March 30,2006

Grassley, Baucus Continue to Question CMS on Specialty Hospitals

WASHINGTON – Sen. Chuck Grassley, chairman of the Committee on Finance, and Sen.
Max Baucus, ranking member, are asking Department of Health and Human Services (HHS)
Secretary Michael Leavitt for documents and raising further questions about the Centers for
Medicare and Medicaid Services (CMS) and the enforcement of the moratorium on physician-owned
specialty hospitals. The senators said that officials from CMS recently confirmed that an Oregon
hospital that had a policy to call 911 in case of a patient emergency in lieu of an on-call physician
was in fact a specialty hospital and should not have been treating Medicare patients as it opened
during the congressionally mandated moratorium on physician-owned specialty hospitals. This
facility was highlighted by Grassley and Baucus in a February 14, 2006, letter to Leavitt questioning
CMS’ enforcement of the moratorium and led to CMS’ current investigation of the Oregon facility.

“The confirmation from CMS that this facility was in fact a specialty hospital raises more
questions than it answers,” Grassley said. “Congress passed an 18-month moratorium on specialty
hospitals, the president signed it into law, but now it’s clear that the law wasn’t enforced in one case.
I intend to find out whether it wasn’t enforced in other cases, and make sure that there aren’t more
facilities out there that violated the moratorium.”

Baucus said, “It appears that this facility was a hospital in name only, and that contributed
to this patient’s death. I want assurances that CMS is on the job across the country, making certain
that Medicare patients aren’t being endangered by ‘hospitals’ that aren’t really hospitals. Medicare
dollars need to be spent wisely at legitimate facilities where patients can receive proper care.”

The text of the latest Grassley-Baucus letter follows.

March 29, 2006

Via Electronic Transmission

The Honorable Michael O. Leavitt
Department of Health and Human Services
200 Independence Avenue, SW
Washington, DC 20201

Dear Secretary Leavitt:

The United States Senate Committee on Finance (Committee) has exclusive jurisdiction over, among
other things, the Medicare and Medicaid programs. As Chairman and Ranking Member of the
Committee, we have a responsibility to protect these programs along with the more than 80 million
Americans who receive healthcare from them.

On February 14, 2006, we wrote to you outlining concerns we had upon learning the tragic details
surrounding the death of a patient who had back surgery at Physicians’ Hospital (Physicians’) in
Portland, Oregon. We were concerned by many details of this story, including that the hospital did
not have a physician physically present, the hospital staff were unable to reach the on-call physicians,
the hospital apparently did not have any arrangement with a local community hospital for
emergencies, and the staff ultimately needed to call 911 for emergency help to resuscitate a patient
who had undergone surgery a few hours prior, and that Medicare was paying the bill for this level
of care.

It was very disheartening to learn that the patient in this case ultimately passed away at another
hospital. The events surrounding this death highlighted not only the serious deficiencies in the
treatment of patients and quality of care at Physicians’, but also brought to light a serious problem
with the administration of the 18-month moratorium on physician-owned specialty hospitals
Congress passed as part of the Medicare Prescription Drug, Improvement, and Modernization Act
of 2003 (MMA).

Tasked with the goal of implementing certain portions of the MMA, the Centers for Medicare and
Medicaid Services (CMS) had the responsibility of implementing the 18-month moratorium on
physician-owned specialty hospitals. The law specifically imposed a moratorium during which
physician-investors in new specialty hospitals may not refer Medicare or Medicaid patients to these
hospitals unless they were under development prior to the start of the moratorium. The authority to
enforce this provision was given to CMS to ensure that the growth of these facilities was contained
until congressional studies could be conducted.

As outlined in our previous letter, information provided to the Committee shows what appears to be
a physician-owned specialty hospital that opened during the moratorium (Physicians’). Through
recent discussions between our staff and CMS, as well as a review of CMS’s correspondence with
Physicians’, it is now clear that CMS has determined that Physicians’ is in fact a specialty hospital
and that it opened in violation of the 18-month moratorium. This finding is unsettling as it only
continues to raise more questions about CMS’s enforcement of the 18-month moratorium and
whether CMS continued to provide Medicare payments to other physician-owned specialty hospitals
in violation of the moratorium.

