Rehab realignment

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CMS' move to relax medical necessity restrictions helps hospitals maintain financially viable rehab facilities both on- and off-campus.

The government's recent easing of medical necessity restrictions for inpatient rehabilitation centers hasn't stopped hospitals from shifting resources "off campus" to freestanding rehabilitation centers. But thanks to the Centers for Medicare & Medicaid Services' change of heart, now hospitals are making those strategic shifts on their own terms.

When CMS in 2004 ramped up its medical necessity guidelines and what's known as the "75 percent rule"--requiring 75 percent of patients in hospital-based rehab centers to have one of 13 serious diagnoses--many hospitals struggled to meet the threshold, which was implemented in steps to give hospitals time to comply. In some cases, hospitals lost profits, patients or entire rehab units.

Hospitals that wanted to continue investing in rehabilitation services began looking toward establishing freestanding hospitals for an answer. These standalone rehabilitation hospitals had an easier time meeting the threshold through volume or by specializing in one of the 13 diagnoses required in the rule--through dedicated spinal cord or stroke programs, for example.

"If you take a smaller acute hospital and they open up a small unit, say a 20-bed unit, it's hard for them, from the patients they have within their hospital, to fill those beds with the diagnoses listed in the 13 requirements to meet the rule," says Vickie Horst, vice president for rehab operations for SSM Rehab, a division of SSM Health Care, which owns, manages and is affiliated with 20 acute-care hospitals and two nursing homes in four states. SSM also operates an 80-bed inpatient rehabilitation operation and multiple outpatient networks.

For hospitals that have trouble maintaining inpatient rehab units, the financial impact can be felt on multiple fronts. In 2006, rehab units at St. Joseph's Hospital of Kirkwood and DePaul Health Center of Saint Louis--both owned by SSM Health Care--closed, slowing down the process of transferring patients to rehab programs.

"We noticed when we closed [those facilities] that the length of stay increased, and so they were losing margin from that side as well as the margin for rehab," says Horst. SSM Rehab responded by partnering with skilled nursing facilities in the area to continue providing patients with the rehab services they needed--only off the main hospital campus.

Though CMS' original intent with the 75 percent rule was to move rehab patients to less-costly settings such as skilled nursing facilities, the profitability of rehabilitation services are too appealing to pass up for many hospitals. At the beginning of 2008, CMS revised the rule to permanently freeze the medical necessity requirements at 60 percent. But the advantages of specialization make freestanding hospitals worth pursuing even with the latest CMS freeze. The rule was being phased in over a four-year period, and after intense lobbying by hospital associations, it never reached its 75 percent goal. The threshold reached its peak at 65 percent last year and was scheduled to hit 75 percent this July.

SSM Rehab has found success with a standalone 20-bed unit that primarily treats brain injuries and handles specialized referrals from other hospitals. "That gives you more volume of those patients, and you take patients from outside your own hospital," she says.

Even without specialization or regulatory concerns, some hospitals are investing in freestanding rehabilitation centers simply to free up beds for medical and surgical cases, says Jay Shreiner, chief financial officer of RehabCare, which provides rehabilitation services in more than 1,250 hospitals, nursing homes, and long-term care facilities.

"Many of these acute rehab units are not the hospital's primary focus," he says. "Building a freestanding hospital helps move patients on a more timely basis from the acute setting to the rehab setting and frees up beds for patients coming into the acute."

Now that the rule has been frozen at 60 percent, it will be easier to maintain financially viable inpatient facilities both on and off campus. Shreiner predicts hospitals will continue to invest in rehabilitation centers, either as sole owners or through joint ventures with firms with private companies.

"From a demographics perspective this is a good business, because with our aging population, more and more Americans are reaching retirement age and are living longer. While we're working through this regulatory change right now, we shouldn't lose sight of the bigger opportunity here and that is it's a growing market."

-Elyas Bakhtiari

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