September 2011 Volume 8 Number 1

CMS Proposes Expansion Request Process for Physician-Owned Hospitals Under the Stark Law and PPACA

By Jennifer Rangel and Lindsay Setliff, Locke Lord Bissell & Liddell LLP, Austin, TX

AuthorAuthorOn July 18, 2011, the Centers for Medicare & Medicaid Services (CMS) published a proposed regulation in the Federal Register providing the anticipated exception process to the recent Stark Law prohibition on expansion by a hospital with physician owners or investors (the Rule).1 As expected, the process will be difficult, if not impossible, for most physician-owned hospitals to meet and most hospitals will be precluded from expanding.

Under the Patient Protection and Affordable Care Act (“PPACA”), a grandfathered physician-owned hospital may not increase the number of operating rooms, procedure rooms, and beds beyond that for which the hospital was licensed on March 23, 2010 unless the hospital is granted one of two exceptions to the expansion prohibition.2 To be eligible for an exception, PPACA provides that a hospital must meet either (1) the applicable hospital exception; or (2) the high Medicaid facility exception.3 CMS sets forth proposed regulations for the process for applicable hospitals and high Medicaid facilities to request an exception.4 PPACA and proposed Rule permit a hospital to apply for an exception up to once every two years. Not surprisingly, the Rule closely follows the PPACA expansion provisions.

The Rule provides clarification for two important defined terms from PPACA, “baseline number of operating rooms, procedure rooms, and beds” and “main campus of the hospital.”5 The Rule follows PPACA by proposing that an applicable hospital’s increase in the number of operating rooms, procedure rooms, and beds may not exceed 200 percent of the baseline number. The Rule proposes to apply the same limitation to a high Medicaid facility as PPACA did not include this language in the high Medicaid facility exception. An applicable hospital must determine baseline facility capacity to ensure compliance with this limit. As in PPACA, there is no specific method given for determining the baseline number when, as is often the case particularly in regard to operating and procedure rooms, the numbers are not set forth on the face of the license. PPACA also provides that any increase may occur only in facilities on the main campus of the applicable hospital (and not in any off campus or satellite location). The Rule would expand this limitation to high Medicaid facilities as well as applicable hospitals.

Applicable Hospital Criteria

PPACA provides that an “applicable hospital” means a hospital located in a county in which the percentage increase in the population during the most recent five-year period is at least 150 percent of the percentages increase in the population growth of the state in which the hospital is located during that period, as estimated by the Bureau of the Census.6 To determine the percentage increase in population, the Rule proposes that the hospital use the most recent population estimates provided by the Bureau of Census. If the hospital is located in an area the Bureau refers to as a county equivalent area, the hospital would use the Bureau’s estimates for the county equivalent area in which it is located. CMS also proposes to review a request based on the population estimates available as of the date that a hospital submits its request regardless of whether updated estimates are available prior to its decision.

PPACA further provides that an applicable hospital’s annual percentage of total inpatient admissions under Medicaid must be equal to or greater than the average percentage with respect to such admissions for all hospitals located in the county in which the hospital is located.7 Pursuant to the Rule, hospitals would calculate inpatient admissions using filed cost report discharge data. CMS plans to issue guidance to further address this process but it is unclear when such guidance would be issued.8 The Rule proposes that a hospital must satisfy this criterion for each of the three most recent fiscal years for which data are available.

PPACA additionally requires that an applicable hospital be located in a state in which the average bed capacity is less than the national average bed capacity.9 The Rule proposes that this requirement must be met for each of the three most recent fiscal years for which data are available.10 Under the proposed process, CMS would use filed hospital cost reporting data to determine state and national average bed capacities. Further guidance will be issued explaining the CMS process but it is unclear when such guidance would be issued.

Pursuant to PPACA, an applicable hospital must have an average bed occupancy rate that is greater than the average rate in the State in which the hospital is located in order to meet the exception.11 The Rule proposes that this requirement be met for each of the 3 most recent fiscal years for which data is available.12 Under the proposed process a hospital would use filed hospital cost reporting data to calculate its own average bed occupancy rate. CMS plans to issue further guidance explaining this calculation, as well.

Under PPACA, an applicable hospital and its physicians as well as a high Medicaid facility may not discriminate against beneficiaries of federal health care programs and the Rule proposes to incorporate this requirement in the regulations.13

High Medicaid Facility Criteria

PPACA provides that a high Medicaid facility means a hospital that is not the sole hospital in a county, and the Rule proposes to incorporate this requirement in the regulations.14 Pursuant to PPACA and the proposed Rule, a high Medicaid facility must, with respect to the three most recent years for which data are available, have an annual percent of total inpatient admissions under Medicaid that is estimated to be greater than such percent with respect to such admissions for any other hospital located in the county in which the hospital is located. The Rule proposes these criteria be met for each of the three most recent fiscal years for which data are available.15 It also proposes that the applicant hospital be required to use filed hospital reporting discharge data as a proxy for inpatient admissions under Medicaid. The data necessary for a hospital to calculate the annual percentage of total inpatient admissions under Medicaid for all other hospitals located in the county will be posted on CMS’ website.

