Fact Sheets

INTERIM REPORT TO CONGRESS ON PROGRESS TOWARD IMPLEMENTING THE DRA PROVISION AFFECTING

Overview:

The Centers for Medicare & Medicaid Services (CMS) today released an Interim Report to Congress outlining the steps CMS is taking to implement a provision in the Deficit Reduction Act of 2005 (DRA) affecting specialty hospitals.   That provision requires CMS to develop a strategic and implementing plan (Strategic Plan) to determine whether physician investments in specialty hospitals are proportional to their investment returns; whether the investment is a bona fide investment; and whether the Secretary of Health and Human Services (HHS) should require specialty hospitals to disclose investment information on an annual basis. 

The DRA also requires the Secretary to consider the provision of care by specialty hospitals to Medicaid and other low income patients, as well as charity care.   Finally, the DRA requires the Strategic Plan to address appropriate enforcement of the rules affecting specialty hospitals. 

Background:

Specialty hospitals were defined in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) as hospitals that are “primarily or exclusively engaged in the care and treatment” of patients with a cardiac or an orthopedic condition, or patients receiving a surgical procedure.   Physicians who refer patients to specialty hospitals are often investors in the hospitals, although physician investors typically refer some patients to a community hospital and most specialty hospitals will accept referrals from non-investor physicians.  By focusing on certain types of cases, specialty hospitals have the potential to increase the quality of care and to provide care (including surgical procedures) in a more efficient manner.  Critics of specialty hospitals, however, have claimed that specialty hospitals solicit the more profitable cases and patients with private insurance, leaving the sicker and poorer patients to be treated at community hospitals.  

Concerned about the growth in the number of specialty hospitals and their implications for health care delivery, Congress in the MMA required the Secretary to impose an 18-month moratorium on payments to certain specialty hospitals for services furnished to Medicare beneficiaries as a result of a referral from a physician with an investment interest in the hospital.   Excepted from the moratorium were specialty hospitals that were in operation, or “under development,” as of November 18, 2003 (provided that such specialty hospitals complied with restrictions imposed by the MMA on increases in the number of physician investors, increases in the number of beds, and changes in the type of services).  The MMA further required that during the moratorium, the Secretary should develop a study of investment and referral patterns and quality of care provided by specialty hospitals, while the Medicare Payment Advisory Commission (MedPAC) should study payment issues.  The Secretary and MedPAC submitted their findings in Reports to Congress last year. 

The Secretary’s May 12, 2005 Report (HHS Report) found that, based on an analysis of claims data, cardiac specialty hospitals delivered high quality of care that was as good as or better than their competitor hospitals.  (Because of the small number of discharges, a statistically valid assessment could not be made for orthopedic and surgery hospitals.)  As with all types of hospitals, there will be exceptions, and CMS will have to be vigilant in monitoring quality of care issues.  Patient satisfaction was also very high in cardiac, orthopedic and surgical specialty hospitals.  The HHS Report also found that specialty hospitals offer greater predictability in scheduling of services and make significant tax contributions to the community.  In addition, the Report did not find evidence that physician ownership in cardiac hospitals resulted in selective referrals.  However, after analyzing the findings and recommendations of the MedPAC Report, CMS concluded that inaccuracies in Medicare payments to hospitals and to ambulatory surgical centers (ASCs) needed to be corrected as quickly as possible.

Following the release of the HHS and MedPAC Reports, CMS announced four key CMS recommendations: (1) reform payment rates for inpatient hospital services through diagnosis-related group (“DRG”) refinements; (2) reform payment rates for ASCs; (3) more closely scrutinize whether specialty hospitals meet the definition of a hospital contained in section 1861(e) of the Social Security Act; and (4) review procedures for approval and for participation in Medicare.  CMS also announced that CMS would consider how provisions of the Emergency Medical Treatment and Labor Act (EMTALA) should apply to specialty hospitals.   Finally, CMS announced that, while it was studying these issues, it was suspending the enrollment of specialty hospitals into Medicare.  The suspension was to end February 15, 2006, but the DRA, which was signed into law before the CMS-imposed suspension ended, extends the suspension for six months while CMS develops a Strategic Plan to address concerns associated with specialty hospitals.  Meanwhile, this report discusses the agency’s findings on enrollment for specialty hospitals, noting that CMS did not identify any needed changes in its enrollment procedures.

