In the 2010 Affordable Care Act, Section 6001 added new regulatory restrictions and requirements for physician-owned hospitals. See 42 U.S.C. § 1395nn(i).

“Physician-owned hospital” means any hospital “in which a physician, or the immediate family member of a physician, has an ownership or investment interest.  The ownership or investment interest may exist through equity, debt or other means, and includes the interest in an entity that holds an ownership or investment interest in the hospital.”  See 42 C.F.R. § 489.3.

Federal regulations previously provided for the “whole hospital” exception to the Stark Laws. This particular safe harbor required that the referring physician/owner: (1) have a financial interest in the whole hospital, and not just a specific part; (2) be authorized to perform services at the hospital; and (3) be expected to actually perform the agreed upon services.  The requirements of Section 6001 substantially modified this exception.  See 42 C.F.R. § 411.362.

Under the Affordable Care Act, the whole hospital exception applies only to physician-owned hospitals that had physician ownership as of March 23, 2010, and had obtained a Medicare provider number by the end of 2010. Furthermore, Section 6001 contains specific requirements for and restrictions on physician-owned hospitals, the regulations for which were promulgated at the end of 2011, as follows:

• Grandfathered Facilities:  All existing physician-owned hospitals that had physician ownership as of March 23, 2010, and possessed a Medicare provider agreement as of December 31, 2010, were “grandfathered”—meaning that they can continue to rely on the protection afforded by the whole hospital exception.

• Extent of Physician Ownership:  The regulations promulgated in response to the Affordable Care Act specify that if a hospital did not have physician ownership on March 23, 2010, but later adds physician owners, the whole hospital exception will not protect referrals to the hospital by the physician owners.  Further, the percentage of physician ownership in place as of the date of enactment of the Affordable Care Act, March 23, 2010, cannot increase. However, there is no requirement that the particular physician owners or investors remain the same. As a result, physician owned shares can change hands, and additional physicians can have an ownership interest in the hospital, so long as the total percentage of physician ownership does not increase.

• Limitation on Expansion: Any expansion in the number of operating rooms, procedure rooms, or beds beyond those existing as of March 23, 2010 (and later changed to December 2010), is prohibited, except as permitted in very limited circumstances.

• Provisions Related to Conflicts of Interest: There are a number of provisions within the Affordable Care Act directed at limiting perceived conflicts of interest. First, each year, physician-owned hospitals must provide the CMS with the identity of each physician owner as well as the nature and extent of each owner’s interest in the hospital. Second, each physician-owned hospital is required to include a mechanism to ensure that referring physician-owners disclose to their patients their ownership in the hospital prior to the patient’s admission. Third, the hospital may not condition any physician-ownership interests on the physician making or influencing referrals to the hospital. Last, physician-owned hospitals are required to disclose the fact that their owners include physicians in any public website or public advertising.

• Provisions to Ensure Bona Fide Investment: The Affordable Care Act and corresponding regulations prescribe certain restrictions regarding the physician-owned hospital’s financial relationship with its physician owners or investors. Specifically, (1) a physician-owned hospital (or any owner or investor in the hospital) may not directly or indirectly provide loans or financing for any investment in the hospital by a physician-owner or investor; (2) a physician-owned hospital (or any owner or investor in the hospital) may not either directly or indirectly guarantee a loan, make a payment toward a loan, or otherwise subsidize a loan, for any individual physician owner or investor or group of physician owners or investors; (3) ownership or investment returns must be distributed to each owner or investor in a physician-owned hospital in an amount that is directly proportional to the ownership or investment interest of such owner or investor in the hospital; (4) physician-owners and investors may not receive, directly or indirectly, any guaranteed receipt of or right to purchase other business interests related to the hospital, including the purchase or lease of any property under the control of other owners or investors in the hospital or located near the premises of the hospital; and (5) a physician-owned hospital may not offer a physician-owner or investor the opportunity to purchase or lease any property under the control of the hospital or any other owner or investor in the hospital on more favorable terms than the terms offered to an individual who is not a physician-owner or investor.

• Patient Safety:  Under the Affordable Care Act and corresponding regulations, all physician-owned hospitals must provide for proper assessment of patients, with the ability to refer and transfer those patients requiring greater resources to other, more appropriate hospitals. Furthermore, the regulations promulgated in response to the Affordable Care Act state, “The hospital inpatient stay or outpatient visit begins with the provision of a package of information regarding scheduled preadmission testing and registration for a planned hospital admission for inpatient care or an outpatient service.” The hospital must also disclose to, and obtain a signed acknowledgement from, a patient if the hospital does not have a physician available on the premises during all hours in which the hospital is providing services to that patient.

The definition of “physician-owned hospital” does not include a hospital with physician ownership or investment interests that satisfy the following two requirements:

1.     42 C.F.R. § 411.356(a):  Publicly-traded securities. Ownership of investment securities (including shares or bonds, debentures, notes, or other debt instruments) that at the time the [designated health services or “DHS”] referral was made could be purchased on the open market and that meet the requirements of paragraphs (a)(1) and (a)(2) of this section.

