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Congress proposes legislation targeting physician-owned specialty hospitals
H.R. 2642 would amend the whole-hospital exception included in the present Stark Law.
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Recently proposed legislation suggests that Congress is moving closer to limiting physician-owned specialty hospitals.
Specialty hospitals primarily or exclusively engage in the care and treatment of patients: with a cardiac or orthopedic condition, who are receiving a surgical procedure; or who are receiving any other specialized category of services designated by the secretary of the Department of Health and Human Services (HHS).
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Critics argue that specialty hospitals cherry-pick the most profitable patients and procedures, leaving community hospitals with the financial burden of treating the poorest and sickest patients for less profitable services.
Critics also suggest that physician-owned specialty hospitals are more likely to receive referrals from their physician-owners, further eroding the ability of community hospitals to sustain their operations and to provide quality care.
Although the federal Stark Law would otherwise prohibit a physician from referring patients to a hospital in which the physician has a financial interest, these arrangements are permitted when they satisfy the criteria for the “whole-hospital” exception to the Stark Law.
Proponents argue that specialty hospitals furnish high-quality, focused care and operate more efficiently than community hospitals. However, based on their actions over the past several years, Congress and the Centers for Medicare & Medicaid Services (CMS) have yet to fully embrace this view.
The history
In the Medicare Prescription Drug Improvement and Modernization Act of 2003 (MMA), Congress required that HHS conduct a study on specialty hospitals, focusing on referral patterns, quality of care and the impact of specialty hospitals on the provision of uncompensated care. The MMA also imposed a moratorium, which ran from December 8, 2003 through June 7, 2005, on the Stark Law’s whole-hospital exception, in effect prohibiting specialty hospitals — except those exempted under a grandfathering provision — from submitting claims for certain designated health services furnished as a result of a physician-owner referral.
Although the moratorium expired on June 7, 2005, CMS immediately announced that it would begin a review of its procedures to enroll specialty hospitals into the Medicare program and evaluate whether they held an unfair advantage over other providers. Also, for a 6-month period, CMS directed its regional offices not to issue new provider agreements to specialty hospitals.
In February 2006, through the Deficit Reduction Act, Congress extended CMS’s suspension on specialty hospital enrollment in Medicare until August 8, 2006, when CMS’ submission of its final report on a Strategic Plan Regarding Physician Investment in Specialty Hospitals allowed the suspension on enrollment to lapse.
Although the moratorium on physician-investor referrals and suspension on specialty hospital enrollments into Medicare have lapsed, specialty hospitals continue to remain a focus area for CMS and Congress.
Proposed modifications
On May 22, 2008, the Senate proposed legislation that would permanently modify the whole-hospital exception. In its current form, the legislation would impose new requirements on existing specialty hospitals and chill the creation of new specialty hospitals after September 1.
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Effective November 1, 2009, the proposed modification would limit the whole-hospital exception to hospitals that had physician ownership and a Medicare provider agreement in effect as of September 1, 2008. Although the modification would also limit physician owners to no more than 40% of the total value of the investment interests held in the hospital, a grandfathering clause would allow physician owners who held a higher percentage on the date the legislation is enacted to maintain their shares.
The legislation would also impose requirements on specialty hospitals to prevent conflicts of interest. For example, a specialty hospital would have to submit an annual report to HHS containing the identities of its owners and the nature and extent of all ownership interests in the hospital. Notably, the HHS secretary would be required to publish the information submitted in these reports on the CMS Web site. Hospitals would also have to implement procedures requiring referring physician-owners to disclose their interest in the hospital to referred patients. Further, the legislation would require the hospital to disclose the fact that it is partially owned by physicians on its public Web site and in any public advertising.
A hospital’s ability to expand its capacity would also be limited under the proposed legislation. With certain exceptions, hospitals would have to apply to the HHS secretary for approval, pursuant to a process that the secretary must implement by November 1, 2009.
The legislation, however, limits eligible hospitals to those that satisfy thresholds related to population growth: Medicaid admissions, average bed capacity and average bed occupancy. Further, even if the hospital received approval for expansion, the hospital’s expansion is limited — for its entire lifetime — to 200% of the capacity it had on the date of the proposed law’s enactment.
Physicians in the process of developing specialty hospitals should consult with legal counsel to assess the risks and benefits of the proposed legislation. Although this legislation, should it become law, will have a chilling effect on the creation of specialty hospitals, its affect is somewhat limited.
A silver lining?
Because the proposed legislation affects only physician-owned specialty hospital arrangements subject to the Stark Law, and because the Stark Law is limited to claims submitted to the Medicare program, the proposed legislation does not affect specialty hospitals that do not bill the Medicare program.
Although Medicare business is almost a de facto requirement for most hospitals, recent studies by the Medicare Payment Advisory Commission, an independent Congressional agency that advises Congress on issues affecting the Medicare program, indicate that orthopedic and surgical hospitals treated primarily privately insured patients. As a result, the impact of the proposed legislation may be limited for physician-owned orthopedic specialty hospitals.
For more information:
- Anthony H. Choe, JD, MPH, can be reached at Arent Fox LLP, 1050 Connecticut Ave. NW, Washington, D.C. 20036; 202-775-5751; e-mail: choe.anthony@arentfox.com.