In recent months, CMS has responded to several requests for advice regarding the moratorium on physician investment in, and referrals to, specialty hospitals. The moratorium relates to the Stark law, which prohibits a physician from referring a Medicare patient, for certain designated health services (DHS), to an entity with which the physician (or immediate family member) has a financial relationship. The Stark law also prohibits the entity from billing Medicare or another entity for services provided as a result of the prohibited referral. There are certain exceptions to the Stark law, how-ever, including exceptions for physician ownership or investment interests in hospitals and rural providers.

In 2003, the MMA limited these exceptions for hospital and rural provider ownership. Section 507 of the MMA stated that for an 18-month period beginning December 8, 2003 and ending June 8, 2005, physician ownership and investment interests in specialty hospitals would not qualify for the exception for physician ownership and investment interests in hospitals, also known as the "whole hospital exception." Furthermore, during this same 18-month moratorium, the exception applicable to rural providers would not include specialty hospitals located in a rural area.

For purposes of the moratorium, a specialty hospital is a hospital that is primarily or exclusively engaged in the care and treatment of: (1) patients with cardiac or orthopedic conditions, (2) patients receiving surgical procedures, and (3) patients receiving any other specialized type of service that CMS may designate. The law specifically excepts the following hospitals from the moratorium: psychiatric hospitals, rehabilitation hospitals, children's hospitals, long term care hospitals and cancer hospitals that are not paid under the inpatient prospective payment system. The MMA also excludes from the definition of specialty hospital hospitals that were in operation before or under development as of November 18, 2003. To determine whether a hospital falls within this category, CMS examines whether as of November 18, 2003, (1) architectural plans were completed, (2) funding was received, (3) zoning requirements were met, and (4) necessary approvals from appropriate state agencies were received. CMS also may consider additional evidence showing that a hospital was under development.

The recent requests for CMS guidance regarding the specialty hospital moratorium, five in total, all specifically pertain to the exception for hospitals under development as of November 18, 2003. CMS found that four out of the five scenarios presented described a hospital that was under development as of November 18, 2003. With regard to the four hospitals CMS determined to be under development for purposes of the moratorium, CMS found that they complied with all four of the exception's criteria. With regard to the one hospital that CMS determined was not under-development for purposes of the moratorium, CMS found it did not meet any of the four criteria. Below is a summary of CMS's findings based on the application of each criteria to the five hospitals.

Architectural Plans

Under-development hospitals: CMS found that in all four scenarios architectural plans existed prior to November 18, 2003, including, but not limited to, floor plans; site maps; construction-ready structural, mechanical, electrical, plumbing and engineering plans; and architectural drawings.
Not under-development hospital: The parties to the project did not engage in discussion with an architectural firm until after November 18, 2003. There were no detailed mechanical, engineering, or structural plans in existence as of November 18, 2003.

Funding

Under-development hospitals: In all four scenarios, as of November 18, 2003, at least $2 million had been raised, secured through a loan, or donated, and at least $3 million had been spent for purposes of constructing a specialty hospital.
Not under-development hospital: As of November 18, 2003, there was no significant financial commitment toward the project. The only investment prior to November 18, 2003, was approximately $145,000 from the project's approximately 100 physician investors.

Zoning Permits

Under-development hospitals: As of November 18, 2003, all four projects had received the applicable zoning approval and/or permits for construction of a hospital.
Not under-development hospital: As of November 18, 2003, there was no commitment to build a hospital; therefore, the hospital project was not subject to any zoning approval.

State Regulatory Approvals

Under-development hospitals: None of the four states in which the projects resided requires a certificate of need prior to development and construction of a hospital. Rather, each of the four states requires that the construction and/or architectural plans be submitted to the applicable state agency or representative for a comprehensive "plan review." Only one of the four projects received state approval prior to November 18, 2003; however, CMS found that this criterion was met if, as of November 18, 2003, the project received notice from the state that it had received the project's "complete plan submittal." Where other state reviews were required (e.g., public accessibility reviews and water quality certification), CMS also maintained that submittal of a completed application for review was enough to comply with these criteria.
Not under-development hospital: The state in which this project resided also required the submission of architectural plans for review and approval. As of November 18, 2003, the project had not obtained or submitted an application to the state for approval.

With regard to the four hospitals CMS deemed to be under development as of November 18, 2003, the specialty hospital moratorium does not preclude physician investors or owners from referring patients to the hospital for DHS. With regard to the hospital deemed not to be under development, the moratorium does apply and its physician investors and/or owners may not refer patients to the hospital for DHS until the moratorium expires.

In December 2004, the Medicare Payment Advisory Commission released a draft recommendation urging Congress to eliminate the "whole hospital" exemption that allows physicians to legally refer patients to hospitals in which they have a financial interest. The recommendation was tabled, however, based on comments at MedPAC's December 2004 meeting. The Commission's final report, released March 8, 2005, instead contained a recommendation that Congress extend the moratorium an additional 18 months, to January 1, 2007. The commission explained, "Specialty hospitals are a relatively new phenomenon and we want to be cautious about inhibiting their development without a fuller understanding of their quality and efficiency."