Published June 2, 2023

Medicare Payment Primers: The Long-Term Care Hospital Prospective Payment System

This Insight is part of our Medicare Payment Primers Series.

Long-term care hospitals (LTCHs) are certified acute-care hospitals that treat medically complex patients who require longer hospital stays than those typically provided by short-term acute care hospitals reimbursed under the Inpatient Prospective Payment System (IPPS). To qualify as an LTCH for Medicare payment, a facility (either freestanding or co-located with another hospital) must meet Medicare’s Hospital Conditions of Participation and maintain an average length of stay of more than 25 days.


Base Rate 

The base rate used to calculate payments under the LTCH Prospective Payment System (PPS) is called the standard federal payment rate. It is updated annually on a federal fiscal year basis using the change in cost from one year to the next for LTCH services. This adjustment is referred to as the market basket update. For LTCH services, a single rate applies to both the inpatient operating and capital-related costs of care.

LTCH services furnished to Medicare beneficiaries are paid under the standard federal payment rate if the beneficiary is

  • Admitted directly from an IPPS hospital at which the beneficiary spent at least three days in an intensive or coronary care unit and does not receive psychiatric or rehabilitation Medicare Severity Long-term Care Diagnosis Related Groups (MS-LTC-DRG) LTCH care or
  • Admitted directly from an IPPS hospital, receives at least 96 hours of LTCH respiratory ventilation services, and does not receive psychiatric or rehabilitation MS-LTC-DRG LTCH care

Cases that do not meet the requirements for payment under the standard federal payment rate are paid at a site-neutral payment rate calculated as the lower of these options: 

  • An IPPS equivalent to per diem amount
  • Estimated case costs calculated by multiplying allowable charges by the LTCH’s cost-to-charge ratio

Facility-Specific Adjustments

Differences in Area Wages: The LTCH PPS uses the same area wage index established for a market under the IPPS, excluding any adjustments due to geographic reclassification or the rural floor (see our article Medicare Payment Primers: The Fundamentals of Prospective Payment Systems for additional information). The base rate is divided into a labor-related amount and a nonlabor-related amount. 

LTCH Quality Reporting Program (QRP): Under the LTCH QRP, an LTCH that does not meet specified reporting requirements on selected quality measures receives a 2 percentage point reduction in payment calculated by applying a reporting factor of 0.980 to the LTCH PPS standard federal payment rate update. There is no equivalent to IPPS hospitals’ Promoting Interoperability program for LTCHs.

Read the current LTCH QRP measures.

Patient/Case-Specific Adjustments

Medicare Severity Long-term Care Diagnosis Related Groups (MS-LTC-DRG): Under the LTCH PPS, patients are classified according to diagnoses and procedures using the same groupings developed for IPPS but with DRG weights specific to the LTCH setting. Patients are grouped into an MS-LTC-DRG based on principal diagnosis, secondary diagnoses, procedures, age, sex, and discharge status. (see our article Medicare Payment Primers: The Fundamentals of Prospective Payment Systems for additional information).

Interrupted Stays: An interrupted stay occurs when an LTCH discharges a patient to another facility (i.e., an IPPS hospital, inpatient rehabilitation facility (IRF), skilled nursing facility (SNF), or swing bed) who is then readmitted to the same LTCH within a specified period. The applicable times away from the LTCH, known as a fixed-day period, are as follows:

  • Discharge to IPPS hospital: nine days
  • Discharge to IRF: 27 days
  • Discharge to SNF or swing bed: 45 days

Interrupted stays are paid as a single discharge. In addition, if the interrupted stay lasts for three days or less, the LTCH is responsible for paying for the services received at the short-term acute care hospital, IRF, or SNF.

The interrupted stay policy also applies when a patient has an intervening stay at home for up to three days without the delivery of additional tests, treatment, or care and is then readmitted to the LTCH within three days. In this case, the days away from the LTCH are not included in the total length of stay (LOS). If the patient receives treatment on any of the three days for which the LTCH is responsible under arrangements, the days are included in the total LOS.

Outliers: Under the LTCH PPS, CMS makes high-cost outlier payments for cases that are extraordinarily costly and makes lower short-stay outlier payments for cases with shorter-than-average lengths of stay.

Cost Outliers: The cost outlier policy adjusts the applicable LTCH payment rate (site-neutral payment rate or standard federal payment rate) for those stays with costs exceeding the cost of typical cases with similar case mix. To qualify as a cost outlier, the estimated treatment costs for the claim must exceed the applicable LTCH PPS payment plus an established cost outlier threshold, called the fixed loss amount. Payment for cost outliers equals 80 percent of the case costs above the fixed loss amount.

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). High-cost outliers are funded by reducing the base payment amount for all facilities paid under the LTCH PPS by an amount estimated to equal to 7.975 percent.

Short-stay Outliers: The short-stay outlier (SSO) policy is intended to assure that claims without a full episode of care are paid correctly. SSO payment adjustments apply only to the standard federal payment rate discharges (not those paid as site-neutral) and when the patient:

      • Discharges to another facility due to the need for urgent treatment or more intensive rehabilitation
      • No longer needs an LTCH-level of care and discharges to another facility
      • Discharges to home
      • Dies within the first several days of the LTCH admission
      • Exhausts LTCH benefits during the stay

The SSO adjustment is applied when the patient’s length of stay ranges from one day to five-sixths of the average length of stay (capped at 25 days) for the assigned MS-LTC-DRG for the case. Cases with an LOS greater than five-sixths of the average LOS are paid at the full standard federal payment rate.

Short-stay cases are reimbursed at a blended rate based on the applicable MS-DRG rate under the IPPS payment methodology and 120 percent of the MS-LTC-DRG per diem amount up to the full LTCH PPS standard federal payment rate.


CMS Long-Term Care Hospital PPS

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.

Executive Contact

Interested in Learning More?

Sign Up for Our Insights, Including COVID-19 Bulletins!

    Select Your Subscriptions