Specialty hospitals, as referred to under federal law, are hospitals that are exclusively or primarily engaged in the caring of cardiac patients, orthopedic patients and/or surgical patients. Though specialty hospitals provide high levels of health care services, because many such hospitals have physician owners, regulatory agencies have questioned whether specialty hospitals’ focus is on profitable patients rather than the quality of care. The DRA spoke to this concern by requiring CMS to develop a “strategic and implementing plan” that addresses the following issues related to physician investment in specialty hospitals: (1) the proportionality of investment return; (2) bona fide investments; (3) annual disclosure of investment information; and (4) specialty hospitals’ provision of care to patients who are Medicaid eligible or receive benefits under a section 1115 waiver and charity care; and (5) appropriate enforcement.

CMS is not the only entity focused on the issue of specialty hospitals. Between 2003 and 2006, MedPAC, DHHS, and the GAO have issued findings and reports on the subject. Together these entities analyzed and commented on numerous issues related to specialty hospitals and specifically to physician-owned specialty hospitals, including the costs of inpatient and outpatient services in both specialty hospitals and competitor acute care hospitals; payor mix; specialty hospital treatment of patients in certain DRGs compared to competitor acute care hospitals; possible updates to the DRG system; the nature of physician investments and physician investors in specialty hospitals; the percentage of patients referred to physician-owned specialty by physicians with an ownership interest; increases in utilization of services in physician-owned hospitals; quality of care in specialty hospitals compared to that in competitor acute care hospitals; the amount of uncompensated care provided in both types of hospitals; and specialty hospitals’ financial and competitive impact on competitor acute care hospitals.

Strategic and Implementing Plan
As required by the DRA, CMS issued an interim report on the specified issues related to specialty hospitals and conducted a survey of 64 physician-owned specialty hospitals and 76 competitor acute care hospitals. The survey was sent to 130 physician-owned specialty hospitals and 320 competitor acute care hospitals. Participation in the survey was voluntary. Relying on its survey findings and interim report, and on the findings of the other entities mentioned above, CMS formulated the strategic and implementing plan addressing specialty hospital issues, as required by the DRA, and released it in its final report to Congress on August 8, 2006. See Department of Health and Human Services, Final Report to the Congress and Strategic Implementing Plan Required Under Section 5006 of the Deficit Reduction Act of 2005.

Improve the DRG and ASC Payment System
One primary concern with specialty hospitals is their perceived ability and tendency to “cherry pick” the more profitable DRGs and patients. CMS believes the best way to reduce or eliminate this incentive is to make to the DRG payment system more accurate, so as to provide equitable and accurate payment across all cases. A similar common complaint is that because orthopedic and surgical specialty hospitals resemble ambulatory surgical centers (ASC), they are able to take advantage of the higher outpatient prospective payment system (PPS) rates for procedures performed in an ASC. CMS did note that payment rates for particular services in ASCs differ significantly from those performed in hospital outpatient departments paid under the outpatient PPS. CMS believes reforms to the ASC fee schedule to accurately reflect resources required to perform certain procedures and to bring them in line with payments under other systems should discourage physicians from engaging in this practice.

Align Physician and Hospital Incentives
CMS observed that physicians and hospitals often have opposite goals. Physicians are inclined to provide a large quantity of services to maximize revenue while hospitals subject to the DRG PPS are inclined to conserve resources to maximize profit. CMS believes that aligning physician and hospital incentives will reduce physician motivation for creating specialty hospitals and improve patient outcomes, as well as increase the efficiency of care delivery. With regard to specialty hospitals, physicians believe their control through ownership enables them to configure hospitals in such a way that they provide higher quality of care at a lower cost, as well as operate more conveniently and productively for the physicians’ type of practice. In addition, as owners, physicians share in hospital profits. Taking this into consideration, CMS is looking towards creating demonstration projects that will provide opportunities for physicians to have increased and meaningful participation in the governance and management of hospitals as well as financially benefit from efficient clinical operations. CMS also is looking to exploring various types of gainsharing arrangements and the incorporation of value-based purchasing with the goal of promoting physician and hospital goal alignment.

