Fight and flight

Some are waiting, some are fighting, some are getting out while they are still getting good offers for their investments, and others are getting creative.

Those are the industry reactions to the Patient Protection and Affordable Care Act's Section 6001—the portion of the massive law that essentially stopped the development of any new physician-owned hospitals (though physician owners are defiantly going forward with one in Frisco, Texas) and restricted the growth of physician-owned hospitals that were already in operation when the law was passed.

Whether the section will survive legal and legislative challenges is unclear. Whether it's worth waiting to see how these challenges are resolved is another question—but some physician investors refuse to go down without a fight.

A federal judge's decision is pending on a lawsuit over Section 6001 filed in Tyler, Texas, and two bills seeking to specifically repeal Section 6001 were introduced last month in Congress. Despite the uncertainty associated with the law's future, many physician investors are seeking to get out of the hospital ownership game. Several have sold all or part of their hospital interest to healthcare systems in recent months.

Dr. Michael Russell, president of the Physician Hospitals of America trade association and a partner in Texas Spine and Joint Hospital in Tyler, says the reform law “put a damper” on an industry sector that had been accomplishing the goals of reform: lowering costs and improving quality. “It's been very damaging,” he says.

Steve Burriss, senior vice president of operations and ambulatory care for Rex Healthcare in Raleigh, N.C., predicts physicians will continue to divest themselves of their hospital ownership stakes. “I don't think that trend is going to reverse itself,” he says.

According to an August 2006 Medicare Payment Advisory Commission report, there were only 46 physician-owned specialty hospitals in 2002, and that included 27 orthopedic hospitals, 12 heart hospitals and seven surgical hospitals. The bulk of these were in Kansas, Oklahoma, South Dakota or Texas— states that do not require new healthcare facilities be granted a certificate of need.

That report found that the number of physician-owned specialty hospitals had increased 85.4% to 89 by 2004 with the roster including 53 orthopedic, 25 cardiac and 11 surgical facilities. (Specialty hospitals with fewer than 25 Medicare cases were not counted.) Facilities were deemed “specialty hospitals” if at least 45% of discharges were in one area of specialization or if 66% were in two areas. But not all facilities are so specialized.

According to the PHA, there are now 277 physician-owned hospitals, though its breakdown varies significantly from MedPAC's. According to the PHA, there are 151 multi-specialty surgical physician-owned hospitals, 68 classified as general acute care, 23 orthopedic, 15 heart, 12 rehabilitation, five long-term acute-care, and one women's, one children's and one psychiatric hospital.

But, with so many deals in the works, these numbers could be significantly different soon. “In general, it's a fear issue,” Russell says of the doctors who are selling their investments. “Fear of the unknown is very unsettling and physicians aren't used to that. They're looking for safety.” Russell and his partners with Texas Spine and Joint, however, are not looking to sell.

“We've chosen to stay and fight because we believe it's right,” he says, adding that it's not a path he would recommend for everyone. Russell says that, with many of the deals, physicians are not selling out completely, but are looking to sell just enough to allow for future expansion under the reform law's terms and give some long-term protection to their investment.

Tyler Spine & Joint joined with PHA to sue HHS Secretary Kathleen Sebelius to throw out Section 6001. The hospital was in the middle of a $35 million expansion when the reform law passed and outlawed the expansion of existing physician-owned hospitals. Russell argues that this is a retroactive taking of private property.

The case was set to go to trial Dec. 9. But after listening to arguments on the government's motions to dismiss and for summary judgment, U.S. District Judge Michael Schneider in Tyler ruled on Nov. 24 that a trial was unnecessary and promised to make a decision shortly.

Others, however, have decided not to wait.

One of the more prominent cases is California's new Loma Linda University Medical Center-Murrieta. The $230 million, 106-bed facility was scheduled to open last month. According to spokeswoman Kathryn Stiles, the facility is ready to go and is waiting to be issued its state license. Stiles says a plan to buy out physicians who had a 45% ownership stake is in its final stage of negotiations. “We regret that we couldn't retain our physician investors,” she says.

