United States Government Accountability Office

GAO Report to the Senate Committee on 

Finance and the House Committee on 

Ways and Means 

MEDICARE

More Specific Criteria 

Needed to Classify 

Inpatient 

Rehabilitation 

Facilities 

April 2005 

 

GAO-05-366 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

April 2005

MEDICARE

More Specific Criteria Needed to Classify 

Highlights of GAO-05-366, a report to Inpatient Rehabilitation Facilities

Senate Committee on Finance and House 

Committee on Ways and Means 

Medicare classifies inpatient 

rehabilitation facilities (IRF) using

the “75 percent rule.” If a facility

can show that during 1 year at least

75 percent of its patients required 

intensive rehabilitation for 1 of 13

specified conditions, it may be

classified as an IRF and paid at a 

higher rate than is paid for less 

intensive rehabilitation in other 

settings. Medicare payments to

IRFs have grown steadily over the 

past decade. In this report, GAO 

(1) identifies the conditions—on 

and off the list—that IRF Medicare

patients have and the number of 

IRFs that meet a 75 percent 

threshold, (2) describes IRF

admission criteria and Centers for 

Medicare & Medicaid Services 

(CMS) review of admissions, and 

(3) evaluates use of a list of

conditions in the rule. GAO

analyzed data on Medicare patients 

(the majority of patients in IRFs) 

admitted to IRFs in FY 2003, spoke 

to IRF medical directors, and had

the Institute of Medicine (IOM) 

convene a meeting of experts. 

What GAO Recommends

GAO recommends that CMS take

several actions, including refining 

the rule to describe more 

thoroughly the subgroups of

patients within a condition that 

require IRF services, possibly using 

functional status or other factors in

addition to condition, to help

ensure that IRFs can be classified 

appropriately and that only patients

needing IRF services are admitted.

CMS generally agreed with the 

recommendations. 

In fiscal year 2003, fewer than half of all IRF Medicare patients were 

admitted for having a condition on the list in the 75 percent rule, and few 

IRFs admitted at least 75 percent of their patients for one of those 

conditions. The largest group of patients had orthopedic conditions, not all 

of which were on the list in the rule, which had been suspended in 2002. 

Almost half of all patients with conditions not on the list were admitted for 

orthopedic conditions, and among those the largest group was joint 

replacement patients. Although some joint replacement patients may need 

admission to an IRF, GAO’s analysis showed that few of these patients had 

comorbidities that suggested a possible need for the IRF level of services.

Additionally, GAO found that only 6 percent of IRFs in fiscal year 2003 were

able to meet a 75 percent threshold. 

IRFs varied in the criteria used to assess patients for admission, and CMS 

has not routinely reviewed IRF admission decisions. IRF officials reported 

that the criteria they used to make admission decisions included patient 

characteristics such as function, as well as condition. CMS, working through 

its fiscal intermediaries, has not routinely reviewed IRF admission decisions.

The experts IOM convened and other clinical and nonclinical experts GAO 

interviewed differed on whether conditions should be added to the list in the 

75 percent rule but agreed that condition alone does not provide sufficient 

criteria to identify the types of patients appropriate for IRFs. The experts 

IOM convened questioned the strength of the evidence for adding conditions 

to the list, finding the evidence for certain orthopedic conditions particularly 

weak, and they called for further research to identify the types of patients 

that need inpatient rehabilitation and to understand the effectiveness of 

IRFs. Other experts did not agree on whether conditions, including a broader 

category of joint replacements, should be added to the list. Experts, 

including those IOM convened, generally agreed that condition alone is 

insufficient for identifying appropriate types of patients for inpatient 

rehabilitation, since within any condition only a subgroup of patients require 

the level of services of an IRF, and contended that functional status should 

also be considered. 

www.gao.gov/cgi-bin/getrpt?GAO-05-366.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Marjorie Kanof 

at (202) 512-7114. 
Contents 

Letter 1

Results in Brief 6 

Background 8

Fewer Than Half of All IRF Medicare Patients in 2003 Were 

Admitted for Conditions on List in Rule, and Few IRFs Were 

Able to Meet a 75 Percent Threshold 11 

IRFs Vary in the Criteria Used to Assess Patients for Admission, 

and CMS Does Not Routinely Review IRFs’ Admission Decisions 19 

Experts Differed on Adding Conditions to List in Rule but Agreed 

That Condition Alone Does Not Provide Sufficient Criteria 22 

Conclusions 27

Recommendations for Executive Action 28 

Agency Comments and Comments from National Associations and 

Our Evaluation 29 

Appendix I List of Conditions in CMS’s 75 Percent Rule 31 

Appendix II Scope and Methodology 33 

Appendix III Rates of IRF Medicare Admissions from Hospitals 

by Top 19 DRGs of Patients Admitted to IRFs, Fiscal 

Year 2003 38 

Appendix IV Comments from the Centers for Medicare & Medicaid

Services 39 

Appendix V GAO Contact and Staff Acknowledgments 43 

GAO Contact 43 

Acknowledgments 43

Page i GAO-05-366 Inpatient Rehabilitation Facilities 
Tables 

Table 1: Proportion of All IRF Medicare Patients Who Had 

Condition on List in Rule, by Condition as Defined by 

Impairment Group, Fiscal Year 2003 14 

Table 2: IRFs That Met Varying Threshold Levels for Medicare 

Patients Admitted with Any of 13 Conditions on List in 

Rule in Fiscal Year 2003 17 

Table 3: Criteria That Characterize Appropriate Patients for 

Admission, as Reported by 12 IRFs 19 

Figures 

Figure 1: Conditions of All Medicare Patients Admitted to IRFs, as 

Defined by Impairment Group, Fiscal Year 2003 13 

Figure 2: Distribution of IRF Medicare Patients Who Did Not Have 

Condition on List in Rule, by Condition as Defined by 

Impairment Group, Fiscal Year 2003 16 

Page ii GAO-05-366 Inpatient Rehabilitation Facilities 
Abbreviations 

CMG case-mix group 

CMS Centers for Medicare & Medicaid Services 

DRG diagnosis-related group 

FI fiscal intermediary 

ICD-9-CM International Classification of Diseases, Ninth Revision, 

 Clinical Modification 

IOM Institute of Medicine 

IPPS inpatient prospective payment system 

IRF inpatient rehabilitation facility 

IRF-PAI Inpatient Rehabilitation Facility—Patient Assessment 

 Instrument 

IRF PPS inpatient rehabilitation facility prospective payment system 

MEDPAR Medicare Provider Analysis and Review 

NIH National Institutes of Health 

PPS prospective payment system 

SNF skilled nursing facility 

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Page iii GAO-05-366 Inpatient Rehabilitation Facilities 
United States Government Accountability Office

Washington, DC 20548 

April 22, 2005

The Honorable Charles E. Grassley 

Chairman 

The Honorable Max Baucus 

Ranking Minority Member 

Committee on Finance 

United States Senate 

The Honorable William M. Thomas 

Chairman 

The Honorable Charles B. Rangel 

Ranking Minority Member 

Committee on Ways and Means 

House of Representatives 

The number of inpatient rehabilitation facilities (IRF) and Medicare 

payments to these facilities have grown steadily over the past decade. IRFs 

are intended to serve patients recovering from medical conditions that 

typically require an intensive level of rehabilitation in an inpatient 

setting.1, 2

 The number of IRFs grew from 907 in 1992 to 1,256 in 2003. 

Medicare payments to IRFs grew from $2.8 billion in 1992 to an estimated 

$5.7 billion for the care of over 500,000 Medicare patients in 2003, and 

payments are projected to grow to almost $9 billion per year by 2015. 

Because patients treated at IRFs require more intensive rehabilitation than 

is provided in other settings, such as an acute care hospital or a skilled 

nursing facility (SNF),3

 Medicare pays for treatment in an IRF at a higher 

rate than it pays for treatment in other settings. To distinguish IRFs from

other settings for payment purposes and to ensure that Medicare patients 

needing less intensive services are not in IRFs, the Centers for Medicare & 

 1

Under authority provided in the Social Security Act, the Secretary defines a rehabilitation 

hospital and unit. See 42 U.S.C. §1395ww(d)(1)(B) (2000). 

2

Not all patients with a given condition may require the level of rehabilitation provided in 

an IRF. For example, although a subset of patients who have had a stroke may require the

intensive level of care provided by an IRF, others may be less severely disabled and require 

less intensive services. 

3

In addition to IRFs, acute care hospitals, and SNFs, other settings that provide 

rehabilitation services include long-term care hospitals, outpatient rehabilitation facilities, 

and home health care. 

Page 1 GAO-05-366 Inpatient Rehabilitation Facilities 
Medicaid Services (CMS) relies on a regulation commonly known as the 

“75 percent rule,” which was initially issued in 1983 and most recently 

revised in 2004.4

 The 2004 rule, which is being implemented over a 3-year 

transition period, states that if a facility can show that during a 12-month 

period at least 75 percent of all its patients, including its Medicare patients, 

required intensive rehabilitation services for the treatment of at least 1 of

the 13 conditions listed in the rule,5

 it may be classified as an IRF.6 The rule 

allows the remaining 25 percent of patients to have other conditions not 

listed in the rule. An IRF that does not comply with the requirements of 

the 75 percent rule may lose its classification as an IRF and therefore no 

longer be eligible for payment at a higher rate. In addition to the 

75 percent rule, IRFs must meet six other facility criteria to be classified as 

an IRF.7

IRF compliance with the requirements of the rule has been problematic, 

and some IRFs have questioned the requirements of the rule. CMS data 

indicate that in 2002 only 13 percent of IRFs had at least 75 percent of 

patients in 1 of the 10 conditions on the list at that time. CMS suspended 

enforcement of the rule in 2002. IRF officials have contended that the list 

of conditions in the rule should be updated because of changes in 

medicine that have occurred since the list was established in 1983 and the 

concomitant expansion of the population that could benefit from inpatient 

rehabilitation services. They have noted that their patients are older than 

 4

See 42 C.F.R. §412.23(b)(2) (2004). 

5

The 13 conditions listed in the 2004 rule are stroke; spinal cord injury; congenital 

deformity; amputation; major multiple trauma; hip fracture; brain injury; neurological 

disorders; burns; certain active polyarticular rheumatoid arthritis, psoriatic arthritis, and

seronegative arthropathies; certain systemic vasculidities with joint inflammation; severe

or advanced osteoarthritis involving two or more major weight-bearing joints meeting 

certain criteria; and knee or hip joint replacement meeting certain specific criteria. The

specific criteria for knee or hip joint replacement are that the patient must have undergone 

a knee or hip joint replacement, or both, during an acute care hospitalization immediately 

preceding the inpatient rehabilitation stay and also have had a bilateral procedure, or be at

least 85 years of age or older, or be extremely obese with a body mass index of at least 50. 

For an annotated list of these conditions, see appendix I.

6

The time period is defined by CMS or the CMS contractor. 

7

To be classified as an IRF, a facility would also have to meet six other regulatory criteria 

showing that it had (1) a Medicare provider agreement; (2) a preadmission screening 

procedure; (3) medical, nursing, and therapy services; (4) a plan of treatment for each

patient; (5) a coordinated multidisciplinary team approach; and (6) a medical director of

rehabilitation with specified training or experience. IRFs must also meet other criteria 

identified in 42 C.F.R. §412.22 (2004) and 42 C.F.R. §412.25 (2004). 

