ABA Health eSource
December 2010 Volume 7 Number 4

CMS Issues Final Regulations Implementing Whole Hospital and Rural Provider Exceptions

By James Pinna, Hunton & Williams LLP, Richmond VA

AuthorSection 6001(a) of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (“PPACA”), amended the Stark Law exceptions for physician ownership in whole hospitals and rural providers to impose additional restrictions on physician-owned hospitals to qualify for such exceptions (the “Revised Exceptions”). The Centers for Medicare and Medicaid Services (“CMS”) released final regulations implementing these Revised Exceptions on November 2, 2010. 1 This article highlights key issues clarified by CMS in these final regulations and questions left unanswered for physician-owned hospitals.

Deadlines for Compliance

Section 6001(a)(2) of PPACA provides that in order to satisfy the Revised Exceptions, a physician-owned hospital must meet the requirements described in a new Section 1877(i)(1) of the Social Security Act (the “Act”) no later than September 23, 2011. However, certain provisions under Section 1877(i)(1) specify other dates for compliance -- in particular, (i) a hospital must have physician ownership and a provider agreement in effect on December 31, 2010, (ii) a hospital may not expand capacity beyond the number of operating rooms, procedures rooms and beds for which it was licensed as of March 23, 2010, (iii) a hospital may not have been converted from an ambulatory surgery center on or after March 23, 2010, and (iv) physician ownership may not exceed the percentage of the total value of physician ownership in the hospital as of March 23, 2010.

CMS resolved potential confusion around these deadlines by clarifying that the deadline for compliance with all provisions within section 1877(i)(1) of the Act that do not contain an explicit deadline is September 23, 2011, but failure to satisfy an earlier deadline specified in the Act will preclude use of the Revised Exceptions. 2 Thus, failure to obtain a provider agreement that is effective on or before December 31, 2010 will prevent a physician-owned hospital from meeting the Revised Exceptions and if a hospital does not have physician ownership as of March 23, 2010 and as of December 31, 2010, the hospital cannot qualify for the Revised Exceptions if it later adds physician ownership. 3 CMS explicitly rejected the proposition that hospitals under development could add physician ownership after March 23, 2010 if the hospital did not have a provider agreement in effect on such date. 4 CMS also clarified that if a hospital does not have a provider agreement in effect on March 23, 2010, but has a provider agreement effective on or before December 31, 2010, then the baseline number of operating rooms, procedures rooms and beds is measured on the effective date of its provider agreement. 5

Limitations on Expansion and Opportunities for Reconfiguration

The Revised Exceptions require that the number of operating rooms, procedure rooms and beds for which a hospital is licensed be no greater than the number of operating rooms, procedure rooms and beds for which the hospital was licensed as of March 23, 2010 (or the later effective date of the hospital’s provider agreement). CMS clarified that this expansion limitation applies to the baseline number of operating rooms and procedures rooms in existence as of the baseline date, regardless of whether a state licenses those rooms. 6

The Revised Exceptions provide that the term “procedure rooms” includes rooms in which catheterizations, angiographies, angiograms and endoscopies are performed, except such term shall not include emergency rooms or departments (exclusive of rooms in which catheterizations, angiographies, angiograms and endoscopies are performed). In the final regulations, CMS decided not to add any additional services to the definition of procedure rooms and, in doing so, explicitly rejected a proposal by one commenter to include rooms where radiation therapy and diagnostic imaging such as MRI, CT, PET, interventional radiology and mammography are performed. 7 This response appears to confirm that diagnostic imaging studies not involving the use of catheter or endoscopy equipment, such as a coronary CT angiography, do not fall within the definition of “procedure rooms.” However, CMS noted that it interpreted PPACA to permit the expansion of the definition of “procedure rooms” and that it would continue to monitor this issue to determine whether it should be revisited in future rulemaking. 8

CMS clarified in the final regulations that a hospital would not violate the expansion limitations in the Revised Exceptions if it retires old beds, operating rooms or procedures rooms for new beds, operating rooms or procedure rooms without increasing the baseline number. 9 CMS also explained that the relocation of operating rooms, procedure rooms or beds to an existing or new site would not violate the expansion limitation if (i) the relocation would not increase the baseline number of operating rooms, procedure rooms or beds, and (ii) following the relocation, all of the hospital’s operating rooms, procedure rooms and beds would continue to be operated by the same legal entity under the same hospital license and provider agreement. 10

Perhaps the most generous interpretation by CMS in the final regulations is its position that the expansion limitation only applies to the aggregate number of operating rooms, procedure rooms and beds. Although the term “aggregate” is not used in the statutory or regulatory text, both the statutory and regulatory language use the terminology “operating rooms, procedure rooms and beds” as opposed to “operating rooms, procedure rooms or beds.” 11 CMS explained in its commentary that if a hospital is authorized to operate 20 beds, 2 operating rooms and 2 procedure rooms, the hospital may reduce or increase the number of each as long as the aggregate number does not exceed 24. 12

