United States: CMS Publishes Final Changes to Inpatient Rehabilitation Facility 75% Rule

On May 7, 2004, the Centers for Medicare & Medicaid Services ("CMS") published a final rule revising the classification criterion, commonly referred to as the "75% Rule," used to determine whether hospitals can be considered inpatient rehabilitation facilities ("IRFs") for purposes of Medicare payment.¹ See 69 Fed. Reg. 25,752 (the "Final Rule"). The Final Rule modifies and expands from 10 to 13 the medical conditions used to determine whether a hospital qualifies as an IRF. In addition, CMS has lowered the compliance threshold percentage effective for cost reporting periods beginning on or after July 1, 2004 and established a three-year timeframe within which that threshold reverts to 75%. The agency also has finalized the conditions under which comorbidities can be used to verify compliance with the 75% Rule. Finally, in the Final Rule, CMS provides additional guidance concerning the timeframe that will be used to determine compliance with the 75% Rule.

This memorandum summarizes the major provisions of the Final Rule, focusing on differences between the Final Rule and the September 9, 2003 proposed rule. See 68 Fed. Reg. 53270 (the "Proposed Rule"). If you require additional details regarding this rulemaking, please do not hesitate to contact us.

To qualify for Medicare payment as an IRF, facilities must satisfy the regulatory requirements set forth at 42 C.F.R. §412.23(b)(2). Among those standards is a requirement for the facility to demonstrate that during its most recent 12-month cost reporting period, the facility served an inpatient population of whom at least 75 percent required services for the treatment of one or more of ten conditions: stroke; spinal cord injury; congenital deformity; amputation; major multiple trauma; fracture of femur (hip fracture); brain injury; polyarthritis (including rheumatoid arthritis); neurological disorders (including multiple sclerosis; motor neuron diseases; polyneuropathy; muscular dystrophy; and Parkinson’s disease); and burns. Qualified IRFs are deemed excluded from the acute care hospital prospective payment system and paid under the IRF-specific prospective payment system (the "IRF PPS").

The 75% Rule was first implemented in 1983, and there have been relatively few developments concerning its application until the past several years. In Spring 2002, CMS initiated a review of how fiscal intermediaries ("FIs") were implementing and enforcing the 75% Rule, as well as industry compliance with the standard. The agency found that FIs were applying the rule inconsistently and that industry compliance with the rule was low. As a result, on June 7, 2002, CMS instituted a moratorium on enforcement of the 75% Rule until it could conduct an examination and determine whether the regulations should be changed.

On May 16, 2003, CMS issued its proposed FY 2004 update to the IRF PPS. While CMS did not propose to change the 75% Rule, the agency did put the provider community on notice that it was authorizing FIs to resume enforcement of the 75% Rule for cost reporting periods beginning on or after October 1, 2003. 68 Fed. Reg. 26786, 26794. Despite its stated intention to resume enforcement, CMS noted in the final rule updating the IRF PPS that, based upon the continued high level of interest concerning the 75% Rule, CMS had elected to revisit its policies, with the implication that enforcement of the rule would be delayed until proposed changes could be issued. 68 Fed. Reg. 45673, 45676 (Aug. 1, 2003).

In the Proposed Rule, issued on September 9, 2003, CMS described several significant changes to the requirements and application of the 75% rule due to its concerns about inconsistent implementation and enforcement. 68 Fed. Reg. at 53275. First, CMS proposed to change the 75% rule to a 65% rule for a 3-year period commencing with the effective date of the change. Second, CMS proposed to replace the "polyarthritis" condition with three more clearly defined arthritis-related conditions; however, the agency refused to include joint replacement, cardiac and certain other conditions in the list. Third, the agency proposed to permit certain patients with comorbidities to be counted toward the 65% threshold. Fourth, CMS proposed to shift the evaluation period from the previous 12-month cost reporting period to the "most recent, consecutive, and appropriate 12-month period." When the Proposed Rule was published, a final rule was anticipated on January 1, 2004.

The Congressional Conference Reports for the Medicare Prescription Drug, Improvement and Modernization Act, signed by President Bush on December 8, 2003 ("Medicare Modernization Act" or "MMA") (Public Law 108-173), and the Consolidated Appropriations Act of 2004, signed by Bush on January 23, 2004 ("CAA") (Public Law 108-199), included statements expressing concern that CMS’s proposed changes to the 75% Rule would adversely impact access to IRF services. Both reports directed additional study to establish clinically appropriate standards for medical necessity and clinically appropriate qualification criteria for IRFs, and pressed CMS to delay implementation of the 75% Rule and not to accept new IRF enrollment applications until the study report was finished. The statements in the Conference Reports were not legally binding, but many expected CMS to follow their direction. Issuance of the Final Rule prior to completion of the Congressionally-recommended studies evidences the agency’s decision to proceed otherwise.

