Second Supplement to Confidential Assignment Summary between Lithotripters, Inc. and Texas Lithotripsy Limited Partnership VII, L.P.

Summary

This document is a supplement to a previous investment offering summary for Texas Lithotripsy Limited Partnership VII, L.P., managed by Lithotripters, Inc. It extends the offering period to March 20, 2001, and addresses new federal regulations (Stark II) affecting physician self-referral for Medicare and Medicaid patients. The supplement outlines steps the partnership will take to ensure compliance with these regulations, including reviewing and potentially modifying contracts with hospitals. Investors are advised to review these changes carefully.

EX-10.168 81 0081.txt EX 10.168 2ND SUPPLEMENT TO MEMORANDUM-TEXAS VII SECOND SUPPLEMENT DATED FEBRUARY 20, 2001 TO THE CONFIDENTIAL ASSIGNMENT SUMMARY DATED DECEMBER 7, 2000 TEXAS LITHOTRIPSY LIMITED PARTNERSHIP VII, L.P. Lithotripters, Inc., a North Carolina corporation ("Litho"), by this Second Supplement hereby amends and supplements its Confidential Assignment Summary dated December 7, 2000, as amended (the "Summary"). Persons who have subscribed for or are considering an investment in the Partnership Interests offered by the Summary should carefully review this Second Supplement. Capitalized terms used herein and not otherwise defined have the meanings provided in the Summary. Extension of the Offering Pursuant to the authority given to Litho in the Summary, Litho hereby elects to extend the offering termination date to March 20, 2001 (or earlier in the discretion of Litho, upon the sale of all Partnership Interests as provided in the Summary). Stark II Final Regulations As set forth in the Memorandum, on January 9, 1998, the Health Care Financing Administration ("HCFA") published proposed regulations designed to interpret and clarify the application of certain legislation prohibiting physician self-referral of Medicare and Medicaid patients for specifically enumerated designated health services, including inpatient and outpatient hospital services ("Stark II"). As these regulations were simply proposed and subject to future modification or repeal, the Partnership awaited the issuance of final Stark II regulations. On January 4, 2001 HCFA issued the first of two rules intended to implement the final Stark II regulations (the "Final Regulations"). The first rule ("Phase I") implements the Final Regulations pertaining to (i) Stark II's general prohibition against physician self-referrals to entities in which they have a financial relationship, (ii) the general exceptions applicable to both the ownership and compensation arrangement prohibitions, (iii) certain new regulatory exceptions, and (iv) the definitions that are used throughout Stark II. HCFA intends to publish a second final rule ("Phase II") shortly which will address the remainder of the Stark II statute and its application to the Medicaid program, as well as certain proposals for new exceptions not included in the proposed Stark II regulations, but suggested in the public comments thereto. Phase I will become effective on January 4, 2002. HCFA has delayed the effective date of Phase I to allow individuals and entities engaged in business arrangements impacted by Phase I time to restructure those arrangements to comply with the provisions in Phase I. Consequently, as discussed below, the Partnership will have time to take the steps required to ensure Stark II compliance. Currently, Medicare and Medicaid only reimburse for lithotripsy if the service is provided through a hospital. The lithotripsy services provided by the Partnership to Medicare/Medicaid hospital outpatients are provided "under arrangements" with hospitals, with the treatment being billed under the hospital's provider billing number. Prior to the release of Phase I, the existence of ambiguities and the lack of definitions for certain terms in the Stark II statute, as well as the uncertainty as to the contents of the Final Regulations, gave rise to alternative interpretations of the Stark II statute. One alternative interpretation led to a reasonable conclusion that Stark II did not apply to the operations of the Partnership. See "Regulation-Federal Regulation-Self-Referral Restrictions" in the Memorandum. As related in the Memorandum, HCFA acknowledged in its commentary to the proposed Stark II regulations that physician overutilization of lithotripsy is unlikely and specifically solicited comments on whether there should be a regulatory exception to Stark II specifically for lithotripsy services. See "Regulation-Federal Regulation Self-Referral Restrictions" in the Memorandum. Upon consideration of numerous public comments received on the proposed regulations and upon review of the Stark II legislative history, HCFA concludes in its commentary to the Final Regulations that it did not have the authority to exclude lithotripsy as an inpatient or outpatient hospital service covered by Stark II. Consequently, the Partnership's practice of providing lithotripsy services "under arrangements" to hospitals for treatment of Medicare and Medicaid patients must comply with the provisions of the Final Regulations. Although the General Partner is disappointed that the Final Regulations do not provide a specific Stark II exception for lithotripsy services, it is pleased that the regulations provided needed clarity and certain opportunities for the Partnership to operate in compliance with Stark II. HCFA asserts in Phase I that its express purpose in the Final Regulations is to interpret the prohibitions of Stark II narrowly while interpreting its exceptions broadly. HCFA also notes its desire to permit physician-owned lithotripsy ventures to continue if such ventures are structured such that no direct or indirect compensation arrangement is created, or the arrangement fits within a compensation arrangement exception to the Stark II statute. The Final Regulations accomplish HCFA's stated purpose and desire by: (i) clarifying that physician-owned lithotripsy vendors providing services "under arrangements" with hospitals are either structured such that they are not compensation arrangements, as defined in the Final Regulations, or that they need only qualify under a compensation exception, and not an ownership interest exception as well; (ii) broadening certain existing Stark II statutory exceptions by redefining certain standards to allow "per use" lithotripsy payments, as long as such payments are at fair market value; and (iii) adding two new Stark II regulatory exceptions that are potentially available for Partnership operations. In order for the Partnership to