Like many provisions of health reform legislation, the restrictions on referrals by physicians to hospitals in which the physician has an ownership interest have created significant conflicts and ambiguities. On July 2, 2010, the Centers for Medicare and Medicaid Services (CMS) proposed implementing new regulations that provide clarity to several of these ambiguities and attempt to reconcile its internal conflicts.
Among the many changes occasioned by the health reform legislation enacted earlier this year are new restrictions on referrals by physicians to hospitals in which the physician has an ownership interest. On July 2, 2010, the Centers for Medicare and Medicaid Services (CMS) proposed implementing regulations that provide clarity to several of the new law's ambiguities and internal conflicts.
Under the Stark Law, a physician is prohibited from making referrals for certain specified services to any entity in which the physician (or an immediate family member of the physician) has a financial relationship (including a direct or indirect ownership or investment interest). Penalties for violating the law are severe, and include steep civil monetary penalties and possible exclusion from the Medicare and Medicaid programs.
Despite this self-referral prohibition, physicians have long been permitted to make referrals to hospitals that they own through exceptions to the law. Prior to enactment of health reform legislation, a physician was allowed to refer Medicare patients to a hospital in which the physician held an ownership or investment interest, so long as the physician was authorized to perform services at the hospital (i.e., as a member of the active medical staff) and the physician's ownership or investment interest was in the entire hospital, as opposed to a distinct part or department of the hospital. This exception was commonly referred to as the "Whole Hospital Exception." A similar exception, commonly referred to as the "Rural Provider Exception," was available for entities located in rural areas that furnish "substantially all" of their designated health services to individuals residing in rural areas. So long as one of these two exceptions was satisfied, a physician's referral to the hospital would not violate the Stark Law. It was under these two exceptions that physicians began developing hospitals in the 1990s, a trend that accelerated over the past decade and drew the attention of lawmakers and those opposed to physician investment in hospitals.
Congress and the CMS responded with a variety of restrictions on physician ownership and referral, including a temporary moratorium on the development of new physician-owned hospitals beginning in 2003 (and ending in 2005), but it was not until the Patient Protection and Affordable Care Act (PPACA) that Congress permanently banned the development of new physician-owned hospitals. Section 6001 of PPACA (as amended by sec. 10601 of the same law, and by section 1106 of the Health Care and Education Reconciliation Act of 2010) amends the Whole Hospital and Rural Provider Exceptions to prohibit physicians with ownership interests in hospitals from self-referring for designated health services to those hospitals, unless the hospital meets certain exceptions. Namely, the new provisions "grandfather" licensed, Medicare-certified hospitals, provide relief for certain hospitals under development as of March 23, 2010 and limit the ability of most physician owned hospitals from expanding their operating room, procedure room and bed capacity.
Like many provisions of the new reform law, Section 6001 features several significant internal conflicts and ambiguities that left many readers unclear as to the scope and effect of the changes. The regulations and accompanying preamble posted by CMS on July 2 attempt to clarify some of those ambiguities, and telegraph the agency's interpretations and intentions with respect to enforcement of the new provisions of the statute.
One of the more vexing ambiguities that CMS is now clarifying arose because the new law provides deadlines for satisfying certain criteria—for example, to qualify for an exception to the prohibition, the hospital must have a provider agreement in effect no later than December 31, 2010—but then generally provides that physician-owned hospitals must meet the requirements of the law not later than 18 months after the date of enactment (that is, by September 23, 2011). CMS is now proposing that compliance with all requirements must occur no later than September 23, 2011, but that failure to satisfy specific, earlier deadlines set forth in the statute will preclude use of the revised exceptions after the earlier deadline has passed. For example, CMS is now stating that, notwithstanding the 18-month effective date, a hospital must have physician ownership or investment on December 31, 2010, and a provider agreement in effect on that date; failure to obtain a provider agreement that is effective on or before December 31, 2010, will preclude use of the revised Rural Provider and Whole Hospital Exceptions on and after January 1, 2011.
Another example is the section of the new law that provides that the percentage of the total value of physician ownership or investment interests held in the hospital, in the aggregate, must not exceed such percentage as of March 23, 2010. Reconciling this with the 18-month effective date also caused some head-scratching. CMS is now taking the position that if a hospital had no physician ownership or investment as of March 23, 2010, and later adds physician owners or investors, the hospital can satisfy neither the Whole Hospital nor the Rural Provider Exceptions, and self-referrals will violate the statute.
To the extent that a provision is not accompanied by its own specific deadline, CMS is proposing that compliance with such provision will be required by September 23, 2011.
CMS also seeks to clarify certain conflicting dates regarding when a hospital had to have physician ownership to qualify for an exception. One criterion provides that the hospital must have had physician ownership or investment on December 31, 2010, while another assumes the existence of physician ownership or investment on March 23, 2010 and provides that the percentage of the total value of physician ownership or investment interests held in the hospital, in the aggregate, on that date must not increase. Reading these provisions together, CMS concludes that a hospital that had no physician ownership or investment as of March 23, 2010, cannot qualify for an exception; if a hospital had physician ownership or investment as of March 23, 2010, it may reduce the number of physician owners or investors, provided that the percentage of the total value of physician ownership or investment interests, in the aggregate, remains the same or decreases.
The new proposed rules prohibit physician-owned hospitals from expanding certain capacities. Under the new law a physician-owned hospital can continue to qualify for an exception only if the number of operating rooms, procedure rooms and beds for which the hospital is licensed at any time on or after March 23, 2010, is no greater than the number of operating rooms, procedure rooms and beds for which the hospital was licensed on that date. CMS has clarified that the limitation on operating room and procedure room expansion applies regardless of whether a state licenses such rooms.
Hospitals with some degree of physician ownership should take note of these proposed changes, evaluate their impact and take steps to respond accordingly. CMS will accept comments on these proposals through August 31, 2010.
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