Issued by the Centers for Medicare & Medicaid (CMS) on Nov. 11, 2013, Advisory Opinion 2013-03 concluded that a proposed construction project by a physician-owned hospital (Hospital) to increase the number of observation beds would not violate Stark Law as such an arrangement would fall under the protection of the “Whole Hospital” exception.

The Hospital is an acute care hospital that is jointly owned by physician investors and a development company. The proposed construction projection is the addition of 14-bed observation unit. The Hospital specified that the observation rooms would not be used as operating or procedure rooms.

For the Hospital to obtain approval, the State must conduct an architectural review. In the materials that the Hospital must submit to the State for such architectural review, the Hospital must certify whether the construction will change the design bed capacity of the Hospital, which then determines the number of licensed hospital beds. If the number of licensed hospital beds increase as a result of the construction, the Hospital must submit a license application and pay a per-bed license fee for each new bed added to the Hospital’s design bed capacity. The State does not license observation beds and the Hospital will not be required to pay a per-bed license fee for any of the new observation beds.

Section 6001(a)(3) of the Affordable Care Act limits a physician-owned hospital’s ability to increase the number of operating and procedure rooms, and beds for which the hospital is licensed as of March 23, 2010. CMS reviewed whether the whole hospital exception under Stark would be applicable, and determined that as the number of licensed beds as of March 23, 2013 would not increase, the addition of 14 observation beds would not violate the prohibition against facility expansion under the whole hospital exception and the Affordable Care Act.