September 27, 1993
Senator J. K. Sherron 14th Senatorial District Room 405, Legislative Office Building Raleigh, North Carolina 27601-2808
Re: Advisory Opinion; Article 2B, Chapter 90
Dear Senator Sherron:
You have submitted the following inquiry for our opinion pursuant to G.S. 90-407(c):
- If Drs. Smith and Jones owned prior to April 1, 1993 a 100% interest in Corporation A, a clinic to which they refer patients, and transferred in September 1993 all the assets of Corporation A to Corporation B,a new corporation in which they also hold an investment interest, are they prohibited from referring patients to Corporation B for designated health care services occurring before July 1, 1995?
- If the same Corporation B acquires in October 1993 Corporation C, a clinic in which Dr. Brown held an investment interest prior to April 1, 1993, is Dr. Brown, who also holds an investment interest in Corporation B, prohibited from referring patients to the clinic for designated health care services occurring before July 1, 1995?
The General Assembly in Chapter 482 of the 1993 Session Laws added Article 2B to Chapter 90 of the North Carolina General Statutes. The purpose of the Act is to prohibit health care providers from referring patients for health care goods or services to entities in which the provider has an ownership interest.
G.S. 90-406 prohibits referrals to entities in which the health care provider or group practice or any member of the group practice is an investor. Violators are subject to disciplinary action by the applicable Board pursuant to Chapter 90 and civil penalties of up to $20,000 or $75,000 depending on the nature of the violation.
Section 2 of Chapter 482 provides as follows:
"Sec. 2. This act is effective upon ratification, and applies to referrals for designated health care services made on or after the effective date, provided that with respect to a legal, beneficial, or investment interest acquired by an investor before April 1, 1993, G.S. 90-406 shall not apply to referrals for designated health care services occurring on or before July 1, 1995." (The bill was ratified July 23, 1993.)
In the questions submitted, there is no dispute that Drs. Smith, Jones and Brown are "health care providers" as defined by G.S. 90-405(7). The questions also presume that all three have "investment interests" as defined in subsection (9) of the same statute. None of the clinics are located in "underserved areas" which are exempt from the Act pursuant to G.S. 90-408.
In Question 1, Drs. Smith and Jones had their investment interest in Corporation B prior to April 1, 1993. In Question 2, Dr. Brown also had his investment interest in Corporation C prior to April 1, 1993. The issue becomes whether the post-April 1, 1993 purchase of the corporate assets of those two clinics by Corporation A, a corporation also owned by the three doctors along with other investors, results in the denial to these providers of the "grace period" found in Section 2 of the Act.
The doctors/investors in Corporation A in essence sold the assets of the corporation to themselves as they are also stockholders of Corporation B. The doctors never relinquished their investment interest in the clinic after April 1, 1993. Similarly, Dr. Brown sold the assets of Corporation C to himself and the other investors of Corporation B. He never relinquished his legal interest in the clinic. Therefore, the investment interest predates the grace period cut off date of April 1, 1993 and Drs. Smith and Jones may continue to refer patients to the clinic formerly organized as Corporation A and Dr. Brown may continue to refer patients to the clinic formerly organized as Corporation C until July 1, 1995.
It is important to note that the grace period permitted to these stockholders of Corporation A does not transfer to each other or other stockholders of the new corporation. Even though all three hold an investment interest in both clinics through ownership of Corporation B, Drs. Smith and Jones did not have that interest in former Corporation C prior to April 1, 1993 and Dr. Brown did not have an investment interest in former Corporation A prior to April 1, 1993. Referring patients to those clinics after July 23, 1993 in this way would be in violation of the new law.
John R. McArthur Chief Counsel