Between healthcare reform, increased enforcement under the Anti-Kickback Statute, less patience on the part of physician leaders for underperforming surgery centers and increased pressure from payors on out-of-network arrangements, it is an interesting time to write about legal issues in the ASC sector. This article briefly discusses 10 legal issues, although any article on this subject could include many more. We hope you will find this a helpful overview of certain key legal issues being faced by surgery centers.
3. 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 HIPAA amendments require 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. 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.
4. Antitrust issues. There are two antitrust issues 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.
5. Medical staff bylaws. Medical staff bylaws issues constantly arise in the surgery center context in several distinct contexts. First, 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 or she does not technically meet a specific qualification. There are pros and cons to periodic waivers of provisions as to specific physicians. Second, the issue of how to remove a physician from the medical staff due to some sort of medical conduct issue or other issue. Here, to obtain the protections of the Healthcare Quality Improvements Act (HCQIA), it is critical that a surgery center exactly follow its medical staff bylaws procedures and also follow the rules of HCQIA.
A third issue related to medical staff bylaws is how removal from the medical staff under the bylaws impacts redemptions 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 in order to be an 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 the medical staff issue is completed, the operating agreement redemption issues can be addressed.
6. Hospital outpatient department transactions and "under arrangements" deals. Over the last few years, "under arrangements" — a type of transaction where an infrastructure company provided all surgery center services to a hospital — 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 company and stay aligned with the hospital. In addition, physicians were getting paid as well as they would typically do in a surgery center (i.e., billing their professional services). 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.
As the government has outlawed under arrangements transactions, we are revisiting 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 three to five 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.
7. 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, 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 out-of-network continues to be hampered.
On the out-of-network side, we are seeing increasing situations where payors either issue audit letters to surgery centers, develop no pay policies on out-of-network, 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 out-of-network precludes patients from accessing true PPO benefits. There are a handful of cases that discuss whether or not payors have responsibilities to pay providers when providers are serving patients out-of-network and in some situations reducing co-payments. This is an evolving area that we expect to get uglier.
8. Physical plant relationships. Increasingly, third-party accreditation firms and CMS surveyors are taking a much harder approach towards grandfathering in outdated physical or non-compliant plant conditions. In many situations, these physical plant conditions may have preexisted certain changes in certification rules that now require different structures, sizes and other types of accommodations. Notwithstanding the fact that many older facilities pre-dated such rules, surveyors are demanding that such facilities be brought up to code immediately. This can provide real challenges to existing surgery centers.
9. 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 middleman 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.
10. 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.
This is intended as a brief summary of 10 key legal issues facing surgery centers today. Should you have additional questions, please contact Scott Becker at sbecker@mcguirewoods.com, Elissa Moore at emoore@mcguirewoods.com or Elaine Gilmer at egilmer@mcguirewoods.com .
References:
1While 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.
273 Fed. Reg. 48713-48714 (Aug. 19, 2008).
1. 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.
However, over the long run, there are three big concerns. First, there are concerns that a substantial number of additional patients will be added to the coverage pool at what is expected to be very low rates. A second concern is whether the current healthcare reform is actually an intermediate step on the way to a more national public option and other efforts to significantly reduce costs and put pressure on commercial payors to further reduce costs. These efforts will likely, in the longer term, mean lower reimbursement for surgery centers. A third long-term concern is to what extent there will be an impact on the independent practice of medicine.
Certain of the concepts set forth in the healthcare reform initiatives 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.
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.
2. Anti-kickback issues. The government over the last few years has initiated huge increases in the funds allocated to healthcare fraud enforcement, which enforcement 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. 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 physicians1 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.
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 parties 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.
(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 Office of Inspector General 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. Again, a key issue is ensuring 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.
(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.
(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.
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 (at least in the Stark context). Although the changes to the Stark Act and the accompanying regulations do not necessarily apply to surgery centers, the analysis and concerns are applicable under the Anti-Kickback Statute to surgery centers. 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."2
(h) Medical directorships. Recently, we have been asked about the use of medical directorships for ASCs. In short, medical directorships should be used only if the medical director is providing true medical direction. If a typical center has one medical director who is an anesthesiologist and/or another surgeon truly involved in that direction, 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.
3. 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 HIPAA amendments require 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. 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.
4. Antitrust issues. There are two antitrust issues 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.
5. Medical staff bylaws. Medical staff bylaws issues constantly arise in the surgery center context in several distinct contexts. First, 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 or she does not technically meet a specific qualification. There are pros and cons to periodic waivers of provisions as to specific physicians. Second, the issue of how to remove a physician from the medical staff due to some sort of medical conduct issue or other issue. Here, to obtain the protections of the Healthcare Quality Improvements Act (HCQIA), it is critical that a surgery center exactly follow its medical staff bylaws procedures and also follow the rules of HCQIA.
A third issue related to medical staff bylaws is how removal from the medical staff under the bylaws impacts redemptions 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 in order to be an 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 the medical staff issue is completed, the operating agreement redemption issues can be addressed.
6. Hospital outpatient department transactions and "under arrangements" deals. Over the last few years, "under arrangements" — a type of transaction where an infrastructure company provided all surgery center services to a hospital — 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 company and stay aligned with the hospital. In addition, physicians were getting paid as well as they would typically do in a surgery center (i.e., billing their professional services). 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.
As the government has outlawed under arrangements transactions, we are revisiting 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 three to five 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.
7. 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, 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 out-of-network continues to be hampered.
On the out-of-network side, we are seeing increasing situations where payors either issue audit letters to surgery centers, develop no pay policies on out-of-network, 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 out-of-network precludes patients from accessing true PPO benefits. There are a handful of cases that discuss whether or not payors have responsibilities to pay providers when providers are serving patients out-of-network and in some situations reducing co-payments. This is an evolving area that we expect to get uglier.
8. Physical plant relationships. Increasingly, third-party accreditation firms and CMS surveyors are taking a much harder approach towards grandfathering in outdated physical or non-compliant plant conditions. In many situations, these physical plant conditions may have preexisted certain changes in certification rules that now require different structures, sizes and other types of accommodations. Notwithstanding the fact that many older facilities pre-dated such rules, surveyors are demanding that such facilities be brought up to code immediately. This can provide real challenges to existing surgery centers.
9. 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 middleman 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.
10. 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.
* * *
This is intended as a brief summary of 10 key legal issues facing surgery centers today. Should you have additional questions, please contact Scott Becker at sbecker@mcguirewoods.com, Elissa Moore at emoore@mcguirewoods.com or Elaine Gilmer at egilmer@mcguirewoods.com .
References:
1While 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.
273 Fed. Reg. 48713-48714 (Aug. 19, 2008).