MedPAC Forecasts a 4.2% Decrease in Medicare Margins for LTACHs and Proposes 2010 Payment Rate Increase

January 5, 2009

On December 4, 2008 the Medicare Payment Advisory Committee (MedPAC) held a public meeting to review the adequacy of Medicare payments under the Long Term Care Hospital Prospective Payment System (LTCH-PPS) for services provided by Long Term Acute Care Hospitals (LTACHs). Commissioners reviewed data related to Medicare payment and cost trends, access to capital, quality of care, access to care, and other factors. MedPAC predicts that average LTACH Medicare margins will decrease industry-wide from 4.7% in 2007 to 0.5% in 2009 primarily as a result of accelerating growth in the cost of care and recently enacted Medicare payment policy changes. As a result, MedPAC proposed a draft recommendation to Congress in favor of an increase to the Medicare payment rate for LTACH services for the 2010 Rate Year by the projected rate of increase in the market basket index, less adjustments for productivity growth. 

Medicare Payment and Cost Trends. LTACH Medicare profit margins grew rapidly after implementation of the LTCH-PPS in 2002. In 2005, the average industry-wide Medicare profit margin was 12%. In 2007, the average profit margin had decreased to 4.7% mainly as a result of Centers for Medicare and Medicaid Services payment adjustments. Medicare profit margins, however, varied greatly in 2007, with a quarter of hospitals having margins of -5.2% or less and another quarter of hospitals having margins of 13.1% or greater. MedPAC also noted that margins for for-profit LTACHs and freestanding facilities in 2007 were significantly higher than those for non-profits and hospitals-within-hospitals, respectively. Although MedPAC projections accounted for 2009 Medicare payment increases, it projected that the average industry-wide Medicare margin would decrease to 0.5% in 2009 as a result of accelerating growth in the cost of care and payment policy changes enacted in 2007 under the Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA).

Access to Capital. MedPAC noted that the impact of the current economy-wide credit crisis will vary across the LTACH industry, and that unlike in past years, access to capital is not a valid or reliable indicator of Medicare payment adequacy. Commissioners also commented on the unevenness of access to capital within the industry, noting that large public LTACH providers will be better able to weather the financial storm than smaller highly leveraged LTACH chains. MedPAC also observed that the MMSEA’s three-year moratorium on the establishment of new LTACHs, LTACH satellite facilities, and increases in the number of LTACH beds (with certain limited exceptions) limits opportunities for expansion and, therefore, reduces the need for capital.

Quality of Care. MedPAC reported that the quality of care provided in LTACHs was generally improving. It considered historical data on the percentage of patient deaths occurring in LTACHs, the percentage of patient deaths occurring within thirty days of discharge, and the percentage of patients readmitted to acute care hospitals for each of the top fifteen LTACH diagnoses (which account for 60% of all LTACH patient admissions). MedPAC found that readmission rates for virtually all diagnoses were stable or declined in 2007. LTACH death rates and deaths occurring within thirty days of discharge also declined for most diagnoses in 2007. Commissioners noted, however, that LTACHs experienced a large increase in the number of septicemia admissions and a correspondingly large increase in septicemia-related death rates.

Access to Care. MedPAC found it difficult to assess patient access to care since there are no fixed admission criteria for LTACH patients and because it is unclear in many cases whether patients treated in LTACHs require the acute level of care provided by such facilities. A CMS-commissioned study currently being conducted by Research Triangle Institute that is scheduled to be presented to Congress by June 2009 will further examine and recommend LTACH patient admission and facility certification standards.

Please contact one of the authors or another member of the McGuireWoods Health Care industry group if you have any questions about LTACHs or the Medicare or Medicaid payment policies applicable to LTACHs.