In the past twelve months, the Office of Inspector General has issued three Advisory Opinions relating to proposed hospital/physician joint venture arrangements. Following is a summary of each of the relevant Advisory Opinions, along with a list of important themes or principles derived from OIG’s analysis and conclusions.
Advisory Opinion 07-05
This Advisory Opinion was issued on June 12, 2007, and was posted on June 19, 2007.
The request was made on behalf of a limited liability company that owned and operated a free-standing, multi-specialty ambulatory surgery center. The members of the LLC consisted of three (3) orthopedic surgeons, two (2) gastroenterologists and two (2) anesthesiologists. The orthopedic surgeons were the founding members of the LLC and, collectively, they owned 94% of the membership interests of the LLC.
Under the proposed arrangement, the orthopedic surgeons sought to sell 40% of their membership interests to a local hospital. The proposed transaction constituted a partial liquidation event for the orthopedic surgeons. These sellers would retain 100% of the proceeds of the sale; no portion of the sale proceeds would be contributed to or would otherwise inure to the benefit of the LLC.
OIG opined that there would be significant risks associated with the proposed transaction.
OIG first determined that the proposed transaction did not qualify for safe harbor protection, “for a number of reasons.” OIG only discussed one of the reasons, however.
According to OIG (in a rather strained analysis), because the hospital would pay considerably more for the ownership interest that it intended to purchase than the orthopedic surgeons originally “paid” for those interests, any distributions made to the members after the closing of the sale would not be directly proportional to capital invested by each of the members. As a result, the proposed arrangement would not qualify for safe harbor protection. OIG then went on to analyze the proposed arrangement under the facts of the arrangement to determine whether there was “minimal risk” of a potential violation of the statute.
OIG concluded that the proposed arrangement carried significant potential risk, pointing to the following facts:
- The hospital was purchasing membership interests from the orthopedic surgeons, rather than purchasing the interests from all of the physician investors in the LLC. This structure allowed the orthopedic surgeon investors to “realize a gain on their original investment.”
- Because only the orthopedic surgeons were selling interests, OIG stated that this raised the possibility that the hospital’s investment was really designed to “reward or influence” a subset of physicians whose referrals to the hospital were particularly valuable.
- The “return on investment” of the remaining membership interests was not directly proportionate to the amount of capital invested by the parties. In OIG’s mind, the orthopedic surgeons would receive a higher rate of return on their remaining membership interests than the other members holding interests in the LLC.
Advisory Opinion 07-13
This Advisory Opinion was issued on October 12, 2007, and was posted on October 19, 2007.
The Advisory Opinion was submitted on behalf of a limited liability company that owned and operated three single-specialty ophthalmology ambulatory surgery centers. The members of the LLC consisted of eight (8) ophthalmologists, who collectively owned 54.33% of the LLC, and a hospital which owned the remaining 45.67%.
The ophthalmologists and the hospital proposed to sell ownership interests in the LLC to a group of optometrists, who were employees of a medical group that also employed the ophthalmologist members of the LLC. Under the terms of this proposed transaction, the hospital would sell the optometrists a portion of its membership interest.
OIG determined that this proposed transaction raised significant issues and risk under the Anti-kickback statute.
OIG stated, first, that the parties proposed to sell ownership interests to optometrists, who do not and would not perform procedures in the surgery centers. This would cause the arrangement to fall outside of the “ambulatory surgery center” safe harbor. OIG then looked at all of the facts of the proposed arrangement to determine if there was “minimal risk” associated with the proposed arrangement.
The requester stated in the advisory opinion request that the ophthalmologist members of the LLC personally performed procedures in the centers. According to OIG, these physician investors therefore used the surgery centers essentially as an extension of their private practice.The same could not be said for the optometrists, however. OIG noted that the optometrists were in a position to, and did in fact, refer patients who required surgical procedures to the ophthalmologists, and that those procedures could be and were performed in the surgery centers.
OIG was concerned that, under these facts, there was a significant risk that the optometrists’ investment in the LLC was simply a vehicle for “receiving remuneration for referrals of patients to the ophthalmologists.” Furthermore, given that the parties established no “safe guards” to obviate this risk, OIG could not conclude that there is “minimal risk” associated with the proposed arrangement.
Advisory Opinion 08-08
This Advisory Opinion was issued on July 18, 2008, and was posted on July 25, 2008.
Under the facts of this Advisory Opinion, a general business corporation would be formed to own and operate an ambulatory surgery center. A partnership consisting entirely of surgeons who would perform procedures in the surgery center would own 70% of the outstanding stock of the company; the remaining 30% of the stock would be held by a tax-exempt corporation that owned, through subsidiaries, several hospitals and other healthcare facilities. There were eighteen (18) surgeon partners in the physician partnership; fourteen (14) of these physicians met the safe harbor requirement that one-third of the surgeon’s income must come from procedures performed in outpatient settings. The other four (4) surgeon partners did primarily inpatient procedures; therefore, one-third of their income did not come from outpatient procedures (although more than one-third of their income came from the performance of surgical procedures, generally).
