Selling an ASC Ownership Interest to Physicians: Overview of Federal and State Laws and Regulations

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This article identifies some of the key federal and state laws and regulations involved in selling an ASC ownership interest to physicians.


1. Anti-Kickback Statute. The Anti-Kickback Statute (AKS) prohibits the knowing and willful solicitation, receipt, offer or payment of "any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind" in return for or to induce the referral, arrangement or recommendation of Medicare or Medicaid business (42 U.S.C. §1320a-7b(b)). Violation of the AKS is a felony and may result in a fine of up to $25,000, imprisonment for up to five years, or both. In addition, the Office of the Inspector General (OIG) is empowered to suspend or exclude providers or suppliers from participation in the Medicare or Medicaid Programs if it determines, in its discretion, that a provider or supplier has violated the AKS (42 U.S.C. §1320a-7b(b)(7)). Arrangements that satisfy all of the requirements of a regulatory safe harbor are immune from both criminal prosecution and administrative enforcement by the OIG. But arrangements that do not meet the terms of a safe harbor are not necessarily illegal. Such arrangements will be scrutinized under the AKS to determine whether remuneration was given or offered as an inducement for referrals.


Concerning physician investment, there is an ASC safe harbor. The four possibilities for meeting the requirements of the ASC investment safe harbor are: (1) surgeon-owned ASCs; (2) single-specialty ASCs; (3) multi-specialty ASCs; and (4) hospital/physician-owned ASCs. With respect to physician investment in an ASC, safe harbor protection is intended to apply to physicians who are unlikely to use the investment as a vehicle for profiting from their referrals to other physicians using the ASC. The focus of the ASC safe harbor is limited to physician-investors who actually use the ASC on a regular basis as an extension of their medical practice, or who practice the same specialty as other physician investors and are thus not likely to refer a significant amount of business to competing physician investors when they can earn the fee on their own.


There are eight common requirements for each of the four types of ASCs to be protected by the ASC safe harbor:


  1. The ASC must be certified by Medicare.
  2. The ASC must use operating and recovery room space dedicated exclusively to the ASC.
  3. Patients referred to the ASC by physician-investors must be fully informed of the physician-investors' investment interests.
  4. Investment interests must be offered on terms not related to previous or expected volume of referrals, services furnished or the amount of business otherwise generated from that investor to the ASC.
  5. Neither the ASC nor any investor may loan funds or guarantee a loan for an investor to use in obtaining the ASC investment interest.
  6. Payments to an investor in return for the investment must be directly proportional to the amount of the capital investment of that investor.
  7. All ancillary services provided at the ASC must be directly and integrally related to the primary procedures performed at the ASC and none may be separately billed to Medicare or other federal healthcare programs.
  8. Neither the ASC nor any of the physicians practicing at the ASC can discriminate against federal healthcare program beneficiaries.


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. A procedure includes any item on the list of Medicare-covered procedures for ASCs. The medical practice income does not, however, necessarily have to be derived from the ASC in which that physician has invested.


Among other requirements, for single-specialty ASCs, the physician-investors must all be engaged in the same specialty and at least one-third of their medical practice income must be derived from the performance of ASC Medicare-covered procedures. Under the multi-specialty ASC safe harbor, the physician-investors must also derive at least one-third of their medical practice income from performing ASC Medicare-covered procedures, but also perform at least one-third of their ASC procedures at the ASC in which the physicians are investors. Finally, the one-third-income test and the one-third practice-location test are designed to ensure that the ASC in which the physician is invested is an extension of such physician investor's practice rather than a means for profiting from their referrals to other surgeons who utilize the ASC. .


2. Stark Act. The Stark Act prohibits, with certain statutory exceptions, a physician who has an ownership interest in, or a compensation arrangement with, an entity from referring patients to that entity for the provision of designated health services (DHS) if payment for those services may be made by Medicare or Medicaid (42 U.S.C. § 1395nn). The Stark Act grants the OIG authority to publish regulations to clarify the statute and/or impose additional requirements to carry out the intent of the statute.


