6 Key Legal Issues Facing Ambulatory Surgery Centers

2011 should be an interesting year for surgery center legal issues. The key issues that we see include increased enforcement under the anti-kickback and related statutes, increased impatience from physicians as to other physicians' activities at surgery centers, increased efforts by physicians to find innovative ways profit from the surgery centers, a bit of a "wait and see" time in terms of the impact of healthcare reform implementation, increased review of certain contracting issues between joint-venture ASCs and hospitals as to whether they can jointly contract to obtain better rates for managed care and increase in co-management arrangements. Lastly, there will continue to be struggles between surgery centers and payors over out-of-network reimbursement.

1. Anti-kickback issues.
The government over the last few years has initiated huge increases in the funds allocated to healthcare fraud enforcement, which focuses on billing and collection issues, as well as physician-hospital relationships. In the past, fraud enforcement focused heavily on billing and collections issues. Now, significant fraud and abuse resources are also put towards review of Stark issues and anti-kickback relationships between hospitals and physicians. In Jan. 2011, an internal investigation by Detroit Medical Center before its sale to Vanguard Health Systems uncovered potentially improper relationships between the health system and more than 250 physicians. The relationship violations reportedly included leases with physicians not at fair market value, free advertising and tickets to events and seminars. The surgery center industry has just begun to see some level of investigation of fraud and abuse on the physician relationship side. We believe the surgery center industry is ripe for more investigative resources to be directed toward it.

We continue to see the evolution of different types of possible anti-kickback situations. These relate to situations where parties are trying to sell shares to physicians at prices that may be below fair market value, situations where facilities are leasing equipment on a per-click basis from physicians  and situations where parties want to sell different quantities of shares to different physicians or pay different types of medical director fees to different physicians. From 2008-2010, there were more than 20 different HHS' Office of Inspector General physician self-referral and anti-kickback settlements, many of which targeted improper relationships between physicians and healthcare facilities..

Over the next few years, as the government allocates more money to 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.

(a) 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 as existing physicians are increasingly less patient with non-safe harbor compliant physicians. In many situations, the partites may offer the non-compliant physicians full value for the shares, even if such full value is not required under the surgery center's operating agreement. The parties may also give such non-compliant physicians a long notice period in which the non-compliant physician may come into compliance with the safe harbor. In addition, it is important that safe harbor concepts not be applied in a discriminatory manner. Rather, the safe harbor concepts should be consistently applied to all physician members if the center is going to enforce the concepts and use them to redeem parties. Further, there is at least one significant case where the use of the safe harbor concepts 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 based on safe harbor compliance. There is an increase in litigation in this area.

(b) Safe harbors — indirect referrals. The government continues to express great discomfort with indirect referral sources and non–safe harbor compliant physicians. That said, the government is very cautiously but intelligently handling cross-referral relationships as evidenced by the extreme caution exercised by the OIG in issuing a positive advisory opinion to a hospital-physician joint venture 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) but were potential referral sources. There, in fact, the OIG prohibited the referral of cases from the non-compliant physicians to parties that would receive such 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. Advisory Opinion No. 08-08 (issued July 18, 2008).

Here, the arrangement did not meet every requirement of the safe harbor in question. However, 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.

(c) Buy-in pricing for junior physicians and new physicians. Parties continue to look for ways to reduce buy-in amounts for junior physicians. Increasingly, there are 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 junior physicians to buy fewer shares, to obtain loans from companies that are in the business of providing financing for physician buy-ins (provided such buy-ins are not guaranteed or supported by any other investor or the surgery center) and to engage in opportunities like recapitalizations to further reduce the cost and value of the center. A key issue is ensuring that the center is not selling shares to junior physicians at below fair market value to induce the referral of cases or the retention for cases. For more extensive advice on selling shares to physicians, please read "Healthcare Fraud Investigations Increase; Greater Caution Urged in ASC Share Sales to Physicians; 22 Do's and Don’t's on Selling ASC Shares."

(d) Can we 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 or other operating agreement terms. For example, a physician who fails to meet the safe harbors may be subject to buyout by the ASC. There will be increased litigation in this area this year. An issue that arises in litigation relates to the purpose of the buyout and whether at fair value or not.

(e) Sale of additional shares to highly productive physicians. We often see situations 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 to facilitate this. It is possible for that physician to try to buy additional shares from other partners. Here, the other partners cannot sell their shares to the high producing physician simply to help keep his or her cases at the center. If existing partners want to sell shares, for reasons unrelated to retaining volume, it is not illegal for them to sell shares to such high producing physicians. The sale of shares should be at fair market value.

