April 2, 2010

This installment of Hall Render's Health Law Broadcast series on health care reform is designed to provide you with the insight, analysis and practical suggestions with respect to the various reform initiatives that will affect your organization.

PHYSICIAN-OWNED HOSPITALS:  FEWER OPPORTUNITIES, MORE CHALLENGES

With enactment of the Patient Protection and Affordable Care Act and related amendments ("PPACA"), the Federal Stark Law has been amended to limit expansion of existing physician-owned hospitals and to prevent future development of physician-owned hospitals unless already under construction. 

Background

The Federal Stark Law ("Stark") prohibits a physician from referring patients for the provision of certain designated health services to entities with which the physician has a "financial relationship" unless an exception is met.  Because physician ownership or investment in a hospital is considered a financial relationship under Stark, the arrangement must meet an applicable Stark exception.  Until passage of PPACA, Stark's so-called whole hospital exception allowed physicians to maintain ownership and investment interests in hospitals, so long as the referring physician was authorized to perform services at such hospital, and the physician's ownership or investment interest was in the entire hospital and not merely in a distinct part or department of the hospital.

PPACA, however, revises the exception for physician ownership or investment in a hospital such that financial relationships meeting the requirements discussed above will no longer be excepted under Stark, unless (i) the hospital has physician ownership or investment and a Medicare provider agreement by December 31, 2010, and (ii) the hospital was not converted from an ambulatory surgical center to a hospital on or after March 23, 2010.

These changes effectively prevent the formation of new physician-owned hospitals, but grandfathers existing hospitals if such hospitals meet additional requirements discussed below.  Further, the Secretary of Health and Human Services (the "Secretary") has power to revoke a physician-owned hospital's provider agreement for the hospital's failure to meet such requirements, and the Secretary has been authorized to establish policies and procedures to ensure compliance which: (i) will include conducting audits beginning no later than May 1, 2012, and (ii) may include unannounced site visits.

Restrictions on Expansion

As of March 23, 2010, (i) the percentage of total aggregate physician ownership or investment interest held in the physician-owned hospital, or in an entity whose assets include such hospital, is frozen and may not be increased in the future, and (ii) the physician-owned hospital's total number of operating rooms, procedure rooms (including rooms in which catheterizations, angiographies, and endoscopies are performed, but exclusive of emergency rooms or departments), and beds is frozen and may not be increased.

But, once every two (2) years a physician-owned hospital that is defined as either an "applicable hospital" or a "high Medicaid facility" may apply for an exception to the restriction on expansion of operating rooms, procedure rooms and beds, if (i) the intended expansion does not exceed 200% of the existing number of such rooms or beds, and (ii) the increase occurs in facilities on the main campus of the hospital.  Although the process for application has been delegated to the Secretary, the process must be implemented by February 1, 2012 (regulations detailing the process by January 1, 2012) and entail an opportunity for community input.  Therefore, it should be noted that though physician-owned hospitals will have an opportunity to apply for expansion, such hospitals will not be able to expand (or apply to expand) until the process is put in place which must be no later than February 1, 2012.  It is unclear how this restriction on expansion will affect facilities currently under construction.

The term "applicable hospital" means a physician-owned hospital (i) that is located in a county which has experienced at least a 150% increase in population growth of the hospital's State during the most recent five (5) year period, (ii) whose annual percentage of total Medicaid inpatient admissions is equal to or greater than the average percentage compared to the same admissions for all hospitals located in the hospital's county, (iii) that does not discriminate against beneficiaries of federal health care programs nor permit such discrimination from its practicing physicians, (iv) that is located in a State in which average bed capacity is less than national average bed capacity, and (v) that has an average bed occupancy rate greater than the average bed occupancy rate in the hospital's State.

The term "high Medicaid facility" means a physician-owned hospital (i) that is not the sole hospital in a community, (ii) has an annual percentage of total Medicaid inpatient admissions estimated to be greater than such percentage as compared to the same admissions for any other hospital located in the hospital's county, and (iii) that does not discriminate against beneficiaries of federal health care programs nor permit such discrimination from its practicing physicians.

Disclosure and Reporting Requirements

On or before September 23, 2011, physician-owned hospitals will be required to submit an annual report to the Secretary containing detailed information regarding: (i) the identity of each physician owner or investor and any other owners, and (ii) the nature and extent of all ownership and investment interests.  This information will be published on the Centers for Medicare & Medicaid Services website.

Further, on or before September 23, 2011, physician-owned hospitals must: (i) have procedures in place requiring disclosure of ownership or investment interests of both referring and treating physicians to referred patients within a time frame that permits the patient to make a meaningful decision regarding the receipt of care; and (ii) disclose ownership or investment by physicians on any public website and any public advertising for the physician-owned hospital.

Patient Safety

And, also before September 23, 2011, in order to protect patient safety, physician-owned hospitals will be required to disclose any inability to provide services to an admitted patient and procure a written acknowledgement from the patient asserting such patient's understanding of the disclosure.  Further, physician-owned hospitals will be required to: (i) have the capacity to provide assessments and initial treatment for any patient, and (ii) refer and transfer such patient to a hospital with the capacity to treat the needs of the patient involved.

Restrictions on Ownership

By September 23, 2011, physician-owned hospitals will also be required to meet certain requirements related to ownership and investment including the following:

• The hospital may not condition any physician's ownership or investment interests, either directly or indirectly, on the physician making or influencing referrals to the hospital or otherwise generating business for the hospital;
• Any ownership or investment interests the hospital offers to a physician may not be offered on more favorable terms than those offered to any non-physician;
• The hospital, nor any owner or investor in the hospital, may directly or indirectly (i) provide loans or financing for any investment in the hospital by a physician, or (ii) guarantee a loan, make a payment toward a loan, or otherwise subsidize a loan for any individual physician or group of physicians related to acquiring any ownership or investment interest in the hospital;
• Ownership or investment returns must be distributed to each owner or investor in an amount which is directly proportional to ownership or investment;
• Physician owners and investors may not receive, directly or indirectly, any guaranteed receipt of or right to purchase other business interests related to the physician-owned hospital, including the purchase or lease of any property under the control of other owners or investors in the hospital or located near the premises of the hospital; and
• The hospital may not offer a physician owner or investor the opportunity to purchase or lease any property under the control of the hospital or any other owner or investor in the hospital on more favorable terms than the terms offered to a non-physician.