United States: Expiration of Specialty Hospital Moratorium: An Update and Forecast

On June 8, 2005, the 18-month moratorium prohibiting certain specialty hospitals from utilizing the "whole hospital" exception under the Stark law expired. Still being debated, however, is the practical effect of the expiration of the moratorium. Absent additional federal and/or state legislative or regulatory action, it appears that specialty hospitals will continue to be developed and constructed.

Specialty hospitals either focus on the health care requirements of specific patient populations or provide a limited range of medical procedures. The traditional types of specialty hospitals are those, such as rehabilitation hospitals, psychiatric hospitals, children’s hospitals and cancer hospitals, that receive Medicare payment under systems different from that applicable to general acute care hospitals. More recently, other varieties of specialty hospitals have emerged, such as those focusing on cardiac, orthopedic, and surgical procedures; these types of specialty hospitals are normally paid under the inpatient prospective payment system applicable to general acute care hospitals. The number of specialty hospitals in the United States tripled between 1990 and 2003, and many of the newer variety of specialty hospitals have physician owners or investors.

The Stark law prohibits physicians from referring Medicare and Medicaid patients for certain designated health services ("DHS") to entities in which the physician or members of their family have a direct or indirect financial relationship. These financial relationships may be an ownership or investment interest (e.g., stock or partnership units) or compensation arrangement (e.g., medical director agreement). The DHS covered by Stark include inpatient and outpatient hospital services.

Importantly, the Stark law details certain exceptions from its general prohibitions, including a whole hospital exception. Under this exception, physicians may make referrals for DHS to hospitals in which they have an ownership or investment interest if: (1) the referring physician is authorized to perform services at the hospital; and (2) the ownership or investment interest is in the entire hospital, rather than a distinct part or department of the hospital.

With the enactment of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "MMA"), the whole hospital exception under Stark was revised and a moratorium instituted so that during the 18-month period from December 8, 2003 through June 8, 2005, physician investment interests in a hospital defined as a "specialty hospital" would not qualify for the exception. Under the MMA, a specialty hospital is defined as a hospital "primarily or exclusively engaged in the care and treatment" of one of the following categories: (1) patients with a cardiac condition; (2) patients with an orthopedic condition; or (3) patients receiving a surgical procedure. The phrase "specialty hospital" does not include any hospital that was in operation or under development before November 18, 2003—effectively allowing these "grandfathered" specialty hospitals to continue use of the whole hospital exception.

Pursuant to the MMA, both the Medicare Payment Advisory Committee ("MedPAC") and the Department of Health and Human Services ("HHS") were tasked with reporting to Congress on certain issues concerning physician-owned cardiac, orthopedic and surgical specialty hospitals. While each of these reports noted both advantages (e.g., improved patient satisfaction and limited financial impact on community hospitals in the same market) and disadvantages (e.g., treating less severe patients than community hospitals) of physician-owned specialty hospitals, the reports recommended that Congress not extend the moratorium. Rather, the reports recommended that changes be made in the Medicare program’s hospital inpatient prospective payment system ("PPS"). In particular, the reports suggested that increases in the number of specialty hospitals nationwide may be in part because of inaccuracies in the diagnosis-related group ("DRG") classification system.

On June 8, 2005, the MMA specialty hospital moratorium expired. Given several factors, however, the practical effect of the expiration of the moratorium is still uncertain.

First, prior to June 8 and in a series of congressional hearings, several public and private entities called for an extension of the moratorium. In response, on May 11, 2005, Senators Grassley and Baucus introduced the "Hospital Fair Competition Act of 2005." The act would permanently extend the moratorium and would be effective as of June 8, 2005, no matter when the bill actually passes. In other words, the act would be retroactive to June 8—effectively continuing the moratorium. The act also would require certain changes to the DRG classifications under the inpatient hospital PPS.

On June 9, 2005 and in August 2005, the Centers for Medicare & Medicaid Services ("CMS") issued fact sheets discussing its policy initiatives in response to the expiration of the moratorium. Specifically, CMS announced that for the rest of 2005, the agency will be reviewing its procedures for enrolling specialty hospitals in the Medicare program. During this review and until January 2006, CMS will not process Medicare participation applications from specialty hospitals and no initial state surveys for new specialty hospitals will be authorized. Additionally, CMS has made and will evaluate further changes in the DRG system and the payment rates for ambulatory surgical centers.

On July 28, 2005, Representatives Rangel, Lewis and Stark delivered a letter to CMS regarding its review and its "certification" moratorium scheduled to expire in January 2006. Concerned with continuing disparities in health care services for ethnic and racial minorities, the congressional letter requests that CMS analyze issues regarding access and quality of care before processing any new specialty hospital Medicare provider applications.

Notwithstanding the bill introduced by Senators Grassley and Baucus, the growing consensus is that the bill, in its current form, will not be passed in the near term, if at all. Representative Barton, Chairman of the House Energy and Commerce Committee, has expressly stated his opposition to efforts to extend the moratorium. The immediate focus required by the Hurricane Katrina disaster and the pending Supreme Court nomination also likely lessen the prospect of congressional action in the near term.

If a compromise bill should pass, it is likely that any retroactive provisions of the legislation would be removed. Additionally, given that both the MedPAC and HHS studies were not entirely unfavorable to specialty hospitals, legislators may be inclined to allow CMS to institute its reforms rather than seek legislative solutions. A recent position paper released by the Republican Policy Committee confirms this conclusion.

Given the likelihood that any future limitations imposed on physician-owned specialty hospitals will not focus on Stark’s anti-referral prohibitions, the growth of specialty hospitals likely will continue. In fact, specialty hospitals that were unsure whether they were "under development" and subject to the moratorium have restarted construction or begun operations. While CMS’s certification moratorium until January 2006 certainly may impact new Medicare provider applications, it appears that absent additional federal and/or state legislative or regulatory action, the specialty hospital boom will continue.

This article is presented for informational purposes only and is not intended to constitute legal advice.