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The short answers to this question are:

1. no, the federal government will not shut down ASCs, and
2. maybe the federal government will halt the development of new physician-owned hospitals and/or restrict the activities of and adopt new rules relating to existing physician-owned hospitals.

Both the anti-kickback statute and section 1877 address Congress’ concern that health care decision-making can be unduly influenced by a profit motive. When physicians have a financial incentive to refer, this incentive can affect utilization, patient choice, and competition. Physicians can overutlilize by ordering items and services for patients that, absent a profit movie, they would not have ordered.²

My motivation for seeking reforms over a long period of time is the effect that specialty hospitals have on community hospitals when specialty hospitals pass the buck on emergency care and cherry-pick based on profits rather than patient needs.³

Interestingly, many of these physician-owned hospitals are amongst the leaders in the country in certain quality studies. As expected, there are an extremely small number of aberrational types of physician-owned hospitals that provide a sub-standard level of care. However, notwithstanding the fact that (i) general acute care hospitals may also provide such substandard level of care and (ii) infections picked up in a general hospital are one of the leading causes of death in this country, each time a bad action occurs at a physician-owned hospital, a congressional study and investigation commences.

C. Surgery centers. Many individuals at CMS have long taken the view that, although they do not love ASCs or physician-owned hospitals, ASCs are located in so many congressional districts and such a large outcry would result if they tried to outlaw physician ownership that it will be impossible to now prohibit physician ownership of ASCs. As a result, their belief is that the ASC’s ship on restriction has sailed but prohibitions may still be possible for physician-owned hospitals.

D. The New Jersey Codey Law. For nearly a decade, the New Jersey Codey Law — the state’s version of the Stark Act — had been read to permit physician-ownership of ASCs. However, in recent cases unrelated to the Codey Law, judges have opined that the Codey Law prohibits physician-ownership of ASCs in the traditional sense.

In Garcia v. Health Net of New Jersey, Inc., the court found that referrals to an ASC in which the referring physician had a significant financial interest violated the Codey Law. Due to such decisions, New Jersey may become one of the first states to prohibit and outlaw the new development of physician-owned ASCs. The compromise likely to result in New Jersey is typical of such political struggles and outcomes. In essence, those already developed physician-owned ASCs have political clout and thus will likely maintain their facilities without prohibition. In contrast, there is no one to protect the unborn ASCs.

This type of situation is precisely why many new laws include a grandfathering clause. Such a clause allows the politicians to protect themselves by allowing the existing ASCs or hospitals to survive while simultaneously pleasing their allies in the American Hospital Association or the Federation of American Hospitals by outlawing new developments. In Jan. 2008, the New Jersey Board of Medical Examiners elected to move forward on an emergency rule in response to these recent cases.

E. Pain nanagement. The government has made pain management part of its work plan for 2009. In essence, much like imaging, the government believes that pain management has grown to unnecessary proportions and that the ownership and profit that pain management procedures provide has led to unnecessary procedures.

F. PET and radiation therapy ventures. CMS has extended the Stark Act to apply to radiation therapy ventures and positron emission tomography (“PET”) services. Therefore, these arrangements may only operate if structured to meet an exception to the Stark Act.

G. Block leases, per-click and under-arrangements. The federal government has made negative comments on “indirect” referrals in various advisory opinions. CMS has taken action to prohibit most types of per-click leases and under-arrangements structures. It has also determined that the anti-markup rules apply to block leases. Further, in Advisory Opinion No. 08-10 issued on Aug. 19, 2008, the Office of Inspector General also raised concerns regarding block lease arrangements under the anti-kickback statute.

What will happen next?
ASCs are likely to survive largely intact. While ASCs may be challenged in some states, the outstanding work of the ASC Association and the fact that for each patient treated in an ASC, the Medicare program receives a 35 percent discount or savings for the procedure (as opposed to the procedure being performed in a hospital outpatient department), it is likely that ASCs will survive the upcoming political changes.

The physician-owned hospital situation is more challenging. Over the last year, the House and Senate have reached agreement on different types of provisions that would essentially eliminate the new development of physician-owned hospitals. The physician-owned hospital industry has been protected by both the White House and a number of Republican and conservative Democratic senators who support entrepreneurial healthcare growth and service (as opposed to protecting acute care hospitals from competition).

With that said, the change in the make-up of the House, the Senate and the White House is not beneficial to physician-owned hospitals. In many ways, it is a story of political clout. Since physician-owned hospitals are in few districts, the Congressmen and Senators in the numerous districts without such facilities may take campaign contributions and abide by the wishes of certain enemies of physician-owned hospitals (i.e., the American Hospital Association and the Federation of American Hospitals), without fear of retribution. In essence, a Congressman or Senator who does not have a physician-owned hospital in his or her district need not worry about retribution in voting positively to restrict physician-ownership. Thus, the risk of applying physician-owned hospital prohibition rules to existing physician-owned hospitals significantly rises.

-- Mr. Becker and Ms. Gilmer are attorneys with McGuireWoods. Contact Mr. Becker at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it . Contact Ms. Gilmer at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it .

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1. Anna Wilde Mathews, “Insurers Hire Radiology Police to Vet Scanning.” Wall Street Journal online, Nov. 6, 2008.
2. 63 Fed. Reg. 1659, 1662 (Jan. 9, 1998).
3. Christopher Lee, “Limits Weight on Physician-Owned Hospitals.” The Washington Post, Dec. 9, 2007, p. A03.