Under existing Medicare Conditions of Participation (CoP), the governing body of a hospital must make all privileging decisions based upon the recommendations of its staff, after the staff has examined and verified the credentials of practitioners applying for privileges. This means the hospital’s medical staff must conduct individual appraisals of its prospective members and examine the credentials of each candidate to make a privileging recommendation to the governing body.

Hospitals may use third-party credentialing verification organizations, but the governing body remains responsible for the privileging decisions. In a move that may facilitate the growth of telemedicine services, CMS has issued a proposed rule to revise hospital Medicare CoP to facilitate credentialing of distant-site doctors at local hospitals seeking their services.

Under the proposal, the governing body of the local hospital would be permitted to grant privileges based on the recommendations of its medical staff, relying in turn on information provided by the distant-site hospital.

The local hospital must see that:

1. The distant-site hospital is a Medicare-participating hospital.
2. The individual distant-site professional is privileged at his own hospital and that the distant-site hospital provides the local hospital a current list of the physician’s privileges.
3. The individual distant-site professional holds a license issued or recognized by the state in which the local hospital is located.
4. The local hospital has evidence that the distant-site hospital conducts an internal review of the distant-site professional’s performance of his privileges.

The local hospital must provide relevant information to the distant-site hospital for its use in periodically appraising the practitioner. Information sent for use in the periodic appraisal must include all adverse events that might have resulted from telemedicine services provided by the distant-site physician to the local hospital’s patients, as well as all complaints the local hospital has received about the distant-site physician.

Of course, these provisions are merely proposals, and may never become law. Nevertheless, the proposal may suggest a greater degree of receptivity to the provision of telemedicine services than we’ve seen in the past. Providers should monitor developments so they can take advantage of this evolution should it become a final rule.

Joseph P. McMenamin
804.775.1015
jmcmenamin@mcguirewoods.com

Melissa Gilmore
202.857.1724
mgilmore@mcguirewoods.com

Jason S. Greis
McGuireWoods LLP
312.849.8217

On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (PPACA).  PPACA Sections 3401 and 3137 contain a number of provisions affecting institutional providers.  The 3401 sections discussed below are effective April 1, 2010, while Section 3137(a) has October 1, 2009, and April 1, 2010 effective dates.  The Centers for Medicare & Medicaid Services is working to expeditiously implement these important provisions of PPACA.  Providers will begin seeing payments under these provision in the late April/early May time frame.  Be on the alert for more information about these provisions and their impact on past and future claims.  What follows are brief descriptions of each provision:

Inpatient Acute Hospitals (Section 3401(a))

Section 3401(a) of PPACA imposes a 0.25 percentage point reduction to the Inpatient Prospective Payment System (IPPS) hospital’s market basket for fiscal year (FY) 2010, effective for discharges on or after April 1, 2010.  The reduction to the market basket will affect IPPS rates for discharges occurring on or after April 1, 2010, through September 30, 2010.

Long-Term Care Hospitals (Section 3401(c))

Section 3401(c) of PPACA imposes a 0.25 percentage point reduction to the Long Term Care Hospital’s (LTCH) market basket for FY 2010, effective for discharges on or after April 1, 2010.  The reduction to the market basket will affect LTCH rates for discharges occurring on or after April 1, 2010, through September 30, 2010.

Inpatient Rehabilitation Facilities (Section 3401(d))

Section 3401(d) of PPACA imposes a 0.25 percentage point reduction to the Inpatient Rehabilitation Facility market basket for FY 2010, effective for discharges on or after April 1, 2010.  The reduction is also resulting in changes to the standard payment conversion factor, payment rates, and the outlier threshold amount.

Extension of Section 508 Hospital Reclassifications (Sections 3137(a) and 10317)

Sections 3137(a) and 10317 extend section 508 and special exception hospital reclassifications from October 1, 2009, through September 30, 2010.  Effective April 1, 2010, section 3137(a) and 10317 also require removing section 508 and special exception wage data from the calculation of the reclassified wage index if doing so raises the reclassified wage index.  All hospitals affected by sections 3137(a) and 10317 will be assigned an individual special wage index effective April 1, 2010.  If the section 508 or special exception hospital’s wage index applicable for the period beginning on October 1, 2009, and ending on March 31, 2010, is lower than for the period beginning on April 1, 2010, and ending on September 30, 2010, the hospital will be paid an additional amount that reflects the difference between the wage indices.  The provision applies to both inpatient and outpatient hospital payments.    

