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Self-Referral Law Amended in Pitched Legislative Battle

Mark Manigan

AN ALTERNATE OF THIS PUBLICATION CAN ALSO BE FOUND HERE

On March 23, Gov. Jon S. Corzine signed into law S-787, Senate President Richard J. Codey’s bill amending his 1991 legislation banning physician self-referrals. In seeking to balance the interests in question, the so-called amendments to the Codey Law actually amend two separate laws. Specifically, Section 1 of the amendments modify the Department of Health and Senior Services (“NJDHSS”) licensing rules (N.J.S.A. 26:2H-12) and Section 2 amends the original Codey Law (N.J.S.A. 45:9-22.5). Enactment arrived 14 months after the infamous November 2007 decision in Garcia v. Healthnet of New Jersey (Docket No. C-37-06), in which the court held that, notwithstanding previous administrative guidance from the New Jersey Board of Medical Examiners (“BME”) to the contrary, a physician’s referral to an ambulatory surgical center (“ASC”) in which the physician holds an ownership interest violated the Codey Law.

The Garcia decision had the potential for setting the New Jersey ASC industry into chaos at the end of 2007. The concern was that many insurance carriers, relying on Garcia, would seek to deny or recoup ASC reimbursement as the carrier in Garcia was seeking to do. In fact, a few other carriers had already begun to allege Codey Law violations not only as an excuse for denying payment, but also as grounds for an insurance fraud claim under the New Jersey Insurance Fraud Prevention Act. N.J.S.A. 17:33A-1.

Soon after the publication of the Garcia decision, we filed emergency applications with the BME to issue further advisory guidance on the Codey Law in an effort to protect the industry. In response, the BME adopted an emergency rule which would have created a Codey Law exception for ASC referrals. While Attorney General Anne Milgram declined to consent to the enactment, she expressed an interest in ensuring that ASCs continued to get paid for services rendered. These actions, combined further with Senator Codey’s timely introduction of S-787 in January 2008, helped “stop the clock” (and for the most part dissuaded) insurance carriers from taking undue advantage of the Garcia decision and preserved the status quo while the issue was addressed by the legislature.

The original Codey Law prohibits referrals for health-care services by practitioners to entities in which they, or their immediate family members, have a financial interest. The Codey Law broadly defines significant beneficial interest as “any financial interest,” N.J.S.A. 45:9-22.4. The original Codey Law contained a number of exceptions to the ban on self-referrals, including referrals relating to radiation therapy, lithotripsy and renal dialysis. N.J.S.A. 45:9-22.5(c)(2). Further, an exception permitted referrals for health-care services provided at a practitioner’s medical office and which are billed to patients directly by and in the practitioner’s name. N.J.A.C. 13:35-6.17(b)(4)(i). This Codey Law exception is commonly known as the “medical office exception.”

Since the mid-1990s the BME, the agency charged under the Codey Law with the duty to implement regulations and enforce the law, issued a number of advisory opinions in which it interpreted the “medical office exception” to permit self-referrals to ASCs in that ASCs were viewed as an extension of a practitioner’s medical office. The BME’s action was consistent with the federal policy permitting such referrals and the policies of every other jurisdiction in the U.S. Currently, there are approximately 5,000 ASCs in the country and 200 in New Jersey. The Garcia suit was instigated by a subset of the physician owners of Wayne Surgical Center, LLC (“Wayne”), who brought claims against Healthnet of New Jersey relating to Healthnet’s termination of their medical practice provider agreements for referring to Wayne, an out-of-network ASC. Healthnet countersued the physicians and filed an action against Wayne asserting, among other claims, that the physicians’ self-referral to Wayne violated the Codey Law, and further, as such that the parties had committed fraud under the Insurance Fraud Protection Act.

The Court found that a physician’s referrals to an ASC in which the physician has a significant financial interest constituted a violation of the Codey Law. N.J.S.A. 45:9-22.5. In reaching this conclusion, the Court distinguished the physician-owned ASC in the Garcia case from the 1997 BME advisory opinion that the physicians claimed to have relied on. In its 1997 opinion, the BME examined a joint-venture ASC owned in part by a hospital and physicians. In that opinion, the BME advised that the surgeon’s referrals of his own patients to the surgery center in which he had an interest was an extension of the physician owners’ medical practice and therefore permissible under the “medical office exception.” By overriding the BME guidance and holding that a physician’s self-referral violated the Codey Law, the Garcia decision called into question the ownership structure of the vast majority of New Jersey’s 200 ASCs. Thankfully, the legislature acted. In a hotly contested battle pitting the insurance industry, versus the ASC industry, versus the hospital industry, the legislature was challenged to harmonize an exceedingly complicated set of interests. The amendments strike a balance between increasing regulatory oversight of the ASC industry, restraining future growth in favor of hospitals, protecting existing physician-owned ASCs (and those in development), and most importantly, the ability of physicians to self-refer to ASCs.

The amendments increase regulatory oversight of the entire ASC industry by requiring, by March 22, 2010, that (1) all unlicensed one-room ASCs must become “registered” with NJDHSS and (2) all licensed ASCs must become accredited by an “accrediting body recognized by Medicare” (currently the Joint Commission, the Accreditation Association for Ambulatory Healthcare and the American Association for the Accreditation of Ambulatory Surgery Facilities, hereafter collectively referred to as an “Accrediting Body”).

The conditions of unlicensed one-room ASC “registration” include the requirement that these centers obtain (1) Medicare certification or (2) accreditation from an Accrediting Body. Further, only existing unlicensed ASCs, as well as those that have construction plans filed by Sept. 17, will qualify for “registration” and therefore the ASC self-referral exemption contained in the amendments. The amendments also permit registered centers to (1) transfer ownership and (2) relocate (a) within 20 miles or (b) to a “Health Enterprise Zone” (provided there was no expansion in the registered ASCs scope of services). Finally, the amendments do not subject “registered” ASCs to the ambulatory care facility assessment (currently 2.95 percent on gross receipts and capped at $200,000 per year).

With regard to the future development of licensed ASCs, the amendments prohibit NJDHSS from issuing new ambulatory surgery facility licenses unless one of the following scenarios apply: (1) ASCs in development — meaning, entities that have filed architectural plans by Sept. 17; (2) the transfer of ownership in a grandfathered ASC; (3) the relocation of a grandfathered ASC provided the relocation is (a) within 20 miles or (b) to a “Health Enterprise Zone” and (c) that there is no expansion in the relocated ASC’s scope of services; (4) new ASCs that are owned in whole or in part by a New Jersey hospital; or (5) new ASCs that are owned in whole by a medical school.

The amendments also abolish exceptions for lithotripsy and radiation oncology by prohibiting physicians from referring patients to lithotripsy or radiation oncology entities in which they hold an interest, unless the interest “was held” within one year following the effective date of the bill. Further, the amendments clarify and arguably expand the “medical office exception.”

NJDHSS is currently working on implementing regulations relating to Section 1 of the amendments. We also understand that the BME is considering amending its corporate practice regulations, which would naturally include implementing the Codey Law modifications contained in the amendments. Hopefully, the promulgation of the implementing regulations will be less controversial than the legislative process. Stay tuned.