Page 2 GAO-05-366 Inpatient Rehabilitation Facilities 
the population served in 1983 and are surviving longer with conditions 

they may not have survived in earlier years. CMS issued a final rule—

effective July 1, 2004—that increased the number of conditions from 10 to 

13, adding, for example, certain hip and knee joint replacements.8

 The 2004

final rule also laid out a 3-year transition period during which enforcement 

of the rule is to be resumed, with the threshold for percentage of patients 

meeting the condition requirements being lowered to 50 percent for the 

first year and rising in stages to reach 75 percent for the IRF’s cost 

reporting period starting on or after July 2007. 

IRFs need to be correctly classified to be distinguished from settings in 

which less intensive rehabilitation is provided because the difference in 

payments to IRFs and payments to these other settings can be substantial. 

For example, the estimated Medicare per case payment in 2004 for a 

patient who underwent a major joint and limb replacement of a lower 

extremity was $17,135 to an IRF and $6,165 to a SNF. Similarly, the 

estimated per case payment for a patient with a stroke was $34,196 to an 

IRF and $8,905 to a SNF.9 Therefore, if IRFs are not correctly classified, 

Medicare is at risk of making large overpayments to incorrectly classified

facilities. Medicare is also at risk of overpayment for individual patients in

an IRF if patients are admitted who could be treated in a less intensive 

setting. IRFs are required to assess patients prior to admission to ensure 

they require the level of services provided in an IRF, and CMS is 

responsible for evaluating the appropriateness of individual admissions 

after the patient has been discharged through reviews for medical 

necessity conducted under contract by its fiscal intermediaries (FI). 

The Conference Report that accompanied the Medicare Prescription Drug, 

Improvement, and Modernization Act of 2003 directed us to issue a report,

in consultation with experts in the field of physical medicine and 

rehabilitation, to assess whether the current list of conditions represents a 

clinically appropriate standard for defining IRF services and, if not, to 

determine which additional conditions should be added to the list.10 In this 

report, we (1) identify the conditions that IRF Medicare patients have, the 

 8

See 69 Fed. Reg. 25752 (May 7, 2004). 

9

See MedPAC, Report to the Congress: New Approaches in Medicare, Ch. 5, “Defining 

Long-Term Care Hospitals” (Washington, D.C.: June 2004),123. CMS officials also reported

that preliminary data showed that IRF payments exceeded costs by approximately 

17 percent in 2002, the first year of IRF prospective payment.

10See H.R. Rep. 108-391, at 649 (2003). 

Page 3 GAO-05-366 Inpatient Rehabilitation Facilities 
number of these patients considered to have 1 of the 13 conditions, and 

the number of IRFs that meet the requirements of the 75 percent rule; 

(2) describe how IRFs assess patients for admission and whether CMS 

reviews admission decisions; and (3) evaluate the approach of using a list 

of conditions in the 75 percent rule to classify IRFs.11

To identify the conditions that IRF Medicare patients have, the number of 

patients considered to have 1 of the 13 conditions, and the number of IRFs 

that meet the requirements of the 75 percent rule, we obtained the 

Inpatient Rehabilitation Facility—Patient Assessment Instrument (IRFPAI) records from CMS for Medicare patients admitted to IRFs in fiscal 

year 2003. We conducted our analyses on Medicare patients only, because 

CMS records contained data on the largest number of IRFs and the 

majority of patients in IRFs are covered by Medicare.12, 13 The IRF-PAI 

records contain, for each Medicare patient, the impairment group code14

identifying the patient’s primary condition and the diagnostic code from 

the International Classification of Diseases, Ninth Revision, Clinical 

Modification (ICD-9-CM) identifying the patient’s comorbid condition.15 We 

 11The Consolidated Appropriations Act, 2005, effectively prohibits the Secretary of Health

and Human Services from enforcing the 75 percent rule and reclassifying IRFs as hospitals 

subject to the inpatient prospective payment system until he either (1) determines that the 

current rule is not inconsistent with the recommendations contained in our report or 

(2) issues an interim rule revising the 75 percent rule. The appropriations act provides for

the Secretary to take such action no later than 60 days after our report is issued. See Pub. L. 

No. 108-447, Div. F., Tit. II, §219, 118 Stat. 2809, 3141-42. 

12We analyzed the 2003 data—the most recent data available at the time—using the 13

conditions in the current regulation even though in fiscal year 2003 there were 10 

conditions on the list. 

13Other data sources contained data on only a subset of IRFs. In addition, analyses by 

RAND using the 10 conditions on the list at that time found that the percentage of Medicare 

patients with the conditions on the list in the rule was a good predictor of the percentage of 

total patients with the conditions on the list in the rule. See Grace M. Carter, O. Hayden, et

al., “Case Mix Certification Rule for Inpatient Rehabilitation Facilities,” DRU-2981-CMS 

(Santa Monica, Ca.: May 2003.) 

14The impairment group code identifies the medical condition that caused the patient to be 

admitted to an IRF, and its sole function is to determine payment rates. As a result, the 

impairment group codes describe every patient in an IRF and include medical conditions

that are on the list in the rule as well as those that are not on the list since IRFs may treat 

patients with conditions not on the list. In contrast, the list of conditions in the rule

describes the patient population that is to be treated in an IRF to ensure that a facility is 

appropriately classified to justify payment for the level of services furnished. 

15As used in this report, a primary condition is the first or foremost medical condition for 

which the patient was admitted to an IRF, and other medical conditions may coexist in the

patient as comorbid conditions, or comorbidities. 

Page 4 GAO-05-366 Inpatient Rehabilitation Facilities 
used these codes to determine whether we considered the patient’s 

primary or comorbid condition to be linked to a condition on the list in the 

rule.16 We also obtained and analyzed Medicare claims records for fiscal 

year 2003 to identify patients that had been discharged from an acute care

hospital to an IRF. We assessed the reliability of the IRF-PAI data by 

interviewing agency officials knowledgeable about the data and by 

interviewing other researchers who had conducted analyses using the IRFPAI data. For both the IRF-PAI data and the claims data we performed 

electronic testing of required data elements. We determined that the data

were sufficiently reliable for this analysis. Although we applied different 

threshold levels to illustrate the impact of the transition period on the 

number of IRFs that meet the requirements of the rule, we did not assess 

the appropriateness of any threshold level. Our analyses used

administrative data only, and estimates could be different if medical 

records were used.17

To determine how IRFs assess patients for admission and whether CMS 

reviews admission decisions, we conducted structured interviews. We 

interviewed the medical director at each of 12 IRFs selected to vary by

region and level of compliance with the 75 percent rule. We also 

interviewed the medical director (or designee) at each of the 10 FIs that 

covered the states in which the 12 IRFs are located (out of a total of 30

FIs). In addition, we interviewed an official representing each of CMS’s 10 

regional offices to determine whether any IRFs had ever been declassified

based on failure to comply with the 75 percent rule, and we interviewed 

three insurers and one regional managed care organization about their 

procedures for referring enrollees to IRFs. 

To evaluate the approach of using a list of conditions in the 75 percent rule 

to classify IRFs, we contracted with the Institute of Medicine (IOM) of The 

National Academies to convene a 1-day meeting of clinical experts in 

physical medicine and rehabilitation, including physicians, rehabilitation 

 16Throughout this report, the “list in the rule” refers to the list of 13 conditions as specified 

in the 2004 75 percent rule, and when we say that a condition is on (or off) the list, we 

mean that we have (or have not) been able to link the condition as identified in the IRF-PAI 

record to a condition on the list in the rule. 

17We followed the instructions CMS provided to FIs for them to use as a first step to 

“presumptively verify compliance” using the list of codes in the manual to estimate how

many patients have one of the conditions on the list in the rule as recorded on the IRF-PAI 

instrument. (See CMS, “Medicare Claims Processing,”CMS Manual System, pub. 100-04,

Transmittal 347 (Baltimore, Md.: Oct. 29, 2004.)) 

Page 5 GAO-05-366 Inpatient Rehabilitation Facilities 
nurses, physical therapists, occupational therapists, a speech and language

therapist, and clinical researchers in the field (referred to in this report as 

“the experts IOM convened”). 

In total, we talked with 106 individuals, of whom 65 were clinicians, 

including the experts IOM convened. We conducted our work from May 

2004 through April 2005 in accordance with generally accepted 

government auditing standards. (For a complete description of our scope 

and methodology, see app. II.) 

In fiscal year 2003, fewer than half of all IRF Medicare patients were 

admitted for having a condition on the list in the 75 percent rule, and few 

IRFs admitted at least 75 percent of their patients for one of those 

conditions. The largest group of patients admitted to IRFs in 2003 had 

orthopedic conditions, not all of which were on the list in the rule. In 

addition, fewer than half of all IRF patients were admitted for a primary 

condition that was on the list, with the proportion increasing to over threefifths when comorbid conditions on the list were counted, as they would 

be during the rule’s 3-year transition period. Almost half of patients with 

conditions that were not on the list were admitted for orthopedic 

conditions, and among those the largest group was joint replacement 

patients. Although some joint replacement patients may need admission to 

an IRF, our analysis showed that few of these patients had comorbidities 

that suggested a possible need for the intensity of services offered by an

IRF. Additionally, we found that only 6 percent of IRFs in fiscal year 2003 

were able to meet a 75 percent threshold, and many IRFs may not be able

to meet the requirements of the rule as the threshold increases to 75 

percent during the transition period. CMS has not generally declassified 

IRFs based on their failure to comply with the 75 percent rule. 

Results in Brief 

IRFs varied in the criteria used to assess patients for admission, and CMS 

has not routinely reviewed IRFs’ admission decisions. Among the IRF 

officials we interviewed, the criteria varied by facility and included patient 

characteristics such as function in addition to condition. Admission 

decisions may also be influenced by an IRF’s level of compliance with the 

75 percent rule’s list of conditions. The IRF officials we interviewed 

reported that they tracked their facility’s level of compliance with the 

rule’s list of conditions and that the decision to admit a given patient could 

be affected by the IRF’s compliance level at that time. CMS, working 

through its FIs, has not routinely reviewed IRF admission decisions, 

although it reported that such reviews could be used to target problem 

areas. 

Page 6 GAO-05-366 Inpatient Rehabilitation Facilities 
The experts IOM convened and other experts we interviewed differed on 

whether conditions should be added to the list in the 75 percent rule but 

agreed that condition alone does not provide sufficient criteria to identify

types of patients appropriate for IRFs. The experts IOM convened 

questioned the strength of the evidence for adding conditions to the list in 

the rule. They reported that the evidence on the benefits of IRF services is 

variable and the evidence on the benefits of such services for certain 

orthopedic conditions is particularly weak, and they called for further 

research to identify the types of patients that need inpatient rehabilitation 

and to understand the effectiveness of IRFs in comparison with other 

settings of care. Other experts we interviewed did not agree on whether 

conditions, including a broader category of joint replacements, should be 

added to the list in the rule. Experts, including those convened by IOM, 

agreed that condition alone is insufficient for identifying appropriate types 

of patients for inpatient rehabilitation, since within any condition only a 

subgroup of patients require the level of services of an IRF, and contended 

that functional status should also be considered. The experts IOM 

convened suggested factors to use in classifying IRFs, including both 

patient and facility characteristics. 