Procedure for Submitting a Request

In order to apply for an exception, the Rule proposes that a hospital submit to CMS a request including the information and documentation required in the Rule.16 Each request would include: 1) the name and address, National Provider Identification number(s) (NPI), Tax Identification Number(s) (TIN), and CMS Certification Number(s) (CCN) of the hospital; (2) the county in which the hospital is located; and 3) the name, title, address, and daytime telephone number of a hospital contact person. The Rule proposes that each request state whether the hospital requests an exception as an applicable hospital or as a high Medicaid facility and contain a clear explanation of how it satisfies the criteria for an exception. The Rule further proposes that each request include documentation supporting the hospital’s calculation of the hospital’s baseline number of operating rooms, procedure rooms, and beds as defined in PPACA and the details of the requested increase. The hospital must also state that it does not discriminate against beneficiaries of federal healthcare programs and does not permit physicians practicing in the hospital to do so. The Rule proposes that each request include a certification signed by an authorized representative of the hospital attesting that all of the information provided is true and correct to the best of his or her knowledge and belief.

Pursuant to PPACA, members of the community in which the applicable hospital is located must have an opportunity to provide input on a hospital’s request for an exception. The Rule clarifies that the opportunity for community comment applies to high Medicaid facility applicants, as well.17 In order to facilitate this community input, the Rule proposes that a hospital disclose that it is requesting an extension on its web site and the notice remain posted from the time of submission until a decision whether or not to grant the exception is finalized by CMS. CMS will also report that the hospital is requesting an exception on the CMS Hospital Listserv and on the CMS’ web site. A hospital’s request would also be published in the Federal Register. Members of the community have 30 days from the date published in the Federal Register to submit written comments. CMS further proposes to notify the hospital in writing if it receives written comments and proposes to allow the hospital 30 days to submit information to rebut the comments.

PPACA states that the Secretary shall publish the final decision on an exception request in the Federal Register not later than 60 days after receiving a complete application. CMS proposes to post such decisions on the CMS Web site. The Rule as proposed will follow PPACA and provides for no administrative or judicial review of CMS’ decision.18 The comment period ended on August 30, 2011. The final rule is generally expected to be published in November and will be effective on January 1, 2012.

Expansion will be Difficult for Many Hospitals

As evidenced by the stringent exception criteria, few hospitals will qualify for an exception. For example, to meet the applicable hospital exception, a hospital will be required to show that it is located in an area that in which the population is growing more rapidly than in the remainder of the state. In addition, the applicable hospital must show that the area in which the hospital is located has a need for additional beds or operating/procedure rooms. These requirements may be difficult to meet in most markets. The high Medicaid facility exception will also be difficult to meet, as few physician-owned hospitals serve a large Medicaid population. Consequently, expansion of physician owned hospitals will be difficult to attain and most of such hospitals will be frozen at their baseline number of beds and operating and procedure rooms. The Rule can be found at http://www.gpo.gov/fdsys/pkg/FR-2011-07-18/pdf/2011-16949.pdf .


1

76 Fed. Reg. 42170 (July 18, 2011).

2 42 U.S.C. § 1395nn(i)(3).
3

Id.

4

76 Fed. Reg. 42170, 42390 (July 18, 2011) (to be codified at 42 C.F.R, § 411.362).

5

Id.

6

42 U.S.C.§ 1395nn(i)(3)(E).

7

42 U.S.C. 1395nn(i)(3).

8 76 Fed. Reg. 42170, 42390 (July 18, 2011) (to be codified at 42 C.F.R, § 411.362).
9

42 U.S.C. 1395nn(i)(3).

10

76 Fed. Reg. 42170, 42390 (July 18, 2011) (to be codified at 42 C.F.R, § 411.362).

11 42 U.S.C. 1395nn(i)(3).
12

76 Fed. Reg. 42170, 42390 (July 18, 2011) (to be codified at 42 C.F.R, § 411.362).

13

42 U.S.C. 1395nn(i)(3).

14

42 U.S.C. 1395nn(i)(3)(F).

15

76 Fed. Reg. 42170, 42390 (July 18, 2011) (to be codified at 42 C.F.R, § 411.362).

16

76 Fed. Reg. 42170, 42390 (July 18, 2011) (to be codified at 42 C.F.R, § 411.362).

17 76 Fed. Reg. 42170, 42390 (July 18, 2011) (to be codified at 42 C.F.R, § 411.362).
18

76 Fed. Reg. 42170, 42390 (July 18, 2011) (to be codified at 42 C.F.R, § 411.362).


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