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TO ALL MEMBERS OF THE AMERICAN LITHOTRIPSY SOCIETY:
IMPORTANT! PLEASE READ CAREFULLY!!

ALS UPDATES FRAUD AND ABUSE COMPLIANCE GUIDELINES FOR PHYSICIAN-OWNED LITHOTRIPSY VENTURES!
April 17, 2002 - Waltham, MA:

The American Lithotripsy Society (ALS) announces an update of its fraud and abuse compliance guidelines for physician-owned lithotripsy ventures. The Board of Directors of the Society voted unanimously, on March 13, 2002, to endorse these updated guidelines and to distribute this information to the full membership of the organization.

Since the establishment of the ALS fraud and abuse guidelines in March 2000, there have been several changes in federal health care law, most notably the promulgation and implementation of the phase I final Stark II regulations. ALS, in its role as the representative voice of the lithotripsy industry, is committed to protecting the rights of physicians to own and provide high quality lithotripsy services in a legal and ethical manner. Unethical or unlawful practices by any physician-owned lithotripsy facility threatens severe adverse consequences to our membership at large. The Board originally published the guidelines out of concern that actions by a few entities could have an adverse impact on the industry as a whole. As the Board noted in 2000, the risk of adverse action is heightened by the added attention the lithotripsy industry has received as a result of the ongoing public policy debate involving lithotripsy coverage under Stark II, the continuing controversy over Medicare reimbursement and the new Ambulatory Surgery Center safe harbor under the Anti-Kickback Act. Since then, the Centers for Medicare and Medicaid Services ("CMS"), formerly the Health Care Financing Administration ("HCFA"), published and implemented phase I of its final Stark II regulations. These regulations treat lithotripsy performed under arrangement for a hospital as an outpatient hospital service and, thus, a designated health service covered by Stark II prohibitions. ALS subsequently filed suit against CMS and the Secretary of Health and Human Services challenging the treatment of lithotripsy under Stark II. It is ever more important that lithotripsy entities comply with applicable fraud and abuse laws. For these reasons, the American Lithotripsy Society has undertaken to update the fraud and abuse guidelines in order to help its member lithotripsy providers recognize and avoid any unscrupulous, unethical or illegal practices they may encounter.

Toward that end, the American Lithotripsy Society has decided to publish these Updated Fraud and Abuse Compliance Guidelines for Physician Owned Ventures. While this is not a full compliance plan and should not be treated as such, these guidelines are intended to assist physician-owned lithotripsy ventures and their physician-investors in the development of effective internal controls that promote adherence to applicable Federal and State law. The American Lithotripsy Society strongly recommends that each lithotripsy provider implement a comprehensive formal compliance plan that includes written policies and procedures, designation of a compliance officer, effective training and education, effective communication, enforcement, auditing and monitoring and response and correction.

The American Lithotripsy Society cannot recommend strongly enough that its members voluntarily implement the guidelines set forth herein; the alternative is the risk of government enforcement. Only through voluntary adherence can we ensure the highest degree of ethical and lawful competition within our industry.
For additional information, contact the Society's Executive Director, Wesley E. Harrington, CAE at the Society's headquarters:

AMERICAN LITHOTRIPSY SOCIETY
305 Second Avenue, Suite 200
Waltham, Massachusetts 02451
Telephone: 781-895-9098
Fax: 781-895-9088
E-Mail:
wharrington@lithotripsy.org
Web Address: www.lithotripsy.org

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Disclaimer
The following Updated Fraud and Abuse Compliance Guidelines for Physician Owned Ventures has been prepared on behalf of the American Lithotripsy Society by Winston & Strawn for informational and discussion purposes only. It does not constitute legal advice. If a particular practice is not specifically addressed in this compliance plan, it does not mean that either the American Lithotripsy Society or Winston & Strawn endorses or otherwise condones such practice.

Counsel for the American Lithotripsy Society has attempted to provide several guiding principles relating to a complex area of law. The opinions expressed herein are not the only possible interpretation of the laws discussed. Reference to or reliance upon these Guidelines must not serve as a substitute for individualized legal advice from experienced health care counsel. The American Lithotripsy Society strongly recommends that lithotripsy providers not structure any arrangement until it has conferred with qualified health care counsel.

