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New Jersey Hospital Systems to Pay $265 Million for Outlier Practices 

The Department of Justice (DOJ) announced on June 15, 2006 that Saint Barnabas Corp., the largest health care system in New Jersey, has agreed to pay $265 million to settle fraud allegations that it inflated Medicare billings to gain outlier payments.  Medicare pays supplemental reimbursement for patients that are unusually expensive to treat, known as outliers.

As a part of the settlement, Saint Barnabas, denying any wrongdoing, entered into a corporate integrity agreement with the Department of Health and Human Services Office of Inspector General to help assure future compliance with regulations.  Assistant Attorney General Peter D. Keisler emphasized that this settlement shows that the DOJ will not tolerate hospitals and health care systems fraudulently overcharging the federal Medicare program.  Saint Barnabas will pay the $265 million over a six year period to shield the financial standing of the system.

IRS Questioning Tax-Exempt Hospitals and Auditing Bond Programs

The IRS has sent "compliance check questionnaires" to more than 550 tax-exempt hospitals to assess how nonprofit hospitals satisfy the community benefit standard for purposes of Section 501(c)(3).  The questionnaire, composed of 81 detailed questions, seeks information about billing practices, the hospital's emergency room, medical research, medical staff privileges, medical education, the hospital's board of directors, uncompensated care, and executive compensation.

The IRS asserts that it will use the questionnaires to determine whether the standards for nonprofit hospitals should be changed.  The current standard relies on the vague concept of "community benefit."  Nonprofit hospitals should provide community benefit in proportion to the benefit it receives from its tax exemption.  Some lawmakers assert that hospitals have too much leeway under this vaguely defined standard, however.

Reporting hospitals should expect auditors to scrutinize their questionnaire responses.  Accordingly, the questionnaire should not be taken lightly, as the IRS has announced its intent to increase formal audits of nonprofit hospitals. 

Further, in August, the IRS will send letters to between 20 and 30 issuers of qualified 501(c)(3) bonds to notify them that their bond issues are under audit.  Many of these audits will involve hospitals.  The audits will examine compliance with the "95/5" test, which requires that at least 95 percent of the use of facilities financed with the proceeds of the tax-exempt bonds be used by the qualifying section 501(c)(3) borrower exclusively in furtherance of its exempt purposes.

The goal of the targeted audits is to foster and emphasize the importance of keeping adequate records to demonstrate compliance with the "95/5" rule.  Previously, the IRS has been forgiving of lapses in record keeping.  However, with the implementation of regulations requiring lifelong measurement of the use of bond proceeds, long-term recordkeeping is now imperative.

The IRS initially planned to begin the audits in June.  However, the IRS delayed the examinations until August to allow issuers and borrowers time to use the IRS' Voluntary Closing Agreement Program (VCAP).  VCAP allows issuers to voluntary report tax-exempt bond violations and seek a closing agreement with the IRS.  However, VCAP is not available if the IRS has notified an issuer that its bonds are under audit.  Therefore, it is advised that issuers and borrowers of qualified 501(c)(3) bonds carefully review their recordkeeping, tracing the bond proceeds from when they were borrowed to when and what they were expended on.

Major Changes to Hospital Inpatient Prospective Payment System Proposed

On April 12, 2006, Center for Medicare & Medicaid Services (CMS) issued a proposed rule, outlining payment and policy changes for acute care hospital services to patients.  The general goal of the proposed changes is to refine the Diagnostic-Related Group (DRG) system to better recognize the severity of illness among patients and to use hospital-specific cost weights, rather than charge-based data, to adjust DRG relative weights. 

CMS proposes a two-step alteration to the current Inpatient Prospective Payment System (PPS). The following changes are proposed:

Phase One
* CMS proposes the use of hospital-specific relative value costs center (HSRVcc) weighting methodology to adjust DRG relative weights.  Recommended by Medicare Payment Advisory Commission (MedPAC), this change involves dividing hospital charges into ten cost center categories.  Individual weights for each of the ten cost centers for every DRG will be calculated. Subsequently, those specific weights will be used to calculate the national DRG weights. Finally, the charge-based weights will be scaled to national cost center charge ratios.

Phase Two
* CMS proposes to implement this second phase by the start of federal fiscal year (FFY)2008, if not earlier.  In this second phase, CMA proposes reconfiguring DRGs to reflect both the patient's diagnosis and the severity of the patient's illness.  Currently, Medicare uses 526 DRGs to classify all Medicare patients.  CMS considered use of 3Ms All Patient Refined Diagnosis Related Group Systems  (APR-DRGs). Use of 3Ms APR-DRGs would, however, increase the number of categories to 1258.  CMS proposes to consolidate 3Ms APR-DRGs into fewer categories.  CMS asserts that this change in categories will ensure that payments will more closely reflect the costs of treating the patient with consideration given to the severity of the patient's illness.

