congress eliminate the update to payment rates for 
LTCH services for 2007.
CMS actions
    CMS has reacted to the growth in LTCHs and Medicare spending with 
several regulatory changes. First, CMS established a new policy, the 25 
percent rule, which CMS intended to protect the integrity of the 
inpatient PPS by attempting to ensure that HWHs do not function as 
hospital-based units of host hospitals. Second, CMS made other changes 
to increase the accuracy of payments under the new PPS.
LTCHS can substitute for other settings
    The Commission undertook extensive quantitative analysis, 
interviews, and site visits to understand which beneficiaries use LTCH 
services, what services they otherwise would have used, and what are 
the costs to Medicare. We found that LTCHs provide post-acute care to a 
small number of medically complex patients who are more stable than 
patients in an intensive care unit (ICU) but may still have unresolved 
underlying complex medical conditions. Many of these patients require 
ventilator support for respiratory problems, have failure of two or 
more major organ systems, neuromuscular damage, contagious infections, 
or complex wounds needing extended care.
    Using quantitative analysis, we found that the tendency to use 
LTCHs is associated with certain diagnoses, severity levels, and the 
proximity of the facility. Having a diagnosis of tracheostomy is the 
single strongest predictor of LTCH use. Diagnoses other than 
tracheostomy also predict long-term care hospital use--respiratory 
system diagnosis with ventilator support, acute and subacute 
endocarditis, amputation, skin graft and wound debridement, and 
osteomyelitis. When we divided each diagnosis into four levels by how 
severely ill the patient was, those with the highest severity level, 
regardless of diagnosis, had almost quadruple the probability of LTCH 
use. Beneficiaries living near an LTCH were more likely to use them, 
and being in an acute hospital with a HWH quadrupled a beneficiary's 
probability of using an LTCH.
    LTCHs can substitute for both hospital care and post-acute care. 
LTCHs can substitute for the end of an acute hospital stay. About 80 
percent of LTCH Medicare patients are transferred from acute hospitals 
and patients who use LTCHs have shorter acute hospital lengths of stay 
than similar patients who do not use these facilities. Freestanding 
SNFs are the principal post acute alternative to LTCHs. Patients who 
would be most likely to use LTCHs often use SNFs and when patents use 
LTCHs the probability of using SNF care declines--suggesting that SNFs 
and LTCHs are used as substitutes.
    In general, patients who use long-term care hospitals are more 
costly to Medicare than similar patients using alternative settings 
when we account for payments over an entire episode--that is, including 
payments in both the acute and post acute settings. However, the cost 
differences narrow considerably when LTCH care is targeted to very ill 
patients who are most likely to need and benefit from this level of 
care.
    To better understand which patients most need and can most benefit 
from the particular capabilities of LTCHs, we undertook site visits and 
held discussions with LTCH representatives. According to LTCH 
clinicians, long-term care hospitals:

      frequently use admission criteria to determine whether 
patients require an LTCH level of care and have sicker patients who are 
more likely to improve
      have active daily physician involvement with patients
      have licensed nurse staffing of 6 to 10 hours per day per 
patient (much higher than other post-acute care settings)
      frequently employ specialist registered nurses and employ 
physical, occupational, speech, and respiratory therapists the latter 
of whom are available 24 hours per day; and
      have multidisciplinary teams that prepare and carry out 
treatment plans.

    We drew on these observations to help tailor our recommendations.
Commission recommendations
    In its June 2004 Report to the Congress: New Approaches in 
Medicare, the Commission recommended that Congress and the Secretary 
define long-term care hospitals by patient and facility criteria that 
ensure that patients admitted to these facilities are medically complex 
and have a good chance of improvement.

      Patient-level criteria should identify specific clinical 
characteristics and treatment modalities.
      Facility-level criteria should characterize this level of 
care by features such as staffing, patient evaluation and review 
processes, and mix of patients.

    Medicare should use more precise criteria to ensure that LTCHs 
treat only appropriate patients. Criteria should describe the level of 
care required by LTCH patients so that their needs are clearly 
distinguishable from those of less resource-intensive patients who 
should be treated in other less costly settings. LTCH criteria should 
focus, to the extent possible, on patients and their care needs, rather 
than on facility characteristics.
    Patient-level criteria would identify specific clinical 
characteristics and treatments required by patients cared for in LTCHs. 
All of these criteria would be intended to ensure that the patients 
admitted to LTCHs require an intensive level of resources and have a 
good chance of improvement.
    National criteria could be required for both admission and 
discharge for each of the major categories of patients treated in 
LTCHs, including respiratory, infectious disease, other medically 
complex, wound care, ventilator-weaning, and cardiovascular or 
peripheral vascular patients. Because these criteria would be specific 
to each of the most common case types, they would need to be as 
detailed and clinically relevant as possible. Discharge criteria would 
ensure that patients are medically ready for discharge to less 
intensive and medically appropriate alternative care settings.
    Patient mix and severity criteria are directed toward ensuring that 
LTCHs treat only medically complex cases. For example, one requirement 
could be that a high share (e.g., 85 percent) of a facility's patients 
must be classified into broad diagnosis categories--such as complex 
medical, complex respiratory, cardiovascular, ventilator-dependent, or 
extensive wound care--and that a large share (e.g., 85 percent) of an 
LTCH's patients demonstrate a high level of severity of illness at 
admission.
    Facility-level criteria should delineate features of the care 
provided in LTCHs. Some examples include a patient evaluation and 
review process, a patient assessment tool, and the availability of 
physicians. A standard patient assessment tool would ensure consistency 
in the assessment process. Though most LTCHs already use assessment 
tools all facilities should use the same tool that emphasizes clinical 
and functional assessments of patients. The level of physician 
availability should be specified. Physicians' presence and their active 
involvement with patients are key aspects of the care that 
differentiates long-term care hospitals from SNFs. Also, requiring 
multidisciplinary teams of professionals, including physicians, to 
prepare and carry out treatment plans would encourage a team-based 
focus on patient care.
    The 25 day length of stay criterion, the only criterion currently 
in place for LTCHs, is intended to ensure that patients require a high 
level of resources. Without other criteria, however, the length of stay 
criterion does not prevent SNF-level patients from being treated in 
LTCHs at much higher costs to Medicare. Over time, as patient criteria 
clearly delineate the types of patients appropriate for treatment in 
LTCHs, CMS could reevaluate use of this criterion.
    A minimum staffing requirement would ensure that LTCHs provide an 
intensive level of care that is comparable to a step-down unit (from 
ICU-level care) in a hospital and would be consistent with long-term 
care hospitals treating medically complex patients who cannot be 
treated in SNFs.
    The Secretary will need to monitor the compliance of LTCHs with 
facility--and patient-level criteria. Therefore, the Commission also 
recommended that the Secretary should require the Quality Improvement 
Organizations (QIOs) to review long-term care hospital admissions for 
medical necessity and monitor that these facilities are in compliance 
with defining criteria. A recent QIO medical record review found that 
29 percent of 1,400 randomly selected LTCH Medicare admissions in 2004 
did not need hospital-level care.
    The Commission's recommendation to better target the patients 
treated in long-term care hospitals should not be taken as a blanket 
endorsement of LTCHs and their role in the post-acute care continuum. 
The rapid growth in long-term care hospitals, the opportunities for 
excess profit, and the fact that patients get care in other settings in 
markets where LTCHs do not exist all raise concerns for the Commission. 
The growth and incentives of the HWHs are of particular concern.
Quality
    Refinements to the LTCH payment policies should be consistent with 
Medicare's longer-term goals for payment policy. These goals include 
improving quality and promoting patient care in the most appropriate 
and cost-effective setting. Better measures of quality for long-term 
care hospitals are needed. Additional measures of quality at the 
hospital-specific level, probably not available from administrative 
data, may come from the LTCH industry. One association and a large 
chain report independent efforts to develop quality indicators. If the 
data for these indicators were available, CMS might use them to monitor 
LTCH care. For example, both organizations plan to measure rates of 
weaning from ventilators, pneumonia contracted while on a ventilator, 
decubitus ulcers acquired in the LTCH, blood stream inflections, falls, 
and use of restraints. However, the specific measures for these 
indicators differ widely between the two organizations. It is a 
positive step that the industry is starting to develop new quality 
indicators. However, the next steps that should be taken are CMS 
involvement, greater validation of the measures, and decisions on a 
data collection strategy.

                                 

