Department of Health and Human Services 


OFFICE OF 

INSPECTOR GENERAL 

LONG-TERM CARE


HOSPITALS-WITHIN-HOSPITALS


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 Investiga ions t

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. 
 ABSTRACT 

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. 

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. 

 O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS i 
 EXECUTIVE SUMMARY 

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 Services’s (CMS’s) controls to determine if hospitals-withinhospitals 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 hospitalswithin-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 payments—one 

for each admission—and 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 armslength 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 HwH’s 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 

 O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS ii 
EXECUTIVE SUMMARY 

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 Medicare’s 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 

 O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS iii 
EXECUTIVE SUMMARY

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 Medicare’s 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 colocation 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 HwH’s readmission rates. 

• CMS could develop a system to facilitate data sharing between 

fiscal intermediaries. 

O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS iv 
EXECUTIVE SUMMARY

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. 

O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 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 M M E N D A T I O 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 N O W L E D G M E N T S .................................................... 26 

E N D N O T E S .................................................................. 27
 INTRODUCTION 

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 Services’s 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 Polici s: e 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 

 O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 1 
INTROD UCTION 

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 longterm care hospital DRGs, thus taking into account the specialized care 

offered by long-term care hospitals. 

Rapid gro th: w 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 

Payments 

($ Millions) 

Number of 

Facilities 

Medicare Beneficiaries 

Discharged 

1995 2002 1995 2002 1995 2002 

All 

LTCHs* $836 $2,193 178 295 42,339 98,678 

HwHs 

(% of all 

LTCHs) 

$135 

(16%) 

$817 

(37%) 

32 

(18%) 

132 

(45%) 

4,621 

(11%) 

34,592 

(35%)

 OIG analysis of HwHs 

* includes HwHs and freestanding LTCHs 

Data sources: CMS’s HCFA Customer Information System (HCIS) and 

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. 

 O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 2 
INTRODUCTION

Concerns About Hospitals-within-Hospitals 

Relationship with Host Hospital: Hospitals, including HwHs, accept 

overall responsibility for a patient’s 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 payments—one for each 

admission—and 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. 

Aggressive marketing to acute care hospitals: 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.” 

CMS’s 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, 

O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 3 
INTRODUCTION 

as well as the organizational and financial independence of the HwH 

from the host hospital. 

5 Per ent R ad c e mission Thresh : old CMS addressed the vulnerability 

presented by readmissions from the host hospital in a 1999 regulation. 

This regulation allows–over the course of an HwH’s fiscal year–up 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 HwH’s 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 Medicare’s 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. 

 O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 4 
INTRODUCTION

• 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. 

• C ief exe ut r h c ive office . 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 HwH’s total inpatient operating 

costs. 

• At least 75 percent of the HwH’s 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 

CMS’s 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. 

O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 5 
INTRODUCTION 

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 CMS’s 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 longterm 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 Medicare’s 5 percent threshold on 

readmissions from the host to the HwH. 

We used SAS®, a statistical analysis package, to determine an HwH’s 

total discharges, discharges to its host, and readmissions from the host. 

We then calculated the readmission rate for each HwH’s fiscal year by 

dividing readmissions by total discharges. 

Our analysis included a total of 87 HwHs—66 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. 

 O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 6 
INTRODUCTION 

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 C iteria r : To determine the extent of CMS’s 

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 S andards t

for Inspections issued by the President’s Council on Integrity and 

Efficiency. 

 O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 7 
 FINDINGS

Nineteen of 87 HwHs exceeded the annual 

5 percent threshold for readmissions at least 

once during their fiscal years ending in 

September 2000 through December 2002. 

In fiscal year 2000, 14 of 66 HwHs 

operating at that time discharged 

to their hosts and then readmitted 

more than 5 percent of patients. In 

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. 

Under the cost-based system in 

effect prior to October 2002, 

CMS lacks a system to detect readmissions 

over the 5 percent threshold. 

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 hospital’s 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. 

 O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 8 
FINDINGS FINDINGS 

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, CMS’s 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 HwH’s 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 

phasing in a DRG-based payment 

system for long-term care 

hospitals over the 5 percent threshold involved 

high-cost DRGs. 

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 

O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 9 
FINDING S 

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 

facilities–more 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. 

