Physician-Owned Hospitals Still Under Attack

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Certain members of Congress continue to agitate for a ban on physician-owned hospitals, and the usual trade groups are taking predictable positions. The Federation of American Hospitals can be counted on to take an "anti-physician ownership" point of view, and Physicians Hospitals of America (a trade association composed of physician-oriented companies) and the AMA can be expected to take the "pro-physician ownership" point of view. It is hard to keep track of the latest iteration of the proposed ban, but what follows is an update as of now. 

As all players in the hospital business know by now, an attempt to ban physician-owned hospitals failed when the House version of last year's first SCHIP bill did not make it through the joint House-Senate reconciliation process with the anti-physician ownership parts intact. No matter, the President vetoed the resulting legislation anyway. Next stop for anti-physician ownership language: The "Paul Wellstone Mental Health and Addiction Equity Act of 2007." When this legislation stalled, opponents of physician-owned hospitals looked to slip it into, of all places, the farm bill. When relevance questions put a stop to that effort, proponents have turned to the war bill, which is certain to pass in some form or another given the situation in Iraq. If that attempt fails, look for renewed interest in the Wellstone mental health bill by the "anti-physician ownership" crowd.  

If legislation passes, what will it look like? Best guess: the Wellstone version, which borrows heavily from the portions of the ill-fated SCHIP legislation dealing with the "whole hospital exception" to the Stark ban on physician ownership. 

Under the Wellstone language, the "whole hospital" exception under the Stark law would be repealed. It is this exception which allows hospitals to be owned by physicians notwithstanding the general ban on the referral by a physician to a facility in which the physician has an ownership interest. Under the Wellstone language, certain hospitals would be grandfathered. In order to be grandfathered, the hospital must have physician ownership on the date of enactment of the bill into law, and must be enrolled in the Medicare program as of that date.

Grandfathered hospitals will be subject to a host of limitations. However, the bill would not impose its limitations on grandfathered hospitals until eighteen (18) months after the enactment of the bill into law. The most important limitation is that a grandfathered hospital may not, at any time on or after the date of enactment of the bill, increase its number of operating rooms or beds beyond the number in existence as of the enactment date. However, unlike the SCHIP version of the whole hospital exception repeal, the Wellstone bill provides for an expansion process for "applicable hospitals". The bill contains a complicated definition of an applicable hospital, but, in summary, an applicable hospital is one that is a growing hospital located in a growing geographical area. 

After the expiration of the 18-month period, miscellaneous additional operating restrictions will go into effect.  In effect, this 18-month delay will constitute a grace period for grandfathered hospitals, during which existing deals could be restructured to comply with the additional operating restrictions. These restrictions will include:

  • reporting the identity of physician owners and the nature of the extent of their ownership, 
  • procedures for making ownership disclosures to patients,
  • requirements to make certain disclosures about physician ownership on the hospital's website and in any public advertising,
  • a prohibition on physician's owning, in the aggregate, more than forty percent (40%) of the hospital entity,
  • a prohibition on any individual physician owning more than two percent (2%) of the investments interest in the hospital, 
  • making disclosures about the lack of twenty-four (24) hour physician coverage (if such is in fact the case), and 
  • other miscellaneous restrictions.

Passage of the Wellstone bill or any other bill containing a whole hospital exception repeal is not at all certain at this time. A mental health parity bill pending in the Senate has no corresponding whole hospital exception repeal language, and the Senate's version of the actual mental health parity provisions differ materially from the House's. 

Predictions at this point are hopelessly out of date by the time they are made. The best course of action is to make sure you have a viable unwind provision built into the investment documents or to wait and see if you cannot fashion a workable unwind. 

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.

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