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Techniques in Gastrointestinal Endoscopy (2011) 13, 239-243

Key legal issues facing U.S. endoscopy centersScott Becker, David M. Wolff

McGuire, Woods, Ross & Hardies, Healthcare Department, Chicago, Illinois.

Ambulatory surgery centers remain strong sites for physician services in the outpatient setting. Therelationship between endoscopists and surgery centers can be complex from a financial and legalstandpoint. The interpretation of Stark and Anti-Kickback laws is a dynamic target, constantly beingsifted by legal minds, and is the topic of review in this chapter. Other important issues are reviewedwithin the context of current interpretation and analysis.© 2011 Published by Elsevier Inc.

KEYWORDS:Ambulatory endoscopycenters;Legal issues;Federal law;State law;Anti-Kickback;Stark;Health care reform;Quality;Safety;Physician relationships;Physician ownership;

Antitrust

Given the issues of health care reform, increased en-forcement of the Anti-Kickback Statute, less patience onthe part of physician leaders for underperforming ambu-latory surgery centers (ASCs), reduced reimbursementfrom Medicare, increased interest in pathology and an-esthesiology relationships, and increased pressure frompayers on out-of-network arrangements, it is a very in-teresting time to write about the legal issues facingendoscopy centers.

Barry Tanner, the Chief Executive Officer of Physi-cians Endoscopy (http://www.endocenters.com), indi-cates that there are approximately 800 single-specialtyendoscopy centers in the United States and likely another1000 centers that perform endoscopy procedures. MrTanner also notes an increased interest in joint-ventureendoscopy centers, often with both hospitals and profes-sional management companies.

This article provides a brief overview of some key legalissues facing U.S. endoscopy centers and other ASCs.

Address reprint requests to Scott Becker, McGuire, Woods, Ross &Hardies, Healthcare Department, 77 West Wacker Drive, Suite 4100,

Chicago, IL 60601. E-mail: sbecker@mcguirewoods.com

1096-2883/11/$-see front matter © 2011 Published by Elsevier Inc.doi:10.1016/j.tgie.2011.08.005

Anti-Kickback and Stark issuesThe federal government has initiated large increases in

the funds allocated to health care fraud enforcement overthe past few years.1 In the past, fraud enforcement focusedheavily on billing and collections issues. Now, significantfraud and abuse resources are also being put toward thereview of relationships between hospitals and physicians.The ASC industry has begun to see some level of investi-gation of fraud and abuse on the physician relationship side,and the ASC industry is ripe for more investigative scrutiny.

ASCs continue to see the evolution of different types ofpossible situations that could run afoul of the fraud andabuse laws. Such situations often relate to circumstanceswhere parties are trying to sell ASC shares to physicians atprices that may be below fair market value, circumstanceswhere ASCs are leasing equipment on a per-click basis fromphysicians,2 and circumstances where parties want to selldifferent quantities of ASC shares to different physicians orpay different types of medical director fees to differentphysicians.

Over the next few years, as the government allocatesmore money to antifraud initiatives, it will be increasinglyimportant to keep an eye on what types of activities ASCs,physicians, and hospitals are engaging in and what types of

activities the government is targeting.

240 Techniques in Gastrointestinal Endoscopy, Vol 13, No 4, October 2011

Safe harbors—noncompliant physicians

Over the past few years, parties have become moreaggressive in trying to redeem physicians who are not safeharbor compliant under the Anti-Kickback Statute. Existingcompliant physician owners have increasingly become lesspatient with non safe harbor–compliant physician owners.

To redeem a party for non safe harbor compliance, thecenter’s operating agreement must require such compliance.In many situations, the parties are advised to offer noncom-pliant physician owners full value for their shares, even ifsuch full value is not required under the ASC’s operatingagreement. The parties may also give such noncompliantphysician owners a long notice period in which the non-compliant physicians may come into compliance with thesafe harbor. In addition, it is important that safe harborconcepts generally not be applied in a discriminatory man-ner. Rather, the safe harbor concepts should be consistentlyapplied to all physician owners if the center is going toenforce the concepts and use them to redeem parties. Fur-ther, there are cases where the use of the safe harborconcepts has been challenged by physicians. It is criticalthat redemption be truly based on safe harbor compliance;in contrast, the safe harbor for single-specialty centers doesnot require that a physician perform one-third of his or hercases at the center he or she is invested in.

