A recent case involving a dispute between an insurance carrier and a physician-owned ambulatory surgical center (the "Center") challenged the typical business model of such centers. As discussed herein, the Court found that the referral of patients to the Center by the physician-owners constituted impermissible "self-referrals", but the Court did not take any action against the Center or physicians.

The business model of the Center is typical. When patients of the physician- owners require surgery, the physicians refer medically appropriate patients to the Center. The patients' insurance carriers must reimburse the Center for the "facility fee" despite the Center's out-of-network status. When the carrier reimburses out-of-network services, it requires the patient to pay a portion of the total fee -- the "co-insurance". The Center's policy is not to collect the co-insurance from the patients that the physicianowners refer to the Center. Instead, the Center accepts as payment in full the assignment of the patient's right to reimbursement from the carrier.

The carrier challenged the Center's practices on a number of grounds -- most notably that the physician-owners and the Center violated the Insurance Fraud Prevention Act ("IFPA"), N.J.S.A. 17:33A- 1, by seeking reimbursement for patients referred to the Center in violation of the self-referral prohibitions in the Cody Act, N.J.S.A. 45:A-22.5. In this regard, the Cody Act provides:

A practitioner shall not refer a patient or direct an employee of the practitioner to refer a patient to a health care service in which the practitioner, or the practitioner's immediate family, or the practitioner in combination with practitioner's immediate family has a significant beneficial interest; except that, in the case of a practitioner, a practitioner's immediate family or a practitioner in combination with the practitioner's immediate family who had the significant beneficial interest prior to the effective date of P.I. 1991, c. 187, the practitioner may continue to refer a patient or direct an employee to do so if that practitioner discloses the significant beneficial interest to the patient.

In defending against the carrier's claims of prohibited self-referral and fraud, the physician- owners and Center relied upon an advisory opinion issued by the Executive Committee of the New Jersey State Board of Medical Examiners on November 12, 1997. There, the Board opined that "it does not deem a surgeon's referral of his or her own patient to an ASC [ambulatory surgical center] in which he has an interest an impermissible self-referral." In its advisory opinion, the Board stated that its "rationale for allowing a self-referral in this context is that the service offered is so integral to the practice of the surgeon that it may be perceived as an extension of his/her medical office practice."

In contrast, in this case, the Court rejected the advisory opinion and found that an ambulatory surgical center is not an extension of the physician-owners' offices, and that the doctors' "referrals of their private patients to the ambulatory surgical center, in which each of them has a significant beneficial interest, runs afoul of the Cody Act ban on self-referrals" -- a seeming death sentence for the Center. However, the Court went on to hold that the carrier had no right to assert an action against the physician-owners or the Center under the Cody Act and that only law enforcement authorities can bring such actions. In this regard, the Court noted that the business model of the Center is widespread in New Jersey, and that the office of the Attorney General is aware of the practices and has taken no steps to declare the practices unlawful (and, in fact, the Attorney General had declined to join in the action against the Center).

Moreover, notwithstanding the Court's finding that prohibited self-referrals had occurred, the Court held that the doctors did not commit insurance fraud by billing for self-referrals and by not billing patients for "co-insurance". As such, the Court took no action against the doctors or the Center and dismissed the carrier's claims. The final chapter on these evolving issues in this, and other cases in which our office is involved, has yet to be written.