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Final Rule: Changes to Whole Hospital and Rural Provider Exceptions to the Physician Self-Referral Prohibition and Related Changes to Provider Agreement Regulations

01.06.11

As part of the Medicare hospital outpatient prospective payment system and ambulatory surgery center payment system final rule for calendar year 2011 (the "Final Rule"), the Centers for Medicare and Medicaid Services (CMS) recently issued final regulations that implement the changes that were made to the whole hospital exception by the Patient Protection and Affordable Care Act and the Health Care Education and Reconciliation Act of 2010 (collectively, the "Acts"). In this bulletin, we call to your attention three significant issues regarding the modifications to the whole hospital exception that were addressed by CMS in the Final Rule:

  1. restrictions on physician investment and ownership interests in hospitals;
  2. limitations on the expansion of physician-owned hospitals; and
  3. physician ownership and availability notification requirements.

Physician Ownership Restrictions

In the Final Rule, CMS confirmed that in order to qualify for the whole hospital exception, a hospital generally must have physician owners and a Medicare provider agreement in effect on Dec. 31, 2010, and that the level of physician ownership in the hospital could not increase after March 23, 2010. It did, however, clarify that if a hospital had physician owners on March 23, 2010, a hospital could increase or decrease the number of its physician owners so long as the percentage of the total value of physician ownership or investment interests, in the aggregate, in the hospital remains unchanged or decreases below the percentage that existed on March 23, 2010. As a result, CMS stated that a physician-owned hospital may repurchase an ownership interest that is held by a deceased physician and subsequently resell that ownership interest to another physician. It also confirmed that a physician owner could transfer his or her ownership interest in the hospital to another physician.

Hospital Expansion Limitations

The Acts generally prohibit a physician-owned hospital from expanding the number of beds, operating rooms, and procedure rooms for which it is licensed after March 23, 2010, unless the hospital obtains an exception from the Secretary of the Department of Health and Human Services. The requirements for obtaining an exception are quite onerous, and it is doubtful that many, if any, physician-owned hospitals would be able to qualify for an exception.

In the Final Rule, however, CMS stated that it was interpreting the phrase "for which the hospital is licensed" that is contained in the Acts as only applying to hospital beds. As a result, CMS noted that the limitation on expansion would apply to operating rooms and procedure rooms regardless of whether or not those rooms are formally licensed by the applicable state regulatory agency. CMS added that in order to be considered as part of the hospital's "baseline" number of beds or operating or procedure rooms, the beds must have been licensed and the operating rooms and procedure rooms must have been in existence and operational as of March 23, 2010.

With respect to the limitation on expansion, CMS stated that it viewed the restrictions set forth in the Acts as a restriction on the expansion of the aggregate number of beds, operating rooms, and procedure rooms for which a physician-owned hospital is licensed and not a restriction or fixed cap on each individual category. CMS gave the following example: if a physician-owned hospital was licensed for 20 beds and had two operating rooms and two procedure rooms on March 23, 2010, the baseline number for the hospital would be 24. According to CMS, the hospital could increase or decrease the number in each individual category so long as the total number of beds, operating rooms, and procedure rooms for which the hospital is licensed did not exceed 24. This interpretation could potentially give physician-owned hospitals that are not operating at capacity some flexibility in their operations and the ability to de-license beds and increase the number of their operating rooms and procedure rooms.

Notification of Physician Ownership and Availability

In addition to discussing the physician ownership restrictions and hospital expansion limitations, the Final Rule also requires that a referring physician owner or investor disclose his or her ownership interest in the hospital (along with the ownership or investment interest of any treating physician) to the patient at a time "that permits the patient to make a meaningful decision regarding the receipt of care." In the Final Rule, CMS declined to adopt a specific form or method of delivery for the required notice. Instead, physician owners and investors are permitted to disclose their ownership and investment interests in any way desired so long as the method permits the patient to make a meaningful decision about his or her healthcare. Given the potential consequences of failing to comply with this requirement, however, most physician-owned hospitals will still likely require the notice to be given in writing, signed by the patient, and included in the patient's medical record.

In addition to discussing the general ownership notification requirements, CMS also clarified the disclosure obligations that a physician-owned hospital and its physician owners have to patients who are treated in the hospital's emergency department. CMS stated that if a patient were treated by a physician owner in the hospital's emergency department, the only disclosure required would be the disclosure that the hospital is required to make under Medicare provider agreement requirements. The physician owner would not be required to give the patient a separate notice regarding his or her ownership interest in the hospital. CMS reasoned that "[b]y the time a patient has presented at the emergency department, the patient or the patient's representative has already made a decision about where to receive care." It is arguable that this rationale would apply to hospital-based physicians as well.

With respect to advertising, CMS clarified that the requirement that a physician-owned hospital disclose its ownership information in any public advertising was not limited to advertisements that were made on the internet, through direct mail campaigns, or through other written communications. CMS stated that the language of the Acts was clear and that it did not have any discretion to exempt television or radio advertisements.

Finally, CMS confirmed that a physician-owned hospital is required to notify its patients before admission if a physician will not be available on the hospital's premises at all times the hospital will be providing services to its patients. CMS stated that the notice must be given to both hospital inpatients and outpatients and that the hospital must receive a signed acknowledgement of the notice from each patient. CMS also noted that failure to obtain a signed acknowledgement from each patient would constitute noncompliance with the Stark Law.

Navigation of the Acts and CMS' rules requires careful review and planning. Please call any member of Waller Lansden's Healthcare Department at 800-487-6380 for more information. Additional information is also available in our March 2010 bulletin, "Healthcare Reform Bill Prevents New Physician Ownership in Hospitals," at this link and our July 2010 bulletin, "CMS Confirms Prohibition on Increased Physician Ownership of Hospitals After March 23, 2010," at this link.