Hospitals get a regulatory and statutory exemption on ownership and licensure of physician practices

Janet Craig

By Janet Craig

Certificate of Need (CON) has been both a blessing and a burden for hospitals as they have adapted to some of the biggest changes in the healthcare market. While CON laws can assist a hospital in opposing competitors coming into its home territory, recruiting and retaining physicians has often required many hospitals including rural hospitals to employ the physicians on their medical staffs.

Unfortunately, until recently, to the extent those physicians are based in an off-campus outpatient clinic or physician practice, this was a multi-step and somewhat confusing process. CON and licensing laws had not kept up with the reality of hospital employment of physicians in an outpatient setting. Now, with the recent amendment of the physician office exemption regulation and the passage of HB 444, hospital employment and ownership of physician practices has become much simpler.

While the Kentucky legislature has long recognized an exemption from CON and licensure for “offices and clinics of practitioners of the healing arts,” this was generally interpreted to be limited to practices owned by physicians or other licensed healthcare practitioners practicing in a form recognized under Kentucky law.

This meant that hospitals had to find a CON exemption and a license for operating clinics and physician practices not on the campus of the hospital. Some popular license categories include primary care center, ambulatory care center, rural health clinic, special clinic, limited health services clinic and network licenses.

While most of these licensed entities were exempt from obtaining a CON, there were steps to go through. For example, a special health clinic required an advisory opinion from the Office of Certificate of Need before it could be licensed. Some categories also required a nonsubstantive CON. For example, a limited health services clinic requires a certificate of need through the nonsubstantive process. Each license category comes with its own set of licensing requirements and restrictions on services that can be provided as well.

Shifting Definitions

When the Cabinet for Health and Family Services challenged physician practices owned by other entities, Franklin Circuit Court ruled that the law was too vague to support such a challenge.

The Cabinet responded with the physician office exemption regulation in 2012 which defined the exemption narrowly. To qualify for the exemption, a practice had to be:

  • Wholly owned by the physician or other practitioners of the healing arts.
  • Primarily provide physician services (evaluation and management codes) rather than services covered by the State Health Plan.
  • The physician/practitioner had to have overall control and management of the services being provided.
  • Services and equipment covered by the State Health Plan being provided by the practice had to be primarily provided to patients whose care was being managed by the practice and related to the care being provided.
  • Major medical equipment in excess of the capital expenditure limits set by state law cannot be utilized in the practice without a statutory or regulatory exemption.
  • Patients treated on an outpatient basis could not be retained overnight on the office premises.

The only hospital-owned practice exemption was one for academic medical centers. Certain practices which did not meet these criteria were grandfathered in if they had a court order, attorney general opinion, an advisory opinion from the Office of Health Policy or its predecessors. Practices who were wholly owned by radiologists had separate criteria for the exemption.


Prior to March 15, 2018, the only hospitals who could take advantage of the physician office exemption from CON and licensure were academic medical centers. Effective March 15, 2018, the Office of Health Policy amended the regulation which established the criteria for the physician office exemption to CON and licensing requirements. The amendment created a new exemption for private practices or outpatient clinics “under the same ownership and administrative and financial control as a Kentucky licensed hospital.”

To qualify for the exemption, the hospital cannot provide pain management services at an off-campus clinic in which most patients of the practitioners at the facility are provided treatment for pain that includes the use of controlled substances; provide any services or equipment covered by the State Health Plan; or provide outpatient surgical services.

In addition, the physicians and other practitioners of the healing arts must be licensed to practice in Kentucky; and employed either by the hospital or by an entity with ownership and control of both the hospital and office or clinic. The amendment also clarifies that the exemption applies to multi-disciplinary practices.

In addition to this regulatory amendment, the Kentucky Legislature added new exemptions to CON and licensing requirements for all operators of certain healthcare facilities in HB 444. Many of these exemptions are for licensure categories traditionally used by hospitals to employ physicians.

Effective July 13, 2018 the following will be exempt from CON and licensure requirements regardless of ownership:

  • Primary care centers
  • Special health clinics (unless the clinic provides pain management services and is located off the campus of the hospital that has a majority interest)
  • Specialized medical technology services (unless providing a State Health Plan Service)
  • Retail based health clinics and ambulatory care clinics that provide non-emergency, non-invasive treatment of patients
  • Ambulatory care clinics treating minor illnesses and injuries
  • Mobile health services (unless providing a service in the State Health Plan)
  • Rehabilitation agencies, rural health clinics, and off-campus, hospital acquired physician practices

The definition of “health facility” was also amended in HB 444 to exclude rural health clinics and primary care centers.

HB 444 is not a clean pass for hospitals as it also specifies categories of care that are not exempt under the physician office exemption or other existing exemptions currently in KRS 216B.020(2) or added in HB 444. Healthcare providers, including both hospitals and physicians, should carefully study what is now not exempt.

Nonexempt facilities include:

  • Ambulatory surgery centers
  • Pain management facilities
  • Abortion facilities that require licensure
  • Health facilities or health services that request a capital expenditure over the major medical expenditure limit
  • Health facilities that provide any of the following types of services: cardiac catheterization, megavoltage radiation therapy, adult day healthcare, behavioral health services, chronic renal dialysis, birthing services, or emergency services above the level of treatment for minor illnesses or injuries

While hospitals may still opt for a licensure category that remains for reimbursement purposes, with these statutory and regulatory changes it is now easier to fit that hospital owned physician practice or outpatient clinic into an exemption from licensing and CON.

-Janet Craig is with Stites & Harbison.


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