Safe harbors—indirect referrals

The government continues to express great discomfortwith indirect referral sources and non safe harbor–compliant physician owners. That said, the government iscautiously addressing cross-referral relationships as evi-denced by the Office of Inspector General (OIG) issuing apositive advisory opinion to a hospital–physician joint ven-ture where only a small number of the orthopedic physicianswere not safe harbor compliant (ie, 4 of 18 physicians werenot safe harbor compliant). In this case, the OIG prohibitedthe referral of cases from the noncompliant physicians toparties that could receive such referrals and then use thesurgery center for those cases. In reaching its conclusion,the OIG said,

In the circumstances presented, notwithstandingthat four Inpatient Surgeons will not regularlypractice at the ASC, we conclude that the ASC isunlikely to be a vehicle for them to profit fromreferrals. The Requestors have certified that, aspractitioners of sub-specialties of orthopedic sur-gery that require a hospital operating room set-ting, the Inpatient Surgeons rarely have occasionto refer patients for ASC-Qualified Procedures(other than pain management procedures, whichare discussed below). Moreover, like the otherSurgeon Investors, the Inpatient Surgeons are reg-ularly engaged in a genuine surgical practice,deriving at least one-third of their medical practice

income from procedures requiring a hospital op-

erating room setting. The Inpatient Surgeons arequalified to perform surgeries at the ASC and maychoose to do so (and earn the professional fees) inmedically appropriate cases. Also, the InpatientSurgeons comprise a small proportion of the Sur-geon Investors, a majority of whom will use theASC on a regular basis as part of their medicalpractice. This Arrangement is readily distinguish-able from potentially riskier arrangements inwhich few investing physicians actually use theASC on a regular basis or in which investingphysicians are significant potential referralsources for other investors or the ASC, as whenprimary care physicians invest in a surgical ASCor cardiologists invest in a cardiac surgery ASC.Advisory Opinion No. 08-08 (issued July 18, 2008)

The arrangement at issue did not meet every requirementof the safe harbor in question. However, certain other fac-tors led the OIG to conclude that, although the arrangementposed some risk, the safeguards put in place by the partiessufficiently reduced the risk of illegal kickbacks to warrantgranting the positive advisory opinion.

Buy-in pricing for junior physicians and newphysicians

Parties continue to look for ways to reduce buy-inamounts for junior physicians. Increasingly, there are argu-ments for lower valuations based on the impact of thechanging economy on endoscopy centers and the uncer-tainty of profits going forward. It is also possible for juniorphysicians to buy fewer shares, to obtain loans from third-party lenders (provided such buy-ins are not guaranteed orsupported by any other investor or the ASC), and to engagein opportunities like recapitalizations to further reduce thecost and value of the center. Again, a key issue is ensuringthat the ASC is not selling shares to junior physicians atbelow fair market value to induce the referral of cases or theretention for cases.

Although it is not uncommon for practice buy-ins pricesto be set at relatively low amounts, the price of shares at theendoscopy center should be at fair market value.

Sale of additional shares to highly productivephysicians

Endoscopy centers often see situations where a physicianwho produces proportionately more than his or her relativeshare(s) wants to buy additional shares in the center. Ingeneral, it is difficult to facilitate this while remainingcompliant. It is possible for a physician to try to buyadditional shares from other partners. However, the otherpartners cannot sell their shares to a high-producing physi-cian simply to help keep his or her cases at the center. Ifexisting partners want to sell shares for reasons unrelated toretaining volume, then it is permissible for them to sell

shares to such high-producing physicians. The sale of such

241Becker and Wolff Legal Issues Facing U.S. Endoscopy Centers

shares should always be made at fair market value and notpreferentially to high-producing physicians.

Gastroenterology practices may seek ways to distributean endoscopy center’s profits based on referrals. There is noclear, safe way to accomplish this.

