While ASCs face a variety of legal issues at their individual state levels, there are several national legal issues affecting the everyday affairs of a surgery center, according to ASC legal experts. The most critical are physician ownership, safe harbor requirements, out-of-network fees as well as recent updates to Red Flags laws and HIPAA.
Physician ownership
Robert Mosher, JD, partner at Nossaman, and a leading expert in healthcare law, mergers and acquisitions and partnerships, says that the most frequent legal issue he deals with involves physician ownership, and, more specifically, the buying and selling of ASC units.
"One of the legal issues that seem to be problematic for surgery centers is the buying out of retiring owners and the bringing in of new owners," he says. "Many ASCs struggle with interpreting their current agreements regarding buying and with the legal requirement of selling for fair market value."
When an ASC needs to sell units due to a financial struggle, finding buyers who are willing to pay fair market value can be an uncertain process for the current partners. "ASC owners must be proactive about bringing in new partners," says Mr. Mosher. "They cannot wait until there is a crisis or profitability problem. Instead, they should be constantly evaluating new partners that can improve the profitability of the center."
Brian Kalver, JD, counsel with Wilentz, Goldman & Spitzer, agrees that the selling of new shares is a very relevant issue and one that he deals with on a daily basis. "The owners want to be able to present investment terms that they feel are fair and will be attractive to new physicians," he says. "Owners often believe that a fair price is an investment equal to the investment they made."
When ASCs look to buy and sell units, determining the fair market value of a facility can be problematic.
"What the owners think of as 'fair' and what is 'fair market value' can be quite different," says Mr. Kalver. "Although we recommend that clients use fair market value to determine the cost of buy-in, there is not a lot of regulatory guidance on how exactly to determine this value."
ASCs tend to use valuation firms or choose from among several different mathematical formulas to establish their fair market value.
Mr. Mosher recommends that ASCs use valuation firms to determine their value. "Valuation firms look at recent major changes — such as expanded service offerings or new physician recruitment — in addition to the historical performance of the center," he says. "Valuation firms can take into account certain aspects of a business that a mathematical formula cannot." Mr. Mosher suggests that large firms consider signing a regular contract with a valuation firm for these services to ensure the most accurate fair market value is offered to prospective buyers.
Mr. Kalver agrees. "A fair market value determination must generally take into account future earning potential," he says. "If an ASC determines its fair market value by using a formula that calculates a multiple of last year's earnings, but half of the physician-owners left the center, taking half of the center's patient volume with them, the new owners buying into the center would have done so at too high of a rate using a formula that relies heavily on the last year's earnings."
Mr. Mosher recommends that centers be cautious when selecting a formula to include in the agreement regarding the buyout of any retiring physicians. "Owners should be conservative when determining these formulas," he says. "Centers should work to find a formula that works for both the older physicians that are nearing retirement as well as the younger ones who will be required to buy them out."
Mr. Mosher suggests that owners revisit this provision in their agreements, if they have not recently, to determine "if it makes sense and will work going forward." Mr. Mosher adds, "Revisiting the issue at a time when a buyout is not approaching will allow all partners to approach the issue with a clear head."
Another legal issue involving physician ownership is the updated CMS Conditions of Coverage requirements for the advance notice of physician financial interest.
According to Amber McGraw Walsh, an associate with McGuireWoods in the firm's healthcare department, the new Conditions of Coverage for ASCs, which were published Oct. 30, 2008 and become effective May 18, require several advance notifications to patients, including notice of physician financial interest in the ASC, patients' rights and advance directives.
These Conditions of Coverage require that ASCs notify patients of physician financial interest in a facility in writing in advance of the day of the patient's procedure.
"'In advance' is generally considered to mean at least one day prior to the planned procedure," says Ms. Walsh. "ASCs should very clearly list every physician-owner in the ASC and make sure that the document that is distributed to patients or patients' representatives is written in a manner that is easily understood.
