CMS Clarifies “75 Percent Rule” Compliance for Hospitals

This post is adapted from an article that appears in the May 2012 issue of Dennis Barry’s Reimbursement Advisor. The author, Christopher Kenny is an attorney with the health care practice group in the Washington, DC, office of King & Spalding, LLP.

The Affordable Care Act established a process whereby hospitals could apply for and receive increases to their full-time equivalent (FTE) caps, redistributed from hospitals training residents below their FTE caps. [See Patient Protection and Affordable Care Act of 2010, P.L. 111-148, 124 Stat. 119, §5503(a).

Hospitals that receive redistributed residency slots are required to meet two conditions:

  • The hospital’s yearly number of FTEs attributable to primary care and general surgery residency programs must not fall below the hospital’s average number FTEs in such programs during the three most recent cost reporting periods; and
  • At least 75 percent of the new positions must be attributable to primary care or general surgery residents.

A reasonable reading of the Federal Register preamble discussion implementing Section 5503 suggests that CMS will require a hospital to devote 75 percent of all of its 5503 slots to primary care/general surgery programs in the first academic year those slots become available. Subsequent comments we have obtained from CMS personnel, discussed below, make clear that a hospital is not required to fill all new Section 5503 residency slots in the first academic year, and that the 75 percent rule applies only to the extent that a hospital uses the new slots in a given year.

Legal Background

In order to receive new slots pursuant to Section 5503, hospitals applying for increases to their residency caps had to demonstrate to CMS, among other criteria, “the likelihood of the hospital filling the positions made available…within the first 3 cost reporting periods beginning on or after July 1, 2011.” [Soc. Sec. Act §1886(h)(8)(C)(i) .]

Hospitals that ultimately receive additional residency slots must abide by two conditions:

  • The number of [the hospital’s] full-time equivalent primary care residents…excluding any additional positions under subclause (II), is not less than the average number of full-time equivalent primary care residents…during the three most recent cost reporting periods ending prior to the date of enactment of this paragraph; and
  • Not less than 75 percent of the positions attributable to such increase are in a primary care or general surgery residency (as determined by the Secretary). [§1886ww(h)(8)(B)(ii)(I)-(II).]

CMS is charged with ensuring hospital compliance with these requirements during the five-year period after the redistribution.

CMS implemented these requirements in the calendar year (CY) 2011 outpatient prospective payment system (PPS) final rule. [See 75 FR 72172 (Nov. 24, 2010); see also 42 C.F.R. §413.79(n)(2)(i).] CMS left some ambiguity as to how it would apply the 75 percent rule; that is, while the statute requires a hospital only to demonstrate a likelihood that it would fill any additional FTE slots over a three-year period, CMS’s discussion in the Federal Register implied that the hospital must devote 75 percent of all FTE slots it received to primary care/general surgery residency programs during each academic year from July 1, 2011-June 30, 2016:

“[D]uring each of the 5 years in the 5-year period of July 1, 2011, to June 30, 2016, for [indirect medical education] IME and direct [graduate medical education] GME respectively, and for each cost report during those 5 years, [the hospital must show] that not only is it maintaining its primary care average, but that 75 percent of the increased FTE slots that it received are being used to count residents training in primary care or general surgery programs.” [75 FR at 72196.]

This instruction seemingly contradicts the statutory language that the hospital has three years to fill the awarded slots.

This interpretation poses the possibility that a hospital would need to devote 75 percent of all new slots to primary care/general surgery programs in the 2011 academic year—even though CMS awarded those slots after the 2011 academic year began. If an auditor were to abide by this interpretation, and found a hospital in noncompliance, the hospital would forfeit all of its additional FTE slots. [75 FR at 72202.]

75 Percent Rule Only Applies to the Extent a Hospital Uses the Slots

CMS staff has informed us that the agency will require hospitals to abide by the 75 percent rule only when the hospital uses the slots to establish new residency programs or to expand existing programs. Moreover, CMS will apply the 75 percent rule only to the extent that the hospital uses those slots in a given year.

For example, if a hospital received five IME FTEs total, but used only four of those FTEs in the 2012 academic year, CMS would require that three of those FTEs must be used toward primary care or general surgery in the 2012 academic year. Furthermore, a hospital is under no obligation to immediately use all (or any) of the FTEs it receives.

A hospital cannot, however, use the slots to provide cap relief without devoting at least 75 percent of the slots to primary care or general surgery. CMS has stated that if a hospital training residents above its FTE caps plans to use the new Section 5503 slots for cap relief, the hospital must eliminate residency slots in nonprimary care/general surgery programs and replace those slots with primary care/general surgery slots in an amount equivalent to at least 75 percent of the Section 5503 slots. A hospital cannot simply apply the Section 5503 slots toward its current FTE count without complying with the 75 percent rule.

CMS advises, however, that while the 75 percent rule would not be applicable in the first year a hospital receives Section 5503 residency slots, the other statutory condition—that the hospital not train less than the average number of primary care/general surgery resident FTEs it trained in the three prior cost reporting periods—is applicable immediately. [See SSA §1886ww(h)(8)(B)(ii)(I).]

While a hospital that has been granted new resident slots is under no obligation to begin a new residency program or expand an existing program in the 2011 academic year, it may not use the slots for cap relief before the new/expanded program begins in a later academic year. CMS has stated that 75 percent of any portion of Section 5503 FTEs a hospital opts to use must be used toward a new or existing primary care/general surgery program. If a hospital training residents above its FTE caps wished to use its new FTEs for cap relief, the hospital must reduce its nonprimary care/general surgery programs and replace those slots primary care/general surgery slots in an amount equivalent to 75 percent of the Section 5503 slots.

CMS provides an example of how a hospital may use its Section 5503 resident slots for cap relief: A hospital with an FTE cap of 100 is training 50 primary care residents and 60 nonprimary care residents, for a total of 110 FTE residents being trained. Assume the hospital’s primary care average is also 50. The hospital receives 10 slots under Section 5503, raising its FTE cap from 100 to 110. The hospital cannot reduce its primary care FTE count from 50 to 40, and then increase its primary care FTE count to 50 again using the 10 FTEs received under Section 5503 for primary care residents in an attempt to meet the primary care average and the 75 percent requirement.

Rather, since the hospital received 10 slots under Section 5503, the hospital must use at least 75 percent of those 10 positions, or 7.5, to either create a new or expand an existing primary care or general surgery program. If the hospital wishes to maintain training 110 FTE residents with a cap of 110, the hospital would need to eliminate 7.5 FTEs of its existing nonprimary care residents, and in their place, train an additional 7.5 primary care or general surgery FTE residents. [75 FR at 72198.]

Thus, were a hospital to begin using the additional FTEs for cap relief, the hospital would be required to eliminate residency slots in nonprimary care/general surgery programs and replace them accordingly.