    Chairman JOHNSON. Do you both agree that we should be 
moving to a criteria-based system, both patient and facility 
criteria?
    Mr. KUHN. Yes, we do agree with the recommendations MedPAC 
made in 2004 and agree with your statement, that, yes, I think 
better classification, better criteria for both facility as 
well as patients are long overdue here.
    Chairman JOHNSON. Dr. Miller, do you agree with that?
    Mr. MILLER. Right, it is a recommendation.
    Chairman JOHNSON. Well, it seems to me that if you have a 
criteria-based system that is correct, then that addresses the 
short-stay issue; that addresses the possibility of an acute 
care transfer to a long-term care facility that is 
inappropriate, does it not?
    Mr. KUHN. I think it would certainly help us. I don't know 
whether that gets us to the end game, because, you know, having 
the classification system is absolutely key, but also payment 
policy can drive behavior as well. Synching of both the payment 
policy as well as the classification system are going to be 
absolutely important components as we go forward.
    Chairman JOHNSON. Dr. Miller?
    Mr. MILLER. From our point of view, and we said at the end 
of our report that we think patient and facility criteria were 
important to define this benefit. Still at the end of the 
report, and as I tried to do in my opening comments, we think 
there are still potential concerns and that you might want, 
even within the payment system, some kinds of adjustments to 
capture inappropriate behavior. We do think that the criteria 
are the way to go and should be pushed forward.
    Chairman JOHNSON. I would hope that if we had good 
criteria, we wouldn't have to have artificial additional 
structures. I see your short-stay policy as the parallel in the 
long-term care arena to the transfer policy in the acute care. 
Is that unreasonable?
    Mr. KUHN. I think the tools that we have are--or I should 
say the strongest tool that we have is really payment, and so 
to deal with the post-acute care policy we had last year and 
last year's In-patient Prospective Payment System (IPPS) rule 
was really designed to make sure that when we had an episode of 
care and we were paying for an episode of care in the acute 
care side, we wanted to make sure that we got those full 
services, and that was to try to prevent premature transfer to 
some post-acute care facility.
    The same holds true here, that we really want to pay 
accurately for the care that is provided, and so, that is what 
is driving the proposal that we have before us now with the 
short-stay outlier policy.
    Mr. MILLER. What I would say about that is that if you 
think about, and I am not sure this is a lot different than 
what Herb is saying--If you think about payment systems and you 
are trying to build these on the basis of average and you build 
your payment per case around what is happening in the field, in 
the delivery at that time, just like in IPPS, you still might 
want to deal with the extreme cases differently in the payment 
system. You have outlier payments when a case becomes extremely 
expensive, and similarly, in a system of averages, you might 
want to address the other end of the distribution when a case 
is extremely different than what you expected the average to 
be.
    Chairman JOHNSON. Yes, and we did do that in the acute care 
setting. We addressed both the transfer payment and the outlier 
issue at the same time, hoping that that would balance out.
    This, I see a little differently, because when you define 
short stay as five-sixths of the mean and you begin to drop off 
those short stays, you put in place a mathematical system that 
is sort of inexorable. After you deal with the first set of 
short-stay patients, and, remember, you can deal with them in a 
number of ways--You can deal with them in keeping them in the 
acute care setting or sending them to a nursing home, and those 
are the ones you are sort of after. You can also deal with them 
by not accepting certain diagnoses because of the tremendous 
unpredictability of that patient, and we are going to hear more 
of that in the next panel. How much do we know about short 
stays? How predictable is it, how long a patient with this kind 
of complexity will need to be in the hospital? If you look at 
the comparison by diagnostic group, between the length of stay 
in an acute care hospital and the length of stay in a long-term 
care hospital, it is about 3 days to 1.
    There is substantial difference between these patients, and 
if you lop off the bottom, then the next five-sixths is just 
going to include more complex patients and so and so up the 
ladder because it is five-sixths in every diagnostic group. You 
are going to have five-sixths of the ventilator patients and 
five-sixths of this and five-sixths of that. Every year you are 
going to get more and more complex patients. You are going to 
be moving up the complexity ladder through this automatic 
system. That is not quite exactly what happened in the acute 
care sector. This seems to be a far less balanced approach, a 
far more dangerous approach, and when you look at just the 
Lewin Study and its prediction in terms of the hospitals that 
will go from positive to negative margins, almost all of the 
institutions have positive margins now. One could say the 
margins are too high, but one could also be very concerned 
about essentially most of the hospitals going to a negative 
margin under the new payment method--in fact, all but the 
category of hospitals of 300 beds or more.
    I am concerned not only about the tremendous shift that 
will take place under this proposal on average, all hospitals 
going from an average margin of 9.17 percent to an average 
negative margin of 4.9 percent. That is a huge swing. 
Institutionally, that is a huge swing. Then, when you look 
solely at the ones who end up with positive margins are the big 
institutions, I do not want payment policy to drive bigness. I 
am worried, terribly worried about the impact of this, and I 
think it is due to the definition of short stay as being almost 
all the patients, five-sixths.
    What is your view, Mr. Kuhn, in proposing this of its 
ongoing impact on the existence of LTCHs?
    Mr. KUHN. That is a good observation you make, and I think 
the observations you made there are what we have heard from a 
lot in the stakeholder community that we hope, we get comments 
during this open public comment period. I think----
    Chairman JOHNSON. Excuse me. I should have asked that 
question. What did your analysis show before this?
    Mr. KUHN. Yes, and I think your point is well taken. These 
are medically complex patients, and that is the whole point of 
what we are trying to drive here to make sure that we pay 
accurately for them.
    Let me give you some information here that we have looked 
at and give you a sense of the ideas of why this proposal is 
out there. In the acute care setting, the average length of 
stay is about 5 days, and so if someone stays 4 days, the delta 
there is not that great in terms of the resources consumption, 
the activity that is there. If you are looking at these 
patients where the average length of stay for the facility and 
the only classification criteria is 25 days or more, and 
someone is there, presumably, for 30 days, but they are out in 
12, that delta is very large, and I think that is something 
that we have to raise as a big concern about in terms of the 
order of magnitude here in terms of the dollars, the lengths of 
stay that we have, and how we are dealing with these short-stay 
outlier patients.
    In LTCHs in 2004, we had about 118,000 cases. Of those 
cases, 44,000 were short stay. Let me give you a couple of 
facts about that. Sixty percent of those patients, about 
26,000, 27,000, were out in 14 days or less. In fact, 23 
percent of them were out in 7 days or less. the point here 
behind our policy is really trying to say if they are looking 
at--if they are taking acute care patients, maybe should we be 
thinking about paying at the acute care rate for these 
facilities.
    Chairman JOHNSON. Well, see, what disturbs me about your 
policy is it does not focus on 14 days or less.
    Mr. KUHN. No. That is right. It looks at the entire short-
stay outlier threshold, and----
    Chairman JOHNSON. The definition of short stay is not like 
in acute care, where you have an average Diagnosis-Related 
Group (DRG) and then short stay is something below average, a 
certain numbers of days below average. It is five-sixths of the 
mean.
    Mr. KUHN. Right. Again, the point is that many of these are 
very, very short stay, and I think this is something that as 
the industry has come in and presented their information--and I 
will say that they have been very responsible in coming forward 
with good information. These are the kind of points that we 
need to have in the notice and comment period that we are in 
now so we can evaluate, we can analyze as we move forward to a 
final regulation.
    Chairman JOHNSON. As you proposed this, did you make any 
runs of your information as to what the impact would be? If so, 
what was your estimate of the impact?
    Mr. KUHN. The impact right now for the short-stay outlier 
policy is about savings of $440 million. It is about 11, 11.4 
percent, I believe, reduction in payment.
    Chairman JOHNSON. Have we ever proposed for any other 
provider an 11-percent reduction in a single year?
    Mr. KUHN. For institutional providers, I am not aware.
    Chairman JOHNSON. I don't remember any reduction of that 
magnitude. Mr. McCrery?
    Mr. MCCRERY. Thank you, Madam Chair. You asked a lot of 
good questions, and you covered much of what I was going to get 
into, but let me just probe a little more. The LTCHs are paid 
on a PPS; is that right?
    Mr. KUHN. That is correct.
    Mr. MCCRERY. That PPS, I assume, is based on kind of an 
average length of stay?
    Mr. KUHN. Yes, basically there is kind of a parallel 
system. We have the DRG system that is kind of a charge-based 
weight system in there, and the LTCH is basically--the LTC. 
DRGs is basically a very parallel system to that with the same 
kind of weighting process that goes on. It is based on averages 
determine the weights, the values for each and every DRG, and 
then, of course, that is multiplied times the standardized 
rate.
    Mr. MCCRERY. That is why you talked about the delta between 
the short stays, the outliers, and the average stay in an LTCH.
    Mr. KUHN. Yes, to give you a sense of the order of 
magnitude, right now, I think for the acute care side, the 
standardized rate is about $4,700; for LTCHs it is $38,000. It 
is a huge difference. If you have something that is a weight of 
1.5 for each one, you can see the dollar differentiation that 
we have here, and that is why I think it raises a big question 
for us if we have folks that look like acute care patients. 
Should they really be treated as acute care patients and not in 
an LTCH facility?
    Mr. MCCRERY. Okay. Well, you know, I think your concern is 
appropriate, but like the Chair, I would question the 
methodology of the five-sixths of the mean, because if you 
achieve the logical result, which would be LTCHs, if they are 
faced with only getting reimbursed--what the acute care 
hospital is going to get reimbursed-- they are not going to 
take those patients. Those patients are going to stay in the 
acute care hospitals. you will reduce the population of the 
LTCHs, but you are still taking five-sixths of the remaining 
mean. you see, it just kind of gets smaller and smaller.
    I understand what you are trying to get at, and I think it 
is a legitimate pursuit. Perhaps, the methodology needs to be 
scrubbed a little. You also made a point a couple times, maybe 
both of you, about in areas where LTCHs are present, acute care 
hospital stays are longer. Is that right?
    Mr. MILLER. Shorter. Where long-term care hospitals are 
present, acute care hospital lengths of stay are shorter.
    Mr. MCCRERY. Acute care hospital stays are shorter?
    Mr. MILLER. Yes, so that, in other words, the presumption 
here is that someone leaves the hospital earlier and goes to a 
long-term care hospital.
    Mr. MCCRERY. Okay, yes. The opposite is true as well. In 
areas where LTCHs are not present, the acute care hospital 
stays are longer. That is what I was trying to get at.
    Mr. MILLER. Right, right.
    Mr. MCCRERY. Well, duh. I mean, if you don't have an LTCH 
to send them to and they have these complex problems, I mean, 
they are going to keep them. They may not be able to treat them 
as effectively as a LTCH, but there is nowhere else for them to 
go. I don't see the point of that data, really.
    Mr. MILLER. Well, I think what we were driving at, if I 
understand your question--at least let me get a couple of 
distinctions in.
    Mr. MCCRERY. I may not understand my question either.
    Mr. MILLER. No, it is quite all right.
    Mr. MCCRERY. We will talk, though.
    [Laughter.]
    Mr. MILLER. Okay. It is complicated. I mean, what we were 
going at was, okay, you have markets with and without. When 
these things present in a market, what happens? Relative to 
what the average is and what is going on, you know, the secular 
trends in the data, when these enter the market--what happens 
is--and it is not just hospitals--skilled nursing facility 
services go down, and the length of stay in the hospital goes 
down. What these things seem to be doing is taking the place of 
a person staying in a hospital for a longer period of time, say 
in a step-down unit or something like that, or in some 
communities these people go to skilled nursing facilities; 
although, I would like to stress there that the ability for a 
skilled nursing facility to deal with these kind of patients 
varies, you know, from facility to facility and market to 
market.
    We are just trying to say if these didn't exist, the 
patient would likely stay in the hospital longer or head to a 
skilled nursing facility. When they present, that is where you 
see the changes. Then the reason we were doing all of that was 
to figure out whether it cost Medicare more or less than if 
they had just stayed in those settings. That is what we are all 
driving at.
    Mr. MCCRERY. Okay. Well, I think it is clear that if the 
patient stayed in those settings, it would cost Medicare less 
because you pay those treatment facilities less than you pay 
the LTCHs.
    Mr. MILLER. If I could just get one--that is what we found, 
but just one subtlety past that. If you focus on a certain 
group of patients, patients with certain diagnosis--ventilator 
dependency, need for wound care, infectious disease, that type 
of thing, and the most severe of those patients, and then you 
ask the same set of questions again, the difference in cost is 
not as great.
    Mr. MCCRERY. Yes.
    Mr. MILLER. If you focus it on certain patients, then the 
long-term care hospitals, because you are looking over an 
episode of care, do not appear to be as expensive relative to 
other settings.
    Mr. KUHN. I would just add the point you are making is kind 
of part of this overall larger debate of what we are trying to 
do here in the entire post-acute care. I know that Chairwoman 
Johnson had a terrific hearing on this last year where we 
really began to look at thoughtfully, the patient care needs 
instead of the name of the facility on the door, because right 
now we pay one rate at one facility, another rate at another 
facility, but it does not really logically follow what does the 
patient need and what is the appropriate payment for that 
patient. So----
    Mr. MCCRERY. There is a study underway right now to get at 
that.
    Mr. KUHN. Part of our effort, in fact, in the Deficit 
Reduction Act (P.L.109-171), you gave us additional authority 
to go out and do a demonstration in this area and do even more 
work in this area, and part of these changes that we are 
talking about here are a logical extension of that and 
incremental movement in that direction.
    Mr. MCCRERY. You are not--my time has expired.
    Chairman JOHNSON. That is okay.
    Mr. MCCRERY. You are not suggesting then, as an uninformed 
observer might conclude based on some of your statements, that 
LTCHs are just not needed?
    Mr. KUHN. No, I wouldn't make that statement at all. I 
think they have a good role, and for those very medically 
complex patients, they do very good work.
    Mr. MCCRERY. If they are needed. If they have a place in 
our health care system, then it seems to me that this study is 
going to tell us a lot about who should go to these LTCHs and 
how much they should be paid. I echo the Chairwoman's comments 
that maybe we are putting the cart before the horse here in 
adjusting the payment rates before we complete this study, to 
get a more complete picture of the appropriate place in our 
system for these settings.
    Mr. KUHN. I think that is a good observation, and we have 
heard that in comments from the stakeholders in the industry 
about this. Our thoughts are this: As I indicated earlier, with 
the short-stay outlier policy that is about $440 million. We 
will have this RTI study this spring. There is going to be some 
analysis, discussion with the industry. It may raise additional 
questions that we have to answer. It could be several years 
before we are ready to move forward on this, and I think as 
stewards of the trust fund, the opportunity from things that we 
have seen in terms of these short-stay patients, we think it is 
appropriate to go ahead and move forward with this policy. That 
is why we have proposed it. Again, we are in the comment 
period, but that is why we proposed it.
    I hear what you are saying, and I think that others have 
raised that as well. From our aspect, it could be a few years 
before we get to that stage. Meanwhile, we think there is an 
opportunity, because the only lever that we have is the payment 
changes to go ahead and make some incremental adjustments here 
to move forward, and that was the basis of our proposal.
    Mr. MCCRERY. Okay, but I would just urge you to scrub your 
payment proposal a little bit more.
    Mr. MILLER. Could I say one thing about that, too? I am 
also aware of that study, and I think Herb said it here right 
at the end of his comments, you know, several years. I think 
there are two ways to think about it. Fortunately, or 
unfortunately, we have a bunch of silos in our post-acute care 
systems, and I think the way we think about it is let's try and 
get that as right as possible while we are trying to get above 
it and get it right across everything. we would urge that the 
criteria be thought through here, too, so that you are defining 
what is happening inside this box. You know, even though, 
maybe, we do not want all these separate boxes, but in the 
short run, that is what we are living with.
    Mr. MCCRERY. Okay. Thank you, Madam Chair.
    Chairman JOHNSON. Thank you. I am very concerned by your 
answer, Mr. Kuhn, to Mr. McCrery's inquiry. First of all, the 
RTI study, which we all look forward to, was actually due 
January 1, 2005. We had this series of hearings planned, we 
have others in this series, to look at the criteria in the 
whole post-acute care arena, not just long-term care 
hospitals--rehabilitation hospitals, nursing homes, home care--
because it isn't just LTCHs that need to have clearer criteria. 
The whole system needs to have clearer criteria so that you can 
get over the sort of placement between the different settings, 
but also guarantee that Medicare patients will have access to 
the advanced care that they need, depending on their illness 
and state of physical well-being.
    We are behind the wheel on this, but I am very disturbed 
that you think that it might take you several years to do 
criteria-based, and that you would be willing to go ahead with 
this short-stay proposal before that, because I see this as 
absolutely the old world, blunt instrument. You are going to 
hear in the panel or your people will hear in the panel, and 
you saw yesterday the industry is far ahead of you. There are 
criteria based proposals that we would be better off starting 
with. If we do a criteria-based proposal, then we will see what 
portion of this problem of under 14 days is criteria-based and 
just that you cannot estimate who is going to die or who is 
going to get well fast and how much of it is actually the 
patient is in too expensive a setting for that patient's 
medical needs.
    I certainly--if that is what you are thinking, then I do 
want to have your staff provide me with copies of the runs that 
your staff did to see what would be the impact of a short-stay 
proposal you are making, because I want to see if they knew at 
the time when they came to the 11 percent, because the 11 
percent is about what Lewin comes to, too. I want to see did 
they realize that everybody was going to be negative margins? 
Did they realize that the average margin in the South was going 
to go from plus 7 to minus 7 and that 78 percent of the 
providers were going to have negative margins? That is just in 
the South.
    In the Midwest and in the North, 55 percent, 56 percent 
would have negative margins; 52 percent would have negative 
margins. I am not interested in a system that treats people as 
complex and sick as these people are, needing as many services 
and as many physicians available to them.
    I want to see those runs because I want to see exactly what 
your people thought you were doing, not just in terms of how 
much money you were going to save, but what was going to be the 
impact on the provider community.
    The last comment. This mechanistic issue is a big issue 
because the five-sixths 1 year is going to be five-sixths--
somebody whose normal DRG is 65 days, and they got 55, or 
whatever five-sixths is. That is a lot of time. If you pay them 
at an acute care rate, you don't even pay short stays in an 
acute care hospital, an acute care day rate. You pay them 
double the first day. To go from the acute care setting to a 
long-term care setting and propose that you pay an acute care 
rate, I mean, that worries me. It worries me that this project 
is not only a very blunt instrument, but the lowest ball on the 
totem pole. I can't tell you any comparable experience that I 
have had, and I have been serving on this Committee since, I 
don't know,1979 or something.
    I do want to see the work sheets and know how you got here 
because this isn't where I am interested in going myself. I am 
interested in going to a criteria-based system, and you will 
hear both sides, both the big national chains and the smaller 
nonprofits, have done an enormous amount of work and are ready 
to hand you a criteria-based system. With a year's experience 
with that, then we could see what is the real honest short-stay 
problem.
    Mr. KUHN. We would be happy to give you all the impacts 
that we have in the regulation and any others that would help 
you understand kind of our analysis and what we did.
    Chairman JOHNSON. It is the analysis that I am interested 
in understanding.
    Mr. KUHN. You bet.
    Chairman JOHNSON. Thank you. Thank you very much. Anything 
else?
    Mr. MCCRERY. No.
    Chairman JOHNSON. Thank you very much. We will start with 
the next panel.
    Chairman JOHNSON. Welcome, Mr. Altman. Will you proceed, 
please?

STATEMENT OF WILLIAM M. ALTMAN, SENIOR VICE PRESIDENT, KINDRED 
                HEALTHCARE, LOUISVILLE, KENTUCKY

    Mr. ALTMAN. Good afternoon, Chairman Johnson, Mr. McCrery. 
Thank you for the opportunity to address the Subcommittee on 
the role of long-term care hospitals in the health care 
continuum.
    My name is Bill Altman, and I serve as senior VP of 
Compliance and Government Programs for Kindred Healthcare. As 
you noted in your introductory remarks, Kindred has a diverse 
set of post-acute services ranging from long-term acute care 
hospitals, nursing facilities, rehabilitation services, and 
pharmacy services, and we operate in over 40 States. I am also 
here on behalf of the Acute Long Term Hospital Association, 
ALTHA, which is the trade association for LTCHs. It represents 
over 60 percent of LTCHs nationwide.
    In the time that I have, I want to basically address three 
issues. First of all, I want to talk about the role of LTCHs in 
the health care continuum, but in the broader context of the 
deliberations of the Subcommittee and MedPAC about the entire 
post-acute space in an attempt to rationalize it. Then, I want 
to amplify a little bit on your comments about the impact of 
this proposed CMS policy on LTCHs. Then, I want to talk 
specifically about why the CMS policy proposal is flawed.
    With respect to the role of LTCHs, let me be clear. Kindred 
and ALTHA support the Committee's initiatives to make sure that 
Medicare beneficiaries are placed in the most appropriate 
setting and that the payments are designed first and foremost 
based on the clinical needs of the patients and the intensity 
of the services they provide. Simply put, the proper role for 
LTCHs, as we have consistently told this Committee, MedPAC, and 
CMS, is to treat the small number of medically complex, 
severely ill patients that require the intense unique services 
that LTCHs provide. As you noted, we have put proposals forth 
that would specifically be designed to ensure that that is the 
proper role of LTCHs.
    Now, unfortunately, as you pointed out, CMS has not 
reciprocated our overtures to them in terms of pursuing this 
shared policy goal, and they have resorted to the blunt payment 
approach that you talked about. I applaud you for asking for 
the data that they relied on and the impact analysis. We have 
asked for the same data. We have also asked for data on 
severity of illness of the patients, both among the short-stay 
outliers and the rest of the LTCH patients, and, frankly, we 
have not received that. We have done our own analysis, and I 
want to talk a little bit about that.
    Before I do, I do want to talk a little bit more about the 
impact and put it in the context of total Medicare spending. As 
you noted, despite growth, LTCH spending from Medicare amounts 
to around 1 percent, and it has been consistent over time, and 
that is an important contextual piece to understand the 
increase in LTCH spending.
    I would also note, to digress for a moment here, that since 
the implementation of the Hospitals In Hospitals (HIH) rule, we 
have seen a significant decline in the number of new LTCHs 
opening. This is based on CMS' own data, and I am not quite 
sure where CMS gets its information from to assert that we are 
seeing continued growth in LTCHs, particularly among free-
standing LTCHs, which is primarily what Kindred does, because 
in 2005, according to CMS's own data, we saw a dramatic decline 
in the number of HIHs that were started, and that is when the 
HIH rule really hasn't gone fully into effect. It is phased in 
over a number of years. We saw one fewer--ten--new free-
standing LTCHs that achieved provider numbers in 2005, and that 
is compared with eleven the year prior. I am not quite sure 
where CMS gets its information to suggest that we are 
continuing to see rapid growth.
    I think the HIH rule has begun to take hold, and we support 
rational growth limited to LTCHs treating medically complex, 
severely ill patients, and I think we are beginning to see 
that. Certification criteria will achieve that in a much more 
direct way. We don't think it should take 2 to 3 years. MedPAC 
made their recommendation in 2004, and we are ready to go, and 
we want to work with this Committee and CMS to see proper 
certification criteria put in place.
    The other thing I want to emphasize is that as a percentage 
of what the Administration has proposed in terms of Medicare 
savings; although LTCHs only represent 1 percent of total 
Medicare spending, in fiscal year 2000 this rule alone accounts 
for 10 percent of the savings proposed by the Administration. 
We think that is disproportionate.
    Let me jump right to the short-stay outlier policy. It has 
been described and you have pointed out some of the logical 
flaws and the actual flaws in it and questioned some of the 
data. Let me just walk very quickly through four assumptions 
that CMS has made in justifying their policy and point out 
through their own data why it is flawed.
    First of all, CMS makes the assumption that LTCH short-stay 
patients--and as you pointed out, many of these patients are 
not short-stay. They have a very long length of stay relative 
to other patients. They make the assumption that those patients 
are clinically similar to patients in the short-term acute care 
hospital and that is the rate that they want to pay. That is 
not accurate.
    We took their same data, the MedPAR data, and assigned 
severity of illness ratings to all LTCH patients, short-stay 
LTCH patients, and compared them with the short-term acute care 
hospital patients. What we see is two things: First of all, 
there is really no difference between the short-stay LTCH 
patients and the regular LTCH patients in terms of their 
severity of illness. The second thing we see is that almost 
twice as many short-stay LTCH patients are in the highest 
severity of illness categories as compared to the short-term 
hospital world.
    Now, that has significant implications not only for 
payment. It is easy to see why the payment shortfall exists 
that you pointed out and the negative margins that Kindred, 
too, will experience as a result of this rule. It is also 
important to know that when the patient comes to us, they look 
basically the same. We do not know whether they are going to be 
short stay or long stay or very long stay. Many are very long 
stay, high-cost outliers. that is the first assumption that is 
actually false based on the data from MedPAR database, 
Medicare's own data, with respect to severity of illness.
    The second assumption that CMS makes is that the short-stay 
patients, just by virtue of their label of short stay, as you 
pointed out, Mrs. Johnson, they have a similar length of stay 
to the short-term acute care hospital patient. We also know 
that that isn't true. Even the short-stay patients have an 
average length of stay of almost 13 days, and that is based on 
the five-sixths threshold. That compares with an average length 
of stay in the short-term hospital world of just over 5 days.
    It is easy to see when you put those two pieces of 
information together--the high severity of illness and the long 
length of stay--why there is such a significant payment 
shortfall and why it is inappropriate to use the short-term 
hospital rate.
    The third assumption that you pointed out, Mrs. Johnson, is 
that LTCHs can predict in advance who is going to be short 
stay, who is going to be normal stay, who is going to be long 
stay, and, more importantly, what the clinical outcome is going 
to be of those patients when they come to us. With this 
medically complex population, it is impossible to predict, 
particularly who is going to be successfully treated and live 
or die. Many of these patients, as it has been pointed out, are 
dependent on ventilators for breathing, and the science is not 
there in terms of being able to predict who is going to 
successfully wean from that ventilator. That is a big 
assumption made in this proposed rule, that we can actually 
change our behavior. We will just not admit short-stay 
patients. The physicians who make the discharge decisions and 
the admission decisions are unable to predict in advance, and I 
would argue should not predict before the full course of care 
is attempted and completed in the LTCH.
    Finally, the last assumption, as you pointed out, is that 
the 37 percent of cases that happen to fall in by CMS' own 
definition as short-stay outliers is too high and that we can 
do something about it. Mrs. Johnson, you have pointed out the 
mathematical inevitability of that statistic, but I would add 
one thing to that, and that is, there is a built-in 
disincentive for LTCHs to knowingly admit patients who are 
going to be short-stay. If we do that on a routine basis, we 
are no longer going to qualify as an LTCH under the current 
criteria, the 25-day length of stay. You will notice from our 
proposal for certification criteria, we are actually 
recommending that we retain the 25-day length of stay as a 
requirement and put on top of that patient and facility 
criteria. That is one of the reasons, because we do think LTCHs 
are appropriate for the longer-stay patient on average, as you 
have pointed out.
    I would just conclude by saying that I think that the--we 
do believe that the policy proposal is excessive. It results in 
negative margins. We have not been able to find the data to 
support it based on their own data or what we have asked for, 
which they have not given it to us, and I think that that is a 
very problematic. Again, we think that certification criteria 
would address the legitimate policy issues that have been 
raised and would address patient placement, growth, and margin, 
and I have to end by saying that the thing that is most 
disturbing to me about the rule is the lack of discussion about 
quality. We have provided a lot of data about the quality 
outcomes we achieve, and the New York Times article that 
referenced the critical shortage of ventilators in this country 
in the event of a bird flu epidemic is more proof of the needed 
role of LTCHs in our health care continuum.
    Thank you very much.
    [The prepared statement of Mr. Altman follows:]

