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Association of American Physicians and Surgeons, Inc.
A Voice for Private Physicians Since 1943
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posted 3/24/2004

Re: Physician Ownership of Facilities

The federal government prohibits certain ownership arrangements in connection with federally funded programs such as Medicare and Medicaid. The applicable federal laws are (i) the Medicare Anti-Fraud and Abuse Statute (the AAnti-Fraud Statute@), enacted in 1972 and applied aggressively by the Office of Inspector General (OIG) AFraud Alert@ of 1989; (ii) AStark I@, effective 1992; and (iii) AStark II@, effective 1993. These laws apply to administration of the Medicare and other federally funded programs. Their common theme is that a physician may not make a referral of a government-funded patient in a way that financially benefits the physician, unless the referral qualifies for a narrow exemption. These laws have been so influential that they have inspired regulations concerning patients outside of federal programs.

In addition to the federal regulations, there are state laws restricting ownership. Both federal and state laws apply with equal force against physicians. It is important to review both in connection with any decision by a doctor to invest in a medical facility.

Anti-Fraud Statute and OIG Fraud Alert

The 1972 Anti-Fraud Statute made it illegal for medical testing facilities to provide Akickbacks@ or referral fees to doctors. The Department of Justice then expanded the scope of the statute by suing Dr. Alvin Greber for forming a corporation to perform diagnostic tests and paying the referring doctor a fee for interpreting the tests. Soon the government adopted the theory that profit distributions could induce referrals in the same way that illegal kickbacks did.

In 1989, the OIG announced that it would investigate investments in clinics by physicians in the form of capital contributions, loans, profit distribution arrangements having large returns for little investments, or otherwise high returns on investment relative to the risk. How physicians are identified for solicitation to become investors is important, particularly if they are picked for the purpose of making referrals. A federal court upheld the OIG=s broad interpretation in February of 1993 and it has been cracking down on doctor-owners ever since.

However, the OIG established Asafe harbors@ for certain joint venture arrangements, meaning that physicians who stayed within these guidelines would not be harassed. For example, a physician can refer Medicare patients to a Alarge entity@ that is part of a large corporation in which he owns shares. In an example directly relevant to many situations, there is a safe harbor for physicians who self-refer to a Asmall entity@ in which no more than 40% of the facility is owned by potentially referring physician-owners and no more than 40% of its revenue is generated by investors. But the return on investment cannot depend on referral volume, or else the exemption is lost. Investment return must be based only on the amount invested. Also, investment opportunities must be offered to non-referring investors on terms equal to that of the referring investors; the clinic cannot make a loan (or guarantee) that enables the physician to acquire his interest. Finally, the clinic cannot market goods or services to physician-investors on terms better than those for non-investors.

Investments totally less than the 40% threshold are not deemed improper. Rather, the OIG policy is not to question arrangements below 40%. Also, there are many exceptions for rural practices, group practices that own the clinic entirely, ambulatory surgery centers where the doctors= fees far exceed their return on investment, and so on. The details of the arrangement can make a big difference.

Stark I and II

Congressman Pete Stark, a longtime opponent of the practice of private medicine and private contracting, instigated legislation banning certain types of physician ownership and self-referrals. His first statute on this issue is known as AStark I@ (the Ethics in Patient Referrals Act), which became effective in January of 1992 and has been amended since. Stark I prohibits referrals by doctors of Medicare (or Medicaid) patients to a clinical laboratory owned in part by the doctor (or an immediate family member). However, this ban does not apply if the doctor personally provides or supervises the service; the lab is in a qualified Arural area@; or the lab is part of a large publicly held corporation. Clinical labs affected by this regulation must provide the government with a list of the names of its doctor-investors, and in filing Medicare reimbursement claims must identify the name and Medicare identification number of the referring physician. Violations are punished severely, including fines up to $15,000 per test and possible exclusion from Medicare for the lab, and fines up to $100,000 for any doctor who enters into an arrangement for the purpose of circumventing the statute. This is taken very seriously indeed.

But this law, Stark I, only applies to referrals of Medicare and Medicaid patients to clinical labs. It is limited in scope, but harsh in application. Its severity set the tone for dealing with physician-ownership issues.