Profiting from anesthesia and pathology

Increasingly, endoscopy centers and physicians arelooking for ways to profit from ancillary services such asanesthesia or pathology. There are certain ways in whichan ASC can lawfully profit from anesthesia services in alegal manner. However, there are also other ways thatraise concern with respect to the legality of profiting fromanesthesia services. This area has recently come underattack by the American Society of Anesthesiology. Al-exander A. Hannenberg, MD, president of the AmericanSociety of Anesthesiology, wrote the following in his 16June 2010 letter to the Inspector General of the UnitedStates:

“First, under the “company model,” since theowners of the facility also own the anesthesiacompany and have a stake in the profits of thisseparate company, they have an incentive toincrease utilization of anesthesia services, whichwill result in an increase in federal health carecosts. When the surgeons or gastroenterologistsperforming procedures in the facility are theowners, they are making clinical judgmentsabout the necessity of anesthesia services fortheir procedures in the context of a financialinterest in the volume of anesthesia servicesprovided in the facility. It is hard to imagine amore obvious conflict of interest or illustrationof the hazards of self-referral. Such hazardsobviously include the costs of care but also thepotential for subjecting patients to unnecessaryanesthesia. In addition, under the “companymodel,” anesthesia providers are required topay remuneration to the facility for their ser-vices. These profits distributed to the facilityowners are estimated to be as high as 40% of theanesthesia fees. The fees paid to anesthesia pro-viders are often less than what they would haveearned under a fee-for-service model where theywould bill directly. Anesthesia providers are un-able to economically compete with the “com-pany model” and are forced to provide an illegalkickback to the facility should they accept pres-sures from facilities to contract accordingly. Be-cause of the continuing increased pressures thatanesthesiology group practices face in comply-ing with the “company model” . . . we respect-fully request the Office of Inspector General toissue a Special Advisory Bulletin regarding this

model.

The laws with respect to profiting from pathology ser-vices are less clear. There is often an ability for gastroen-terology practices related to endoscopy centers to performpathology services in their own offices and to profit fromsuch services. However, there is a whole range of analysisthat must be performed to ensure that such efforts complywith the Anti-Kickback Statute, the Stark Act, and theAnti-Markup Provisions.

“Per-click” relationships

There have traditionally been several different types of“per-click” arrangements for such items as gamma knives,lithotripters, lasers, computed tomography, and magneticresonance imaging scanners and other types of equipment.However, the government has now outlawed most per-clickrelationships (at least in the Stark Act context). Althoughthe changes to the Stark Act and the accompanying regula-tions do not necessarily apply to ASCs, the analysis andconcerns are applicable under the Anti-Kickback Statute toASCs. The Centers for Medicare & Medicaid Service(CMS) offered an explanation of its position in the com-mentary to the new rules:

At this time we are adopting our proposal to pro-hibit per-click payments to physician lessors forservices rendered to patients who were referred bythe physician lessor. We continue to have concernsthat such arrangements are susceptible to abuse,and we also rely on our authority under sections1877(e)(1)(A)(vi) and 1877(e)(l)(B)(vi) of the Actto disallow them.

We are also taking this opportunity to remindparties to per-use leasing arrangements that theexisting exceptions include the requirements thatthe leasing agreement be at fair market value(§411.357(a)(4) and §411.357(b)(4)) and that itbe commercially reasonable even if no referralswere made between the parties (§411.357(a)(6)and §411.357(b)(5)). For example, we do notconsider an agreement to be at fair market valueif the lessee is paying a physician substantiallymore for a lithotripter or other equipment and atechnologist than it would have to pay a nonphysician-owned company for the same or sim-ilar equipment and service. As a further exam-ple, we would also have a serious question as towhether an agreement is commercially reason-able if the lessee is performing a sufficiently highvolume of procedures, such that it would beeconomically feasible to purchase the equipmentrather than continuing to lease it from a physi-cian or physician entity that refers patients tothe lessee for DHS. Such agreements raise thequestions of whether the lessee is paying thelessor more than what it would have to pay

another lessor, or is leasing equipment rather

242 Techniques in Gastrointestinal Endoscopy, Vol 13, No 4, October 2011

than purchasing it, because the lessee wishes toreward the lessor for referrals and/or because itis concerned that, absent such a leasing ar-rangement, referrals from the lessor wouldcease. In some cases, depending on the circum-stances, such arrangements may also implicatethe anti-kickback statute.3

Medical directorships

Medical directorships should be used only if the medicaldirector is providing true medical direction. An endoscopycenter should generally only have one medical directorunless there is a legitimate reason for the need for multiplemedical directors. The fees paid to medical directors mustbe fair market value, and such arrangements must not beintended to provide kickbacks in exchange for the referral ofcases.

