Expansion of Physician-Owned Hospitals Faces New Challenges

This month’s edition of ABA Health eSource, through the ABA’s Health Law Section, published an article detailing the upcoming challenges for physician-owned hospitals and their expansion, including those who were already grandfathered in prior to its legal barriers under the Patient Protection and Affordable Care Act (“PPACA”).

http://www.americanbar.org/content/newsletter/publications/aba_health_esource_home/aba_health_law_esource_1109_rangel.html

Brief History
Stark law has many prohibitions focusing on physician self-referral. It also had and still has many exceptions. One of those exceptions was the whole-hospital exception. Physicians with ownership interest in a whole hospital, rather than just an acute care center or some other entity, were allowed to refer their patients to that hospital. The presumption was that a single physician’s interest in an entire hospital is so small that the referral is likely not to be financially incentivized. Congress, CMS, and other entities have been trying for years to do away with this exception because of the potential profitability in physician-owned hospitals, particularly those who receive a large volume of Medicare patients through referrals from their physicians and now investors. Many attempts were met with a veto from past administrations; even those including provisions that were slipped in unrelated defense bills to do away with the exception.

They still exist, but the exception does not
The PPACA amended the Stark Law by modifying the whole hospital exception. This exception now only applies to hospitals which the physician had an ownership interest on December 31, 2010, meaning they were grandfathered in for those who invested before that. As for those who were thinking about it and never got to it by that date, you’re out of luck. Grandfathered physician-owned hospitals, however, are subject to substantial restrictions under the PPACA. These restrictions include the following: a prohibition on increasing total physician ownership percentages, increasing the number of beds, operating rooms or procedure rooms. A process has been established under the PPACA whereby a grandfathered physician-owned hospital can seek an exception to these facility restrictions. That is the focus of the ABA Article. Additionally, grandfathered hospitals will have to have procedures in place whereby the referring physician-owners will have to disclose their ownership interests to their patients within a reasonable time. Grandfathered hospitals will also be required to file annual reports with the Secretary of Health and Human Services identifying the physician and non-physician owners. Lastly, these grandfathered hospitals will have to publically disclose the fact the hospital is partially physician owned via any public website of the hospital and in any of the hospital’s public advertising. Grandfathered physician-owned hospitals must have a provider agreement in place on or before December 31, 2010, and a hospital with no physician ownership as of March 23, 2010 will not qualify for the whole hospital Stark exception. The 224 page proposed rule mentioned in the article can also be found online.

http://www.gpo.gov/fdsys/pkg/FR-2011-07-18/pdf/2011-16949.pdf

Summary of the Article
The article covers the two exceptions to the expansion provision. They are the applicable hospital exception and the high Medicaid facility exception. The article states the guidelines for how a hospital qualifies for either exception or in some cases both exceptions. It also details how to submit such a request. However, the article also makes it clear that it is very difficult for a hospital to meet such exceptions.

“Expansion will be Difficult for Many Hospitals
As evidenced by the stringent exception criteria, few hospitals will qualify for an exception. For example, to meet the applicable hospital exception, a hospital will be required to show that it is located in an area that in which the population is growing more rapidly than in the remainder of the state. In addition, the applicable hospital must show that the area in which the hospital is located has a need for additional beds or operating/procedure rooms. These requirements may be difficult to meet in most markets. The high Medicaid facility exception will also be difficult to meet, as few physician-owned hospitals serve a large Medicaid population. Consequently, expansion of physician owned hospitals will be difficult to attain and most of such hospitals will be frozen at their baseline number of beds and operating and procedure rooms.”

Posted by Attorney Saif R. Kasmikha

Midwest Legal Partners, LLC