Issued July 22, 2009, and posted July 29, 2009
Written by Ingrid Brydolf; reviewed by Joseph M. Kahn*
The OIG has issued an advisory opinion concluding that it would not impose administrative sanctions on a proposed ambulatory surgery center joint venture (ASC JV), owned jointly by a hospital and a group of physicians, operating outside of an anti-kickback statute safe harbor. The opinion focuses on: the hospital's ability to influence referrals to the ASC JV; pass-through entity investments by physicians in the ASC JV; and whether investor return is proportional to investment.
Seven orthopedic surgeons (Surgeons) in a single group practice formed a limited liability company (Surgeon LLC). The Surgeons' ownership interests in the Surgeon LLC are proportional to their capital investments, and each of the Surgeons receives at least one-third of his or her medical practice income from the performance of procedures that are payable by Medicare when performed in an ambulatory surgery center (ASC).
The Surgeons and a local hospital (Hospital) seek to form a two-operating-room ASC on the Hospital campus. Apparently to avoid the necessity of a certificate of need, the Surgeons and the Hospital decided to stage the development of the ASC JV as follows. First, the Surgeon LLC developed a Medicare-certified ASC (single operating room) in a Hospital campus building. The Hospital plans to develop a single operating room ASC in space directly adjacent to the Surgeons' ASC. Once the Hospital ASC receives regulatory approval, the Hospital will contribute its ASC assets to the ASC JV. Then, the Surgeon LLC will purchase a one-half ownership interest in the ASC JV.
The purchase price that will be paid by the Surgeon LLC to the ASC JV will consist of the assets of the Surgeons' ASC and, to the extent necessary, cash. The parties will receive third-party, fair-market-value appraisals of the ASC JV and the Surgeons' ASC. The appraisals will not take into account the volume or value of referrals or business otherwise generated among the parties and will be based solely upon tangible assets. If the fair market value of the Surgeons' ASC is less than the fair market value of the ASC JV, then the Surgeon LLC will pay the difference in cash. If the fair market value of the Surgeons' ASC is more than the fair market value of the ASC JV, then the Hospital will pay the difference in cash.
The resulting two-operating-room ASC JV would be owned equally by the Hospital and the Surgeon LLC. However, it would not meet all of the requirements of the hospital/physician-owned ASC safe harbor, 42 CFR 1001.952(r)(4). The OIG focused on those safe harbor deficiencies in the opinion. In each case, the OIG found that sufficient safeguards were in place to minimize risk.
First, the Hospital would be in a position to make or influence referrals directly or indirectly to an investor and the ASC JV. However, the Hospital made the following commitments: Hospital employees will not refer to the ASC JV; the Hospital will not encourage or require any medical staff member to refer to the ASC JV or the Surgeons; the Hospital will not track referrals; no compensation paid by the Hospital will take into account referrals; the Hospital will inform the medical staff annually of the foregoing commitments; and the Hospital will continue to operate its own outpatient surgery facilities.
Second, the Surgeons would not hold their investment interests in the ASC JV either directly or through their group practice. Rather, the chain of ownership would be interposed with the Surgeon LLC. However, the OIG noted that each of the Surgeons was qualified to invest in the ASC JV directly without destroying the safe harbor eligibility. The existence of a "pass-through" entity, the Surgeon LLC, did not substantially increase the risk of fraud or abuse, according to the OIG.
Third, it is possible that, depending upon the amounts originally invested in the separate ASCs and the value of the tangible assets at the time that the two ASCs are merged, the Hospital and the Surgeon LLC could receive different returns on their investments. The OIG found, however, the risk of abuse to be low because any difference in returns would not be related to the investors' past or future referrals. The OIG cautioned that its conclusion might be different if the valuation of assets included intangible assets. In addition, the OIG said that it might be concerned if the valuation employed a cash-flow-based valuation because it might include the value of the Surgeons' referrals during the pre-merger period when their ASC was operating. The OIG was careful to point out, however, that it was not asserting that a cash-flow valuation or intangible asset valuation necessarily results in an anti-kickback statute violation.
*The Practice Group Leadership would like to thank Advisory Opinions Task Force members Ingrid Brydolf, Esquire (Davis Wright Tremaine LLP, Portland, OR), and Joseph M. Kahn, Esquire (Nexsen Pruet PLLC, Greensboro, NC), for respectively writing and reviewing this summary.