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Physician-owned Hospitals in Washington's Crosshairs
Expect new restrictions and regulations in 2009 aimed at outlawing doctor self-referral.
Eric Zimmerman, Roger Strode
Publish Date: January 10, 2009   |  Tags:   News

What is the future of physician-owned hospitals? This question will likely be answered shortly into the new year, as a predominantly Democratic Congress and a president who is sympathetic to the argument that physician ownership of hospitals leads to overutilization of resources and higher healthcare costs take office.

Given the millions of uninsured Americans, the freefall in which the economy finds itself and, more importantly, the political environment in Washington, D.C., we expect significant legislative proposals aimed at physician-owned hospitals. In a recently published healthcare reform white paper, Sen. Max Baucus (D-Mont.) highlighted physician-owned hospitals as a business model that may "place financial interests ahead of the needs of patients and the American taxpayer." According to Sen. Baucus, "[n]o serious effort at reform can ignore the potential gaming that conflicts may create."

Congressional target: physician ownership
Physician ownership of hospitals implicates the Stark Law through the creation of a financial relationship between the physician and the facility. However, a long-standing exception to the law — the so-called "whole hospital exception" — lets physicians own hospitals and refer to them without violating the general prohibition.

Since the early part of this decade, Congress and the Centers for Medicare and Medicaid Services have attempted to slow the growth of physician-owned hospitals and, more recently, to eliminate physician ownership altogether (see "The Long Crusade to Curb Physician-owned Hospitals" on page 70). Members of Congress who favor limits on physician ownership appear determined to revive the issue again in 2009. Sens. Baucus and Charles Grassley (R-Iowa), as well as Rep. Pete Stark (D-Calif.), the original law's namesake, have announced their intentions to seek new restrictions on physician-owned hospitals. Although these congressional leaders have announced similar plans in the past, enhanced Democratic majorities and control of the White House improve the prospects for legislative changes.

Future Stark Law changes
If legislation is enacted, what will it look like? It's hard to say with absolute certainty, but if past is prologue we expect opponents of physician-owned hospitals to develop legislation designed to stop development of any new physician-owned facilities that intend to bill Medicare for hospital services.

There are about 180 physician-owned hospitals in the United States, according to the American Hospital Association in its April 2008 TrendWatch. That said, since there likely are enough proponents of these facilities in Congress, it's anticipated that existing hospitals — those that have physician-investors, are licensed and are Medicare-certified — will survive any new legislation. However, based on past legislative attempts at curbing physician ownership, these protections could include limits on aggregate physician ownership.

A significant question is whether Congress will grandfather hospital facilities that are under development or operational, but aren't Medicare-certified (meaning they don't have a Medicare provider number) as of the date of enactment of any future legislation. Millions of dollars are likely at stake when you consider that, as of April 2008, about 85 physician-owned facilities were in various stages of physical development, not to mention those deals that have been financed but on which construction hasn't commenced.

How will these facilities be treated? It's possible that these deals won't survive new legislation. Neither of the most recent attempts at legislation included provisions grandfathering hospitals that were under development. If the 2003 moratorium is instructive, unless bright lines are drawn as to what constitutes a hospital that is "under development," Congress and the CMS will be concerned about hospitals, physicians and developers engaging in "hurry-up" deals in order to meet legislative deadlines. In addition, a sentiment has been expressed by opponents of physician-owned hospitals that "fair warning" has already been given that restrictive legislation could be enacted, thereby eliminating the need for protections for hospitals "under development."

Additionally, as was the case with the 2007 and 2008 bills, it's expected that any future legislation may propose caps on the expansion of existing facilities, including limits on new operating rooms, procedure rooms and beds.

What needs to be done?
Depending upon the stage at which a hospital and its physician-investors currently find themselves, strategies will differ significantly.

Existing hospitals (those that are operational and Medicare-certified) and their investors won't likely need to do anything, unless there's a concern relative to surgical/procedural or bed capacity, in which case such facilities may want to consider expanding, assuming that they're not capital constrained and there are not overwhelming administrative or regulatory hurdles to expansion. In the event that future legislation were to cap physician ownership at 40 percent or less, certain entities may need to find a capital partner to purchase equity interests from divesting physicians. These hospitals may also want to use this time as an opportunity to consider what should be done with inactive physician-investors or to seek investment by physicians who might be accretive to the enterprise.

Physicians who own interests in facilities that are under development, or are not yet Medicare-certified, are faced with more vexing issues — continue with development or not? The answer depends on how far along the hospital is in the development phase. As uncertain as the prospect of legislation is, the timing and "cut off" are even more uncertain. A new facility generally will take at least 90 days following the date it opens to become Medicare-certified. Thus, any facility that is under development should determine its ability to become Medicare-certified during the first or second quarters of 2009.

