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ABA Health eSource
January 2010 Volume 6 Number 5

Health Reform Legislation Promises Significant Limitations On New and Continued Physician Ownership and Investment in Specialty and Other Hospitals

by Michael W. Paddock, Esq., and Matthew T. Fornataro, Esq., Crowell & Moring LLP,
Washington, D.C.

AuthorAuthorI. Introduction

The health reform legislation just passed by the Senate, the Patient Protection and Affordable Care Act (“Senate Bill”), 1 as well as the healthcare bill already passed by the House of Representatives, the Affordable Health Care for America Act (“House Bill”), 2 both propose significant changes to the federal law that prohibits physician “self-referrals,” otherwise known as the Stark Law. 3 That law prohibits a physician from referring Medicare patients for “designated health services” to entities with which the physician (or an immediate family member) has a financial relationship. 4 The Stark Law confers strict liability and provides stiff penalties for violations, including denial of payment, refunds of improper payments, and high civil money penalties -- ranging from $15,000 to $100,000 per violation. 5 Though the Stark Law’s prohibitions are triggered by the presence of countless types of financial relationships between physicians and the entities to which they refer patients, the law does permit referrals and claims if any such financial relationship satisfies either a statutory or regulatory “exception.”

The proposed Senate Bill and House Bill would both amend the Stark Law’s statutory “whole hospital” exception, which currently allows physicians to refer their Medicare patients to hospitals in which they have an ownership or investment interest, so long as certain conditions are met. 6 Currently, the primary condition necessary to satisfy the exception is that the physician’s ownership or investment interest must be in the hospital itself (and not merely in a subdivision of the hospital). 7

Both bills propose to amend the “whole hospital” exception in order to limit significantly the amount of “excepted” physician investment in hospitals by limiting the exception to ownership and investment interests in only hospitals that satisfy numerous new requirements. These proposals, if enacted, would impact virtually all physician ownership and investment in hospitals – specialty and otherwise – and would add another layer of complexity to an already complex law. This article examines the background of the efforts to ban physician ownership in specialty hospitals, the provisions in the pending health reform legislation, the implications for hospitals owned or invested in by referring physicians, and possible new steps that physicians and hospitals would be required to take in order to facilitate compliance with the law.

II. History of Efforts to Ban Physician Ownership in Specialty and Other Hospitals

The first significant effort to prevent physician ownership or investment in specialty hospitals was the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”), 8 which amended the whole hospital exception to include an 18-month moratorium on physician ownership in specialty hospitals. That moratorium lasted from December 8, 2003 through June 7, 2005. 9 The moratorium did not prevent physicians from building specialty hospitals or interfere with hospitals’ Medicare participation; it simply made the “whole hospital” exception unavailable to specialty hospitals for a period of time, thus making it a violation of the Stark Law for a physician to refer a Medicare patient to any specialty hospital in which he or she had an ownership or investment interest and, perhaps more importantly, a violation of the Stark Law for any such hospital to bill Medicare for items and services rendered pursuant to such referrals. The moratorium had a significant chilling effect on the efforts of physicians to invest in and maintain investment interests in specialty hospitals.

Subsequently, the Centers for Medicare and Medicaid Services (“CMS”), as ordered by Congress in the MMA, issued a report that expressed misgivings regarding specialty hospitals. CMS sought reassurance that specialty hospitals meet core requirements necessary for the health and safety of Medicare beneficiaries. Just prior to the moratorium’s planned expiration, Senators Charles Grassley (R-Iowa) and Max Baucus (D-MT) introduced S.B. 1002, The Hospital Fair Competition Act of 2005, which would have extended the moratorium indefinitely. The bill was immediately referred to the Senate Finance Committee; however it did not become law. Despite CMS’ report and this proposed legislation, Congress did not act to extend the moratorium, which expired on June 7, 2005.

