2007 Advisory Opinion Limits Physicians’ Ability to Sell Ownership Interests in ASC to Hospital*

In 2001 and 2007, the Department of Health and Human Services' Office of Inspector General ("OIG") issued advisory opinions on the issue of whether a hospital could purchase, from physicians, a portion of the physicians' ownership interests in an existing ambulatory surgery center ("ASC"). In 2001, the OIG concluded that even though the arrangement could implicate the anti-kickback statute, the OIG would not impose administrative sanctions on the parties. However, in June 2007 the OIG drew the opposite conclusion and stated that because the proposed sale, by orthopedic surgeons of a portion of their ownership in the ASC, might potentially generate prohibited remuneration under the anti-kickback statute the OIG could potentially impose administrative penalties on the requestors. The conflicting conclusions in these two Advisory Opinion has resulted in significant "reverberations" in the healthcare industry as the OIG did not describe the factors (if any) in the two fact patterns that contributed to these different results.

In Advisory Opinion 07-05, three orthopedic surgeons, two gastroenterologists, and two anesthesiologists ("Investor Physicians") owned 100% of an ASC, with the orthopedic surgeons holding over 90% of the ownership interests. The orthopedic surgeons proposed selling 40 percent of their shares to a hospital for an amount that the requestors certified was fair market value. However, because the ASC was more valuable than when the physicians originally invested in the ASC, the fair market value rate of the ownership interests was greater at the time of the advisory opinion request than when the physicians purchased their interests.

The OIG cited three reasons why it believed the sale of the shares in the joint venture could potentially violate the anti-kickback statute and why it could potentially impose penalties.

(1) The OIG expressed concern over the fact that the hospital is purchasing shares, for cash, from the orthopedic surgeons instead of investing capital in the ASC itself. The OIG emphasizes that the funds invested by the hospital are not for operation of the ASC (to expand or enhance the facility or fund its operations) and instead provide a gain on the orthopedic surgeons' original investment.

(2) Because neither the gastroenterologists nor anesthesiologists are selling a portion of their ownership shares to the hospital, the OIG concluded that the possibility exists that the hospital's investment is to reward or influence the orthopedic surgeons, whose referrals may be particularly valuable.

(3) The OIG expressed concern that the return on investment for the hospital was not directly proportional to the amount of capital invested. The OIG noted that although the amount paid to each investor would be proportional to their ownership interests, the hospital would pay more for ownership interests than the orthopedic surgeons but receive a lower rate of return.

Although, the OIG acknowledged that none of these factors taken alone or in combination necessarily signifies fraud, the OIG stated, "we cannot conclude that the difference in cost of capital acquisition, which results in financial gain to a subset of the physician investors whose referrals may be particularly valuable, is not related, directly or indirectly, to the value or volume of referrals or other business generated between the parties, including referrals by the selling Orthopedic Surgeons to the Hospital or the ASC. Accordingly, the Proposed Arrangement poses a heightened risk of fraud and abuse."

As stated above, in rendering Advisory Opinion 07-05, the OIG neither referenced the existence of nor differentiated the facts in 07-05 from Advisory Opinion 01-21, in which the OIG evaluated a substantially similar proposed transaction where a medical center proposed purchasing an interest in an existing ASC from a group of gastroenterologists. In Advisory Opinion 01-21, the OIG raised two main concerns (the different prices paid by investors for units of ownership and the fact that because the gastroenterologists purchased their shares at a lower price they would receive a higher rate of return on their investment than the medical center). However, in 2001, the OIG accepted the investors' claims that the difference in the prices were related to the timing of the purchases and an appreciation in the value of the ASC. The OIG concluded that these reasons were reasonable and were not directly attributable to referrals and, therefore, even though the Proposed Arrangement could potentially generate illegal remunerations the OIG would not impose sanctions.

The OIG's conflicting conclusions between Advisory Opinions 01-21 and 07-05 have resulted in significant uncertainty as to whether physicians can sell their interests to an entity in which the physicians may refer patients even when the parties have certified that the amount to be paid reflects fair market value.

*Anjali Downs is a Summer Associate (not admitted to the practice of law) in the firm's Washington, DC office and contributed significantly to the preparation of this analysis.