Setting the bar a bit lower than many experts thought possible, the federal government gave the go-ahead last week to a physician-owned specialty hospital that had done little more than file a few architectural plans, assemble a roster of doctor investors and smooth out the land on which the facility will soon stand.
In its first advisory opinion on exemptions for specialty hospitals since issuing guidance in March, the CMS said the hospital-which will have 60 to 70 beds-met the criteria established in the Medicare Prescription Drug, Improvement and Modernization Act of 2003.
The six-page advisory opinion said the hospital, a joint venture of 20 to 30 orthopedic surgeons and neurosurgeons and an "established national operator of ambulatory surgery centers and specialty hospitals," was under development as of Nov. 18, 2003-the deadline established in the Medicare law for any new physician-owned specialty hospital during an 18-month moratorium on such projects.
Investors had spent about $7.8 million on the project before the deadline, including $6 million for land acquisition, the CMS noted in an advisory opinion first disclosed in a June 23 Modern Healthcare alert. That significant investment-along with many other factors cited by the CMS-led some legal experts to suggest that the rule may not clarify key legal issues for other specialty facilities whose development remains in doubt.
"This was a proverbial no-brainer," said Scott Becker, a Chicago lawyer with McGuireWoods who serves as legal counsel to the American Surgical Hospital Association and represents several investors and developers.
"These guys had put so much money into it. It was an easy decision (for the CMS)," Becker said. "It's a hard one to gauge too much from in terms of any insight into whether the CMS will take a liberal or a hard look at these."
An estimated 20 to 30 specialty hospitals are now "under development" and thus must meet the strictures in the new law, according to officials with the San Diego-based surgical hospital association. They say the initial advisory opinion bodes well for many of these projects-the majority of which are being planned in Texas and California, according to an October 2003 report from the General Accounting Office. At least eight projects have sought expedited advisory opinions from the CMS. Becker said he is preparing several requests for his clients, and others may be forthcoming.
In March, the CMS issued guidance to help investors determine whether their projects meet the grandfather exemptions. To qualify as "under development," the CMS said, hospitals must have received funding, completed architectural plans, met all zoning requirements and received necessary approvals from the appropriate state agencies.
The unnamed hospital in the agency's first advisory ruling apparently met only some of these requirements. By the deadline date, investors had filed several key papers with its state department of health, including civil engineering documents, preliminary architectural plans and completed architectural drawings. But the developers had raised equity that amounted to only a small percentage of the total project cost and had not yet received final state health department approval, beating the deadline by one day by presenting a "complete plan submittal" to state officials. While "demolition and grading on the site were completed" prior to the deadline, construction had not begun, the CMS said.
"CMS seems to be showing some flexibility," said Roger Strode, a lawyer with Quarles & Brady in Milwaukee. "There's no steel-no structure. Yet the hospital was deemed to be under development. And this is a hospital with very scant regulatory approval. That's very good news for a lot of these (prospective) specialty hospitals."
Officials at two of the largest developers of for-profit ambulatory surgery facilities and specialty hospitals-Chicago-based National Surgical Hospitals and United Surgical Partners International in Addison, Texas-said their companies are not involved in the project.
Lawyers and other industry observers contacted by Modern Healthcare said they either did not know or declined to reveal the name of the facility that was given clearance, saying it might trigger protest from the facility's competitors, or from the federation and the American Hospital Association, whose intense lobbying efforts led to the 18-month moratorium. Opponents say physician ownership of specialty hospitals creates a clear conflict of interest and robs community hospitals of the profitable businesses they need to survive.
Richard Coorsh, a spokesman for the Federation of American Hospitals, said it would be "hard to draw from (the CMS opinion) and apply it overall." He repeated the group's view that "Limited-service hospitals have a deleterious effect upon communities that depend upon full-service hospitals to meet each and every health need, 24 hours a day, seven days a week."