Articles on Compliance Strategies

New CMS Regulations Aim to Address Specialty Hospital Problems

Reprinted from the Aug. 14, 2006, issue of REPORT ON MEDICARE COMPLIANCE, the nation's leading source of news and strategic information on false claims, overpayments, compliance programs, billing errors and other Medicare compliance issues.

Specialty hospitals will be allowed to re-enter Medicare, but their financial arrangements will face new CMS scrutiny and violations will be punished under the Stark self-referral law, according to CMS's new "strategic and implementing plan" for specialty hospitals. The plan, mandated by the Deficit Reduction Act (DRA), was unveiled simultaneously with three new outpatient payment regulations on Aug. 8. The flurry of regulatory activity, coming a week after CMS finalized an inpatient prospective payment system (IPPS) regulation, sends a message from CMS that payment fairness across all of Medicare — and finding the right setting for every patient — is the best path to solving specialty hospital-related problems.

With the presentation of the final DRA report to Congress, the moratorium on specialty hospital participation in Medicare ends. In its stead, CMS is entering "a new era of disclosure and transparency and oversight" for specialty hospitals, CMS Administrator Mark McClellan, M.D., said at an Aug. 9 media briefing. Specialty hospitals will be required to disclose to CMS their compensation and investment relationships with physicians in new Medicare enrollment forms.

McClellan emphasized that the agency means business. For one thing, CMS is collecting $12 million from six hospitals that inappropriately billed Medicare for services provided at a time they were barred from participation because of the moratorium implemented by the Medicare reform law, he said.

The specialty hospital report set out to determine whether physician investments in specialty hospitals are non-bona fide. For example, are the hospitals' distributions to physician investors proportional to their contributions? "Nonproportional returns on investment violate Stark and are suspect under the anti-kickback statute," McClellan said. A ballpark figure could be a 1% investment with a 5% to 6% return, Don Romano, director of CMS's Division of Technical Payment Policy, said at the briefing.

With the data it had, CMS found no pattern of abuses, but many hospitals surveyed didn't answer questions regarding physician investment and compensation activity. As a result, CMS said in the report, "we are sufficiently concerned about potential tainted relationships and will begin seeking financial disclosure with those hospitals and will implement a regular disclosure process." Hospitals that don't spill the beans could face $10,000 a day in civil monetary penalties.

In fact, disclosure requirements will become the norm. "CMS and OIG can use this information and other tools to take appropriate action in case of any arrangements that are problematic and that we identify," McClellan says. "Having this information helps us identify [offenders] when it comes to enforcing this. We mean it, and we are going to do it."

The strategic and implementing plan describes steps to solve alleged problems associated with specialty hospitals, such as "cherry picking" healthier patients within diagnostic categories. Among these steps:

(1) CMS says the best way to deal with "perceived unfair competition" from specialty hospitals is to "make the DRG payment system more accurate." That process is under way with the planned revamping of IPPS. CMS on Aug. 1 finalized the first of two regulations that overhaul IPPS for the first time since its 1983 creation. Among other things, CMS says the accuracy of inpatient payments should improve because they will be premised on hospital costs, not charges, and adjusted to better reflect the severity of the patient's illness. The second IPPS regulation, tentatively slated to be finalized in October, would replace the existing 526 DRGs with 861 severity-adjusted DRGs, which should eliminate cherry picking.

(2) Next up is CMS's proposal to significantly change the ambulatory surgery center (ASC) fee methodology for fiscal year 2007. "The goal we share with Congress is to ensure we get rid of inadvertent incentives that favor one setting over another, so we propose major revisions in ASC that logically align ASC and OPPS to encourage the most appropriate outpatient setting," McClellan said at the briefing. Community hospitals say certain kinds of specialty hospitals (some orthopedic and surgical) may be more akin to ASCs, but they sign up with Medicare as hospitals so they can collect more lucrative outpatient prospective payment system (OPPS) payments. To keep the balance, the proposed ASC rule would allow ASCs to perform most outpatient procedures (if considered safe and effective in that setting), but Medicare won't pay them the facility fee. ASC payment rates will be based on APC payment rates for the same surgeries, but adjusted downward to reflect lower costs. However, CMS will pay ASCs a facility fee (i.e., the lesser of the ASC or OPPS rate) for 14 designated procedures.

(3) To align physician-hospital incentives without spurring specialty hospitals, CMS is pursuing demonstration projects under DRA and the Medicare reform law. This includes gain sharing, which allows hospitals to reward physicians for achieving cost savings in the hospital while not harming quality of care.

(4) CMS has taken a stand with respect to specialty hospitals that lack an emergency department, and in the past avoided obligations under the Emergency Medical Treatment and Labor Act (EMTALA). The fiscal year 2007 IPPS final rule required all hospitals "with specialized capabilities, including specialty hospitals," to take appropriate transfers of unstable patients, even if the hospital lacks an emergency department. "CMS has, in the past, taken enforcement actions based on its policy that all participating hospitals with specialized capabilities have an EMTALA obligation to accept an appropriate transfer of an unstable individual protected by EMTALA."

(5) CMS will change the 855-A enrollment form to ensure that the agency can determine a hospital is a specialty facility. CMS will also periodically survey specialty hospitals on their compensation and investment interests with physicians.

Los Angeles attorney Charles Oppenheim says CMS's action plan for specialty hospitals "is a step or two in the right direction but not far enough. Specialty hospitals are exploiting a potential loophole of Stark and masquerading as whole hospitals when in fact they are the functional equivalent of a department of a hospital, which Stark did not intend to allow."

Fixing DRG payments and moving ahead with the gain-sharing demonstration, as well as other CMS fixes, "are fine and noble goals," but they don't "really have anything to do with" the dangers that specialty hospitals pose to acute care hospitals by leaving them the sicker patients, says Oppenheim, who is with the law firm Foley & Lardner LLP.

View the specialty hospital final report at www.cms.hhs.gov/PhysicianSelfReferral/
06a_DRA_Reports.asp#TopOfPage.

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