With success comes scrutiny: ASCs face legal obstacles

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When Georgia general surgeon Christopher Smith, MD, made plans in 1991 to open an ambulatory surgery center with his partners at Albany Surgical PC, he envisioned having a less-hectic schedule, sending patients home instead of to the hospital, and reducing costs for his practice and his patients.

Dr. Smith did not envision getting sidelined in the courts for years. But he did, thanks to a state law barring general surgeons from operating an ASC without first proving that the outpatient facility would serve a community need. Although recent changes lifted the certificate-of-need restriction, "we've never been able to get off the ground," he said. "To say it was an uphill battle is an understatement."

Dr. Smith's story may be familiar to physicians looking for more control over their practices.

The number of freestanding ambulatory surgery centers, sometimes called outpatient surgery centers or same-day surgery centers, has exploded in recent years, reaching nearly 5,000 last year. But with that growth, the facilities have faced their fair share of legal hurdles. ASCs appear lately to have gained some measure of acceptance from an often-resistant hospital community that fears losing profitable patients and becoming overburdened with charity care. But legal experts and other industry observers anticipate ongoing pressures.

"At the federal level, ambulatory surgery centers are given rather friendly treatment," said health care regulatory expert Lorin E. Patterson, a partner at law firm Reed Smith in Falls Church, Va. "Where the restrictions come into play and where you are seeing the challenges now are at the state level."

Federal anti-kickback law generally prohibits doctors from profiting from referrals to their own facilities. But it includes exceptions for physician owners of ASCs as long as doctors perform at least one-third of their outpatient procedures there, among other requirements.

"The [government] looks at this and says, it's got to be an extension of your practice, and if not, you don't have a seat at the table," said Amy S. Leopard, a health care attorney and partner with Walter & Haverfield LLP in Cleveland.

State anti-kickback laws typically mirror the federal structure. But nothing bars states from imposing stricter requirements, Leopard said. For outpatient centers that are not subject to the same federal requirements because they do not treat Medicare or Medicaid patients, state rules are even more pertinent.

American Medical Association Board of Trustees member William A. Hazel Jr., MD, said surgicenters give patients options for high-quality, cost-effective care while offering doctors flexibility and additional income in the face of dwindling federal payment rates.

"But frequently what you see is a large-scale effort [by hospitals] to use these laws to stifle competition," said Dr. Hazel, an orthopedic surgeon in Oakton, Va.

Barriers mount

Such pressures deterred Dr. Hazel's practice from pursuing licensure to become a freestanding ASC through the state's certificate-of-need process. Instead, he and his partners run a two-room outpatient facility through their orthopedic practice. However, it cannot accept Medicare or Medicaid patients.

The AMA continues to oppose CON laws over concerns the statutes hinder competition and fail to control health costs, and the U.S. Justice Dept. and Federal Trade Commission have generally backed that stance.

Dr. Smith's battle helped lead to favorable changes to Georgia's CON law, but not without some concessions from physicians.

The Georgia Alliance of Community Hospitals sued the state's Dept. of Community Health over a 2007 rule exempting general surgery ASCs from the CON process. Physicians ultimately obtained the CON exemptions in the Legislature in April 2008, and the hospitals' suit was dismissed in July of that year. The new law also requires ASCs to provide a minimum level of indigent care, among the first requirements of its kind.

"Charity care was a compromise. But we do charity care out the wazoo" without the benefit of tax-exempt status, said Dr. Smith. He is past president of the Georgia Society of General Surgeons, which formed to push for the legislative changes. The Medical Assn. of Georgia also supported the bill. Without it, Georgia risked a further exodus of surgeons who could go to neighboring states and set up ASCs without restriction, Dr. Smith said.

ASCs may see more so-called fair share laws as hospitals continue to cry foul over charity care, Reed Smith's Patterson said. Some states levy a tax on ASCs to help fund Medicaid and uncompensated care at community hospitals.

That issue has come up in at least one court case. A Florida trial court in 2000 found a state tax unconstitutional because it burdened ASCs without providing them any benefit. An appeals court reversed the decision in Fla. Agency for Health Care Admin. v. Hameroff two years later, finding the tax a legitimate basis to "level the economic playing field" for hospitals.

Lessons from New Jersey

A recent New Jersey case also prompted legislative change. A trial court in 2007 declared illegal any referrals by physicians to surgery centers they owned. This conflicted with regulations from the state medical board, which considered ASCs an extension of a physician's practice and exempted such referrals.

