Future of Physician-Owned Hospital Projects

Posted on June 25, 2010


The Patient Protection and Affordable Care Act (aka the Healthcare Reform Bill) was passed on March 23, so its ripple effect has had about 90 days to sink in to all those affected.  Besides the speed of its adoption and the complexity of its contents (over 2,400 pages), the wild card with legislation coming out of Washington is always the unmentioned items buried in the text, the fine print so to speak. 

One of the most surprising and not fully understood items in the Bill is a provision to limit physician-owned hospitals.  In essence, it put an immediate ban in place on expansion and forces all physician-owned hospitals to complete current construction projects by December 31 or risk losing Medicare certification. A Washington Post article describes the issues very well.

Does this apply to hospitals with partial or minority ownership by doctors?  Is this permanent or do these restriction expire?  If so, when?  Without clarification, it is difficult for affected physicians to make decisions, and thus anyone involved in physician-owned hospitals must act conservatively and assume the worst:  finish (or scrap) projects by Dec. 31 or else.

The real-life ramifications of the Healthcare Reform Bill affect a current client of ours. Haskell is involved with a hospital project with 15% physician ownership that luckily is projected to open well before the end of the year. Yet, the owners and their lawyers are scrambling to not only understand the legislation, but how it affects them and how they should most appropriately act.

Our client has one main concern:  will they be able to build out two floors of shell space after the December 31 deadline?  They figure not. So their options are three:  build the floors out at double-speed to make the Dec. 31 deadline, swallow the loss and make their shelled floors into handball courts, or buy out the physicians to avoid the effects of the Reform Bill.  They chose to buy out the 15% physician ownership, which involves finding over $10 million in a very tight debt market.

Their project is a fairly simple problem.  What about facilities with more gray area and more money at stake?

My view of the whole physician-owned hospital limitations?  Expect lawsuits.

A real estate attorney I am not, but changing the rules mid-stream to the detriment of individuals usually results in protest. To me, it is akin to the city or county changing zoning on your property which limits your ability to develop it as you had intended. When you purchased it, you had a reasonable expectation what you could do with your property, and the municipality took that away. In law parlance, that is an unlawful taking.

Interestingly, similar setback zoning law changes in NYC have been overturned on Fifth / Fourteenth Amendment protection, with particular emphasis on the Due Process and Equal Protection clauses, respectively. The Bill of Rights Fifth Amendment provisions are particularly relevant:  “No person…nor be deprived of life, liberty, or property without due process of law…” If expected use of property is denied, a valid claim is likely in order to make the owner whole. I see no reason why this would not apply to physician-owned hospitals.

What makes the physician-owned hospital section of the Reform Bill ripe to be nullified is the unreasonable nature of it. 

  • There are no grandfathering provisions for hospitals already in the construction process (already permitted projects), which is unreasonable.
  • It is unreasonable to expect projects of the size and complexity of hospitals to finish in nine months regardless of current construction progress.
  • Given the nature of healthcare, technology and population growth, the concept of no future construction allowance (renovations, additions, new construction) is not reasonable.
  • Not providing a cap or expiration date for ‘no future changes’ is not reasonable.

The United States judicial branch supports sound law. Judges like balance and any time unjust inequality rears its head via law courts seek, when asked, a return to balance.  This reminds me of those Ally Bank commercials:  even kids know when something is not fair.

The physician-owned hospital component of the Healthcare Reform Bill was hastily conceived and not well researched. I believe it will be deemed unconstitutional before December 31, 2010.