Calendar year 2008 has begun where 2007 ended, by presenting us with a number of legal developments impacting the provision of outpatient surgical care. Keeping up with such developments is a challenge for those of us whose careers revolve around representing outpatient surgical facilities. Keeping up for those who actually own and/or operate such facilities as part of their practices may simply be impossible.

Accordingly, we hope you find our discussion of selected recent developments in the outpatient surgery arena to be useful. This alert and others that we will forward do not purport to be exhaustive accounts of legal developments impacting ASCs or physician-owned hospitals nationally. Rather, we have identified developments that we found particularly interesting in that they address common themes or questions that we frequently encounter.

Developments on the Specialty Hospital Front

For at least five years now, Congress has “flirted” with the notion of somehow restricting the growth and operation of physician-owned hospitals. On March 5, 2008, the House of Representatives passed H.R. 1424, the Paul Wellstone Mental Health and Addiction Equity Act of 2007, which includes specialty hospital restrictions along the lines of the House/Stark CHAMP Act (H.R. 3162).

In short, H.R. 1424 provides that in order for a hospital to qualify for the whole hospital or rural provider exceptions, the hospital must have had a Medicare provider agreement in effect on the date of enactment (rather than July 24, 2007 in the CHAMP bill). Moreover, those facilities that have a provider agreement in effect on that date and thus are grandfathered are required to meet a series of new requirements within 18 months of enactment, including, among other things: a prohibition on expansion of beds (as noted below, H.R. 1424 would add an exception process); disclosure requirements designed to prevent conflicts of interest; a series of conditions to demonstrate a bona fide investment, including a limit on physician ownership equal to 40 percent of the total value of the investment and 2 percent individual physician investment interest; and certain patient safety provisions.

In a notable change to the CHAMP bill, H.R. 1424 requires the Secretary of the U.S. Department of Health and Human Services to establish and implement a process under which certain hospitals can apply for an exception to the prohibition on expansion of facility capacity. The process would permit an applicable hospital to apply for an exception up to once every two years, and the increase in capacity would be capped at 150 percent of the baseline number of operating rooms and beds. Hospitals would need to meet a number of conditions to be eligible for the exception, including being located in areas with large increases in population, having a high Medicaid population, and being located in an area with certain bed capacity standards.

The White House issued a statement March 5, 2008 opposing the House version of the bill, in part because of the specialty hospital provision:

H.R. 1424 also includes two provisions to offset the approximately $3 billion in on-budget costs associated with the bill. First, the bill would place new restrictions on physician-owned hospitals. The Administration opposes this provision, which is unnecessary and could restrict patient choice without decreasing Medicare costs. HHS already has administrative policies in place to address concerns about physician-owned hospitals, including disclosure of physician ownership, patient safety measures, and revisions to Medicare’s payment systems to better reflect patients’ severity of illness and the resources needed to treat patients.

The text of H.R. 1424 is on the Rules Committee website at http://www.rules.house.gov/110/text/110_hr1424.pdf; the hospital ownership provisions begin at page 390. The White House statement is posted at http://www.whitehouse.gov/omb/legislative/sap/110-2/saphr1424-h.pdf. Those who are interested in tracking the progress of this legislation should feel free to contact Debra McCurdy, our Health Law Policy Analyst.

Managed Care Payor “Dust Up”

We frequently refer to managed care contracts as the “life blood” of physician-owned surgery centers. Despite the fact that they are unquestionably cost-effective providers of health care services, “sparring” between managed care organizations (“MCO(s)”) and such surgery centers too often proves to be the rule rather than the exception. A major ASC management company located in Ohio has recently experienced one such “dust up” with an MCO that warrants discussion. The facts surrounding this situation illustrate both (i) how MCOs may be responding to the recently implemented APC-based reimbursement system, and (ii) the difficulties for physician-owned ASCs in responding to the actions of MCOs.

When the new ASC reimbursement system was first proposed, we were frequently asked what impact the system might have on arrangements with private payors. MCOs have historically referred to the Medicare system when structuring their contracts. It was not clear if, or when, MCOs might do the same after the 2008 federal reimbursement changes were implemented.