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

For more information, please contact one of the below authors:

Scott Becker
312.750.6016
sbecker@mcguirewoods.com

Julie Ann Sullivan
312.849.8166
jsullivan@mcguirewoods.com

It is important to note that although lawmakers are not required to heed the Commission’s advice, MedPAC’s recommendations have historically influenced and informed congressional and scholarly debate.  For example, the Commission has been an ardent proponent of moving toward quality-based provider reimbursement, instead of continuing with the existing FFS reimbursement, which compensates providers based upon service volume and arguably promotes excess medical spending.  The Commission has repeatedly advocated on behalf of pilot programs to test alternative care models, such as medical homes, accountable care organizations, continuing care hospitals and episode of care payment bundling.  It is therefore interesting to find that The Patient Protection and Affordable Care Act (P.L. 111-148) (“PPACA”), which was signed into law by President Obama March 23, 2010, and the companion reconciliation bill, The Health Care and Education Affordability Act of 2010 (H.R. 4872) (“HCEAA”), which is anticipated to be signed into law this week, contain many of the Commission’s historical proposals intended to create a fiscally sustainable, comprehensive delivery system that ensures quality, affordability and patient access.  This article provides an overview of the Final Report’s key physician payment and policy recommendations and explains how Congress’s recent landmark health care reform legislation is consistent with, and expands upon, the Committee’s historical proposals.

1.  MedPAC’s Physician and Payment Policy Recommendations

The Final Report found that in 2008, the Medicare program spent about $61 billion on physician services (e.g., payment for office visits, surgical procedures and other diagnostic and therapeutic services).  Most payment adequacy indicators for physician services suggested that beneficiaries are generally able to obtain physician care on a timely basis and that a modest increase to physician payment rates was needed.  As a result, the Commission recommended an update to the Medicare physician fee schedule conversion factor of 1% in 2011.  Specifically, in assessing payment adequacy, the Commission found that:

• Overall beneficiary access to physician services was good.  The Final Report noted, however, that finding a primary care physician was more difficult than finding a specialist, with racial and ethnic minorities experiencing the most critical healthcare access problems.
• Service volume per beneficiary grew 3.6% per beneficiary in 2008.  The Final Report noted that certain subcategories of physician services experienced significant increases in volume per beneficiary, with some of the most significant increases occurring in imaging services and certain spinal surgeries—raising questions about necessity and efficacy of services provided.
• Medicare’s payment for physician services in 2008 was about 80% of private insurer payments, about the same levels it has been over the last decade.

As in the past, the Commission expressed concern about the inequity of a payment system that allows some proceduralists to generate volume and revenue more readily than primary care physicians.  The Commission therefore reiterated its June 2008 and March 2009 recommendation to increase payments for selected primary care services.  It appears that MedPAC’s historical concerns about inequitable physician compensation, disparate access to primary care physician services and the overutilization of certain categories of services did not escape Congress’s attention in passage of PPACA and HCEAA, which address all of these concerns while providing a “mixed bag” of benefits and opportunities for some physicians and potentially devastating financial cuts and losses for others.

2.  Primary Care Physicians Will Benefit the Most from Healthcare Reform

Most primary care physicians are probably pleased that an addition sixteen million people could be added to states’ Medicaid programs under PPACA, since Medicaid reimbursement rates for evaluation and management services and immunizations will be increased under the HCEAA to Medicare levels for family practitioners, internists and pediatricians in 2013 and 2014.  HCEAA also provides 100% Federal funding for the incremental costs to states of meeting this requirement.  This is particularly attractive to certain internists whose compensation from Medicaid and some private plans only pay approximately 70% to 80% of Medicare rates.  Additionally, all general surgeons who perform major procedures in a health professional shortage area will be eligible for a 10% bonus payment for these services from 2011 to 2016.

