Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

L -T C
ONG ERM  ARE

H - -H
OSPITALS WITHIN OSPITALS

Inspector General 
July 2004 
OEI-01-02-00630  Office of Inspector General 

http://oig.hhs.gov 
The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, 
as amended, is to protect the integrity of the Department of Health and Human Services 
(HHS) programs, as well as the health and welfare of beneficiaries served by those 
programs. This statutory mission is carried out through a nationwide network of audits, 
investigations, and inspections conducted by the following operating components: 
Office of Audit Services 
The OIG's Office of Audit Services (OAS) provides all auditing services for HHS, either by 
conducting audits with its own audit resources or by overseeing audit work done by others. 
Audits examine the performance of HHS programs and/or its grantees and contractors 
in carrying out their respective responsibilities and are intended to provide independent 
assessments of HHS programs and operations in order to reduce waste, abuse, and 
mismanagement and to promote economy and efficiency throughout the department. 
Office of Evaluation and Inspections 
The OIG's Office of Evaluation and Inspections (OEI) conducts short-term management 
and program evaluations (called inspections) that focus on issues of concern to the 
department, the Congress, and the public. The findings and recommendations contained 
in the inspections reports generate rapid, accurate, and up-to-date information on the 
efficiency, vulnerability, and effectiveness of departmental programs.  The OEI also 
oversees State Medicaid fraud control units, which investigate and prosecute fraud and 
patient abuse in the Medicaid program. 
Office of Investigations
The OIG's Office of Investigations (OI) conducts criminal, civil, and administrative 
investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries 
and of unjust enrichment by providers. The investigative efforts of OI lead to criminal 
convictions, administrative sanctions, or civil monetary penalties. 
Office of Counsel to the Inspector General 
The Office of Counsel to the Inspector General (OCIG) provides general legal services to 
OIG, rendering advice and opinions on HHS programs and operations and providing all 
legal support in OIG's internal operations. The OCIG imposes program exclusions and 
civil monetary penalties on health care providers and litigates those actions within the 
department. The OCIG also represents OIG in the global settlement of cases arising 
under the Civil False Claims Act, develops and monitors corporate integrity agreements, 
develops model compliance plans, renders advisory opinions on OIG sanctions to the 
health care community, and issues fraud alerts and other industry guidance.    A B S T R A C T  

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 HwHs 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 Medicares 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. 
In addition, CMS has no ongoing mechanism to determine whether 
HwHs are financially and organizationally separate from their host 
hospitals. 
We recommend that (1) CMS develop a system to monitor HwHs 
compliance with the 5 percent readmission rule, and (2) CMS require 
HwHs to demonstrate their organizational and financial independence 
on a continuing basis. 
In its response to our draft report, CMS generally supports our findings 
and the thrust of our recommendations.  The agency indicated that it is 
moving forward with programs to address the concerns that we 
identified. 
  OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  i    E X E C U T I V E   S U M M A R Y  

OBJECTIVES 
To assess the rate at which long-term care hospitals-within-hospitals 
readmit patients discharged to their host hospitals, and whether that 
rate exceeds the 5 percent threshold for full Medicare reimbursement. 
To document the nature and extent of the Centers for Medicare & 
Medicaid Servicess (CMSs) controls to determine if hospitals-within-
hospitals meet the criteria for exclusion from the Medicare acute care 
hospital prospective payment system (PPS). 
BACKGROUND 
Medicare regulations require that long-term care hospitals have an 
average length of stay greater than 25 days.  Medicare excludes these 
hospitals from the acute care hospital PPS.  Long-term care hospitals-
within-hospitals (HwHs) are physically located inside acute care 
hospitals (host hospitals). Between 1995 and 2002, the number of 
HwHs quadrupled from 32 to 132, while Medicare payments to them 
rose from $135 million to $817 million.  Medicare beneficiaries treated 
in HwHs increased 7-fold, to over 34,000. 
The co-location of an HwH and its host raises concerns about potentially 
inappropriate financial incentives. For example, the proximity of an 
HwH and its host creates an incentive for an HwH to discharge patients 
to the host hospital and then readmit the same patient for additional 
care.  The HwH would receive two separate Medicare paymentsone 
for each admissionand the host hospital would also receive a payment.  
The co-location of the HwH and its host also raises concerns about the 
degree to which transactions between them are conducted on an arms-
length basis. 
As a result of these concerns, CMS set out specific regulatory 
requirements for HwHs.  An HwH that readmits more than 5 percent of 
its patients from its host over the course of a fiscal year faces limits on 
the Medicare payments it receives.  Under the cost-based payment 
system, in effect prior to October 2002, HwHs over the 5 percent 
readmission threshold were paid on the basis of their average cost per 
discharge, up to a ceiling amount.  Under the new long-term care 
hospital PPS, if an HwHs readmission rate exceeds 5 percent, the HwH 
would receive only one DRG payment per patient for all admissions  
from the host hospital regardless of the number of readmissions from 
the host hospital. This payment limitation applies to the fiscal year in 
  OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  ii  E X E C U T I V E   S U M M A R Y  
which the HwH exceeded the 5 percent threshold.  CMS also requires 
that an HwH meet specific organizational and financial criteria in order 
to be excluded from the acute care hospital PPS.   
We determined readmission rates through analysis of Medicares 100 
Percent Inpatient Hospital File.  We reviewed files on 80 HwHs at 2 
CMS regional offices and the fiscal intermediary that serves the 
majority of HwHs.  We also interviewed staff from CMS central office 
and four regional offices, three fiscal intermediaries, and three national 
long-term care hospital chains.  
Our inspection focused on HwHs established from October 1995 to 
January 2002.  Our analysis of readmission rates examined admissions 
for fiscal years beginning in October 1999 through January 2002, when 
HwHs were paid under a cost-based system.  During this period, HwHs 
were supposed to face financial penalties in their cost report settlement 
if they exceeded the 5 percent readmission threshold.  Because HwHs 
faced this threshold under the cost-based system, it is useful to examine 
how HwHs responded to the threshold as a potential predictor of 
behavior under the new PPS system. 
FINDINGS 
Nineteen 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. 
Because HwH fiscal years commence at the beginning of different 
months, the available data allow us to analyze complete 2000 and 2001 
fiscal years, and a subset of 2002 fiscal year data.  This subset of fiscal 
year 2002 data comprises those HwHs with fiscal years ending between 
September and December 2002.  Nine HwHs exceeded the 5 percent 
threshold in multiple fiscal years, including two that exceeded it in all 3 
years of our analysis.   
CMS lacks a system to detect readmissions over the 5 percent 
threshold. CMS has not made monitoring readmissions a priority.  
Cost reports do not contain data necessary to monitor readmissions. 
Many HwHs and host hospitals have different fiscal intermediaries and 
different fiscal years, so intermediaries do not have access to data 
needed to verify readmission rates. The cost reports for HwHs have not 
yet been settled for fiscal years since the 5 percent readmission 
threshold was imposed in 1999. As a result, at this point in time we 
  OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  iii  EE XX EE CC UU TT II VV EE    SS UU MM MM AA RR YY
cannot determine whether the appropriate adjustments in payments to 
HwHs have been or will be made. 
Many readmissions in the hospitals-within-hospitals over the 
5 percent threshold involved high cost diagnosis-related groups. 
As Medicares PPS 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. In our analysis of fiscal 
years 2000 and 2001 data, and a subset of fiscal year 2002 data, 
three high cost diagnosis-related groups (DRGs) dominated in HwHs 
over the 5 percent readmission threshold. In addition to having a 
higher base payment under the long-term care hospital PPS than under 
the acute care PPS, all three of these DRGs are multiplied by relative 
weights greater than 1.0, with two of the DRGs having weights greater 
than 2.0. The high cost of these DRGs is exacerbated when a patient is 
readmitted, because two DRG payments are made to the HwH. 
CMS provides limited oversight of hospital-within-hospital 
compliance with the exclusion criteria. CMS requires HwHs to 
demonstrate annual compliance with the 25-day average-length-of-stay 
criterion in order to maintain their status as long-term care hospitals. 
However, CMS has no ongoing mechanism to determine whether HwHs 
are meeting the organizational or financial independence criteria. 
Further, HwHs self-report data, which CMS does not independently 
verify. 
RECOMMENDATIONS 
The potential for improper Medicare payments to HwHs due to their co-
location with host hospitals makes strong oversight critical. We found 
that CMS lacks such oversight of HwHs, creating a vulnerability for the 
Medicare program. Therefore, we recommend that CMS: 
Develop a system to monitor hospital-within-hospital compliance 
with the 5 percent readmission threshold. 
 	 CMS could require HwHs to submit annual discharge, 
admissions, and readmissions data to their fiscal intermediaries. 
 	 CMS could use that data to monitor HwHs readmission rates. 
 	 CMS could develop a system to facilitate data sharing between 
fiscal intermediaries. 
OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  iv  EE XX EE CC UU TT II VV EE    SS UU MM MM AA RR YY
Require hospitals-within-hospitals to demonstrate ongoing 
compliance with the organizational and financial independence 
criteria. 
 	 CMS could specify what supporting documentation HwHs must 
submit to demonstrate ongoing organizational independence. 
 	 CMS could require HwHs to submit financial independence data 
annually to their fiscal intermediaries. 
 	 CMS could conduct a focused review of a sample of HwHs to 
assess their compliance with the exclusion criteria. 
AGENCY COMMENTS 
We received comments on our draft report from the Centers for 
Medicare and Medicaid Services (CMS). CMS generally supports our 
findings and the general thrust of our recommendations. The agency 
indicates that it is moving forward with programs to address the 
concerns that we identified. 
OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  v    T A  B  L E   O F   C O N T E N T S  

