If two doctors who owned a clinic before April 1, 1993 transfer the clinic's assets to a new corporation they also own, do they keep the grandfathered 'grace period' that lets them refer patients to that clinic until July 1, 1995?

Plain-English summary

A 1993 North Carolina law restricted referrals by health care providers to entities in which the provider or a group-practice member held an investment interest. Section 2 of Chapter 482 gave a time-limited exception for interests acquired before April 1, 1993: the referral prohibition in G.S. § 90-406 would not apply to specified referrals occurring on or before July 1, 1995. The AG was asked how that exception applied after clinics' assets moved into a corporation with additional investors.

The first question involved Drs. Smith and Jones, who had owned a clinic before April 1 and transferred its assets into a new corporation in which they also held an interest. The second involved Dr. Brown, whose earlier clinic was acquired by that corporation. The AG reasoned that each original investor had retained an interest in the underlying clinic through the restructuring. Smith and Jones could continue referring patients to the clinic formerly organized as Corporation A, and Brown to the clinic formerly organized as Corporation C, through the date stated in Section 2.

The exception did not pass to the other investors or across the two clinics. Smith and Jones had not held a pre-April interest in Brown's former clinic, and Brown had not held one in theirs. The opinion said those cross-referrals after the law's July 23, 1993 effective date would violate the new law. The analysis concerned the statutory grace period and these particular ownership histories.

Currency note

The grace period discussed here ended on July 1, 1995. The opinion does not address any later repeal, amendment, or current status of G.S. § 90-406. Check current law before assessing a present referral arrangement.

Background and statutory framework

Chapter 482 of the 1993 Session Laws added Article 2B to Chapter 90. The opinion described G.S. § 90-406 as barring referrals to entities in which a provider, group practice, or group-practice member was an investor. It reported possible professional discipline and civil penalties, depending on the violation.

Section 2 made the new law effective on ratification and gave limited protection for earlier-acquired legal, beneficial, or investment interests. The opinion said the doctors' clinics were not in underserved areas covered by G.S. § 90-408's exemption. The question was whether transferring clinic assets after April 1 destroyed the original investors' grace period or gave it to others. The AG answered no to both possibilities.

Common questions

Did moving a clinic's assets into a new corporation end the original doctor's grace period?

On the facts presented, no. The AG said the original doctors had not relinquished their interests in the underlying clinics, so their referrals to those clinics retained the Section 2 protection through July 1, 1995.

Could another investor in the new corporation use that protection for both clinics?

No. The opinion tied the grace period to each investor's pre-April 1, 1993 interest in a particular clinic. It did not extend to another investor merely because the clinics came under a shared corporation.

Does this opinion say the referral prohibition was later repealed?

No. It describes the 1993 law and the grace period; it contains no later legislative history. Its conclusion should not be used to determine the current status of G.S. § 90-406.

Citations

• Chapter 482 of the 1993 NC Session Laws (adding Article 2B to Chapter 90)
• G.S. § 90-405(7) (definition of "health care provider")
• G.S. § 90-405(9) (definition of "investment interest")
• G.S. § 90-406 (prohibition on referrals to entities in which provider has investment interest)
• G.S. § 90-408 (underserved-area exemption)

Source

• Landing page: https://ncdoj.gov/opinions/article-2b-chapter-90/

Original opinion text

• 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