1. OVERVIEW I. INTRODUCTION

Transcription

1 1. OVERVIEW I. INTRODUCTION The country's first ambulatory surgery centers ("ASCs") opened in From that date until 1982, growth in the country's ASCs was slow but reasonably consistent. In 1982, Medicare approved reimbursement for ASCs. Since 1982, the growth in ASCs has exploded. Today, there are close to 2,600 ASCs in operation. ASCs, for purposes of this monograph, are providers that focus on outpatient surgery. They are physically and organizationally separate from another provider, whether a hospital or a physician practice. The separation can be permanent or semi-permanent. The typical ASC is freestanding in that it is not physically within the four walls of either a hospital or a practice. However, an ASC can be operated under a separate license from a hospital and be considered a hospital-based ASC. Hospitals, as of 1999, principally provide outpatient surgical services through hospital outpatient departments. The distinction between a hospital-based ASC and hospital outpatient department is principally related to reimbursement. This distinction is discussed in chapter 5. Operators and owners of ASCs include hospitals, physicians and management companies. Ownership is often shared by one or more of these parties. The development of an ASC can be driven by many factors. For example, initially ASCs were often encouraged or developed by health plans. Since then, ASCs have been and are developed by physicians based on various motives, including practice convenience, operating site control, and profit. Finally, ASCs are developed by hospitals to accomplish one or more objectives. These may include the freeing up of operating room space to focus on larger-scale surgical programs or to use an ASC as a joint venture and solidify relationships with physicians. Because ASCs have multiple types of owners, and because they serve a number of goals and involve a wide range of legal issues, healthcare lawyers have regular and significant opportunities to work in one manner or another on behalf of ASCs, or one of the partners to the ASC. The healthcare lawyer may represent, for example, one of the partners information; the medical director or anesthesiologist in his or her contractual relationships with the ASC; the ASC (or an opposing party) in its certificate of need and licensing efforts; the ASC or holding company in its sale of interests through private placements; a partner or the ASC itself in its antitrust, Stark, Medicare and Medicaid fraud and abuse, tax exemption or other legal analysis; or one of many other parties. This chapter discusses four critical issues. First, it summarizes the national growth in ASCs. Second, it explores the tensions often raised by ASCs between hospitals and physicians. Third, it examines the potential benefits to the joint venturing of ASCs by hospitals and physicians. Fourth, it outlines the key legal issues related to ASCs. 1

2 This monograph, in addition to providing an overview of ASCs and their legal issues, covers several principal areas of concern in the context of ASCs. First, it discusses Medicare and Medicaid federal fraud and abuse statute issues and Stark issues. Second, it reviews tax exemption and other tax related issues. Third, it reviews state self-referral laws and their impact on ASCs. Fourth, the monograph explains ASC and hospital outpatient reimbursement. Fifth, it details certificate of need, licensure, and accreditation issues. Finally, the publication includes sample documents with annotations and a chapter that reviews miscellaneous issues. Throughout the monograph, we attempt to focus on current issues and provide practical and useful guidance. II. GROWTH IN ASCS As of 1999, there were approximately 2,600 ASCs in operation in the United States. 1 Of these, a majority have physician owners. Many ASCs also are owned, in whole or in part, by hospitals or health systems or by a corporate chain or national company owners. The largest national chains in the ASC area remain Columbia/ HCA and Health South. However, there are also a number of smaller chains that also own multiple centers (e.g., United Surgical Partners, Amsurg, Ambulatory Resource Centers). The growth in ASCs has exploded since In that year, Medicare approved payments to ASCs. At the time, there were approximately 293 ASCs in existence. 2 Today, there are approximately 2,600 ASCS. 3 A great deal of today's ASCs are fully built-out, multispecialty surgery centers that provide a broad range of outpatient surgical services. SMG Marketing Group, Inc. conducts an annual national review of ASCs. Their report provides a great array of statistical data regarding ASCs. For example, its 1997 report indicates: Approximately 2,100 ASCs are Medicare certified. Nearly 70% of all surgeries are now conducted on an outpatient basis. 9% of all ASCs perform more than 5,000 surgeries per year. Almost 90% of independent centers (often physician-owned) perform fewer than 3,000 surgeries per year. Ophthalmology, gastroenterology and OB/GYN procedures remain the most frequently performed procedures in ASCs. 1 FEDERATED AMBULATORY SURGERY ASSOCIATION, HISTORY AND GROWTH OF THE AMBULATORY SURGERY CENTER INDUSTRY (l998). 2 Id. 3 Id. 2

