A recent CMS (Centers for Medicare & Medicaid Services) advisory opinion provides an answer to the riddle, “When is a hospital bed not a hospital bed?” The answer provided by Advisory Opinion No. 2013-03, issued November 11, 2013, is that under certain circumstances a hospital bed in a physician-owned hospital may not be a hospital bed for purposes of Sec. 6001(a)(3) of the Affordable Care Act (ACA).

That section of the ACA amended the “whole hospital” exception to the Stark Law’s general prohibition on referring a patient to a facility in which the referring physician has a financial interest. The ACA removed that exception prospectively, grandfathering existing physician-owned hospitals, provided that they not increase the number of operating or procedure rooms or beds for which they are already licensed.

The Advisory Opinion considered the request by a physician-owned hospital for a ruling that it would not lose its grandfathered status by adding 14 observation beds. Noting that the hospital is located in a state that doesn’t require a license for observation beds, the opinion ruled that the 14 beds would not be “beds” that were “licensed” under the ACA’s prohibition against the addition of licensed beds by a grandfathered hospital.

So, at least in this case, observation beds are an exception to a limitation on an exception. That is, they are an exception to the ACA’s limitation on the whole-hospital exception to the Stark Law.

This is good news for physician-owned hospitals, which are otherwise permanently barred from adding beds, operating rooms or procedure rooms. If managed well, observation units can be an important profit center for hospitals now that CMS has changed its payment system to allow for reimbursement of services provided in observation units. And about a quarter of observation patients end up getting admitted as inpatients.

In related news, last week CMS extended the deadline for physician-owned hospitals to satisfy the ACA’s strict ownership reporting requirements. Originally due December 1, 2013, the financial interest reports are now due March 1, 2014.