Whitney Palmer

Physician-Owned Hospitals Get an Overhaul

Published in the October 2010 AAMC Reporter

—By Whitney L. J. Howell, special to the Reporter

Physician-owned hospitals, also known as specialty or limited-service hospitals, are about to undergo serious changes.

The health care reform law created in March bans any new building expansions for existing specialty hospitals, freezes the level of physician ownership allowed in each hospital, and essentially pushes them toward accepting more Medicare and Medicaid patients by establishing a Dec. 31 deadline by which physician-owned hospitals must secure Medicare provider numbers.

No strangers to controversy, physician-owned hospitals typically focus on nonemergency services, such as orthopedic or cardiac care, that are low-risk and fairly lucrative. They are often owned solely or in part by the doctors who work there, with physicians “self-referring” patients to the facilities they own.

Many health care organizations have opposed the practices of these hospitals, accusing the facilities of “cherry-picking” patients and pushing away uninsured or complex cases. Health care analysts also worry they foster the overutilization of certain procedures or treatments. Responding to opposition from the AAMC and other groups, such as the American Hospital Association and the Federation of American Hospitals, Congress in 2003 imposed an 18-month moratorium on doctor self-referrals to physician-owned specialty hospitals.

“We’re trying to develop better health care models,and this levels the playing field,” said Leonard Marquez, AAMC’s director of government relations. “Once you do that, providers will be more likely to collaborate and seek new ways to align their services and expertise.”

Before the reform law, physician-owned hospitals werea growth market. According to Physician Hospitals of America (PHA), a trade and advocacy group, the numberof physician-owned facilities increased by 140 percent from 2001 to 2010, with 265 facilities in existence today (including those under construction) versus 110 in 2001.

“I think other hospitals watched physicians steer patients to facilities where they have a lucrative interest,” said Jeffrey G. Micklos, J.D., the Federation of American Hospitals’ executive vice president of management, compliance, and general counsel. “In these cases, patients with more comorbidities or those who have more difficult-to-treat chronic conditions are sent to the teaching andcommunity hospitals.”

In addition to limiting hospital growth, the health reformlaw requires that doctors tied to physician-owned hospitals be

Indiana Orthopaedic Hospital will be one of the most affected physician-owned hospitals when its expansion is completed in late October. New legislation that puts new restrictions and guidelines in place for specialty hospitals puts the new building's use in question.

bona fide investors, meaning any profit they glean must directly result from services they personally render. Craig A. Conway, a health law specialist with the Health Law and Policy Institute at the University of Houston Law Center, said the new law will not necessarily spell the end of specialty hospitals—or an automatic revenue boost forother hospitals.

“This is definitely a significant hit to physician-owned hospitals, and they will suffer in the long term, but a lot more needs to be done to flesh out how the provisions will actually work before we know what the future holds,”Conway said. “Whether things get better for teaching hospitals or stay at the status quo doesn’t just depend on this reform. You have to look at Medicare reimbursement and the impending physician shortage, too.”

Conway said urban areas will feel the most impact because physician-owned hospitals tend to congregate in more highly populated areas. Some teaching hospitals have been affected by the presence of physician-owned facilities. Officials at Harris County Hospital District in Houston said they anticipate serving 30,000 additional uninsured patients next year, and potentially 375,000 annually by 2015, as a result of a nearby specialty hospital declining to treat those cases.

The physician-owned hospital effect does tend to vary, however. Leni Kirkman, executive director of corporate communications and marketing for University Health System in San Antonio, said nearby physician-owned hospitals have not adversely affected the university’s bottom line.

“We do have a few small physician-owned specialty hospitals in San Antonio, but they have not grown to be major players in the market,” Kirkman said. “I would not expect [their impact] to be significant. Our market share has remained fairly constant over the past decade.”

Physician-owned hospitals have their supporters, and some plan to fight the health care reform provisions. PHA and Texas Spine and Joint Hospital filed a lawsuit in the U.S. Federal Court in the Eastern District of Texas, questioning the law’s constitutionality and asking that hospitals with ongoing construction projects be allowed to finish.

Curtailing physician-owned hospitals and preventing doctors from having an ownership stake in a hospital will not improve the quality of health care overall, said PHA Executive Director Molly Sandvig.

“This is a lose-lose situation for everyone,” Sandvig said. “We want patients to have choices for better services. This law restricts those options and affects patients in a hugely negative way.”

Some physician-owned hospitals and their patients already feel the effects of the legislation, particularly those with new buildings under construction. As of June, Indiana Orthopaedic Hospital (IOH), a 42-bed, physician-owned hospital, was 70 percent finished with a $27 million expansion that initially included three new operating rooms. When the building is finished in late October, John Dietz, M.D., IOH chairman and an orthopedic surgeon, said he does not know how the hospital will use the new space. IOH’s expansion could become an extremely small hospital or, if it cannot secure a Medicare provider number by the deadline, the hospital could opt to reject future Medicare and Medicaid patients. Neither option is palatable, he said.

“We don’t want to become what we don’t believe in,” Dietz said. “This law is forcing us to think about trying things we don’t want to be. We don’t want to step back from any of our patients, including those with Medicare and Medicaid. This legislation is making it difficult to do the right thing.”

October 10, 2010 - Posted by wjpalmer | Healthcare, Politics