Overview:  The Centers for Medicare & Medicaid Services will undertake over the next six months a review of its procedures for enrolling specialty hospitals in the Medicare program.  In addition, CMS will undertake a series of steps to reform Medicare payments that may provide specialty hospitals with an unfair advantage over other types of providers, such as community hospitals and ambulatory surgical centers.  Specialty hospitals are those with limited focus that generally treat only cardiac, orthopedic or surgical cases.  Physicians who refer patients to these specialty hospitals often have a limited ownership interest in them.

The steps CMS is announcing today are designed to promote true and fair competition in hospital services, while improving quality and avoiding unnecessary costs for patients and for the Medicare program.

Background:  In the Medicare Modernization Act of 2003, Congress instructed CMS to prohibit physician-investor referrals to specialty hospitals for a period of 18 months, ending June 8, 2005, unless the hospitals were already under development as of November 18, 2003.  Congress mandated that during the moratorium, the Medicare Payment Advisory Commission (MedPAC) and the Department of Health and Human Services (HHS) conduct separate studies, with MedPAC focusing on payment issues raised by specialty hospitals, and HHS focusing on such issues as referral patterns, quality of care, and impact on the provision of uncompensated care.  MedPAC submitted its report and recommendations on March 8, and HHS submitted its report and recommendations on May 12.

CMS is now beginning to implement the recommended changes.

Key Steps:   In its May 12 Report to Congress, CMS outlines four recommendations concerning specialty hospitals.

Reform payment rates for inpatient hospital services through changes to the DRG system.

CMS will evaluate potential changes to the inpatient prospective payment system (IPPS).  The changes will be implemented to more accurately reflect the severity of a patient’s illness in setting the payment level.  CMS will also review specific DRGs such as cardiac, orthopedic, and surgical DRGs that are alleged to be overpaid and that may therefore create incentives for physicians to create specialty hospitals.  CMS expects to implement most of these IPPS changes by fiscal year 2007.

Reform payment rates for ambulatory surgical centers (ASCs).

The CMS study of specialty hospitals found that orthopedic and surgical specialty hospitals tend to have few inpatient beds and raised the question of whether these entities concentrate primarily on outpatient care.  Physician-owners may seek the specialty hospital designation because payment rates for hospital outpatient services under the outpatient prospective payment system are often higher than those for the same procedures when performed in ASCs.  CMS is already planning to reform the ASC payment system to diminish these differences.  CMS will implement the ASC payment reforms by January 2008.

Review procedures for approving hospitals for participation in Medicare and closely scrutinize processes for approving and starting to pay new specialty hospitals.

Under Medicare, a hospital must primarily furnish care to inpatients.  CMS has expressed concern that some specialty hospitals may concentrate primarily on outpatients and may therefore fail to meet the Medicare definition.  Accordingly, the May 4, 2005 proposed rule updating the Hospital Inpatient Prospective Payment System for Fiscal Year 2006 indicated that, if specialty hospitals are not primarily engaged in inpatient care, new applications for hospital provider agreements will be denied and existing provider agreements may be terminated. 

CMS will review its current standards for approval for participation and payment, to determine whether additional or different standards should apply to specialty hospitals in light of the focused nature of their services.  Specifically, CMS intends to continue meeting this summer with State survey agencies, JCAHO, and AOA, the organizations that accredit hospitals, to discuss standards for determining whether a specialty hospital meets statutory requirements to be a hospital under Medicare. 

CMS also plans to seek public comment on the appropriate standards for specialty hospitals.  Specifically, CMS will:

• Seek advice from the EMTALA Technical Advisory Group (TAG) ‑ CMS has added several items related to specialty hospitals to the agenda for the TAG’s meeting on June 15-17, 2005. Among other items, CMS plans to discuss transfer requirements between community hospitals and specialty hospitals, and the participation of specialty hospitals with emergency departments in local community emergency services protocols.

• Solicit public input on certification issues related to specialty hospitals ‑ To obtain as much information and as many views as possible, CMS will seek input from the public in an Open Door Forum in September 2005.  Open Door Forums provide an opportunity for live dialogue between CMS and the provider community at large, in order to understand and then help find solutions to contemporary program issues.  The date and time of the Open Door Forum will be announced later on the Open Door website at: www.cms.hhs.gov/opendoor .

In the context of this review, CMS will also seek public input on how it can best support all types of hospitals in achieving further quality improvements and efficiency gains.

During this review, CMS is instructing its regional offices not to issue new specialty hospital provider agreements or authorize an initial survey by the state survey agency for new specialty hospitals.  Medicare fiscal intermediaries have been instructed not to process new provider enrollment applications for specialty hospitals until further notice.  The suspension does not apply to those specialty hospitals that have prior to June 9, 2005, submitted an enrollment application or have requested an advisory opinion from CMS concerning whether they were subject to the moratorium under section 507 of the MMA.  CMS plans to complete its review process by January 2006.