1. Patient disclosure. New Conditions for Coverage require that an ASC patient be notified of certain information related to physician ownership and related to advance directives. The disclosure must be in writing and prior to the date of the procedure. This requirement will make it critical that the physician become more engaged in the process of physician disclosure. The surgery center will have to take steps to ensure that it is comfortable that disclosure is happening at the proper time. The language of the new Conditions for Coverage concerning this is as follows:
"The ASC must also disclose, where applicable, physician financial interests or ownership in the ASC facility in accordance with the intent of part 420 of this subchapter. Disclosure of information must be in writing and furnished to the patient in advance of the date of procedure."
There is some argument that the addition of governmental payment for many patients will also increase the total pool of patients available for ASCs. We expect that this will be of negligible benefit to surgery centers
3. Anti-kickback issues. We continue to see the evolution of different types of anti-kickback situations. These relate to issues where parties are trying to sell shares to physicians at prices that are below fair market value, situations where facilities are leasing equipment on a per-click basis from physicians (while not necessarily illegal, the lease fees must be fair market value and there must be very strong arguments to defend the practice as not intended to induce referrals under the Anti-Kickback Statute) and situations where parties want to sell different amounts of shares or pay different kinds of medical director fees to different physicians. We continue to see many types of issues that are in a gray area and other items that are black and white and should not be pursued. Over the new few years, as the government puts more money into anti-fraud initiatives, it will be important to keep an eye on what types of activities people are engaging in and what types of activities the government is particularly targeting.
4. Safe harbors — non-compliant physicians. Over the past few years, parties have become more aggressive in trying to redeem physicians who are not safe harbor compliant. We see less patience from existing physicians and more efforts to try and cause physicians that are not safe harbor compliant to be redeemed from surgery centers. In many situations, the parties may offer the physicians full value for the shares, even if they are not required to by the operating agreement, and give them a long period of notice to try to come into compliance with the safe harbor. In addition, it is important that safe harbor concepts not be applied in an indiscriminate manner. Rather, the safe harbor concepts should be applied to all parties if they are going to be used to redeem parties. Further, there is at least one significant case where the use of the safe harbors was challenged by a physician. While the case was dismissed on other grounds, it has provided additional comfort to parties who are looking to redeem physicians based on lack of safe harbor compliance. Again, it is critical that redemption be truly be based on compliance.
5. Safe harbors — indirect referrals. The government continues to pronounce great discomfort with indirect referral sources and non–safe harbor compliant physicians. They are increasingly very intelligent relating to cross-referral relationships as evidenced by the extreme caution they showed as the Office of Inspector General issued a positive advisory opinion for a joint venture between physicians and a hospital where only a small number of the orthopedic physicians were not safe harbor compliant (i.e., four out of 18 physicians were not safe harbor compliant). There, in fact, they prohibited the referral of cases from physicians to parties that would receive referrals and then use the surgery center for those cases. In reaching its conclusion, the OIG said:
"In the circumstances presented, notwithstanding that four Inpatient Surgeons will not regularly practice at the ASC, we conclude that the ASC is unlikely to be a vehicle for them to profit from referrals. The Requestors have certified that, as practitioners of sub-specialties of orthopedic surgery that require a hospital operating room setting, the Inpatient Surgeons rarely have occasion to refer patients for ASC-Qualified Procedures (other than pain management procedures, which are discussed below). Moreover, like the other Surgeon Investors, the Inpatient Surgeons are regularly engaged in a genuine surgical practice, deriving at least one-third of their medical practice income from procedures requiring a hospital operating room setting. The Inpatient Surgeons are qualified to perform surgeries at the ASC and may choose to do so (and earn the professional fees) in medically appropriate cases. Also, the Inpatient Surgeons comprise a small proportion of the Surgeon Investors, a majority of whom will use the ASC on a regular basis as part of their medical practice. This Arrangement is readily distinguishable from potentially riskier arrangements in which few investing physicians actually use the ASC on a regular basis or in which investing physicians are significant potential referral sources for other investors or the ASC, as when primary care physicians invest in a surgical ASC or cardiologists invest in a cardiac surgery ASC.1
In this case, although the arrangement did not meet every requirement of the safe harbor in question, certain other factors led the OIG to conclude that although the arrangement posed some risk, the safeguards put in place by the parties sufficiently reduced the risk of illegal kickbacks to warrant granting the positive advisory opinion.
6. Buy-in pricing for junior physicians and new physicians. Parties continue to look for ways to reduce buy-in amounts for junior physicians. There are increasing arguments for lower valuations based on the impact of the changing economy on surgery centers and the uncertainty of profits going forward. It is also possible for juniors to buy a lesser number of shares, to obtain loans from companies that are in the business of providing financing for physician buy-ins (such buy-ins are not guaranteed or supported by any other investor) and to engage in opportunities like recapitalizations to further reduce the cost and value of the center. Again, a key issue is to ensure that one is not selling shares to junior physicians at below fair market value to induce the referral of cases or the retention for cases.
