Testimony before the House Health and Family Services Committee

Wednesday, June 25, 2003

House Bill 71

   

Offered by Mary Gallagher
Ohio Hospital Association

 

Chairman Jolivette and members of the House Health and Family Services Committee, I am Mary Gallagher, Vice President and General Counsel for the Ohio Hospital Association. OHA is the statewide trade association representing Ohio’s over 170 community hospitals and 40 health systems.

 

I am here this morning at the request of the Chairman to explain the legal and legislative background and structure of House Bill 71, which seeks to clarify state law regarding physician referrals. This is an issue with which I am particularly familiar, having lectured and written a legal reference manual on the subject, State and Federal Prohibitions on Physician Referrals: A Guide to Compliance, originally published in 1998 and currently undergoing a fifth update.

 

From a legal perspective, the approach proposed in House Bill 71 is entirely consistent with existing state and federal laws. In previous hearings, you’ve heard testimony from proponents and opponents about legal prohibitions on physician referrals, known as Stark laws. This morning, I’m not going to repeat much of what you’ve heard, but I would like to reinforce a few points, chiefly those concerning a loophole called the “whole hospital exception.”

 

The Ohio General Assembly and Congress enacted a simple, but powerful prohibition against any physician referring even a single patient to an entity with which that physician has a financial relationship.  The concept of physician self-referral law is simple: physicians who have an ownership interest in health care facilities should not also refer their patients to those facilities. The law recognizes the inherent conflict of interest in such an arrangement.

 

The state and federal Stark laws contain certain specific exceptions, including one to allow physicians to invest in and refer patients to a full service hospital, but physicians are prohibited from investing in and referring patients to a specific department within a hospital, such as a cardiac unit or orthopedic department. You’ll find that provision in Ohio Revised Code Section 4731.67, which can be found on line 178 of House Bill 71. Out-of-state corporations have recognized the loophole that exists in state and federal law and they’re teaming up with a few physicians to build freestanding orthopedic departments and cardiac units. And they’re calling them hospitals. House Bill 71 would close the loophole and keep Ohio’s prohibition on physician referrals true to its intended purpose.

 

Interest in this issue is gaining attention across the country, as more and more states are seeing an influx of physician-owned, limited-service specialty hospitals, just as we are here in Ohio. Several different approaches have been suggested for dealing with this fast-developing trend, but the remedy gaining most support is the one OHA advocates in House Bill 71.

 

This approach most recently emerged in Congress on June 12, when the Senate Finance Committee included an amendment in the Prescription Drug and Medicare Improvement Act. This is legislation that President Bush has asked Congress to send him before July 4. The fact that the amendment made it into this must-pass legislation suggests strongly this is the right way to address this concern.

 

The approach in the amendment is simple, and it mirrors House Bill 71. It specifies those physicians who own a limited-service specialty hospital couldn’t also send their patients to that hospital. Using a slightly more surgical approach than House Bill 71, the amendment says the whole-hospital exception in current physician self-referral law cannot be invoked for hospitals focused on cardiac, orthopedic, surgical or other specialties.

 

Relying on the combination of physician owners and physician patient-referral powers, these hospitals target better-paying health care areas, such as cardiac and orthopedic services, and healthier, more profitable patients. Full-service community hospitals are left with sicker, more expensive patients. Reimbursement is the same for both, which means the ability of full-service community hospitals to provide needed but unprofitable services — such as 24/7 emergency care, trauma and preventive care — is crippled.

 

A recent report to Congress by the U.S. General Accounting Office lends credence to OHA’s concern. The GAO is studying the impact of physician-owned specialty hospitals on full-service community hospitals, at the request of House Ways and Means Chairman Bill Thomas and Rep. Jerry Kleczka. In a preliminary report to Thomas and Kleczka released in May, the GAO found the number of specialty hospitals across the country is growing rapidly, “many are owned, in part, by the physicians who work in them” and their patients “tended to be less sick than patients with the same diagnoses at general hospitals.”  Of the 92 specialty hospitals studied by the GAO, 70 percent involved physician ownership, and in half of those, physicians owned the majority interest.

 

The GAO report was followed by an announcement last month that the Centers for Medicare and Medicaid Services (CMS) would propose a regulation in July to limit the whole-hospital exception and clarify that physician owners of limited-service specialty hospitals cannot also send their patients to those hospitals. While CMS must wait for Congress to act before it has the authority to issue a new regulation, CMS Administrator Tom Scully has said he will seek this legislative authority to close the whole hospital loophole because as he explained last Wednesday, “I am very concerned about the perverse incentives created by the whole hospital exemption.” 

 

Again — further evidence that the approach advocated in House Bill 71 is the right remedy to resolve this issue.

 

Ohio hospitals’ concerns over this emerging trend were also echoed in an April report by the Robert Wood Johnson Foundation-funded Center for Studying Health System Change, “Specialty Hospitals: Focused Factories or Cream Skimmers?” And again, clarifying the whole-hospital exception emerged as a public policy solution that could be employed to address the problem.

 

Even if Congress eventually acts to clarify prohibitions on physician self-referrals, federal law applies only to referrals of Medicare and Medicaid patients. A change in state law would make it clear that physician self-referral is bad public policy. Without a change in state law, physician-owned, limited-service specialty hospitals will continue to proliferate in Ohio. The community assets we know as our full-service hospitals should not be dismantled as an unintended consequence of legislative inaction.