AMERICAN LITHOTRIPSY SOCIETY

UPDATED FRAUD AND ABUSE COMPLIANCE GUIDELINES FOR PHYSICIAN-OWNED LITHOTRIPSY VENTURES
[Revised: March 13, 2002]

As the lithotripsy industry representative, the American Lithotripsy Society is committed to protecting the rights of physicians to own and provide high quality lithotripsy services in a legal and ethical manner. Unethical or unlawful practices by any physician-owned lithotripsy facility threatens severe adverse consequences to our membership at large. The risk of adverse action is heightened by the added attention the lithotripsy industry has received as a result of the ongoing public policy debate involving lithotripsy coverage under Stark II, the continuing controversy over Medicare reimbursement and the new Ambulatory Surgery Center safe harbor under the Anti-Kickback Act.

For these reasons, the American Lithotripsy Society has undertaken to help its member lithotripsy providers to recognize and avoid any unscrupulous, unethical or illegal practices they may encounter.

Toward that end, in 2000 the American Lithotripsy Society published Fraud and Abuse Compliance Guidelines for Physician Owned Ventures. Since that publication, there have been several changes in federal fraud and abuse law, most notably the publication and implementation of the phase I Stark II regulations. While this is not a full compliance plan and should not be treated as such, these updated guidelines are intended to assist physician-owned lithotripsy ventures and their physician-investors in the development of effective internal controls that promote adherence to applicable Federal and State law. The American Lithotripsy Society strongly recommends that each lithotripsy provider implements a comprehensive formal compliance plan that includes written policies and procedures, designation of a compliance officer, effective training and education, effective communication, enforcement, auditing and monitoring and response and correction.

The American Lithotripsy Society cannot recommend strongly enough that it its members voluntarily implement the guidelines set forth herein; the alternative is the risk of government enforcement. Only through voluntary adherence can we ensure the highest degree of ethical and lawful competition within our industry.

Disclaimer

The following Fraud and Abuse Compliance Guidelines for Physician Owned Ventures has been prepared on behalf of the American Lithotripsy Society by Winston & Strawn for informational and discussion purposes only. It does not constitute legal advice. If a particular practice is not specifically addressed in this compliance plan, it does not mean that either the American Lithotripsy Society or Winston & Strawn endorses or otherwise condones such practice.
Counsel for the American Lithotripsy Society has attempted to provide several guiding principles relating to a complex area of law. The opinions expressed herein are not the only possible interpretation of the laws discussed. Reference to or reliance upon these Guidelines must not serve as a substitute for individualized legal advice from experienced health care counsel.
The American Lithotripsy Society strongly recommends that lithotripsy providers not structure any arrangement until it has conferred with qualified health care counsel.

FRAUD AND ABUSE COMPLIANCE GUIDELINES FOR PHYSICIAN-OWNED LITHOTRIPSY VENTURES
[Revised: March 13, 2002]

I. Introduction

Over the past two decades, we have seen the proliferation of physician-owned lithotripsy ventures. While there are, and have been, distinct benefits to the patient public when physicians own, manage, participate in and treat at their own facilities, urologists must be sensitive to the regulatory issues which arise as a result of physician ownership and control.

One guiding principle bears re-emphasizing. A physician may not offer, give, solicit or receive anything of value as an inducement for his or her referrals to the lithotripsy venture. Plainly, "anything of value" is a broad term that encompasses payments, gifts, discounts and rebates. An entity to which a physician refers patients may not engage in such conduct, either. As a general rule, if a physician is getting "something" he would not otherwise get simply because he makes, or is in a position to make, referrals to a venture, he should decline to participate. In the hyper-competitive health care industry, physicians are sure to be inundated with attractive offers from promoters, hospitals, manufacturers and other physicians. If the offer appears too good to be true, it likely is.