7. HIPAA. The Health Insurance Portability and Accountability Act continues to be updated in a manner that adds additional burdens. One of the biggest burdens in the most recent amendments with respect to the HIPAA laws requires that a patient be notified of any sort of inadvertent breach of disclosure of confidential information. Previously, centers and healthcare providers could decide on a case-by-case basis whether or not to notify the patient of an inadvertent breach. Now, all breaches must be notified to the patient. Further, under the newly revised HIPAA, the patient has the right to receive medical records with little cost even if the surgery center must incur costs to provide the medical records.
8. Red Flags Rules. The Red Flags Rules that were intended to help credit and finance companies track identify theft and other types of related issues are being read to apply to almost all industries where financing is extended. They also add additional cost to all kinds of industries, including the healthcare industry. They continue to be delayed by the government in terms of actual implementation.
9. Can I kill a partner physician? One question that ties closely into the safe harbor concepts is, "Can I kill a physician who does not perform cases at the center?" The answer, briefly stated, is you cannot kill such physician. However, there are possibilities to work with the safe harbors and compliance guidelines to see if the party is someone that should be redeemed pursuant to not complying with the safe harbors.
10. Sale of additional shares to highly productive physicians. We often see a situation where a physician who produces proportionately more than he owns wants to buy additional shares in the surgery center. In general, it is very hard for a management company or the center to facilitate this. It is possible for that physician to try and buy additional shares from other partners. Here, the other partners cannot sell the shares to him or her simply to help keep his or her cases at the center. If they do want to sell shares, for reasons unrelated to retaining volume, it is not illegal for them to sell shares to him or her. The sale of shares should be at fair market value.
11. Profiting from anesthesia and pathology. Increasingly, we see situations where centers are looking for ways to profit from ancillary services such as anesthesia, pathology or other areas. Again, there are certain ways in which an ASC can profit from anesthesia in a legal manner, and then there are certain ways in which there are more significant concerns with respect to the legality of profiting from anesthesia. This area has recently come under scrutiny from the American Society of Anesthesiology.
The laws with respect to profiting from pathology are somewhat murkier. There is an ability often for gastroenterology practices related to surgery centers to perform pathology services in their own office and profit from these. However, there is a whole range of analysis that has to be performed to ensure that such efforts comply with the Fraud and Abuse laws, the Stark Act, and the Anti-Markup Provisions.
12. Antitrust issues. There are two key types of antitrust issues that are most prevalent in the ASC industry. First, there is a question as to whether a hospital and physicians can jointly contract together to try and obtain better rates from managed care payors. Here, the key issue is trying to ensure that two entities can be considered one entity for purposes of the antitrust laws. This makes them legally incapable of conspiring with each other. Generally, there is a great deal of law on this across the country. For example, if a hospital owns 80 percent or more of the surgery center and has substantial control of the surgery center, there are very strong arguments that conspiring together is not possible from an antitrust law perspective. When the ownership is between 50 percent and 80 percent, the determination differs by district court, which is to say by region of the country. Further, the amount of control the hospital has over the surgery center is a critical component of the ultimate determination. Where a hospital owns less than 50 percent of the surgery center, it is still possible to be considered one entity, but the hospital must have substantially all control of the surgery center.
The other common issue that arises from an antitrust perspective is a situation where a surgery center is excluded from being able to serve payors due to aggressive hospital competition. Here, the challenge for the surgery center is showing that the hospital provides more than simple competition but rather a conspiracy to harm the physician-owned surgery center or an effort to monopolize the market.
13. Medical staff bylaws. Medical staff bylaws issues constantly arise in the surgery center context. These are in several distinct contexts. First is determining whether or not to waive a provision to the medical staff bylaws in order to allow a physician to remain on or join the medical staff even though he does not technically meet a specific qualification. There are pros and cons to periodic waivers of provisions as to specific physicians. Second is the issue as to how to remove a physician from medical staff due to some sort of medical conduct issue or other issue. Here, to obtain the protections of the Healthcare Quality Improvements Act, it is critical that a surgery center follow its medical staff bylaws exactly and also follow the rules of HCQIA.
A third issue related to medical staff bylaws is how the redemption from the medical staff bylaws impacts being redeemed from the surgery center as an owner. Here, there is commonly a requirement in the operating agreement that a member must be on the medical staff to be owner in the surgery center. It is critical that the two efforts be somewhat divided from each other. In essence, this means that the effort must be made first to make sure that the decision under the medical staff bylaws be handled separately and not tied to ownership. Then, once it is completed, the operating agreement redemption issues are burdensome.
