ASC Joint Venture Causes Concern for the OIG

The Group had 52 shareholders (the “Group Shareholders”), each of whom was a licensed physician and an employee of the Group, and each Group Shareholder owned one share of the Group's stock. In addition, the Group employed other physicians who did not own Group stock (the “Group Associates”), and other health care professionals, such as physical therapists, optometrists, and licensed nurse practitioners. For purposes of the advisory opinion, all of the physicians in the medical group were collectively referred to as “Group Physicians.” Some Group Physicians were surgeons; however, most were not. For example, there were 14 family practitioners, 11 internists, six pediatricians, five obstetricians/gynecologists, two general surgeons, three orthopedic surgeons, and two ophthalmologists. The Surgical Center certified for the opinion that the salaries, bonuses, and any other forms of employment-related remuneration payable to Group Physicians would not take into account the physicians' referrals of patients to the Surgical Center or the volume of surgical procedures.

According to the facts in the opinion, the Surgical Center had two classes of members: the voting, Class A Members, consisting solely of the Hospital and the Group, and the non-voting, Class B Members, each of whom must be either a state-licensed physician eligible for credentialing at the Surgical Center, or a state legal entity with a majority of its owners being physicians who meet the foregoing requirements. No Class B memberships had, as of the date of the request for the advisory opinion, been sold.

Overview of the Law

As most all readers already know, the anti-kickback statute makes it a criminal offense knowingly and willfully to offer, pay, solicit, or receive any remuneration to induce or reward referrals of items or services reimbursable by a federal health care program. Where remuneration is paid purposefully to induce or reward referrals of items or services payable by a federal health care program, the anti-kickback statute is violated. By its terms, the statute ascribes criminal liability to parties on both sides of an impermissible “kickback” transaction. For purposes of the anti-kickback statute, “remuneration” includes the transfer of anything of value, directly or indirectly, overtly or covertly, in cash or in kind.

The anti-kickback statute has been interpreted to cover any arrangement where one purpose of the remuneration was to obtain money for the referral of services or to induce further referrals. Safe harbor regulations have been issued that define practices that are not subject to the anti-kickback statute because such practices would be unlikely to result in fraud or abuse. The safe harbors set forth specific conditions that, if met, assure entities involved of not being prosecuted or sanctioned for the arrangement qualifying for the safe harbor. However, the reader should keep in mind that safe harbor protection is afforded only to those arrangements that precisely meet all of the conditions set forth in the safe harbor.

The safe harbor for investment interests in ASCs jointly owned by hospitals and physicians is relevant to the Proposed Arrangement. One condition of the hospital-physician ASC safe harbor is that investing physicians who are in a position to refer patients to the ASC can only invest as individuals who meet the requirements for surgeon-owned ASCs, single-specialty ASCs, or multi-specialty ASCs, or as group practices composed of such physicians or surgical group practices. Since the Surgical Center's investing physicians are investing through a multi-specialty group practice, for safe harbor protection the group practice (ie, the Group) must meet all the requirements of the group practice safe harbor and the group practice must be composed of physicians who meet both the one-third practice income test and the one-third practice test.

The OIG's Analysis and Conclusion

According to the Office of Inspector General, surgical center joint ventures that include physician-investors in a position to generate surgical business are susceptible to fraud and abuse. Notwithstanding, in recognition that some physician-owned ASC ventures may be beneficial to the federal programs and their beneficiaries, a narrow safe harbor was issued for physician-owned ASCs that meet criteria carefully tailored to mitigate these risks of fraud and abuse. With respect to physician-investors, the safe harbor was carefully drafted to apply only to physicians who are unlikely to use the investment as a vehicle for profiting from their referrals to other physicians using the ASC. Accordingly, safe harbor protection is limited to physician-investors who actually use the ASC on a regular basis as part of their medical practices or who practice the same specialty as other physician-investors and are therefore unlikely to refer substantial business to “competing” physician-investors when they can earn the fees themselves.

According to the facts presented, the majority of the Group Physicians in this instance fit neither category. Since the Group was multi-specialty, there was a substantial likelihood of cross-specialty referrals for services performed in the ASC. Moreover, few of the Group Physicians would actually use the Surgical Center on a regular basis as part of their medical practice. In other words, the Proposed Arrangement would allow those Group Physicians for whom the Surgical Center was not an extension of their office practices to profit from their referrals to the Surgical Center or to their partners who performed procedures there. In this respect, the Proposed Arrangement posed the same risks as an ASC owned directly by surgeons and primary care physicians in the same community. In these circumstances, the fact that the ownership of the ASC was held indirectly through a group practice whose membership included both surgeons and other potential referring physicians did not reduce the risk that the venture may be used to reward referrals according to the OIG.

Conclusion

Based on the facts mentioned above, the OIG concluded that the Proposed Arrangement could potentially generate prohibited remuneration under the anti-kickback statute and that the OIG could potentially impose administrative sanctions on the Surgical Center.

Reed Tinsley, CPA, is a leading consultant to physicians, medical groups, third-party payers, and health care facilities. He serves on the Board of Editors of this newsletter, and is President of Reed Tinsley in Houston, Tinsley may be reached at 281-379-5988. E-mail: [email protected].

The Office of the Inspector General, in OIG Advisory Opinion Number 03-5, recently ruled whether an ambulatory surgery center (ASC) could be jointly owned by a hospital and a multi-specialty group practice that had a substantial number of physician members who would not personally use the ASC (the “Proposed Arrangement”). More specifically, the OIG was asked to provide an opinion about whether or not the Proposed Arrangement would constitute a violation of the anti-kickback statute.