3 Average charges per ASC case were between $1,100 to $1,200 in This movement from inpatient to outpatient surgery, plus the development of outpatient surgical centers to handle a great amount of the outpatient surgery, has coincided with significant changes in the hospital environment. As of 1999, there are approximately 5,200 medical-surgical hospitals throughout the country. This is significantly fewer than the number of medical-surgical hospitals that existed in At that time, there were approximately 5,900 medical-surgical hospitals. 5 Hospitals perform nearly 55% of all their surgeries on an outpatient basis as compared to an inpatient basis. This is a significant change from ten years ago, when the great majority of hospital surgery was inpatient surgery. 6 III. TENSIONS BET EEN ASCS AND HOSPITAL The development of the ASC business as an industry has led to great tensions between hospitals and physicians. These tensions are particularly acute in small- and mediumsized communities as opposed to larger metropolitan areas. Of course, they are also acute in specific market segment areas in larger communities. The tensions revolve around competition for a limited total number of cases, surgeons and healthcare dollars. The tensions often manifest themselves in the following areas. Certificate of Need. A Certificate of Need ("CON") is required to develop an ASC in many states. A certificate of need application often creates a battle between a group of physicians or a national company attempting to obtain a CON and a local hospital attempting to maintain its market position with respect to technical fees and outpatient surgery. In certain situations, a hospital may attempt to obtain its own CON or expand its operations to make it more difficult for others to obtain approval. For example, CONS are often granted or denied based on statistical criteria that review cases per operating room performed in an area. If the hospital can open more operating rooms without CON approval, it can unilaterally reduce the number of cases per operating room in an area and make it impossible to meet the CON criteria needed for another party to develop an ASC. CON battles are also often lodged at the legislative level, with hospitals attempting to tighten CON laws and other groups attempting to reduce CON restrictions. 7 Differences in CON legislation from state to state have led to large 4 See SMG MARKETING GROUP, INC., FREESTANDING OUTPATIENT SURGERY CENTERS, REPORT AND DIRECTORY INDUSTRY TRENDS, MARKET PROJECTIONS, COMPARATIVE ANALYSIS July 1997). 5 AMERICAN HOSPITAL ASSOCIATION, HISTORICAL TRENDS IN UTILIZATION, PERSONNEL AND FINANCES FOR SELECTED YEARS FROM 1996 THROUGH 1996 (1998). 6 See Alden Solovy, Benchmarking Guide, 73 HOSPITALS AND HEALTH NETWORKS, 49 (January 1999). 7 See Peg Boyles, Do ASCs Cause Hospital Closures,... Rural Hospitals Battle Outpatient Surgicenters, 21 NEW HAMPSHIRE BUSINESS REVIEW (January 29,1999). In the waning weeks of 1998, a health care dispute that's simmered for decades erupted into vitriolic public warfare. It's a war all parties involved in insist they don't want, can't afford and shouldn't have to fight. But 3

4 differences in the number of ASCs in operation. For example, California, a state without CON restrictions, has more than 400 ASCs in operation. 8 New York, in contrast, which until recently had very tight restrictions, has fewer than 50 ASCs in operation. 9 Payor Contracting. The development of an ASC often leads to extensive price competition between hospitals and ASCs. Traditionally, certain out-patient surgical procedures had provided large profit margins for hospitals (particularly on the commercial payor side). The development of additional sites for outpatient surgery increases competition significantly, and will lead to price cutting with payors. In certain situations, it also leads to efforts to obtain exclusive contracts with payors to cut off a source of cases for the competitor. Market and Primary Care Dominance. Conflict between ASCs and hospitals often leads to other financial and strategic actions. For example, in response to the threat of a physician-owned assert greater control over the primary care physician community (via acquisition of practices or otherwise). Then it may attempt to restrict referrals by such primary care physicians away from surgical specialists who use the ASC. On the public relations side, the hospitals may attempt to characterize the physicians as money oriented and not concerned about the greater community welfare. Physician Recruitment. The establishment of an ASC often leads a hospital to target areas for recruitment to compete with the ASC. For example, a hospital may recruit orthopedic surgeons to compete with an ASC owned or used by orthopedic surgeons. To reduce these conflicts, many hospitals and physicians have attempted to collaborate in joint venture ASCs. Potential benefits of these joint ventures are discussed next. IV. JOINT VENTURES POTENTIAL BENEFITS Many potential benefits can be gained from joint ventures between hospitals and physicians. A brief review of these potential benefits is as follows: CON Battle. Often, where the hospital and the physicians combine to attempt to obtain a CON, the opposition to the CON is co-opted. Thus, a CON is often easier to obtain. Moreover, the ASC can become operational much quicker if a long, drawn-out CON battle can be avoided. the fighting intensifies, waged before state regulatory bodies, in the press, the Legislature and the courts. The battle pits the state's rural hospital networks against physician/investor groups seeking the freedom to own and manage freestanding outpatient facilities that compete directly with the hospitals. 8 SMG Marketing Group, Inc., MARKET FACTS (SURGERY CENTERS) (1998). 9 Id. 4