DHS include:


  • clinical laboratory services;
  • physical therapy services;
  • occupational therapy services;
  • radiology, including magnetic resonance imaging, computerized axial tomography scans and ultrasound services;
  • radiation therapy services and supplies;
  • durable medical equipment and supplies;
  • parenteral and enteral nutrients, equipment and supplies;
  • outpatient prescription drugs;
  • prosthetics, orthotics and prosthetic devices and supplies;
  • home health services; and
  • inpatient and outpatient hospital services.


Physicians may only own interests in or have relationships with providers or entities that provide DHS if the relationships or operations are structured to qualify for at least one of the statutory exceptions to the Stark Act.


Much like the ASC safe harbor under the AKS, there is an exception to the Stark Act for ASCs. Under Phase I of the Final Stark II regulations, referrals from physician-owners of the ASC to the ASC itself do not implicate the Stark Act, as surgical procedures performed in an ASC do not qualify as DHS. There is no guarantee, though, that such referrals will not implicate state physician anti-referral laws (discussed later). Further, CMS has clarified that it does not intend for the Stark Act to cover services provided by an ASC that are also reimbursed by Medicare under the ASC group rate. Thus, as long as the procedures and services are not separately billable to the Medicare or Medicaid programs other than through the ASC payment rates, ASCs are not prohibited under the Stark Act from providing outpatient surgical services and related services. In contrast, the Stark Act will prohibit the provision by an ASC of separately billable labs, prescription drugs and physical therapy services.


3. Federal securities laws. Under federal law, an offering of securities (such as the sale of an ASC ownership interest to a physician) is subject to registration and disclosure requirements, unless an exemption is available. The most common exemptions from federal securities registration are those under Regulation D promulgated under the Securities Act of 1933 (1933 Act). Regulation D is a series of six rules — rules 501-506 — establishing three transactional exemptions from the registration requirements of the 1933 Act.


Rules 501-503 set forth definitions, terms and conditions that apply generally throughout the regulation. Specific exemptions are set out in Rules 504-506. Rule 504 applies to transactions in which no more than $1,000,000 of securities are sold in any consecutive 12-month period. Rule 504 imposes no ceiling on the number of investors, permits the payment of commissions and imposes no restrictions on the manner of offering or resale of securities. Further, Rule 504 does not prescribe specific disclosure requirements. Generally, the intent of Rule 504 is to shift the obligation of regulating very small offerings to state "Blue Sky" administrators, though the offerings continue to be subject to federal anti-fraud provisions and civil liability provisions of the Securities Exchange Act of 1934 (Exchange Act).


Rule 505 applies to transactions in which not more than $5,000,000 of securities is sold in any consecutive 12-month period. Sales to 35 "non-accredited" investors and to an unlimited number of accredited investors are permitted. An issuer under Rule 505 may not use any general solicitation or general advertising to sell its securities.


Rule 506, which is one of the most used exceptions to the 1933 Act, has no dollar limitation on the offering, and is available to all issuers for offerings sold to not more than 35 non-accredited purchasers and an unlimited number of accredited investors. Rule 506, however, unlike 504 and 505, requires an issuer to make a subjective determination that, at the time of acquisition of the investment, each non-accredited purchaser meets a certain sophistication standard, either individually or in conjunction with a purchaser representative. Like Rule 505, Rule 506 prohibits any general solicitation or general advertising.


"Accredited investor" is defined in Rule 501(a). The principal categories of accredited investors are as follows:


  • Directors, executive officers and general partners of the issuer, including general partners of general partners in two-tier syndicating. (The term "executive officers" is more fully defined in the regulation.)
  • Purchasers whose net worth either individually or jointly with their spouse equals or exceeds $1 million. Prior to 2010, a purchaser's home, furnishings, etc., are includable in the determination of net worth. However, a recent change to the definition of accredited investor excludes the net value of a purchaser's home from the determination of net worth. So, be careful when determining a physician investor's net worth.
  • Natural person purchasers who have "income" in excess of $200,000 in each of the two most recent years and who reasonably expect an income in excess of $200,000 in current year (or $300,000 jointly with their spouse).
  • A business entity will be treated as a single accredited investor unless it was organized for the specific purpose of acquiring the securities offered, in which case each beneficial owner of the security is counted separately.


