July 2004

Long Term Care Hospitals-Within-Hospitals

Medicare regulations define long-term care hospitals as having an average length of stay greater than 25 days. Medicare excludes these hospitals from the acute care hospital prospective payment system. Long-term care hospitals-within-hospitals (HwHs) are physically located inside acute care hospitals (host hospitals). The co-location of an HwH and its host hospital creates potentially inappropriate financial incentives. As a result, the Centers for Medicare & Medicaid Services (CMS) imposes payment limits on HwHs that readmit more than 5 percent of patients discharged to their host hospitals over the course of the HwH's fiscal year. CMS also requires that HwHs be organizationally and financially independent from their hosts. 

We found that 19 of 87 HwHs exceeded the annual 5 percent threshold for readmissions from their host hospitals at least once during their fiscal years ending in September 2000 through December 2002. Currently, CMS lacks a system to detect readmissions over the 5 percent threshold. Many of these readmissions involved high cost diagnosis-related groups (DRGs). As Medicare's prospective payment system for long-term care hospitals is fully implemented, paying HwHs that are over the 5 percent readmission level could result in increased costs to the Medicare program.