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Statement of Need: The Medicare inpatient hospital acute-care PPS was established by the Social Security Amendments of 1983 (Pub. L. 98-21). This prospective payment system (PPS) generally applies to all hospitals participating in the Medicare program with certain exclusions, exemptions, and adjustments specifically set out under the law. Long-term care hospitals (LTCHs), established under section 101 of Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982, which amended section 1886(b) of the Social Security Act, was one of four classes of specialty hospitals (the others being children's, psychiatric, rehabilitation, and psychiatric and rehabilitation units in acute-care hospitals) that were excluded from the inpatient acute-care PPS. These classes of hospitals and cancer hospitals, which were added to the category of, excluded hospitals beginning in fiscal year 1990, under section 6004 of the Omnibus Budget Reconciliation Act (OBRA) of 1989, continued to be paid for under TEFRA. The exemption of these facilities from the PPS was intended to be a temporary measure, pending the development of more appropriate systems to pay these providers under a PPS. Section 123 of Public Law 106-113, the Balanced Budget Refinement Act of 1999 (BBRA), requires the establishment and implementation of a prospective payment system (PPS) for long-term care hospitals (LTCHs) by October 1, 2002. Section 307(b) of Public Law 106-554, the Benefits Improvement and Protection Act of 2000 (BIPA), authorized the Secretary to examine and evaluate a number of adjustment factors for inclusion in the LTCH PPS. Congressional intent regarding a timely implementation of the LTCH PPS is reflected in the statutory establishment of a default model under which LTCHs will receive Medicare payments for services furnished on or after October 1, 2002.

Summary of the Legal Basis: Section 123 of Public Law 106-113, the BBRA, requires that the Secretary develops and implements the PPS for LTCHs by October 1, 2002. Section 307(b) of Public Law 106-554 confers broad authority on the Secretary to determine whether and which payment adjustments should be included in the system.

Alternatives: None.

Anticipated Costs and Benefits: Section 123(a) of the BBRA requires that the PPS for LTCH maintain budget neutrality. Payment will be estimated using the excluded hospitals' market basket update. The ability to pay for long-term care prospectively at LTCHs will have a direct, positive impact on the Medicare system by controlling the increase in costs for services that these hospitals provide. Although some hospitals will benefit more than others during the first year of the PPS due to variations in individual case mix indices, we anticipate that the system to "self-correct" within two years, because the more accurate coding and data-reporting required by a PPS will affect payment rates. Operating under a PPS will also have a beneficial impact on the efficient management and planning capability of individual LTCHs.

Risks: Failure to develop and implement the PPS for LTCHs by October 1, 2002 would place us in violation of the BBRA and BIPA. Moreover, failure to meet the deadlines imposed by the notice and comment rulemaking process (citation) would make it impossible to comply with statutory requirements for implementation.