A: Generally, a hospital, whether for-profit or not-for-profit, does not need to own 51 percent of the joint venture. The ownership of 51 percent can help with respect to managed-care contracting (some hospital-payor contracts permit affiliated ASCs (i.e., ASCs where the hospital owns at least 51 percent) to participate), it can help with tax-exempt concerns (however, control is more important than ownership) and for for-profit hospitals, it can help with “the consolidation of financial statements” (i.e., financial statements that combine the assets, liabilities, etc. of separate entities that are controlled by a “parent”). That stated, control of management is often more important for tax-exempt concerns and financial statement consolidation than is ownership.
2. Q: What are the main legal considerations in three-way joint ventures between physicians, management companies and hospitals?
A: The main considerations in these ventures are very similar to the considerations in a simple hospital-physician joint venture or a management company-physician joint venture. First, all ownership must be handled in a manner that complies with concepts under the anti-kickback statute. Persons must not be given more or less shares based on referrals; they must not be able to buy shares cheaper or at a higher price based on referrals; their ownership should not be tied to a certain amount of referrals to the venture or to the hospital; and another party cannot finance their investment in the center, among other characteristics.
Second, from a tax-exempt perspective, the concerns are very similar as to those concerns in physician-hospital joint ventures (i.e. the hospital must have significant control to assure that the venture will serve charitable purposes).
3. Q: If a hospital is brought into a joint venture, is the joint venture legally required to utilize all the hospital services, such as pathology, radiology, linens, etc?
A: From a state and federal law perspective, the joint venture is generally not required to use hospital services. However, many hospitals have contracts with pathology groups, radiology groups, anesthesiology groups and others that may require the usage of their services in joint ventures where the hospital has ownership. Generally, it is not required by law.
4. Q: What are the common mistakes you see occurring in the marketplace when existing physician-owned ASCs decide to sell part of their facility to either a hospital partner or corporate partner (or both)?
A: The more common mistakes involve issues surrounding the amount of ownership that must be sold (whether it has to be a minority or majority interest) and the different obstacles to closing (e.g., covenants not compete or control of management) and understanding those different obstacles. In some instances, we see parties still wanting to use concepts such as “earn outs,” where a bigger price is paid if more referrals are made after the deal or similar types of concepts where the price is not paid at the time of closing. Most parties are aware that these concepts are very questionable.
5. Q: If a party decides to sell part of its facility to a corporate partner or hospital, is a third-party valuation required?
A: Generally, if selling to a hospital, whether exempt or not, it is likely that a valuation will be required. This is to avoid implications that the purchase price is above fair market value, provides special private benefit or is otherwise intended to reward the physicians for referrals to the hospital. When a national management company buys into a surgery center, it is generally not necessary to obtain a valuation. However, the later sale of shares to physicians would often require a valuation.
— Contact Scott Becker at sbecker@mcguirewoods.com; contact Elissa Moore at emoore@mcguirewoods.com.