    Statement of William M. Altman, Senior Vice President, Kindred 
                       Healthcare, Louisville, KY

    Good afternoon Chairman Johnson, Ranking Member Stark and members 
of this Subcommittee. Thank you for the opportunity to comment on the 
role of Long Term Acute Care Hospitals (LTCHs) in the health care 
continuum.
    My name is Bill Altman and I serve as Senior Vice President of 
Compliance and Government Programs for Kindred Healthcare, which is 
based in Louisville, Kentucky. Kindred is a leading provider of 
diversified long term care services, with 78 Long Term Acute Care 
Hospitals, 248 skilled nursing facilities, and several assisted living 
facilities providing services in 40 states. We also provide contract 
rehabilitation and pharmacy services to hospitals, nursing centers, 
outpatient centers and assisted living facilities nationwide. I am also 
testifying as Chair of the Public Policy Committee for the Acute Long 
Term Hospital Association (ALTHA), the association representing over 
two-thirds of LTCHs nationwide.
    We are grateful for the opportunity to testify about a recent rule 
proposed by CMS that reduces payments to LTCHs to a point where care is 
jeopardized for the critically ill Medicare patients LTCHs serve. But 
first I would like to make a few comments on the broader context of the 
Subcommittee's discussions about the role of LTCHs in the health care 
continuum and your efforts to promote a rational policy for the post-
acute sector.
    Kindred is uniquely situated to assist policymakers to define the 
proper role of LTCHs in relation to other providers such as SNFs, 
Inpatient Rehabilitation Facilities, Hospice and Home Health because of 
the diversity of our service lines. Let me be clear from the start--
Kindred and ALTHA support the Subcommittee's initiatives to make sure 
that Medicare beneficiaries are placed in the most appropriate setting 
and that Medicare payments are based first and foremost on the needs of 
patients. Simply put, the proper role for LTCHs is to treat the small 
number of medically complex, severely ill Medicare beneficiaries who 
can benefit from the unique set of intensive services that only LTCHs 
are equipped to provide. To support this policy goal, ALTHA testified 
before this Subcommittee in June of 2005 and expressed our support for 
a range of policies related to post-acute care. Specifically, we 
recommended four guiding principles we believe policymakers should 
follow in this area:

    1.   First, policy should seek clearer definitions of the distinct 
role of each post-acute provider, while recognizing that a certain 
amount of overlap is inevitable and necessary to ensure continuity of 
care across settings;
    2.   Second, policy should explore development of a unified post-
acute assessment instrument. Development of such an instrument is an 
important prerequisite to deciding appropriate patient placement, 
coordinating care, and possibly determining appropriate payment;
    3.   Third, consistent with MedPAC's recommendations, patients 
should be cared and paid for in the most appropriate setting, based on 
an objective evaluation of clinical characteristics, needs and resource 
intensity. Patients who can be safely and effectively cared for in SNFs 
should not be treated and paid for in LTCHs or IRFs. Likewise, severely 
ill, medically complex patients should have access to the intensive set 
of services only available in LTCHs;
    4.   Fourth, also consistent with MedPAC's recommendations, policy 
should require not only that patients be placed in the appropriate 
setting, but that providers have the capacity to meet the needs of 
patients, in terms of staffing levels, staff skill mix, availability of 
diagnostic tests, sophistication of technology and intensity of 
service.

    Chairman Johnson, as we have discussed with you and your staff, 
Kindred has begun our own work in developing tools to evaluate patients 
for the purposes of making appropriate decisions about placement and 
care planning. And ALTHA has put forth specific policy proposals to 
refine the current LTCH certification criteria to help ensure that 
LTCHs admit, treat and get paid for medically complex Medicare 
beneficiaries. These are critical steps towards rationalizing the 
entire post-acute sector and we stand ready to work with policymakers 
through demonstration projects or joint research studies to advance 
policy in this area.
    Unfortunately, all of our attempts to work with CMS toward these 
shared policy goals have not been reciprocated. Instead, CMS has 
resorted to the bluntest of policy approaches--draconian payment cuts 
at unprecedented levels--with little to no transparent data and without 
even considering other mechanisms that this Subcommittee and MedPAC 
have consistently endorsed. More troubling, CMS has taken these actions 
without even discussing their proposals with other branches of 
government or the LTCH provider community. Nor has CMS analyzed the 
mass of data readily available to it showing the defects in its policy. 
Our repeated requests for the data they did rely on have gone 
unanswered.
Impact of CMS Proposal
    As you heard from earlier testimony, CMS proposes not only to 
freeze LTCH rates by holding the LTCH market basket update to zero, 
they propose cutting rates an additional 11.1% by applying a policy 
that assumes, wrongly, that some 40% of LTCH patients whose length of 
stay is shorter than the average for all LTCH patients should have 
never been admitted to the LTCH in the first place. Last Friday, ALTHA 
submitted comments to CMS detailing why this policy is flawed, and we 
have provided these comments to the Subcommittee as part of our written 
testimony.
    Before summarizing why CMS's policy proposal is wrong, I urge the 
Subcommittee to evaluate it in the context of total Medicare spending 
and the recent deliberations in Congress about Medicare savings. 
Despite recent growth in the number of LTCHs, LTCHs still represent 
only about 1% of total Medicare spending. Specifically, in 2005, 
Medicare spending on LTCHs represented just 1.3% of total Medicare 
spending. Yet, in the Administration's budget, which proposes an 
addition $36 billion in Medicare savings over the next 5 years, over 7% 
of proposed Medicare savings comes from the LTCH rule we are discussing 
today. In fiscal year 2007 alone, over 10% of the proposed savings 
comes from LTCHs. This level of cuts is disproportionate to the share 
of Medicare attributable to LTCHs. It is important for the Subcommittee 
to understand that these LTCH cuts would be imposed by regulation--
unlike other parts of the proposed Budget, no Congressional action is 
needed or requested for these cuts to take effect on July 1st of this 
year.
    It is not surprising therefore that CMS's proposal violates the 
threshold principle that Medicare payment systems should at least 
attempt to cover costs. On the contrary, CMS's proposal fails to cover 
the costs that LTCHs incur in caring for Medicare's most medically 
complex beneficiaries. For Kindred, CMS proposes to pay rates in the 
upcoming rate year that fall short of our actual costs by 6.2%. Revenue 
shortfalls of this magnitude cannot help but call into question our 
ability to continue to provide the level and intensity of service our 
patients expect and deserve.
CMS Policy on ``Short Stay Outlier'' Patients is Flawed
    The major reason that CMS's proposal cuts rates so significantly is 
the way it proposes to pay for so-called ``short stay outlier'' 
patients. As you know, LTCH payments are divided into 3 categories: 1) 
Normal DRG payment for patients whose length of stay is about average; 
2) High Cost Outlier payments for patients with usually high and 
unpredictable costs of care--those whose length of stay is longer than 
average; and 3) Short Stay Outlier payments for patients whose length 
of stay is shorter than average.
    It is important to understand what a short stay outlier patient is, 
and what it is not, to understand why CMS's policy is flawed. CMS 
defines ``short stay outliers'' as those patients with lengths of stay 
less than 5/6ths of the mean length of stay for all patients in the 
same diagnostic category (i.e., DRG). Each DRG has its own length of 
stay and, not surprisingly, patients in those DRGs have different 
lengths of stay resulting in an average length of stay for all 
patients. For example, the average length of stay for the most common 
LTCH patient, those dependent on mechanical ventilators for breathing, 
is about 34 days. The threshold for defining these patients as ``short 
stay'' is 5/6ths of the mean, or 28.5 days. So an LTCH could 
successfully wean a patient from the ventilator in 26 days, send the 
patient home, and that patient would be defined as a ``short stay 
outlier.'' Likewise, weaning attempts could fail and the patient, with 
family support, could decide to terminate life support before reaching 
the average length of stay. The average length of stay for all ``short 
stay'' patients is just under 13 days, almost 3 times as long as the 5-
day average length of stay for all patients in a short-term acute care 
hospital.
    CMS now proposes to pay for these ``short stay'' outlier patients 
at rates that are equivalent to what short-term community hospitals are 
paid for patients in the same diagnostic categories. CMS assumes--
wrongly-- that the patients in these two settings are clinically 
similar and therefore require the same level of resources and cost the 
same to treat. In fact, CMS's own data, which it failed to consider in 
formulating the policy, shows the opposite--LTCH patients in the same 
diagnostic categories are much sicker and have much longer lengths of 
stay than patients in short-term acute care hospitals. This is true 
even for so-called ``short stay outlier'' patients in LTCHs. In fact, 
short stay outlier patients in LTCHs are really no different from other 
LTCH patients in terms of how sick they are, their risk of mortality 
and their major diagnostic categories.
    The following graph shows the percentage of patients that are 
classified in the highest severity of illness categories for all LTCH 
patients, ``short stay'' LTCH patients, and short-term acute care 
hospital patients. I want to re-emphasize that these data come from 
CMS's own database--MedPAR--and CMS could have done the same analysis 
to evaluate the appropriateness of its proposed policy. The graph shows 
that LTCH patients are much sicker than equivalent short-term acute 
care hospital patients in the same diagnostic categories. Even ``short-
stay'' outlier LTCH patients are sicker--in fact, nearly twice as many 
short stay LTCH patients are in the highest severity of illness 
categories. Equally important, shorter stay LTCH patients are really no 
different than other LTCH patients in terms of how severely ill they 
are.



    Likewise, LTCH patients--even so-called ``short stay'' patients--
have much longer lengths of stay than do equivalent short-term acute 
care hospital patients. Table One shows that, on average, LTCH patients 
have a length of stay of about 27 days, ``short stay'' patients have a 
length of stay just under 13 days, and Short-Term Acute Care Hospital 
patients have lengths of stay of just over 5 days.

                                     

                                TABLE 1





                                                                                                                                               LTCH
                                                                                                                                              Short    Short-
                                                                                                                                               Stay
                                                                                                                    LTCH DRG    Description  Average  Hospital
                                                                                                                                              Length
                                                                                                                                                of     of Stay
                                                                                                                                               Stay

475                                          RESPIRATORY SYSTEM DIAGNOSIS WITH VENTILATOR SUPPORT           13.0          8.0
87                                           PULMONARY EDEMA & RESPIRATORY FAILURE                          13.0          4.9
88                                           CHRONIC OBSTRUCTIVE PULMONARY DISEASE                           9.8          4.1
271                                          SKIN ULCERS                                                    13.0          5.5
89                                           SIMPLE PNEUMONIA & PLEURISY AGE >17 W CC                       10.1          4.8
                                             All DRGs (weighted by case frequency)                          12.7          5.6


    The combined effects of higher severity of illness and longer 
lengths of stay explains why CMS's policy is flawed and results in such 
significant payment shortfalls. Simply put, patients who are, on 
average, more severely ill and have longer lengths of stay are more 
costly to care for. Prospective payment systems produce rates based on 
these averages. Use of a prospective payment system for short term 
hospitals, based on one set of averages, will never produce rates that 
are adequate for the LTCH prospective payment system, which is based on 
another set of averages.
    Consider the example I mentioned above regarding patients dependent 
on ventilators. The payment rate for LTCHs for a ventilator dependent 
patient assumes that the patient will stay in the LTCH 34 days, on 
average. Even ``short stay'' patients stay, on average, 13 days. Under 
CMS's proposed rule the LTCH would receive the short term hospital 
payment rate for all patients who stay less than 28 days--the threshold 
for defining ``short stay''--when the average ventilator dependent 
patient in the short term acute care hospital stays only 8 days. The 
perverse effect of CMS's policy is to penalize LTCHs who admit and 
treat the most medically complex patients who happen to be defined as 
``short stay'' under CMS's own rules.
    HHS had it right in 1982 when it told this Subcommittee that paying 
LTCHs (and other exempt hospitals) under a short-term hospital DRG 
system would be inappropriate because the system ``was not designed to 
account for [the] types of treatment'' found in these hospitals and 
therefore ``would be inaccurate and unfair'' (August 31, 2002 Federal 
Register, Vol. 67, No. 169, p. 55957). Congress had it right in 1983 
when it exempted LTCHs because ``the DRG system was developed for 
short-term acute care hospitals and as currently constructed does not 
adequately take into account special circumstances of diagnoses 
requiring longer 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). And CMS had it right in 2002 when it first developed 
the LTCH-specific DRG system at Congress' direction and stated that the 
short-term hospital system could ``systematically underpay'' LTCHs ``if 
the same DRG system were applied to them.'' (August 31, 2002 Federal 
Register).
    Without any data analysis, CMS justifies its proposed policy by 
making a number of assumptions, each of which is without substance. 
First, CMS asserts that LTCH patients who stay shorter than the average 
did not complete their course of care in the short-term acute care 
hospital and have been discharged too early. Yet, CMS's own data shows 
that patients discharged to an LTCH had prior lengths of stay in a 
short-term acute care hospital of over 13 days, nearly 3 times the 
average length of stay of just over 5 days for all other patients. So 
there is no evidence that short-term hospitals are discharging 
medically complex patients to LTCHs earlier than is clinically 
appropriate.
    CMS next assumes that LTCHs can predict--in advance--how long 
patients will stay and what the clinical outcome of their care will be. 
This assumption is particularly troubling because it is very difficult 
to predict length of stay or clinical outcome with the medically 
complex patient population that LTCHs typically treat. As I noted 
above, shorter stay LTCH patients are no different than the average 
LTCH patient in terms of severity of illness, making it even more 
difficult for LTCH physicians to distinguish between patients whose 
length of stay may be shorter than average. I would also note that a 
certain percentage of these medically complex patients expire during 
their LTCH stay, some shortly after admission. Here again, LTCH 
physicians cannot predict in advance with any accuracy whether or when 
patients may expire. In fact, the ``risk of mortality'' for short stay 
patients is virtually identical to the average LTCH patient.


