Is ASC Litigation on the Rise?

Reprinted from EndoEconomicsTM Aug. 2013 with permission from Physicians Endoscopy. This article is written by Robert McGuirl, principal of the Law Offices of Robert J. McGuirl, LLC.

Litigation tends to rise during trying times. Problems and issues with economic consequence which might have been let go in the past no longer seem as small. Continued success is no longer available as a balm to heal real or perceived inequities. Festering problems in the background or on a slow burn now seem to be pressing and come to the forefront. There is a need to deal with these things. Litigation frequently ensues.

In this article we will take a look at the current climate for free-standing, independently-owned physician surgery centers predominately in New Jersey, but affecting many areas of the country, and why it may be the harbinger for increased litigation to come. We'll highlight a few of the recurring legal issues which tend to arise and take a look at some of the more common and fertile areas for litigation.  


The ASC landscape in New Jersey, as well as some other states, is currently rife with declining profitability that stems in part from the end of the heyday of more generous out-of-network benefits under insurance plans. Limited or non-existent out-of-network benefits are becoming increasingly more prevalent in health insurance plans, while downward pressure continues on reimbursement rates. Payors are insisting upon and obtaining in-network contracts with physicians and ASCs.

The referral patterns of non-member, primary care core referring physicians to their colleagues who are ASC owner-members are under pressure and changing as well. Accountable care organizations, hospital consolidations and the purchase by healthcare organizations of primary care practices all contribute to the selectiveness of the number of initial referrals that feed the member physicians who utilize the ASC facilities; it all depends how they are affiliated with the umbrella healthcare organization or network which they have joined.

As the healthcare landscape among physicians, which has been long fragmented, begins to quickly jell and consolidate into groups orbiting around a central healthcare system or other provider (just ask a cardiologist), the pressure to either go big or join with a larger player has allowed the successful entrance of private outside investors into independent physician-owned ASCs at a rate faster than in the past. In exchange for the partial equity buy-in, the investor typically seeks to protect its investment while maintaining sufficient equity of the physician-owners to motivate them and fuel their commitment to the success of the ASC.

Physicians in independent private practices, alone or in larger groups, are rapidly becoming rarer. Younger MDs are increasingly eschewing whatever openings are being offered in private practice in favor of careers free of its pressures and considered more stable and predictable.

While the doom and gloom may have perhaps been overstated, the general trends in these directions seem widely accepted. Litigation lives in the places where the expectations of some meet the less ideal realities of others. Where might those places be in the coming years? Membership, management, anesthesia and restrictive covenants are just a few that come to mind.

Before touching briefly on each one, it would be useful to revisit a few legal issues that often become part of the litigation.


The Covenant of Good Faith and Fair Dealing Implied in Every Contract.

The covenant of good faith and fair dealing implicit in every contract dictates that parties to a contract shall not do anything which shall have the effect of destroying or injuring the right of the other party to receive the fruits of the contract. Palisades Props. Inc. v. Brunetti, 44 N.J. 117, 130 (1965). The covenant exists independently of the contract's express terms. Good faith conduct is conduct that does not "violate community standards of decency, fairness or reasonableness."

The Anti-Kickback Statutes

The Federal Fraud and Abuse Act (which includes the anti-kickback statutes), 42 U.S. C. 1320a-7b(b), and its New Jersey state counterpart, N.J.A.C. 13:35-6.17, make it a crime for an individual or entity to knowingly and willfully offer, pay, solicit, or receive remuneration to induce business reimbursable under federal or state healthcare programs. The definition of remuneration is broad. It includes commissions, rebates or other forms of direct or indirect payment.

Office of Inspector General Safe Harbors and Advisory Opinions: Reading the Tea Leaves

Dependent upon the nature of the issue presented and what position the ASC may have taken toward meeting the criteria for an applicable safe harbor, its provisions may come into play. However, safe harbor provisions usually have limited utility in a case, if they ultimately have any role at all. While meeting the provisions of a safe harbor provides protection against criminal prosecution, failure to do so hardly equates to much if any substance in a civil case.

Office of Inspector General (OIG) Advisory Opinions are instructive on issues in a civil case but usually and ultimately inconclusive as well. Rarely if ever are the facts in any litigated case squarely on all fours with those set forth in an Advisory Opinion. Counsel and any experts retained will be quick to note the distinguishing facts as needed. It is not often one finds applicable bright lines here.