To help ensure that IRFs can be classified appropriately and that only 

patients needing the IRF level of services are admitted to them, we 

recommend that CMS ensure that FIs routinely conduct targeted reviews 

for medical necessity for IRF admissions; that CMS conduct additional 

activities to encourage research on the effectiveness of intensive inpatient 

rehabilitation and factors that predict patient need for these services; and 

that CMS use the information obtained from reviews for medical necessity, 

research activities, and other sources to refine the rule to describe more 

thoroughly the subgroups of patients within a condition that require IRF 

services, possibly using functional status or other factors in addition to 

condition. 

In commenting on a draft of this report, CMS stated that our work would 

be of assistance to the agency in examining issues related to patient 

coverage and the classification of IRFs. CMS generally agreed with our 

recommendations. Although CMS indicated its intent to follow our 

recommendation to more thoroughly describe subgroups of patients 

within a condition, it said it wanted to carefully consider this action and

potentially base its descriptions on future research. We clarified language

in the recommendation to encourage CMS to obtain research for this 

effort. CMS agreed on the need to encourage research and said it would 

collaborate with the National Institutes of Health (NIH). CMS also agreed

that targeted reviews for medical necessity are necessary and said that it 

Page 7 GAO-05-366 Inpatient Rehabilitation Facilities 
expected resources to be directed toward areas of risk. In its technical 

comments, CMS also noted we analyzed data from fiscal year 2003, when 

the rule was not being enforced, and said that this could have affected our 

findings. Other organizations that reviewed the report—the American 

Hospital Association, the American Medical Rehabilitation Providers 

Association, and the Federation of American Hospitals—also raised 

concerns about our use of fiscal year 2003 data. We analyzed a sample of 

data from July through December 2004, the first 6 months after the rule 

took effect, and found no material difference for the same time period in 

fiscal year 2003 data. 

While the 75 percent rule has been in effect in one form or another for 

over two decades, the current payment system and review procedures for 

IRFs went into effect in recent years.

The Social Security Amendments of 1983 changed the Medicare hospital 

payment system from a cost-based retrospective reimbursement system to 

a prospective system known as the inpatient prospective payment system 

(IPPS), under which hospitals receive a per discharge payment for a 

diagnosis-related group (DRG).18 However, the amendments excluded 

“rehabilitation hospitals,” and so IRFs continued to be paid under a 

reasonable-cost-based retrospective system. Before the IPPS was 

implemented, CMS consulted with the Joint Commission on Accreditation 

of Healthcare Organizations (JCAHO)19 and other accrediting organizations

to determine how to classify IRFs, that is, distinguish them from other 

facilities for payment purposes. The 75 percent rule was established for 

that purpose in 1983.20 To develop the original list of conditions in the 75 

percent rule, CMS relied, in part, on information from the American 

Academy of Physical Medicine and Rehabilitation, the American Congress 

of Rehabilitation Medicine, the National Association of Rehabilitation 

Background 

History of the 75 Percent 

Rule 

 18See Pub. L. No. 98-21, §601(e), 97 Stat. 65, 152-162 (1983) (codified at 42 U.S.C. 

§1935ww(d) (2000)). 

19At that time, JCAHO was known as the Joint Commission on Accreditation of Hospitals. 

20See 48 Fed. Reg. 39752 (Sept. 1, 1983). 

Page 8 GAO-05-366 Inpatient Rehabilitation Facilities 
Facilities, and the American Hospital Association.21 According to CMS, the 

conditions on the list accounted for approximately 75 percent of the 

admissions to IRFs when the original list was developed. In January 2002 a

prospective payment system (PPS) was implemented for IRFs—known as 

the inpatient rehabilitation facility prospective payment system (IRF PPS). 

On June 7, 2002, CMS suspended the enforcement of the 75 percent rule 

after its study of FIs, which have responsibility under contract with CMS 

for verifying compliance with the rule, revealed that they were using 

inconsistent methods to determine whether an IRF was in compliance and 

that in some cases IRFs were not being reviewed for compliance at all. 

Specifically, CMS found that only 20 of the 29 FIs conducted reviews for 

IRF compliance with the 75 percent rule and that the FIs that did these 

reviews used different methods and data sources. In 2004, CMS 

standardized the verification process that the FIs were to use to determine 

if an IRF met the classification criteria, including how to determine 

whether a patient is considered to have 1 of the 13 conditions. 

The 2004 Final Rule When the final rule was made effective on July 1, 2004, a transition period 

was established for IRFs to meet the requirements of the rule. In addition 

to lowering and then increasing the threshold, the transition period allows 

a patient to be counted toward the required threshold if the patient is 

admitted for either a primary or comorbid condition on the list in the rule. 

But at the end of the transition period, a patient cannot be counted toward 

the required threshold on the basis of a comorbidity on the list in the rule. 

The requirements of the transition period are as follows:22

• July 1, 2004, to June 30, 2005: 50 percent threshold, counting comorbidities 

• July 1, 2005, to June 30, 2006: 60 percent threshold, counting comorbidities 

• July 1, 2006, to June 30, 2007: 65 percent threshold, counting comorbidities 

 21This information included Health Care Financing Administration Technical Assistance 

Document No. 24, “Sample Screening Criteria for Review of Admissions to Comprehensive 

Medical Rehabilitation Hospitals/Units,” prepared by the Committee on Rehabilitation 

Criteria for the Professional Standards Review Organization of the American Academy of

Physical Medicine and Rehabilitation and the American Congress of Rehabilitation 

Medicine. 

22The threshold level applies to an IRF’s cost reporting period beginning on or after July 1 

of each year. 

Page 9 GAO-05-366 Inpatient Rehabilitation Facilities 
Effective July 1, 2007, the threshold will be 75 percent, not counting 

comorbidities. 

During the 3-year transition period, CMS plans to analyze claims and 

patient assessment data to evaluate if and how the 75 percent threshold 

should be modified. In addition, the agency has announced its willingness 

to consider alternative policy proposals to the 75 percent rule submitted 

during this period. In the past, CMS has declined requests to modify the 

rule’s threshold or list of conditions, citing a lack of supporting or 

objective data from the clinical community. However, in the final rule, the 

agency solicited “objective data or evidence from well-designed research 

studies” that would support a change in the rule’s 75 percent threshold or 

list of conditions.23 Also, because of the relative absence of clinical 

research studies in the peer-reviewed medical literature, CMS contracted

with NIH to convene one meeting of a research panel to review the current 

medical literature24 and identify priorities for conducting studies on 

inpatient rehabilitation. 

Beginning in January 2002, CMS implemented the IRF PPS to pay IRFs on 

a per-discharge basis. Payment is contingent on an IRF’s completing a 

patient assessment after admission and transmitting the resulting data to

CMS. The Inpatient Rehabilitation Facility—Patient Assessment 

Instrument (IRF-PAI) includes identification of an impairment group code 

that identifies the impairment group, or the condition that requires 

admission to rehabilitation. The patient’s comorbidities are also recorded 

on the IRF-PAI. 

The impairment group code is combined with other information on the 

IRF-PAI to classify the patient into 1 of 100 case-mix groups (CMG). 

Patients are assigned to a CMG based on the impairment group code, age, 

and levels of functional and cognitive impairment. The CMG determines 

the payment the IRF will receive for a patient. Each CMG is weighted to

account for the relative difference in resource use across all CMGs. Within 

each CMG, the weighting factors are “tiered” based on the estimated effect 

Payment and Review for 

Medical Necessity 

 23See 69 Fed. Reg. 25752 (May 7, 2004). 

24CMS contracted with the Agency for Healthcare Research and Quality to prepare a 

literature review for the NIH meeting. 

Page 10 GAO-05-366 Inpatient Rehabilitation Facilities 
of comorbidities. Each CMG has four payment tiers reflecting the level of 

comorbidities.25

CMS contracts with FIs, the entities that conduct compliance reviews, to 

conduct reviews for medical necessity to determine whether an individual 

admission to an IRF was covered under Medicare. FIs were specifically 

authorized to conduct reviews for medical necessity for inpatient 

rehabilitation services beginning in April 2002.26 According to the Medicare 

Benefit Policy Manual, two basic requirements must be met if inpatient 

hospital stays for rehabilitation services are to be covered: (1) the services 

must be reasonable and necessary, and (2) it must be reasonable and

necessary to furnish the care on an inpatient hospital basis, rather than in

a less intensive facility, such as a SNF, or on an outpatient basis.27

Determinations of whether hospital stays for rehabilitation services are 

reasonable and necessary must be based on an assessment of each 

beneficiary’s individual care needs. 

Fewer than half of all IRF Medicare patients in fiscal year 2003 were 

admitted for conditions on the list in the 75 percent rule. The patients 

admitted in 2003 had a variety of conditions, not all of which were on the 

list in the rule. Nearly half of the patients admitted for conditions not on 

the list were admitted for orthopedic conditions. The largest group of 

patients admitted for orthopedic conditions not on the list were admitted

for joint replacements that did not meet the list’s specific criteria for joint

replacement. Relatively few of these patients had comorbid conditions 

that suggested a possible need for the intensive level of rehabilitation 

provided in IRFs. Additionally, we found that based on the fiscal year 2003 

data few IRFs were able to meet a 75 percent threshold. 

Fewer Than Half of 

All IRF Medicare 

Patients in 2003 Were 

Admitted for 

Conditions on List in 

Rule, and Few IRFs 

Were Able to Meet a 

75 Percent Threshold 

 25There are a total of 385 groups because five special CMGs do not have tiers.

26Prior to this time, Quality Improvement Organizations had this authority. CMS Transmittal 

21 made clear that FIs have the authority to review admissions to IRFs. 

27Rehabilitative care in a hospital, rather than in a SNF or on an outpatient basis, is 

considered to be reasonable and necessary when a patient requires a more coordinated,

intensive program of multiple services than is generally found outside of a hospital 

(Medicare Benefit Policy Manual, chapter 1, Section 110.1). 

Page 11 GAO-05-366 Inpatient Rehabilitation Facilities 
Medicare Patients 

Admitted to IRFs in 2003 

Had Variety of Conditions 

Medicare patients were admitted to IRFs in fiscal year 2003 with a variety

of conditions, as defined by the impairment group codes we analyzed. 

Forty-two percent of the 506,662 Medicare patients admitted to IRFs in 

2003 were admitted with orthopedic conditions, representing the largest 

category of patients.28 Figure 1 shows the distribution of all the conditions, 

based on impairment group codes, for which patients were admitted to 

IRFs in fiscal year 2003. The largest impairment group consisted of 

patients admitted for joint replacement.29

 28Patients with orthopedic conditions include all patients with an impairment group code 

related to unilateral or bilateral hip fracture, femur fracture, pelvic fracture, unilateral or 

bilateral hip and/or knee replacement, or other orthopedic patients. 

29To determine whether admissions changed after enforcement of the rule, we compared

admissions for the largest group of patients, joint replacement patients, between July 

through December 2003 and July through December 2004. There was no material difference

overall. Across all IRFs, the percentage of Medicare patients admitted to an IRF whose 

primary condition was joint replacement declined by 0.1 percentage point. Among the top 

10 percent of IRFs admitting the highest proportion of Medicare joint replacement patients, 

the percentage of all Medicare patients admitted for a joint replacement declined by about

6 percentage points. 

