Selling equity in ambulatory surgery centers – An investigation of key legal concepts and certain equity sale models

For most ambulatory surgery centers, there are numerous business, operational and inter-personal considerations involved with identifying appropriate physician partners and selling shares to such partners. Additionally, there are a variety of key legal concepts that any ASC should also keep in mind. This paper addresses these issues and considers the appropriateness of some equity sale models.

Additionally, this paper more specifically discusses situations in which (1) an ASC sets a buy-in price at a flat amount and promises that the physician will receive the same flat amount upon on redemption of the shares, (2) an ASC’s governing documents state that a physician will receive a specific guaranteed amount on redemption and (3) an ASC finances a physician’s investment in the ASC.

The three foregoing practices are discussed more fully in Part IV of this paper, but in summary:

A. We strongly discourage a situation in which a physician is allowed to buy equity at a static standard amount as the physician should be required to buy shares at fair market value at the time he or share is buying shares. Further, the fact that the physician will pay the same set price on buy-in as well as receive that price upon redemption is not, in our view, helpful to making the case that ‎the entry price is fair market value. The equity price should be based on standard methodologies for determining fair market value, and a set price may provide returns on investment that are outside of fair market value returns.

B. Likewise, we discourage a flat non-fluctuating redemption price because it can provide the sense that the physician’s investment is not truly at risk.

C. Finally, we discourage an ASC from itself (or its owners) financing a physician’s investment in an ASC, such as by allowing the physician to pay through a promissory note to the ASC/owners or through payment in other installment approaches. Such practices are directly contrary to guidance from the Office of Inspector General of the Department of Health and Human Services (the OIG). The risk of such practice can be reduced if the physician is completely at risk for the purchase on day one and guarantees payment of the price regardless of center results (e.g. through some security mechanism such as a lien on the equity etc.), but even with such a complete transfer of business risk to the physician, there remains some regulatory risk with such a practice. By contrast, it is permissible and not uncommon for the physician to obtain third party financing from an unaffiliated lender.

I. Fundamental Concepts

ASCs can go a long way toward ensuring appropriately structured sales of shares if they are mindful of the following fundamental concepts:

A. Physician investors should invest real capital and take real business risk on their investment.

B. Physician investors should pay fair market value for their shares.

C. The terms of investment for physician investors should (1) not be tied in any way to the volume or value of their referrals to the ASC, (2) not be structured with any intention of rewarding or inducing passive referrals by investors who do not personally perform services at the ASC and (3) be structured consistent with any specific requirements under applicable state law.

As discussed more fully in Section IV below, partnership structures that do not adhere to these fundamental concepts are at risk of being deemed in violation of Federal and state law.

II. Federal and State Fraud & Abuse Considerations

A. The Federal Anti-kickback Statute Generally

The most relevant Federal statute applicable to ASCs is the Federal Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b), which generally prohibits anyone from offering, paying, soliciting, or providing anything of value (i.e., remuneration) to another person in exchange for the referral of healthcare business to another person or entity. The concept of remuneration under the Anti-Kickback Statute has been defined broadly to prohibit several types of payments, discounts or transfers of anything of value in exchange for referrals. A violation of the Anti-Kickback Statute is considered a felony, and individuals or providers who violate the Statute may be subject to penalties, including fines of up to Twenty-Five Thousand Dollars ($25,000) per violation, imprisonment for up to five (5) years, or both. Additionally, the Secretary of the Department of Health and Human Services (DHHS) has the authority to exclude providers, including individuals or entities, who have committed any of the prohibited acts, from participation in the Medicare or Medicaid programs.

B. The ASC Ownership Safe Harbor

When selling shares to physicians in an ASC, ensuring compliance with the Anti-Kickback Statute is critical. In 1999, the OIG promulgated the "ASC Ownership Safe Harbor" regulations. There are actually four different "ASC Ownership Safe Harbors," based on a different ownership structure (physician-hospital JV, physician only JV, multispecialty JV and single specialty JV) but there are numerous common elements among all four various of the ASC Ownership Safe Harbors. Joint ventures that are structured consistent with all elements of the applicable ASC Ownership Safe Harbor are deemed immune from prosecution under the Anti-Kickback Statute as to certain ownership issues. Thus ASC companies generally strive to ensure that their joint ventures, including the sale of shares to physicians are structured in accordance with the ASC Ownership Safe Harbor. The core qualitative elements of the ASC Ownership Safe Harbor are as follows:

1. The terms on which an investment interest is offered to an investor must not be related to the previous or expected volume of referrals, services furnished, or the amount of business otherwise generated from that investor to the entity.

2. The entity or any investor (or other individual or entity acting on behalf of the entity or any investor) must not loan funds to or guarantee a loan for an investor if the investor uses any part of such loan to obtain the investment interest.