Physician Investment

With respect to the level of physician investment in physician-owned hospitals, CMS clarified that the total aggregate value of physician ownership in the hospital can fluctuate so long as it never exceeds the percentage of the total value of physician ownership in the aggregate as of March 23, 2010, and confirmed that the Revised Exceptions do not restrict the total number of physician owners. 13

A question left unanswered by CMS in the final regulations is whether “minimum contacts” provisions in medical staff bylaws are inconsistent with the requirement in the Revised Exceptions specifying that hospitals cannot condition physician ownership either directly or indirectly on the physician making or influencing referrals to the hospital or otherwise generating business for the hospital. The final regulations fail to address the potential conflict between the foregoing requirement and the pre-existing requirement at 42 C.F.R. 411.356(c)(3)(ii) requiring physician owners to have bona fide authorization to perform services at the hospital. The requirement that physician owners have bona fide authorization to perform services at the hospital is typically interpreted to require that physician owners be on the medical staff with clinical privileges to perform services in their medical specialty. It is common practice for hospitals, whether physician-owned or not, to include minimum contact requirements in their medical staff bylaws that require physicians to have a minimum number of patient contacts at the hospital in order to retain medical staff membership and clinical privileges. These minimum contact requirements serve an important role for hospitals to evaluate the clinical competency of physicians on their medical staff (whether physician owners or not) and are typically set so low that it would be difficult to argue they serve as substantive referral obligations. Absent such requirements, hospitals would need to request information on physicians from other healthcare facilities to evaluate clinical competency, implicating concerns under federal and state privacy and peer review laws. Unless CMS provides further clarification on this issue, these types of minimum contact requirements in medical staff bylaws of physician-owned hospitals could raise compliance concerns under the new requirements in the Revised Exceptions. Further clarification in the form of a FAQ would be welcome to assure that minimum contact requirements necessary for effective peer review are will not be regarded as impermissible conditioning of physician ownership on referrals.

Disclosure Requirements

To address concerns about implementation and potential overpayment liability, CMS modified the physician disclosure requirements in the final regulations to specify that physician-owned hospitals must require each referring physician owner to agree, as a condition of medical staff membership or admitting privileges, to provide written disclosure of his or her ownership interest in the hospital (and, if applicable, the ownership of any treating physician) to all patients the physician refers to the hospital “by a time that permits the patient to make a meaningful decision regarding the receipt of care” as opposed to “at the time of referral” as originally proposed. 14 CMS also clarified that a physician’s failure to make such disclosures required as a condition of medical staff membership would result in a disciplinary matter for the hospital and would not necessarily result in prohibited referrals under the Stark Law. 15 In response to concerns about feasibility of physician notifications, CMS explained that physician disclosure was not necessary for patients treated in the emergency department because the patient has already decided the location for his or her receipt of care, and further indicated that a prominently displayed sign in a physician’s office could potentially satisfy the physician disclosure requirement. 16

Notwithstanding the physician disclosure requirements in the final regulations implementing the Revised Exceptions, the Medicare regulations regarding provider agreements at 42 C.F.R. § 489.20(u)(2) still include a similar disclosure requirement that physician-owned hospitals must require each physician who is a member of the hospital’s medical staff to agree to provide written disclosure of any ownership interest in the hospital to patients at the time of referral. CMS decided not to modify this corresponding regulatory provision in connection with the final regulations implementing the Revised Exception. Thus, the concession on physician disclosure requirements made by CMS in the final regulations may be of little practical value because the Medicare provider agreement regulations still stipulate disclosure at the time of referral.

Conclusion

The final regulations issued by CMS on November 2, 2010 implementing the Revised Exceptions provide helpful clarification on certain issues, such as deadlines for compliance, limitations on expansion and flexibility for reconfiguration, and calculation of bona fide physician ownership. Yet, several inconsistencies remain and physician-owned hospitals may need to seek further guidance from CMS particularly on the issue of minimum contact requirements in medical staff bylaws.


1 Medicare Program: Hospital Outpatient Prospective Payment System and CY 2011 Payment Rates, 75 Fed. Reg. 71800 (November 24, 2010).
2 75 Fed. Reg. at 72241.
3 75 Fed. Reg. at 72242.
4 Id.
5 75 Fed. Reg. at 72243.
6 75 Fed. Reg. at 72244.
7 75 Fed. Reg. at 72246.
8 Id.
9 75 Fed. Reg. at 72244.
10 75 Fed. Reg. at 72245.
11

See 42 U.S.C. § 1395nn(i)(1)(B) and 42 C.F.R. § 411.362(b)(2).

12 Id.
13 75 Fed. Reg. at 72249.
14 75 Fed. Reg. at 72247.
15 75 Fed. Reg. at 72248.
16 Id.

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