Page 12 GAO-05-366 Inpatient Rehabilitation Facilities 
Figure 1: Conditions of All Medicare Patients Admitted to IRFs, as Defined by Impairment Group, Fiscal Year 2003 

0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 110,000 100,000 120,000 130,000

Source: GAO analysis of CMS IRF-PAI data.

Joint replacements

Stroke

Hip fracture

Other orthopedic conditions

Medically complex

Cardiac

Debility

Neurologic conditions

Spinal cord dysfunction

Brain dysfunction

Arthritis

Amputation

Pain syndromes

Pulmonary disorders

Other disabling impairments

Major multiple trauma

Burns

Congenital deformities

Developmental disability

Total number of patients in impairment group

27

121,528

85,516

51,467

40,359

29,148

28,011

27,208

23,422

21,207

17,733

16,195

14,448

10,925

10,009

5,258

3,658

345

198

Conditions as defined by

impairment group

Orthopedic conditions

Fewer Than Half of All IRF 

Medicare Patients Were 

Admitted for Conditions 

on List in Rule 

Fewer than half of the Medicare patients (222,316 of the 506,662 patients) 

admitted in fiscal year 2003 were admitted for a primary condition that 

was on the list in the 75 percent rule. Using the impairment group codes 

assigned to these patients at the time of their admission, we determined 

that in fiscal year 2003 less than 44 percent of IRF admissions had a 

Page 13 GAO-05-366 Inpatient Rehabilitation Facilities 
primary condition that was on the list in the rule. However, when 

comorbid conditions that were on the list were counted—as they would be

during the transition period—the number of patients having a listed 

condition rose to 311,740 (62 percent) of IRF patients in that year. (See 

table 1.) 

Table 1: Proportion of All IRF Medicare Patients Who Had Condition on List in Rule, by Condition as Defined by Impairment 

Group, Fiscal Year 2003 

Patients whose primary 

condition was on list in rule

Patients whose primary or

comorbid condition was on

list in rule 

Condition, as defined by

impairment group 

Total number of

patients in 

impairment group Number

Percentage of

patients in 

impairment group Number 

Percentage of

patients in 

impairment group

Joint replacements 121,528 15,761 13.0 61,890 50.9

Stroke 85,516 85,516 100.0 85,516 100.0

Hip fracture 51,467 51,467 100.0 51,467 100.0

Other orthopedic conditions 40,359 0 0.0 11,168 27.7

Medically complex 29,148 0 0.0 6,363 21.8

Cardiac 28,011 0 0.0 4,296 15.3

Debility 27,208 0 0.0 5,784 21.3

Neurologic conditions 23,422 9,933 42.4 16,846 71.9

Spinal cord dysfunction 21,207 21,207 100.0 21,207 100.0

Brain dysfunction 17,733 15,694 88.5 16,885 95.2

Arthritis 16,195 5,372 33.2 7,874 48.6

Amputation 14,448 13,165 91.1 13,652 94.5

Pain syndromes 10,925 0 0.0 2,078 19.0

Pulmonary disorders 10,009 0 0.0 1,393 13.9

Other disabling impairments 5,258 0 0.0 1,113 21.2

Major multiple trauma 3,658 3,658 100.0 3,658 100.0

Burns 345 345 100.0 345 100.0

Congenital deformities 198 198 100.0 198 100.0

Developmental disability 27 0 0.0 7 25.9

Total (overall percentage) 506,662 222,316 43.9 311,740 61.5

Source: GAO analysis of CMS IRF-PAI data. 

Note: CMS’s Medicare Claims Processing Manual lists the specific codes that we used to determine 

whether a patient’s condition was on the list in the rule. See CMS, “Medicare Claims Processing,” 

CMS Manual System, pub. 100-04, Transmittal 347 (Baltimore, Md.: Oct. 29, 2004.) 

Page 14 GAO-05-366 Inpatient Rehabilitation Facilities 
The amount of increase that occurred when comorbid conditions were 

counted varied by impairment group. For some impairment groups, the 

percentage of patients who had a condition on the list in the rule 

substantially increased when comorbidities were counted. For example, 

the percentage of joint replacement patients having a listed condition 

increased from 13 percent to 51 percent by virtue of their comorbidities. 

The comorbidity that qualified over 90 percent of this group was some 

form of arthritis.30 In contrast, the increase was lower for patients in the 

medically complex, cardiac, debility, pain syndrome, and pulmonary 

disorder impairment groups, increasing between 14 percentage points and 

22 percentage points. The comorbidity that qualified about one-third of 

cardiac and debility patients was stroke, and the comorbidity that qualified 

over one-third of pulmonary patients was a neurological condition. 

Almost Half of IRF 

Medicare Patients That Did 

Not Have Condition on List 

in Rule Were Admitted for 

Orthopedic Conditions 

Almost half of the 194,922 IRF Medicare patients that did not have a 

condition on the list in the rule, either as a primary condition or as a 

comorbid condition, were admitted for orthopedic conditions. (See fig. 2.)

The single largest group of patients who did not have a condition on the 

list were the joint replacement patients whose condition did not meet the 

list’s specific criteria for joint replacements.31 Over 30 percent of patients 

who did not have a condition on the list had been admitted to IRFs for 

joint replacement, with another 15 percent having been admitted for 

“other orthopedic,” that is, any orthopedic condition other than hip 

fractures or joint replacements. The next largest group, cardiac patients, 

represented 12 percent. 

 30The forms of arthritis include osteoarthritis, rheumatoid arthritis, and systemic 

vasculidities. The extent to which these codes refer to arthritis in the joint that was 

replaced as opposed to active arthritis following the procedure cannot be determined from

these data. The IRF-PAI training manual generally encouraged coders to be comprehensive, 

instructing them to list “ALL comorbid conditions, not just those conditions that may affect

Medicare payment.” (CMS, IRF-PAI Training Manual, rev. Jan. 16, 2002 (Baltimore, Md.:

2002), II-17.)) 

31See footnote 5. 

Page 15 GAO-05-366 Inpatient Rehabilitation Facilities 
Figure 2: Distribution of IRF Medicare Patients Who Did Not Have Condition on List in Rule, by Condition as Defined by 

Impairment Group, Fiscal Year 2003 

a

Includes joint replacement patients who had a unilateral procedure and were under age 85, and 

therefore did not meet the specific criteria for joint replacements set out in the 75 percent rule. Codes 

from CMS for body mass index were not available. 

Relatively Few Medicare 

Joint Replacement 

Patients in IRFs Had 

Comorbid Conditions That 

Suggested Possible Need 

for IRF Level of Services 

Although some joint replacement patients may need the level of services 

of an IRF, such as those who have a comorbid condition that significantly 

affects their level of function, our analysis of the case-mix groups used for 

payment purposes suggests that relatively few of the Medicare joint 

replacement patients currently admitted by IRFs fit this description.32 In 

particular, 87 percent of joint replacement patients admitted in fiscal year 

2003 had unilateral procedures and were less than 85 years of age, and 

thus did not fit the criteria for joint replacement on the list in the rule 

based on their primary condition. Of the joint replacement patients who 

 32One of the experts at the meeting convened by IOM stated that the field has suggested 

that joint replacement patients in the lowest comorbidity tiers potentially could be treated

in another setting. 

Page 16 GAO-05-366 Inpatient Rehabilitation Facilities 
did not fit the criteria based on their primary condition, over 84 percent 

were in a payment tier with no comorbidities that affected costs.33

Few IRFs Were Able to 

Meet a 75 Percent 

Threshold 

Only 6 percent of IRFs were able to meet the requirements of full 

implementation of the rule that would be in place at the end of the 

transition period, that is, a 75 percent threshold not counting 

comorbidities. Our analysis of fiscal year 2003 data for Medicare patients

admitted to IRFs, which used the current list of 13 conditions, showed that 

as the threshold level increased from 50 percent to 75 percent and both 

primary and comorbid conditions were counted, progressively fewer IRFs 

were able to meet the higher threshold levels. (See table 2.) In addition, 

when the count was based only on whether the patient’s primary condition 

was on the list in the rule, as it would be after the transition period, even 

fewer IRFs met the requirements of the rule. However, many IRFs were 

able to meet the lower thresholds that would be in place earlier in the 

transition period. Over 80 percent of IRFs were able to meet a 50 percent

threshold based on the primary conditions or comorbid conditions of the 

patients they admitted in 2003. 

Table 2: IRFs That Met Varying Threshold Levels for Medicare Patients Admitted

with Any of 13 Conditions on List in Rule in Fiscal Year 2003 

Compliance 

threshold 

Percentage of IRFs that met 

threshold based on either

primary condition or related 

comorbid conditions 

Percentage of IRFs that met 

threshold based solely on 

primary condition

50 percent 85 39

60 percent 62 20

65 percent 50 14

75 percent 27 6

Source: GAO analysis of CMS IRF-PAI data. 

 33The IRF PPS identifies three sets of comorbidities that past experience has shown to be 

associated with either a low, medium, or high increment in patient costs. IRF patients who 

have none of these comorbidities are placed in a fourth payment category, or tier. These 

comorbidities affect the payment rate to an IRF for a specific patient and are different from 

the consideration of whether a patient has a comorbidity that is 1 of the 13 conditions on

the list in the rule. Joint replacement patients without these comorbidities still vary 

substantially in the degree of impairment they present, as reflected in their placement 

among the different CMGs. Across the six joint replacement-related CMGs, the proportion 

of patients in the tier with no such comorbidities ranged from 74 percent to 91 percent.

Page 17 GAO-05-366 Inpatient Rehabilitation Facilities 
Some IRF officials are concerned that they may have to limit admissions in 

order to comply with the rule and that some IRFs may have to close or 

reduce beds.34 Some of the IRF officials we interviewed reported that as 

the threshold of the rule increases they expect to limit admissions for 

patients with conditions not on the list in the rule. One IRF official 

estimated that the facility’s revenues would decrease by 40 percent by the 

third year of the rule’s transition period, severely harming the facility 

financially and affecting access to care, and another IRF official reported 

that the facility expected its census to drop by half, which would affect the 

number of beds it could operate and staff it could employ. An IRF official 

whose facility was meeting the 75 percent threshold said that if the facility 

fell below the threshold, it would limit admissions to remain in 

compliance.

IRFs have not generally been declassified based on the failure to comply 

with the 75 percent rule, and CMS recently clarified instructions for FIs to 

use to conduct compliance assessments. Officials from CMS’s 10 regional

offices reported that no IRFs had been declassified in at least the past 5 

years.35 When CMS found that FIs were using different approaches to 

conduct compliance assessments, it determined that one cause was that 

the CMS manuals did not detail the methodology FIs should use to 

perform the reviews. Following CMS’s modifications of the rule, it issued 

new instructions in a program transmittal that defined and standardized 

the procedures that FIs are to use to conduct compliance assessments, 

and some FI officials we interviewed reported that instructions were 

clearer and more detailed than in prior years. 

