On April 29, 2021, the U.S. Department of Health and Human Services Office of Inspector General (OIG) issued a favorable advisory opinion regarding the development and investment of an ambulatory surgery center (ASC) owned jointly by a hospital (health system), management company (manager), and physician investors employed by the health system. The advisory opinion is significant because it provides first-time guidance on the permissibility of investments in ASCs by (i) management companies and (ii) physician investors employed by the hospital investor of an ASC joint venture.
The OIG concluded that while the proposed arrangement would implicate the federal Anti-Kickback Statute (AKS), the OIG would not impose administrative sanctions despite the fact that the proposed remuneration would not satisfy any safe harbor and would pose some risk of prohibited remuneration. As with all OIG advisory opinions, the OIG’s conclusions apply only to the proposed arrangement. It is, however, informative for those evaluating similar ASC ownership arrangements.
Proposed Arrangement Cannot Satisfy the Hospital-Physician Safe Harbor
The proposed arrangement involved an ASC that would be owned by the health system, the manager, and the physician investors employed by the health system. The physician investors would include five orthopedic surgeons and three neurosurgeons. The health system, the manager, and the physician investors would also form a real estate entity (real estate joint venture) that would construct a new facility where the new ASC would be located. The new ASC would enter into space and equipment leases as well as services arrangements with the health system and the real estate joint venture.
Although the new ASC would meet some elements of the ASC safe harbor for hospital/physician ASC joint ventures, it would not meet three elements.
First, the ASC safe harbor for hospital/physician joint ventures applies only to ASCs owned directly by a hospital and individual physicians. The ASC safe harbor does not contemplate ownership by a management company. Therefore, the new ASC could not meet the ASC safe harbor due to the manager’s ownership.
Second, not all of the neurosurgeon physician investors were expected to meet the one-third medical practice income test, which requires physician investors to derive at least one-third of their medical practice income from all sources for the previous fiscal year (or previous 12-month period) from the physician’s performance of procedures on the list of Medicare-covered procedures for ambulatory surgery centers under applicable Medicare regulations (ASC qualified procedures). These neurosurgeons would not satisfy the medical practice income test because they primarily derive their medical income from inpatient hospital procedures that require a hospital setting and thus cannot be performed in an ASC setting.
Third, the ASC safe harbor applicable to hospital/physician joint ventures requires that the hospital investor not be in a position to make or influence referrals directly or indirectly to any investor or the ASC. As is the case in many hospital-owned ASCs, the health system would be in a position to refer to the ASC.
Other than the three safe harbor requirements outlined above, the new ASC expected to satisfy the five remaining requirements of the hospital/physician safe harbor.
OIG Concludes Proposed Arrangement Poses Low Risk Under AKS
- Management Companies May Invest in ASCs if Arrangements Are Properly Structured.
The OIG concluded that, even though the manager would be in a position to influence referrals to the new ASC, sufficient safeguards would be put in place to mitigate the risk that the ASC’s offer or payment of investment returns to the manager would be problematic under the AKS. The OIG specifically noted that the manager certified that (1) it would not make or influence referrals to the physician investors or the new ASC, and (2) no physician has or would have ownership in the manager. The OIG’s finding that a management company can hold an ownership in an ASC through a properly structured arrangement is significant because no previous OIG advisory opinions have addressed ownership of an ASC by a management company despite management company prevalence in the industry.
- Physician Investors’ Failure to Satisfy the Medical Practice Income Test Is Permissible if the ASC Will Be Regularly Used for ASC Qualified Procedures and There Are Minimal Cross-Referrals.
While the neurosurgeons would not meet the medical practice income test, the OIG similarly determined sufficient safeguards would exist to mitigate the risk posed under the AKS. Specifically, the health system certified that the neurosurgeons would use the ASC on a regular basis as part of their practice. Further, the physician investors would rarely refer to each other, and the estimated number of procedures not personally performed by the referring physician investors would be less than 1 percent of all procedures performed at the ASC each year. The OIG noted that the physician investors would not be significant sources of cross-referrals to each other.
