Published April 20, 2023

Medicare Payment Primers: The Inpatient Rehabilitation Facility Prospective Payment System

This Insight is part of our Medicare Payment Primers Series.

Inpatient rehabilitation facilities (IRFs), either freestanding rehabilitation hospitals or distinct rehabilitation unit(s) of an inpatient acute facility, provide intensive rehabilitative care to patients following surgery, illness, or injury.

For admission to an IRF following discharge from an acute facility, a patient must be able to tolerate and benefit from intensive therapy and must have a condition that requires frequent supervision by a rehabilitation physician. Additionally, the patient must be sufficiently stable to actively participate in the program – intensive therapy typically consisting of three hours of therapy each day for at least five days per week – and must require active and ongoing therapy in at least two modalities, one of which must be physical or occupational therapy.

Under Medicare coverage guidelines, no less than 60 percent of the total patient population in an IRF must have a primary diagnosis or comorbidity that falls into one of 13 conditions that typically require intensive rehabilitation therapy.

The 13 qualifying medical conditions established by the Centers for Medicare & Medicaid Services (CMS) are these:

  1. Stroke
  2. Spinal cord injury
  3. Congenital deformity
  4. Amputation
  5. Major multiple trauma
  6. Hip fracture
  7. Brain injury
  8. Certain neurological conditions (e.g., multiple sclerosis, motor neuron diseases, polyneuropathy, muscular dystrophy, Parkinson’s disease, etc.)
  9. Burns
  10. Three arthritis conditions (i.e., polyarticular, psoriatic, and seronegative) for which appropriate, aggressive, and sustained outpatient therapy has failed
  11. Systemic vasculidities with joint inflammation
  12. Severe or advanced osteoarthritis
  13. Hip or knee replacement when it is bilateral, when the patient’s body mass index is greater than or equal to 50, or when the patient is age 85 or older

This “60 percent” rule is intended to distinguish IRFs from acute care hospitals. If an IRF cannot meet this compliance threshold, it will be paid under the inpatient prospective payment system (IPPS).

Read additional information on the coverage criteria.  

Discussion

Base Rate 

Payments under the IRF PPS encompass inpatient costs of furnishing covered rehabilitation services. Costs covered by the base rate include routine operating, ancillary, and capital costs. IRFs may receive additional reimbursement for indirect medical education costs, costs of approved nursing and allied health education activities, Medicare bad debts, and other services or items outside the scope of the IRF PPS.

The IRF PPS uses a pre-determined payment rate for the various services provided during a patient stay. This pre-determined rate is referred to as the IRF base rate and is adjusted annually using an IRF-specific market basket index, which reflects increases in the cost of goods and services IRFs buy to produce patient care.

Facility-Specific Adjustments

Differences in Area Wages: The IRF PPS uses the same area wage index established for a market under the IPPS, without regard to geographic reclassification or the rural floor (see our article, Medicare Payment Primers: The Fundamentals of Prospective Payment System for additional information.) The IRF base rate is separated into labor-related and non-labor-related portions. Only the labor-related portion is adjusted by the wage index. Currently about 73 percent of the standardized amount is wage-index adjusted.

Indirect Medical Education (IME): Rehabilitation hospitals/units with a residency program receive add-on payments to reflect the additional indirect costs associated with operating an approved graduate medical education (GME) program. The add-on payment to the case-mix adjusted episodic payment is calculated based on the number of interns and residents in the program in relation to the average daily census, raised to the 1.0163 power, and is shown as

 

This payment is different from the payment an IRF may receive for the actual operation of an approved GME program. The payment for direct medical education costs is included in a hospital’s overall direct medical education reimbursement because­e the residents are included in the determination of allowable residents, and the Medicare and total rehabilitation unit days are included in the determination of the Medicare load factor percentage.

Disproportionate Share Hospital (DSH): Rehabilitation hospitals/units treating a disproportionate share of low-income patients receive additional payments intended to partially offset revenue losses from furnishing uncompensated care. For IRFs, this factor is known as the low-income percentage (LIP). The LIP is calculated based on the combined share of Medicare days furnished to beneficiaries in the IRF eligible for Supplemental Security Income (SSI) benefits and the share of all patient days furnished to Medicaid patients not covered by Medicare. The calculation uses an SSI percentage specific to the IRF hospital or unit data.The additional payment is calculated as

Rural Providers: Based on analysis that shows rehabilitation hospitals/units located in a rural area have fewer cases, longer length of stay (LOS), and higher average costs, rural IRFs receive a 14.9 percent increase in their base rate.

Quality Reporting Program (QRP): The IRF QRP requires IRFs to submit quality data on selected measures for all patients, regardless of payer. Providers failing to supply this information receive a two-percentage-point reduction to the market basket update for all claims filed during the fiscal year.

Read the QRP selected measures.

Patient/Case-Specific Adjustments

IRF Patient Assessment Instrument (IRF PAI): The IRF PAI is the instrument IRF providers use to collect patient assessment data for quality measure calculation and payment determination in accordance with the IRF QRP. Completion of the IRF PAI is required for each Medicare Part A fee-for-service and Medicare Part C patient treated in the IRF. The IRF PAI is completed both at admission and on discharge/transfer, and the IRF PAI information is then used to classify (or group) patients into distinct categories for payment purposes. For the collection period beginning in calendar year 2023, the IRF PAI will be required for all IRF patients, not just those covered under Medicare.

Case-Mix Groups (CMGs): Initially, a rehabilitation patient is assigned to a rehabilitation impairment category based on the primary IRF admitting diagnosis. Then, based on the patient’s functional status (motor and cognitive scores) and age, the case is assigned to a case-mix group, which is further refined to one of four tiers based on certain comorbidities found to increase the cost of care. All patients with an LOS <3 days are grouped into a single CMG (CMG 5001), regardless of diagnosis, age, level of function, or presence of comorbidities.

For each of the CMGs, CMS has developed relative weighting factors to account for a patient’s clinical characteristics and expected resource needs. The weighting factors account for the relative difference in resource use across all CMGs. A case-mix weight is calculated for each CMG proportional to the resources needed by an average IRF patient grouping into the same CMG. The CMG weights are updated annually corresponding to the federal fiscal year.

Outliers: In addition to the base IRF PPS payment, IRFs can receive an outlier payment for high-cost patients. The cost of the case must exceed the sum of the IRF’s usual payment for the specific CMG plus a fixed-loss threshold (adjusted annually). If a case is determined to be an outlier, the claim is paid an amount in addition to the IRF rate of 80 percent of the estimated cost of the case and the outlier threshold. High-cost outliers are funded by reducing the base payment amount for all IRFs by an amount estimated to equal 3 percent of total IRF spending.

Case costs are determined using a cost-to-charge ratio – the claim-specific charges multiplied by the facility’s overall cost-to-charge ratio from the most recent cost report (filed or settled). The outlier pool is required by legislation to equal an estimated 3 percent of the total expected IRF spending for the year.

Transfers:  IRFs receive adjusted payments in instances in which the patient is transferred to another institutional setting with an IRF length of stay less than the average LOS for the CMG.

Interrupted stays: IRFs receive a single payment amount for those cases in which a patient is discharged from the facility and returns to the same IRF within three consecutive calendar days.

Resources

CMS Inpatient Rehabilitation Facility PPS

CFR 2009 Title 42, Section 412-622 (PDF)

This Insight is part of our Medicare Payment Primers Series. If you have questions about reimbursement, strategy and transactions, compliance, or valuation, one of our executive contacts would be happy to assist. You may e-mail them below or call (800) 270-9629.

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