LTACHs: A Lesson in Healthcare Ethics, Governmental Oversight, and Creative Financial Decisions

Long-term acute care hospitals, colloquially known as “LTACHs,” are one of the highest-stakes arenas of healthcare thanks to their distinctive history and lucrative payment structure. LTACHs enjoyed over three decades of intense growth and ballooning reimbursements before regional oversupply and Medicare payment reforms prompted their decline in 2012. In a sudden victory, the CARES Act waived many of the debilitating payment reforms for the duration of the coronavirus. The reprieve promises substantial gains for 2020 and a renewed workforce supply throughout the decade, but will this be enough to ensure LTACHs’ recovery? This is the story of LTACHs’ unexpected birth, scandal-ridden youth, and uncertain future.

A Dysfunctional Family

Once upon a time, there was a dysfunctional couple named American Taxpayer and Medicare. Together, they had a PAC of unruly children: L’Taco (Long-term acute care hospitals), SNF (skilled nursing facilities), and HHA (home health agencies). L’Taco was his mother’s favorite, so he made off with the largest allowance. SNF was the unfortunate middle-child, hard-working, reliable, unglamorous, and always stuck doing L’Taco’s worst chores for less pay. HHA was the youngest child and received the smallest allowance. His mother suspected that he had high-potential and might eclipse his siblings one day, but it was too soon to tell. Technically, the children were all part of PAC (post-acute care). But their mother knew they were not the same. The Birth of L’Taco — 1982 Prior to the 1980s, LTACHs did not exist in the government’s book. The LTACH classification was created as a regulatory exemption for a small cluster of Northeastern hospitals that specialized in clinically complex patients who required long hospital stays and often incurred higher costs. The year was 1982. Medicare had been doing a lot of creative thinking and was about to unleash a brand-new federal payment regulation, PPS (Prospective Payment System), that would impact all of her PAC children. But Medicare was worried. She’d noticed a small group of specialty hospitals that were about to get crushed by PPS. “Look at these poor hospitals,” said Medicare. “They’ll die without our protection. We should save them.” And so, she made an exception for them. L’Taco’s birth was a surprise to American Taxpayer. His father took one look and said, “That boy will be a tack in my shoe!” And from then on, he referred to the boy as LTACH. Medicare thought this was vulgar and mean. Instead, she called the boy her pet name, L’Taco. L’Taco Starts to Misbehave — 2002 In 2002, Medicare reversed its original exemption for LTACHs, moving them onto a PPS. The structure of the reimbursement plan provides small payments at the beginning of a patient’s stay (1,300 per day) before jumping to a large lump sum (13,000) after a certain threshold of days. This action provided a novel financial opportunity for LTACHs to maximize their profits by strategically discharging the patient immediately after reaching the threshold. L’Taco was ignored by his father for nearly twenty years. L’Taco didn’t mind: he was very good at making profits. He grew larger and larger until he was ten times his original size. L’Taco convinced his mother that his lifestyle was very expensive, and that he needed a bigger allowance. Suddenly, American Taxpayer came back from his extended vacation and noticed how inefficient and bloated L’Taco looked. “That’s it!” said American Taxpayer. “I’m sick of exempting LTACH. He’s going onto PPS, just like everyone else.” Medicare agreed, but not before cooking up a special PPS just for L’Taco. She was convinced that there was no way he could get around these rules and he would finally start to behave. L’Taco Misbehaves Again This time was no different. No sooner had she put L’Taco on the new payment plan than she noticed something strange. Usually, L’Taco had a steady stream of patient discharges at his hospitals. But this time, everyone was leaving right after day 25. “Why are all of his patients leaving on day 25?” Medicare asked. “Could they all be getting better at the same exact time?” “That one doesn’t look too good to me,” said American Taxpayer. “It must be something in that PPS of yours.” Site-Neutral Payments — 2015 Prior to site-neutral payments, a 25-day patient stay at LTACHs produced an average reimbursement of $41,000 from Medicare. In 2013, the average daily cost at an LTACH ($1,512) was significantly more expensive than SNFs ($388 base rate) or “intensive” home care ($189). One day, American Taxpayer received an anonymous letter from his savvy neighbor. This is what the letter said: “Did you know that you and Medicare could save $4.6 BILLION every year if you just got rid of L’Taco???” American Taxpayer showed the letter to Medicare. She cried and made excuses. Then she yelled at L’Taco. “Why are you so expensive?” said Medicare. “Your sister, Skilled Nursing Facility, does a fantastic job, especially considering how little your father pays her.” “Stop comparing me to my sister!” said L’Taco. “That’s like comparing Bloomingdales to Wal-Mart.” “Precisely,” said American Taxpayer. “And if Wal-Mart don’t got it, I don’t need it!” To assuage her grumbling husband, Medicare made a site-neutral payment rule. It would reduce spending on services that could have been performed in a lower-cost setting, such as SNF. She wanted L’Taco to prove that he was only taking care of very sick patients. He would no longer receive his usual allowance unless his patients spent three days in an ICU or used a ventilator for at least 96 hours. If they didn’t, he would receive the same payment as his sister. L’Taco Goes Bankrupt — 2018 Following site-neutral payment reforms, Kindred Healthcare, once the largest player in the field, was sold to Humana, TPG, and Carson, Anderson, and Stowe for $9 a share — a discount of 42% from its high in 2016 — after facing revenue declines of 13% for its LTACH division in 2017. Further consolidation and restructuring are predicted for the industry. L’Taco begged his mother not to do this. He told her he felt underpaid and would have to scale back his lifestyle. In fact, he might even go bankrupt. L’Taco wasn’t wrong. Seven percent of his hospitals immediately closed. The rest were predicted to follow suit unless L’Taco made big changes. He tried to resist. If patients weren’t sick enough, he started to refuse them. Other times, he just asked hospitals to change the revenue codes so that every patient looked like they had been in the ICU. Finally, he sued his mother in 2019, winning back a reimbursement loss of $380 million. But Medicare wasn’t worried. She knew site neutral would be back in 2020. Epilogue — 2020 In a surprise reversal, the CARES act waived the site-neutral payment policies for LTACHs during the duration of the coronavirus crisis. Medicare is uncertain how L’Taco will use this reprieve to reform himself. She thinks he might respond well to more competition, or take a page out of his younger brother’s book and diversify. In the meantime, she’s formulating another payment system that she hopes will make all of her children better citizens. American Taxpayer says good riddance, it’s about time someone took the head off of the hydra. But if there’s one thing we know about L’Taco, he always finds a way to survive. On May 1st, 2020, Select Medical, the largest remaining provider of LTACHs with over 101 facilities in the US, reported a 21.3% increase in adjusted EBITDA compared to the same quarter last year. Robert Ortenzio, executive chairman and cofounder of Select Medical, expressed great hope for LTACH’s futures. He cited a new wave of referring hospitals, greater recognition of LTACH’s specialty services (thanks to their treatment of COVID-19 patients), and the rise of respiratory infectious diseases as significant factors that will strengthen LTACH’s market position and cement their reputation as an indispensable provider of post-acute care services. About Colbeck: Colbeck is a strategic lender that partners with companies during periods of transition, providing creative capital solutions to meet their evolving needs. You can reach the team at inquiries@colbeck.com.


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