CMS received approximately 9,800 items of correspondence containing multiple comments concerning the Proposed Rule. The Final Rule reflects a number of changes from the Proposed Rule based upon the public comments; however, many of the basic principles reflected in CMS’s September 2003 proposal (e.g., exclusion of joint replacement, cardiac and other conditions from the list of qualifying conditions, temporary reduction in the compliance threshold and shifting of the compliance measuring period) remain fundamentally unchanged.

In the Proposed Rule, CMS announced its plan to change the percentage of the total IRF population used as a criterion to distinguish an IRF from an acute care hospital from 75 percent to 65 percent. Consequently, the agency also proposed to reduce the percentage of a facility’s cases that must fall within the list of proposed medical conditions to 65 percent. CMS intended this change as a way to mitigate any unintended, adverse effects on access to care resulting from its modifications to the IRF certification criteria and its toughened stance on enforcement of those standards. However, CMS proposed that the reduction in the compliance threshold would continue only for a three-year period (proposed to be for cost reporting periods starting on or after January 1, 2004 and before January 1, 2007). Absent data indicating that the compliance threshold should remain at 65 percent, the threshold would return to 75 percent at the end of the three-year period.

The Final Rule preserves the concept of reducing the compliance threshold for a temporary period, but it changes the timeframe for the reduction and incorporates a gradual phase-out mechanism. Under the Final Rule, the compliance threshold is set as follows:

During the transition period, CMS plans to analyze claims and patient data to evaluate if and how the lowering of the threshold, in addition to the other changes in the Final Rule, affected admission trends and overall IRF utilization.

In the Final Rule, CMS also agreed with commenters that it would be appropriate to adopt an administrative presumption that, if an IRF’s Medicare population satisfies the 75% Rule, the provider’s FI should presume that the IRF’s total patient population meets that compliance threshold. CMS plans to instruct FIs, however, that if an IRF’s Medicare population does not satisfy the 75% Rule, the FI should specifically calculate whether the facility’s total population meets the standard. This administrative presumption will only be available if the IRF’s Medicare population represents at least a majority of the IRF’s total population.

In the Proposed Rule, CMS proposed to remove the term "polyarthritis" from the list of qualifying conditions and to substitute the three more clearly defined arthritis-related conditions. The three new arthritis conditions were proposed as follows:

• Active, polyarticular rheumatoid arthritis, psoriatic arthritis, and seronegative arthropathies resulting in significant functional impairment of ambulation and other activities of daily living, which has 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 which results from a systemic disease activation immediately before admission, but has the potential to improve with more intensive rehabilitation.

• Systemic vasculidities with joint inflammation, resulting in significant functional impairment of ambulation and other activities of daily living, which has 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 which results from a systemic disease activation immediately before admission, but has the potential to improve with more intensive rehabilitation.

• Severe or advanced osteoarthritis (osteoarthrosis or degenerative joint disease) involving three 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.

Otherwise, the agency proposed to leave the list of qualifying conditions unchanged on the theory that the remaining conditions "are the most appropriate conditions for treatment in an IRF."

In response to comments on the Proposed Rule, CMS incorporates certain changes to the list of qualifying conditions. First, the agency is reducing from three to two the number of weight bearing joints used to determine whether a case complies with the osteoarthritis-related condition. Second, CMS is adding a new condition that includes patients who undergo knee and/or hip joint replacement during an acute hospitalization immediately preceding the IRF stay and also meet one of the following criteria:

• The patient underwent bilateral knee or hip joint replacement surgery during the acute hospitalization immediately preceding the IRF admission;

• The patient is extremely obese with a Body Mass Index of at least 50 at the time of admission to the IRF; or

• The patient considered to be "frail elderly," i.e., is age 85 or older, at the time of admission to the IRF.

Notwithstanding comments received by the agency, there are a number of aspects in which CMS refuses to incorporate further changes in the Final Rule. First, CMS rejects comments seeking to make the list of rehabilitation conditions used for purposes of IRF certification coextensive with 20 of the 21 rehabilitation impairment categories ("RICs") used for purposes of payment under the IRF PPS. As a basis, the agency explains that the process used to develop the medical conditions in 42 C.F.R. § 412.23(b)(2)(iii) was fundamentally different than that used to develop the RICs, since the latter merely sought to describe each patient being treated in an IRF without examining whether it was appropriate for the patient to be treated in that setting. CMS is, however, encouraging interested parties to conduct "scientifically sound research" demonstrating that additional diagnoses are most appropriately treated in the IRF setting.

