On July 25, 2008, the Office of Inspector General (OIG) of the Department of Health and Human Services posted OIG Advisory Opinion No. 08-08, a favorable advisory opinion regarding the development and operation of an ambulatory surgical center (ASC) owned jointly by a hospital and a group of surgeons (the Arrangement). The OIG concluded that it would not impose sanctions under the federal anti-kickback statute (42 U.S.C. §1320a-7b) (the Anti-Kickback Statute), notwithstanding the fact that the Arrangement does not meet any specific safe harbor and poses some risk of prohibited remuneration.
The Arrangement involves a joint venture between a hospital and members of a large multi-site physician group (collectively, the Requestors). The physician group investors include 18 “orthopedic” surgeons (the Surgeon Investors). For purposes of the Arrangement, the Surgeon Investors are members (owners) of a limited liability company, owned equally by each member, which, in turn, owns 70 percent of the ASC. The hospital (the Hospital Investor) owns the remaining 30 percent of the ownership interests in the ASC. Any patient that comes to the ASC would be provided with written disclosure of the ownership interest of the Surgeon Investors.
Of the 18 Surgeon Investors, 14 of them meet the so-called “1/3 income test,” (set forth in the Anti-Kickback Statute safe harbor for “surgeon-owned ASCs”) having each received at least one-third of his or her medical practice income for the previous fiscal year or previous 12-month period from the performance of procedures payable by Medicare in an ASC setting (ASC Procedures). The remaining four surgeons (the Inpatient Surgeons) do not meet this test since each receives little or no medical practice income from the performance of ASC Procedures. Each Inpatient Surgeon, however, does derive at least one-third of his or her medical practice income from procedures requiring a hospital operating room setting. Further, the Requestors certified that none of the Surgeon Investors will refer patients for pain management procedures to be performed in the ASC, unless any such procedure is going to be performed by the referring physician.
The Hospital Investor is a not-for-profit corporation that owns three hospitals and other health care related entities, including a large physician group practice consisting of employed primary care and specialty physicians (the Hospital-Owned Practice).
Restrictions on Referrals and Third Party Agreements
The Arrangement describes two restrictions that will be imposed by the Hospital and Surgeon Investors on the ability to make or influence referrals to the ASC as well as the terms of a third party agreement for anesthesiology services. These facts were critical in the OIG’s determination of this request and its assessment of the potential risk of sanctions.
First, none of the Surgeon Investors will refer pain management procedures to the ASC unless those procedures are to be performed personally by the referring Surgeon Investor. This restriction is important to the OIG to ensure that there will be little to no risk of cross referrals by one Surgeon Investor to another Surgeon Investor.
Second, the Hospital Investor agreed to incorporate certain safeguards against influencing referrals to the ASC, including refraining from taking any actions to require or encourage physicians affiliated with the Hospital Investor (including employees, independent contractors and medical staff members) from referring patients to the ASC or the Surgeon Investors. Moreover, the Hospital Investor will not track any referrals to the ASC or the Surgeon Investors, and has certified that any compensation from the Hospital Investor to its affiliated physicians will be fair market value and will not take into account the volume or value of any referrals made to the ASC, the Surgeon Investors or their limited liability company investment vehicle.
Finally, although the ASC entered into a written agreement with the Hospital-Owned Practice to exclusively provide anesthesiology (excluding pain management) services to the ASC and for an anesthesia provider affiliated with the Practice also to serve as the medical director of the ASC, the Requestors certified that the stipend paid to the anesthesia provider will be fair market value and will not be determined in a manner that takes into account the volume or value of referrals.
In its analysis, the OIG considered the Anti-Kickback Statute safe harbors that might apply to the Arrangement. While the OIG determined that the Arrangement will not qualify for safe harbor protection for the reasons discussed in more detail below, it concluded that the Arrangement incorporated safeguards significant enough to minimize the likelihood of fraud and abuse.
First, the OIG considered the fact that the Surgeon Investors will hold their interests in the ASC indirectly through their ownership of a limited liability company (which, in turn, holds a 70 percent interest in the ASC). The OIG noted that this ownership structure runs afoul of the Physician/Hospital ASC safe harbor and the requirement that physician investors hold their investment interests in an ambulatory surgery center either directly or through a group practice composed of qualifying physicians. Please note that the Physician/Hospital safe harbor does not explicitly include this requirement. Rather, the Physician/Hospital safe harbor requires that the physician investors in an ambulatory surgery center (attempting to meet the safe harbor requirements) must meet the requirements of one of the other ambulatory surgery center safe harbors found at 42 C.F.R. §1001.951(r). In this instance, since all of the Surgeon Investors are orthopedic surgeons, compliance with the Physician/Hospital safe harbor requires the Surgeon Investors to meet the requirements of the so-called “surgeon-owned ASC” safe harbor, found at 42 C.F.R. §1001.952(r)(1). Under that safe harbor the interests in an ambulatory surgery center must be owned directly by the physician investors.
The OIG’s primary concern is that an intermediary (or “pass-through”) investment vehicle can be used by its investors to redirect revenues to reward referrals. However, as the OIG noted, the use of a “pass through” entity that is owned proportionately to the investment of the Surgeon Investors and distributes returns on investment to each member directly proportional to his or her investment, and provides the Surgeon Investors with a return that is “exactly” the same as if they had invested directly in the ASC, “does not substantially increase the risk of fraud or abuse.”
