CMS guidance may require new strategies for short-stay hospitals

Current quality and cost-cutting trends are taking patient care away from large, inpatient focused hospitals towards lower acuity settings. Subsequently, there has been an increase in the construction and operation of short-stay hospitals.

Micro-hospitals for example, have become increasingly common as a way to serve markets with convenient care offerings that have inadequate demand for full service hospitals. Plus, there are hundreds of specialty and surgical-focused hospitals, many of which have considerably more outpatient care than traditional hospitals.

As a result, CMS is beginning to pay closer attention to what it means to be a licensed, acute care hospital and eligible to receive the reimbursement premiums that accompany hospital licensure when compared to lower acuity, outpatient facilities. Specifically, CMS has taken a more active role in introducing policy and guidance aimed at reducing the cost of patient care by clarifying the characteristics that should be exhibited by an acute care hospital. While most general acute care hospitals would easily exceed the stated inpatient threshold to be considered “primarily engaged” and eligible for hospital reimbursement, non-traditional hospital providers should understand CMS’ current guidance related to this standard.

It is critical for these short-stay hospitals in particular to be aware of changing CMS policy and guidance. These new standards could impact their financial performance, organization structure or licensure requirements. In fact, it may be that some short-stay hospitals around the country will need to rethink strategy in order to ensure compliance and a sustainable business.

Recent Regulatory Guidance
On September 6, 2017, the Center for Medicare and Medicaid Services (“CMS”) issued Survey and Certification (“S&C”) Memo: 17-44, which revises the State Operations Manual by providing additional guidance on the Medicare definition of a hospital and the metrics used to determine whether a hospital is “primarily engaged” in inpatient services.

The new guidance states that in order to make an accurate evaluation, surveyors must observe the provision of care. The surveyors will review the facility’s admission data to determine if the average daily census (“ADC”) and average length of stay (“ALOS”) meet the requirements for being primarily engaged. The guidance claims that if a facility does not have a minimum ADC of two inpatients and an ALOS of two over the last 12 months, the facility is likely not “primarily engaged” in providing care to inpatients and the CMS regional office must look at additional factors to determine whether to conduct a second survey or to recommend denial of an initial applicant or termination of a current provider agreement. These factors include:

• The number of provider-based off-campus emergency departments (“EDs”)
• The number of inpatient beds in relation to the size of the facility and services offered
• The ratio of outpatient to inpatient surgical procedures
• Trends in the ADC by day of the week
• Staffing patterns
• How the facility advertises itself to the community

It is important to note that there is no single factor that will determine whether a facility is in compliance with these standards and CMS has the final authority to determine whether a facility meets the definition of a hospital by SSA standards. This new guidance resolves some of the ambiguity of what it means to be “primarily engaged” in inpatient services, but also brings attention to short-stay hospitals and their licensure.

Potential Strategies for Short-Stay Hospitals
The aforementioned CMS guidance has encouraged many short-stay hospitals to assess whether they are compliant with the ”primarily engaged” standard. As a result, some are contemplating potential new strategies. If a facility believes it is likely it will not meet the refined CMS regulatory standards, four basic strategies exist:

1) Attract adequate inpatient volume to meet the required “primarily engaged” standard;
2) Terminate and wind-down the operations of the hospital;
3) Continue to operate as a hospital until CMS performs a survey; or
4) Transition the hospital to a compliant structure.

Strategy #1 is easy to understand, but may be difficult and costly to implement depending on the existing market conditions. Strategy #2 is a bit drastic, but certainly a choice. Strategy #3 is not a long-term solution. Strategy #4 is something VMG Health is starting to see happen in the market, when the right condition exist.

A prime candidate for Strategy #4 would be a successful surgical specialty hospitals that provides primarily outpatient services and very limited inpatient care. Pro-actively converting such a hospital to a compliant structure – such as a licensed ambulatory surgery center (“ASC”) can be a lucrative endeavor, but certainly requires significant due diligence and analysis.

As an example, in order to order to obtain ASC licensure, a facility is not permitted to have certain ancillary services such as imaging, laboratory and urgent care. Therefore, the hospital would divest itself of all of the assets related to these ancillary business lines, which provides an influx of new capital. Meanwhile, some of the high costs associated with hospital licensure get eliminated, and focus may be aimed at more profitable surgical cases. As a result, following such a conversion, a newly transitioned ASC may enjoy considerable financial success and provide excellent investment returns to its equity owners.

The analyses required to make such a decision under Strategy #4 would include a review of the facility’s case mix, assets, ancillary businesses, and competitive market conditions. As a result, many transactions and changes to the business may be a part of this strategy. A deep understanding of the healthcare industry’s opportunities and regulatory guidance will be critical first steps. Lastly, any new structure and licensure requirements should be vetted by legal counsel, while any associated transaction typically needs to be set at fair market value.


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