This year has witnessed a virtual flood of legal developments impacting the provision of outpatient surgical care. Keeping up with such developments is a challenge for those of us whose careers evolve around representing outpatient surgical facilities. Keeping up with the developments for those who actually own and/or operate such facilities as part of their practices may simply be impossible.

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

New Jersey Court Finds that Physician Ownership of ASCs Violates State Anti-Referral Statute

Much “excitement” has been created by the recent finding of the Superior Court of New Jersey for Bergen County that physician ownership of ambulatory surgery centers (“ASCs”) runs afoul of that state’s self-referral statute. The concern created by this case is certainly understandable. New Jersey’s “mini-Stark statute” (called the “Codey Law”) broadly prohibits self referrals by physicians. Unlike the federal Stark statute, the Codey Law does not except out referrals to ASCs owned by physicians. Rather, the numerous physician-owned ASCs already operating in New Jersey have been developed in reliance on informal guidance given by that state’s Board of Medical Examiners (the “BME”), which has concluded that ASCs constitute “extensions of their physician-owners office spaces and practices,” and that referrals of patients to them is not the kind of practice that the Codey Law was intended to prevent.

Garcia v. Health Net of New Jersey. This case was decided in late November and was specifically related to the Wayne Surgical Center (the “Center”). In the case, the court concluded that the plain language of the Codey Law prohibited physician referrals to ASCs that they owned, and that a prior advisory opinion issued by the BME did not extend to the Center. The court concluded, however, that the perceived violation of the Codey Law did not grant private parties, such as the managed care payor bringing the litigation, with a remedy. Consequently, this case involves a situation where none of the parties involved is satisfied with the outcome.

The Health Net case clearly raises troubling issues for those who own interests in ASCs in New Jersey in which physicians are also investors. The case is in the process of being appealed, and interested parties should consult their counsel to determine whether they should join in such appeals, or if any other action regarding their center is warranted. Reed Smith possesses a considerable presence in New Jersey, and we would be glad to field any questions that readers might have on this case.

Health Net is also instructive for other reasons. The case provides an example of the kind of arguments that those ASCs involved in treating patients on an out-of-network basis can expect to face from payors, and the type of practices that should be avoided as ASCs in any state are established. First, we are frequently contacted by ASCs that are required to conduct business with a number of payors on an out-of-network basis. Our advice to such clients is generally that such an approach raises a number of legal issues on a variety of fronts. These issues are succinctly outlined in the arguments made by the payors in the case.

  • Waiver of Copays – The Center in the Health Net case apparently waived all copays that patients were contractually obligated to pay under their managed care contracts. Although the case indicates this is not expressly prohibited under New Jersey law, it is illegal under the law of many states and can be counted on to arouse a particularly hostile reaction from payors, regardless of where the activity is conducted. This case presents an instance in which this was certainly the case.
  • Possible Causes of Action – Participants in ASCs should be aware that payors may assert a number of causes of action in response to what they perceive as unreasonable out-of-network practices. Such causes of action include fraud, a breach of the implied covenant of good faith and fair dealing, and tortious interference with the contracts that the payors have established. Each of these causes of action was asserted in Health Net. Concerning the claim of fraud, payors may argue that the “usual and customary charges” that out-of-network providers submit to payors are inflated because of the manner in which copays and coinsurance are handled. In the case of tortious interference, payors may allege that the waiver of copays, etc., upsets the “steerage” that the managed care payors have contracted for through the creation of their managed care contracts and networks. In order to reduce the possibility that such claims are asserted, we generally advise clients to clearly disclose to payors the fact that they treat out-of-network patients and the extent to which copays and coinsurance are discounted or waived. Such disclosure can significantly reduce the possibility of a payor asserting that it has been defrauded.
  • Manner in which ASCs are Organized – In Health Net, the payors successfully persuaded the court that the terms of the BME’s Advisory Opinion did not apply to the Center’s investors, partly because discovery disclosed that when the Center was formed, the projected referrals of each investor were taken into account in determining how the shares in the entity were allocated. This is the sort of conduct that we regularly advise clients to avoid. While there is no legal requirement that all physician investors in an ASC own the same amount of shares, tying the amount of interests offered to projected referrals is very problematic. This may be one of the first factors examined when the validity of a particular transaction is challenged. Accordingly, we generally advise clients to offer the same amount of interest to all possible referral-source investors (with the particular investors deciding how much to buy) or avoiding situations in which ownership varies widely within the investor base.

