1. This writing sample is an example of complex research and analysis that I have experience in
authoring. It is about a rule governing Medicare payment for a specific type of hospital and
incorporates analysis of the relevant statutes and regulations, as of July 2014. The purpose of
the piece is to educate the relevant hospitals how this rule applies to them. I am submitting it
because it contains no privileged client information and because it illustrates my ability to analyze
and explain complex federal regulatory schemes.
-Matthew Dunne

2. 1
The 25% Rule for LTACHs: A Detailed Analysis
By Matthew Dunne
Introduction
In Fiscal Year (FY) 2005, the Centers for Medicare & Medicaid Services (CMS) established a
special payment adjustment policy for long-term acute care hospitals (LTACHs) commonly
known as the 25% rule. The rule was originally established in order to adjust Medicare
payments for LTACHs located within another hospital (referred to as a hospital within hospital
or HwH). This adjustment was made when too many patients came from the host-hospital
(defined as those in excess of 25% of the LTACH’s discharges). Medicare reimbursement for
discharges in excess of that threshold was to be adjusted to the lesser of payment under the
LTACH Prospective Payment System (LTACH PPS) or the Inpatient Prospective Payment System
(IPPS).
The belief was that this would ensure that LTACHs were not being used as a department of
their host hospitals, but rather as a separate, independent facility providing inpatient care for
extended periods. Over the years, the rule has been rewritten many times, the result of which
is that it has become exceedingly complicated in its application to individual LTACHs. Indeed,
even under the current rule the relevant threshold for payment adjustments is scheduled to be
modified in the coming years. Further complicating matters is recent legislation that could
replace the rule entirely. This article will review the origin, subsequent modifications, and
currents status of the 25% rule. It will also explain, in detail, how the rule applies to various
types of LTACHs.
The Creation of the 25% Rule and Subsequent Modifications
At the inception of the 25% rule there was a special dispensation for (1) rural LTACHs and (2)
when the admissions to the LTACH came from either the only other hospital in the

3. 2
Metropolitan Statistical Area (MSA) or a MSA-dominant hospital.1
In these cases, the threshold
was set at 50%. Other LTACHs under the rule were subject to the standard 25% threshold.
Subsequent to its introduction, the rule was expanded beyond HwH LTACHs. Specifically it came
to include LTACHs that are freestanding (not co-located with another hospital) and
grandfathered (co-located with another hospital and classified as a LTACH before September
20, 1995).2
The threshold for these facilities was set at 25%.
The Medicare, Medicaid, and SCHIP Extension Act of 2007 (MMSEA) modified the 25% rule
further by delaying its full implementation. The MMSEA was itself subject to further
adjustments by Congress in the American Recovery and Reinvestment Act of 2009 (ARRA), and
the Affordable Care Act of 2010 (ACA). While these legislative actions made numerous
alterations to the rule,3
those of greatest importance include a higher threshold for some HwH
LTACHs and a moratorium on the application of any threshold to freestanding or grandfathered
LTACHs.
The most recent modification to the rule, specifically the Bipartisan Budget Act of 2013 (BBA)
extended the delay in the full application of the rule until cost reporting years beginning on or
after October 1, 2017 (previously October 1, 2013). This kept in place the higher thresholds for
some HwH LTACHs; extended the exemption for freestanding LTACHs; and made permanent
the exemption for grandfathered LTACHs.
The Rule as it Currently Stands
At present the 25% rule is, in fact, a collection of rules, only some of which use a threshold of
25%. As such, the use of the term “25% rule” is something of a misnomer, albeit a useful one.
1
Per the rules, a MSA-dominant hospital is one that was responsible for more than 25% of the total hospital
Medicare discharges in the MSA.
2
See Section 114(c)(1)(B) of the Medicare, Medicaid, and SCHIP Extension Act of 2007, which refers to Section
4417(a) of the Balanced Budget Act of 1997. Section 4417(a) applies to “[a] hospital that was classified by the
Secretary on or before September 30, 1995, as a hospital described in clause (iv)” meaning an LTACH as described
under Section 1886(d)(1)(B)(iv) of the Social Security Act.
3
For example, there was a delay in application for LTACHs co-located with provider-based locations of an IPPS
hospital that did not deliver services payable under the IPPS at those campuses where the LTCHs or LTCH satellites
were located.

