Physician-Owned Hospitals (including LTACHs) Safe . . . For Now: SCHIP Bill Passes without Provision Restricting Physician Ownership or Investment Interests

Posted by Jason Greis on February 5, 2009 under Articles | Be the First to Comment |  Print

President Obama signed the State Children’s Health Insurance Program bill into law on Wednesday, February 4, 2009, which will eable approximately seven million children to continue to have medical coverage through the program, and which will also allow an additional four million to sign up.   President Obama called the bill “a first step toward fulfilling a campaign pledge to provide insurance for all Americans.” 

Physician-owned hospitals (including some physician-owned LTACHs) and the Physicians Hospitals of America (an industry group representing physician-owned hospitals), celebrated passage of the final bill, which did not contain a provision previously included in the House version of the bill that would have prevented construction of new physician-owned hospitals and expansion of current physician-owned hospitals.  Please read my previous posting for a thorough description of the House bill.

House Ways and Means Health Subcommittee Chairman Fortney Pete Stark, who proposed inserting the contraversial language in the House SCHIP bill, together with a growing number of other lawmakers (including Senators Charles Grassley and Max Baucus), have criticized physician-owned hospitals as having a significant negative impact on full-service community hospitals that are not physician-owned.  In December 2007, the Washington Post quoted Senator Grassley as saying:

My motivation for seeking reforms over a long period of time is the effect that [physician-owned] specialty hospitals have on community hospitals when specialty hospitals pass the buck on emergency care and cherry-pick based on profits rather than patient needs.

Aside from reduced revenue resulting from the shift in referrals to physician-owned hospital by their investors, community hospitals also report experiencing considerable turmoil resulting from physician competitors remaining on the community hospital’s medical staff.  Community hospitals report numerous instances where physicians who compete with hospitals fail to properly handle conflicts stemming from their investment interest, refuse to accept community service obligations such as indigent care and emergency room call coverage, and “free ride” on the community hospital by cherry-picking more profitable patients while admitting or transferring uninsured, Medicaid or more acutely ill patients to the community hospital, thereby eliminating an otherwise valuable revenue stream of private pay and privately insured patients.

Many industry experts believe that the provision in the House SCHIP bill merely represents another step in Congressman Stark’s crusade to permanently shutter physician-owned hospitals.  Other commentators (including myself) believe that there has been a fundamental shift in Washington policy over the past few years  in which certain legislators, policymakers, and enforcement agencies have attempted to bring about an eventual end to physician-owned hospitals, and physician health care investment more generally.

For example, in 2007, the Centers for Medicare & Medicaid Services (CMS) issued a final rule updating the Inpatient Prospective Payment System.  Included in the final rule was a provision requiring physician-owned hospitals to furnish written notice to all patients at the beginning of their hospital stay or outpatient visit that physicians have an ownership or investment interest in the hospital.  The required notice is intended to promote transparency and to assist patients in making informed decisions regarding their care.  The implicit, albeit questionable, assumption in this requirement is that many patients would seek care elsewhere if they knew that a facility was physician-owned.

CMS has also been active in attempting to curb physician ownership and investment in certain health care entities by amending certain provisions of the Stark Act, which generally prohibits physician self-referrals unless an exception is met.  Recent changes to the Stark Act (affectionately known as Stark III) have prohibited most physician “under arrangements” transactions effective October 1, 2009.  These changes have also increasingly made indirect ownership  or investment by physicians in a physician organization (e.g., a group practice) that enters into a financial relationship with an entity that furnishes designated health services untenable.

Other “transparency through disclosure” laws impacting physicians are pending.   For example, Senator Grassley and  Senator Herb Kohl have (re)introduced the Physician Payments Sunshine Act requiring drug, biologic, and medical device manufacturers to report certain gifts and payments made to physicians.  This information would be registered in a national and publicly accessible online database on the CMS website.  Democratic Senators Claire McCaskill, Chuck Schumer, Amy Klobuchar, and Ted Kennedy were also original co-sponsors of the bill.

The movement appears to be growing, and “the writing may be on the wall” for physician-owned hospitals.  I would not be surprised to see the provision previously included in the House version of the bill re-introduced in other legislation proposed by Congressman Stark, Senator Grassley, Senator Kohl, or Senator McCaskill later this year or early next year.  Developments in this area should be closely monitored.

Jason S. Greis
312.849.8217
jgreis@mcguirewoods.com