Both phases are scheduled to be fully implemented by FFY 2008.  Under this new proposed rule, specialty hospitals will experience declined reimbursement.  CMS estimates cardiac hospitals will see an estimated 11.7 percent decline in reimbursement when the severity-adjusted DRGs become effective.  Further, CMS estimates that orthopedic hospitals will see an estimated 9.4 percent decline in reimbursement.  Although rural hospitals likely will see an increase in reimbursement in FFY 2007, this increase will dissipate when the severity-adjusted DRGs go into effect.  Ultimately, however, CMS believes the proposed changes will increase the quality and efficiency of care in hospitals.

CMS Issues Final Rule on Payment Changes for Long-Term Care Hospitals

On May 2, 2006, CMS issued a final rule that changes the payment system for long term acute care hospitals (LTCHs). According to CMS' press release, the rule is "designed to assure appropriate payment for services by [such hospitals] to severely ill or medically complex patients, while providing incentives for more efficient care for Medicare beneficiaries."

 Under the new rule, the following changes will be made:

* CMS will no longer use the "excluded hospital with capital" market basket as the measure of inflation for calculating payment updates.  Instead, CMS has adopted the Rehabilitation, Psychiatric and Long-Term Care market basket.  This is based on operating and capital costs of inpatient psychiatric facilities, LTCHs, and inpatient rehabilitation facilities.  CMS asserts that this will result in an increase in the labor share from 72.8885 percent to 75.665 percent.

* The new rule changes the payment adjustment formula for short-stay cases, known as short-stay outliers (SSOs).  Under the current system, payment for these patients is based on the least of: (1) 120 percent of patient costs; (2) 120 percent of the per diem of the Long Term Care Diagnosis Related Group (LTC-DRG); or (3) the full LTC-DRG payment.  Under the new rule, the portion of the formula based on patient costs is reduced from 120 percent to 100 percent.  This is to ensure that payments do not substantially exceed costs.  Additionally, the new rule adds a fourth component to the payment formula.  This component is a blend of an amount comparable to what would be paid under the hospital inpatient PPS rate and 120 percent of the LTC-DRG per diem payment.  This blended payment option reflects revisions to the proposed version of the rule, which set out a payment option based on an amount comparable to what would be paid to an acute care hospital under the inpatient PPS rate.

* Under the new rule, Medicare will pay hospitals an additional amount for unusually high costs under the "high-cost outlier policy."  However, hospitals are only eligible for this additional amount where its estimated costs in treating the patient exceeds the LTC-DRG payment by an outlier fixed-loss amount.  CMS has set this amount at $14,887 for rate year 2007 compared with $10,501 in rate year 2006.       

* CMS has eliminated the surgical DRG exception to the three-day or less interrupted stay policy.  This policy provides that if a patient is discharged to a rehabilitation facility, acute-care hospital, the patient's home, or a skilled-nursing facility and then re-admitted to a long term care facility within three days, Medicare will make only one LTCH PPS payment.  If the care delivered during a three-day or less interruption was for inpatient surgery, the surgical exception allowed Medicare to make a separate payment to the acute care hospital.

Ultimately, CMS believes that the final rule fairly reflects the input it received from all stakeholders and its commitment to ensuring that patients requiring hospital-level care get the care they need with appropriate payments. 

FOR PROVIDERS

Independent Medical Staff Not Protected Under ADA, Court Rules

On June 9, 2006, the U.S. Court of Appeals for the Eighth Circuit found that a member of the hospital's medical staff could not bring claims under the Americans with Disabilities Act (ADA) or the Rehabilitation Act because he was an independent contractor in the hospital and not an employee.  Cardiothoracic surgeon Paul A. Wojewski was on the medical staff at Rapid City Regional Hospital (RCRH), but acted independently with respect to leasing office space, hiring staff members, and scheduling time in the hospital's operating rooms.

After Wojewski was diagnosed with bipolar disorder, he took a leave of absence.  Wojewski was eventually reinstated to the active medical staff subject to certain conditions outlined in a Letter of Agreement.  Wojewski then suffered an acute episode during surgery and RCRH terminated his staff privileges.  Wojewski then sought relief under the ADA and the Rehabilitation Act. 

RCRH moved for summary judgment, asserting that Wojewski was not an employee and, therefore, not covered under the ADA or the Rehabilitation Act.  In agreeing with RCRH, the district court held that Wojewski's employment discrimination claims failed because he was not an employee of the hospital.

During pendency of Wojewski's appeal, Wojewski died and his wife, Sara Wojewski, was substituted as appellant.  Agreeing with the district court, on appeal, the Eighth Circuit found that the ADA protects "employees" but not "independent contractors."  The court held that although the Letter of Agreement subjected him to a level of control, this heightened control did not make him an employee of the hospital.  Finally, the court rejected Wojewski's argument that the Rehabilitation Act provides relief for independent contractors, noting that the Act focuses on providing remedies for employees only.

Wojewski v. Rapid city Reg'l Hosp. Inc., No. 05-2952, 2006 U.S. App. LEXIS 14180 (8th Cir. June 9, 2006).