Howard B. Kessler, MD and Michael Burke, JD

Countless factors are in play within the medical delivery system that will reshape the landscape of medical imaging. Declining reimbursement and intense competition from within the radiology community as well as other specialties have the potential to squeeze complacent radiologists out of competitive and lucrative aspects of the imaging market. The dearth of radiologists poses an insidious, poorly understood threat in the form of  entrepreneurs and, more recently, physicians in other medical specialties interested in filling the supply gap. And why not? Our clinical colleagues, like ourselves, face declining reimbursement and increasing practice expenses, particularly related to medical malpractice. Neurologists, neurosurgeons, and orthopedic surgeons in addition to multispecialty group practices are all considering their options and internally filling imaging needs.

To counter this trend and reestablish their position as the premier suppliers of imaging, radiologists are beginning to look at novel means to retain and increase their market share. Traditional models that have been used with success in the past may not be the way of the future. For example, the independent, single modality MRI is threatened by: saturation of urban, metropolitan, and semirural markets; closed panels for providers for single and multimodality centers; onerous restrictive covenants from hospitals and health systems; and the inability to adequately staff the professional and technical components of a facility.

On the other hand, the following economic factors support the establishment of new ventures:

• Low cost financing and new alternatives to conventional equipment acquisition

• Aggressive marketing and financing by vendors to increase or maintain market share

• Expanded platforms for conventional high fields and open systems

• Telecommunications capabilities enabling transfer of studies from primary imaging sites to remote reading facilities

• Rapid rise in software systems enabling interpreting entities to read from multiple sites with the advent of floating software licenses and access to web-enabled systems for transmission and archiving of images.

The current climate favors a shift from conventional imaging opportunities back to variants of the joint venture model that meet applicable legal requirements. This approach will differ from those of the late  1980s, which ultimately conflicted with Stark I and subsequently led to divestiture and a less reliable referral base. Those physician partnerships were subsequently eclipsed by relationships with entrepreneurs and larger publicly traded facilities. The next wave of acquisition and ownership, however, may be represented by ventures between physicians, structured to avoid the regulatory concerns. 

Before embarking on such a venture, it is imperative to have not only a basic understanding of supply and demand, but also a thorough understanding of federal and state laws governing these joint ownership scenarios. Several initiatives are underway in Washington, DC, including new legislation from Rep Pete Stark (D-Calif) and a Special Advisory for the Office of Inspector General (OIG) of the Department of Health and Human Services (see box, page 34), to further limit and define the issue of self-referral, and these initiatives could result in an altered legal environment that is even more restrictive than the current one.

supply and demand

In order to gain an understanding of supply and demand in a given market, the following questions should be addressed.

Who are the competitors? Knowledge about the competition is critical if one is to make informed decisions about new business opportunities. Equipment type, report turnaround, and the skill of interpreting physicians can go a long way to predicting the need for and ultimate success of a new imaging venture.

What is the backlog at my facility? Specifically, what is the waiting time to schedule elective procedures in my catchment area? One rule of thumb in acting to expand services by either hours of operation or addition of new sites is a requisite waiting time for an elective procedure of 4 working days or longer.

Is my backlog consistent with my competitors? If so, is it reasonable to assume that there is a need for expansion in the area in which service is provided? If there are disparate backlogs, they may be attributed to perceived difference in services provided.

Is the competition hospital-based or freestanding? As a general rule, hospitals tend to be less flexible, lacking entrepreneurial spirit and financial wherewithal, as well as comfortable with the extra time it takes to obtain an appointment for an elective procedure. This complacency has enabled freestanding facilities to flourish next to established inpatient enterprises. Physicians and patients avoid using a hospital-based facility when there are more comfortable and convenient facilities.

Does my facility or that of my competitors operate under constraints such as hours of operation?

Hours of operation limited to weekdays and normal business hours are among the most important factors to consider. With the clear knowledge that supply will not keep pace with market demand, success can be improved with flexible hours of operation during business hours to accommodate necessary cases. Established facilities can lose market share quickly because of off-hours availability by new competition. Expanded hours of operation lower unit costs and can dramatically improve revenue with a lower per procedure increase in expenses.

Are restrictive covenants preventing the business from being successful? The question of restrictive covenants can obviously work against an entity contemplating an outpatient-imaging venture. Consider the following:

1. When negotiating a contract with a hospital or entity requiring a restrictive covenant, consider limiting the distance and time that the restrictive covenant is in place. Mileage will depend on the location of the enterprise. You should attempt to keep time restrictions to no more than 12 months, if possible. You should also attempt to limit the situations in which the restrictive covenant will apply if the agreement terminates.

