• Specialty Hospitals Come in for Renewed Scrutiny
  • April 28, 2006
  • Law Firm: Baker, Donelson, Bearman, Caldwell & Berkowitz, PC - Nashville Office
  • For nearly a decade, the alleged benefits and risks (financial and healthcare) of specialty hospitals has been one of the most debated subjects in the health care industry. Thanks to recent events, the arguments against specialty hospitals have been fortified as an enhanced spotlight has been placed on the standards the Centers for Medicare and Medicaid Services (CMS) has been using in the enrollment process and whether those standards have been applied consistently.

    On February 14, 2006, Senators Chuck Grassley (R-IA) and Max Baucus (D-MT), chairman and ranking member respectively, of the Committee on Finance sent a letter to the Secretary of the Health and Human Services (HHS) seeking to learn whether the federal government has adequately overseen the licensing, safety and quality of physician-owned specialty hospitals. This letter came after an 88-year-old woman died soon after surgery at a specialty hospital which opened during the federal moratorium. The hospital allegedly did not have a doctor on site during the woman's crisis and had a policy to call 911 in case of a patient emergency in lieu of an on-call physician.

    On March 30, 2006, Senators Grassley and Baucus authored another letter to the Secretary of HHS questioning the continuity and accuracy of CMS' enforcement of the moratorium. In order to determine whether CMS has been enforcing the moratorium, and if so, to better understand its methods, the Senators requested that CMS provide certain information, including: (a) the number of Medicare provider numbers issued since November 18, 2003; (b) the number of specialty hospitals CMS is currently investigating as potentially violating the moratorium; and (c) a detailed description of the procedures CMS has implemented to determine whether a hospital is a physician-owned specialty hospital. CMS was directed to provide the requested information, as well as the outstanding information requested in the February letter, no later that April 14, 2006.

    These letters came in the wake of Congressional passage of the Deficit Reduction Act of 2005 (DRA) on February 1, 2006. The DRA is another blow to the proponents of specialty hospitals as it places significant restrictions on the creation of new specialty hospitals by extending the moratorium on new physician investments in specialty hospitals originally put in place by the Medicare Modernization Act of 2003 (MMA) and extended by CMS in June, 2005. Pursuant to the DRA moratorium, CMS is prohibited from enrolling new specialty hospitals in the Medicare program for at least six to eight months from the enactment date. Additionally, the DRA requires the Secretary of HHS to develop a strategy for addressing certain specialty hospital issues, including methods for determining bona fide investments, disclosure of investment interests and proportionality of investment return.

    While renewal of the specialty hospital moratorium illustrates that a permanent ban on Medicare enrollment is a real possibility, many questions about specialty hospitals remain. One of the most pressing is how to accurately determine whether a hospital is a "specialty hospital." The MMA defined a specialty hospital as a hospital primarily or exclusively engaged in cardiac, surgical or orthopedic services. But neither the MMA, DRA or any other legislation or regulation has provided a concrete methodology as to how CMS (or the responsible fiscal intermediary) decides whether a hospital is "primarily or exclusively" engaged in specialty services.

    While the DRA has continued the attention on the moratorium, the refocused attention of Senators Grassley and Baucus has the potential to significantly increase the scrutiny placed on Medicare applications and the procedures used by CMS. In addition, the death of a patient at an (allegedly) improperly enrolled specialty hospital will increase the pressure against any future enrollment of new specialty hospitals, as well as the arguments for enacting a permanent moratorium on physician investments in specialty hospitals.

    It is too early to predict what types of regulatory changes CMS will make to address the issues with specialty hospitals and the Medicare enrollment process. However, the reporting requirements of the DRA and the recent inquiries from the Senate Finance Committee ensure that specialty hospitals will continue to be a heavily debated topic.