Background

A “Surgical Center” entity was formed for the purpose of planning, developing, and operating an ASC that would be certified by Medicare. An acute care hospital (the “Hospital”), owned 49% of the Surgical Center, and a multi-specialty clinic (the “Group”) owned 51% of the Surgical Center. For each investor, the return on the Surgical Center investment would be directly proportional to the amount of capital that the investor contributed. The Surgical Center would maintain an open medical staff. It would be located on land owned by the Hospital and leased to the Surgical Center pursuant to a written lease.

The Group had 52 shareholders (the “Group Shareholders”), each of whom was a licensed physician and an employee of the Group, and each Group Shareholder owned one share of the Group's stock. In addition, the Group employed other physicians who did not own Group stock (the “Group Associates”), and other health care professionals, such as physical therapists, optometrists, and licensed nurse practitioners. For purposes of the advisory opinion, all of the physicians in the medical group were collectively referred to as “Group Physicians.” Some Group Physicians were surgeons; however, most were not. For example, there were 14 family practitioners, 11 internists, six pediatricians, five obstetricians/gynecologists, two general surgeons, three orthopedic surgeons, and two ophthalmologists. The Surgical Center certified for the opinion that the salaries, bonuses, and any other forms of employment-related remuneration payable to Group Physicians would not take into account the physicians' referrals of patients to the Surgical Center or the volume of surgical procedures.

According to the facts in the opinion, the Surgical Center had two classes of members: the voting, Class A Members, consisting solely of the Hospital and the Group, and the non-voting, Class B Members, each of whom must be either a state-licensed physician eligible for credentialing at the Surgical Center, or a state legal entity with a majority of its owners being physicians who meet the foregoing requirements. No Class B memberships had, as of the date of the request for the advisory opinion, been sold.

Overview of the Law

As most all readers already know, the anti-kickback statute makes it a criminal offense knowingly and willfully to offer, pay, solicit, or receive any remuneration to induce or reward referrals of items or services reimbursable by a federal health care program. Where remuneration is paid purposefully to induce or reward referrals of items or services payable by a federal health care program, the anti-kickback statute is violated. By its terms, the statute ascribes criminal liability to parties on both sides of an impermissible “kickback” transaction. For purposes of the anti-kickback statute, “remuneration” includes the transfer of anything of value, directly or indirectly, overtly or covertly, in cash or in kind.

The anti-kickback statute has been interpreted to cover any arrangement where one purpose of the remuneration was to obtain money for the referral of services or to induce further referrals. Safe harbor regulations have been issued that define practices that are not subject to the anti-kickback statute because such practices would be unlikely to result in fraud or abuse. The safe harbors set forth specific conditions that, if met, assure entities involved of not being prosecuted or sanctioned for the arrangement qualifying for the safe harbor. However, the reader should keep in mind that safe harbor protection is afforded only to those arrangements that precisely meet all of the conditions set forth in the safe harbor.

The safe harbor for investment interests in ASCs jointly owned by hospitals and physicians is relevant to the Proposed Arrangement. One condition of the hospital-physician ASC safe harbor is that investing physicians who are in a position to refer patients to the ASC can only invest as individuals who meet the requirements for surgeon-owned ASCs, single-specialty ASCs, or multi-specialty ASCs, or as group practices composed of such physicians or surgical group practices. Since the Surgical Center's investing physicians are investing through a multi-specialty group practice, for safe harbor protection the group practice (ie, the Group) must meet all the requirements of the group practice safe harbor and the group practice must be composed of physicians who meet both the one-third practice income test and the one-third practice test.

The OIG's Analysis and Conclusion

According to the Office of Inspector General, surgical center joint ventures that include physician-investors in a position to generate surgical business are susceptible to fraud and abuse. Notwithstanding, in recognition that some physician-owned ASC ventures may be beneficial to the federal programs and their beneficiaries, a narrow safe harbor was issued for physician-owned ASCs that meet criteria carefully tailored to mitigate these risks of fraud and abuse. With respect to physician-investors, the safe harbor was carefully drafted to apply only to physicians who are unlikely to use the investment as a vehicle for profiting from their referrals to other physicians using the ASC. Accordingly, safe harbor protection is limited to physician-investors who actually use the ASC on a regular basis as part of their medical practices or who practice the same specialty as other physician-investors and are therefore unlikely to refer substantial business to “competing” physician-investors when they can earn the fees themselves.

According to the facts presented, the majority of the Group Physicians in this instance fit neither category. Since the Group was multi-specialty, there was a substantial likelihood of cross-specialty referrals for services performed in the ASC. Moreover, few of the Group Physicians would actually use the Surgical Center on a regular basis as part of their medical practice. In other words, the Proposed Arrangement would allow those Group Physicians for whom the Surgical Center was not an extension of their office practices to profit from their referrals to the Surgical Center or to their partners who performed procedures there. In this respect, the Proposed Arrangement posed the same risks as an ASC owned directly by surgeons and primary care physicians in the same community. In these circumstances, the fact that the ownership of the ASC was held indirectly through a group practice whose membership included both surgeons and other potential referring physicians did not reduce the risk that the venture may be used to reward referrals according to the OIG.

Conclusion

Based on the facts mentioned above, the OIG concluded that the Proposed Arrangement could potentially generate prohibited remuneration under the anti-kickback statute and that the OIG could potentially impose administrative sanctions on the Surgical Center.

Reed Tinsley, CPA, is a leading consultant to physicians, medical groups, third-party payers, and health care facilities. He serves on the Board of Editors of this newsletter, and is President of Reed Tinsley in Houston, Tinsley may be reached at 281-379-5988. E-mail: [email protected].