Accordingly, as Chairman and Ranking Member of the Committee, we request that you provide the
following documents, as well as written responses to the following:

(1) A copy of the March 2, 2006, letter sent to Physicians’, alerting the hospital of CMS’s intention
to terminate its provider agreement with the Medicare program and notifying how Physicians’ could
avoid the termination.

(2) A copy of the results of the CMS survey conducted at Physicians’ on February 24, 2006, referred
to as the "CMS Statement of Deficiencies/Plan of Correction," also known as, "CMS 2567".

(3) A copy of the March 10, 2006, letter that was sent by CMS to Physicians’, which accompanied
"CMS Statement of Deficiencies/Plan of Correction".

(4) A copy of the "Plans of Corrections" submitted to CMS by Physicians’ in response to CMS’s
finding of immediate jeopardy related to Medicare’s Condition of Participation requirement for
medical staff.

(5) A list of all hospitals that qualify as a "specialty hospital" under Section 507 of the MMA
(codified at 42 U.S.C. 1395nn(h)). In complying with this request please provide the name of the
facility, the Medicare provider number of the facility, the geographic location of the facility, and the
date that the Medicare provider number was granted to the facility.

(6) A list of all new Medicare provider numbers issued since November 18, 2003. In complying with
this request please include the name of the facility, the geographic location of the facility, and the
date that the Medicare provider number was granted to the facility.

(7) A detailed response outlining how many specialty hospitals CMS is currently investigating as
potentially violating the moratorium. In complying with this response, please state the name of the
facility, why CMS is examining a certain facility, and the current status of any investigation.

(8) Please describe what procedures CMS has implemented to determine whether a hospital is a
physician-owned specialty hospital as defined in the MMA. Please include what actions you have
taken to ensure that existing specialty hospitals adhered to the moratorium in terms of not expanding
their number of physician investors or scope of services, and limiting expansion of their number of

(9) In its mandated report to Congress on Specialty Hospitals, CMS stated the following:
"To address these concerns, we plan to revisit the procedures by which applicant hospitals are
examined to insure compliance with relevant standards. We will instruct our agents to refrain from
processing further participation applications from specialty hospitals until this review is completed
and any indicated revisions are implemented. During this six-month review period, we expect to
conduct a comprehensive review of our procedures… We expect to complete revisions to procedures
by January 2006."

Then, on January 3, 2006, CMS issued a fact sheet that stated, "Last summer, CMS temporarily
suspended enrollment of new specialty hospitals while the agency reviewed its procedures for
enrollment. At present, CMS plans to continue the suspension until February 15, 2006, after this
review is completed."

a. Please identify how many hospitals you have placed on hold during the suspension on enrollment.
b. Please provide an update on your review of CMS procedures for enrollment.

We remain very concerned that CMS’s enforcement of the 18-month moratorium was insufficient
and question how many new physician-owned specialty hospitals may have received Medicare
funding in violation of the moratorium. CMS has both a duty and responsibility to beneficiaries and
taxpayers to ensure that every dollar the Medicare program spends is distributed according to the
letter of the law. At the least, the 18-month moratorium appears to have been violated in this one
specific case. Working together, we need to determine whether any additional facilities violated the

We thank you in advance for your cooperation and request that your staff provide a point of contact
for this matter no later than April 5, 2006. Additionally, we request that CMS provide the requested
documents and written responses no later than April 14, 2006, and ask that this information be
pooled together with our previous request of February 14, 2006, which remains outstanding. In
complying with this request, please respond to each enumerated question by repeating the question,
followed by CMS’s response. Should any of the requested documents be available prior to
completion of written responses, please provide the available documents on a rolling basis.


Charles E. Grassley

Max Baucus
Ranking Member

Cc: The Honorable Mark McClellan, M.D., Ph.D.