3. The amount of payment to an investor in return for the investment must be directly proportional to the amount of the capital investment (including the fair market value of any pre-operational services rendered) of that investor.

4. All ancillary services for federal healthcare program beneficiaries performed at the entity must be directly and integrally related to primary procedures performed at the entity, and none may be separately billed to Medicare or other federal healthcare programs.

5. The entity and any surgeon investors must treat patients receiving medical benefits or assistance under any federal healthcare program in a non-discriminatory manner.

In addition to these requirements, there are two quantitative elements most commonly referred to as the "one-third tests." The one-third tests are as follows:

a. For solely surgeon-owned or single-specialty ASCs, the physician investor must generate not less than one-third of her professional income from the performance of ambulatory surgical procedures listed on the Medicare ASC list in order for the ASC Ownership structure to receive Safe Harbor protection.

b. For multi-specialty surgery centers, an investor must meet the one-third professional-income test noted in (a) above and must also perform not less than one-third of his or her ASC procedures at the ASC in which he or she invests. This is intended to ensure that certain physicians who do not perform services are not being rewarded for the efforts of other physicians or their referrals to other physicians who do perform procedures at the ASC. The OIG’s concern is that such parties refer to the other surgeons and are receiving the benefits of returns from the surgery center due to their indirect referrals.

C. OIG Commentary Relating to ASC Ownership

The OIG has commented negatively on situations where the value of services or items is discounted to a party who is a referral source in exchange for referrals by the party in both its commentary related to the ASC Safe Harbor and the small entity investments Safe Harbor and through Special Fraud Alerts. The OIG has specifically discussed its concern being that a return on investment is a disguised payment for referrals, including situations where shares in the entity to which a physician refers patients are sold to the physician for a nominal value and annual returns on investment can be over 50 percent to 100 percent.

In addition to the ASC Ownership Safe Harbor, the OIG has stated in its commentary that certain "legitimate ASC arrangements may not fit precisely in the final ASC Ownership Safe Harbor. Those that do not fit may be eligible for Safe Harbor protection under the small entity investments Safe Harbor…" In discussing small entity investments Safe Harbor and the capital investments made by investors, the OIG has stated:

We do believe, however, that it is useful to analyze joint ventures on a case-by-case basis to determine what the real capital needs of the project are, and whether the capital that has been invested is merely a sham to pay investors for referrals.

The OIG issued a "Special Fraud Alert" relating to health care joint ventures and the Anti-Kickback Statute in 1989. In the Special Fraud Alert, the OIG identified the features of what it perceived as "suspect" joint ventures under the Anti-Kickback Statute. Specifically, with respect to "Financing and Profit Distribution," the OIG identified the following as indicators of potentially unlawful activity:

1. The amount of capital invested by the physician may be disproportionately small and the returns on investment may be disproportionately large when compared to a typical investment in a new business enterprise;

2. Physician investors may invest only a nominal amount, such as $500 to $1500;

3. Physician investors may be permitted to ‘borrow’ the amount of the ‘investment’ from the entity, and pay it back through deductions from profit distributions, thus eliminating even the need to contribute cash to the partnership;

4. Investors may be paid extraordinary returns on the investment in comparison with the risk involved, often well over 50 to 100 percent per year.

D. The Impact of State Law

In addition to the Federal Anti-kickback Statute, most states have additional kickback and fee-splitting laws that should be considered when structuring ASC share sales. While these statutes often closely track the Federal law, some states do place more onerous requirements on physician investors, such as requiring certain precise wording when disclosing ownership to patients who are referred to the ASC.

III. The Importance of Fair Market Value

It is important that all shares to physician investors be sold at fair market value. As noted above, this requirement comes straight out of the ASC Ownership Safe Harbor, and there has been growing attention on the critical importance of fair market value sales in recent years. There is no single correct way that an ASC company must calculate share price in order for the sale to be deemed fair market value. Many ASC companies effectively utilize market data and certain common approaches to the calculation of share price, such as a multiple of historical EBITDA (earnings before deductions for interest, taxes, depreciation and amortization). However, there has been increasing attention on the value of greater precision in determining such share prices following a number of government investigations and lawsuits. Thus many ASC companies have moved toward more consistently utilizing third-party valuation companies to make such determinations in order to ensure a more precise and detailed consideration of all factors that impact fair market value.

For example, in 2001, several complaints were filed against Columbia HCA by the United States joining parties in bringing qui tam actions (commonly referred to as "whistleblower suits"). These complaints related in part to the sale of interests to physicians in hospitals and included allegations of sham investments. One example of alleged illegal action claimed by the government and relator in the suit was that despite advice of counsel that "if partnership interests were acquired at below fair market value or for nominal consideration (e.g., nonrecourse notes), the rate of return on investment could appear unreasonably high, thereby raising the implication that the return on investment is, in part, payment for patient admissions or referrals to the Hospitals, " certain HCA executives "offered and provided investments to physicians at minimal or no out of pocket cost to the physicians for the express purpose of inducing referrals."