II. Analysis of Particular Practices

A. Who May Invest

1. Active Participation

It is extremely important that physicians actively participate in the medical aspects of the lithotripsy venture in which they have invested. Physician investors should not be passive investors in the venture. Save for routine coverage arrangements, they must perform lithotripsy procedures on their own patients. Physician ownership, in this context, is most likely to be viewed (as it properly should) as an extension of the urologist's office practice. When physicians do not personally treat the patients they refer and actively participate actively in all medical aspects of the lithotripsy entity, ownership may look more like a mechanism to receive money in exchange for referrals.

2. Limiting Investment to Urologists

Many lithotripsy ventures limit investment to a discrete class of investors who are or will be in a position to refer patients to the venture, such as "Urologists" or "Physicians practicing in the state of X." There is no legal authority directly concluding that these investment opportunities must be made available to the general public or that the failure to do so constitutes a violation of either the Anti-Kickback Act or Stark II. While generally believed to be permissible, there is also no legal authority directly concluding that limiting investment solely to urologists is permissible. There are some suggestions in government statements that permitting primary care physicians who refer patients to urologists for lithotripsy may be problematical and viewed as a reward for these referrals. Whether your venture chooses to limit investment to urologists only is a decision that must be made in consultation with qualified health care counsel who is in a position to evaluate all of the facts and circumstances particular to your offering.

3. Limiting Physician Investment in Lithotripsy Ventures

Certain smaller ventures may choose to limit total physician investment in order to insulate itself from Anti-Kickback Act scrutiny. The regulations implementing the Anti-Kickback Act exempt from prosecution certain business arrangements and payment practices which might otherwise technically violate the Anti-Kickback Act. These exemptions are known as "safe harbor" provisions.

One such exemption is the Small Business Safe Harbor. To qualify for this Safe Harbor, at least three conditions must be met. First, the entity must have less than $50,000,000 in undepreciated net tangible assets over the last 12 month period or fiscal year. Most lithotripsy ventures should meet this criterion. Should the entity be any larger, it would not qualify as a "small business."

Second, physicians who are in a position to make or influence referrals or otherwise generate business for the entity may account for no more 40% of the total investment in the entity. Diffuse ownership tends to lessen the ability of a physician to impact his investment return with his referrals.

Third, investors may generate, through referrals, items or services furnished, or business otherwise generated, no more than 40% of the gross revenue of the entity. Unless the entity has a strong referral source from non-investors, it is extremely unlikely that a lithotripsy venture will meet this criterion.

Although compliance with the Small Business Safe Harbor is very difficult to achieve, non-compliance is not fatal. Failure to meet all of the criteria of a safe harbor does not necessitate the conclusion that a practice violates the Anti-Kickback Act. Failure to comply fully with a safe harbor provision means only that the practice or arrangement does not have the absolute assurance of protection from anti-kickback liability. Full compliance guarantees an exemption from prosecution.

B. Structuring and Valuing the Entity

1. Business Purpose

Typically, ownership interests in lithotripsy facilities are sold to urologists in connection with start up ventures where capital is needed for the purchase of machines, buildings, vans, etc. The business purpose is self-evident. Occasionally, however, entities which are adequately capitalized and do not contemplate any significant capital expenditures attempt to raise funds through private offerings

Resyndication may not be proper where the purpose of the sale of interests is, in fact, to induce referrals. If a lithotripsy venture intends to resyndicate, it must identify a legitimate business purpose for doing so. Absent a legitimate business purpose, health care enforcement authorities may infer that the purpose in selling interests only to urologists is to induce their referrals. That creates a prima facie case under the Anti-Kickback Law, i.e., a thing of value (ownership interests which provide a mechanism for receiving a financial return) in return for Medicare-reimbursed lithotripsy referrals.

2. Fair Market Value

Prior to any sale of interests, it is incumbent upon the lithotripsy venture to establish the fair market value of the investment interests it intends to offer. Indeed, the single most important aspect regarding transactions with referring physicians is the notion of "fair market value." When interests are purchased from or sold to participating physicians at a fair market value which does not take into account the volume or value of referrals, there is little risk of impropriety. While not required per se, a valid independent appraisal provides objective, virtually unassailable evidence of fair market value.