14. Hospital outpatient department transactions and "under arrangements" deals. Over the last few years, a type of transaction where parties put together an infrastructure company and then provided all of their surgery center services to a hospital "under arrangements" became very popular. This was because it allowed the hospital to continue to charge hospital outpatient department rates and allowed the physicians, in part, to own the infrastructure by staying aligned with the hospital. In addition, physicians were getting paid as well as they would typically do in a surgery center. In essence, this type of structure abrogated the benefit to CMS of the lower payment rate for ASC services. The Department of Health and Human Services, as part of the most recent Inpatient Prospective Payment System, changed a number of related Stark Act provisions. In that regard, they specifically outlawed this type of arrangement:
"In the CY 2008 PFS proposed rule, we noted our continuing concern about the risk of overutilization with respect to services provided 'under arrangements' to hospitals and other providers because the risk of overutilization that we identified in the 1998 proposed rule has continued, particularly with respect to hospital outpatient services for which Medicare pays on a per-service basis (72 FR 38186). We proposed to revise our definition of entity at §411.351 to include both the person or entity that performs the DHS, as well as the person or entity that submits claims or causes claims to be submitted to Medicare for the DHS . . .
"In this final rule, we are adopting our proposal with modification and amending the definition of 'entity' at §411.351 to clarify that a person or entity is considered to be 'furnishing' DHS if it is the person or entity that has performed the DHS, (notwithstanding that another person or entity actually billed the services as DHS) or presented a claim for Medicare benefits for the DHS. Note that where one entity performs a service that is billed by another entity, both entities are DHS entities with CMS-1390-F 1110 respect to that service. We are delaying the effective date of the amendment to the definition of 'entity' at §411.351 until October 1, 2009 in order to afford parties an adequate time to restructure arrangements."2
15. "Per-click" relationships. As a corollary to the under arrangement structures, there have been several types of transactions and deals set up as "per-click" arrangements. These include such items as gamma knives, lithotripters, lasers, CT and MRI scanners and other types of equipment. Generally, the government has now outlawed (at least in the Stark context) per-click relationships. Although the changes to the Stark Act and the accompanying regulations do not necessarily apply to surgery centers, their analysis and concerns would be applicable under the Anti-Kickback Statute to surgery centers. Thus, it would be unlawful for the provider of designated health services (such as imaging services) to rent equipment or real estate from a referring physician on a per-click basis that he or she would rent to the surgery center or hospital. CMS offered an explanation of its position in the commentary to the new rules:
"At this time we are adopting our proposal to prohibit per-click payments to physician lessors for services rendered to patients who were referred by the physician lessor. We continue to have concerns that such arrangements are susceptible to abuse, and we also rely on our authority under sections 1877(e)(1)(A)(vi) and 1877(e)(l)(B)(vi) of the Act to disallow them.
"We are also taking this opportunity to remind parties to per-use leasing arrangements that the existing exceptions include the requirements that the leasing agreement be at fair market value (§411.357(a)(4) and §411.357(b)(4)) and that it be commercially reasonable even if no referrals were made between the parties (§411.357(a)(6) and §411.357(b)(5)). For example, we do not consider an agreement to be at fair market value if the lessee is paying a physician substantially more for a lithotripter or other equipment and a technologist than it would have to pay a non physician-owned company for the same or similar equipment and service. As a further example, we would also have a serious question as to whether an agreement is commercially reasonable if the lessee is performing a sufficiently high volume of procedures, such that it would be economically feasible to purchase the equipment rather than continuing to lease it from a physician or physician entity that refers patients to the lessee for DHS. Such agreements raise the questions of whether the lessee is paying the lessor more than what it would have to pay another lessor, or is leasing equipment rather than purchasing it, because the lessee wishes to reward the lessor for referrals and/or because it is concerned that, absent such a leasing arrangement, referrals from the lessor would cease. In some cases, depending on the circumstances, such arrangements may also implicate the anti-kickback statute."3
16. New Jersey self-referral law. Over the last two years, New Jersey had a series of cases that provided great concern to physician-owned surgery centers. Briefly stated, a statute called the Codey Law was read to prohibit physician ownership of surgery centers if they were not truly and completely office-based. This ruling caused great concerns for surgery centers because traditionally the view has been that physician ownership in a surgery center was generally permitted under the Codey Law, although people acknowledged there was some risk. This law was amended to clarify that physician ownership for existing centers it places very severe restrictions on the further development of physician-owned surgery centers. This is now the first state in the country that has a prohibition on physician ownership of surgery centers.
17. Out-of-network reimbursement. The ability to profit substantially from out-of-network patients continues to decrease. While many parties profit from out-of-network payments, payors are increasingly aggressive regarding recoupment, regarding assuring that parties collect appropriate co-payments from patients and regarding increasing co-payment and deductible responsibilities significantly. Thus, the ability to make outsized profits or have serious negotiation leverage through the use of out of network continues to be hampered.
Notes:
1 OIG Advisory Opinion No. 08-08.
2 CMS-1390-F 1107 et seq.
3 CMS-1390-F 1077 et seq.
This is intended as a brief summary of 17 key legal issues facing surgery centers today. Should you have additional questions, please contact Scott Becker at sbecker@mcguirewoods.com.