In a March 19, 2004, program transmittal, CMS issued the definitions and criteria that it will apply in implementing the 18-month moratorium on physician investment in, and referrals to, certain specialty hospitals. Transmittal 62 (Mar. 19, 2004). The moratorium, enacted as part of the MMA, specifically applies to the "whole hospital" exception under the Stark law, which, prior to the MMA, permitted a physician to make referrals to a hospital in which the physician had an ownership or investment interest provided certain criteria were met. Under the moratorium, the whole hospital exception does not apply to physician ownership or investment interests in specialty hospitals, including those located in rural areas. The program transmittal establishes the definition of a specialty hospital, lists hospitals that are specifically excluded from the moratorium, sets forth the criteria for determining whether a specialty hospital is grandfathered under the moratorium, and provides information for seeking an advisory opinion from CMS concerning a "grandfathering determination."

Specialty Hospital Defined
CMS defines a specialty hospital, for purposes of the moratorium only, as a hospital "primarily or exclusively engaged in the care and treatment of" patients with a cardiac or orthopedic condition, or patients receiving a surgical procedure or any other specialized category of services designated by CMS. CMS decided against designating any other specialized services that would cause a hospital to be considered a specialty hospital under the moratorium.

CMS also identifies a number of hospitals that offer specialized services that are not considered specialty hospitals subject to the moratorium: psychiatric hospitals, rehabilitation hospitals, children's hospitals, long-term care hospitals, certain cancer hospitals, and grandfathered specialty hospitals.

Grandfathered Specialty Hospitals
Specialty hospitals that were in operation, or under development, as of November 18, 2003, are excluded from the moratorium, provided, since that date, (1) the number of physician investors has not increased, (2) the specialized services provided by the hospital have not changed, and (3) any increase in the number of beds has occurred only on the hospital's main campus and is not greater than five beds or 50 percent of the beds in the hospital. A grandfathered hospital will become subject to the moratorium if it fails to meet any of these criteria at any time after November 18, 2003.

CMS instructs parties seeking grandfathering determinations to submit written requests according to the procedures established for obtaining advisory opinions on the application of the Stark law, at 42 C.F.R. §§ 411.370 - .389. No grandfathering determination is necessary for specialty hospitals that had a provider agreement in effect as of November 18, 2003; the provider agreement serves as the determination that the specialty hospital was in operation as of that date.

In making grandfathering determinations, i.e., whether a specialty hospital was under development as of November 18, 2003, CMS will consider whether architectural plans were completed, funding was received, zoning requirements were met, and necessary approvals were received from state agencies. Recognizing that completion of all of these steps sometimes may not have been feasible, CMS indicates that it anticipates making determinations on a case-by-case basis, and that it will consider any other evidence that would indicate whether a specialty hospital was under development as of the deadline.

Congress enacted the specialty hospital moratorium in response to concerns raised by community hospitals that the proliferation of specialty hospitals would leave them with sicker, more expensive patients - the most profitable patients having been "cherry picked" by specialty hospitals. However, a preliminary study by the Medicare Payment Advisory Commission, also mandated under the MMA, found that, although specialty hospitals treat fewer low-income patients than community hospitals and reap the more profitable procedures, they do not appear to have a significant negative financial impact on their competitor community hospitals. (The transcript of the MedPAC meeting is available at www.medpac.gov/public_meetings/
transcripts/091004_specialty_AW_transc.pdf.) MedPAC's full report is due to Congress by March 2005. The moratorium will expire June 8, 2005.