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NEW JERSEY COURT RULES THAT PHYSICIAN REFERRALS TO

AMBULATORY SURGICAL CENTER IN WHICH THEY OWN AN
INTEREST VIOLATES CODEY ACT
On November 20, 2007, a New Jersey court ruled that the Codey Act and that knowingly submitting insurance claims
referrals of a patient to an ambulatory surgical center (“ASC”) for such acts constituted insurance fraud under the IFPA. The
in which the referring physician owns an interest—an physicians and the Center refuted the Health Net arguments
everyday occurrence throughout the State—violates the by relying on (a) a 1997 advisory opinion (the “1997 BME
New Jersey anti-self-referral law, commonly known as the Ruling”) of the New Jersey Board of Medical Examiners (the
Codey Act. N.J.S.A. 45:9-22.5. “BME”) holding that an ASC was really an “extension of the
physician’s medical office” and therefore the arrangement
Impact: This ruling has potentially devastating
did not violate Codey, and (b) the prevalence of these
consequences for every ambulatory surgical center in
arrangements throughout New Jersey and the BME never
New Jersey. From this point forward, any physician who
taking any enforcement action against any of them.
refers a patient to an ASC in which he owns an interest
risks violating the Codey Act and the New Jersey Insurance
Fraud Prevention Act. (“IFPA”), N.J.S.A. 17:33A-1 et. seq., nsurance carriers, relying on this decision,
which carries a variety of penalties including triple damages. may well refuse to pay claims of ASCs for all
Insurance carriers, relying on this decision, may well refuse to self-referred procedures, delivering a potentially
pay claims of ASCs for all self-referred procedures, delivering crippling economic blow.
a potentially crippling economic blow.
Background: The case, Joseph Garcia, M.D., et. al. v.
The Decision: The Court held that the referral to the
Health Net of New Jersey, Inc. v. Wayne Surgical Center,
Center of the physician-owners’ patients was a violation of
LLC, arose as a result of the physician-owners of Wayne
the Codey Act, and that neither the 1997 BME Ruling nor
Surgical Center (the “Center”) being in-network with Health
the lack of enforcement action changed that.1 However,
Net but referring their patients to the Center, which was
the Court also held that neither the physicians nor the
out-of-network, thereby resulting in substantially higher
Center had committed fraud because they had no reason
reimbursement by Health Net to the Center. To make
to know that their conduct constituted a Codey violation.
matters worse, as a matter of policy, the Center routinely
Moreover, the Court ruled that although the patients were
did not collect out-of-network co-insurance payments from
obligated under their agreement with Health Net to pay the
the patients referred by the physician-owners, thereby
co-insurance, the Center was not legally obligated to collect
eliminating any financial disincentive for the patients to go
the co-insurance.
to an out-of-network facility. Health Net claimed that the
physicians and the Center committed insurance fraud and It should be noted that the Court went out of its way to
sought over $15 million in damages. state that while the Codey Act was designed to prevent
unnecessary health services and having medical judgment
Health Net argued that the referral by the physician-owners
impacted by financial incentives, there was not a shred of
of their patients to the Center was a direct violation of the
 (continued)
evidence in the case to suggest that any surgery performed
at the Center was unnecessary or that any of the physician-
owners’ medical judgment was impacted by his or her interest
in the Center. The Court went on to say “that important
considerations of efficiency and convenience are served
by having appropriate surgical candidates undergo their
necessary procedures in a Center owned in part by the
patient’s physician, as opposed to having the exact same
necessary procedure performed in a hospital. And the very
ubiquitousness of physician-owned ambulatory surgical
centers, receiving referrals from physician investors, is proof
positive that this mechanism for delivering health care to the
public is serving a need.”
Notwithstanding, although critical of the Codey Act, the
Court noted that it “can only deal with the law as it is”
and the law “plainly and unambiguously bars physician
self-referrals to ambulatory surgical centers in which the
physician owns a significant beneficial interest, and so the
Court concludes that the arrangement violates the strictures
of the Codey Act. That violation is not undone by the fact
that there is no evidence that the particular doctors in this
case have let their medical judgment be clouded by their
financial stake in the Center.”
In essence, the judge was stating that he was constrained to
follow the law and that it is up to the legislature to change it.
The Implications: With the release of this opinion, all
physician-owners of ASCs in New Jersey arguably have been
put on notice that referring their patients to their ASCs is a
Codey Act violation and all such ASCs may be committing
insurance fraud by submitting insurance claims for facility
fees associated with procedures performed on patients
referred by physician-owners. Hence, it would appear
from this opinion that pending some legislative or judicial
solution, all physician-owned ASCs in New Jersey have been
placed in an impossible position that threatens their very
existence. Given the force of this opinion, ASCs and their
physician-owners continue “business as usual” at their peril.
What Next? As of this Client Alert, motions have been filed
seeking to have the Court reconsider its opinion. Failing
that, it is likely that the case will be appealed and that a
stay of the decision will be sought pending the appeal. The
better avenue for relief, however, rests with State legislature
amending the Codey Act to permit the self-referral to
physician-owned ASCs. In all events, physician-owners
of ASCs should be contacting their legislators urging
emergency action to address this situation.
Should you have questions concerning the Court’s ruling, its
implications, or simply wish to discuss the matter, please feel
free to call any of the members of Flaster/Greenberg’s Health
Care Practice Group.
1
While the Court distinguished the facts in the 1997 Ruling from the
Health Net case because the ASC in the 1997 Ruling was jointly owned
by a hospital, based on the Court’s analysis, it seems likely that the
holding would not have changed had a hospital been a joint owner of
Wayne Surgical Center.
This report is for general use and information, and the content should
not be interpreted as rendering legal advice on any matter. Specific
situations may raise additional or different issues and such information
should be coordinated with professional legal advice.

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