Key Considerations for Hospital-Physician Joint Venture Ambulatory Surgery Centers

Given the ongoing migration of surgical care to outpatient settings and growing emphasis on value-based care, both hospitals and health systems are increasingly factoring ambulatory surgery centers (“ASCs”) into their strategic planning.

A proposed ASC can be a new facility developed by the hospital, or repurposed outpatient hospital space. Alternatively, the hospital can co-invest alongside community physicians in a pre-existing facility. 

This article highlights key considerations for hospitals in evaluating, developing, and implementing an ASC transaction, with a focus on fraud and abuse considerations related to investing alongside physicians. It also highlights the type of regulatory analysis that providers and others contemplating transactions involving health care entities must consider and address.

The Regulatory Framework

Ownership interests in an ASC are subject to federal and state laws designed to prohibit fraud and abuse, including the federal Anti-Kickback Statute (“AKS”). The AKS is a criminal, intent-based statue that prohibits any person from “knowingly and willfully” providing any remuneration to induce referrals, or in exchange for referrals, of federal health care program patients or business. 

So-called “safe harbors” promulgated by the Office of the Inspector General (“OIG”) under the AKS can immunize an arrangement from prosecution, if all the criteria of the applicable safe harbor are satisfied. If an arrangement fails to meet all applicable safe harbor criteria, it would not necessarily be viewed as high risk from a fraud and abuse perspective. Rather, if an arrangement does not meet every element of a safe harbor, it would be subject to scrutiny and potential prosecution if the necessary intent to induce referrals is deemed to be present.

In addition to the federal AKS, many states have fraud and abuse legislation that could also apply to an ASC joint venture. An ASC is also subject to a variety of other types of laws and standards governing the facility and its services, including licensure, determination/certificate of need requirements and accreditation. If an existing hospital facility will be repurposed, the parties may need to form a new entity to assume the assets, lease the space, and hire any employees. New billing numbers and contracts would likely be required.  All of these requirements will need to be considered in structuring an ASC transaction.  

Hospital/Physician ASCs

Four safe harbors expressly permit physician investment in ASCs: single-specialty, multi-specialty, and surgeon-owned or hospital/physician-owned ASCs. The hospital/physician owned ASC safe harbor protects joint ventures that have at least one hospital investor, when all of the remaining investors are physicians who either meet specific requirements or are non-referring investors.  

The physician investors must be in a position to refer to and perform procedures at the ASC and derive at least one-third of their practice income from the performance of these pro¬cedures, or they must not be in a position to refer at all. 

In addition, to meet the safe harbor, the ASC would need to satisfy eight criteria: 

1. The terms on which investments are offered to investors must not relate to prior or expected referrals, services furnished or business otherwise generated for the ASC. 
2. The ASC or any investor (or anyone acting on their behalf) may not loan funds or guarantee any loan to an investor if the loan proceeds are used to purchase the investment.
3.  The return on investment must be directly proportional to the amount of capital invested.
4.  The ASC and its hospital and physician investors must treat patients receiving medical benefits or assistance under any federal health care program in a non-dis-criminatory manner.
5. The ASC may not use hospital space, equipment, or services unless it meets the requirements, respectively, of the space, equipment or personal services safe harbors.
6.  All ancillary services provided at the ASC must be directly and integrally related to primary procedures provided there, and none may be separately billed to the Medicare or Medicaid programs.
7. The hospital may not include on its own cost report or claim for payment any costs of the ASC, unless it is required to do so.
8. The hospital may not be in a position to make or influence referrals directly or indirectly to any investor or the entity (for example, by having physician employees or owning a medical practice—see below). Also, patients referred to the ASC by a physician investor must be fully informed of the referring physician’s investment interest.

Since a hospital is generally in a position to make or influence referrals directly or indirectly to its physician employees and contractors, investment by those physicians in a hospital-affiliated ASC would likely fall outside of the applicable safe harbor.  

As a result, certain precautions (some of which are described in the narrative below) can be taken to ensure there is sufficiently low risk of fraud and abuse. For this purpose, in addition to approximating safe harbor criteria where possible, experienced legal counsel turn to advisory opinions (“AOs”) that have been issued by the OIG to mitigate risk and structure legally compliant hospital/physician ASC joint venture opportunities.

These opinions are limited to the specific parties that requested the individual opinions (and only to the extent that the facts certified by the requester are indeed accurate); however, they are a useful barometer for how the regulators would likely review similar arrangements. 

Identify physician investors who will plan to use the ASC as an extension of their practice. 

Under safe harbor criteria, at least one-third of each physician investor’s yearly medical practice income must be derived from his or her performance of ASC-qualified procedures, and (except for single-specialty ASCs) at least one-third of the physician’s yearly procedures must be performed at the specific ASC.  

If a physician may not necessarily meet the criteria (for example, a neurosurgeon whose practice can be heavily inpatient), he or she should still be expected to use the ASC on a regular basis, and personally perform procedures at the ASC. The key, from a regulatory standpoint, is that the physician rarely cross-refer to other surgeon investors, but instead, actively use the ASC for the physician’s own practice. 

Consider opening the opportunity to employed physicians.  

