Amendments to Codey Law Finally Signed Into Law

On March 21, 2009, Gov. Jon S. Corzine signed into law the much anticipated and hotly debated amendments to the New Jersey law prohibiting self-referrals by physicians (commonly referred to as the "Codey Law"). One of the most important components of the amendment is the creation of an exception to the Codey Law for certain referrals to licensed ambulatory surgical facilities (ASFs) and surgical practices. A copy of the amended Codey Law will be available at www.njleg.state.nj.us/lawsconstitution/chap.asp, P.L.2009, c.24.

As discussed in more detail below, the amended Codey Law also requires registration of surgical practices and imposes a moratorium on new licenses for ASFs and new registrations for surgical practices. Physicians who intend on opening a new surgical practice or an ASF that will not be jointly owned by a New Jersey hospital, must file their plans, specifications and other required documents with the municipality or Department of Community Affairs no later than Sept. 17, 2009 in order to obtain a registration or license.

Background of amendments
The Codey Law prohibits physicians from referring patients to health care services "in which the practitioner, or the practitioner's immediate family … has a significant beneficial interest" unless an exception applies. The Codey Law is broader than the federal Stark Law since it applies to all types of health care services and is not limited to Medicare and Medicaid.

For many years, practitioners relied on a Nov. 12, 1997 N.J. State Board of Medical Examiners (BME) advisory opinion indicating that physicians who refer patients to an ASF in which they had an ownership interest would not violate the Codey Law. The advisory opinion stated that the physicians' referral did not violate the Codey Law because the ASF was an extension of the practitioner's medical office.

On Nov. 20, 2007, the N.J. Superior Court, Chancery Division, Bergen County issued a decision in the case of Garcia, et al. v. HealthNet of New Jersey, Inc. that held that ownership in an ASF by physicians who refer patients to the ASF violates the Codey Law. On March 26, 2008, the N.J. Superior Court, Civil Division, Union County issued an opinion in the case of Endo Surgi Center, P.C. v. Liberty Mutual Insurance Company similarly holding that physicians who owned interests in a New Jersey surgical facility (this time a single-operating room facility that was exempt from the health care facility licensure requirement) violated the Codey Law.

In response to the Garcia decision, in Jan. 2008, the BME proposed an emergency rule attempting to create an exception for referrals to an ASF under the Codey Law. However, the rule was stalled for procedural reasons and never signed by the N.J. Attorney General. On Jan. 24, 2008, Sen. Richard Codey introduced an amendment to the Codey Law to the N.J. State Senate also proposing an exception for ASF referrals. After a number of revisions, the N.J. Senate passed the amendment on Dec. 15, 2008 and the N.J. Assembly passed the amendment on Feb. 5, 2009. Governor Jon S. Corzine signed the bill into law on March 21, 2009.

Referral exception
Under the amended Codey Law, referrals for ambulatory surgery or procedures requiring anesthesia performed at a registered surgical practice (as defined below) or at a licensed ASF are exempt from the Codey Law if the following conditions are satisfied:

(i)     the referring practitioner must personally perform the procedure;
(ii)    the practitioner's remuneration as an owner of or investor in the surgical practice or ASF must be directly proportional to his or her ownership interest and not to the volume of patients the practitioner refers;
(iii)     all clinically related decisions at an ASF owned in part by non-practitioners are made only by practitioners in the best interests of the patient; and
(iv)    written disclosure of the referring practitioner's interest is made to the patient at or prior to the time of the referral.

The BME will prescribe by regulation the information that must be disclosed to a referred patient. The disclosure must include whether any services or fees associated with a referral will be considered to be, and reimbursed at, an "out-of-network" level by the patient's insurance carrier or other third-party payor.

Surgical practices
The amendments to the Codey Law require that a surgical practice register annually with the N.J. Department of Health and Senior Services (DHSS). A surgical practice is defined as having the following characteristics:

(i)     no more than one operating room, equipped to perform surgery and designed to accommodate invasive diagnostic and surgical procedures;
(ii)     one or more post-anesthesia care units or a dedicated recovery area where a patient may be closely monitored until discharge; and
(iii)     is established by a physician, physician professional association surgical practice, or other professional practice form specified by the BME solely for private medical practice.

A surgical practice existing prior to March 21, 2009 will be required to register with DHSS by March 20, 2010. The registration must be renewed annually.

As a condition of registration with DHSS, a surgical practice must obtain certification by CMS as an ASC or ambulatory care accreditation from an accrediting body recognized by CMS, and must comply with certain annual reporting requirements concerning utilization and staffing. A surgical practice will be required to annually report the number of patients served by payment source, including the number of Medicaid-eligible and medically indigent persons served; the number of new patients accepted; and the number of physicians, physician assistants and advance practice nurses providing professional services at the surgical practice.

Ambulatory surgical facilities
The amended Codey Law requires an ASF licensed by the DHSS to obtain ambulatory care accreditation from an accrediting body recognized by CMS as a condition of licensure by DHSS. Existing licensed facilities have until March 20, 2010 to comply with this requirement.

Moratorium on new registrations and licenses
The amended Codey Law imposes a moratorium on new licenses for ASFs and registrations for surgical practices except as set forth in the following limited circumstances:

(i)     transfer of ownership if the DHSS reviews the qualifications of the new owners and approves the transfer;
(ii)     relocation within 20 miles or to a "Health Enterprise Zone" provided there is no expansion in the scope of services and the DHSS approves the relocation;
(iii)     the entity is a surgical practice required to be registered and meets the registration requirements;
(iv)    the entity has filed its plans, specifications, and required documents with the Health Care Plan Review Unit of the Department of Community Affairs or the municipality where the surgical practice or facility will be located, on or before Sept. 17, 2009;
(v)     the facility is owned jointly by a general hospital in New Jersey and one or more other parties; or
(vi)     the facility is owned by a hospital or medical school.

Lithotripsy and radiation therapy
Effective March 21, 2010, the amended Codey Law eliminates the current exemption for self-referrals for lithotripsy or radiation therapy pursuant to an oncological protocol. However, practitioners holding interests in such services before March 21, 2009 will be permitted to continue referring patients, provided they comply with the Codey Law's disclosure requirements.

Grandfathering of referrals
The amended Codey Law includes a grandfather provision for referrals to ASFs and surgical practices in which a physician has a beneficial interest made before March 21, 2009 and until March 20, 2010. Such referrals will be deemed compliant with the Codey Law if the referring practitioner personally performs the procedure and, for referrals from March 21, 2009 through March 20, 2010, the practitioner discloses his or her beneficial interest to the patient in writing.

Conclusion
The enactment of the amended Codey Law is a significant milestone for the physician community. After months of confusion following the Garcia decision, physicians may now rest assured that their referrals to surgical practices and ASFs in which they have a significant beneficial interest will be deemed to comply with the Codey Law, provided the requirements set forth in more detail above are carefully followed.

Mr. Schaff (mschaff@wilentz.com), Mr. Kalver (bkalver@wilentz.com) and Ms. Leone (aleone@wilentz.com) are healthcare attorneys for Wilentz, Goldman & Spitzer.

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