"ASCs would ideally post the disclosure document in the facility in addition to giving a copy directly to the patient," says Ms. Walsh.
If the patient is not scheduled for an initial appointment at the ASC before the date of surgery, the ASC may be able to meet the advance requirement by providing verbal notice over the telephone and mailing or e-mailing the written materials to the patient or instructing the patient to download the materials from the ASC website.
Safe harbor requirements
Another area where ASCs can find themselves in legal entanglements that may result in litigation is their adherence to safe-harbor requirements. If a center wants to comply with the requirements of safe harbor laws and avoid facing potential violations of the anti-kickback statue, it must ensure that all physician-owners are adhering to the one-third threshold. That is, at least one-third of each physician-investor's medical practice income for the year must come from the physician's performance of outpatient surgical procedures and at least one-third of those procedures must be performed at the specified ASC. This ensures that a physician's investment in an ASC actually represents an extension of the physician's office.
If a center decides to exempt physicians from this threshold, and therefore forgo its safe harbor status, it must be consistent in who it will exempt.
"It is easy to state the tests a center will use to determine safe-harbor compliance, but it is difficult to implement them in a real-life setting without being discriminatory," says Mr. Mosher. "Centers need to establish the specific circumstances in which they will exempt physician-owners and be consistent in applying that policy. For example, a physician taking military leave may be exempt while a physician claiming they just can't meet the criteria probably should not be."
Michael Schaff, JD, LLM, MBA, chair of the corporate and healthcare departments and shareholder of Wilentz, Goldman & Spitzer, agrees that, at times, adherence to safe harbor requirements can be problematic for ASCs.
"Unproductive owners are a concern for surgery centers," he says. "Physician-owners may want to eliminate an owner that is failing to bring a certain volume of patients to the center, but centers have to be extremely careful here. The physicians that own the center may not be aware that it is improper to base ownership on the volume or value of referrals."
ASCs that want to ensure all owners are productive can include safe harbor provisions in their agreements, Mr. Schaff says. However, he warns that centers that include this provision must enforce it for all physicians and not selectively.
Mr. Schaff cautions that ASCs that decide to forgo safe harbor provisions must be very careful in dealing with underperforming physicians.
"You must be careful not to force them out due to their lack of cases brought to the center," he says. "Even if you have a no cause termination provision in your center's documentation, the ousted physician can seek recourse for being terminated based on lack of referrals. In no circumstance should the basis of terminating a physician's ownership be based on her lack of referrals unless the center has a provision whereby failure to meet the appropriate safe harbor has been triggered, and she and all others that do not meet the criteria for ownership are treated similarly."
Mr. Schaff says that some of the ASCs he has worked with have had success using peer pressure to negotiate a buyout. However, Mr. Schaff again warns that any conversations surrounding the physician to be bought-out should not refer to the physician's underperformance.
Out-of-network fee waivers
The waiver of out-of-network patient fees is another legal issue that is very relevant to surgery centers. Many ASCs across the country have a significant portion of their business coming from procedures for out-of-network patients. Insurers pay more for these procedures due the absence of a contracted rate, making them attractive, but the patient's financial obligation is higher as well.
Andrew Wachler, managing partner at Wachler & Associates, a healthcare attorney for more than 25 years, says that out-of-network billing is one of the key legal issues for ASCs. "From my experience, this is one of the biggest issues where ASC leaders are looking for guidance," he says.
Some ASCs choose not to collect the full amount of an out-of-network patient's financial responsibility, such as a co-payment or co-insurance fee, because procedures on these patients are profitable even without these fees. However, the legality of waiving these fees is an issue that is currently under debate. ASCs are required by CMS to collect these fees for Medicare patients, but restrictions on this practice when dealing with private insurers varies by state.
Healthcare legal experts agree that what is allowed and what is restricted in regard to out-of-network fee waivers is a state-by-state issue. As a result, ASCs must be aware of the laws and guidance that affect their state.
