CHAMP Act Amendment Continues to Threaten Surgical Hospitals’ Livelihood

Members of the surgical hospital industry who convened at the seventh annual meeting of the Physician Hospitals of America (PHA) in mid-September learned the finer points of just how their industry is being threatened by a piece of legislation making its way through Congress currently. It’s not the first time that surgical hospitals have been in the political bullseye, but lobbyists for the PHA say it’s one of the most serious situations the industry may face in a recent past that includes the now-infamous 18-month moratorium.

Tucked away in the Children’s Health and Medicare Protection (CHAMP) Act of 2007 — a bill introduced by Democrats in the House of Representatives earlier this year to provide insurance coverage for children and strengthen Medicare for America’s seniors and people with disabilities — is language that if enacted, would hamper or even eliminate physicians’ ability to invest in hospitals and would impose new requirements on existing physician-owned hospitals.

Jay D. Christiansen, JD, a partner in the Minneapolis law office of Faegre & Benson and a frequent speaker on Medicare issues and Stark law, told the PHA audience that it was essential for them to understand the statutory framework of Stark law and the anti-kickback statute. “They have been around a lot longer and many of the concepts being proposed in Section 651 have a history in these statutes and safe harbors,” Christiansen says.

Essentially, Section 651 of the bill eliminates the whole hospital exception to the federal physician self-referral law, known as the Stark law, so that physicians could not refer to hospitals in which they have an ownership interest. Although existing arrangements would be grandfathered, these grandfathered hospitals will have only 18 months to meet a number of new requirements related to growth, disclosure of ownership, limiting physician ownership to no more than 40 percent of the value of the facility and no more than 2 percent individually, and other patient disclosure requirements. Rep. Pete Stark (D-CA) introduced this amendment to the CHAMP Act on July 24, 2007.

Specifically, Section 651 would prohibit physicians from referring Medicare patients to hospitals in which they have ownership interest. This amendment would apply to all hospitals, and not only physician-owned specialty hospitals. However, the amendment would grandfather hospitals that were in operation with Medicare provider agreements as of the date of introduction of the bill.

“The perceived problem, according to Stark and others like him is that physician ownership leads to things like a loss of competition and excessive utilization — you have heard it all before,” Christiansen said in a presentation to PHA members during the annual meeting. “The original statute to attack this problem is the anti-kickback statute which makes it illegal to knowingly offer payment to induce referrals in government program business like Medicare. Almost any transaction in our industry has something to do with patient referrals of some kind, so everything is in play here. In 1987, the Office of the Inspector General (OIG) was told to promulgate the safe harbors, which are different from exceptions under Stark law; if you fit within a safe harbor, you were protected from prosecution. They are like a get-out-of-jail-free card, but they protect things that weren’t problematic in the first place. Among safe harbors are 60/40 joint ventures and ambulatory surgery centers (ASCs), but there is no safe harbor for the ownership of hospitals.”

The Issue in Historical Context

As a way of providing context for the understanding of Section 651, Christiansen reminded PHA members that Stark recognized that under the anti-kickback statute, the government was reluctant to pursue prosecutions because it had to prove criminal intent and provide the preponderance of evidence required in a criminal trial. “Stark decided we ought to have a ‘bright line rule,’ so he introduced the Ethics and Patient Referrals Act of 1989 — or the Stark Act,” Christiansen said, adding that Stark had zeroed in on whether or not there was a referral for a designated health service (DHS). So within the parameters established by the aforementioned Stark laws, Christiansen explained, surgical hospitals then faced the watershed year of 2003, in which an amendment to the “whole hospital” exception under Stark was made as part of the Medicare Modernization Act.

“This amendment basically said, ‘Let’s look at a certain class of hospitals in which physicians have investments — specialty hospitals,’” Christiansen noted. “And for a period of 18 months there could not be a referral to those hospitals and still be protected by the whole hospital exception. That moratorium expired on June 8, 2005, and much of what was talked about then is still talked about now in Section 651 of the CHAMP Act.”

Christiansen continued, “CMS decided not to process applications for Medicare provider agreements beyond the 18-month period until they released a report in August 2006 that essentially said, ‘We don’t find them to be a problem.’ New hospitals were able to get Medicare provider agreements again. Even during that moratorium, if you fit the grandfather provisions, referrals would be allowed, but you had to be under development or have a Medicare provider number.

