Morris Manning & Martin, LLP

New Restrictions on Physician-Owned Hospitals

04.01.2010

The Patient Protection and Affordable Care Act (P.L. 111-148) as amended by the Health Care and Education Reconciliation Act of 2010 (together, the “Healthcare Reform Act”) accomplished what the previous unsuccessful legislative attempts could not attain; namely, significantly limiting the expansion of all physician owned hospitals. Under the Stark II Statute and accompanying regulations physicians were previously permitted to have an ownership or investment interest in a hospital provided that the ownership interest is in the “whole hospital”; the physician was authorized to provide services at the facility; and the hospital was not a specialty hospital during the moratorium period set forth by the Centers for Medicare and Medicaid Services (“CMS”).1 The Healthcare Reform Act modified this exception and added additional requirements for the hospital to satisfy. Specifically, the hospital must have physicians as owners or investors prior to December 31, 2010 and the hospital must have a provider agreement with CMS by December 31, 2010. In addition, the physician’s ownership must satisfy the “bona fide ownership” requirements. The hospital’s total aggregate ownership held by physician owners or investors cannot change subsequent to March 23, 2010 . The bona fide ownership interest limitations appear to conflict with the statement that the hospital must have physician ownership by December 31, 2010 when the aggregate ownership in the hospital is capped as early as March 23, 2010. Accordingly, if a hospital is 85% owned by physicians, the physicians’ aggregate ownership must not exceed 85% subsequent to March 23, 2010.

Not only does the Healthcare Reform Act place restrictions on ownership investment interest, but it also limits the expansion of facilities owned by physicians. Specifically, the number of operating rooms, procedure rooms and beds for which a hospital is licensed at any time on or after March 23, 2010 cannot increase unless the hospital satisfies the federal statutory exception to permit expansion. If the hospital does not have a Medicare Provider Agreement on March 23, 2010, then the effective date of the Provider Agreement would establish the date of the determination of the physician-owned hospital’s licensed capacity, provided that the Provider Agreement is obtained prior to December 31, 2010. These deadlines are critical to physician-owned hospitals that have approved Certificate of Needs, but have not completed the construction and obtained a license. These hospitals are technically limited in expanding, based upon the current statute, to the licensed bed capacity as of March 23, 2010, unless the hospital has not signed its Medicare Conditions of Participation Agreement in which case the date of signing, as long as it is before December 31, 2010 will be the date to determine the hospital’s licensed capacity.

In order for physician-owned hospitals to expand, the hospital must satisfy narrow requirements as an “applicable hospital” defined by the Healthcare Reform Act, as described below:

1. Hospital is located in a County in which the percentage increase in the population during the most recent five (5) year period (as the application date) is at least 150% of the percentage increase in the population growth of the State in which the hospital is located during that period, as estimated by Bureau of the Census;

2. Hospital’s annual report of total in-patient admission that represent the in-patient admissions under Medicaid is equal to or greater to than the average percent with respect to such admission for all hospitals located in the County in which the hospital is located;

3. Hospital does not discriminate against beneficiaries of federal or state healthcare programs and does not permit physicians practicing at the hospital to discriminate against such beneficiaries;

4. Hospital is located in a State in which the average bed capacity is less than the national average; and

5. Hospital has an average bed capacity rate that is greater than the average bed capacity rate in the State in which the hospital is located.

If a physician-owned hospital cannot satisfy the requirements above, then in the alternative if the facility is a high Medicaid facility, the facility may seek expansion. A high Medicaid facility must satisfy the following conditions:

1. Hospital is not the sole hospital in the Community;

2. Hospital, with respect to each of the three most recent years in which data is available has an annual percent of total in-patient admissions that represent in-patient admissions under Medicaid that is estimated to be greater than the percent with respect to such admission for any other hospital located in the County in which the hospital is located; and

3. Hospital must not discriminate and must require that its physicians do not discriminate against federal healthcare beneficiaries.

The narrow exception to permit hospitals that are either deemed high Medicaid facilities or that satisfy “applicable hospital” exceptions serves as a Federal Certificate of Need. In other words, the physician-owned hospitals cannot expand unless an exception to the expansion prohibition is satisfied. Please note, this Federal restriction on expansion is in addition to any State Certificate of Need laws. Thus, physician-owned hospitals will be required to seek permission from the Federal government to expand its beds, procedure or operating rooms, and at the same time satisfy the State law restrictions and complete the State Certificate of Need process.

In summary, after multiple failed legislative attempts to limit physician ownership of hospitals, the Healthcare Reform Act established a steadfast and sweeping prohibition that will limit not only physician ownership, but deters investment due to the limitations on physician-owned hospital capacity. Notwithstanding the broad prohibition, there is some inconsistency within the physician ownership regulations. Basically, subsequent to December 31, 2010, hospitals must have physician ownership to satisfy the Stark II whole hospital exception, but to establish a bona fide investment, the aggregate physician ownership percentage is set on March 23, 2010. Moreover, the hospitals licensed bed, procedure and operating room capacity is limited as March 23, 2010, if the hospital has a Medicare Participation Agreement. Otherwise, the limitation on licensed capacity will vary for each physician-owned hospital, depending upon the date of signing the Medicare Participation Agreement, but no later than December 31, 2010. Once the licensed capacity is set, unless the hospital satisfies the applicable hospital requirements described above or the hospital is deemed a high Medicaid facility the hospital will not be permitted to expand, limiting the access to expanded services and limiting the physician’s investment potential.

1 42 U.S.C. Section 1395nn.

Michele P. Madison is a partner in the firm’s Healthcare and Healthcare Information Technology Practices, where she provides general legal advice to health systems in various regulatory and business matters. Ms. Madison received her bachelor’s degree from Georgia State University and her law degree from the University of Georgia.