D Healthcare Daily

The pent-up demand for long-term acute care hospital (LTAC) expansion is about to explode. A government moratorium on new facilities will end at the end of the year.

Long-term care hospitals treat patients who stay more than 25 days, on average, and who typically suffer from clinically complex problems. They treat patients who are too sick for nursing homes but are not improving at traditional hospitals. Hospital intensive care units stabilize severely ill or injured patients, but are not intended to treat them for several weeks.

Each year more than 10 million Medicare beneficiaries are discharged from acute care hospitals into post-acute care settings, including LTACs. Others settings include inpatient rehabilitation facilities, skilled nursing facilities, and patients’ homes with services from home health agencies. Medicare beneficiaries receiving post-acute services include some of the frailest and most vulnerable elderly people. Medicare’s spending on them has more than doubled in the past decade, increasing from $26.6 billion in 2001 to $58 billion in 2010.

There were only a few LTACs in the early 1980s. However, more than 400 have opened nationally in the last 25 years. Between 1988 and 1997, Medicare spending for post-acute care increased at an average annual rate of 25 percent. This rapid rise in spending prompted Congress in the Balanced Budget Act of 1997 to mandate prospective payment systems for post-acute care providers treating Medicare fee-for-service beneficiaries.

Coinciding with the increase in average reimbursement under the prospective payment system, the number of LTACs increased 20 percent between 2002 and 2004. During the same time period, total Medicare spending on post-acute care in these specialized hospitals increased 25 percent annually, and the payment per case increased 10 percent annually. This eventually led to a moratorium in 2007.

Dallas-based Cornerstone Healthcare Group is keeping its expansion plans close to the vest. An economic development official in Round Rock said last month that Cornerstone was eying land in that city to build a new facility. Company officials declined to confirm that.

Owned by Dallas-based investment management firm Highland Capital Management, Cornerstone is a $240-million company with 16 LTACs and about 1,300 employees. The company merged with Solara Healthcare in August 2010. Five of its hospitals are hospitals-within-hospitals, with the remainder being free-standing facilities.

The company relocated its headquarters from Austin to Dallas in 2008, even though it does not have any facilities in the area, to be closer to Highland Capital headquarters and because company officials believed North Texas has a strong healthcare workforce from which to recruit.

LTACs are concentrated primarily in the Midwest and eastern half of the country–with Texas having a disproportionate share. Nine of Cornerstone’s 16 locations are located in Texas, with four each in the Houston area and the Rio Grande Valley, and one in Austin.

David Smith, Cornerstone president and chief executive officer, said the state’s lack of certificate-of-need requirements, lower penetration of Medicare Advantage, and high numbers of Medicare beneficiaries has fueled LTAC growth in Texas.

Smith said the company relies on Medicare for about 70 percent of its revenue, with the remainder split between commercial payers and Medicaid. Small changes in Medicare reimbursement policy can have a substantial impact on healthcare facilities.

For example, Smith said Medicare is reducing its hardship waiver from 70 percent to 65 percent in October, which he said “seems small,” but would have an effect through the company.

Smith said Cornerstone plans to grow its company “prudently” in areas where it already has a market presence. He said the current focus is on revenue growth through occupancy in its current facilities. He also said it would consider adding hospitals either through acquisition or by building them.

Steve Jacob is editor of D Healthcare Daily and author of the new book Health Care in 2020: Where Uncertain Reform, Bad Habits, Too Few Doctors and Skyrocketing Costs Are Taking Us. He can be reached at steve.jacob@dmagazine.com.