‘A landmark moment’ — Is Medicare ready to revive physician-owned hospitals?

It appears physician-owned hospitals could become part of a new payment model of the U.S. Centers for Medicare & Medicaid Services (CMS).

The proposed 2027 Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals (IPPS) includes a request for information about participation of physician-owned hospitals in Medicare’s new Transforming Episode Accountability Model (TEAM).

Buried among the thousands of words is a nod to something doctors have been saying for years: “There is some evidence that suggests that POHs (physician-owned hospitals) may help control costs, maintain or improve patient outcomes, and prevent hospital consolidation.” CMS cited at least four studies about benefits of physician ownership of hospitals, and posted a list of questions about how those could participate in a payment model that started this year. A public comment period on the issue has opened and runs to June.

‘A landmark moment’

CMS publishing that request for information “is a landmark moment,” said Carlos Cardenas, MD, president of the organization Physician-Led Healthcare for America (PHA).

“CMS has taken a forward-thinking and courageous step by recognizing what the evidence has shown for decades: Physician-led hospitals deliver outstanding quality, lower costs, and genuine competition that benefits patients,” Cardenas said in a news release.

“We are deeply grateful to CMS and CMMI for their willingness to explore what role these hospitals can play in making the TEAM model more successful,” he said, referring to the Center for Medicare & Medicaid Innovation. “This proposal reflects exactly the kind of innovative, patient-centered thinking that American health care needs.”

What is TEAM?

TEAM is a mandatory five-year model that started Jan. 1, aiming to help clinicians coordinate care that leads to better outcomes for patients undergoing knee replacements, hip fracture treatments, spinal fusions, coronary artery bypass grafts, and major bowel procedures. Goals include improving patient experience, incentivizing care redesign, and promoting collaboration with accountable care organizations and primary care physicians. Participating organizations must refer patients to primary care services, and success will be measured by reducing avoidable hospital readmissions and emergency department use.

What’s the big deal about POHs?

A physician-owned hospital (POH) is any hospital in which a physician, or an immediate family member of a physician, holds an ownership or investment interest. CMS estimates that more than 250 acute care hospitals are owned in part or fully by physicians.

Under the federal physician self-referral law, commonly known as the Stark Law, doctors generally are prohibited from referring Medicare patients to facilities in which they hold a financial interest, unless specific exceptions apply.

The Affordable Care Act (ACA), enacted in 2010, effectively eliminated those exceptions for new physician-owned hospitals and prohibited existing ones from expanding their number of operating rooms, procedure rooms, and beds beyond what was licensed as of March 23, 2010. Hospitals that had a Medicare provider agreement in place by Dec. 31, 2010, were grandfathered under the law and may continue operating under what are known as the rural provider exception and the whole hospital exception.

That section of ACA is known as Section 6001, and PHA noted Medicare “does not place expansion handcuffs on hospitals without physician ownership.”

Who selects the sick?

CMS’ payment rule in the Federal Register states that the restrictions were designed to guard against overutilization of services, patient steering toward higher-revenue cases, cherry-picking of healthier patients, and lemon-dropping, the practice of avoiding sicker, costlier patients.

While possible in theory, PHA argued those practices have not emerged in real life. A 2023 study commissioned by the Physicians Advocacy Institute and Physicians Foundation analyzed nearly 740,000 Medicare patients across 186 physician-owned hospitals and found no evidence of cherry-picking. Researchers found that patient age, race, ethnicity, and comorbid conditions were virtually identical between physician-led and traditional hospitals serving the same geographic areas, according to PHA.

Competition in the market

Meanwhile, advocates argue Medicare would have saved money in recent years if physician-owned hospitals were part of its care programs. A 2023 study estimated that physician-led hospitals could have generated up to $1.1 billion in Medicare savings in 2019 alone. A separate 2023 study published in JAMA Network Open by Johns Hopkins University researchers found that physician-owned hospitals charged 17.5% lower commercially negotiated prices and 46.7% lower cash prices than competing hospitals in the same market for the same procedures.

PHA also noted that markets with physician-owned hospitals have 16.7% lower health care market concentration, with only 4% of those markets considered highly concentrated compared to 13% in markets without them.

“Opponents of physician-led hospitals have had 15 years since the Affordable Care Act placed handcuffs on physician-owned hospitals to prove they could deliver more options, higher quality, and lower costs to Americans,” Cardenas said. “Instead, the opposite has happened. It’s time to give physicians, who possess the highest level of clinical training in the health care system, the opportunity to compete, expand access and deliver the care Americans deserve.”

CMS maintaining model integrity

Although the proposal exists on paper, it is not necessarily a shoo-in for a new wave of physician ownership. TEAM was designed as a mandatory model, and CMS expressed concern that allowing voluntary participation could result in net costs to Medicare or reduce anticipated savings. Self-selection, CMS noted in the Federal Register, "may result in net costs to Medicare or reduce anticipated savings" and "risks the integrity of the evaluation design," leading to biased findings about TEAM as a payment model.

The agency said any voluntary participation pathway would likely include guardrails similar to those imposed on other voluntary participants — including requirements to participate in all episode categories and restrictions on voluntary exit — to limit self-selection and ensure model integrity.

CMS is also asking how it can ensure that physician-owned hospitals return to full compliance with ACA restrictions once the TEAM model expires and any associated waivers end. For example, if a waiver allowed a physician-owned hospital to expand its number of operating rooms during the model period, CMS is asking how it could ensure that capacity is reduced back to baseline levels once the waiver lapses.

Opening salvos

It was unclear if the CMS request for information would launch a new war of words about the best ways to own and manage the facilities that deliver care to patients, though there are strong feelings around the issue.

Analyst Dutch Rojas couched the 2010 ACA rules as a victory for the pro-hospital “cartel” over physician entrepreneurship. The CMS request for information could be a way to crack open a door that has been shut to doctors for the last 15 years, he said.

The American Medical Association in December publicized a letter of support organized by the American Academy of Orthopaedic Surgeons asking lawmakers to expand physician- or provider-owned hospitals. In Congress, Rep. Morgan Griffith (R-Virginia) has introduced the Physician Led and Rural Access to Quality Care Act, legislation that would “revise certain physician self-referral exemptions relating to physician-owned hospitals.”

That legislation has not had a vote, but it did inspire additional research. The American Hospital Association (AHA) and the Federation of American Hospitals (FHA) last year publicized a study they argued supports restrictions against physician-owned hospitals. Expanding physician-owned hospitals would hurt, not help, rural health care, those organizations said.

“It is well established that POHs — arrangements in which physicians can refer their healthiest, best-insured patients to hospitals they own — lead to overutilization and higher costs,” said a statement from Ashley Thompson, AHA Senior Vice President for public policy analysis and development, and Don May, FHA executive vice president.

“Previous analysis has also shown that POHs report on fewer quality measures and have higher readmission measure penalties,” they said. “Compared to full-service hospitals, POHs are limited in the scope of services offered, often specializing in one type of care, like cardiac or orthopedic surgery, and treating patient populations that are younger, more likely to be commercially insured, and present with less complex conditions. Unlike full-service community hospitals, POHs are not required to provide emergency care, and they often do not. In fact, in many POHs, when a patient needs emergency services, staff call 9-1-1 and send the patient to a full-service hospital for care.”