Micro hospital fails to meet the definition of a hospital for Medicare enrollment


A recent decision by the Department of Health and Human Services’ (HHS) Departmental Appeals Board (DAB) found that a health care entity having four inpatient beds (a so-called “micro hospital”) does not meet the statutory definition of “hospital” and, as such, cannot participate in the Medicare program as a hospital. 

With pressure on overall reimbursement and, particularly, with the waning of more generous reimbursement under the OPPS for non-excepted off-campus provider-based hospital departments, providers may be left searching for additional revenue sources and configurations. Recent efforts have focused on micro hospitals —the use of a small number of inpatient beds to qualify a facility as a hospital.

In a recent matter involving Wills Eye Hospital (Wills), the DAB affirmed the decision of an Administrative Law Judge (ALJ) in favor of the Centers for Medicare & Medicaid Services’ (CMS) determination that Wills was not “primarily engaged” in providing services to inpatients, as required by the Social Security Act’s definition of a hospital. In reaching its ultimate decision, the DAB also found that (1) CMS is not bound to follow the survey or licensing decisions of state health departments, and (2) a case-by-case determination of provider status, taking into account all of the facts and circumstances surrounding an enrolling provider, is appropriate rather than adopting a bright-line numerical or other standard.


Wills operated from 2002–2013 as an ambulatory surgery center (ASC) providing ophthalmic services in the Philadelphia area when it decided to add inpatient beds in order to qualify as a hospital for Medicare purposes. (Hospitals generally carry a higher rate of reimbursement than that available for an ASC.) Wills renovated its physical plant in order to meet the hospital Life Safety Code requirements, added four inpatient beds, surrendered its state ASC license, applied for and was granted a state license as a hospital, asked for a termination of its Medicare enrollment as an ASC and applied for new Medicare enrollment as a hospital. 

The Pennsylvania Department of Health surveyed Wills, found it in compliance with the Medicare hospital conditions of participation, and recommended to CMS that it certify Wills as a hospital and enroll it in the Medicare program. CMS, however, denied Wills' application, stating that Wills did not meet the definition of a hospital in Section 1861(e)(1) of the Social Security Act as 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.”

DAB findings

In upholding the ALJ decision that CMS had acted appropriately in denying Wills’ enrollment as a hospital, the DAB reaffirmed that to be a hospital the bulk of the services must be provided to inpatients and the primary activity of the entity must be inpatient care. It rejected Wills’ definitional argument that of the services provided to inpatients the primary type(s) of services must be those listed at (A) and (B) of the definition. While the DAB did not find nor impose a standard on the volume of services, it did find significant that even if all of Wills’ inpatient beds were occupied 365 days per year, inpatient procedures would only make up slightly more than 17 percent of the institution’s volume. The DAB also took note of the focus of the operations of the entity, noting that staffing levels did not change from ASC to proposed hospital operations, suggesting that no significant new inpatient focus had been added as a result of the desired enrollment status change.


Health care institutions must be careful when considering the opening of a micro hospital. Albeit small, a micro hospital must still meet all of the requirements of a hospital under both state and federal law. Reliance on state licensure or even state agency survey results is no guarantee that CMS will agree with these determinations. There have been several recent instances,[1] of which Wills Eye Hospital is only the latest, that have found both new and converting facilities failing to meet the inpatient definitional threshold to qualify as a hospital. It appears that CMS will continue to scrutinize this area heavily. Health care entities should consider factors used by CMS to evaluate how a new hospital or converting entity measures up to the standard of being “primarily engaged in inpatient care.” They should also consider other strategies, such as hospital remote locations, to achieve similar goals to the use of micro hospitals.

[1] See, e.g., Arizona Surgical Hospital, LLC, DAB No. 1890 (2003) and Kearney Regional Medical Center, DAB No. 2639 (2015)

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