Fact Sheets




Today’s Action:


The Centers for Medicare & Medicaid Services (CMS) today released a Final Report to Congress outlining a “strategic and implementing plan” to address key issues relating to physician investment in specialty hospitals.  The Report was required by the Deficit Reduction Act of 2005 (DRA).




A “specialty hospital” is defined by the DRA as a hospital that is exclusively or primarily engaged in the care or treatment of one of the following categories of patients:  patients with a cardiac condition; patients with an orthopedic condition; or patients receiving a surgical procedure.  To provide a foundation for the report, CMS reviewed a broad range of previous studies of specialty hospitals, their financial support, and their impact on care, and conducted a factual inquiry that included a new, comprehensive survey that CMS sent to specialty hospitals and competitor community hospitals.  CMS also reviewed comments on the steps outlined in its Interim Report issued in May.  Consequently, the Final Report includes both a comprehensive review of the evidence on specialty hospitals and a strategic and implementing plan as required by the DRA. 


Elements of Strategic and Implementing Plan


Major Hospital and Ambulatory Surgery Payment Reforms to Better Align Medicare Payments with Costs of Care.  The Strategic Plan (Strategic Plan or Plan), as outlined in the Final Report, emphasizes the need to continue the payment reforms that CMS identified in the Interim Report.  That is, CMS will continue to work to make the hospital inpatient prospective and ambulatory surgical center payment systems more accurate, which CMS and Medicare Payment Advisory Commission (MedPAC) believe will address some of the incentives physicians have to form, or invest in, specialty hospitals.


New Opportunities to Support Hospitals and Physicians Working Together to Improve Care.  Traditional full-service hospitals have expressed concern that specialty hospitals can promote better coordination between the facility and the staff physicians because of the opportunity for physician ownership.  To level the playing field by enabling hospitals to provide better financial support for high-quality, low-cost care, CMS will implement demonstration programs to support better hospital-physician collaboration. This includes a “gainsharing” demonstration as required by the DRA, as well as use of other CMS authorities including authorities in the Medicare Healthcare Quality Demonstration program (under Section 646 of the Medicare Prescription Drug, Improvement and Modernization Act (MMA) to support physician-hospital collaboration to improve care.


Required Emergency Service for Patients When Appropriate, Regardless of Ability to Pay.  CMS has clarified EMTALA requirements to state that, even if a hospital does not have an emergency department (and many specialty hospitals do not), they must nonetheless accept transfers of cases when they have the capacity to provide appropriate care. 


Transparency in Hospital Investment.  CMS will require hospitals to disclose information concerning physician investment and compensation arrangements.  CMS will begin by requiring such disclosure for hospitals that have not yet fully responded to the CMS survey on hospital investment.   Hospitals that do not respond timely with the required information can face stiff penalties, including a fine of up to $10,000 for each day that the response is late.  Specialty hospitals will also be required to disclose to patients, in advance of providing care, that their staff physicians have an investment interest in the hospital.  In addition, CMS is changing the hospital enrollment form for the Medicare program to clearly identify specialty hospitals.


Enforcement of Stark and Anti-Kickback Rules for Improper Investment.  The Strategic Plan announces CMS’s 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. Although the survey results to date did not reveal, on their face, any disproportionate or non-bona fide arrangements, CMS and the Office of the Inspector General (OIG) will take appropriate action against any such arrangements that are identified.  The required disclosure of these financial arrangements provides CMS and the OIG with the information needed to identify potentially concerning investment relationships for further investigation. 


Continued Enforcement of the MMA Moratorium.   The Strategic Plan also details the action CMS has taken to enforce the 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.  After reviewing inpatient claims data, CMS identified 10 hospitals that may have been subject to the moratorium and sent letters to each hospital, requiring information concerning the ownership of the hospital and the nature of the services performed.  Based on the information CMS received, CMS determined that four of these hospitals were subject to the MMA moratorium.   Letters informing these hospitals of CMS’s initial determination of an overpayment of approximately $12.1 million in aggregate were sent in July 2006.  These actions are in addition to overpayment notices issued to two hospitals that were mentioned in the Interim Report. 


Key Findings in the Final Report


The initiatives in the final report are based on a comprehensive review of the evidence on specialty hospitals, their financial arrangements, and their impact on care, including the analysis of responses to the recent detailed CMS survey. This survey addressed investment issues including the investment arrangements of physician-owners, the proportionality of investment return, evidence on bona fide investment, and the provision of care to Medicaid and uninsured patients (charity care) by specialty hospitals.


