• CMS Releases Interim Report to Congress on Specialty Hospitals
  • July 12, 2006 | Author: Gregory M. Fliszar
  • Law Firm: Pepper Hamilton LLP - Philadelphia Office
  • As part of the Deficit Reduction Act (DRA), passed in February 2006, the Department of Health and Human Services (HHS) is required to develop a “strategic and implementing plan” regarding physician investment in specialty hospitals that addresses the following issues:

    • whether physician investments in specialty hospitals are proportional to their investment returns
    • whether such physician investment in a specialty hospital is a “bona fide investment”
    • annual disclosure of investment information
    • the provision by specialty hospitals of charity care and care to Medicaid enrollees
    • appropriate enforcement.

    Additionally, the DRA must include recommendations for legislative and administrative action. The report is due to Congress on August 8, 2006.

    HHS defines specialty hospitals as hospitals that are primarily or exclusively engaged in the treatment of patients with a cardiac condition, the treatment of patients with an orthopedic condition or patients receiving a surgical procedure.

    While the plan is under development, Congress has required the Centers for Medicare and Medicaid Services (CMS) to continue its suspension on the enrollment of new specialty hospitals in the Medicare program, which was set to expire on February 15, 2006. The suspension began in June 2005 after the expiration of the federal moratorium on payments to certain specialty hospitals for services rendered to Medicare beneficiaries as a result of a referral from a physician who had an investment interest in the hospital. The suspension will remain in effect until HHS’ final report is submitted to Congress or six months after the DRA’s enactment, whichever is earlier. If HHS fails to complete the report within the required six months, the suspension will be extended for an additional two months.

    CMS released its Interim Report to Congress on May 9, 2006, and on May 17, CMS Administrator Mark McClellan testified to the Senate Finance Committee regarding specialty hospitals. In addition to addressing the issues outlined by the DRA, CMS discussed steps that it has taken to respond to recommendations and concerns contained in earlier reports on specialty hospitals generated by HHS and the Medicare Payment Advisory Commission (MedPAC), including:

    • proposed payment reforms for inpatient hospital reimbursement
    • reform payments to Ambulatory Surgical Centers (ASCs)
    • Emergency Medical Treatment and Labor Act (EMTALA) obligations
    • hospital definitions.

    Proposed Payment Reforms for Inpatient Hospital Reimbursement

    CMS has taken steps to revise the hospital Inpatient Prospective Payment System (IPPS) for nine cardiovascular diagnosis-related groups ( DRGs) to better recognize severity of illness. The fiscal year 2007 IPPS proposed rule includes two additional payment reforms: the proposed payment changes would not only assign weights to DRGs based on estimated hospital costs rather than on reported charges, but also reconfigure DRGs to reflect not only the patient’s diagnosis but also the severity of the illness.

    CMS hopes this change will make it less attractive for a physician investor in a specialty hospital to refer less severely ill, but more profitable patients to the specialty hospital and refer the more severely ill and costly patients to community hospitals.

    Reform Payments to Ambulatory Surgical Centers (ASCs)

    In its 2005 report to Congress, HHS found that many orthopedic and surgical specialty hospitals were more similar to ASCs than to acute care hospitals (i.e. few inpatient beds and a perceived concentration on outpatient care). However, payment rates differed between specialty hospitals and ASCs for what were essentially similar services. As a result, CMS intends to reform payments to ASCs beginning in 2008 to remove some of the incentives for physician investors to form orthopedic and surgical specialty hospitals to take advantage of higher payments under hospital payment systems.

    Emergency Medical Treatment and Labor Act (EMTALA) Obligations

    Many specialty hospitals do not have emergency departments and have not been required to follow the screening and stabilization requirements under EMTALA. The fiscal year 2007 IPPS proposed rule includes a provision requiring all hospitals (including specialty hospitals) with specialized capabilities to accept, within the capacity of the hospital, appropriate transfers of unstable patients covered by EMTALA without regard to whether the hospital has an emergency department.

    Definition of Hospital

    CMS is scrutinizing whether specialty hospitals meet the definition of a hospital. Under current law, a hospital must be “primarily engaged” in furnishing services to inpatients. CMS does not intend to refine that definition, but will continue to interpret “primarily engaged” on a case-by-case basis and explore other options for addressing the issue.

    Response to DRA’s Mandated Strategic and Implementing Plan

    In its Interim Report, CMS describes how it intends to respond not only to the DRA’s mandates concerning the issues of physician investment, but also to charity care and care to Medicaid beneficiaries, and to enforcement.

    Evidence on Financial Arrangements and Care to Low Income and Charity Care Patients

    CMS is sending a survey to approximately 130 specialty hospitals and 270 general acute care hospitals to gather information about physician investment interests in specialty hospitals and the provision of care to low-income and charity care patients. The survey asks for information about:

    • the identity of physician investors and returns on the investments
    • any limitations on liability the physician investors have available to them
    • if the physician investors received a loan from the hospital to purchase the investment interest
    • whether the physician investors have a compensation arrangement (management contract) with the hospital or an entity related to the hospital.

    The survey also asks the hospitals to list their number of Medicaid discharges, revenue derived from Medicaid patients and the amount of charity care provided.


    CMS wants public comment on how it can best support enforcement actions against inappropriate investment in specialty hospitals. CMS acknowledged that many questions related to whether a physician’s investment is “proportional” or “bona fide” are appropriately addressed under the federal anti-kickback statute. Accordingly, CMS intends to consult with the HHS Office of Inspector General (OIG) for guidance on matters relating to anti-kickback statute enforcement.

    Additionally, if CMS uncovers evidence of possible violations of the anti-kickback statute or evidence of potential violations of the physician self-referral law (the Stark Law), it will refer those cases to the OIG for possible enforcement actions.

    McClellan explained CMS’ view of the “whole hospital” exception to the Stark Lawto the Senate Finance Committee. “CMS recognizes that there are different opinions regarding physician-owned specialty hospitals. Physician-owned specialty hospitals are legal under the existing whole hospital exception to the physician self-referral law and elimination of the exception cannot be done administratively,” he said.


    CMS appears likely to rely upon the data it receives from the survey process to make any recommendations concerning physician investments in specialty hospitals. As CMS has stated that it will refer matters to the OIG if it uncovers evidence of possible violations of the federal anti-kickback statute or Stark, hospitals receiving such surveys may wish to consult with counsel before completing the CMS survey. Additionally, CMS’ statement that the whole hospital exception cannot be eliminated administratively indicates it’s deferring to Congress on the decision to enact another moratorium regarding specialty hospitals.