3. Departure from Fair Market Value

Once the fair market value is assessed, virtually any variation from that amount will implicate the health care fraud and abuse laws. These include gifts of interests to referring physicians, loans to physicians to purchase investment interests, and discounts on the fair market value price of the interest.

a. Gifts

A lithotripsy venture may not give investment interests to physicians that refer or may refer patients to the venture. Giving an investment interest to a physician is a clear form of remuneration. If the physician receiving the interest is in a position to refer patients, this establishes a virtually indefensible presumption that value (the investment interest) was given in return or as an inducement for referrals, in violation of the Anti-Kickback law.

b. Loans

Lending a physician money for the purchase of investment interests, or guaranteeing the physician's loan, is also an extremely unwise practice. The OIG casts a jaundiced eye at physician self-financing arrangements.

First, if the physician cannot borrow the money independently or cannot borrow it on terms as favorable as that offered by the venture, a loan or guarantee may itself be a thing of value, creating the presumption that it is given in return or as an inducement for referrals.

Second, a physician investor, like any investor, expects or hopes for a financial return on his or her investment. That return on investment is not a "kickback, bribe or rebate" under the Anti-Kickback law so long as the physician acquires the interest legitimately, for fair market value and profits from the venture are distributed in proportion to each physician's ownership interests. If extraordinary returns on investment are promised or forecast, or if the investment is, in the context of the financial undertaking, nominal, this may be evidence that the interests are being sold at less than fair market value, or, putting it another way, that the financial returns include a fee for referrals. The OIG looks specifically at whether the physician-investor has invested only a nominal amount and whether a physician receives returns on his or her investment which are disproportionate in comparison with the risk involved.

These notions extend beyond loans to individual physicians for the purchase of investment interests. It is extremely unwise for any lithotripsy venture to make a loan to a physician member for any purpose. Lithotripsy ventures are in the business of providing lithotripsy services. They are not banking institutions. Again, this raises the issue of whether the physician could not obtain the loan from other sources or at comparable terms.

Any loan situation involving physicians in a position to refer must be scrutinized closely to ensure that the loan recipient is "at risk" for non-payment of the loan. Loans for the benefit of a physician investor, in the main, should be made by an entity other than the recipient of the physician's referrals. If the loan is nonetheless made by the venture, it should be recourse to the individual physician member of a lithotripsy venture. Where a loan is recourse to the entity, as opposed to its constituent physicians, the physician-investor is not at "at risk" for his investment, as he normally would be for any other legitimate investment. In essence, the promoter might be conveying a benefit to the individual physicians. This could be construed as remuneration as an inducement for referrals.

Similarly, a lithotripsy venture may not pledge its assets or that of an affiliated entity as collateral for a loan made to a physician. The venture properly may pledge its assets as collateral for a loan made to it.

c. Discounts

It is of the utmost importance that physicians in a position to refer patients to the venture are not allowed to purchase shares at a price less than their fair market value. The rationale is identical as that for gifts. Allowing a physician to purchase a discounted share clearly conveys value to the physician that could be inferred as an inducement for referrals. The prudent practice is to provide neither discounts nor premiums, and strictly price investment shares at fair market value.

C. Billing Arrangements and Payments to the Entity

Current Medicare policy is to only reimburse hospitals for lithotripsy procedures. For an individual provider to be reimbursed, it must render lithotripsy treatment "under arrangement" with a hospital. As a result of this billing quirk, the Centers for Medicare and Medicaid Services ("CMS"), formerly the Health Care Financing Administration ("HCFA"), characterizes lithotripsy as an "outpatient hospital service," subject to the prohibition on self-referrals, even though the Stark II amendments do not specify that lithotripsy is a designated health service.

In its comment to HCFA on the then proposed Stark II regulations, and in the subsequent lawsuit filed against CMS, the American Lithotripsy Society has taken the position that the legislative history to Stark II is clear and compelling that Congress did not intend Stark II to apply to lithotripsy. Authorities at CMS initially made several unofficial statements to that effect. Nonetheless, the phase I final Stark II regulations provide that Stark II applies to lithotripsy services. Until such time as ALS is successful in its lawsuit or an ASC rate is set for lithotripsy services, providers must structure their agreements accordingly.