Hospitals are increasingly exploring permitting their employed physicians to invest in an ASC, alongside or instead of community (independent) physicians.  Opening the opportunity to employed physicians can serve several key strategic objectives, including driving engagement, creating accountability for outcomes, and serving as a recruiting tool. Since the hospital employer would be positioned to make or influence referrals directly or indirectly to its physician employees and contractors, the investment would fall outside of the safe harbor. 

There are several precautions that should be taken to mitigate risk. The hospital should not require or encourage employed or contracted physicians to refer patients to the ASC or its physician owners, and should not track referrals made to the ASC. Also, no hospital-affiliated physician should be compensated in a way that relates, directly or indirectly, to the volume or value of referrals to the ASC or its physician investors.

Consider using a holding company to support physician ownership.

The OIG has recognized that using a pass-through holding company, or HoldCo, where the physicians would buy-in and buy-out of their ASC investment at a holding company level, may be supportable, and it can have some business advantages. However, the OIG has found that investing in an ASC through a multi-specialty group (where few group physicians would actually use the ASC on a regular basis as part of their medical practice) could potentially generate prohibited remuneration under the AKS, if the requisite improper intent was present.

A HoldCo can allow the physicians to “speak as one” through their shared governance.  Buy-in and buy-out would occur at the HoldCo level, diluting and accreting only the HoldCo investors, not the physicians’ aggregate investment in the ASC. 

In a HoldCo model, the physician investors should individually meet applicable safe harbor criteria, so the structure does not vitiate the safeguards provided by direct investment. Each physician investor’s ownership would still need to be proportional to his or her capital investment, with the investors receiving a return on their investments that is the same as if they had invested in the ASC directly. Finally, care should be taken to coordinate HoldCo and ASC governing documents and ensure appropriate ASC protective provisions flow through to the HoldCo level. 

Provide equal investment opportunities to all investors.  

Each physician investor should have the right to purchase the same amount of equity, at the same purchase price, as the others. This helps avoid any implication that high-volume physicians received favorable buy-in terms (such as the chance to own more equity, or to buy equity at a lower purchase price), or conversely that lower-volume physicians are “punished.” ASCs are often structured such that physicians are equal owners for this reason; the key is for the physician have the same opportunity, and personally decide how much to invest.  

Structure the offering under federal and state securities laws. 

These laws, in particular Regulation D under the Securities Act of 1933 (the “Act”), establish criteria for private offerings and would apply to ASC investment opportunities. A transaction may be eligible for an exemption from registration requirements under the Act if participation is limited to accredited investors (or there are restrictions on participation by non-accredited investors).  The Act defines an “accredited investor” to include a natural person with net worth (individually or with spouse or partner) over $1 million, excluding primary residence, and who has income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years, with a reasonably expectation for the same in the current year.

Nevertheless, in connection with the issuance of its securities, the ASC should ensure the information provided to its investors, in light of the circumstances under which it is furnished, is not misleading. Also, applicable state “blue sky” laws related to the offer and sale of securities may apply, and may require a notice be filed with the state.

Consider retaining majority hospital ownership.  

There can be advantages to the hospital retaining a majority or controlling interest in the ASC. If the hospital is a non-profit, majority ownership may help support alignment with the hospital’s charitable purpose and tax-exempt mission. (Control can also be demonstrated in other ways, e.g., through board control. Hospitals are recommended to consult with their tax counsel in evaluating options.) 

Moreover, hospitals are often able to command considerably higher rates than ASCs for the same services, and by taking a majority investment position in an ASC, a hospital may be able to negotiate stronger payer agreements, and improve the ASC’s financial position.  

However, since such hospitals/investors also provide surgical services in their own facilities, coordinating activities (including reimbursement) with the ASC may implicate antitrust laws, and the hospitals and ASCs should work closely with counsel to implement appropriate safeguards. 

Price the initial offering, and subsequent buy-in/buy-out events, to be consistent with fair market value.

Obtaining an independent appraisal of fair market value, and applying objective, prospectively developed, and documented criteria for buying-in and buying-out of ASC ownership, can help safeguard against the risk of fraud and abuse. The OIG has recognized that investment terms may vary as a result of a variety of factors such as the timing of purchases or the ASC’s appreciation in value over time.

However, in the OIG’s view, variable buy-in prices may also mean the returns on investment would vary and the ASC would not meet the third prong of the safe harbor described above (i.e., that the return on investment must be directly proportional to the amount of capital invested).  In one negative advisory opinion, the OIG determined that a hospital’s investment in a mature ASC at an appreciated price (albeit, from a subset of physician owners) could potentially generate prohibited remuneration, for this reason. 

Appraise any contributed assets to ensure they are FMV.

Particularly if an existing facility will be repurposed, the parties may plan to contribute assets towards their buy-in price (e.g., the existing space or equipment). Any tangible assets contributed to the joint venture by a party in consideration of ownership interests will need to be appraised for fair market value, and the valuation should not take into account the volume or value of referrals made or business otherwise generated among the parties to the transaction, including past or anticipated referrals to the ASC. The parties could contribute cash, if necessary, to arrive at their desired respective ownership amounts.  

Author: Adria Warren, Foley & Lardner LLP