Buy-outs and Dealing with Physician Owner Inequities

Buy-outs and Dealing with Physician Owner Inequities Jeff Fox Vice President, Acquisitions & Development, Ambulatory Surgery Centers of America Eric B. Gordon, M.D. Partner, McDermott Will & Emery LLP FEBRUARY 24, 2012

2 Agenda Reallocation of Ownership Interests Physician Deadweight/Physician Buybacks Removal for Non-Compliance with 1/3 Tests Medical Directorships and Other Perks

3 Reallocation of Ownership Interests Reallocation occurs when deadweight physicians are removed resulting in larger ownership interests for the remaining investors in the ASC Reallocation occurs when heavy utilizers are offered the opportunity to acquire greater ASC percentage ownership Dilemma is how to accomplish this in a legal manner Reallocation occurs when new physicians are recruited to buy into an existing ASC

4 Reallocation of Ownership Interests (cont d) An ASC cannot allocate percentage interests or terms of investment based on utilization without creating significant legal risk Periodic reallocations are inherently suspect and disfavored

5 Reallocation of Ownership Interests (cont d) Some potential justifications for offering different terms to physician investors include the following: Timing of individual physician s purchase Initial syndication versus subsequent sales Physician seniority (most relevant in group practice setting) Amount of risk being assumed (e.g., timing of purchase; preconstruction; prior to CON or other regulatory approvals; commencement of operations; or stable EBITDA) Physician specialty mix

6 Reallocation of Ownership Interests (cont d) Business realities Ownership in most ASCs has no correlation to actual utilization by physician investors resulting in windfall to the less and non-productive surgeon Survey results Many ASCs desire to reallocate or reshuffle physician ownership to more closely reflect ASC utilization by its physician investors Anti-kickback statute implications are significant

7 Dealing with Deadweight Physicians Non-productive surgeon investors Free riders Obstacles to recruitment and succession Cannot punish for not referring, but can remove or redeem physician investors in appropriate circumstances

8 Dealing with Deadweight Physicians (cont d) Removal through credentialing/quality assurance ASC would need to have a functioning QA/UR process Need an adequate sample size to evaluate current skills Removal for competition or conflicts Partner/member s fiduciary duty to act in the best interests of the ASC In OIG Advisory Opinion 03-02, the OIG approved a hospital-physician joint venture that contained a broad non-competition agreement that prohibited investment, management or development of a competing ASC

9 Dealing with Deadweight Physicians (cont d) Redemption for loss of medical staff privileges, retirement, relocation, death, incapacity, or nonattendance at meetings Lack of active involvement in management or decision-making versus use requirement Redemption price may be FMV or a formula or a penalty State mandated redemptions for ASCs structured as PCs (e.g., death; incompetency; loss of licensure)

10 Dealing with Deadweight Physicians (cont d) Removal for cause Medicare fraud; felony; bankruptcy; divorce are all typical Unlawful behavior, including harassment or creating a hostile working environment, are also legitimate reasons Removal without cause may create significant legal risk, especially if used to remove a non-productive physician Facts and circumstances need to be carefully reviewed and documented contemporaneously

11 Dealing with Deadweight Physicians (cont d) Hospital employment (or hospital affiliated group employment) of physician investors in an ASC Not currently covered in most ASC governance documents Often results in lower ASC utilization; hospital may mandate referrals to their system and/or ASC divestiture No FMV requirement when removing investors If removal without cause or otherwise raises potential antikickback issue, FMV is safest

12 Dealing with Deadweight Physicians (cont d) Takeaway: An ASC that wants to include repurchase events should clearly describe all events in the ASC s governance documents, including price Real-world examples

13 Removal For Non-Compliance with 1/3 Tests One-Third Medical Practice Income Test Every referring physician investor must derive at least 1/3 of the physician s medical practice income from ASC procedures Medical practice income arguably does not include returns from investments, income from teaching, or expert witness fees One-third medical practice income test applies to all ASCs

14 Removal For Non-Compliance with 1/3 Tests One-Third ASC Procedures Test Every referring physician investor must perform at least 1/3 of the physician s ASC procedures at the investment ASC ASC procedures are set forth on the Medicare list of procedures approved for an ASC, regardless of payor status or site of service One-third procedures test only applies to multi-specialty ASCs

15 Removal For Non-Compliance with 1/3 Tests (cont d) How to measure practice income? Revenue Collections Net income after expenses Other

16 Removal For Non-Compliance with 1/3 Tests (cont d) DeBartolo v. HealthSouth (June 26, 2009) Lawsuit by a physician-investor against an ASC for revoking his partnership interest because he failed to satisfy the 1/3 procedures test Federal district court dismissed the lawsuit, DeBartolo appealed, and the 7 th Circuit ruled that the district court should not have even heard the matter because it only involves State law contract claims

17 Removal For Non-Compliance with 1/3 Tests (cont d) Can an ASC use a low-utilizing physician s failure to satisfy a 1/3 test as the basis for divesting the physician? Surgery Center at Hamilton ASC safe harbor compliance is arguably a legitimate basis for divesting a low utilizer,... If the ASC is genuinely committed to compliance with the ASC safe harbor, and the other physicians would satisfy the 1/3 tests if the physician is divested

18 Removal For Non-Compliance with 1/3 Tests (cont d) If there are other physicians who do not satisfy the same 1/3 test Divestiture creates anti-kickback risk because the ASC cannot argue that divestiture is required for safe harbor compliance Divestiture creates an inference that the terms of the investment for the physician relate to the physician s prior or expected volume of referrals Approximating compliance with the ASC safe harbor could be a legitimate reason for divesting a low utilizer, but consistency is key Divested physician fails the 1/3 test by a mile, while the other investors failures are de minimis

19 Removal For Non-Compliance with 1/3 Tests (cont d) Real-world examples: how do ASCs address the 1/3 tests?

20 Medical Directorships and Other Perks First issue: and other perks Directorships must be Needed Documented Reasonable hours Directorships scrutinized on due diligence Hospital systems ASC companies Real-world examples

21 Medical Directorships and Other Perks (cont d) Other Perks OR access Start times Scrub nurses U.S. ex rel. Fry v. Health Alliance of Cincinnati

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