2. Insist that the restrictive covenant be bilateral, binding a group with a restrictive covenant to a hospital bound by the same restriction. This will keep outside interests from approaching your hospital partner if other groups attempt to come into the area with the intention of collaborating with the hospital administration.

Comfort level with risk

Practices frequently are held back by individual and collective inertia. This applies to embarking on new ventures, changing the direction of the practice, and assumption of debt. Older members tend to be more comfortable with the existing direction of their practice and more risk averse. Younger members tend to be more interested in risk, although in general there is a misunderstanding about the nature of risk. (See Part II of this article in the August issue.) Understanding risk and the implications of individual and corporate risk is key to moving forward. Moving from one model to another of greater risk and reward requires an understanding of costs, revenue, and budgets, and support personnel to assist in legal, accounting, and administrative activities

Radiologists among their clinical counterparts have a better than average understanding of the business aspects of the practice of medicine. However, without billing and coding expertise, any venture is challenged from the outset. The market has seen a dramatic change in the manner in which this activity has been performed. Practices frequently did their own billing 15 years ago. Others relied on small- and medium-sized companies, either local or regional, for billing expertise. Many of these companies have been acquired or consolidated until the larger entities divested the billing component of their corporate structure or the companies themselves folded. Today's billing companies have expanded into credentialing and compliance.

LEGAL CONSIDERATIONS

In evaluating whether to embark on a venture opportunity, it is critical to understand the federal and state legal considerations that go along with such a decision. These issues include compliance with federal and state fraud and abuse statutes and regulations, the federal Stark II legislation and similar state statutes, federal and state environmental requirements, and other federal and state regulatory and licensure issues that may be involved in such a decision. This portion of the article will focus on the federal fraud and abuse and Stark II issues that may arise in analyzing such a venture. This does not mean that the other issues are not as important, but because state laws vary widely as to their substance, it is necessary to deal with those issues on a case-by-case basis.

The federal Stark II legislation provides that it is unlawful for a physician to refer patients for the furnishing of "designated health services," which are reimbursable by Medicare or Medicaid, to an entity with which the physician has a financial relationship, unless an exception applies. Radiology services are included in the definition of designated health services. The Centers for Medicare & Medicaid Services (CMS) publishes a list that is updated yearly of the radiology services it considers to be "designated health services." This is an extensive list, with most of the exclusions coming within the area of interventional radiology, where CMS believes that the radiology service is incidental to the main procedure. CMS has recently indicated that further broadening of the Stark II definition of radiology services will be forthcoming, but the specifics are not known at this time.

The Stark II restriction applies to any "financial relationship" that a physician has with an entity to which it refers. As such, it applies to any direct or indirect ownership interests or compensation arrangements that a physician has with an entity. Therefore, if a physician refers Medicare or Medicaid patients to an entity for the performance of designated health services and the physician has a financial interest in that entity, these referrals are prohibited unless one of the exceptions set forth in Stark II is met.

There are exceptions that protect compensation arrangements between a physician and an entity as well as ownership arrangements between a physician and an entity. There also are exceptions that protect both ownership and compensation arrangements between a physician and an entity. Each requirement of a Stark II exception must be met, and if more than one Stark II exception applies to an arrangement between physicians and entities to which they refer, each such exception must be met.

The Stark II legislation is a blanket prohibition, and unless one of the exceptions to Stark II is satisfied, no referrals may be made by a physician to an entity with which he or she has a financial relationship for the performance of designated health services. This is unlike the federal Anti-Kickback Statute (to be discussed below), whereby "remuneration" may be paid by or to a referring physician to another physician or entity, so long as the payment is not intended to induce the referral of any federal health care program business.

If a referral for a designated health service is made in violation of Stark II, no payment is to be made by Medicare for such service. In addition, any person who presents or causes to be presented a claim for a service that violates Stark II shall be subject to a civil monetary penalty for not more than $15,000 for each service. False claims issues also may arise as a result of a violation of the Stark II prohibition.

