Physician-owned facilities also express concern over PPACA growth caps  

In the year since President Barack Obama signed the ground-breaking Patient Protection and Affordable Care Act (PPACA) into law, doctors and health care facilities have carefully studied new health care mandates, incentives and compliance issues to understand how the many reform provisions will alter how they do business. With billions of dollars in federal Medicare reimbursements at stake, physicians and health organizations are working overtime to reconcile their operations and policies with health care reform's new rules and regulatory guidance phasing in over the past year. Among immediate questions health organizations must answer are how to navigate new controls over their finances and collaborate with other institutions on costs without breaking antitrust laws.

In this month's Emerging Trends Q&A, attorney Douglas A. Grimm, a member of Pillsbury's Health Care and Life Sciences practice and a former hospital administrator, describes some of medical professionals' and hospitals' greatest challenges in implementing PPACA.

Q: Health care reform was an elusive U.S. policy goal for generations; what do doctors and hospitals make of PPACA?

Grimm: The U.S. health care industry is strikingly diverse, even within discrete groups like hospitals or doctors' practices, so it's difficult to uniformly speak for these groups at-large. What our clients do have in common is a desire to provide quality care to patients - while complying with all the new mandates and anti-fraud laws, the latter of which have significantly sharpened potential penalties. PPACA helps ensure that private health care continues to cover and treat patients regardless of their financial or insurance status--securing access to health care for as many Americans as possible was, after all, a main driver for health care reform.

At the same time, however, the new rules imposed some notable restrictions on private businesses, such as the cap placed on physician-owned hospitals' growth. These kinds of trade-offs go with the territory when you have to reconcile the federal government's perspective, as the underwriter of Medicare, for example, with market forces driving the private enterprises administering care.

Q: What are physician-owned hospitals, and how are they similar, or different, from other care facilities?

Grimm: Physician-owned hospitals really boomed over the past several years; more than 275 exist today, up from approximately 50 in 2006. Many were established to provide treatments in specific, targeted areas - like services for the heart, spine or orthopedics – by pooling knowledge, talent and patient outreach. Such specialization creates integration and efficiency advantages in any business. Doctors practicing in these hospitals can also bypass a lot of red tape when referring patients to these facilities, if they are part owners of the entire hospital organization. This is a major plus for physicians, since they can focus more on patient care and less on bureaucracy. Moreover, when doctors actually own the hospital - as opposed to simply being able to practice there - physicians are incentivized to provide more cost-effective care.

That is not to say physician-owned centers are unique in this regard; clearly a lot more goes into quality medicine than ownership structures. Still, the physician-owned model introduced some interesting integration and efficiency attributes by giving doctors more flexibility and control over their patients' inpatient stays and ownership incentive to focus on efficiency and resource optimization.

Q. What are the PPACA caps exactly?

Grimm: Under health care reform, physician-owned hospitals are limited in two ways: the amount of patient capacity may not increase and the aggregate percentage of physician ownership in the hospital may not increase.

Patient “capacity” is defined as the aggregate number of hospital beds, operating rooms, and procedure rooms for which a hospital is licensed. Therefore, the hospital may add a bed only if it concurrently closes an OR or procedure room.

PPACA further limits physician-owned facilities' ownership by doctors to the aggregate amount existing at the time the law went into effect. So, if doctors collectively owned 80 percent of a hospital, for example, they can re-allocate those shares today among themselves and new partners, but are prohibited from offering incoming doctors new equity raising the aggregate physician ownership to, say, 82 or 85 percent of the facility. That hospital is locked at 80 percent aggregate physician ownership.

Physician-owned hospitals' remarkable rise put them front-and-center when health reformers started looking at the attributes of all the different care entities treating patients, and sought to balance their respective roles and capabilities. Taking that approach obviously forced some hard decisions.