 34The American Hospital Association and the American Medical Rehabilitation Providers 

Association, which represent IRFs, have also reported concern with the impact of the rule

on the field. They estimated that in the first year almost 25 percent of IRFs would not meet

the requirements of the rule and that when the rule is fully implemented following the 

transition period 80 percent of IRFs would not meet the rule, which could force them to 

discontinue services or close. 

35One CMS regional office official reported that five or six IRFs had been declassified in the 

mid-1990s or earlier, but none since then. 

Page 18 GAO-05-366 Inpatient Rehabilitation Facilities 
The criteria IRFs used to assess patients for admission varied by facility, 

and CMS has not routinely reviewed IRFs’ admission decisions. In 

particular, IRFs used a range of criteria in making admission decisions, 

including patient characteristics such as function, in addition to condition. 

Admission decisions may also be influenced by an IRF’s level of 

compliance with the 75 percent rule’s list of conditions. CMS, working 

through its FIs, has not routinely reviewed IRF admission decisions for 

medical necessity, although the CMS officials reported that such reviews 

could be used as a means to target problems. 

The IRF officials we interviewed varied in the criteria they used to 

characterize the patients that were appropriate for admission. (See table

3.) The number of criteria they reported using ranged from two to six, with 

no IRF reporting that it relied on a single criterion for admission. 

IRFs Vary in the 

Criteria Used to 

Assess Patients for 

Admission, and CMS 

Does Not Routinely

Review IRFs’ 

Admission Decisions 

IRFs Use Variety of 

Criteria, Including 

Functional Status, to 

Assess Patients for 

Admission 

Table 3: Criteria That Characterize Appropriate Patients for Admission, as Reported

by 12 IRFs

Criteria 

Number of IRFs reporting 

use of criterion

Potential to return to home/community, discharge plan 8

Need for/ability to tolerate 3 hours of therapy daily 8

Functional level/potential for functional improvement 6

Medical issues, requirement for inpatient monitoring, level

of medical stability 6

Need for two types of therapies 3

Cognitive ability to learn 3

Patient willingness to participate in therapy 2

Need for 24-hour nursing care 2

Family support, expectations 2

Diagnosis 2

Need for multidisciplinary approach 1

3- to 4-week length of stay 1

Age 1

Comorbidities that affect function 1

Source: GAO analysis of IRF officials’ interview responses. 

Page 19 GAO-05-366 Inpatient Rehabilitation Facilities 
Whereas some IRF officials reported that they used function to

characterize patients who were appropriate for admission (e.g., patients 

with a potential for functional improvement), as shown in table 3, others 

said they used function to characterize patients not appropriate for 

admission (e.g., patients whose functional level was too high, indicating 

that they could go home, or too low, indicating that they needed to be in a

SNF). In combination, all the IRF officials we interviewed evaluated a 

patient’s function when assessing whether a patient needed the level of 

services of an IRF, and almost half of the IRF officials interviewed stated 

that function was the main factor that should be considered in assessing 

the need for IRF services. 

The IRF officials we interviewed reported that they did not admit all the 

patients they assessed. They estimated that the proportion of patients they 

assessed but did not admit ranged from 5 percent to 58 percent.36 Most 

patients were admitted to IRFs from an acute care hospital, and the IRF 

officials reported receiving referrals from as few as 1 hospital to as many 

as 55 hospitals.37 The IRF typically received a request from a physician in 

the acute care hospital requesting a medical consultation from an IRF 

physician, or from a hospital discharge planner or social worker indicating 

that they had a potential patient. An IRF staff member—usually a 

physician and/or a nurse38—conducted an assessment prior to admission 

to determine whether to admit a patient. 

Admission Decisions May 

Also Be Influenced by 

IRF’s Level of Compliance 

with Rule’s List of 

Conditions 

In addition to individual patient characteristics, admission decisions may 

also be influenced by an IRF’s level of compliance with the 75 percent 

rule’s list of conditions. All the IRF officials we interviewed were able to

track their own facility’s compliance level regularly, and said they tracked 

it generally on a daily, weekly, or monthly basis. Some IRF officials we 

interviewed reported that the admission decision for a given patient may 

be affected by the IRF’s compliance level at that time. For example, on a 

day when the facility is at the required level of compliance a patient with a 

certain condition that is not on the list in the rule may be admitted, but on 

 36The most common response, by 7 of the 12 IRFs, was between 30 percent and 40 percent.

37For hospital-based IRFs (10 of the 12 interviewed), the percentage of referrals from the

parent hospital ranged from 25 percent to 99 percent, with 3 reporting that less than half 

their patients came from the parent hospital. 

38Most IRFs reported that the assessment was done by a physician and/or a nurse, although 

one IRF reported that it was done by a recreational therapist. 

Page 20 GAO-05-366 Inpatient Rehabilitation Facilities 
another day when the facility is below its compliance level a patient with 

the same condition might not be admitted.39 Half of the IRF officials said 

that when the rule is enforced they expect they will try to admit more 

patients with conditions on the list in the rule. 

CMS Has Not Routinely 

Reviewed Admission 

Decisions 

CMS, working through its FIs, has not routinely reviewed IRF admission 

decisions for medical necessity. Among the 10 FI officials we interviewed, 

over half were not conducting reviews of patients admitted to IRFs. Those 

that were doing reviews used different approaches for selecting records to

be reviewed, such as focusing only on the largest IRFs that failed to 

comply with the rule or requesting a few records from each IRF in its 

service area. CMS officials estimated that less than 1 percent of 

admissions in facilities excluded from IPPS, such as IRFs, are reviewed, 

and reported that such reviews could be used as a means to target 

problems or vulnerabilities. 

Among the experts IOM convened and other experts we interviewed, it 

was stated that because there has been no routine review for medical 

necessity in IRFs, some IRFs have become “sloppy” in their admitting 

practices and have taken a “laissez-faire attitude” toward admitting 

patients. This perspective is borne out through ad hoc studies done by 

three FIs that found inadequate justification for admission. For example, 

in one study an FI official reviewed about 3,000 medical charts and 

reported that the need for inpatient rehabilitation was unclear in about 

30 percent to 40 percent of the IRF patients’ charts reviewed.40 The other 

two FIs reviewed fewer cases, but found a higher proportion of patients in

IRFs who did not appear to need inpatient rehabilitation. 

In contrast to CMS’s approach, private payers rely on individual 

preauthorization to ensure that the most appropriate patients are admitted

to IRFs. Of the three major insurers and one managed care plan whose 

officials we interviewed, all required preauthorization for each admission 

to an IRF when determining whether a specific patient should be admitted, 

judging each case individually. In making their decisions, they relied on a 

variety of factors, which differed from payer to payer, including diagnosis, 

 39Other experts also reported about the potential for the opposite to happen. For example, 

a patient may have a condition on the list and not need the intensity of services of an IRF, 

but still be admitted if the facility wants to increase its compliance level. 

40We did not conduct an independent review of these reported results.

Page 21 GAO-05-366 Inpatient Rehabilitation Facilities 
symptoms, treatment plan, the need for and the patient’s ability to 

participate in 3 hours of daily therapy, the need for care by a physiatrist,41

and the potential for an IRF admission to provide an earlier discharge 

from the acute care hospital (compared to a possibly longer stay in the

acute care hospital with discharge to home or a SNF). Three private 

payers we spoke with indicated that IRFs are generally paid on a per diem

basis, and all said that patients are monitored by the insurer or health plan 

throughout their IRF stay. 

The experts IOM convened and other experts we interviewed differed on 

whether conditions should be added to the list in the 75 percent rule but 

agreed that condition alone does not provide sufficient criteria to identify

the types of patients appropriate for IRFs. The experts IOM convened 

questioned the strength of the evidence for adding conditions to the list. 

They reported that the evidence on the benefits of IRF services—

particularly for certain orthopedic conditions—is variable, and they called

for further research. Other experts did not agree on whether conditions, 

including a broader category of joint replacements, should be added to the 

list. The experts IOM convened and other experts agreed that condition 

alone is insufficient for identifying appropriate patients and contended 

that functional status should also be considered. The experts IOM 

convened suggested factors to use in classifying IRFs, including both 

patient and facility characteristics. 

The experts IOM convened generally questioned the strength of the 

evidence for the conditions suggested for addition to the list in the rule. 

Some of them reported that there was little information available on the 

need for inpatient rehabilitation for cardiac, transplant, pulmonary, or 

oncology patients. One of them stated that inpatient rehabilitation may be 

the best way of caring for patients who have weakened physically due to 

long hospital stays but added that “we simply do not know.” The same 

expert also cited a study that showed that inpatient rehabilitation services 

made a difference for patients with metastatic spine cancer and noted that 

this result was unexpected and could indicate that “clinical intuition” on 

the benefits of inpatient rehabilitation may not always be reliable. 

Experts Differed on 

Adding Conditions to 

List in Rule but 

Agreed That 

Condition Alone Does 

Not Provide Sufficient 

Criteria 

Experts IOM Convened 

Questioned Evidence for 

Adding Conditions to List 

in Rule, Finding Evidence 

for Certain Orthopedic 

Conditions Particularly 

Weak, and Called for More 

Research 

 41A physiatrist is a physician who specializes in physical medicine and rehabilitation. 

Page 22 GAO-05-366 Inpatient Rehabilitation Facilities 
For conditions currently on the list in the rule, the experts IOM convened 

reported varying degrees of strength in the evidence on the benefits of IRF 

services. Although the experts IOM convened did not comment on every 

condition on the list, the group generally agreed that the data on the 

benefits of intensive inpatient rehabilitation for stroke are 

“incontrovertible.” For certain other conditions on the list, such as spinal 

cord injury and traumatic brain injury, they reported that it is reasonable 

to expect intensive inpatient rehabilitation to provide good outcomes 

because these patients need intensive training about self-care and patients

with traumatic brain injury may also require behavioral services. One 

expert questioned the strength of the evidence related to hip fractures, 

saying it was unclear whether patients with a hip fracture would be better 

served by sending them home right away, by putting them in an IRF, or by

giving them some combination of intensive inpatient rehabilitation, home 

health care, or care in a SNF. 

The condition the experts IOM convened discussed most was joint 

replacement, which was the most common condition for patients admitted 

to IRFs and is included on the list of conditions in the rule but only under 

certain circumstances. In general, they reported that, except for a few 

subpopulations, uncomplicated unilateral joint replacement patients rarely 

need to be admitted to an IRF.42 For example, one of the experts said that 

admission to an IRF of a healthy person with an uncomplicated joint 

replacement is an example of a practice that is not evidence-based, and 

others said that there are no data and little evidence on the effectiveness 

of intensive inpatient rehabilitation for elective joint replacement patients. 

Another expert stated that the evidence on the benefits of IRF services for 

hip fracture and joint replacement patients is “very, very weak,” that 

orthopedics is the “heart of the issue” related to the list of conditions in 

the rule, and that a panel of clinicians should be convened to focus solely 

on the orthopedic conditions. 

Most of the experts IOM convened called for more research in several 

areas, including which types of patients can be treated best in IRFs and the

 42We interviewed a leading orthopedic physician who said that unilateral joint replacement 

patients rarely require admission to an IRF following surgery, the exceptions including 

patients with a surgical complication, previous stroke, polio, or heart transplant because 

such patients need close medical supervision. In addition, three of the four officials we 

interviewed at major insurers and a managed care plan generally agreed that unilateral 

joint replacement patients rarely require admission to an IRF, unless there is an active

comorbidity or accompanying complex medical problem. One reported that an IRF referral 

for a unilateral joint replacement patient was a “red flag” that called for closer review. 