Issue Guidance on Patient Safety Measures
CMS expressed its concern that specialty hospitals without emergency rooms are not subject to the same regulatory requirements as hospitals with emergency rooms. These requirements include specific mandates related to patient safety. Though hospitals without emergency rooms are required under the law to have certain written policies and procedures related to the evaluation, treatment, and appropriate transfer of emergency cases, CMS believes additional guidance regarding these issues of emergency medicine in hospitals without emergency departments is warranted. For example, CMS clarified in the FY 2007 inpatient PPS rule that specialty hospitals are required under EMTALA to accept appropriate transfers of unstable patients. 71 Fed. Reg. 47,870, 48,097 (Aug. 18, 2006). Further emphasizing its stance on the matter, CMS released on April 26, 2007, separate guidance on hospital emergency services requirements in the form of a survey and certification letter, specifically instructing that any hospital participating in Medicare—including specialty hospitals and others without emergency departments—must be capable of evaluating persons with emergencies, providing initial treatment, and referring or transferring such persons as appropriate. See Survey and Certification Letter S&C-07-19 (Apr. 26, 2007). CMS also will review the findings of the OIG’s current study on patient care and safety issues in physician-owned specialty hospitals.

Promote Transparency of Investment
The DRA specifically required CMS to review the issue of an annual disclosure of hospital investment information. In doing so, CMS found that out of the 22 states with specialty hospitals, only Texas requires specialty hospitals to disclose physician ownership interests to the state. Most other states (16 of the 22) require physicians to disclose their ownership interests to patients they refer to hospitals or other facilities. In surveying both specialty hospitals and competitor general acute care hospitals, CMS found that most hospitals would be willing to disclose physician ownership information. A smaller number maintained they would only disclose such information if all hospitals were required to do so.

CMS believes it has authority under the Stark statute to require hospitals to disclose the names of physician-owners or investors and the nature and extent of their ownership or investment interest, as well as information regarding compensation arrangements with, and other payments to, physicians. Therefore, because physician ownership in all hospitals raises issues under the Stark statute, as well as the antikickback statute, CMS will require all hospitals to provide such information on a periodic basis. Hospitals submitting late responses will be subject to a fine of up to $10,000 per day. CMS has yet to decide whether it will survey hospitals annually, stagger its survey so all hospitals are not reviewed in the same year, and/or focus its inquiry on certain types of relationships or hospitals. CMS also will require hospitals to disclose to patients ownership and/or compensation relationships with physicians who refer prior to providing care. Physicians, as a condition of medical staff membership, would be required to disclose to patients their ownership interests in a hospital at the time they refer patients to that hospital. CMS has proposed to include these requirements in the FY 2008 inpatient PPS rule. 72 Fed. Reg. 24,680, 24,816–17, 24,833 (May 3, 2007). Finally, in order to determine whether a hospital is or is not a specialty hospital, it will define the term specialty hospital as well as require hospitals to disclose whether they fit into this definition on their provider enrollment form.

Enforcement
As required by the DRA, CMS reviewed the proportionality of investments in specialty hospitals as well as the extent to which such investments were bona fide. CMS considered an investment to be bona fide if the capital contributed by a physician represented an investment for which the physician was at risk. CMS was unable to determine from the data collected whether the investments were paid for with cash or borrowed funds. When investment funds are borrowed, a physician has little or nor risk associated with it. Though CMS did request physician loan information from hospitals, only 18 hospitals reported the existence of any loans and of those only 3 were specialty hospitals. CMS was unable to make a determination as to the fair market value of these loans.

In analyzing the existence of any non-bona fide investments, CMS looked to how hospitals chose and retained investors. CMS inquired as to whether physicians received investment opportunities on the same terms as nonphysician investors. Though CMS received limited data in response, it did focus on the fact that many investment or subscription agreements inquired about the amount of revenue a physician generated in the past two years, the names of hospitals to which the physician referred, and the volume of patients referred. CMS found this suggested that such hospitals factored in the volume or value of physician referrals and revenues when selecting and/or retaining investors.

