On November 2, 2010, the Centers for Medicare and Medicaid Services (CMS) released the final rule implementing section 6001 of the Affordable Care Act, which involves physician-owned hospitals. The final rule is part of the larger rule governing 2011 payment rates for hospital outpatient departments and ambulatory surgical centers (ASCs). Although the final rule clarifies some issues, it provides little change from the proposed rule. In fact, legal advisors for physician-owned hospitals will still find some key issues unresolved. This is because CMS chose to delay action on certain parts of the law given that the effective date of the provision is still years away. In some cases, CMS is suggesting that concerned parties seek advisory opinions.

The final rule can be found on the CMS website. The discussion of physician-owned hospitals is found on pages 1711–1779 and 1795–1799. The rule will be published in the Federal Register on November 24, 2010.

Summary of the Final Rule

One of the challenges for CMS and hospital and physician stakeholders were poorly drafted sections of the statute that created several conflicting effective dates. CMS interpreted the dates in a very literal way in the proposed rule. Several commenters had argued that the agency should acknowledge the drafting problems and try to resolve as many of the conflicts as possible through rulemaking. CMS did not heed these recommendations and left the conflicts in effective dates as they were in the statute and the proposed rule.

Here are the dates that apply to physician-owned hospitals under the rule, as well as key clarifying commentary from CMS:

  1. In order to qualify for the Stark whole-hospital exception, as amended, a hospital must have had physician ownership on March 23, 2010 (the date of enactment). The percent of ownership cannot increase beyond the percent in effect on that date. This applies to hospitals that are already seeing patients and to projects that are still under development. Investing physicians who do not refer to the hospital are not included in determining the ownership percentages. CMS did caution against schemes where physicians in one state would own a hospital, but would refer to a hospital that was owned by physicians in another state. Hospitals can increase the number of physician owners as long as the total percentage of ownership does not change. So a joint-venture hospital with 40 physician owners who hold 49 percent of the value of the investment could double the number of owners as long as the total percentage of physician ownership does not increase beyond 49 percent. Likewise, a hospital could reduce the number or percentage of physician ownership.

Commenters suggested clarifying whether the bona fide investment level is based on the aggregate percentage of the number of shares held by physicians or the aggregate percentage of the value of shares held by physicians. They suggested that the more workable option is for the limit to be based on a strict percentage of the number of outstanding shares. It was further contended that basing the limit on a hospital’s value would require the hospital to ascertain its value on a regular basis to make certain that the aggregate value of the physicians’ ownership never exceeds the March 23, 2010 limit. However, CMS did not adopt this suggestion, stating that “the plain language of the statute refers to the value of the investment interests, not the number of shares held by physicians.” Having determined that shares of stock are not representative of the “value of the investment interests,” though, CMS provided no further clarification on the issue of whether hospitals would have to make an initial valuation of the physician ownership, followed by periodic valuations to determine their compliance with the law.

Hospitals are required to make an annual report on physician ownership. CMS has chosen not to implement that provision at this time, however, indicating that this will be addressed in a later rulemaking.

  1.  A hospital may not have been converted from an ASC after March 23, 2010. “Conversion” is not defined, and CMS suggests that anyone having questions about the applicability of the provision seek an advisory opinion.
  2.  Physician-owned hospitals will not be allowed to increase the number of beds, operating rooms or procedure rooms beyond the number in place on March 23, 2010. If a hospital did not have a Medicare agreement in place on that date, the baseline will be determined as of the date the hospital receives the agreement, so long as it is received by December 31, 2010. A hospital will only be allowed to increase the number of beds, operating rooms and procedure rooms by meeting certain criteria and by applying to the Secretary of Health and Human Services. However, this process does not have to be in place until 2012, so the current rulemaking does not address any of the issues associated with the process. This will be done later in a separate rulemaking.

A “procedure room” is defined only as a room in which catheterizations, angiographies, angiograms and endoscopies are performed. Emergency rooms or departments (exclusive of rooms in which catheterizations, angiographies, angiograms and endoscopies are performed) are not included in the definition, nor are other procedure rooms, such as an imaging centers or labs.

CMS will allow relocation of beds, operating rooms and procedure rooms under certain circumstances as long as the baseline number is not exceeded, and suggests that a hospital obtain an advisory opinion to determine if the proposed relocation is appropriate.