5 Amortization of Costs. When all parties are involved in the same joint venture, these is an ability to amortize the costs of the venture over a greater number of cases. Because the two principal costs relevant to an ASC are fixed in part (lease or building costs and many of the administrative and employee costs), the addition of cases simply makes the surgery center more viable and more profitable. It can also allow the ASC to buy better equipment, employ better staff and technology and better accept risk. Payor Contracts. By combining the resources of multiple physicians or physicians and a hospital, there is often an ability to provide a broader array of services to a payor. The combination of resources may also provide additional leverage in negotiating with payors. Indigent Care and Medicaid Services. By joint venturing a surgery center, it is often easier to ensure that a hospital will have physician resources available to assist with providing services to indigents and Medicaid patients. Protection Against Risks. Partners to the joint venture often can ensure the provision of additional capital to the venture. In many situations, the greatest problems revolve around surgery centers having insufficient cash flow and surgery centers having or carrying too much debt. Additional partners reduce the debt load for the center and reduce the risks inherent in a larger debt load. Professional and Competitive Jealousy. Surgery centers, by having multiple partners, can avoid the jealousy that exists when one or two physicians own the surgery center. In short, when there is a variety of partners, the surgery center is often viewed as a community asset rather than simply a method to provide profits to a few physicians. In many situations, this has very positive effects upon the surgery center. The most successful ASCs are used heavily and in large part by physicians who are not owners of the surgery center. When there are multiple owners, non-owners become far more comfortable using the center because they do not perceive that they are simply benefiting a few physicians. V. PRINCIPAL LEGAL ISSUES Lawyers involved in structuring ASC joint ventures, in acquiring surgery joint ventures or in simply providing day-to-day counseling to surgery centers must be familiar with and provide guidance on a variety of issues. A brief overview of the principal legal issues is set forth below. These issues are discussed in greater detail in chapters 2 through 6 of this monograph. A. Antitrust Does the involvement of a hospital in an ASC joint venture lead to Sherman Act conspiracy concerns? Does the joint venture include "price-fixing terms" between the hospital and the ASCs? 5

6 Is the joint venture intended to monopolize outpatient surgical services in the market area? Will a joint venture or acquisition require a Hart-Scott-Rodino ("HSR") filing? Because most individual ASCs do not meet the size requirement for HSR, HSR filings are typically not an issue. B. Medicare and Medicaid Anti-Kickback and Fraud and Abuse Will the ownership and compensation relationships be deemed intended to induce referrals of Medicare or Medicaid business to the ASC? Will the proposed surgery center fit within a safe harbor? Will the venture be structured to concur with guidance provided by the Health Care Financing Administration ("HCFA") and the Office of Inspector General ("OIG") regarding physician ownership of providers, including ASCs? Do other compensation relationships such as medical director, anesthesiologist or management relationships raise fraud and abuse concerns? Can primary care physicians own interests in the joint venture? Can returns be made to surgeons based on their referrals? C. Tax-Exempt Issues Will the participation of a tax-exempt entity in an ASC venture hurt its tax- exempt status? Will the income of the tax-exempt entity from the venture be considered exempt or unrelated business taxable income? Do leases or other management contracts create tax exemption or taxexempt financing issues or concerns? D. Certificate of Need Does the development of an ASC require a certificate of need? What criteria are used to judge CON applications statistical or subjective? Can an ASC certificate of need application of a competitor be challenged? Is the ASC exempt from CON under a specific state exemption? For example, exemptions from the requirement to obtain a CON often exist for ASCs that are: 6

7 a. owned by health maintenance organizations ("HMOs"); b. operated in physician offices; c. operated by single practices; or d. which are expanded if they spend less than a certain amount of money on the expansion. E. Stark Act Will the services of the ASC be considered "Stark-designated health services"? Typically, if not "hospital-based," the basic services are not deemed Stark services. Will the center be "hospital-based?" Will it be a hospital outpatient department? Or will it be "free-standing"? Will the surgery center provide ancillary services that are not billed as part of the ASC payment rate? For example, will the ASC provide imaging or lab services? Will a related party provide such services? F. Employee Benefits and Employee Issues Will the surgery center be considered an "affiliated service group" of its owners for ERISA purposes? Will the surgery center hire its own employees? G. State Self-Referral Issues Does the State Self-Referral Act permit physician ownership? If the state act permits physician ownership, does the state's Anti-kickback Statute or state version of the Stark Act provide for specific exceptions or specific requirements? Is there a mandatory patient disclosure requirement? H. Licensure, Accreditation and Medical Staff Issues Does the state specifically license surgery centers? Does the center intend to obtain third-party Medicare "deemed status" by an accrediting agency such as the JCAHO or AAAHC? 7

8 Will the medical staff be open or closed? Will the ASC have an exclusive contract with anesthesiologists and with other physicians? What is the process for actually obtaining the provider number in the state of operation? How quickly are provider numbers being processed? How will cash flow be handled while the ASC is waiting for the provider number? I. Real Estate-Related Issues Will the surgery center own its property? Will it lease property pursuant to a full lease or pursuant to a ground lease? What terms and representations will the ground lease or lease contain? Who owns improvements and structure? Will the relationships raise taxexempt or fraud and abuse issues? Will the surgery center have control of the property for a long period of time to enable it to amortize capital and other improvements? Is the CON location specific? Does relocation require state approval? VI. SUMMARY This monograph discusses legal issues applicable to ASCs. It specifically reviews in detail Medicare and Medicaid fraud and abuse, tax exemption, Stark, certificate of need, tax-related and licensing issues. It also provides samples of documentation with annotations. We intend for this to be useful to the experienced lawyer who desires a reference guide for specific issues. However, this monograph should also be useful to the novice healthcare lawyer looking for an overview issues critical to ASCs. Throughout the monograph, in addition to providing a full discussion and articulating positions proffered by HCFA and others, we have attempted to identify frequently asked questions and to address those questions. We hope this will be helpful to your efforts. 8

