The rules that govern participation in the Medicare program are notoriously voluminous and complex. Indeed, courts have described them as akin to a “[body of] law written by James Joyce and edited by E.E. Cummings” and “among the most completely impenetrable texts within human experience.” And yet, the term “hospital”—defined in the Social Security Act as an institution that, among other things, is “primarily engaged” in providing inpatient services—has, for the most part, escaped meaningful elaboration in regulatory and subregulatory guidance.

On September 6, 2017, the Centers for Medicare and Medicaid Services (CMS) issued new guidance on what it means to be “primarily engaged” in the provision of inpatient services, and therefore qualified for Medicare payment as a hospital. The guidance, which takes the form of a memorandum to state survey agency directors and revisions to the State Operations Manual, focuses on a facility’s actual provision of inpatient care, rather than its mere capacity, and highlights a number of factors that surveyors will consider in determining whether a facility should be or remain certified as a Medicare-certified hospital. Surgical hospitals, small community hospitals, and other facilities that provide limited inpatient care should carefully review the new guidance and consider their potential exposure.

Statutory Requirement and Previous Interpretive Guidance

In order to participate in the Medicare program as a hospital, an institution must, among other things, be “primarily engaged” in providing inpatient services. Specifically, Section 1861(e)(1) of the Social Security Act defines the term “hospital” to mean, in part, an institution that “is primarily engaged in providing, by or under the supervision of physicians, to inpatients (A) diagnostic services and therapeutic services for medical diagnosis, treatment, and care of injured, disabled, or sick persons, or (B) rehabilitation services for the rehabilitation of injured, disabled, or sick persons.” Failure to comply with this requirement may lead to termination of a facility’s Medicare provider agreement, or result in denial of a facility’s application for an agreement. 

Despite the stakes, CMS has not defined the phrase “primarily engaged” in formal rulemaking. This lack of action reflects, in part, a struggle to establish criteria that target perceived abuses by small surgical hospitals but protect rural or community hospitals with low inpatient volumes. For example, in a 2006 report concerning physician investment in specialty hospitals, the U.S. Department of Health and Human Services (HHS) stated that CMS “has not yet identified any quantitative method, such as percentage of services or ratio of inpatient-to-outpatient services, that could be used without disqualifying both community hospitals and specialty hospitals.”

Until the issuance of this month’s guidance, the clearest public statement of CMS’s interpretation of the “primarily engaged” requirement was found in a 2008 memorandum to state survey agencies. In that memorandum, CMS stated that it interprets the requirement to mean that “the provider devotes 51% or more of its beds to inpatient care.” CMS noted that this test “may not be dispositive in all cases,” and that, “[a]t the request of the applicant[,] CMS may examine other factors in addition to bed ratio.”

Beyond the 2008 guidance, facilities have looked to recent CMS enforcement actions. Several matters have been heard by, and generated decisions from, the HHS Departmental Appeals Board. However, such matters often generate limited public records, are highly fact-specific, and carry uncertain precedential value.

New Interpretive Guidance

In its new guidance, which became effective immediately, CMS clarifies that “[g]enerally, a hospital is primarily engaged in providing inpatient services under [the Social Security] Act when it is directly providing such services to inpatients. Having the capacity or potential capacity to provide inpatient care is not the equivalent of actually providing such care.” CMS notes that an “inpatient” for these purposes is a patient admitted to the facility “with the expectation that he or she will require hospital care that is expected to span at least two midnights[,]” even if later the patient is actually transferred or discharged and does not occupy a hospital bed overnight. Under the two-midnight rule, a patient admitted for observation is not considered an inpatient because observation is classified as an outpatient service. 

This emphasis on a facility’s actual provision of care—rather than its mere capacity to provide care—now forms the basis of a threshold requirement in facility surveys. CMS explains that, in order to properly evaluate whether a facility is in compliance with Medicare requirements, including the definition of a hospital, surveyors must observe the actual provision of care. To ensure this is the case, the revised survey instructions require that a facility “have at least two inpatients at the time of the survey in order for surveyors to conduct the survey.” If a hospital does not have two inpatients at the time of the survey, the surveyors will review the facility’s admissions data to determine if it has had an average daily census (ADC) of at least two patients and an average length of stay of at least two midnights in the trailing 12 months. If the facility’s data meets these thresholds, the surveyors will return at a later date to attempt another survey. If, however, the facility falls below these thresholds, “the facility is most likely not primarily engaged in providing care to inpatients[,]” and CMS must consider “other factors” to decide if the facility nonetheless merits another survey attempt. 

According to CMS’s guidance, these “other factors” include the following:

• The number of provider-based off-campus emergency departments (EDs). If a facility has “an unusually large number” of off-campus EDs, it “may suggest that a facility is not primarily engaged in inpatient care and is instead primarily engaged in providing outpatient emergency services.”

• The number of inpatient beds in relation to the facility’s size and scope of services offered. If a facility’s inpatient beds are clearly outnumbered by its operating rooms, emergency department bays, and ambulatory surgery department beds, then the facility is “most likely not primarily engaged in inpatient care.”

• The volume of outpatient surgical procedures compared to inpatient surgical procedures.

• In the case of a “surgical hospital,” whether the procedures performed are mostly inpatient or outpatient. In particular, CMS looks to whether the facility routinely schedules surgeries early in the week and whether it appears the facility’s scheduled admissions result in all or most patients being discharged prior to the weekend (leaving the vast majority of the facility’s “inpatient” beds vacant).

• Trends in the facility’s ADC by day of the week. If the ADC consistently drops to zero on weekends, it suggests the facility “is not consistently and primarily engaged in providing care to inpatients.”

• Staffing patterns. If the facility schedules its nurses, pharmacists, physicians, and other key staff for 24/7 coverage, the facility is more likely to be primarily engaged in inpatient care (as opposed to staffing patterns that support outpatient operations).

• The facility’s marketing in the community. If the facility advertises itself as a “specialty” or “emergency” hospital, or uses terms like “clinic” or “center,” that may indicate the facility is not primarily engaged in providing inpatient care.

CMS makes clear that none of the above factors is conclusive in determining whether a facility meets the Medicare definition of a hospital primarily engaged in providing inpatient care. It also emphasizes that the conclusions of state surveyors are just one component (albeit an important one) of the agency’s ultimate decision to certify or recertify a facility.

Concluding Thoughts

The new guidance suggests CMS is directing more attention to reimbursement of non-traditional hospital models. Several of the agency’s factors for determining whether a facility is a hospital primarily engaged in inpatient care respond to industry trends toward “micro-hospitals” and other facilities that meet the standards for a state-licensed hospital but dedicate the bulk of their resources to non-inpatient services such as emergency or outpatient surgical care.

While additional guidance in this area is useful, CMS’s clarified policies raise questions for the industry regarding how to provide the best services for patients who primarily require outpatient care, but would benefit from features of an inpatient setting. Without a designation between, for example, an ambulatory surgery center and a general, acute care hospital, providers will continue to have to make difficult choices regarding how to structure their services if they want to participate in the Medicare program.