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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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