Page 23 GAO-05-366 Inpatient Rehabilitation Facilities 
effectiveness of IRFs in comparison with other settings of care. CMS has 

also identified questions for a future research agenda that can assess the 

efficacy of rehabilitation services in various settings.43 CMS may also 

undertake other activities, such as periodically holding additional 

meetings with researchers or encouraging observational studies, as well as 

soliciting comments from the public for additional studies. 

IRF Officials Differed on 

Whether Conditions, 

Including More Broadly 

Defined Joint 

Replacement, Should Be 

Added to List in Rule 

There was no general agreement among the IRF officials we consulted on 

whether conditions should be added to the list in the rule, and if so, which 

conditions. In our interviews with IRF officials, three-quarters identified 

various conditions that should be added. Of these, all suggested the 

addition of cardiac conditions, and some identified other conditions, such 

as pulmonary conditions, transplants, and more joint replacements than 

are currently on the list. The reasons these IRF officials gave for adding 

these conditions included that these patients can become weakened 

physically during a hospital stay and need services in an IRF to regain their 

strength and also that their experience shows they can achieve good

outcomes for these patients. The remaining IRF officials said no 

conditions should be added. Some reasons they cited were that these 

patients can be treated in a less intensive setting, the conditions are too 

broad to be meaningful, and using a list of conditions is the wrong 

approach. IRF officials differed regarding the addition of joint replacement 

patients. Half of them suggested that joint replacement be more broadly 

defined to include more patients, saying, for example, that the current 

requirements were too restrictive and arbitrary, and a couple of them said 

that unilateral joint replacement patients are not generally appropriate for 

IRFs. 

 43CMS Fact Sheet #1, “Inpatient Rehabilitation Facility Classification Requirements,” 

includes two specific questions with respect to IRFs: (1) how better to identify those 

patients who are most appropriate for intensive medical rehabilitation resources provided 

in the IRF setting as opposed to alternative care settings, and (2) what conditions, in

addition to those on the list in the rule, typically require intensive rehabilitation treatment

available in IRFs but not in alternative care settings. 

Page 24 GAO-05-366 Inpatient Rehabilitation Facilities 
The experts IOM convened contended that condition alone was 

insufficient for identifying which patients, or types of patients, required 

the level of services available in an IRF and generally agreed that 

functional status should also be used. A patient’s condition was perceived

as an acceptable starting point to understanding patient needs and as a 

way to characterize the patients served by IRFs. But the experts IOM 

convened generally agreed that condition, by itself, was insufficient and

that more information was needed. They said that condition alone fails to 

identify the subgroup within each condition that is most appropriate for 

intensive inpatient rehabilitation. For example, one of them noted that 

although an IRF could be filled with patients that have conditions on the 

list in the rule, the patients could be completely inappropriate for that 

setting. Another expert at the meeting reported general agreement among 

the group that using diagnosis alone is not sufficient.44

Experts Contended That 

Functional Status, in 

Addition to Condition, 

Should Be Used to Identify 

Appropriate Types of 

Patients for Intensive 

Inpatient Rehabilitation 

In addition to the experts convened by IOM, other experts we interviewed 

also said that condition alone was insufficient because having a condition 

on the list in the rule does not automatically indicate the need for intensive 

inpatient rehabilitation (e.g., even though stroke is on the list, only a 

subgroup of stroke patients require IRF services) and having a condition 

not on the list does not necessarily mean the patient does not need IRF 

services (e.g., although there is no cardiac condition on the list, a 

subgroup of cardiac patients need the level of services of an IRF). In 

addition, the FI and IRF officials we interviewed generally reported as well 

that condition alone was insufficient. Over half the FI officials we 

interviewed said that condition is insufficient by itself to determine the 

need for intensive inpatient rehabilitation, and some said that diagnosis is 

only a starting point. As noted earlier, all the IRF officials reported using a 

variety of criteria, beyond condition, to assess patients for admission, 

including function. 

Among the experts convened by IOM, functional status was identified 

most frequently as the information required in addition to condition. Half

of the experts IOM convened commented on the need to add information 

about functional status, such as functional need, functional decline, motor 

 44Our analysis of Medicare patients that had been discharged from hospitals provides

further indication that not all patients with a condition on the list go to IRFs. The 

percentage of these patients who went on to IRFs within 30 days for their postacute care 

varied across selected diagnosis-related groups (DRG) and was in no case greater than 50

percent. The largest percentages of patients going to IRFs after hospital discharge were

bilateral joint replacement and unilateral joint replacement patients. (See app. III.) 

Page 25 GAO-05-366 Inpatient Rehabilitation Facilities 
and cognitive function, and functional disability. To measure both 

diagnosis and function, one of them suggested using the case-mix groups 

because they combine both dimensions. 

Experts we interviewed also raised some concerns, however, about using 

function as a measure of need for intensive inpatient rehabilitation. The 

concerns voiced by the FI officials we interviewed included the potential 

for abuse by qualifying more patients for admissions and the potential for 

difficulty in adjudicating claims. One FI official said that moving toward an

assessment of functional status would require a better instrument than 

currently exists.45 Another expert we interviewed said that using only 

functional status could lead to including custodial patients that are 

currently in SNFs. Officials at CMS also expressed concerns regarding 

how to measure the need for intensive inpatient rehabilitation based on 

functional status because a patient can have a low functional status but 

not need intensive inpatient rehabilitation. 

Experts IOM Convened 

Suggested Factors to 

Consider Using to Classify 

IRFs 

Almost all the experts IOM convened said that IRF classification should 

include characteristics of the patients served, but a couple said that IRF 

classification should not include patient characteristics. Among those 

expressing the need to use patient characteristics, function was identified

most often, although it was mentioned that it would be hard to 

operationalize. Some of the experts IOM convened also suggested that the

percentage threshold be set at a lower level than 75 percent (for example, 

60 percent or 65 percent) as a compromise until more information 

becomes available to modify the list in the rule. 

The experts IOM convened who opposed using patient characteristics to 

classify IRFs suggested that IRFs be classified with just the other six 

facility criteria, potentially looking at state licensure requirements for 

additional facility criteria that could be applied specifically to IRFs. These 

experts (as well as others we interviewed) said that no other facility is 

classified using both patient and facility characteristics and that IRFs are 

unique in being subjected to this approach. However, Medicare does 

classify other facilities that are exempt from IPPS using a characteristic 

 45The FI official reported that the FIMTM instrument that is currently used does not 

adequately measure progress in small increments, such as a quadriplegic patient might 

experience. Another respondent also reported that the FIMTM only measures functional 

status at a point in time, but does not predict functional improvement. 

Page 26 GAO-05-366 Inpatient Rehabilitation Facilities 
about the patients served in those facilities.46 Furthermore, other experts 

at the meeting did not agree that the six certification criteria were 

sufficient for distinguishing IRFs since long-term care hospitals could 

likely meet these criteria as well.47

Our analysis of Medicare data shows that there are Medicare patients in 

IRFs who may not need the intensive level of rehabilitation services these 

facilities offer. Just over half of all Medicare patients admitted to IRFs in 

fiscal year 2003 were admitted for a condition that was not on the list in 

the 75 percent rule. Of those patients whose primary or comorbid 

condition was not on the list, the largest group was joint replacement 

patients whose condition did not fit the list’s specific criteria for joint 

replacement. The experts IOM convened and other experts we interviewed 

reported that unilateral, uncomplicated joint replacement patients rarely 

need to be in an IRF. These experts also reported that patients who may 

not need to be in an IRF may have been admitted because CMS has not 

been routinely reviewing the IRFs’ admission decisions to determine 

whether they were medically justified. Increased scrutiny of individual 

admissions through routine reviews for medical necessity following 

patient discharge could be used to target problems and vulnerabilities and 

thereby reduce the number of inappropriate admissions in the future. 

Conclusions 

While some patients do not need to be in an IRF, the need for IRF services 

may be more difficult to determine for other patients. The experts 

convened by IOM called for more research to understand the effectiveness 

of intensive inpatient rehabilitation, reporting that the evidence for the 

effectiveness of IRF services varied in strength for conditions on the list 

and was particularly weak for certain orthopedic conditions. CMS has also 

recognized the need for more research in this area and asked NIH to 

 46For example, generally, in cancer hospitals, 50 percent of patients must have neoplastic 

diagnoses, and psychiatric hospitals must primarily provide psychiatric services for the

diagnosis and treatment of mentally ill persons. See 42 C.F.R. §412.23(f)(1)(iv) (cancer 

hospitals); 42 C.F.R. §412.23(a)(1) (psychiatric hospitals). 

47Long-term care hospitals use admission criteria to determine whether patients require

that level of care; have active daily involvement with physicians; have licensed nurse 

staffing of 6 to 10 hours per day per patient; employ specialist registered nurses; employ 

physical, occupational, speech, and respiratory therapists; and have multidisciplinary 

teams that prepare and carry out treatment plans. MedPAC recommended that a 

combination of facility and patient criteria be used to distinguish postacute settings of care. 

(MedPAC, Report to the Congress: New Approaches in Medicare, Ch. 5, “Defining LongTerm Care Hospitals” (Washington, D.C.: June 2004), 128-130.) 

Page 27 GAO-05-366 Inpatient Rehabilitation Facilities 
convene one meeting to help identify research priorities for inpatient 

rehabilitation. Research studies that can produce information on a timely 

basis, such as observational studies or meetings of clinical experts with 

specialized expertise, would be especially helpful in this effort. 

The presence of patients in IRFs who may not need that level of services 

and the calls for more research on the effectiveness of inpatient 

rehabilitation lead us to conclude that greater clarity is needed in the rule

about what types of patients are most appropriate for rehabilitation in an 

IRF. There was general agreement among the experts we interviewed, 

including the experts convened by IOM, that condition alone is not 

sufficient to identify the most appropriate types of patients since within 

any condition only a subgroup of patients require the level of services of 

an IRF. We believe that if condition alone is not sufficient to identify the 

most appropriate types of patients, it would not be useful to add more 

conditions to the list at the present time. There was also general 

agreement among the experts that more information is needed to 

characterize appropriate types of patients, and the most commonly 

identified factor was functional status. However, some of the experts 

convened by IOM recognized the challenge of operationalizing a measure 

of function, and some experts questioned the ability of current assessment 

tools to predict which types of patients will improve if treated in an IRF. 

Despite the challenge, more clearly delineating the most appropriate types 

of patients would offer more direction to IRFs—and to the health 

professionals that refer patients to them—about which types of patients 

can be treated in IRFs. 

We believe that action to conduct reviews for medical necessity and to 

produce more information about the effectiveness of inpatient 

rehabilitation could support future efforts to refine the rule over time to 

increase its clarity about which types of patients are most appropriate for 

IRFs. These actions could help to ensure that Medicare does not pay IRFs 

for patients who could be treated in a less intensive setting and does not 

misclassify facilities for payment. 