Many believe that these reimbursement hikes may cause primary care physicians to increase the number of Medicaid patients they accept, and could create new opportunities and business models for primary care physicians.  For example, with increased payment under Medicaid, more primary care physicians and general surgeons may be interested in serving the most needy and destitute minority areas identified by the Commission as experiencing the most critical healthcare access problems.  This pay hike is also likely to improve precarious balance sheets of urban hospitals by converting charity care patients into paying patients.  Furthermore, if primary care medicine is viewed as a more lucrative area of medicine, then it is possible that an increasing number of student loan debt-ridden medical students may pursue careers in this area and ease the growing shortage of primary care physicians.

3.  The Heavy Hand of the Government Falls Hard on Imaging Specialists and Physician-Owned Hospitals

Many radiologists are irate over a provision in HCEAA that will raise the imaging equipment utilization assumption rate—the time during office hours that imaging equipment is assumed to be in operation.  The utilization assumption rate is used to help determine the technical portion of reimbursement in a non-hospital setting.  Beginning in 2011, the rate will be increased from the 2010 level of 62.5% to 75% for equipment costing $1 million or more (e.g., both magnetic resonance imaging & computerized tomography equipment) as determined by the Centers form Medicare & Medicaid Services (“CMS”).  Radiation therapy services, however, are excluded.  This provision will trump CMS’s rule requiring the rate to increase to 90% in 2013.  This increase is intended to address concerns about perceived overpayments and overutilization of imaging technology—a theme repeatedly discussed by the Commission in its Final Report and in previous reports to Congress.  In response to this change, the American College of Radiology recently issued a statement strongly opposing these cuts, suggesting that they would shift necessary imaging care to large hospitals, increase the cost to Medicare of appropriate imaging, reduce accessibility and cause potentially life threatening delays in diagnosis and treatment of cancer and other serious illnesses.

Passage of comprehensive health reform legislation is also devastating for physicians who have an ownership interest in hospitals—including short-term acute care hospitals, specialty hospitals and long-term acute care hospitals.  Opponents of physician-owned hospitals, such as Senator Charles Grassley (R-Iowa) and the American Hospital Association, have argued that physician ownership creates inappropriate incentives for physicians to refer patients to hospitals in which they have an ownership interest and results in “cherry picking” of the most profitable patients.  Proponents of these hospitals, however, argue that they provide superior care and better clinical outcomes and do not financially harm their community counterparts.  Regardless of which side is correct, it is clear that these new laws will preclude new physician-owned hospitals that are not Medicare-certified by December 31, 2010 from enrolling in Medicare.  Furthermore, PPACA places immediate limits on expansion of operating rooms, beds and procedure rooms, limits aggregate increases in physician ownership as of March 23, 2010, and imposes certain disclosure requirements on existing physician-owned hospitals.  Physician Hospital Association Executive Director Molly Sandvig stated that “[t]hese provisions are extremely harmful . . . . They virtually destroy many of the hospitals that are currently under development, and leave little room for the future growth of the industry.”

Finally, a new tax being levied to fund healthcare reform may also hit physicians especially hard.  PPACA calls for a 3.8% Medicare Part A tax on net investment income for individuals making more than $200,000 a year and married couples making more than $250,000. The tax is intended to ensure the solvency of the Medicare Part A Trust Fund for an additional nine years, through 2026.

Physicians were also troubled by what was not contained in these new laws, namely proposals for comprehensive tort reform and a permanent fix to, or elimination of, Medicare’s current Sustainable Growth Rate (“SGR”) formula that would wipe away the looming 21.2% cut to physician payments that will once again become effective April 1, 2010.  To the dismay of the American Medical Association and its physician members, Republicans’ proposal for comprehensive tort reform was not included in comprehensive health care reform legislation.  The legislation, however, authorized the Secretary of Health and Human Services (“HHS”) to award five-year demonstration grants to states to develop, implement and evaluate alternative medical liability reform initiatives, such as health courts and early offer programs, beginning in 2011.  Medical liability protections under the Federal Tort Claims Act would also be extended to officers, governing board members, employees and contractors of free clinics.  Republicans, however, have expressed optimism about picking up seats in both the House and Senate during November 2010 mid-term elections.  Their hope is that even if they are unable to gain majorities in one or both chambers, that a more even redistribution of legislative power could be sufficient to push through key Republican healthcare agenda items, including comprehensive tort reform.

