DEPARTMENT OF HEALTH AND HUMAN SERVICES 
DEPARTMENT OF HEALTH AND HUMAN SERVICES
OFFICE OF INSPECTOR GENERAL 
OFFICE OF INSPECTOR GENERAL
WWAASSHHININGGTOTNO,N, DDCC 2200220101 
MIIAARR0O 662 0210313 
TO:  Marilyn Tavenner 
TO: Marilyn Tavenner
Acting Administrator 
Acting Administrator
CCeenntetersrs ffoorr MMeeddiciacraere && MMeeddicicaiadid SSeerrvviciceess 
~'(/J~;C 
FROM:  Stuart Wrigh  . 
FROM: Stuart Wriglt
Deputy Inspector General 
Deputy Inspector General
for Evaluation and Inspections 
for Evaluation and Inspections
SUBJECT:  Early Alert Memorandum Report:  Co-Located Long-Term Care Hospitals 
SUBJECT: Early Alert Memorandum Report: Co-Located Long-Term Care Hospitals
Remain Unidentified, Resulting in Potential Overpayments, 
Remain Unidentified, Resulting in Potential Overpayments,
OEI-04-12-00491 
OEI-04-12-00491
This early alert memorandum report provides information related to our ongoing study 
This early alert memorandum report provides information related to our ongoing study
Medicare Payments for Interrupted Stays in Long-Term Care Hospitals 
Medicare Payments/or Interrupted Stays inLong-Term Care Hospitals
((OOEEI-I0-044-1-21-20-00409409)0) aanndd aalelertrsts tthhee CCeenntetersrs ffoorr MMeeddicicaraere && MMeeddiciaciadid SSeerrvviciceses ((CCMMSS)) ooff 
vulnerabilities resulting from inaccurate information on the co-located status of long-term 
vulnerabilities resulting from inaccurate information on the co-located status of long-term
ccaarree hhoossppitiatlasls ((LLTT CCHHs)s. ). 1 
1
SUMMARY  .. 
SUMMARY.,
Not all co-located LTCHs (i.e., LTCHs located in the same building or on the same 
Not all co-located LTCHs (i.e., LTCHs located in the same building or on the same
campus as another hospital-level provider or skilled nursing facility) have notified their 
campus as another hospital-level provider or skilled nursing facility) have notified their
respective Medicare Administrative Contractors or fiscal intermediaries (i.e., claims 
respective Medicare Administrative Contractors or fiscal intermediaries (i.e., claims
processing contractors) of their co-located status.  This lack of information on co-located 
processing contractors) of their co-located status. This lack of information on co-located
status can cause Medicare to overpay for services provided in these facilities. 
status can cause Medicare to overpay for services provided in these facilities.
Co-located L TCHs must notify their claims processing contractors about the providers 
Co-located LTCHs must notify their claims processing contractors about the providers
with which they are co-located and whether there are any changes in co-located status.2 
with which they are co-located and whether there are any changes in co-located status?
However, preliminary analysis for our ongoing study indicates that many co-located 
However, preliminary analysis for our ongoing study indicates that many co-located
LTCHs are not notifying their claims processing contractors.  Specifically, nearly half of 
LTCHs are not notifying their claims processing contractors. Specifically, nearly half of
the 211 LTCHs whose co-located status we have determined have not reported this 
the 211 LTCHs whose co-located status we have determined have not reported this
information to claims processing contractors.  As a result, CMS does not have accurate 
information to claims processing contractors. As a result, CMS does not have accurate
1 Department of Health and Human Services (HHS), Office of Inspector General (OIG), Work Plan, Fiscal 
Department ofHealth and Human Services (HRS), Office of Inspector General (OIG), Work Plan. Fiscal
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Pian-20 13 .pdf.  Our study will determine the extent to which Medicare made improper payments for 
Plan-20 13.pdf. Our study will determine the extent to which Medicare made improper payments for
interrupted stays in L TCHs and the extent to which L TCHs readmitted patients directly after the fixed-day 
interrupted stays in LTCHs and the extent to which LTCHs readmitted patients directly after the fixed-day
reriod, resulting in new admissions rather than interrupted stays. 
reriod, resulting in new admissions rather than interrupted stays.
42 CFR  412.532(i).  See also CMS, Medicare Claims Processing Manual, Pub. 100-04, ch. 3 
. 42 CFR 412.532(i). See also CMS, Medicare Claims Processing Manual, Pub. 100-04, ch. 3
 115500.9.9.1.1.4..4.  Page 2  Marilyn Tavenner 
 
information on the co-located status of LTCHs, which prevents it from applying two 
payment policies that would lower Medicare payments if co-located LTCHs exceeded 
certain readmission thresholds.  Failure to appropriately apply these payment polices 
could result in Medicare overpaying for services provided to beneficiaries in LTCHs.   
 