Second, CMS refutes the notion that the polyarthritis condition had been commonly understood to include joint replacements, citing its meetings with industry representatives over the past five years in which the agency consistently expressed its position that joint replacements did not meet the polyarthritis condition used to classify IRFs. Third, CMS refused to count joints with joint replacement as counting toward the number of arthritic joints used to satisfy the osteoarthritis condition. Fourth, CMS continues its rejection of cardiac, cancer, pulmonary and pain conditions as qualifying conditions for IRF certification.

Acknowledging the continuing controversy concerning the list of condition used to classify IRFs and the relative absence of "appropriate evidence-based outcomes-oriented clinical research studies in the peer-reviewed medical literature," CMS states its plans to convene an expert panel early in the transition period. This panel will (1) based on evidence currently available, consider which are the most appropriate clinical conditions for care in IRFs, and (2) formulate a research agenda to assist in developing scientific studies to examine this question.

As part of the Proposed Rule, CMS offered two alternatives through which a hospital could be considered to be providing intensive rehabilitation services even if it did not admit a patient for one of the specified rehabilitation conditions. Under the first proposal, a case could be counted toward the compliance threshold if (a) a patient is admitted for rehabilitation for a condition not included in the qualifying list, (b) the patient also has a comorbidity that falls in one of the conditions on the qualifying list, and (c) the comorbidity has caused significant functional ability decline so that, even in the absence of the admitting condition, the patient requires intensive rehabilitation of a type unique to IRFs and that cannot be appropriately performed in another setting. Under the second alternative, CMS would permit a case to be counted toward the compliance threshold only if the patient were admitted to the IRF for postoperative care immediately following a hip or knee replacement and met conditions similar to (b) and (c) under the first alternative.

In the Final Rule, CMS adopts the first alternative above to permit cases involving comorbidities that fall within the new list of 13 qualifying conditions to meet the compliance threshold. In addition to noting that the majority of commenters supported the first methodology, CMS states its believe that this approach to counting comorbidities is more comprehensive in recognizing the types of conditions requiring intensive inpatient rehabilitation. The agency also notes that the provision to count comorbidities as meeting the compliance threshold expires for cost reporting periods beginning on or after July 1, 2007.

Under current rules, CMS requires that data from "the most recent 12-month cost reporting period" be used to determine compliance with the 75% Rule. In the Proposed Rule, the agency proposed to revise this policy to specify that data from the most recent, consecutive, and appropriate 12- month period of time would be used to assess compliance with the new percentage standard. As part of its proposal, CMS indicated that it would be necessary to institute a transition period for those cost reporting periods where the most recent 12-month period includes admissions that occur before the effective date of the Final Rule. Thus, in order to ensure that admissions occurring before the effective date of the Final Rule were not counted in an IRF’s compliance percentage, CMS would give FIs and affected parties specific instructions concerning what time period would be used to determine compliance with the revised percentage thresholds.

In the Final Rule, CMS adopts this revised approach to compliance determinations essentially unchanged. CMS plans to provide FIs and affected IRFs with the following general procedures concerning the review period used to verify compliance with the applicable percentage threshold:

• A determination of non-compliance with the compliance threshold will affect the IRF’s classification for its cost reporting period that begins after the 12-month review period.

• Patient data from any period before the effective date of the Final Rule would not be included in the 12-month review period.

The standard period of time FIs and Regional Offices ("ROs") may take to make and administer a compliance determination is four months. If an FI requires additional time, the FI must consult with the IRF prior to changing the review period and before using patient data that may overlap patient data from the previous 12-month review period. CMS expects that such exceptions will be relatively infrequent, and it will instruct FIs and ROs to maintain a consistent 12-month review period from year to year for each IRF.

At the margins, the Final Rule represents a moderation of the policy clarifications and modifications contained in the Proposed Rule. In particular, the phase-in of the compliance threshold (with its reduced percentages in the first two years), the inclusion of a new qualifying condition to address joint replacements for the extremely obese and frail elderly, the reduction in the required number of osteoarthritis-affected joints from three to two, and the confirmation that comorbidities can be used to satisfy the compliance threshold all represent accommodations to the IRFs expecting to be hard hit by the implementation of the Final Rule and to the patients whose access to care by IRFs may be adversely affected by newly-restrictive admissions policies required to achieve compliance with the clarified standards. Ultimately, however, CMS refused to modify its proposals in response to many of the most loudly voiced concerns and, as a result, implementation of the Final Rule will embody a sea change for the nation’s inpatient rehabilitation industry. In addition, the fact that CMS issued the Final Rule at this time and, effectively, ignored Congressional direction to conduct further study on clinically appropriate IRF qualification criteria has not gone unnoticed by many members of Congress. It remains to be seen, however, whether legislative pressure on CMS or industry efforts to obtain legislative changes to the agency’s approach to enforcement of the IRF certification criteria will be successful.

This article is presented for informational purposes only and is not intended to constitute legal advice.