Futureproofing: How LTACHs Can Survive and Even Thrive After Medicare Reform

Medicare accounts for an increasingly large portion of all long-term acute care hospital (LTACH) discharges, with current estimates indicating that approximately two thirds of all LTACH discharges are Medicare discharges. Between 2004 and 2013, Medicare spending on patients in LTACHs increased from $3.7 billion to $5.5 billion.

These rising costs have not translated to improvements in patient outcomes. For example, though Medicare pays for 2,000 days of post-acute care (PAC) services for every 1,000 patients, roughly one fifth require readmission to hospitals, often for preventable conditions. By contrast, Kaiser Permanente averages just 600 days of PAC services per 1,000 patients, and enjoys much lower readmission rates.


Medicare Reform

In an effort to contain these rising costs, Medicare dramatically altered its LTACH payment model with the Pathway for SGR Reform Act of 2013. This change, implemented in fiscal year 2016, aims to reduce the payment rate for certain discharges and will significantly impact LTACHs and the healthcare industry as a whole.

The most important change is the shift from a prospective payment system (PPS) toward a “site-neutral” payment model. Rather than prospectively defining reimbursement for groupings of patients with similar characteristics, Medicare will calculate payments as the lesser of two rates based on tighter patient characteristic criteria. The resulting payments will be similar to what Medicare pays in the acute care setting, and will either be calculated as an inpatient PPS (IPPS) comparable per diem amount, or the estimated costs of the case.


Bracing For Change

In an attempt to mitigate negative effects on the industry, the rollout of these changes has been gradual. The full force of the changes are expected to hit LTACHs this year, and will have serious implications for LTACHs across the country, particularly those in the New England and West South Central regions. Research by Berkeley Research Group indicates that LTACHs in Texas, Louisiana, Oklahoma, and Mississippi will see a 19% drop in Medicare payments, while New England states could see drops as high as 38%.

A recent report by Standard & Poor offers a bleaker outlook: “We expect a material portion of the approximately 435 LTACH facilities nationwide to close over the next few years amid the phase-in of lower reimbursement.” With the second phase of payment changes still on schedule to roll out in 2018/2019, we must begin asking ourselves if we are truly prepared.


Futureproofing the LTACH Industry

There are many strategies LTACHs could employ to offset the effects of the recent Medicare reform, such as

  • Changing year-end reporting dates
  • Diversifying through acquisitions
  • Portfolio optimization
  • Cutting costs
  • Shutting down unprofitable facilities
  • Attracting patients still eligible for the attractive LTAC-specific rate.

These strategies help optimize your census to maximize profitability.

Another strategy that can positively affect the survival of LTACHs is one you’ve likely already heard of: dedicated care coordination from pre-admission to post-discharge.

Historically, LTACHs have been slow to improve care coordination and reduce readmissions, content to wait for the emergence of third-party companies that will specialize in care coordination… for a hefty fee. This is a mistake. Only aggressive action towards in-house care coordination will ensure the long-term survival of your business while significantly improving outcomes for your patients.

To find out how to build a strategy for your LTACH, be sure to read the second installment in theLTACH Futureproofing series!