CMS also permits hospitals to change the use of a room as long as the baseline total is not exceeded. For example, if a hospital has 20 inpatient beds, eight operating rooms and two procedure rooms, CMS will consider the aggregate number to be 30; the aggregate number is the operative provision. Therefore, a hospital could close two inpatient beds and convert the space to two more procedure rooms, bringing the total of procedure rooms up to four. As long as the aggregate number – in this case 30 – is not exceeded, such change in use is permissible.

Hospitals will be permitted to replace inpatient beds, operating rooms and procedure rooms as long as the aggregate total does not change. As a result, older facilities can be retired and be replaced within the baseline limit.

  1.  The hospital must also have a Medicare provider agreement by December 31, 2010 in order to qualify for the amended whole hospital exception. CMS notes that a physician-owned hospital will meet this requirement if the provider agreement is issued after December 31, 2010, so long as the provider agreement letter contains an effective date on or before December 31, 2010.
  2.  By September 23, 2011 (18 months after enactment), the hospital must meet all other requirements, as follows:
  • The hospital must require each referring physician owner or investor who is a member of the hospital’s medical staff to agree, as a condition of continued medical staff membership or admitting privileges, to provide written disclosure of his or her ownership or investment interest in the hospital (and, if applicable, the ownership or investment interest of any treating physician) to all patients the physician refers to the hospital. Disclosure must be required by a time that permits the patient to make a meaningful decision regarding the receipt of care. That time will generally be the point at which a referral is made, although there will be exceptions for emergency situations. CMS does not prescribe the way that disclosure is to be made. A physician might have a form as part of the regular patient documentation provided at the point of referral. The physician could include a list of all owners to cover situations where the treating physician and referring physician might be different. CMS does not define “treating physician,” but assumes that the disclosure requirement affects any physician with an ownership interest that may play a role in the patient’s care.
  • The hospital must not condition any physician ownership or investment interests directly or indirectly on the physician owner or investor making or influencing referrals to the hospital or otherwise generating business for the hospital. Commenters asked if hospitals may condition a physician’s ownership interest on his or her continued practice of medicine and require the physician to divest his or her investment interest in the hospital if the physician retires or ceases to practice medicine in the community served by the hospital. CMS has suggested that this practice could result in a violation of the statute.
  • The hospital must disclose on any public website for the hospital and in any public advertising that the hospital is owned or invested in by physicians. All advertising is included in this requirement, but the requirement can be satisfied by a simple statement that the hospital has physician owners. Disclosure on the hospital website only needs to be done at a location that would commonly be seen by patients or potential patients, such as the “About Us” section that appears on most hospital websites.
  • The hospital must ensure that any ownership or investment interests that the hospital offers to a physician owner or investor are not offered on more favorable terms than the terms offered to a person who is not a physician owner or investor.
  • The hospital (or any owner or investor in the hospital) cannot directly or indirectly provide loans or financing for any investment in the hospital by a physician owner or investor. The hospital (or any owner or investor in the hospital) cannot 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 that is related to acquiring any ownership or investment interest in the hospital.
  • Ownership or investment returns are distributed to each owner or investor in the hospital in an amount that is directly proportional to the ownership or investment interest of such owner or investor in the hospital.
  • Physician owners and investors cannot 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.
  • The hospital must 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.
  • If the hospital does not have a physician available on the premises to provide services during all hours in which the hospital is providing services to the patient (24/7), the hospital must disclose this information to the patient. Before providing services to the patient, the hospital must receive a signed acknowledgment from the patient stating that the patient understands that a physician may not be present during all hours when services are furnished to the patient. This requirement can be met in the situation where the physician-owned hospital is physically adjacent to another hospital and there are transfer and coverage agreements in place. Other circumstances could be subject to an advisory opinion.
  • The hospital must have the capacity to provide assessment and initial treatment for all patients, and the ability to refer and transfer patients to hospitals with the capability to treat the needs of the patient that the hospital is unable to address.

Future Rulemaking

If CMS determines that further guidance is needed on any of these points, it will provide clarification in a separate rulemaking. In addition, a hospital may request an advisory opinion on any existing or final investment arrangement.

Most of the rules will apply to the conditions of payment under the Stark Law. Only those provisions affecting patient safety, such as notification if there is not a physician present 24/7, will apply to the conditions of participation.

One additional note: CMS does not include any language related to the enforcement requirements, such as audits. A subsequent rulemaking will address these issues.