4. 3
This is because the particular threshold applied to an individual LTACH is not always 25%. The
threshold used depends on several factors, including where the hospital is located, where its
admissions come from, and which cost reporting year (CRY) is at issue.
As explained above, grandfathered facilities are now permanently exempt from the 25% rule
and so we will focus on the application of the rule to LTACHs that are (1) freestanding or (2)
HwHs.4
It is useful at the outset of this analysis to explain precisely how a LTACH’s percentage is
calculated for purposes of the rule. First, it only applies to the LTACH’s Medicare inpatients.5
Second, Medicare patients on whose behalf a high cost outlier payment was made to the
referring hospital are not included in the calculation.6
Third, adjustments are only made for
discharges that cause a LTACH to go over the threshold.
Furthermore, the precise date when a LTACH starts its CRY matters greatly for purposes of
knowing when the rule goes into full effect. In many cases, the rule only applies in its entirety
for CRYs beginning on or after October 1, 2017. It must be stressed that the rule does not,
strictly speaking, apply to discharges after that date, rather to CRYs that begin after that date.
For example, if the LTACH’s CRY begins July 1, the rule would only come into full effect for
discharges on or after July 1, 2018 because that would be the first CRY beginning on or after
October 1, 2017.7
Given the underlying purpose of the rule one must also consider other changes recently made
to the LTACH PPS, namely the introduction of site-neutral payment scheme as part of the BBA.
Congress has intimated that site-neutral payments could replace the 25% rule. Indeed, the
latter was always intended as a stop-gap until LTACH admission criteria could be developed -
which the former goes some way toward doing. However, until this actually occurs LTACHs
should plan on complying with both the 25% rule and the site-neutral payment system.
4
The rule also applies to the satellite facilities of LTACHs.
5
See, e.g. 42 CFR § 412.536(b)(1).
6
See, e.g. 42 CFR § 412.536(b)(3).
7
The text of the regulations, specifically 42 CFR §§ 412.534 and 412.536, has not necessarily been updated
following the passage of the BBA. These regulations still say October 1, 2013 rather than October 1, 2017 for when
the rule goes into full effect and so do not reflect the changes made by the BBA.

5. 4
Freestanding LTACHs
The application of the 25% rule is relatively straightforward for freestanding LTACHs. These
LTACHs are temporarily exempted and so there is no threshold for discharges that these
facilities can cross that will necessitate an adjustment in their payments, at least for purposes
of the rule.
This exception will lapse in a few years, however. In general, for cost reporting years beginning
on or after October 1, 20178
the threshold for most freestanding LTACHs will be 25%. If the
LTACH is in a rural area, then the threshold is 50%.9
The rule is slightly more complicated when
the relevant admission comes from the only other hospital in the MSA (referred to as “urban
single” in the regulations) or a MSA-dominant hospital.10
For admissions from these hospitals, the threshold is equal to the percentage of total Medicare
discharges in the MSA attributable to the referring hospital (not the LTACH), but in no case less
than 25% or more than 50%.11
For example, if the referring MSA-dominant hospital had 35% of
all Medicare discharges in the MSA, then the LTACH would have its payments adjusted when
more than 35% of its discharges were admissions from the MSA-dominant hospital. If the MSA-
dominant hospital had 55% of all Medicare discharges the threshold for the LTACH would still
be only 50%.
Table 1: The Payment Adjustment Threshold under the 25% Rule for Freestanding LTACHs
Freestanding LTACHs
Type of Freestanding LTACH Relevant Threshold
LTACHs (General Rule) Currently: No threshold
CRYs on or after 10/1/2017: 25%
Rural LTACH Currently: No threshold
CRYs on or after 10/1/2017: 50%
The other hospital is an urban single/MSA-
dominant hospital
Currently: No threshold
CRYs on or after 10/1/2017: 25%-50%
8
Note: The relevant regulation, 42 CFR § 412.536, still says October 1, 2013 and so does not reflect the changes
made by the Balanced Budget Act.
9
42 CFR § 412.536(c)(1).
10
The rule counts LTACH discharges of patients who were admitted from another hospital.
11
42 CFR § 412.536(d)(2).

