Physician Owned Hospitals: The Best of Times and the Worst of Times

Physician Owned Hospitals: The Best of Times and the Worst of Times

Posted In: Uncategorized

By Scott Becker, JD, CPA and Elissa Koch Moore, JD McGuireWoods LLP

Dr. Duick and Dr. Youngman, both cardiologists from Cardiovascular Consultants of Kansas.

For physician owned hospitals in the United States, this is truly the best of times and the worst of times.  Here’s why:


1. The moratorium on the development of physician owned hospitals ends. This past year, in August of 2006, after an initial legislative moratorium passed as part of the Medicare Modernization Act and a subsequent extension of the moratorium, the prohibition on the development on new hospitals by physicians ended. Thus, for the first time in several years, physicians no longer face a prohibition on developing a new hospital and becoming Medicare certified.

2. DHHS final report. The Department of Health and Human Services (DHHS) issued its Final Report to the Congress on physician-owned hospitals as required under the Deficit Reduction Act of 2005 (the “Final Report”)1.  In the Final Report, the DHHS Services noted:

We are not recommending at this time that Congress amend the whole hospital exception to prohibit physician ownership of specialty hospitals….[C]ongress did not enact an absolute bar to physician ownership of small facilities in order to ensure that there would be no incentive for physicians to self-refer. To the contrary, the physician selfreferral statute allows physician ownership of any hospital, regardless of its size, including ownership in small community hospitals, and also allows physician ownership of rural facilities (including, but not limited to, hospitals), regardless of their size.2

3. Growth. There is expected to be tremendous growth in the development of physician owned hospitals. The Final Report counted approximately 130 specialty hospitals throughout the country as of its last study. The Wall Street Journal, relying on similar figures, also showed that there are approximately 130 specialty hospitals. The best defense to the development of prohibitory legislation is tofficials at CMS stated that they would be pleased with a prohibition on physician ownership of ambulatory surgery centers. However, they noted then that there were simply just too many ASCs at that time to pass any sort of prohibition. In contrast, physician owned hospitals due to their smaller numbers are still vulnerable to such a challenge.

4. Changes in ASC reimbursement. The systematic provision of higher reimbursement for hospitals over surgery centers for the exact same services has the unintended effect of making it more palatable for physicians to develop hospitals instead of surgery centers. This will lead to further growth in physician owned hospitals.

5. Patients of smaller physician owned specialty hospitals. Studies tend to demonstrate that the quality and the patient satisfaction results in small physician owned hospitals that are focused are extremely high compared to the survey results for community and general acute care hospitals. Thomas A. Gustafson, Ph.D., a Deputy Director at CMS testified to the Senate Finance Committee on March 8, 2005 about CMS findings relative to patient satisfaction:

Patient satisfaction was extremely high in both cardiac hospitals and surgery and orthopedic hospitals, as Medicare beneficiaries enjoyed large private rooms, quiet surroundings, adjacent sleeping rooms for family members if needed, easy parking, and good food. Patients also had very favorable perceptions of the clinical quality of care they received at the specialty hospitals.

MedPac also reported similar findings of high patient satisfaction in its March 2005 Report to Congress.

6. Profits of community hospitals are at record amounts. It was recently noted that community hospitals as a whole managed to make profits of approximately $29 billion dollars in 2005. When this type of profit is shown, it makes it increasingly hard to argue that specialty hospitals and physician owned hospitals are putting a significant dent in profits or causing harm to general and acute care hospitals. Government and other reports support this conclusion:

The financial impact on community hospitals in markets in which physician-owned specialty hospitals are located has been limited, thus far. Those community hospitals competing with specialty hospitals have demonstrated financial performance comparable to other community hospitals.3

In essence, profits are at record numbers despite the growth of surgery centers and specialty hospitals.


The current positive outlook due to the six factors noted above is offset in large part by substantial problems and concerns. Certain of these problems and concerns are as follows:

1. The Senate does not seem to like physician owned hospitals. Neither the Republican leadership (Charles Grassley) nor the Democratic leadership (Max Baucus) on healthcare issues seems to like physician owned hospitals. Senators Grassley and Baucus introduced the Fair Hospital Competition Act of 2005 which, if passed, would have prohibited the development of physician owned hospitals. The bill  faced stiff Republican opposition and failed to gain enough votes pass.

However, Senators Grassley and Baucus have continued to argue for prohibitions on the development of physician owned hospitals. With Charles Grassley, his contradictory views of physician owned hospitals   and physician owned ambulatory surgery centers is striking. In short, he tends to support surgery centers but desires to prohibit physician owned hospitals. Perhaps this is because there are no physician owned hospitals in Iowa but there are physician owned surgery centers in Iowa, his constituency.

2. The House of Representatives has been the biggest ally of physician owned hospitals. The substantial political shift of power in the House of Representatives is likely to change this dynamic. In essence,  rather than rely upon more right-leaning members of Congress who tend to be pro competition, it is likely that more moderate, left of center allies will have to be sought out. Legislators like Pete Stark, who are unlikely to ever be a friend to physician ownership, have already articulated physician owned hospitals as one on the key avenues of attack for the party as the Democrats have significant control of the Senate and the House.

