What's Next For Physician-Owned Hospitals?

From Law360, 03.03.2009

Law360, New York (March 03, 2009) -- In most situations, a physician, having invested in a hospital, is only permitted under federal law to refer Medicare patients to that facility because of a certain statutory exception to physician self-referral prohibitions. But if the past is prologue, the continuing availability of this exception, hence the viability of business models involving physician investment in “single-specialty hospitals,” is far from assured.

The federal physician self-referral statute,[1] commonly known as “Stark Law,” prohibits physicians from referring Medicare patients to facilities in which they have ownership or investment interests for the provision of “designated health services” absent compliance with a Stark exception. Because the definition of designated health services under Stark Law includes inpatient and outpatient hospital services, physicians would generally be precluded from referring Medicare patients to hospitals in which they have invested if not for the Stark “whole hospital” exception.

Generally speaking, the whole-hospital exception permits a physician who has invested in a hospital to refer patients to it so long as the investment interest is in the hospital itself, and not a subdivision of it (e.g., a heart center affiliated with the hospital), and the physician is authorized to perform services at the hospital.

This exception to Stark investment/ownership prohibitions has spawned an industry involving health care delivery by hospitals owned by physicians that focus on such single specialties as cardiology, neurology and orthopedics. General hospitals have opposed this development, claiming that specialty hospitals siphon away the best and most certain reimbursement and thus increase general hospitals’ already disproportionate share of low-reimbursement procedures and under- and non-insured patients.