CMS intends for this Interim Report to generate comments and input as CMS works to finalize its Strategic Plan for specialty hospitals, including ways in which CMS can support other government regulators that oversee key aspects of specialty hospital activities.   The Interim Report includes a summary of steps CMS has taken since June 2005 to respond to the recommendations contained in the HHS and MedPAC reports, and outlines many of the steps CMS is considering for the future.

Enforcement of Payment Restrictions for New Specialty Hospitals:

As noted above, the MMA prohibited Medicare payment to specialty hospitals for services furnished to Medicare patients who were referred to the hospital by physician owners during the 18-month moratorium, unless the specialty hospital was excepted from the moratorium.  Specialty hospitals that existed, or were “under development” as of November 18, 2003 were excepted from the moratorium, provided that they complied with certain restrictions concerning changes in specialized services, and increases in the number of  beds and the number of physician-investors.   To assist hospitals in determining whether they were “under development” or whether they met the definition of a specialty hospital, CMS utilized its existing advisory opinion process.  That is, hospitals submitted requests for a formal advisory opinion, together with supporting financial and other transactional information (for purposes of determining whether the hospital was under development) or actual or projected discharge data (for purposes of determining whether the hospital met the definition of a specialty hospital).

As in other areas, CMS takes its responsibilities for monitoring quality of care and appropriateness of Medicare payments very seriously.  CMS has identified two hospitals that billed Medicare for services in violation of the specialty hospital restrictions imposed under the MMA moratorium.  CMS has initiated procedures to recover improper Medicare payments made to these hospitals.

As part of ongoing quality monitoring activities for all hospitals that treat Medicare patients, CMS has also found significant quality concerns with one of the above-referenced hospitals, and has placed it on a termination track.  Termination of a hospital’s enrollment in Medicare can have severe adverse impacts on access to health care in a community, as well as resulting in loss of employment for hospital staff. Consequently, hospitals usually undertake significant responses to improve quality and safety when these steps are undertaken. CMS’s first emphasis is on bringing a hospital into compliance, with termination occurring when that proves impossible.

Proposed Payment Reforms For More Accurate Inpatient  Hospital Reimbursement:

In the hospital inpatient prospective payment system (IPPS) final rule for FY 2006, CMS found a sound analytical basis for revising nine cardiovascular DRGs that account for nearly 700,000 cases, to better recognize severity of illness. The refinements to the DRGs were taken as an interim step to better recognize severity in the DRG system until CMS completed a more comprehensive analysis of the MedPAC recommendations earlier this year.

In the FY 2007 IPPS proposed rule, CMS’ analysis suggests that the current, charge-based weights and the current DRG classifications result in notable distortions between payments and the relative costs of care.   The proposed rule includes two major types of reforms.  First, the reformed payment changes would assign weights to DRGs based on estimated hospital costs, rather than on reported charges.  Second, the DRGs would be reconfigured to reflect not only the patient’s diagnosis, but also the severity of the illness.  This change, if implemented, would ensure that whether services were furnished in a specialty hospital or a community hospital, the payment would more closely reflect the costs of treating the patient, in light of the severity of illness.  It would therefore make it less attractive for a physician-investor who might be inclined to refer the less severely ill patients to the specialty hospital for financial reasons while leaving the more severely ill and more costly patients to be served by the community hospital. 

Payments for Services by Ambulatory Surgical Centers:

One of the findings in the HHS Report was that many orthopedic and surgical specialty hospitals were more similar to ASCs than to acute care hospitals.  However, the difference in payments for the same services, depending on whether they were furnished in an ASC or a hospital outpatient department, encourages providers to enroll what are essentially ASCs as specialty hospitals.

