Exploring the Adverse Impact of Federal Healthcare Reform on Physician-Owned Hospitals

Posted by Jason Greis on April 1, 2010 under Articles | Read the First Comment |  Print

After almost a year of heated debate, President Obama signed into law the Patient Protection and Affordable Health Care Act (P.L. 111-148) (“PPACA” or the “Act”) on March 23, 2010, as amended by the Health Care and Education Affordability Act of 2010 (H.R. 4872) (“HCEAA”) on March 30, 2010.  While many of these laws’ provisions are benign, some contain “bombshells” that will permanently alter the business and regulatory landscape for certain businesses.  One such provision is contained in Section 6001 of PPACA, which significantly curbs physician ownership and investment in hospitals by restricting application of the Federal Ethics in Patient Referrals Act’s (the “Stark Law”) statutory “whole-hospital exception.”

The Stark Law generally prohibits physicians from making referrals for designated health services to an entity with which a referring physician (or an immediate family member) has a financial relationship, unless an exception is met.  Penalties for violating the Stark Law include denial of payment and civil monetary penalties ranging from $15,000 to $100,000 per violation.  The Stark Law also implicates penalties under the Federal False Claims Act.  Prior to passage of PPACA, physicians were generally permitted to refer patients to a hospital (including LTACHs, STACHs and specialty hospitals) in which they had an ownership or investment interest so long as physicians could satisfy the elements of the whole-hospital exception.  PPACA, however, has significantly narrowed this once broad exception.

A History of Efforts to Ban Physician Ownership

Opponents of physician-owned hospitals (“POH”), such as Senators Charles Grassley (R-Iowa) and Max Baucus (D-MT) and Representative Fortney “Pete” Stark (D-CA) have long argued that physician ownership creates inappropriate incentives for physicians to refer patients to POHs in which they have an ownership interest and results in “cherry picking” of the healthiest, wealthiest and most profitable patients.  Proponents of POHs, however, argue that they provide superior care and better clinical outcomes and that they do not financially harm their community counterparts.  As a direct result of this debate, several attempts have been made to curb or eliminate physicians’ ownership and investment in hospitals. 

The first significant effort to eliminate physician ownership and investment occurred in the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“MMA”), which placed an 18-month moratorium on physician ownership in specialty hospitals and made it a violation of the Stark Law for physicians to refer Medicare patients to any specialty hospital in which a physician had an ownership or investment interest.  Just prior to the moratorium’s planned expiration, Senators Grassley and Baucus introduced the Hospital Fair Competition Act of 2005, which would have extended the moratorium indefinitely.  However, the bill languished in the Senate Finance Committee and the moratorium expired on June 7, 2005.

Shortly after expiration of the moratorium the Centers for Medicare & Medicaid Services (“CMS”) took matters into its own hands by advising all State Survey Agency Directors not to process any new Medicare provider enrollment applications for specialty hospitals.  Congress finally required CMS to lift this enrollment suspension on August 8, 2006.  Then in 2007, CMS issued a final rule updating the Inpatient Prospective Payment System.  Included in the final rule was a provision requiring POHs 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 POH.  The required notice was intended to promote transparency and to assist patients in making informed decisions regarding care.  The implicit, albeit questionable, underlying assumption was that some patients would be inclined to seek care elsewhere if they knew that a facility was physician-owned.

More recent attempts have been made to prevent construction and expansion of POHs.  In January 2009, House Ways and Means Health Subcommittee Chairman Pete Stark inserted a provision into the House’s version of the SCHIP bill that would have significantly limited the Stark Law’s whole-hospital exception.  Also, in March 2009 Senator Grassley proposed introducing a stand-alone physician-ownership ban if such a provision was not included in Federal healthcare reform legislation.

PPACA’s Devastating Impact on Physician-Owned Hospitals

PPACA’s amendment to the Stark Law’s whole-hospital exception creates significant barriers to new and expanded physician ownership and investment in all hospitals—including in LTACHs, STACHs and specialty hospitals.  According to Molly Sandvig, Executive Director of the Physician Hospitals of America, the leading trade organization representing POHs, the law “virtually destroys many of the hospitals that are currently under development, and leaves little room for the future growth of the industry.”  In fact, PPACA effectively (i) grandfathers licensed physician-owned hospitals that have Medicare provider agreements in places as of December 31, 2010 and that meet certain additional requirements within eighteen months of March 23, 2010, (ii) establishes a permanent moratorium on the creation or expansion of new physician-owned hospitals after December 31, 2010, and (iii) prohibits any aggregate increase of physicians’ equity in existing physician-owned hospitals after March 23, 2010.