(f) Profiting from anesthesia and pathology. Increasingly, we see situations where centers and physicians 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 lawfully profit from anesthesia in a legal manner. However, there are certain other ways, such as setting up an anesthesia management company, which are of more significant concern with respect to the legality of profiting from anesthesia. This area has recently come under attack by the American Society of Anesthesiology. A letter from the ASA to the OIG brought up the following concerns about the increasing popularity of the "company model" that allows ASCs to profit from anesthesia:

"Coupled with the increasing prevalence of the 'company model' are additional demands upon anesthesia providers to pay renumeration for services beyond what they actually receive, including non-clinical supplies, scrubs, locker room and lunch room use, and full-time administrative office staff despite providing services for only part of a work week. We feel that these requests constitute kickbacks."

The ASA put forth that the "company model" would result in overutilization of anesthesia services and is likely to result in corruption of professional judgment.

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 Anti-Kickback Statute, the Stark Act, and the Anti-Markup Provisions.

(g) "Per-click" relationships.
There have traditionally been several different types of "per-click" arrangements for such items as gamma knives, lithotripters, lasers, CT and MRI scanners and other types of equipment. However, the government has now outlawed most per-click relationships in the Stark context. The changes to the Stark Act do not necessarily apply to surgery centers. The analysis and concerns are applicable under the Anti-Kickback Statute to surgery centers. In ASCs, parties should be quite cautious regarding the use of per-click arrangements. 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."  

(h) Medical directorships. Medical directorships should be used only if the medical director is providing true medical direction and clinical administrative services. If a typical center has one medical director who is an anesthesiologist and/or another surgeon truly involved in that effort, that should be the core model a surgery center should consider. When looking at other situations, for example, having a medical director for each specialty, there must be a legitimate reason for the need for multiple medical directors, the fees must be fair market value, and such arrangement must not be intended to provide a kickback in exchange for cases. Improper medical directorships and other improper employment arrangements have led to legal action against hospitals in the past several years. Ivinson Hospital in Laramie, Wyo., was alleged to provide medical director services in excess of fair market value, while Tuomey Hospital in Sumter, S.C. was alleged to pay physicians for part-time employment services that violated Stark. Increasing action against hospitals regarding improper employment arrangements suggests ASCs may also be subject to more investigations as well.

(i) IOL relationships. Increasingly, there are situations where physicians buy intraocular lenses, specifically the premium lenses, and sell them to their patients. Here, the physicians may or may not buy these lenses from the surgery center itself and some physicians may have a relationships where they directly buy the lenses and sell them to patients. Either way, these transactions raise issues as to how much money goes back and forth between the surgery center and the physicians as to the IOLs and whether the surgery center is improperly allowing the physician at the center to profit from the sale of equipment. There are also issues as to the proper pricing of such lenses sold to patients. We are also aware of certain situations where two lens manufactures may provide free sample lenses to physicians and the physicians may sell these lenses to patients. This is likely improper. In general, it is preferable that the center be the seller of the lens and not physicians.

(j) Physician-owned equipment companies.
One of the interesting new scenarios is where physicians own an equipment company and sell equipment to the surgery center. In essence, the physicians become a middle man between the surgery center and the equipment provider. This allows the physicians to profit on the sale of equipment used in any cases that they perform. ASCs should be cautious regarding these relationships. This new trend follows a longstanding concern over physician ownership of diagnostic medical equipment. A 2011 Center for Studying Health System Change report showed that nearly one in seven physicians in community-based, physician-owned practices own or lease three or more types of equipment to perform laboratory, x-ray or advanced imaging services. Starting in 2011, physicians are required to make financial interest disclosures to any patients seeking imaging services and must provide alternative supplies. The report — which is not pro-physician — concluded that "given the growing evidence that physician self-referral contributes to unnecessary and costly care, policy makers might reconsider the broadness of the in-office ancillary service exemption to the Stark law."

2. Hospital outpatient department transactions and "co-management arrangements" deals. As the government has outlawed under "arrangements transactions", there has been substantial growth in situations in which a surgery center sells to a hospital and develops what is titled a "co-management" relationship. This provides the physician or physician group compensation for managing the service of the hospital but allows the hospital to really be the owner and provider of the services and to provide the services at hospital outpatient department rates. The great challenge in these relationships will be assuring that they are fair market value and paying physicians for reasonably needed services and not just a means to get money to physicians in exchange for business. The further great challenge of these relationships will be how they look 3-5 years after a transaction is completed. In essence, there is nothing as congruent in terms of interests as a true joint venture. Over time, there is a great likelihood that case volumes will be reduced and that the glue of the relationship will be not as strong as it was when first formed.