Once the door was opened to regulation in this area, it became inevitable that the restrictions would be expanded beyond clinical labs. Congressman Stark sponsored, and President Clinton signed, the Comprehensive Physician Ownership and Referral Act of 1993 (popularly known as AStark II@). It flatly prohibits self-referrals of Medicare patients for broad categories known as Adesignated health services.@ These go far beyond labs and include physical, radiation, occupational therapy, radiology and other diagnostic services, durable medical equipment, prosthetics, orthotics, and prosthetic devices, parenteral and enteral nutrients, supplies and equipment, outpatient prescription drugs, home health services, and even inpatient and outpatient hospital services. It also bans indirect ownership schemes that were permitted under Stark I. A physician has to satisfy an exception in order to hold an investment in connection with referrals. Many physicians felt compelled to divest their holdings as a result of Stark II.

Patients outside of federal programs are not covered by the foregoing federal laws, nor are their physicians. Instead, state law governs, as discussed below.

State Restrictions

South Carolina has regulations in this field of self-referrals and physician-ownership that are more stringent than those in most states. Like Florida, South Carolina extends the federal prohibitions against self-referral ownership arrangements to all patients. In 1993, South Carolina enacted the AProvider Self-Referral Act.@ S.C. Code Ann. § 44-113-10 through -80. It does have the following exception: it permits the potential for self-referral when less than 50% of the investors in a clinic are in a position to refer to the clinic. This exception is similar to the OIG=s safe harbor, but South Carolina uses 50% rather than 40% as the threshold.

There is another important difference between the 50% rule of South Carolina and the 40% federal rule. The OIG requires that no more than 40% of the revenues of a clinic come from referrals by doctor-investors. However, South Carolina does not limit self-referrals in this manner. Instead, South Carolina creates a safe harbor based solely on ownership status, not the level of referrals. This is the operative statutory provision:

A(A) Except as provided in this section and other provisions of this chapter, a health care provider may not refer a patient for the provision of designated health services to an entity in which the health care provider is an investor or has an investment interest. However, this prohibition does not apply to:(1) an investment interest where the health care professional directly provides the health care services within the entity or will be personally involved in the provision, supervision, or direction of care to the referred patient.... or(3) with respect to an entity other than a publicly-held corporation described in subsection (A)(2) and a referring provider's investment interest in the entity, each of the following requirements are met:(a) no more than fifty percent of the value of the investment interests are held by investors who are in a position to make referrals to the entity;(b) the terms under which an investment interest is offered to an investor who is in a position to make referrals to the entity are no different from the terms offered to investors who are not in a position to make referrals;(c) the terms under which an investment interest is offered to an investor who is in a position to make referrals to the entity are not related to the previous or expected volume of referrals from that investor to the entity;(d) there is no requirement that an investor make referrals or be in a position to make referrals to the entity as a condition for becoming or remaining an investor....(C) No claim for payment may be presented by an entity to an individual, third party payor, or other entity for a service furnished pursuant to a referral prohibited under this section.(D) If an entity collects any amount that was billed in violation of this section, the entity shall refund the amount on a timely basis to the payor or individual, whichever is applicable.(E) A health care provider who makes a referral prohibited by this section or who fails to disclose information required by Section 44-113-40(A) or presents or causes to be presented a bill or a claim for services that the health care provider knows or should know is for a service for which payment may not be made under subsection (C) or for which a refund has not been made under subsection (D) is subject to a civil penalty of not more than five thousand dollars for each such service to be imposed and collected by the appropriate board.(F) A health care provider or other entity that enters into an arrangement or scheme which the health care provider or entity knows or should know has a principal purpose of assuring referrals by the health care provider to a particular entity which, if the health care provider directly made referrals to the entity would be in violation of this section, is subject to a civil penalty of not more than twenty-five thousand dollars for each circumvention arrangement or scheme to be imposed and collected by the appropriate board.(G) A violation of this section by a health care provider constitutes grounds for disciplinary action to be taken by the applicable board. A hospital licensed under Title 44, Chapter 7 found in violation of this section is subject to the regulations promulgated by the department....(I) Each board, and in the case of hospitals, the department, shall encourage the use by licensees of an advisory opinion procedure to determine the applicability of this section or any regulation promulgated pursuant to this section as it applies solely to the licensee.

S.C. Code Ann. § 44-113-30 (emphasis added). When referrals are made, there must be adequate disclosures to the patients. Id. § 44-113-40.


The bottom line is that physicians in South Carolina qualify for the Asafe harbor@ exemption from doctor-ownership prohibitions when the referring doctors invest less than 50% in the facility. This restriction applies to mandate that Aa health care provider may not refer a patient for the provision of designated health services to an entity in which the health care provider is an investor or has an investment interest.@ S.C. Code Ann. § 44-113-30(A). In the absence of the possibility of referrals, this particular rule would not apply.