We are providing this memorandum at this time so that CMS may begin addressing the 
issue of inaccurate co-location information to avoid overpayments to co-located LTCHs.  
After completing our ongoing study entitled Medicare Payments for Interrupted Stays in 
Long-Term Care Hospitals (OEI-04-12-00490), we will provide CMS with additional 
information on this subject and will make recommendations regarding the issues raised in 
this memorandum.   
 
BACKGROUND 
 
LTCHs generally treat patients who have been discharged from acute care hospitals but 
have complex medical conditions that require prolonged hospital-level care.  LTCH 
services include comprehensive rehabilitation, respiratory therapy, head trauma 
treatment, and pain management.  To qualify as an LTCH for Medicare payment, a 
facility must meet Medicare conditions of participation for acute care hospitals and have 
an average length of stay greater than 25 days for its Medicare beneficiaries.3  In 2011, 
Medicare paid $5.3 billion for services furnished by 445 LTCHs.4   
 
Reporting Requirements of Co-located LTCHs 
An LTCH can be freestanding or co-located with another hospital-level provider (e.g., an 
acute care hospital) or a skilled nursing facility.  A co-located LTCH is located in the 
same building as another provider or in a separate building on the same campus as 
another provider.5  An LTCH that is co-located specifically with an acute care hospital is 
called a hospital-within-a-hospital.6  An LTCH may also have a satellite facility, which 
operates as part of the LTCH but in a separate location.7  A satellite facility can also be 
co-located with a hospital-level provider or a skilled nursing facility.     
     
A co-located LTCH must notify its claims processing contractor about the provider(s) 
with which it is co-located within 60 days of its first cost-reporting period.8  Additionally, 
an LTCH must report a change in co-located status within 60 days of the change.  The 
                                                 
3 Social Security Act  1861(ccc), 42 U.S.C. 1395x(ccc).  42 CFR pt. 482 defines the conditions of 
participation for hospitals.  42 CFR pt. 489 specifies the terms of provider agreement for hospitals.  
42 CFR  412.23(e)(2) defines LTCHs as having an average length of stay greater than 25 days for 
Medicare beneficiaries. 
4 OIG analysis of 2011 National Claims History Part A Standard Analytic File. 
5  Campus means the physical area immediately adjacent to the providers main buildings; other areas 
and structures that are not strictly contiguous to the main buildings but are located within 250 yards of the 
main buildings; and any other areas that the CMS regional office determines (on an individual-case basis) 
to be part of the providers campus.  42 CFR  413.65(a)(2). 
6 42 CFR  412.22(e). 
7 42 CFR  412.22(h). 
8 42 CFR  412.532(i).  See also:  CMS, Medicare Claims Processing Manual, Pub. 100-04, ch. 3 
 150.9.1.4. 
Co-Located LTCHs Remain Unidentified, Resulting in Potential Overpayments (OEI-04-12-0491)  Page 3  Marilyn Tavenner 
 
claims processing contractor notifies the appropriate CMS regional office of an LTCHs 
co-located status. 
 
Medicare Payment Policies for Co-located Providers 
Co-location of LTCHs creates incentives for co-located providers to make decisions 
about admitting and discharging patients on the basis of maximizing Medicare payments, 
rather than providing effective and efficient care.9  As a result, CMS developed two 
payment policies that apply to co-located LTCHs.   
 
The first payment policy, known as the 25-percent threshold rule, was established in 
fiscal year 2005 and applies only to LTCH hospitals-within-hospitals and satellites.10  
The 25-percent threshold rule limits the proportion of patients that an LTCH admits from 
its host hospital during the LTCHs cost-reporting period.11  Medicare payments for stays 
that occur after an LTCH exceeds this threshold are subject to adjustments that reduce the 
amounts the LTCH receives.  For such stays, Medicare will pay the LTCH the lesser of 
(1) the LTCH prospective payment system (PPS) amount, or (2) an amount equivalent to 
the Inpatient PPS rate for patients admitted from the host hospital.12, 13  That is, an 
LTCHs payments for certain stays that occur after exceeding the admission threshold 
should be reduced to a lower Medicare payment rate.   
 
