Physician/ASC Self-Referral Law Signed by New Jersey Governor

On March 23, Governor Jon Corzine of New Jersey signed into law a bill that amends the State’s existing physician self-referral statute in order to provide greater clarity in the area of ambulatory surgery center referrals and to make several other significant changes to the way surgery centers and office-based surgery are regulated under New Jersey law. The bill in question, Senate Bill 787, was first introduced almost a year ago in the wake of two state court cases that cast doubt on the permissibility of physicians referring patients to surgery centers in which they had an ownership interest.

The key changes contained in the new law are as follows:

No new ASCs will be allowed, unless there is an applicable exception.
Hospitals and medical schools can still establish new ASCs and enter into ASC joint ventures with physicians or other parties.
No “indirect referrals” are allowed from physician owners to their ASCs.
All ASCs and surgical practices are now subject to certain state reporting requirements.
All ASCs must now be accredited. This applies to existing centers as well.

The New Jersey physician self-referral law, N.J.S.A. 45:9-22.5 et seq., commonly known as the “Codey Law” and named after Senator Richard J. Codey, was adopted in 1991 and was originally intended to implement the concepts contained in the federal Stark Law at the state level. The key restriction in the Codey Law is as follows:

“A practitioner shall not refer a patient or direct an employee of the practitioner to refer a patient to a health care service in which the practitioner, or the practitioner’s immediate family, or the practitioner in combination with the practitioner’s immediate family has a significant beneficial interest; except that, in the case of a practitioner, a practitioner’s immediate family or a practitioner in combination with the practitioner’s immediate family who had the significant beneficial interest prior to the effective date of P.L.1991, 19 c.187 (C.26:2H-18.24 et al.), the practitioner may continue to refer a patient or direct an employee to do so if that practitioner discloses the significant beneficial interest to the patient.”

In summary, there is a general prohibition on physician referrals of patients for “health care services” in which the physician or an immediate family member has a “significant beneficial interest”. The statute then provides a relatively short laundry list of exceptions to this prohibition. Previously, there were only two exceptions to this prohibition contained in the statute: (1) a health care service that is provided at the practitioner’s medical office and for which the patient is billed directly by the practitioner; and (2) radiation therapy pursuant to an oncological protocol, lithotripsy and renal dialysis.

The healthcare community has traditionally interpreted this prohibition as not applying to ambulatory surgery centers. Traditionally, surgery centers were viewed as an extension of a physician’s practice and as a result most people who were involved in the industry believed that ASCs would fall within the exception discussed above. This notion was confirmed in a New Jersey Board of Medical Examiners (“BME”) advisory opinion, which New Jersey ASCs had historically relied upon to legitimize their physician owners’ referrals.

Two New Jersey cases were decided last year that created a great deal of angst in the surgery center industry due to their controversial, and some say misguided, interpretation of the Codey Law. The first case, Garcia v. Health Net of New Jersey, Inc., C-37-06 (N.J. Super. Ct. Nov. 20, 2007), involved claims by a payor that certain physicians had fraudulently submitted claims to payors for services provided in an ambulatory surgery center. The key issue in the Garcia case was not the direct applicability of the Codey Law to these allegedly fraudulent claims. Rather, the Court chose to include in its opinion a statement that the claims in question also potentially violated the referral prohibition contained in the Codey Law. Although the Court’s decision did not rest upon this conclusion of law, its analysis caused a great deal of turmoil and uncertainty around physician referrals to ASCs.

In response to the Garcia case, the BME proposed an Emergency Amendment to the New Jersey Administrative Code Section 13:35-6.17(b) that would have affirmatively exempted ambulatory surgery center referrals from the self-referral prohibition. Before the proposed Emergency Amendment was signed, a second case was decided that again called into question the exception so many surgery centers and physicians had relied upon over the prior 15 years. In that case, Endo Surgi Center, P.C. v. Liberty Mutual Insurance Company, Letter Opinion of Hon. Ross R. Anzaldi (March 26, 2008), the court held that the defendants violated the Codey Law because the applicable exception requires that the medical service be performed “at the doctor’s medical office” and “the patient must be billed directly in the doctor’s name.” Typically, ambulatory surgery centers are not physically located in a physician’s office and since the fees generated by ASCs are facility fees, rather than professional fees, they are usually billed separately. The court found this problematic in a strict reading of the statute.