Then in September 2014, Meridian Surgical Partners, LLC settled a qui tam lawsuit (i.e. a "whistle blower suit") alleging, among other things, that Meridian sold shares to physician investors for below fair market value in its Treasure Coast Surgery Center joint venture. Although Meridian denied such claims, and although the settlement with the government of $3.32 million was a small fraction of the $100 million originally demanded, the attention that the government and judge in such lawsuit gave to the determination of fair market value was illuminating. Both the government prosecutors and the judge stressed how valuable third party valuation would have been to substantiate Meridian’s claim that the shares were really fair market value.

IV. A Look at Certain Models

The most common and comfortable structure for an ASC joint venture involves (a) owner physicians who are all outpatient surgeons personally performing services at the ASC, investing as individuals directly in the JV entity, (b) in some cases in partnership with an ASC management company and/or hospital partner and (c) with all physician and non-physician investors paying well-supported fair market value for their equity and taking full personal business risk in the investment in the same manner as other partners (with variation based solely on pro rata ownership).

However, as the healthcare industry continues to evolve, we do see other models emerge, with varying degrees of associated regulatory risk. For example, as we see physician practices consolidate into larger groups or become acquired by hospitals, and as physicians gravitate toward IPAs and similar risk-bearing organizations, such larger groups and risk-bearing organizations are beginning to look at investment in ASCs in unique and effective ways. These investments typically fall outside of the ASC Ownership Safe Harbor, meaning that the investment is not immune from liability under the Anti-kickback Statute, but that does not necessarily mean that such investment violates the Anti-kickback Statute and there may be some facts and circumstances in which such an ASC partnership can be structured in compliance with Federal and state law.

By contrast, an ASC investment model that does not make real effort to determine the fair market value of the equity or that does not involve physician investors taking real business risk would be problematic under the Anti-kickback Statute and some state laws. Examples of such structures that involve significant regulatory risk include:

A. A partnership in which the equity price is a flat fee that is not routinely (at least annually, or more frequently if extraordinary events occur) re-evaluated by a third party valuation firm or subjected to serious internal review of market considerations and center performance to ensure that price continues to reflect fair market value. There is considerable risk that the pricing of equity in such a fashion would be viewed by the government as inconsistent with fair market value, provides returns on investment that are outside of fair market value returns and therefore violates Federal and state kickback laws. The fact that the physician will receive the same set price upon redemption is not, in our view, helpful to making the case that ‎the entry price is fair market value. Such arrangements are particularly problematic if they involve low entry and exit prices because in such cases the physician has little capital at risk, making the arrangement appear to be akin to a contractual arrangement to distribute referrals, versus a legitimate investment in a joint venture.

B. A partnership in which the governing documents guaranty that redeemed physicians will receive upon departure a price that is equal to (or at least as great as) the original buy-in price. In such a structure, the physician has very little real risk of losing his or her investment regardless of how the partnership performs, how the market fluctuates etc. Such a structure could be viewed by the government as a violation of Federal and state kickback laws because it is inconsistent with the ASC Safe Harbor and general government view that physician investment in an ASC should involve real business risk, versus merely serving as a mechanism for rewarding referrals.

C. A partnership in which the physicians are permitted to pay the ASC for his or her equity with financing from the center or the center owners, such as payment in installments over time despite receiving the full amount of equity (and distributions relating thereto) on day one. Again, such a structure is contrary to OIG guidance on the matter and inconsistent with the fundamental concept that investing physicians should take real business risk in the investment. The risk of such practice can be reduced if the physician is completely at risk for the purchase on day one and guarantees payment of the price regardless of center performance (e.g. through some security mechanism such as a lien on the equity etc.) but even with such transfer of business risk to the physician, there remains some regulatory risk with such a practice. Note that it would be permissible for the physician to obtain third party financing from an unaffiliated lender such as a traditional bank given that the bank would itself pay the ASC in full and would then require a lien on physician personal assets or other security methods.

V. Conclusion

In addition to the other business and operational considerations relevant to structuring the sale of equity to physicians in an ASC partnership, ASCs would be wise to also consider the fundamental concepts discussed in this paper to enhance the likelihood of the ownership structure being deemed compliant with Federal and state law.



1. 64 Fed. Reg. 63536.

2. 56 Fed. Reg. 35970.

3. The 1989 Special Fraud Alert was reprinted in the Federal Register in 1994. See 59 FR 65372 (December 19, 1994).


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