A little slack

Restrictions on physician hospital ownership contained in the healthcare reform law are being implemented by the CMS and, while doctors who wish to invest in new facilities have an uphill battle, those with ownership stakes in existing facilities were given a little room to breathe.

In addition to the main implementation storyline, there are two side dramas in the ongoing saga over physician-owned hospitals. There is a push by Sen. Dianne Feinstein (D-Calif.) to allow a nearly completed $211 million facility in Murrieta, Calif., to go forward as a joint venture between physicians and the Loma Linda (Calif.) University Medical Center when construction finishes next March, and a federal lawsuit is being heard in Tyler, Texas, where plaintiffs seek to have the new restrictions declared unconstitutional.

The implementation road map of the new regulations for these facilities is contained in a 69-page chapter of the 2,452-page 2011 hospital outpatient prospective payment system final rule posted online by the CMS on Nov. 2. It repeats how physician-owned hospitals must have a Medicare provider agreement in place by Dec. 31 and cannot expand beyond the capacity licensed for as of March 23, when the reform bill was approved.

The rule does, however, allow for some flexibility in that “capacity” is capped at the aggregate number of operating rooms, procedure rooms and beds it was licensed for on March 23. So more operating rooms, for example, can be added if the same number of procedure rooms or beds are eliminated.

“That’s not flexibility that was obvious in the statute,” said attorney Michael Lampert, a Boston-based associate in the healthcare group of law firm Ropes & Gray, adding that, if there was one surprise, it was that the CMS could have issued more restrictions but didn’t.

“CMS hasn’t gone beyond the limits that the statute has set forth,” Lampert said. He added, however, that the prohibition on increasing the number of physician-owned hospitals or expanding their capacity “is essentially implemented,” and “the real losers are the hospitals that were in development and had deals under way in 2010.”

The final implementation piece, Lampert said, will come in 2012 when the CMS is required to develop a waiver process allowing an existing facility to expand under certain circumstances. “They’ll have to demonstrate that they’re in an area that is underserved in some manner,” Lampert said.

The new rule could have been more restrictive if the CMS had applied a broader definition of “procedure room,” but Lampert said the term strictly applies to places where catheterizations, angiographies, angiograms and endoscopies are performed, so facilities may increase the number of rooms where nonoperative procedures are done. “CMS had not gone an iota past the (standard) definition of procedure room—although it could have done so,” he said.

The rule also allows for relocation to a new facility as long as the new facility has fewer or the same aggregate number of operating rooms, procedure rooms and beds than the old facility had on March 23.

Physician are also free to sell their ownership stakes, though the percentage of physician ownership in a hospital or “in an entity whose assets include the hospital” is not allowed to go higher than it was on March 23.

There is a provision that may upset a standard business agreement between physician investors. Often, physicians will be required to sell their ownership stake if they retire or move and no longer practice in the community where the hospital is located. According to the rule, hospitals are prohibited “from conditioning any physician ownership or investment interest either directly or indirectly on the physician’s ability to make or influence referrals to the hospital.”

Since the rule followed basic expectations, it didn’t generate a strong reaction from the American Hospital Association.

Of course, it could all be moot point if the reform law is declared unconstitutional as a result of the lawsuit brought by the Physician Hospitals of American advocacy organization and the Texas Spine & Joint Hospital, Tyler, Texas, whose $27 million expansion was stopped when the Patient Protection and Affordable Care Act was signed into law.

The trial is tentatively set to start Dec. 9, though it could be over before it begins if U.S. District Judge Michael Schneider agrees with the Justice Department’s motion for a judgment on whether the suit should even be brought to trial.

According to Molly Sandvig, executive director of the PHA, there are at least 269 Medicare-certified, physician-owned hospitals, and there are about 15 that have opened and applied for certification plus five more that plan to open before Dec. 31.

Then there’s Loma Linda University Medical Center-Murietta, which plans to open next March as a joint venture between Loma Linda and a group of physicians who would have 45% ownership in the facility. Feinstein has been pushing to let the hospital, which began construction in 2008, open under the current ownership structure.

Sandvig said that although physician-owned hospitals have bipartisan congressional support, they are often portrayed as having mostly Republican sponsors. She said that is a product of most physician-owned hospitals being located in states with GOP representation. But she added that Feinstein has been very helpful and supporting of the Loma Linda project and others in California.

—with Jessica Zigmond