Second, the OIG noted that the Inpatient Surgeons did not (and will not) meet the “1/3 income test” requirement of the Physician/Hospital ASC safe harbor. Under the surgeon-owned ASC safe harbor (which, as noted above, is “boot strapped” into the analysis of the Physician/Hospital safe harbor) 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 that physician’s performance of ASC Procedures. As noted in the Opinion, the “1/3 income test” helps insure that the safe harbor applies only to investment income to physicians who are unlikely to use the investment as a vehicle for profiting from their referrals to other physicians using the ambulatory surgery center.
The failure to meet the “1/3 income test” notwithstanding, the OIG took into account the fact that the Inpatient Surgeons certified that they rarely have occasion to refer patients for ASC procedures. The OIG also considered the fact that, like the other Surgeon Investors, each of the Inpatient Surgeons is regularly engaged in a “genuine surgical practice” deriving at least one-third of his or her income from procedures requiring a hospital operating room setting. Moreover, any referrals to the ASC by an Inpatient Surgeon for a pain management procedure would be personally performed by such referring Inpatient Surgeon.
The OIG noted that the Inpatient Surgeons are qualified to perform surgeries at the ASC and may in fact do so in medically appropriate cases, and also that they comprise a small number of the total surgeon investors. The OIG distinguished this case from potentially riskier arrangements in which few investing physicians use the surgery center or where investing physicians are significant potential referral sources for other investors or the surgery center.
Taking the above into account, and based on the restrictions placed upon the Surgeon Investors on referrals for pain procedures, the OIG concluded that “[i]n the circumstances presented, notwithstanding that four Inpatient Surgeons will not regularly practice at the ASC, we conclude that the ASC is unlikely to be a vehicle for them to profit from referrals” and stated that the controls put in place by the ASC for pain management services “serves to mitigate the potential for abusive referrals, with regard to this type of procedure.”
Third, the OIG notes that the Hospital Investor is in a position to make or influence referrals to the ASC and the Surgeon Investors. As such, the OIG concluded that the Arrangement does not qualify for the Physician/Hospital ASC safe harbor. However, after reviewing the restrictions placed upon the Hospital Investor’s ability to influence such referrals by the ASC, the OIG concluded that “[i]n light of these safeguards, the ability of the Hospital Corporation to direct or influence referrals to the ASC is significantly constrained.”
Fourth, the OIG concluded that the Arrangement did not meet the safe harbor requirement that any services provided by the Hospital Investor to the ASC must be pursuant to a contract that complies with the “personal services and management contracts” safe harbor (found at 42 C.F.R. § 1001.952(d)). Specifically, the OIG concluded that the anesthesiology agreement, which provides for sporadic or part-time services, did not specify exactly the schedule of such services, their precise length and the exact charge for such services as required by the personal services safe harbor. However, the OIG took comfort from the facts that (i) all of the services to be provided were set out in the agreement, (ii) the Requestors certified that the services are reasonable and necessary for the ASC, and (iii) that the amounts to be paid are fair market value for the services were determined at arm’s length and do not take into account the volume or value of referrals or other business generated between the parties. In light of the foregoing, the OIG opined that the lack of scheduled services did not raise the risk of fraud and abuse.
In issuing Advisory Opinion 08-08, the OIG has demonstrated flexibility in permitting joint ownership of ASCs by physician and hospital investors outside of the strict confines of the various ASC safe harbors. The OIG has shown a willingness to endorse non-safe harbor compliant arrangements as long as appropriate measures are taken to reduce the potential for improper inducements to refer procedures to the ASC.
The OIG’s approval of the “pass-through” model of ASC investment provides support for the use of an indirect ownership model (i.e., investment vehicles) by physician investors, and provides guidelines as to how such a mechanism should be structured.
Moreover, the OIG also appears willing to allow for physician investment even when the ASC is not strictly a true “extension” of the physician investor’s practice as long as the appropriate safeguards against passive investment referrals are in place.
Finally, the OIG’s position on hospital investors that employ physicians may provide some sense of clarity, and comfort, to hospitals and health systems that have steered away from ASC investments because of concerns over claims of indirect and improper referrals from hospital-employed doctors.
As a result, many existing ASCs seeking new physician investors may now have somewhat greater flexibility in attracting those physician groups composed of both ASC utilizers and surgeons (or proceduralists) who have a primarily hospital-based practice. The Opinion could also affect the drafting of the operating agreements or other governing documents of certain multi-specialty ASCs that have incorporated the “1/3 procedures test” as a basis for the redemption of a physician’s ownership interests. Please note that the Opinion did not address the “1/3 procedures test” since the test is not part of the surgeon-owned ASC safe harbor. However, the rationale employed by the OIG with respect to the “1/3 income test” as applied to the Inpatient Surgeons conceivably could be applied with respect to the one-third procedures test as it relates to “hospital-based” physician investors.
It is important, however, to note that the restrictions placed upon the various portions of the Arrangement were developed on the basis of the specific facts of the situation. As noted, the conclusions reached by the OIG have “no application to, and cannot be relied upon by, any other individual or entity.” Any application of the rationale of the OIG to different circumstances should be carefully evaluated by counsel experienced in ASC transactions.
Nevertheless, the conclusion and rationale of the OIG in Advisory Opinion 08-08 seem to indicate an interest in promoting, rather than restricting, the development of physician-hospital ASCs, so long as appropriate measures to protect against fraud and abuse are included.