Hospital Syndications: Opportunities and Options, or Poised for Extinction?
By Leigh Walton, Esq., Bass, Berry & Sims PLC, Nashville, TN

Review by J. Lauren H. Savory, Regent University School of Law, Class of 2010

As a way to raise capital and spread the risk of hospital ownership, both for-profit and not-for-profit hospitals sell a percentage of ownership interest to investors including physicians. The syndication or sale of ownership interests of a non-rural hospital to a third party is limited by both federal and state regulations.

Federal statutes “Stark Law” and the “Anti-Kickback Statute” give regulations for physician investment in hospitals. Parties to syndication must also consider the legal issues including, whether fair market value was exchanged for ownership interests, the intent of the parties to the transaction, and other relationships that exist among the parties.

The Stark Law prohibits physicians from referring a patient to a hospital that is reimbursable by Medicare or Medicaid if the physician has a financial interest and also is prohibited from presenting a claim to the Medicare program after a prohibited referral. Violations result in a variety of sanctions including exclusion from participation in the Medicare program.

There are many exceptions to the Stark Law including an exception for physician ownership of a whole hospital. This exception, with guidance from the Centers for Medicare & Medicaid Services (“CMS”), is limited to the services furnished by a hospital. To refer patents to the hospital the Physician Investor must be authorized to perform services at the hospital, must be an investment in the entire hospital, and must only offer hospital services reimbursed by Medicare.

On August 8, 2006, the ban on physician-owned specialty hospitals was lifted. In January 2008, the OIG reported concerns regarding physician-owned specialty hospitals’ ability to give emergency care, and recent legislation efforts focus on restricting the “whole hospital” exception. Even with all the concern, hospital syndication is still a viable alternative, and the client should be made aware of legislative initiatives to restrict physician ownership of hospitals.

The current whole hospital exception applies to both direct and indirect ownership of a hospital if all the conditions of the exception are met. It is feasible for a group practice to invest in syndication because indirect ownership interest of physicians in the hospital fall under the exception. Changes to the Stark Law regulations in the 2009 inpatient prospective payment system rule (“IPPS Rule”) have resulted in whole hospital syndication popularity, but parties must keep a close eye on federal and state developments aimed at the whole hospital exception.

The Federal Anti-Kickback prohibits physicians from receiving remuneration for referrals to services reimbursed by federal or state healthcare programs. Violations include potential liability under the federal False Claims Act. Safe harbors to the Anti-Kickback Statute are afforded to those that meet all of the conditions, but failure to meet all the requirements does not mean that the statute is necessarily violated. CMS issued an IPPS system in 2009 that reaches the disclosure requirement to include any physician’s immediate family to keep consistent with Stark Law. Parties involved in hospital syndication must remain in compliance with these disclosure requirements.

The above restrictions can be assimilated into a list of practical suggestions for creating viable hospital syndication.

For more information on hospital syndications, see Volume 21, Number 4, April 2009 of The Health Lawyer. [Members Only PDF].

J. Lauren H. Savory is a 2L at Regent University School of Law in Virginia Beach, VA. Lauren will graduate in May 2010. Lauren received a Bachelors of Arts from Marshall University in Huntington, WV, in 2006, where she majored in Political Science. Her heath law interests include healthcare administration, healthcare litigation, and regulatory compliance.