Quashing Ownership: Health Reform Law Bans New Physician-Owned Hospitals

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Medical Economics Feature – August 2010

Tex Med. 2010;106(8):29-33.

By  Ken Ortolon
Senior Editor

With nearly 70 Texas hospitals with some type of physician investment, the state is a national leader in the physician-owned hospital industry. And, members of that industry say it has been good for patients.

"We know that physician investment in hospitals is a model that develops high quality," said Beaumont orthopedic surgeon David Teuscher, MD, one of the owners of Beaumont Bone & Joint Institute. "It's a model that has yielded high patient satisfaction. In fact, a majority of the top-rated hospitals in the state last year had some element of physician ownership."

But the health system reform law [PDF] Congress passed earlier this year slams the door on new physician-owned hospitals by prohibiting them from obtaining a Medicare provider number.

Dr. Teuscher and others say that's bad news for patients - particularly Medicare and Medicaid enrollees - who stand a chance of losing access to some of the state's best hospitals. But it also could be bad news for physicians in Texas and elsewhere who have new physician-owned hospitals on the drawing board. If they can't get those facilities into operation by the end of this year, they will have to cancel the projects or forego their ownership stake.

Yet, some physicians say the reform law is not that clear, especially its limitations on expanding existing physician-owned hospitals.

"Fundamentally, there's a great deal of uncertainty still as to the application of the law," said Houston urologist John Bertini, MD, chair of the Board of Directors of the physician-owned St. Joseph Medical Center in Houston.

Cutting Off Competition

Advocates of physician-owned hospitals say the push to ban such hospitals largely came from the for-profit hospital industry, which sees physician-owned facilities as major competitors.

"The American Hospital Association [AHA] and the Federation of American Hospitals [FAH] have spent huge sums of money on lobbying over the past decade to kill physician ownership," said Bobby Hillert, executive director of the Texas Physician Hospital Advocacy Center (TPHAC).

Since 2003, several efforts have been mounted in Congress to ban or limit physician ownership. All were unsuccessful until this year's health system reform debate.

The new law, the Patient Protection and Affordable Care Act, grandfathers all existing physician-owned hospitals that were operating on March 23, the day President Barack Obama signed the new law. It also allows physician-owned hospitals under development to proceed, but only if they can obtain their Medicare provider numbers by Dec. 31. After that date, physician investment in new hospitals is banned -- at least for those hoping to serve patients enrolled in any health care programs administered by the U.S. Centers for Medicare & Medicaid Services (CMS), such as Medicare and Medicaid. And, after the end of the year, grandfathered facilities are banned from ever adding beds and operating or procedure rooms or from ever increasing the percentage of physician ownership.

"In general, we strongly support the provision in the health reform law that bans self-referrals to new physician-owned hospitals because that practice drives up health costs by increasing utilization," said Elizabeth Lietz, an AHA spokesperson.

But TPHAC officials say AHA and FAH are more concerned about stifling competition than cost. They point to a 2005 Department of Health and Human Services study that found physician-owned hospitals have lower complication and mortality rates, as well as higher nurse-to-patient ratios, than do general hospitals.

They also point to CMS patient satisfaction ratings that show 85.1 percent of patients gave physician-owned hospitals a rating of nine or 10 on a scale of 10, compared with a national hospital mean of only 64 percent.

Taking a Debt Position

Mr. Hillert says the ownership ban caught a handful of Texas hospitals being developed. It is unknown whether some of them can meet the end-of-the-year deadline, but at least one already has altered its ownership structure.

Lakeway Regional Medical Center, a 104-bed general hospital under construction outside of Austin, was going to be 80-percent physician owned, with the remaining 20 percent owned by Surgical Development Partners, a Tennessee-based hospital management company, and other private investors. But it will not open until 2012.

Cardiologist Samuel DeMaio, MD, chair of the Lakeway hospital's Board of Directors, says the law has forced physicians out of the ownership picture. Now, the physician investors are taking a "debt position" rather than an "equity position" in the hospital, he says. They will be lenders to the facility, rather than investors.

While the hospital no longer will be physician owned, it will be physician run, Dr. DeMaio says.

"It wasn't that big of a hurdle because the doctors are more interested in being able to practice medicine the way they want to and not have to be beholden to big corporations," he said. "They wanted to be able to have some control over their life and how they take care of their patients, so it wasn't a real hard sell on the doctors."

But TMA officials say converting from physician investment in the hospital to a debt position also may be prohibited. Under federal law, physicians cannot refer patients to entities with which they have a financial arrangement, says Lee Spangler, JD, TMA vice president for medical economics.

"Loans secured in an entity's property or revenue is an ownership interest that creates a financial relationship," Mr. Spangler said. "Just having a debt position is not enough. It is also possible that the debt could be considered a compensation arrangement that will meet the definition of financial relationship."

