Medicare Regulations Compliance for Long-term Care Hospitals-within-Hospitals

Christine S. Kim
Assistant Editor
Loyola University Chicago School of Law, J.D. 2017


Due to the inextricably association between long-term care Hospitals-within-Hospitals (“HwHs”) and their respective Long Term Care Hospitals (“LTCH”), or host hospitals, efforts to circumvent compliance with federal reimbursement regulations have evolved. This blog article discusses the ways in which the Centers for Medicare and Medicaid Services (“CMS”) regulations as well as the U.S. Department of Health and Human Services Office of Inspector General (“HHS-OIG”) reports have strategized to reinforce compliance between the corresponding hospitals with Medicare regulations.


HwHs are separate providers licensed and certified as a hospital in its own right, and as archetypal constructs, are physically located inside respective “host hospitals,” or acute care hospitals. The establishment of HwHs represents the greatest growth in the realm of LTCHs.

Abusive Referral Programs

HHS OIG, as well as CMS, expressed that augmented regulation of HwHs was necessary for continuing compliance.  Specifically, CMS has expressed concern to possibilities of fraud due to the location of HwHs in LTCH hospitals, which creates an incentive to reap the supplementary Medicare reimbursement. Just this past March HHS-OIG recommended the state of Missouri refund over $1,455,378 for unallowable Medicaid payments for individualized supported living habilitation services.

Previously, with respect to reimbursements, CMS would distribute Medicare reimbursement to LTCHs on a free-for-service basis. Presently, however, CMS has adopted a new prospective payment system (“PPS”) in order to reflect a higher average cost of caring for patients in these hospitals due to its need for substantial long-term medical support, ventilators, and other medical procedures to treat organ failure or infectious diseases.

In particular, CMS expressed a concern that LTCHs and their HwHs were reprocessing patients through abusive referral programs between one another. To illustrate, an HwH could discharge a patient to its host LTCH and then readmit that same patient, each time receiving a new PPS payment from Medicare, which would in turn, also trigger a Medicare payment to the host LTCH.

Accordingly, on August 2004, CMS incorporated a rule, which set a threshold of 25 percent on the number of Medicare referrals that HwHs could acquire from their host hospitals.

CMS necessitated an increased level of organizational separation between the two entities, such as conducting its own services separately from its host hospital. Alternative ways to separate organizations entailed separate governing bodies between host hospitals and HwHs, separate chief medical and chief executive officers, and separate medical staffs.

Moreover, CMS has also proposed requirements that HwHs must provide proof of financial independence from its host hospital. Specifically, CMS requires that HwHs must satisfy one of the following:

  • The HwH must perform basic hospital functions such as quality assurance, utilization review, medical record and laboratory services separately from their host hospitals,
  • The cost of services that an HwH obtains from its host hospital must not exceed 15% of the HwH’s total inpatient operating costs, or
  • At least 75% of the HwH’s inpatient population must have been referred to the HwH from an institution other than its host hospital.

Principally, CMS requires that LTCHs that are part of HwHs must comply with the “interrupted stay policy” for all cases of patient movement from the LTCH to other on-site providers, regardless of the length of stay at the intervening provider, if the number of such cases exceed 5 percent of all discharges during a cost reporting period.

This requirement has prompted great concern as numerous advocates of the hospital industry have argued that CMS’s new reimbursement policy will harshly affect HwHs’ ability to thrive.

Similarly, in June 2004, MedPAC released a report failing to endorse CMS’s methodology of limiting the referrals between host hospitals and HwHs. OIG also has noted the inadequacies of CMS’s regulation due to the evidentiary support of documented violations of the 5 percent threshold for readmissions.

However, CMS has also incorporated in its regulation a transition period for existing LTCHs, which should afford the provider community a chance to continue a confab of these issues with CMS and Congress. The ultimate goal of these discussions being that HwHs can ultimately function under rules that both safeguards proper admissions to these hospitals while also preventing arbitrary restrictions, which essentially restrict availability to long-term patient care.

Nonetheless, the development of standards which would ascertain distinctive characteristics of an LTCH-eligible patient, as opposed operating an arbitrary limit on the percentage of HwH admissions would likely be an efficacious alternative to stimulate compliance between the respective agencies without disrupting long-term patient care.