Alabama Supreme Court Announces Modified Four-Part Test for Application of the Physician Office Exemption Under CON Rules

By Jennifer H. Clark
Bradley Arant Boult Cummings LLP

On November 21, 2012, the Alabama Supreme Court announced a modification of the Physician Office Exemption (“POE”) to Alabama’s Certificate of Need (“CON”) rules and regulations. In Ex parte Sacred Heart Health System, Inc. (In re: “Infirmary Health System and South Baldwin Regional Medical Center v. Sacred Heart Health System, Inc.”), the court withdrew its March 2, 2012, opinion that had crafted a new test adding a fifth part, and, instead, modified the original four-part test, referred to as “the POE Application Test.” The Court indicated that the modified POE Application Test will “provide an objective standard that can be used to determine whether the POE applies to any medical practice, whether the practice is solo or group, large or small, specialized or general.”

            This case arose when Infirmary Health System and South Baldwin Regional Medical Center filed an action seeking a declaratory ruling that Sacred Heart Health System was required to obtain a certificate of need in order to develop a medical building that would accommodate physician offices, an outpatient surgery center, a diagnostic center, a laboratory, and a rehabilitation center. (The surgery center and rehabilitation center were later dropped from the project.)

            The trial court held that the part of the building that was to be occupied by Sacred Heart Medical Group physicians qualified for the POE and did not require a CON. The court later amended its judgment to hold that the exemption applied only to the part of the building to which three physicians had previously located their practices. On appeal, the Court of Civil Appeals reversed and remanded, holding that none of the building qualified for the exemption.

            The Alabama Supreme Court granted certiorari and, in its opinion, noted that the CON Review Board had previously formulated a four-part test to determine whether a proposed project qualifies for the POE. While determining that the four-part test used by the CON Review Board is still substantially sound, the court made minor modifications to the test, specifically to the second and third factors of the test. In doing so, the court reversed the judgment of the Court of Civil Appeals and remanded the case for analysis under the new POE Application Test.

            Under the current form of the POE Application Test, all four criteria must be satisfied in order to qualify for the Physician Office Exemption from CON review. The modified POE Application Test is as follows:

1.  The proposed services are to be provided, and related equipment used, exclusively by the physicians identified as owners or employees of the physicians’ practice for the care of their patients.

2.  The proposed services are to be provided, and related equipment used, at any office of such physicians.

3.  All patient billings related to such services are through, or expressly on behalf of, the physicians’ practice.

4.  The equipment shall not be used for inpatient care, nor by, through, or on behalf of a health care facility.