The Board of Medical Examiners

Much as in the federal arena, for a litigator's use, the proscriptions of the State Board of Medical Examiners (BME) suffer from the same lack of precision and predictability. In addition, sheer unavailability of any written guidance on many germane topics is a problem. Counsel and clients are forced to go on opinions and predict from the limited amount of guidance they may have obtained. Absent some clear mandate or regulation, the role of BME regulations in ambulatory surgery center litigation is usually minimal as well.

Having quickly revisited some familiar ground and maxims, now we can take a look at a few areas where one might expect some friction and attendant litigation to develop.


Member Termination: Share Redemption Value

Most ASCs, formally governed by lengthy operating agreements drafted by healthcare counsel, have provisions in them which attempt to address the circumstances in which a member can be voted out by his/her colleagues. All have the egregious conduct provisions (conviction of a felony or crime of mortal turpitude, loss of DEA license, inability to practice medicine, etc.) which are defined as "for cause" and which allow "for cause" expulsion from the ASC, often by a simple majority vote. Given the usually extreme nature of the defined "for cause" egregious conduct, rarely are these provisions utilized or ever come into play in litigation.

Termination by the membership "without cause" is invariably where the litigation or arbitration of the case starts. It is an appropriate time to involve outside litigation counsel to minimize the risk, to decrease the likelihood of litigation occurring by appropriate preventive action and to be prepared to talk down or handle any efforts by the terminated member to challenge the action or the valuation of his membership interest.

Typical ASC operating agreement "without cause" provisions require the vote of a supermajority of members, however defined in the agreement (e.g., two-thirds, three-quarters). Operating agreement provisions regarding share redemption, valuation and dispute resolution procedures vary.

What is often disputed is the appropriate value to be paid for the removed member's interest. Share valuation provisions are all over the spectrum. Provisions which have been the subject of litigation include multiples based upon an averaged set number of prior years' member's earnings, which can range toward the high side, to the value of a member's then current book value, or adjusted capital account, on the low side. The valuation provision often becomes part of the litigation.

Dispute resolution procedures are sometimes set forth in the ASC operating agreement and may include initial mediation, binding arbitration (e.g., American Arbitration Association), an agreed upon state court venue or a combination of all three. An award of attorneys' fees in favor of the prevailing party is not unheard of either.

Although designated "without case" in order to avoid unpleasantness and accusations among former colleagues, a reason, whether poorly or well-defined, invariably underlies the termination. Given the covenant of good faith and fair dealing implicit in all contractual undertakings and the various anti-kickback and BME regulations offering quickly alleged impermissible motives in terminating a member (i.e., lack of productivity), that reason behind the termination inevitably becomes part of the litigation. Its fairness, plausibility and reasonableness under the circumstances will come into issue.

Claims advanced frequently include those predicated to be in violation of the various anti-kickback statutes and BME regulations; it is the claims alleging that he real reason for expulsion is a failure to refer a sufficient dollar amount of profitable business to the Center to justify distributions in the eyes of former ASC colleagues rather than the allegedly pretextual reasons offered by the ASC. Testimony concerning prior oral representations or misrepresentations is sometimes cited as evidence, usually in conjunction with advancing alleged breaches of the covenant of good faith and fair dealing. Operating agreement and accounting interpretation issues will also arise along the way.

Providing Anesthesia: Outside Contractor or In House

The provision of the anesthesia services at an ASC produces substantial dollars. The issue is who receives those dollars: An independent contractor anesthesia provider or the ASC members through an in-house arrangement. Not surprisingly, this issue can be fiercely litigated, given what is at stake.

For many years following the turn of the millennium, traditional wisdom held that the same rules which allowed the formation of single- and multi-specialty physician owned surgery centers prohibited those same physician-owned centers from having a beneficial interest in the provision of anesthesia for the procedures done at the Center.  Recapture of the anesthesia service by the members of the ASC from the outside provider has been a growing phenomenon in recent years. ASC leaders note that anesthesia is an integral part of surgery, provides no meaningful potential for duplication or abuse in the manner sought to be protected by anti-kickback statutes, and control over it by the ASC ensures better procedures and outcomes.

Independent contracting anesthesia providers have sought to protect their position and contracts. Litigation alleging illegal in-house arrangements and contractual breaches has and continues to be filed.