Fast-forward to 2005, when Sen. Chuck Grassley (Iowa) and Sen. Max Baucus (Montana) introduced the Hospital Fair Competition Act, a piece of legislation that would have made permanent the moratorium that was about to expire from the 2003 amendment. “This legislation would have put further restrictions on grandfathered hospitals, but fortunately it did not pass,” Christiansen said. “However, some of the concepts in this bill found their way into Section 651 of the CHAMP Act.”

Christiansen cautioned PHA members about disregarding Section 651’s whole hospital exception’s application to specialty hospitals. “This exception does not care whether you are a specialty hospital vs. a general hospital, as that distinction is not relevant. I have heard a lot of conversations in which people are confusing the safe harbors, the exceptions, and the anti-kickback statutes. Some people have said that if the moratorium becomes permanent, they’ll become a different kind of hospital to get around it, and that won’t work. If you want to qualify for the whole hospital exception, you have to meet it 18 months from the date of enactment — and that date hasn’t occurred yet. If the CHAMP Act is adopted and signed by the President, only at that point will the 18- month period begin.”

Christiansen acknowledged that interpretation of several points in Section 651 is tricky at best. “A hospital will have to meet requirements no later than 18 months after enactment — in theory you could say, ‘We met them on Sept. 14; we don’t anymore, but we met it not later than 18 months.’ Presumably that’s not what’s intended in this language, but there’s a lot of (ambiguity) here.” With Section 651, there is no test to determine the difference between existing hospitals vs. those under development, Christiansen noted, adding, “The only question is, did the hospital have a Medicare provider agreement on July 24, 2007, the date that the bill was introduced into the House. So if a hospital gets one on Dec. 1, it can treat Medicare patients until 18 months from enactment, and then this requirement kicks in and there will be a look-back to see if you had a provider agreement on July 24 and thus meet the whole hospital exception. What this means is that people in a state of development without a provider number might not be able to use this exception. Also, surgical hospitals that haven’t gotten to the drawing board yet will be precluded.”

Surgical hospitals may be tempted to start establishing what Christiansen alludes to a “high water mark” in case the legislation is passed, but there is much uncertainty as to whether this gambit could pay off. “Section 651 says a hospital can’t increase the number of beds or the number of operating rooms beyond the date of enactment, and I think this will prove to have a number of challenges,” Christiansen said. “We don’t know what the bill says about various scenarios, such as a hospital with an OR shell that can be put into service in a year or two, or a fully equipped OR that is not being used, or having some licensed beds that are in service and some that are not — all these questions will have to addressed if this bill is enacted.”

Going to the heart of Section 651 is the potential impact on physicians’ livelihoods relating to their ownership interests. “Under Section 651, physicians can’t own more than 40 percent, which is unlike what we saw in the 2003 amendments which said you can’t increase the number of physician investors,” Christiansen explained. “Here you can, you just have to have the total investment as 40 percent or less. The real issue here is knowing what the bill means when it says 40 percent of the total value of the investment. It doesn’t say 40 percent of the units; the value could be different than who owns the units. In valuation lore, certain units may be more valuable than others depending on factors such as governance rights and the exit strategies of minority interests.”

Christiansen added, “It’s the biggest head scratcher of the bunch. Section 651 says the distribution must be made on the investment of capital. It doesn’t say it’s based on the value as discussed in the 40 percent/2 percent provisions, and it doesn’t say it’s based on units. Let me illustrate the issue by theorizing that eight doctors start a hospital by investing $100,000 each, and each unit is identical, with a one-eighth distribution. The facility starts making money, has good payor agreements, has reduced its debt, and has appreciated in value. Everyone knows that the security rises or falls in value as time goes on. So five years later Dr. Newbie joins the hospital and the owners tell him each share is now $200,000 — which is exactly what the original investors will receive when they get out of the game.

That’s standard economics 101. But Dr. Newbie pays $200,000 and he gets one unit; he ought to get one-ninth of the distribution but Dr. Newbie only has $200,000 out of $1 million in capital, so he gets two-tenths — or one-fifth of the distributions for his unit. Not all units are equal under this scheme. It becomes problematic when, if you decide you want to fix this and stay within this safe harbor, you have to sell down your interest. The facility’s founding fathers will say, ‘If I sell some of my units, they will pay more capital if I take an appreciated price — I won’t get the same distribution as they get.’ Another option is, ‘I forgo the appreciation I ought to get so I can keep the same level of distribution compared to everyone else.’ It creates confusion.”