A B S T R A C T .....................................................................i 

E X E C U T I V E S U M M A R Y ................................................... ii 

I N T R O D U C T I O N ............................................................. 1 

F I N D I N G S ..................................................................... 8 

  Hospitals-within-hospitals exceeding readmission threshold ....... 8 

Lack of system to detect readmissions................................. 8 

Readmissions in high-cost DRGs ...................................... 9 

Limited oversight of exclusion criteria ...............................12 

R E C O MM  E  N  D A T IO  N  S  ....................................................15 

Develop system to monitor compliance with 5 percent threshold ..15 

Require compliance with the exclusion criteria......................16 

A G E N C Y C O M M E N T S .....................................................18 

A P P E N D I C E S ................................................................19 

A:  Methodology ........................................................19 

B: Data Tables .........................................................22 

C: Agency Comments..................................................24 

A C K NO  WL  E D G M E N T S  ....................................................26 

E N D  N O T E S ..................................................................27
   I N T R O D U C T I O N  

OBJECTIVES 
To assess the rate at which long-term care hospitals-within-hospitals 
readmit patients discharged to their host hospitals, and whether that 
rate exceeds the 5 percent threshold for full Medicare reimbursement. 
To document the nature and extent of the Centers for Medicare & 
Medicaid Servicess controls to determine if hospitals-within-hospitals 
meet the criteria for exclusion from the Medicare acute care hospital 
prospective payment system (PPS). 
BACKGROUND 
Long-Term Care Hospitals 
Medicare regulations require that long-term care hospitals have an 
average length of stay greater than 25 days.1  These hospitals focus on 
patients with medically complex conditions or multiple conditions 
(comorbidities).  Types of patients treated in long-term care hospitals 
include those who are ventilator dependent, need multiple rehabilitative 
therapies, suffer from organ failure, or have infectious diseases.  
A long-term care hospital must first operate as a Medicare-certified 
acute care hospital for at least 6 months.  After 6 months, the hospital 
may apply to be reclassified as a long-term care hospital.  The Centers 
for Medicare & Medicaid Services (CMS) determines the status of a 
long-term care hospital at the beginning of each subsequent annual cost 
reporting period.2 
Hospitals-within-Hospitals: Hospitals-within-hospitals (HwHs) are 
physically located inside an acute care hospital, referred to as the host 
hospital. The vast majority of HwHs are long-term care hospitals; in 
this report, our use of the term HwH refers only to long-term care 
HwHs. Typically, an HwH leases unused space from the host hospital.  
Even though an HwH is located in the same building as its host, it is a 
separate hospital, organizationally independent from its host, with its 
own Medicare provider number, not a unit of the host hospital.  
Regulatory requirements for HwHs are found at 42 C.F.R.  412.22. 
Reimbursement Policies:  Long-term care hospitals generally treat 
medically complex patients with long stays. As a result, CMS excludes 
them from the acute care hospital PPS.  Prior to October 1, 2002, CMS 
paid all long-term care hospitals on a cost basis, up to a ceiling based on 
costs per discharge. CMS is currently phasing in a long-term care 
  OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  1  I N T R O D
 U C T I O N  
hospital PPS that uses diagnosis-related groups (DRGs).  These DRGs 
are identical to the acute care hospital DRGs.  However, CMS applies a 
larger base payment and generally higher relative weights to the long-
term care hospital DRGs, thus taking into account the specialized care 
offered by long-term care hospitals. 
Rapid growth: Over the past decade, long-term care hospitals have 
grown more rapidly than any other post-acute setting.  From 1995 to 
2002, Medicare payments to long-term care hospitals and the number of 
beneficiaries treated in that setting more than doubled (see Table 1).  
The number of facilities increased by over 100, from 178 to 295. 
Table 1 
Growth of Long-term Care Hospitals (LTCHs) 
and Hospitals-within-Hospitals (HwHs) 
1995-2002 
Medicare 
Number of  Medicare Beneficiaries 
Payments 
Facilities  Discharged 
($ Millions) 
1995  2002  1995  2002  1995   2002  
All 
LTCHs*  $836  $2,193  178  295  42,339  98,678 
HwHs  $135  $817  32  132  4,621  34,592 
(% of all 
(16%)  (37%)  (18%)  (45%)  (11%)  (35%)
LTCHs) 
* includes HwHs and freestanding LTCHs 
Data sources: CMSs HCFA Customer Information System (HCIS) and 
 OIG analysis of HwHs 
HwHs account for much of the growth in long-term care hospitals.  
Between 1995 and 2002, the number of HwHs more than quadrupled, 
from 32 to 132.  In 1995, HwHs constituted 18 percent of all long-term 
care hospitals; by 2002 they comprised 45 percent.  Similarly, Medicare 
payments to them rose from $135 million (16 percent of payments to all 
long-term care hospitals) to $817 million (37 percent of all long-term 
care hospital payments). Between 1995 and 2002, the number of 
beneficiaries treated in HwHs increased 7-fold, from just under 5,000 to 
over 34,000. Our interviews with industry observers, both among 
providers and in Government, suggest that these trends will continue. 
  OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  2  III NNN TTT RRR OOO DDD UUU CCC TTT III OOO NNN
Concerns About Hospitals-within-Hospitals 
Relationship with HostHospital: Hospitals, including HwHs, accept 
overall responsibility for a patients care and furnish all services 
required. The hospital discharges a patient only after completing the 
full course of treatment. 
The co-location of an HwH and its host raises concerns about potentially 
inappropriate financial incentives. For example, the proximity of an 
HwH and its host creates an incentive for an HwH to discharge patients 
to the host hospital and then readmit them for additional care. The 
HwH would receive two separate Medicare paymentsone for each 
admissionand the host hospital would also receive a payment. 
Furthermore, the payment system creates a financial incentive for the 
host hospital to transfer patients to the HwH without having completed 
a full course of treatment. In those cases, Medicare would make two 
payments for the same patient: the host hospital would receive full 
payment, even if it had not completed the full course of treatment; and 
the HwH also would receive full payment for the care it provides. 
Finally, the co-location of an HwH and its host raises concerns about the 
degree to which they operate as separate facilities. These concerns 
include whether management decisions, such as lease agreements and 
purchase of services, are arms-length transactions based on fair market 
value. 
Aggressivemarketing toacute carehospitals: Many HwHs are part of 
chain organizations that aggressively market their services to potential 
hosts. We reviewed web sites and marketing materials of several chain 
organizations and found they stress the financial incentives described 
above. These materials include the following claims: 
 	 A host hospital will have increased cash flow by realizing lease 
and purchased services revenue from an HwH. 
 	 A host can gain as much as $1.8 million per year in extra 
revenues though partnering with an HwH. 
 	 An HwH offers solutions to problems that are faced daily, 
including large outlier financial costs and financial losses from 
Medicare PPS restrictions. 
CMSs Hospital-within-Hospital Regulations 
Because of the concerns described above, CMS issued regulations that 
address the readmission of patients from the host hospital to the HwH, 
OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  3  I N T R O D U C T I O N  
as well as the organizational and financial independence of the HwH 
from the host hospital. 
5 Percent Readmission Threshold:  CMS addressed the vulnerability 
presented by readmissions from the host hospital in a 1999 regulation. 
This regulation allowsover the course of an HwHs fiscal yearup to 5 
percent of discharges from the HwH to its host to be readmitted to the 