CMS Adopts Restrictions on Sharing of Space for Independent Diagnostic Testing Facilities

When implementing its new ASC reimbursement system, the Centers for Medicare & Medicaid Services (“CMS“) encouraged ASCs to deal with any hardships imposed by the system by “diversifying.” A new policy recently adopted by CMS may make such diversification involving other providers more difficult. The 2008 Medicare Physician Fee Schedule (“MPFS”) Final Rule issued by the CMS was published November 27, 2007. The MPFS Final Rule finalizes the proposed revisions to the independent diagnostic testing facility (“IDTF”) performance standards.1 The changes to the IDTF performance standards may impact ASCs either have, or are considering,  diagnostic imaging or similar (e.g., sleep studies) arrangements with IDTFs. A significant change made to the IDTF performance standards is to preclude an IDTF from sharing space or equipment with any other Medicareenrolled individual or entity (which would include an ASC). Under the new rule, an IDTF that is located somewhere other than in a hospital building may not enter into any type of arrangement with an ASC, a physician practice or other entity that involves leasing or subleasing the IDTF’s office space and/or imaging equipment. This restriction would apply even to previously permissible, safe harbored block-time lease arrangements with a provider, such as an ASC, to use the space for IDTF purposes when the space is not being used by the other providers (e.g., an ASC) for its own purposes.

The standard does not prohibit an ASC and an IDTF from being located in the same building or from sharing certain common areas, such as hallways, reception areas, waiting rooms or parking spaces. Although the regulations do not specifically state this, it appears based on CMS’s preamble discussion of what constitutes impermissibly “sharing space” that CMS is applying the “separate post office address” rule. If the IDTF and the ASC are in space that has one post office address, then the two entities would be impermissibly “sharing space.” If, however, the two entities have different post office addresses, with at least different suite numbers (i.e., 100 Main Street, Suite A and 100 Main Street, Suite B), then the two entities are not “sharing space,” even if they do share common areas. Recognizing that this new standard would require IDTFs currently engaged in spacesharing arrangements to restructure those arrangements, CMS has delayed the implementation date for existing IDTFs until January 1, 2009 in order to provide IDTFs a full year to restructure their relationships.

Physician Ventures Under Scrutiny

Too often our physician-owned ASC and specialty hospital clients operate under the misconception that they are “operating under the regulatory radar.” This misconception is fueled by factors such as the favorable treatment given under the ASC Investment Safe Harbor and the small size of most of these providers. The truth is that ASCs and other physician-owned providers have been the subject of several recent regulatory actions reported around the country. These matters serve as reminders that the government does target all providers regardless of their size. Owners of such providers should therefore engage in strict utilization management and compliance review activities, particularly regarding billing practices and documentation of medical necessity. 

  • Physician Found Guilty of Health Care Fraud for Unnecessary Surgeries on Recruited Patients – A surgeon was recently convicted of conspiracy and health care fraud by a federal district court jury in California for allegedly unnecessary procedures. The surgeon allegedly submitted a claim to an insurer for medically unnecessary “sweaty palm surgery” on recruited patients. The penalty for the one guilty count is a maximum of 10 years in prison. The charges included running a “scam” in which healthy patients were recruited and compensated to receive unnecessary medical procedures, such as esophagogastrioduodenscopies and colonoscopies, as well as sweaty palm surgeries within an ASC.
  • ASC Overpayments Uncovered by New York Audits – According to reports of audits released by the office of the New York State Comptroller, four ASCs in New York waived out-of-pocket fees for members of the state employee health plan and then submitted inflated charges to the state health insurance program. The state is seeking recovery of approximately $8 million in overpayments for claims submitted over the past five years. The New York insurance administrator is also taking steps to assure that other providers are not engaging in similar activities.
  • Specialty Hospital Settles Clinical Research Matter – Arizona Heart Hospital, a physician-owned specialty hospital in Phoenix, recently entered into a settlement with the United States Department of Justice (the “DOJ”) under the federal Civil False Claims Act. The hospital submitted claims to Medicare for physician services involving the implantation of certain endoluminal graft devices from 1998 to 2002. The services were not reimbursable because the devices had not received final  marketing approval from the Food and Drug Administration, and were allegedly either implantedwithout an approved investigational device exception (“IDE”) or outside of an approved IDE protocol.

The allegations relate solely to the use of grafts, which were considered experimental, and not to quality of patient care. The settlement reportedly includes a payment of approximately $5.8 million and a five-year corporate integrity agreement with the Office of the Inspector General of the Department of Health & Human Services. Two affiliated physician groups paid an additional $900,000 related settlement. (See the attached press release issued by Med Cath Corporation, majority owner of the Arizona Heart Hospital.)

Growth of ASCs Continues

We are often asked whether the growth of ASCs has peaked since there are now approximately 4,500 ASCs in the country. Our experience tells us that the answer to this question is “no!” A recent state study supports this conclusion. The Pennsylvania Health Care Cost Containment Council reports that ambulatory surgery centers in Pennsylvania continued to grow in number and expand profit margins. Between June 2006 and May 2007, 28 new ASCs opened in the state. Pennsylvania now has a total of 232 ASCs, the majority of which are physician-owned. This report states that during 2006, 27.5 percent of outpatient diagnostic and surgical procedures performed in Pennsylvania were performed in ASCs—up from 10.2 percent in 2000.