Congress Still Toying with Physician-Owned Hospitals

White Paper


For those interested in the repeal or the continuation of the current Stark exception which allows physicians to own an interest in a "whole hospital," it should be interesting to watch the machinations in Congress over the next few weeks.  The Senate recently voted to include in its supplemental war spending package a watered down repeal of Stark's "whole hospital" exception.  This proposed repeal, contained in the Supplemental Appropriations Bill, would make referrals by physician investors in hospitals illegal under the existing Stark framework.  However, the Supplemental Appropriations Bill proposal is less onerous than proposals contained in earlier SCHIP legislation and in the still pending Paul Wellstone Mental Health and Addiction Equity Act.  If the Senate's Supplemental Appropriations Bill makes its way through the system and becomes law, here is what the regulatory landscape will look like:

  • Any hospital with physician ownership as of September 1, 2008 will be grandfathered if it has a provider agreement in effect on that date.
  • The expansion of grandfathered facilities will be limited, although less so than under prior iterations of this type of legislation.  The core limitation in this proposal is a growth ban: there may be no increase in operating rooms, procedure rooms, and beds in a grandfathered hospital.  
  • The current proposal contains an exception to the growth ban for grandfathered hospitals with certain characteristics. 
    • Grandfathered hospitals exempt from the growth ban must be located in a county in which the population growth is 150 percent of the state's population growth.
    • They must have Medicaid admissions greater than the county average.
    • They must be located in a state in which the average bed capacity is less than the national average bed capacity.  Note that this restriction eliminates the possibility of expansion of facilities in many states, including states known for their prevalence of physician-owned hospitals.
    • They must not discriminate against beneficiaries of federal programs and must not permit their medical staffs to do so.
    • They must have an average bed occupancy rate that is greater than the average in the state where the hospital is located.  
  • There is a lifetime limit of a 100 percent increase in the number of operating rooms, procedure rooms, and beds for grandfathered facilities that are exempt from the growth ban.
  • The Senate's proposal contains requirements that physician-owned hospitals make certain disclosures with respect to doctor ownership directly to CMS, and requires that these facilities establish procedures for disclosing physician ownership to patients and the general public.
  • The Senate's proposal requires that physician investment be limited to the greater of 40 percent or the amount of physician investment on the date of enactment.  Note that a facility with greater than 40 percent physician ownership on the date of enactment can maintain that greater level of physician investment.   Note also that there is no limit on the size of the percentage interest an individual physician can hold.  Under the Wellstone version, no physician could hold more than two percent of the interests of any facility.  
  • There are miscellaneous other restrictions contained in the Senate proposal, including restrictions that mirror certain restrictions contained in the safe harbors to the anti-kickback statute.
  • Like in prior versions, the proposal contains an 18-month period for grandfathered hospitals to come into compliance with certain restrictions.

The ultimate outcome of attempts to ban physician-owned hospitals is impossible to predict.  The Bush Administration is said to be opposed to the Senate's proposed ban, but it is doubtful that the administration would veto a larger spending bill solely to preserve the whole hospital exception.  A veto might be forthcoming, however, because the appropriation bill is becoming cluttered with domestic priorities that the administration opposes.  In the end, some sort of compromise will need to be struck between the House, Senate and the administration on all of the issues presented by the appropriation proposals, and, except for the trade associations with a direct interest in the outcome of the proposals, the fate of physician-owned hospitals is not the first priority of any of the major Washington powers centers.

If you have any questions about the topics in this article, please contact Jay Hardcastle at  615.252.2386 or any other member of the Health Care team.