Physician-Owned Hospitals Are Losers in Healthcare Reform Law

After President Obama signed healthcare reform legislation last week, there was much joy for Democrats (at least for Democrats). For physicians who own hospitals, it meant upheaval.

As of now, there are about 260 physician-owned hospitals in the U.S. About 58 are undergoing construction and expansion plans, with an estimated $5 billion that has been expended or financed. With healthcare reform, those projects are frozen, going nowhere, or in the midst of confusion.

The new law restricts existing physician-owned hospitals from adding beds, procedure rooms, ORs and especially reduces funding for Medicare patients. Most of the physician-owned hospitals have an average of 2 % doctor ownership.

At least 28 new hospitals were scheduled to open by August 1, 2010, and another 74 are in the planning stages to open after that date. Dozens are trying to meet a Dec. 31 deadline to "grandfather" in some new hospital expansion plans or allow some new facilities. While some new hospitals may be approved, Molly Sandvig, executive director of Physician Hospitals of America, the advocacy group for physician-owned hospitals, says it doesn't seem current hospitals meet the complicated standards imposed to carry out billions of dollars in construction projects.

After Congress passed the healthcare bills, the calls started to pour into Sandvig's office in South Dakota.

The doctors' questions: What do I do now? What's next?

Sandvig has no real answers for the questions. "It's sad. These aren't run of the mill hospitals," Sandvig says, responding to critics who say the physician hospitals are inadequate. "These are top notch places that patients love to go to."

Sandvig is a mild-mannered lawyer and registered lobbyist who runs a small office in Sioux Falls. Her major opponents are behemoth lobbyists, the American Hospital Association and the Federation of American Hospitals, to name a few.

Guess who is winning?

The AHA, the FAH, and others wrote a letter to Congress in fall 2008, saying, "self-referral to physician-owned hospitals encourages the selection of healthier, less complex and insured patients for higher reimbursement." The letter added: "self-referral to physician-owned hospitals threatens community hospitals' ability to provide services such as emergency departments, neonatal intensive care units and burn units." Critics of physician-owned hospitals also point to a Congressional Budget Office report saying that cutbacks to physician-owned hospitals could save more than $2 billion for 10 years. Proponents of the physician-owned hospitals say the numbers are off-base.

Despite all the rhetoric, conflict of interest is the key here. There's another term that docs use and that's "cherry picking"—in which physician-owned hospitals would ensnare the most profitable patients.

I understand that, on paper. But you talk to Sandvig, do some research, and then discuss the situation with John Dietz, a spine specialist and chairman of the small Indiana Orthopaedic Hospital (IOH), and suddenly the federal action smacks of too much politics and too many patients left out in the cold.

The IOH has 42 inpatient beds and 10 operating rooms on a main campus in Indianapolis. The hospital has plans for a $47 million expansion, but shrewdly kept much of it on hold because of worries over the federal hold on construction, which unfortunately turned out to be true.

"We spent about $300,000," Dietz says.

There are plans in abeyance for four additional operating rooms, 20 beds, and dozens of jobs. "We're crushed by this," Dietz says. The hospital carries out 11,000 procedures a year—a "very busy place," Dietz says.

At an outpatient facility, the hospital has plans for a $27 million expansion. "We were two-thirds of the way there" in construction, Dietz says. But that's on hold, too.

"From the overall perspective, this legislation throws ice water on some of the most valuable and innovative hospitals in the country; they are completely shut off [from the funding]," Dietz says. "These physicians— like us—represent 1% ownership—and they have completely turned around many of these hospitals. And that's going on throughout the country."

"There are some things in the legislation we have no problems with," he says. "We're totally in compliance with the requirement to disclosure our ownership to patients. We're very happy to tell our patients."

Last fall, as Congress began debating the healthcare reform issue and took steps to cut down physician-owned hospitals, Sen. Dianne Feinstein, D-CA, warned that it would "result in harm to patient access to care in California."

Feinstein pointed out how ongoing hospital construction projects were urgently needed, especially to meet California's strict seismic standards. One hospital's construction project that appeared to be at risk was at Pacific Alliance Medical Center, a 142-bed full-service hospital that has "been the community's main hospital for 140 years and was purchased by a group of physicians 20 years ago after the existing hospital board planned to lose and demolish the facility," Feinstein said in the letter to Sen. Max Bauer, D-MT. "The hospitals' clientele is overwhelmingly poor and the hospital serves the second largest population of Medicare, SSI and Medicaid patients of any hospital, public or private, in the entire country."

Another hospital where ongoing construction projects were threatened by the legislation included Loma Linda University Medical Center–Murrieta, which serves Riverside County, CA. Expansion was seen as needed because the hospital has only 1.47 hospital beds per 1,000 people, "well below" the national average of 2.7 beds, Feinstein said.

Then Feinstein got to the core of the debate. "None of these facilities are designed to cherry pick the most profitable patients; instead they're innovative ways to fill communities' needs for additional healthcare facilities," Feinstein said.

Pick and choose. This time, physicians lost their hold on hospitals—and patients lost, too.