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Publish Date: October 10, 2007   |  Tags:   News

Physician Ownership
Giving Deadwood Docs the Boot
There's a name for surgeons who don't do cases at the surgery centers they have ownership stakes in: deadwood docs. Now there's a way to get rid of such physician-owners, a legal end around of sorts called a squeeze-out merger whereby a majority of utilizing physicians cast out the non-utilizer through a properly approved transaction.

Absentee owners
Few things can eat away at the morale of a surgery center like a physician-partner who doesn't do his cases at the facility he owns - yet collects dividend checks and has a say in how the center is run. If you're in the unenviable position of having a physician (or a few) who owns but doesn't use your ASC, you can now terminate the ownership of these non-utilizers.

The ASC safe harbor to the Federal Anti-kickback Statute that exempts an ASC from scrutiny under the statute contains two one-third tests - a one-third of income test and a one-third of cases test. This means that outpatient surgery must represent a substantial portion of the physicians' practice and, for multi-specialty centers, physicians must actively use the ASC they've invested in.

Thanks to this guidance, most newer ASCs have provisions in their governing document - such as the partnership, shareholders or operating agreement - that lets the ASC repurchase any physician's ownership interest for a reasonably low price if he is not actively using the ASC. Reasons might include death, disability, retirement, relocation, failure to meet the one-third tests or breach of restrictive covenants, says Jerry J. Sokol, Esq., a partner in the healthcare department of McDermott, Will and Emery in Miami. Such ASCs are well-positioned to deal with the problem of non-utilizing physicians; many other ASCs, however, were set up without this foresight and as a result have struggled with deadwood physicians for years, says Mr. Sokol.

"With respect to this second category, ASC healthcare legal advisors frequently receive calls from desperate clients who want to remove these owners in the absence of a specific contractual right to do so," says Mr. Sokol. Most of these ASCs have followed the same strategies, he says. First, they try to negotiate repurchase, which rarely works.

There are two reasons for this. Non-utilizers are often aware of large multiples from national ASC companies, and they think the utilizers are trying to undercut them; but the difference in valuation is the result of such companies gaining control of the center. "Plus, holding ownership in an ASC is a great return on your money," says Mr. Sokol. He cites an example: Let's say you're making $50,000 a year from the ASC, and the other owners want to buy you out for a three multiple, or $150,000. Even if you take that $150,000 and invested it where you make a 10-percent return, that's a far cry from the $50,000 a year you've been pulling in.

Utilizers then try more aggressive action, such as sending a legal letter stating that continued ownership by non-utilizers creates Anti-kickback Statute risk. More often than not, this is unsuccessful, because the letter is either ignored, or the non-utilizer's lawyer responds by explaining how continued ownership by his client would not create any material anti-kickback risk for the ASC, says Mr. Sokol.

What is a Deadwood Doc? The situation is common: Some of the physician-partners aren't even working in their own center. It's understandable in some cases, such as the physician having retired or relocated. Other times, it's even more exasperating:

  • the owner who has stopped doing surgery because he's getting older or insurance premiums are too high - but who's still doing office visits;
  • the owner who hasn't set foot in your center since the ribbon-cutting;
  • the owner who controls desirable blocks of the OR schedule but performs almost no cases during those blocks; or
  • worst of all, the owner who took advantage of your lack of a non-compete clause and set up shop in another ASC across town.

No matter how it comes about, the bottom line is that these non-utilizers are taking a cut without contributing to the facility. They may well be your No. 1 frustration - and barricade - to profitably operating the surgery center you've worked so hard to get up and running. They can eat away at the morale of the producing partners and gum up the scheduling process. You and the other utilizers try to negotiate to oust the non-utilizer, but to no avail.

"I see this all the time," says Jerry J. Sokol, Esq., a partner in the healthcare department of McDermott, Will and Emery. "They throw up their hands and say, 'How can we get rid of our non-utilizers?'"

- S.W.

