CMS Enforcement against Hospitals for Failure to be Primarily Engaged in Inpatient Care

Vol. 10 No. 8

AuthorThe Centers for Medicare & Medicaid Services (“CMS”) has implemented a recent enforcement trend under which it is seeking to terminate the provider agreements of hospitals with low inpatient volumes as compared to outpatient volumes.  Under this trend, CMS is citing hospitals for failure to comply with the requirements codified in Social Security Act section 1861(e), which states, in relevant part, that a hospital must be “primarily engaged” in providing services to inpatients.  This enforcement trend naturally affects hospitals with low numbers of licensed inpatient beds, but it also has had the effect of targeting specialty, often physician-owned hospitals.

CMS’s enforcement activity is likely motivated by its understanding that hospitals with low inpatient volume are more appropriately recognized as ambulatory surgical centers, but that such facilities have enrolled in the Medicare program as inpatient hospitals in order to obtain greater reimbursement under the hospital outpatient prospective payment system.  Whether or not enforcement against physician-owned hospitals is also an intended result remains unclear.  More importantly, CMS regulations and guidance instructing what it means to be “primarily engaged” in the delivery of inpatient care is equally unclear.

As CMS reimbursement policy increasingly favors the delivery of hospital care in the outpatient setting, one might anticipate that the “primarily engaged” problem, and CMS’s enforcement thereof, will only continue to grow.  This article provides a discussion of the history behind CMS’s approach to interpreting the “primarily engaged” requirement in light of its current enforcement initiative.

Statutory Requirement

The Social Security Act provides that CMS may “refuse to renew or may terminate” a Medicare provider participation agreement to the extent that such provider “fails to comply substantially with the provisions of the agreement, with the provisions of [U.S. Code Title 42, Subchapter 7] and regulations thereunder.”1  In relevant part, CMS’s enforcement activity is based on a hospital’s continued obligation to meet all statutory provisions of Social Security Act section 1861(e).

Social Security Act section 1861(e) requires that an organization must be primarily engaged in providing inpatient services in order to participate as a hospital in the Medicare program.  The statutory definition of the term “hospital” includes those institutions that are “primarily engaged in providing, by or under the supervision of physicians, to inpatients . . . diagnostic services and therapeutic services for medical diagnosis, treatment, and care of injured, disabled, or sick persons.”2  While CMS requires that each Medicare-participating hospital be primarily engaged in the provision of inpatient care, no CMS statute or regulation establishes what it means to be so “primarily engaged.”  Although CMS has never adopted a formal definition for the term, the agency has informally discussed whether hospitals have met the “primarily engaged” requirement for purposes of participation in Medicare.

Discussion Regarding Physician-Owned Specialty Hospitals

In 2005, then Department of Health and Human Services (“HHS”) Secretary Michael O. Leavitt offered his comments on Government Accountability Office (“GAO”) and HHS reports concerning physician-owned specialty hospitals.  “[S]ome entities providing specialty care may concentrate primarily on outpatient care and thus may not qualify as hospitals. . . . In order to be a hospital, an institution must, among other things, be primarily engaged in furnishing services to inpatients.”3  Secretary Leavitt continued: “[A]n institution that currently has a Medicare hospital provider agreement but does not presently meet the requirement of primarily engaging in furnishing services to inpatients would be subject to having its provider agreement terminated pursuant to 42 C.F.R. § 489.53. . . . To address these concerns, we plan to revisit the procedures by which applicant hospitals are examined to insure compliance with relevant standards.”4 

Subsequently, Mark B. McClellan, MD, Ph.D., then CMS Administrator, explained the agency’s intent to examine small surgical hospitals in a hearing before the House Committee on Energy and Commerce:

We speculate that these entities may describe themselves as hospitals rather than [ambulatory surgical centers] in part to take advantage of the more favorable payment rates that apply under the hospital outpatient prospective payment system . . . as opposed to the ASC payment system. This is problematic from CMS’s perspective, however, since the Medicare program defines a “hospital” as an entity that provides care “primarily” to inpatients. To the extent that such a facility is not, in fact, primarily providing care to inpatients, it is inappropriately categorized as a hospital and should not be treated as one under the Medicare program. . . . CMS will scrutinize whether specialty hospitals meet the definition of a hospital. Specifically, we will analyze existing data to assess whether specialty hospitals meet the requirements that to be defined as a hospital it must provide primarily inpatient care.5

Dr. McClellan declined, however, to specifically identify the data that CMS would examine in this effort. Moreover, CMS has yet to definitively address what it means to be primarily engaged in inpatient care.

Deficit Reduction Act

On May 9, 2006, HHS released an interim report in response to a Deficit Reduction Act of 2005 requirement that the agency address physician investment in specialty hospitals.6  The report stated that CMS has “not yet identified any quantitative method, such as percentage of services or ratio of inpatient-to-outpatient services, that could be used without disqualifying both community hospitals and specialty hospitals.”7  Therefore, CMS did not intend to define by regulation the “primarily engaged” in furnishing services to hospital inpatients statutory requirement.8  The interim report indicated that CMS will continue to interpret “primarily engaged” on a case-by-case basis.9  In its subsequent final report, HHS explained that “[w]e are in no better position now than we were at the time of the Interim Report was issued to define “primarily engaged” by regulation and, thus, are not committed at this time to engage in rulemaking.”10