Christiansen acknowledged the angst building within the PHA audience and commented, “You are probably thinking, ‘Does this mean we have to sell some of our company?’ The answer is, maybe. It’s the likeliest consequence, absent some other alternative if you choose to comply with the bill should it pass.” Christiansen added, “What are we going to do about this? If it does pass, the one option would be convert to an ASC. One of the reasons for doing so is because you take Stark off the table, as it doesn’t apply to ASCs. You may have to get recertified or maybe relicensed. Another option is to get out of the Medicare business altogether. You can also sell it all to a third party, or possibly combine with other hospitals and form a publicly traded company — it’s challenging but not impossible to think about.”

Fall’s Upcoming Fight

As unsavory as these scenarios may be, the take-home message for PHA members is to fight for their industry and their livelihood, according to PHA lobbyist Randy Fenninger, JD, president of Washington, D.C.-based MARC Associates. Fenninger provided the PHA audience with an insider’s view on how the CHAMP Act is progressing on Capitol Hill.

“The House has passed the CHAMP Act, but an important point is that the bill’s authority expires at the end of September. That means there might be no money from the government to the states, and that’s the locomotive driving the political train in this session,” Fenninger explained. “The Senate decided not to add any Medicare provisions to its version of the bill because the Democrats realized they could never pass it. The House, inversely, has a bill loaded with Medicare provisions. The Democratic leadership is trying to figure out how to send two very different bills to the President for veto, as the President has said he would veto either bill if it came to him in present form. Democrats are looking to make a political statement by getting a veto on this bill so that they have a nice campaign issue next fall; I suggest there won’t be an early compromise which everyone can agree to.”

Fenniger advised PHA members to expect a short-term extension of the CHAMP Act. “Everyone on the Hill is admitting to this reluctantly. It means we we’ll have a piece of legislation at the end of the year with other stuff attached to it. The end game for us is not the first conference session but the last train out of town,” Fenninger said. “That’s where our opponents will have the opportunity to do something to us, but we will have some leverage to protect ourselves from the worst of Section 651. Because of the conflict between both parties and the White House, it gives us more time as an industry to ameliorate the worst impacts of this bill and get it to where it is manageable for you to continue operating. If we use our time well, it will work for us and work against our opponents; they lose as time goes on — that’s the nature of compromise. It does not look like it will be a quick conference session, and that works to our advantage.”

Fenninger said the industry has a good opportunity to influence key decision-makers on the Hill. “We are not without allies. The Bush administration remains supportive of competition in healthcare and they are appreciative of the support of their initiatives on transparency. CMS is making no change in regulatory policies that have been unfolding, and even though the Democrats have taken over, we are not seeing the Administration take the bait and move with them; as long as the Administration stays unmoved, that’s a bulwark for us.” Fenninger added, “We have met with our opponents like the AHA and will do it again as soon as the wounds heal. We will have another conversation and take a few more licks, but it’s an important dialogue.

Rep. Charles Rangel, chairman of the House Ways and Means Committee, has asked us to have that dialogue. He has said to us, ‘I am now your newest best friend.’ He has told us his mind is not made up yet about Section 651 and he has told us to work with him and his staff. This is big because he will be the dominant force in any conference on the bills that go forward. Rangel is holding out his hand in friendship and we will clasp it; we will return his friendship and meet his needs because he will be pressured to go back to stronger language in Section 651. If you are thinking to yourselves, ‘Why should I help the guy who chairs the committee that wrote the bill that knocked down the house I just built?’ let me remind you he is the one Democrat who has publicly said he will work with our supporters, the traditional Republican base we had – to resolve this satisfactorily.”

Fenninger emphasized to the PHA members further, “This is the strongest advantage we have right now. Rangel is chair of the most powerful committee in the House, and Speaker Pelosi won’t tell Rangel to go back and redo the bill; she will trust Rangel to carry the day, and that’s why he is so critical to our strategy. A door has opened for us, and it’s an opportunity we will not let escape. We will show him we know how to get answers to his questions, as we have answered them all before. We will be smart politically, and we will turn this around through our collective efforts. This is a very serious situation, and we’ve been there before; I’ve seen you work together and amaze people in Washington, and I expect nothing less.”

The text of the bill may be obtained at the House Ways and Means Committee Web site at: http://waysandmeans.house.gov/media/pdf/110/CHAMP/Chairmanamendment.pdf  

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