December 01, 2017

Lifting the Ban on Physician-Owned Hospitals: Problems, Alternatives, Solutions

Jess Bailey and Anton Stewart, Bailey Law Firm, PLLC The Woodlands, TX

Earlier this year, the Centers for Medicare & Medicaid Services (CMS) invited comments on the role of physician-owned hospitals (POHs) in the American healthcare system.1 Some have cautiously interpreted this solicitation as a hint at a potential removal or at least a relaxation of the effective ban on the participation of new POHs in Medicare as well as of the prohibition on the expansion of existing Medicare-participating POHs.2 Others view the comment request as an invitation to join a national conversation on POHs.3 CMS has not yet issued a ruling or other response to this invitation to comment; however, with more than 250 POHs on the line,4 any changes to the current rules on hospital ownership are going to have long-ranging and lasting consequences. 

What started in the mid-20th century as a mere move towards group practices5 is now a robust part of the hospital industry.  No matter the outcome, opening a dialogue will hopefully generate some objective analytical data that will be conductive to CMS’ efforts to decrease costs and increase patient satisfaction in the Medicare program. What remains unclear are the implications that any changes could have.6 This article will discuss the challenges of changing the status quo regarding POHs as well as potential solutions and outcomes.

The Stark Law: Beginnings and Expansion

The driving force behind the ban on hospital ownership by physicians was the Stark Law.7 Originally a narrow prohibition against referrals to certain types of laboratory service providers, the Stark Law was amended and interpreted to cover a broad range of financial and business arrangements between physicians (or their immediate family members) and entities in which they have a financial interest.8 Prior to the passage of the Patient Protection and Affordable Care Act (PPACA) in 2010, new and existing POHs could take advantage of the “whole hospital” exception to the Stark Law’s prohibition on self-referrals.9 The exception allowed physicians to refer patients to hospitals in which they had a financial or investment interest, so long as such interest was in the whole hospital.10

Section 6001 of PPACA froze the creation and banned the expansion of POH facilities participating in the Medicare program beyond certain limits by limiting the applicability of the whole hospital exception solely to the POHs existing as of December 31, 2010.11 The reason for such a drastic measure was that some physicians were organizing entities and designating them as hospitals merely to use the whole hospital exception without a genuine intent to operate as a real hospital. Those facilities lacked adequate emergency care, were in effect “cherry-picking” low-risk patients, and concentrated on high-cost services.12 In order to overcome those issues and to promote further transparency of physician-hospital relationships, Congress elected an outright ban on participation of new POHs in the Medicare program and a freeze on capacity expansion of the existing ones.13

 There have been a few arguments, mostly between interest groups, as to whether the ban achieved any of its desired goals or whether it made patient care and access to quality medical facilities harder.14 The supporters of the ban, usually represented by community hospital groups, argue that lifting the ban would unfairly benefit the POHs, with physicians referring healthier, high-income or insured patients to POHs in which they hold a financial interest and sending poor and uninsured patients to the community hospitals. Opponents counter that POHs benefit the communities by paying taxes that subsidize healthcare for the poor and the uninsured. No matter which of the two sides is right, or whether there is some middle ground, considering the high percentage of revenue that Medicare reimbursements generate on an average hospital’s books15 the ban as is effectively prevents physicians’ financial participation in the business of providing medical services through hospitals in which they hold an investment or financial interest.

Avenues for Softening or Repealing the Ban

Since the prohibition on physician ownership was enacted as a PPACA amendment to the Stark Law,16 it is only natural that the Stark Law should be the prime suspect for a potential conflict with any prospective CMS regulation or other change to POHs.

The Stark Law contains an explicit prohibition on the designation of new POHs as recipients of Medicare funds.17 Given that the prohibition is statutory, it is outside of CMS’s discretion to grant permits to any post-PPACA POH. Any such grant would violate the statutory proscription and would certainly be struck down by the courts.18 Congressional action would be required to remove the prohibition in its entirety or to lift it substantially.

