Wempe Plummer

Better Health Care? How the Affordable Care Act Affected Physician-Owned Hospitals

The ACA imposed restrictions on physician-owned hospitals to improve quality of care. Elizabeth Plummer, professor of accounting, and Bill Wempe, associate professor of accounting, researched those hospitals to see if the restrictions worked.

November 30,  2017

By Elaine Cole

Controversy has long surrounded physician-owned hospitals. Proponents say they improve care, improve population health and reduce costs. Critics counter that physicians’ ownership of hospitals provides them with incentives to improperly refer patients to facilities in which they have financial interests and prescribe unnecessary medical tests. In addition, physician-owned hospitals can choose patients with good general health who opt for specialized and highly profitable medical treatments, which reduces other hospitals’ bottom lines and ability to provide indigent care.

The Affordable Care Act imposed three restrictions on physician-owned hospitals. First, physicians cannot refer Medicare or Medicaid patients to a hospital in which they have an ownership share if the hospital was formed after 2010. Second, physician-owned hospitals can’t increase the aggregate percentage of physician ownership after March 23, 2010. Third, with certain exceptions, physician-owned hospitals cannot increase the number of operating/procedure rooms and beds above the number for which they were licensed as of March 23, 2010; however, they can convert an operating room into a procedure room or reallocate beds across categories. 

Did the restrictions work? Since the ACA affects consumers, health care providers, insurance companies and government agencies, Elizabeth Plummer, professor of accounting, and Bill Wempe, associate professor of accounting, examined 106 physician-owned hospitals in Texas, home to 40 percent of the country’s facilities. 

They focused on two questions: Did the hospitals and their physician-owners take preemptive action, and did they modify operating practices to maintain or increase profitability under the new restrictions?

Their research shows that the hospitals and physicians reacted quickly to the deadlines of the policy changes.

“Immediately prior to the ACA’s effective dates, more physician-owned hospitals were formed, more physicians took ownership, and existing physician-owned hospitals increased in size,” Plummer said.  

After the ACA’s provisions took effect, the hospitals improved the use of assets to generate increased services, revenues and profits. Staffed beds increased by 15.1 percent, revenue per square foot increased 21 percent, and revenue per full-time employee increased 20.1 percent. 

“None of the existing physician-owned hospitals stopped accepting Medicare to avoid the ACA restrictions, although hospitals formed after the ACA attempted to do so,” Wempe said. “These hospitals have been sold or are in bankruptcy proceedings, so not accepting Medicare doesn’t appear to be a viable strategy.”

Plummer and Wempe conclude that the ACA restrictions effectively eliminated the formation of new physician-owned hospitals and severely curtailed the expansion of existing ones, thus accomplishing what previous legislative efforts had failed to do. 

“The legislation absolutely had its intended effect,” Wempe said. 

“The Affordable Care Act’s Effects on the Formation, Expansion, and Operation of Physician-Owned Hospitals,” E. Plummer and W. Wempe. Health Affairs, 2016