Excerpted from The Biggest Legal Mistakes Physicians Make: And How to Avoid Them

Edited by Steven Babitsky, Esq. and James J. Mangraviti, Esq. (©2005 SEAK, Inc.)

Download Free 646 Page E-book: The Biggest Legal Mistakes Physicians Make and How to Avoid Them

Executive Summary

Due to declining practice income, many physicians are exploring ownership of medical equipment that can be used to enhance income and improve access to services for patients. Structuring such ventures requires careful analysis of various state and federal laws and regulations, including the federal Stark and antikickback laws and their state law counterparts, the antitrust laws, the Internal Revenue Service’s intermediate sanction regulations, and applicable reimbursement methodologies. Also, to the extent such additional services and equipment are regulated under a state certificate-of-need (CON) process, physicians must obtain prior state approval to offer the service. Physicians face many roadblocks in the CON process. In addition to failing to recognize that a CON law might apply in the first place, physicians wrongly expect to be treated like nonprofit hospitals in the process. Physicians need to be prepared and do their homework before venturing into the shark-infested waters of state CON reviews.

Mistake 1        Investing in Equipment and Services Before Recognizing That a State CON Law Applies

Too many physicians make an investment in the construction of an ambulatory surgery center or purchase imaging equipment without realizing that the acquisition and use of the surgery center or equipment may trigger state CON laws. About two thirds of the states require CON approval for various health care services. Before granting Medicare certification for an ambulatory surgery center or for an independent diagnostic treatment facility, Medicare regional offices look to see if the facility requires state licensure. States typically will not issue licenses or licensure waivers to physician-owned and -operated facilities that do not comply with state CON laws.

Action Step     Physicians should check their state’s CON law before signing on to purchase or construct any project. 

Mistake 2        Failing to Understand Public Need vs. Private Need

Most physicians and physician groups that apply for CONs do not appreciate that the purpose of the CON laws is to regulate the location and per capita distribution of health care resources. Many physicians assume that because they have a large volume of patients who require surgery, imaging, or other CON-regulated services and that their practice may be busy enough to use an operating room or an MRI four hours per day, five days per week, they are somehow entitled to CON approval. Typically, CONs are not given to physicians based on their own practice needs but instead are tied to the unmet need for services in a medical service area. Hence, even if a physician practice could meet the volume standards for CON approval, the formulas are typically tied to availability of services within a given region. Thus, underused operating rooms or imaging equipment in one part of the service area may bar CON approval of equipment for a physician practice or even a hospital.

Action Step     Physicians should review applicable regulations defining public need, the entire medical service area inventory, and calculations of unmet needs before seeking CON approval. 

Mistake 3        Expecting to Receive the Same Regulatory Treatment As Institutional Applicants

Many physicians assume that the CON laws apply fairly to all applicants. This assumption is incorrect. CON laws are tied to the needs within a region but favor institutional applicants, such as hospitals. Many CON policies allow expansion of beds, operating rooms, and services in the hospital setting even when there is no regional need. This institution-specific need may be explicit or simply implicit in the regulatory approval process. As proprietary providers, physicians are at a disadvantage in the public CON process when pitted against nonprofit hospitals claiming an adverse effect if the physician project is approved.

Action Step     Physicians should recognize and account for the hospital franchise advantage in CON review. They should also take advantage of institutional franchise opportunities through joint venture arrangements that expand existing services, and they should neutralize any hospital opposition (remembering that half a loaf is better than no loaf).

Mistake 4        Failing to Involve Necessary Consultants

The CON application process is a data-intensive exercise. It involves review of health plans, inventories of existing equipment and services, population statistics, incidence rates, and development of projections for unmet need for various services. It also requires the completion of forms with extensive financial projections and demographic analysis. Physicians need to include, as part of their CON application team, health planning experts to review demographic information and to develop the argument for the need for the service. Accountants are often necessary to prepare financial projections based on historical data and realistic assumptions of future performance. Without a well-crafted application, the physician-sponsored CON project starts at a significant disadvantage. Further, engaging such experts early in the process can help physicians evaluate the feasibility of the project, so that they can decide at an early stage whether to move forward with the CON application process.

Action Step     Physicians should budget for and hire necessary consultants early in the CON application process.

Mistake 5        Not Playing to the Audience

The CON process involves public review, typically including public hearings before lay boards that make recommendations on CON projects to the state health commission or commissioner. Public officials who have the public’s agenda at heart (or believe that they do) review the applications and other materials the applicant files. A physician-sponsored CON may attract suspicion from many bureaucrats and lay board members who view the project as a way simply to increase physician revenue rather than serve the public. Physicians must address how the public, especially the uninsured, will be served by their proposed project and should be prepared to demonstrate how a project will not simply “cherry pick” the profitable patients from existing providers. Creative arrangements showing that the project is committed to meeting the needs of the uninsured may improve the likelihood of CON approval.

