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Legal Update
Facility Fees for Doc-owned ASCs Under Fire
John Fanburg
Publish Date: January 18, 2008

In a recent ruling, a New Jersey Superior Court judge declared that physicians referring patients to ASCs in which they have ownership interests are violating state law. The ruling has the state's legal and medical communities pondering its impact on surgery centers. Facing the possibility that future referrals to their ASCs will be ruled impermissible, physician-owners are also forced to contemplate whether filing claims for ASC facility fee reimbursement might be seen as insurance fraud.

The facts
The facts of the case are not in dispute. Garcia v. Health Net of New Jersey, Inc., a civil lawsuit, involved insurance claims for facility fees for procedures performed at a physician-owned ASC. The physicians who referred the cases and performed the surgeries had ownership interests in the center. While the physicians were within the Health Net coverage network, the surgery center was not.

On Nov. 20, 2007, Judge Robert P. Contillo declared that the physicians overstepped the law by referring their patients to an ASC that they owned. The referrals, the judge asserted, violated the Codey Law, a 1991 state statute that prohibits medical self-referral (see "Just What Is the Codey Law?").

Despite citing this violation, the court determined that the physicians didn't commit insurance fraud by seeking facility fee reimbursement for those services. Examining the ASC's practice of not collecting co-insurance payments from patients, the court also found that the ASC didn't violate the law by accepting as payment in full the assignment of each patient's right to reimbursement from Health Net.

New Jersey's Board of Medical Examiners issued an advisory opinion in November 1997 stating that a surgeon's referrals to a surgery center he owns aren't impermissible. The board said its "rationale for allowing a self-referral in this context is that the service offered is so integral to the practice of the surgeon that it may be perceived as an extension of his/her medical office practice." New Jersey physicians widely rely on that advisory opinion.

In the Health Net case, though, the court rejected the advisory opinion on grounds that it addressed an ASC-hospital joint venture instead of the wholly physician-owned facility at issue. The absence of partial hospital ownership, the court opined, removed an important safeguard that served to insulate the commingling professional and financial interests of physician-owners. The court also dismissed the notion that ASCs are extensions of physicians' practices, finding that exception to the Codey Law "simply inapplicable." The court concluded that it "can not be avoided in this case" that physicians' referrals to ASCs in which they hold significant financial interests violate the Codey Law.

The co-insurance complaint
The judge's declaration was an unexpected outcome of an insurance-related lawsuit. While finding the Codey Law violation, the court articulated that Health Net had no cause of action against the physicians or the ASC because such a private cause of action is not authorized by the Codey Law.

In its lawsuit, Health Net had alleged that the physicians and the ASC violated state law by failing to collect co-insurance from patients to the ASC.

As a general rule, when an insured patient is referred to an ASC, the insurer is obligated to pay the ASC's facility fee on covered patients, even when a facility is out-of-network. Under such an arrangement the patient must pay a portion of that fee, called co-insurance (not to be confused with co-pay, the patient's obligation under in-network benefits).

Despite this obligation, the court found that the ASC didn't act unlawfully in routinely failing to collect co-insurance from patients who were Health Net insurance plan subscribers. The court stated that, while a patient's obligation to pay co-insurance arises under an agreement with Health Net, the ASC isn't legally obligated to collect it.

The fraud complaint
Health Net had also claimed that the ASC and physicians violated the state's Insurance Fraud Prevention Act by submitting facility fee claims for services that violated the Codey Law.

One element of New Jersey statutory insurance fraud includes knowing that a claim contains false or misleading information. As such, the court declared it highly relevant whether the physicians were aware of their violation of the Codey Law.

In spite of finding violations in connection with referrals to the physician-owned ASC, the court determined that the ASC and physicians didn't commit insurance fraud because the knowledge element wasn't present. Rather, the court predicated that the ASC and the physicians believed they complied with the law. In view of the widespread understanding in the industry that such referrals were permissible, there could be no finding of fraud.

Just What Is the Codey Law?

New Jersey has its own version of the federal Stark law that prohibits a physician from referring a patient to a healthcare service if the practitioner (or an immediate family member) has a financial interest. Known as the Codey Law, this law parallels Stark, but is broader than Stark. It applies to all patients (not just Medicare and Medicaid) and applies to all healthcare services (not just the Stark list of designated health services). However, this restriction doesn't apply to services provided at the practitioner's medical office and for which the patient is billed directly by the practitioner. Accordingly, a physician may generally refer a patient to his own medical practice without violating the Codey Law.

— John D. Fanburg, JD

Resulting questions
In the wake of this decision, the question now arises whether physicians could be considered on notice that self-referrals to an ASC in which they have an ownership interest might be seen as a violation of law.

Could Judge Contillo's remarks impact future case law by imparting knowledge on physicians that self-referrals to ASCs are impermissible, therefore satisfying the knowledge element for insurance fraud? That remains to be determined.

In response to the uncertainty and need for clarification, the Board of Medical Examiners issued a statement on Dec. 12 indicating its intent to pursue an emergency rule defining a "medical office" for the purposes of the Codey Law. Also, legal and medical communities are working with state lawmakers to draft regulatory standards on this issue.

In the meantime, uncertainty remains whether the integrity of the physician-owned ASC business model is intact in New Jersey as an extension of a physician's practice if there is risk that an insurer may decline reimbursement for facility fees for self-referred procedures. Such an outcome could cripple hundreds of ASCs in New Jersey.

Although the physicians won the basis of the Health Net case, the court still found the physicians violated the law. Appeals of this decision are expected, but if it is upheld, insurance companies might rely on it, taking the position that they do not have to reimburse facility fees for procedures performed in an ASC when the referring physician had an ownership interest. As a result, the survival of such reimbursement remains an open question.