Physician investors in ambulatory centers in luck

Physician-owned centers stand to profit

In its first opinion since establishing an advisory process for providers or family members who receive compensation from or have a financial stake in another provider, an Oct. 29 HCFA advisory opinion found that a proposed arrangement for a physician-owned ambulatory treatment surgical center (ATSC) "would qualify for the rural provider exception to the prohibition against physician referrals."

Referrals for designated ancillary health services such as outpatient prescription drugs, clinical laboratory services, and radiology services are "potentially appropriate" for the rural provider exception in this arrangement as well, according to the opinion.

The entity that requested the advisory opinion is a newly formed limited liability company proposing to build and operate an ambulatory surgical treatment center. "In order to finance the construction and operation of the ATSC, [the entity] will sell shares of the company to investors. The investors will be physicians who will refer patients to the ATSC. Further, some of these physicians will perform medical and surgical procedures at the ATSC. [The entity] expects that physician investors will refer Medicare beneficiaries to the ATSC," HCFA states in the advisory opinion.

The Social Security Act prohibits a physician from referring a Medicare patient to an entity for certain designated health services if the physician has a financial relationship with the entity, unless an exception applies. The statute specifies two categories of "financial relationship": (1) an ownership or investment interest in an entity, and (2) a compensation arrangement between a physician and an entity. An ownership or investment interest can be through debt, equity, or other means.

The rural provider exception "is available to parties that are involved in an ownership arrangement." The advisory opinion states that "the arrangement as described to us" between the company and its investors "fits within the definition of an ownership or investment interest" under the statute.

The entity had indicated to HCFA that in exchange for capital contributions, it proposes to offer investor physicians up to 49% of the company’s interest in profits, losses, and cash flow. The remaining 51% of the equity will be owned and controlled by one physician. The company has not presented any issues regarding compensation relationships between the physicians and the company. "Therefore, this advisory opinion applies just to the ownership or investment interest," the document states.

The opinion states that the rural provider exception is "potentially appropriate" for designated health services furnished by the ATSC. The self-referral ban prohibits referrals for designated health services that include clinical laboratory services, radiology services, and outpatient prescription drugs. "[The entity] indicates that it anticipates providing some of these designated health services. Unless an exception applies, a physician investor in [the entity] who refers Medicare patients for a designated health service to the ATSC would be making a prohibited referral," the opinion states.

The rural provider exception for designated health services involves a two-part test. "In addition to the requirement that designated health services be furnished in a rural area, substantially all designated health services furnished by the provider must be furnished to individuals residing in a rural area," according to the advisory opinion. HCFA has interpreted "substantially all" to mean at least 75%.

"If, as [the entity] certifies, substantially all of the designated health services furnished by the ATSC are furnished to individuals residing in a rural area, the ATSC will meet the second element of the rural provider exception," the advisory opinion states. HCFA cautions, however, that the "substantially all" test is an "ongoing requirement."

Advisory opinions may be requested only by individuals or entities actually involved in a specific business arrangement, and an opinion "may be legally relied upon only by the requestors," under the rule. Advisory opinions issued by HCFA apply only to the specific arrangement described in the request for the advisory opinion and do not apply to other arrangements, even to those that appear to be similar.