9 2. MEDICARE AND MEDICAID ANTI-KICKBACK FRAUD AND ABUSE STATUTE AND STARK ACT SELF-REFERRAL ISSUES ASCs, like most healthcare providers, rely on physician referrals for cases to be performed at the ASC, and, thus, for their revenues. For a variety of reasons, ASCs can be a fertile source of federal anti-kickback problems. A few of these are: Many ASCs rely heavily on Medicare cases (e.g., ophthalmology). Many ASCs are overbuilt and thus heavily indebted, giving rise to situations in which an ASC requires substantial business to remain open. Many ASCs rely too heavily on only a few physicians. The federal government has encouraged growth in ASCs and has been reasonably relaxed in its investigation, advisory and prosecution efforts against ASCs. These factors have arguably led many ASCs to "stretch the envelope" in terms of the practices they engage in to encourage business referrals to ASCs. Practices that can be considered problematic in the ASC context include: selling interests to physicians at below-market value; paying excessive rents for equipment or property to physicians who refer business to the ASC; paying excessive director fees to physicians who refer business to the ASC; paying lease or service payments that may be based on the volume of business generated at the ASC; requiring ASC-based anesthesiologists to "buy services" from the ASC; providing discounts to physicians that do "globally billed" procedures (e.g., plastic surgery) in exchange for the referral of other business; offering to waive co-payments or deductibles, or offering other benefits to patients; receiving benefits in exchange for providing ancillary referrals; conditioning physician ownership in the ASC on performance; 9

10 tying permitted ownership amounts to business generated at the ASC; and tying management fees to profits of the ASC. These reflect typical fraud and abuse problems. The Stark Act 1, in contrast to the Fraud and Abuse Statute, 2 does not apply to most non-hospital ASCs. Freestanding, nonhospital-based ASCs are not themselves generally viewed as providing outpatient hospital services as defined under the Stark Act. However, the Stark Act does apply to: ASCs that are hospital-based; and ancillary services, such as lab services or imaging services, if separately provided and billed for by the ASC. This chapter discusses case law as well as HCFA and OIG guidance relating to ASCs and joint ventures under the Fraud and Abuse Statute and the Stark Act. It also provides a sample compliance plan. I. THE FRAUD AND ABUSE STATUTE Guidance under the Fraud and Abuse Statute can be derived from many sources, including the Statute itself, the regulatory safe harbors, case law that applies the Statute to joint ventures, OIG commentary to the safe harbors and OIG advisory opinions. In examining these sources of guidance, it is helpful to have an understanding of the typical issues raised in the ASC context. A. Frequently Raised Fraud and Abuse Questions Can surgeons invest in ASCs? Can primary care physicians invest in ASCs? Can a non-referring partner or the entity finance physician investment in an ASC? Can the non-physician partner in an ASC guarantee debt or finance the ASC s operations? Can the ASC provide for distributions or payments based on production? Can a management company be paid based on a percentage of revenues? Can a physician-owned entity manage an ASC? If so, how can it be paid? 1 42 U.S.C. 1395nn. 2 U.S.C a-7b(b). 10

11 Can the ASC require the performance by investors of a certain number of cases at the ASC? Can the ASC require the buyout of a physician if he or she is not in a position to perform services at the ASC? Can physicians own more than 60% of the ASC? These questions should be analyzed in light of both OIG commentary and existing case law. This analysis may differ, however, from state to state (1) based on state law concerns, and (2) based on whether a tax-exempt entity is involved in the venture. B. The Proposed ASC Safe Harbor and OIG Advisory Opinion No OIG, through its proposed ASC safe harbor, and through OIG Advisory Opinion No , has clearly articulated a level of comfort with a surgeon's investment in an ASC to which the surgeon refers cases and in which the surgeon also performs services. OIG, in its commentary relating to the proposed ASC safe harbor, stated as follows: A special situation may exist when a physician sees a patient in his or her office, makes a referral to an entity in which he or she has an ownership interest and performs the service for which the referral is made. This concept is often referred to as an extension of the physician's office practice. In the above situation, the physician-investor receives two payments: (1) the professional fee for furnishing the service, and (2) the profit distribution from the entity based on the program payment the entity receives that was generated from the referral. We do not consider the statute to be implicated by the first payment. However, we believe that the second payment is potentially covered by the statute. As with any investment interest held by a potential referral source, the profit distribution provides some financial incentive to refer patients to the entity. To the extent this payment has the potential to induce physicianinvestors to overutilize the entity, no safe harbor protection is warranted. In contrast, where these payments do not constitute a significant inducement to make referrals, they may merit safe harbor protection. Where the professional fee generated by a referral is substantially greater than the facility fee generated by the referral, we believe that the profit distribution payment (which results from the facility fee) does not constitute a significant improper inducement. Only where a great disparity between the facility and professional fees exists will the incremental increase in profit distribution from a referral be so small as to be 11