OIG determined that the structure of this ASC would not meet the applicable safe harbor. OIG further concluded, however, that the proposed ASC would pose only a “minimal risk” under the Anti-kickback Statute for the following reasons:
- The safe harbor requires that physician investors in the ASC hold their ownership interests either directly or through their group practice entity. In this case, the physician investors would hold their interests through the partnership. OIG opined that this arrangement represented only a minimal risk because distributions to the Partnership were commensurate with the Partnership’s capital investment in the ASC; and each physician’s interest in distributions from the Partnership was commensurate with his or her capital investment in the Partnership.
- Although four (4) surgeon investors did not meet the one-third test, OIG opined that it was not unduly troubled by this fact. The four (4) physicians who did not meet the test were nevertheless surgeons who generated a significant portion of their practice income from inpatient surgical procedures. In addition, they were qualified to perform surgeries in the ASC and could do so in medically appropriate cases. Therefore, according to OIG, this was not a situation where non-surgeon physicians, such as a group of primary care physicians, were allowed to invest in the ASC because they were potentially significant referral sources who would “profit” from their interest in the ASC, not as a result of their personal use of the ASC, but purely from referrals.
- The hospital owner was in a position to make or influence referrals to the ASC. The hospital owned and controlled a sizeable captive physician group. In this case, however, the hospital agreed to put “safeguards” in place to ensure that there was no direct or indirect requirement or encouragement to the hospital employed physicians to refer patients to the surgeons or the ASC. According to OIG, these safeguards minimized the risk that the hospital owner would exercise its power to make or influence referrals.
What Do These Advisory Opinions Tell Us?
The issuance of Advisory Opinion 08-08 was a welcome break in the string of negative hospital-physician joint venture advisory opinions. The 2007 Advisory Opinions seem to be characterized by an unwillingness to take into account the legitimate business interests of the parties, and/or to consider reasonable interpretations of underlying facts. In Advisory Opinion 08-08, the OIG seemed to take a broader, and more reasonable, view of the business and operational motivations of the parties to these transactions. These Advisory Opinions raise several specific questions and concerns, however:
- Note that all three of these Advisory Opinions involve outpatient ambulatory surgery centers. Given the extremely narrow exceptions for ownership arrangements under the Stark II law, are outpatient ASCs the last remaining avenue for hospital/physician outpatient joint ventures?
- Does Advisory Opinion 07-05 preclude a hospital from acquiring an interest in an existing ASC? OIG clearly ignored legitimate business considerations of the parties. It utilized a very strained analysis of the parties’ “return on investment” to conclude that the proposed transaction in that case posed a substantial risk under the Anti-kickback Statute. Clearly, OIG simply did not like the idea that the orthopedic surgeons were “cashing out” a portion of their investment in the surgery center. Query whether OIG’s Opinion would have been different had all of the physician investors sold a portion of their interests in the LLC to the hospital, or would OIG’s opinion have been different if the hospital had proposed to purchase the interests from the LLC, rather than from the existing physician investors? Implicit in OIG’s analysis is an assumption that the orthopedic surgeons were significant referral sources to the hospital. Would OIG’s analysis have been different if this was not the case? Or if the parties had implemented “safeguards” to ensure that the physicians’ referral patterns did not change? Would OIG’s analysis have been different if, rather than the hospital, the proposed purchaser was a healthcare provider or other entity with which the orthopedic surgeons did not have a referral relationship?
- Where is the line drawn with regard to physician investors who do not derive at least one-third of their professional income from outpatient surgical procedures? OIG rejected a proposal under which non-surgeons practicing in the same practice group with surgeons would be given the opportunity to purchase ownership interests in an outpatient ASC. OIG then signed off on a proposal under which surgeons who perform primarily inpatient procedures and are members of the same medical group as surgeons performing outpatient procedures in the ASC would be permitted to acquire ownership interests in the ASC. At first blush, this appears to be a valid distinction; but, upon closer analysis, is it really? In both cases, the proposed investors are members of the same physician group as the surgeon investors, and in either case are likely to refer patients who require outpatient surgery to their partners. Why is it a “better fact” that the surgeons who do inpatient procedures are “qualified” to perform procedures in the outpatient ASC, and “could choose to do so” in appropriate circumstances, absent of any evidence that these physicians routinely performed outpatient procedures and would do so in the outpatient ASC?
- Providers take note: to the extent an arrangement will not qualify for safe harbor protection, and the parties can implement “safeguards” to eliminate or minimize the risk of inappropriate referrals, the implementation of those safeguards will be viewed favorably by OIG.