"States have struggled to find a line between what's considered a facility versus a physician practice and who should be keeping an eye on the safety of these centers," said Elizabeth G. Litten, a health care regulatory attorney and partner with Fox Rothschild LLP in Princeton, N.J.

State physicians, with help from the Medical Society of New Jersey, successfully lobbied for a measure to undo the decision, but they also made some concessions.

The bill, passed in February, would allow ASC owners to self-refer with some conditions, including notifying patients of their financial interests in advance. The bill also would freeze new ASC construction in the state unless the outpatient facility is jointly owned by a hospital.

Gov. Jon S. Corzine signed the measure March 21. Meanwhile, an appeals court has halted the litigation. The Medical Society of New Jersey and the Litigation Center of the AMA and State Medical Societies filed a brief supporting the doctors in the case, Garcia v. Health Net.

Moratoriums are a worrisome prospect, said Ambulatory Surgery Center Assn. President Kathy Bryant. New Jersey's restriction is the first, but she said it could set a bad precedent, particularly for states without CON laws on the books.

Disclosure requirements, while nothing new, also are worth noting, experts said. Federal law has long required transparency by ASC owners. But more stringent rules set to take effect in May could have negative repercussions, Bryant warned. The new regulations specify that ASC owners must notify patients of their financial interest at least 24 hours before treatment.

"This is an example of a government regulation that seems innocuous on the surface but could really affect access" if treatment is delayed, Bryant said. For example, a patient who doesn't receive the disclosure until he or she shows up at a relatively faraway ASC for treatment might decide to seek costlier care at a nearby hospital rather than make the longer trip back a day or two later.

The AMA urges doctors to disclose to patients any financial interest in referrals. In addition to promoting transparency, the practice also may help guard against potential medical liability, Patterson said.

Payment disputes could form the next wave of litigation, experts said. "Even if you are on all fours with respect to state and federal [regulations], be aware commercial payers may look for licensure or other violations as reasons not to reimburse," said Litten. The New Jersey case was instigated when a health insurer sued an ASC for billing fraud, alleging the facility sought payment for care from illegal referrals.

Clashes over network issues also have surfaced. New York state auditors in April 2008 censured an ambulatory facility for potentially fraudulent billing practices when it waived out-of-network co-payments. The ASC was ordered to refund the insurer $1 million in alleged overpayments. The issue also arose in the New Jersey case.

Hospital competition for managed care contracts has raised obstacles, and in some corners, ASCs have found antitrust relief. A California appeals court last December allowed an ASC to file antitrust claims against a dominant hospital that negotiated exclusive payer contracts for inpatient and outpatient services -- a practice known as tying. Still, such relief can prove costly to pursue, Patterson said.

Hospitals push back

General hospitals say policy changes like those in New Jersey and Georgia, while not perfect, help ensure their interests are represented.

"It's all part of an effort to bring parity in the provider community, but there's more work to be done," said Randy Minniear, vice president of legislation and policy for the New Jersey Hospital Assn. The association is backing separate legislation to require additional ASC quality and cost reporting.

"By bringing light to the financial component, we can track referral patterns," Minniear said. "We're also interested in clinical outcomes. If something goes wrong [at an ASC], it usually ends up in the emergency room, and the adverse event ends up a hospital statistic."

The American Hospital Assn., in policy statements, said that the rapid increase in ASCs has fueled concerns over self-referrals and overutilization, and it said regulatory standards for the facilities have not kept pace. Public- and private-payer policies -- such as lower co-payments for ASCs -- also drive competition concerns, the AHA said.

Georgia hospitals were disappointed with the new law, but they saw the indigent-care provisions as a win, Georgia Hospital Assn. spokesman Kevin Bloye said. ASCs in the state also must adhere to reporting standards on par with hospital requirements.

"Hospitals are struggling as it is and saw this [ASC exemption] as a threat to some profitable business" that helps community hospitals keep their doors open, he said.

Dr. Smith is glad to see a resolution of the matter, but he remains unsure what the future holds for his surgicenter. Building restrictions for surgical rooms have changed, and he and his partners -- now in their 50s -- would have to rebuild the facility if they still wanted to become an ASC.

Such a venture may be more feasible now for younger physicians, he said. Still, "it truly is a minefield, because hospitals will be watching every step."

This content was published online only.

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