Planning and Strategy

OIG Issues Favorable Ambulatory Surgery Center Advisory Opinion

On July 25, 2008, the Office of Inspector General (OIG) of the Department of Health and Human Services posted a favorable Advisory Opinion (08-08) regarding the development and operation of an ambulatory surgical center (ASC) owned jointly by a Hospital and a group of Surgeons. The OIG concluded that it would not impose sanctions under the Federal Anti-Kickback Statute notwithstanding the fact that the Arrangement does not meet any specific safe harbor and poses some risk of prohibited remuneration. In issuing the Opinion, the OIG shows flexibility in permitting joint ownership of an ASC outside of the strict confines of the ASC safe harbors and demonstrates a willingness to endorse non-safe harbor compliant arrangements as long as appropriate measures are taken to reduce the potential for improper inducements to refer procedures to the ASC.

Background
The ASC in the Opinion was to be owned by a hospital and 18 "orthopedic" surgeons. The Surgeons were to own, in equal shares, 70% of the ASC through an LLC; the Hospital was to own the remaining 30%. Fourteen of the 18 Surgeons met the "1/3 income test" while the remaining four Inpatient Surgeons did not. Each Inpatient Surgeon, however, did derive at least 1/3 of his or her medical practice income from procedures in an OR setting. The Hospital is a not-for-profit corporation that owns three hospitals and other health care related entities including a large physician group practice employing primary care physicians and specialists. Several restrictions on referrals were put into place regarding pain management referrals, cross referrals, referral compensation and tracking, as well as stipends paid for anesthesiology (to a Hospital-owned anesthesiology practice that was to provide anesthesia services to the ASC).

OIG Analysis
Although the OIG determined that the ownership arrangement did not qualify for safe harbor protection, it concluded that it incorporated safeguards that would minimize the likelihood of fraud and abuse.

  1. Although the ASC was to be owned, indirectly, by the Surgeons through an LLC (contrary to safe harbor requirements), the OIG concluded that the ownership structure did not substantially increase the risk of fraud or abuse because the LLC ownership interests were to be owned proportionately to the investment of the Surgeons and the LLC was to distribute returns on investment to each Surgeon member directly proportional to his or her investment, thereby providing the Surgeons with a return that is "exactly" the same as if they had invested directly in the ASC.

  2. The OIG determined the although the Inpatient Surgeons did not (and would not) meet the so-called "1/3 income test" (necessary for safe harbor protection), they were engaged in a genuine surgical practice" deriving at least 1/3 of their income from procedures requiring a hospital operating room setting, and were qualified to perform surgeries at the ASC. In addition, the OIG considered the fact that the Inpatient Surgeons certified that they rarely have occasion to refer patients for ASC procedures. Finally, the OIG looked favorably upon certain restrictions related to pain management referrals by the inpatient surgeons.

  3. The OIG also noted that although the investment by the Hospital voided safe harbor protection (because, by employing physicians, the Hospital is a referral source) it concluded that the various safe- guards related to Hospital referrals (e.g., refraining from taking any actions to require or encourage physicians affiliated with the Hospital to refer cases and refraining from tracking such referrals) "significantly constrained" the ability of the Hospital to direct or influence referrals to the ASC or the Surgeons.

  4. The OIG concluded that although the anesthesiology arrangement (between the ASC and the Hospital-owned anesthesia practice) did not comply with the safe harbor, the OIG took comfort from the fact that (i) all of the services to be provided were set out in the agreement, (ii) the services are reasonable and necessary for the ASC, and (iii) the amounts to be paid are fair market value, determined at arm's length and do not take into account the volume or value of referrals or other business generated between the parties.

Conclusion
In issuing this Opinion, the OIG has demonstrated flexibility in permitting joint ownership of ASCs by physician and hospital investors outside of the strict confines of the various ASC safe harbors. As a result, many existing ASCs seeking new physician investors may now have somewhat greater flexibility in attracting those physician groups composed of both ASC utilizers and surgeons (or proceduralists) with hospital-based practices.  The Opinion could also affect the drafting of the operating agreements or other governing documents of certain multi-specialty ASCs that have incorporated the "1/3 procedures test" as a basis for the redemption of a physician's ownership interests. Finally, the rationale employed by the OIG with respect to the "1/3 income test" as applied to the Inpatient Surgeons conceivably could be applied with respect to the one-third "procedures" test as it relates to "hospital-based" physician investors.

Written by Roger Strode, McDermott Will & Emery, (312) 984-7717, rstrode@mwe.com