While we wait to see what comes of the legislative and regulatory initiatives on Capitol Hill that would effectively end physician investments in surgery hospitals, it's important to understand what's at stake and to consider your options in case Washington clamps down on physician ownership of these facilities.

Medicare bill controls short-term fate
The most immediate legislative threat to physician ownership of specialty hospitals is the Medicare Prescription Drug and Modernization Act of 2003. The Senate and the House are conferring to reconcile their versions of the bill, each of which poses a different degree of threat to physician ownership of specialty hospitals.

An amendment to the Senate version of the Medicare reform bill would ban physician ownership of specialty hospitals. The amendment excludes an exception to the Stark Act (the "whole-hospital exception") that lets physicians invest in a hospital that is primarily or exclusively devoted to surgical, orthopedic, cardiac or other specialty services so long as their ownership interest is of the hospital itself and not merely a subdivision (such as the HOPD). The Senate bill grandfathers certain existing specialty hospitals and certain specialty hospitals that are in the development phase.

The House bill requests that the Medicare Payment Advisory Commission (MedPAC) studies specialty hospitals. Such a study could lead to future anti-specialty hospital legislation. We don't know whether the House and Senate will be able to reconcile the bills or whether lawmakers will adopt the Senate version. Indications are that the final version of the full Medicare bill may be delayed until October.

Prepare for the worst Here are your options if the Senate version prevails or if Congress should pass legislation that causes your specialty hospital to violate the Stark Act.

• Broaden your service range. A specialty hospital may expand its operations to avoid being defined as a "specialty hospital." The General Accounting Office (GAO) deems a facility a specialty or surgical hospital if more than two-thirds of its services or surgical procedures fall within the same major diagnostic category. Under the Senate bill, a specialty hospital is a facility that is exclusively or "primarily" (at least 50 or 51 percent) devoted to surgical, orthopedic, cardiac or other specialty services. It's unclear if the proposed rules for determining specialty hospitals will be based on revenues or the number of patients seen or procedures performed at the hospital.
• Scale down to an ASC. The proposed legislation doesn't affect physicians' ability to own an ambulatory surgery center or an imaging facility. A single group practice or a community hospital could purchase the imaging portion of the facility.
• Turn away Medicare/Medicaid patients. The Stark Act's referral restrictions only apply to those covered by a federal healthcare program, so you could conceivably not furnish services to patients. Yes, this may not be economically feasible. And state laws may require that a hospital provide a certain percentage of its business to Medicare, Medicaid or indigent patients.
• Sell to a third party. Physician-owners who sell to a non-physician third party can retain ownership in the real estate on which the hospital is constructed and act as a landlord or serve in other aspects of the business.
• Merge. Another option is to merge with other specialty hospitals or ASCs to create a publicly traded company. One exception to the Stark Act lets a physician refer patients for designated health services to a publicly traded company in which he has an ownership interest. Some combined laboratory and radiology businesses have used this approach to avoid Stark violations. A specialty hospital can combine with other hospitals to qualify for this exception. The resulting entity must have more than $75 million in total assets or stockholder equity (on average over the preceding three fiscal years) and be publicly traded.
• Invoke the "rural exception." A specialty hospital located in a rural area that provides "substantially all" of its services to individuals residing in such a rural area may qualify for the "rural exception" allowed by the Stark Act. The Senate version of the Medicare bill would eliminate this exception for specialty hospitals.
• Create a non-profit holding company. Physician-owners could avoid a prohibited financial relationship with a specialty hospital if a not-for-profit holding company owned entirely the hospital. A board made up of physician-owners could govern the non-profit entity. Under this structure, the specialty hospital would not be able to pay shareholders any company profits. Any remuneration that a physician or a physician's family member would receive (a salary or lease payments) would be considered "compensation" under the Stark Act and would need to meet a separate Stark exception.
• Go into group practice. The Stark Act contains an exception that lets a group practice wholly own an "office ancillary services" entity. Physician-owners could combine their practices and own the specialty hospital in compliance with this exception to the Stark Act. This exception may not survive or be interpreted as appropriate for purposes of specialty hospital ownership.

Proper planning
Don't push the panic button about what Washington has in store. Be watchful and plan accordingly.