Although SB 787 allows the types of referrals that Garcia found problematic, it represents a significant departure from past practice and what is considered “normal” to the vast majority of the ASC industry. The chief importance of this Bill is that it implements a moratorium on the development of new ASCs, subject to certain limited exceptions. It also subjects changes of ownership and relocations to review by the Department of Health and Senior Services. Second, with respect to the confusion created by the Garcia and Endo Surgi Center cases, the Bill does provide clarity by adding an exception to allow certain referrals made by physicians to surgery centers in which they have a significant beneficial interest.

Essentially there are four elements of the exception. If each of these requirements is satisfied, then the referral will not be prohibited by the Codey Law:

the practitioner who provided the referral personally performs the procedure;
the practitioner’s remuneration is directly proportional to his ownership interest and not to the volume of patients the practitioner refers to the facility;
all clinically-related decisions at a facility owned in part by non-practitioners are made by practitioners and are in the best interests of the patient; and
disclosure of the referring practitioner’s interest in the facility is made to the patient in writing, at or prior to the time that the referral is made.

In addition to the new exception described above, the Bill also adds several other important requirements for healthcare providers in New Jersey. A brief summary of the key changes and additions is below:

Any entity that operates a surgical practice, must register with the Department of Health and Senior Services within 1 year of the Bill’s passage.
“Surgical practice” means a facility: (i) with no more than 1 operating room, (ii) that has at least one PACU or recovery area, and (iii) is established by a physician or a professional practice. It also includes an ASC that is unlicensed but Medicare certified.
Any entity that has not commenced operations as a “surgical practice” as of the Bill’s effective date must register with the Department of Health and Senior Services within 180 days.
In order to register with the Department of Health and Senior Services, a “surgical practice” must be Medicare certified or accredited by an approved accreditation agency.
In order to register with the Department of Health and Senior Services, a “surgical practice” must report the following information each year: (i) the number of patients served by payment source, including the number of Medicaid-eligible and medically indigent persons served; (ii) the number of new patients accepted; and (iii) the number of physicians, physician assistants, and advance practice nurses providing professional services at the surgical practice.
All “ambulatory care facilities” will now be required to obtain accreditation from a CMS-approved accrediting body. Existing facilities will have 1 year to comply with this requirement.
No new registrations or licenses will be issued for “surgical practices” or “ambulatory care facilities” unless: (i) in the case of a change of ownership, the Commissioner of the Department of Health and Senior Services reviews the qualifications of the new owner or owners and approves the transfer, (ii) there is a relocation within 20 miles of the current location or within an underserved area and there is no increase in the scope of services offered and the Commissioner approves the relocation, (iii) the entity is a “surgical practice” that is registered with the Department of Health and Senior Services, (iv) the entity has filed plans, specifications and required documents with the Health Care Plan Review Unit of the Department of Community Affairs within 180 days after March 23, 2009, (v) the facility is jointly owned by a New Jersey general hospital and one or more other parties, or (vi) the facility is owned by a hospital or medical school.

The key takeaway from these changes are that (i) Every surgical practice or ASC will need to be registered or licensed in the State within the next year and (ii) There is a moratorium on new ASCs, with certain exceptions as defined above.

This is relevant not only to healthcare providers in New Jersey, but also to healthcare providers in every other state because this situation represents a rare and relatively serious threat to physician ownership in and referrals to ASCs. Ultimately, the legislature reached a compromise that stopped short of banning physician referrals to ASCs they own. Although physician-owned hospitals have faced much more serious threats, it is exceedingly rare for ASCs to be confronted with the kinds of restrictions that have been implemented here. Although this law significantly curbs the future development of physician-owned ASCs, it did not impair the ability of physicians to continue owning in and referring patients to existing facilities.