Health Insurance Portability andAccountability Act (HIPAA)

HIPAA continues to be updated in a manner that addsadditional burdens. For example, the most recent HIPAAamendments require that a patient be notified of any sort ofinadvertent breach of disclosure of confidential information.Previously, centers and health care providers could decide,on a case-by-case basis, whether to notify the patient of aninadvertent breach. Now, patients must be notified of anybreach. Further, under the newly revised HIPAA, patientshave the right to receive medical records with little costeven if the center must incur costs to provide the medicalrecords.

Antitrust issuesThere are two antitrust issues that are most relevant to

the ASC industry. First, there is a question as to whethera hospital and physicians can jointly contract to try toobtain better rates from managed care payers. Here, thekey issue is ensuring that the two entities can be consid-ered one entity for purposes of the antitrust laws, whichmakes them legally incapable of conspiring with eachother. There is a significant difference in legal interpre-tations on this issue across the country. For example, if ahospital owns 80% or more of an ASC and has substantialcontrol of the ASC, there are very strong arguments thatconspiring together is not possible from an antitrust lawperspective (ie, the hospital and endoscopy center arealready effectively one entity). However, when the own-ership is between 50% and 80%, the determination differsby region of the country. The amount of control thehospital has over the ASC is a critical predictor of theultimate determination. Although it may still be possiblefor the hospital and the ASC to effectively be considered

one entity when the hospital owns less than 50% of the

ASC, the hospital must have very substantial control ofthe ASC. The other common antitrust issue facing ASCsarises when an ASC is excluded from certain payercontracts because of aggressive hospital competition.Here, the challenge for the ASC is showing that thehospital does not merely provide simple competition, butrather that it has conspired to harm the physician-ownedASC or made an effort to monopolize the market. Gath-ering facts to prove such a conspiracy exists can be a veryexpensive process.

Medical staff bylawsMedical staff bylaw issues may arise in the ASC context

in several distinct situations. One such situation is the issueof determining whether to waive a provision of the medicalstaff bylaws to allow a physician to remain on, or join, themedical staff although he or she does not technically meet aspecific prerequisite qualification. There are pros and consto granting periodic waivers of such provisions for specificphysicians. A second situation is the issue of how to removea physician from the medical staff based on some sort ofmedical conduct issue or other issue. In such a situation, toobtain the protections of the Healthcare Quality Improve-ments Act, it is critical for an ASC to precisely follow itsmedical staff bylaws procedures and also follow the rules ofthe Healthcare Quality Improvements Act.

A third situation related to medical staff bylaws is theissue of how the removal of a physician from the medicalstaff under the bylaws impacts the redemption of suchphysician from the ASC as an owner. Here, there is com-monly a requirement in the ASC’s operating agreement thata physician member must be on the medical staff to be anowner in the ASC. It is critical that the two components ofsuch requirement be somewhat divided from each other. Inessence, this means that an effort must be made first toensure that the decision under the medical staff bylaws ishandled separately and is not a sham or trumped up to forcea buyback. Then, once the medical staff issue is resolved,redemption pursuant to the ASC’s operating agreement maybe addressed.

Hospital outpatient department transactionsand “under arrangements” deals

Over the past few years, “under arrangements”—atype of transaction where an infrastructure company pro-vided all ASC services to a hospital— became very pop-ular. This popularity arose because the system allowedthe hospital to continue to charge higher hospital outpa-tient department rates and allowed the physicians, in part,to own the infrastructure company and stay aligned withthe hospital. In addition, physicians remained stable,billing usual professional services. In essence, this typeof structure abrogated the benefit to CMS of the lower

payment rate for ASC services. The Department of

243Becker and Wolff Legal Issues Facing U.S. Endoscopy Centers

Health and Human Services changed a number of relatedStark Act provisions and specifically outlawed this typeof arrangement.

