By Christopher Guadagnino, Ph.D.

Published September 2008

MM: Last fall, a judge in Bergen County determined, based on his plain reading of the Codey Law – which is New Jersey’s prohibition against physician self-referrals – that physicians who utilize and refer patients to an ASC in which they have an ownership interest violates the Codey Law. The decision was fairly controversial because it was inconsistent with various advisory opinions issued by the NJ Board of Medical Examiners (BME) – the agency that is charged with interpreting and administering the Codey Law – that the typical ASC structure is compliant with the Codey Law. For the past 10 or 15 years, we’ve had a number of instances where the BME has evaluated surgery center transactions and said they were permissible under the Codey Law, and we now have close to 200 ASCs in the state. By the way, the growth of the industry in New Jersey is not unique. Due to strong federal public policy supporting the development of ASCs, there are over 4,000 in the country.

The insurance company in the Bergen County case, and carriers in other litigations that are currently taking place, have taken the position that the Codey Law has not been appropriately enforced. The focus has been on the exception under the Codey Law for referrals by a physician to his or her medical office for which services are billed in the referring physician’s name. The BME has interpreted this exception to cover ASCs, but the judge in the Bergen County case had a different view, a much more technical analysis, that arguably gives merit to claims being filed by some insurance companies seeking to deny or recoup payment for the services rendered because the ASC setup was illegal. In April, there was another case in Union County in which the judge basically took the same position on the Codey Law. Both of these cases arose out of payment disputes between ASCs and insurance companies – HealthNet in the Bergen County case and Liberty Mutual in the Union County case.

Under New Jersey’s Insurance Fraud Prevention Act (IFPA), if a provider is determined to have submitted a knowingly fraudulent claim for payment, the provider is subject to disgorging those payments, treble damages, and counsel fees to the insurance company. The argument that the carriers are making in these cases is that a typical ASC structure violates the Codey Law, that the ASC should know this, and therefore the ASC submitted fraudulent claims in violation of the IFPA.

To provide cover for ASC providers back in the fall of 2007, we petitioned the BME to undertake some form of emergency action to reaffirm and memorialize its prior guidance on ASCs. We were concerned that insurance companies would take advantage of the Bergen County decision to deny or recoup payments. This would in essence shut down this industry, which has become a vital source of health care services in the state. The petition was the first part of our approach, and was designed to provide immediate relief when we knew the ultimate fix to the problem was legislative in nature.

In response to our request, the BME adopted an emergency rule modifying the BME’s regulations such that it was more clear that ASCs would fall within the Codey Law’s definition of "medical office." Administrative agencies like the BME have the ability to adopt emergency rules, subject to a finding by the governor that there is an imminent threat to public health or safety, without going through the standard rulemaking process, which requires the agency to publish the regulation, receive public comment on it, and then have those comments addressed. The standard process can take quite a bit of time. In this case, however, the state attorney general determined that there was no imminent threat to public safety because most of the insurance carriers in the state were in fact paying ASCs for services rendered. While the emergency rule did not become law, the BME’s action application drew a great deal of attention to the matter, including a legislative response by Senator Codey. We were also gratified to get the attorney general on record that widespread non-payment of ASCs would be a major problem warranting government action.

MM: While the industry continues to conduct business during these uncertain times, the viability of the ASC industry in New Jersey is at stake. Thankfully, Senator Codey has introduced a bill to fix the injustice of a situation where an industry that has developed around regulatory guidance is now being threatened by judicial decisions. Senator Codey knows health care policy as well as anyone else in the state and has gone out of his way to listen to all of the interested parties.

There are several important characteristics of Senator Codey’s bill. First, it creates an exception for ASCs from the self-referral prohibition contained in the current Codey Law. Second, it deems any referrals to ASCs that occurred prior to the enactment date compliant with the Codey Law. Essentially, it protects the hundreds of thousands of referrals and claims that have been submitted over the last 20 years, and will prevent insurance companies from obtaining a windfall at the expense of the provider community. The bill also proposes to create a two-year moratorium on the development of new licensed surgery centers, and creates a task force to study self-referrals in New Jersey. ASCs that are in development would be grandfathered with the threshold being set at the filing of architectural plans with the state. My sense is that some aspects of the bill are going to change, as there has been a lot of pressure from the hospital industry to modify the bill to exempt from the moratorium ASC joint ventures between hospitals and physicians.

MM: Violations of the Codey Law are regulatory in nature, so ultimately a physician’s license could be at stake. However, consistent with its prior guidance on the subject, the BME has not undertaken any enforcement action against physician owners and, quite frankly, I would be surprised to see them do so. There is a significant practical problem in that HealthNet and Liberty Mutual have taken the position in various litigations that the typical ASC setup doesn’t comply with the Codey Law, and are therefore is not entitled to reimbursement for services rendered or liable to disgorge payments made. Also, in a rather disheartening development, Horizon, the largest health insurer in the state, recently filed a lawsuit against a client of mine based on the same theory. I don’t think Horizon has done it on an industry-wide basis yet, and hopefully they won’t. Clearly, if all the carriers in the state stopped paying and sought to recoup payments, we would have a major health care crisis in the state as tens of thousands of procedures that need to be done would not have a place to be done.

We’ve always advised our surgery center clients to have appropriate ownership disclosure to their patients. We also advise our clients to notify insurance carriers of their ownership interests. At a minimum, notifying the carrier makes it harder for the carrier to make a claim that there was some attempt to willfully defraud the carrier by submitting claims from an entity which the physician knew was illegal.

Senator Codey’s legislation is the true and ultimate fix. Until and unless it becomes law, the uncertainty in the industry will continue. The bill has come out of the health committee in both bodies and is ready for a floor vote in both the Assembly and the Senate. While I suspect that additional amendments to the bill are forthcoming, the Legislature returns in September and we’re hopeful that we can have relief by the end of the year.