Legal Aspects – Forming an Ancillary Service

    0
    269

    The challenge of creating higher quality service at a lower cost for an older and less healthy patient population gives physicians the impetus of necessity as the mother of invention and the spur of innovation. To augment practice revenues and to control quality for their patients, a number of physicians have begun investing in or opening ancillary service facilities.

    Many types of ancillary entities exist today in the form of single-specialty or multispecialty hospitals, or ancillary service facilities that offer imaging pain management, physical therapy or rehabilitation, diagnostic technologies with electromyography, electroencephalography, or remote video monitoring of surgeries or sleep studies, and ambulatory surgery centers. ASCs alone have experienced significant growth in the past several years: More than 4,500 ASCs received Medicare certification in 2005 with an annual growth rate of 8.3 percent.

    o

    Whether the venture is on a small or large scale, with or without partners, or single specialty or multispecialty, many of the motivations and issues involved in establishing an ancillary service facility are the same. To ensure that the arrangement will not violate the law and that the proper legal structure is created, a physician who is considering investing in an ancillary service or entering into a contract involving an ancillary service should do so only after consulting an attorney experienced in representing healthcare providers. This article is intended to provide an overview of the legal issues involved in opening an ancillary service facility.

    Creating a New Legal Entity
    The formation of an ancillary service facility typically requires the creation of a new legal entity. A physician group can establish this new legal entity by forming a corporation, a general partnership, a limited partnership or a limited liability company commonly known as an LLC. Most lawyers specializing in healthcare joint ventures recommend forming the new legal entity as an LLC.

    Corporations Corporations protect shareholders by containing the liabilities of the corporation within the shell of the corporation. Thus shareholders are not responsible to creditors of the corporation. There are two types of corporations, c-corporations and s-corporations. The difference between these corporate forms is the way the profits of the corporation are taxed. The downside of the c-corporation structure is that profits of the corporation are taxed prior to making any distributions to its shareholders. This is a double taxation that deters the formation of a corporation by most professionals. S-corporations are treated as partnerships for tax purposes and have the advantage of pass-through tax treatment (tax items are passed through to the partners so that only one level of tax is paid, that is, no corporation tax is paid). The downside of the s-corporation structure is the limitation that is imposed on the number and type of entities that can invest in the company.

    General Partnerships General partnerships do not enjoy the same limitation of liability afforded by the corporate form. General partnerships have the advantage of pass-through tax treatment, but all partners in a general partnership are jointly and severally liable for the debts of the business and for the wrongful acts committed by other partners in the course of the partnership’s business. A limited partnership has at least one general partner and one limited partner, with management and control vested with the general partner(s). The liability of a general partner is unlimited just as in a general partnership, while limited partners are limited in their liability exposure by the amount of their investment in the partnership.

    Limited Liability Company An LLC is a hybrid legal entity that combines traits of a corporation with traits of a partnership. An LLC allows its members to have pass-through tax treatment like a partnership and limited liability like a corporation. Most lawyers specializing in healthcare joint ventures recommend forming the new legal entity as an LLC because of those favorable liability and taxation traits. An LLC is formed by filing Articles of Organization with the Secretary of State in the state where the LLC is formed. More importantly, the LLC members will also adopt an Operating Agreement that will serve as the venture’s principle governing document. The Operating Agreement will detail ownership, governance, distributions, non-compete and divestiture issues for the entity. The Operating Agreement should be written and negotiated very carefully by the physician(s) as it will be relied upon by a court of law should a dispute arise amongst the members of the LLC.

    Federal Regulation of Ancillary Service Facilities
    Antikickback Statute The federal antikickback statute establishes criminal penalties for any person who knowingly and willfully offers, pays, solicits or receives any remuneration to induce payment in return for: (1) referring an individual to a person for the furnishing or arranging for the furnishing of any item or service payable in whole or in part under a federal healthcare program (Medicare or Medicaid); or (2) purchasing, leasing, ordering, or arranging for, or recommending purchasing, leasing, or ordering any good, facility, service or item payable under a federal healthcare program. Remuneration is defined as including the transfer of anything of value, in cash or in kind, directly or indirectly, overtly or covertly. Remuneration has been interpreted to include the receipt of free goods or services and the opportunity to bill for services (that is, receipt of an exclusive contract). Because this is a criminal statute, there is often extensive judicial inquiry into the facts of a specific arrangement in order to determine whether the participants were “knowing and willful,” making litigation in these cases long and costly.

    Violation of the antikickback statute constitutes a felony punishable by a maximum fine of $25,000, imprisonment up to five years, or both. Conviction will lead to an automatic exclusion from Medicare, Medicaid, and other federally funded healthcare programs. In addition, violations of the antikickback statute are subject to civil monetary penalties of up to $50,000 and damages of up to three times the amount of the illegal kickback.

