Historical Paper on Medicare Inpatient Rehabilitation PPS, continued

Balanced Budget Act of 1997

The Balanced Budget Act of 1997 requires that the Secretary of the U.S. Department of Health and Human Services implement a prospective payment system for rehabilitation hospitals and units to be phased in over a period of three years, with full implementation by October 1, 2002. During the first year of a two year transition, payments will be a mix of two-thirds of what a facility would have been paid under TEFRA and one-third of the prospective payment amount. In the second year, payments will consist of one-third of the TEFRA amount and two-thirds of the prospective payment amount. During this phase in period, aggregate payments must be two percent less then what they would have been under TEFRA.

The BBA requirements of a PPS for rehabilitation includes:

  • payments to be based on the inpatient operating and capital cost of rehabilitation facilities and adjusted case mix using patient classification groups, area wages, inflation, outlier and special payments, and other factors necessary to reflect variations in cost of treatment;
  • a two-year transition;
  • total payments made under the system to rehabilitation facilities during fiscal years 2001 and 2002 to be equal to 98 percent of estimated payments that would have been made under the current Tax Equity and Responsibility Act of 1982 (TEFRA) payment system;
  • limits outlier payments to no more than 5 percent of the total projected payments for a fiscal year.
Classification System

The BBA did not specify a particular patient classification system or unit of payment for the payment system. One classification system that could be used is the Functional Independence Measure - Function Related Group (FIM-FRG) system. The FIM system is used for tracking the functional abilities of patients. The FIM became the standard in rehabilitation hospitals and units for tracking the functional abilities of patients at admission, discharge, and post-discharge because it was determined that the cost of treating a rehabilitation patient was not predictable from the diagnosis of the patients. The Function Related Groups (FRG) were developed by Margaret Stinemen, MD and colleagues at the University of Pennsylvania in 1990.

The FIM-FRG system is a discharge-based classification system that sorts patients into one of 21 impairment categories such as stroke, spinal cord, and cardiac. The FIM-FRG use assessment of patient functional cognitive abilities and age to classify them into one of about 70 groups. The patient assessment data used to design the classification system were obtained from the Uniform Data System for Medical Rehabilitation (UDSMR). The UDSMR is an ongoing national repository of information on rehabilitation patients operated by the State University of New York at Buffalo. The UDSMR collects data on patient age, sex, living situation prior to hospitalization, diagnosis leading to disability, and functional status at admission and discharge. It also includes patient admission and discharge information and hospital charges. Over one-half of all rehabilitation hospitals and units submit information to UDSMR.

The FIM-FRG classification system is considered to be stable over time and predictive of length of stay and per-discharge resources use. A modified FIM-FRG system has been developed that incorporates patient assessment at both admission and discharge. If built into a payment system, that type of information could allow provider payments to be adjusted to reflect differences in patient outcomes.

Originally, rather than pursue a per-discharge based payment system using the FIM-FRG, HCFA began pursuing a more uniform payment policy across post-acute care settings by designing a system that is conceptually similar to the per diem PPS implemented for Skilled Nursing Facilities. Such a system relies on the use of a classification system called the Minimum Data Set 2.0 (MDS 2.0) patient assessment tool, which was designed only for nursing facilities.

HCFA has modified the MDS for use in rehabilitation facilities and long term hospitals, as well as SNFs. The new instrument is called the Minimum Data Set - Post Acute Care (MDS-PAC). This MDS-PAC, currently in Version 1.0, is expected to become a patient assessment tool in rehabilitation and other post-acute care facilities.

The MDS-PAC is being developed by Dr. John Morris of the Hebrew Rehabilitation Center for the Aged in Boston, who also developed the MDS 2.0 for SNFs. Dr. Carl Granger and Anne Deutsh of UDSMR were invited to work with Dr. Morris to assist with the refinement of the MDS-PAC so that it would contain the essential elements of the 18 FIM items.

Payment Method

The Medicare Payment Advisory Committee (MedPAC), an independent federal body formed as part of the BBA to advise the U.S. Congress on issues affecting the Medicare program, supports a discharge-based unit of payment for the new PPS. During the last few months of 1998, and the beginning of 1999 the AAPM&R, the American Academy of Neurology (AAN), the American Hospital Association (AHA), the American Medical Rehabilitation Providers Association (AMRPA), and the Federation of American Health Systems (FAHS) urged MedPAC to recommend a per-discharge based on the FIM-FRG payment methodology for inpatient rehabilitation PPS. In MedPAC’s March 1, 1999 report to Congress, they recommended, among other things, the development of a discharge-based PPS for rehabilitation facility patients based on the FIM-FRG. HCFA, on the other hand, had been proposing a per diem reimbursement system that utilizes a new data collection tool, the Minimum Data Set for Post Acute Services (MDS-PAC) as the data collection tool and a RUGs classification methodology.

In mid-1999 HCFA announced that they will support the MedPAC recommendation of a per-discharge payment methodology under a PPS for rehabilitation hospitals and units. HCFA’s support of the MedPACs recommendation reverses their earlier approach of a per-diem payment methodology.

In developing a PPS, HCFA will adopt: the per - discharge based approach of payment that was recommended by the MedPAC (and the Academy, AAN, AHA, AMRPA, and FAHS); the use of the MDS-PAC as a comprehensive patient assessment instrument; the use of a classification system based upon FRG; and the application of an outlier policy and other adjustments. MedPAC recommended the development of transfer and short-stay outlier policies to discourage inappropriately early discharges and decreased utilization.


The proposed rule on the inpatient rehabilitation prospective payment system was scheduled to be published in the Federal Register at the beginning of the year 2000. The MDS-PAC is being tested as a pilot project in select hospitals around the country prior to the release of the proposed rule. In March 2000, HCFA announced that they will delay by six months the implementation of the Rehabilitation PPS from October 1, 2000 with a target date of April 1, 2001 (e.g., effective for cost-reporting periods beginning on or after April 1, 2001). There will be a two-year transition period according to HCFA, from April 1, 2001 to April 1, 2003.

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