12 inconsequential when compared to the corresponding professional fee. Therefore, we will only consider providing safe harbor protection to types of extensions of practice that receive facility fees from referrals that are greatly disparate from the professional fee generated by the referral. Because we believe that ASCs generally fit this criterion, we have proposed a safe harbor for certain investment interests in ASCs. When a patient is referred to an ASC for surgery, there is a great disparity between the surgeon's professional fee and the ASC s facility fee. Therefore, we propose to protect the payment of profit distributions from the ASC to investors where all investors in the ASC are surgeons in a position to refer to the ASC and perform services. This proposed safe harbor applies only to ASCs certified under 42 CFR part 416. We are not proposing to protect ASCs located on the premises of a hospital that share their operating or recovery room space with the hospital for treatment of the hospital s inpatients or outpatients. 3 The comments also note that the reasoning for the safe harbor should not be deemed applicable to nonsurgeons: The rationale underlying this safe harbor does not extend to investment interests held by physicians who are not in a position to refer patients directly to the ASC and perform surgery. Such physicians do not receive a professional fee performed by the entity. An example to illustrate the potential perils of protecting profit distributions to such investors would be where a non-surgeon physician investor may refer a patient to a surgeoninvestor who may, in turn, refer the patient to the ASC where the surgeoninvestor may perform the surgery. In this scenario, the non-surgeon investor would receive a return, through the ASC's profit distribution, for the "indirect referral" of the patient. Because of the potential for improper inducement of referrals illustrated in this example, we do not think investment interests held by non-surgeon investors merit safe harbor protection. 4 The proposed safe harbor includes five standards: It precludes an investor from being afforded better investment terms based on past or expected referrals or amount of services furnished to the entity; It requires that a passive investor not be require to make referrals to the entity in order to continue as an investor; It prohibits the entity or any investor from loaning funds to the investor for use in obtaining an investment interest; It requires that payments not be based on referrals; and 3 58 Fed. Reg. 49,008, 49,009 (Sept. 21,1993). 4 Id. at 49,

13 The practitioner must agree to treat Medicare and Medicaid patients. 5 OIG Advisory Opinion No reviews similar issues as those raised in the ASC safe harbor. Specifically, it reviews the formation of an ASC by five physicians: two anesthesiologists and three orthopedic physicians. In this advisory opinion, OIG s analysis was articulated as follows: Owners Provide Substantial Capital. The Physician-Investors will be the shareholders of the corporation, or the owner-members of the limited liability company, and will make substantial capital contributions to the ASC. 7 Ownership Interest Not Tied to Referrals. The Physician-Investors have certified that the amount of their capital contributions will not be based on any expected volume of referrals to the other Physician-Investor. 8 Proportionate Voting and Control Among the Members. The Physician- Investors will receive voting and distribution rights proportional to their investment. 9 Proportionate Guarantees by Members. The Physician-Investors will personally guarantee payment under the lease for the ASC's prernises. 10 Expected Use by Physicians; Office-Like Setting Evidences Practice-Like Setting. The Physician-Investors expect to utilize the ASC as their preferred ambulatory surgical center for procedures for which it is appropriately equipped. The Physician-Investors have represented that each Physician- Investor will perform the majority of his ambulatory surgical center procedures at the ASC. ASC procedures currently include certain pain management procedures performed by the Physician-Investors who are anesthesiologists. 11 Priority Scheduling. Although the ASC will be available for use by non-investor physicians, the Physician-Investors will be given priority scheduling and have represented that they will perform over 80% of the total procedures performed at the ASC Id. at 49, OIG Advisory Opinion No (Sept. 16,1998). 7 Id. 8 Id. 9 Id. 10 Id. 11 Id. 12 Id. 13

14 No Separate Ancillaries. All ancillary services performed at or by the ASC will be integrally related to the primary procedure a Physician-Investor is performing at the ASC. 13 Small Amount of Medicare Business. The Physician-Investors have certified that Medicare reimbursement will account for approximately 5% of the ASC annual revenue. 14 Professional Fees Billed Separately. Each of the Physician-Investors will directly bill his patients and related third-party payors, including Medicare and Medicaid, for the professional component of the ASC procedures he performs. 15 Patient Disclosure. The Physician-Investors will provide their p disclosure of their ownership in the ASC, explaining referring patients to the ASC. 16 Based on these facts, OIG articulated its position at length. There, it stated a degree of comfort with physician-asc joint ventures but distinguished ASCs from other joint ventures: This Office has long been concerned with the risk of abuse posed by healthcare joint ventures in which investors are also sources of referrals or suppliers of items or services to the joint venture. In 1989, the Office of Inspector General issued a 'Special Fraud Alert' specifically addressing joint venture arrangements. The Special Fraud Alert distinguishes between those joint ventures that are clearly legitimate and those that are suspect under the anti-kickback statute. A joint venture may be suspect when physicians are both investors in the joint venture and are in a position to refer to the joint venture. Under these circumstances, remuneration paid to the physicians in exchange for referrals may be disguised as profit distributions. Such suspect joint ventures... may be intended not so much to raise investment capital legitimately to start a business, but to lock up a stream of referrals from the physician investors and to compensate them indirectly for these referrals. Because physician investors can benefit financially from their referrals, unnecessary procedures and tests may be ordered or performed, resulting in unnecessary program expenditures. 59 Fed. Reg ( ec. 19, 1994). Substantial ownership by investors who are in a position to refer patients to the joint venture ('Interested Investors') is an indicator of a suspect joint venture because such ownership increases the likelihood that the joint venture's primary purpose is to control a stream of referrals. See 56 Fed. 29,1991). Other factors that could indicate potentially unlawful activity include the Interested Investors receiving a disproportionate return on their investments, and the joint 13 Id. 14 Id. 15 Id. 16 Id. 14