HwH without an intervening discharge to another setting. Under the 
cost-based system in effect prior to October 2002, HwHs were paid on 
the basis of their average cost per discharge, up to a ceiling amount. 
CMS set the ceiling rate at $39,850 for HwH fiscal years beginning on 
or after October 1, 1999; $41,745 for years beginning on or after October 
1, 2000; and $44,009 for years beginning on or after October 1, 2001.  
Payments to HwHs exceeding the 5 percent threshold were to be 
decreased by excluding all readmissions from the host from the 
calculation of the average cost per discharge regardless of the number of 
readmissions from the host hospital. This payment limitation applies to 
the fiscal year in which the HwH exceeds the 5 percent threshold.3 
Effective for fiscal years beginning October 1, 2002, all long-term care 
hospitals, including HwHs, are being paid under a new long-term care 
PPS. The new PPS, which uses DRGs for payment, is being phased in 
over a 5-year period. Under the new PPS, if the readmission rate 
exceeds 5 percent over the course of an HwHs fiscal year, the HwH 
would receive only one DRG payment per patient for all admissions 
from the host hospital regardless of the number of readmissions from 
the host hospital. This payment limitation applies to the fiscal year in 
which the HwH exceeds the 5 percent threshold.4 
Exclusion Criteria: In a 1995 regulation, CMS required that HwHs 
meet three criteria to be excluded from Medicares acute care hospital 
PPS. 
1. Average length of stay.  HwHs must maintain an average length of 
stay greater than 25 days.  This is required of all long-term care 
hospitals. 
2. Organizational independence. The organizational independence 
criterion is designed to ensure that an HwH operates as an independent 
hospital, rather than just a unit of a host hospital.5  They must keep 
the following administrative components separate from their hosts: 
 	 Governing body. The governing body must not be under the 
control of the host or a third party with control of both hospitals. 
  OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  4  II NN TT RR OO DD UU CC TT II OO NN
 	 Chief medical officer. The chief medical officer must not be 
employed by, or under contract with, the host or a third party 
with control of both hospitals. 
 	 Medical staff. The medical staff must be directly accountable to 
the HwH governing body. The medical staff adopts and enforces 
bylaws governing medical staff activities. It is also involved in 
the granting of privileges to individual practitioners. 
 	 Chief executive officer. The chief executive officer must not be 
employed by, or under contract with, the host or a third party 
with control of both hospitals. 
Medicare regulations define control to exist if an individual or an 
organization has the power, directly or indirectly, to significantly 
influence or direct the actions or policies of an organization or 
institution.6 
3. Financial independence. The financial independence criterion is 
intended to address incentives that could lead to unnecessary transfer 
of patients from the host hospital or excessive purchase of services from 
the host hospital.7  HwHs must meet one of three criteria: 
 	 They must perform basic hospital functions (quality assurance, 
medical staffing, utilization review, infection control, and 
nursing, medical record, pharmacy, radiology, and laboratory 
services) independently from the host. 
 	 The costs of services purchased from the host hospital must be 
no more than 15 percent of the HwHs total inpatient operating 
costs. 
 	 At least 75 percent of the HwHs inpatient population must come 
from a source other than the host hospital. 
HwHs in operation prior to October 1995 do not need to meet the 
organizational or financial independence criteria.8 
SCOPE AND METHODOLOGY 
This inspection focuses on HwHs established between October 1995 and 
January 2002. HwHs established before October 1995, while still 
subject to the 5 percent readmission threshold, are not required to meet 
CMSs organizational and financial independence criteria. As of 
October 1995, 32 HwHs were in operation and are exempt from these 
criteria. We do not include those 32 HwHs in our analysis. 
OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  5  I N T R O D U C T I O N  
Because CMS data systems do not identify the universe of HwHs, we 
first developed our own list.  We obtained a listing of all long-term care 
and acute care hospitals from CMSs Online Survey Certification and 
Reporting (OSCAR) system. We then matched addresses of long-term 
care hospitals and acute care hospitals.  If we could not make an exact 
match, we used the Internet to identify which long-term care hospitals 
were HwHs.  We did this by visiting long-term care hospital web sites, 
host hospital sites, industry-related sites, news sites, HwH chain 
organization sites, and mapping sites to determine which long-term care 
hospitals were HwHs. When we could not determine whether a long-
term care hospital was an HwH, we contacted the facility directly. 
Our analysis identified 87 HwHs beginning operation between October 
1995 and January 2002. 
Compliance with 5 percent readmission threshold: This analysis
focused on assessing compliance with requirements that payments to 
HwHs exceeding the 5 percent readmission threshold were to be 
decreased by excluding all readmissions from the host from calculation 
of the average cost per discharge.  These requirements were in effect for 
HwH fiscal years commencing on or after October 1, 1999.9 
We analyzed readmission rates for each HwH for each of those fiscal 
years, because the payment limitation was to have applied to the fiscal 
year in which the HwH exceeded the 5 percent threshold.  To determine 
readmission rates, we analyzed the National Claims History 100 
Percent Inpatient File for HwHs and their hosts for fiscal years 
beginning on or after October 1, 1999. We selected that date because it 
corresponded to the effective date of Medicares 5 percent threshold on 
readmissions from the host to the HwH.   
We used SAS, a statistical analysis package, to determine an HwHs 
total discharges, discharges to its host, and readmissions from the host.  
We then calculated the readmission rate for each HwHs fiscal year by 
dividing readmissions by total discharges. 
Our analysis included a total of 87 HwHs66 with a fiscal year ending 
between September 30, 2000 and August 31, 2001; an additional 18 
began operations in the following year, for a total of 84; and an 
additional 3 HwHs began operations in the first 4 months of the 
following fiscal year (ending December 31, 2002), for a total of 87.  The 
increase in HwHs for each year is a result of new HwHs being 
established. 
  OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  6  I N T R O D U C T I O N  
We truncated the analysis with fiscal years ending December 31, 2002, 
because more current data were not available at the time we conducted 
our analysis.  Because HwH fiscal years commence at the beginning of 
different months, the available data allow us to analyze only a subset of 
2002 fiscal year data.  This subset of 38 HwHs comprises those with 
fiscal years ending between September and December 2002. 
Oversight of Exclusion Criteria:  To determine the extent of CMSs 
oversight of the exclusion criteria, we visited the Chicago and Dallas 
regional offices, which have jurisdiction over 53 of the 87 HwHs in our 
scope. We reviewed files on 52 of these facilities and interviewed staff 
at both regions.  We also interviewed staff in the Atlanta and 
Philadelphia regional offices, which have jurisdiction over 25 additional 
HwHs. 
We visited Mutual of Omaha, the fiscal intermediary that services 74 
HwHs within our scope.  We reviewed files on 68 HwHs and interviewed 
relevant staff.  We also interviewed staff at two other fiscal 
intermediaries.  Between our visits to Mutual of Omaha and the 
Chicago and Dallas regional offices, we reviewed files on 80 of the 87 
HwHs in our scope. 
The interviews and the file reviews focused on how CMS ensures that 
HwHs are meeting the 5 percent readmission threshold and the criteria 
for exclusion from the acute care hospital PPS.  Appendix A provides 
full details on our methodology. 
We conducted this inspection in accordance with the Quality Standards
for Inspections issued by the Presidents Council on Integrity and 
Efficiency. 
  OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  7    F I N D I N G S