Mr. Hillert says at least one new physician-owned hospital,  Methodist Hospital for Special Surgery in Addison,  may beat the Dec. 31 deadline.

"I understand they're working around the clock," he said. "And there are some rehabilitation hospitals that are trying to get up, too."

In addition, Mr. Hillert says, a few physician-owned hospitals in Texas already are expanding their number of patient beds or operating room capacity, including Texas Presbyterian Hospital in Flower Mound and Houston Physicians Hospital in Webster. Those facilities may have to cancel those expansions if they cannot complete them by Dec. 31, he says.

While some hospitals were scrambling to get up and running by the end of the year, at least one prominent health care attorney says a drafting error in the bill may actually have cut off any new physician-owned hospitals as of March 23, the day President Obama signed the bill.

Jed Morrison, JD, a San Antonio-based partner in the law firm Jackson Walker, says the law prohibits a physician-owned hospital from increasing the number of patient beds, operating rooms, and procedure rooms it is licensed for after March 23. That means any hospital not already licensed by that date may not be grandfathered.

Finding a Loophole

Dr. Bertini says the ban on expansion of existing physician-owned hospitals is not an immediate concern to St. Joseph, the largest physician-owned hospital in the nation. He says St. Joseph, a general acute care medical center with 792 beds, has excess capacity by virtue of having more licensed beds than it can currently fill.

"We have capacity allowances for growth that will certainly position us for the foreseeable future, so I'm not particularly concerned where that's the case," he said.

Even facilities with excess capacity, such as St. Joseph, are challenged by the new law's lack of clarity. In addition to licensed beds, the law prohibits physician-owned hospitals from expanding beyond their current number of licensed operating and procedure rooms. Dr. Bertini says this limitation is problematic because while Texas hospitals are licensed for a certain bed capacity, operating and procedure rooms are not subject to the same rules.

"We are continuing to get advice as to how this portion of the legislation applies to St. Joseph, given the Texas licensure laws," Dr. Bertini stated.

And, Dr. Bertini says the law is so unclear that there almost certainly will have to be follow-up legislation to make technical corrections. For example, some provisions of the law have as many as three contradictory effective dates, he says.

"It was written, pasted together, and in the thousands of pages, there are bound to be many sections that need to be addressed in follow-up legislation," he said.

Hurting Patients

Even if those restrictions do apply, it may not stop some physician-owned hospitals from expanding, even if it means the loss of their Medicare and Medicaid patients.

"If your business model in a growing community finds that six operating rooms are not enough and you need 10 ORs in the next five or 10 years, what are you going to do?" asked Dr. Teuscher. "Are you going to turn away that business or are you going to expand and be forced by the federal government to turn away patients with government coverage?"

If hospitals opt for the latter, unfortunately, it's the patients who will lose, Dr. Teuscher says.

"It is going to impact future patients who are on Medicare, Medicaid, and TRICARE because it's going to make it illegal for them to go to these facilities if the facilities ever happen to expand by even one nursing or treatment bed or one operating room. It is a constitutional issue that disenfranchises folks whom the government promised to cover from being able to utilize these modern health care facilities that continue to consistently get very high quality and patient satisfaction ratings."

Notice: This information is provided as a commentary on legal issues and is not intended to provide advice on any specific legal matter. You should not rely on this information when dealing with personal legal matters; rather, legal advice from retained legal counsel should be sought.

Ken Ortolon can be reached by telephone at (800) 880-1300, ext. 1392, or (512) 370-1392; by fax at (512) 370-1629; or by e-mail at  Ken Ortolon.


Tyler Hospital Joins Suit Challenging Ownership Ban

A physician-owned hospital in Tyler is among the plaintiffs in a lawsuit filed in early June challenging the new health insurance reform law's limits on doctor-owned hospitals.

Texas Spine and Joint Hospital in Tyler joined Physician Hospitals of America, a lobby group for physician-owned hospitals, in the lawsuit against the federal government. The industry group and the hospital are challenging the constitutionality of a provision in the law that bans the formation of new physician-owned hospitals and prohibits existing ones from expanding.

The Tyler hospital is also seeking an injunction that would allow it to go ahead with plans to expand.

Supporters of the physician-ownership limits say Medicare spending rises when doctors refer patients to hospitals where they have an ownership interest. Hospital trade groups also contend that physician-owned facilities siphon off insured patients.

But advocates of physician ownership counter that those hospitals consistently rank high in both quality and patient satisfaction.

The new lawsuit is just one of several that have been filed against the health system reform law. Twenty states, including Texas, and the National Federation of Independent Business have sued to overturn the law's requirement that individuals get health insurance or pay a fine.

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January 27, 2016