February 2000 Bulletin

New safe harbors rule poses questions

Practices scramble to assess risk of investments in groups, ambulatory surgical centers

By Mark R. Fitzgerald

On November 19, 1999, the Office of Inspector General (OIG) of the Department of Health and Human Services issued a final rule containing eight new safe harbors under the federal anti-kickback statute. In pertinent part, the anti-kickback statute prohibits the knowing and willful offer or payment of remuneration to induce referrals or in return for purchasing or recommending the purchase of any item or service payable by a federal healthcare program.

The new rule reflects a continuation of OIG’s policy to use its authority to issue safe harbor regulations conservatively in order to preserve maximum flexibility in selecting cases for enforcement action. While the rule offers some help, it also raises questions about the application of the anti-kickback statute to many common arrangements. In particular, the new safe harbors for investments in group practices and ambulatory surgery centers (ASCs) will have many orthopaedic practices scrambling to assess the degree of risk posed by their existing arrangements.

Significance of safe harbors. In the preamble to the rule, the OIG emphasizes that transactions falling outside the safe harbors do not necessarily violate the law. The OIG does not have the authority to criminalize conduct by regulation. Instead, the safe harbors protect from prosecution under the anti-kickback statute a narrow band of transactions that can meet very strict standards.

Investments in group practices. This new safe harbor is designed to protect income (e.g., a dividend) that a physician receives as an owner of his or her own practice. It represents a major rewrite of a group practice safe harbor originally proposed in 1993.

The OIG has established four standards.

Clearly, the most difficult standard under the group practice safe harbor will be the unified business test, which is already controversial under Stark. It requires a group to have centralized decision-making, pooling of expenses and revenues, and an integrated compensation/profit distribution system for its satellite offices. The test originally was proposed by the Health Care Financing Administration in January 1998 in connection with the Stark II proposed implementing rule. It reflects the government’s long-term concern that "sham groups" and "group practices without walls" promote overutilization. The unified business test likely will preclude many large group practices from qualifying for safe harbor protection.

Ambulatory surgery centers. The OIG also created a safe harbor that protects four types of ASCs: traditional, surgeon-owned ASCs; single-specialty ASCs; multi-specialty ASCs; and hospital/physician ASCs. All of the protected ASC categories contain certain common criteria, such as a prohibition on loans to investors and a requirement that profit distributions be directly proportional to the capital invested. Further, an ASC entity may not bill for ancillary services separately from the ASC procedure payment.

The most difficult requirements, however, are referred to as the "one-third tests." Each physician investor must derive at least one-third of his medical practice income from ASC procedures (regardless of where they are performed) and, for multi-specialty ASCs, each investing physician also must perform at least one-third of his total ASC procedures at the ASC joint venture.

The OIG’s stated rationale for the one-third tests is that they ensure that a physician’s investment in an ASC will truly represent an extension of his or her office practice; however, the one-third tests go beyond ensuring that requirement. They also exclude any physician who does not perform a substantial number of ASC procedures, even if the physician personally performs all of the procedures that he or she refers to the ASC entity.

In summary, the new safe harbors, like the old safe harbors, protect only a few vessels. They are more likely to raise concern for healthcare professionals than they are to provide comfort.

Mark R. Fitzgerald, is a Washington, D.C. health care attorney at Powers, Pyles, Sutter & Verville, P.C.

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