The Paradox of Surgeon ASC Ownership

Ambulatory Surgery Centers or “ASCs” have fundamentally and irrevocably changed the landscape of surgery in the United States.  Where surgery was once the exclusive purview of full-service hospitals, advances in medical technology have permitted safe surgical performance in increasingly smaller and less cost-intensive venues.  As a result ASCs have become the centerpiece of cost-cutting and “gainsharing” measures implemented by both public and private insurers.  By many estimates, the underlying “costs” of performing procedures in an ASC, are up to seventy-five percent less than their hospital counterpart.  Expense reduction provides obvious appeal to health insurers who are keen to save even pennies per transaction, and who were instrumental in the lobbying efforts necessary to provide a legal environment where privately-owned ASCs could exist.

On November 19, 1999, the Department of Health and Human Services’ Office of Inspector General (OIG) issued a final rule to clarify six of the existing Safe Harbors (from the application of the Federal Anti-Kickback Statute (“AKS”)) and implement eight new safe harbors, including the ASC Safe Harbor.[i] The AKS provides criminal penalties for individuals or entities that knowingly and willfully offer, pay, solicit or receive remuneration in order to induce business reimbursable under Federal or State healthcare programs, including Medicare and Medicaid.  A violator of the AKS could face imprisonment, fines, and be excluded from participating in Federal and State healthcare programs.[ii] The primary feature of the enabling legislation is the permission it provides to surgeons to own equity in an ASC where they perform their own surgeries, permitting them to share in “facility fees”, which would otherwise directly violate the AKS.  The conditions of this ownership, however, provides the subject paradox.

Though there are four (4) independent types of ASCs that qualify for protection under the ASC Safe Harbor, there are eight (8) common requirements.  Of these, two (2) provide the instant restrictions:

  • Investment interests must be offered on terms not related to the volume or value of referrals; and
  • Payments to an investor in return for the investment must be directly proportional to the amount of the capital investment of that investor.

 

This certainly provides for surgeon investment and participation that accomplishes the public policy objectives of the AKS, but it also provides perverse incentives with respect to the business of the ASC, which often leads to the proximate cause of the ASC’s failure.

 Why?

In a perfect strategic partnership, each partner contributes directly proportionally to their partnership interest.  Surgeon ownership of an ASC is certainly considered a strategic investment – as the physician is investing in that particular ASC precisely because he/she intends to perform procedures there and benefit from them.  However, the ASC Safe Harbor effectively isolates the surgeon from these strategic incentives.  First, the ASC can only remunerate its surgeon owners based on the capital they invest, and not their ongoing strategic value to the center.  Then, the ASC cannot even base its offering to any particular surgeon on the potential strategic value of that surgeon.  So, it would seem that the regulators imagined that surgeons would primarily be interested in ASC investment as a financial, as opposed to a strategic investment.  But that’s certainly not the case, because to be protected under the ASC Safe Harbor, at least one-third of each physician-investor’s medical practice income from all sources for the previous fiscal year or 12-month period must be derived from his or her performance of ASC procedures.  Hence the paradox.  Or paradoxes?

Practically, this circumstance ultimately results in an uneven distribution of equity between strategic contributors, where large equity participants contribute relatively few or relatively less valuable procedures, while smaller participants contribution the majority of procedures and value.  Inevitably, this leads to unrest between owners and eventually leadership.

 So?

The ongoing transition of procedures from hospitals to lower acuity facilities has been a boon to the healthcare industry.  The cost savings have been extraordinary and have given rise to a generation of cost savings programs that annually save billions of taxpayer dollars.  ASCs have additional economic advantages over hospitals, because of their ability to choose their offerings, allowing greater focus, intensified quality control, efficient cost management and strong outcomes while avoiding large-scale demands for space, resources and attention of management.  Unfortunately, the nature of the regulatory restrictions surrounding physician ASC ownership threatens their ongoing economic viability.  There are two practical solutions to this issue:

  • Legislative action resulting in the elimination/modification of the relevant requirements of the ASC Safe Harbor; and/or
  • Development of a compliant corporate/governance structure for ASCs that effectively resolves this paradox.

Unfortunately, there has been little mention of serious legislative interest, and given the nature of the current priorities of national government, it is unlikely to appear anytime soon.  This leaves private industry to work to develop creative solutions that allow surgeon ASC owners to have strategic incentives while still complying with the AKS.

What’s Next?

 Many ASC leadership teams are working on just those types of solutions, coordinating with consultants, professionals and experts, each seeking the economic advantage, and we are excited to have been included in a number of them.  We look forward to publishing future articles with case studies of the bespoke structures that have been developed and the common elements which provide for the necessarily compliance and strategic goals.

[i] Armon, Bruce D.  FindLaw.  Safe Harbors for Ambulatory Surgical Centers.  March 26, 2008https://corporate.findlaw.com/law-library/safe-harbors-for-ambulatory-surgical-centers.html

[ii] Id.

By Glenn H.  Truitt, Esq.  and James Stirratt (Eagle Strategies)

Related Insights