First, lawmakers came for physician-owned hospitals in the Affordable Care Act (ACA) by prohibiting Medicare bed expansions. Then, led by Republican Senator Orin Hatch of Utah, they came for physician-owned distributorships (PODs) by pushing the Office of Inspector General (OIG) to issue a Special Fraud Alert, calling such ownership “suspect.”
Are physician-owned ambulatory surgical centers (ASCs) next?
Fraud Enforcement Shift
According to a recent paper by attorneys at Haynes and Boone, it’s not just PODs that will continue to garner government attention in 2014. They say all POEs (physician-owned entities) will be put under the Department of Justice’s microscope in the coming year.
The attorneys say the government’s targeting of PODs signals a new direction for the agency, noting that Special Fraud Alerts have usually addressed patently criminal conduct, such as durable medical equipment suppliers engaging in unscrupulous telemarketing practices. But in the POD Alert, for the first time in years, the OIG labeled a specific type of transaction common in the healthcare industry as inherently suspect of violating the Anti-Kickback Statute and in the context of overutilization due to alleged physician conflicts of interests.
This signals a continuing enforcement trend that raises the specter of anti-kickback and Stark Law violations supported by medical-based evidence for potentially unnecessary services, wrote the lawyers.
Physician Investors Beware
They conclude that non-POD physician investors may also face scrutiny.
“With the shift under the ACA from reimbursing providers based on utilization to rewarding ‘quality, ‘ providers should expect Congress and regulators to make similar findings and conclusions. Because the OIG was acting at the direction of Congress, physician investors can expect to see additional Congressional inquiries in other specialty areas, which will likely trigger OIG commentary regarding the risk posed by other POE arrangements. The popularity of POEs, coupled with the OIG’s findings that PODs may in fact increase costs and utilization, mean that physicians and investors should carefully review existing and potential investments.”
Ambulatory Surgical Centers
Now back to the ASCs.
Amber McGraw Walsh of McGuireWoods LLP, in a recent article in Law360, advises that before venturing into the ASC industry, investors and lenders [and physicians] should examine key drivers and common misconceptions of the outpatient surgery center business.
Walsh says the ASC market is more fragmented than other healthcare sectors. According to Hoover’s, the top 50 companies generate only 30% of the industry’s revenues. There are currently approximately 5, 000 ASCs nationwide; 1, 500 of those are owned in part by management companies and another 1, 500 or so are partially owned by hospitals.
The most common model by which non-physician investors participate is through direct equity ownership in a joint venture with physicians (and sometimes also a hospital). Investors will also often invest in a management company that takes a fair market value management fee in exchange for designated day-to-day administrative duties.
She writes that profitability in a surgery center generally equals the number of cases multiplied by the reimbursement rate, then adjusted for uncollectible amounts. Thus the profitability of the surgery center is largely driven by how favorable its commercial payor rates are, the total case volume in the center and the mix of cases.
McGuireWoods ASC Investor Primer
Walsh offers a primer for investors. We’ve summarized some of the key issues for physicians to consider when getting involved in an ASC.
Get Thee to a Safe Harbor
The Anti-Kickback Statute prohibits the offer of value with the intent to induce the referral of patients. If all elements of an Anti-Kickback Statute safe harbor are met, then the arrangement is deemed compliant. If the arrangement does not meet all elements of at least one safe harbor, then the arrangement can be examined by regulators, who largely focus on the intent of the parties underlying the payment.
There are several prongs of the safe harbor that must be satisfied (which vary depending on whether the center is single-specialty, multispecialty and/or owned in part by a hospital), and every single element must be satisfied. ASC safe harbor compliance is often memorialized in the governing documents of the entity (e.g., operating agreement) and is part of a robust compliance plan.
However, says Walsh, although complete safe harbor compliance is typically an ASC’s goal, even ownership structures that fall short of meeting every element can still be compliant with the Anti-Kickback Statute so long as the structure clearly demonstrates that it is not intended to reward or induce such referrals.
The Extension of Practice – Beware the Referring Partner
One of the fundamental aspects of the most compliance-oriented surgery center ownership structures is that the investing physicians are using the center as an extension of practice.
Walsh notes the OIG has expressed a concern against indirect referrals. In a surgery center, rewarding “indirect referrals” is allowing a physician or hospital to invest in return for that party making referrals of patients to the surgery center without personally providing services to patients.
