N.J. Codey Ruling, “A Dramatic Threat” to N.J. ASCs

On November 20, in Health Net of New Jersey, Inc. v. Wayne Surgical Center, LLC, a New Jersey court ruled that physicians who refer their patients to an ambulatory surgery center (ASC) in which they have an ownership interest, violate the Codey Act’s ban against self-referrals.

The case involved surgeons who referred their patients to a physician-owned facility for surgery in which they possessed an ownership interest. At issue were Health Net insurance claims for procedures performed at the ASC by surgeons who referred the patients from their own private practices. While the physicians were within the Health Net coverage network, the surgery center was not. The Court also examined the ASC’s practice of not collecting co-insurance payments from patients, but instead accepting as payment in full the assignment of each patient’s right to reimbursement from Health Net.

On Nov. 30, Wolfblock law firm, acting on behalf of the New Jersey Association of Ambulatory Surgery Centers; Medical Society of New Jersey; Orthopedic Surgeons of New Jersey; Alliance for Quality Care; New Jersey Academy of Ophthalmologists; and Orthopedic Surgery Center of Northwest Jersey, LLC; filed an order to show cause to intervene. In addition, a motion for the judge to reconsider his decision with regard to his position that the physicians who referred patients to the surgery center were violating the provisions of the Codey Law also was filed, according to John D. Fanburg, Esq., chair of the healthcare and hospital law department at Wolfblock.

In a hearing on Dec. 5, the judge reserved judgment, Fanburg reports. “We expect him to decide on the intervention judgment within a couple of days, probably by end of the week.”

“We have reached out to the Board of Medical Examiners to get them involved and to take a position that referral to the surgery center is not in violation of the Codey Law and we are waiting to hear back from them as to what they will do.”

Fanburg notes the Board has its monthly meeting Dec. 12 and they may decide to hold out in discussion until that meeting. “In light of the impact this decision is having on this industry, I believe it is imperative that they (weigh in on this decision).”

Fanburg reiterates that ownership of a surgery center is indeed an extension of the physician’s private practice, and therefore does not violate the Codey Law.

“I don’t believe that was part of what Codey intended. That law was passed in 1991, and based upon a whole host of communications that we have had with the Board of Examiners over the years as well as other unrelated actions by the legislature; I do not believe there was any intent to prohibit this type of ownership and referral relationship.”

“That judge I feel, just clearly didn’t get it,” states ASC veteran attorney, Lorin E. Patterson, JD, partner with Reed Smith. “Why would he? He wouldn’t. He doesn’t know. The advisory opinion he was reading was done prior to the time of the ASC safe harbor.

He is saying it is not an extension of the practice, and it clearly is. That’s the way the federal government looks at it, and the federal government and Office of Inspector General (OIG) has been bombarded with calls on this too.”

This case was brought about, according to Fanburg, because Wayne Surgery Center had a surgery center that was out-of-network (not participating with Health Net), and Health Net took a position that this was in violation of their contracts, as well as the fact that physicians routinely waved co-pays and deductibles that they would have had going to an out-of-network facility. Health Net took the action against them by not paying them, Fanburg says.

“The surgery center then had to file litigation against them (Health Net) to get paid and that’s what generated all of these other ancillary, but very important, other issues that are now involved.”

Patterson notes that this is a classic case of a court interpreting an area in which a regulatory body is more equipped and qualified to address.

“The advisory opinion and the regulatory authorities in N.J. have already addressed this, so that’s really the surprise in this instance. On the other hand, I view the N.J. case as a law school exam example on how a payor can react to what I would call ‘aggressive out-of-network billing practices’ by ASCs. All of this occurred not because a court thought there was some illegal activities going on, but because a payor felt it was being improperly billed by an ASC.”

Patterson continues, “It’s very illustrative, and I hope people take that away from the case. There is a predictable response that you will get from doing things such as billing people on an out-of-network basis and not attempting to collect co-pays. They are going to allege certain things — and they are pretty predictable what they are going to allege.”

Fanburg says more will be known on the case when “we find out whether we win the motion to intervene. Then we have to convince the judge that he made a mistake. If not, then we will appeal further.”

“We believe that the provision of services in ASCs are less costly than in a hospital setting, Fanburg asserts. “They are much more patient-friendly, they are very efficient in terms of its operations and it’s an important service for the patients and frankly insurance companies and the paying public.”

Supplementary Information

Codey Violation

The Court ruled that referrals to the ASC, in which physicians had a significant financial interest, violated the Codey Act, N.J.S.A. 45:9-22.5. The Court distinguished the physician-owned ASC from an arrangement which includes a hospital owner and rejected a widely relied upon advisory opinion of the New Jersey Board of Medical Examiners from 1997, which indicated that a surgeon’s referrals of his or her own patients to a surgery center of which he or she is an owner is not an impermissible referral. The court also declared that an ASC is not an extension of a physician’s office. This viewpoint, if upheld on appeal, would have severe adverse effects on the numerous physicians who own and operate surgery centers in New Jersey.

Co-Insurance

The Court found that the ASC did not act unlawfully in routinely failing to collect co-insurance from patients (note, that this applies to out-of-network benefits and is distinguishable from a co-pay which is an obligation arising under in-network benefits).  The Court stated that while the patient's obligation to pay co-insurance arises under an agreement with Health Net, the ASC is not legally obligated to collect it.

No Private Cause of Action or Fraud

Notwithstanding its finding of a Codey violation, the Court found that Health Net had no cause of action against the physicians or the ASC because such a private cause of action is not authorized by the Codey Law. In addition, the Court held that, in view of the widespread understanding in the industry that such referrals were permissible, there could be no finding of fraud.

What Should Your ASC Do?

If you continue to operate your ASC, WolfBlock recommends that you provide patients with written disclosure that a referring physician has a financial interest in the ASC in accordance with New Jersey Board of Medical Examiner regulations and, likewise, that insurance companies are notified of a referring physician’s ownership as well.

Moreover, Fanburg says insurance companies may hold payment and even deny claims. “Yes, because I think the insurance companies that read this case can take the position: ‘Hey, you guys are violating the law, so we’re not going to pay.’ So this can tie up ASC reimbursements while this is being judicated, yes,” he concludes.

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