Developers of a growing number of physician-owned specialty hospitals said a recent government legal warning won't put a damper on their projects.
Among them are two not-for-profit systems, St. Louis-based SSM Health Care and Edward Health Services in Naperville, Ill., which said they are proceeding with specialty hospital joint ventures with physicians in their markets.
The announcements by the systems come in the wake of an advisory bulletin from HHS' inspector general's office that muddied the issue of physician ownership in specialty hospitals (July 12, p. 12).
While it's not law, the July 8 bulletin has sent many healthcare executives scrambling to consult with legal counsel.
The bulletin throws into question a growing strategy to link physicians to hospital revenue streams, and it could affect the ability to obtain financing for such projects, some healthcare lawyers said.
Edward announced plans July 13 to build a 71-bed heart hospital on its campus in suburban Chicago. The $80 million hospital is a joint venture between Edward and local cardiac physicians and surgeons. Investment in the hospital also will be open to physicians who practice there.
"We absolutely are going to do our projects within the law," said Pam Meyer Davis, Edward's president and chief executive officer. Edward Health Services is the parent of 155-bed Edward Hospital.
SSM, a 21-hospital Roman Catholic healthcare system, announced its plans for a women's hospital July 19.
The 55-bed hospital is a joint venture between SSM; Women's Health Physicians, a 71-physician independent practice association; and Women's Health Partners, a Nashville-based company that develops specialty hospitals.
Dixie Platt, an SSM spokeswoman, said the system's lawyers are reviewing the inspector general's advisory bulletin.
"An informal advisory is not grounds for suspending this cutting-edge hospital, which will provide comprehensive women's services," said Platt, reading from a prepared statement.
The bulletin said arrangements that reward physicians for reducing hospital costs, known as gain-sharing, violate the civil monetary penalty section of the Social Security Act, which bars the practice of paying doctors to reduce services to Medicare or Medicaid patients. Two paragraphs near the end of the bulletin say "clinical joint ventures" involving physicians may also violate the act. Such ventures include freestanding specialty hospitals and arrangements in which a service that generates high revenues is "restructured and legally incorporated as a separate hospital," the bulletin states.
HHS spokeswoman Alwyn Cassil said there's been "more read into the language" than was intended. However, she could not comment last week on whether the office would issue a clarification.
Cassil said some hospital-physician joint ventures "can look very much (like) and have the same kind of impact as gain-sharing arrangements. I think we chose that language to raise just a little bit of a yellow caution flag."
Cassil said a potential violation might be a specialty hospital that has only physician investors on its staff and tracks costs routinely, keeping physicians apprised of how specific reductions in care would affect their profits.
Congress carved out a specific exemption for physician investment in "whole hospitals" under the Stark law against physician self-referrals. For that reason, healthcare lawyers say clarification is needed.
Lawyer Carrie Valiant, a partner with Epstein Becker & Green in Washington, said government regulators need to be more specific about what they don't like in these deals.
"To me, it is inconceivable that Congress would have created a specific, explicit exception for a particular kind of arrangement . . . that they thought might violate some other areas," Valiant said. "I doubt that Congress is interested in baiting people into violating the law."
The advisory bulletin goes to the core strategy of at least two specialty companies: MedCath and Women's Health Partners, which is working with SSM on its women's hospital.
In interviews last week, officials at both companies said they believe their projects comply with existing law and they have no plans to change or delay projects as a result of the bulletin.
"A lot of people are jumping up and (saying), 'What does this mean?' Nobody knows other than to say, go with the law," said Jerry Brown, senior vice president of operations at Women's Health Partners.
MedCath, based in Charlotte, N.C., operates five heart hospitals and is scheduled to open four more within a year or so; three include not-for-profit hospital partners.
Women's Health Partners plans to open its first hospital, a 20-bed facility on the campus of Baptist Hospital in Nashville, in October. The company has three more hospitals in development, including the SSM project (Nov. 16, p. 2).
Women's Health Partners will have a minority share in the SSM venture, said Stephanie McCutcheon, SSM's president and CEO. It also will have a management contract at the new hospital.
The new $45 million women's hospital, which will include a medical office building and diagnostic center, is scheduled to open on Mother's Day 2001.
Once the hospital is open, SSM will relocate delivery services from two of its hospitals to the new facility, McCutcheon said.
Richard Muckerman, M.D., chairman of Women's Health Physicians, said other independent physicians will be allowed to invest in the hospital, but doctors need not invest to be able to practice there. The new hospital will be in Chesterfield, Mo., a suburb of St. Louis.
The heart hospital Edward Health Services has proposed building is unique because, unlike the SSM venture, Edward won't have an outside management partner.
The heart hospital, which still needs certificate-of-need approval, is expected to be completed in 2002.
Once it's open, Edward plans to move its existing cardiovascular services into the new for-profit hospital. This will help free up bed space at Edward Hospital, Davis said.
Edward, a not-for-profit, will have a slight majority interest in the new facility, Davis said.
Davis said she didn't know yet if Edward would seek an advisory opinion on its proposed deal from HHS' inspector general or a private-letter ruling from the Internal Revenue Service.
Mount Carmel Health System in Columbus, Ohio, announced plans this month to open a 50-bed general acute-care hospital near Lancaster, Ohio, in a joint venture with local physicians. It's not concerned with the bulletin, it said, because the bulletin did not mention general acute-care hospitals.