Since Congress did not act on the issue, CMS took matters into its own hands and, on June 9, 2005, instructed all State Survey Agency Directors “not to process any new Medicare provider enrollment applications (CMS-855A forms) for specialty hospitals.” 10 Though physicians could resume referring Medicare patients to existing specialty hospitals in which they had an ownership or investment interest, and those hospitals could resume billing Medicare for items and services rendered pursuant to such referrals, CMS had effectively ordered a moratorium on the Medicare enrollment of new specialty hospitals, whether physician-owned or not. Later, through the Deficit Reduction Act of 2005, Congress required CMS to continue the enrollment suspension until CMS developed and provided to Congress a final report regarding physician investment in specialty hospitals. CMS delivered that report to Congress on August 8, 2006, at which time CMS’ enrollment moratorium ended.

III. Proposed Health Reform Legislation Limitations on Physician Ownership in Hospitals

Now that both the referral moratorium and the enrollment moratorium have concluded, (1) physicians can refer Medicare patients to specialty hospitals in which they have ownership or investments interests that satisfy the “whole hospital” exception, (2) those hospitals can bill Medicare for items and services rendered pursuant to such referrals, and (3) newly-established specialty hospitals can enroll in Medicare. Medicare referrals are permitted under the current whole hospital exception, provided that the referring physician is authorized to perform services at the hospital and the physician’s ownership or investment interest is in the “whole” hospital. 11 This current freedom, however, would likely be significantly curtailed if Congress and President Obama enact health reform. The previous efforts to curtail physician ownership and investment in specialty hospitals have been resurrected except, this time, the efforts will affect all hospitals in which physicians have investment or ownership interests – not just specialty hospitals.

The House Bill and Senate Bill provisions that would amend the Stark Law’s whole hospital exception both have an ultimate goal of constructing further barriers to physician investment and ownership in hospitals. Most significantly, in order for physician investment in a hospital to continue to satisfy the whole hospital exception, the bills would require that the hospital have had physician ownership or investment, as well as a provider agreement with Medicare, effective on either January 1, 2009 (House Bill) or August 1, 2010 (Senate Bill). In effect, the bills would establish an indefinite moratorium on physician ownership or investment in hospitals that don’t currently have physician ownership or investment – and physicians could not build and invest in new hospitals.

Additionally, in order to comply with the revised exception, the physicians’ ownership or investment interests would have to be “ bona fide.” Among the numerous requirements for an investment or ownership interest to qualify as “ bona fide,” both bills would require that: “[t]he percentage of the total value of the ownership or investment interests held in the hospital, or in an entity whose assets include the hospital, by physician owners or investors in the aggregate would not exceed such percentage as of the date of enactment.” 12 In other words, the expansion of current physician ownership or investment interests in hospitals would be curtailed. The effect of this provision would mandate that -- for future investment -- physicians could purchase shares only from other selling physicians (lest the aggregate percentage of physician ownership in the hospital increase, which would cause all physicians’ investment interests in the hospital to fail to satisfy the exception and, accordingly, trigger the Stark Law’s prohibition on Medicare referrals and related claims).

Moreover, the physical expansion of any hospital with physician investors or owners -- in terms of operating rooms, procedure rooms, and beds -- would be prohibited after the date of enactment. The hospital could apply to the Department of Health and Human Services (“HHS”) to expand its facilities under a protocol yet to be determined, but (i) such applications could only be made once every two years; (ii) under no circumstances would a hospital be permitted to physically expand by more than 200 percent of its “baseline” facilities ( i.e., the facilities it had on the date of enactment); and (iii) under no circumstances could a physical expansion occur off the main campus of the hospital.

Among other proposed limitations, the bills would also require the hospital to publicize its physicians’ ownership and investment interests on its website and in public advertising, and no hospital converted from an ambulatory surgery center after the date of enactment could satisfy the exception. The hospital would be required not to condition physician ownership or investment on the physician making or influencing referrals, and the hospital would be required to submit an annual report to the Secretary of HHS detailing the identity of its physician owners and investors and the nature and extent of all ownership and investment interests in the hospital.

IV. Implications of the Reform Legislation

The disruptive effect on physician ownership of and investment in hospitals that health reform legislation promises should prove worrisome for both hospitals in which physicians invest, as well as their investing physicians. No new physician-owned hospitals could be built, and further investment in existing physician-owned hospitals could be offered to additional physicians only if some or all of the current physician-investors are willing to sell their interests. In addition to these limitations, physician-owned hospitals would have an especially difficult time competing in states with Certificate of Need (“CON”) laws, since the future expansion of these facilities would be generally prohibited. For example, if there are three hospitals in a growing community, one of which is physician-owned, the two non-physician-owned hospitals would gain a significant competitive advantage in their capacity to win CON approval to expand their facilities and serve that growing need, while the physician-owned hospital would be required either to remain static or risk Stark Law non-compliance.