Q. Why were these restrictions implemented?

Grimm: The challenge for policymakers was that just as growth was occurring among physician-owned specialty hospitals, many general hospitals began voicing concerns about their long-term viability in the face of such growth. Large urban general hospitals observed that they were losing patients to specialty hospitals, thus depriving general hospitals of the revenue streams associated with specialized procedures such as cardiac surgery, cancer treatments, elective surgery, and so forth.

Since health care reform's primary goals are to improve care access for as many Americans as possible and ratchet down costs, Congress struggled with how to let these two very different hospital business models coexist while drawing blueprints for a “reformed” health system that is still firmly run by the private sector.

Q: What do the law's limits on physician-owned hospitals mean for their future?

Grimm: Health care reform deliberately favored large general hospitals over specialty facilities by imposing the caps mentioned earlier. Nonetheless, the physician-owned and specialty care segments will likely continue given the positive benefits many patients and doctors experience under this model. Demand for these services will continue, but one can imagine that physician owners take a dim view toward what they perceive as health care reform's artificial constraints on growth.

Q: What about the ACO mandate?

Grimm: Both general hospitals and their physician-owned counterparts are wrestling with how to deliver on the government's call to establish deeper cost-reducing collaboration between hospitals by creating “accountable care organizations” or ACOs. ACOs are meant to encourage participating providers to come together and determine how best to collectively reduce costs – perhaps by consolidating their purchasing power, comparing overhead, or otherwise collaborating - in exchange for receiving a portion of verifiable savings they achieve.

Q: How quickly can health care facilities begin creating ACOs?

Grimm: The road to ACOs has been rocky thus far. The March 31, 2011 proposed rule addressing ACOs listed substantial criteria that must be met before shared savings occurs. Many providers have decided to postpone any effort to implement an ACO until the final rule is in place and several key questions addressed. Chief among those questions is the idea that ACOs, by their nature, are, to some extent anti-competitive, as ACO participants will be required to compare charges, overhead, reimbursement, and other price drivers.

This mode of cooperation is clearly not “business as usual” for health care executives, and raises antitrust concerns. Federal guidance on ACO antitrust exemptions has recently been published, but hospital managers and their general counsel offices are reflexively and rightfully concerned any time two or more businesses start discussing how to align costs and savings.

Q: So ACOs will marry public and competitive mechanisms in the marketplace, once care providers sign-up?

Grimm: Precisely. To implement wider insurance coverage mechanisms, the law also needed to address skyrocketing care costs. By encouraging all those currently delivering patient care to work together by comparing data and exploring how to leverage buying power and best practices, the ACO concept implicitly advocates for a lessening of competition - in its purest sense - among care providers in the industry. In return, the government wants to see substantial cost reductions in the market as soon as ACOs gain traction.

It sounds straightforward, but the risk – in practice – is that the time and administrative task of creating ACOs and threading them through the crucial antitrust exemptions and regulators' forms will delay or impede ACOs' performance, at least initially.

Q: Is the government doing anything to help ACOs take off by reassuring businesses of areas where they can safely collaborate without fear of prosecution?

Grimm: Again, federal agencies have recently issued guidance on the antitrust and fraud and abuse implications of ACOs, but there remain substantial gaps in the guidance. Many hospitals simply aren't accustomed to comparing prices and business plans with their peers, and may well prefer to sit things out until they have final guidance and the benefit of time for their finance departments and business systems to adjust. Pillsbury's health care practice is providing extensive advice to our clients regarding the most efficient and effective means for ACO implementation given the current landscape.

Q: What impact has health reform had on fraud and abuse compliance?

Grimm: Regulators view vigorous anti-fraud efforts as a major health care cost control measure in its own right. Given the billions of dollars in federal health care reimbursements to providers, preventing even a small percentage of fraudulent transactions yields tremendous savings. Thus, health reform created and enhanced a host of mandates and penalties to reduce fraud and abuse.

Healthcare organizations should keep a close eye on recent fraud and abuse guidance to ensure continuing compliance. It certainly helps to consult experienced attorneys who can perform crucial mapping between an organization's current status and that required by federal law.