Congressional Action: Unclear Path to Softening or Repealing the Ban

If Congress does elect to act, commentators differ as to how it might proceed with relaxing the ban. No bill has of yet been introduced to do so. In the past, legislators have consistently coupled increased restrictions on POHs with tightening the requirements for patient disclosures related to financial interests owned by referring physicians. It is possible that Congress would use this approach19 and couple any relaxation of the POH ban with increasing the disclosure and transparency requirements.20 More stringent disclosure rules, however, often have consequences that are contrary to legislators’ intent.21 Many patients, even after learning of a physician’s financial involvement with the entity the patients were referred to still choose to use that entity’s services.22 Despite the fact that their trust in a physician’s judgment may be eroded by the suspicions of self-dealing, the patients are nevertheless inclined to go with their physician’s advice and use the physician’s PHO.23 While an argument may be made that a disclosure could improve a patient-doctor relationship because the patient, aware of the physician’s financial interest, will trust a more upfront physician, that appears not to be the case.24  Increased disclosure requirements would also increase a POH’s administrative burdens.

Some suggest instead that Congress should authorize CMS to introduce predetermined fixed fee schedules for the majority of treatments that POHs offer to patients.25 The commentators’ reasoning stems from the presumption that fixed fees would offer a greater degree of transparency than the current system does without burdening patients with additional forms and unnecessary information.26

While the authors of this article would not discard the idea of fixed fees in and of itself, it is not a panacea for the shortcomings of the current reimbursement system. First, while the temptation to turn patient referrals into a source of lucrative additional income may be reduced if predetermined fixed fees are set by CMS, a per-treatment fee schedule will require additional expenditures and investments on the part of the POHs. Namely, it will call for the creation of additional code lists for the POHs on top of the current already-complex Medicare coding system. Additional codes would arguably require additional personnel and other resources. Further, the more complex compliance requirements become, the harder it is to comply and the more likely it is that litigation would result at some point in the future.

Second, while a fixed fee schedule may provide patients with some additional clarity and may deter physicians from cherry picking which patients they refer to their POHs, it does not necessarily inform patients of the ultimate fee they may be charged for.  Even the best doctors often cannot tell how many procedures or treatments a certain condition may require. For instance, two patients with the same autoimmune disease in the same stage may respond to the same treatment differently. One may go into remission after a single flat fee procedure, and the other may need five of them. The final bill of the less lucky patient will end up being five times higher than the bill of the other patient. 

An outright repeal of the ban by Congress also seems unlikely at present, even though such a bill to do so has been introduced in both Houses of Congress.27 The Patient Access to Higher Quality Health Care Act of 201728 was introduced simultaneously by GOP Senator Lankford of Oklahoma and GOP Rep. Johnson of Texas.29 This two-section Act calls for the  outright repeal of Section 6001 of PPACA, without providing for any additional or supplemental requirements that POHs would have to abide by.30 Republicans en masse support an outright repeal of Section 6001 in its entirety, while Democrats are largely opposed to any attempts to touch any single portion of PPACA.31 Taking into account that the sponsors of the Act did not offer or suggest any compromise or alternative to the repeal of the ban,  it seems improbable that the Act will move out either of the House Ways and Means and Energy and Commerce Committees, where it has been since February, or the Senate Finance Committee, where the bill has been since May.32 It seems unlikely that the bills’ sponsors will gather enough support to have the Act passed.

Absent a bipartisan congressional will for either the relaxation or the repeal and/or replacement of the current law, the range of options is limited to the-now available means at CMS’ disposal.

Administrative Means to Change or Lift the Ban

CMS may currently take several steps to alleviate the burden of the ban on its own. For instance, it has the power to grant expansion permits to the existing POHs every two years, subject to certain caps and restrictions.33 CMS, in its sole discretion, may allow a 100 percent expansion to each now-existing POH that was grandfathered by PPACA.34 While limited by provisions of the Stark Law itself, the rulemaking authority of the agency and its discretion in granting expansion permits is nevertheless broad, and CMS has been using it relatively liberally.35 That alone could remove a few obstacles for the development of the POH system, as it will at the bare minimum enhance the competition between POHs and community hospitals, particularly if CMS were to exercise this power further.

Second, CMS can relax the stringency of the filing and compliance requirements under the Stark Law regarding POHs, which also would be a way to relax the governmental grip on POHs.  For example, CMS could remove the requirement for additional Web and advertising disclosures by POHs, which requires a POH to state in plain language on its website and its commercials that it is owned by physicians.36

Finally, CMS has broad discretion to greenlight certain financial arrangements that “do not pose a risk of [Medicare] or patient abuse.”37  CMS is yet to exercise that discretion and to define which financial arrangements do not pose a risk of abuse.38 Permitting at least several straightforward and transparent management- or consultancy-based arrangements may allow non-POHs to operate in the same way as the POHs do, without defeating the purposes of the ban. One of these arrangements could allow a physician-owned entity to enter into a comprehensive bona fide management agreement with a hospital owned by a third party that would permit physicians to exercise control over the hospital for a share of profit.