Nineteen of 87 HwHs exceeded the annual    In fiscal year 2000, 14 of 66 HwHs 
5 percent threshold for readmissions at least  operating at that time discharged 
to their hosts and then readmitted 
once during their fiscal years ending in 
more than 5 percent of patients.  In 
September 2000 through December 2002. 
fiscal year 2001, 10 of 84 HwHs 
readmitted patients over the 5 percent threshold.  In a subset of HwHs 
with complete fiscal year data for 2002, 6 of 38 readmitted more than 5 
percent of their patients.    Appendix B provides a summary of 
readmission data by year. 
During their fiscal years ending in September 2000 through December 
2002, the readmission rates for those 19 HwHs ranged from just over 5 
percent to 10.7 percent. 
Nine HwHs exceeded the 5 percent threshold in multiple fiscal years, 
including two that exceeded it in all 3 years of our analysis.  This shows 
a continuing pattern of readmission in these HwHs.  Among them, 
however, we found no consistent factors that might provide an 
explanation. For example, the HwHs came from several different chain 
organizations. 
The geographic distribution of the HwHs over 5 percent parallels the 
national distribution of all HwHs, with 13 of the 19 HwHs located in 
Louisiana, Michigan, Ohio, Pennsylvania, and Texas.   
CMS lacks a system to detect readmissions  Under the cost-based system in 
over the 5 percent threshold.  effect prior to October 2002, 
payments to HwHs exceeding the 
5 percent threshold were to be limited by excluding all readmissions 
from the calculation of their cost per discharge. At this point in time, 
however, we cannot determine whether the appropriate adjustments to 
HwHs cost ceilings have been or will be made.  Fiscal intermediaries 
make those adjustments during the cost report settlement process, 
which occurs 2 to 3 years after the close of a hospitals fiscal year; that 
process has not yet been completed. 

