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

In 1993, the NC General Assembly enacted Chapter 482 of the Session Laws, adding Article 2B to Chapter 90 of the General Statutes. The new article prohibited health care providers from referring patients for designated health care services to entities in which the provider or any member of the provider's group practice held an investment interest. Violators faced disciplinary action by their professional board and civil penalties of up to $20,000 or $75,000 depending on the violation.

To soften the immediate impact on doctors who already held clinic ownership, the legislature wrote a grace period into Section 2 of Chapter 482: for investment interests acquired before April 1, 1993, G.S. § 90-406 did not apply to referrals occurring on or before July 1, 1995. Pre-existing arrangements thus had roughly two years to unwind or restructure.

The opinion addressed a fact pattern that tested whether the grace period survived corporate restructuring. Drs. Smith and Jones owned all of Corporation A, a clinic. In September 1993, they transferred Corporation A's assets into Corporation B, a new corporation in which they also held an investment interest along with other investors. The question was whether Drs. Smith and Jones still had the grace period for referrals to the clinic that used to be Corporation A but was now part of Corporation B. A second variation added Dr. Brown, who held a pre-April-1993 investment interest in Corporation C, which was acquired by Corporation B in October 1993.

Chief Counsel John R. McArthur concluded that the original investors kept their own grace periods because they never actually parted with their investment interest in the underlying clinics. The doctors of Corporation A sold the clinic's assets to themselves through Corporation B, so the same investors held the same clinic before and after the restructure. Dr. Brown did the same thing with Corporation C. The grace period therefore continued to apply to referrals by those original investors to those clinics until July 1, 1995.

But the grace period did not extend to other Corporation B stockholders. Even though Drs. Smith, Jones, and Brown all ended up with investment interests in both reorganized clinics through Corporation B, Drs. Smith and Jones never held an investment interest in former Corporation C before April 1, 1993, and Dr. Brown never held an investment interest in former Corporation A before that date. As to those cross-relationships, Article 2B applied without a grace period from the date the new investment interests were acquired, and referrals after July 23, 1993 (the effective date of Chapter 482) would have been violations.

Currency note

This opinion was issued in 1993. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

The Article 2B grace period under Chapter 482 expired on July 1, 1995, so the time-limited holding here has no continuing application. The substantive prohibition on self-referrals in G.S. § 90-406 was repealed in 1995 by Session Law 1995-484, leaving the federal Stark Law and Anti-Kickback Statute as the primary federal restrictions on physician self-referral in North Carolina. Anyone analyzing modern physician investment arrangements should look to federal Stark/Anti-Kickback law and current state licensing-board guidance rather than this opinion.

Common questions

Q: What did "investment interest" mean for purposes of Article 2B?
A: G.S. § 90-405(9) defined the term. The opinion did not quote the full definition but treated stock ownership in a corporation that owned a clinic as the canonical example. The statute reached legal interests as well as beneficial interests, so straw-man arrangements would not have avoided the prohibition.

Q: Why did the doctors' transfer of assets not break the grace period?
A: Because the same people kept the same investment interest in the underlying clinic. The doctors transferred the clinic's assets from Corporation A to Corporation B but were stockholders of both corporations. As the opinion put it, "the doctors never relinquished their investment interest in the clinic after April 1, 1993." Form changed; substance did not.

Q: Why didn't the grace period pass through to the other Corporation B stockholders?
A: Section 2 of Chapter 482 tied the grace period to "a legal, beneficial, or investment interest acquired by an investor before April 1, 1993." A stockholder who joined Corporation B in the 1993 restructure could not point to any pre-April-1993 interest in former Corporation A or former Corporation C. The grandfather clause applied to specific investors and specific interests, not to corporate vehicles.

Q: What were the civil penalties for a violation?
A: The opinion identified ceilings of $20,000 or $75,000 per violation depending on the nature of the violation, plus disciplinary action by the applicable licensing board under Chapter 90.

Q: Was there any exception for underserved areas?
A: Yes. G.S. § 90-408 exempted clinics located in "underserved areas." The opinion noted the fact pattern did not involve underserved-area clinics, so the exemption was not at issue. The existence of the underserved-area carve-out suggests the legislature was already calibrating Article 2B to access-to-care concerns.

Q: Could a careful pre-April-1993 owner structure new investments to extend the grace period?
A: The opinion's logic ran the other direction. Restructuring did not strip the grace period from existing investors who kept their interest in the underlying clinic, but it also did not create a new grace period for new co-investors. Adding partners after April 1, 1993 brought those partners under Article 2B's prohibition immediately.

Background and statutory framework

Article 2B was North Carolina's version of the wave of state-level self-referral restrictions that followed the federal Stark Law (Omnibus Budget Reconciliation Act of 1989). The federal statute targeted Medicare referrals for clinical laboratory services to entities in which the physician had a financial relationship; states extended similar logic to non-Medicare referrals and broader categories of services.

The 1993 NC legislation defined the universe of regulated providers through G.S. § 90-405(7) and the kind of financial connection through G.S. § 90-405(9). The substantive prohibition in G.S. § 90-406 covered referrals for "designated health care services" to entities in which the provider, the provider's group practice, or any member of the group practice held an investment interest. Penalties came in two tiers, scaled to seriousness.

The grace period was a practical concession. Existing clinics had been organized under prior law, often through partnerships or closely held corporations among the referring physicians themselves. Forcing immediate divestiture in 1993 would have caused widespread restructuring and possibly closures. The two-year window let pre-existing arrangements either unwind or refit themselves into a permissible form.

The opinion's holding kept the legislature's calibration intact. Reading the grace period to disappear on any corporate restructuring would have punished mere paperwork changes. Reading it to extend to all new co-investors of a successor entity would have created an indefinite shield that the General Assembly clearly did not write into Section 2.

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