Texas test

Physician-owned hospital advocates posed a philosophical argument in Texas last week when they filed a lawsuit against HHS, claiming a section of the new health reform law is unconstitutional.

In U.S. District Court in Tyler, Texas, 20-bed Texas Spine & Joint Hospital in Tyler, along with trade group Physician Hospitals of America, filed a motion for declaratory and injunctive relief from a section of the Patient Protection and Affordable Care Act that the plaintiffs argue singles out U.S. physician-owned hospitals from all other facilities in their ability to expand.

As they contend, the law violates due process because it “retroactively, illegitimately and irrationally burdens plaintiffs' private property,” according to the motion filed on June 3. In addition, the plaintiffs argue the law violates equal protection because it “irrationally targets for its anti-competitive burden” hospitals that are owned by physicians.

The centerpiece of these arguments lies in Section 6001 of the health reform law, which prohibits any physician-owned hospital from becoming Medicare-certified after this year, limits the increase in the percentage of physician ownership and attempts to limit expansion of those physician-owned hospitals that are certified.

“We opened in 2002 to better serve our patients,” said Michael Russell, an orthopedic surgeon at Texas Spine & Joint Hospital who is also president-elect of Physician Hospitals of America. “We've certainly seen that has happened. We've seen the fruition of our efforts,” he added. “We can't extend that to more patients.”

Two years ago, Texas Spine & Joint Hospital spent $2.1 million to buy land to expand its facility, which was built after converting an abandoned Montgomery Ward store in 2002. According to Russell, the 37 physician investors—who wholly own the facility—planned to increase the hospital's bed count to 40 from 20, with expectations of adding 10 more in the future as well as expanding the hospital's number of operating rooms to six from three.

All told, the physicians expected to invest $37 million in the expansion that was to add 50,000 square feet to the existing hospital (Texas Spine & Joint also has an outpatient facility within five miles of the main hospital). As the court filing showed, the hospital terminated commercial leases for those existing structures on the acquired property that would be razed during development. The leases totaled more than $500,000 a year in rent, and the hospital is now responsible for those properties on its books.

“We chose Texas Spine & Joint primarily because it well represents the issues around the country,” in that the hospital has spent money and tried to expand but is unable to, said Molly Sandvig, a lawyer who serves as executive director for Sioux Falls, S.D.-based PHA. Sandvig said the group is waiting for the court's response—which she said is expected this month—to determine if the law's restrictions can be placed on hold.

For years, physician owners have made the case that physician-owned hospitals provide quality care for patients. And they also assert that these facilities contribute to a community's local economy. According to PHA, about 265 physician-owned hospitals in 34 states employ more than 75,000 full- and part-time employees and have an average payroll of $13 million per hospital, with $3.4 billion in cumulative annual payroll nationwide.

But they have long been at odds with opponents such as the American Hospital Association, which has claimed in the past that physician-owned facilities choose or “cherry-pick” more lucrative procedures from their community hospital counterparts. An AHA representative was not available for an interview to discuss the Texas lawsuit, but the organization provided a written statement on the day the motions were filed.

“As we said when the law was passed, we strongly support the health reform law provision that bans self-referral to new physician-owned hospitals, a practice that drives up health costs by increasing utilization,” the AHA statement said. “These facilities undermine the ability of full-service hospitals to continue to provide essential services as the community's healthcare safety net.”

Roger Strode is a lawyer who represents physician-owned hospital clients as a partner at the law firm McDermott Will and Emery in Chicago. As he explained, the plaintiffs have a tough task ahead of them.

“Preliminary injunctions are difficult to get because there has to be no question of fact,” Strode said. In this case, it's a big bet. This is a preliminary injunction by a specific hospital in Texas. The PHA has joined as a party there, but I don't know about the applicability to one injunction respective to all of the hospitals,” he added. “Even if this injunction is granted, do other hospitals feel free to expand as though the law were never granted? If there is a preliminary injunction issued, there has to be a trial on the permanent injunction. If the plaintiffs were to lose at the permanent injunction and others expand—the problem is the law is still in place.”

Strode said he expects it to be “business as usual” for the segment in the near future. At the same time, Strode said physician-owned facilities are considering different business strategies after passage of the new law, including turning to public ownership to take advantage of an exception to expand, or venturing jointly with other investors or local community hospitals.

As these hospitals weigh the alternatives, the PHA said more lawsuits such as the one in Texas could come.

“We do want to see how this goes, and we're in discussions with other hospitals, so it's definitely a possibility,” Sandvig said, adding, “I'm not going to count out a class action.”