CMS is addressing this problem in several ways.  Effective CY 2008, CMS will significantly expand the list of surgical procedures eligible for payment in ambulatory surgical centers (ASCs) to include all surgical procedures performed in hospital outpatient departments except for those that pose a significant safety risk or require an overnight stay.  At the same time, CMS will revise the payment methodology for ASCs to align payments more closely with the payment rates in other payment systems for the same procedures.  This will remove much of the incentive for physicians and other investors to form orthopedic and surgical specialty hospitals in order to take advantage of the typically higher payments under the inpatient and outpatient hospital systems.

Clarifying EMTALA Obligations:

Many specialty hospitals, especially orthopedic and surgical hospitals, do not have emergency departments, and therefore, have not been required to follow the screening and stabilization requirements under the Emergency Medical Treatment and Labor Act (EMTALA).  To address the need for specialty and other hospitals without emergency departments to provide appropriate care for patients in need, the FY 2007 IPPS proposed rule includes a provision that would require all hospitals (including specialty hospitals) with specialized capabilities to accept appropriate transfers of unstable patients covered by EMTALA, without regard to whether the hospital has an emergency department.

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

In connection with this Interim Report, CMS is sending a survey to approximately 130 specialty hospitals and 270 general acute care hospitals seeking information about physician investment interests and provision of care to low income and charity patients.  This survey is designed to provide us with comprehensive information on how physician investment arrangements are structured.  CMS also anticipates that this survey will provide much more information about the provision of charity care and care to Medicaid patients by specialty hospitals and their general acute care hospital competitors than has previously been obtained.  For example, the survey asks hospitals to identify their physician investors, the returns on the investments, whether the physicians have stop losses or other types of limitations on liability available to them, whether the physicians received a loan from the hospital to

purchase his or her investment interest, and whether the physicians have or have had a compensation arrangement (such as a management contract) with the hospital or an entity related to the hospital.  The survey also asks such questions as the hospital’s number of Medicaid patient discharges, its revenue from Medicaid patients, and the amount of charity care it provided.

The information gained from the survey will be used to develop the final Strategic Plan to be released later this year.   To ensure a high quality survey, CMS sought and received input from the American Surgical Hospital Association, National Surgical Hospitals Incorporated, the MedCath Corporation, the Federation of American Hospitals and the American Hospital Association.  Because CMS would not want to make recommendations to Congress without thorough, timely information, all of these hospital organizations committed to contacting their member hospitals to encourage their participation in the survey. 

Support for Enforcement against Inappropriate Investment Activities

In addition to developing factual information about investments in specialty hospitals, CMS is very interested in public comment on how CMS can best support enforcement against inappropriate investment – an issue that goes beyond our usual mandate and capacities to promote quality care and to pay appropriately for care provided to our beneficiaries.  CMS is continuing to assess the extent to which relevant State and other Federal agencies have jurisdiction over issues related to whether investments are bona fide and result in “appropriate” return on investment.  In this regard, CMS notes that CMS has program responsibility for the physician self-referral statute under section 1877 of the Social Security Act.  That statute’s “whole hospital exception” permits a physician to refer a patient to a hospital in which the physician has an investment or ownership interest, so long as the investment is in the whole hospital, and not just the department to which the physician makes referrals.  The exception applies without regard to whether the hospital is a specialty hospital or some other type of hospital.

Presently, there are no additional restrictions in the physician self-referral statute and regulations with respect to whether a physician’s investment is “proportional” or “bona fide” (to use language from section 5006 of the DRA).  Rather, these are questions that are appropriately addressed under the anti-kickback statute, section 1128B(b)(1) of the Social Security Act.  Therefore, CMS intends to consult with staff of the HHS Office of Inspector General (OIG) who can provide valuable technical guidance on matters that relate to enforcement under the anti-kickback statute.  If CMS uncovers evidence of possible violations of the anti-kickback statute, or evidence of potential knowing violations of the physician self-referral statute, CMS will refer those cases to the OIG for appropriate enforcement action.  Consequently, in conjunction with the hospital survey, CMS is also assessing how CMS can best promote the availability of accurate and relevant information on physician investments in hospitals.

CMS is accepting public comments on the Interim Report.  Comments should be sent by close of business on June 12, 2006, to Donald.Romano@cms.hhs.gov.

A final Report to Congress will be issued later this year.