Expanding the Number of Licensed Beds Will Be Very Difficult

After March 23, 2010, existing POHs are generally prohibited from expanding the number of beds, operating rooms or procedure rooms for which they are licensed.  Procedure rooms include rooms in which catheterizations, angiographies, angiograms and endoscopies are performed, but do not include emergency rooms or departments.  For POHs presently under development that do not have a Medicare provider agreement as of March 23, 2010, but obtain one by December 31, 2010, the effective date of that provider agreement will be the date used to measure the baseline number of operating rooms, procedure rooms and beds.  Hospitals may apply for an expansion exception once every two years, subject to satisfying a number of stringent criteria that few hospitals will be able to meet.  Total facility expansion, however, is capped at 200% of the baseline number of operating rooms, procedure rooms or beds that the hospital originally had, and applications for expansion would be subject to public comment from providers in the same community as the applicant.

 Aggregate Physician Equity is Hospitals is Frozen as of March 23, 2010

 The Act also caps the total percentage of physicians’ direct or indirect ownership or investment interest in a hospital at the percentage owned by all of the physicians in a hospital as of March 23, 2010.  A “physician owner or investor” is defined as a physician (or immediate family member of such physician) with a direct or indirect ownership or investment interest in a hospital.  This likely means that physicians will be able to transfer equity interests in a physician-owned hospital among themselves and to non-physician joint venture partners.  Physician owners should also be able to individually increase or decrease their proportion of equity in a hospital, but future physician equity syndications to raise funds for new capital projects (e.g., high observation units) will be prohibited.  The Act effectively freezes aggregate physician ownership effectively as of March 23, 2010.

New Bona Fide Physician Ownership and Investment Requirements

PPACA also authorizes collection of physician ownership and investor information and imposes certain additional restrictions on physician ownership, including the following:

• Ownership or investment interests offered to physician owners or investors cannot be more favorable than those offered to non-physician owners or investors;
• A POH, or any owner or investor in a POH, may not directly or indirectly provide financing for any investment in the POH by a physician owner or investor;
• A POH, or any owner or investor in a POH, may not guarantee a loan, make payment on a loan or subsidize a loan for any physician owner or investor or group of physician owners or investors that is related to acquiring an ownership or investment interest in a POH;
• Distribution of profits must be proportional to a physician’s ownership or investment interest percentage;
• A POH cannot offer more favorable terms for the purchase or lease of hospital property to physician owners and investors that it offers to non-physician owners or investors; and
• A POH may not condition physician ownership or investment on the ability to refer patients to the hospital or to generate business for the POH.

These bona fide investment requirements have long been a part of organizational documents of physician-owned ambulatory surgery center joint ventures to comply with Federal fraud and abuse laws, and physician-owned LTACHs have recently begun adding similar provisions.  Many POHs, however, may need to amend both their organizational documents and alter their practices to comply with these requirements.

Disclosure of Physician Ownership and Investment Interests

 PPACA also require POHs to submit annual reports identifying all investors and owners and the nature and extent of their ownership or investment interests.  POHs will also be required to disclose any physician ownership or investment on any public website or public adverting for the POH. 

POHs must also have procedures requiring referring and treating physicians to disclose their ownership or investment interest in such a manner that allows patients to make a meaningful decision regarding the receipt of care.  It remains to be seen how much this requirement will broaden the scope of current regulations requiring POHs and physician-owners who refer patients to a POH in which they (or a family member) have an ownership or investment interest to provide a list of physician owners at the time a referral is made.

LTACHs Utilizing Off-Site Physician Coverage Must Obtain a Signed Patient Acknowledgment

 The Act also requires hospitals that do not have a physician available on premises at all times to disclose this fact to patients and to obtain a signed acknowledgement from patients prior to admission.  Written disclosure that a hospital that does not have a physician on premises 24 hours per day, 7 days per week and a description of how a hospital would treat patients with an emergency medical condition is already required.   However, obtaining a signed patient acknowledgment is a new requirement.  Many LTACHs that utilize after-hours off-site physician coverage should therefore consider revising their patient admission and general consent forms to incorporate this new requirement.

Key Take-Away Points for Physician-Owned LTACHs

 It should be noted that there is presently some confusion under the Act regarding whether POHs are required to comply with the new bona fide ownership, physician investment disclosure, and patient acknowledgment requirements discussed above as of March 23, 2010 or eighteen months from the date of PPACA’s enactment.  Most attorneys believe that the compliance date for these new provisions is September 23, 2011.  Without regulations, however, the answer remains unclear.

 Section 6001 of PPACA dramatically impacts investment in, and operation of, physician-owned LTACHs and those seeking to develop such hospitals.  Many existing hospitals will need to make various changes to current organizational documents, policies, admissions forms,  medical staff by-laws, marketing materials and websites to comply with the Act and should consider consulting with counsel prior to doing so.

 Jason S. Greis, Esq.
312.849.8217
jgreis@mcguirewoods.com

Shayna A. Bowen, Esq.
404.443.5732
sbowen@mcguirewoods.com