    Finally, CMS asserts that because 37% of LTCH cases are defined as 
``short stay'' outliers, then LTCHs somehow must be engaged in 
admission practices that are inappropriate. But the percentage of short 
stay cases is determined by CMS's own rules and it is not surprising 
that about half of all patients have lengths of stay below the mean of 
all patients--it's simply proving the law of averages. When the same 
definition is applied to short-term acute care hospitals, over 40% of 
cases are likewise defined as ``short stay,'' a statistic that is 
understandable given the definitions used by CMS. And even assuming 
LTCHs could predict length of stay or clinical outcome in advance, 
there is a built-in disincentive against LTCHs admitting patients whose 
length of stay might be short. If they routinely admit short stay 
patients, LTCHs risk losing LTCH certification status because they will 
no longer be able to meet the 25-day length of stay threshold for 
qualifying as an LTCH.
Conclusion and Recommendations
    As I noted at the outset, this Subcommittee and MedPAC have raised 
legitimate issues regarding the proper role of LTCHs in the health care 
continuum, appropriate patient placement and recent LTCH growth. 
Kindred, in partnership with other ALTHA members, have developed 
specific policy alternatives designed to define an appropriate role for 
LTCHs. An inevitable byproduct of this work will be to ensure 
appropriate patient placement and limit growth. Specifically, we 
fundamentally agree with MedPAC's recommendation and this 
Subcommittee's endorsement that LTCH certification criteria should be 
refined to ensure that medically complex, severely ill patients are 
admitted to LTCHs. We have provided MedPAC and this Subcommittee the 
details of this proposal. We also provided a copy to CMS months ago, 
but have yet to receive any kind of response. Certification criteria, 
not draconian payment cuts, are the appropriate policy response to the 
LTCH policy issues we've been discussing today.
    We also recommended to CMS in our comments a variety of non-payment 
approaches to address the policy issues they perceive to exist with 
shorter stay patients. For example, pre-admission physician 
certification of the need for LTCH services, coupled with post-hoc 
reviews of medical necessity as called for by MedPAC, would address the 
concerns raised by CMS. Similarly, ALTHA has long-encouraged CMS, as 
has MedPAC, to adopt uniform admission screening criteria to ensure the 
appropriateness of LTCH admissions. Many LTCH providers and Quality 
Improvement Organizations (QIOs) use such screening tools, but CMS has 
yet to standardize their use.
    Finally, in our comment letter we have also encouraged CMS to adopt 
a more targeted approach to addressing its concerns about shorter stay 
patients, rather than resorting to across the board dramatic payment 
cuts. While we generally oppose use of the payment system to address 
the issues raised, CMS could easily target payment reform to ``very 
short stay'' patients and avoid the damage caused by the proposed rule.
    I would be remiss if I did not close today by sharing with the 
Subcommittee the importance of what LTCHs do in terms of quality 
outcomes. Perhaps most disappointing about CMS's proposed rule is the 
lack of any discussion about quality or any analysis about the impact 
of the payment reforms on access or quality. Kindred is very proud of 
the quality outcomes we have been able to achieve over the last several 
years in key areas of importance to the medically complex patients we 
treat. These outcomes were not achieved by chance--our strategic 
quality plan has systematically improved outcomes in key clinical areas 
such as ventilator associated pneumonia rates, blood stream infection 
rates, customer satisfaction, and ventilator weaning ratios.


    * Internal Kindred Data, Rates Per 1,000 Patient Days
    Based on available data, our clinical outcomes exceed those in 
other settings.
Kindred Complication Rates are Less than Other Health Care Settings*


    * National Nosocomial Infection Surveillance (NNIS) (2003)
    Internal Kindred Data, Rates Per 1,000 Patient Days
    Just this last Sunday the New York Times reported a critical 
shortage of available ventilators should the bird flu pandemic reach 
the United States. LTCHs are a vital part of our nation's already 
fragile infrastructure for complex respiratory care. CMS's proposed 
rule would deal a significant blow to this infrastructure. We look 
forward to working with the Subcommittee, MedPAC, CMS and others to 
implement policy reforms for LTCHs and other post-acute providers that 
balance fiscal responsibility with access to critical care.
    Thank you again for the opportunity to testify and I would be happy 
to answer any questions you have.

                                 

    Chairman JOHNSON. Thank you. Ms. Moore?

   STATEMENT OF LAURA N. MOORE, VICE PRESIDENT, STRATEGY AND 
          OPERATIONS, MASSPRO, WALTHAM, MASSACHUSETTS

    Ms. MOORE. Chairwoman Johnson, Congressman McCrery, and 
Congressman Pomeroy, I would first like to thank you for 
allowing me to address you today. My name is Laura Moore, and I 
am the Vice President of Strategy and Operations for MassPRO, 
the quality improvement organization, also known as the QIO, 
for Massachusetts. I am here today to provide some information 
related to the use of patient criteria for long-term hospital 
patients. My discussion will center on screening criteria to 
evaluate whether beneficiaries being treated in the long-term 
care hospitals specifically need the level of care that these 
hospitals provide. As a representative of the QIO community, my 
role and the basis of expertise that I can provide to this 
Committee is related to the patient-centered and evidence-based 
assessment that we practice in our case review efforts, rather 
than the financial aspects of the process, since QIOs are 
quality/performance improvement, not payment, organizations.
    As a QIO, MassPRO has significant experience with assessing 
the importance of employing the right criteria to ensure the 
appropriateness of both the admission and the continued stay. 
More particular to our testimony today, our nurse reviewers 
perform case review under contracts with the Centers for 
Medicare and Medicaid Services--CMS--one of the statutory 
requirements for federally designated QIOs, as well as our 
State Office of Medicaid.
    In addition to the case review role, MassPRO has 
significant experience with long-term care hospitals because of 
several targeted projects we have worked on. For example, 
MassPRO was contracted by CMS to develop the written manual of 
policies and procedures that the QIOs use to ensure consistency 
and standardization in the review process. In addition, CMS 
used MassPRO's technical expertise in this arena to train other 
QIOs on several fronts, including: what the overall environment 
in the long-term care hospital setting encompasses; how to 
conduct outreach and educate long-term care hospitals on the 
QIO case review process; and how to explain the expectations 
within the--and at the time that we were doing this the new--
prospective payment system, PPS, to long-term care hospital 
providers.
    By introducing this new program with consistent materials, 
CMS promoted consistent and standard review practices. The only 
aspect of the program that was--and still is today--not 
standardized is the use of screening criteria. As with criteria 
for all case reviews, CMS neither requires not promotes the use 
of a single set.
    In addition, MassPRO is currently working with the National 
Association of Long Term Care Hospitals, NALTH, in its effort 
to modernize patient-level screening criteria for the long-term 
care hospital industry. We are assessing NALTH's five sets of 
screening criteria to ensure that severity of illness and 
intensity of treatment are appropriate and valid. Although the 
effort is still in process, our assessment so far is that these 
criteria are on the right track. They address the complex 
medical conditions of long-term care hospital patients, and we 
believe that providing a standard, consistent measurement tool 
will not only improve quality of care but also help protect the 
Medicare trust fund by reducing inappropriate admissions.
    An example of our experience with long-term care hospital 
providers in Massachusetts is as follows: since August 2005, 
MassPRO has reviewed 75 long-term care hospital cases, 
including 12 each from two different facilities and 11 cases 
involving respiratory DRGs. Our review process enables case 
reviewers to begin to see patterns of practice and perhaps 
trends, even in the relatively small number referenced above. 
When a patient is discharged in fewer days than the SSO 
threshold, it will be for one of three reasons, other than the 
death of the patient: one, the expertise of the hospital, 
therefore, the patient improves and gets better; circumvention 
of the rules by the providers, for example, multiple transfers; 
or, three, the reality that the patient should not have been 
admitted to the hospital in the first place.
    In its report to Congress in June 2004, MedPAC reported, 
``In general beneficiaries treated in long-term care hospitals 
cost Medicare more than patients treated in alternative 
settings; however, if long-term care hospital care is better 
targeted to those patients who appear to be most suitable for 
long-term care hospital care, the costs to Medicare are more 
comparable.'' MedPAC, therefore, recommended ``patient-level 
criteria should identify specific clinical characteristics and 
treatment modalities.''
    We believe and are in agreement with the MedPAC report that 
many problems with PPS for long-term care hospitals can be 
reduced through efforts to develop screening criteria that will 
improve the appropriateness of admissions and continued stay.
    By having a standard criteria set, long-term care hospitals 
will reduce the number of inappropriate admissions. In its June 
2003 report, MedPAC asserted, and MassPRO agrees, that ``if 
care shifts among settings, it should occur for clinical 
reasons and not because of different payment rates or the 
profitability of specific settings of care.'' By having 
specific criteria in place, only those patients who should be 
admitted to long-term care hospital will be.
    Thank you again for letting me talk with you today, and I 
would be happy to answer any questions.
    [The prepared statement of Ms. Moore follows:]

 Statement of Laura N. Moore, Vice President, Strategy and Operations, 
                          MassPRO, Waltham, MA

    Chairwoman Johnson, Ranking member Stark and the members of the 
Subcommittee, I would like to thank you for allowing me to address your 
committee today. My name is Laura Moore, and I am Vice President of 
Strategy and Operations at MassPRO, the Quality Improvement 
Organization (QIO) for the Commonwealth of Massachusetts. I am here 
today to provide some information related to the use of patient level 
criteria for Long Term Care Hospital (LTCH) patients. My discussion 
will center on screening criteria to evaluate whether beneficiaries 
being treated in LTCHs specifically need the level of care that these 
hospitals provide. As a representative of the QIO community, my role 
and the basis of expertise that I can provide to this committee is 
related to the patient-centered and evidence-based assessment we 
practice in our case review efforts, rather than the financial aspects 
of the process, since QIOs are quality/performance improvement, not 
payment, organizations.
    As a QIO, MassPRO has significant experience with assessing the 
importance of employing the right criteria to ensure the 
appropriateness of both the admission and the continued stay. More 
particular to our testimony today, our nurse reviewers perform case 
review under contracts with the Centers for Medicare and Medicaid 
Services (CMS), one of the statutory requirements for federally 
designated QIOs, as well as our state Office of Medicaid.
    In addition to the case review role, MassPRO has significant 
experience with LTCHs because of several targeted projects. For 
example, MassPRO was contracted by CMS to develop the written manual of 
policies and procedures that the QIOs use to ensure consistency and 
standardization in the review process. In addition, CMS used MassPRO's 
technical expertise in this arena to train other QIOs on several fronts 
including: what the overall environment in the LTCH setting 
encompasses; how to conduct outreach and educate LTCHs on the QIO case 
review process; and how to explain the expectations within the (then 
new) Prospective Payment System (PPS) to LTCH providers. PPS was 
established in regulation in 2002, training and outreach to providers 
occurred in 2003 and the new QIO review process was instituted as 
directed by CMS in January 2004.
    By introducing this new program with consistent materials, CMS 
promoted consistent and standard review practices. The only aspect of 
the program that was (and is) not standardized is the use of screening 
criteria. As with criteria for all case review, CMS neither requires 
nor promotes the use of a single set.
    In addition, MassPRO is currently working with the National 
Association of Long Term Care Hospitals (NALTH) in its effort to 
modernize patient-level screening criteria for the LTCH industry. We 
are assessing NALTH's five sets of screening criteria to ensure that 
severity of illness and intensity of treatment are appropriate and 
valid. Although the effort is still in process, our assessment so far 
is that these criteria are on the right track--they address the complex 
medical conditions of long-term care hospital patients, and we believe 
that providing a standard, consistent measurement tool will not only 
improve quality of care but also help protect the Medicare Trust Fund 
by reducing inappropriate admissions.
    An example of our experience with LTCH providers in Massachusetts 
is as follows: that since August 2005, MassPRO has reviewed 75 LTCH 
cases, including 12 each from 2 different facilities and 11 cases 
involving respiratory DRGs. Our review process enables case reviewers 
to begin to see patterns of practice and perhaps trends, even in the 
relatively small number referenced above. When a patient is discharged 
in fewer days than the SSO threshold, it will be for one of three 
reasons (other than the death of the patient): (1) due to the expertise 
of the hospital, the patient improves and gets better, (2) 
circumvention of the rules by the providers (e.g. multiple transfers), 
or (3) the reality that the patient should not have been admitted to 
the hospital in the first place.
    In its report to Congress in June 2004, MedPAC reported, ``In 
general, beneficiaries treated in long-term care hospitals cost 
Medicare more than patients treated in alternative settings; however, 
if LTCH care is better targeted to those patients who appear to be most 
suitable for LTCH care, the costs to Medicare are more comparable.'' 
MedPAC therefore recommended, ``patient-level criteria should identify 
specific clinical characteristics and treatment modalities.''
    We believe, and are in agreement with the MedPAC report, that many 
problems with PPS for LTCHs can be reduced through the use of 
standardized screening criteria that will improve the appropriateness 
of admissions and continued stay.
    By having a standard criteria set, LTCHs will reduce the number of 
inappropriate admissions. In its June 2003 report, MedPAC asserted, and 
MassPRO agrees, that ``if care shifts among settings, it should occur 
for clinical reasons and not because of different payment rates or the 
profitability of specific settings of care.'' By having specific 
criteria in place, only those patients who should be admitted to LTCHs 
will be.
    MedPAC also recommended that QIOs, given the requisite additional 
funding, could review LTCHs for medial necessity and monitor that these 
facilities are in compliance with defining criteria. By implementing 
both of these recommendations, costs will be reduced and patient care 
improved by providing the necessary tools for LTCHs to select 
appropriate patients and for QIOs to ensure that they do.
    Thank you.
Background Information
    Case Review Process
    The case review process may need some explanation. On a monthly 
basis, CMS assigns a random sample of LTCH cases for full case review. 
CMS uses an average of 1,400 per year (116 per month). In January 2006, 
this review was incorporated under the Hospital Payment Monitoring 
Program (HPMP), whose purpose is to measure, monitor, and reduce the 
incidence of improper fee-for-service inpatient payments, including 
errors in DRG coding; provision of medically necessary services; and 
appropriateness of setting, billing, and prepayment denials. The long-
term goal of HPMP is to help inpatient prospective payment system 
hospitals monitor payment patterns by analyzing data, conducting 
focused audits, and implementing system changes to prevent payment 
errors.
    Once the file is selected, the process begins with a request of the 
medical record. When the record is received, the nurse reviewer (called 
a review case manager, or RCM) uses screening criteria appropriate to 
the admission to determine whether or not the

      services or items provided to a patient were medically 
necessary, reasonable and provided in an appropriate care setting 
(Utilization Review),
      quality of the services/items was adequate (Quality 
Review), and/or
      hospital and patient record accurately reflects the 
services/items provided and billed (Diagnosis Related Groups (DRG) 
Validation Review).