15 venture being structured as a 'shell' for use by on-going entities already engaged in a particular line of business The Proposed Arrangement is the antithesis of the small entity investment safe harbor business structure. All of the investors will be referral sources to the ASC, and virtually all such business of the ASC will be from investor referrals. Nevertheless, for the reasons and in the circumstances set out below, we conclude that although the Proposed Arrangement may potentially violate the anti-kickback statute, we would not impose sanctions. At the outset, we note that the Healthcare Financing Administration promotes ambulatory surgical centers as a cost-effective alternative to higher cost settings, such as hospital inpatient surgery facilities. Many patients prefer treatment in less intensive settings, such as ambulatory surgical centers. Thus, ambulatory surgical centers benefit both the Medicare program and its beneficiaries. This Office has proposed a safe harbor to protect surgeons who, as an extension of their personal office practice, routinely per- form procedures in ambulatory surgical centers in which they have investment interests. See 58 Fed. Reg (Sept. 21,1993). There are obvious and legitimate business and professional reasons for surgeons to want to own an ambulatory surgical center in which they will personally perform services on a routine basis. These reasons include personal and patient convenience, professional autonomy, accountability, and quality control. Moreover, any risk of overutilization or unnecessary surgery is already present by reason of the opportunity for a surgeon to generate his professional fee; the additional financial return from the ambulatory surgical center investment is not likely to increase the risk of overutilization substantially. Notwithstanding, this Office is concerned about the potential for investments in ambulatory surgical centers to serve as vehicles to reward referring physicians indirectly. For example, a primary care physician, who performs little or no services in an ambulatory surgical center in which he has an ownership interest, may refer to surgeons utilizing the ambulatory surgical center, thereby receiving indirect remuneration for the referral through the ambulatory surgical center's profit distribution. Similarly, an investment by orthopedic surgeons in an ambulatory surgical center that is not equipped for orthopedic surgical procedures, or that is exclusively used by anesthesiologists performing pain management procedures on patients referred by the orthopedic surgeons, would be suspect. 15

16 The situation presented here is very different. First, all Physician-Investors will be making substantial financial investments in the ASC and incurring financial exposure for the ASC's lease. Second, although not all Physician- Investors are surgeons, each Physician-Investor has certified that he currently derives, and anticipates continuing to derive, at least 40% of his aggregate medical practice income from ASC procedures. In addition, each Physician-Investor has certified that he will perform the majority of his ASC Procedures in the ASC. Third, given that the revenue from procedures on Medicare beneficiaries is estimated to be only 5% of the ASC's total revenues, any income from procedures performed on referred Medicare patients will be insubstantial compared to the income from procedures performed on the Physician-Investors' own patients. Fourth, any return on investment to the Physician-Investors will be proportional to their capital investments, and not based on referrals. In these circumstances, the Proposed Arrangement is substantively equivalent to an "all surgeon" ambulatory surgical center and presents a minimal risk that the return on investment would be a disguised payment for referrals. Finally, the Physician-Investors will provide their patients with a written disclosure of their ownership in the ASC, explaining that they are referring patients to the ASC. This written disclosure is required by the state's law. While we do not believe that disclosure to patients offers sufficient protection from program abuse, effective and meaningful disclosure offers some protection against possible abuses of patient trust. 17 The proposed safe harbor and the Advisory Opinion are useful in under- standing what OIG does and does not condone. Specifically: OIG, in the opinion, condones the intent of the physicians to refer to the ASC and receive the profit return. OIG bases its approval on its belief that ASCs are good for the Medicare Program rather than basing its approval on the statute itself. Because OIG's attitudes toward types of patients and providers change as abuses arise in certain areas, it is critical that providers be cautious in relying on such current beliefs as opposed to relying on the statute itself. OIG does not condone primary care investment. OIG disfavors ownership based on potential referrals. OIG permits returns based on ownership but not returns based on level of referrals. OIG prefers that an entity or partner not lend funds to a physician to finance investment. 17 Id. 16

17 The guidance applies to investment ownership but not compensation relationships. OIG's guidance provides a good starting point for answering questions relating to the actual structure of the investment in an ASC and to those questions relating to primary care investment in ASCs. C. Small Investment Safe Harbor In its commentary related to the small investment safe harbor, OIG articulated a number of principles that provide useful guidance in the structuring of joint ventures. 18 OIG elaborated on these principles as follows: Equal Marketing. The entity or any investor must not market or furnish the entity's items or services to passive investors in a manner different than that marketed or furnished to non-investor. 19 In other words, although an entity may seek referrals or other business from passive investors, it must promote and furnish its items or services to investors and noninvestors in the same manner. No Distribution of Referral Information. Any distribution to passive investors of individual or aggregate investor referral patterns would not be protected under this provision. 20 No Cross-Referrals. The entity or any investor must not promote the items or services of other entities as part of a cross-referral agreement. 21 No Loans to Investors. The entity must not loan funds to or guarantee a loan for an investor to use for the purpose of obtaining the investment interest. 22 OIG stated that it did not believe that protection should be afforded where an investor is loaned money from the entity, or from a parent or subsidiary corporation (or is guaranteed a loan by the entity or a related organization), and the investor makes an investment based on that loan. 23 In such a situation, the investor is adding no real capital to the entity. OIG, however, noted that safe harbor protection is available where the investor borrows from other sources. 24 A large number of commentators to the small investment safe harbor argued that physician involvement in joint ventures is necessary because physicians provide Fed. Reg. 35,952 (July 29, 1991). 19 Id. at 35, Id. 21 Id. 22 Id. 23 Id. 24 Id. at 35,

