On August 8, the Centers for Medicare & Medicaid Services (CMS) released a final report to Congress outlining a strategic and implementing plan to address key issues relating to physician investment in specialty hospitals.  The Deficit Reduction Act of 2005 (the DRA) defined a “specialty hospital” as a hospital that is exclusively or primarily engaged in the care or treatment of patients with a cardiac or orthopaedic condition or patients receiving a surgical procedure.  Enacted as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, the original 18-month moratorium on payments to specialty hospitals for services furnished to Medicare beneficiaries as a result of a referral from a physician with an investment interest in the hospital expired on June 7, 2005.  CMS subsequently suspended enrollment of specialty hospitals into Medicare until a strategic plan regarding such hospitals is developed.

Pursuant to the DRA, CMS conducted a survey of specialty hospitals and competitor community hospitals, and it reviewed past such studies.  The results of the survey indicated that, contrary to popular conception, physicians investing in specialty hospitals were not receiving disproportionate returns, nor was there evidence of non-bona fide investments by physicians.  Notwithstanding these findings, CMS determined that it is necessary to require ongoing reporting of physician investment activity in order to ensure that investments are bona fide, that returns on investment are proportionate, and that physician self-referral and anti-kickback statutes are not violated. 

The strategic plan set forth in CMS’s final report contained the following proposals:

• CMS will work to make the hospital inpatient prospective payment system and the ambulatory surgical center payment system more accurate so as to discourage physicians from forming specialty hospitals simply to take advantage of higher payments for hospital services (as opposed to, for instance, ambulatory surgical center payments).
• CMS will implement demonstration programs to support better hospital-physician collaboration (including gainsharing arrangements).
• CMS clarified EMTALA requirements to state that even where a specialty hospital does not have an emergency department, it must nevertheless accept transfers of cases for which it has the capacity to provide appropriate care.
• CMS will require hospitals to disclose information concerning physician investment and compensation arrangements.  Specialty hospitals will have to disclose to patients, in advance of providing care, that their staff physicians have an investment interest in the hospital.
• CMS is changing the hospital enrollment form for Medicare to clearly identify specialty hospitals.
• CMS clarified its 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.

Despite CMS’s obvious reservations regarding physician ownership of specialty hospitals, this most recent report to Congress and strategic and implementing plan indicates that the agency is prepared to permit such ownership subject to certain reporting and disclosure requirements and subject to ongoing restrictions regarding terms of investment and returns on investment.  We will continue to monitor and provide updates regarding CMS’s implementation of the strategic plan.  In the mean time, feel free to contact us if you have questions about the impact of the strategic plan on an existing or proposed hospital venture or on any other aspect of your business.