Having an ownership structure with physician investors that are solely surgeons or other proceduralists is the most common structure for these reasons. Investors investigating a structure with primary care or other physicians in a position to refer, but not to personally perform services, should strongly consider the risks involved.
Physician Employment is Uncommon
Most ASCs are legally distinct entities separate from the physicians’ practice. Physicians from several local area practices may be co-investors in the same surgery center. Regardless of the number of affiliated practices involved, physicians typically remain separately employed by their own medical practices and will continue to bill and collect through such separate practices.
Although uncommon, some ASCs do employ physicians and bill and collect for such physicians’ professional services (e.g., anesthesiologists and, even less commonly, surgeons). To the extent an ASC chooses to employ physicians, Walsh says the arrangement needs to be structured properly to comply with state corporate practice of medicine restrictions.
Make Nice With Local Hospital
There has been a strong national trend toward hospital employment of physicians. A competing hospital with the ASC can cause significant problems by hiring away the ASC’s main physician partners and placing restrictions on the physicians’ use of the ASC. Carefully structure the physicians’ employment contract and cooperate with local hospitals when possible.
Maximize Noncompetes
Noncompetes in the surgery center investment context are typically viewed by courts differently than noncompetes in the employment context. Noncompetition covenants covering investment, ownership or management of competing facilities can be, in some states, more enforceable than employment-related noncompetes because they do not typically restrict the practice of the physicians’ profession.
However, adds Walsh, the enforceability will depend on both the scope of services as well as state-level laws and investors are cautioned to fully understand those state limitations when relying on a noncompete to protect the ASC.
Beware of Non-Obvious Stark Law Risks
There is often confusion between the scope of the Anti-Kickback Statute and the Stark Law. The Stark Law regulates the appropriate circumstances for referrals for a specific list of “designated health services.” Services provided at surgery centers generally do not meet that definition and thus the Stark Law does not generally apply to an ASC’s ownership structure or physician contractual relationships.
However, says Walsh, there are other types of relationships that may be governed by Stark that are ancillary to the surgery center itself. For example, the Stark Law will generally prohibit (except in extremely limited circumstances) the provision of imaging, DME (durable medical equipment), laboratory and other Stark services in the ASC.
The ASC’s arrangements with third parties for the provision of such services to ASC patients can also implicate the Stark Law. Finally, if there is a hospital investor in the surgery center, the hospital and physician relationships outside of the ASC (which will be governed by the Stark Law) can have implications for the ASC’s own compliance programs and operational parameters.
Scrutinize Ancillary Physician Agreements
Walsh urges a careful examination of all physician ancillary relationships, including medical director agreements, consulting agreements, physician-owned distributorship relationships, management agreements, and space and equipment leases.
Critical aspects of such vetting process include ensuring that any service for which a physician is paid is fully needed by the hospital and that the compensation paid by or to the physician is fair market value.
Out-of-Network Reimbursement Risk
ASCs can take advantage of much higher out-of-network reimbursement rates offered by commercial payors. But, adds Walsh, in some states payors have taken aggressive steps toward curtailing the use of out-of-network strategies by providers, resulting in drastic reductions to both the amount paid on an out-of-network basis as well as the number of claims submitted by out-of-network providers.
Some adjustments may be necessary for potentially unsustainable revenue stream, depending on the state, payor mix and other factors of the specific ASC’s operations.
The Medicare Anti-Assignment Challenge
The Medicare anti-assignment rules do not permitted direct assignment of Medicare and Medicaid accounts receivable to lenders and investors. Walsh notes that some industry participants consider certain methods for structuring the participation of investors in such receivables to avoid running afoul of the anti-assignment rules, while at the same time maintaining security in the underlying collateral.
Beware the Hospital Outpatient Conversion
Physicians generally are not allowed to own directly in a hospital outpatient department (HOPD) for Medicare or Medicaid patients.
Some have attempted to convert unprofitable surgery centers into hospital outpatient departments to take advantage of the higher reimbursement rates. However, upon conversion, physicians are almost always required to divest their ownership due to the restrictions on owning in HOPDs.
In a structure where an ASC converts to a HOPD, the hospital and physician can investigate options for maintaining physician relationships by implementing a co-management, medical director or other non-ownership arrangements.
This writer believes that healthcare reform will continue to favor large healthcare systems and business models where physicians are employees. But don’t count out the individual physician who wants to own his or her own business such as an ASC just yet.
