House SCHIP Bill Threatens Whole Hospital Exception

On January 14, 2009 the U.S. House of Representatives passed the Children’s Health Insurance Program Reauthorization Act of 2009, H.R. 2.  Section 623 of the bill includes language that would eliminate the Stark “whole hospital” exception for future hospitals and place restrictions on current physician investment in hospitals.  The bill provides that Medicare-enrolled hospitals with physician ownership on January 1, 2009 would be grandfathered into the exception, but must abide by certain operational restrictions.  The bill further provides that the aggregate percentage of ownership held in the hospital by physician owners must never exceed the percentage held as of the date of the bill’s enactment.  However, the bill does provide a short window of opportunity for hospitals that were physician-owned as of January 1 to add additional physician investors, as the aggregate ownership for each hospital would be capped not as of January 1, but as of the enactment date of the bill.

The bill also would require that hospitals:

• submit an annual report to the Secretary of Health and Human Services listing each physician owner and the extent and nature of their investments in the hospital, with such information to be posted on the CMS website;
• maintain procedures requiring referring physicians with an ownership interest to disclose such interests to patients “by a time that permits the patient to make a meaningful decision regarding the receipt of care”;
• disclose to, and obtain a written acknowledgement from, a patient prior to admission if the hospital does not have a physician on site to provide services during all hours which hospital is providing services to the patient;
• not condition any physician ownership in the hospital either directly or indirectly on the physician making or influencing referrals to the hospital or otherwise generating business for the hospital; and
• include a notification of physician investment on any advertisements and on the hospital’s website.

The Secretary would be required, beginning no later than July 1, 2011, to perform audits to determine if hospitals are violating the above requirements.

Prohibition on Expansion

As in past legislative attempts, H.R. 2 contains a general prohibition on expanding the number of beds, operating rooms or procedure rooms in physician-owned hospitals.  However, the bill does contain a narrow exception for capacity expansion.  By June 1, 2010, the Secretary would be required to promulgate rules concerning exemptions from the prohibition on capacity expansion.  Under such rules, an “applicable hospital” could apply to HHS for one exception every two years for an increase in operating rooms, procedure rooms and/or beds.  However, such expansion could only occur on the “main campus” of the hospital, and only if the area in which the hospital is located meets specified growth, Medicaid and bed capacity standards.  Based on these criteria, it appears that few hospitals would be eligible for an expansion exception.

Major Change From Prior Versions

One important change from prior versions of the physician ownership provision is that hospitals that were already owned by physicians will be grandfathered at their current physician ownership percentage levels, and that such ownership levels will establish the maximum physician ownership percentage on a going forward basis.  Prior versions of the physician ownership provision would have limited physicians to owning no more than 40% collectively and no more than 2% individually.  Compared to prior versions of the proposed physician ownership restrictions, this change would make the implementation of the restrictions less onerous for hospitals that are already owned by physicians.

Future Developments

Following its passage by the House, H.R. 2 was sent to the Senate for consideration.  The Senate Finance Committee on January 13 released its Chairman’s Mark of the draft version of the Senate’s SCHIP bill, which was scheduled for committee markup January 15. The Senate Finance Committee version does not contain the House restrictions on physician ownership in hospitals. With differing Senate SCHIP legislation in the wings, it is uncertain how the new Senate and administration will react to the House’s version.  Bradley Arant Boult Cummings LLP will continue to track this developing matter.