The U.S. Department of Health and Human Services (HHS) on August 8 submitted to Congress the final report required by the Deficit Reduction Act of 2005. Its final report details the Bush administration’s plans to address perceived concerns about specialty hospitals and discusses several significant changes that will affect specialty and general hospitals alike.
In recent years Congress has been keenly focused on, and deeply divided over, specialty hospital development. In 2003 Congress amended the physician self-referral proscription, commonly referred to as the "Stark Law," to impose an 18-month moratorium during which physician-investors in new specialty hospitals could not refer Medicare patients to those hospitals. The 2003 moratorium effectively stifled development of new specialty hospitals during the moratorium period and for a short while afterward while Congress continued to debate their fate.
Congress debated specialty hospitals throughout 2005 and after the moratorium lapsed in June 2005. In early 2006, Congress approved more specialty hospital legislation. However, this time Congress declined to extend the ban on physician self-referrals to specialty hospitals. Instead, Congress directed the Secretary of HHS to prepare a plan for dealing with physician investment in specialty hospitals. The legislation required the secretary to issue an interim report within three months and a final report no later than six months after the date of enactment. It also obliged the secretary to withhold provider numbers from new specialty hospitals during the six-month period while the reports were being developed.
Report Details CMS’s Existing and Future Actions
The report issued on August 8 is the final report the Deficit Reduction Act requires of the secretary. It details a variety of steps that the Centers for Medicare & Medicaid Services (CMS) has already taken to address specialty hospital development, and it announces several additional steps that CMS and other HHS agencies intend to take in the near future.
Significant Hospital Payment Reforms
CMS took initial steps to refine payments under the hospital inpatient prospective payment system in 2005 when it expanded the number of cardiovascular DRGs within MDC 5 (Diseases and Disorders of the Circulatory System), an MDC cardiac specialty hospitals commonly bill. These changes more accurately reflect within-DRG differences in severity of illness and more closely relate reimbursement with resource utilization during these patient admissions.
Earlier this spring CMS proposed two additional and significant hospital payment reforms that would have dramatically revised how and how much Medicare pays hospitals. However, in a final rule released earlier this month to be published August 18, CMS announced its intent to implement only one of the two proposed changes this year: to assign weights to DRGs based on estimated hospital costs rather than on reported charges. CMS postponed its plan to dramatically reconfigure the DRGs, although as an interim step it created 20 new DRGs and modified 32 others to better relate the DRGs to patient severity of illness. CMS estimates that once these changes are fully adopted, there will be an aggregate reduction of more than 5 percent in the relative weights for cardiac specialty hospitals. However, these changes will affect specialty and general hospitals alike, as evidenced by the outpouring of opposition to CMS’s proposed changes from hospitals around the country.
ASC Payment Changes
CMS likewise just released a proposal to substantially reform how and how much it pays ambulatory surgery centers (ASCs). If finalized, CMS will link ASC payments to the payment system used for hospital outpatient services, a move CMS says will discourage physician investors from forming orthopedic and surgical specialty hospitals to take advantage of the typically higher payments under hospital payment systems. These changes are expected to be implemented in January 2008. However, here too CMS appears headed toward using another blunt instrument that will not only affect specialty hospital development but also existing and common hospital-physician joint ventures in ASCs.
Changes to EMTALA
CMS also recently announced changes to the Emergency Medical Treatment and Active Labor Act (EMTALA) that now explicitly require hospitals with specialized capabilities (including hospitals without emergency departments) to accept appropriate transfers of unstable patients. The recent report to Congress reveals CMS’s intent to issue additional guidance on what is expected of hospitals without emergency departments. CMS indicated it is considering its requirements for appraising a patient’s medical condition and providing initial treatment, and whether to require personnel trained in proper patient revival techniques (such as advanced cardiac life support-trained nurses) to be on the premises at all times.
Reporting on Investment and Compensation Relationships
The report further signals CMS’s intent to require hospitals to report information on a periodic basis about investment and compensation relationships with physicians. It will initially limit reporting requirements to specialty hospitals, but ultimately the requirements will apply to all hospitals. CMS also is exploring a change to Medicare regulations to require hospitals to disclose to patients investment interests, and possibly certain compensation arrangements as well, with physicians who refer to the hospital.
HHS intends to step up enforcement of the physician self-referral and anti-kickback laws. Specifically, CMS intends to more aggressively scrutinize the relationships between physician investment and compensation. According to the report, if a physician-investor has a 2 percent ownership interest in a specialty hospital but receives a 10 percent share of the profit distributions, CMS might regard the excess 8 percent as not a true profit distribution that is therefore not eligible for a compensation-related exception.
The Inspector General for HHS (IG) similarly intends to examine suspect joint ventures for possible violations of the anti-kickback statute. Specifically the IG will review the number of venture participants in a position to make or influence referrals, the investment disparities among those expected to make a large number of referrals versus fewer referrals, programs that encourage participants to make referrals, and contractual provisions that encourage or require participants to divest their ownership interest if they fail to sustain a level of referrals.
Through a survey recently sent to 130 physician-owned specialty hospitals and 320 competitor hospitals, HHS obtained substantial data with respect to Medicaid and charity care patient populations and found that competitor hospitals treat a significantly higher proportion of Medicaid patients and the uninsured. Nonetheless, HHS is not proposing to require specialty hospitals or other hospitals to furnish minimum levels of charity care or care to Medicaid patients.
Hospitals likely have not heard the end of the matter. Congress, and particularly the Senate Finance Committee led by Senator Charles F. Grassley and Senator Max Baucus (both vocal critics of specialty hospitals), is scrutinizing tax-exempt hospital charity care policies and practices and contemplating substantial changes in this area. Legislative action may yet occur in 2006.
Effective with the release of the report, CMS discontinued its moratorium on issuing new provider numbers. Physician-owned specialty hospitals are now free to enroll to participate in the Medicare program, and many may do just that.
Reimbursement changes that seek to minimize the financial incentives and competitive advantages associated with specialty hospitals may alter the financial appeal of such institutions. However, these may not be the silver bullet opponents are seeking. Policymakers and hospital executives may need to develop new tools for coping with the rapid growth of specialty hospitals.