By: Dave Davidson
The debate over the pro’s and con’s of physician-owned hospitals has been raging for decades. Physician-owners say their hospitals are more patient-focused, provide higher quality care, obtain better outcomes and therefore receive higher patient satisfaction scores. They also point out their convenience and efficiency.
Opponents argue that physician-ownership leads to overutilization and cherry-picking of only the best patients. The less-desirable patients (both clinically and financially) are then left to be taken care of by the community hospitals. For those reasons, both the American Hospital Association and the Federation of American Hospitals remain strongly opposed to physician-owned hospitals.
Federally, the Stark Law includes an exception which allows a physician to refer patients to a hospital in which the physician has an ownership interest, so long as the ownership interest is in the entire hospital, and not just a subdivision of the hospital. However, in 2010, the federal government weighed in again on the issue, and passed the Affordable Care Act (ACA), which includes provisions which (i) restrict physician referrals to hospitals in which they hold an ownership interest; (ii) restrict any increases in physician-ownership of a hospital; and (iii) restrict expansion of physician-owned hospital facilities. CMS has granted exceptions to these restrictions, but those have been limited to rural hospitals and high Medicaid hospitals, and attempts to amend the law have failed.
One solution to these federal restrictions is for a physician-owned hospital to not accept Medicare of other federal reimbursement. While that seems like a simple solution, it has become clear that all hospitals need Medicare to survive. For example, nine physician-owned hospitals were opened in Texas following passage of the ACA. None of them accepted Medicare; and all of them were either sold or in bankruptcy within six years.
Physician-owned hospitals can remain a viable alternative for patients. However, aside from BI and PI based claims, when Medicare is an essential payor, extreme care must be taken in order to comply with the Stark Law, the ACA, and state regulations, while serving to disprove the negative perceptions raised by opponents to the structure.
Physicians jumping in here will need help:
Organizing and structuring themselves and their colleagues. While an LLC is the dominant model, one size does not fit all. Even more, figuring out the control issues is no walk in the park. And then considering issues like “one third” testing requirements is something that is likely to generate a lot of debate. Eject clauses will also be an important consideration in building a solid corporate structure as a means of avoiding destabilization that often accompanies contributing vs. non contributing owners.
Picking the right development/management company. There’s a growing pool of consultants and companies that have expertise in the space. Physicians will have to dig into and negotiate core issues like (1) the line between clinical control and business control, (2) development and management fees, and (3) termination/augmentation rights. And since most development/management firms “come with” financing lined up, navigating those options requires a lot of experience. Physicians with the right management and physician mix will likely be bolder with issues like financial investment (to lock in more favorable financial terms) and have leverage on personal guarantees.
Anticipating payer pushback. Where the business model entails a significant amount of out of network payer involvement, physicians (and the management company!) will need someone who’s been there, done that in terms of some shocking but well documented payer strategies to avoid paying and to seek recoupment on monies paid. properly drawn policies, procedures and compliance plans designed to document clinical considerations (instead of financial ones) leading treatment will go a long way to making it difficult for payers to make inroads here.