A surgeon who doesn't perform procedures at an ASC but still receives a portion of the profits can frustrate the other physician-partners and block the sale of a controlling interest to a management company or health system. Your operating agreement should set forth the triggering events, buy-back price and buy-back mechanism for a physician-partner's interest. Such redemption events as death or disability are rarely controversial. But here's a review of 2 buy-back events that may strain an ASC's desire for compliance with the federal anti-kickback statute and a redeemed (and disgruntled) partner's potential state law claims.

The one-third tests tightrope
The one-third tests come directly from the anti-kickback statute's ASC safe harbor. First, the one-third income test requires that a physician-investor in an ASC generate at least one-third of his professional medical income from the performance of Medicare-covered ASC procedures. Second, the one-third use test requires that a physician-investor in a multi-specialty ASC perform at least one-third of his ASC procedures at the ASC in which he has invested.

Compliance with the one-third tests may provide a potential mechanism for eliminating your deadweight physicians. If you didn't incorporate the one-third tests into your initial governing documents, you might want to add them through an amendment.

You may be reluctant to enforce a physician-partner's redemption due to his failure to meet 1 or both of the one-third tests, particularly if it's a result of his failure to meet the one-third use test. Such a redemption may potentially implicate the anti-kickback statute if it's determined that you're selectively enforcing a one-third test in order to penalize under-utilization as opposed to applying it to ensure that all ASC physician-owners are using the ASC as an active extension of their practices.

ASCs that have amended their governing documents to add the one-third tests may also be subject to scrutiny in attempting to enforce such provisions against a physician-partner. A recently filed Illinois lawsuit, DeBartolo v. HealthSouth et al., may be the first case to receive a court's guidance on the interplay between an ASC's perceived attempt at regulatory compliance (through the enforcement of the one-third tests) and a disgruntled partner's state law claims. The case was brought by a physician-partner against an ASC that had modified its governing documents to add the one-third tests and then attempted to redeem the surgeon's interests. While the case was dismissed for lack of subject-matter jurisdiction, the appellate court acknowledged that the case involved a claim of breach of contract that a state court could decide. Until a government agency or court issues further guidance on this matter, the one-third tests will continue to be an issue of great interest and tension among ASCs.

Redemption without cause
Due to the controversy that may accompany a physician's buy-out under the one-third tests, some ASCs are now opting to include a redemption without cause provision. Such a provision lets you redeem a physician-partner's interest for absolutely no reason whatsoever. As a result, a redemption without cause is often subject to a heightened voting threshold (for example, 75% of the other physician-partners' approval). A redeemed physician may try to build a case under the anti-kickback statute that the redemption without cause was merely a pretext for penalizing him for not using the ASC.

If the redemption without cause is unrelated to the physician's use, then the buy-back likely won't pose any regulatory issues. If, however, the redemption can be tied to utilization issues, then the redeemed physician may try to raise regulatory issues, particularly if you don't consistently apply the buy-back provision for safe harbor compliance purposes. A redeemed physician may also attempt to pursue such state law claims as breach of contract and breach of fiduciary duty.

Your operating agreement should define how you'll calculate the redemption price. You could use a formula similar to a new physician's buy-in:

• take the ASC's earnings before interest, taxes, depreciation and amortization (EBITDA) for the preceding 12 months;
• multiply that by a pre-determined multiple;
• subtract the ASC's long-term debt; and
• multiply that by the redeemed partner's ownership percentage.

Unlike with a new investor's buy-in, the buy-out isn't required to be consistent with fair market value. Indeed, it's quite common for a discount to be applied if the buyout relates to a "for cause" event, such as breach of a non-compete provision. Still, paying fair market value under such circumstances is likely the most conservative approach for many regulatory and state law reasons.

Other methods of calculating a buy-out price: an independent appraisal, an agreed-upon amount determined by the ASC's board and subject to change each year or a return of the capital contribution (less distributions) the redeemed physician made.

If your operating agreement doesn't address redemption events, you may look to other tactics to eliminate uncooperative physicians in the absence of a contractual right to do so. One approach that has proven useful is to effectuate a merger that results in the "squeeze out" of certain physician-partners in exchange for a payment (often at fair market value) to such physicians for their interests. In this 2-step process, the ASC's users form a new entity in which they're the sole owners. The existing ASC company and the new entity vote to merge, with only the utilizers receiving equity in the surviving entity.

Handle with care
One of the most contentious issues that an ASC may face is the buy-out of a physician-partner. A botched redemption can raise various compliance concerns and state law claims, something your governing document should protect against.