The squeeze-out merger
You now have a mechanism that applies certain general corporate and healthcare law principles that lets a majority of utilizing physicians squeeze out the non-utilizer through a properly approved transaction. It sounds complicated, but it's really a two-step process, says Mr. Sokol. Here's how he describes it.

First, the ASC's utilizers form a new entity owned solely by them (this can also be done under a collaboration with and funding from a management company or other corporate sponsor). For illustrative purposes, let's assume both the existing ASC and the newly formed entity are LLCs (though this type of transaction can usually be performed with any entity type). The utilizers put enough money into the new LLC - by contributing their own money, borrowing from a bank or getting it from the corporate sponsor - to pay the non-utilizers fair market value for their equity in the existing ASC LLC. Experts advise you to hire an independent third-party appraiser to issue an opinion that values this interest.

Second, the existing ASC LLC and the new LLC approve a plan to merge the two entities together, making the new LLC the surviving entity. This plan should spell out the fair market value cash payments to the non-utilizers and ensure the utilizers will receive equity in the surviving LLC, says Mr. Sokol. You'll typically need a vote of the holders of a majority of the equity, unless the governing document requires some higher voting threshold. If the utilizers hold enough of the equity to meet the voting threshold, they can approve the transaction and squeeze out the non-utilizer, leaving the utilizers as the sole owners of the surviving entity.

Treated fairly, not equally
The non-utilizers could bring suit, but most states prescribe that all owners be treated fairly, not that they be treated equally. Most states' corporate laws give minority owners in private companies very few rights other than the rights that they have under the company's governing document. If carefully done, the only valid claim a non-utilizer could have is a claim for the difference (if any) between the court-determined fair value of his interest in the former ASC LLC and the amount he actually received, says Mr. Sokol. This so-called dissenters' right claim ensures non-utilizers are paid a fair price.

The threat of a squeeze out could bring about the negotiation of a repurchase, which is much less expensive for all parties, says Mr. Sokol.

Depending on the existing ownership structure and your state's corporate laws, the squeeze-out transaction might be structured differently than in this example. Tax laws might also affect the structure of the transaction. Mr. Sokol advises that you review your governing document to ensure minority owners can't block this type of transaction.

- Stephanie Wasek

Waiting Game
California State Surveyors in No Hurry to Inspect ASCs
If you thought it took your state surveyor a long time to show up at your facility, welcome to sunny California, where the wait for a licensing and certification survey can be a year or more. The reasons? Too few surveyors and too many nursing homes and hospitals to inspect, license and certify before the surveyors can turn their attention to surgery centers. For newly built or newly purchased facilities in the state with the most ASCs, the months of waiting can be devastating, particularly since most third-party payers won't contract with you unless you're state-licensed.

Jonathan Ahdoot, MD, says he applied for a state survey in December 2003, nine months before the Irvine Endoscopy & Surgical Institute was to open. He figured it would take six months for a surveyor to show up at his 4,300-square foot facility. It ended up taking 15 - provided the surveyor who told Dr. Ahdoot he'd be there March 29 and 30 kept his appointment.

Dr. Ahdoot says the year-plus wait has gotten the facility he and his partner sunk their homes and their futures into off to a sputtering start: too few contracts and physician-users, too many mounting bills and frayed nerves. "It has been really miserable," says Dr. Ahdoot. "When you're waiting, every day seems like a year."

"It's like somebody put a pin in a balloon and let all the air out," says Renee Adams, RN, the director of nursing.

Having gotten a three-year provisional certification by passing AAAHC's deemed status accreditation survey, the facility is staying afloat by treating mostly Medicare patients, says Ms. Adams.

"But this is only a Band-Aid because most of the payers want you to be state-licensed," says Lisa Harrington, president of Langston Healthcare Services, a San Diego-based consulting company that helps surgical facilities get licensed, certified and accredited.