Survey & Certification Memorandum S&C-08-08

On January 11, 2008, CMS stated in a survey and certification memorandum that new providers seeking certification as a hospital specializing in outpatient services “have the burden of proof to demonstrate that they meet the statutory definition of a hospital for Medicare purposes, and their applications require detailed, case-specific analysis.”11 The memorandum notably contains the sole numerical interpretation of the “primarily engaged” certification standard. Importantly, CMS “interpret[ed] the statutory requirement that a hospital be primarily engaged in the provision of inpatient services to mean that the provider devotes 51% or more of its beds to inpatient care.”12  The agency further explained as follows:

In the absence of other clearly persuasive data, CMS renders a determination regarding hospital status based on the proportion of inpatient beds to all other beds. At the request of the applicant CMS may examine other factors in addition to bed ratio. The agency recognizes that the “51%” test may not be dispositive in all cases. However, we consider the burden of proof (to demonstrate that inpatient care is the primary health care service) to reside with the applicant, and consider the burden to increase substantially as the ratio of inpatient to other beds decreases.13 

The 51 percent standard appears to be CMS’s sole attempt to interpret and apply in written guidance the statutory requirement that a hospital must be “primarily engaged” in furnishing services to inpatients, which the agency previously declined to do in formal notice and comment rulemaking.14  However, CMS does not appear to be applying the 51 percent inpatient beds test in its current investigations.

Current Enforcement

When CMS determines that a hospital does not meet the section 1861(e) statutory definition, the agency will issue a termination notice to the hospital. Under the terms of the notice, the hospital may not continue to participate in the Medicare program as a hospital and CMS will not make payments for inpatient hospital services furnished to patients after the termination date. However, CMS will generally permit the hospital to avoid termination if it can demonstrate that it is “primarily engaged” in the delivery of inpatient services. 

If a hospital is terminated, CMS will not permit the hospital to enter into another Medicare provider participation agreement unless the hospital can demonstrate that, going forward, the reason for termination has been addressed and that the hospital can provide reasonable assurance that the compliance problem will not recur. Each CMS Regional Office has reserved the discretion to establish the period during which reasonable assurance must be demonstrated, based on the hospital’s prior history of compliance. Only then may a hospital having been terminated for failure to be “primarily engaged” in inpatient care enter into another Medicare provider participation agreement.  Given the nature and length of the post-termination compliance period, a hospital given notice of a potential termination is likely to fare better if it can reconcile all outstanding compliance issues with CMS prior to termination.

Recent CMS enforcement actions have instructed hospitals that merely having the potential to provide inpatient care is not the equivalent of actually having provided such care, and thus the mere capacity to provide inpatient care may not necessarily permit a facility to qualify as a hospital “primarily engaged” in the delivery of inpatient services. In this regard, CMS has not looked solely to inpatient / outpatient bed ratios to establish a lack of primary engagement.  Rather, CMS has also looked at the ratio of inpatient / outpatient service volumes when investigating a hospital.  Other CMS informal guidance instructs that hospitals are to be evaluated on whether the hospital operates in bona fide accordance with the Medicare Conditions of Participation for hospitals.


Unfortunately, the dearth of clear guidance on how to determine whether a hospital is primarily engaged in inpatient care does not provide hospitals with much opportunity to recognize whether they are at risk of termination, though CMS has informally indicated that its current enforcement interest is limited to only the most egregious of cases.  Fortunately, as CMS has indicated that it will entertain “case-specific” and “clearly persuasive data” that a hospital is so primarily engaged, hospitals should have a broad range of arguments from which to choose in disputing any enforcement action for failure to meet the requirements of Social Security Act section 1861(e). Depending on a hospital’s own particular circumstances, the best course of action in response to a termination letter may be to work with the issuing CMS Regional Office in order to jointly establish criteria that the agency would find persuasive in demonstrating that the hospital is primarily engaged in providing inpatient care.



42 U.S.C. § 1395cc(b)(2)(A).  See also 42 C.F.R. § 489.53(a)(1), Medicare State Operations Manual (CMS Pub. 100-03) Ch. 3, § 3030A (Rev. 1, May 1, 2004).  42 C.F.R. § 488.3(a)(1) provides that, in order to be approved for participation in the Medicare program, a prospective provider must satisfy the applicable statutory definition in Section 1861, as well.


42 U.S.C. § 1395x(e)(1)(A).


Michael O. Leavitt, Secretary, HHS, Recommendations Regarding Physician-Owned Hospitals, 7. Available at:


Id. at 7-8.


Mark B. McClellan, MD, Ph.D., Administrator, CMS, Testimony Before the House Committee on Energy and Commerce Hearing on Specialty Hospitals: Assessing Their Role in the Delivery of Quality Health Care, May 12, 2005, 2-3. Available at:


HHS, Strategic Plan Regarding Physician Investment in Specialty Hospitals Section 5006 of the Deficit Reduction Act Interim Report, (May 9, 2006). Available at:


Id. at 5.






HHS, Final Report to the Congress and Strategic and Implementing Plan Required under Section 5006 of the Deficit Reduction Act of 2005, 79. Available at:


CMS, Survey & Certification Memorandum S&C-08-08, (Jan. 11, 2008), 1.


Id. at 5 (emphasis added).


Id. (emphasis added).


See HHS, Final Report to the Congress and Strategic and Implementing Plan Required under Section 5006 of the Deficit Reduction Act of 2005, 79.


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