Physicians also expressed concern that the Senate adjourned on March 26, 2010 without taking action to pass the Continuing Extension Act of 2010 (H.R. 4851), which the House passed on March 17, 2010 and which would further delay until May 1, 2010 a 21.2% Medicare payment cut slated to become effective April 1, 2010.  In the FFS program, Medicare pays for physician services according to a fee schedule that lists services and their associated payment rates.  The fee schedule assigns each service a set of three relative weights (physician work, practice expense, and professional liability insurance) intended to reflect the typical resources needed to provide the service.  These weights are adjusted for geographic differences in practice costs and multiplied by a dollar amount—the conversion factor—to determine payment amounts.  In general, Medicare updates payments for physician services by increasing or decreasing the conversion factor.  By law, the update of the physician fee schedule conversion factor is determined by a formula—the sustainable growth rate (“SGR”)—set forth in the Balanced Budget Act of 1997.  It ties payment updates to four factors: changes in input costs, changes in Medicare FFS enrollment, changes in the volume of physician services relative to growth in the national economy, and changes in law and regulation.

Barring any legislative surprises, this would be the second time in as many months that Congress has allowed the Medicare physician SGR formula reduction to take effect.  Physicians’ Medicare reimbursement was reduced 21.2% on March 1, 2010 before the Senate acted on March 2, 2010 to delay the cut until April 1, 2010 by passing the Temporary Extension Act of 2010 (H.R. 4691).

Both the AMA and MedPAC have urged Congress to enact a permanent payment fix that would repeal the SGR formula.   MedPAC has repeatedly expressed its dissatisfaction with use of the SGR formula, which the Commission argues does not provide quality-based incentives for individual physicians to control volume growth and is inequitable across physicians.  The cost to repeal the SGR formula, however, is estimated to be $210 billion over ten years—thereby effectively eliminating the $138 billion in savings that the CBO has estimated PPACA and HCEAA would save over the first decade after implementation, together with a portion of the $1.2 trillion dollars estimated to be saved during the second decade after passage.  Many K Street watchers believe prospects for comprehensive physician payment reform to be poor prior to mid-term elections, since it is unlikely that the parties will be able to agree upon appropriate cost offsets or additional tax increases to pay for the cost of such a permanent fix.  Instead, many politicos believe that with passage of the current health reform package, Congress will quickly turn its attention to other less divisive domestic priorities, such as job creation and immigration and environmental reform, and leave the difficult task of creating a permanent fix for 2011.

4.  Looking Forward: The Enemy Physicians Know is Better than the Enemy Physicians Don’t Know

Physicians are generally cautiously optimistic about healthcare reform.  However, a number of proposals contained in PPACA and HCEAA and executive orders have left physicians feeling vulnerable to additional payment cuts.  For example, PPACA establishes an Independent Payment Advisory Board (“IPAB”) comprised of fifteen members that will submit legislative proposals to the President and Congress beginning in January 2014 recommending reductions to the per capita growth in Medicare spending if spending exceeds an established growth target rate of the average of CPI-U and CPI-M.  IPAB’s recommendations would become effective unless Congress acts to amend IPAB’s recommendations.  Beginning January 2018, the growth target would be modified such that IPAB would submit recommendations if Medicare per capita spending exceeds GDP per capita plus 1%.  Hospitals and hospices would not be subject to cost reductions proposed by IPAB through 2019.  With hospitals excluded from IPAB cost reductions through the end of the decade, physicians may be concerned that their fees may be reduced disproportionately to offset the hospital carve out and other cost increases.

Physicians are also concerned that their Medicare payments may be cut if FFS payment is replaced with bundled episode of care payments—a strategy long advocated by the Commission. PPACA requires CMS to establish by January 1, 2013 a national, voluntary Medicare pilot program to develop and evaluate paying one bundled payment for physician services, acute inpatient hospital services, outpatient hospital services and post-acute care services for an episode of care that begins three days prior to hospitalization and spans thirty days following discharge.  If the pilot program achieves stated cost containment, quality and other goals, then the pilot program would be expanded by January 1, 2016.  It is important for all providers to note that if the original voluntary pilot program is successful, PPACA only requires an expansion of the original voluntary pilot program—not the full-scale implementation of episode of care payment bundling.

