EDINBURG, Texas – South Texas Health System (STHS) has registered its opposition to DHR Health’s application to expand services.

STHS, which includes McAllen Medical Center (pictured above), sent a letter to the Centers for Medicare & Medicaid Services, saying it “opposes DHR’s request… for an exception to the federal prohibition against expansion of the facility capacity of a physician-owned hospital.”

The letter stated: “We urge CMS to deny DHR’s request for an exception because, under the auspices of a routine expansion in facility capacity, DHR has choreographed the opening of the first new POH (physician owned hospital) in the United States for over a decade – in direct contravention of federal law.”

In the letter, STHS cited a story in The Rio Grande Guardian International News Service as evidence that DHR had “misled” the federal government.”

DHR Health is slated to officially open a 59-bed general hospital in Brownsville, Texas, in the coming weeks. 

According to information sent to the Texas Health & Human Services Commission, DHR says the hospital will have 39 medical/surgical inpatient beds at single occupancy and 59 at double occupancy, along with “clinical laboratory services, diagnostic x-ray services, treatment facility, including surgery, a 24/7 basic emergency department, intensive care unit with three beds, and seven nursing stains with around-the-clock nursing care.”

In order to build and operate a general hospital in Brownsville, DHR Health had to seek an exception to a federal prohibition against expansion of the facility capacity of a physician-owned hospital.

DHR Health is a physician-owned hospital based in Edinburg, Texas. It needed the approval of CMS in order to expand into Brownsville. 

As it considered DHR’s application, CMS invited public comment. Some of the correspondence CMS received was in favor of DHR’s expansion. Some was against. Here, below, is the letter sent to CMS ob behalf of STHS. It was penned by Marc James Ayers, an attorney with Bradley Arant Boult Cummings LLP.

March 11, 2022 

The Honorable Chiquita Brooks-LaSure, Administrator Centers for Medicare & Medicaid Services
Department of Health and Human Services
Hubert H. Humphrey Building 

200 Independence Avenue, SW Washington, D.C. 20201 

RE: CMS-1774-PN; Medicare Program: Announcement of Request for an Exception to the Prohibition on Expansion of Facility Capacity under the Hospital Ownership and Rural Provider Exceptions to the Physician Self- Referral Prohibition; Notice with request for comment, Federal Register (Vol. 87, No. 27), February 9, 2022 

Dear Administrator Brooks-LaSure: 

I write to you on behalf of South Texas Health System—a hospital system comprising five acute hospitals and one behavioral health hospital in and around Hidalgo County, Texas—in reference to the request of Doctor’s Hospital at Renaissance (“DHR”) captioned above. Specifically, we oppose DHR’s request under 42 C.F.R. § 411.362(c)(3) for an exception to the Federal prohibition against expansion of the facility capacity of a physician-owned hospital (“POH”). We urge CMS to deny DHR’s request for an exception because, under the auspices of a routine expansion in facility capacity, DHR has choreographed the opening of the first new POH in the United States in over a decade—in direct contravention of Federal law. 

As you know, the Federal government effectively prohibited the expansion of existing POHs, as well as the establishment of new POHs, under Title VI of the Patient Protection and Affordable Care Act of 2010 (“ACA”). While prohibiting POH expansion and establishment generally, Congress carved out two very narrow exceptions permitting expansion for existing POHs when such POHs are serving particularly vulnerable, traditionally underserved or otherwise access-limited populations. As described more fully below, these capacity increase allowances derive not in virtue of the POH-applicant but in virtue of the community which the POH-applicant serves. In other words, the need of the community—not the need of the POH—is the statutory impetus for granting exceptions to the prohibition on POH expansions. 

The first such exception, found at 42 C.F.R. § 411.362(c)(2)5 (the “Applicable Hospital Exception”), permits expansion of POH bed capacities based on the satisfaction of certain hospital-level, county-level and state-level metrics (e.g., over the past year, hospital must not have less Medicaid admissions than other hospitals in its county; the population of its county must be growing at least 150% faster than the population of its state; and its state must have an average bed capacity that is less than the national average bed capacity. Importantly, in light of the broad swath of geographic data taken into account under the Applicable Hospital Exception, Congress specifically limited any expansions under this exception to the “main campus of the applicable hospital.”

By contrast, the second exception available to POHs largely hinges on one critical metric: whether the hospital has had the largest proportion of Medicaid admissions in its county over the last three years. Specifically, under 42 C.F.R. §411.362(c)(3) (the “High Medicaid Exception”), the hospital must not be the sole hospital in the county in which the hospital is located (the “Measuring County”) and, for the three most recent years for which data is available, must have had the highest proportion of Medicaid admissions of any hospital in the Measuring County. In other words, to obtain the High Medicaid Exception, a hospital must show itself, year-over- year, to be the primary healthcare concourse for the Measuring County’s Medicaid population. Unlike the Applicable Hospital Exception criteria, the High Medicaid Exception considers only a single geographic unit, the county. Accordingly, there is no need for a direct proximity limitation as with the Applicable Hospital Exception’s main campus requirement; instead, the High Medicaid Exception’s ambit is plain: utilization of the Measuring County’s metrics begets beds for the Measuring County. After all, the Measuring County’s Medicaid beneficiaries are the identifiable class from whom the High Medicaid Exception capacity increase derives, so it naturally follows they must be members of the class to whom the benefit of increased capacity inures. 

