August 3, 2020

Volume X, Number 216

July 31, 2020

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“Primarily Engaged” in Hospital Services: What Critical Access and Other Small Hospitals Need to Know

To reduce program waste and ensure fiscal integrity of the Medicare and Medicaid programs, CMS continues to assess whether hospitals are “primarily engaged” in providing hospital services. In connection with its initial assessment and ongoing monitoring of providers providing hospital and other services, CMS surveyors make findings as to whether a facility purporting to be a hospital is primarily engaged in providing inpatient services. If it is not so engaged, the facility may not be certified by CMS as a hospital or, if already certified, may have its Medicare hospital provider agreement revoked.

“Micro hospitals,” or small-scale acute care facilities that focus on the delivery of outpatient and/or emergency room services, are particularly vulnerable to revocation if they have or anticipate low inpatient volume. In considering taking action against a provider holding itself out as a hospital, CMS assesses a variety of factors, including but not limited to a provider’s:

  • Average daily census (ADC).

  • Average length of stay (ALOS).

  • Number of off-campus emergency departments or other outpatient locations associated with a single acute care provider.

  • Number of inpatient beds relative to the size of the facility and services offered.

  • Volume of outpatient surgeries or other outpatient care compared to such activities on an inpatient basis.

If upon survey, CMS believes the provider may not be primarily engaged in providing hospital services and therefore may be improperly enrolled as a CMS provider based on the factors above, CMS will determine whether a second survey should be attempted, or recommend a denial of an initial applicant or termination of a provider agreement.

Since 2013, CMS has particularly relied on the “Two-Midnight” policy in assessing the hospital’s ADC and ALOS, and ultimately, in determining whether the hospital is primarily engaged in providing care to inpatients. Under this interpretation, if the facility does not have a minimum ADC of two inpatients and an ALOS of at least two nights in the most recent 12 months, CMS determines that the facility is most likely not primarily engaged in providing care to inpatients. This policy has remained steadfastly unpopular among hospital stakeholders, which generally contend that the policy purports to cloud or overrule physician judgment in justifying inpatient admissions. CMS attempted to clarify the policy in the 2016 Hospital Outpatient Prospective Payment System final rule. Under the update, CMS will follow a Two-Midnight Presumption: presuming that hospital stays spanning two or more midnights are reasonable and necessary for Medicare Part A reimbursement. Meanwhile, CMS contends that Quality Improvement Organizations will assess patients’ shorter stays on a caseby-case basis, as reimbursement may still be appropriate if the patient’s admission is supported as medically necessary in the medical record documentation.

While other small hospitals have faced Medicare termination for failure to meet volume thresholds, there is no indication that CMS will target Critical Access Hospitals under this arrangement. First, Polsinelli’s limited survey indicates that Critical Access Hospitals routinely achieve the requisite “two-midnight” ALOS, though some struggle to maintain an ADC of two or more patients. Regardless, there has been no publicized survey activity surrounding Critical Access Hospitals to indicate that CMS intends to pursue Medicare termination for these entities based on these criteria. Given that Critical Access Hospitals are considered to play a crucial role in providing acute care services to rural populations where they are usually the sole hospital provider, CMS may be willing to give these critical providers the leeway to fluctuate on these measurements.

Absent demonstration or clarification to the contrary, CMS will likely continue to rely heavily on ADC and ALOS measures when making final determinations about hospital certification and small hospitals will continue to be at risk for termination if the scope of their operations fall short of the Two-Midnight criteria.

© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume X, Number 43


About this Author

Kara M. Friedman Health Care Attorney Polsinelli Law Firm

Kara Friedman’s extensive understanding of the health care industry allows her to offer advice on service line development activities and assist clients in developing feasible strategies to enhance the delivery of health care in a collaborative way.

Kara's practice is devoted to the general representation of health care providers and includes advising clients regarding the structures around and the relationships among health care providers within the complex federal and state regulatory environment. She has an active Certificate of Need practice...

Adrienne A. Testa Healthcare Attorney Polsinelli Law Firm

Adrienne Testa is dedicated to providing effective, efficient and innovative legal solutions to health care clients. She leverages her deep understanding of health care issues to represent hospitals, physician groups and other health care professionals and organizations in a variety of health care matters. Adrienne works closely with seasoned Polsinelli attorneys to deliver clients strategic solutions tailored to their specific needs.

Adrienne graduated cum laude from Loyola University Chicago School of Law, where she received the Beazley Institute for Health Law and Policy Fellowship. While attending Loyola, Adrienne served as Editor-in-Chief for the Annals of Health Law and competed on Loyola’s Health Law Transactional Team.

Prior to joining Polsinelli, Adrienne was the Legal Fellow for a multistate health system. During law school, she clerked in the healthcare practice group of a Chicago law firm and worked as a legal extern in the general counsels’ offices for two Chicago-area hospitals.