ASC Joint Venture Receives Favorable OIG Opinion

In order to reduce health care costs, many commercial payors have recently been attempting to steer procedures to ambulatory surgery centers rather than higher-cost hospitals. Additionally, during the COVID-19 pandemic, ambulatory surgery centers (after resuming elective procedures) have become an even more popular option as some evidence suggests hesitancy to return to hospitals because of infection concerns. For these reasons and others, it is reasonable to expect to see an increase in procedures being performed at ambulatory surgery centers going forward, including hospital and physician joint venture ambulatory surgery centers. On April 29, 2021, the Office of Inspector General ("OIG") issued Advisory Opinion No. 21-02 regarding an investment by an unnamed health system, management entity, and certain surgeons in a newly formed ambulatory surgery center (the "Joint Venture"). Based upon the facts provided in the advisory opinion, the OIG concluded that due to the low risk of fraud and abuse, the OIG would not impose sanctions on the health system or the management entity in connection with the Joint Venture.

The physician ownership in the Joint Venture consists of five orthopedic surgeons and three neurosurgeons each of whom are employed by the health system. The health system owns 46 percent of the Joint Venture, the surgeons collectively own 46 percent (between four to eight percent for each surgeon), and the management entity owns eight percent. In addition, the Joint Venture will operate in a newly constructed medical facility owned by a real estate holding company that is also owned by the health system, the surgeon investors, and the management entity. The Joint Venture will enter space and equipment leases as well as services arrangements with the health system and the real estate holding company.

The OIG's position on investment in an ambulatory surgery center, such as the Joint Venture, is that any offer or payment of distributions from the ambulatory surgery center to an investor constitutes remuneration under the Federal anti-kickback statute ("AKS"). The AKS prohibits anyone from knowingly and willfully offering, making, soliciting, or receiving any remuneration in return for referring an individual to another person or entity for the furnishing of any item or service reimbursed by a federal health care program. Congress has, however, developed several statutory exceptions to the AKS and the U.S. Department of Health and Human Services has promulgated safe harbor regulations that, if met, protect persons from sanctions under the AKS. The "ASC Safe Harbor" is applicable to ambulatory surgery centers jointly owned by hospitals and physicians. In order to meet the safe harbor, there must be at least one hospital investor, and all physician investors must be surgeons, physicians of the same specialty, or multi-specialty physicians, each of whom is in a position to refer and perform surgeries at the ambulatory surgery center. The ASC Safe Harbor also includes certain requirements related to medical practice income and procedures; in particular, at least one-third of each physician investor's medical practice income from all sources for the previous fiscal year or previous 12-month period must be derived from the physician's performance of ambulatory surgery center qualified procedures (in short, procedures that are eligible for Medicare reimbursement at the surgery center), and at least one-third of the procedures performed by each physician investor for the previous fiscal year or previous 12-month period must be performed at the investment entity. Compliance with a safe harbor is voluntary and arrangements that do not strictly comply with a safe harbor are not necessarily improper but are evaluated on a case-by-case basis.

In the case of the Joint Venture, not all of the surgeon investors are anticipated to meet the requirements of the ASC Safe Harbor. In particular, one or more of the neurosurgeon investors will fail to meet the requirement that a physician investor derive at least one-third of his or her medical practice income for the previous fiscal year or previous 12-month period from the performance of ambulatory surgery center qualified procedures. The health system certified, however, that neurosurgeon investors will use the Joint Venture on a regular basis as part of their medical practices. Additionally, the health system certified that the surgeon investors will rarely refer patients to each other for qualified procedures (less than one percent). In other words, the surgeon investors will use the Joint Venture as an extension of their practice and personally perform almost all qualified procedures such physician refers to the Joint Venture. Based on these facts, the OIG concluded that surgeon investors will not likely be a significant source of cross-referrals to other surgeon investors.

In addition, the OIG noted that the Joint Venture will be operated with certain safeguards in place to reduce the risk that the health system will make or influence referrals to the Joint Venture or the physician investors. For example, the health system certified that any compensation paid to employed or otherwise affiliated physicians for services furnished, e.g., an employee or personal services arrangement, would be consistent with fair market value and would not be related, directly or indirectly, to the volume or value of referrals such physicians may make to the Joint Venture or its surgeon investors. The health system further certified that it would refrain from any action to require or encourage such physicians to refer patients to the Joint Venture or to its physician investors and would not track referrals made to the Joint Venture by such physicians (the management entity would, however, monitor each surgeon investor's compliance with procedure and practice income requirements).

Beyond these safeguards, several other factors further help mitigate the risk that investors who are referral sources for the Joint Venture would be rewarded for their referrals through either: (i) ownership based on past or future referrals or (ii) disproportionate profit distributions. For example, neither the Joint Venture, nor any other investor, will loan funds to, or guarantee a loan for, any investor to obtain ownership in the Joint Venture. The Joint Venture committed not to offer ownership to any party based on the previous or expected volume or value of referrals made by any party. In addition, capital contributions and profit distributions are made in proportion to an investor’s ownership in the Joint Venture. Further, all new investors will invest directly in the Joint Venture (i.e., no investor would hold any ownership through a pass-through entity, which could be used to redirect revenues to reward referrals or otherwise erode the safeguards provided by direct investment).

In regards to real estate and equipment, the health system certified that any space or equipment leased by the Joint Venture from the health system or the real estate holding company will comply with the AKS safe harbors for space rental and equipment rental, as applicable, and any services performed by the health system or the real estate holding company for the Joint Venture will comply with the safe harbor for personal services and management contracts and outcomes-based payments.

Finally, the Joint Venture and its investors will provide written notice to patients referred by investors to the Joint Venture of the referral source’s investment interest in the Joint Venture. The Joint Venture, the health system, the surgeon investors, and the management entity will treat patients receiving medical benefits or assistance under any Federal health care program in a nondiscriminatory manner, and all ancillary services provided to Federal health care program beneficiaries performed at the Joint Venture will be related directly and integrally to primary procedures performed at the Joint Venture and will not be billed separately to Medicare or any Federal health care program, and the health system will not include on any cost report or any claim for payment from a Federal health care program any costs associated with the Joint Venture, unless such costs are required to be included by a Federal health care program.

With respect to the management entity investment interest, it certified that: (i) it would not make or influence referrals, directly or indirectly, to the surgeon investors or to the Joint Venture; and (ii) no physician has or would have ownership in the management entity. These safeguards mitigate the risk that the offer or payment of investment returns by the Joint Venture to the management entity would be problematic under AKS.

For all of the reasons outlined above, the OIG ultimately concluded that the risk of the proposed arrangement is sufficiently low under AKS despite not fitting squarely within the ASC Safe Harbor, and the OIG would not impose administrative sanctions on the health system or the management entity in connection with the Joint Venture. While this advisory opinion is issued only to the parties requesting it and cannot be relied upon by others, OIG's analysis provides important insight into how it will evaluate similar joint ventures and how health systems might mitigate AKS risk in their ambulatory surgery centers ventures.

For more information, contact James Banister, Taryn Stone, Kevin Woodhouse or the Ice Miller Health Care attorney with whom you normally work. 

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.