Furthermore, hospitals and physicians desiring to enter into physician investment or ownership relationships should consider some potential additional steps prior to entering into such agreements. For instance, physicians desiring to acquire an ownership or investment interest in a hospital to which he or she makes referrals should consider obtaining a representation and warranty that other physicians maintained ownership interests in the hospital before either January 1, 2009 or August 1, 2010 (whichever date is enacted), and that the hospital was party to a Medicare provider agreement before that same date. If there was no physician ownership before that date, or if the hospital became party to such an agreement after that date, the physicians could acquire ownership or investment in the hospital but would be prohibited from referring their Medicare patients to the hospital, and the hospital would be prohibited from billing for items and services rendered to such patients. Similarly, an acquiring physician may wish to obtain assurances that the total percentage of physician-ownership would not increase upon his or her acquisition, and had not since January 2, 2009 or August 1, 2010.

V. Conclusion

While the historical efforts underlying the current health reform legislation were aimed principally at specialty hospitals due to the concerns of both Congress and CMS, the new law as currently contemplated would affect all hospitals with physician ownership and investment interests, and prohibit future physician ownership or investment in hospitals that currently do not have such ownership or investment, as well as in hospitals that have yet to be built. As a result, this new effort to stifle physician investment in and ownership of hospitals, which theoretically would help prevent improper patient referrals, would significantly limit the current bounds of the Stark Law’s whole hospital exception, and would certainly negatively affect the growth and competitive ability of hospitals with physician owners or investors. Moreover, physicians and hospitals desiring to enter into physician investment and ownership relationships – or for that matter desiring to ensure the continued legal compliance of their current physician investment and ownership relationships – should consider the proposed legislation and whether additional steps such as negotiating, drafting, and tailoring contracts and organizational documents are necessary or advisable in order to facilitate continued compliance with the Stark Law.
1 H.R. 3590, 111th Cong. (2009).
2 H.R. 3962, 111th Cong. (as passed by House of Representatives, Nov. 7, 2009).
3 42 U.S.C. § 1395nn et seq. The law’s common name derives from Congressperson Pete Stark (D-CA), the House Member who originally introduced the statute and strongly supported it.
4 Id. at § 1395nn(a)(1).
5 Id. at § 1395nn(g)(1)-(6). In addition, violations of the Stark Law may implicate the civil False Claims Act (“FCA”), which, as recently amended, penalizes “reverse false claims” that may arise from “obligations” to repay the government. See 31 U.S.C. 3729(a)(1)(G). As a result, to the extent a Stark Law violation results in an entity’s retention of what would be deemed an “overpayment,” FCA liability could be imposed and could mean treble damages, penalties of up to $11,000 per violation, and assessment of attorneys’ fees and costs.
6 42 U.S.C. §1395nn(d)(3); See also 42 C.F.R. § 411.356(c)(3).
7 Id. The requirement that the ownership interest be in the hospital itself demands that the physician’s interest be in the “whole” hospital, thus giving this exception its name.
8 Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. No. 108-173 (2003).
9 “Specialty hospital” is defined as one that is “primarily or exclusively engaged in the care and treatment of one of the following categories: (i) patients with a cardiac condition; (ii) patients with an orthopedic condition; (iii) patients receiving a surgical procedure; [or] any other specialized category of services that [the Department of Health and Human Services (“HHS”)] designates.” 42 U.S.C. § 1395nn(h)(7).
10 See CMS Letter, “Suspension of Processing New Provider Enrollment Applications (CMS-855A) for Specialty Hospitals (June 9, 2005), http://www.cms.hhs.gov/SurveyCertificationGenInfo/downloads/SCLetter05-35.pdf.
11 42 U.S.C. §1395nn(d)(3). See also 42 C.F.R. §411.356(c)(3).
12 Senate Bill § 6001; House Bill § 1156.

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