18 needed capital. 25 Other commentators, in contrast, questioned whether investors are really generating capital for the joint ventures in which they invest. 26 Many suggested that the OIG should only protect an investor's capital in cases where the capital was genuinely at risk. 27 In other words, if the investor's interest is obtained through a no-interest loan paid off through deductions from future dividend distributions, there was never really any capital placed in risk. 28 OIG responded as follows: For example, the entity may borrow from the investor, and investors may borrow from other sources to obtain funds to use for the capital investment. But as we discussed above, where investors make their investment with money loaned from the entity, they are adding no real capital to it. Thus, this standard will help assure that physicians and other investors in fact provide new needed capital and that the joint venture is not in reality a sham to facilitate the distribution of payments for referrals. 29 Returns Proportionate to Ownership. The amount of payment in return for the investment interest must be directly proportional to the amount of the capital investment. 30 Such payments are consistent with the type of corporate dividend payment that OIG is trying to protect. Equal Investment Opportunity. (1) A bona fide opportunity to invest is made on an equal basis without regard to the investor's ability to make referrals, (2) no requirement is imposed on the investor to make referrals, and (3) payments are not related to referral. 31 ' The standards address the problems of discriminatory marketing strategies that result in the offer of better deals, for example, more shares or a better price, to individuals who will refer a high volume of patients. Safe harbor protection also requires that an offering to a passive investor is not conditioned on his or her ability to refer business to the venture and, further, that an offering is not made on more favorable or otherwise different terms based on the expectations as to how much business can be generated by an investor. D. Suspect Joint Ventures Fraud Alert A Special Fraud Alert provides further guidance on permitted ways to structure and invest in ASCs and other joint ventures. 32 In the Fraud Alert, OIG laid out and discussed key factors that suggest that a particular joint venture is suspect under the fraud and abuse statute: 25 Id. 26 Id. 27 Id. 28 Id. 29 Id. 30 Id. at 35, Id Fed. Reg. 65,373 (Dec. 19, 1994). 18

19 Capital Versus Business Referrals. Under these suspect joint ventures, physicians may become investors in a newly formed joint venture entity. The investors refer their patients to this new entity and are paid by the entity in the form of "profit distribution. 33 These suspect joint ventures may be intended not so much to legitimately raise investment capital to start a business, but to lock up a stream of referrals from the physician investors and to compensate them indirectly for these referrals. Because physician investors can benefit financially from their referrals, unnecessary procedures and tests may be ordered or performed, resulting in unnecessary program expenditures. 34 Divestment. Physician investors may be actively encouraged to make referrals to the joint venture, and they may be encouraged to divest their owner- ship interest if they fail to sustain an acceptable level of referrals. 35 Investors may be required to divest their ownership interest if they cease to practice in the service area, for example, if they move, become disabled or retire. 36 Tracking Referrals. The joint venture tracks its sources of referrals, and distributes this information to the investors. 37 Shell Ventures. The structure of some joint ventures may be suspect. For example, one of the parties may be an ongoing entity already engaged in a particular line of business. That party may act as the reference laboratory or DME supplier for the joint venture. In some of these cases, the joint venture can be best characterized as a shell. 38 In the case of a shell laboratory joint venture, for example: It conducts very little testing on the premises, even though it is Medicare certified. The reference laboratory may do the vast bulk of the testing at this central processing laboratory, even though it also serves as the "manager" of the shell laboratory. Despite the location of the actual testing, the local "shell" laboratory bills Medicare directly for these tests. 39 In the case of a shell DME joint venture, for example: 33 Id. 34 Id. 35 Id. 36 Id. 37 Id. 38 Id. 39 Id. 19

