The Department of Health and Human Services (HHS) today announced a strategic and implementing plan to address issues regarding physician investment in specialty hospitals.  As defined by Congress, specialty hospitals are hospitals exclusively or primarily engaged in caring for one of the following categories of patients:  patients with a cardiac condition or an orthopedic condition; or patients receiving a surgical procedure. 

“Specialty hospitals often achieve high levels of service, but especially under current payment methods, there have been questions about whether they focus on profitable patients rather than quality care,” said Centers for Medicare & Medicaid Services (CMS) Administrator Mark B. McClellan, M.D., Ph.D.  “This final report is a comprehensive review of the evidence on specialty hospitals and a comprehensive path forward to address concerns that have been raised.”

The strategic plan is contained in a Final Report to Congress to implement a provision in the Deficit Reduction Act of 2005 (DRA).  This provision requires the development of a strategic and implementing plan to address these issues.

“The steps we are taking in our final report will not only promote high-quality, appropriate care in specialty hospitals, but will also encourage appropriate hospital care for all patients, and better information about the financial arrangements involved in hospital care as well,” said Dr. McClellan. 

Dr. McClellan summarized key elements of the report:  “We are moving forward on making our hospital payment systems much more accurate, because hospital services should be based on patient need not excessive payments,” he said.  “We are bringing transparency to physician investments in hospitals, to help ensure that investment and compensation are appropriate, and to make sure that any such financial arrangements are disclosed to patients.  We are supporting innovative new approaches for general hospitals to collaborate with their physicians to improve quality and reduce hospital costs.   And we are enforcing the statutory requirements on appropriate payment and appropriate investment.” 

The plan highlights the importance of moving forward with the major payment reforms to the hospital inpatient prospective and ambulatory surgical center payment systems that have been initiated by CMS.  By eliminating the sometimes large difference between payments and costs for some types of hospital care, improper incentives can be eliminated for physicians and hospitals to invest in services simply because they are most profitable. 

Similarly, the plan includes new approaches for implementing “gainsharing” and value-based payment approaches as a means to align physician and hospital incentives, while achieving measurable improvements in quality of care.

The plan also contains transparency of investment initiatives, whereby hospitals will be required to provide CMS information concerning physician investment and compensation arrangements, and to disclose to patients whether they have physician investors.

The strategic plan announces CMS’ position that non-proportional returns on investments and non-bona fide investments may violate the physician self-referral statute and are suspect under the anti-kickback statute.

“Our voluntary survey of hospitals highlighted the importance of obtaining accurate information about physician investment and the returns on that investment,” said Dr. McClellan.  “With the disclosure of investment information, we have a better foundation for enforcement action under the physician self-referral statute whenever appropriate.   Hospitals that do not comply with this new disclosure requirement may face civil penalties of $10,000 per day that they are in violation of the law.”

"The Office of Inspector General welcomes the additional information contained in this report and supports efforts to prevent and detect fraud and abuse and to encourage compliance with all Federal health care program requirements," said Inspector General Daniel R. Levinson.

Other components of the plan include providing further guidance concerning what is expected of hospitals that do not have emergency departments, under the Emergency Medical Treatment and Labor Act (EMTALA) and changes in the enrollment form to identify specialty hospitals. 

Concerned about the growth in the number of specialty hospitals and their implications for health care delivery, Congress in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) required the Secretary of HHS 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 those specialty hospitals did not increase the number of physician investors or the number of beds, and did not change the type of services).

After the MMA moratorium expired, CMS instructed its regional offices and the contractors that process hospital payments not to enter into new provider agreements with specialty hospitals, and not to enroll new specialty hospitals as Medicare providers.  The DRA extended these provisions for six months, expiring today.

“We have put a lot of effort into enforcing the 18-month moratorium imposed by the Medicare Modernization Act, and subsequently into our suspension of Medicare enrollment for new specialty hospitals that Congress extended through today,” said Dr. McClellan.  “We intend to put the same effort into enforcing the new disclosure and other requirements for specialty hospitals.”

In addition to the action taken against two specialty hospitals detailed in the May 9 Interim Report, CMS has reviewed the activities of 78 specialty hospitals, and identified potential overpayments totaling $12.1 million for four hospitals that have been found in violation of the moratorium.

The MMA required the Secretary to develop a study of investment and referral patterns and quality of care provided by specialty hospitals, and the Medicare Payment Advisory Commission (MedPAC) to study payment issues.  The Secretary and MedPAC submitted their findings in Reports to Congress last year.

Today’s report responds to Section 5006 of the DRA, which requires the Secretary to develop a “strategic and implementing plan” to address the following issues:  (1) proportionality of investment return; (2) bona fide investment; (3) annual disclosure of investment information; (4) the provision by specialty hospitals of (i) care to patients who are eligible for Medicaid (or who are not eligible for Medicaid but who are regarded as such because they receive benefits under a section 1115 waiver) and (ii) charity care; and (5) appropriate enforcement.

For more information, visit the CMS Web site at:

http://www.cms.hhs.gov/PhysicianSelfReferral/