Physician-Owned Medical Centers: The Timing is Right

The Birmingham healthcare community seems constantly to be reinventing itself. The most significant development in some time may be the transition of Carraway Medical Center to Physicians Medical Center Carraway. Along with several other hospitals in Alabama, this hospital has transformed itself to a majority physician-owned for-profit facility. A significant number of physicians, many of whom did not formerly practice at Carraway, have banded together to purchase the Carraway facility out of bankruptcy. A partnership with GP Medical Ventures out of Nashville, Tenn., this facility is being led by the well-known healthcare executive Martin Nowak and appears poised for success. Nowak has recruited a stellar management team and developed an ambitious plan for growth and redevelopment. Occupancy has soared, and there are new signs of life everywhere around the newly named Physicians Medical Center campus. The hospital appears to be adding material numbers of both employees and physicians. Significant new capital projects are rumored to be in the works. When physicians own a hospitaluj, the interest of physicians and the hospital are much more closely aligned. Both parties have a vested interest in saving money at the hospital and providing cost efficient, quality care to the patient. Physicians who invest in a hospital are much less likely to invest in competing ventures that may hurt the hospital's volume or case mix. Physicians may also see the benefit of encouraging their patients to choose hospital-offered services rather than services provided by independent entities. In the increasingly turbulent healthcare arena where hospitals and physicians may be competing to own or provide various healthcare services in order to maintain incomes and to make up for shrinking reimbursement, physician ownership of hospitals make sense. This model allows physicians and hospitals to work together rather than to compete against one another. What makes this model possible is the "whole hospital" exception under the Stark Act. Generally, the Stark Act prohibits physicians who own an interest in a healthcare entity from referring governmental patients for "designated healthcare services" to this entity. But, under the "whole hospital" exception, a physician-owner may lawfully refer Medicare or Medicaid patients to a hospital where the physician practices if certain criteria are satisfied. These criteria include the requirement that the referring physician be authorized to perform services at the hospital. In addition, the physician must own an interest in the entire hospital, not just a department or subsidiary of the hospital. The physician investment in the hospital must also not violate the anti-kickback statute. Although this statute does not mandate compliance with an applicable safe harbor like the Stark Act, both the hospital and investing physicians need to be cognizant of the important aspects of the safe harbors and come as close as possible to their requirements as possible. Chiefly, physician investors who make referrals to the hospital must purchase their interests on the same terms as investors who are not in a position to make referrals. The physicians cannot be required to make referrals as a condition of their continuing ownership in the hospital. The hospital cannot lend money to physicians to cover the physicians' investment in the hospital. It is important to note that Physicians Medical is not the type of physician-owned venture that has been the focus of criticism from the American Hospital Association and other sectors. Generally, the attacks against physician-owned hospitals have focused on certain "specialty" hospitals, particularly in the cardiac or orthopedic areas, that do not serve a wide range of patients. These groups accuse the specialty hospitals of siphoning off profitable cases from hospitals that provide a broader array of services, including needed but unprofitable services. Physicians Medical Center, however, is not a specialty hospital. It provides many services in an underserved area of Birmingham, operates a busy emergency room and treats patients from diverse backgrounds. The physician ownership model has worked well for ambulatory surgical centers over many years. Most ambulatory surgical centers are owned at least in part by the physicians who perform cases at the centers. The key to the success of this model appears to be both an alignment of interests as well as top quality professional management that can work for and with the physicians and not at cross purposes with physicians. It appears that Physicians Medical has adapted this model and is using it in the acute care setting. It will be interesting to see if other Birmingham facilities follow suit.