After a prolonged period of stagnant growth primarily due to a glut of capacity coupled with flat or declining revenue growth, we’re beginning to see a resurgence of Ambulatory Surgery Centers (ASCs).  In fact, experts are forecasting a significant growth spurt in the ASC industry including de novo growth.  This growth is likely precipitated by the move toward outpatient care, especially into more focused, efficient, and cost effective settings, such as ASCs.

With that growth in mind, and with the anticipated increase in deal volume, we thought it might be beneficial to review our thoughts on ASC ownership, including current models and industry trends; here are seven of those thoughts:

1. The Impact of Anti-Referral Laws

The ownership of, and referral to, an ASC by a physician is not subject to the federal Stark Law^[1], but will implicate the federal Anti-Kickback Statute (AKS) (as well as, likely, many state laws). This allows for a great deal of leeway in the structuring of ASC investments. However, because the AKS is implicated, and because the primary investors in ASCs are physicians, it is important to consider the impact of physician ownership and referral arrangements under that statute. Because of the breadth of the statute, there is a robust safe harbor found at 41 C.F.R. Section 1001.952(r), that provides that if an ASC investment is structured to meet one of the enumerated safe harbors, any return on that investment will not be deemed as remuneration that violates the AKS. In addition to the aforementioned regulations, the Office of Inspector General (OIG) has issued a substantial number of Advisory Opinions, which provide guidance, but not legal precedent, for structuring or analyzing ASC investments.

2. Structuring Basics

A few high level rules of the road with regard to structuring physician ownership in an ASC include:

• Well advised ASC investors should consider only allowing physicians whose practices include the provision of medical services that can be provided in an ASC setting to invest in an ASC (this is often referred to as an “extension of practice” requirement).
• If a physician invests in an ASC, he or she generally should be required to provide at least one-third of the ASC type services that he or she provides in the center in which he or she is an investor (this is a corollary to the extension of practice requirement).
• A physician investor must pay fair market value for any interest purchased in an ASC; there should be no quid pro quo or “sweat equity” given in exchange for referrals to the ASC.
• Neither an ASC entity nor any other ASC investor should loan money to, or guarantee any loans for, any physician investor for purposes of investing in an ASC.
• Distributions of profit or other property from an ASC to its investors should be made in accordance with the percentage interests owned by each investor. For example, an owner of a 10% interest in an ASC should receive only 10%, in value, of any distribution and not more.

3. Creating Physician-Hospital Joint Ventures

An increasingly common structure in the industry is the joint venture structure involving joint ownership by physicians and hospitals.

• The move toward this model has been precipitated, in part, by the inability of many physician-owned centers to attract or maintain competitive managed care rates, leading to declining investment returns. Hospitals, on the other hand, are often able to command considerably higher rates than ASCs for the same services.  By taking, what is usually, a majority investment interest in an ASC, a hospital generally can increase a center’s reimbursement by negotiating stronger payer agreements. Physicians are usually happy to take dilution in exchange for what can be substantially higher per share returns on their equity.
• This type of venture can be popular with a hospital since it usually will allows the hospital to regain surgical volume lost when the center in question was originally developed by the physician investors.
• There are antitrust risks attendant to this model and care should be taken when structuring such an investment. This is because hospital investors also provide surgical services in their own facilities and unless the venture is structured correctly, the ASC and its hospital investor could be considered competitors and unable to coordinate their activities (including reimbursement) without violating the antitrust laws.

4. Management Company Ventures

Another very common structure is co-ownership of an ASC by physicians and a propriety developer/manager/investor group, such as AMSURG, ASCOA, Surgical Care Affiliates and the like. Many of these companies are either publicly traded enterprises or owned by private equity sponsors. The structures and relationships often depend upon the negotiations between the parties. However, almost every relationship involves both ownership of equity in, and management of, the ASC by the management company.  Depending upon the needs of the management company to consolidate the financial operations of the ASC with the manager’s overall operations, for financial statement purposes, the manager will need to have a certain level of control over the ASC, including its operations and governance. The unwind provisions can be complex, especially in change of control contexts, as the managers desire to preserve the value of their enterprises and will resist the ability of other owners to buy them out in the event of a change of control of the management company. These structures often include hospital ownership for the reasons described above.

5. Ownership by Group Practices

Ownership of an ASC by a physician group practice can be tricky, especially if the group practice is multispecialty in nature and owned, in part, by primary care, or other, physicians who act as referral sources to physicians (such as surgeons) who perform procedures in the center.  The OIG has taken a dim view of these arrangements arguing that practice owners who do not perform surgical procedures will benefit from their referrals to those who do. This position is consistent with the extension of the practice safe harbor requirements described above.  We believe that despite the OIG’s reservations, these arrangements can be structured in a legally compliant manner.

6. Dealing with Non-Compliant Physicians

Dealing with non-compliant physician owners is often vexing. What can be done if one or more physicians invest in, but fail to use and support an ASC? This often leads to resentment among fellow physician investors, especially those who actively support the center and feel as though they are subsidizing investment returns to physicians who choose not to do cases in the ASC. While it is not advisable to simply require a physician to redeem his interests in an ASC for a lack of referrals, it is possible to use the aforementioned extension of practice requirements to remove a non-compliant physician; this is done by requiring physician investors to perform at least one-third of their ASC cases at the center each year, and further, annually certify their compliance. Because the so-called “one-third test” is a safe harbor requirement, an ASC is free to impose this obligation on each ASC physician investor.  Failure to meet this requirement can be cause to repurchase any non-compliant physician investor’s interests in the ASC.

7. Legal Battles

While ASCs have traditionally been “sacred cows” when it comes to federal and state regulators—primarily because they are seen as lower cost providers of care—the same can’t be said for insurers. There has been a spate of litigation by insurance companies against ASCs, primarily in response to those ASCs who bill “out of network” and, as alleged by insurers, agree to waive or deeply discount co-pays and deductibles for patients to encourage them to receive care at ASCs even if the ASC does not accept the patient’s insurance. Insurers allege that these waivers and discounts are illegal and encourage patients to seek care at out-of-network ASCs while defrauding the insurers.  Aetna was successful in such an action in Northern California several years ago and more insurers have followed suit by bringing claims against a number of out-of-network surgery centers. We fully expect this area of law to continue to develop.

[1] The definition of “designated health service” under the Stark Law and regulations expressly excludes entities that bill a facility fee, including ambulatory surgery centers.