The American Hospital Association and the Federation of American Hospitals want federal regulators to deny a Texas physician-owned hospital’s request for an exception to rules that prevent it from expanding its facilities.

The hospital trade associations say there isn’t demonstrated need for the expansion and that granting one could set a bad precedent because there’s no process to revoke an expansion exception. That could affect other hospitals in the community, including their own members, they say in a letter to CMS sent March 11.

The two groups also want the Centers for Medicare and Medicaid Services to reverse the recent policy change that eased restrictions on expansion for physician-owned hospitals that serve high percentages of Medicaid patients.

The Physician Self-Referral Law, also known as the Stark Lawprohibits physician-owned hospitals from expanding capacity beyond their size as of 2010, with limited exceptions. One of those exceptions is for hospitals deemed “high Medicaid facilities,” which have a higher percentage of Medicaid admissions than other hospitals in their county.

The Trump administration changed the high Medicaid facility exception, effective January 2021. Hospitals that meet high Medicaid facility requirements now can request larger and more frequent expansions, and expansions no longer need to be located on the hospital’s main campus.

The exception affects a narrow slice of hospitals. While it’s difficult to determine the exact number that could qualify, AHA and FAH analyses from 2020 estimate around 24 or 25 could take advantage of the policy in the near future.

Still, both associations slammed the policy when it was proposed, saying the impact of the proposal would stretch far beyond Medicaid beneficiaries.

Edinburg, Texas-based Doctors Hospital at Renaissance is the first facility to request the exception since the new regulations went into effect, according to documents posted on CMS’ website. The organization wants permission to add 551 beds, operating rooms and procedure rooms.

The hospital separately submitted plans to expand to a new facility in Brownsville, Texas, approximately 50 miles away from its main campus and in a different county. Roberto Haddad, Doctors Hospital’s vice president and counsel for government affairs and policy, did not confirm whether any of the new beds and rooms were intended for the Brownsville facility. The waiver is under review, according to the Texas Health and Human Services Commission.

FAH President and CEO Chip Kahn said he worries that if CMS approves Doctors Hospital’s request, and if Texas grants the hospital a waiver to build a facility more than 30 miles from the main campus under the original license, Doctors Hospital could set up a whole system of hospitals across the state.

Even if Doctors Hospital expands into Brownsville, there could be consequences for the neighboring hospitals — one of which is a FAH member. Doctors Hospital’s waiver application to the state indicates it will only transfer patients to its main campus in Hidalgo County. Transferring patients 50 miles away when hospitals in Brownsville and Cameron County have lower average occupancy rates than Doctors Hospital’s main campus is unnecessary and poses safety concerns, the associations write.

Also, even though Doctors Hospital meets the necessary high Medicaid facility requirements in Hidalgo County, the proposed Brownsville hospital is unlikely to clear that bar in Cameron County, according to data compiled by the two associations. Other hospitals in Cameron County have a higher percentage of Medicaid discharges than Doctors Hospital’s main campus and are relatively moderate volume hospitals, Kahn said.

“They’ve got plenty of space, if there were more Medicaid admissions that were required,” he added. “There’s no way that this hospital, which shows no intent to serve Medicaid, specifically, meets the spirit of the law.”

Doctors Hospital would continue to meet the needs of the community with a high Medicaid facility exception, Haddad said. Local lawmakers and Rep. Henry Cuellar (D-TX) submitted letters of support to CMS for DHR’s request.

“We are not a corporate hospital model with statewide expansion plans. DHR Health is applying for a high Medicaid facility expansion exception to increase the overall capacity allowed under the law so that we may continue serving our community now and into the future,” Haddad said in an email.

Kahn said he hasn’t spoken to CMS about the issue outside of the letter but plans to in the future. The Biden administration may do away with the Trump-era policy in future rulemaking.

“I know the current administration feels very strongly about this Stark Law, and so I think we can hope that they’ll choose to roll this back,” he said.

With so many competing priorities, reversing this relatively narrow policy change is likely not at the top of CMS’ list, said Bill Horton, a partner at Jones Walker who co-chairs its healthcare industry team. He said he thinks CMS may deny the request without reversing the entire policy change.

“This exception is really, I think, intended to be a fairly narrow exception to deal with circumstances where there is a sort of demonstrable community in the Medicaid lower-income population and it sort of seems to me that that’s a stretch to say, well , let’s go an hour’s drive away from here and include that,” he said.