To help ensure that IRFs can be classified appropriately and that only 

patients needing intensive inpatient rehabilitation are admitted to IRFs, we 

recommend that the CMS Administrator take three actions: 

Recommendations for 

Executive Action 

• CMS should ensure that FIs routinely conduct targeted reviews for 

medical necessity for IRF admissions. 

Page 28 GAO-05-366 Inpatient Rehabilitation Facilities 
• CMS should conduct additional activities to encourage research on the 

effectiveness of intensive inpatient rehabilitation and the factors that 

predict patient need for intensive inpatient rehabilitation. 

• CMS should use the information obtained from reviews for medical 

necessity, research activities, and other sources to refine the rule to 

describe more thoroughly the subgroups of patients within a condition 

that are appropriate for IRFs rather than other settings, and may consider

using other factors in the descriptions, such as functional status. 

In commenting on a draft of this report, CMS stated that our work would 

be of assistance to the agency in examining issues related to patient 

coverage and the classification of inpatient rehabilitation facilities. CMS 

generally agreed with our recommendations and provided technical 

comments, which were incorporated as appropriate. CMS agreed that 

targeted reviews for medical necessity are necessary and said that it 

expected its contractors to direct their scarce resources toward areas of 

risk. CMS said that it has expanded its efforts to provide greater oversight 

of IRF admissions through local policies that have been implemented or 

are being developed by the FIs. CMS also agreed with our 

recommendation to encourage additional research and noted that it has 

expanded its activities to guide future research efforts by encouraging 

government research organizations, academic institutions, and the 

rehabilitation industry to conduct both general and targeted research. 

CMS said that it would collaborate with NIH to determine how best to 

promote research. CMS also stated that, while it expected to follow our 

recommendation to describe subgroups of patients within a medical 

condition, it would need to give this action careful consideration because 

it could result in a more restrictive policy than the present regulations. 

CMS noted that future research could guide the agency’s descriptions of 

subgroups. Although CMS indicated its intention to follow this 

recommendation, we clarified the language in the recommendation to 

encourage CMS to obtain research and other information to undertake this 

effort. CMS’s written comments are reprinted in appendix IV.

We also received oral comments on a draft of this report from 

representatives of the American Hospital Association, the American 

Medical Rehabilitation Providers Association, and the Federation of 

American Hospitals. All three groups noted that we applied the criteria for 

a rule that was effective July 1, 2004, to data from fiscal year 2003, when 

IRFs were operating under a different list of conditions. They stated that a

difference between the lists of conditions in these 2 years was in the 

definition of polyarthritis, which affected the circumstances under which 

Agency Comments 

and Comments from 

National Associations 

and Our Evaluation 

Page 29 GAO-05-366 Inpatient Rehabilitation Facilities 
joint replacement patients were counted under the rule. They reported 

that in fiscal year 2003, IRFs admitted Medicare joint replacement patients

who they believed were within the criteria of the rule in effect at that time,

but may not have been within the criteria of the rule that took effect July 1,

2004. In its technical comments, CMS also raised concerns about our use 

of fiscal year 2003 data. We analyzed the admission of joint replacement 

patients to IRFs and found no material change between the same time 

periods in 2003 and 2004, as noted in the report. In addition, all three 

groups supported the call for more research. The three groups also 

provided technical comments, which we incorporated where appropriate. 

We are sending copies of this report to the Administrator of CMS and 

other interested parties. We will also make copies available to others on 

request. In addition, the report will be available at no charge on the GAO 

Web site at http://www.gao.gov. 

If you or your staffs have any questions about this report, please call me at 

(202) 512-7114 or Linda T. Kohn at (202) 512-4371. The names of other staff 

members who made contributions to this report are listed in appendix V.

Marjorie Kanof 

Managing Director, Health Care 

Page 30 GAO-05-366 Inpatient Rehabilitation Facilities 
Appendix I: List of Conditions in CMS’s 75

Percent Rule

Page 31 GAO-05-366 Inpatient Rehabilitation Facilities 

Appendix I: List of Conditions in CMS’s 75 

Percent Rule 

A facility may be classified as an IRF if it can show that, during a 12-month 

period1

 at least 75 percent of all its patients, including its Medicare 

patients, required intensive rehabilitation services for the treatment of one 

or more of the following conditions:2

1. Stroke. 

2. Spinal cord injury. 

3. Congenital deformity. 

4. Amputation. 

5. Major multiple trauma. 

6. Fracture of femur (hip fracture). 

7. Brain injury. 

8. Neurological disorders (including multiple sclerosis, motor neuron 

diseases, polyneuropathy, muscular dystrophy, and Parkinson’s 

disease). 

9. Burns. 

10. Active, polyarticular rheumatoid arthritis, psoriatic arthritis, and 

seronegative arthropathies resulting in significant functional 

impairment of ambulation and other activities of daily living that have 

not improved after an appropriate, aggressive, and sustained course of 

outpatient therapy services or services in other less intensive

rehabilitation settings immediately preceding the inpatient 

rehabilitation admission or that result from a systemic disease 

activation immediately before admission, but have the potential to 

improve with more intensive rehabilitation. 

11. Systemic vasculidities with joint inflammation, resulting in significant 

functional impairment of ambulation and other activities of daily living 

that have not improved after an appropriate, aggressive, and sustained 

course of outpatient therapy services or services in other less intensive 

 1

The time period is defined by CMS or the CMS contractor. 

2

See 42 C.F.R. §412.23(b)(2)(iii) (2004). 
Appendix I: List of Conditions in CMS’s 75

Percent Rule

rehabilitation settings immediately preceding the inpatient 

rehabilitation admission or that result from a systemic disease 

activation immediately before admission, but have the potential to 

improve with more intensive rehabilitation. 

12. Severe or advanced osteoarthritis (osteoarthritis or degenerative joint 

disease) involving two or more major weight bearing joints (elbow, 

shoulders, hips, or knees, but not counting a joint with a prosthesis) 

with joint deformity and substantial loss of range of motion, atrophy of 

muscles surrounding the joint, significant functional impairment of 

ambulation and other activities of daily living that have not improved 

after the patient has participated in an appropriate, aggressive, and 

sustained course of outpatient therapy services or services in other 

less intensive rehabilitation settings immediately preceding the 

inpatient rehabilitation admission but have the potential to improve 

with more intensive rehabilitation. (A joint replaced by a prosthesis no 

longer is considered to have osteoarthritis, or other arthritis, even

though this condition was the reason for the joint replacement.) 

13. Knee or hip joint replacement, or both, during an acute hospitalization 

immediately preceding the inpatient rehabilitation stay and also meet 

one or more of the following specific criteria: 

a. The patient underwent bilateral knee or bilateral hip joint 

replacement surgery during the acute hospital admission 

immediately preceding the IRF admission. 

b. The patient is extremely obese, with a body mass index of at least 

50 at the time of admission to the IRF. 

c. The patient is age 85 or older at the time of admission to the IRF. 

Page 32 GAO-05-366 Inpatient Rehabilitation Facilities 
Appendix II: Scope and Methodology 

Page 33 GAO-05-366 Inpatient Rehabilitation Facilities 

Appendix II: Scope and Methodology 

In undertaking this work, we analyzed data on Medicare patients admitted 

to inpatient rehabilitation facilities (IRF) and also interviewed a wide 

variety of experts in the field to obtain various perspectives. We used 

several different sources of data, including data from the Centers for 

Medicare & Medicaid Services (CMS) about Medicare patients admitted to 

IRFs; interviews with officials at IRFs, fiscal intermediaries (FI), CMS 

regional offices, and private insurers; a 1-day meeting of clinical experts in

the field of physical medicine and rehabilitation; and interviews with other 

clinical and nonclinical experts and researchers in the field of

rehabilitation as well as officials from professional associations of various 

disciplines involved in inpatient rehabilitation. In total, during this 

engagement, we spoke with 106 individuals, of whom 65 were clinicians. 

We conducted our work from May 2004 through April 2005 in accordance 

with generally accepted government auditing standards. 

To identify the conditions that IRF patients have, we obtained from CMS 

the Inpatient Rehabilitation Facility—Patient Assessment Instrument (IRFPAI) records for all IRF admissions of Medicare patients for fiscal year 

2003 (October 1, 2002, to September 30, 2003), which have data on patient

age and sex, impairment group code and case-mix group (CMG) 

classification, and comorbid conditions. To assess whether individual 

patients were considered to have 1 of the 13 conditions defined by the list 

of conditions in CMS’s 75 percent rule, we applied the criteria laid out in

CMS’s Medicare Claims Processing Manual.

1

 This document lists the 

specific impairment group codes and ICD-9-CM diagnostic codes for 

comorbid conditions entered into the patient’s IRF-PAI record that were 

used to identify patients who belonged in the 13 conditions.2

 We 

conducted our analyses on Medicare patients only because CMS records 

contained data on the largest number of IRFs and the majority of patients

in IRFs are covered by Medicare. Prior work by RAND found that the 

percentage of Medicare patients with the conditions on the list in the rule 

was a good predictor of the percentage of total patients in the conditions

on the list in the rule.3

 We analyzed these data at the patient level to 

 1

CMS, “Medicare Claims Processing,” CMS Manual System, pub. 100-04, Transmittal 347

(Baltimore, Md.: Oct. 29, 2004). 

2

The procedure described by CMS counts comorbidities listed either as an etiologic 

diagnosis or as a comorbid condition entered on the IRF-PAI form. We followed the 

procedures CMS provided to FIs for them to presumptively verify compliance. 

3

See Grace M. Carter, O. Hayden, et al., “Case Mix Certification Rule for Inpatient 

Rehabilitation Facilities,” DRU-2981-CMS (Santa Monica, Ca.: May 2003). 
Appendix II: Scope and Methodology 

compare compliance with the rule across impairment groups. To permit a 

discrete assignment of each patient to one impairment group, we gave 

priority to the impairment group code designated at admission.4

 To assess 

the extent to which Medicare patients in IRFs with joint replacements had

comorbidities, we examined their distribution among the four payment 

tiers assigned under the prospective payment system for IRFs. The 

assigned CMG in the IRF-PAI data set includes a letter prefix that indicates

that the patient either had no comorbidities related to the cost of 

providing inpatient rehabilitation or had one or more comorbidities 

expected to have a low, medium, or high impact on those costs. We 

calculated the proportion of joint replacement patients that fell into the 

no-comorbidity group, both overall and within each of the six joint 

replacement CMGs. To do our supplementary analysis on a sample of 2004 

data, we compared the proportion of Medicare patients admitted to an IRF 

whose primary condition was joint replacement from July through 

December 2003 to the proportion of such patients from July through 

December 2004, using data from IRF-PAI records. We computed the 

proportion of Medicare patients admitted to IRFs that were joint 

replacement patients, ranked the facilities according to the proportion of 

Medicare joint replacement patients in 2003, and calculated the difference 

across the two time periods. 

To determine the number of IRFs that met the requirements of the 

75 percent rule, we aggregated Medicare patients treated at the same IRF 

and calculated the total percentage of each IRF’s patients that were 

admitted with a primary condition or a comorbid condition on the list in 

the rule. We examined the distribution of compliance levels across IRFs, 

applying the different thresholds that the rule phases in over several years,

but we did not assess the appropriateness of any threshold level. To 

determine whether any IRFs had ever been declassified based on failure to 

comply with the 75 percent rule, we interviewed officials at CMS’s 10 

regional offices. 

