"Grey's Anatomy" vs. Obamacare?

Is Grey's Anatomy taking on Obamacare? That seems unlikely, especially considering that the TV show's executive producer, Shonda Rhimes, has been an active supporter of President Obama. But it's television -- where the unlikely happens all the time.

The latest story line on the ABC drama changes the name of the fictional hospital that serves as the primary location of the show from "Seattle Grace Mercy West Hospital" to "Grey Sloan Memorial Hospital." Why the change? Several of the doctors now own the hospital and wanted to honor the memories of fellow physicians who died as a result of a plane crash. It makes for an interesting plot twist for viewers but also pits fiction against reality. In the real world, the doctors couldn't buy the hospital -- thanks to a lesser-known provision in Obamacare.

Why can't doctors own a hospital?
Section 6001 in the Patient Protection and Affordable Care Act prohibits physician-owned hospitals from expanding. The wording of the provision also basically prohibits new hospitals owned by physicians.

In the past, physician ownership of hospitals was allowed by the government but restricted in several ways by legislation known as the Stark Law. For example, physicians couldn't own a distinct division of the hospital but could own the "whole hospital." 

Why all the fuss? Some believe that physicians who own hospitals will unnecessarily refer patients to their hospital to make more money. Others maintain that physician-owned hospitals could cherry-pick patients who are healthier and eligible for higher reimbursements, leaving less-desirable patients for community hospitals to treat. 

Obamacare does allow a few exceptions. Hospitals owned by physicians prior to the end of 2010 and were Medicare-certified are grandfathered in.  Physician-owned hospitals can also request exemption from the Secretary of Health and Human Services if they meet specific bed occupancy and population growth criteria or if they have high Medicaid admissions.

Impact on real world investors
Do these restrictions on physician ownership really matter to investors in the real world? To some extent.

Less competition isn't a bad thing if you happen to own shares in a publicly traded hospital chain. That's particularly true when the potential competitors tend to perform really well.

Obamacare established new quality programs where financial incentives are given to hospitals that achieve better scores in key metrics. According to a Kaiser study, 75% of physician-owned hospitals eligible to participate received more money. 74% of other hospitals received penalties rather than incentives. That's a stark contrast.

Overall, publicly traded hospitals have fared well under Obamacare so far. Shares of large hospital chain Community Health Systems have nearly doubled in the past year. The same holds true for Tenet Healthcare. Health Management Associates  (NYSE: HMA  ) stock is up nearly 50% during the period. HCA Holdings hasn't performed as well as the others, but the stock is still up around 40% in the last 12 months.

HMA lowered expectations for 2013 recently after previewing disappointing financial results for last quarter. This news dragged down its shares and also those of Community Health Systems, Tenet, and HCA.

However, many analysts think HMA's problems aren't applicable for the rest of the industry. The consensus opinion still appears to be that hospital stocks will flourish as Obamacare is fully implemented, because they won't have to absorb costs from uninsured patients. And less potential competition doesn't hurt, either.

Tune in later
Hospitals in the real world should do well under Obamacare -- as long as they're not owned by physicians. We'll have to wait for the next episodes of Grey's Anatomy to see how the fictional hospital fares.

It's actually a shame that the good doctors on the TV show had to buy their hospital in the first place. Alas, the hospital was about to go under because of the financial repercussions of a lawsuit. Obamacare couldn't help "Seattle Grace Mercy West" in that regard. While there are many provisions in the 906-page law, none of them address tort reform. Maybe that plot line will make it into next season.

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