Healthcare Fraud Investigations Increase; Greater Caution Urged in ASC Share Sales to Physicians; 22 Dos and Don'ts on Selling ASC Shares

The oversight and scrutiny of physician hospital and physician provider transactions and relationships has increased tremendously over the last few years.  Scott Becker, JD, CPA, partner at McGuireWoods, discusses two legal trends affecting the relationship between surgery centers and physicians — and how ASCs can reduce the risk that transactions between the center and its physician investors will be investigated.

1. Healthcare fraud and false claims investigations have increased tremendously.
ASCs have historically avoided much scrutiny regarding false claims, healthcare fraud and kickbacks — but surgery centers should not depend on this trend to continue. "We have great concern that [the lack of scrutiny] is starting to change as surgery centers become a bigger piece of the pie and the government spends more time looking at physician relationships," Mr. Becker says. More than ever, he perceives that ASCs must be very diligent in their compliance approach.  

In the April article "10 Key Legal Issues Facing Ambulatory Surgery Centers," Mr. Becker and his colleagues discussed the increase in government funds allocated to healthcare fraud enforcement. "We continue to see the evolution of different types of possible anti-kickback situations," the authors said. "These relate to situations where parties are trying to sell shares to physicians at prices that may be below fair market value, situations where facilities are leasing equipment on a per-click basis from physicians and situations where parties want to sell different quantities of shares to different physicians or pay different types of medical director fees to different physicians."

The last few years have seen an increase in kickback allegations and settlements. For example, in July 2010, the OIG reached a $7.3 million civil settlement agreement with Chicago-based, physician-owned United Shockwave Services, United Prostate Centers and United Urology Centers over charges that United and its physician-owners received payments in exchange for patient referrals.

Between 2008-2010, there were more than 20 different HHS' Office of Inspector General physician self-referral and kickback settlements, many of which involved improper attempts at aligning with physicians. As scrutiny of hospital-physician relationships increases, surgery centers are sure to experience increased oversight as well, Mr. Becker predicts.  

2. ASCs must be even more responsible about physician investment. If physicians are planning to invest in your ASC, you must be careful to avoid a situation that amounts to physicians being allowed to buy shares at below fair market value. HealthCare Appraisers' Healthcare Transactions 2009 Year in Review reported the most common methods for determining fair market value of share price are: soliciting an independent fair market value opinion (41 percent), using a predetermined formula (28 percent) and using a board-determined amount (24 percent). In an August interview with Becker's ASC Review, VMG Health senior partner Greg Koonsman said a minority interest investor might invest at around 4-4.5 times EBITDA — compared to at 6.5 times EBITDA for a majority interest investor.  

Chris Suscha, vice president of de novo business development for Meridian Surgical Partners, said an ASC should take a good look at the factors affecting the value of your ASC. You want to be able to account for the value of your shares, so take a look at your facility's historical cash flow, growth potential, recruitment opportunity, partnership stability and payor mix.

"As far as physicians investing in ASCs, they should be buying at fair market value, they shouldn't get any special deals and they shouldn't get the chance to buy more or less based on how many cases they're going to bring," Mr. Becker says. Most surgery center administrators comply with rules about self-referrals and physician investment, but because ASCs have historically suffered less scrutiny over kickbacks and healthcare fraud than hospitals, some providers are more careless than they should be.  

Treat physician investment seriously and approach every investment as if it could be investigated for kickbacks and abuse. If your center wants to sell shares to physicians, make sure the shares have been evaluated by a third party to determine fair market value. "You can use an internal committee to analyze share price too, but you have to be even more careful and conservative," Mr. Becker says.

In "10 Key Legal Issues Facing Ambulatory Surgery Centers," Mr. Becker and his colleagues discussed the danger of selling additional shares to highly productive physicians. "We often see situations where a physician who produces proportionately more than he owns wants to buy additional shares in the surgery center," the authors said. "In general, it is very hard to facilitate this." They said, while a physician can attempt to buy additional shares from other partners, those partners cannot sell their shares to the highly productive physician just to keep his or her cases in the center. If the partners decide to sell the shares, they must have a reason other than to retain volume — and ensure the shares are sold at fair market value.

3. 22 Dos and Don'ts on Selling Shares to Physician Investors
. In a 2009 paper on selling units in an ASC to physician investors, Mr. Becker listed 14 "don'ts" for ASCs to avoid, based on federal cases related to the syndication of interests in hospitals, labs and joint ventures:

1.    Do not offer less or more shares or a higher or lower price based on the number, volume or value of referrals a physician can generate.
2.    Do not reallocate shares based on the volume or value of referrals.
3.    Do not focus on individual distributions being tied to the number of patient referrals. Never make any indications that could lead a potential investor to believe that referrals or performance will determine an individual's "piece of the pie." Focus on overall distributions and profits.
4.    Physicians should not be allowed to invest based upon the fact that they can generate referrals for another physician who may use the center.
5.    Avoid providing physicians with estimates as to the amount of revenue that will be generated from their referrals or from another physician's referrals.
6.    Except as to compliance with the one-third tests, do not develop investor eligibility determinations based on the number of potential referrals. In evaluating physicians, examine compliance with all of the safe harbor criteria.
7.    Do not create "target lists" of physicians based on their ability to make high amounts of referrals.
8.    When creating target lists, avoid making notations indicating the potential number of referrals, the growth potential of the physician's practice, that a certain physician is a good target (based on referrals), etc.
9.    Avoid using age as an influencing factor when targeting physicians.
10.    Subject to non-discrimination rules, consider excluding Medicare and Medicaid referrals from any internal revenue and investment analysis.
11.    Do not offer remuneration or special treatment under various disguises, such as directorship contracts or discounted lease arrangements, in order to induce investors.
12.    Do not pressure a physician investor to shift their current referral patterns.
13.    Do not make any indications to investors that low-referring physicians will be pressured to withdraw.
14.    Units should be sold at fair market value.

Mr. Becker also included eight ways ASCs should approach physician investment:
1.    Offer equal amounts of units per investor.
2.    Offer units at the same price per unit.
3.    Offer units at the then fair market value per unit.
4.    Provide investor with the current financial statements and not their potential revenues.
5.    Offer units to only physicians that will comply with the safe harbors — meet all tests and not just the one-third tests.
6.    Clarify that the hospital or management company partner does not generate referrals for the ASC.
7.    Review investors against compliance with the requirements of the safe harbors.
8.    An ASC may ask physicians why they choose not to use the ASC

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