On October 12, 2015, three Texas hospitals filed suit against the Department of Health and Human Services (“HHS”), the Secretary of HHS (“Secretary”) and the Centers for Medicare & Medicaid Services (“CMS”) seeking to reverse CMS’s decision to grant the request of a Texas physician-owned hospital (“POH”) to expand the hospital’s current facility by 100 percent. The hospital’s request was recently granted under the “applicable hospital” exception to the expansion prohibition currently placed on POHs by the Affordable Care Act (“ACA”).


Under the ACA’s amendments to the Stark Law, a POH cannot expand the aggregate number of operating rooms, procedure rooms or licensed beds beyond the number for which the hospital was licensed on March 23, 2010. The Secretary may grant an exception to the prohibition on expansion to POHs qualifying as either an “applicable hospital” or a “high Medicaid facility,” as those terms are defined in the regulations.

The defendant hospital in the complaint (“Hospital”) is a 530-bed general acute care POH located in Texas. The complaint filed against the Secretary alleged that Hospital first filed its application for an exception to the expansion prohibition on March 20, 2014 (“Original Application”). According to the complaint, CMS never published the Original Application in the Federal Register nor sought comment from interested individuals and entities, as required by the ACA. The complaint also alleges that CMS failed to render and publish a decision on the Original Application within 60 days of receipt in accordance with statutory requirements1.

On November 10, 2014, nearly nine months after Hospital’s Original Application, CMS published an amended final rule effective January 1, 2015. The amended final rule, among other things, changed the expansion application process to allow applicant hospitals and interested parties to submit certain external data sources in support of their application or public comment. On May 8, 2015, CMS published Hospital’s second amended application for expansion (“Amended Application”) in the Federal Register and opened the Amended Application up for a 30-day comment period. Interested parties and entities submitted 21 comments, most of which opposed the expansion on the grounds that Hospital did not satisfy the required expansion criteria for applicable hospitals. Despite these opposing comments, CMS granted the exception request on September 11, 2015, thereby allowing Hospital to expand the facility by 100 percent.

Details of the Suit

Following Hospital’s expansion approval by CMS, three competitor hospitals located in the same county as Hospital filed suit seeking a declaratory judgment to reverse CMS’s approval of the expansion. These hospitals included a 227-bed nonprofit hospital, an 848-bed multi-hospital system and a 14-bed POH, all of which provided comments to CMS with data demonstrating that Hospital failed to satisfy one or more of the applicable hospital criteria and alleging that the Amended Application was filled with errors, internally inconsistent arguments and misleading information. The complaint further alleged that CMS arbitrarily and capriciously applied congressionally mandated criteria and created its own rules to the Hospital expansion application in violation of the Administrative Procedure Act for the following reasons:

  • Under the ACA, CMS was required to allow public comment on Hospital’s Original Application; however, CMS failed to publish the Original Application in the Federal Register;
  • CMS granted the expansion in violation of the expansion exception, which bars an applicant hospital from applying for an exception more than once every two years. Because the Original Application was due to be denied (as it could not satisfy the statutory requirements for an applicable hospital), Hospital’s Amended Application also should have been denied as a violation of CMS’s 2-year rule; and
  • Hospital did not meet the statutory requirements for an applicable hospital or a high Medicaid facility under the expansion exception.

Next Steps in the Case

To date, the court has not yet determined whether the statements alleged in the complaint are factual. Further, because the Original Application was not published, it is not clear whether the allegations with respect to the Original Application have merit. Hall Render will continue to provide updates on any developments in this case. Hospital is one of just three POHs that have been permitted to expand since the expansion moratorium took effect in 2010.