    The antikickback statute clearly prohibits a business arrangement in which payment is made for a patient referral, but when the business arrangement is a joint venture between two or more individuals or organizations its legality is less clear. The courts filled in this lack of clarity in the United States v. Greber case by interpreting the antikickback statute to have a “one purpose” test. Thus, when even one purpose of the arrangement in question is to induce referrals, irrespective of the existence of other legitimate purposes, the payment violates the antikickback statute.

    The Department of Health and Human Services Office of the Inspector General has created a number of exceptions, “safe harbors,” to protect legitimate business arrangements. When an arrangement meets the description of an OIG safe harbor, one can be assured that the arrangement does not violate the antikickback statute. Whenever possible, a joint venture should meet a safe harbor, but an arrangement that does not meet a safe harbor is not necessarily illegal. An attorney can help a business arrangement meet as many elements of the safe harbor as possible.

    Currently four ASC safe harbors exist for:

    ■ surgeon-owned ASCs in which all physician investors are general surgeons or surgeons engaged in the same surgical specialty provided that they perform ASC procedures as a significant part of their medical practice (defined as one-third of the physician investor’s medical practice income from all sources for the previous fiscal year — also known as the “one-third test”);

    ■ single-specialty ASCs in which all of the physician investors are engaged in the same medical practice specialty provided that they perform ASC procedures as a significant part of their medical practice (see the one-third test discussed above);

    ■ multispecialty ASCs in which the physician investors are a combination of (a) general surgeons, (b) surgeons engaged in the same surgical specialty, or (c) physicians engaged in the same medical practice specialty, who perform ASC procedures as a significant part of their medical practice (see the one-third test discussed above) and who perform at least one-third of their procedures at the ASC; and

    ■ ASCs in which at least one hospital is an investor and the other investors are either (a) individual physicians or group practices that otherwise qualify under the ASC safe harbor or (b) individuals or entities who are not the source of patient referrals. Hospital investors in this latter situation may not be in a position to refer patients to the ASC or any physician investor nor may the hospital own or employ any of the space, equipment, or personnel in the ASC.

    It is notable that physicians who do not meet the one-third test, such as anesthesiologists, still may be able to invest in an ASC without exposing the entity to significant risk of violating the antikickback statute provided that those physicians are not in a position to refer patients to the ASC.

    Congress has stated that in the interest of convenience, professional autonomy, accountability and quality control, surgeons should be allowed to form ASCs. Congress’ view is that the possible risk of overutilization or unnecessary surgery is mitigated by the fact that each surgeon already has an opportunity to generate income via the professional fee and that the additional financial return from the ASC is not likely to increase utilization.

    Federal Stark Law Federal law, commonly known as Stark law after the original legislation’s author U.S. Rep. Pete Stark, further restricts physician referrals to a physician joint venture and thus can affect physician investment in the joint venture. Stark law provides that a physician with an ownership or investment interest in or compensation agreement with an entity is prohibited from making referrals to that entity for the furnishing of “designated health services” for which payment may be made under a federal healthcare program. Designated health services include physical therapy, occupational therapy, radiology or other diagnostic services, radiation therapy, durable medical equipment and supplies, parenteral and enteral nutrients, prosthetics, orthotic and prosthetic devices, home health services, outpatient prescription drugs, and inpatient and outpatient hospital services. Services provided in an ASC are not considered designated health services to the extent that payment for those services is included in the global ASC payment rate. Thus, radiology services and more complex diagnostic tests that are not included in the ASC payment rate do not fall under that exception and could initiate a Stark law violation.

    Similar to the federal antikickback law, Stark law provides certain exceptions that allow physicians to receive payment for referring Medicare or Medicaid patients to an entity in which they have a direct or indirect financial interest. These exceptions include:

    ■ services provided personally by or under the direct supervision of another physician in the same group practice;

    ■ in-office ancillary services provided in the same building of the practice or in a centralized building for a group;

    ■ services rendered pursuant to a prepaid plan or a hospital affiliation;

    ■ rental of office space or equipment;

    ■ bona fide employment or personal service arrangements;

    ■ certain types of physician incentive plans;

    ■ physician recruitment;

    ■ isolated transactions; and

    ■ certain group practice arrangements with a hospital.

    Stark is a civil rather than a criminal statute (different from antikickback law). Violation of Stark law may result in civil penalties not to exceed $100,000 for each “arrangement or scheme” that a person knows or should know has a principal purpose to violate the statute. Additionally, the government may withhold payments for prohibited referrals or seek to recoup past payments.

    For purposes of establishing ancillary service facilities other than ASCs, such as MRI, CT or fluoroscopic imaging facilities, the Stark “in-office ancillary services” exception is particularly helpful. If the service is provided in the same building in which the referring physician generally practices, and the receipt of the designated health service is not the primary reason the patient contacted the referring physician, or if the service is provided in a centralized building that is used exclusively by the referring physician’s group practice, then that service would be excepted from Stark law prohibition.

