New Jersey’s New Codey Law – New Limits on Physician Ownership and Referrals

January 2009Newsletters Staying Well within the Law

Long before United States Congressman Pete Stark (D-CA) pushed for prohibitions against physician self-referrals of Medicare and Medicaid patients (now known as the “Stark” law), New Jersey Senator Richard Codey was working on legislation prohibiting physicians from making referrals to health care services in which they held ownership interests back. This New Jersey version of what would become the Stark law, logically dubbed the “Codey” law, is about to undergo its first significant amendment since taking effect back in 1991, further defining when and whether New Jersey physicians can refer patients to health care services in which the physicians hold ownership interests.

The new Codey law, Senate Bill 787, was approved by the full Senate on December 15, 2008, and by the full Assembly on February 5, 2009. When signed into law and after taking full effect (up to 12 months following enactment), the new Codey law will freeze the number of certain physician-owned ambulatory care and ambulatory surgery facilities to which physician owners may refer patients. It will also add a new level of regulatory oversight over physician practices that perform office-based surgery (surgery performed in the physician’s medical office – so-called “single room” surgery practices), rather than in licensed ambulatory surgery facilities.

Many legislators and policy makers, including Congressman Stark, have argued that health care utilization and costs increase inappropriately when physicians are able to reap financial profits from their referrals of health care services. If physicians cannot benefit financially from their referrals, so the argument goes, they will make fewer referrals that are medically unnecessary and motivated solely by profit. In New Jersey, and in the wake of the original Codey law, the physician self-referral prohibition has been modified by the idea that, in some instances, self-referrals should be allowed, or perhaps not really viewed as referrals.1 Thus, hundreds of physician-owned licensed surgery facilities2 and physician-owned surgical practices3 currently operate in New Jersey, rendering services to patients sent by the physician owners.

In late 2007, an earthquake struck the physician-owned facility landscape. A ruling by a Superior Court judge in Bergen County, New Jersey, while limited to the litigants involved (and, thus, not precedent-setting), caused deep fissures in the ground on which many physician-owned facilities were built. The judge in Garcia, et al v. HealthNet of New Jersey, Inc. v. Wayne Surgical Center, LLC (No. BER-C-37-06, decided November 20, 2007) held that, despite the proliferation of physician-owned surgical facilities and the existence of a widely circulated letter by the Board of Medical Examiners (BME) apparently interpreting the Codey law in such a way as to permit physician referrals to certain surgical facilities in which the referring physicians held ownership interests, these referrals were illegal.

Fast-forward 14 months, and the after-shocks of this ruling (which is under appeal) have barely abated. Debates ensued and many continue, despite the enactment of S.787: under what circumstances is a physician making a referral? Is it a referral when the physician provides the referred service herself, and bills in her (or her practice’s) name? Which physician-owned facilities should be licensed by DHSS (and potentially subject to the ambulatory care facility assessment used to offset the cost of hospital charity care)? Should referrals of certain types of services be exempt from the prohibition, either because they are unlikely to result in overutilization, or because patients benefit from physician investment in these services? Where should the line be drawn between DHSS-regulated health care facilities and BME-regulated physician practices?

Key aspects of S.787 include the following:

  • “Single-room” surgical practices will be required to register with DHSS (existing practices will have a year after enactment to register; new practices that file plans with the municipality within 180 days of enactment may also register to operate, if they register prior to commencement of services), and shall, as a condition of registration, get certification from the Centers for Medicare and Medicaid Services (CMS) as a surgery center or accreditation from a CMS-recognized accrediting body. Registered surgical practices shall then be required to report specified patient information to DHSS on an annual basis.
  • DHSS-licensed ambulatory care facilities must get ambulatory care accreditation from a CMS-recognized accrediting body within a year of enactment.
  • No new registrations for surgical practices and no new ambulatory care facility licenses for surgery services will be issued by DHSS after enactment, except under specified circumstances (including transfer or relocation); no new surgical practice registrations will be issued unless the facility’s plans were filed with the municipality within 180 days after enactment. However, new licenses may be issued for facilities that will be jointly owned by a general hospital in New Jersey and one or more other parties, and for facilities owned by a hospital or medical school.4
  • The original Codey law exemption for referrals of lithotripsy services and radiation therapy pursuant to an oncological protocol will end, but physicians holding interests in such facilities prior to the first day of the 12th month following enactment may continue to make referrals to facilities in which they hold financial interests.
  • Similar to the original Codey law, physicians will be permitted to send patients for medical treatment or a procedure that is provided at the physician’s medical office and for which a bill is issued directly in the name of the physician or the physician’s medical office. “Medical office” is not defined in the original Codey law or in S.787.
  • Physicians will be permitted to refer patients to DHSS-registered surgical practices and DHSS-licensed ambulatory surgical facilities in which they hold financial interests, as long as the referring physician personally performs the procedure; the physician’s remuneration as an owner or investor is proportional to his or her ownership interest and not to the value or volume of referrals; all clinically-related decisions at a facility owned in part by non-physicians are made by physicians and are in the best interests of the patient; and disclosure of the physician’s financial interest is made at the time of the referral. The disclosure must include information related to whether the facility is considered “out-of-network” by the patient’s insurance carrier or third-party payer.

The BME’s regulations will require amendment following this enactment. It will be interesting to see if the amendments will be narrowly tailored to conform with the new law, or if the BME will attempt (as it has twice before over the last two decades, to no avail) to overhaul the entire, often painfully outdated, regulatory scheme. Many in the industry would welcome an attempt to make the BME regulations compatible with federal law (for example, with respect to the in-office ancillary services and group practice provisions in the Stark laws). Often, compliance with federal law and compliance with the BME regulations seems awkward, if not impossible. Similarly, an overhaul of the BME regulations might encourage collaboration between the BME and the DHSS and result in better delineation of where the BME’s oversight over physician practices and the DHSS’s oversight over health care facilities begins, ends or overlaps.

Perhaps most interestingly, the new Codey law foreshadows a shift that goes well beyond the original Codey law’s prescient (pre-Stark law) focus on physician self-referrals and overutilization of health care services. Rather than simply picking up the ambulatory surgery facility debris left in the wake of the Garcia decision and letting the industry re-build itself upon a new delineation of permissible referrals, the new Codey law all but fixes the number and types of ambulatory care facilities that will exist in New Jersey going forward. In this respect, the new Codey law resonates more of long-forgotten certificate of need and health planning policy than it does of the original law’s concern with physician profit motives and overutilization. Perhaps, after the new Codey law is enacted and the dust settles, the health care facility landscape in New Jersey will look more like it did in 1985 than it did in 2005.

1) These modifications were developed as a result of agency interpretations (including those contained in letters responding to particular physician inquiries) and were premised on the idea that prevalent, non-abusive medical office arrangements and practices should not be disrupted.
2) In general, all health care services, except those provided in a physician’s private practice, must be provided in health care facilities licensed by the New Jersey Department of Health and Senior Services (DHSS). N.J.S.A. 26:2H-1 et seq.
3) DHSS regulations define “surgical practice” as “a structure or suite of rooms which has the following characteristics: 1. No more than one room dedicated for use as an operating room which is specifically equipped to perform surgery, designed and constructed to accommodate invasive diagnostic and surgical procedures; 2. One or more postanesthesia care units or a dedicated recovery area where the patient may be closely monitored and observed until discharged; and 3. Established by a physician or physician professional association surgical practice solely for his/her/their private medical practice.”
4) While ambulatory care facilities licensed to provide surgery as of the date of enactment may continue to be owned by non-licensed entities or individuals, only entities that are owned directly by New Jersey-licensed hospitals or medical schools, or are owned directly by hospitals in combination with other parties or entities, will be granted a license to operate. However, entities owned in whole or in part by non-licensed (non-hospital, non-physician) parties that are not yet licensed to operate a facility, but that have filed plans, specifications and required documents with the Department of Community Affairs or the municipality where the facility will be located, as applicable, will be permitted to continue to seek licensure and, once licensed, to operate as an ambulatory surgery facility.