The OIG recently issued an advisory opinion that contains important guidance on ambulatory surgery center (ASC) joint ventures between hospitals and physicians. In
Advisory Opinion No. 09-09, the OIG approved of an arrangement whereby a hospital and a physician group would form a joint venture by combining their two ASCs into a single, larger ASC. The opinion is important because for the first time, the OIG has addressed fair market value appraisal methodologies.
Prior to entering into the joint venture, seven orthopedic surgeons owned and operated an ASC (Physician ASC) through a limited liability company (“Physician LLC”). Each physician’s ownership in the Physician ASC was proportional to his or her capital investment and each Physician received at least one –third of his medical practice income from performing outpatient surgical procedures. Under the proposed arrangement, the hospital would develop its own ASC (Hospital ASC) directly adjacent to the Physician ASC. Both the Physician ASC and the Hospital ASC would undergo a fair market value appraisal that would take into consideration only the tangible assets of the ASCs, such as equipment, furniture and supplies, and would not take into consideration the value of the ASCs as going concerns. The parties would each contribute the assets used in the operation of their respective ASCs to the new joint venture (JV) and each entity would hold a 50 percent ownership interest. If the fair market value of either the Physician ASC or Hospital ASC was determined to be greater than the other, the other party would make a cash contribution to the JV in the amount of the difference. The parties certified that any physicians employed by the hospital would not make referrals to the jointly-owned ASC, the hospital would not require or encourage its medical staff to refer patients to the ASC nor track any referrals made by medical staff members to the ASC, and the hospital would continue to operate its own facilities for outpatient surgery.
The OIG concluded that the arrangement presented minimal risk of fraud or abuse, despite the fact that it did not fit within any applicable anti-kickback safe harbors. In the proposed arrangement, the physicians would not invest in the JV directly, but rather indirectly through the Physician LLC. In the past, the OIG has expressed concern that intermediate investment entities “could be used to redirect revenues to reward referrals.” The OIG determined, however, that the use of a “pass-through” entity in this case did not substantially increase the risk of fraud and abuse since the physicians’ ownership interest in the Physician LLC were directly proportional to each physician’s capital investment, and each physician would receive a return on investment in the same way as if they invested in the JV directly.
Perhaps most interesting to the OIG’s opinion, however, was that fair market value was based only on the tangible assets of each ASC. In a footnote, the OIG stated:
“Our conclusion might be different if the valuation of the respective contributions of the investors included intangible assets. For example, given the circumstances of the Proposed Arrangement, we might be concerned if the valuation were based on a cash flow analysis of the Surgeon ASC as a going concern. Because the Surgeon Investors are referral sources for the Surgeon ASC, a cash flow-based valuation of that business potentially would include the value of the Surgeon Investors’ referrals over the time that their ASC was in existence prior to the merger with the Hospital ASC.”
The OIG went on to note that a valuation involving intangible assets would not necessarily result in a violation of the anti-kickback statute, but would require a review of all the facts and circumstances. It is not clear whether the OIG is concerned about using a cash flow-based valuation in most healthcare transactions involving referral sources, or just transactions, like this one, where the parties’ contributions would be valued differently for contributing the same assets if only one party’s contribution is valued as a going concern based on cash flow. Also, the OIG appears to be focused on historical cash flow rather than a projected, discounted cash flow, which is a commonly used valuation methodology. What is clear is that for the first time, the OIG addressed valuation methodologies, which could lead to increased scrutiny of all transactions involving physicians.
.
