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Legal Update
Exceptions to the Specialty Hospital Moratorium
Joseph Sowell II
Publish Date: October 10, 2007

Joseph A. Sowell II, Esq. When Congress imposed a moratorium on Medicare payments to physician-owners of specialty hospitals, about 100 such facilities were in operation, and 25 or so more were either in the planning or building stages. Specialty hospitals that were either in existence or already under development on Nov. 18 will not be subject to the 18-month moratorium, as long as they meet three requirements:

  • the number of physician-investors doesn't increase after Nov. 18;
  • the types of specialty services the hospital provides doesn't change after Nov. 18; and
  • the number of beds in the specialty hospital doesn't increase after Nov. 18 by more than 5 beds or 50 percent, whichever is greater.

The moratorium defines specialty hospitals as hospitals devoted primarily or exclusively to the care of patients with cardiac conditions or orthopedic conditions, patients receiving surgical procedures or any other specialized category of services the Secretary of Health and Human Services (HHS) determines is inconsistent with the purpose of the whole-hospital exception.

In determining whether a hospital was under development as of Nov. 18, HHS will consider any relevant evidence, including whether you've obtained state regulatory permits or approvals, secured financing or finalized building plans.

Murky waters
The grandfather clause leaves two key questions unanswered:

  • How do you determine the number of new physician-investors? New physician-investors can become specialty hospital owners as long as the total number of investors doesn't increase. As physicians relinquish their ownership interests as a result of death, retirement or otherwise, new physicians can be brought in to replace them. It's not clear how the number of physicians will be counted where physicians own their ownership interest through their practice. If a physician practice owns an interest in a specialty hospital, can the practice admit an associate as an owner of the practice?
  • What services can and can't be performed? While we know that a specialty cardiac hospital can't add orthopedic services, we don't know if a cardiac specialty hospital can add cardiac services that it wasn't performing on Nov. 18. How will the rule be applied to surgical hospitals? Can any service be added as long as it is a surgical service, or can the hospital only perform the specific types of surgical cases it performed before Nov. 18? How will the permitted services be defined for hospitals in development on Nov. 18?

Presumably, private-placement memorandums, pro formas and business plans prepared in conjunction with such specialty hospitals will all be considered in determining the type of specialty services that are grandfathered. As yet, however, there is little guidance. CMS is soon expected to issue its official guidance to physician-owners and hospitals administrators explaining the details of the moratorium.

After 18 months
If the specialty hospital industry can demonstrate that specialty hospitals improve outcomes and lower costs of services, Congress is unlikely to extend the moratorium when it expires. But if MedPAC's reports paint an unfavorable picture of specialty hospitals, the 18-month moratorium could very well become a permanent restriction.