20 It owns very little of the DME or other capital equipment; rather, the ongoing entity owns them. The ongoing entity is responsible for all day-to-day operations of t joint venture, such as delivery of the DME and billing. 40 The following guidance, that can be derived from the safe harbor and from the Fraud Alert, is as follows: No difference in price or investment opportunity should be based on referrals. No requirements to refer should be imposed on physician investors. No financing of investment interests should be provided by partners or related entities. Any disproportionate provision of profits to one partner as compared to capital or ownership should be viewed as suspect. True joint ventures are significantly preferred to contract or shell joint ventures. Exit provisions must be defensible as not intended to lock up referrals. Having privileges at other providers should not be prohibited. E. Case Law and Other Guidance Primary Care Investment and Management The safe harbors and the Fraud Alert are extremely helpful in setting the ground rules for a surgeon's investment. However, they do not fully resolve issues relating to primary care investment or to other compensation and management relationships. The OIG, as noted above, has expressed concerns regarding primary care investment in ASCs. However, arguments exist that primary care investments in ASCs should not be deemed per se prohibited. In Hanlester Network v. Shalala, 31 E3d ) and in Baglio v. Baska, 940 F. Supp. 819 (1996), aff d, 116 E2d 467 (3r Cir. 1997), the courts asserted that referral joint ventures not be deemed per se unlawful. In the Hanlester case, the court stated: Healthcare joint ventures such as that entered into were not per se unlawful. The evidence shows that Hanlester desired to comply with the law and structured its business operation in a manner which it believed to be lawful. There is ample evidence that appellants intended to encourage limited partners to refer business to the joint venture laboratories. The appellants offered physicians the opportunity to profit indirectly from 40 Id. 20

21 referrals when they could not profit directly. Potential partners were told that the success of the limited partnerships depended on referrals from the limited partners. While substantial cash distributions were made to limited partners by the joint venture labs, dividends were paid to limited partners based on each individual's ownership share of profits, and not on the volume of their referrals. Payments were made to limited partners whether or not they referred business to the joint venture labs. The fact that a large number of referrals resulted in the potential for a high return on investment, or that the practical effect of low referral rates was failure for the labs, is insufficient to prove that appellants offered or paid remuneration to induce referral. 41 Similarly, in Baglio, the court stated that physician self-referral joint ventures are not prohibited per se by the plain language of the [fraud and abuse] statute. 42 In this case, the plaintiff alleged that the actions of various defendant physicians, officers and directors in promoting and establishing a clinical pathology laboratory joint venture with a hospital violated the fraud and abuse statute. The court evaluated the joint venture arrangement in light of the Hanlester case and held that, by itself, the fact that the return on investment rises and falls in direct relation to the level of referrals to the joint venture is not enough to demonstrate that a joint venture arrangement violates the fraud and abuse statute. 43 Based on case law, it appears that something more than investment itself and a return thereon is necessary to declare primary care investment illegal. This premise is supported by the fact that the Stark Act does not generally prohibit investment and, further, that OIG (at least in the Stark Act regulations) has asserted that a return on investment itself is not compensation. 44 Given OIG's position, it is apparent that nonsurgeon investment must be very carefully structured to assure that the purpose of the investment is not to encourage referrals. 45 This is also important because many states specifically prohibit ownership by physicians that can refer but not treat patients at a venture. 46 Although OIG expresses comfort with a surgeon's investment in an ASC, it does not extend this comfort to a surgeon's compensation relationship with ASCS. 47 Nevertheless, promoters and ASCs in certain situations attempt to encourage surgeon involvement in ASCs through compensation without an actual investment in the ASC. This is common in situations where either state law places restrictions on direct investment (through self- 41 Hanlester, 51 F.3d at Baglio, 940 F. Supp. at Id C.F.R (a) (1997); 63 Fed. Reg. 1659, (1998). 45 Id. at 42 C.F.R (a); Id. at 63 Fed. Reg See Chapter Fed. Reg (1998). 21

22 referral or certificate of need reinvestment) or situations in which the owner designs to retain greater control. The structure of such management relationships must be carefully developed so as not to mimic ownership. In short, OIG's favor with partnership returns does not extend to compensation that is intended to mimic ownership. Therefore, most management or compensation relationships should be structured as annual fixed fee and fair market value relationships that do not vary based on the referral of business. The safe harbor for management and personal services is as follows: The personal services and management contracts safe harbor provides protection for personal services contracts if all of the following six standards are met: (i) the agreement is set out in writing and signed by the parties; (ii) the agreement specifies the services to be performed; (iii) if the services are to be performed on a part-time basis, the schedule for performance is specified in the contract; (iv) the agreement is for not less than one year; (v) the aggregate amount of compensation is fixed in advance, based on fair market value in an arms-length [sic] transaction, and not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made by Medicare or a State healthcare program; and (vi) the services performed under the agreement do not involve the promotion of business that violates any Federal or State law. 48 The OIG has further commented on percentage-based relationships in Opinion 984 and in safe harbors. In this advisory opinion, the OIG stated: Percentage compensation arrangement for marketing services may implicate the anti-kickback statute. In our preamble to the 1991 final safe harbor rules, 56 Fed. Reg (July 29,1991), we explained that the anti-kickback statute "on its face prohibits offering or acceptance of remuneration, inter alia, for the purposes of arranging for or recommending, purchasing, leasing, or ordering any...service or item payable under Medicare or Medicaid. Thus, we believe that many marketing and advertising activities may involve at least technical violations of the statute. 56 Fed. Reg. at This Proposed Arrangement is problematic for the following reasons. The Proposed Arrange may include financial incentives to increase patient referrals. The compensation that Company B receives for its management services is a percentage of Company A s net revenue, including revenue from business derived from managed care contracts arranged by Company B. Such activities may potentially implicate the anti-kickback statute, because the compensation Company B will receive will be in part for marketing services. Where such compensation is based on a percentage, there is at least a potential technical C.F.R (d) (1997). 22