In what has become an annual event, physician-owned hospitals are once again under attack by Congress. The latest assault on physician-owned hospitals was tucked inside the Paul Wellstone Mental Health and Addiction Equity Act of 2008 (H.R. 1424), which would require health plans offering mental health coverage to provide the same benefits for mental illness as they do for other medical conditions. The legislation would amend the whole hospital exception to the Stark Law to prohibit physicians from referring patients to hospitals in which they have an ownership interest. The legislation is similar to the recently proposed amendment to the whole hospital ownership exception contained in the original House of Representatives’ version of the state children’s health insurance program (SCHIP) reauthorization bill (H.R. 3162). Although a full discussion of the Stark Law and its exceptions is beyond the scope of this article, it is important to note that a physician may currently refer patients to a non-rural hospital in which the physician has an ownership interest only under the whole hospital exception to the Stark Law. The whole hospital exception requires that the referring physician owner (1) have a financial interest in the whole hospital, and not merely a distinct part; (2) be authorized to perform services at the hospital (i.e., be a member of the medical staff) and (3) be expected to actually perform services at the hospital. Without the whole hospital exception, the physician would have no way of avoiding the general prohibition on referrals to non-rural hospitals in which the physician has an ownership interest. The prohibition contained in the mental health bill would take effect eighteen months after enactment unless certain conditions are satisfied. The legislation would grandfather existing physician-owned hospitals that had a provider agreement in effect on the date of the legislation’s enactment, although grandfathered hospitals could not increase the number of operating rooms and beds without successfully navigating an exception process to be established and implemented by the Secretary of Health and Human Services. This process would forbid a grandfathered hospital from increasing its number of operating rooms and beds by more than 50 percent of its “baseline number of operating rooms and beds.” Any such increase could only occur in facilities on the main campus of the hospital. The legislation additionally has strict ownership rules limiting the levels of physician ownership in the existing hospitals. The conditions for physician ownership would require that physician owners in the aggregate not own more than 40 percent of the total value of the investment interests in the hospital, that the investment interest of any individual physician owner not exceed 2 percent of the total value of the investment interests in the hospital and that any ownership or investment interests that the hospital offers to a physician owner are not offered on more favorable terms than the terms offered to a person who is not a physician owner. According to an estimate by the Congressional Budget Office, the ban on physician-owned hospitals would provide nearly $2 billion in funds for the proposed mental health bill over the course of the next ten years. The whole hospital exception has clearly proved far more controversial than the drafters of the Stark Law could ever have imagined. Generally, the attacks against physician-owned hospitals have focused on single-specialty hospitals that concentrate on a single type of diagnosis or condition, such as cardiology, neurology or orthopedics. Advocates of physician-owned specialty hospitals contend that smaller facilities can provide higher quality of care at more competitive prices than similar services provided by larger general hospitals. However, critics maintain that physician-owned specialty hospitals “cherry pick” only the patients with the highest-paying procedures and the best ability to pay. This practice, critics claim, jeopardizes the viability of the community’s general hospital by siphoning off profitable cases and patients, leaving the hospitals to struggle with low reimbursement or non-paying patients in a challenging reimbursement environment. Critics further claim that physicians who own hospitals have an incentive to over-treat patients with expensive and oftentimes unnecessary procedures. It is important to keep in mind that the House bill must still be reconciled with a Senate-approved version (S. 558). If the prohibition survives in the final version of the bill, it still must be signed by the president. Although the ultimate fate of the prohibition is uncertain at this time, industry observers should consider the long-term availability of the whole hospital exception when structuring deals. April 2008