By Lisa S. Miller and Jed Morrison

On March 23, 2010, and March 30, 2010, President Obama signed, respectively, the Patient Protection and Affordable Care Act and the Healthcare and Education Reconciliation Act of 2010 (collectively the “PPACA”). One significant consequence of the new laws is the limitation placed on physician-owned hospitals. The PPACA eliminates the exception to the Stark Statute which permits physician ownership of hospitals, although existing physician-owned hospitals will be grandfathered.

The Stark Statute generally prohibits physicians from making certain referrals to entities with which they (or their immediate family members) have a financial relationship. One historical exception to the Stark Statute allowed a physician to refer patients to a hospital in which such physician or his or her family members held an ownership or investment interest in the whole hospital. For years, CMS and Congress have sought to narrow this exception, enacting a statutory moratorium and even an informal administrative suspension. The PPACA has now finally eliminated this exception.

Grandfathered Hospitals

The effect of the PPACA on existing and operating physician-owned hospitals is clear: any licensed hospital which had physician investors and a Medicare provider agreement in effect no later than the date of enactment will continue to qualify for the Stark whole-hospital exception. However, such hospitals are subject to new prohibitions on growth. The PPACA provides that the percent of physician ownership or investment in a hospital may not be increased at any time after March 23, 2010, and the number of operating rooms, procedure rooms, and beds for which a hospital is licensed may not be increased at any time after March 23, 2010. A hospital will be granted an exception to the prohibition on physical growth only if it meets five very narrow requirements related to its location and the population served. In addition, exceptions may be granted only once every two years. Finally, even if a hospital can qualify for such a narrow exception, no hospital will be permitted to expand to a number of operating rooms, procedure rooms, or beds which is greater than 200% of its “baseline number” of such beds or rooms, calculated on the later of March 23, 2010, or the effective date of its Medicare provider agreement.

Hospitals Under Development

While the effect of the PPACA on existing physician-owned hospitals is clear, the consequences for any hospitals currently under development are a bit ambiguous. The new law on its face allows still-developing hospitals until December 31, 2010, to have physician owners and a Medicare provider agreement in place. That is how most commentators describe the law. As noted above, however, any increase in the percent of physician owners or investors in a hospital after March 23, 2010, is strictly prohibited, and the expansion of the number of operating rooms, procedure rooms, or beds for which a hospital is licensed after March 23, 2010, is severely restricted.

The practical effect of these restrictions for a hospital under development is that a hospital which did not have a license on March 23, 2010, may not be grandfathered even if a Medicare provider agreement could be put in place by December 31, 2010. For example, if a developing hospital with physician ownership on March 23, 2010, was not licensed until August 1, 2010, the number of beds for which it was licensed on March 23, 2010, was zero, and the license subsequently issued in August increased that number, which is a violation of the PPACA.

The same analysis applies to physician ownership. While the PPACA only requires that a hospital must have physician ownership by December 31, 2010, in order to be grandfathered, it also makes it a violation of the law to increase the percent of physician ownership in a hospital after March 23, 2010; effectively requiring hospitals to have physician ownership or investment in place as of March 23, 2010.

Despite the literal reading of the law, it may have been Congress’ intent to permit the continued development of these hospitals. For example, the “baseline number” of operating rooms, procedure rooms, or beds (which is calculated to determine the maximum permitted growth of a physician-owned hospital) will be calculated on the later of March 23, 2010, or the effective date of the hospital’s Medicare provider agreement. This suggests that Congress intended to permit the continued development of hospitals beyond March 23, 2010, so long as a Medicare provider agreement is in effect by December 31, 2010. (Again, this is how most commentators describe the law.) However, the structure of the law is such that the “baseline number” of operating rooms, procedure rooms, or beds is a term used only for purposes of a hospital qualifying for expansion after meeting the five narrow requirements discussed above. If a hospital does not meet these five requirements, then the December 31, 2010 date has no relevance, and the prohibition on growth is measured by its status on March 23, 2010. Additionally, no expansion of the percent of physician ownership beyond March 23, 2010, is permitted at any time, even for developing hospitals.

Conclusion

Because of this ambiguity in the application of the PPACA to hospitals under development as of March 23, 2010, it is unclear whether such hospitals will be grandfathered under the new law. A literal reading seems to exclude from the Stark Statute whole-hospital exception any physician-owned hospital under development which did not have physician ownership or was not licensed on March 23, 2010; but this may not have been the intent of the drafters. As a result, this legal gray area will continue to exist until regulations or further guidance are provided by CMS.

If you have any questions regarding this e-Alert, please contact Jed Morrison at 210.978.7780 or jmorrison@jw.com or Lisa Miller at 210.978.7781 or lsmiller@jw.com.