“If I have seen further, it is by standing on the shoulders of Giants,” said Sir Isaac Newton of the contributions his predecessors made to his own work.1
The same might be said by a young physician today, reflecting on the legacy of those who pioneered the free-standing ambulatory surgery center (ASC), just over 50 years ago. Little could those early innovators imagine the complexity and scope of the procedures now performed in this type of facility.
As those “giants” approach retirement, however, other giants lurk in their midst.
The Issue of Fair Market Value
Just as the prevalence of the ASC has grown,2 so has the price tag for ownership in such a center. Regulatory considerations call for buying and selling of physician ownership in ASCs to reflect fair market value (FMV). While this mitigates risk of fraud and abuse, it presents a giant challenge for successful centers, where retiring physicians may struggle to collect their full FMV redemptions without bankrupting the centers they once dedicated their careers to building.
Angela Rust, Marquette 2007, is a shareholder on
von Briesen & Roper’s health law team in Neenah, where she helps ambulatory surgery centers and other provider-owned businesses navigate the complexities of health care regulations.
Meanwhile, younger physicians struggle to buy in at price points that loom large when combined with medical school debt. These challenges are particularly acute in Wisconsin, where our state population is among the nation’s 15 oldest,3 and over 21% of physicians were already over 65 by 2022.4 High turnover during the COVID-19 pandemic exacerbated this problem.5
Unlike many states, there is no certificate of need requirement to build an ASC in Wisconsin. This may modestly reduce FMV when considering the lack of barrier to entry for competitors, but that reality can drive would-be investors to prefer syndication of a de novo center rather than investment in existing centers with high buy-in prices and mounting debt to retired owners.
The Anti-kickback Statute
So why buy and sell at FMV? Why not stipulate to a fixed subscription and redemption values and let physicians make their money in profit distributions?
The answer lies predominantly in the federal Anti-kickback Statute (AKS), which makes it a criminal offense knowingly and willfully to offer, pay, solicit, or receive any remuneration to induce or reward referrals of items or services reimbursable by federal health care programs.6
A physician’s return on investment, whether through routine profit distributions or a larger liquidity event, could be construed as a payment for the referrals to an ASC.
Safe Harbors
The Department of Health and Human Services has published “safe harbor” regulations defining characteristics of physician ASC ownership it considers unlikely to result in fraud or abuse.7 Failure to meet a safe harbor is not itself illegal, but the safe harbors are indicative of arrangements the Office of the Inspector General (OIG) finds acceptable. OIG Advisory Opinions allow parties to seek protection for arrangements that may not qualify for a safe harbor.8
While such an opinion only applies to the party requesting it, these are also a good source of guidance as to how the OIG will view various arrangements.
All of the applicable safe harbors require that the terms on which an investment interest is offered to a physician must not be related to the previous or expected volume of referrals, services furnished, or the amount of business otherwise generated by the physician for the ASC.
Payments to a physician investor must be directly proportional to their capital investment.9 The OIG has further clarified that it is not enough for payments to be proportional to the resulting equity ownership, but rather to the investment itself and the related financial risk.10 The OIG is particularly concerned when a physician’s capital investment is disproportionately small, and the returns on investment are disproportionately large when compared to the risk involved for the physician.11
The Rollercoaster of FMV
The price of ASC ownership interests may vary over time as a result of the timing of the purchases, but this should be as a result of an appreciation or decrease in the value of the investment.12 Buy-ins below FMV may be viewed as an inducement for future referrals. Similarly, a redemption higher than FMV may be viewed as payment for prior referrals.
Therefore, an independent FMV appraisal is the typically recommended means of setting the price. Formulas, such as EBITDA-based calculations, are sometimes used to approximate FMV. However, if a formula or stipulation artificially inflates or discounts what would otherwise be “FMV,” this increases the risk that the price will be viewed as an illegal kickback.
This link to FMV leads many ASCs to experience a lifecycle with significant peaks and valleys. Upon the first syndication, risk is considerable and value is low. Then, as a center matures and grows, value climbs. As investors depart, FMV redemptions or cross-purchases create substantial returns, often paid over time through promissory notes.
Meanwhile, buying into the center may become an expensive proposition, resulting in less recapitalization through new offerings, and potentially less interest and referrals from would-be investors. Eventually, if physician departures outpace new investors, value begins to decline.
Finally, the now lower value motivates new investors and/or recapitalization, and the cycle begins again.13
Physicians riding this rollercoaster – particularly those who find the value of their center on a downward trajectory as they approach retirement – understandably search for alternative solutions.
In some ASCs, for example, low stipulated redemption values are adopted to avoid debt burden and encourage departing physicians to recruit a replacement to whom they can sell their interest at a negotiated price above the stipulated redemption value. The argument goes that low redemptions are the opposite of rewarding referrals. However, any guaranteed return may be inconsistent with the notion of a full-risk capital investment.
Further, if these types of arrangements drive physician-to-physician transactions that are not consistent with FMV, risks of running afoul of the AKS remain, particularly if the departing physician exits without retiring or if suppressed values are the intention of a broader scheme.14
The Need for Proactive Planning
While there are no easy solutions to these issues, proactive succession planning may reduce the drama that can arise when these issues are put off until an individual is faced with a challenging buy-in or disappointing exit valuation.
As attorneys, we can help the future generation of ASCs and ASC investors to stand on the shoulders of giants, spot areas of risk, and find a way forward.
This article was originally published on the State Bar of Wisconsin’s
Health Law Blog. Visit the State Bar
sections or the
Health Law Section webpages to learn more about the benefits of section membership.
Endnotes
1 Jamie Vernon, “
On the Shoulders of Giants,”
American Scientist, July-August 2017.
2 “
It’s Time to Convert Your HOPD to an ASC,” Sullivan Healthcare Consulting Blog, updated Sept. 18, 2024.
3 Wisconsin Hospital Association,
2024 Wisconsin Health Care Workforce Report, March 2024.
4 Association of American Medical Colleges,
U.S. Physician Workforce Data Dashboard, 2023 Key Findings and Definitions.
5
Id.
6 42 U.S.C. § 1320a-7b(b).
7 42 C.F.R. § 1001.952. When all safe harbor criteria are satisfied, this provides protection from prosecution and sanctions.
8 42 C.F.R. § 1008.
9 42 C.F.R. § 1001.9529.
10 OIG Advisory Opinion 01-21.
11 OIG Special Fraud Alert, 1989.
12 OIG Advisory Opinion 01-21.
13 Of course, other exit strategies, such as sale to a hospital or private equity firm, are also possible outcomes, as is the potential liquidation of a center unable to reset this cycle.
14 The OIG has expressed suspicion as to cross-purchase arrangements, for example, that do not invest in the operations of the ASC, but are primarily designed to allow surgeons to realize a gain on their original investment.
See Advisory Opinion 07-05. Further, under IRS Revenue Ruling 59-60, even outside of the healthcare field, fair market value is “[t]he amount at which the property would change hands between a willing buyer and willing seller, when the former is not under any compulsion to buy,
and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts” (emphasis added).