Management Agreements

An ASC developer described the life cycle of a typical management services agreement as follows: "At first they [the member physicians] think you know everything and they need you for everything. After a while, they think they can do this as well as you. Down the line, they sometimes think they can do it better than you." In short, having learned the ropes in practice, some ASC physicians will question the benefit and value added by an outside management company; they'll look to remove the management company and take the role in-house.

In handling premature termination of a management services agreement, whether on behalf of the management services company or the ASC, performance under the agreement becomes the central issue. The outside management group sets forth how it has performed and continues to distinguish itself. It trumpets the results it has achieved in providing the agreed upon services, usually in exchange for percentage based compensation.

The ASC contests proper attribution for the results in response. The management company may be portrayed as absent and its site representative inept and ill-equipped. The ASC is frequently arguing that it is actually performing the agreed upon management services, not the management company, and that management company's failure in performance justifies neither current nor future compensation.

The subject matter is sensitive, particularly to a management services company whose success depends in large part on satisfied client centers and its reputation. There is substantial motivation for each side to resolve these conflicts amicably. Involving outside counsel at this juncture to maximize advantage and negotiate the most favorable resolution is a way to avoid litigation. It provides the benefit that the involvement of a litigation-savvy and experienced negotiator can bring to the situation.

Restrictive Covenants: Enforcement and Relaxation

Many ASC operating agreements contain within them restrictive covenants against competition as well as employment and patient solicitation for set terms within geographic areas and scopes of practice. New Jersey law, utilizing a "blue pencil" doctrine, has traditionally enforced such restrictions as long as they are reasonable in time, geography and scope and they serve to protect legitimate business interests, not merely prevent competition.

As an ASC physician member's private practice group enters into affiliation agreements with healthcare facilities and other entities which expect a reciprocal and supportive referral relationship, the ability of an ASC physician member to easily refer to an ASC of which he is a member which may not be part of the new arrangement will be put under strain.  That physician member's economic interest in the ASC of which he is a part may be seen as at odds with the group's economic interest as a whole. Affiliation of the group with another entity may involve entry and membership into a different and competing ASC. There are multiple ways in which the shifting of the loyalties and affiliations, as well as referral patterns and consolidation, may be put under strain and cause violations of existing restrictive covenants that were structured at a time prior to and not contemplating these developments. The resulting conflicts produce negotiation by counsel and, if unsuccessful, litigation.


Friction occurs when what is rubs against what is going to be. It produces conflict which, if unchecked, can develop into litigation.

Current economic realities and patterns of practice are rubbing against changes, some coming and some already in place, in an evolving playing field within which ambulatory surgery centers operate. Engaging outside counsel early in the process to negotiate the most favorable resolution can help avoid litigation. When litigation is the only solution, engaging a firm who is experienced in ASC healthcare litigation, cost conscious and cost efficient, with the ability to accelerate the process will reduce the overall costs and increase the certainty of results.

Robert J. McGuirl is certified by the Supreme Court of New Jersey as a Civil Trial attorney and is the principal of the Law Offices of Robert J. McGuirl, LLC. He devotes as substantial portion of his time to litigating healthcare-related matters, including those involving ambulatory surgery centers.


Case Study:

Examples of underlying reasons for removal advanced at times on behalf of either an ASC or a member run the gamut.

•    A physician member in one very successful ASC was terminated after failing to meet a reasonable minimum of surgeries at the center to satisfy ASC credentialing requirements after repeated warnings to that effect.
•    A physician member at another center threatened and followed through on institution of suit against the center over losses allegedly incurred by him in termination of his related anesthesia services contract with the center.
•    A physician member, lead plaintiff with several other ASC colleagues in litigation with a payor, quietly abandoned his claims and settled with the payor, unbeknownst to his colleagues; the member agreed in the process not to bring any of his cases to the center for an interim period.
•    A physician member, bound by a restrictive covenant found elsewhere in the ASC operating agreement, found a new ASC to support during its pendency, thus violating the covenant.
•    Others in ASC's seeking to adhere to the "one-third rule," or safe harbor, have refused or been unable to meet this commonly imposed and agreed upon requirement for preservation of the center from possible prosecution.

More Articles on ASC Issues:
Ambulatory Care Services Drive August Healthcare Job Growth, Adding 26,000 Jobs
22 Observations on ASCs for 2014
Ambulatory Surgery Centers Project to Save Medicare $57.6B Over Next 10 Years

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