Start over says U.S. Court of Appeals to physician-owned hospitals seeking relief from Obamacare

This past weekend PoliticoPro reported that the U.S. Court of Appeals for the Fifth Circuit, in Physician Hospitals of America v. Sebelius, upheld Obamacare’s stifling limits on physician-owned hospitals.[1] A closer look at the case shows this report to be inaccurate.

On March 31, 2011, the U.S. District Court for the Eastern District of Texas ruled that Section 6001 of Obamacare, which bans new physician-owned hospitals and places severe restrictions on expansions of such hospitals, was constitutional as applied to the plaintiffs of the case: Physician Hospitals of America and Texas Spine & Joint Hospital (TSJH).

Contrary to the PoliticoPro report, the Fifth Circuit did not uphold the district court’s decision, but vacated it. Furthermore, the Fifth Circuit did not even discuss the merits of the district court’s holding that Section 6001 of Obamacare is constitutional. Instead, the Fifth Circuit ruled that, under the facts of this case, federal courts do not have jurisdiction to decide the matter.[2]

In this case, TSJH was in the process of expanding its facilities and had already spent $3 million when Obamacare was passed on March 23, 2010. The expansion would have cost $30 million, but TSJH abandoned the expansion upon Obamacare’s passage.

Section 6001 of Obamacare allows for existing physician-owned hospitals to continue operating provided they were licensed by December 31, 2010. But TSJH’s expansion, had they continued with it, would not have been completed in time.

The Fifth Circuit found that federal law requires that Medicare providers take their complaints against Medicare policy first to the Department of Health and Human Services (HHS). Providers can only seek redress from the courts after HHS decides against them and after no further appeal is possible within the agency.

The plaintiffs argued that this requirement is a “practical denial of [their right to] judicial review.”[3] They argued that they would have had to have done the following:

[K]nock down two commercial buildings, perfect financing, borrow tens of millions of dollars, finish the architectural and construction plans, pay a contractor, take two years to build a new hospital, treat a patient in the expansion, bill Medicare, appeal the denial of the payment administratively, receive a final denial of claim, and file a suit in federal court under Section 405(g).[4]

The Fifth Circuit did not deny that TSJH would have to take significant risks to get to federal court, but said that TSJH cannot bypass HHS unless there is a complete inability to access the courts.

Barring an unlikely overturning of the decision by the Supreme Court, new or expanding physician-owned hospitals may have to risk substantial losses if they are to successfully fight the stringent limits Obamacare places on them.

Update: Sometime after we published this article, we discovered that PoliticoPro published a corrected version of its report along with a statement that the original version "incorrectly stated that a federal appeals court upheld provisions in the Affordable Care Act that limited the expansion of physician-owned hospitals."