6. 5
LTACHs that are Hospitals within Hospitals
Like their freestanding counterparts, LTACHs that are HwHs have different thresholds
depending on whether they are rural or receive admissions from a MSA-dominant hospital.
Additionally, their payment adjustments will also be influenced by the October 1, 2017 date
which will, in many cases, require a lowering of their current thresholds.
Unlike freestanding LTACHs (which by definition are not co-located with another hospital), it
makes a significant difference to HwHs whether or not the admission comes from the hospital
with which it is co-located.
 If the admission comes from a hospital other than the one with which it is co-located
then the LTACH is essentially treated as freestanding, except that the relevant thresholds
are in effect now, rather than having to wait for CRYs beginning on or after October 1,
2017 as would be the case for a true, free-standing LTACH.12
 If the admission comes from the co-located hospital, the October 1, 2017 date does
matter. This is because a lower threshold than is currently in effect will apply for CRYs
beginning on or October 1, 2017.13
It is necessary to make further distinctions when the admission to the HwH LTACH comes from
the co-located hospital. For these admissions, the threshold for rural LTACHs and those co-
located with a MSA-dominant hospital is currently 75%. For CRYs beginning on or after October
1, 2017, the threshold will be lowered to 50% in the case of former and 25%-50% for the latter,
depending on the level of the host-hospital’s MSA dominance.14
In essence, the rules will be the
same as for freestanding LTACHs as of that date.
The rule is slightly more complicated for HwH LTACHs that are neither rural nor co-located with
a MSA-dominant hospital. For these hospitals the relevant question is when they became
12
42 CFR § 412.534(b)(2) makes clear that when the patient is admitted from a hospital not in the same building or
campus, then 42 CFR § 412.536 applies, even if the LTACH in question is a HwH.
13
42 CFR § 412.534(b).
14
42 CFR § 412.534(d), (e).

7. 6
LTACHs. For those that were governed under the original 25% rule as passed in FY 200515
the
payment adjustment threshold is 50% now and will be 25% for CRYs beginning on or after
October 1, 2017.16
For those hospitals that were never subject to the original rule, i.e. became a
LTACH after October 1, 2004, the threshold is already 25%.17
Table 2: The Payment Adjustment Threshold under the 25% Rule for
LTACH Hospital within Hospital
LTACH Hospital within Hospital
Where was the patient admitted from?
A co-located hospital Not a co-located hospital*
The other hospital is an urban
single/MSA-dominant hospital
Currently: 75%
CRYs on or after 10/1/2017: 25%-50%
25%-50%
The LTACH is rural Currently: 75%
CRYs on or after 10/1/2017: 50%
50%
LTACH on or before 10/1/2004 Currently: 50%
CRYs on or after 10/1/2017: 25%
25%
Not a LTACH on or before
10/1/2004
Currently: 25%
CRYs on or after 10/1/2017: 25%
25%
* For admissions to a HwH LTACH from a hospital with which it is not co-located the relevant threshold does not
change for CRYs beginning on or after October 1, 2017.
Conclusion
The 25% rule has been modified to such an extent over the years that it hardly resembles its
original form although its original intent still holds. At present the rule is, in actuality, a
collection of rules that apply to various types of LTACHs based on the nature of the LTACH, the
source of the original admission, and the cost reporting year in question. Furthermore, one
should anticipate additional changes to the rule. For all these reasons, the application of the
25% rule is a complex process, heavily dependent on the facts of a given situation.
15
This means that they were paid under the LTACH PPS or began their 6-month qualifying period to become a
LTACH on or before October 1, 2004 per 42 CFR § 412.534(g).
16
42 CFR § 412.534(c), (g).
17
42 CFR § 412.534(c)(2)(i).