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From Health Law Daily, November 16, 2016

Ownership by conglomerate disqualifies ambulatory surgical service from exemption

By Harold Bishop, J.D.

A Washington state appellate court has decided that the Washington State Department of Health (Department) was correct when it determined that a health care conglomerate’s ownership of a physician surgical service disqualified it from an ambulatory surgical facility (ASF) exemption from obtaining a certificate of need prior to operation. The court did find, however, that the Department erred to the extent that it ruled that the physician surgical service must own the facility space to qualify for the exemption. In addition, the court concluded that the Department did not engage in formal rulemaking through its interpretation of the ASF exemption (Providence Physician Services Co. v. Washington State Department of Health , November 15, 2016, Bjorgen, T.).

Background. Providence, a large nonprofit health care conglomerate, is the sole shareholder and owner of Providence Physician Services Co. (PPSC), a separately created for-profit corporation that employs 27 surgeons. Providence recently built the Providence Sacred Heart Medical Center (Medical Center) in Spokane, Washington. The Medical Center provides a wide range of health care services, including ASFs.

Under Washington state law, an ASF is "any free-standing entity, including an ambulatory surgery center that operates primarily for the purpose of performing surgical procedures to treat patients not requiring hospitalization. This term does not include a facility in the offices of private physicians or dentists, whether for individual or group practice, if the privilege of using the facility is not extended to physicians or dentists outside the individual or group practice."

PPSC proposed to lease from Providence a portion of the Medical Center’s building that contained the ASF and to limit the facility’s privileges to PPSC surgeons. PPSC submitted the proposal to the Department’s Certificate of Need (CN) Program for a determination as to whether it would be subject to CN approval. The CN Program initially decided that PPSC was not required to obtain a CN for the new facility because the proposed facility did not qualify as an ASF. Rockwood Health System objected to the CN Program’s determination and requested an adjudicative proceeding to determine the applicability of the ASF exemption.

A hearing officer concluded that if PPSC surgeons owned the proposed ASF, it would qualify for the ASF exemption. However, because Providence owned the facility, the hearing officer held the ASF exemption inapplicable.

PPSC sought review of the Department’s initial order before a departmental review officer. The review officer concluded that PPSC did not qualify for the ASF exemption because (1) PPSC’s proposed ASF would be located in the Medical Center, which is a mixed use ambulatory health care facility, and (2) the PPSC surgeons are employees of Providence, and even if they were not employees, PPSC is entirely owned by Providence.

Both the hearing officer and the review officer relied on Providence’s ownership as a reason for denying the exemption. In reaching his decision, the review officer relied on the definition of "private practice" as the "practice of a profession (as medicine) independently and not as an employee." The review officer also noted that PPSC was not a private practice because PPSC itself characterized its practice as neither a solo nor group practice. Thus, the review officer concluded that to allow PPSC’s proposed facility to qualify for the ASF exemption would undermine the statutory requirement that ASFs be subject to CN review.

Appeal. On appeal, PPSC argued that the Department erred in interpreting the ASF exemption because the exemption does not require a physician group to be separately and independently owned and to possess its own facility space. The Washington Court of Appeals found that the Department did not err in its interpretation to the extent it determined that Providence’s ownership of PPSC disqualified it from the ASF exemption, but did err to the extent it determined that PPSC must own the facility space to qualify for the exemption.

"Private physician" in a "group practice." PPSC’s main argument was that it is a "group practice" of "private physicians" within the ASF exemption’s plain language and that the ASF exemption does not contemplate a distinction between physician groups based on ownership. The appellate court decided that since "private physicians" in a "practice" reasonably implies a private practice, the Department properly relied on the definition of "private practice" in its interpretation of the ASF exemption. The court noted that the term "private practice" includes not only professionals who do not work for the government, but also those that are not controlled or paid for by a larger company (such as a hospital). A group of physicians, therefore, who are controlled or paid for by a hospital would not fall under the definition of "private practice."

Providence, through one of its subsidiaries, is the sole shareholder and owner of PPSC. Thus, the court found that the review officer correctly determined that PPSC surgeons are not engaged in private practice under these definitions and therefore do not fall under the terms of the ASF exemption.

The court also noted that, under PPSC’s theory, a hospital that sought to establish an ASF could circumvent the CN requirement merely by creating another entity, which in effect would still be under the ownership and direction of the hospital. By repeating this scenario, the court felt that hospitals would be able to balloon the amount of ASFs in Washington and undermine the cost controlling measures of the CN Program through the guise of a pseudo-subsidiary that is otherwise under the authority of the hospital.

The court decided that PPSC’s proposal should not be deemed a facility in the offices of private physicians for individual or group practice under the plain language of the exemption. Thus, the court held that the Department correctly determined that PPSC’s proposal did not fall within the ASF exemption.

Space ownership requirement. PPSC next argued that the Department erred in reading a "space-ownership" requirement into the ASF exemption. The appellate court agreed that the Department arguably interpreted the ASF exemption to require PPSC to own its space within the Medical Center. To that extent, it agreed with PPSC that the Department erred in this reading of the ASF exemption.

The ASF exemption provides that an ASF "does not include a facilityin the officesof private physicians." According to the court, the plain meanings of "facility" and "offices" do not contemplate a requirement that private physicians must own the ASF in which they work. Furthermore, the purposes of the CN Program would not be furthered merely by requiring a truly private group practice of physicians to own the space in which they operate. Therefore, the court found that the Department erred to the extent that it imposed a space-ownership requirement to qualify for the ASF exemption.

Rulemaking authority. PPSC next argued that the Department’s interpretation of the ASF exemption was a "rule" subject to the formal rule making procedures outlined in the Administrative Procedure Act. The court found that the Department’s interpretation of the ASF exemption was not a rule subject to the formal rule making procedures. According to the court, while the Department’s interpretation of the ASF exemption will be generally applicable to any hospital-owned physician group that tries to apply for an exemption, the adjudicative proceedings to resolve the issue of interpretation frequently have this general effect, and this does not necessarily transform the resolution into rulemaking.

The appellate court affirmed the decision of the Department.

The case is No. 47885-4-11.

Attorneys: Brian William Grimm (Perkins Coie LLP) for Providence Physician Services Co.; Richard Arthur McCartan, Attorney General Office and John Francis Sullivan (Law Offices of John F. Sullivan) for the Washington State Department of Health.

Companies: Providence Physician Services Co.; Rockwood Health System

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