3. DHHS final report. The DHHS Report, while overall positive for physician owned hospitals, still provides plenty of statistical data that can be used by the Federation of American Hospitals (FAH) and the American Hospital Association (AHA) to argue that specialty hospitals are bad for healthcare. In essence, in each of the many reports that have been developed by the federal government over the last several years, there is information and statistics that can be used by both sides of the debate to press their point.

4. Physician owned hospitals are particularly concentrated in several states. Physician owned hospitals are prevalent in approximately 10 states and overwhelmingly not present in states with strong certificate of need laws. The results of a General Accounting Office report support this:

Although 28 states had at least one existing specialty hospital, about two-thirds of the 100 specialty hospitals we identified were located in 7 states. The specialty hospitals that are planned to open over the next few months or years will reinforce this pattern of concentration. Specialty hospital location was associated with regulatory and demographic conditions that may facilitate or encourage hospital development.4

This means that representatives and senators in any of the states that do not have a physician owned hospital face little constituent backlash or political consequence to voting along the lines of a Baucus-Grassley bill. In essence, these legislators do not have constituents that will remove them from office based on a vote.

5. Single patient death. Last year, a patient died in a specialty hospital in Portland, Oregon.  The industry was then subjected to a whole scale review and negative commentary by Charles Grassley and others. In essence, he asked for a comprehensive investigation of safety practices in specialty hospitals.  It is unusual that a single death results in a review of that entire industry. The heightened reaction to this incident shows that physician-owned hospitals are still vulnerable on a federal and state level.

6. The battle at the state level remains brisk. In several states, legislators have worked to pass legislation prohibiting the development of physician owned hospitals. For example, the Kansas Hospital Association (KHA) released its 2007 legislative agenda for Kansas Community Hospitals, one of the key action items included taking action against limited service facilities, such as physician owned hospitals, “to ensure that no additional harm is created that will jeopardize the care and services received by Kansans.”5 The KHA noted that “there have been numerous studies on the national and state level that point to the negative impact limited-service facilities have on communityhospitals” and further noted that policy changes are necessary.

In Ohio, Governor Bob Taft of Ohio signed into law on December 29, 2006 a moratorium which provides the following prohibition:

[D]uring the ninety-day period beginning on the effective date of this act, no person, political subdivision, or agency or instrumentality of this state shall establish, develop, or construct a special hospital in a county with a population of more than one hundred forty thousand but less than one hundred fifty thousand.6

“Special hospital” was defined as a hospital primarily or exclusively engaged in the care and treatment of one or more of the following: patients with a cardiac condition; patients with an orthopedic condition; patients receiving a surgical procedure; or patients receiving any other specialized category of services specified by the Director of Health.7

In addition, Montana passed a temporary moratorium. The Montana Code provides that the Montana Department of Public Health and Human Services “may not license a specialty hospital until July 1, 2007.”8 Like the Ohio legislation, “specialty hospital” is defined the same way as the federal statutes define specialty hospital, i.e., a hospital that is exclusively or primarily engaged in the treatment of one of the following categories: patients with a cardiac condition; patients with an orthopedic condition; patients receiving a surgical procedure; or patients receiving any other specialized category of services as the secretary may specify. California and Pennsylvania almost passed similar legislation this past year.

7. The middle of the house. As Congress changes and evolves, the battle for the centrists in the House of Representatives becomes more and more critical. Associations such as the American Hospital Association and the Physician Hospitals of America (PHA) will be aggressively attempting to seek alliances with centrist representatives to lobby for or against legislation.

8. Omnibus Bill. Until at least 2008, there will be a President and an administration that is in favor of physician owned hospitals and competition. One of the real risks to the industry arises in the context of not a single issue bill but an omnibus bill. For example, if the Republican representatives in the House and Senate believe that they need “something” as part of an omnibus reconciliation package or other package, this is the situation where a law related to physician ownership of hospitals can become part of a much larger legislative package.

Should you have questions on issues related to physician ownership of hospitals or other issues in this article, please contact Scott Becker and Elissa Koch Moore, the coauthors of this article. For additional information, or should you wish to support the Physician Hospitals of America, please contact Molly Gutierrez, PHA Executive Director, at 605-275-5349 or and join PHA.

Scott Becker is a partner based in the Chicago office of the McGuireWoods Law Firm’s Health Care Department and serves as Co-Chair of the Health Care Department. He also serves as counsel to PHA.

Elissa Koch Moore is an associate based in the Chicago office of the McGuireWoods Health Care Department. As of December 2006, McGuireWoods LLP is the nation’s fourth largest health care law firm as ranked by the American Health Lawyers Association.


1. The Final Report is available in its entirety at

2. Final Report, Section V.G., p. 78.

3. MedPac, 2005 Report to Congress: Physician-Owned Specialty Hospitals.

4. Specialty Hospitals: Geographic Location, Services Provided, and Financial Performance, GAO Report, GAO-04-167 (October 2003) (and cited in the Final Report).

5. Kansas State Hospital Association Press Release, “Kansas Community Hospitals, State Advocacy  Issues.”

6. Ohio State Senate Bill No. 116, Section 4(B).

7. Ohio State Senate Bill Number 116, Section 4(A). Section 4(C) provided an exception to the prohibition, i.e., any project that had obtained all local permits necessary to begin construction were obtained on or prior to the effective date of the act.

8. Montana Code § 50-5-245 (2007).

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