The main findings include the following: 

  • All specialty hospital respondents reported proportionate returns compared to physician investment; (however, 53 percent of respondents did not complete this portion of the survey);
  • Cardiac hospitals reported always offering non-investor physicians terms similar to those offered to physician investors, whereas orthopedic and surgical did so at a reduced rate; although not explicitly given by the hospitals as a criterion for selecting investors, it appears that the volume of referrals and revenue generated may have been a critical factor for some hospitals in determining which physicians were permitted to invest;
  • Related to initial physician investment, classes of stock (if any), whether there had been any independent valuation of the stock, and subsequent distributions, of the 21 specialty hospitals that responded to our question, 11 hospitals had one class of stock, and 10 had two or more;
  • Our survey identified few instances where specialty hospitals reported making loans or loan guarantees to physician investors.   Other specialty hospitals reported the existence of commercial loans from third party lenders that indicate the existence of loan guarantees.
  • Medicaid inpatient discharge rates averaged 18.4 percent of total inpatient discharges for competitor acute care hospitals, whereas specialty hospitals averaged only 3.6 percent.   Medicaid outpatient visits averaged 12.3 percent of total outpatient visits at competitor acute care hospitals.  Comparatively, reporting specialty hospitals averaged 6.1 percent overall.
  • For fiscal years (FYs) 2004 and 2005, competitor acute care hospitals provided a substantially higher amount of charity care to patients than did specialty hospitals.  Competitor acute care hospitals averaged 7.8 percent (as a percent of net patient revenue), while reporting cardiac specialty hospitals averaged 3.9 percent, reporting orthopedic specialty hospitals averaged 1.0 percent, and reporting surgical specialty hospitals reported 0.2 percent on this measure.
  • Our survey results are consistent with previous studies showing that:   (1) competitor acute care and cardiac hospitals are much more likely to have emergency departments than are orthopedic and surgical hospitals; and (2) orthopedic and surgical hospitals have smaller emergency departments, if they have them at all.


Although the survey responses and other data that we received do not show, on their face, disproportionate returns or non-bona fide investments, we note that many hospitals did not respond to our request for physician investment and compensation information.  We also note that some of the information we received warrants further inquiry into the propriety of some arrangements.  Therefore, CMS has determined that it is necessary and appropriate to require ongoing reporting of physician investment activity. Transparency of investment information will help ensure that investments are bona fide and returns on investment are proportionate, that is, the physician self-referral and anti-kickback statutes are not violated.  The findings also reinforce the importance of moving forward with major reforms in Medicare’s payment systems to improve the accuracy of payments. 


CMS found differences in the provision of charity care and Medicaid services between specialty hospitals and competitor hospitals.  However, the profile of services offered by specialty hospitals may contribute to the differences in patient mix.  Because Congress has considered the issue of requirements for charity and Medicaid care, both in the context of specialty hospitals and the context of possible reforms in the not-for-profit hospital tax exemption, CMS is presenting to Congress the information it has obtained, in order to assist Congress as it continues to study this issue.  CMS is implementing reforms in EMTALA related to the provision of urgently needed care by hospitals with specialized capabilities, even if they do not have emergency rooms, to ensure that no hospital turns away patients who need the care that such hospital can provide.




Specialty hospitals were defined in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) as hospitals that are “primarily or exclusively engaged in the care and treatment” of patients with a cardiac or an orthopedic condition, or patients receiving a surgical procedure.  Physicians who refer patients to specialty hospitals are often investors in the hospitals, although physician investors typically refer some patients to a community hospital, and most specialty hospitals will accept referrals from non-investor physicians.  By focusing on certain types of cases, specialty hospitals have the potential to increase the quality of care and to provide care (including surgical procedures) in a more efficient manner.  Critics of specialty hospitals, however, have claimed that specialty hospitals solicit the more profitable cases and patients with private insurance, leaving the sicker and poorer patients to be treated at community hospitals.  


Concerned about the growth in the number of specialty hospitals and their implications for health care delivery, Congress in the MMA required the Secretary 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 such specialty hospitals complied with restrictions imposed by the MMA on increases in the number of physician investors, increases in the number of beds, and changes in the type of services).


The MMA further required the Secretary to study 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.  The MMA moratorium expired on June 7, 2005.


This Final 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.