N.J. Legal Developments Relating to Ownership of ASCs

Physician owned ambulatory surgery centers (ASCs) in New Jersey continue to face uncertain futures in the wake of recent legal developments in that state. This uncertainty was created by comments from the case of Garcia v. Health Net of New Jersey, Inc., to the effect that physicians in that case were violating New Jersey's anti-self-referral law (the "Codey Law").

The judge specifically called into question the application in that case of certain guidance from the New Jersey Board of Medical Examiners ("BME") upon which many New Jersey physicians had relied in their use of physician-owned ASCs as extensions of their office practice. In response to Garcia, the BME proposed an emergency rule ("Proposed Rule") earlier this month attempting to clarify how ASCs fit into the exceptions to anti-self-referral found in the New Jersey Administrative Code. Significantly, the Proposed Rule limited the exception to ASCs owned by physicians or physicians together with a licensed hospital, excluding from the exception an ASC owned in part by a health services management company or similar investor. However, that proposed rule has not yet been signed by the Governor, and is as yet of no practical effect.

Then, on January 24, 2008, Senator Richard Codey submitted to the New Jersey State Senate Bill 787 (the "Codey Amendment") which proposes an amendment to the law bearing his name.  The Codey Amendment proposes to amend the Codey Law in order to allow physicians to refer patients to ASCs in which they own interests if (i) the referring physician also performs the procedure which is being referred, and (ii) the income derived from the ASC is not related to the referring physician's volume or value of referrals (i.e., the investors could only receive a pro rata portion of the ASC's income).  However, as presently worded, the amendment only applies the exception to ASCs which are licensed with the New Jersey Department of Health and Senior Services on or prior to the date that the Codey Amendment becomes law.

Typically, in legislation of this type, we would expect to find a "grandfather clause," or delayed effective date, in order to allow time for ASCs currently under development to benefit from the exception, or to allow existing ASCs to make any changes in structure or procedure needed in order to comply.  No such language is presently in the amendment. 

Our contacts in New Jersey indicate that they and other interested parties are working with Senator Codey and the Committee at this time to limit the restrictions on ASCs and implement changes, including a grandfather clause or similar provision.   The Codey Amendment has been through its first reading in the Senate and is now in the Senate Health, Human Services and Senior Citizens Committee under consideration. Of course, before it becomes law it will need to be passed by the Senate, the Assembly and then be signed by the Governor.

It is not known when, or if, the Codey Amendment will become effective, or what the contents would be at such time, but our contacts in New Jersey suggest that passage could occur as early as April 1, 2008.  If and when either takes effect, the Codey Amendment or the Proposed Rule will give some certainty to the future of physician owned ASCs in New Jersey, but for now we wait on the next development.  In the meantime we encourage interested persons to contact and support the New Jersey Association of Ambulatory Surgery Centers (www.njaasc.org), who is taking a leading role in working with the legislature on this important issue.

For more coverage on this case, click here, here, here, here and here.

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