Exceptions to the rule

Depending on the type of venture being pursued, different exceptions to the Stark II legislation may have to be analyzed. For example, if a radiologist is going to own an interest in a venture with referring physicians, there are limited exceptions that apply to such a situation. One of the exceptions that may be available would be the "rural entity" exception; however, this is limited to areas outside of a Metropolitan Statistical Area as defined by the Office of Management and Budget. There are also qualifications on the amount of services that must be provided to residents of the rural area. The other generally available exception that would apply to an ownership interest in a venture is the in-office ancillary services exception. However, this exception would require any entity that consists of two or more physician-owners to be a Stark II "group practice." Without going into the specifics of this exception, unless the practice of the radiologists is merged into the practice of the other physician-investors, this exception most likely will not be able to be satisfied. However, if a physician group seeks to provide radiology services through its own group practice and enter into contractual arrangements with radiologists in connection therewith, if structured carefully, the physicians of the group could possibly satisfy the group practice definition (a key to satisfying the in-office ancillary services exception) while the contractual arrangements between the specialty physicians and radiologists could possibly satisfy some of the financial relationship exceptions to be discussed below.

Another possibility is for specialty physicians and radiologists to form a joint venture to own the equipment and lease the space in which the equipment will be located. This equipment joint venture could then sublease the space out to the specialty physicians and/or the radiologists. This is a type of "time-sharing" arrangement that increasingly has seen use lately. However, any time-share venture must be structured carefully to avoid concerns related to indirect ownership arrangements between the specialty physicians and the radiologists, the ability of the specialty physicians to satisfy the group practice definition of the Stark II legislation, and the contractual arrangements between the parties meeting applicable financial exceptions. Medicare reimbursement rules and Anti-Kickback Statute concerns then also must be considered.

The financial relationship exceptions to Stark II that potentially may be used to protect time-share arrangements or other arrangements between referring physicians and radiologists include the employment exception, personal service arrangements exception (which would include management arrangements and possibly interpretation agreements), space and equipment rental exceptions, and the fair market value exception. While it is beyond the scope of this article to discuss each of these exceptions in depth, if carefully planned, it may be possible to structure a venture that satisfies all applicable Stark II exceptions and meets the desired needs of the contracting parties. However, please note that one must be sure to analyze any state statutes and regulations that are similar to Stark II, which generally expand the prohibitions contained in the Stark II legislation beyond Medicare and Medicaid services and may limit the exceptions that are available under Stark II.

ANTI-KICKBACK STATUTE

Notwithstanding a venture's ability to comply with the Stark II legislation, one must also analyze the impact of the federal Anti-Kickback Statute in connection with any possible venture arrangement. This is especially true in light of the Special Advisory Bulletin on Contractual Joint Ventures issued in April 2003 by the OIG.(Please see box on page 34).

In general, the federal Anti-Kickback Statute provides that it is unlawful to knowingly and willfully offer or pay or solicit or receive any "remuneration" (including a kickback, bribe, or rebate), directly or indirectly, in cash or in kind, in return for the referral, solicitation, or generation of federal health care program business. This is a criminal statute, a violation of which constitutes a felony, punishable by fines of up to $25,000 and/or jail terms of up to 5 years for each violation. In addition, a violation of the federal Anti-Kickback Statute also subjects an individual or entity to a civil monetary penalty of up to $50,000 per act.

As is the case with the Stark II legislation, the OIG has promulgated exceptions to the Anti-Kickback Statute that protect certain types of activities if the requirements contained in each exception are completely satisfied. These exceptions are known as "safe harbor regulations." In order to satisfy a safe harbor regulation, each requirement of an applicable safe harbor must be met. In addition, if more than one safe harbor regulation applies to a given arrangement, each safe harbor that applies must be completely satisfied to arguably have assurance of compliance with the Anti-Kickback Statute.

Failure to comply with one of the safe harbors does not necessarily mean that an individual or entity has violated the Anti-Kickback Statute. This is different than the Stark II legislation, which requires an exception to be met. If an arrangement is not protected by the safe harbor regulations, the decision as to whether the Anti-Kickback Statute has been violated will be made on a case-by-case basis depending on the factual circumstances involved. The OIG would have to prove that a party "knowingly and willfully" offered to pay remuneration in exchange for the referral of federal health care program-related business in order to prove a violation of a criminal Anti-Kickback Statute. There is considerable debate among the courts as to what constitutes "knowingly and willfully" in the context of this statute, and the United States Supreme Court has yet to weigh in directly on this issue. In any event, the OIG often uses the ability to pursue the $50,000 per claim civil monetary penalty as leverage in investigating alleged anti-kickback violations.