The advisory opinion’s favorable review of the proposed arrangement is generally consistent with a 2008 OIG advisory opinion. In the 2008 advisory opinion, certain neurosurgeon physician investors also failed to satisfy the medical practice income test because the physician investors primarily required hospital-based settings for their surgery procedures but certified that they expected to regularly use the ASC for their ASC qualified procedures and affirmed that they would rarely have an opportunity refer patients to the other physician investors of the ASC for ASC qualified procedures. The 2008 advisory opinion noted that these physician investors “comprise[d] a small proportion of the overall physician investors” and therefore the arrangement was “readily distinguishable from potentially riskier arrangements in which few investing physicians actually use the ASC on a regular basis.”
This 2021 advisory opinion is notable because the OIG did not focus on the number of physician investors who would not meet the one-third medical practice income test. Instead, the OIG appeared to give greater weight to the fact that the noncompliant physician investors would use the ASC for their ASC qualified procedures on a regular basis as part of their practice and have limited opportunity to refer patients to other physician investors.
- Hospital Investors May Employ Physician Investors With Proper Safeguards.
The OIG endorsed the health system’s plan to implement certain safeguards to address the health system’s ability to influence the referrals of the health system-employed physician investors. Specifically, the health system agreed to do the following:
- Refrain from any action requiring or encouraging physicians who are its employees, independent contractors or medical staff members (affiliated physicians) to refer patients to the ASC or to the physician investors.
- Not track referrals made to the ASC by affiliated physicians.
- Not require any affiliated physician arrangement with the health system, including any physician investor’s employment arrangement, to refer to the ASC.
- Any compensation the health system would pay to affiliated physicians for services furnished, including employee compensation to physician investors, would be consistent with fair market value and would not be related, directly or indirectly, to the volume or value of referrals affiliated physicians may make to the ASC or its physician investors.
The safeguards are consistent with those the OIG previously endorsed in arrangements that involve hospital and physician investors, including those addressed in the 2008 OIG advisory opinion discussed above. The OIG’s 2021 advisory opinion is notable because the OIG has not previously discussed investment by physicians employed by a hospital investor, as is the case here.
- The Proposed Arrangement Satisfies All Other Elements of the ASC Safe Harbor.
The OIG also noted, in reaching its favorable determination, that the new ASC would satisfy all of the remaining elements of the ASC safe harbor applicable to hospital/physician joint ventures.
First, the proposed arrangement would not reward investors for their referrals through: (i) the offer of ownership based on past or future referrals, or (ii) profit distributions that are disproportionate to the respective investor’s ownership in the new ASC and are tied to referrals. The OIG noted that neither the new ASC nor any investor would loan funds to, or guarantee a loan for, any investor to obtain ownership in the new ASC. The new ASC would not offer ownership to any party based on the previous or expected volume or value of referrals made by any party to the proposed arrangement. In addition, capital contributions and profit distributions would be made in proportion to an investor’s ownership in the new ASC. Finally, all new ASC investors would invest directly in the new ASC (i.e., no investor would hold any ownership through a pass-through entity, as the OIG has expressed concern that such entities pose a fraud and abuse risk because they could be used to redirect revenues to reward referrals or otherwise erode safeguards provided by direct investment).
Second, the parties certified that they would implement certain safeguards to reduce the risk that the investors would receive profit distributions for referrals of patients to the new ASC. Specifically, the health system certified that the new ASC would enter into space and equipment leases as well as services arrangements with the hospital and the real estate joint venture, and the parties certified that these rental and services arrangements would comply with the applicable AKS safe harbors. The new ASC and the investors also agreed to provide written notice to patients of the referral source’s investment interest in the new ASC.
Finally, the parties certified the proposed arrangement would satisfy the other required elements of the ASC safe harbor. The parties affirmed that they would treat patients receiving medical benefits or assistance under any federal healthcare program in a nondiscriminatory manner and all ancillary services provided to federal healthcare program beneficiaries performed at the new ASC would be related directly and integrally to primary procedures performed at the new ASC. In addition, the parties affirmed that ancillary services would not be billed separately to Medicare or any federal healthcare program. The health system also certified that it would not include on any cost report or any claim for payment from a federal healthcare program any costs associated with the ASC, unless such costs are required to be included by a federal healthcare program.
Conclusion
The OIG concluded that the proposed arrangement would generate prohibited remuneration under the AKS if the requisite intent were present, but the OIG would not impose administrative sanctions because the arrangement would present a low risk of fraud and abuse for the reasons discussed above.
Please contact one of the authors for additional information on structuring ownership investments in ASCs or other related compliance concerns.