Conclusion

There are several avenues for removing the burden that Section 6001 of PPACA imposed on the POHs. With Congressional action not expected in the foreseeable future, it may be left entirely to CMS’ discretion to deal with the ban. The invitation to comment on POHs is a good indication that CMS is interested in at least some outside input on the matter. Given the polarized nature of the debate, CMS may have to come up with its own compromise solution that would be satisfactory, at least in part, to both the proponents and the opponents of physician hospital ownership. With so many variables as to the prospective POH ruling and the absence of public information, any prediction as to outcome of CMS’ scrutiny would be at best speculative. 

  1.  See Medicare Program; Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and the Long-Term Care Hospital Prospective Payment System and Proposed Policy Changes and Fiscal Year 2018 Rates; etc., 82 Fed. Reg. 19796-01 (Apr. 28, 2017).  To date CMS has not made the comments on POHs public.
  2.  Virgil Dickson, Lifting restrictions on physician-owned hospitals could be key to widening access to care, Modern Healthcare (June 27, 2017), http://www.modernhealthcare.com/article/20170627/NEWS/170629899.
  3.  CMS Requests “National Conversation” About Improving Medicare, Fox Rothschild LLP (Apr. 18, 2017), https://physicianlaw.foxrothschild.com/2017/04/articles/medicare/cms-requests-national-conversation-about-improving-medicare/.
  4.  Daniel M. Blumenthal et al., Access, Quality, and Costs of Care at Physician Owned Hospitals in the United States: Observational Study, BMJ (Sep. 2, 2015), https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4558297/.
  5.  Joshua E. Perry, A Mortal Wound for Physician-Owned Specialty Hospitals? The Legal and Ethical Prognosis for Market-Driven, Entrepreneurial Medicine in the Wake of 2010 Health Care Insurance Reforms 1, 27 (2010), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1607029.
  6.  See, generally, Kenya S. Woodruff and Neil Issar, Reigniting the Debate About Restrictions on Physician-Owned Hospitals, Haynes & Boone (Sep. 6, 2017), http://www.haynesboone.com/publications/reigniting-the-debate-about-restrictions-on-physician-owned-hospitals.
  7.  42 U.S.C. § 1395nn (2012), see, e.g., Knapp Med. Ctr. V. Burwell, 192 F.Supp.3d 129, 131 (D.D.C. 2016).
  8.  Patrick A. Sutton, The Stark Law in Retrospect, 20 Annals Health L. 15, 15-16 (2011).
  9.  Joseph E. Nelson and Jonathan D. Nowlin, A "Whole" New World: Hospital-Physician Alignment After the Affordable Care Act, 9 J. Health & Life Sci. L. 32, 36 (2015).
  10.  42 C.F.R. § 411.356(c)(3)(iii) (2016).
  11.  42 U.S.C. § 1395nn(i)(1)(A)(ii).
  12.  H.R. Rep. 111-443, pt. 1, at 355-6 (2010).
  13.  Id., see also 42 U.S.C. § 1395nn.
  14.  See Nelson and Nowlin, supra n.9, at 35-36; compare R. Blake Curd, Physician-Owned Hospitals: Competition that Drives Quality, The Hill (Feb. 16, 2017, 11:40AM), http://thehill.com/blogs/congress-blog/healthcare/319865-physician-owned-hospitals-competition-that-drives-quality, with Physician Self-Referral to Physician-Owned Hospitals, American Hospital Association, http://www.aha.org/content/15/fs-physicianowned.pdf.
  15.  Melissa C. Schade van Westrum, Physician Owned Hospitals: Congress Should Change the ACA’s Course of Treatment, 12 Ind. Health L. Rev. 811, 813 (2015).
  16.  42 U.S.C. § 1395nn.
  17.  42 U.S.C. § 1395nn(a).
  18.  See Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-843 (1984).
