ABA Health eSource
 November 2006 Volume 3 Number 3

Summary Of CMS' Final Report To Congress And Strategic And Implementing Plan Regarding Specialty Hospitals
by Kathy L. Poppitt, Thompson & Knight LLP, Austin, TX

Kathy L. PoppittIntroduction.

The Deficit Reduction Act of 2005 (DRA), enacted on February 8, 2006, requires the Secretary of Health and Human Services to develop a "strategic and implementing plan" to address certain issues relating to physician investment in specialty hospitals. The issues required to be addressed are: 1) proportionality of investment return; 2) bona fide investment; 3) annual disclosure of investment information; 4) the provision by specialty hospitals of both care to patients who are eligible for Medicaid or receive benefits under a section 1115 waiver and charity care; and 5) appropriate enforcement. The DRA defines a specialty hospital as a hospital that is exclusively or primarily engaged in the care or treatment of either patients with a cardiac condition; patients with an orthopedic condition; or patients receiving a surgical procedure.

To develop its plan, CMS reviewed the studies by the Department of Health and Human Services (HHS) and the Medicare Payment Advisory Commission (MedPAC), a governmental body that advises the Congress on Medicare issues, that had been required by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) and reviewed the information submitted by hospitals in connection with their requests for advisory opinions as to whether they were excepted from the MMA moratorium on the development of new specialty hospitals. CMS determined that there were several areas in which additional information was needed, so it developed a survey and sent it to both specialty and competitor acute care hospitals. After reviewing and analyzing the results of this survey as well as the previous studies and requests for advisory opinions, CMS issued a final report and plan. The issuing of this final report ends the current moratorium on the enrollment of new specialty hospitals.

A Note on the Survey Results.

CMS selected two groups of hospitals to receive its survey. One group consisted of the universe of 130 specialty hospitals that CMS knows to exist. This group includes the 76 specialty hospitals previously identified in the HHS MMA Study, the 49 specialty hospitals that had requested an advisory opinion during the moratorium, and other hospitals identified by CMS as specialty hospitals based on Medicare claims data. The second group of hospitals consisted of acute care hospitals identified as competitors of specialty hospitals. It appears that hospital response to several survey questions was minimal, particularly for the survey questions on investment interests and compensation arrangements. According to the report, many hospitals only completed the portions of the survey that they wanted to answer and left the rest blank.

CMS' Strategic and Implementing Plan for Addressing Issues Related to Specialty Hospitals.

A. Continue Making Improvements in the Diagnosis Related Group (DRG) 1 and Ambulatory Surgical Center (ASC) 2 Payment Systems

According to CMS, the most effective way to deal with perceived unfair competition by specialty hospitals in the form of selecting more profitable diagnosis related groups (DRGs) and more profitable patients (that is, less severely ill) within those DRGs is to make the DRG payment system more accurate. This process began with two sweeping changes made by CMS to the Inpatient Prospective Payment System reimbursement rates for FY 2007: 1) the creation of 20 new DRGs and modification of 32 others in an effort to improve the DRG system's recognition of severity of illness; and 2) the adoption of a system of cost weights over a three year transition period beginning in FY 2007. CMS will continue to study further adjustments to both the DRG and weighting systems and may make further changes to the IPPS for FY 2008.

CMS also plans to update and reform the ASC fee schedule to better reflect the costs of performing specific surgical procedures and to bring those costs in line with payments made under other payment systems for similar procedures. CMS believes that these reforms may discourage physicians and other investors from forming orthopedic and surgical specialty hospitals simply to take advantage of the typically higher payments made under the payments systems for inpatient and outpatient hospital services. In furtherance of this goal, on August 8 2006, CMS issued proposed outpatient PPS and ASC reimbursement rules 3 which expand access to procedures in the ASC setting over the next two years. The proposed rules also revise the payment system for ASCs beginning January 1, 2008.