1. Standard Lease Requirements

Under the Stark II law applicable to designated health services, all equipment lease agreements to which the lithotripsy venture is a party should include the following elements:

The lease should be in writing, signed by the parties, and set forth, with particularity, the equipment covered by the lease.

It should provide for a rental term of at least one year. Each renewal term also should be for a term of one year. This is to prevent the parties from continuously renegotiating terms based on referral streams. Leases should not include clauses permitting the parties to terminate the agreement "without cause" prior to the expiration of one year.

The rented or leased equipment should not exceed that which is reasonable and necessary for the legitimate business purposes of the lease or rental and is used exclusively by the lessee when being used by the lessee. The "reasonable and necessary" requirement means that the rental agreement should be narrowly tailored to actual use. For example, a hospital may not lease four lithotripters from a lithotripsy venture, even at fair market value, if its legitimate business needs call for a single machine. The "exclusive use" requirement is designed to ensure that lessor actually relinquishes control of the equipment during the lease term.

The lease should be commercially reasonable even if no referrals were made between the parties. That the physician investors intend to refer patients to the hospital at which the procedure will be performed may not be factored into the rental price.

2. Lithotripsy Services

If the lithotripsy venture provides more to the hospital than the lease of a lithotripter, such as the services of a technician, the Under Arrangement Agreement shall include all the provisions of the standard lease agreement. In addition, the agreement shall include a rendition of all services to be provided. The services must meet the "reasonable and necessary" requirement explained above. All terms must be commercially reasonable even if no referrals were made. The fee cannot reflect lithotripsy referrals by the physician investors to the hospital where the procedure will be performed.

3. Fixed Payments for Medicare and Medicaid Services

The critical element of both the Stark II equipment lease exception and the equipment lease safe harbor to the Anti-Kickback Act requires that the rental charges over the term of the lease "not be determined in a manner that takes into account the volume or value of referrals." Although the fee charged may not take into account referrals that will be made by investor physicians, the Stark II regulations now provide that lease payments from the hospital may be made on a "per procedure" basis."

Prior to structuring any agreements, however, your entity should consult with experienced health care counsel in order to structure a venture that fully complies with the law, regulations and current enforcement policy and trends.

4. Pass Through Leases

One of the most troublesome arrangements in the marketplace is the no-risk, per-click, mark-up lease. It works like this: A physician-owned venture that does not own a lithotripsy machine leases a machine from a third party at a "per click" rate. The manufacturer or leasing company agrees not to collect any lease payment from the venture until the venture has received its lease payment from the hospital or facility to which it subleases the machine. The venture then leases the machine to the hospital or facility, also on a "per use" basis, at a rate higher than it pays to the manufacturer or leasing company.

The government believes that several layers of this arrangement bear discussing. First, the question must be asked what value the physician owned venture is adding. Why doesn't the original lessor lease the machine directly to the hospital since it is only paid to the extent the hospital pays? The likely government response is that referrals are being purchased.

Where the lease to the hospital exceeds the lease for the machine, the government likely will draw an inference that the hospital is paying a premium above fair market value to induce continued referrals unless the premium is fair market value for the services or other value added by the physician-owned entity. The government likely will conclude that this plainly implicates the Anti-Kickback Act. Alternatively, it likely will draw an inference that the owner of the machine is providing the physician-controlled venture with a discount to induce continued referrals to it. The government likely will conclude that this also implicates the Anti-Kickback Act.

Central to this analysis is the notion that the physician-investors are not "at risk" for their lithotripter lease. The venture is not at risk if the manufacturer or leasing company agrees not to collect any lease payments from the venture until the venture has received its lease payment from the hospital or health care facility. Because the physician-owned venture is not at risk, the manufacturer or leasing company could be viewed as providing the physician venture with something of value (i.e., use of a machine for less than fair market value) as an inducement for referrals. This implicates the Anti-Kickback Act.

Note that these same concerns are not present where the lithotripsy venture purchases its own machine. When the venture owns its machine, it is clearly "at risk" for the value of the machine. Its primary concern is that it leases the machine to the hospital or facility at a price which approximates fair market value.