    If the case ``passes'' screening criteria, the paperwork is 
finalized and the case is closed.
    If the RCM identifies any concerns, he/she refers the case to the 
physician reviewer (PR). Regulations specify the type of reviewer to 
ensure the applicability of peer review. The PR uses his/her medical 
experience and judgment to render a decision. PRs do not use screening 
criteria in rendering their decisions. The PR may resolve the concerns 
of the RCM, in which case the paperwork is finalized and the case 
closed. If, instead, he/she agrees with the concerns identified by the 
RCM, or identifies additional concerns, the provider is given an 
opportunity to discuss the concerns before a final determination is 
made. If appropriate, the QIO notifies the Fiscal Intermediary it 
should adjust the payment to the facility. In 2004, $2.2M in net 
dollars were identified through QIO review as having been made in 
error.
    The QIO's RCM uses the screening criteria selected by that QIO. CMS 
does not require nor even promote the use of any specific screening 
criteria (although, for short-term acute care hospitals, QIOs have use 
of InterQual criteria as a pass-through cost in their contract). 
MassPRO strongly supports NALTH's development of standard screening 
criteria for LTCHs.
      

                                 

    Chairman JOHNSON. You have to pull the microphone a little 
closer. Thank you.

 STATEMENT OF JOHN VOTTO, D.O., PRESIDENT AND CHIEF EXECUTIVE 
  OFFICER, HOSPITAL FOR SPECIAL CARE, NEW BRITAIN, CONNECTICUT

    Dr. VOTTO. Thank you for inviting me here today to speak. 
My name is John Votto. I am a pulmonary physician. I practice 
at the Hospital for Special----
    Chairman JOHNSON. Can you pull it closer to you? Try that.
    Dr. VOTTO. Can you hear me now?
    Chairman JOHNSON. Not very well.
    [Pause.]
    Dr. VOTTO. My name is John Votto. I am a pulmonary 
physician. I practice at the Hospital for Special Care in New 
Britain, Connecticut, and at the VA Hospital in Connecticut. I 
am President of the Hospital for Special Care. I am on the 
Board of Directors of the National Association of Long Term 
Hospitals, which I will refer to as NALTH throughout this 
testimony. I also chair the Physician Committee and the 
Criteria Development Committee, which you just heard about. The 
hospitals in NALTH organization care for approximately a third 
of all Medicare beneficiaries who receive care at long-term 
hospitals. My hospital, the Hospital for Special Care, is a 
228-bed long-term acute care hospitals, with a special emphasis 
on ventilator and wound programs, and we do act as a safety 
valve hospital for the State of Connecticut.
    I will refer frequently throughout this testimony to the 
analysis of the proposed rule done by the Lewin Group at the 
request of NALTH. I know that you have heard a lot of numbers, 
but there are a few more important numbers. According to this 
report, 66 percent of all short-stay outliers and 28 percent of 
all admissions would be paid under the acute inpatient 
prospective payment system rate. This policy would obviously 
have a negative financial and patient care effect. CMS 
estimated 11.3 percent reduction in revenues, and at my 
hospital that would represent about $1.1 million. What is clear 
is that CMS sees all short-stay outlier cases as patients who 
should not be admitted to LTCHs but are instead premature 
discharges from acute care hospitals.
    The payment penalty is formidable, as you have heard. 
Payments for short-stay outliers fall from an average of 
$14,500 to approximately $8,000 overall. LTCH margins for 
treating these cases will be 81 percent less than cost from 
what we hear. As Mrs. Johnson said, many of the LTCHs will have 
negative margins on the average of 5 percent. Additionally, a 
perverse consequence of the short-stay outlier policy is that 
so much money would be taken out of the long-term care payment 
system that more costly patients, those that are high-cost 
outliers, this threshold would be increased from $10,500 to 
$18,500. Therefore, a long-term hospital would be penalized for 
patients that are defined as short stay and patients that are 
long stay. These patients, as Mr. Altman mentioned, are more 
severely ill. According to Lewin's data, the case mix index for 
short-stay outliers in LTCHs is approximately 2.05, while the 
case mix index for the same DRG in acute care hospitals is 0.9, 
a 109-percent difference. The length of stay, according to 
Lewin, is 71 percent longer for the long-stay patients.
    The proposed rule contains an explicit instruction which 
may preclude admission of very ill patients requiring a long 
stay. At my hospital we admit long-stay or very ill patients 
who have a very limited number of Medicare days left. If they 
have days left less than the five-sixths of the geometric mean, 
and even if they stayed for a very long time, they would be 
considered short-stay outliers and would be paid as a short-
stay outlier, which would substantially under pay for this 
necessary care.
    The major problem of the policy, as it has been stated, is 
that it destroys the fundamental premise of every prospective 
payment system, which is that the losses from the high-cost 
cases will be offset by the shorter-term low-cost cases. In 
other words, the proposal destroys the principle of averaging. 
We have heard about the 37 percent of cases being too short. We 
have heard the issue of the arithmetic, and the five-sixths 
does define, as Lewin states in their report, will always 
identify 35 to 40 percent of the patients, and thus, 37 percent 
is inevitable.
    There are clear benefits to the patients cared for in 
LTCHs. MedPAC's 2004 report found that patients treated in 
LTCHs were readmitted to an acute care hospital 26 percent less 
often than those to other settings. In Nalth's ventilator 
outcome study, looking at 1,419 patients discharged from acute 
care hospitals, after failing multiple weaning attempts--and 
they were defined to have to have failed multiple weaning 
attempts--over 400 had stays of less than 29 days, thus 
qualified as short-stay outliers. Ninety-four percent of these 
patients came directly from ICUs and despite advanced age, 
multiple complications, and multiple co-morbidities, 54 percent 
of these patients were weaned from the ventilator, and 75 
percent of these patients survived to discharge.
    NALTH has developed LTCH-specific criteria, as you have 
heard. I did lead that Committee, and we did spend a solid 2 
years, and I am now on the 31st draft of the admission 
criteria. I believe that we are in the final-final-final draft 
of these criteria, and I believe that these criteria clearly 
constitute a more patient-centered approach to identify 
patients who qualify for admission to LTCHs. These criteria 
will very shortly be ready for implementation by the 
appropriate Medicare review organizations.
    I also wish to note, in the March 2006 report to Congress, 
MedPAC reported a 29-percent denial rate when they reviewed a 
small, 1,400-case sample of LTCH cases. A 29-percent denial 
rate is a huge number of cases, and I would suggest that these 
criteria might lower that rate of denials.
    I would also like to comment just shortly on the 25-percent 
rule because when it is phased in, it will be another example 
of a payment system driving admissions instead of good clinical 
evaluation. When this rule is in effect and under the scenario 
of this rule, any patient above the 25-percent threshold will 
be paid at the IPPS rate, whether they are a short-stay outlier 
or a high-cost outlier, if they are in a collocated hospital. 
This is another financially driven disincentive to admit 
clinically appropriate patients.
    If the Committee would indulge me, I just would like to 
comment on the LTCH satellite that we developed in the State of 
Connecticut. The State of Connecticut came to us and said that 
they were having problems with back-up in the intensive care 
units throughout the State. They asked us if we could increase 
our number of bed as we are usually full. We researched the 
possibility of adding 25 beds to our main campus; however, the 
cost was untenable at $25 million.
    The Office of Health Care Access then authorized a 
demonstration project allowing an LTCH satellite to be 
established in an acute care hospital. We then partnered with 
the acute care hospital in the State of Connecticut that 
happens to be the busiest cardiac surgery hospital in New 
England, for obvious reasons, because we thought that would be 
the most likely patients.
    They identified a unit that they were not using, and at the 
cost of $2.1 million we together developed a 28-bed unit in an 
acute care hospital. We opened this hospital or this unit in 
September of 2004, and under the present 25-percent rule, we 
would have to begin dismantling it in September of 2006.
    Thank you for your attention, and I will be happy to take 
questions.
    [The prepared statement of Dr. Votto follows:]

    Statement of John Votto, President and Chief Executive Officer, 
               Hospital for Special Care, New Britain, CT

    Chairman Johnson and members of the Subcommittee, thank you for 
inviting me to speak before you today on the important issues which are 
the focus of this hearing: CMS' proposed changes to the payment system 
for long-term care hospitals and, more specifically, the proposed rules 
regarding short-stay outliers, the 25% rule and the 0% update. My name 
is John Votto. I am a physician with a specialty in pulmonary medicine. 
For the past eighteen years, I have practiced medicine at the Hospital 
for Special Care in New Britain, Connecticut. Currently, I am the 
President of the Hospital for Special Care and also maintain an active 
practice caring for patients at the Hospital. Additionally, I care for 
pulmonary patients at the Veterans Hospital located in Newington, 
Connecticut. I am a Director of the National Association of Long Term 
Hospitals and serve as the Chairman of the Association's Physician 
Committee, as well as its Committee on Criteria Development. The 
hospitals which constitute the National Association of Long Term 
Hospitals account for approximately one-third of all Medicare 
beneficiaries who receive services in long-term care hospitals. While 
many of my remarks today are made on behalf of the National Association 
of Long Term Hospitals, they also relate to the Hospital for Special 
Care. The Hospital for Special Care is a relatively large, long-term 
care hospital with 228 beds and an active outpatient department. The 
hospital provides a wide range of clinical services, including 
ventilator weaning services, to patients who have complex medical care 
needs. The hospital provides rehabilitation services and maintains the 
only certified spinal cord injury unit in the State of Connecticut. The 
Hospital for Special Care also operates a freestanding, 282-bed skilled 
nursing facility. Accordingly, I am keenly aware of the issues related 
to the appropriateness of services provided to inpatients in the long-
term care hospital setting as compared to other settings.
    At several points during my testimony, I will refer to an extensive 
analysis of CMS' January 27, 2006 proposed rule which the National 
Association of Long Term Hospitals asked The Lewin Group to prepare. 
This report is entitled ``Final Report: Analysis of Long Term Care 
Hospitals RY 2007 Prospective Payment System Notice of Proposed 
Rulemaking'' and has been made available, in its entirety, to the 
Committee's professional staff.
    The focus of this hearing is to explore issues related to CMS' 
proposed changes to the payment system for long-term care hospitals. 
The proposal of these rules, in and of itself, has created an emergency 
situation for long-term care hospitals which, if not abated, will 
affect Medicare beneficiaries' access to patient care at the Hospital 
for Special Care and other long-term care hospitals throughout the 
nation in the next month or two, prior to the rule's July 1, 2006 
proposed effective date. The situation I am referring to is created by 
the proposal of changes to the current short-stay outlier payment 
policy.
Effect of Proposed Rule
    Currently, short-stay outliers are paid the lower of 120% of 
patient costs, 120% of the per diem of the LTCH-DRG or the full LTCH-
DRG payment. CMS proposes to change this to the lower of 100% of 
patient costs, 120% of the per diem of the LTCH-DRG, the full LTCH-DRG 
or an amount comparable to what would be paid under the acute inpatient 
hospital prospective payment system. According to the Lewin Report, 77% 
of all short-stay outlier cases, and 28% of all cases, would be paid at 
acute inpatient hospital prospective payment system rates under the 
proposed rule. CMS' proposed short-stay outlier policy will have a 
negative impact on both patient care and the financial viability of 
long-term care hospitals. CMS estimates that the effect of this policy 
will be an 11.3% reduction in reimbursement. When combined with the 
estimated 3.6% reduction resulting from CMS' proposed 0% update, the 
aggregate reduction of about 15% would, for example, cost the Hospital 
for Special Care $1,100,000 out of approximately $11,500,000 in annual 
Medicare revenues.
    It is clear that CMS views all short-stay outlier cases as patients 
who should not be admitted to long-term care hospitals. This is seen in 
the straightforward assertion, contained in the preamble to the 
proposed rule, that short-stay outlier cases ``may be inappropriate 
admissions of patients who are prematurely discharged from acute care 
hospitals.'' 71 Fed. Reg. 4688. The preamble to the rule also 
explicitly states that the objective of the short-stay outlier proposal 
is to ``discourage LTCHs from admitting patients that could be 
premature discharges from acute care hospitals.'' 71 Fed. Reg. 4687. 
CMS assumes patients identified as short-stay outlier cases in long-
term care hospitals have lengths of stay more typical of an acute care 
hospital and that the long-term care hospitals which admit these 
patients may be behaving like acute care hospitals. 71 Fed. Reg. 4687.
    CMS clearly and admittedly is proposing the new short-stay outlier 
policy as a way, effectively, to preclude Medicare beneficiaries who 
would become short-stay outlier patients from being admitted to long-
term care hospitals. The payment penalty which is proposed as a 
deterrent for admission of the beneficiaries is indeed formidable. 
According to the Lewin Group, the following financial consequences 
would accrue as a result of the short-stay outlier policies.

      Payments for short-stay outliers would fall from $14,582 
per case in 2006 to $8,042 per case in 2007.
      Long-term care hospitals' margins for treating short-stay 
outlier cases would be a negative 81.2%. That is, hospitals would be 
paid 81.2% less than costs for treating a short-stay outlier patient.
      On a national basis, 68.6% of all long-term care 
hospitals would have negative margins of, on average, negative 4.93%. 
Not-for-profit hospitals' negative margins would be double the national 
average, at negative 8.80%.
      The rural areas and the south would have the worst 
negative margins.

    Additionally, a perverse consequence of the short-stay outlier 
policy is that so much money would be taken out of the long-term care 
hospital payment that the cost threshold for treating longer-term, 
cost-outlier patients (those whose costs exceed 80% of full LTCH-DRG 
payments) would be increased from $10,501 to $18,489. Long-term care 
hospitals, therefore, would be penalized for patients CMS defines as 
short-stay patients and as high-cost (long-stay) patients.
    The underlying policy premises for the short-stay outlier proposal 
also are clearly erroneous. Moreover these erroneous assumptions, as a 
real matter, drain all validity from the long-term care hospital 
prospective payment system.
    Short-stay outlier cases in long-term care hospitals are not 
comparable, in terms of length of stay or medical resource use, to 
patients assigned to the same diagnosis-related groups in acute 
hospitals. In fact, the patients CMS identifies as short-stay outlier 
cases in long-term care hospitals would be extraordinary long-stay, 
costly cases in acute hospitals.
    Using the 2004 MedPAR data which CMS used for its impact file in 
the proposed rule, the Lewin Group determined that the weighted average 
length of stay (``ALOS'') for short-stay outlier cases admitted to 
long-term care hospitals is 12.7 days, which is 72% longer than the 
ALOS of patients assigned to the same diagnosis-related groups 
(``DRGs'') in acute hospitals. The point is made best by comparing the 
ALOS of patients in long-term care hospitals with the ALOS of patients 
in acute hospitals, for the top three DRGs, as illustrated in the 
following chart.


