Bricker & Eckler, LLP

Chairman Jolivette and members of the House Health and Human Services Committee, I am Mike Gire and I am an attorney with the law firm of Bricker & Eckler and outside counsel for the Ohio Hospital Association. OHA is the statewide trade association representing Ohio’s 170 community hospitals and 40 health systems.

I am here today to provide the committee with an overview on Ohio’s existing physician self-referral statutes and background information on why and how these statutes came to be.

The notion of prohibiting physicians from referring patients to certain facilities in which they are investors is not a new concept to state or federal law. The issue first arose back in the late 1980s after a report was issued by the Office of the Inspector General of the United States Department of Health and Human Services. That report showed that patients of physicians who owned or had investment interests in clinical laboratories received 45% more lab services than Medicare patients in general.

Soon after the report was issued, Congressman Pete Stark from California introduced legislation addressing what he described as “one of the most pressing problems confronting the Medicare program - conflicts of interest arising from physician self-referrals.” Congress enacted the legislation in 1989, citing several policy concerns, including:

Physician investments pose a risk that patients won’t be referred to the facility that provides the best care. Patients may be asked to travel miles out of their way for treatment, bypassing a qualified facility closer to home.

Patients may be referred for costly services that are unnecessary. Various studies demonstrated higher utilization and even overutilization when physicians had a financial stake in the facility.

Financial performance pressures should not interfere with objective medical judgment.

Honest competition is undercut. Facilities are forced to compete not on price or quality, but on the cut of the action they give the physicians who control referrals - the source of business in health care.

The so-called “Stark” legislation passed by Congress in 1989 prohibited physicians from referring Medicare and Medicaid patients to clinical labs if they had an investment in the lab. Violation of the law expose both the physician and the entity to civil sanctions, including penalties and potential exclusion from the Medicare and Medicaid programs.

Because the federal legislation only applied to Medicare and Medicaid patients, many states extended the prohibition on referrals to clinical labs to patients with private health insurance. The Ohio General Assembly passed Ohio’s physician referral prohibition in 1992.

In the early 1990s, additional federal studies were conducted showing that the problems which arose when physicians owned clinical labs were also problematic when the physician had ownership in other types of health care facilities. For example, a 1992 study showed that physician-owners employed diagnostic imaging 1.7 to 7.7 times more frequently than physicians referring to outside radiologists, and charges were 1.6 to 6.2 times greater for self -referring physicians.

In 1993, Congress passed legislation, commonly referred to as Stark II, extending the referral prohibition on clinical labs to 10 other health care entities. Those entities include:

1. Physical therapy services

2. Occupational therapy services

3. Radiology services including MRI, CT scans, and ultrasound services

4. Radiation therapy services and supplies

5. Durable medical equipment and supplies

6. Parenteral and enteral nutrients, equipment and supplies

7. Prosthetics, orthotics, and prosthetic devices and supplies

8. Home health services

9. Outpatient prescription drugs

10. Inpatient and outpatient hospital services.

So, in federal statute, there is a prohibition on physicians referring Medicare and Medicaid patients to inpatient hospitals if they are part owners of the hospital. However there is an exception to this statute. And it’s very important to understand the exception and what it means.

The exception allows a physician to invest in an entire hospital, but not a distinct part or department of the hospital. This is commonly referred to as the “whole hospital exception.” It was intended to allow physician ownership in a full-service hospital, where any potential financial conflict would likely be diluted.

In addition, as Congressman Stark explained when he first introduced legislation in 1989, most physician-owned hospitals were established years ago in small communities in rural states. The “whole hospital” exception was developed to continue patient access and as originally proposed, only excepted ownership interests established before 1989.

Playing this exception out in real life: A physician would be allowed to invest in and refer patients to a full service hospital, but would be prohibited from investing in and referring patients to a specific department within a hospital, such as a cardiac unit or orthopedic department.

Following enactment of the Stark II legislation, many states extended their laws so that they applied to patients with private health insurance. In 1995, the Ohio General Assembly extended Ohio’s Stark laws to home health companies and outpatient pharmacies (SB 150, 121^st General Assembly, Effective 11/24/95). The legislature included the prohibition on physician investments in subdivisions of a hospital. You’ll find that provision in Ohio Revised Code Section 4731.67, which can be found on line 178 of House Bill 71. To reiterate, current Ohio law prohibits physician investment and referrals to a department within a hospital, but allows investment in and referral to an entire hospital.

Out-of-state companies have recognized the loophole which exists in state and federal law and they’re teaming up with a few physicians to build off-campus orthopedic departments and cardiac units. They’re calling them hospitals. But they provide access to care that is otherwise unavailable in the community; instead they are duplicating existing services offered by the community’s full-service hospitals. House Bill 71 would close the loophole which exists in current law; legislation is also pending in the U.S. Congress which would clarify federal law.

The Ohio General Assembly and the U.S. Congress have recognized that patients’ interests and cost containment initiatives are better served if physician referral decisions are isolated from any monetary incentives. Previous legislatures have recognized that a conflict exists when a physician invests in a department within a hospital and refers patients to that department. Taking what was once a department within a hospital and moving it off campus does nothing to eliminate the conflict.

Free-standing cardiac and orthopedic hospitals are a relatively new trend to Ohio and other states. It was a trend not envisioned when previous legislatures allowed the whole-hospital exception in Ohio’s self-referral law. Enactment of House Bill 71 would recognize the dangers of this new trend and update Ohio law consistent with concerns recognized more than a decade ago.

OHA requests your support of House Bill 71. I would be happy to answer any questions the committee may have.