Physicians would also be wise to carefully monitor the activities of a special eighteen-member bipartisan Blue-Ribbon Commission created by an executive order issued by President Obama on February 18, 2010.  The Commission on Fiscal Responsibility and Reform is responsible for developing a plan to reduce the Federal deficit by 2015 by 3% of gross domestic product.  The Commission will issue a report to Congress by December 1, 2010—after mid-term elections.  The report is widely anticipated to propose a number of significant tax increases, and many also believe the commission was created to provide “political cover” for its members to propose such politically unpopular ideas as raising the Social Security eligibility age to 70 and tying it to life expectancy, raising the Medicare eligibility age and reducing Medicare services through significant cost cutting measures.  It is possible that the commission could recommend allowing the 21.2% SGR physician payment cut to become effective and rebase physician payments on a going-forward basis.

MedPAC has repeatedly emphasized over the years that payment rate updates alone are incapable of solving the underlying problem that providers are paid more when they deliver more services without regard to the quality or value of those additional services.  It appears as though Congress considered this overarching guidance in enacting comprehensive healthcare reform.  What these changes mean for physicians remains to be seen.  The devil will be in the details as the rule-making process gets under way.  It would seem, however, that physician services, especially those provided by specialists, may be a prime target for additional payment reform.

Jason S. Greis
McGuireWoods LLP
312.849.8217

The Provena Court’s analysis focused on an earlier decision made by the revenue director who, agreeing with the recommendation of the Champaign County Board of Review, found that PCMC did not qualify for a property tax exemption because it failed to provide a sufficient amount of charity care and used aggressive debt collection efforts against former patients who were unable to pay for their healthcare services. The director’s conclusion was based on the contention that a hospital should not be allowed to maintain a property tax exemption if it dedicates less than one percent of revenues to providing charity care. PCMC, however, argued that the amount of charity care a hospital provides is only one of many factors that courts have historically considered when analyzing whether an entity operates with a charitable purpose. PCMC further argued that the six-factor “charitable purpose” test first established by the Illinois Supreme Court in 1968 in Methodist Old People’s Home v. Korzen (Korzen) (and long since criticized as outdated), purposefully did not place a greater emphasis on charity care over the remaining factors and that rescinding a charitable hospital’s property tax exemption based solely upon one factor was inconsistent with the Court’s long-standing precedent.

Nevertheless, the Provena Court applied the Korzen test without questioning its appropriateness. Under the Provena ruling, an institution claiming to operate with a charitable purpose is still required to show that:

1. It is used for the benefit of an indefinite number of persons . . . for their general welfare – or in some way reducing the burdens of government;
2. It has the distinctive characteristics of a charitable institution, thus, it has no capital, capital stock or shareholders, and earns no profits or dividends;
3. It derives its funds mainly from public and private charity;
4. It dispenses charity to all who need and apply for it;
5. It does not place obstacles of any character in the way of those who need and would use the charitable services; and
6. Its property is truly primarily and predominantly used for charitable purposes.

Although the Provena decision’s affirmation of the Korzen test without clarification of the relevant factors has drawn criticism and a call for legislative action, the members of the Illinois General Assembly appear to be split on the question of whether the decision warrants legislative corrective action. According to recent news reports, State Sen. Michael Frerichs (D-Champaign) said “the hospital and the local community need more answers than they got from the Supreme Court ruling [and] that without clear guidance about how much charity care is required, one can see cash-strapped cities and other local governments turning to hospitals as they search for revenue.” Sen. Frerichs also said that “I think we need to act quickly because I think you’re going to see a lot of taxing bodies looking to pounce on hospitals in their areas. And I think, ultimately, that is not the answer for good, quality medical care in our communities.”

On the other hand, other legislators are taking a “wait and see” approach before concluding that legislative action is imperative. As a result, there is no clear signal that the General Assembly will intervene and alter the ruling of the Court by legislative action. Because of the uncertainty, not-for-profit hospitals must analyze their operations in light of the Provena decision. If the hospital concludes that the amount of charity it provides is anything less than sufficient, immediate action should be taken to enhance charitable services.

