CMS recently issued Advisory Opinion CMS-AO-2014-01 (“Opinion”)1 evaluating the methodology used to determine the percentage of the requesting hospital’s physician ownership as of March 23, 2010 (“Baseline Physician Ownership”).  Even though the requesting hospital executed a contribution agreement prior to March 23, 2010, CMS concluded that such action did not affect the percentage of Baseline Physician Ownership because the transaction did not take place and assets were not transferred until April 30, 2010.

Background

The federal Stark Law does not allow physicians to refer Medicare patients for designated health services to any entity with which the physician (or the physician’s immediate family member) has a financial relationship, unless an exception applies.  The Stark Law also prohibits the entity from presenting claims to Medicare, the Medicare beneficiary or any other entity for designated health services that are furnished as a result of a prohibited referral.  A Stark Law exception exists that allows for physicians to have ownership or investment interests in hospitals if certain conditions are met.  The Affordable Care Act (“ACA”) amended the hospital ownership exception to prevent the development of new, or the expansion of existing, physician-owned hospitals.

Commonly referred to as the “whole hospital exception,” the hospital ownership exception requires, among other things, that the physician-owned hospital had a Medicare provider agreement in effect prior to December 31, 2010.  The hospital ownership exception also requires that the “percentage of the total value of the ownership or investment interests held in the hospital, or in an entity whose assets include the hospital, by physician owners or investors in the aggregate [must] not exceed such percentage as of March 23, 2010.”2  Therefore, physician-owned hospitals cannot have an aggregate physician ownership or investment percentage that exceeds the Baseline Physician Ownership at the time of a physician owner’s referral.

Proposed Arrangement

The acute care hospital that requested the Opinion (“Requestor”) began developing the hospital in 2009.  In  2009, physicians owned 88% of Requestor’s shares, with the remaining 12% held  by a limited liability company with no physician ownership. Several months later, Requestor discussed investment opportunities in the hospital with two ambulatory surgery centers (“ASCs”).  One of the ASCs also had physician ownership.  Requestor and the two ASCs executed a contribution agreement to form a new company (“NewCo”) to own the hospital; however, the contribution of the assets into NewCo did not occur until April 30, 2010.  As of March 23, 2010, Requestor certified that it had 88% physician ownership.  As of April 30, 2010, physicians owned only 62.21% of NewCo (the entity that owned the hospital).

Several months later, the non-physician owned ASC withdrew from the NewCo joint venture and its ownership interest was distributed proportionally to both the physician investors and non-physician investors.  Additionally, a non-physician investor sold its ownership interest to a physician.  As a result, Requestor had 80% physician ownership.  Requestor sought CMS’s opinion regarding the appropriate percentage of physician ownership for Requestor to use as its Baseline Physician Ownership.

Analysis and CMS Determination

In the Opinion, CMS stated that it did not believe that the ACA was intended to disrupt physician investment in entities developing hospitals that were close to completion at the time the ACA was enacted.  To determine Baseline Physician Ownership, CMS looks to direct and indirect physician ownership and investment interests held in Requestor on March 23, 2010.  The contribution agreement did not modify ownership or investment interests held in Requestor as of March 23, 2010 because the assets were not transferred until April 30, 2010.  As a result, CMS determined that the hospital’s Baseline Physician Ownership would not take into account the value of any ownership or investment attributable to assets committed for contribution, but not transferred, on or before March 23, 2010.  Therefore, the hospital’s Baseline Physician Ownership was deemed to be 88% on March 23, 2010.  Additionally, CMS determined that Requestor’s aggregate physician ownership never exceeded the baseline after March 23, 2010.

Practical Takeaways 

Physician-owned hospitals that had pending transactions on or around March 23, 2010 should review and seek guidance if there are any ambiguities regarding the hospital’s Baseline Physician Ownership percentage. It is critical that careful attention is paid to ensure future transactions do not increase physician ownership percentages beyond the Baseline Physician Ownership.