Florida rate cap tossed; divestitures to follow?

July 29, 1992

A federal court judge threw out Florida's controversial pricecap on medical procedures this month, setting the stage for improvedimaging center valuations and a physician-investor exodus fromjoint-ventured centers. U.S. District Court Judge William

A federal court judge threw out Florida's controversial pricecap on medical procedures this month, setting the stage for improvedimaging center valuations and a physician-investor exodus fromjoint-ventured centers.

U.S. District Court Judge William Stafford ruled July 13 thatthe rate cap was unconstitutional because exemptions to the capdid not apply equally to all health-care providers. The cap, peggedat 115% of Medicare rates, was enacted earlier this year as partof legislation banning physician referral to centers in whichthere is an investment interest (SCAN 7/15/92).

The self-referral law applies to facilities in four areas lawmakersfound to be sources of health-care overutilization: imaging centers,physical therapy facilities, clinical labs and radiation therapycenters. The cap contained a number of exemptions, however, suchas for hospitals and group practices, that put it on shaky legalground.

"(The judge) said that no evidence had been presentedthat supported the contention that the Legislature had any rationalbasis in mind when it created those exemptions," said DonLester, an attorney for the plaintiffs, Panama City Medical Diagnosticsof Panama City, FL, and two limited-partner physicians, Drs. FrankSyfrett and Steve Taylor.

Observers of the legislation had been predicting a court battle.Indeed, even legislative sponsors of the self-referral law saidthey weren't surprised that the rate-cap section was overturned.

Because it was added to the self-referral legislation as partof a last-minute compromise on the length of the joint-venturedivestiture period, the cap didn't receive the attention neededto withstand a legal challenge, according to David Teek, an aideto Rep. Charles Roberts (D-Titusville).

"We all suspected that there was a fair chance the ratecap wouldn't stand up in court," Teek said. "It wasdrafted in very brief fashion and didn't have any committee scrutiny.If that rate cap had been subjected to some scrutiny I don't thinkit would have been passed."

HAVING WON ONE victory, Lester said his clients are debating whetherto continue their attack on the self-referral law. Although thelawsuit focused on the rate cap, the plaintiffs could seek tooverturn other sections of the law as well.

"The next step for our clients is determining just howstrongly they feel about the rest of the statute," Lestersaid. "(They are) deciding whether they want to continuewith the challenge to the remainder of the statute or whetherthey'll be content to accept this victory."

If Panama City Medical Diagnostics decides to forgo its lawsuit,plenty of other challengers are waiting in the wings. An attorneyfor the state of Florida said he knew of at least three othercases that have been filed against the self-referral law on thestate-court level.

Other sections of the law relating to divestiture are stillin effect. No new physician joint ventures are allowed in thestate, and existing joint ventures must be divested by October1995.

Ironically, many industry observers believe that the demiseof the rate cap will accomplish exactly what the Florida Legislatureset out to do in the first place: spur physician divestiture ofjoint ventures.

"I expect you'll see a lot of divestiture occurring quickly,"said Teek, explaining that the cap made it harder for physiciansto find buyers for their centers because price regulation reducedthe value of the investments.

"We predict that transactions will increase significantlyover the next few weeks and months," said Nathan Kaufmanof the Kaufman Group, a San Diego-based management consultingfirm. "I believe we'll see a lot of activity as to the rollingup of partnerships and purchasing by outside entities."