A few final thoughts on using Regulation D exemptions:


  • Regulation D does not exempt offerings from the anti-fraud and civil liability provisions of the various federal securities laws.
  • Further, Regulation D in no way relieves issuers of their obligation to furnish to investors all material information that may be needed to make any required disclosures not misleading.
  • Similarly, notwithstanding exemption from registration at the federal level, Regulation D in no way eliminates an issuer's obligation to comply with applicable state law.
  • Regulation D is interpreted as providing "transactional" exemptions to issuers only. An investor whose purchase was exempt from registration cannot resell his or her interest without establishing an independent basis of exemption from the Exchange Act.


4. State laws


A. Certificate of need (CON). Several states have CON programs[1] which are aimed at restraining healthcare facility costs and allowing coordinated planning of new services and construction. Laws authorizing such programs are one mechanism by which state governments seek to reduce overall health and medical costs. The basic assumption underlying CON regulation is that excess capacity (in the form of facility overbuilding) directly results in healthcare price inflation. When a hospital cannot fill its beds, fixed costs must be met through higher charges for the beds that are used. Bigger institutions have bigger costs, so CON supporters say it makes sense to limit facilities to building only enough capacity to meet actual needs. CON programs currently tend to concentrate their activities on outpatient facilities, such as ASCs and long-term care. This is largely due to the trend toward freestanding, physician owned facilities that constitute an increasing segment of the healthcare market.


B. Choice of entity. There are several different entity forms in which an ASC may be organized and operated, such as a "C" corporation, an "S" corporation, a limited partnership and a limited liability company. By far, the most popular and flexible form of ownership for ASCs is the limited liability company, which provides the liability protection of a corporation and the pass-through taxation of a partnership. Make sure to review your state's licensure laws to ensure that LLCs may provide healthcare services.


C. State fraud and abuse laws. Several states have their own versions of the Anti-kickback Statute and Stark Law, as well as fee splitting restrictions.


i. State anti-kickback laws. Thirty-seven states and the District of Columbia have anti-kickback laws. These laws are either general in application or Medicaid specific. State anti-kickback laws usually apply to all payors while the federal statute only applies to payments related to federal healthcare programs. States' anti-kickback statutes that are general in nature vary widely, are usually not modeled after the federal law and often lack the intent requirements of the federal law. In contrast, Medicaid-specific anti-kickback laws typically are modeled after federal law, although there can be variation, both among states and within a state, by service. State laws vary in the extent to which they include the types of safe harbor provisions found in the federal statute. For example, the federal Anti-kickback Statute exempts remunerations paid by an employer to a bona fide employee; on the other hand, Florida's anti-kickback statute does not. The relatively broad nature of many state anti-kickback laws makes state level enforcement much easier as it requires less proof than required at the federal level. However, at least one state court has held that a state anti-kickback law is preempted by the federal Anti-kickback Law.


ii. "Mini-Stark" laws. State self-referral laws are often referred to as "mini-Stark" laws and have been enacted in 34 states. Such laws fall into three main categories: 1) laws that are nearly identical to federal Stark laws as applied to state programs; 2) laws that prohibit all self-referrals; and 3) laws with a disclosure requirement of financial interests to patients. In a number of cases, state mini-Stark statutes simply incorporate the terms of the federal law by reference. In the case of state laws that ban all self-referrals (and are thereby more stringent than the federal Stark Law), physicians are banned from any ownership interest in hospitals or other facilities to which they refer their patients. State statutes requiring only disclosure vary widely across the states, but most require disclosure in writing to the patient. Whatever forms the state self-referral laws take, some state statutes may reach self-referrals not covered by the federal prohibition. State law may extend to referrals paid for by payers other than Medicare and Medicaid, referrals by practitioners other than physicians, and referrals for services other than those designated by the federal law. In contrast, other state laws are more flexible than the Stark laws in providing broader exceptions to prohibitions on referrals.


Contact James Shafer at

[1] Jurisdictions with existing CON laws: AL, AK, CT, DE, GA, HI, IL, IA, KY, ME, MD, MA, MI, MS, MT, NV, NH, NY, NC, RI, SC, TN, VT, VA, WA, WV, DC, PR


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