Ambulatory Surgical Center OIG Advisory Opinion

On July 29, 2009, the Office of Inspector General (OIG) issued Advisory Opinion No. 09-09 regarding an ambulatory surgical center joint venture between a hospital and an entity owned by seven orthopedic surgeons (Surgeon Investors). The hospital and the Surgeon Investors desire, through a multi-step transaction, to establish an ambulatory surgical center owned 50/50 by the hospital and the surgeon entity. The multi-step transaction apparently was required by Certificate of Need restrictions whereby the hospital, through a subsidiary, and the Surgeon Investors, through a limited liability company (LLC), each developed a one-suite ambulatory surgical center with the LLC eventually acquiring an interest in the hospital ambulatory surgical center (the ASC). The ASC would lease space from the hospital in a medical office building owned by the hospital that complied with the safe harbor for space rental.

The hospital and the Surgeon Investors represented that the proposed investment in the ASC would meet the hospital/physician ambulatory surgical center safe harbor, except i) the hospital would be in a position to make or influence referrals directly or indirectly to any of the Surgeon Investors or the ASC; ii) the Surgeon Investors were not investing directly in the ASC or through a group practice as the separate LLC would be formed through which the Surgeon Investors would own an interest in the ASC; and iii) the return on the investments may not be directly proportional to the amount of capital investment as the timing of each investment would be different.

As seen in past ambulatory surgical center joint venture opinion letters from the OIG, the hospital made the following certifications:

1. The hospital's employed physicians would not make referrals to the ASC;
2. The hospital would not encourage its medical staff to refer patients to the ASC;
3. Neither the hospital nor the ASC would track referrals;
4. All compensation paid by the hospital to its medical staff would be fair market value and not take into account the value or volume of referrals made to the ASC or the Surgeon Investors; and
5. The hospital will notify its medical staff annually of the above safeguards.

The OIG held that the LLC owned by the Surgeon Investors, through which the ownership interest in the ASC was held, would not increase the risk of fraud and abuse as it was only a "pass through" entity. The OIG emphasized that although it has previously expressed concern regarding intermediate investment entities, because such entities could be used to channel referrals since the LLC only held an interest in the ASC, the OIG found this structure to be acceptable.

The OIG continues to express concern regarding disparate returns on investments if each investor did not pay the same amount for each ownership unit. As is expected in normal business holdings, if the ambulatory surgical center is successful, investors will experience an appreciation in the value of their ownership units. By way of example, if a hospital becomes an investor several years after the formation of an ambulatory surgical center, the value of the center may have appreciated, causing the fair market value purchase price of each unit to be acquired by the hospital to be of an amount greater than the amount the physicians originally invested on a per unit basis. As a result, any annual distributions given to the hospital would have a lower percentage return since the hospital paid more for each unit than the initial physician investors. The OIG emphasized the same could be experienced by the hospital and Surgeon Investors in 09-09 since each were to form a separate one operating room ambulatory surgical center and then, in effect, merge the LLC's ambulatory surgical center into the ASC with additional contribution being required by the entity, either the hospital or the LLC, that had the lower valued ambulatory surgical center.

An important fact in this Advisory Opinion was that the value of the separate ambulatory surgical centers would be based only on tangible assets. Because the valuations of the separate ambulatory surgical centers were not based on intangible assets, the OIG felt that there was a low risk for fraud and abuse since the value of the separate ambulatory surgical centers would not take into account the value or volume of business being generated by the Surgeon Investors. In a very detailed footnote, the OIG stated that it is not asserting "that a cash flow-based valuation or other valuation involving intangible assets would necessarily result in a violation of the anti-kickback statute."

Thus, the OIG, in Advisory Opinion No. 09-09, is sending a message that valuations including the value of intangible assets could increase the risk of fraud or abuse. Again, it is important to emphasize that the OIG is not stating that the valuation of intangible assets necessarily increases the risk of fraud or abuse.

Because of this opinion, it is important that valuations that include intangible assets be carefully reviewed to understand the risks involved by including such assets.