In a memo obtained by Outpatient Surgery, the state Department of Health Services cites budgetary cuts and hiring freezes for the loss of more than 150 surveyors from 2001 to 2003. DHS also cites a federal mandate to first recertify long-term care skilled nursing facilities, homes for the developmentally disabled and home health agencies before it can conduct an initial licensing survey of an ambulatory surgical center. Every time Ms. Harrington called DHS, she says she got the same response: "You guys are not our priority."

"The department is concerned about these delays," says Lea Brooks, spokesperson for the California Department of Health Services. "However, our top priority will always be investigating the 20,000-plus complaints of abuse, neglect and quality of care that we receive every year and to insure that the providers who are already operating meet minimum standards of care." Today, 445 surveyors conduct periodic surveys of more than 6,000 health facilities and investigate more than 20,000 complaints annually, says Ms. Brooks.

"This is going to kill the new surgery center business in California," says Eric Friedlander, CEO of Starpoint Health in Irvine, which owns and operates three surgery centers in Southern California.

Starpoint Health is in an acquisition mode, hoping to add one or two new surgery centers a year in each of the next four years. The dearth of state surveyors will likely force the company to alter its strategic plan.

"We're out there looking for new surgery centers to take over, either de novo projects or underperforming centers. This surveyor situation might prohibit us from expanding," says Mr. Friedlander. "This could shift our focus from acquiring facilities to getting more surgeons to use our current facilities." - Dan O'Connor

Parting Ways with Your Management Firm
Nice or nasty: How do you break up with your management consultant? Not all relationships between management firms and facilities end in acrimonious divorce. One administrator we talked to says her center decided against renewing its management agreement after five years, a previously agreed upon exit window negotiated into the original document. "We found they were better at starting a center and we became greater experts in running our center as time went on," she says.

Deciding not to renew
Here's what she says led to her facility's decision to strike out on its own, and her advice on ways to protect your center during a management turnover.

  • Determine added value. Ask yourself: What value do they add? What will we be missing if we don't work with them? Would the management fee cover other expenses we could outsource? Functions such as accounting and payroll services are easily outsourced locally.
  • Hang on to P&Ps. Do you own your procedure and policy manuals? The administrator we talked to says the operating manuals remained her center's property - but only because the policies were edited and customized to the facility's practice.
  • Avoid no-compete clauses. Will you lose your facility's director? Be sure your partnership agreement doesn't have a no-compete clause for the workers employed by the management company. You'll lose key members of your team if they are contractually barred from leaving the firm in a management change.
  • Have supply-buying confidence. Can you negotiate an effective GPO on your own? The answer is yes. The management company made it sound like it would be hard to get competitive pricing for supplies, says the administrator, but it's actually very easy. If you have a good credit history, GPOs will be knocking down your door to do business, she says.

The administrator tells us her center dropped its management company because the facility's board of mangers actively reviews financials and individual components of the business on a monthly basis. "After we approached the management group and asked them to sell us on why we should renew our contract, we felt comfortable not renewing the contract" she says.

Taking them to court
Of course, things might get nasty, as in the case of a healthcare management firm and a group of orthopedic surgeons locked in a legal battle after their partnership to develop a surgery center deteriorated over the last two years. A rift had developed between the sides when the management company ignored the surgeons' requests for financial and operational reports.

When the surgeons tried to disengage from the management company by offering to buy out the firm's interest in the center, the firm turned the offer down. The physicians' group then terminated the 12-year management agreement. The management company contends in its lawsuit that its representatives were not included in meetings leading up to the termination of the management agreement and the termination is "wrongful and constitutes a material breach."

This case underscores the need for an exit strategy in any management agreement, which is easier said than done. "Most management companies won't agree to termination without cause," says Scott Becker, Esq., CPA, of Chicago-based McGuire Woods, LLP, "and it's hard to show cause in most situations." As important as an exit strategy, says Mr. Becker, is to verify how well the management company has done with other centers. Did it do what it said it would do? Did it earn its fee?