 Because HwH fiscal years commence at the beginning of different months, the available 
data allow us to analyze only a subset of 2002 fiscal year data.  This subset of 38 HwHs 
comprises those with fiscal years ending between September and December 2002. 
  OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  8  FF II NN DD II NN GG SS  
Identifying readmissions is not a priority. 
CMS has no edits in its claims payment system or under development 
that would identify HwHs over the 5 percent readmission threshold. 
Nor has CMS instructed fiscal intermediaries, in either the Medicare 
Intermediary Manual or the Provider Reimbursement Manual, to 
identify and deal with HwHs over the 5 percent readmission threshold. 
In our discussion with CMS regional offices, staff told us that reviewing 
compliance with the 5 percent threshold is the responsibility of the 
fiscal intermediaries. However, CMSs fiscal integrity branch, which 
sets yearly priorities for reviews by the fiscal intermediaries, has not 
instructed them to identify HwHs over the 5 percent threshold. Fiscal 
intermediary staff we interviewed corroborated this lack of instruction. 
Medicare cost reports lack information needed to identify HwHs over the 
5 percent threshold. 
Even had CMS instructed the fiscal intermediaries to identify HwHs 
over the 5 percent threshold, it would be difficult to do so. First, cost 
reports do not contain information on the source of admissions or 
readmission rates, making it impossible for the fiscal intermediaries to 
calculate that rate. 
Second, even if the HwH included the readmission rate in its own 
calculations, the fiscal intermediaries would be able to verify this rate 
only by examining billing data for both the host and HwH. However, 
the host and HwH are separate hospitals, each filing its own cost report. 
Consequently, fiscal intermediaries do not conduct such examinations. 
Many HwHs and host hospitals have different intermediaries and different 
fiscal years. 
Fifty-one HwHs have different fiscal intermediaries than their host 
hospitals. This means that the HwHs intermediary would not have 
access to data about admissions to and discharges from the host. This 
problem is compounded further when the HwH and host hospital have 
different fiscal years. 
Many readmissions in the hospitals-within- On October 1, 2002 CMS began 
hospitals over the 5 percent threshold involved  phasing in a DRG-based payment 
high-cost DRGs.  system for long-term care 
hospitals, including HwHs. HwHs 
that exceed the 5 percent readmission threshold are supposed to receive 
only one DRG payment for all their admissions from the host hospital 
OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  9  F I N D I N G
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regardless of the number of readmissions from the host hospital.  This 
payment limitation applies to the fiscal year in which the HwH exceeds 
the 5 percent threshold.  (HwHs below the 5 percent threshold would 
receive two payments, one for the initial admission and one for the 
readmission.)  Not having a system in place to identify those HwHs that 
exceed the 5 percent threshold means that Medicare risks making two 
payments to HwHs over that threshold (one for the initial admission 
and a subsequent payment for the readmission). 
Our analysis is based on data from the period immediately preceding 
the implementation of the long-term care hospital PPS.  During this 
period, however, HwHs were supposed to face financial penalties in 
their cost report settlement if they exceeded the 5 percent readmission 
threshold from the host hospital regardless of the number of 
readmissions from the host hospital. This payment limitation applies to 
the fiscal year in which the HwH exceeds the 5 percent threshold. As 
shown above, we found that CMS lacked a system to identify 
readmissions.  In the absence of such a system, it is useful to examine 
how HwHs responded to that threshold as a potential predictor of 
behavior under the new PPS system. 
Three high cost DRGs accounted for 155 of the 425 readmissions in these 
facilitiesmore than 36 percent.   
For fiscal years ending September 2000 through December 2002, three 
DRGs dominated in HwHs over the 5 percent threshold.  All three of 
these DRGs have relative weights greater than 1.0, the base weight that 
applies to the average DRG.10   Medicare reimbursement for July 1, 
2003 through June 30, 2004 for that average DRG is $35,726.18, 
referred to as the standard Federal rate.  Appendix B shows the 
distribution of and costs associated with the most common DRGs for 
readmissions. 
The most common DRG for readmissions among HwHs over the  
5 percent threshold was DRG 271 (skin ulcers), accounting for 53 
readmissions (12.5 percent of the total readmissions in these HwHs); its 
relative weight of 1.2354 yields a per discharge payment of $44,136.   
The second most common was DRG 475 (respiratory system diagnosis 
with ventilator support), which accounted for 52 (12.2 percent) 
readmissions in HwHs over the 5 percent threshold.  DRG 475 has a 
relative weight of 2.3043. Multiplied by the standard Federal rate, this 
DRG yields a payment of $82,324, more than $46,600 over the payment 
for the average DRG. 
  OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  10  F I N D I N G S  
DRG 87 (pulmonary edema and respiratory failure), the third most 
frequent DRG, with 50 (11.7 percent) readmissions has a relative weight 
of 2.4202, yielding a per discharge payment of $86,465. 
We focused this analysis on these 3 DRGs because the numbers of 
readmissions in other DRGs fall sharply down to 17 readmissions for 
the fourth most frequent DRG. 
Appendix B contains data on the 9 DRGs in which 10 or more patients 
were readmitted to HwHs over the 5 percent threshold during the time 
covered by our analysis.  These nine DRGs account for 55 percent of all 
readmissions to these facilities. 
The high cost of these DRGs is exacerbated when a patient is readmitted.   
Without an effective oversight system in place that limits payments for 
readmissions over the 5 percent threshold, Medicare would pay three 
times for a patient whom the HwH discharges to the host and then 
readmits to the HwHtwo DRG payments to the HwH (for the first 
admission and the subsequent readmission) plus a third payment to the 
host hospital for its treatment in the interim. In other words, for a 
patient who was readmitted with DRG 271, Medicare would pay the 
HwH $88,272; for patients with DRG 475, Medicare would pay 
$164,648.  The host hospital would receive an additional payment for its 
services to that patient. 
One possible explanation for the high readmission rates among these 
high cost DRGs is that the clinical condition of these patients 
necessitates discharge to an acute care hospital at a greater rate than 
for patients with other diagnoses. 
Another plausible explanation, however, is that the high revenue 
potential of these DRGs makes patients with those conditions 
potentially vulnerable to readmission for financial rather than clinical 
reasons. 
  OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  11  FFF III NNN DDD III NNN GGG SSS
  
CMS provides limited oversight of hospital-
within-hospital compliance with the exclusion 
criteria. 
CMS requires HwHs to demonstrate annually that they meet the 25-day 
average-length-of-stay criterion. 
Two months prior to the end of an HwHs fiscal year, its fiscal 
intermediary requires the HwH to submit data showing their average 
length of stay. The fiscal intermediary confirms for CMS that the HwH 
maintains an average length of stay greater than 25 days, as is required 
of all long-term care hospitals.11 
We corroborated that all HwHs met this criterion for their most recently 
filed cost reporting period through an analysis of cost report data from 
CMSs Healthcare Cost Report and Information System. Prior to the 
long-term care hospital PPS, CMS and the fiscal intermediaries 
included all patients in calculating the average length of stay. The new 
long-term care hospital PPS makes that determination for Medicare 
patients only. As a result, the fiscal intermediaries can now assess 
compliance using Medicare claims payment data, rather than self-
reported cost report information. 
However, CMSs State Operations Manual does not specify what data 
should be submitted. In our file review at Mutual of Omaha, the fiscal 
intermediary servicing 74 of the 87 HwHs within our scope, we found 
that the level of detail submitted by HwHs varied widely. Some HwHs 
submitted only the total number of discharges and patient days, 
together with a simple calculation showing they had an average length 
of stay greater than 25 days. Others provided a complete listing of their 
patient census, including all admissions and discharges. That complete 
census listing provides an opportunity for the fiscal intermediary to 
verify the length-of-stay calculation. 
From our interviews at Mutual of Omaha, we found that the fiscal 
intermediarys auditors lacked access for more than 2 years to Medicare 
data that would aid in verifying average length of stay. This gap 
resulted from conflicts between shared claims processing systems. 
When auditors gained access to the data, they performed an analysis on 
a small number of HwHs. They compared average length of stay based 
on self-reported data and Medicare cost report data. The test revealed 
that the sample met the criterion, and Mutual of Omaha did not expand 
its review further. 
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Currently, CMS has no ongoing mechanism to determine whether HwHs are 
complying with the organizational and financial independence criteria. 
CMS determines an HwHs compliance with these criteria only once, 
when the agency first classifies it as a long-term care hospital.  At this 
initial classification, HwHs submit documentation demonstrating 
independence to the CMS regional office or State agency that conducts 
Medicare surveys. 
However, CMS does not specify the time in this process at which an 
HwH must submit documentation.  Many chain organizations submit 
documentation when their HwHs first enter Medicare; in other cases, 
the CMS regional office requests it when the HwHs convert to long-term 
care status. 
This initial submission is the only time CMS requires HwHs to submit 
such documentation.  CMS does not require them to demonstrate 
ongoing compliance with the independence criteria. 
Further, data supporting compliance with the organizational and financial 
independence criteria are self-reported and not independently verified. 
CMS does not independently verify the initial documentation HwHs 
submit through site visits, audits, or requests for supporting evidence. 
Additionally, CMS has never developed guidelines on what evidence is 
needed to demonstrate compliance. The State Operations Manual does 
not offer instructions on what would demonstrate HwH independence 
from the host.  The manual states that a CMS regional office makes the 
determination on a case-by-case basis...using whatever procedure it 
deems appropriate.12   As a result, there is no consistency in the 
amount, type, and detail of information available to CMS and State 
agencies as they make their decisions. 
To demonstrate organizational independence, some HwHs submit 
organizational charts, management information, information about 
their corporate parent, and copies of their leases, bylaws, and purchased 
services agreements.  Some HwHs also submit information concerning 
their hosts, including the hosts board of governors and senior 
management. 
Others, however, provide significantly less documentationin some 
cases omitting any information about the host hospital, the HwHs own 
governing board, or corporate parent.  Some HwHs submit a statement 
that their medical staff is separate from the hosts staff, but do not 
include any additional documentation. 
  OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  13  FFFF IIII NNNN DDDD IIII NNNN GGGG SSSS  
Another avenue for potential verification of organizational 
independence is an accreditation survey, which an HwH can choose 
instead of a State survey. The Joint Commission on Accreditation of 
Healthcare Organizations may review organizational arrangements 
during the accreditation process, but that is not required, nor is 
information necessarily shared with CMS. 
HwHs also vary in the amount of documentation they submit to 
demonstrate their financial independence. HwHs must show that they 
meet 1 of 3 criteriathat they perform basic hospital functions 
independently from the host; that at least 75 percent of their admissions 
come from a source other than the host; or that they limit their 
purchase of services from the host to no more than 15 percent of HwH 
expenses. Nearly all choose to meet the 15 percent criterion. To 
demonstrate compliance with this criterion, some HwHs submit detailed 
financial summaries, including a complete breakdown of services 
purchased from their hosts, while others submit only the total dollar 
value of purchased services. Further, some HwHs send CMS a letter 
stating they plan to meet the criterion, with no supporting data. 
While some CMS regional office staff told us that HwHs send detailed 
information on their purchases from the host to their fiscal 
intermediaries, none of the intermediaries we spoke with receive or 
review such data. 
OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  14    R E C  O M M E N D A T  I O N S  