Additionally, a separate payment policy applies specifically to interrupted stays that 
occur between co-located providers.  An interrupted stay is when a patient is discharged 
from an LTCH for treatment and services that are not available at the LTCH and returns 
after a specific number of days to the same LTCH for further medical treatment.  If the 
patient returns to the same LTCH after a certain defined fixed-day period, CMS considers 
it a new admission rather than an interrupted stay.  As a result, the LTCH will receive 
two Medicare paymentsone payment for the first stay and a separate payment for the 
subsequent stay.  Had the patient been readmitted during the fixed-day period, the LTCH 
would have received only one Medicare payment.  If the number of discharges and 
readmissions between a co-located LTCH and the provider with which it is co-located 
                                                 
9 Testimony of Herb Kuhn, former Director of the Center for Medicare Management at CMS, before the 
House Committee on Ways and Means, Subcommittee on Health, U.S. House of Representatives, 
110th Cong., March 15, 2006.  Accessed at http://www.hhs.gov/asl/testify/t060315a.html on January 4, 
2013.   
10 42 CFR  412.534.  In July 2007, the 25-percent threshold rule was to be expanded to almost all LTCHs 
(i.e., freestanding LTCHs and those co-located with providers other than acute care hospitals) and phased 
in over 3 years; however, legislation and CMS have delayed the expansion of this policy until fiscal 
year 2013.  Additionally, less stringent thresholds apply to hospital-within-hospitals and satellites in rural 
areas or in urban areas where an LTCH is the sole LTCH or where there is a dominant acute care 
hospitali.e., a hospital with one-fourth or more of the acute care cases for the metropolitan statistical 
area. 
11 Ibid.  See also:  CMS, Medicare Claims Processing Manual, Pub. 100-04, ch. 3  150.9.1.4. 
12 Medicare payments under the LTCH PPS are based on the same diagnosis-related group system (i.e., 
rates are set prospectively based on the patients diagnosis and the severity of the patients medical 
condition) as the Inpatient PPS, but payment weights associated with the LTCH patient classifications are 
calculated based on generally higher treatment costs at LTCHs.  
13 Patients from the host hospital who are considered to be outliers under the Inpatient PPS before their 
transfer to the hospital-within-a-hospital do not count toward the threshold and continue to be paid for at 
the LTCH PPS rate even if the threshold has been reached. 
Co-Located LTCHs Remain Unidentified, Resulting in Potential Overpayments (OEI-04-12-0491)  Page 4  Marilyn Tavenner 
 
exceeds 5 percent of the LTCHs total discharges during a cost reporting period, all such 
discharges and readmissions are to be paid as one discharge, regardless of the time spent 
at the intervening facility.14   
 
Related Work 
In 2004, OIG found that 19 of 87 LTCH hospitals-within-hospitals exceeded the annual 
5-percent threshold for readmissions from their host hospitals at least once during the  
fiscal years ending in September 2000 through December 2002.15  For that study, OIG 
developed its own list of LTCHs that were co-located with acute care hospitals because 
CMS data systems did not identify hospitals-within-hospitals.  Additionally, OIG found 
that CMS lacked a system to detect readmissions over the 5-percent threshold.  LTCH 
hospitals-within-hospitals currently operate under a modified readmission threshold, 
which CMS has not established a program to enforce. 
 
METHODOLOGY 
 
As part of our ongoing study entitled Medicare Payments for Interrupted Stays in 
Long-Term Care Hospitals (OEI-04-12-00490), we requested that all CMS claims 
processing contractors provide data on the co-located status of LTCHs in their respective 
provider service areas for calendar years 2010 and 2011.16  We received responses from 
all contractors, a 100-percent response rate.  We reviewed claims processing contractors 
responses to determine how many LTCHs had notified them of their co-located status.   
 