Arguably, if the lease is a capital lease (in a capital lease the lessee lithotripsy entity is entitled to purchase the machine at the end of the lease term for nominal value) the lease is more in the nature of an installment purchase and the physician-owned venture should be deemed at risk. We strongly advise that you seek the advise of competent health care counsel before entering into a capital lease.

5. Fair Market Value

The phase I Final Stark II regulations provide that fair market value is to be determined by the price that would result from bona fide bargaining between well informed parties neither of which is in a position to generate business for the other. CMS has taken the position that to determine fair market value for a contract between a physician-owned lithotripsy entity and a hospital, the rate charged must be set either by looking agreements between hospital and entities that are not physician-owned, or by setting the rate at cost plus "a reasonable rate of return." The American Lithotripsy Society does not agree with this view and it is a fundamental component of the Stark II lawsuit that the Society has filed against CMS. Nonetheless, this is the position taken by CMS. We advise that you obtain a valuation from a competent valuation firm that will provide you with a valuation in accordance with the regulation, or be prepared to defend your valuation otherwise in the event of federal scrutiny.

D. Payments by the Entity

1. Medical Advisory Board / Medical Directorships

We often encounter partnership and operating agreements that provide for appointment of referring physicians to a Medical Advisory Board or to the position of Medical Director. There are a myriad of legitimate business justifications for wanting to establish these positions, including accreditation. Indeed, there is nothing wrong with the practice, per se. If, however, the venture intends to compensate these referring physicians for their work, certain steps should be taken to protect the integrity of the arrangement.

Both the members of the Medical Advisory Board and the Medical Director must be paid fair market value for actual services rendered. Members of the Advisory Board and the Medical Director are required to perform work (including attending meetings) sufficient to justify that the fee received approximates fair market value for each physician's time or for the services rendered. Enforcement authorities generally look for documentation of services actually rendered. In addition, the scope of services cannot exceed that which is reasonable and necessary for the legitimate business purposes of the venture.

Under no circumstances should there be any correlation between appointment to either position and the volume or value of a physician's referrals. The positions, and the compensation therefore, must not be a reward for prodigious referrers.

2. Repurchase of Investment Interests

Partnership or operating agreements often provide for the repurchase of a physician's investment interest. There may be valid business reasons for including such provisions. It provides the company with flexibility in case it needs to restructure and allows the physician-investor to divest upon the occurrence of unforeseen circumstances.

The most prevalent of these repurchase provisions are often found in the context of what are known as "legislative put options" or "legislative call options." Under a legislative put option, investors have the option to sell their interests back to the venture upon the adoption of any Federal or state statute or regulation that prohibits the investors from referring patients (whether Medicare, Medicaid, or otherwise) to the lithotripsy venture. A legislative call option gives the entity the right to purchase, or "call," the investment interests, instead of conveying to the investors the right to sell, or put, the investment interest.

These options are very common. While they necessarily suggest a nexus between investment and referrals, it is in the context of an exit strategy upon the later change in law or regulation, and generally are lawful. Management for the venture should confer with counsel to ensure that any termination option it chooses to employ does not create an improper or unlawful a relationship between investment and referrals. Note that even where option itself is lawful, the price at which the option is exercised must be consistent with fair market value. If it is not consistent with fair market value, the option event could be construed as a method for paying for past or future referrals.

E. Transfer Restrictions and Restrictive Covenants

1. Anti-Trust Concerns

While a valid anti-trust analysis requires a complete assessment of the market conditions for lithotripsy services in the geographic area where the venture is located, your venture should avoid practices which hamper competition on the basis of quality or price or which unduly restrict the practice activities of physician investors. If your market share in the region in which you practice is relatively high, anti-trust counsel should be consulted.

2. Kick Out Clauses

Many lithotripsy ventures are inclined to include mandatory divestiture requirements which convey to the venture the option to purchase an investor's interest upon the occurrence of certain events. When these are events which limit the ability of the physician-investor to refer patients to the venture, they are known as "kick-out clauses." The OIG has stated that such provisions may be an "indicator of potentially unlawful activity." These provisions create an extremely strong connection between referrals and investment and should not be included.