The ASC management company described above operates four ambulatory surgery centers in the greater Cincinnati, Ohio area, and reports that Humana, Inc. recently terminated all existing provider agreements with its centers effective March 31, 2008. This action followed the management company’s rejection of Humana’s proposed change in reimbursement methodology for ambulatory surgery centers beginning Jan. 1, 2008. The insurer’s proposed changes would have resulted in estimated double-digit decreases in reimbursement for 2008. Humana, one of the largest insurers in the Southwest Ohio area, reported that it was revising its reimbursement structure to bring it in line with the major changes to Medicare reimbursement for 2008.

Given the efficiencies that ASCs offer, one might ask why they experience such difficulties in negotiating with MCOs. The dilemma that this management company faces may provide one answer. The management company and others have also speculated that Humana and other insurers keep physician-owned surgery centers out-ofnetwork as part of a plan to obtain more favorable deals with local hospitals. Although ASCs generally provide outpatient surgeries at lower costs to insurers than hospitals do, hospitals may offer better rates on inpatient services if the hospital receives all of the insurer’s patients for outpatient services. This conduct has resulted in antitrust litigation brought by physician-owned surgery centers or surgical hospitals against insurers and hospitals. The success of any antitrust claim will depend on a number of factors, including the specific facts and the market share of the insurers and hospitals. Physician owners of ASCs must know that antitrust claims are difficult to prove, and such actions may be very expensive and require years to complete.

One such example of an antitrust lawsuit, which is being followed closely by those in the industry, is a pending case involving Heartland Spine and Specialty Hospital in Overland Park, Kansas. Heartland, a physician-owned surgical hospital, brought an action against several Kansas City-area acute-care hospitals and major health insurers. Heartland alleges that the defendants conspired with insurers to exclude physician-owned facilities, such as Heartland, from their health plan networks. The Heartland suit alleges that area hospitals with large market shares negotiated agreements with MCOs, which provided for large rate increases if the insurers admitted physician-owned facilities into their networks. While the hospitals argue that limiting competition is in the interest of patient care, physician-owned hospitals and ASCs argue that excluding them from networks limits patient choice and denies patients high quality care. The Heartland case, which was brought in April 2005, is the first suit of its type to proceed to trial, which is reportedly scheduled to begin April 1 of this year. Because of the difficulty and expense in bringing claims against MCOs, the response of most physician-owned ASCs when they have been excluded from networks is to simply operate on an out-of-network basis. MCOs have become increasingly aggressive in responding to what they view as some improper out-of-network practices. The ultimate answer for many ASCs may be to joint venture with their local hospital in the interest of “harmony.” The number of such “JVs” that our firm is handling has increased dramatically.

“Inadvertent CHOWS”

Under Medicare regulations, when a controlling interest in a Medicare participating provider occurs, the provider may be required to obtain a new billing number and proceed once again through the survey process. The disruption that such a change of control process, or CHOW, can impose on a provider can be substantial in that the provider may be required to hold Medicare claims for a number of months while the process plays out. Severe strain on cash flow for the provider can result.

Over the past year, we have witnessed a number of instances where seemingly innocuous actions by providers, such as the mere change of the type of legal entity through which the provider operates, have been deemed to constitute CHOWs, even though the identity of the owners of the provider or its tax identification number remains unchanged. Because of these developments, it may be possible that many providers may be operating without realizing that a CHOW has occurred, and that they are in violation of the provisions applicable to CHOWs.

Given the potentially severe penalties involved for not complying with the Medicare CHOW requirements, providers who have undertaken modifications, such as a change of entity, or who are considering doing so, would be well advised to consult on the matter with counsel. Even if such an action has already occurred, counsel’s intervention with the Centers for Medicare and Medicaid Services (“CMS”) may be able to correct the situation to the satisfaction of all concerned parties. The impact that any such changes may have under state regulatory schemes must also be considered.

Again, we hope that you find this information useful. Please do not hesitate to contact the authors of this Bulletin with questions or comments.

We also note that it is time to consider attending the Fifth Annual Today’s Surgicenter Conference to be held September 18–20 at the Rio Hotel and Casino in Las Vegas. Debra McCurdy has had the pleasure of chairing this program for all five years and attests that extremely pertinent and fresh information will be presented to attendees by this year’s experienced faculty. Information regarding the Conference is available at www.surgicenterconference.com.