December 7, 2010
Health Reform May Limit Expansion by Hospitals with Physician-Held Debt
As part of the Patient Protection and Affordable Healthcare Act, the Centers for Medicare and Medicaid Services recently released final regulations implementing changes to the Stark Law "whole hospital" and "rural provider" exceptions. While the expressed intent of these changes was to limit the expansion of physician-owned specialty hospitals, they may also impose restrictions on hospitals that are not typically considered "physician-owned," most notably prohibiting expansion of hospitals that have outstanding debt held by referring physicians.
Physician-Held Debt May Constitute Ownership Interests under Stark
The Stark Law definition of an "ownership or investment interest" includes, among other interests, "...loans, bonds, or other financial instruments that are secured with an entity's property or revenue or a portion of that property or revenue." This language potentially implicates the issuance by a hospital of tax-exempt or taxable bonds, participating bonds, certificates of participation for lease transactions, promissory notes or any other forms of debt instruments.
"Publically-Traded" Debt Instruments Are Not Necessarily Exempt from Stark
While the ownership exception for "publicly traded securities" remains unchanged, debt instruments such as bonds, even those that the layman would consider "publically traded," do not qualify for the "publically traded securities" Stark exception, as they are not listed on an exchange or traded on an "interdealer quotation system operated by the National Associate of Securities Dealers." However, the purchase of "publically-traded" debt instruments of a hospital by its admitting physicians will not trigger Stark unless the hospital had actual knowledge of the sale of such debt to its physicians (or acted with reckless disregard as to the potential buyers of its debt). Practically, a hospital should not sell to physicians in an initial debt offering, but will not be in violation of Stark if physicians have purchased its "publically traded" debt in the secondary market without the hospital's actual knowledge.
Non-Publically-Traded Debt Instruments May Require a Stark Exception
Currently, there are multiple exceptions to the referral prohibitions of Stark for physician ownership/investment interests, including exceptions for rural providers and ownership in a whole hospital. Alternatively, a debt transaction may have been structured as an unsecured loan subordinate to a credit facility, which does not constitute an ownership or investment interest under Stark, though it would still create a compensation arrangement under Stark.
Changes to the Stark Ownership Exceptions
As noted above, the "rural provider" and "whole hospital" exceptions have been amended in connection with the new health reform law to include the following additional restrictions and requirements:
In the event a hospital has physician ownership as of December 31, 2010, the hospital may not increase the number of operating rooms, "procedure rooms," and beds beyond that for which the hospital was licensed on March 23, 2010 unless an exception is granted by the Secretary of Health and Human Services.
Effective September 23, 2011, the hospital must comply with significant conflict of interest disclosure requirements, including but not limited to (i) annual reports detailing physician ownership, (ii) disclosure of physician ownership in any public advertising, and (iii) requiring as a condition of medical staff membership that physicians who have an ownership interest in the hospital provide written disclosure of ownership to all patients referred to the hospital.
Effective September 23, 2011, the hospital must satisfy detailed criteria to ensure bona fide investment by physicians, including but not limited to a requirement that the percentage of the total value of the ownership or investment interests held by physicians in the aggregate does not exceed such percentage as of March 23, 2010.
Hospitals that have placed debt with physicians (via tax-exempt bonds, taxable bonds, participating bonds or some other debt structure) in reliance upon either the rural or whole hospital exceptions may find themselves subject to restrictions on expansion and other new restrictions and disclosure requirements. Any hospital with outstanding debt which it knows to be held by admitting physicians should work with counsel as soon as possible to determine (a) if such ownership will subject the hospital to the "physician-owned hospital" restrictions and if so, (b) how best to restructure the physician-held debt to avoid these restrictions.
In order to avoid these new requirements entirely, an affected hospital could, by December 31, 2010, restructure debt held by physicians, so as to covert the debt from an ownership interest to a compensation arrangement, or, alternatively, divest all physician ownership.
While the regulations are not clear on their face, to the extent a hospital has physician ownership as of December 31, 2010 but later divests such ownership, it would seem to follow that these requirements and restrictions would no longer apply. A hospital that has physician ownership of hospital debt that wishes to avoid the requirements set forth in Paragraph 2 above would be able to do so by restructuring or divesting physician debt ownership before September 23, 2011.
Any hospitals that will have physician ownership on December 31, 2010, even if they intend to divest in the near future, should determine as soon and as accurately as possible what the total aggregate referring physician ownership percentage was for said hospital on March 23, 2010 to ensure physician ownership never exceeds such percentage.
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