Action Step     As part of the CON review, physicians should address the public’s issues and concerns, not just the issues and concerns of the physicians. They should be prepared to offer concessions regarding charity care. 

Mistake 6        Not Preparing Adequately for Public Meetings

One of the worst mistakes a busy professional can make is not to prepare for a board meeting or public hearing on a CON project. Too many physicians, overwhelmed with the demands of their practice, do not take the time to outline key points, anticipate questions, and prepare logical arguments for a particular CON project. Physicians should practice their presentation with their attorney several times, at least a day before the hearing. Also, too many hearings occur without prior communication with CON review staff on potential concerns. The failure to prepare often leads to overstatement or a seemingly arrogant response and disastrous results. Physicians should ask, and state CON staff may tell them, about their concerns before the hearing so the physicians can address them head on at the hearing.

Action Step     Physicians should remember that success is 90% preparation. They should tell the truth, and be humble. 

Mistake 7        Not Setting Realistic Goals and Timetables

A substantial part of the CON analysis turns on the applicant’s ability to demonstrate that the public will use the project at levels that the regulators believe are adequate to demonstrate that “public need” exists. Unfortunately, when developing a CON project, some physicians are unreasonably optimistic with projections and expect to fill an operating room or fully use imaging equipment in the first year. Other physicians may expect to immediately obtain the necessary privileges at various hospitals. The CON agency staff charged with reviewing a CON application is usually very good at seeing through unrealistic projections, and CON reviewers may conclude that a physician applicant is unprepared or, worse yet, not telling the truth. The failure to establish realistic goals or even a phase-in of a particular project may result in its denial. Realistic volumes may also result in a more modest pro forma financial performance, addressing the regulator’s concern that money is the true CON objective.

A corollary to the failure to set realistic goals is the failure to set realistic timetables for project development and implementation. Reviewers want to see a realistic plan for development of a project, often as a precondition to approval. Physicians lose credibility by not establishing a realistic timetable for CON application development that can be accomplished. Discussions with health planning consultants, architects, and regulators are essential prior to CON filing and during CON reviews.

Action Step     Physicians should be realistic in their volume assessments and communicate a realistic plan. 

Mistake 8        Not Investigating Other Applicable Laws

Physicians need to make sure that the proposed project is consistent with other applicable laws, including:

  • Zoning and land use requirements
  • Building code requirements
  • Radiation health regulations
  • Traffic and access requirements
  • Medicare and Medicaid antikickback and Stark laws
  • State patient referral and antikickback laws
  • Wage and hour laws
  • OSHA laws and regulations
  • Medicare reimbursement statutes, regulations, intermediary policies, and program manual requirements
  • Managed care contracting requirements
  • Professional licensure laws (including any provisions for office-based surgery)
  • Facility and program licensure laws
  • Environmental laws and regulations applicable to construction or operation of the proposed services 

Action Step     Physicians need to investigate the regulatory requirements for a proposed venture to make sure that the project will be in full compliance with the applicable regulations as proposed and avoid legal bars to project development. 

Mistake 9        Not Taking Advantage of Public Support

CON laws allow for public comment on CON applications. Often, intelligent and well-scripted public comment on a project can sway a board member, staff members, and even competing applicants. The opportunity to showcase patients with good experiences with the physician, bad experiences at other available services, or both should not be missed.

Action Step     Physicians should get their patients involved. Also, they should ask their competitors to support them with letters, and ask for support from legislators or municipal leaders. In addition, they should consider requesting support from local free clinics or other providers of indigent care. 

Mistake 10      Failing to Retain Competent Counsel

Attorneys who practice before state boards and commissions and who have experience in the CON process are essential to obtaining the best result. While the CON attorney may not need to attend all of the hearings or speak on the applicant’s behalf at each, it is essential to have an experienced attorney who knows the boards and commissions in the CON process and who can advise physicians on potential shortcuts and hurdles. Physicians should involve their attorney early and often to maximize results. 

Action Step     Physicians should retain competent counsel and invest necessary resources up front in their CON project approval process.


The CON process requires that the applicant demonstrate a public need for the project to obtain approval. Public need is established by showing, among other things, that existing facilities are at capacity or otherwise unavailable; that the new project will lower cost, improve access, and improve quality; that competitors will not be harmed; and that charity care in the community will be enhanced. Physicians should involve necessary consultants and legal counsel in developing and presenting the CON application and should be realistic in their goals and timetables. They should expect a frostier reception than the local nonprofit hospital receives. Above all, physicians need to be prepared for and have understanding of the audience reviewing their project. Anticipating these events can improve chances for CON approval.

Written by:

Peter M. Mellette, Esq.

Peer reviewed by:

Jeannie A. Adams, Esq.

Download Free 646 Page E-book: The Biggest Legal Mistakes Physicians Make and How to Avoid Them