As a general rule, legitimate ownership dividends are not considered rebates or kickbacks. "Kick-out clauses" derogate from this principle because they intrude upon the hallmark of stock or limited partnership ownership -- the ability to alienate freely an owner's interest. Indeed, one nearly inescapable conclusion is that the entity doesn't want the physician to remain as an investor if he is not going to continue to refer lithotripsy cases. Where the venture has limited investment to practicing urologists, this conclusion becomes even stronger.

The typical "kick-out clause" gives the entity the option to purchase "if the investor moves from X County" or "should the investor cease to live in X state." In such a case, the connection between investment and referrals is obvious. Other forms of kickout-clauses include provisions which allow the entity to purchase the shares of an investor "at any time," "who leaves the practice of urology," "upon loss of medical licensure," "upon the death of investor," "should the physician fail to maintain adequate malpractice insurance," or "if the investor becomes permanently disabled or incapacitated." None of these events typically give rise to an option to purchase legitimate, non-referral related investments.

Lithotripsy entities are not protected by any of the "safe harbors" promulgated by the OIG. The OIG commentary to the safe harbors for ambulatory surgical centers ("ASCs") specifically state that lithotripsy facilities and other health facilities would not be covered by those safe harbors. The ASC safe harbors view an ASC as an extension of the physician's office and permit an ASC entity to limit investment in the ASC entity to those physicians who are in a position to refer patients to the ASC and perform the procedure on the referred patient. The OIG believes that the purchase of investment interests by practicing physicians not in a position to refer raise the possibility that those referring but non-treating physicians would be rewarded for their referrals. The American Lithotripsy Society believes that a lithotripsy facility also is an extension of the urologist's office. Although lithotripsy entities cannot receive safe harbor protection, it may be permissible to limit investors in a lithotripsy entity to those urologists who are in a position to refer patients for lithotripsy and perform the procedure on those patients. Kick-out clauses that force retiring physicians or physicians who move out of the area to divest those interests still would not likely be permissible.

3. Transfer Restrictions

A lithotripsy venture's organizational documents should not include onerous transfer restrictions. According to the OIG, non-transferable investment interests also may constitute an "indicator of potentially unlawful activity." Freely transferable units tend to legitimize the arrangement as a true investment opportunity. The greater the restrictions on transfer, the stronger the suggestion that the entity seeks to maintain the investment because of the physician-referral source.

F. HIPAA

1. Privacy Regulations

Pursuant to the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") the Department of Health and Human Services ("HHS") has promulgated extensive regulations regarding patient privacy. The HIPAA Privacy Regulations cover all health care not just government programs. While the HIPAA Privacy Regulations are not normally thought of as a part of the federal fraud and abuse laws, it is imperative that all lithotripsy providers that are required to comply with the regulations do so. The Privacy Regulations become effective April 14, 2003. Any individual or entity that provides health care items or services and submits claims electronically is covered by the HIPAA Privacy Regulations. Providers that have billing companies or coding companies that submit electronic claims on their behalf are also subject to the regulations. It should not be difficult for a lithotripsy entity to comply with the HIPAA Privacy Regulations if guided by competent professionals. The regulations are extensive and complicated. Each provider that is covered by the regulations will have to implement a compliance structure within the entity which will take planning. We strongly urge each lithotripsy provider to seek the assistance of competent health care counsel as soon as possible.

2. Electronic Standards

In addition, under HIPAA providers that conduct electronic transactions (electronic filing of health care claims to private and government payors) are required to comply with electronic standards by October 16, 2002. HHS will permit a provider to delay its compliance with the electronic standards until October 16, 2003 if the provider submits an easy to complete form prior to the October 16, 2002 deadline. The form is available on the CMS web site at http://www.cms.gov/hipaa/ under the heading HIPAA Administrative Simplification by pressing the title "Standard Model Compliance Form."

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American Lithotripsy Society
305 Second Avenue, Suite 200
Waltham, Massachusetts 02451
Telephone: 781-(895-9098
Fax: 781-895-9088
email:
als@lithotripsy.org


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