Proposed eased restrictions on physician-owned hospitals: potential impacts for physician groups, health systems, and hospitals


Proposed eased restrictions on physician-owned hospitals: Potential impacts for physician groups, health systems, and hospitals

On June 5th, U.S. House Energy & Commerce health subcommittee ranking Republican, Michael Burgess (R-TX), and Rep. Vicente Gonzalez (D-TX) introduced a bill, the “Patient Access to Higher Quality Health Care Act of 2019,” which would repeal the ban on physician-owned hospitals imposed by Sect. 6001 of the Affordable Care Act (ACA).


Prior to introduction of the bill, Burgess and 32 members of Congress sent a letter to Centers for Medicare and Medicaid Services (CMS) Administrator Seema Verma, requesting the Center for Medicare and Medicaid Innovation (CMMI) consider creating a demonstration to support expansion and formation of new physician-owned hospitals:

“As CMMI continues to examine innovative payment and delivery models in the Medicare program, we ask you to consider a model that improves competition and empowers patients in their treatment decisions,” the lawmakers wrote. “As hospital consolidation is both occurring at a rapid pace and resulting in higher costs for both beneficiaries and the Medicare program, initiatives at physician-owned hospitals are important in maintaining quality and access to health care for American patients.”

Before the Congressional initiatives, Health and Human Services (HHS) Secretary Alex Azar, just two weeks into his tenure, expressed interest to ease restrictions on physician-owned hospitals as an effort to promote more competition and lower health costs.3 When pressed for full repeal during a HHS budget hearing before the House Ways and Means Committee, Azar replied, “I commit to work with you on any changes we can make to make sure we are allowing good competition, allowing physician-owned, or other-owned, facilities to compete and deliver the highest quality, low-cost care to our beneficiaries.

On April 14, 2017, CMS issued a request for information about how best to improve the delivery system, specifically the “appropriate” role of physician-owned hospitals in providing care to Medicare beneficiaries, as well as how the restrictions surrounding physician-owned hospitals have impacted the healthcare delivery system overall.


The physician-owned hospital model has long been a subject of debate, beginning in about 1991, when laws emerged proscribing physicians from making referrals to entities in which they had a financial interest or relationship. Congress did attach an exception to the Stark Laws, also known as physician self-referral laws, known as the “whole hospital exception,” which allowed physicians to refer to whole hospitals, not just a part or service of the hospital. Congress could not foresee how this exception would lead to a surge of multiple subdivisions of the same entity that was covered by the law. Perhaps today’s physician-owned hospital model and self-referral patterns were not envisioned when the exception was added. The whole hospital exception was amended with the addition of Sect. 6001 of the ACA.

The update specified the whole hospital exception applies only to physician-owned hospitals established as of March 23, 2010 and those assigned a Medicare ID by the end of 2010. A range of restrictions were also detailed in the update, from expansion limits to ownership percentages and patient safety.

Opponents, including the American Hospital Association (AHA) which represents not-for-profit hospitals and the Federation of American Hospitals (FAH), representing investor-owned hospitals, argue that physicians are more likely to selectively provide services to the “healthiest and wealthiest” patients, order unnecessary tests and procedures, and refer patients to their own hospitals.2

Proponents, including the American Medical Association (AMA) and Physician Hospitals of America (PHA), contend that physician-owned hospitals are more efficient, have less administrative costs, and provide high-quality care. Supporters assert that physician-owned hospitals promote market competition and offer more choice in the new consumer-driven landscape.

Sect. 6001 of the ACA was added because prior studies conducted by the Government Accountability Office (GAO) and the Medicare Payment Advisory Commission (MedPAC) found that physician ownership and self-referrals resulted in preferred service to the healthiest and wealthiest patients, leaving not-for-profit hospitals to shoulder the burden of caring for the sickest and most disadvantaged populations. The intent of the provision is to close the “whole hospital” loophole, which has prevented physician owners from creating conflicts of interest from self-referrals.4

Using updated data from Medicare cost reports, Dobson DaVanzo conducted an analysis comparing the characteristics of physician-owned hospitals and all other Medicare Inpatient Prospective Payment System (IPPS) hospitals and reiterated much of the findings from the earlier studies.1

Key characteristics of physician-owned hospitals include:

  • Avoiding Medicaid and uninsured patients.
  • Treating fewer medically complex patients.
  • Enjoying margins nearly three times those of non-physician owned hospitals.
  • Providing few emergency services.
  • Being penalized for unnecessary readmissions at 10 times the rate of non-physician owned hospitals.



Physician groups, health systems, and hospitals must be attentive to the proposed House legislation to repeal Sect. 6001 of the ACA coupled with HHS’s commitment to support states’ repeal of certificate of need (CON) laws.ERDMAN-ALERT-PHYS-OWNED-HOSPITALS_TAKEAWAYSPhysician ownership of facilities has long existed in the majority of outpatient surgery and diagnostic facilities. Managing health in cost-effective settings, rather than physician-ownership, should be the strategic focus.

Physician ownership of hospitals should be viewed as an opportunity for physician organizations, health systems, and hospitals to innovate in the design and delivery of new healthcare models that are convenient, efficient, and digitally connected to care coordination programs that reduce costs and improve outcomes.

ERDMAN Analytics provides physican groups, health systems, hospitals, and capital partners an objective view of opportunities to collaborate in more meaningful ways to develop systems of health that create healthier communities.


  1. American Hospital Association and Federation for American Hospitals. (Jan. 11, 2019). “Community hospitals oppose legislation to repeal ban on self-referral to physician-owned hospitals (Memo).”
  2. McClellan, M. B. (2005). “Specialty hospitals: Assessing their role in the delivery of quality health care.” Testimony before the House Energy and Commerce Committee, 12.
  3. U.S. Department of Health and Human Services; U.S. Department of the Treasury; U.S. Department of Labor. (Dec. 3, 2018) “Reforming America’s healthcare system through choice and competition (Memo).”
  4. U.S. General Accounting Office. (2003). “Specialty hospitals: Information on national market share, physician ownership, and patients served.” Pub. no. GAO-03-683R(1 –18).
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