This article outlines 10 key legal and regulatory issues related to surgery centers.
1. Selling of shares to physicians. It remains the case that parties must be extremely careful in selling shares to physicians. Shares must be sold at fair market value. You cannot differentiate the amount of shares based on the volume or value of referrals, you cannot provide financing to physicians for the purchase of shares and you have to be very cautious of any sort of special deals related to the sale of shares. This is an area where simpler is often better. For example, in the typical situation, all investors should be offered the same number of shares, they should each pay in cash for their shares, the shares should all be priced the same and no “special” deals or options to purchase in the future or at a discount should be offered to any investor.
2. Safe harbor compliance. 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 OIG 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., 4 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).4 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.
3. Syndication and flip transactions. We have seen certain transactions where at the same time as physicians buy shares in an ASC, they would simultaneously or shortly thereafter sell shares to a national surgery center company. In essence, physicians might buy shares for $100 a share and then turn around on the very same day and sell half of their shares for $200 to $300 per share. This provides the net affect of allowing such physicians to invest for practically no money. This is the kind of transaction structure that, if investigated, could cause great concern from a regulatory perspective.
4. Hospital outpatient department transactions and “under arrangements” deals. Over the last few years, atype 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. They principally became very popular because it allowed the hospital to continue to charge hospital outpatient department rates, and the physicians in part to own the infrastructure by staying aligned with the hospital and 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
The key change to the concept of “entity” essentially erases the distinction between the party that performs designated health services and the party that ultimately bills the Medicare program. Previously, this is the distinction that many had taken advantage of that permitted certain types of under arrangements relationship. As a result, providers can no longer avail themselves of the argument that simply because they are not billing Medicare directly, that they are not an entity that provides DHS and consequently are outside the Stark Law restrictions.
5. “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 from a referring physician on a per click basis equipment or real estate 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 nonphysician- 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
6. New Jersey self-referral law. In the last year, 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 is in the process of being amended to clarify that physician ownership is allowed but it will likely include restrictions on further development of physician-owned surgery centers. This will be the first state in the country that has a prohibition on physician ownership of surgery centers.
7. Physician ownership of hospitals. This continues to be a huge area of scrutiny and regulatory concern. Congress continues to try and pass bills that would prohibit physician ownership of hospitals. Certain of these contain grandfathering clauses that are very liberal, while certain of them are much more restrictive. In general, the Federation of American Hospitals and the American Hospital Association have gained more strength and momentum over the last couple of years with respect to these issues. The presidential election may well be the ultimate determination of whether or not physician ownership of hospitals in the long term will be permitted.
8. California licensure laws. Over the last year, California decided that they would no longer license ambulatory surgery centers. This was not intended as an insult against surgery centers; rather, it seems to be part of a budgetary determination. In essence, they did not have the funds to handle licensure and thus going forward instead of licensure, ASCs would be handled through accreditation and centers will become Medicare-certified from the deemed accreditation effort. While this may make sense, the suddenness of the change caused great concern for surgery centers and left a great deal of uncertainty. In some situations, it has also led to payment problems for surgery centers as some payors have demanded a license. Of course, it appears clear that the core goal of the payors is to find a way not to pay and has nothing to do with real legal standards.
9. OIG issues two physician ownership advisory opinions. The OIG issued two advisory opinions this year that relate closely to physician ownership arrangements. First, as discussed above, they issued an advisory opinion that related to ownership of a joint venture surgery center between an orthopedic group and a hospital. There they issued a favorable advisory opinion but required several different prophylactic steps to allow the joint venture to continue as structured. Second, they issued a negative advisory opinion related to a block leasing scenario related to radiation therapy. In this situation, one urology group had established a radiation therapy center and intended to fully block lease the center to other physician groups. The OIG concluded that this looked too much like several of the contractual joint ventures that they have tried to advise against over the last couple of years. Thus, they determined that this was not a permissible arrangement and would not offer a favorable advisory opinion with respect to the same. In their analysis, the OIG commented that the nature of the contractual relationships in this arrangement essentially gave rise to a sort of “joint venture” amongst the parties. The Advisory Opinion specifically refers to the Special Advisory Bulletin on Contractual Joint Ventures issued by the OIG on April 30, 20034 in which they noted the heightened risk of arrangements where a healthcare provider expands into a related healthcare business by contracting with an existing provider to provide the new service to the provider’s existing patients. The initial owners in this situation essentially contracts out all of the operational and management aspects of the new service line. In this Advisory Opinion, the OIG noted that the urology group was in much the same position. The OIG concluded:
Accordingly, based on the facts presented here, we are unable to exclude the possibility that the parties’ contractual relationship is designed to permit the Requestor to do indirectly what it cannot do directly; that is, pay the Urologist Groups a share of the profits from their IMRT referrals. In other words, the Requestor may be offering the Urologist Groups impermissible remuneration by giving them the opportunity to obtain the difference between the reimbursement received by the Urologist Groups from the Federal health care programs and the rent and fees paid by the Urologist Groups to the Requestor and the individual Radiologists (i.e., the profit from IMRT ordered by the Urologist Groups.) By agreeing effectively to provide services it could otherwise provide in its own right for less than the available reimbursement, the Requestor and its Radiologists would potentially be providing a referral source – a Urologist Group – with the opportunity to generate a fee and a profit. If the intent of the Proposed Arrangement were to give the Urologist Groups remuneration through the IMRT to induce referrals to the Requestor, the anti-kickback statute would be violated. Indeed, there is a significant risk that the Proposed Arrangement would be an improper contractual joint venture that would be used as a vehicle to reward the Urologist Groups for their referrals.5
10. Out-of-network reimbursement. The ability to profit substantially from out-of-network patients continues to decrease. While many parties still do fine with out of network payments, payors are increasingly aggressive regarding recoupment, regarding assuring that parties collect from patients appropriate co-payments, and regarding increasing significantly co-payment and deductible responsibilities. Thus, the ability to make outsized profits or have serious negotiation leverage through the use of out of network continues to be hampered.
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Each of the foregoing items will have a significant impact on the way ASCs do business. In particular, the new federal regulations will likely cause a number of existing relationships to be restructured. Further, new challenges to hospital ownership by physicians will continue to arise at the federal level. Finally, states remain active in the areas of licensure and reform of existing laws that govern ASCs.
-- Contact Scott Becker at sbecker@mcguirewoods.com; contact Bart Walker at bwalker@mcguirewoods.com; contact Elaine Gilmer at egilmer@mcguirewoods.com.
1 OIG Advisory Opinion No. 08-08.
2 CMS-1390-F 1107 et seq.
3 CMS-1390-F 1077 et seq.
4 68 F.R. 23148.
5 OIG Advisory Opinion No. 08-10.