B. Align Physician and Hospital Incentives

CMS states in the report that since Medicare payment systems often put physicians and hospitals at cross purposes, it plans to encourage closer alignment of physician's and hospital's incentives to reduce physicians' motivation for creating specialty hospitals and to improve patient outcomes and the efficiency of care delivery. The three mechanisms that CMS will explore to encourage this closer alignment are gainsharing, value-based purchasing and quality demonstration programs.

Gainsharing is intended to allow physicians and hospitals to share the savings from agreed-upon efficiency measures, such as standardizing products, substituting generic drugs, or re-engineering clinical practice protocols. In the DRA, Congress authorized CMS to test various gainsharing arrangements. CMS is currently organizing a three-year gainsharing demonstration project.

Value-Based Purchasing involves both aligned quality measures and aligned payment incentives for a hospital stay or episode of care. For example, if a physician and hospital work together to lower surgical infection rates, then that physician and hospital can share in the payment rewards for their joint activities in improving care. Aligned measures could cover clinical quality, patient safety, preventive services, care coordination and transitions or cost of care.

On September 6, following issuance of the Specialty Hospital report, CMS announced a three-year demonstration program, know as the Physician-Hospital Collaboration Demonstration, in which participating hospitals will be paid their usual inpatient reimbursement rate, but will pay to the physician a portion of the savings resulting from quality improvement and efficiency initiatives taken by the physician. These incentive payments will only be allowed for documented, significant improvements in quality of care and savings in the overall costs of care.

C. Issue Guidance on Patient Safety Measures

CMS is considering issuing additional guidance to hospitals regarding patient safety in several ways. First, CMS will add guidance to the hospital Medicare conditions of participation on what is expected of hospitals without emergency departments with respect to the appraisal, initial treatment, and, when appropriate, referral of patients with medical emergencies. Second, CMS intends to consider the specific requirements for appraising a patient's medical condition and for providing initial treatment to that patient. Third, through the final IPPS rules for FY 2007, CMS now requires under Emergency Medical Treatment and Active Labor Act (EMTALA) that hospitals with specialized capabilities (including hospitals without emergency departments) accept appropriate transfers of unstable patients. 4 Additionally, the OIG is currently studying patient care and safety issues in specialty hospitals and CMS will consider the OIG's findings and recommendations once the study is complete and will issue guidance if necessary.

D. Promote Transparency of Investment

CMS is currently developing a procedure for requiring hospitals to disclose the names of physician-owners or investors, the nature and extent of their interests, and information concerning any possible compensation arrangements such as loans, or profit distributions, dividends, or other payments made by the hospital to the physicians. Failure to timely disclose the information sought can result in civil monetary penalties of up to $10,000 for each day beyond the deadline established for disclosure (the time allowed for responding will be at least 30 days). 5 All hospitals, not just specialty hospitals, will be required to provide CMS information on investment and compensation relationships with physicians on a periodic basis but CMS has not yet decided with what frequency. Texas is currently the only state with specialty hospitals that requires submission of information on physician investors to a state agency (Department of State Health Services). 6 CMS is also considering a change to either the provider agreement requirements or to the hospital conditions of participation to require hospitals to disclose to patients investment interests and possibly certain compensation arrangements with physicians who refer to the hospital. Texas law currently requires physicians to inform patients whom they refer for surgery of any ownership interest the physician has in the facility to which the patient is referred. CMS is also considering changing the provider enrollment form (CMS-855A) to capture whether the application hospital is, or is projected to be, a specialty hospital.

E. Enforcement

CMS will be looking very closely at whether specialty hospitals are involved in investment or compensation arrangements that violate the Stark physician self-referral statute, 7 the Anti-Kickback statute 8 or the False Claims Act. 9 For purposes of this report, CMS considers a bona fide investment to be one in which the capital contributed by a physician does, in fact, represent an investment for which the physician is at risk. For example, an investment would not be considered bona fide if a physician made a five percent capital contribution, but some or all of that contribution was funded by another person or entity that did not expect repayment. Another example where the investment would not be considered bona fide would be where a physician makes a five percent capital contribution but receives a profit distribution in excess of five percent. CMS would consider this second example to be a disproportionate return on the investment.