She says it was built into the original agreement that, if state or federal legislation rendered their partnership invalid, the physicians would be bought out. “It's that pathway they're following,” Stiles says, explaining that the parties involved did not feel that waiting for resolution of the reform law's challenges would be beneficial. “There has been a climate change toward the healthcare reform law, but it could take years to be settled,” she says. “I think the group here felt the need to get the hospital opened as soon as possible.”

In contrast, at the 32-bed Methodist Hospital for Surgery in the Dallas suburb of Addison, local architects BOKA Powell and construction crews raced last fall to finish ahead of the reform laws deadlines, secured a Medicare provider number and opened Nov. 1. The hospital now operates as a joint venture between area physicians, the Methodist Health System, and Nueterra Healthcare, a Leawood, Kan.-based healthcare management company.

But in Frisco, another Dallas suburb, construction has just started on another BOKA Powell project. A groundbreaking ceremony was held in February for the future 50-bed Forest Park Medical Center at Frisco, a new $83 million physician-owned facility that will survive mostly off private insurance because, under provisions of the ACA, it won't be allowed to bill Medicare or Medicaid except in limited circumstances such as emergency care.

Other physician owners are deciding against that business model.

In one deal that closed last year, Prime Healthcare Services, Ontario, Calif., acquired 121-bed Alvarado Hospital in San Diego from Plymouth Health, a physician-owned company based in Sherman Oaks, Calif. Terms were not disclosed and the two physician brothers who owned Plymouth Health, Drs. Pedram and Pejman Salimpour, were not available for comment. Tenet Healthcare Corp. sold the hospital in January 2007 as part of a deal to settle criminal charges related to physician-relocation deals, and Tenet received pre-tax proceeds of $22.5 million from the sale. Meanwhile, several other deals are pending.

In February, it was announced that a letter of intent was signed signaling that Catholic Health Initiatives was looking to purchase the 52-bed Nebraska Heart Hospital in Lincoln as well as its practice group, the 29-physician Nebraska Heart Institute.

A letter of intent was signed in December 2010 for a 524-bed HCA-owned facility in Wichita, Kan., the Wesley Medical Center, to acquire the 82-bed Galichia Heart Hospital, also in Wichita. Back in December, Galichia Heart CEO Stephen Harris said that his institution is roughly 80% physician-owned and that talks on selling began with Wesley soon after the reform law passed in March 2010.

Alisa Crawford, Galichia Heart vice president of human resources, business development and marketing, says the deal is only a few weeks away from closing and there has been no discussion about waiting to see if physician-ownership restrictions are lifted.

“We're going to move forward. I don't think there's any indication at all that we'd wait,” Crawford says. “We're hoping to get to an agreement pretty quickly and close on it because we think it's a positive partnership with HCA.”

It's not only the physician investors who own hospitals who are dealing, but those with a financial interest in ambulatory surgery centers as well. Surgical Care Affiliates, a Birmingham, Ala.-based for-profit developer and operator of ambulatory surgery centers and surgical hospitals, has been busy crafting some creative deals involving physician investors.

In January it announced a deal where it would operate the Greensboro (N.C.) Specialty Surgery Center under joint ownership with SCA, physician investors, the 1,012-bed Moses Cone Health System in Greensboro; Carolina Neurosurgery & Spine Associates, Charlotte, N.C.; and Vanguard Brain and Spine, Greensboro.

Last month, SCA announced deals that included an agreement with the six-hospital not-for-profit St. Barnabas Health Care System, Orange, N.J., to “work together to acquire ownership interests in physician-owned ambulatory surgery center in Northern and Central North Jersey,” and entered into a formal partnership with WakeMed Health & Hospitals, Raleigh, N.C., and 41 physician investors for joint ownership of the Blue Ridge Surgery Center in Raleigh. As part of the arrangement, SCA will also manage surgical services for the 192-bed WakeMed Cary Hospital and the day surgery program at the WakeMed North Healthplex in Raleigh.

Andrew Hayek, president and CEO of SCA, says that rather than bringing in new doctors to invest, the deals involve bringing corporate partners to work at established locations.