Other strategies may also be available; you should discuss these with counsel. In doing so, physician-investors should consider the impact of recent changes in the Stark Law rules related to "under arrangements" structures and rental arrangements. In addition, stakeholders should engage with lawmakers to apprise them of individual circumstances that should be reflected in any legislative proposals that may be forthcoming.

The Long Crusade to Curb Physician-owned Hospitals

Physician-owned specialty hospitals have long been under legislative attack, starting with successive moratoriums that had the desired effect of chilling development of physician-owned specialty hospitals. Here's a look back.

  • 2003: Congress enacts 18-month moratorium. Congress amended the Stark Law with language that, in practice, placed an 18-month moratorium on the development of any "specialty hospitals" while various agencies studied the impact of physician-owned hospitals on community hospitals. The moratorium allowed for continued physician ownership and referrals to existing facilities as well as those hospitals that were then "under development."
  • 2005: CMS passes six-month moratorium. The 18-month moratorium ended in June 2005, but CMS then imposed its own six-month moratorium on the certification of physician-owned facilities. The reason? To conduct several additional studies and report to Congress on such issues as payment rate reforms for inpatient hospital services, payment rate reforms for ambulatory surgery centers, procedures for certifying new specialty hospitals and review of the U.S. Emergency Medical Treatment and Active Labor Act (EMTALA) issues for specialty hospitals.
  • 2006: A reprieve and a renewal? When the Republican-controlled Congress of the time refused to act further on specialty hospitals in Medicare legislation enacted in late 2006, many observers viewed the issue as resolved and in the favor of letting physicians own specialty hospitals. Promoters of specialty hospitals revived development plans and physician-owned facilities once again appeared to be on the rise. Not so fast.
  • 2007: Whole hospital exception and aggregate physician ownership threatened. The Democratic takeover of Congress in 2007 again shifted the balance, this time in favor of those opposing physician ownership. In summer 2007, the U.S. House of Representatives approved the Children's Health and Medicare Protection Act of 2007 (CHAMP). The main focus of CHAMP was to extend children's health insurance benefits under the federal State Children's Health Insurance Program (SCHIP) program; however, the bill also included provisions that would have amended the Stark Law effectively halting the development of any physician-owned hospitals after date of enactment of the legislation. The legislation would have eliminated the whole hospital exception, other than for existing facilities. Although existing physician-owned hospitals would be permitted to continue without violating the law, the CHAMP legislation imposed additional requirements on these hospitals to be able to continue to qualify for the whole hospital exception. Specifically, to continue to qualify for the exception, aggregate physician ownership in existing facilities would be limited to 40 percent of the total value of investment interests held in the hospital; individual physician ownership would have been limited to two percent of such value. Most notably, the legislation would require that existing facilities not increase the number of operating rooms or beds at any time after the date of enactment. The children's health insurance provisions of the bill were heavily debated in Congress and became a political hot potato. As such, neither the CHAMP bill nor the Stark Law provisions advanced further in 2007.
  • 2008: Proposed Stark Law amendments fail to advance. Opponents of physician-owned hospitals made further attempts to advance restrictions in 2008. The question of physician ownership re-emerged, this time in the Military Construction and Veterans Affairs and Related Agencies Appropriations Act of 2008. This bill, which was approved by the U.S. Senate, again would have amended the Stark Law and halted development of physician-owned hospitals after a certain date. Existing hospitals that had physician ownership and were Medicare-certified as of Sept. 1, 2008, would have been grandfathered, but subject to the same types of restrictions found in the CHAMP bill. Once again, the Stark Law provisions failed to advance in 2008.
  • 2009: Codey Law prohibits new doc-owned ASCs in N.J. New Jersey has its own homegrown Stark Law called the Codey Law, which prohibits self-referral. Proposed revisions to the Codey Law would let the state's 200 or so current physician-owned surgical centers operate legally by creating a safe harbor that reclassifies the state's existing centers as extensions of the doctor's office, says Mark E. Manigan, JD, a partner in the law firm WolfBlock in Roseland, N.J. The revisions to the law would also require unlicensed surgical centers to register with the state department of health and obtain Medicare certification or accreditation. Licensed centers also would be required to obtain accreditation. In terms of future development, the revised bill would prohibit the state from issuing any new ASC licenses unless one of the following scenarios apply: 1) a change of ownership; 2) the relocation of an ASC within 20 miles (provided there was no expansion in the ASC's scope of services); 3) entities have filed architectural plans within six months (reduced from nine months) of the effective date; 4) entities that are owned wholly or in part by a New Jersey hospital; or 5) entities are wholly owned by a medical school. ?

— Roger Strode, JD, and Eric Zimmerman, JD