With regard to the proportionality of physician investments, CMS requested information showing the amounts of physician investments and the returns on such investments. Though CMS only received responses from 53 percent of the specialty hospitals, those responding reported proportional investments.

In its strategic and implementing plan, CMS emphasized that each physician compensation and/or ownership arrangement with specialty hospitals must fit within an exception to the Stark statute to avoid the imposition of significant penalties. CMS also detailed the OIG’s long-standing concerns regarding joint venture arrangements between federal health care program referral sources and those that benefit from such referrals (e.g., physicians and specialty hospitals). CMS noted that such arrangements be structured to fit within an applicable safe harbor. CMS stated that it will continue to work with the OIG in the investigation and prosecution of credible Stark and antikickback violations. CMS believes its initiative to collect and review data on hospital ownership will enhance the government’s ability to detect and prevent potential fraud and abuse. CMS will also continue to enforce the moratorium on specialty hospitals, specifically with regard to two hospitals that did not seek advisory opinions as to whether they were exempted from the moratorium but turned out to be non-exempt specialty hospitals.

Medicaid and Charity Care
As required under the DRA, CMS reviewed hospitals’ patient revenues generated from services provided to Medicaid beneficiaries and those eligible for benefits under a Section 1115 waiver, as well as such patient admissions or visits as a percentage of total admissions or visits. Based on the data from the hospitals responding to CMS’s survey, CMS found that Medicaid/1115 waiver revenue for specialty hospitals averaged at 2.3 percent, while the percentage of such revenue in competitor acute care hospitals averaged at 7 percent. Similarly, CMS found that Medicaid inpatient discharge rates in specialty hospitals were much smaller (3.6 percent) than in competitor acute care hospitals (12.3 percent).

With regard to charity care or care furnished to hospital inpatients for little or no charge, CMS found that acute care hospitals provided a significantly higher amount of charity care in FY 2004 and 2005 at 7.9 percent where specialty hospitals provided an average of 3.9 percent.

At this time in its strategic and implementing plan, CMS is not requiring specialty hospitals to provide a certain amount of charity care or care to Medicaid/1115 waiver patients. However, it does hope that the data revealed in its report will help Congress address questions about the responsibilities of for-profit and nonprofit hospitals with respect to caring for the indigent, uninsured, and underinsured.

Non-selected Policy Options
CMS decided that at this time it will not recommend that Congress amend the whole hospital exception to the Stark statute to prohibit physician ownership of specialty hospitals. Though it noted issues that potentially support such amendment, such as the conflict of interest between a physician’s duty to care and a physician’s financial interest, CMS stated that such issue was beyond the mandates of the DRA related to this strategic and implementing plan. In addition, CMS believes its reports provide sufficient additional information so Congress can decide what action, if any, to take with regard to the whole hospital exception. According to CMS, the DRA, for the time being, permits physician ownership of and self-referrals to specialty hospitals and CMS’s current role is to devise a plan for dealing with the related issues.

CMS also stated it will not continue the suspension on enrollment of new specialty hospitals. Section 5006 of the DRA provides that the suspension on enrollment instituted on June 9, 2005, is to continue until the earlier of the date the Secretary submits the final report or the date that is six months after the date of the enactment of the DRA (August 8, 2006), and if the final report is not issued by August 8, 2006, the suspension is to be continued to two months. CMS believes that while these congressionally mandated dates may not be an end to the mandate for suspension, they are an end to the authorization for the suspension.

Finally, CMS also has not further defined the term primarily engaged, as used in the statutory requirement that a hospital is an entity primarily engaged in furnishing services to inpatients. CMS will continue to interpret this term on a case-by-case basis and will not commit to engaging in rulemaking on the topic.

What This Means for Specialty Hospitals
Specialty hospitals remain under the federal government’s microscope. Current and future financial relationships with physicians will continue to be the subject of increased scrutiny, as will be a specialty hospital’s provider enrollment application. As additional approaches to specialty hospital issues not addressed in CMS’s plan continue to be discussed by other government entities, specialty hospitals should look for future additional administrative action, which could further restrict relationships with physicians.