Introduction
It is no secret that ambulatory surgery centers (“ASCs”), instead of hospitals, are becoming the go-to place for physicians to perform procedures, as physicians attempt to increase revenue and align with hospitals. The Centers for Medicare and Medicaid Services (CMS) define an ASC as “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 CRF § 416.2, Definitions. There are certainly benefits to owning and operating an ASC. But before jumping on the ASC bandwagon, it is imperative that physicians and other investors understand the process of starting and operating an ASC, and evaluate the legal, business and regulatory implications for such an endeavor. Although the corporate-practice-of-medicine doctrine in New York State generally prohibits general business corporations from employing physicians to provide medical services or arrange for others to provide medical services, ASCs, unlike medical practices, can be owned by non-physicians. See NY BCL §1501, et seq.; NY Education Law §6522.
Certificate of Need
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 process are to promote delivery of high-quality health care, and ensure the services are aligned with community need. The CON process can be very complex and often takes several months to complete. All proposed operating documents must be submitted for approval, in addition to floor plans for the proposed facility, and any other pertinent information.
To increase the chances for approval, many ASCs are partnering with hospitals as hospitals are often better able prove the need in the community. Additionally, hospitals have an interest in such joint ventures, because hospitals tend to find it more cost effective to perform procedures at an ASC rather than at a hospital.
Legal Documents
Before beginning the CON application process, ASC documents need drafting. Formation documents (Articles of Organization or Certificates of Incorporation) are needed, as are operating documents (operating agreements or shareholders agreement) to govern the ASC, set forth the rights and obligation of its owners, and provide for its management. There are several key provisions to consider in such operating documents. For instance, potential investors should ascertain information regarding how distributions are to be made, how business and management decisions are made, and who will be responsible for day-to-day management and decision making. Furthermore, potential investors should consider how new members would be added, and 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 if the owner wants to terminate the relationship, and the buy-out terms for a termination. So too, it is important to consider whether there are any restrictive covenants and non-solicitation provisions, which may preclude the physician-investor from having ownership interests in other ASCs within a certain geographic region, or from soliciting patients, employees and referral sources. A Subscription Booklet, including a Subscription Agreement, should also be drafted and distributed to potential investors. These documents would outline the terms of the venture, including but not limited to its investment terms, and, if applicable, the proposed terms of any lease agreement, billing agreement, consulting agreement, or escrow agreement. A questionnaire should also be distributed to obtain information regarding potential investors for due diligence purposes.
Regulatory Concerns
If an investment is made by a physician and there are referrals being made, all 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) significantly restricts physician joint ventures, it does not prohibit a physician from entering into an arrangement with an ASC. Subject to certain exceptions, 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. Since ASC services are not, themselves, “designated health services” covered by the Stark law, the statute 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
That said, 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 businesses. 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), because physician’s return on investment can arguably be viewed as an inducement for physician investors to refer patients to the ASC.
Such an arrangement would not run afoul of the Anti-Kickback Statute if the arrangement falls within the parameters of an applicable safe-harbor provisions, such as those that protect various types of physician-owned ASCs, and hospital or 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 statutory conditions, 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” a payment that is a return on an investment interest made to an investor, so long as the investment entity (a) is a Medicare-certified ASC; (b) the ASC’s operating and recovery room space is dedicated exclusively to the ASC; (c) patients referred to the ASC by an investor are fully informed of the investor’s investment interest; and (d) 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 category listed above are found in 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 investor’s capital investment (including the fair-market value of any pre-operational services rendered).
- 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 procedures on the list of Medicare-covered procedures for ASCs (e.g., with respect to a multi-specialty ASC, at least one-third of these procedures must be performed in the ASC).
- 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, and none may be separately billed to any federal-health-care programs, including Medicare.
- The ASC and any surgeon investors must not discriminate against federal-health-care-program beneficiaries.
It is important to note that physicians must also in writing disclose to patients their ownership interest in the ASC. See42 CFR Part 420. So too, ASCs must 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 an ASC’s services are accurate and substantiated by medical records.
Conclusion
To be sure, investing in an ASC can be a great opportunity for physicians and other non-physician investors. But before investing and participating, it is in the best interest of potential investors to evaluate the opportunity from a business and regulatory perspective to ensure compliance with all legal guidelines and optimal economic benefit.
About the Author:
Mathew J. Levy is a Shareholder/Director of the Firm and co-chairs the Firms corporate transaction and healthcare regulatory practice. Mr. Levy has extensive experience in, defending healthcare professionals in actions brought by State licensing authorities and Federal agencies. Mr. Levy has successfully defended numerous healthcare providers in actions involving the US Attorney’s Office investigations, Medicare Fraud Waste and Abuse investigations, Medicaid Fraud Control Unit investigations, OPMC, OPD, Medicare, Medicaid as well as commercial insurance audits. Mr. Levy has successfully structured and negotiated joint venture agreements, private equity transactions, venture capital transactions, stock purchase agreements, asset sale agreements, shareholders agreements, partnership agreements, employment contracts, managed care agreements and commercial leases. Mathew Levy can be reached at 516-926-3320 or [email protected]
Weiss Zarett Brofman Sonnenklar & Levy, P.C. is a Long Island law firm providing a wide array of legal services to the members of the health care industry, including corporate and transactional matters, civil and administrative litigation, healthcare regulatory issues, bankruptcy and creditors’ rights, and commercial real estate transactions.
This article contains general advice that is not designed to apply to the reader’s specific situation and does not constitute the formation of an attorney-client relationship.
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