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LifeCare Holdings, Inc. Announces Third Quarter Results
Date:11/14/2007

at are effective for discharges occurring on or after July 1, 2007. The final rule was amended on June 29, 2007 by revising the high cost outlier threshold. CMS estimates these changes will reduce overall payments to LTAC hospitals by 1.2% in the first year of implementation. These changes include: (a) a 0.71% increase to the standard federal payment rate from $38,086 to $38,356; (b) revisions to payment methodologies impacting short-stay outliers; (c) adjustments to the wage index component of the federal payment; (d) an extension of the policy known as the "25 Percent Rule" to all LTAC hospitals, including those previously exempted due to a "grandfather status," with a three year phase-in; and (e) an increase in the high-cost outlier fixed-loss threshold amount from $14,887 to $20,738. The proposed short-stay outlier revisions include the creation of a new payment category for discharged cases having lengths of stay less than or equal to the geometric mean length of stay for patients with the same diagnosis in short-term acute care hospitals. Payment for these cases would be similar to that received by a short-term acute care hospital for the same diagnosis.

CMS also states that the annual update to the DRG classifications and relative weights will be made in a budget neutral manner, effective October 1, 2007. As such, the estimated aggregate industry LTAC PPS payments would be unaffected by the annual recalibration of DRG payment weights.

While we believe that the new policy will reduce our Medicare reimbursement, we will attempt to mitigate the effect of these recent regulatory changes. There can be no guarantee that such efforts will be successful.

CMS Changes to DRG Weighting for Fiscal 2008

On August 1, 2007, CMS issued final inpatient prospective payment system (IPPS) regulations for fiscal year 2008. These regulations establish a new Medicare severity-based patient classification system for fiscal year 2008, called the Medicare-Sever
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