Safe harbor restrictions create unease at centers

November 20, 1991

Operators of joint-ventured diagnostic imaging centers have puttheir fingers to the wind and decided that the way their businessesare organized sets them up for prosecution under Medicare's stringentanti-kickback law. Although federal efforts to combat

Operators of joint-ventured diagnostic imaging centers have puttheir fingers to the wind and decided that the way their businessesare organized sets them up for prosecution under Medicare's stringentanti-kickback law.

Although federal efforts to combat physician self-referralabuses have made the operators nervous, most center managers believethey are not required to alter their investment structure or theirphysician-referral pattern to comply with the law (see charts).

A mail survey of 1200 imaging centers conducted by SCAN foundthat 30% of the business managers at joint-ventured services believetheir centers are vulnerable to prosecution if they do not complywith the safe harbors. Only 5% believe it is very unlikely theywill be prosecuted if they do not comply with safe harbors.

Managers at three of four joint-ventured operations said thefederal government is very likely or somewhat likely to prosecutemedical businesses that do not comply.

Among all respondents, most believe no action is needed tobring their centers into compliance. About 56% said no changesare required. About 23% reported some changes will be required.Many changes are called for at 8% of the centers, while another8% said compliance will be impossible for them.

This pattern was repeated when all the managers were askedwhether their investment structures will have to be altered. About54% said their current ownership configuration would pass safeharbor muster.

The percentages are reversed for joint-ventured imaging centers.A majority--about 54%--of the managers who operate only joint-venturedimaging centers reported that their ownership arrangement willhave to be changed to comply with the safe harbors.

At the same time, the managers appear confident their operationswill pass the Office of the Inspector General's 40/60 tests forreferral volume. The safe harbors require that no more than 40%of patient volume originates from physicians who have investedin the service.

Only 17% of the respondents said they will have to alter theircenter's patient referral patterns to comply with safe harborrequirements.

THE SCAN SURVEY WAS CONDUCTED during the two months followingthe July 31 publication of safe harbors guiding Medicare anti-kickbacklaw compliance. Results were compiled from 157 completed questionnairescovering a variety of business arrangements that support freestandingradiological services.

SCAN received responses from 100 joint-ventured imaging centersrepresenting 14 variations of ownership. Joint ventures betweenhospitals and physicians constitute the most prevalent configurationamong the responding centers. Twenty-eight centers based on thisformula returned completed questionnaires. Twenty-four joint venturesbetween radiologists and doctors are included in the mix.

The results included responses from 57 non-joint-ventured centers.A majority of these businesses are owned by radiology groups,and 10 are owned by hospitals.

Most centers responding to the survey are well-established.Nearly 88% opened before 1988. Only one center was organized inthe past 18 months.

This pattern could be responsible for underestimation of theamount of self-referral reported in the survey. Newer centersrely more on their physician owners for patient volume than establishedcenters that have had time to market their services to the community,according to many consultants.

Freestanding centers predominate in the survey sample. Therewere 128 freestanding centers among the respondents. Fifteen servicesare attached to a hospital or situated on a hospital campus. Sevenservices are mobile.

Of the 157 completed surveys, 107 are centers equipped withMRI. Eighty services provide mammography. Another 80 have ultrasound.Sixty-four are equipped with CT, and 36 have nuclear medicine.

Referring physicians do not have a dominant presence in theboard rooms of most of the centers. They control a minority shareof interests at 74% of the centers. They hold more than three-quartersof the ownership interests at only 10% of the facilities.

This finding runs counter to results from more comprehensivestudies.

A recent survey of joint-ventured imaging centers found thatall but 11 of the 160 diagnostic imaging centers in Florida in1989 were at least partially owned by physicians. Nearly two-thirdsof the facilities indicated that all their health-care-providerowners were physicians. Only one freestanding center providingMRI or CT services in Florida two years ago was not owned by physicians.Only one in 10 of these physician owners was a radiologist.

The quality of the responses showed that many imaging centeroperators have done their homework on the safe harbor requirements.While most said they already comply with the safe harbors, thosethat don't described varied strategies they are using to fallinto line.

Seventeen respondents, who have to restructure, plan to havethe joint-venture general partner buy out the referring-physicianshares. Eleven managers suggested increasing the number of diagnosticmodalities to diversify services.

Another 11 respondents said they will make no changes to thecomposition of their centers' ownership, while nine respondentsdisclosed that they will seek out companies that qualify for thelarge-entity safe harbor to buy at least 60% of the center's ownershipshares. The issue was still in attorneys' hands at nine facilities.

Although no managers said their centers will restrict referralsfrom self-referring physician investors, one respondent said hiscenter persuaded physician investors who rarely self-refer tosign statements guaranteeing that they will never refer patientsto the service. This measure ensures the center falls below theregulation's 40% physician-ownership ceiling.

About 17% of the center managers said they will change theirreferral mix to comply with the safe harbor 40/60 volume requirement.Respondents are planning to adopt other tactics that include droppingMedicare and Medicaid, marketing to noninvestor physicians, resellingsome of the physicians' stock to radiologists or nearby hospitalsand selling unissued stock to the general public.

One respondent who reported being out of compliance said hiscenter management had assumed a wait-and-see attitude. He wonderedwhether the OIG's thunder on alleged self-referral abuses actuallywill translate into more than token enforcement. "I can'tbelieve the OIG's intent is what it appears to be," he said.

Responses to questions pertaining to buy-out agreements indicatethat the joint-venture general partner may be required to purchasephysician-investor shares in some cases. About 20% of the respondentssaid their bylaws require the general partner to buy out the limitedpartners under certain circumstances. When asked if the safe harborstriggered that buy-out mechanism at their centers, one in fiveof those managers said they did.