Although Provena centers on the property tax exemption of a large hospital provider, the Court’s decision should concern all not-for-profit entities across Illinois and is likely to take on national importance. Hospitals and other not-for-profit entities, such as skilled nursing facilities, assisted living facilities, long-term acute care hospitals and even academic institutions, will need to review bylaws, admissions policies, charity care and collections policies, and any other policy that could be used to show the entity is not truly operating as a charitable owner or for a charitable purpose.

McGuireWoods routinely assists clients with matters involving tax exemptions for not-for-profit entities and is well-positioned to offer guidance as not-for-profit entities take steps to secure their exempt status in light of this ruling. Should you require assistance, please feel free to contact one of the below authors.

James B. Riley Jr.
312.750.8665
mailto:jriley@mcguirewoods.com

Joseph J. Hylak-Reinholtz
312.641.2088
mailto:jhylak-reinholtz@mcguirewoods.com

Jeffrey C. Clark
312.750.8636
mailto:jclark@mcguirewoods.com

Julie Ann Sullivan
312.849.8166
mailto:jsullivan@mcguirewoods.com

• A Status Update on Efforts to Extend MMSEA’s LTACH Provisions;
• Novel Issues in Developing an Antimicrobial Stewardship Program in LTACHs;
• The Joint Commission Approves Interim Staffing Effectiveness Standards for Hospitals and Long Term Care Organizations;
• MedPAC Releases 2010 Final Report Recommending No Payment Update for LTACHs for RY 2011;
• Other Recent GreisGuide posts;
• Career Opportunities; and
• Upcoming Events.

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The LTACH industry’s latest efforts to introduce legislation to extend MMSEA’s LTACH provisions can be found in two bills—H.R. 4213 § 221, and H.R. 3590 § 3106.  H.R. 4213 is the Tax Extenders Act of 2009, which is a bill introduced by Senate Majority Leader Harry Reid (D-Nev.) and Senate Finance Committee Chairman Max Baucus (D-Mont.) on March 1, 2010 as a substitute amendment to a tax extenders bill passed by the House in December 2009.  H.R. 3590 is The Patient Protection and Affordable Care Act, which is the Senate’s health care reform bill that passed on December 24, 2009 by a party-line vote of 60-39.  A comparison of the LTACH-related provisions in these two bills follows:

 *Although the text of Section 3106 of The Patient Protection and Affordable Care Act available through the Library of Congress only reflects a one-year extension of MMSEA’s LTACH provisions, an amendment proposed by Senator Reid on December 24, 2009 extended the term of the MMSEA extension to two years.  It should also be noted that unlike H.R. 4213, H.R. 3590 includes a separate funding mechanism for LTACH payments. 

Although the fate of these bills remains unclear due, in part, to the growing uncertainty that Democrats will be able to muster the needed 217 votes in the House to pass H.R. 3590  (recall that the House passed its healthcare bill (H.R. 3962) by a vote of 220-215 in November), it is clear that the LTACH industry will continue seeking opportunities and legislative vehicles to extend the life of MMSEA’s LTACH protections.  In the meantime, LTACHs should pay attention to legislative developments related to these two bills, contact their respective trade organizations (ALTHA and NALTH) to determine how they may be of assistance, and consider contacting congressional representatives to encourage them to vote in favor of passage of these two bills.

Jason S. Greis
McGuireWoods LLP
312.849.8217

Jim has been president and chief executive officer of RML Specialty Hospital since 1996.  Previously, he held positions as chief operating officer of Suburban Hospital and president of the Ventilator Support Center, both located in Hinsdale, and served for more than eight years as vice president of operations for Sparrow Hospital in Lansing, Michigan.  A Fellow of the American College of Healthcare Executives (ACHE), Jim is a member of the Northern Illinois Regent’s Council for ACHE.  He has served on the board of NALTH since 1998 and is active on committees of the Illinois Hospital Association.

Jim is a graduate of Albion College and received his master’s degree in health services administration from the School of Public Health at the University of Michigan in Ann Arbor.  Congratulations Jim!

Jason S. Greis
McGuireWoods LLP
312.849.8217