by Clay J. Countryman

The OIG issued an advisory opinion on June 12, 2007 regarding a hospital’s proposed purchase of a partial ownership interest in a physician-owned Ambulatory Surgical Center (ASC). The message from this advisory opinion appears to be that the purchase of an interest in an existing physician-owned provider, such as an ASC, imaging center or Specialty Hospital, will receive a heightened level of scrutiny by the OIG.

In this advisory opinion, a non-profit hospital proposed to purchase a partial interest in an existing ASC owned by three orthopedic surgeons, two gastroenterologists, and two anesthesiologists. The orthopedic surgeons own approximately 94% of the ASC and the gastroenterologists and anesthesiologists collectively own 4% of the ASC. Under the proposed acquisition, the orthopedic surgeons would sell to the hospital a number of units currently owned by the orthopedists necessary for the hospital to own 40% of the limited liability company that owns and operates the ASC.

In analyzing the proposed buy-in by the hospital, the OIG first reiterated its “long-standing” concerns with joint venture arrangements between referral-source physician investors and providers that furnish items or services paid for by a Federal health care program (e.g., the hospital). The OIG commented that joint venture arrangements raise concerns under the anti-kickback statute because they pose a risk of fraud and abuse income from the venture may be payment for referrals to the venture or to coinvestors.

The OIG commented that the proposed acquisition does not qualify for one of the ASC safe harbors in the Federal anti-kickback statute for several reasons. One reason cited was that the amount of payment to an investor in return for the investment would not be directly proportional to the amount of capital investment of that investor. 

The OIG also concluded that it is not clear that the structure of the proposed acquisition of the units directly from the orthopedic surgeons is not related to referrals of Federal health care program business to the hospital. First, the OIG stated that the hospital’s investment in the ASC is unrelated to the operations of the ASC because the hospital would purchase the units of ownership in the ASC directly from the orthopedic surgeons. Thus, the funds invested by the hospital would not be used to expand or enhance the ASC facility or fund its operations. Ultimately, the funds invested by the hospital would permit the orthopedists to realize a gain on their original investment in the ASC.

Another reason stated by the OIG was that not all of the physician owners (i.e., the anesthesiologists and gastroenterologists) would be selling a portion of their interests to the hospital at an “appreciated price.” This aspect was described in the advisory opinion as raising the possibility that one purpose of the hospital’s investment was to reward or influence a subset of the physician owners whose referrals of patients to the hospital or ASC itself was valuable.

The OIG commented that the return on investment would not be directly proportional to the amount of capital invested by each investor in the ASC. Although the profit distributions to the physician owners and the hospital would be proportional to their ownership interest, the orthopedic surgeons would receive a higher return on their remaining ownership interest than the hospital would receive on its newly acquired ownership interest in the ASC. This comment by the OIG is based on the fact that the hospital would pay more per ownership unit than the orthopedic surgeons originally paid when the orthopedists created the ASC. 

Finally, the OIG stated that given all of the facts of the proposed acquisition that it cannot conclude that the difference in the price of the ownership units to the hospital, which would result in a financial gain to only a subset of the physician owners, is not related to the value or volume of referrals or other business generated between the parties. An interesting note is that the OIG concluded in similar proposed arrangement in an advisory opinion released in 2001 that there was a reasonable basis for the variance in the stock price paid by original physician investors in an ASC and a hospital that acquired an ownership interest at a later date.