The co-location of an HwH and its host hospital raises concerns about 
potentially inappropriate financial incentives.  These incentives make 
strong CMS oversight of the relationship between an HwH and its host 
hospital critical. Yet, such oversight is lacking. In fact, CMS lacks a 
system to detect readmissions over the 5 percent threshold.  As payment 
transitions to a prospective DRG-based system, the financial threat 
posed by failing to detect these readmissions could be significant since 
CMS would continue to make two DRG payments, rather than one 
payment, to HwHs over the 5 percent readmission threshold.  The lack 
of a mechanism to determine whether HwHs are complying with the 
organizational and financial independence criteria means that CMS has 
no effective way of determining whether HwHs and their hosts are, in 
fact, separate facilities. Compounding this vulnerability is the ongoing 
rapid growth of HwHs. 
These recommendations do not require new HwH-specific regulations.  
Rather, these recommendations to improve CMSs oversight of HwHs 
could be issued through instructions in program memoranda. 
CMS should develop a system to monitor  We suggest three key directions 
hospital-within-hospital compliance with the 5  that CMS could take toward this 
percent readmission threshold.  end: 
CMS could require HwHs to submit annual discharge, admissions, and 
readmissions data to their fiscal intermediaries. 
CMS requires fiscal intermediaries to obtain average-length-of-stay 
data 2 months prior to the end of the HwHs fiscal year end.  CMS could 
also require the fiscal intermediaries to solicit readmission data at the 
same time it requests average-length-of-stay data.  These readmission 
data could specify all patients admitted to the host from the HwH and 
then readmitted without an intervening stay. 
CMS could use the data submitted to the fiscal intermediaries to monitor 
HwH readmission rates. 
Data submission would enable the fiscal intermediaries and, by 
extension, CMS to monitor readmission rates annually rather than 3 
years after the fact during the cost report settlement process.  CMS 
could then have the intermediaries analyze these data to determine the 
number of readmissions from the host hospital to the HwH and whether 
this number exceeds the 5 percent threshold.  Those HwHs found to be 
  OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  15  RR	 EE CC OO MM MM EE NN DD AA TT II OO NN SS  
over the 5 percent threshold could then be subject to a thorough audit to 
determine whether Medicare must recoup any overpayment. 
CMS could target for medical review those DRGs with large relative 
weights that tend to be associated with the most commonly readmitted 
patients. These include DRGs 271, 475, and 87. The purpose of this 
review would be to determine whether those DRGs are particularly 
vulnerable to abuse through upcoding or unnecessary discharge and 
readmission. 
CMS also could analyze whether, in fact, 5 percent is the appropriate 
threshold at which payment adjustments should take place. 
If CMS finds that abuse of the payment system is prevalent, it may 
wish to take more stringent measures, such as establishing some type of 
concurrent edits. Such edits could avoid overpayment, prospectively. 
CMS could develop a system to facilitate data sharing between fiscal 
intermediaries. 
CMS could work with fiscal intermediaries to develop a system to 
coordinate data sharing between intermediaries. This system could 
eliminate barriers that make it difficult to acquire host hospital claims 
data. Access to these data would be particularly useful since it would 
give fiscal intermediaries the raw data they need to verify their HwHs 
readmission rate calculations. 
CMS should require hospitals-within-hospitals 
Options for ensuring HwH
to demonstrate ongoing compliance with the 
organizational and financial
organizational and financial independence 
independence include: 
criteria. 
CMS could specify what supporting documentation HwHs must submit to 
demonstrate ongoing organizational independence. 
When HwHs request classification as long-term care hospitals, they 
could submit a uniform package of documentation to the State agency or 
CMS regional office. HwHs already classified as long-term care 
hospitals could send this information before the start of their next cost-
reporting period. The information could include: 
 	 detailed descriptions of the HwHs and hosts governing bodies 
 	 detailed descriptions of any third parties that control both 
hospitals, and an explanation of how the third party controls 
them 
OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  16  R	 E C O M M E N D A T I O N S  
 	 information on the HwHs corporate parent, if applicable 
 	 names of HwH and host CEOs and their employers 
 	 detailed organizational charts, including chief medical officers 
from both facilities and where the medical officers are 
credentialed and privileged 
 	 names of medical staffs and copies of medical staff bylaws 
These initial submissions would serve as a baseline.  CMS could then 
require HwHs to report any changes in their organizational structure to 
the regional office.  These changes might include a new chief executive 
officer or chief medical officer, a change in corporate ownership, or a 
change in bylaws. This information could be provided at the same level 
of detail as the initial submission. 
CMS could require HwHs to submit annual financial independence data to 
their fiscal intermediaries.   
Two months prior to the end of their fiscal years, at the same time they 
are required to submit average-length-of-stay data, HwHs could submit 
data demonstrating financial independence.  HwHs could specify which 
of the three criteria they meet, as well as provide summary data and 
raw calculations in support.  We recommend that CMS define the 
specific data to be submitted to allow verification by the fiscal 
intermediary.  HwHs could submit these data, readmissions data, and 
average-length-of-stay data to their fiscal intermediaries in one 
package. Annual reporting would allow CMS to monitor the purchased 
services agreements between HwHs and their hosts. 
CMS could conduct a focused review of a sample of HwHs to assess their 
compliance with the exclusion criteria. 
Because there are no Medicare conditions of participation specific to 
long-term care hospitals, certification surveys and accreditation surveys 
do not address CMSs long-term care hospital and HwH-specific criteria.  
An annual focused-review project of a sample of HwHs would determine 
the degree to which HwHs are complying with CMS criteria. 
  OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  17    A G E N C Y   C O M M E N T S  

