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KICKED TO THE CURB As much as you'd like to, resist the temptation to force underperforming physicians to sell back their ownership shares.They own shares in your surgery center, but they don't do their fair share of cases, which is causing resentment in your ranks. And you want them out. Using the safe harbor requirements to force underperforming surgeons to redeem their shares might seem like a good idea, but it can backfire.
The safe harbors that protect ambulatory surgery center investment interests are the only safe harbors that require a certain level of referrals. Yet failing to meet one or both of the one-third safe harbor tests — the one-third of income rule and the one-third of cases rule — doesn't automatically disqualify a physician from maintaining an investment or create any real compliance risk. That is because they are only safe harbors. Safe harbors can insulate you from risk, but failing to meet them does not cause a violation of the Anti-Kickback Stature (AKS). Even though one or both of the one-third tests (osmag.net/7KArwB) are not met, the physician might still be in compliance with the AKS.
The risk of forced redemption
This is not what busy physician-owners want to hear, but the ASC safe harbors were never intended to be used as a tool to exclude existing investors. Yes, lower performing docs can create an undercurrent of resentment and in some cases might create compliance risk. But hasty action to exclude a lower-performing surgeon can create regulatory risk for your surgery center. Some mistakes I often see centers make:
Forcing out lower-producing physicians. Using exclusion clauses in your operating agreements to squeeze out lower-performing docs can backfire. Redemption provisions often put too much focus on the safe harbors instead of considering whether the AKS is violated.
Letting the environment create "bad facts." Evidence of derogatory comments (deadwood doc), scheduling inequities, unfortunate emails or evidence of plotting to freeze out an investor can create more risk than failing to meet a safe harbor.
Threatening to involuntarily redeem shares. Pressuring underperforming investors to increase their volume of referrals to the ASC to meet safe harbors creates risk under the AKS. A letter demanding or even suggesting that a surgeon perform more surgery at the center can be construed as requiring additional referrals in order to maintain a flow of remuneration. This creates what we call in the law business a "bad fact."
Many operating agreements governing the rules relating to ASC ownership can create legal compliance risk. It's critical to establish procedures for excluding providers in advance. The procedures should include an analysis of the risk of violating the AKS rather than reliance on the safe harbors. Exclusion standards must be uniformly followed and can't raise any inference that additional referrals are required to maintain an investment interest. It's easy to turn efforts to bring investors closer to compliance with safe harbor standards "inside out" by characterizing them as a demand for additional referrals.
INVESTOR EXCLUSION
In ASC Safe Harbor Compliance, Close Doesn't Count
What makes the ambulatory surgery center (ASC) safe harbor unique (it's the only safe harbor that includes a volume-of-referral requirement) also makes it risky to base your ASC's exclusion process solely on failing to meet its requirements.
Requiring an ASC investor to come closer to meeting the one-third safe harbor requirements inherently includes an inference that referrals should be increased. Some will argue we should apply a normal safe harbor analysis (closer to compliance) to an ASC investment structure for compliance with the Anti-Kickback Statute (AKS). This approach is inherently risky.
Most investor exclusion cases never reach the point of producing a published legal opinion. These cases usually settle short of complete adjudication and without reaching the ultimate issue of whether coming closer to complying with the ASC safe harbor reduces risk. Viewed from this perspective, facts that imply an investor should increase referrals to meet safe harbor requirements are not helpful to the ASC when going through mediation or settlement discussions. Who wants to come out on the wrong side of this argument if the case ever goes to court, is subject to a whistleblower claim, or catches the eye of a government enforcement agency? Cases that include pressure to increase volume almost always result in the ASC paying the excluded investor — sometimes a very large amount of money.
ASCs can prevent this situation by establishing appropriate criteria and procedures for analyzing the risk of an investment interest. The usual provisions in an operating agreement that parrot the safe harbor requirements are not adequate to mitigate risk presented by improper exclusions. In fact, many operating agreements contain provisions that actually create first source evidence supporting the claim of an excluded investor. There are ways to reduce the risk associated with excluding underperforming investors, but using the safe harbor requirements to force redemption is not one of them.
Investors who perform more surgeries or higher-value procedures might feel the lagging investors are taking a ride on their efforts. But once investors own interests in an ASC, it's very difficult to force redemption without creating significant legal risk. Unless, that is, you've created the appropriate process in advance. OSM
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