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Understanding Ambulatory Surgery Centers

On Behalf of | Mar 31, 2014 | Articles, Healthcare Law, Healthcare Transactions

By: Mathew J. Levy, Esq. & Stacey Lipitz Marder, Esq.Email the Author


It is no secret that ambulatory surgery centers (“ASCs”) are becoming the go to place for physicians to perform procedures as opposed to hospitals as physicians attempt to increase revenue and align with hospitals. As per the Centers for Medicare and Medicaid Services (CMS), an ASC is defined as followed: “any distinct entity that operates exclusively for the purpose of providing surgical services to patients not requiring hospitalization and in which the expected duration of services would not exceed 24 hours following an admission. See 42 cfr § 416.2 Definitions  While there are certainly several benefits to ownership in an ASC, prior to jumping on the ASC bandwagon, it is imperative that physicians and other investors understand the process of starting/operating an ASC, as well as evaluate the legal, business and regulatory implications. Although the corporate practice of medicine doctrine in New York State generally prohibits general business corporations from employing physicians for the purpose of providing medical services or arranging for the provision of medical services, ASCs, unlike medical practices, can be owned by non-physicians. See NY BCL §1501 et seq.; NY Education Law §6522

CON Process:

In order to operate an ASC in New York, approval must be obtained from the Department of Health and Health Planning Committee via the Certificate of Need (CON) process. The objectives of the CON process are to promote delivery of high quality health care and ensure that services are aligned with community need.  The CON process can be very involved and can often take several months to complete.  All proposed operating documents have to be submitted, in addition to floor plans and other information pertaining to the project.

In order to increase the probability that approval is granted, many ASCs are partnering with hospitals as hospitals often are able help prove the need for an ASC in the community.  Additionally, hospitals have an interest in entering into joint ventures with ASCs as it is more cost effective to perform procedures at an ASC as opposed to a hospital.

Legal Documents:

Prior to commencement of the CON application process, proposed documents in connection with the ASC need to be drafted. For instance, formation documents (Articles of Organization/Certificate of Incorporation) need to be drafted, as well as operating documents (operating agreement/shareholders agreement) dictating the terms regarding how the ASC will be governed and the rights of its owners.  There are several key provisions to consider in such operating documents. For instance, potential investors should ascertain information regarding how distributions are made, how decisions are made with respect to the ASC, as well as who is responsible for the day to day management and decision making. Furthermore, potential investors should consider how new members are added, as well as what their buy-in will be.  Termination provisions are also important to consider, specifically how an owner can be terminated (without cause or with cause), whether an owner has an exit strategy in the event the owner wants to terminate the relationship, as well as what the buy-out terms are in the event of termination.  Furthermore, it is important to consider whether there is a restrictive covenant and non-solicitation provision, which may preclude the physician investor from having an ownership interest in another ASC within a certain geographic region, as well as soliciting patients, employees and referral sources. A Subscription Booklet, including a Subscription Agreement, should also be drafted and distributed to potential investors. Such documents would outline the terms of the venture, including but not limited to investment terms, and the proposed terms of a lease agreement, billing agreement, consulting agreement, and escrow agreement, as applicable.  A questionnaire should also be distributed to obtain information regarding potential investors for due diligence purposes.

Regulatory Concerns:

In the event an investment is made by a physician and there are referrals being made, the federal and state rules and regulations governing referrals must be reviewed, including but not limited to the Stark Law and Anti-kickback Statute.

While the Stark Law (self-referral statute) has significantly restricted the possibility of many physician joint ventures, it does not prohibit a physician from entering into an arrangement with an ASC.  The Stark law prohibits physicians from referring Medicare patients to an entity for certain “designated health services” if the physician has a financial relationship with that entity, subject to certain exceptions. Since ASC services are not, themselves, “designated health services” covered by the Stark law, the Stark Law does not restrict physician ownership of ASCs, so long as the ASC does not provide any separately billable designated health care services. See 42 USC § 1395NN

However, an investment by a physician in an ASC can implicate the Anti-kickback Statute.  The Ant-kickback Statute prohibits any person from “knowingly and willfully” providing any remuneration to induce referrals, or in exchange for referrals, of federal health care program patients or business. See 42 U.S.C. § 1320a-7b(b) Accordingly, the Anti-kickback Statute applies to any physician-owned ASC that treats federal health care program patients (including Medicare and Medicaid) since the physician’s return on investment can arguably be viewed as an inducement for physician investors to refer patients to the ASC.

