posted 3/24/2004

Re: Physician Ownership of Facilities

The federal government prohibits certain ownership arrangements in connection with federally funded programs such as Medicare and Medicaid. The applicable federal laws are (i) the Medicare Anti-Fraud and Abuse Statute (the AAnti-Fraud Statute@), enacted in 1972 and applied aggressively by the Office of Inspector General (OIG) AFraud Alert@ of 1989; (ii) AStark I@, effective 1992; and (iii) AStark II@, effective 1993. These laws apply to administration of the Medicare and other federally funded programs. Their common theme is that a physician may not make a referral of a government-funded patient in a way that financially benefits the physician, unless the referral qualifies for a narrow exemption. These laws have been so influential that they have inspired regulations concerning patients outside of federal programs.

In addition to the federal regulations, there are state laws restricting ownership. Both federal and state laws apply with equal force against physicians. It is important to review both in connection with any decision by a doctor to invest in a medical facility.

Anti-Fraud Statute and OIG Fraud Alert

The 1972 Anti-Fraud Statute made it illegal for medical testing facilities to provide Akickbacks@ or referral fees to doctors. The Department of Justice then expanded the scope of the statute by suing Dr. Alvin Greber for forming a corporation to perform diagnostic tests and paying the referring doctor a fee for interpreting the tests. Soon the government adopted the theory that profit distributions could induce referrals in the same way that illegal kickbacks did.

In 1989, the OIG announced that it would investigate investments in clinics by physicians in the form of capital contributions, loans, profit distribution arrangements having large returns for little investments, or otherwise high returns on investment relative to the risk. How physicians are identified for solicitation to become investors is important, particularly if they are picked for the purpose of making referrals. A federal court upheld the OIG=s broad interpretation in February of 1993 and it has been cracking down on doctor-owners ever since.

However, the OIG established Asafe harbors@ for certain joint venture arrangements, meaning that physicians who stayed within these guidelines would not be harassed. For example, a physician can refer Medicare patients to a Alarge entity@ that is part of a large corporation in which he owns shares. In an example directly relevant to many situations, there is a safe harbor for physicians who self-refer to a Asmall entity@ in which no more than 40% of the facility is owned by potentially referring physician-owners and no more than 40% of its revenue is generated by investors. But the return on investment cannot depend on referral volume, or else the exemption is lost. Investment return must be based only on the amount invested. Also, investment opportunities must be offered to non-referring investors on terms equal to that of the referring investors; the clinic cannot make a loan (or guarantee) that enables the physician to acquire his interest. Finally, the clinic cannot market goods or services to physician-investors on terms better than those for non-investors.

Investments totally less than the 40% threshold are not deemed improper. Rather, the OIG policy is not to question arrangements below 40%. Also, there are many exceptions for rural practices, group practices that own the clinic entirely, ambulatory surgery centers where the doctors= fees far exceed their return on investment, and so on. The details of the arrangement can make a big difference.

Stark I and II

Congressman Pete Stark, a longtime opponent of the practice of private medicine and private contracting, instigated legislation banning certain types of physician ownership and self-referrals. His first statute on this issue is known as AStark I@ (the Ethics in Patient Referrals Act), which became effective in January of 1992 and has been amended since. Stark I prohibits referrals by doctors of Medicare (or Medicaid) patients to a clinical laboratory owned in part by the doctor (or an immediate family member). However, this ban does not apply if the doctor personally provides or supervises the service; the lab is in a qualified Arural area@; or the lab is part of a large publicly held corporation. Clinical labs affected by this regulation must provide the government with a list of the names of its doctor-investors, and in filing Medicare reimbursement claims must identify the name and Medicare identification number of the referring physician. Violations are punished severely, including fines up to $15,000 per test and possible exclusion from Medicare for the lab, and fines up to $100,000 for any doctor who enters into an arrangement for the purpose of circumventing the statute. This is taken very seriously indeed.

But this law, Stark I, only applies to referrals of Medicare and Medicaid patients to clinical labs. It is limited in scope, but harsh in application. Its severity set the tone for dealing with physician-ownership issues.

Once the door was opened to regulation in this area, it became inevitable that the restrictions would be expanded beyond clinical labs. Congressman Stark sponsored, and President Clinton signed, the Comprehensive Physician Ownership and Referral Act of 1993 (popularly known as AStark II@). It flatly prohibits self-referrals of Medicare patients for broad categories known as Adesignated health services.@ These go far beyond labs and include physical, radiation, occupational therapy, radiology and other diagnostic services, durable medical equipment, prosthetics, orthotics, and prosthetic devices, parenteral and enteral nutrients, supplies and equipment, outpatient prescription drugs, home health services, and even inpatient and outpatient hospital services. It also bans indirect ownership schemes that were permitted under Stark I. A physician has to satisfy an exception in order to hold an investment in connection with referrals. Many physicians felt compelled to divest their holdings as a result of Stark II.

Patients outside of federal programs are not covered by the foregoing federal laws, nor are their physicians. Instead, state law governs, as discussed below.

State Restrictions

South Carolina has regulations in this field of self-referrals and physician-ownership that are more stringent than those in most states. Like Florida, South Carolina extends the federal prohibitions against self-referral ownership arrangements to all patients. In 1993, South Carolina enacted the AProvider Self-Referral Act.@ S.C. Code Ann. § 44-113-10 through -80. It does have the following exception: it permits the potential for self-referral when less than 50% of the investors in a clinic are in a position to refer to the clinic. This exception is similar to the OIG=s safe harbor, but South Carolina uses 50% rather than 40% as the threshold.

There is another important difference between the 50% rule of South Carolina and the 40% federal rule. The OIG requires that no more than 40% of the revenues of a clinic come from referrals by doctor-investors. However, South Carolina does not limit self-referrals in this manner. Instead, South Carolina creates a safe harbor based solely on ownership status, not the level of referrals. This is the operative statutory provision:

S.C. Code Ann. § 44-113-30 (emphasis added). When referrals are made, there must be adequate disclosures to the patients. Id. § 44-113-40.

Conclusion

The bottom line is that physicians in South Carolina qualify for the Asafe harbor@ exemption from doctor-ownership prohibitions when the referring doctors invest less than 50% in the facility. This restriction applies to mandate that Aa health care provider may not refer a patient for the provision of designated health services to an entity in which the health care provider is an investor or has an investment interest.@ S.C. Code Ann. § 44-113-30(A). In the absence of the possibility of referrals, this particular rule would not apply.