Health Law Advisory Bulletin
CMS Reports to Congress on Specialty Hospitals
and Senate Considers Legislative Solution to Specialty Hospitals,
DRGs and Gainsharing
By Robert
G. Homchick
[May 2005]
Last week, both CMS and Congress made noteworthy statements
about specialty hospitals and DRG reimbursement reforms. In the
Senate, the Hospital Fair Competition Act of 2005 was introduced
by Senators Charles Grassley and Max Baucus on Wednesday, May 11,
2005. The bill makes the specialty hospital moratorium permanent,
tinkers with how DRG payments are calculated, and directs the Secretary
of HHS to establish parameters for gainsharing programs that will
qualify for exceptions to the fraud and abuse and Stark laws. The
day after the Grassley-Baucus bill was introduced, the Centers for
Medicare and Medicaid Services (CMS) published its report to Congress
on physician-owned specialty hospitals. In the report, CMS indicated
that it plans to review the procedures for determining whether specialty
hospitals meet Medicare Conditions of Participation and reform payment
rates for inpatient hospital services to better align reimbursement
with the severity of illness. More specifically, CMS indicated that
it would review the cardiac, orthopedic and surgical DRGs, which
are alleged to be “rich” service lines that provide
incentives to physicians to create specialty hospitals.
Specialty Hospitals
If enacted, the Hospital Fair Competition Act would
make the existing moratorium on the development of physician-owned
specialty hospitals permanent. The existing moratorium, established
in 2003 by the Medicare Modernization Act (MMA), amended the whole
hospital and rural provider exceptions to the Stark physician self-referral
law to prohibit physician ownership in new specialty hospitals for
an 18-month period. If Congress does not act, the specialty hospital
moratorium will expire on June 8, 2005.
Although the proposed legislation would permanently
ban physician ownership of new specialty hospitals, physician-owned
specialty hospitals already in operation or under development before
Nov. 18, 2003 would be exempt if they met certain conditions. Those
conditions include not adding new physician investors, not increasing
the percent of physician investment (individually and in the aggregate),
not expanding current services and not adding new beds or operating
rooms.
The Senate bill ignores the recommendation of the
Medicare Payment Advisory Commission (MedPAC) to extend the moratorium
for an additional 18 months to allow for further study of the issues
raised by physician ownership of specialty hospital facilities.
The CMS report to Congress on specialty hospitals, also does not
recommend that the moratorium be made permanent. Rather, CMS indicates
that it will reform DRG payments and more closely scrutinize whether
specialty hospitals meet Medicare conditions of participation. It
remains uncertain whether the Hospital Fair Competition Act will
gain momentum, die amid the controversy or be amended in the congressional
debate to follow the MedPAC and CMS recommendations.
DRG Modifications
The bill introduced by Senators Grassley and Baucus would also
make a number of changes to the DRG system. It directs CMS to recalibrate
DRG weights at least every five years, calculate relative weights
based upon hospital specific data rather than national data, adjust
DRG weights to reflect differences in the frequency of outliers,
and examine current DRGs to ensure they accurately capture patients'
severity of illness.
These revisions to the DRG system appear to be prompted by a MedPAC
report suggesting that flaws in the current calculations create
market incentives for physicians to establish specialty cardiac,
orthopedic and surgical hospitals.
Echoing the proposed legislation, the CMS report indicates that
the agency plans to undertake a careful review of DRG reimbursement
to align payments with the severity of illness and address the incentives
created by the level of reimbursement in cardiac, orthopedic and
surgery service lines.
The interest of MedPAC, Congress and CMS in reforming the DRG payment
system may be the most significant development. If successful, the
traditional cash rich service lines may be less profitable while
other services will receive higher payments. While this shift may
make specialty hospitals less attractive, it may also be disruptive
to full-service hospitals and health systems that have strategic
plans based on the historical margins of various service lines.
Gainsharing
Finally, picking up on another issue raised in the MedPAC report,
the Hospital Fair Competition Act also directs the Secretary to
establish parameters for gainsharing programs between hospitals
and physicians. More specifically, the Act would create statutory
exceptions to the Civil Money Penalty prohibition on hospital-physician
incentive payments, the Anti-kickback statute and the Stark law
for arrangements in which physicians share in the savings experienced
by a hospital by reason of cost-reduction efforts that involve the
physicians. The Secretary is to set the requirements for the gainsharing
exceptions with an eye toward ensuring that the quality of care
provided to patients is protected and financial incentives that
could affect physician referrals are minimized.
Grassley Press Release with Description of Bill: http://finance.senate.gov/press/Gpress/2005/prg051105a.pdf
Text of Grassley/Baucus bill: http://finance.senate.gov/press/Gpress/2005/prg051105abill.pdf
CMS Specialty Hospital Report and Recommendations:
http://www.cms.hhs.gov
The Health Law practice at Davis Wright Tremaine is nationally
known and serves clients from across the nation. If the Hospital
Fair Competition Act of 2005 is enacted, it will have significant
effect on DRG reimbursement, joint venture options and gainsharing
opportunities. Our Health Law practice has working groups dedicated
to areas of special interest enabling us well equipped to help clients
navigate these changing waters.
Our Payment and Accreditation Group assists a variety of clients,
including, community hospitals, physicians, nursing homes, ancillary
providers and academic medical centers. We advise these clients
on payment and accreditation matters, including obtaining coverage
for new services and products, securing provider status, resolving
payment disputes, assisting with audits, conducting internal investigations
and advising on compliance issues.
Our Joint Ventures Group works with a wide variety of clients on
joint ventures involving hospitals, physicians, pharmacies, long-term-care
and ancillary providers and management companies of various types.
We strive to help our clients structure these ventures in a way
that maximizes business potential while limiting the regulatory
risks.
For assistance with health law matters or for additional
information, please contact:
Kathleen
H. Drummy, Los Angeles, (213) 633-6870, KathyDrummy@dwt.com
Thomas
E. Jeffry, Los Angeles, (213) 633-6882, TomJeffry@dwt.com
Ingrid
Brydolf, Portland, (503) 276-5804, IngridBrydolf@dwt.com
Timothy
M. Dozois, Portland, (503) 778-5422, TimDozois@dwt.com
Kent
B. ("Bernie") Thurber, Portland, (503) 778-5202, BernieThurber@dwt.com
Gerry
Hinkley, San Francisco, (415) 276-6530, GerryHinkley@dwt.com
M. Steven
Lipton, San Francisco, (415) 276-6550, SteveLipton@dwt.com
This Health Law Advisory is a publication
of the Health Law Group of Davis Wright Tremaine LLP. Our purpose
in publishing this Advisory is to inform our clients and friends
of developments in health care law. It is not intended, nor should
it be used, as a substitute for specific legal advice as legal counsel
may only be given in response to inquiries regarding particular
situations.
Copyright 2005, Davis Wright Tremaine LLP.
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