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Legal Update
Resist the Temptation to Bill Like a Hospital
Scott Becker
Publish Date: October 10, 2007

Scott Becker, Esq., CPA Ever wish your surgery center could bill at higher hospital rates? If you're joint-ventured with a hospital, you can: your ASC provides the services, but the hospital bills and collects the higher reimbursements, then pays you. If that sounds too good to be true, it just might be. While your bottom line would grow, you'd risk running afoul of the Anti-kickback Statute, Stark, the IRS and the False Claims Act.

Scott Becker, Esq., CPA\ How the scheme works
As the joint venture has become more popular, hospitals and physicians are exploring ways to make them profitable. One way is for the hospital and physician-owners to form a new entity, an ASC that owns and operates the equipment, employs most of the staff, leases space and holds other assets related to the provision of surgical services. This entity also contracts with the hospital to provide surgical services to the hospital's patients.

This is where it gets sticky. The joint venture entity is operated, as a technical matter, under the hospital's license and staff bylaws. The hospital bills for the services provided, under the hospital's license and billing number, as hospital services. In exchange, the hospital pays the entity a fair market value fee for providing the surgical services. Essentially, the hospital buys the surgical services from the venture and bills the services under its own license, obtaining reimbursements at the higher hospital rates and increasing the profitability of the JV.

Forbidden fruit
Let's briefly examine how this arrangement could get you into regulatory trouble.

  • Federal Anti-kickback Statute. This prohibits payments to induce referral of Medicare or Medicaid business, and federal courts have held that arrangements that might induce referrals violate the statute (the fact that a financial relationship doesn't meet a safe harbor doesn't mean that such relationship is per se illegal). Some safe harbors exempt a variety of financial and compensation relationships from violation of the Anti-kickback Statute; these exist for space and equipment rental, small investment interests and surgery center ownership, among other things. The provider-based joint venture structure wouldn't precisely meet the terms of any of these safe harbors; in fact, it closely resembles a "per-click" arrangement (the ASC is paid per surgery, rather than a flat rate), which may violate the statute.
  • The Stark Act. This restricts a physician from having a financial or compensation relationship (including an ownership interest) with any entity that provides designated health services - and if you guessed that hospital-based outpatient surgery is one of them, you'd be right.

In the under-arrangement JV we've described, the physician would have a compensation relationship in an entity that provides designated health services. The one-third rule is the safe-harbor that usually keeps physicians from violating this tenet. But the Stark Act frowns on the idea that an ASC would provide services billed through the hospital, regardless of your compliance with the one-third safe harbor.

  • Tax-exempt status. Many hospitals are tax-exempt entities that are obligated to serve charitable purposes. Internal Revenue Service regulations restrict hospitals and other tax-exempt entities from making payments that could constitute private benefit. The IRS, in General Counsel Memorandum 39862, negatively commented on JVs it called "net revenue stream" arrangements because they essentially let the physician participate in the net revenue of and encourage referrals to a hospital. The IRS concluded that it's possible a hospital could jeopardize its tax-exempt status with this type of JV.
  • False Claims Act. Where a venture tries to take advantage of a higher provider-based billing scheme and it is operating in a manner that is really akin to a freestanding facility, it could subject itself to claims of false or improper billing.

Both hospitals and physicians who knowingly file fraudulent or false claims payable by the Medicare program could be subject to both criminal and civil liability under the False Claims Act.

Not worth the risk
With such a variety and number of risks accompanying the use of a provider-based or under-arrangements model, hospitals and physicians alike should shy away from ever entering into a JV of this type.