Physician ownership of hospitals is one of the most controversial topics in American healthcare today. Particularly where specialty hospitals are involved, there are strong feelings regarding the appropriateness of physician ownership. Although Alabama has not seen the development of specialty hospitals, the state has a long standing tradition of physician ownership of acute care hospitals. Currently, at least one Birmingham hospital appears to be actively pursuing the sale of a significant interest in the hospital to a group of referring physicians. Although controversial, physician ownership is legally permissible under specific criteria. Because hospital inpatient and outpatient services are "designated health services" under the Stark Act, referring physicians may only own an interest in hospitals that accept patients with governmental payors if the interest complies with an exception under the Stark Act. The applicable exception for physician ownership is the "whole hospital" exception. This exception essentially incorporates two basic conditions: (1) the investing referring physician must be authorized to perform services at the hospital; and (2) the ownership or investment interest must be in the hospital itself (as opposed to a subdivision of the hospital). Although these requirements under the "whole hospital" exception appear to be fairly straightforward, they frequently cause issues for physicians and hospitals. Hospitals often want to allow physicians to invest only in specific product lines or business operations and not the hospital itself. This exception does not work for anything but the entire hospital operation. In addition, tax issues for non-profit facilities make whole hospital joint ventures with physicians very difficult. Moreover, hospital-owned entities, such as home health agencies, that bill for services under different provider numbers do not qualify for the whole hospital exception. In order to allow physicians to purchase an interest in a hospital that operates these types of other business units, the hospital must spin off or divest any operations associated with designated health services and separate provider numbers. Physician ownership of hospitals also implicates the Anti-Kickback Statute. Under the Anti-Kickback Statute's safe harbor for investments by referral sources, physicians can own no more than 40 percent of the outstanding interest in the hospital. (This percentage increases to 50 percent in designated underserved areas.) Moreover, the physicians who own an interest in the hospital may not be responsible through their referrals for more than 40 percent of the hospital's revenues in the previous 12 months. Physicians must be investing in the hospital on the same terms as other investors who are not referral sources. In addition, the hospital may not directly or indirectly loan money to the physicians to buy an interest in the hospital. Of course, the hospital cannot require the investing physicians to make referrals or generate business in order to invest or maintain their interest. Although the investment safe harbor under the Anti-Kickback Statute is not mandatory, prudent hospitals and physicians would do well to follow the applicable guidelines to avoid unnecessary and unpleasant scrutiny by the OIG. Specialty hospitals have proven to be a particularly attractive investment for physicians nationally. Specialized orthopedic, cancer or cardiac facilities are frequently owned by referring physicians. Critics of these arrangements allege that these facilities skim off the lucrative patients and leave the poorly paying procedures and patients for the general acute care hospitals. Proponents of physician-owned hospitals argue that these facilities provide more efficient and targeted care. In response to criticism of specialty hospitals, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 provided that for the 18-month period beginning on Dec. 8, 2003 and ending on June 8, 2005, physician ownership in specialty hospitals would not qualify for "the whole hospital" exception under the Stark Act. After the expiration of the moratorium, CMS temporarily suspended Medicare enrollment of new specialty hospitals. CMS then published a study of physician-owned specialty hospitals. This report is available at http://www.cms.hhs.gov/MLNProducts/Downloads/RTC-StudyofPhysOwnedSpecHosp.pdf. Subsequently, the Medicare Payment Advisory Commission (MedPAC) has extensively discussed physician-owned specialty hospitals and concluded that the issue is not as black and white as some commentators had argued. Most experts now believe that this suspension on enrollment of new specialty hospitals will be lifted sometime in the later half of 2006. Because of certain regulatory and economic issues, Alabama has not seen physician-owned specialty hospitals. It has, however, seen physician ownership of general acute care hospitals, particularly in rural areas. This model may spread to Alabama's major cities. Within the right regulatory context, this model may more closely align the economic and clinical interests of hospitals and physicians. That development could be good for all concerned. Colin H. Luke is the Chairman of Balch & Bingham, LLP's Health Law Practice Group.