As is the case with the exceptions of the Stark II legislation, the safe harbor regulations apply to both ownership interests and financial arrangements. The problem is, however, that the exceptions to the Stark II legislation and the safe harbor regulations are not exactly the same, and you may comply with a Stark II exception but not meet a safe harbor regulation.

Safe Harbors

The basic exceptions that exist for ownership arrangements under the safe harbor regulations are the "small entity" in underserved areas, group practice, and the ambulatory surgery center. Without going into the details of each of these safe harbors, it is difficult to satisfy the small entity safe harbor because (among other things) it requires that: no more than 40% of the investment interests of an entity may be held by owners who are in a position to make or influence referrals to the entity, furnish items or services to the entity, or otherwise generate business for the entity; and no more than 40% of the entity's gross revenues can come from referrals or business generated from investors. The safe harbor for entities located in an "underserved area" is difficult to satisfy because it is not the same as the rural entity Stark II exception, and applies only to entities located in Medically Underserved Areas as defined by the Department of Health and Human Services. The group practice safe harbor suffers from the same drawbacks as the in-office ancillary services exception to the Stark II legislation, because the safe harbor incorporates the definition of a "group practice" from Stark and thereby limits the ability of the groups to meet this safe harbor without merging their outside practices together.

As such, any entity that does not meet a safe harbor regulation will require a case-by-case analysis to analyze the ownership interests possessed in the entity by investors. Remember, this does not mean that the venture is illegal, but rather that an analysis of the Anti-Kickback Statute to the terms of the arrangement must be undertaken. In addition, potential parties to such an arrangement could seek an advisory opinion from the OIG as to the legality of such an arrangement, although such requests can be costly (in terms of both attorney's fees and fees of the OIG) and time-consuming.

If an ownership structure is not pursued, contractual arrangements between the parties could also satisfy safe harbors to the Anti-Kickback Statute. These safe harbors include employment, personal services and management contracts, and rental of office space and equipment. Remember that if more than one financial relationship exists between a physician group and radiologists (such as an independent contractor interpretation agreement and a rental of space or office equipment), a safe harbor for each of these arrangements would have to be satisfied in order to fully protect the arrangement. The safe harbor regulation for personal service arrangements and management contracts is harder to satisfy than its Stark II counterpart, and as such, it may be difficult to fully satisfy a safe harbor in this regard, and an analysis of the implications of the arrangement under the Anti-Kickback Statute may have to be taken.

ADDITIONAL THOUGHTS

As noted above, compliance with the federal Stark II legislation and Anti-Kickback Statute is not the end of the story. Many states have specific statutes or regulations that imitate either the federal Anti-Kickback Statute or Stark II legislation. Most of these statutes expand the scope of the prohibitions beyond Medicare and federal health care program services to all services rendered by physicians. In addition, these state restrictions either may be more expansive or have fewer exceptions than the federal rules. Careful analysis of these state rules must be undertaken prior to entering into any potential venture opportunity.

The key point to be made is that radiologists cannot turn a blind eye to the fraud and abuse laws because they do not typically "refer" services to an entity. The connection of the radiologists to an entity or in an arrangement with physicians who do refer brings the federal Anti-Kickback Statute, Stark II legislation, and state laws into play. An analysis of these rules and their applicability to a given arrangement must be undertaken. In addition, the fallout from and potential chilling effect of the recent Special Advisory Bulletin issued by the OIG on contractual joint ventures will have to be further reviewed to see how this affects the industry.

CONCLUSION

We have attempted in this article to focus on some of the practical and legal considerations that must be considered when a radiologist analyzes a new opportunity. These opportunities may be presented to radiologists by others or developed by radiologists in attempting to maintain their business. It is critical that radiologists use their  experience and knowledge of the relevant market, as well as seeking advice from  financial and legal advisors, in considering venture opportunities that arise. n

NOTE: Part II in this series, "The Next New Models: Financial Considerations," will appear in the August issue.

Howard B. Kessler, MD, is chairman, department of radiology, Holy Redeemer Hospital and Medical Center, Philadelphia, president, Pennsylvania Radiology Group, and a member of the Decisions in Imaging Economics editorial advisory board. Michael Burke, JD, is an attorney with Kalogredis, Sansweet, Dearden and Burke, Ltd, a health care law firm located in Wayne, Pa; mburke@ksdbhealthlaw.com.