----------------------------------------------------------------------------------------------------------------
                                                                                                      Acute Care
               DRG                                       DRG Name                         SSO ALOS     Hospital
                                                                                                         ALOS
----------------------------------------------------------------------------------------------------------------
475                               Respiratory System DX with Ventilator Support                28.8         14.5
87                                Pulmonary Edema & Respiratory Failure                        21.2         11.7
271                               Skin Ulcers                                                  23.1         13.1
----------------------------------------------------------------------------------------------------------------

    According to the Lewin Group, only 14% of the short-stay outlier 
cases in long-term care hospitals have a length of stay which is below 
the geometric mean length of stay of patients assigned the same DRG in 
the acute hospitals. It is beyond dispute that short-stay outlier cases 
in long-term care hospitals would be very long-stay, high-cost cases in 
acute hospitals. I have appended, as Attachment A to my testimony, all 
of the average case comparative length of stay data for DRGs which are 
in common in both long-term care hospitals and acute hospitals. An 
ironic consequence of the short-stay outlier policy is that it would 
penalize the Hospital for Special Care when it admits very ill patients 
who have a long length of stay and exhaust their Medicare day benefit 
prior to reaching 5/6 of the average length of stay for their DRG. CMS 
labels these long-stay patients as short-stay patients for billing 
purposes and will drastically underpay the cost of their care. These 
patients are usually medically indigent. The Medicare program should 
not establish financial disincentives for these patients to access care 
in long-term care hospitals. A payment system neither should be a 
substitution for a physician's clinical decision-making nor should it 
impinge on a beneficiary's freedom of choice, as secured by Section 
1802 of the Social Security Act.
    Short-stay outlier cases also are different in terms of their use 
of medical resources and, hence, cost of care, than the acute hospital 
patients who are assigned the same DRGs. The Lewin Group has determined 
that the case mix index of short-stay outlier cases is 2.0592, which is 
109% greater than the 0.9873 case mix index of cases assigned to the 
same DRGs in acute hospitals. The difference in DRG weights for all 
DRGs which are common to long-term care hospitals and acute hospitals 
are contained in Attachment B to my written statements.
    Where the average length of stay and case mix of short-stay outlier 
cases is dramatically different, it is clear that the proposed short-
stay outlier policy will not make payments which reflect the difference 
in patient resource use and cost, which was required by Congress when 
it enacted Section 123(a)(1) of the Balanced Budget Refinement Act of 
1999. Adherence to this statutory standard is fundamental to the 
establishment of a valid prospective payment system. The short-stay 
outlier policy, however, destroys the fundamental premise of every 
prospective payment system, that standard payments allow losses from 
high-cost cases to be offset by shorter-term, low-cost cases. This 
fundamental tenet for payment under prospective payment systems was 
established by HHS Secretary Schweiker in a 1982 report to Congress\1\ 
as the base for the then-proposed acute inpatient hospital PPS. The 
Lewin Group has concluded that the proposed short-stay outlier policy 
destroys the averaging of profit and losses which is essential to a 
viable PPS because:
---------------------------------------------------------------------------
    \1\ Schweiker, R.S., ``Report to Congress: Hospital Prospective 
Payment for Medicare,'' Secretary of the Department of Health and Human 
Services, December, 1982.
---------------------------------------------------------------------------
    Under the currently proposed rule, averaging is not only taken 
away--it is reversed. The very cases required to balance the system as 
averages would be widely underpaid ($14,500 in costs vs. $8,000 in 
payments), and account for about 40 percent of all LPPS cases. To have 
40 percent of cases paid at a 81.2 percent margin, and the other 60 
percent paid to barely cover or paid slightly less than costs, is an 
untenable situation, should CMS intend to ensure the stability of care 
delivery in the LTCH setting.''
    CMS states that short-stay outliers currently account for 
approximately 37% of all long-term care hospital patients. CMS is wrong 
when it states that this percentage reflects ``an inappropriate number 
of patients being treated in LTCHs who most likely do not require the 
full measure of resources available in [an LTCH].'' Id. CMS' logic is 
flawed, as explained by the Lewin report.
    CMS defines an SSO case in such a way that it is essentially 
impossible for LTCHs to admit a smaller percentage of SSOs in any given 
year. CMS uses a relative measure of ``short stay'' that guarantees 
that approximately 30 to 40 percent of cases will always be considered 
``short.'' A short stay is defined as a ``stay shorter than 5/6 of the 
geometric mean length of stay.'' . . . Stays less than 5/6 of the 
geometric mean will always account for about 30 to 40 percent of cases, 
regardless of the expected-stay threshold the LTCHs require for an 
admission. . . . To object that this is ``too many'' is like objecting 
to the fact that LTCHs have 50 percent of cases that are below the 
median.
    If long-term care hospitals were able, somehow, to eliminate all 
short-stay outlier cases, then when CMS engaged in its annual re-
weighting of DRGs, it would re-calculate average lengths of stay, 
including calculation of the 5/6 geometric mean lengths of stay of 
DRGs, thereby identifying new short-stay outliers. In other words, 
cases which were not short-stay outliers last year would be deemed to 
be short-stay outliers next year.
    Not only is the number of short-stay outliers essentially 
inevitable, CMS also is incorrect in its assertion that these patients 
most likely do not require the full measure of resources available in a 
long-term care hospital. The Lewin Report found that long-term care 
hospital short-stay outlier cases, as compared to acute hospital cases 
within the same diagnosis-related group, have a 70% higher length of 
stay, are about 70% more intense and are more severe. The Lewin Report 
also found that both types of hospitals have a similar percentage of 
short-stay cases.
    In Chapter 5 of its June 2004 (``New Approaches in Medicare'') 
Report to Congress, MedPAC found that ``[p]atients treated in LTCHs 
tend to have fewer acute hospital readmissions--a measure of outcomes--
than patients treated in other settings. Patients using LTCHs were 
readmitted 26 percent less frequently than similar patients in 
alternative settings.'' Therefore, proper admission of a patient to a 
long-term care hospital can save the Medicare program the costs of 
readmission to another hospital.
    I can provide you with empirical evidence about the sorts of cases 
which CMS is suggesting long-term care hospitals should not admit. A 
significant segment of patients admitted to long-term care hospitals 
are in respiratory failure with ventilator support. The National 
Association of Long Term Hospitals sponsored a study of the 
characteristics of these patients, including ventilator weaning rates, 
and provided CMS and MedPAC with reports and study outcome data. This 
multi-site study, conducted by the Barlow Respiratory Hospital Research 
Center, included data on 1,419 patients who were admitted to 23 long-
term care hospitals located throughout the country, which had active 
ventilator weaning programs. Most, if not all of the long-term care 
hospitals embrace the multidisciplinary, rehabilitative model of care 
for weaning patients from prolonged mechanical ventilation.
    Of all the patients studied, 32% had stays of less than 29 days, 
which means they would qualify as short-stay outliers because they were 
admitted under DRG 475 (respiratory system failure with ventilator 
support), which has a 5/6 geometric mean length of stay threshold of 
28.8 days. Prior to transfer to the long-term care hospital, 93.9% of 
patients were in an ICU, with an additional 4.2% transferred from 
``step-down'' or monitored units. Patients transferred to long-term 
care hospitals for weaning from prolonged mechanical ventilation are 
elderly with severe acute illness superimposed on chronic disease. This 
population requires extensive continued treatments and interventions at 
the long-term care hospital, not only for respiratory failure but for 
numerous pre-existing conditions, co-morbidities and complications, the 
latter predominantly being infections. In short, these patients were 
failing at the acute hospitals and were admitted to the long-term care 
hospitals for ventilation weaning, which could not be done as 
successfully at the acute care hospital. Despite advanced age and 
numerous co-morbidities and complications, and despite the fact that 
all of these patients already had failed multiple weaning attempts at 
the acute hospitals, more than 50% of all patients enrolled in the 
study were weaned successfully from mechanical ventilation at the long-
term care hospitals. The rate of survival to discharge was 74.8%, 
illustrating that long-term care hospitals, with their specialized 
programs of care, safely can wean a population with exceptional medical 
challenges. Nearly 30% of patients returned directly home or to 
assisted living following discharge from the long-term care hospital. 
This percentage was not comparable to their status prior to their 
catastrophic illness. Furthermore, at 12-months post-admission to the 
long-term care hospital, nearly two-thirds of survivors reported good 
functional status.
    Medicare beneficiaries such as those treated in this study have a 
right to access long-term care hospitals, which would be defeated by 
the short-stay outlier policy.
    I understand that CMS and the Committee are concerned that the 
Medicare program makes inappropriate payments where patients who 
require the same or similar medical resources receive care in different 
Medicare provider settings at different rates of payment. An 
appropriate response to this concern was recommended by MedPAC in its 
June 2004 Report to Congress. MedPAC recommended, and the National 
Association of Long Term Hospitals strongly supports, that the 
Secretary: (i) develop facility and patient criteria to ensure patients 
admitted to long-term care hospitals are medically complex and have a 
good chance of improvement; and, (ii) increase medical necessity review 
of long-term care hospital admissions by Quality Improvement 
Organizations (``QIOs''), which also can monitor whether hospitals 
comply with the criteria. Implementation of MedPAC's recommendations 
would ensure that Medicare beneficiaries receive care in the most 
appropriate, cost-effective and safe setting. CMS' recent proposed 
rules effectively ignore MedPAC's recommendations. Rather than 
addressing its concerns through a reassessment of the proper placement 
of patients, CMS is proposing drastic changes to the long-term care 
prospective payment system, which both violate the fundamental logic of 
averaging which underlies prospective payments systems and fail to 
consider the potential crippling impact on the long-term care hospital 
sector and the resultant, negative effect on the treatment of Medicare 
beneficiaries.
    As part of implementation of the long-term care hospital 
prospective payment system, the Secretary included review 
responsibilities for the appropriateness of admission to a long-term 
care hospital for a small sample of 1,400 Medicare cases in the QIO 
scope of work for 2004. The reported denial rate from this review 
process was 29%, as reported in MedPAC's March 2006 Report. The 
Secretary has retained this small sample size for the 2005 QIO scope of 
work. The denial of a patient admission by a QIO means there has been a 
finding that the patient could have been treated in a lower-cost, more 
appropriate Medicare provider setting, such as at a skilled nursing 
facility or at home with care from a home health agency. In every case 
where there is a final denial by a QIO, the long-term care hospital 
receives zero payment for the case at issue. The National Association 
of Long Term Hospitals has followed closely the review of Medicare 
cases by QIOs and believes that QIOs effectively and efficiently can 
distinguish between cases that require the medical resources and 
programs provided by long-term care hospitals and those provided by, 
for example, skilled nursing facilities. The Secretary properly may 
consider expanding QIO review responsibilities to include the 
appropriateness of continued stay and discharge. This would result in 
review for medical necessity and length of stay, the two factors which 
affect payment under the long-term care hospital prospective payment 
system.
    Similar issues exist with CMS' proposed changes to the 25% rule. 
This rule, once it becomes fully phased-in, will apply when more than 
25% of a long-term care hospital-within-hospital's or satellite 
facility's Medicare inpatient population (excluding outlier patients) 
are admitted from a hospital which is co-located on the same campus. 
Payments for the patients who are admitted from the co-located hospital 
and who cause the long-term care hospital-within-hospital or satellite 
facility to exceed the 25% threshold are the lesser of the amount 
otherwise payable under the long-term care hospital prospective payment 
system or an amount equivalent to what would be paid under the acute 
inpatient hospital prospective payment system. Payment equivalent to 
what would be paid under the acute system blatantly ignores the 
different resources used by long-term care hospitals and the statutory 
requirement, in Section 123 of the Balanced Budget Refinement Act of 
1999, that payments should reflect differences in patient resource use 
and cost.
    In the preamble to the proposed rules (at 71 Fed. Reg. 4697), CMS 
acknowledges that it was informed of a study commissioned from the 
Lewin Group, which found that 71.2% of freestanding long-term care 
hospitals admit more than 25% of their patients from a single source 
acute-care hospital. Therefore, long-term care hospitals-within-
hospitals and satellite facilities which do the same are punished 
merely because of their co-location.
    The State of Connecticut has ICUs which frequently have 
insufficient bed capacity to meet patients' needs. To address this 
need, the Hospital for Special Care initially decided it would add 25 
beds to its facility. This proved to be infeasible because building an 
addition to the hospital would have cost $25,000,000. Therefore, to 
address the need in a more fiscally responsible way, the State of 
Connecticut approved a demonstration project that allowed the creation 
of a long-term care hospital within an acute hospital. The cost of 
renovating a floor at St. Francis Hospital, to create a 28-bed long-
term care hospital-within-hospital, was only $2,000,000. This long-term 
care hospital-within-hospital currently provides much needed services. 
However, the proposed changes to the 25% rule, if implemented, would 
destroy the long-term care hospital-within-hospital, harm the patient 
population it otherwise would serve and strain the capacity of the 
State of Connecticut's precious ICU beds.
    CMS' proposed rule provides for a 0% update in Rate Year 2007. It 
freezes the long-term care hospital prospective payment system standard 
amount at the RY 2006 level of $38,086.04. Experts in the LTCH industry 
estimate that the effect of this 0% update policy will be a 3.6% 
reduction in reimbursement. While most long-term care hospitals could 
deal with the effect of this proposal if all other aspects of the 
payment system remained unchanged, the cumulative effect of the 0% 
update and the proposed changes to the short-stay outlier policy--an 
untenable 15% reduction in reimbursement--could mean the destruction of 
the long-term care hospital industry. This is an emergency situation 
which cannot be ignored.
Requested Relief
    The proposed rules, if implemented, would come into force on July 
1, 2006. The proposed short-stay outlier rule would apply to patients 
admitted to long-term care hospitals in the next few months. The 
National Association of Long Term Hospitals and the Hospital for 
Special Care suggest the following steps be taken by CMS itself or 
under Congressional direction.

    1.   The proposed changes to the short-stay outlier policy should 
be withdrawn immediately because they have a present, adverse effect on 
beneficiary access to patient care.
    2.   CMS should halt the phase-in of the 25% rule for long-term 
care hospitals-within-hospitals and satellite facilities which 
currently exist (thereby allowing them to admit up to 75% of their 
patients from co-located hospitals).
    3.   CMS should address the issue of appropriate admissions through 
the use of more intensive Quality Improvement Organization review (i.e. 
to increase the small sample which they currently review).
    4.   Congress should require CMS to report to Congress on the 
development of facility and patient criteria for admission to long-term 
care hospitals by January 1, 2008 and to advise whether the 
implementation of such criteria would require Congressional authority.
    5.   If such criteria are not implemented by January 1, 2009, CMS 
automatically should implement criteria established by the National 
Association of Long Term Hospitals and validated by MassPRO.\2\
---------------------------------------------------------------------------
    \2\ The National Association of Long Term Hospitals has developed 
long-term care hospital screening criteria, including cardiovascular, 
complex medical, respiratory, ventilator weaning, wound care and 
rehabilitation criteria sets. The criteria are in the final stage of 
validation by MassPRO and will be ready for use within a month. The 
Association has shared drafts of these criteria with the Subcommittee 
staff, CMS and MedPAC.

    I wish to thank you and the Committee's staff again for inviting me 
here today and for your courtesy and your attention to these important 
questions.
Attachment A to Testimony of John Votto, D.O.
Appendix B
Short Stays and Mean Length of Stays by DRG based on 2004 MedPAR Data



Short Stays and Mean Length of Stays by DRG based on 2004 MedPAR Data 
        (continued)

        
        
Short Stays and Mean Length of Stays by DRG based on 2004 MedPAR Data 
        (continued)
        
        
Short Stays and Mean Length of Stays by DRG based on 2004 MedPAR Data 
        (continued)
        
        
Short Stays and Mean Length of Stays by DRG based on 2004 MedPAR Data 
        (continued)
        
        
Short Stays and Mean Length of Stays by DRG based on 2004 MedPAR Data 
        (continued)
        
        
Short Stays and Mean Length of Stays by DRG based on 2004 MedPAR Data 
        (continued)
        
        
    * The short-stay threshold is 5/6 of the nominal LTH GMLOS
    Source: Lewin Group analysis of the 2004 Medicare Provider 
Analysis and Review (MedPAR) data. The CMS nominal values from 
the IPPS Final Rule for FY 2006.

Attachment B to Testimony of John Votto, D.O.