ASCs are now examining situations in which an ASCsells its assets to a hospital and develops what is titled a“comanagement” relationship. Such a relationship providesthe physician or physician group compensation for manag-ing the service of the hospital, but allows the hospital toreally be the owner and provider of the services and toprovide the services at the higher hospital outpatient depart-ment rates. The great challenge in these relationships isassuring that they proceed at fair market value and thatphysicians are compensated for reasonably needed servicesand not just in exchange for generating business. Anothersubstantial challenge posed by these relationships will bemaintaining longer-term success after such a transaction iscompleted. Because such comanagement interests are not ascongruent in terms of a true joint venture, there is anincreased challenge to the long-term success of such rela-tionships.

Out-of-network reimbursementThe ability to profit substantially from out-of-network

patients continues to decrease. Although many parties profitfrom out-of-network payments, payers are becoming in-creasingly aggressive regarding recoupment, collection ofappropriate copayments from patients, and increasing co-payment and deductible responsibilities. Thus, the ability torealize profits or significant negotiation advantage throughthe use of out-of-network arrangements is hampered.

On the out-of-network side, situations are arising wherepayers are issuing audit letters to centers, developing no paypolicies on out-of-network consultations or services, or pay-ing ASCs just a fraction of general expected revenue. ASCs,on their end, are making more efforts to work with statedepartments of insurance to explain how the cutting off ofout-of-network reimbursements precludes patients from ac-cessing true preferred provider organization benefits. A fewcases discuss whether payers have responsibilities to payproviders when providers are serving patients out-of-net-work and in some situations reduce copayments. This is anevolving area that may become combative.

Physical plant relationshipsIncreasingly, third-party accreditation bodies and CMS

surveyors are taking a much stricter approach toward grand-fathering in outdated physical or noncompliant plant con-ditions. In many situations, these physical plant conditionsmay have preexisted changes in certification rules that nowrequire different structures, sizes, and other types of accom-modations. Notwithstanding the fact that many older facil-ities predated such rules, surveyors are sometimes demand-

ing that such facilities be brought up to code immediately.

This can provide challenges and significant expenses toexisting ASCs.

Quality and safety issuesWith the focus on the improper use of syringes at one

center and quality and infection control generally, it iscritical that endoscopy centers focus heavily on properclinical procedures. The hepatitis outbreak, for example, atthe Endoscopy Center at Southern Nevada has led to classactions and investigations as to that center and the closure ofthat center.

Health care reformNo one knows exactly what the ultimate impact of health

care reform will be on endoscopy centers and other ASCs.However, in the short term, it does not appear that healthcare reform will have an immediate negative impact onendoscopy centers. In fact, because the reform legislationmandates certain incentives for preventative care, such asrequiring new insurance plans (ie, plans established on orafter 23 September 2010) to cover and eliminate copays,deductibles, and coinsurance amounts for preventative treat-ments such as colonoscopies, and because there is no publicoption, it is not clear that there will be an immediatenegative impact.4

However, in the long term, health care reform raisesconcerns for endoscopy centers and other ASCs. First, al-though health care reform is expected to expand insurancecoverage, it is widely anticipated that a substantial numberof newly insured people will be added to the coverage poolat low rates. A second concern is that health care reform willput pressure on commercial payers to further reduce costs,which would likely lead to lower reimbursement for endos-copy centers. A third long-term concern is the extent of theimpact health care reform will have on the independentpractice of medicine. Certain of the concepts set forth in thehealth care reform initiatives involve integrative effortsbetween hospitals and physicians to develop accountablecare organizations and other efforts that allow for the jointpackaging of care. These efforts, together with other pay-ment incentives for hospitals, are leading to more employ-ment of physicians by hospitals. This reduction in the poolof physicians means a reduction in the lifeblood of endos-copy centers and other ASCs.

1 See Press Release, Office of Public Affairs, U.S. Department of Justice,“Departments of Justice and Health and Human Services Team Up toCrack Down on Health Care Fraud” (5 November 2010), available athttp://www.justice.gov/opa/pr/2010/November/10-ag-1256.html.

2 Although not necessarily illegal, the lease fees must be fair market valueand there must be very strong arguments to defend the practice so asnot intended to induce referrals under the Anti-Kickback Statute.

3 73 Fed. Reg. 48713-48714 (19 August 2008).

4 45 C.F.R. §147.130 (2010).