Such arrangement would not run afoul of the Anti-kickback Statute in the event the arrangement falls within the parameters of an applicable safe harbor, specifically those which protects various types of physician-owned ASCs as well as hospital/physician ASC joint ventures. See 42 C.F.R. § 1001.952(r)  Although safe harbor protection is afforded only to those arrangements that precisely meet all of the conditions set forth in the safe harbor, the absence of safe harbor protection is not fatal, rather the arrangement may be subject to further scrutiny.

The ASC safe harbor generally excepts from the definition of “remuneration” payment that is a return on an investment interest made to an investor, so long as the investment entity is a Medicare-certified ASC, the ASC’s operating and recovery room space is dedicated exclusively to the ASC, patients referred to the ASC by an investor are informed fully of the investor’s investment interest, and all of the applicable standards are met within one of four categories: surgeon-owned ASCs, single-specialty ASCs, multi-specialty ASCs and hospital-physician ASCs.

Some standards which are applicable to each of the categories are as follows: See 42 C.F.R. § 1001.952(r)

  • the terms on which an investment interest is offered to an investor must not be related to services furnished, the previous or expected volume of referrals or the amount of business otherwise generated from that investor to the entity;
  • any distribution or dividend payment to an investor in return for the investment must be directly proportional to the amount of the capital investment (including the fair-market value of any pre-operational services rendered) of the investor;
  • at least one-third of each surgeon investor’s medical practice income from all sources for the previous fiscal year or previous 12-month period must be derived from the surgeon’s performance of those procedures on the list of Medicare-covered procedures for ASCs (with respect to a multi-specialty ASC, at least one-third of these procedures must be performed in the ASC as well);
  • any and all ancillary services for federal health care program beneficiaries performed at the ASC must be directly and integrally related to primary procedures performed at the ASC, and none may be separately billed to any federal health care programs, including Medicare; and
  • the ASC and any surgeon investors must treat federal health care program beneficiaries in a nondiscriminatory manner

It is important to note that physicians must also disclose in writing their ownership interest in an ASC to patients.  See 42 CFR Part 420  ASCs must also ensure that all rules and regulations governing patient confidentiality, including but not limited to HIPAA, are complied with, and that all billing and coding rendered in connection with services rendered at the ASC are accurate and are substantiated by the medical records.


In sum, investing in an ASC can be a great opportunity for physicians and other non-physician investors.  To that end, prior to participating, it is in the best interest of potential investors to evaluate the opportunity from a business, as well as regulatory perspective in order to ensure maximum benefit.

About the Authors:

Mathew J. Levy is a Partner of the firm and co-chairs the Firms corporate transaction and healthcare regulatory practice. Mr. Levy has particular experience in advising health care clients with respect to contract issues, business transactions, practice formation, regulatory compliance, mergers & acquisitions, professional discipline, healthcare fraud & billing fraud, insurance carrier audits including prepay and post payment review, litigation & arbitration, and asset protection-estate planning. You can reach Mathew Levy at 516-627-7000 or email: [email protected].

Stacey Lipitz Marder is an associate at Weiss Zarett Brofman Sonnenklar & Levy, PC., with experience representing healthcare providers in connection with transactional and regulatory matters including the formation and structure of business entities, negotiating and drafting contracts and commercial real estate leases, stock and asset acquisitions and general corporate counseling.  Ms. Marder also has experience advising healthcare clients on a wide range of regulatory issues including Stark, the Anti-Kickback Statute, fraud and abuse regulations, HIPAA, reimbursement and licensing matters.