Ambulatory Surgery Center Physician Exclusions – Reducing Risk of Forced Redemption of ASC Investment Interests

March 3, 2017

Many surgery centers are eventually faced with decisions about how to treat investing physicians who do not perform as many procedures in the surgery center as others. Under performing physicians can create political issues in ASCs because investors who perform more surgeries or higher value procedures at the center feel the other investors are taking a ride on their efforts.  Over time, higher producers may start to view those with lower surgery levels as “dead wood”.  This dynamic is a perfect set up for violating the Anti-kickback Statute which specifically prohibits basing investment offering on the actual or expected volume or value of referrals.
​The Anti-kickback Statute standards that apply to surgery centers are somewhat counterintuitive.  The safe harbors that protect ASC investment interests actually require an investor to make certain levels of referral in order to receive the benefits of the safe harbor.  Usually, the Anti-kickback Statute considers referral requirements to be suspect.  So the one-third requirements under the single and multi-specialty safe harbor provision are somewhat counterintuitive.
​The conditions included in the ambulatory surgery center safe harbors act as a proxy for determining when an investing physician actually uses the ASC as a natural extension of his or her office practice.  An investing physician might still use the ASC as an extension of practice when the one-third requirements are not met.  The failure to meet the one-third safe harbor does not automatically disqualify a physician from maintaining an investment and many investments that do not meet the safe harbors present very little compliance risk.
The safe harbors are just that; safe harbors.  An investing physician who does not meet the one-third requirements of the safe harbor might still be perfectly in compliance.  The investing physician might still be using the ASC as a natural extension of his or her medical practice, but the natural flow of the practice may not permit full compliance with the one-third requirements.  The fact is that many ASC’s do not strictly meet the safe harbor provisions yet do not create any real compliance risk.
This might not be what the higher referring physician investors in the ASC want to hear.  In reality, they may feel that lower volume providers are taking a ride on the higher profitability created by their more lucrative practice. Depending on the specific situation, the attitude of the more profitable physician might be very dangerous and could potentially create more compliance risk than the investor who does not strictly meet the one-third tests.  Strict adherence to the one-third tests for multi-specialty ambulatory surgery centers can support the positions of the high-volume surgeons to the detriment of the lower volume surgeons who still realistically create very little risk under the Anti-kickback Statute because they use the ACS as a natural extension of their practice.
I have seen several ASCs use exclusion clauses in their operating agreements to force out lower producing physicians.  Generally, the “in crowd” argues the lower producing physician does not meet one or both of the one-third safe harbor tests.  I have also seen ASC’s send letters or otherwise take action to pressure “underperforming” investors to increase their volume of referrals to the ASC under threat of having their investment interest involuntarily redeemed.  In most cases, this type of approach is a big mistake.  Pressuring a physician to make more referrals, even with the goal of meeting a safe harbor requirement, creates risk under the Anti-kickback Statute.  The letter demanding (or even suggesting) that referrals be increased creates what we call in the law business, a “bad fact.”
These types of cases run significant risk of being challenged under the Anti-kickback Statute by excluded investors or governmental enforcement agencies.  Great care must be taken in surgery centers with this dynamic to assure that frustrations of higher volume producers do not lead to actions that create regulatory risk for the surgery center.
Many operating agreements that govern the rules relating to ambulatory surgery center ownership actually create legal compliance risk.  It is critical the procedures for excluding providers be established in advance, are uniformly followed, and do not raise any inference that additional referrals are being required in order to maintain an investment interest.  Efforts to bring investors closer to compliance with safe harbor standards can easily be “turned inside out” and be re-characterized as requiring additional referrals.
Once investors own interests in an ambulatory surgery center, it is very difficult to force redemption without creating significant legal risk.  The ASC Safe Harbor provisions exist to protect arrangements from further scrutiny where they contain elements that the federal government has indicated are reflective of there being a lower level of risk of abuse.  The safe harbors were never intended to be used as a tool to exclude existing investors or replace a complete risk analysis presented by the referral flow from the physician’s practice.
Not everyone who practices in this area agrees with my analysis.  Some believe that a normal safe harbor analysis should be followed.  In other types of arrangements, coming closer to compliance with a safe harbor requirement is generally believed to mitigate potential risk.  I do not believe the same analysis always applies when analyzing an ASC investment structure for compliance with the Anti-kickback Statute.  In the ASC case, requiring an investor to come closer to meeting the one-third safe harbor requirements inherently includes an inference that referrals should be increased.  No other safe harbor includes a volume of referral requirement.  This makes the ASC safe harbor unique.  Although I understand the arguments made by those who apply the “normal” safe harbor (closer to compliance) analysis to ASC compliance issues, I believe the approach is inherently risky.
Keep in mind the usual investor exclusion case never reaches the point of producing a published legal opinion.  Most of these cases settle without reaching the ultimate issue of whether coming closer to complying with the ASC safe harbor reduces risk.  Viewed from this perspective, facts that imply an investor should increase referrals to meet safe harbor requirements are not helpful to the ASC when going through mediation or settlement discussions.  Who wants to come out on the wrong side of that argument if the case ever goes to court, is subject to a whistleblower claim, or catches the eye of a government enforcement agency?
What ends up happening with more of these cases is they settle short of litigation or very early in the mediation or litigation process.  The ASC ends up paying the wrongfully excluded investor; sometimes a very large amount of money.
This situation can be prevented if an ASC establishes appropriate criteria and procedures for analyzing the risk of an investment interest.  The usual provisions in an operating agreement that “parrot” the safe harbor requirements are not adequate to mitigate risk presented by improper exclusions.  In fact, many operating agreements contain provisions that actually create first source evidence supporting the claim of an excluded investor.  There are certainly ways to reduce the risk associated with excluding under-performing investors, but using the safe harbor requirements to force redemption is not included.  If your ASC contains exclusion provisions based on the one-third safe harbor provisions, you should seriously consider rethinking your exclusion process.  What you have is not going to work without creating quite a bit of risk.
Links to Additional Articles Regarding Ambulatory Surgery Center Compliance Issues
Ambulatory Surgery Center – Anti-kickback Issues and Safe Harbor Regulation Compliance
Ambulatory Surgery Center Compliance Federal Settlement Raises Issues for Physician Owned Surgery Centers
Ambulatory Surgery Center Compliance Legal Practice
Ambulatory Surgery Center Advisory Opinions
Ambulatory Surgery Center Radiologist Rules – Proposed Simplified By CMS
Anesthesia Company Model Advisory Opinion 12-06

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