Service firms await Safe Harbor II as state and federal efforts coincide

November 6, 1991

Safe-harbor-induced structural changes in imaging joint ventureswill not be as sweeping as originally expected. But additionalrestrictions on referring-physician participation in medical partnershipshave been implemented or are imminent at the state and

Safe-harbor-induced structural changes in imaging joint ventureswill not be as sweeping as originally expected. But additionalrestrictions on referring-physician participation in medical partnershipshave been implemented or are imminent at the state and local levels.

The House Ways and Means subcommittee on health heard explosivetestimony Oct. 17 chronicling kickback abuses in the imaging servicesindustry. Witnesses unloaded damaging evidence to support thecampaign by Rep. Fortney "Pete" Stark (D-CA) to prohibitreferring physicians from owning interests in outpatient diagnosticimaging centers.

Legislative actions elsewhere have also blemished joint venturing'sappeal. Maryland, New Jersey and Connecticut have enacted stringentdisclosure laws to regulate physicians who self-refer. A prohibitionwas passed in Texas, and Florida legislators plan a strong bidto ban the practices there next year.

"There has been a bandwagon effect," said HarveyA. Yampolsky, a Washington, DC, attorney who helped draft thesafe harbor regulations during his turn with HHS Office of theInspector General.

A dozen members of Congress--an unusually large number fora fact-finding session--attended the subcommittee hearing on self-referralin October. "They all realize this is a hot issue,"Yampolsky said.

Robert Carl, president of imaging center firm Health Images,lent support to a recent Florida study that found high utilizationand profitability at joint-ventured imaging centers. Such centersmake up 93% of all freestanding diagnostic services equipped withMRI in Florida (SCAN 8/28/91).

Using data compiled by Dr. Zachery Dyckman at the Center forHealth Policies Studies in Columbia, MD, Carl testified that Florida'snonhospital imaging centers perform 118% more MRI scans than thenational average. Charges for MRI are 92% higher. Charges andutilization rates for MRI tests performed in Florida hospitals,however, are close to national averages, Carl said.

The American Academy of Neurology faulted the study for notaddressing whether the procedures were appropriate. Higher volumedoes not mean the tests were not needed, the academy said.

Carl also described abuses Health Images encounters when dealingwith self-referring physicians. Physicians threatened to shifttheir business elsewhere if they were not allowed to invest andprofit from the imaging service, according to Carl.

"One physician explicitly told company reps that he wouldneed a `little tickle' to refer his patients to a Health Imagescenter," Carl said.

In another instance, a large orthopedic group proposed sendingas many as 300 patients per month for MRI scans in exchange forvacation trips to Mexico.

In a third case, patient volume at a Health Images center fellby half because physicians were angry about their dividends. Referralsfrom the group evaporated after the company bought their shares,Carl said.

"When we had physician investment, physicians seldom expressedan interest in service quality," Carl testified. "Theywere usually more concerned with the size of the returns on theirinvestment."

Such disclosures led a subcommittee aide to conclude that thehearing had generated enough ammunition to persuade Congress toexpand the federal ban against self-referral for clinical laboratorytests to include self-referral for diagnostic imaging. A ban isunlikely, however, before Congress considers the next budget reconciliationlate next year.

The battle is shifting to state governments in the meantime.Texas adopted its own modest kickback ban in September. The law,endorsed by the Texas Medical Association, prohibits health-careproviders from accepting payments for securing patients. Arrangementsthat meet federal safe harbors and base remuneration on the sizeof investment rather than referral volume are exempted. Violationsare misdemeanors, subject to maximum fines of $200.

"There is a lot of confusion about the law. People arespreading doom and gloom, and that's not correct," said C.T. Francisco III, assistant general counsel at the medical society.

Legislation introduced in Florida last year by Rep. CharlieRoberts (D-Titusville) is being rewritten to reflect recommendationsgrowing out of the Florida health-care cost-containment boardstudy. The board submitted its findings to Gov. Lawton Chileson Oct. 24. It called for regulations prohibiting physician ownersfrom self-referring to diagnostic imaging centers, clinical laboratories,physical therapy and rehabilitation centers and radiation therapyservices.

The board asked for regulations requiring physicians who ownother types of medical services to disclose their interests topatients who are the objects of self-referral and to provide thename of an alternative service.

The Roberts bill, which stalled in the state senate last session,will be reintroduced in November, according to legislative assistantDavid Teek. "There have been editorials in virtually everynewspaper here favoring regulation or prohibition, so it's likelythat legislation will be enacted this time around," he said.