(1)   They are either–

(i) Listed for trading on the New York Stock Exchange, the American Stock Exchange, or any regional exchange in which quotations are published on a daily basis, or foreign securities listed on a recognized foreign, national, or regional exchange in which quotations are published on a daily basis; or

(ii) Traded under an automated interdealer quotation system operated by the National Association of Securities Dealers.

(2)  They are in a corporation that had stockholder equity exceeding $75 million at the end of the corporation’s most recent fiscal year or on average during the previous 3 fiscal years. “Stockholder equity” is the difference in value between a corporation’s total assets and total liabilities.

2.     42 C.F.R. § 411.356(b):  Mutual funds. Ownership of shares in a regulated investment company as defined in Section 851(a) of the Internal Revenue Code of 1986, if the company had, at the end of its most recent fiscal year, or on average during the previous 3 fiscal years, total assets exceeding $75 million.

Section 851(a) states:

General rule.–For purposes of this subtitle, the term “regulated investment company” means any domestic corporation–

          (1) which, at all times during the taxable year–

                      (A) is registered under the Investment Company Act of 1940 . . . a management company or unit investment trust, or

            (B) has in effect an election under such Act to be treated as a business development company, or

          (2) which is a common trust fund or similar fund excluded . . . from the definition of ‘investment company’ and is not included in the definition of ‘common trust fund.

Constitutional challenges to Section 6001 have thus far been unsuccessful. In Physician Hospitals of America v. Sebelius, 781 F. Supp. 2d 431 (E.D. Tex. 2011), health care providers argued that Section 6001 was an unconstitutional limitation on the ability of physician owned hospitals to bill Medicare for self-referrals.  Plaintiffs contended that Section 6001 violated the Fifth Amendment’s guarantees of due process and equal protection “because the law is improperly retroactive, unreasonably arbitrary, and is impermissibly targeted to but one type of competitor.” Plaintiffs also argued that Section 6001 effectuated an administrative taking  of real property and is unconstitutionally vague.

The District Court granted summary judgment in favor of the Federal Government, concluding: “Congress did not act unconstitutionally and that it is not the function of the Court to determine the wisdom of this Congressional action.”  Id. at 434.  The Court relied upon the four justifications for Section 6001 presented by the Federal Government: “(1) physician ownership leads to overutilization of services; (2) physician ownership results in greater healthcare expenditures; (3) referral patterns undermine public and community hospitals, which provide uncompensated care and other services not typically offered by physician owned hospitals;  and (4) physician owned hospitals provide inadequate emergency care.” Id. at 443.

The Court also noted:

Plaintiffs insist that Section 6001 will detrimentally impact one of the most efficient and successful components of the national healthcare system: [Physician Owned Hospitals]. They may be right. But Congress took a different position, focused particularly on concerns that physician ownership creates an incentive for unnecessary referrals. Plaintiffs’ evidence and arguments in support of [Physician Owned Hospitals] is persuasive and well-documented. It may even suggest a wiser legislative approach. But even if true, it fails to counter every conceivable rational basis for the law [which is the standard on review]. Id.  at 447.

Recently, the Fifth Circuit reviewed the District Court’s decision in Physician Hospitals of America v. Sebelius, No. 11-40631 (5th Cir., Aug. 16, 2012).  Rather than focus on the merits of the District Court decision, the Fifth Circuit vacated and dismissed the entire lawsuit for lack of subject-matter jurisdiction.  The Fifth Circuit concluded that the Medicare Act imposes specific restrictions on any challenges, requiring “virtually all legal attacks” be brought through the Department of Health and Human Services (HHS).  (quoting Shalala v. Illinois Council on Long Term Care, Inc., 529 U.S. 1, 13 (2000)).

The Fifth Circuit held that plaintiff must first comply with 42 U.S.C. § 1395ii and submit the dispute to HHS, and only after HHS reaches a final decision may the party “obtain a review of such decision by a civil action commenced within sixty days after the mailing to him of notice of such decision or within such further time as the [Secretary] may allow.”  (quoting 42 U.S.C. § 405(g)).  The Fifth Circuit again referred to the Illinois Council decision and the Supreme Court:

In the context of a massive, complex health and safety program such as Medicare, embodied in hundreds of pages of statutes and thousands of pages of often interrelated regulations, any of which may become the subject of a legal challenge in any of several different courts, paying this price may seem justified. In any event, such was the judgment of Congress as understood [by the Court]. Illinois Council on Long Term Care, Inc., 529 U.S. at 13.

While the Fifth Circuit decision fails to bring any closure to the constitutional challenges of Section 6001, the continuing passage of time may ultimately prove to be fatal to physician owned hospitals.