 O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 10 
FINDINGS 

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 HwH–two 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. 

 O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 11 
FINDINGS FINDINGS 

CMS provides limited oversight of hospitalwithin-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 HwH’s 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 

CMS’s 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 selfreported cost report information. 

However, CMS’s 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 

intermediary’s 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. 

O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 12 
FINDING S 

Currently, CMS has no ongoing mechanism to determine whether HwHs are 

complying with the organizational and financial independence criteria. 

CMS determines an HwH’s 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 host’s board of governors and senior 

management. 

Others, however, provide significantly less documentation–in some 

cases omitting any information about the host hospital, the HwH’s own 

governing board, or corporate parent. Some HwHs submit a statement 

that their medical staff is separate from the host’s staff, but do not 

include any additional documentation. 

 O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 13 
FINDINGS FINDINGS 

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 criteria–that 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. 

O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 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 CMS’s oversight of HwHs 

could be issued through instructions in program memoranda. 

CMS should develop a system to monitor We suggest three key directions 

that CMS could take toward this 

end: 

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 requires fiscal intermediaries to obtain average-length-of-stay 

data 2 months prior to the end of the HwH’s 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 

 O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 15 
RECOMMENDATIONS ECOMMENDATIONS

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 costreporting period. The information could include: 

• detailed descriptions of the HwH’s and host’s governing bodies 

• detailed descriptions of any third parties that control both 

hospitals, and an explanation of how the third party controls 

them 

O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 16 
R ECOMMENDATIONS 

• information on the HwH’s 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 CMS’s 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. 

 O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 17 
 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. 

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 facility’s 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. 

 O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 18 
APPENDIX~A APPENDIX~ : METHODOLOGY 

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 CMS’s 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 CMS’s 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 HwHs—66 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 HwH’s fiscal year. We 

then divided the number of Medicare patients readmitted to an HwH 

from its host hospital by the HwH’s total Medicare discharges to 

determine the HwH’s 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. 

 O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 19 
APPENDIX~A: METHODOLOGY 

CMS CONTROLS TO ENSURE COMPLIANCE WITH THE 

EXCLUSION CRITERIA 

Organizational and Financial Independence 

CMS Re n s gio al Office . 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 Inter ed m iaries. 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, CMS’s 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. 

 O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 20 
APPENDIX~A: METHODOLOGY 

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 CMS’s 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 CMS’s 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. 

 O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 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 

Fiscal Year Number 

of HwHs Readmissions 

Total 

Medicare 

Discharges 

Readmission 

Percentage Readmission Range 

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 

 O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 22 
APPENDIX~B: DATA TABLES 

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 

DRG DRG Description 

 Long-Term 

Care 

Hospital 

Relative 

Weight 

Discharges 

FY 2000 

Discharges 

FY 2001 

Discharges 

FY 2002 

Total 

Discharges 

Cumulative 

Percent 

Payment per 

Discharge 

271 SKIN ULCERS 1.2354 29 12 12 53 12.5% $ 44,136 

475 

RESPIRATORY SYSTEM 

DIAGNOSIS WITH 

VENTILATOR SUPPORT 2.3043 20 28 4 52 24.7% $ 82,324 

087 

PULMONARY EDEMA & 

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 

088 

CHRONIC OBSTRUCTIVE 

PULMONARY DISEASE 0.9390 5 3 6 14 47.3% $ 33,547 

127 

HEART FAILURE & 

SHOCK 0.8658 6 4 2 12 50.1% $ 30,932 

014 

SPECIFIC 

CEREBROVASCULAR 

DISORDERS EXCEPT 

TRANSIENT ISCHEMIC 

ATTACK 1.0143 1 1 9 11 52.7% $ 36,237 

130 

PERIPHERAL VASCULAR 

DISORDERS WITH 

COMPLICATION OR 

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 

 O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 23 
 A P P E N D I X ~ C 

Agency Comments 

 O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 24 
APPENDIX~C 

 O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 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 

 O E I - 0 1 - 0 2 - 0 0 6 3 0 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 26 
 END NOTES 

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 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 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 longterm care hospitals that are HwHs. 

OEI-01-02-00630 L ONG - TERM CARE H OSPITALS - WITHIN - H OSPITALS 28