Some calm returns after first safe-harbor shock

August 28, 1991

Turbulence in the imaging center business may be subsiding, althoughmany doctors are nervously reconsidering existing or potentialinvestments, industry sources report. Center deals ground to a halt this month following publicationof the Department of

Turbulence in the imaging center business may be subsiding, althoughmany doctors are nervously reconsidering existing or potentialinvestments, industry sources report.

Center deals ground to a halt this month following publicationof the Department of Health and Human Services' safe harbor regulations.These rules clarify when referring-physician ownership of medicalbusinesses complies with Medicare anti-kickback legislation passedby Congress (SCAN 8/14/91).

Initial press reports, including those in this newsletter,were "alarmist," one center developer complained. Whilecenter ventures are finding it unexpectedly difficult to gainsafe-harbor protection from prosecution, there has been no changein the underlying law against referral abuse. HHS is likely toprosecute only the most flagrant violators, he said.

The safe harbors do, however, affect the fundamental risk/returnequation for medical ventures. The HHS regulations are among themost comprehensive health-care guidelines ever to come out ofWashington, another center developer said. They will provide securityto those who can qualify. Those who cannot qualify are less securethan before the rules were issued.

Few public center firms will qualify for the $50 million net-tangible-assetssafe harbor, the developer commented (see following story). Intangiblegood will constitutes a substantial portion of assets for mostcompanies, he said.

It is not clear how HHS is going to sniff out center violators.The department distributed a four-page booklet entitled "SpecialFraud Alert" two year ago, which encouraged anonymous tipson abusive centers via a toll-free hotline (SCAN 5/10/89). Tell-on-thy-neighbortactics could become a competitive factor in tight imaging markets,one executive said.

NEW CENTER DEALS are moving forward again, according to DouglasMancino, a Los Angeles-based partner in the Washington, DC, lawfirm of McDermott, Will & Emery.

The financial community's response to the rules has been mixed,Mancino said. Some banks have shrugged off the safe harbors' implications.But a major financial backer to an unnamed California imagingchain announced it will finance only centers that fully comply,he said.

Among other requirements, the safe harbors prohibit hospitalsand physicians from owning more than 40% of an imaging center'sstock. At least 60% of their business must originate from physicianswho have not invested in the center.

Physician response has been strong and dramatic. There wasnear panic at some joint-ventured imaging centers as their physicianowners puzzled over the rules, according to an Orange County,CA, source.

"Many physician investors wrongly concluded that centersthat do not comply fully with the safe harbors automatically breakthe law," Mancino said. "Merely increasing the prospectsof investigation doesn't mean that, if investigated, you're goingto have a problem."

Some practices, however, are clearly out of bounds, Mancinosaid. He recommends, for instance, dropping provisions that requirepartners to sell their shares when they are no longer in a positionto refer patients. Physicians who retire or move outside the center'sservice area fall into this category.

Mancino advises physician investors against panic selling.

"I would not make my business decisions exclusively onwhether my center meets the safe harbors on investment interests,"he said.