"I suggest that ASCs have someone outline for them what exactly is allowed or restricted in their specific state," says Mr. Wachler. "This is a very difficult task to do without legal counsel."
Mr. Wachler recommends that ASCs analyze state law — including false claims, anti-inducement, anti-kickback and unfair competition law — as well as the opinion of the state attorney general and state case law to determine the legality of waiving the fees within their state.
Waiving out-of-network fees without an appropriate analysis of state law could put ASCs at risk. For example, if a bill for a procedure for an out-of-network patient is $100 and the ASC bills the insurer for 80 percent of that fee but does not collect the co-insurance from the patient, the actual bill for the procedure is only $80. By reporting that the service was worth $100 to the payor, providers could be at risk for violating the false claims act in some states. As a result, ASCs need to be sure their policies for waiving these fees fits within their state law.
Mr. Kalver suggests that ASCs ask themselves, "Is there an obligation to collect money from the patient? Am I violating a state law or misrepresenting a charge by waiving the fee?"
Mr. Wachler recommends that ASCs who want to continue waiving out-of-network fees provide notice to all private payors of these policies. He warns, however, that providing the notice in itself can be problematic because it makes the payor aware of your actions.
Mr. Wachler also suggests that ASCs talk with billing vendors, many of which he says are quite astute at dealing with out-of-network billing issues, to develop business processes that align with the legal requirements of each state.
Red Flags requirements
In addition to advance ownership disclosure requirements, another legal issue that is likely to affect the day-to-day business practices of ASCs is the Red Flags Rule, part of the Federal Trade Commission's Fair and Accurate Credit Transactions Act. The Act, which was issued last fall and goes into effect Aug. 1, will require many businesses, including healthcare providers, to develop, implement and administer an identity theft prevention program designed to detect signs, referred to as "red flags," of identity theft, as well as to prevent and mitigate it.
"Healthcare providers are deemed creditors by the FTC because they typically do not collect for services in-full upfront," says Ms. Walsh "As a result, ASCs must ensure that their facility implements an identity fraud detection policy that meets the requirements of the Red Flags Rule."
Ms. Walsh suggest that providers should think about which red flags will apply to their facility and work to implement a policy that looks for and responds to those red flags.
"In determining what red flags they should be aware of, I recommend that healthcare providers and their legal counsel spend time looking at the examples provided by the FTC and enact policies that appropriately address these red flags," says Ms. Walsh. "Once the policy is enacted, every worker should be aware of what to look for and what response to take if a red flag appears."
HIPAA requirements
Recent changes to HIPAA requirements as part of the Health Information Technology for Economic and Clinical Health Act, which was passed in February by Congress, are also expected to change the current business practices of ASCs, specifically in regard to the ways in which they report breaches of protected health information security and privacy.
"The HITECH Act expands the obligations of covered entities," says Ms. Walsh. "For example, the Act changed the requirements for reporting breaches of protected health information. In the past, your responsibility in the case of unauthorized disclosure as a healthcare provider was to mitigate the harm, which meant you sometimes reported the breach to the patient. Now, the patient must be notified."
Ms. Walsh says that additional changes to HIPAA as a result of the Act expand patient rights and the roles of business associates as well as a number of other changes.
Proper counsel is essential
All the legal issues discussed will continue to affect the business practices of ASCs for some time to come. In order for ASCs to ensure that these practices meet these and forthcoming legal requirements and restrictions, legal experts suggest that surgery centers seek sound counsel to advise them.
"Surround yourself with experienced and knowledgeable advisors," says Mr. Schaff. "Physicians tend to do what they feel is right, and what might feel right or makes sense from a business or logical perspective could actually land them or other ASC leadership in jail. I recommend that each surgery center find both an attorney and accountant that are experienced in healthcare law to guide them as they work to bring their business practices in line with the ever-changing legal environment surrounding ASCs."
Contact Lindsey Dunn at lindsey@beckersasc.com.