“Physicians continue as investors,” he says. “What we're seeing is more interest on behalf of physicians to bring in a management company and a not-for-profit health system.”

Hayek says SCA manages 130 surgery centers with 20 not-for-profit system partners. “Their interest is high,” he says of the growing not-for-profit involvement with surgery centers.

ASCs do appear to be becoming attractive joint venture vehicles between physician investors and hospitals.

As part of 323-bed Swedish Covenant Hospital's $55 million expansion of its Chicago campus, an eight-story medical office building is being built that will house the Swedish Covenant Surgical Center—a joint venture between the hospital, a group of 23 physicians and Regent Surgical Health. Based in suburban Westchester, Ill., Regent Surgical has 22 surgery centers in operation—11 of which are joint ventures with hospitals and doctors.

Last month, a group of 25 surgeons closed on a $3.34 million deal for a 22% stake of the Rex Surgery Center of Cary (N.C.), a facility owned by Rex Healthcare, a subsidiary of the Chapel Hill, N.C.-based UNC Health Care System.

Burriss says Rex Healthcare had not been actively seeking to partner with physician investors, but it set up the legal and operational infrastructure in advance in the event doctors sought them out—which he said is what happened in Cary. “We wanted it ‘on the shelf,' so to speak, just in case we were approached by physician investors,” he says.

Burriss notes that, besides a new orthopedic surgery center planned for Raleigh, no other deals are in the works. And he adds that these moves are not meant to counter anything being done by UNC's regional archrival, WakeMed.

“WakeMed's involvement doesn't really change the fact that the (Blue Ridge) surgery center was already here,” Burriss says.

Russell, however, thinks these arrangements with hospitals will “be fairly rare,” and he questions the legality of some arrangements in light of how the reform law restricts the percentage of physician hospital ownership to go no higher than it was a year ago when the law was passed. “If you're at 0%, you can't go higher than that,” he says.

Hayek and Burriss disagree. “The surgery center is held in a different entity,” Burriss says. “The asset itself is not held by the hospital.”

Hayek says surgery centers provide a safe harbor for physician investors, noting that the moratorium on physician-owned surgical hospitals is not applicable to physician-owned surgical centers. He adds that, while there are roughly 5,200 ambulatory surgery centers and about the same amount of acute-care hospitals in the U.S., physician-owned hospitals make up only a small fraction of that total.

“The overlap between physician investors in surgery centers and physician investors in hospitals is actually relatively small,” he says.

And, while this dealing is going on, two bills have been introduced to repeal restrictions on physician ownership. Rep. Sam Johnson (R-Texas) introduced a bill that would repeal Section 6001 as well as Section 10601, which limits Medicare exception to the prohibition on self-referral. Another bill, introduced by Rep. Doc Hastings (R-Wash.) covers the same territory but would also repeal Section 6002, which requires physicians to report ownership and investment interests. While saying the PHA supports both bills, Russell clarifies that his organization is “100% behind transparency and disclosure.”

The Federation of American Hospitals and the American Hospital Association declined to comment for this article, but the AHA previously issued a statement by AHA Executive Vice President Richard Pollack urging Congress to keep the ban on self-referral to physician-owned hospitals in place. “Repealing it would drive up healthcare costs and will make it hard for full-service hospitals to provide essential public services,” Pollack says.

The bills were blasted by U.S. Drug Watchdog, a division of the consumer advocacy group America's Watchdog, “as a really, really bad idea.” It criticizes the repeal of transparency requirements in Hastings' bill in particular, but spokesman M. Thomas Martin says “the paramount issue is overutilization.”

“This is just not going to fly,” Martin says. “We're going to bury this thing.”

A news release issued by Johnson, however, says physician-owned hospitals drive innovation because “doctors can bypass bureaucracy and eliminate red tape often created by administrative red tape and corporate bottom lines.”

He unveiled his legislation at the Baylor Frisco Medical Center, a facility north of Dallas and where physicians share ownership with Baylor University.

Russell singled out Baylor for praise, but adds that “most hospital systems in Texas have embraced physician ownership” and he calls such arrangements the “ultimate” accountable care organization.