We are also mapping LTCHs geographic locations in relation to those of other providers 
to independently identify co-located LTCHs.  We analyzed claims data from CMSs 
National Claims History Part A Standard Analytic File to identify LTCHs that received 
Medicare payment in 2011.  We have completed this process for 47 percent (211 of 445) 
of LTCHs.  We compared our results to contractor responses to identify co-located 
LTCHs that have not notified their claims processing contractors of their status.   
 
This study was conducted in accordance with the Quality Standards for Inspection and 
Evaluation issued by the Council of the Inspectors General on Integrity and Efficiency. 
 
RESULTS 
 
At Least 97 Co-located LTCHs Have Not Notified Their Claims Processing 
Contractors of Their Status 
Eight of fourteen CMS claims processing contractors provided information on 
98 co-located LTCHs and the providers with which they are co-located.  One large 
                                                 
14 42 CFR  412.532. 
15 OIG, Long-Term Care Hospitals-within-Hospitals, OEI-01-02-00630, July 2004.  Prior to October 1, 
2002, CMS paid LTCHs on a cost basis and imposed a payment limitation when an LTCH 
hospital-within-a-hospital readmitted more than 5 percent of its discharges to its host hospital within the 
LTCHs fiscal year.  This policy is no longer in effect and is different than the current 5-percent threshold 
for interrupted stays in LTCHs.  Compare 42 CFR  413.40 (2000) with 42 CFR  412.532(c) (2009). 
16 At the time of our data request, certain claims processing contractors changed and/or were consolidated; 
however, our data are comprehensive and include all provider service areas. 
Co-Located LTCHs Remain Unidentified, Resulting in Potential Overpayments (OEI-04-12-0491)  Page 5  Marilyn Tavenner 
 
hospital chain provided the co-located status of the majority (78 of 98) of LTCHs to 
1 claims processing contractor.  Additionally, five of these eight contractors did not 
report that any LTCHs in their provider service areas were co-located with providers 
other than hospitals (e.g., skilled nursing facilities or inpatient rehabilitation facilities). 
 
Six contractors reported that no LTCHs in their provider service areas had notified them 
of being co-located.  Additionally, two of these six contractors stated that they do not 
track LTCHs that are co-located.  Although contractors are not required to actively track 
LTCHs co-located status, LTCHs are required to notify contractors of their co-located 
status and contractors are required to report this information to CMS regional offices.   
 
Of the 211 LTCHs for which we have determined the co-located status, our preliminary 
data analysis shows that 141 (or 67 percent) are co-located.17  Only 44 of these 
141 LTCHs had notified their claims processing contractor of their co-located status.  
Consequently, at least 97 co-located LTCHs (46 percent of the 211 LTCHs) had not, 
according to contractor responses, notified their respective claims processing contractors 
of their co-located status.  This inaccurate data on LTCHs co-located status could result 
in overpayments if these LTCHs exceeded the readmission threshold for either payment 
policy.   
 
CONCLUSION 
 
Not all co-located LTCHs have notified their respective claims processing contractors of 
their co-located status.  Specifically, nearly half of the 211 LTCHs whose co-located 
status we have determined have not reported this information to contractors.  This 
prevents CMS from applying two payment policies specific to co-located providers and 
thus could result in Medicare overpaying for LTCH services.  Claims processing 
contractors had information on 98 co-located LTCHs.  Our preliminary analysis identifies 
an additional 97 co-located LTCHs that have not notified their contractors of their status. 
 
We are providing this information at this time so CMS may begin addressing the 
inaccuracy of co-location information to avoid overpayments to co-located LTCHs.    
CMS could have claims processing contractors provide educational materials to LTCHs 
regarding this notification requirement.  CMS or its contractors could also survey LTCHs 
on a recurring basis to identify co-located LTCHs and changes in co-located status.  We 
will provide information to CMS on the 211 LTCHs whose co-located status we have 
determined thus far.  Upon completion of our ongoing study entitled Medicare Payments 
for Interrupted Stays in Long-Term Care Hospitals (OEI-04-12-00490), we will provide 
additional information on this subject and make recommendations to CMS regarding the 
issues raised in this memorandum report.     
 
This report is being issued directly in final form.  If you have comments or questions 
about this report, please provide them within 60 days.  Please refer to report number 
OEI-04-12-00491 in all correspondence. 
                                                 
17 We have not yet identified the provider service areas in which these LTCHs are located. 
Co-Located LTCHs Remain Unidentified, Resulting in Potential Overpayments (OEI-04-12-0491)