Disclosure laws elsewhere have already had a chilling effect,according to Yampolsky. The effect is particularly apparent inMaryland, where one of the nation's most stringent disclosurelaws went into effect in July. Self-referring physicians theremust obtain a signed statement from patients certifying that theyhave been informed of their doctor's investment in services towhich they were referred. The statement is filed in the patient'smedical record.

"Many of my client physicians have thrown up their handsbecause they don't want to go through the red tape of making theseadded disclosures," Yampolsky said. "Some are embarrassedto make the disclosures and have decided they would just as soonget out of the deals now, especially when they see what's comingdown the pike in a few years."

While the issue is heating up on the state level, physician-investoranxiety appears to be cooling about the implications of the federalsafe harbors. Initial concern has given way to resignation thatfew joint-ventured imaging deals can comply with the rules withoutsetting themselves up for bankruptcy, according to regulatoryexperts.

Alan E. Reider, a partner in the Washington, DC, law firm ofArent, Fox, Kintner, Plotkin & Kahn, argues that joint-venturedimaging centers face no more legal jeopardy now than they didbefore the safe harbors were announced. Full compliance may protectcenters against prosecution, but noncompliance does not necessarilymean self-referring physician owners are breaking the law.

"Perceptions have changed and pressures have increased,but the law has not changed in the past year," Reider said.

Many center operators are reassured by the huge number of joint-venturedmedical businesses that have fallen short of following the letterof the anti-kickback regulation.

They note that the HHS Office of the Inspector General, thefederal agency that enforces the Medicare fraud and abuse law,employs only about 300 inspectors to monitor thousands of potentiallyabusive self-referral arrangements.

Observers expect the OIG to initiate several showcase prosecutionsto frighten other joint ventures into compliance. Most operatorshope a good-faith effort to adhere to most of the safe harborswill suffice.

For joint venture participants who cannot stand the heat, imagingcenter entrepreneurs were waiting in the wings at a recent nationalsymposium on the economics of diagnostic imaging in Washington,DC. On hand were Bill Wilson, director of acquisition for HealthImages in Atlanta; Terrance Gill, president of Medical Venturesin Solana Beach, CA; and Robert L. Via, Gill's Atlanta-based associate.

Health Images was one of the few concerns that have more than$50 million in undepreciated net tangible assets to qualify forthe large-entity safe harbor requirement. It was the first companyto announce a buy-out of a joint-ventured center after the Julypublication of the safe harbor regulations. Carl bought TulsaMagnetic Imaging in October. Health Images paid cash amountingto five times earnings to gain a 100% interest and managementrights for the concern.

American Shared Hospital Services in San Francisco is alsoin a position to drop anchor in the large-entity safe harbor,according to vice president Richard Magary. As of June 30, thepublicly traded company held $61 million in net tangible assets.The company owns 27 MRI and about 20 CT systems, nearly all ofwhich are based in trailers for mobile or temporary siting. "We'reclearly over the $50 million threshold," Magary said.

The company has yet to make an acquisition, but it is in aposition to examine opportunities. "We've looked at someand we've had discussions," he said.

Medicare Ventures uses a different tactic. The company operatesas a loose affiliation of consultants that began in 1989 to acquireminority interests in the imaging centers they helped organize.

Gill leads the group, which includes Via, Lon Gilette, CharlesBooth and John Roberts. Medical Ventures bought less than 10%interest in most of those early deals, Gill said. He is now interestedin picking up a 60% share, so the centers will meet the structuralsafe harbor. Physicians are selling their interests at three tofive times earnings, he said.

Gill visualizes his company eventually holding interest inup to 150 centers. He estimates that 750 centers are ripe forrestructuring. Most well-managed centers already meet the 40%safe harbor limit on self-referred patient volume, he said. Manyindustry insiders challenge that point, however.

Although the OIG has dampened interest in new equipment, newjoint-ventured centers continue to germinate. Yampolsky, for example,lent legal counsel on a recent deal arranged by two hospitals,a radiology group and referring physicians. The venture was insulatedfrom OIG scrutiny by its location, a two-hour drive from the nearestMRI facility.

The hospitals and radiology group joined as general partners,sharing equally in management control over the service. Physiciansconstituted a majority of the limited partners, but nonphysicianswere given an opportunity to invest, Yampolsky noted.

"We dealt with the limited partners at arm's length. Westressed that the physicians would not be under any obligationto refer, and we created a written record to minimize risk,"he said. "The deal violates the safe harbors, but I believeit is a safe situation."