- Daniel Cook


  • The Texas Workers' Comp Commission passed an amendment to the ASC Fee Guideline that doesn't change the payment adjustment factor from 213.3 percent of Medicare, but does allow for separate reimbursement of surgically implanted, inserted or otherwise applied devices at their invoice cost. It adds 10 procedure codes that are not included on the CMS list of approved procedures for the ASC setting and assigns billing groupers to each. The amendment also lets other omitted procedures be performed in an ASC by prospective agreement between the provider and the carrier. The amendment took effect April 1.
  • The Colorado Ambulatory Surgery Center Association's effort to enact legislation that would prohibit hospitals from restricting credentialing of physicians who have an ownership interest in an ASC failed on a tie vote in committee.
  • The Pennsylvania Department of Health issued notices to the state's 170-plus ASCs that they may resume laparoscopic surgeries if they seek approval from the agency; the procedures were banned in December. "After an expedited exemption is completed - which includes those laparoscopic procedures reimbursed by Medicare - we will be able to continue performing the laparoscopic procedures many of us have done for over a decade," says Anita Fuhrman, RN, the president of the Pennsylvania Ambulatory Surgery Association. To perform other laparoscopic procedures not on the Medicare list, such as lap choles, lap nissens and lap appys, ASCs will have to complete a longer exemption process and receive a DOH waiver.
  • Two Illinois ASCs have sued regional healthcare insurance providers, alleging breach of contract and other unfair business practices. Chicago-based Advanced Ambulatory Surgical Center has filed suit against United HealthCare of Illinois, while Marion HealthCare of Marion, Ill., is taking similar measures against the Blue Cross Blue Shield Association. Both ASCs seek compensation for unpaid reimbursement and monetary damages for potential lost business. In both lawsuits, the ASCs claim that the insurers committed numerous breaches of contract over the past three years by refusing to reimburse the center the agreed-upon percentages of incurred expenses.
  • South Dakota is opting out of the federal physician supervision requirement for nurse anesthetists. South Dakota is the 13th state to do so, following Iowa, Nebraska, Idaho, Minnesota, New Hampshire, New Mexico, Kansas, North Dakota, Washington, Alaska, Oregon and Montana.


  • The Texas Hospital Association (THA) hopes to curb the growth of specialty hospitals and other limited-service facilities by supporting legislation that would create a moratorium on physician self-referral and require that physicians disclose their business relationship to a facility to which a patient is referred. Texas lawmakers have introduced 11 bills aimed at niche providers. Of the 100 or so specialty hospitals in the United States, 47 are in Texas with 29 more under under development. A large population growth and lack of CON laws in Texas have contributed to the boom in specialty hospitals, says Charles Bailey, general counsel for the THA. THA is sharing information and ideas with Kansas, California and Louisiana - states without CON laws also facing a proliferation of specialty hospital development, says Mr. Bailey.
  • A bill in the Kansas senate would place a one-year state moratorium on the construction of specialty hospitals to let the state study their effect on Kansas's healthcare system. An existing national moratorium on the development of new specialty hospitals expires Jan.1, 2007. Per capita, Kansas has the most specialty hospitals in the nation: 17 in operation and two more in development.
  • The federal government recently approved its seventh gain-sharing contract that lets hospitals split savings on supply costs with physicians. Few hospitals have these agreements, but supply costs now are equal to 12 percent to 17 percent of a hospital's total revenue. Gain-sharing agreements are seen as a means to control the costs.
  • JCAHO alerted hospitals again to the importance of checking the ID badge of anyone claiming to be a JCAHO surveyor, after a third report that a bogus JCAHO surveyor had attempted to gain access to a hospital. The latest imposter arrived at a hospital in the Midwest about 8 a.m. on March 10, claimed that no JCAHO identification was needed but then fled when pressed by hospital staff, JCAHO said in an e-mail alert to organizations it accredits. Two other hospitals last month reported similar incidents.