We received comments on our draft report from the Centers for 
Medicare and Medicaid Services (CMS).  CMS generally supports our 
findings and the general thrust of our recommendations. 
With regard to the first recommendation, CMS indicates that it is 
presently formulating a program to enforce the 5 percent readmission 
threshold. We are encouraged that the agency is moving forward to 
address this area.  We hope that our suggestions will be useful to the 
agency in developing an effective monitoring system. 
With regard to the second recommendation, CMS indicates that 
determining ongoing compliance with the organizational and financial 
independence criteria is a problem, but cautions that annual review of 
each facilitys articles of incorporation is not administratively feasible.  
The agency does, however, indicate it plans to strengthen oversight of 
these independence criteria by establishing a method that will allow an 
annual review. We support efforts to strengthen that oversight; our 
recommendation offered some options for doing so, but we welcome 
other ways of achieving that same goal.  Our real concern is that the 
oversight system achieve some way of ensuring that an HwH is indeed a 
separate facility from its host in order to dispel the possibility of 
inappropriate financial transactions. 
We also adopted technical comments that CMS suggested. 
The full text of the CMS comments appears in Appendix C. 
  OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  18  AA PP PP EE NN DD II XX ~~ A  :   M E T H O D O L O G Y  
IDENTIFICATION OF HOSPITALS-WITHIN-HOSPITALS 
We first developed a list of HwHs operating as of March 2003.13  We 
began by obtaining a listing of all long-term care hospitals and acute care 
hospitals from CMSs Online Survey Certification and Reporting (OSCAR) 
system. With this list we matched addresses of long-term care hospitals 
and acute care hospitals.  If we could not make an exact match, we used 
the Internet to determine whether we could identify which long-term care 
hospitals were HwHs. We visited long-term care hospital web sites, host 
hospital sites, industry-related sites, news sites, HwH chain organization 
sites, and mapping sites to determine what long-term care hospitals were 
HwHs. When we could not determine whether a long-term care hospital 
was an HwH, we contacted the facility directly. 
5 PERCENT READMISSION THRESHOLD 
To determine HwH readmission rates, we obtained the National Claims 
History 100 Percent Inpatient File for HwHs, and their corresponding 
host hospitals, through CMSs Data Extract System.  CMS instituted the 
5 percent readmission threshold on October 1, 1999.  HwHs were to limit 
their readmissions from their host hospitals in the fiscal year beginning 
on or after that date.  Therefore, we focused on fiscal years commencing 
after that date. This came up with a total of 87 HwHs66 with a fiscal 
year ending between September 30, 2000 and August 31, 2001; an 
additional 18 began operations in the following year, for a total of 84; and 
an additional 3 HwHs began operations in the first 4 months of the 
following year (ending December 31, 2002). 
We used SAS to determine the number of instances in which Medicare 
patients were discharged from the HwH to its host hospital and then 
readmitted directly to the HwH.  We also used SAS to determine the 
total number of Medicare discharges during each HwHs fiscal year.  We 
then divided the number of Medicare patients readmitted to an HwH 
from its host hospital by the HwHs total Medicare discharges to 
determine the HwHs readmission rate.   
When we identified an HwH over the 5 percent readmission threshold, we 
further identified all Medicare patients readmitted to the HwH from its 
host hospital. Next, we used SAS to obtain a summary of patients 
claims history in the HwH and host hospital, which provided the DRG for 
each patient. 
  OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  19  A P P E N D I X ~ A :   M E T H O D O L O G Y  

CMS CONTROLS TO ENSURE COMPLIANCE WITH THE 
EXCLUSION CRITERIA 
Organizational and Financial Independence 
CMS Regional Offices. We visited two CMS regional offices.  The Chicago 
office is responsible for 28 HwHs in our scope, and the Dallas office is 
responsible for 25 HwHs in our scope.  At these regional offices, we 
interviewed staff who deal with these HwHs, and we reviewed the files on 
52 of these 53 HwHs.  The Chicago Regional office was unable to locate 
files on one HwH.  Both the interviews and the file reviews focused on 
how CMS ensures that HwHs are meeting the 5 percent readmission 
threshold and the criteria for exclusion from the acute care hospital PPS. 
We also performed telephone interviews with 2 other CMS regional 
offices:  Atlanta (14 HwHs in our scope) and Philadelphia (11 HwHs).  
Our interviews focused on how CMS ensures whether HwHs are meeting 
the 5 percent readmission threshold and the criteria for exclusion from 
the acute care hospital PPS. 
Fiscal Intermediaries. We visited Mutual of Omaha, the fiscal 
intermediary that services 74 HwHs within our scope.  During this site 
visit, we interviewed staff who regularly deal with HwHs, focusing on the 
role the fiscal intermediary plays in the oversight of HwHs.  Additionally, 
we reviewed files on 68 HwHs, focusing on whether the files contained 
documentation related to the 5 percent readmission threshold or 
compliance with the criteria for exclusion from the acute care hospital 
PPS. While Mutual services 74 HwHs in our scope, we reviewed files on 
only 68 HwHs.  At the time of our site visit to Mutual, CMSs HCFA 
Customer Information System (HCIS) did not have fiscal intermediary 
information for three HwHs.  Only after our site visit did further 
investigation confirm that Mutual services these three HwHs.  
Additionally, Mutual was unable to furnish files on three HwHs.  
We also interviewed two other fiscal intermediaries, Blue Cross Blue 
Shield of Oklahoma and AdminiStar Federal, Inc. of Indianapolis, by 
telephone and electronic mail.  These two fiscal intermediaries service 
five HwHs, thus representing 5 percent of the HwHs within our scope. 
These interviews focused on their role in ensuring compliance with the 5 
percent readmission threshold and the criteria for exclusion from the 
acute care hospital PPS. 
  OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  20  A P P E N D I X ~ A :   M E T H O D O L O G Y  
Average Length of Stay 
Healthcare Cost Report Information System. To verify the average length 
of stay for the HwHs in our scope, we analyzed the most recently filed 
HwH cost report data from CMSs Healthcare Cost Report Information 
System.  From this data set, we were able to verify the average length of 
stay for HwHs within our scope.  Specifically, we divided the total number 
of Medicare-covered days by the total number of Medicare discharges. 
OTHER DATA SOURCES 
Descriptive Statistics. We obtained descriptive statistics for HwHs from 
analysis of data contained in CMSs HCFA Customer Information System. 
HwH Industry Groups. We visited the corporate offices of two for-profit 
HwH chains and one not-for-profit HwH chain. We also visited an HwH 
of one of the for-profit chains. 
Additionally, we met with the two long-term care hospital associations, 
the Acute Long Term Hospital Association and the National Association 
of Long Term Hospitals. 
  OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  21    A P P  E N D I X   ~   B :   D A T  A    T A  B L E S  