F. Charity Care and Care to Medicaid/Section 1115 Waiver Patients

CMS determined through its survey that the reporting specialty hospitals provided proportionally less care to Medicaid patients than did the reporting competitor hospitals for both inpatient and outpatient services. The reporting specialty hospitals also incurred much less bad debt and provided substantially less charity care than did the reporting competitor hospitals. On the other hand, CMS recognized that most of the reporting competitor hospitals are nonprofit hospitals which receive tax exemptions and government subsidies such as Disproportionate Share Hospital 10 payments and uncompensated care pool arrangements and that all of the reporting specialty hospitals are for-profit hospitals which pay taxes and typically do not receive such subsidies. In this report CMS chose not to recommend or take any action regarding this very complex situation. Instead, CMS is providing its survey results and analysis in this report to assist Congress in addressing the questions about the responsibilities for-profit and nonprofit hospitals should bear with respect to serving the indigent, the uninsured and the underinsured.

G. Actions CMS Chose Not to Take

CMS states in its report that it has decided not to recommend at this time that Congress amend the whole hospital exception to prohibit physician ownership of specialty hospitals as has been recommended by various groups. Rather, CMS saw it as its responsibility to devise a plan for dealing with the perceived underlying issues with regard to specialty hospitals. CMS also decided that it did not have either Congressional authority or reason to continue the suspension on enrollment of new physician-owned specialty hospitals past August 8, 2006. CMS also states in its report that it chose not to define the term "primarily engaged" as that phrase is used in section 1861(e) of the DRA. Instead, CMS states that it will continue to determine whether a hospital is "primarily engaged" in furnishing certain services to hospital patients on a case-by-case basis citing its reason for this decision as concern about unintended consequences that a more specific definition might have, especially for small rural hospitals.


CMS has left a path open for the continued existence and the creation of new specialty hospitals. However, it has made clear that it will continue to reduce incentives for physicians to form specialty hospitals by making additional reforms to the IPPS, OPPS and ASC payment systems and by attempting to align the interests of physicians and general hospitals. CMS will begin collecting physician investment and compensation information from hospitals in order to take a hard look at specialty hospital and physician compliance with Stark and Anti-Kickback requirements. CMS will address other concerns that it has regarding specialty hospitals by making changes to the hospital Medicare conditions of participation, the EMTALA requirements and the information requested on the provider agreement applications. Those involved in, or considering becoming involved in, specialty hospitals should keep a close eye on the actions of both Congress and CMS for additional changes to regulations involving those entities.

Note 1.

1 Diagnosis Related Groups (DRGs) are used by Medicare for classification of inpatient hospital services based on principle diagnosis, secondary diagnosis, surgical procedures, age, sex, and presence of complications.
2 Ambulatory Surgery Centers (ASCs) services are paid by Medicare payment groups and are categorized within nine payment groups based on their cost similarity.
3 http://www.cms.hhs.gov/HospitalOutpatientPPS/Downloads/CMS1506P.pdf.
4 42 C.F.R. 489.24(e).
5 As authorized by Section 1877(g)(5) of the Social Security Act, 42 U.S.C. § 1395.
6 Texas Occupations Code §105.002.
7 Soc. Sec. Act. § 1877 (42 U.S.C. § 1395nn).
8 42 U.S.C. § 1320a-7b(b).
9 31 U.S.C. § 3729-3733.
10 DSH Payments are made by either Medicare or a state's Medicaid program to hospitals that serve a "disproportionate share" of low-income or uninsured patients. These payments are in addition to the regular payments such hospitals receive for providing care to Medicare and Medicaid beneficiaries. Medicare DSH payments are based on a federal statutory qualifying formula and payment methodology. For Medicaid DSH, there are certain minimum federal criteria, but qualifying formulas and payment methodologies are largely determined by states.