New Jersey court sends blow to doctor-owned surgery centers

A New Jersey trial court ruling puts most, if not all, of the 200 physician-owned ambulatory surgery centers there in violation of the state's anti-referral law.

A 1989 law called the Codey Act prohibits doctors from referring patients to an entity in which they have a financial interest, except in certain circumstances, such as for radiation therapy or if the service is provided at the doctor's medical office.

Health Net of New Jersey sued Wayne Surgical Center for billing fraud. The insurer claims that the multispecialty facility sought payment for care resulting from illegal referrals. The physician investors were part of the Health Net network, but the surgery center was not. The insurer also challenged the facility's out-of-network billing practices.

In his Nov. 20, 2007, opinion, Bergen County Superior Court Judge Robert P. Contillo said he recognized that "the very ubiquitousness of physician-owned ambulatory surgery centers ... is proof positive that this mechanism for delivering health care to the public is serving a need. But the [law], as is, plainly and unambiguously bars physician self-referrals."

Contillo also questioned whether surgical centers qualify as another medical office for the physicians who operate at them.

But the judge also found against Health Net. He wrote that he saw no evidence to support its fraud claim, given that Wayne Surgical and hundreds of facilities like it have been allowed to operate under what he called a largely unenforced law. Contillo also said there was nothing wrong when the doctors did not collect coinsurance payments from patients for out-of-network surgeries.

Both Wayne Surgical and Health Net are considering an appeal. The ruling regarding the Codey law rests in the hands of the medical board for enforcement.

The physician community is hustling to topple the decision, which doctors say could threaten immediate access to care. The Medical Society of New Jersey, American Assn. of Ambulatory Surgery Centers and several medical specialty groups plan to join the battle via a friend-of-the-court brief or legislative efforts.

Attorney John D. Fanburg, who represents the organizations, said the referral law does not spell out exemptions for ambulatory surgery centers, but the court overlooked state medical board regulations and other laws giving the green light to the industry.

"The board has acknowledged that this is an extension of a doctor's private practice and is OK," Fanburg said. It's up to the board, not the courts, to enforce the law, he said.

Mirroring federal safe harbors promulgated after New Jersey's law went into effect, the state Board of Medical Examiners said in various opinions that doctors can treat their patients in surgery centers they own, provided that the surgeons personally perform the procedures and bill for them. In addition, the state taxes the facilities and sets rigorous inspection standards, doctors said.

Access problems predicted

Fanburg said a significant consequence of the court ruling is that "insurance companies will just not pay." This would force ambulatory surgery centers to shut down or cut back on services.

AAASC Executive Director Craig Jeffries warned that the ruling could spark similar challenges to other states' self-referral laws.

"That's the risk in many states: While through different judicial or regulatory actions, the state has encouraged or sanctioned the development of ambulatory surgery centers with physician ownership, some of that has been done without black-letter law," he said.

Medical Society of New Jersey President and Chair Richard J. Scott, MD, said the facilities have been operating in good faith under the various state regulations. On the other hand, insurers often punish doctors and patients for using out-of-network services, he said.

"The consequences [of the decision] for physicians is disastrous because they've literally invested millions of dollars, and for patients, they lose their freedom" to choose where they want to go for treatment, he said.

Dr. Scott, an orthopedic surgeon and former ambulatory surgery center investor, said many doctors are turning to the ventures for added income in the face of lower Medicare payments and higher responsibility for charity care. In addition to the economic benefits, the smaller facilities can offer improved quality and convenience over traditional hospitals, he said.

The hospital community declined to comment on the case but contends that the medical board has failed to enforce the referral ban on ambulatory surgery centers properly.

In April testimony to the governor, New Jersey Hospital Assn. President and CEO Gary Carter said applying the medical office exception to the facilities is a loophole that "needs to be examined." The association claims that the surgery centers choose higher-paying patients, yet have lower quality and reporting standards than do acute-care hospitals.

Health Net spokeswoman Amy L. Sheyer said the insurer "utilizes and reimburses for ambulatory surgery centers often. We just want them to operate in compliance with state laws."

Health Net says Wayne Surgical's fees are higher than charges at other area hospitals or ambulatory facilities for similar services.

The court seemed to agree, finding that "many of the physician-investors earned more money from [Wayne Surgical Center's] facility fees than they do from practicing medicine full-time."

But Wayne Surgical's attorney Thomas Gentile said the court looked at the center's aggregate income without considering the operating expenses, employee salaries and other costs the physician owners incur before they get paid.

The court said there was no claim or evidence that Wayne Surgical's referrals were based on "anything but sound medical decision-making" and that the doctor-owners had disclosed their interests in the facility adequately to patients and state regulators.

Meanwhile, doctors and insurers in December 2007 petitioned the medical board to clarify its position on the issue. The board did not return calls seeking comment. The agency said in a statement that it would issue emergency regulations clarifying the definition of a medical office as it pertains to the Codey Act and immediately implement "a reform measure" addressing ambulatory surgery centers.

"Any effort on the part of insurers to deny claims submitted by physician-owners will likely have a significant impact on the availability of services, representing a potential imminent peril to the public health," the board said.