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Legal Update
Happy or Sad Days for Doc-owned Hospitals?
Scott Becker
Publish Date: October 10, 2007

Here are six reasons 2007 could be a terrific year for physician-owned hospitals - and six reasons 2007 could be a tumultuous time.

The best of times ...
The moratorium is over. In August 2006, the prohibition on the development of new physician-owned hospitals ended. For the first time in several years, physicians no longer face a prohibition on developing a new physician-owned hospital and having it become Medicare-certified. A bit of history: When the Medicare Moderniza-tion Act became law in December 2003, it imposed an 18-month moratorium on Medicare reimbursement for services rendered at specialty hospitals. About 100 previously existing facilities were exempt from the moratorium, but the provision chilled the construction of new specialty hospitals. While the moratorium expired in June 2005, CMS was able to effectively extend it by announcing a freeze on the issuance of new Medicare provider numbers to specialty hospitals until February 2006.

HHS Final Report. The Department of Health and Human Services concluded that there was no need to prohibit physician ownership of hospitals "at this time" when it issued its final report in August 2006.

Growth. By most estimates, about 130 specialty hospitals are operating throughout the country. It's expected that there will be tremendous growth in the development of physician-owned hospitals. Indeed, the best defense against the development of prohibitory legislation is the growth in the industry. Years ago, certain individuals at CMS stated that they would be pleased with a prohibition on physician ownership of ambulatory surgical centers. However, they noted that there were simply too many ASCs at that time to pass any sort of prohibition. In contrast, physician-owned hospitals, due to the fact that there are so few of them, are still vulnerable to such a challenge.

Changes in ASC reimbursement. The systematic provision of higher reimbursement to hospitals over ambulatory surgical centers for the exact same services has the unintended effect of making it more palatable for physicians to develop hospitals instead of ASCs. This will lead to further growth in physician-owned hospitals.

Patients like specialty hospitals. Studies appear to demonstrate that the quality of care and patient satisfaction at small, focused, physician-owned hospitals are extremely high compared to those factors at community and general acute care hospitals.

Community hospitals post record profits. Community hospitals, as a whole, reported $29 billion in profits in 2005. This number makes it more difficult to argue that specialty hospitals and physician-owned hospitals are significantly affecting profits or causing significant harm to general and acute care hospitals. The truth is, profits at community hospitals are at record numbers despite the growth of ASCs and specialty hospitals.

... the worst of times
The positive outlook is offset in large part by these problems and concerns.

The Senate doesn't seem to like physician-owned hospitals. In the Senate Finance Committee, neither incoming chairman Sen. Max Baucus (D-Mont.) nor ranking Republican member Sen. Charles Grassley (Iowa) seems to like physician-owned hospitals, with each having argued for prohibitions on their development. In short, Sen. Grassley tends to love ambulatory surgery centers but seems to hate physician-owned hospitals. Perhaps this explains why there are no physician-owned hospitals in Iowa, but plenty of physician-owned surgical centers.

The Republican-led House of Representatives was an ally of physician-owned hospitals. The new Democratic majority in the House may change this dynamic. Instead of relying on pro-competition representatives from the right of center, physician-owners will likely have to seek out allies who are more left of center and moderate in the House of Representatives. Members such as Pete Stark (D-Calif.), who are unlikely to ever become friends to physician ownership, have already articulated physician-owned hospitals as one of their primary targets now that the Democrats have significant control of both houses of Congress.

HHS Final Report. The Department of Health and Human Services Final Report, while mainly positive for physician-owned hospitals, still provides plenty of statistical data that can be used by the Federation of American Hospitals and the American Hospital Association to argue that specialty hospitals are bad for healthcare. Each of the many reports that have been developed by the federal government over the last several years contains information and statistics that can be used by both sides of the debate to support their cases.

Heavy concentration. Physician-owned hospitals tend to be concentrated in about 10 states and are overwhelmingly not present in others - especially in states with strong certificate of need laws. This means that, for representatives and senators in the states where there are no physician-owned hospitals, there are very few political consequences to voting in support of legislation that would curb physician ownership. In other words, without constituents who would remove them from office, they've little incentive to vote against legislation that doesn't favor physician-owned hospitals.

Stung by patient death. Last year, an 88-year-old woman died soon after elective back surgery at a Portland, Ore., specialty hospital. While in recovery, the patient had been given an injection of hydromorphone, which led to her suddenly going into cardiac arrest. The nursing staff immediately began CPR, but reportedly there was no doctor available to assist. The nurses followed procedure and called 911 for emergency help. Paramedics were able to intubate the patient and transport her to a neighboring hospital, but she died four days later after her family made the decision to remove life support. The specialty hospital industry soon found itself under wholesale review and negative commentary from Sen. Grassley and other lawmakers, who demanded an investigation of safety practices in specialty hospitals. It is unusual that a single death in an industry leads to an entire review of that industry. This incident and its fallout show specialty hospitals' continuing vulnerability on the federal and state levels.

The battle at the state level remains brisk. In several states, legislators have co-sponsored and considered bills that would prohibit the development of physician-owned hospitals. Montana and Ohio have passed temporary moratoriums, and California and Pennsylvania considered similar legislation this past year.

The support of the House. As the politicial leadership in Congress shifts, the battle for political support in the House becomes more and more critical. Parties such as the American Hos-pital Association and Physician Hospitals of Amer-ica will joust aggressively for alliances among the House's moderates to force or forestall legislation.

Omnibus bill. Until at least 2008, there will still be a presidential administration that's in favor of physician-owned hospitals and competition. One risk to the industry could arise in a potential omnibus, rather than in a single-issue bill. That is to say, legislation related to physician ownership of hospitals may arrive on the floors of the House and Senate buried within much larger legislative packages known as omnibus bills that contain unrelated appropriation or reconciliation efforts.

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