By Lisa S. Miller and Jed Morrison

As we discussed in our previous e-Alert “Stark Hospital Exception Amendments Create Confusion for Developing Hospitals,” the Patient Protection and Affordable Care Act and the Reconciliation Act of 2010 (collectively the “PPACA”) have created some ambiguity regarding the effect that the new law would have on physician-owned hospitals which were in development on March 23, 2010, the date of enactment of the PPACA.

Earlier this month, the Centers for Medicare & Medicaid Services (“CMS”) issued the Hospital Outpatient Prospective Payment System Proposed Rule for FY 2011 (the “Proposed Rule”), which has clarified some of this ambiguity. Specifically, with regard to physician ownership of hospitals, it was unclear whether a hospital that did not have any physician owners or investors as of March 23, 2010, would be grandfathered under the PPACA. The Proposed Rule has addressed this issue, and despite the fact that the PPACA requires that a hospital must have a provider agreement and physician ownership in place by December 31, 2010, CMS has now clarified that “if a hospital has no physician ownership or investment as of March 23, 2010, and later adds physician owners or investors, the hospital will not satisfy the whole hospital and rural provider exceptions.” The reasoning offered to support this conclusion is that the December 31, 2010, date is merely an outside deadline for physician ownership, but the prohibition on an increase in the percent of physician owners or investors following March 23, 2010, controls. CMS states that failure to satisfy earlier deadlines of the PPACA precludes the use of the revised exceptions after the earlier deadline has passed unsatisfied. Accordingly, and as noted in our prior e-Alert, any physician-owned hospital in development on March 23, 2010, that did not yet have physician ownership or investment on that date, will not be grandfathered under the PPACA.

The Proposed Rule also provides some clarification regarding the issue of hospital licensure. As discussed in our previous e-Alert, a literal reading of the PPACA seems to require that a physician-owned hospital be licensed as of March 23, 2010. However, CMS has adopted a more lenient reading of the PPACA. The Proposed Rule maintains that a physician-owned hospital “will be limited to the number of operating rooms, procedure rooms, and beds for which the hospital is licensed on March 23, 2010, or if the hospital did not have a provider agreement in effect as of that date, but does have an agreement in effect on December 31, 2010, the effective date of such provider agreement.” Though this is not entirely clear as to what facility expansion is permitted between March 23, 2010, and the effective date of the provider agreement, it does seem to provide that a hospital is not required to be licensed as of March 23, 2010, and may continue to pursue state licensure through December 31, 2010, on the condition that a provider agreement is in effect by the end of this year. Furthermore, CMS has requested public comment on whether “procedure rooms” should include rooms where additional services, such as CT or PET scans, are performed and has stated that “the limitation on expansion applies to operating rooms and procedure rooms regardless of whether a State licenses these rooms.” Comments on the Proposed Rule are due on August 31, 2010.

Interestingly, the Proposed Rule continues to leave some issues unaddressed. For example, if a hospital has applied for a provider agreement and does not receive notice of acceptance until 2011, but the provider agreement is deemed effective prior to December 31, 2010, does this satisfy the requirements of the PPACA? Furthermore, may referrals be made by physician owners to the hospital in the interim? Those questions remain unanswered by CMS.

While questions will continue to arise regarding the practical affects of the PPACA on developing hospitals through the end of this year, the Proposed Rule has provided some useful insights into the interpretation of the PPACA by CMS. If you have questions about this e-Alert, contact Jed Morrison at 210.978.7780 or jmorrison@jw.com, or Lisa Miller at 210.978.7781 or lsmiller@jw.com.