Our analyses rely on Medicare billing information, and we determined that 

these data were sufficiently reliable for this analysis. We followed the 

instructions CMS provided to FIs to “presumptively verify compliance” 

using the list of codes in the Medicare Claims Processing Manual to 

 4

Patients may have a different impairment group code assigned at discharge (both are 

recorded in the IRF-PAI data set), but the IRF prospective payment from Medicare is based

on the admission impairment group code. 

Page 34 GAO-05-366 Inpatient Rehabilitation Facilities 
Appendix II: Scope and Methodology 

estimate how many patients have one of the conditions on the list in the 

rule as recorded on the IRF-PAI instrument. FIs use the list of codes in this

manual as a first step to estimate how many patients have one of the 

conditions on the list in the rule. To assess the reliability of the IRF-PAI 

records for our data analyses, we interviewed two researchers who had 

experience using the IRF-PAI data set, and performed electronic testing of 

the required data elements, including impairment codes, comorbid 

conditions, and admission dates. We examined the IRF-PAI data set and

found few missing or invalid entries for the variables we used. We did not 

compare the information entered on the IRF-PAI to medical records. All of 

these analyses encompassed services provided in facilities located in the 

50 states and the District of Columbia. 

To determine how IRFs assess patients for admission and how CMS 

reviews admission decisions for medical necessity, we interviewed the 

medical directors at 12 IRFs and the medical director or designee at 10 FIs.

We used data from the RAND Corporation’s “Case Mix Certification Rule 

for Inpatient Rehabilitation Facilities” (2003), prepared under contract to 

CMS, to select our respondents out of a total of more than 1,200 IRFs. 

RAND had analyzed the level of compliance of each IRF with the rule 

using the 10 conditions on the list at that time. We used RAND data to 

create a sampling frame to select IRFs to interview, but we did not rely on

RAND’s data for any findings or conclusions. We matched facilities with 

data from the IRF-PAI to identify them and sorted them by zip code 

according to the Northeast, Midwest, South, and West regions as defined 

by the U.S. Census Bureau. Within each region, we selected IRFs with a 

high, median, and low level of compliance with the 75 percent rule. We 

identified the median complier in each region, and if necessary adjusted

the selection of IRFs to (1) avoid interviewing more than one IRF in the 

same state and (2) provide a selection of for-profit, freestanding, and rural

facilities. If a selected provider was unwilling or unable to participate in 

the interview, we substituted the IRF next on the list that was most similar 

in characteristics to the facility originally chosen. We conducted a 

structured interview with the medical director of each facility, and 

provided unstructured time at the end of the interview for the respondent

to raise other issues. For nonclinical questions that the medical directors 

were unable to answer, we spoke to a member of the administrative team.

We identified the areas covered in the interviews through background 

interviews with professional associations, advocacy groups, CMS, and 

experts in inpatient rehabilitation and health policy research, and 

pretested the interview protocol with two IRFs not included in our sample. 

Page 35 GAO-05-366 Inpatient Rehabilitation Facilities 
Appendix II: Scope and Methodology 

The FIs we selected to interview were those that serviced the states in 

which the IRFs we selected were located. Because some FIs serviced more

than one state, our selection yielded 10 FIs (out of a total of 30). To 

facilitate our interviews, we spoke with the appropriate CMS regional 

office, which notified an official at each FI about this engagement. We 

conducted a structured interview with the medical director or designee 

regarding (1) appropriate patients for inpatient rehabilitation, (2) the list 

of conditions in the rule, (3) assessment for compliance, and (4) reviews 

for medical necessity. We pretested the interview protocol with three FIs 

that were not included in our sample. We also spoke with FI officials who 

had been identified as being interested in inpatient rehabilitation. All FI 

officials had the opportunity to discuss issues other than those we 

highlighted. To compare Medicare’s approach to the approaches of other 

payers, we selected a convenience sample of three insurers and one 

regional managed care organization to learn about their activities 

regarding inpatient rehabilitation. We interviewed officials from these 

payers, asking how they identified facilities for intensive inpatient 

rehabilitation, and how they identified appropriate patients for such 

services. 

Our interviews do not represent all concerns or experiences of inpatient 

rehabilitation facilities, FIs, or private payers, and the answers to the 

structured interviews were not restricted to Medicare patients. Because 

we were directed to examine the 75 percent rule and not directly to 

evaluate the relative value of inpatient rehabilitation, we did not ask 

questions about the full spectrum of postacute care. 

To evaluate the approach of using a list of conditions in the 75 percent rule 

to classify IRFs, we contracted with the Institute of Medicine (IOM) of The 

National Academies to convene a 1-day meeting of clinical experts broadly 

representative of the field of physical medicine and rehabilitation. We 

identified for IOM the categories of participants preferred at the meeting. 

To identify specific participants, IOM obtained input from us, IOM 

members, advocacy groups, and individual experts in the field. It identified 

a pool of participants according to the preferred categories. In total, 14 

experts participated: 4 practicing physicians, 2 physical therapists, 2 

occupational therapists, 1 speech therapist, 2 nurses, 1 

physician/researcher in postacute care, 1 physician/researcher from a 

research institute, and 1 health services researcher. The meeting was 

facilitated by a physician/researcher with expertise in Medicare payment 

policy. Invitations to participate were issued by IOM. Participants were 

invited as individual experts, not as organizational representatives. The

group was not asked to reach consensus on any issues, and IOM was not 

Page 36 GAO-05-366 Inpatient Rehabilitation Facilities 
Appendix II: Scope and Methodology 

asked to produce or publish a report of the meeting. We observed the 

meeting and subsequently reviewed the transcript and audiotape of the 

meeting, listed the individual comments made during the meeting, and 

grouped the comments around a limited number of themes. The comments 

from the meeting of the experts IOM convened represent their individual 

statements and not a consensus of the group as a whole. In convening the 

meeting, IOM was not able to get participation of clinical experts who 

were not employed in IRFs (such as referring physicians or therapists in 

acute care settings) and a private payer. The comments of participants 

should not be interpreted to represent the views of IOM or all clinical

experts in the field of rehabilitation. 

To examine the proportion of Medicare patients discharged from hospitals 

with different diagnosis-related groups (DRG) who went to IRFs for 

postacute care, we obtained CMS’s Medicare Provider Analysis and 

Review (MEDPAR) file that contained all Medicare inpatient discharges 

from both acute care hospitals and IRFs for fiscal year 2003. This file 

provided information on patient admission and discharge dates from acute 

care hospitals and rehabilitation facilities along with the DRG assigned for 

each acute care stay. We identified all the patients who entered IRFs 

within 30 days of their hospital discharge during fiscal year 2003 and 

calculated the frequencies for each DRG among them. We then selected 

the 19 DRGs that represented at least 1 percent of IRF admissions from 

acute care hospitals. Next we determined the total number of hospital 

discharges with those DRGs and computed the proportion of patients in 

each of these DRGs that were admitted to an IRF within 30 days. The 

analysis of acute hospital discharges required that we use the separate 

MEDPAR file that had information on inpatient DRGs and on patients who 

did not enter IRFs as well as those who did. The MEDPAR analysis may 

therefore reflect a slightly different IRF patient population from that 

reflected in the analyses conducted with the IRF-PAI data set. Apparent 

variations in the admission dates recorded for IRF patients in the two sets 

of data prevented us from combining data from each into one consolidated 

data set. 

Page 37 GAO-05-366 Inpatient Rehabilitation Facilities 
Appendix III: Rates of IRF Medicare 

Admissions from Hospitals by Top 19 DRGs of

Patients Admitted to IRFs, Fiscal Year 2003 

Page 38 GAO-05-366 Inpatient Rehabilitation Facilities

Appendix III: Rates of IRF Medicare 

Admissions from Hospitals by Top 19 DRGs 

of Patients Admitted to IRFs, Fiscal Year 2003

DRG Medical condition or procedure described by DRGa

Number of 

total hospital 

discharges

Number of IRF 

admissions

from hospitals

Percentage of total 

hospital 

discharges 

admitted to IRFs

209 Unilateral joint replacement of lower extremity 428,518 124,754 29.1

14,15 Strokeb 325,361 54,433 16.7

210, 211 Hip or femur proceduresb except joint replacement 155,366 30,381 19.6

127 Heart failure/shock 695,349 14,863 2.1

243 Medical back problems 100,994 8,970 8.9

89 Pneumonia and pleurisy 521,432 8,591 1.6

88 Chronic obstructive pulmonary disease 398,066 7,427 1.9

113 Amputation for circulatory disorders except upper limb and toe 38,656 7,200 18.6

1 Craniotomy 32,916 6,969 21.2

471 Bilateral joint replacement of lower extremity 14,420 6,941 48.1

497 Spinal fusion except cervical with complication and comorbidity 25,714 6,613 25.7

107 Coronary artery bypass surgery 78,557 6,584 8.4

478 Vascular operations except heart 110,609 5,881 5.3

236 Hip or pelvis fracture 42,231 5,863 13.9

296 Nutritional and metabolic disorders 262,387 5,588 2.1

121 Heart attack 164,548 5,440 3.3

499 Back and neck procedures except spinal fusion 37,590 5,366 14.3

Source: GAO analysis of CMS MEDPAR data.

a

For some DRG descriptions, we reworded the DRG definition for simplicity. We selected all DRGs 

that represented at least 1 percent of IRF admissions from hospitals in fiscal year 2003. These 19

DRGs accounted for 59 percent of all such admissions. Over 94 percent of patients admitted to IRFs

in fiscal year 2003 came from acute care hospitals, while about 3 percent came from the community 

and 1 percent from SNFs. DRGs only partially coincide with the impairment group codes used to 

categorize patients admitted to IRFs. For example, patients with hip fractures are included in DRG 

209 or 471 if they received one or more joint replacements. Hip fractures treated with other surgical 

procedures are coded under DRG 210 or 211, and those treated medically are in DRG 236. 

b

Contains two DRGs. 
Appendix IV: Comments from the Centers for Medicare &

Medicaid Services 

Page 39 GAO-05-366 Inpatient Rehabilitation Facilities

Appendix IV: Comments from the Centers for 

Medicare & Medicaid Services 
Appendix IV: Comments from the Centers for Medicare &

Medicaid Services 

Page 40 GAO-05-366 Inpatient Rehabilitation Facilities
Appendix IV: Comments from the Centers for Medicare &

Medicaid Services 

Page 41 GAO-05-366 Inpatient Rehabilitation Facilities
Appendix IV: Comments from the Centers for Medicare &

Medicaid Services 

Page 42 GAO-05-366 Inpatient Rehabilitation Facilities
Appendix V: GAO Contact and Staff Acknowledgments

Page 43 GAO-05-366 Inpatient Rehabilitation Facilities 

Appendix V: GAO Contact and Staff 

Acknowledgments 

GAO Contact Linda T. Kohn, (202) 512-4371 

Manuel Buentello, Behn Kelly, Ba Lin, Eric Peterson, Kristi Peterson, and 

Roseanne Price made key contributions to this report. Acknowledgments 

(290351) 
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Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, D.C. 20548 

Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

Obtaining Copies of 

GAO Reports and 

Testimony

Order by Mail or Phone 

To Report Fraud,

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Public Affairs 

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