    Federal Tax Exemption Issues
    When a physician group forms a joint venture with a nonprofit, tax-exempt entity (such as a hospital) two issues are raised for the nonprofit hospital: (1) impact on the hospital’s tax-exempt status; and (2) the potential that the hospital’s return on investment in the joint venture will be treated as taxable income. These concerns are mitigated if the joint venture is structured in a manner that furthers the charitable purposes and mission of the hospital. This can be accomplished if the hospital controls a majority of the board and management is by an independent third party.

    In contrast, if the hospital’s participation is a 50-50 split or less and effective control is in the hands of for-profit individuals, the hospital’s tax exemption could be in jeopardy. In Redlands Surgical Services v. Commissioner of the IRS, the circuit court determined that a joint venture between a for-profit and nonprofit was inconsistent with the tax-exempt entity purpose because of a 50-50 split in board governance as well as the fact that the joint venture provided minimal services to Medicaid patients and no indigent care.

    Thus it seems that for a hospital or other nonprofit entity to minimize the risk of jeopardizing its tax-exempt status, the nonprofit entity must maintain control of the joint venture in a way that furthers its charitable purpose. If the joint venture is not structured in that way, the hospital’s profit from the joint venture would be taxable income. Whether the tax-exempt hospital’s participation in the joint venture also threatens loss of its tax exemption will depend on the size of the joint venture’s operations relative to the other tax-exempt activities of the hospital.

    State Law
    Many states have enacted laws to supplement the federal restrictions on the referral of Medicare and Medicaid patients. This may be accomplished through a variety of means including obtaining a certificate of need which requires the need for the facility to be justified in front of a state-appointed panel, or placing additional restrictions on the referral or reimbursement of patient services from state funds. These laws vary in their detail and comprehensiveness and should be thoroughly reviewed by a joint venture’s legal counsel.

    Future Regulation
    Predicting the regulatory actions of the federal or a state government is a fool’s game. However, there are several indications that, at least on a federal level, Congress is scrutinizing joint venture ancillary facilities that are owned in whole or in part by physicians. The Department of Health and Human Services semiannual agenda released in mid-December outlined CMS plans to issue as many as 30 proposed rules in the first half of 2007, including a rule to revise the conditions for coverage in ASCs.

    The CMS also had previously proposed a Stark law rule change that was published in the Federal Register on Aug. 22, 2006. The proposed change would eliminate the use of “condo” pathology laboratories — labs that are operated by a separate medical group but the same group of pathologists and technicians service multiple labs — with far-reaching implications for many common diagnostic imaging joint ventures.

    Currently, the CMS allows for reassignment of Medicare reimbursement from the owner medical group to outside entities — in this case the pathologists and technicians — under contractual agreement. The proposed rule change would amend the current contractual reassignment exception so that the billing group would be required to perform the interpretation of the study and Medicare would limit the payment to the physician or group to the lower of: the supplier’s net charge to the billing physician or group; the billing physician or group’s actual charge; or the Medicare fee schedule amount. All contractual agreements involving the performance of diagnostic tests thus would be subject to this “anti-markup” provision, changing the economics that underlie current contractual agreements.

    Additionally, the CMS is considering merging the requirements for “purchased interpretations” into the contractual reassignment exception. Under these changes, a physician or group would be able to bill for the reassigned professional component of a diagnostic test under the contractual arrangement exception only when: the test is ordered by a physician who is outside of the group performing the billing, and independent of the interpreting physician; the physician or group performing the interpretation does not see the patient but only sees the test for purposed of furnishing an interpretation; and the physician or group billing for the interpretation also performed the technical component of the diagnostic test.

    Thus, physician groups with an imaging device and a contract with a radiology group to perform interpretation would have to reconsider those contracts. This rule change would require these groups to perform the interpretation themselves, to employ (rather than contract with) the pathologists or radiologists to read the test, or to cease billing for the interpretation altogether.

    In summary, regulation of ancillary facilities is a constantly changing landscape. The assistance of experienced legal counsel when investing in or entering into a contract involving such facilities is essential.

    Dave Shelton Atteberry, MD, MS, Ann R. Stroink, MD, Patrick J. Wade, MD, and Richard N. Wohns, MD, are members, and Alan M. Scarrow, MD, JD, is chair of the Medico-Legal Committee of the Council of State Neurosurgical Societies.

    Acknowledgement
    The authors gratefully acknowledge the contribution to this article of Orly Rumberg, a healthcare attorney with Schwartz, Manes, Ruby & Slovin, in Cincinnati, Ohio.

    ]]>

    Print Friendly, PDF & Email
    o