  19.  Every reform of the Medicare reimbursement system by Congress was coupled with the imposition of more stringent patient disclosure requirements on physicians when referring patients to entities in which physicians have a financial or an investment interest. Compare Physician Financial Relationships with, and Referrals to, Health Care Entities That Furnish Clinical Laboratory Services and Financial Relationship Reporting Requirements, 60 Fed. Reg. 41914-01 (1995) (requiring referring physicians to simply disclose to patients the existence of an interest in an entity the patient is being referred to), with Schade van Westrum, supra n. 15, at 824-5 (summarizing current disclosure requirements for the POHs, which now include compulsory disclosure of the financial interest, advising the patient of alternative, non-physician-owned facilities, disclosure of the risk that may be associated with the referral, etc.).
  20.  See Nancy L. Zisk, Investing in Health Care: What Happens When Physicians Invest and Why the Recent Changes in the Patient Protection and Affordable Care Act Fail to Protect Patients from Their Physicians' Self-Interest, 36 Seattle U. L. Rev. 189, 200-1 (2012).
  21.  See generally Daylian M. Cain et al, The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts of Interest, 34 J. Legal Stud. 1 (2005); Sunita Sah et al., The Burden of Disclosure: Increased Compliance with Distrusted Advice, 104 J. Personality & Soc. Pchychol. 289 (2013), for a discussion of downsides of more stringent disclosure requirements.
  22.  Zisk, supra n. 20, at 203-4.
  23.  Sah et al, supra n. 21, at 290.
  24.  See Jo-Ellyn Sakowitz Klein, The Stark Laws: Conquering Physician Conflicts of Interest?, 87 Geo. L.J. 499, 527 (1998) (suggesting that patients’ lack of awareness as to the necessity of the procedures they are being referred for makes disclosure of a financial interest a source of distrust); Nicholas J. Diamond, Giving Disclosure Its Due: A Proposal for Reforming the Stark Law, 16 DePaul J. Health Care L. 1, 13 (2014) (arguing that the patients lose trust in physician’s decisions after the disclosure, due to lack of medical knowledge in an average patient and the inappropriateness of patient disclosure in the emergency settings).
  25.  Zisk, supra n. 20, at 208.
  26.  Sutton, supra n. 8, at 48.
  27.  See, e.g., American Health Care Act of 2017, H.R. 1628, 115th Congress (2017).
  28.  Patient Access to Higher Quality Health Care Act of 2017, H.R. 1156, 115th Congress (2017).
  29.  American Health Care Act of 2017, H.R. 1628, S.1133, 115th Congress (2017), https://www.congress.gov/bill/115th-congress/senate-bill/1133/cosponsors.
  30.  Id.
  31.  163 Cong. Rec. S3294-04 (Jun. 6, 2017) (Patient Access to Higher Quality Health Care Act co-sponsors).
  32.  Id.
  33.  42 U.S.C. § 1395nn(i)(3).
  34.  42 U.S.C. § 1395nn(i)(3)(C)(ii).
  35.  See, for example, Approval of Expansion Application of The Women’s Hospital, 81 Fed. Reg. 75088 (Oct. 28, 2016), Approval of Expansion Application of Texas Health Presbyterian Hospital, 81 Fed. Reg. 75090 (Oct. 28, 2016), Approval of Extension of Doctors Hospital at Renaissance, 80 Fed. Reg. 55851 (Sep. 17, 2015), etc. for the most recent approvals of expansion applications allowed under PPACA.
  36.  42 C.F.R. § 411.362(b)(3)(ii)(C) (2017).
  37.  42 U.S.C. § 1395nn(b)(4).
  38.  See 42 C.F.R. § 411.355 (2011).

Jess Bailey

Bailey Law Firm, PLLC

Jess Bailey is the Managing Attorney of Bailey Law Firm PLLC in The Woodlands, Texas. Her practice is focused on health law, real estate, oil and gas, and business transactions. Jess is the recipient of the Pinnacle Award from the Houston Intercontinental Chamber of Commerce. She can be reached at jess@bailey-law-firm.com or (832) 510-2900.

Anton Stewart

Bailey Law Firm PLLC

Anton Stewart is an Associate Attorney of Bailey Law Firm PLLC. His areas of practice are oil and gas, healthcare compliance (HIPAA, Stark Law, Anti-Kickback Statute), real estate, and corporate law. He can be reached at anton@bailey-law-firm.com or (832) 510-2900.