Table B-1 
Readmissions to Hospitals-within-Hospitals (HwHs) from their Host Hospitals 
HwH Fiscal Years Ending September 2000 through December 2002 
Total 
Number  Readmission 
Fiscal Year  Readmissions  Medicare
of HwHs  Percentage 
Discharges 
2000  66  409  14,505  2.8% 
2001  84  516  19,712  2.6% 
2002*  38  318  10,037  3.2% 
Table B-2 
Hospitals-within-Hospitals (HwHs) Exceeding 5 percent Readmission Threshold 
HwH Fiscal Years Ending September 2000 through December 2002 
Total 
Number  Readmission 
Fiscal Year  Readmissions  Medicare  Readmission Range 
of HwHs  Percentage 
Discharges 
low  high 
2000  14  178  2,497  7.1%  5.1%  10.7% 
2001  10  132  1,998  6.6%  5.5%  8.5% 
2002*  6  115  1,538  7.5%  5.2%  9.1% 
Total  n/a   425   6,033  n/a  n/a  n/a 
Fiscal Year (FY)2000:  cost report periods ending September 2000 through August 2001 
FY2001:  cost report periods ending September 2001 through August 2002 
*FY2002:  cost report periods ending September 2002 through December 2002.  Only 38 
HwHs had fiscal years ending in that time frame. 
Source:  OIG Analysis of Medicare National Claims History 100 Percent Inpatient File 
  OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  22  A P P E N D I X ~ B :   D A T A   T A B L E S  

Table B-3 
Nine Most Common Diagnosis-related Groups (DRGs) for Patients Readmitted  
to Hospitals-within-Hospitals (HwHs) from Host Hospital 
For HwHs Exceeding 5 percent Readmission Threshold 
HwH Fiscal Years Ending September 2000 through December 2002 
 Long-Term 
Care 
Hospital 
Relative  Discharges  Discharges  Discharges  Total  Cumulative Payment per 
DRG  DRG Description  Weight  FY 2000  FY 2001  FY 2002  Discharges  Percent  Discharge 
271  SKIN ULCERS  1.2354  29  12  12  53  12.5%  $  44,136 
RESPIRATORY SYSTEM 
DIAGNOSIS WITH 
475  VENTILATOR SUPPORT  2.3043  20  28  4  52  24.7%  $  82,324 
PULMONARY EDEMA & 
087  RESPIRATORY FAILURE  2.4202  20  8  22  50  36.5%  $  86,465 
416  SEPTICEMIA AGE >17  1.1222  7  7  3  17  40.5%  $  40,092 
316  RENAL FAILURE  1.1553  8  6  1  15  44.0%  $  41,274 
CHRONIC OBSTRUCTIVE 
088  PULMONARY DISEASE  0.9390  5  3  6  14  47.3%  $  33,547 
HEART FAILURE & 
127  SHOCK  0.8658  6  4  2  12  50.1%  $  30,932 
SPECIFIC 
CEREBROVASCULAR 
DISORDERS EXCEPT 
TRANSIENT ISCHEMIC 
014  ATTACK   1.0143  1  1  9  11  52.7%  $  36,237 
PERIPHERAL VASCULAR 
DISORDERS WITH 
COMPLICATION OR 
130  COMORBIDITY  0.9391  4  6  10  55.1%  $  33,550 
Fiscal Year (FY) 2000:  cost report periods ending September 30, 2000 through August 31, 2001 
FY2001:  cost report periods ending September 30, 2001 through August 31, 2002 
FY2002: cost report periods ending September 30, 2002 through December 31, 2002 
Source:  OIG Analysis of Medicare National Claims History 100 Percent Inpatient File 
  OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  23    A P P  E N D I X   ~   C  
Agency Comments 
  OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  24  A P P E N D I X ~ C  

  OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  25    A C K N O W L E D   G M E N T S  

This report was prepared under the direction of Mark R. Yessian, Ph.D., 
Regional Inspector General for Evaluation and Inspections in the Boston 
Regional Office, and Joyce M. Greenleaf, MBA, Assistant Regional 
Inspector General.  Other principal Office of Evaluation and Inspections 
staff who contributed include: 
Russell W. Hereford, Ph.D., Team Leader 
Christopher T. Gould, M.S., Project Leader 
Ivan E. Troy, MPA, Program Analyst 
Bambi Straw, Program Specialist, Baltimore 
Technical Assistance: 
Linda M. Moscoe, Program Analyst, Baltimore 
  OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  26    E N D   N O T E S  

1 42 C.F.R.  412.23(e)(2)(i).  The criterion requires a long-term care 
hospital to have an average length of stay greater than 25.0 days.  
Prior to the October 2002 implementation of the long-term care 
hospital prospective payment system (PPS), the Centers for Medicare 
& Medicaid Services (CMS) calculated the average length of stay of all 
patients.  After implementation of the long-term care hospital PPS, 
CMS calculates the average length of stay of all Medicare patients. 
2 42 C.F.R  412.22(d) 
3 42 C.F.R  413.40(a)(3) 
 For example, a hospital-within-hospital (HwH) with 50 discharges and 
allowable costs of $2 million, or $40,000 per discharge, would be paid 
the full $40,000 per discharge.   
  However, if the HwH exceeded 5 percent readmissions from its host, the 
allowable cost per discharge would be calculated as follows:  Assume 
that 5 of those 50 discharges (10%) were readmissions from the host. 
Then the total allowable costs would be only $1.8 million.  In 
calculating the cost limits, the 5 readmissions would only be counted 
once, so the per-discharge limit would be based on 45 discharges. 
4 42. C.F.R.  412.532(c) 
5 42 C.F.R.  412.22(e)(1-4) 
6 42 C.F.R  412.22(g)   
7 42 C.F.R.  412.22(e)(5)  
8 42 C.F.R.  412.22(f)   
9   The requirements are found at 42 C.F.R. 413.40(a)(3)(B) 
10 Under the long-term care PPS, CMS calculates a standard base rate 
that reflects average costs of caring for all patients in long-term care 
hospitals.  For July 1, 2003 through June 30, 2004 that base rate is 
OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  27  $35,726.18.  A relative weight is calculated for each diagnosis-related 
group (DRG), depending on the complexity and resource utilization of 
patients in that DRG. To determine payment, the relative weight 
assigned to the DRG is multiplied by the standard base rate.  Those 
DRGs that are less complex and that utilize fewer resources have a 
relative weight less than one; those DRGs that are complex and 
require significant resources have a relative weight greater than one. 
11 The fiscal intermediary requires this submission from all long-term 
care hospitals, both HwHs and free-standing hospitals.  CMS is able to 
identify all long-term care hospitals, even though it cannot identify 
which are free standing and which are HwHs.  Thus, its inability to 
identify which long-term care hospitals are HwHs does not prevent it 
from obtaining these data. 
12 Medicare State Operations Manual,  3112.1 (March 1998) 
13 October 1, 2002 regulations require that all co-located facilities, such as 
HwHs, notify their CMS regional office of their co-located status.  
Prior to issuing these regulations, CMS was unable to determine 
which long-term care hospitals were HwHs, unless an HwH 
volunteered that information.  Therefore, since CMS did not have a list 
of long-term care HwHs, our study began by developing a list of long-
term care hospitals that are HwHs. 
OEI-01-02-00630  LONG-TERM CARE HOSPITALS-WITHIN-HOSPITALS  28