3. Out-of-network reimbursement. The ability to profit substantially from out-of-network patients continues to decrease. Payors are increasingly aggressive regarding recoupment, collection of appropriate co-payments from patients and increasing co-payment and deductible responsibilities. Thus, the ability to make outsized profits or have serious negotiation leverage through the use of OON continues to be hampered. Some state governments have also taken action to regulate OON insurance markets. For example, New Jersey released and re-released a bill in 2010 that places various additional regulators on OON surgery centers, including requirements that OON physicians and facilities inform patients whether the health services they seek are in-network or OON and others. While the bill eliminated previous language that would have required N.J. OON ASCs to charge patients out-of-pocket costs in many cases, the NJAASC still said it was "far from happy" with the end result.

On the OON side, we are seeing increasing situations where payors either issue audit letters to surgery centers, develop no pay policies OON or pay surgery centers just a fraction of what they expect to get paid. Surgery centers, on their end, are increasingly making efforts to work with state departments of insurance to explain how the cutting off of OON precludes patients from accessing true PPO benefits. There is a handful of cases that discuss whether or not payors have responsibilities to pay providers when providers are serving patients OON and in some situations reducing co-payments. This is an evolving area that continues to become more combative.

4. Antitrust issues – joint-venture managed care contracting
. There are two 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 to try to obtain better rates from managed care payors. Here, the key issue is ensuring that two entities can be considered one entity for purposes of the antitrust laws, which makes them legally incapable of conspiring with each other. There is a significant difference in legal interpretations 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 (i.e., the hospital and surgery center are one). When the ownership is between 50 percent and 80 percent, the determination differs from district court to 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 may still be possible for the hospital and surgery center to be considered one entity, but the hospital must have very substantial control of the surgery center.

The other common antitrust issue arises when a surgery center is excluded from certain payor contracts due to aggressive hospital competition. Here, the challenge for the surgery center is showing that the hospital provides more than simple competition but rather has conspired to harm the physician-owned surgery center or has made an effort to monopolize the market. This can be a very expensive process of gathering facts to prove such conspiracy exists.

The Health Insurance Portability and Accountability Act (HIPAA) continues to be updated in a manner that adds additional burdens. One of the biggest burdens in the most recent HIPAA amendments 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, patients must be notified of any breach. Healthcare organizations have already come under fire for failing to notify patients of data breaches in a timely manner: In Nov. 2010, an Indiana attorney filed suit against Indianapolis-based health insurance company WellPoint for failing to notify 32,000 customers of a data breach until June 2010, at least eight months after the breach began. Additionally, portable devices that store electronic protected health information must be constantly tracked and controlled by employees under Section 164.310(d) of the HIPAA Security Rule, meaning the convenience of portable devices is coupled with a substantial risk. 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.

6. Healthcare reform. No one knows exactly what the ultimate impact of healthcare reform will be on ASCs. However, almost everyone expects that it will lead to an incremental increase in the number of governmental and lower paying patients. In the short run, healthcare reform does not appear to have a very immediate negative impact on surgery centers. In fact, because the reform legislation provides certain incentives for preventive efforts, such as colonoscopies, and because there is no public option, the immediate negative impact is not clear.

Some of the concepts set forth in the healthcare reform law involve integrative efforts between hospitals and physicians to develop accountable care organizations and other efforts that allow the joint packaging of care. These efforts, together with other payment incentives for hospitals, often lead to more employment of physicians by hospitals. This reduction in the pool of physicians means a reduction in the lifeblood of surgery centers. In theory, ACOs should view surgery centers as a low-cost, high-quality alternative to other forms of care delivery, but some worry that ACOs will not fit with the traditional operation and mindset of the ASC. Saul Epstein, co-administrator of ParkCreek Surgery Center in Coconut Creek, Fla., told Becker's ASC Review that ASCs could turn out to be a cost center for ACOs rather than a cost-saving alternative. "When an ACO is paid a lump sum for a patient's care, surgery will be seen as a cost center," he said.

Healthcare futurist Joe Flower says ASCs, which are traditionally designed to focus on a single niche, may have trouble adapting to the "continuum of care" model. Andrew Hayek, president and CEO of Surgical Care Affiliates, wrote in Becker's ASC Review that ASCs involved with ACOs will need to have "robust clinical systems and sophisticated tools to improve cost and efficiency, and they will need to tie their clinical and cost analytics into the ACO's information on the overall patient population to drive ongoing improvement in outcomes and cost." This may prove a significant obstacle for ASCs that lack the assets to invest in advanced IT.

While the overall verdict on healthcare reform is not yet in, certain of the long-term trends do not favor surgical centers despite the fact that ASCs greatly reduce the cost of care.

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This is intended as a brief summary of six key legal issues facing surgery centers today. Should you have additional questions, please contact Scott Becker at sbecker@mcguirewoods.com.

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