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When Is a Hospital Not a Hospital? New Guidance Sheds (Some) Light on the Definition

In Depth

Effective September 6, 2017, the Centers for Medicare and Medicaid Services (CMS) clarified guidance regarding the requirement that a hospital participating in the Medicare program be “primarily engaged” in inpatient services in order to be considered by Medicare as a hospital and thus, receive payments for hospital services. Under the new guidance, CMS will determine whether a facility is a hospital based on “an evaluation of the facility in totality” with a focus on factors such as average daily census, average length of stay and total number of off-campus locations. While CMS indicates that facilities are not required to have a specific inpatient to outpatient ratio to meet the definition of “primarily engaged,” CMS states that having the capacity or potential capacity to provide inpatient care is not the equivalent of actually providing inpatient care. Hospitals currently enrolled in Medicare, other than Critical Access Hospitals and Psychiatric Hospitals (neither of which are subject to the new guidance), and do not meet the new criteria for being primarily engaged in inpatient services risk termination of their Medicare provider agreements, while facilities under development that do not meet the criteria may be unable to participate in the Medicare program as a hospital.

As established by Section 1861(e) of the Social Security Act, Medicare defines a “hospital” as an institution that, among other requirements, is primarily engaged in providing services to inpatients. CMS had not previously defined “primarily engaged” through regulation or guidance. Nevertheless, in recent years, CMS has been engaged in active enforcement activity related to facilities with low inpatient volumes. While some of the CMS oversight appears to have resulted from growth in the development of “micro hospitals” (small, often suburban, hospitals with emergency departments and limited inpatient beds), much of the enforcement action has targeted established hospitals with community changes or clinical care circumstances resulting in low inpatient volumes. For example, CMS is currently engaged in litigation related to its decision to deny Medicare hospital status to Wills Eye Hospital on the basis that, despite being licensed as a hospital, Wills Eye Hospital did not have sufficient inpatient volume to meet the requirement of being primarily engaged in inpatient services.

Under the new guidance, CMS will now require state survey agencies to review hospital compliance with the “primarily engaged” criteria in order to certify that a facility is eligible to participate in the Medicare program as a hospital. As a baseline for compliance, CMS will require that a facility have at least two inpatients at the time of a survey as a prerequisite for a survey to be conducted. If the facility has less than two inpatients, surveyors will review admission data while on-site and will proceed with the survey if the data demonstrates an average daily census of at least two patients and average length of stay of at least two midnights over the prior 12 months. If the facility meets these criteria, a survey will be attempted at a later date. If the facility does not meet these criteria, CMS instructs that the facility is most likely not a hospital (due to failure to meet the “primarily engaged” requirement) and that the CMS Regional Office should evaluate other factors to determine if a second survey should be attempted.

Among the factors that the new guidance indicates CMS Regional Offices should consider when determining whether to make a second attempt to survey are:

  • Number of provider-based off-campus emergency departments (noting that an unusually high number of such entities may suggest that the facility is not primarily engaged in inpatient care);

  • Number of inpatient beds in relation to the size of the facility and services offered;

  • Volume of outpatient surgical procedures to inpatient surgical procedures, as well as whether the facility holds itself out as a “surgical” hospital;

  • Patterns/trends in average daily census that suggest inpatients are routinely discharged before the weekend;

  • Staffing patterns that support inpatient care vs. outpatient care; and

  • Manner in which the facility holds itself out to the public and whether it suggests that the facility does not consider itself a hospital or primarily engaged in inpatient services.

While the CMS Regional Offices are instructed to consider all of the above criteria and other criteria as necessary, the guidance emphasizes that a determination of non-compliance with the “primarily engaged” requirement will not be based on a single factor. Further, the guidance stresses that the final decision of whether or not a facility meets the definition of “hospital” is made by CMS based on the recommendations of the State Agency surveyors, as well as other evidence submitted by state agencies and accrediting organizations. State licensure as a hospital and approval of Medicare hospital enrollment application materials do not confer hospital status for Medicare program purposes.

In the guidance materials, CMS explicitly excludes two categories of hospitals that often have low inpatient volumes and lengths of stay, Critical Access Hospitals and Psychiatric Hospitals, from the scope of the guidance. Therefore, hospitals in these categories are not currently subject to termination from Medicare for failing to satisfy the “primarily engaged” requirement.

Because this new guidance was effective immediately upon release (September 6, 2017), Medicare-enrolled hospitals with low average daily census and facilities under development that are anticipating low inpatient census should promptly compare the criteria listed above to current operational metrics to determine risk under the new guidance. Although it is not yet clear how accrediting organizations with Medicare deeming authority (e.g., The Joint Commission) will implement the new guidance, hospitals currently participating in Medicare by virtue of deemed status from an accrediting organization will likely be subject to some form of the new guidance and will be subject to the new guidance if subject to survey by the State Agency (for example, if subject to a complaint survey or validation survey). 

© 2020 McDermott Will & EmeryNational Law Review, Volume VII, Number 257


About this Author

Emily J. Cook, McDermott Will Emery Law Firm, Health Care Attorney

Emily J. Cook is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Los Angeles office.  She focuses her practice on Medicare provider certification, reimbursement and regulatory compliance.

Sandra DiVarco Healthcare Attorney Health Systems Lawyer McDermott Will Emery Law Firm

Sandra DiVarco is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office. Sandy focuses her practice on the representation of hospitals and health systems. She has counseled health care facility and system clients regarding all aspects of health law transactions and health system restructurings. As a registered nurse, Sandy regularly advises clients on the legal aspects of clinical issues and policy/procedure matters. Sandy also has significant experience in assisting clients with regulatory, licensure and accreditation issues, including state-level and CMS survey responses, formulation of successful Plans of Correction, Joint Commission complaint responses and EMTALA/regulatory investigations. Sandy is a member of the Firm’s Catholic Organizations Practice Group, and has experience working with Catholic organizations within health care and other business areas. She is also co-leader of the Firm’s General Institutional Provider affinity group. 

In addition to maintaining an active transactional practice, Sandy has a deep knowledge of regulatory, licensing and accreditation issues of particular concern to health care providers in today’s heightened enforcement climate. Sandy regularly advises clients on the legal aspects of clinical regulatory issues and policy/procedure and operational matters. A significant component of her practice involves assisting health care provider clients across the United States with regulatory, licensure and accreditation issues, including state-level and Centers for Medicare and Medicaid Services (CMS) survey responses, formulation of successful plans of correction, Joint Commission complaint responses and Emergency Medical Treatment and Active Labor Act (EMTALA)/regulatory investigations. Drawing on her experience as a registered nurse, and holding a current license in the state of Illinois, Sandy brings a pragmatic perspective and first-hand knowledge of health care operations to these complex and mission-critical matters.

Nicholas Alarif, McDermott Law Firm, Healthcare Law Attorney

Nicholas Francis Alarif focuses his practice in health care regulatory and fraud and abuse matters, including the physician self-referral law (Stark Law), False Claims Act (FCA), the Federal Anti-Kickback Statute and other health care compliance matters. He also advises clients on the complex legal and factual issues surrounding Medicare Parts A–D reimbursement and other Centers for Medicare & Medicaid Services (CMS) payment policies.