Appendix A

Comparison of LTCH and ACH DRG Weights by DRG for All SSO Cases



                                                                                               Diff
                                                Number of                                     Between
        Diagnosis  Related Group  (DRG)            LTCH     LTCH DRG  Number of   LTCH DRG   LTCH and
                                                  Cases      Weight   ACH Cases    Weight     ACH DRG
                                                                                              Weight

7                                                     113     3.0390     14,782     1.8486      1.1904
9                                                      58     1.6313      1,724     0.9803      0.6510
10                                                     66     1.4084     18,551     0.8634      0.5450
12                                                  1,750     1.2480     52,059     0.6364      0.6116
13                                                     41     0.9573      7,063     0.5701      0.3872
14                                                    144     1.3218    235,629     0.8744      0.4474
15                                                     57     0.9657     92,689     0.6734      0.2923
16                                                     92     1.2891      9,895     0.8785      0.4105
18                                                    121     1.1752     29,545     0.6990      0.4762
19                                                     11     0.9560      8,485     0.4911      0.4649
20                                                    154     1.7316      6,179     1.8929    (0.1613)
23                                                     15     1.1852     11,165     0.5737      0.6114
24                                                     72     1.2414     58,700     0.7014      0.5400
27                                                     11     1.4511      4,447     0.9317      0.5195
28                                                     60     1.4822     13,952     0.9304      0.5518
34                                                    234     1.3440     23,699     0.6916      0.6524
35                                                     19     0.7638      7,411     0.4428      0.3211
64                                                     43     1.5637      3,109     0.9113      0.6524
65                                                      5     0.7358     39,944     0.4010      0.3348
67                                                      1     3.7672        383     0.5427      3.2245
68                                                     20     1.2358     11,465     0.4555      0.7804
73                                                     26     1.4268      7,654     0.5703      0.8565
75                                                      9     2.6586     43,245     2.1226      0.5360
76                                                    608     4.7632     44,348     1.9640      2.7992
78                                                    111     1.3039     39,220     0.8856      0.4184
79                                                  1,710     1.6891    167,196     1.1133      0.5758
80                                                     47     0.9747      7,929     0.5853      0.3894
82                                                    158     1.2138     63,922     0.9560      0.2578
85                                                     95     1.3759     22,136     0.8299      0.5460
86                                                      2     0.7097      2,226     0.4783      0.2315
87                                                  2,163     1.8007     60,498     0.9348      0.8659
88                                                  2,008     1.2142    398,325     0.6271      0.5871
89                                                  1,864     1.3499    525,617     0.7244      0.6255
90                                                     49     0.8806     47,542     0.4276      0.4530
92                                                    109     1.1902     15,657     0.8374      0.3528
94                                                     25     1.0823     12,763     0.7895      0.2928
96                                                     61     1.2468     56,023     0.5205      0.7263
97                                                     15     0.9493     28,360     0.3840      0.5652
99                                                    143     1.5350     21,198     0.4901      1.0448
100                                                     2     0.5292      8,182     0.3643      0.1648


Comparison of LTCH and ACH DRG Weights by DRG for All SSO Cases 
        (continued)



                                                                                               Diff
                                                                                              Between
     Diagnosis  Related Group  (DRG)       Number of     LTCH DRG    Number of    ACH DRG    LTCH and
                                           LTCH Cases     Weight     ACH Cases    Weight      ACH DRG
                                                                                              Weight

101                                               136       1.3668      22,194      0.6030      0.7638
102                                                 2       1.0346       5,584      0.3793      0.6553
113                                                60       3.8085      39,525      2.0303      1.7783
114                                                18       2.5241       8,280      1.1460      1.3781
120                                               185       2.4948      38,097      1.6150      0.8797
121                                                48       1.3892     162,443      1.0968      0.2924
123                                                23       1.5470      38,308      1.0915      0.4555
126                                               208       1.6560       5,371      1.7552    (0.0991)
127                                             1,400       1.2546     667,674      0.7117      0.5430
130                                               498       1.3147      88,024      0.6558      0.6589
131                                                21       0.9300      26,812      0.3926      0.5374
132                                               161       1.2110     141,313      0.4458      0.7652
133                                                13       0.8132       8,584      0.3879      0.4253
134                                                32       1.0708      40,950      0.4152      0.6556
135                                                50       1.0918       7,749      0.6441      0.4478
138                                               127       1.0221     206,600      0.5812      0.4409
139                                                11       0.6227      86,760      0.3600      0.2627
141                                                24       1.0640     108,038      0.5210      0.5430
142                                                 7       0.6541      52,222      0.4019      0.2522
144                                               615       1.2835      94,294      0.8529      0.4306
145                                                11       0.6396       7,277      0.4036      0.2359
148                                                11       4.3224     133,149      2.3720      1.9504
151                                                 1       2.6289       5,108      0.9111      1.7177
170                                                46       3.4173      15,615      1.9687      1.4486
171                                                 1       1.9987       1,508      0.8305      1.1682
172                                               136       1.5401      31,193      0.9517      0.5884
173                                                 5       0.9743       2,456      0.5246      0.4497
174                                                92       1.2301     249,690      0.6982      0.5320
175                                                 6       0.4560      34,572      0.3895      0.0665
176                                                15       1.3985      13,384      0.7665      0.6320
179                                                30       1.5018      13,115      0.7589      0.7429
180                                                86       1.4414      89,518      0.6716      0.7698
182                                               323       1.4524     270,142      0.5733      0.8791
183                                                11       0.7272      90,281      0.4017      0.3255
185                                                 6       1.3115       5,350      0.6053      0.7062
188                                               470       1.7765      83,496      0.7722      1.0042
189                                                13       0.8060      13,002      0.4173      0.3887


Comparison of LTCH and ACH DRG Weights by DRG for AllSSO Cases 
        (continued)



                                                                                                          Diff
                                                                                                         Between
            Diagnosis  Related Group  (DRG)              Number of   LTCH DRG    Number of    ACH DRG   LTCH and
                                                        LTCH Cases    Weight     ACH Cases    Weight     ACH DRG
                                                                                                         Weight

202                                                             72      1.0629      26,597      0.9130    0.1499
203                                                             51      1.2459      29,851      0.9390    0.3069
204                                                            161      1.6195      65,032      0.8124    0.8070
205                                                             74      1.1771      27,308      0.8414    0.3357
207                                                             35      1.2914      32,486      0.8000    0.4914
211                                                              1      0.1411      29,910      0.8679  (0.7268)
213                                                             50      2.8658       9,941      1.3179    1.5479
217                                                            283      2.8227      17,302      2.0906    0.7321
225                                                             14      2.0605       6,458      0.8165    1.2440
233                                                             24      3.2714       9,955      1.3963    1.8751
235                                                              4      1.1596       5,077      0.5240    0.6356
236                                                             28      1.2198      39,734      0.5049    0.7149
238                                                            565      1.7180       8,853      0.9431    0.7749
239                                                             82      1.1457      45,836      0.7293    0.4164
240                                                             44      1.0881      11,991      0.9164    0.1717
242                                                            122      1.7388       2,575      0.8116    0.9273
243                                                            188      1.0084      95,842      0.5242    0.4841
244                                                             41      1.1881      14,536      0.4989    0.6891
245                                                             14      0.9037       5,794      0.3338    0.5699
246                                                              7      1.1017       1,483      0.4229    0.6788
247                                                             27      0.8153      20,262      0.3991    0.4162
248                                                             71      1.1231      13,801      0.5982    0.5249
249                                                          1,922      1.1332      12,889      0.4698    0.6634
253                                                             17      1.0099      21,978      0.5279    0.4820
254                                                              3      0.5843      10,705      0.3110    0.2733
256                                                            174      1.5773       6,679      0.5704    1.0070
263                                                          1,079      2.8294      23,018      1.4324    1.3970
264                                                             58      1.6955       3,859      0.7394    0.9561
265                                                             26      2.2588       4,097      1.1148    1.1441
269                                                            140      3.0307       9,800      1.2373    1.7933
271                                                          2,001      1.6761      19,129      0.7163    0.9599
272                                                             22      1.1947       5,696      0.7094    0.4852
274                                                              9      1.7102       2,283      0.8063    0.9039
277                                                            701      1.2173      99,585      0.6089    0.6085
278                                                              8      0.7974      31,973      0.3775    0.4199
280                                                             59      1.0462      17,758      0.4956    0.5506
281                                                              3      0.2868       7,518      0.3393  (0.0526)
283                                                             23      1.3608       6,010      0.5101    0.8507
285                                                             27      3.2003       6,942      1.4518    1.7485
287                                                            121      2.3060       6,223      1.3171    0.9888
294                                                            244      1.4007      97,377      0.5410    0.8596
296                                                            411      1.3599     277,113      0.5988    0.7611
297                                                             25      0.7324      47,860      0.3537    0.3787


Comparison of LTCH and ACH DRG Weights by DRG for All SSO Cases 
        (continued)



                                                                                                         Diff
                                                                                                       Between
          Diagnosis  Related Group  (DRG)            Number of   LTCH DRG    Number of    ACH DRG      LTCH and
                                                    LTCH Cases    Weight     ACH Cases     Weight      ACH DRG
                                                                                                        Weight

300                                                         25      1.0277      18,635       0.7665       0.2612
301                                                          3      0.8190       3,592       0.4293       0.3897
315                                                        135      2.8792      34,014       1.4505       1.4287
316                                                        853      1.4338     118,639       0.9037       0.5301
317                                                         24      1.4998       2,029       0.5932       0.9066
318                                                         16      1.5144       5,737       0.8261       0.6883
320                                                        438      1.3191     185,666       0.6115       0.7076
321                                                         47      0.9245      30,824       0.3951       0.5295
331                                                        155      1.4582      51,130       0.7395       0.7188
332                                                          6      0.6851       4,964       0.4171       0.2680
334                                                          1      2.3165      10,503       1.0330       1.2834
346                                                         14      1.1964       4,823       0.7118       0.4846
350                                                         30      1.2172       6,669       0.5139       0.7033
357                                                          1      1.4275       5,609       1.5861     (0.1586)
366                                                         22      1.3991       4,555       0.8907       0.5084
368                                                         21      1.5966       3,547       0.8121       0.7845
395                                                         71      1.4058     106,920       0.5770       0.8288
397                                                         38      1.4092      18,865       0.8811       0.5280
398                                                         27      1.2725      18,054       0.8609       0.4117
403                                                        113      1.3262      31,718       1.2678       0.0584
409                                                         65      1.7428       2,155       0.8678       0.8750
413                                                         28      1.4028       5,303       0.9209       0.4820
415                                                        333      2.9569      43,248       2.5272       0.4297
416                                                      1,551      1.5416     190,961       1.1082       0.4335
418                                                        652      1.5435      25,757       0.7420       0.8015
421                                                         26      1.6616      10,646       0.5206       1.1409
423                                                        130      1.6837       8,039       1.2646       0.4192
425                                                         11      0.5728      16,028       0.4726       0.1001
426                                                         12      0.4620       4,549       0.3544       0.1076
428                                                          3      0.7784         793       0.5080       0.2705
429                                                         96      1.2124      27,000       0.5679       0.6445
430                                                        724      0.8735      64,921       0.4732       0.4003
431                                                          8      0.6812         316       0.4605       0.2207
432                                                          1      0.1442         448       0.4542     (0.3099)
439                                                         16      2.6165       1,516       1.2242       1.3924
440                                                        123      2.5308       5,775       1.3162       1.2145
442                                                         37      3.1882      17,534       1.6867       1.5015
443                                                          2      0.4440       3,910       0.6826     (0.2386)
444                                                         40      1.5246       5,723       0.5211       1.0035
445                                                          3      0.8830       2,544       0.3498       0.5332


Comparison of LTCH ans ACH DRG Weights by DRG for All SSO Cases 
        (continued)



                                                                                                         Diff
                                                                                                        Between
           Diagnosis  Related Group  (DRG)             Number of    TCH DRG    Number of    ACH DRG    LTCH and
                                                      LTCH Cases    Weight     ACH Cases    Weight      ACH DRG
                                                                                                        Weight

452                                                          573      1.7898      25,608      0.7280      1.0618
453                                                           22      1.1296       5,670      0.3566      0.7730
461                                                          231      2.6655       4,964      0.8157      1.8498
462                                                        1,528      1.1667       9,653      0.6749      0.4918
463                                                          248      0.9982      26,785      0.4779      0.5203
464                                                           34      0.7624       7,137      0.3473      0.4151
465                                                          335      1.0854         197      0.6196      0.4658
466                                                        1,629      1.1684       1,716      0.5641      0.6044
468                                                          325      4.2355      51,309      2.6472      1.5884
473                                                           22      1.5193       8,064      2.4235    (0.9042)
475                                                        4,959      3.4036     109,073      2.5009      0.9027
477                                                          119      2.9505      26,262      1.3152      1.6353
482                                                            1      3.6175       5,284      2.4243      1.1932
484                                                            1      2.3226         345      3.7689    (1.4463)
487                                                           10      1.3611       3,885      1.3904    (0.0293)
489                                                          113      1.7921      13,365      1.2968      0.4953
490                                                           27      1.1293       5,439      0.7331      0.3962
508                                                           10      1.4059         622      0.9554      0.4505
510                                                            4      1.3835       1,634      0.8220      0.5615
521                                                           13      0.5523      30,580      0.4956      0.0567
523                                                            2      0.4695      15,190      0.2756      0.1939
524                                                           10      0.8570     131,223      0.5104      0.3466
537                                                           11      3.1824       6,861      1.2683      1.9142



                                 