comply with Stark II as modified by the Final Regulations, the Partnership's financial relationships with its Independent Contract Hospitals must either fall outside the definition of a compensation arrangement, or comply with a Stark II compensation arrangement exception. The General Partner, along with the Partnership's legal counsel, have worked to establish a compliance program that is in the process of implementation. As noted above, due to the Final Regulations delayed effective date, the Partnership has until January 4, 2002 to take reasonable steps to review the Partnership's operations under the Final Regulations. Specifically, the Partnership intends to work with all its Independent Contract Hospitals to review and modify, if necessary, its lithotripsy service contracts so that they satisfy the standards set forth in the new Final Regulations. To the extent financial arrangements with Independent Contract Hospitals meet the definition of "indirect compensation arrangements" under the Final Regulations, then the Partnership intends to see that such agreements fit within the new indirect compensation arrangement exception. Indirect compensation arrangements have several important elements, including the presence of an intervening entity, such as the Partnership, that directly links referring physician owners with the entity providing the designated health service (e.g., the Independent Contract Hospital). In order to comply with the indirect compensation exception, the Partnership's Hospital Contracts must meet each of the following standards: o The compensation received directly by the Partnership from the Independent Contract Hospitals must be fair market value for the items or services provided under the arrangement and must not take into account the value or volume of referrals or other business generated by the referring physician for the Independent Contract Hospital; o The compensation arrangement between the Partnership and the Independent Contract Hospitals must be set out in writing, signed by the parties, and specify the services covered by the arrangement; and o The compensation arrangement must not violate the Anti-kickback Statute or any laws or regulations governing billing or claims submission. In regard to the Partnership's operations, the indirect compensation arrangement exception may be used with respect to any or all payments made by Independent Contract Hospitals to the Partnership, including payments for the use of the lithotripter, as well as the personal services of a technician and/or nurse. It is important to note that the Final Regulations allow per use payments for lithotripsy services, as long as they reflect fair market value. The General Partner believes that the Partnership's current Hospital Contracts can be modified to the extent necessary to satisfy the requirements of the indirect compensation arrangement exception, and that accordingly, the Partnership will be able to operate in compliance with Stark II. To succeed with its compliance plan, the General Partner must obtain the Independent Contract Hospitals' cooperation in making any necessary revisions to their lithotripsy service agreements consistent with the indirect compensation arrangement exception. Whereas the Partnership believes that its financial relationships with Independent Contract Hospitals have always met the fair market value standard, the Final Regulations clearly shifts the burden to the contracting parties that rely on the indirect compensation exception to prove the standard is met. The Partnership intends to engage an independent valuation expert or pursue other commercially reasonable methodologies to assist it in meeting that burden of proof. The General Partner believes it will successfully implement its above described compliance plan, however, there can be no assurance that such will be the case. Independent Contract Hospitals may not cooperate with the Partnership. Further, reliable fair market value assessments regarding Independent Contract Hospital payments to the Partnership may be difficult to obtain. If the Partnership is unable to successfully implement its plan to comply with the indirect compensation arrangement exception (to the extent a Stark II exception is needed), then the General Partner intends to explore and implement any other available options that would allow the Partnership to comply with Stark II, as well as all other material health care statutes and regulations. Such alternative options may include contracting with ambulatory surgery centers ("ASCs") rather than hospitals, since lithotripsy services at ASCs are not covered by Stark II. The Medicare and Medicaid programs, however, do not reimburse for lithotripsy services at ASCs at this time. It is anticipated that ASCs will receive reimbursement for treatment of Medicare and Medicaid patients in the near future, but there can be no assurance that such will be the case. It should be noted that there can be no assurances that compliance action taken by the Partnership under any potential alternative can be carried out in a manner that does not have a material adverse effect on the Partnership. The General Partner Pursuant to his recent retirement, effective December 31, 2000, Dr. Joseph Jenkins resigned as Director, and as President and Chief Executive Officer of the General Partner. Dr. Jenkins' position on the Board of Directors will be assumed by Brad Hummel. Mr. Hummel will also succeed Dr. Jenkins as President and Chief Executive Officer of the General Partner. Set forth below is a brief description of Mr. Hummel's background. Brad Hummel was elected President and Chief Executive Officer of Prime in May 2000, and previously served as Chief Operating Officer of Prime from October 1999 until May 2000. Effective January 1, 2001, Mr. Hummel was appointed a Director of the General Partner and was elected as President and Chief Executive Officer of the General Partner. From 1984 to 1999, Mr. Hummel served in various operating capacities at Diagnostic Health Services, and served as its Chief Executive Officer from February 1999 until October 1999. Bank Commitment Litho has obtained the approved and executed Bank Commitment providing financing under the Limited Partner Note. The terms and conditions for financing a portion of the purchase price of a Partnership Interest are set forth in the Bank Commitment which is attached hereto as Appendix A, and are discussed in the section entitled "The Offering - Limited Partner Loans" in the Summary. The necessary documents for prospective assignees to apply for financing under the Bank Commitment are included in the Assignment Packet.