We fully endorse and subscribe to the comment submitted by the Federation of American Hospitals (“FAH”) on this matter. As FAH’s comment explains in detail, CMS has no statutory or regulatory obligation to grant a High Medicaid Exception as a matter of course and has absolute discretion to deny a High Medicaid Exception. Moreover, CMS’s discretion to deny is at its zenith where, as here, the exception sought contravenes the statute’s plain and intended meaning— opening the door to the degradation of the Federal statutory framework designed to protect Americans and our healthcare delivery systems against the serious risks of self-referring arrangements. If CMS grants the exception sought by DHR, then CMS will be clearing a path for the establishment of new POHs under the guise of existing hospital licensure. 

DHR previously sought and was granted an expansion under the Applicable Hospital Exception in 2015, yet DHR still has not used the capacity increase it received under that application. Nevertheless, DHR now comes before CMS seeking an additional expansion exception, this time under the High Medicaid Exception. Since the passage of the POH prohibition, a key stakeholder concern about CMS’s implementation of Congress’s statutory directives has been that the bare criteria relied upon by CMS are manipulable and could be easily gamed by POHs. Where, as here, a POH has failed to implement lawful bed capacity increases— which expressly derive from that POH’s treatment activities in “medically underserved communities” — CMS must be circumspect in its review of subsequent applications which expressly rely upon that POH’s disproportionate treatment of such medically underserved communities. And CMS’s review should be all the more exacting where, as here, data shows a difference of less than one percent (1%) between the Measuring County’s highest Medicaid provider and its second-highest Medicaid provider, and where the highest Medicaid provider has taken overt steps to game the data (e.g., by refusing to expand bed capacity in order to avoid diluting its Medicaid numbers, despite having a vested legal right in such expansion). Upon information and belief, but for DHR’s bad faith refusal to increase its bed capacity, DHR would not have been the Measuring County’s highest Medicaid provider in 2019. 

Even setting aside the inadequate and adulterated data submitted by DHR, CMS has a firm basis for denying DHR’s request because DHR has also omitted other material facts from its High Medicaid Exception application to CMS. In particular, DHR has failed to communicate to CMS that it intends to use the capacity increase to open a new POH in a different county, the U.S.’s first such new POH in over a decade. DHR recently purchased the premises of a former standalone hospital in Brownsville, Cameron County (the “New Hospital”) — in excess of 50 miles from DHR’s current service area in Hidalgo County. Meanwhile, DHR has requested that the Texas Health and Human Services Commission (“THHSC”) waive the condition of Texas hospital licensure requiring that facilities operating under a single license be within 30 miles of one another. As DHR blatantly stated in its waiver application to THHSC, the combined effect of the THHSC waiver and the High Medicaid Exception, if granted, would be to thwart the Federal moratorium and allow the New Hospital to obtain otherwise proscribed Medicare and Medicaid payments. Consequently, granting DHR’s High Medicaid Exception threatens to upend the Federal statutory protections designed to shield patients and taxpayers from the dangerous economic and quality-of-care risks posed by self-referring hospitals.

To wit, DHR has submitted various paltered statements and applications to governmental authorities and to the public in furtherance of two superficially distinct actions which, upon closer inspection, are part and parcel of one larger scheme: 

  •   DHR has submitted an application to CMS to expand the number of Medicare beds on the basis of Hidalgo County’s data; and
  •   DHR has simultaneously shared its intentions with the public and has sought the waiver of HHSC to open the New Hospital in Cameron County’s Brownsville

Thus, DHR’s scheme is as follows: Submit to CMS an expansion application to service a larger number of Hidalgo County patients based on serving the largest number of Hidalgo County Medicaid recipients; meanwhile, seek expansion of its state hospital licensure beyond Hidalgo County and represent to residents of Cameron County that they will soon have a new POH. In so doing, DHR has concealed material facts from CMS and from the public. In sum, DHR has misled the Federal government and Texas and is now asking CMS to both consummate its scheme and to preemptively (and perhaps illusorily) pardon it.

Finally, it is worth noting that DHR’s heavy reliance on the Texas waiver to obtain its desired result presents serious preemption problems and constitutional concerns regarding federalism. CMS cannot ratify THHSC’s decision as to the applicability of Stark Law, thereby allowing the decision of a state administrative body to subvert the express statutory intent of Congress. The High Medicaid Exception was tailored to serve Medicaid beneficiaries in the Measuring County, not those of some far-flung locality determined at the whim of State licensing authorities. While licensure is no doubt an area of state concern, the Stark Law—including the 2010 prohibition on POH expansion—clearly preempts any State licensing used by a provider to deliberately end-run the Stark Law’s prohibitions. 

In sum, the denial of DHR’s request is necessary to protect the integrity and stability of our healthcare delivery system; to reinforce the rule of law and the accompanying reliance and expectations of industry stakeholders and investors; and to ensure that, after surviving the ravages of the past two years, healthcare providers and the communities they serve do not suffer from the consequences of an administrative decision removed from both the plain meaning of the statute and the circumstances of the real world. 


Marc James Ayers 

Bradley Arant Boult Cummings LLP 

Editor’s Note: The above news story is the third in a series of stories about DHR Health’s expansion into Brownsville. Click here to read the first. Click here to read the second. Click here to read the third.

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