    Chairman JOHNSON. My first question is going to be to Dr. 
Votto and Mr. Altman, and also Ms. Moore if she cares to answer 
it. There seems to be a contradiction in your testimony. On the 
one hand, you say you cannot predict who is going to be a short 
stay and, on the other hand, you say you will have to not 
accept short stays if this proposal goes through. Discuss that 
issue. Those two comments were at different points in different 
statements, and so, please clarify that.
    Mr. ALTMAN. I will start, if that is okay. I think that 
what I testified was that we cannot predict and, therefore, I 
don't think there is any way that we would be able to not admit 
people that would be short stay. that would be what our 
position would be, and that is what I am told by our 
physicians. I don't think there is any way we can respond to 
this rule in the way that CMS assumes by taking fewer patients 
that would be short-stay outliers because I don't think we can 
predict that.
    Chairman JOHNSON. Dr. Votto?
    Dr. VOTTO. I will comment on that. I agree that there is no 
way and there is no evidence or publication that suggest that 
there is any way to predict a short-stay outlier, just like 
there is really not a lot of evidence that predicts who can get 
off a ventilator and who cannot and the way you do your 
weaning, because there is just not a lot of evidence.
    I think that one of the problems with long-term acute care 
hospitals is in the definition. We are acute care hospitals; 
thus, we have to take theoretically acutely ill patients. If 
you say--you take acutely ill patients but they have to have a 
long length of stay and they have to look similar to acute care 
patients, but you have to predict that they are going to stay a 
long time, this makes it a little bit tough. That is why it 
took us so long to develop the admission criteria. We believe 
that we have criteria that can distinguish these groups of 
patients, but as was stated, there is no way to predict. I 
believe that we can reduce the numbers of very short stay, 
possibly, with very good review by QIOs or whoever, if they 
audited the admission criteria and the use of the admission 
criteria.
    Chairman JOHNSON. This leads me to my next question. Dr. 
Votto, you have talked about spending 2 years developing 
criteria. Mr. Altman, you have talked about developing 
criteria. Ms. Moore, you have been very directly involved in 
it. How close are you three to being able to sit down and come 
together on a set of criteria that we could put in place?
    Dr. VOTTO. Well, it is March 15th, and I believe our 
criteria will be ready on March 31st. I don't know--but if we 
then looked at trying to collaborate with others, I think that 
would be reasonable. I think we could put out criteria at this 
time and adjust them over time. As most places do that develop 
criteria, you usually bring them out, try them out. We have had 
them validated, as Laura said, by MassPRO. We believe that they 
are good criteria. We believe that they are useful. We have no 
problem, though, revisiting them at certain intervals, and we 
have to do that, anyway.
    Mr. ALTMAN. I think ours will be available March 30th.
    [Laughter.]
    Mr. ALTMAN. I think what would be helpful perhaps is some 
direction from Congress to CMS--and, by extension, the provider 
community--to sit down and work this through in an open, 
transparent, public way. We at ALTHA and Kindred are more than 
happy to sit down, we have been trying to sit down with various 
folks in the government to move this thing along.
    I think one thing that might be helpful is some direction 
from Congress to CMS and to us to engage in an open public 
process to come up with criteria that meets the policy goals 
that we all seem to share. I think that can be done very 
quickly.
    Chairman JOHNSON. Well, I hope you will take this hearing 
as giving you that direction. You cannot beat something with 
nothing. We have something that I think is not only not 
workable but positively negative and will have a damaging 
impact on the system. I think the answer is to go forward with 
what we have said we wanted to do for several years now and 
that MedPAC recommended--I don't remember whether it was 2 or 3 
years ago--that we need a criteria-based system, because it is 
best to start with that with you folks. Then we can back down 
on that for the other facilities. We need to get greater 
clarity about what kinds of patients you treat, recognizing 
that, of course, two people can come in the same state and one 
does remarkably well and one does very badly.
    The system is supposed to account for that already. The 
arbitrariness of short-stay policies in my estimation conflict 
with the underlying logic of a DRG system. I am not anxious to 
start down that path with facilities that deal with such 
extremely complex and ill patients. I would like to get some 
idea of whether you can begin working together in your criteria 
to see whether you can merge your opinions. I am more familiar 
with Dr. Votto's efforts since he is a neighbor, but I know his 
Committee has been nationwide. The experience cannot be all 
that different. The nature of for-profits and nonprofits in 
this arena I do not believe is all that significant. I think, 
Mr. Altman, with your experience of not only LTCHs but nursing 
homes who do this kind of--you know, do the stepdown, that 
could be very useful. Ms. Moore, are you optimistic that we 
could move forward on a criteria-based system in a reasonable 
period of time?
    Ms. MOORE. Like I said, our efforts are with NALTH, and I 
echo Dr. Votto's statement, that we really do intend on having 
criteria for a long-term care hospital setting completed by the 
end of the month. As a quality improvement, performance 
improvement organization, we believe in and foster 
collaboration, and we would be more than happy to assist in the 
effort in any way. It helps us and the Medicare trust fund as 
well in terms of----
    Chairman JOHNSON. One vastly overlooked strength of the 
QIOs is that you are actually on the ground in every single 
State and do see the care issues patient by patient and 
provider by provider.
    Ms. MOORE. Absolutely.
    Chairman JOHNSON. All right. Mr. Pomeroy? It is a pleasure 
to have Mr. Pomeroy with us. He has taken a great interest in a 
number of the issue areas before this Committee, and this is 
one of them.
    Mr. POMEROY. Madam Chairman, thank you very much, and 
although I am not a member of this Subcommittee, I follow your 
hearings with the greatest of interest, and this one involves a 
segment in the continuum of care that I really was not very 
familiar with. I found out, in response to the CMS rule change, 
North Dakota has two of these facilities. There are now 122 
nationally?
    Mr. ALTMAN. More like 380.
    Mr. POMEROY. Three hundred and eighty? Oh, that is more 
than I thought. Is that a rapidly growing number?
    Mr. ALTMAN. It has grown by number of facilities in the 
last few years at a pretty good rate. I think it is important 
to put that into context, as we discussed before. Number one, 
many of these facilities are small. You can have a 40-, 50-, 
60-bed hospital.
    Mr. POMEROY. Right.
    Mr. ALTMAN. It is not like especially the newer ones are 
very large. Number two, the interesting thing about the recent 
growth and your experience in particular is that there has been 
historic geographic mal-distribution of LTCHs concentrated in a 
small number of States. The growth has occurred in areas where 
there were not formerly LTCH services, including North Dakota 
and some other areas.
    Then, the last thing that we discussed about growth before 
you were able to join us is that the growth has really slowed 
down, particularly in the last year, with the implementation of 
the 25-percent HIH rule that Dr. Votto referenced, which has 
not even really fully gone into effect, so that growth really 
hasn't even taken into effect those HIHs that are going to have 
to close as a result of this rule. The growth we do see is 
slowing down a little bit. The growth that is occurring, is 
evening out the distribution and making this service available 
to a larger, a more diverse set of---geographic set of 
beneficiaries.
    Then the last thing that we discussed and probably the most 
important, is that the best way to get at growth, because there 
is growth that is inappropriate, and then, there is growth that 
would arguably be appropriate because it is providing an 
expanded service to the people we want that service to be 
available to, and that is the medically complex, severely ill 
people, and that is the certification criteria. That will also 
address growth. The last thing I would say in terms of growth 
is that we at Kindred have seen a significant----
    Mr. POMEROY. What is the status--so, there is a 
certification of what is a legitimate LTCH for purposes of 
Medicare reimbursement?
    Mr. ALTMAN. Right now, the only certification criteria for 
an LTCH is if you have a 25-day length of stay for your 
Medicare patients. We are part of a number of people, including 
policymakers, who say, you know what, that is not a targeted 
enough definition. We really ought to make it based on the 
patients more.
    Mr. POMEROY. It strikes me that this issue really brings to 
the fore the fact that we spend an awful lot of money on very 
ill people at the end of life who are struggling to hang on to 
life, frankly. Obviously, that is an essential function of the 
health care system, provide for people at that time, but it 
really does get extremely expensive. I was very interested in 
your testimony, Ms. Moore. You talk about noting, yes, these 
are expensive, but compared to what? If you look at treatment 
of those that are legitimately in these facilities, it really 
is not necessarily, more expensive. They are going to be an 
extremely expensive patient no matter where they are. They are 
very, very ill. Is that correct?
    Ms. MOORE. I am sorry. We really cannot comment on the 
payment system. We do not have experience with that. The 
evidence and data we collect do not talk to that. What we can 
say is that the screening criteria really help us direct the 
patient to the appropriate setting.
    Mr. POMEROY. Okay. On that point, so the industry is 
basically saying, look, develop an admission criteria. You have 
concerns here; develop an admit criteria. Don't just whack 
rates, because you are going to what people that need to be in 
these facilities. The institutions in North Dakota that I 
visited with on Monday in preparation for this hearing told me 
that they believe these rates will dramatically shrink services 
and affect the willingness of hospitals to take transfers, and 
you are going to have ICUs stacking up all across the country. 
Do you have a comment on that?
    Ms. MOORE. What I can say, again, in developing the 
criteria with NALTH, one of the criterion we look at is weaning 
of mechanical ventilation, and what the criteria tells us is 
that when the patient fails weaning on a regular basis or 
repeatedly, that is a patient appropriate for the long-term 
care hospital setting. What that does do, is it frees up a 
short-term ICU bed in the acute care hospital setting and gives 
the patient the right expertise that they need. I can speak to 
that in terms of an example for the Committee.
    Mr. POMEROY. Right. If that referral source is not 
available, what do you do? You have got--it looks like a long-
term case here, weaning was not successful. Do you pull the 
plug on the ventilator because you have got nowhere to send 
them? Of course, you cannot do that. They stay in the ICU even 
though it is over indicated lengths of stay. That gets very 
expensive as well. This whole business is--it needs more of a 
holistic approach than just watch the rates and see what 
happens. We are talking about lives in the balance. I thank the 
Chairman. I yield back.
    Chairman JOHNSON. Thank you, Mr. Pomeroy. I do want to 
clarify a couple of things while you are before us just for the 
record. One is we look at the growth of both the long-term care 
hospitals and the hospitals within a hospital, satellites. What 
has driven that growth?
    Mr. ALTMAN. I am sorry. What has driven the growth----
    Chairman JOHNSON. Why has there been a really dramatic 
increase in patients needing that level of care? This is not a 
hard question. I just want it on the record. It is so obvious 
to you that I see you staggering. I do not want some mysterious 
answer. I want to put on the record what kinds of treatment 
capability have we developed in the last decade that has 
allowed this expansion, because Dr. Votto's hospital has been 
there a long, long time. When I was first elected to the State 
Senate 30 years ago, it was basically a residential facility. 
When you went there, you did not leave. I have seen the 
evolution. In the last, I do not know, 10 or 12 years, there 
have been some advances in medicine because you are a different 
operation now than you were even when you moved from a 
residential facility to an actual hospital. I think we need to 
put on the record what are some of the diagnoses that are, what 
are some of the treatment capabilities that are different, and 
why are people able to go home from these institutions and 
become independent when they are unlikely to be able to go home 
from either an acute care hospital or a nursing home.
    Dr. VOTTO. Okay. I will try to answer that question. First 
of all, technology has prolonged the lives of many people. I 
would like to answer Mr. Pomeroy's question maybe before he 
leaves, real quick.
    Chairman JOHNSON. Do that first, yes.
    Dr. VOTTO. Or try to answer it, anyway, because I have to 
answer it anecdotally, not with side-by-side data. In our study 
looking at ventilator outcomes, our average patient costs 
approximately $68,000 from 23 different centers, so the average 
is pretty good and that is 1,400 patients.
    When we looked at a side-by-side population that was 
published in the Critical Care Journal, it looked at the length 
of stay of patients that were difficult to wean, not dissimilar 
to our patients, and the cost average, if you extrapolated the 
costs in an acute care hospital, which is about 2 to 3 times 
more per day than a long-term hospital, the cost comparison we 
came up with was about $210,000 versus $68,000.
    Mrs. Johnson's question gets to the issue of possibly why 
do we have more of these patients. The answer is that there is 
better technology. Patients who had septic shock 15 years ago 
probably died most of the time. Patients with septic shock 
nowadays, certainly many of them live. They end up on a 
ventilator. They end up pretty sick, but they will live. They 
are very sick when they get out, and it takes them a long time 
to recover.
    The reason, I think, LTCHs in general have better outcomes 
is because we have a more programmatic rehabilitative approach 
with a team approach. In my hospital, we have a team that, as 
soon as you come in and you are a ventilator-weaning patient, 
just like NASA's job was to get somebody on the Moon and 
everybody understood that was their job, get somebody on the 
Moon, for all those years and they got somebody on the Moon, 
our job is to get people off ventilators, so we spend all of 
our time, energy, and staff getting them off the ventilator. 
That is the job, so that physical therapy and occupational 
therapy see them the day they come in. Nutrition sees them the 
day they come in.
    It is an approach that you have to use with critically ill 
patients, or you don't get good outcomes. Critical masses are 
the important issue in LTCHs. If you have a critical mass of 
patients who are ventilator dependent, then you know how to do 
it. You have a whole team that can do it. If you have patients 
who are ventilator dependent scattered throughout a big acute 
care hospital, you cannot have the team approach. The same with 
wounds, the same with head injury, lots of specific diagnostic 
categories that relate to LTCH care. I would think that that 
would be the answer that I would give for those questions.
    Chairman JOHNSON. Would you like to add anything?
    Mr. ALTMAN. The only thing I would add is the notion of 
interdisciplinary versus multidisciplinary care, and the 
interdisciplinary care approach that Dr. Votto has described, 
where you have a team captain and all the disciplines working 
toward a common goal is really not the way short-term acute 
care hospitals are set up. They are set up to stabilize and 
treat, and they do a very good job of that. They are not set up 
to do the extended course of care that is what we do in LTCHs.
    Chairman JOHNSON. If you come in for knee replacement and 
you have heart problems, you go down to the cardiac floor.
    Dr. VOTTO. Right.
    Mr. ALTMAN. Right.
    Chairman JOHNSON. It is a very different concept, and I 
think we need to recognize that.
    The last thing I want to get on the record is your 
experience, Dr. Votto--in the cost of a new bed, building a 
free-standing institution versus the cost of building a bed in 
a hospital that has space.
    Dr. VOTTO. Well, the example that I used, when we looked at 
25 beds costing $25 million, I found out that the industry--
this is not unusual in the industry. A million dollars a bed 
for a hospital is pretty much fairly standard, at least in New 
England. When we realized that we could afford to do that, we 
looked to partner, and there are certainly many older hospitals 
in New England with lots of new attachments, new buildings to 
them, and so they have units that they have not used. What we 
found was that we could renovate a very large unit, as we said, 
28 beds, at a price 10 percent of the cost of building a new 
building. It seemed like a very logical approach.
    I believe that we have the same--we do have the same 
programs there as we have at the base hospital. One advantage 
that we have at the satellite is that we can actually take even 
sicker patients because we can get surgeons to come over more 
quickly, and if there are diagnostic tests that you absolutely 
need, you can get them a little bit easier. There are 
advantages to the satellite.
    Chairman JOHNSON. All right. Thank you very much for your 
testimony. It has been very helpful. We are expecting that the 
RTI study will be done in a couple of months or so. I know some 
of you have been interviewed by their researchers and have had 
input into it, and we certainly will encourage them to move 
along rapidly. I encourage you to move along rapidly so that we 
can get some sense of what is the consensus from the care giver 
community and what impact you think it will have. That way we 
will be able to compare your analysis, your information with 
the administration's analysis and information, which has not 
yet been made public and should be made public, and what RTI is 
doing. Because, clearly, we need to move to a criteria-based 
system, and we need to figure out how we make that transition, 
and that is number one. Then after that is done, we will know 
whether there is or is not a legitimate problem with people 
being in the high-cost setting of an LTCH versus a more 
appropriate setting for that particular patient of a nursing 
home or an acute care facility.
    That is our goal. We must pursue it, and you will just have 
to accelerate your time to do this and come to some conclusion 
so you can provide guidance. You know, the real answer is, in a 
democracy, for the real world to provide guidance to the 
government. The government should only come in to do what the 
real world cannot on their own, and you cannot individually 
assure that the criteria is the same for all institutions. We 
can do that. The criteria should come from the patient-
physician level, and I am pleased that you are so far along, 
and we look forward to working with you, and thank you, Ms. 
Moore, for the role of the Massachusetts QIO in not only 
developing this approach and teaching other QIOs and doing some 
basic work over the last few years, but also for working with 
NALTH to review their proposal.
    Thank you very much.
    [Whereupon, at 4:45 p.m., the hearing was adjourned.]
    [Question submitted from Mr. Sam Johnson to Mr. Kuhn and 
his response follow:]

    Question: In your testimony, you mentioned that CMS estimates the 
margins of Long-term Care Hospitals (LTCHs) to be around 12 percent. Do 
those margins take into account changes in regulation that have taken 
place over the last couple years, such as the so-called ``25-percent 
rule,'' or the re-weighting of the DRGs? Do you think that those 
changes have taken full effect? If not, do you think there is any 
wisdom in letting those policies run their course?
    Answer: In the long-term care hospital prospective payment system 
(LTCH PPS) final rule for rate year (RY) 2007, the Centers for Medicare 
& Medicaid Services (CMS) calculated ``revenue-weighted'' Medicare 
margins to evaluate the overall financial status of LTCHs. CMS' 
analysis of the latest available LTCH data found that LTCH Medicare 
margins for fiscal year (FY) 2003--the first year of the LTCH PPS--were 
7.8 percent, and preliminary data for FY 2004 based on the most recent 
data revealed a Medicare margin of 12.7 percent. These estimates do not 
take into account changes in the regulations that have taken place over 
the last few years, including the impact of the ``25-percent rule'' or 
the re-weighting of the long-term care diagnosis related groups (LTC-
DRGs).
    The ``25-percent rule'' is a special payment provision for long-
term care hospitals-within-hospitals (HwHs) and satellites, which 
comprise approximately 39.5 percent of all LTCHs. Under this policy, 
CMS adjusts payments for patients admitted from the host hospital to 
the co-located LTCH that exceed a specified threshold percentage (in 
most cases, 25 percent). For cost reporting periods beginning on or 
after October 1, 2003, which was the effective date of the rule, the 
only affected facilities were those co-located LTCHs that had their 
first cost reporting period as a LTCH after the effective date. 
Existing co-located LTCHs were held-harmless for their first cost 
reporting period following the effective date of the regulation. 
Therefore, CMS did not have the data to evaluate the impact of this 
policy, and could not factor in the anticipated behavioral changes by 
both the host hospital and the co-located LTCHs.
    CMS determines LTC-DRG relative weights to account for differences 
in resource use by LTCH patients who typically have complex cases and 
multiple medical problems. For payments for discharges occurring in FY 
2006, CMS recalibrated the LTC-DRG relative weights based on an 
analysis of LTCH claims data from FY 2004. The recalibration of LTC-DRG 
weights only corrects for coding improvement for the purpose of making 
accurate LTCH PPS payments in FY 2006. Annual recalibration does not 
serve to account for payments that were made based on improved coding 
(rather than patient severity) in prior years.
    Based on the information available to us, we do not believe that it 
would be appropriate to ``postpone implementation'' of the policies 
finalized for FY 2007, including the zero percent update to the 
standard Federal rate, the payment adjustment for short-stay outlier 
cases, and the case mix adjustment to the market basket, pending an 
analysis of other impacts on LTCH payment adequacy.

                                 
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