First, the hospital would acquire its interest in the joint venture through a direct purchase of equity interests from the physician investors rather than by making a capital infusion into the joint venture itself. Second, only a subset of the physicians was selling a portion of its interests in the joint venture. Third, and perhaps most troubling, the inspector generals office concluded that the return on investment would not be proportional to the amount of capital invested by each investor. Because the hospital would be paying more per ownership unit than the selling physicians had paid as founders of the company, the inspector generals office reasoned that the physicians would receive a higher rate of return on their remaining interests than the hospital would on its newly purchased interests.
There are a number of ways in which the parties could structure the transaction to mitigate the first two factors that the inspector generals office appeared to find troubling. For example, the hospital could invest directly in the joint venture, diluting all of the investors proportionally and providing cash for the venture to make capital improvements, expand or add services, and/or make cash distributions to all of the other investors.
The original group of selling physicians would still benefit from the transaction proceeds, and the physicians who were not among the sellers in the proposed transaction would be able to tag along. The possibility of rewarding or influencing one subset of physicians over another would be neutralized, and all the physicians would realize the same, pro-rated gain.
The third factor is the conundrum. Under the proposed transaction, the hospital would pay fair-market value for the interests it would acquire. The inspector generals office concluded that because the current fair-market value of the ASC resulted in a price per unit that exceeded the amount originally paid by the founding physicians for their units, the physicians would receive a higher rate of return on their remaining interest than the hospital would receive on its interest.
The opinion suggests that paying fair-market value may no longer be sufficient to meet the anti-kickback laws safe harbor in cases where the value of a joint venture business has appreciated considerably since it opened. This suggestion ignores the economic reality of many successful ASCs, and, for that matter, any other business that becomes successful.
The business of healthcare generally, including ambulatory services, is subject to substantial risk. Reimbursement uncertainty, technical developments, economic fluctuations, changing consumer demand, and regulatory changes combine to make investing in an ASC anything but a conservative investment. The founding investors in an ASC joint venture bear the largest measure of this riskthe ASC has no operating history, no revenue stream and no established patient base. This risk then is reflected in the lower price the founders pay for their equity interests. It is a risk that, under any business model, should be rewarded if the business succeeds at the time of sale years later. If the physicians who bear this risk early on are not able to sell their interests at fair-market value to a third party willing to buy in and continue the operation of the ASC, how will they exit? With limited exit strategies, who will invest in the first place?
Arguably, the hospital in this proposed transaction was in a position to make or influence referrals to the ASC. Yet the inspector generals office reached its conclusion despite the fact that the hospital was buying the interests at fair-market value and had agreed to implement several safeguards to limit its ability to make or influence referrals to the ASC.
Physicians, increasingly caught between pressures from payers to reduce the cost of care and their own and their patients demand for higher-quality care, are looking for opportunities to develop ASCs and other ambulatory services in their communities. Physicians form joint ventures for a variety of reasons, but most often it is to pool their resources to develop and provide a new or improved service to their patients. Often, this can be accomplished only with a cash investment from a hospital or other institution. The inspector generals offices opinion signals that hospital-physician joint ventures, and particularly sales and buyouts to even more critical review.
While the inspector generals office opinion addresses only the facts and circumstances of the parties involved, its impact is already being felt. Even more careful consideration must be given to the anti-kickback statute risks inherent in physician joint ventures, particularly hospital-physician joint ventures. Practitioners should seek the advice of counsel before entering into such transactions, which should include carefully structured liquidity terms, including buyout provisions and fair-market value appraisal mechanisms, and affirmative representations by the parties that the transaction is not intended to generate or reward referrals.
Importantly, physicians should consider their personal investment timelines when deciding when and whether to invest in a joint venture. While the inspector generals offices opinion raises more questions than it answers and it remains to be seen if future opinions will follow its reasoning, steps can be taken to mitigate the risk of no exit.
The views expressed in this article are those of the authors and do not represent the formal positions of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo; any of its clients; or other attorneys at the firm.