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By: OSD Staff
Published: 4/3/2008
Equity Interest or Conflict of Interest?
Inside a Prominent Lawyer's Practice of Investing in His ASC Clients
Is it appropriate for attorneys to invest in ambulatory surgery centers that they helped develop? That's a question that has healthcare attorneys buzzing, after the nation's leading ASC attorney confirmed that he routinely does just that.
In March, soon after Outpatient Surgery began inquiring about his investment practices, Scott Becker, JD, CPA, published a conflict of interest disclosure in his Becker's ASC Review in which he admitted that he owns stakes in some of the facilities he's helped develop. In an interview with us, he elaborated, saying that he owns 0.25 percent to 2 percent stakes in "eight to 10" surgical centers as well as a small stake in Physicians Endoscopy, a privately-held firm that develops and manages single-specialty endoscopic ASCs in partnership with practicing GI physicians and hospitals.
"Usually, we develop long-term relationships with the people we do business with," says Mr. Becker. "At some point, if they're looking to raise capital, I say, ???I'd be happy to invest with you.'"
He claims to have lost all of his investment in a couple early deals ("They were in bad reimbursement markets and did poorly," he says) and calls the shares he currently holds in ASCs "a mix — some terrific, some fair and some poor." He declined to name any of the centers in which he's invested. He says he's invested "maybe a couple hundred thousand dollars" in his clients over the years.
A source who declined to be named claims that Mr. Becker has teamed with corporate partners in buyouts of existing surgical centers. Mr. Becker denies this, saying in an e-mail that "we have not participated in this manner that I can recall."
Mr. Becker claims that his investments have never been a secret. If anything, the partner and co-chairman of the healthcare department at Chicago-based law firm McGuireWoods feels the practice is a plus for his clients. "Understanding the business side of ASCs through these roles has been invaluable ??? in advising clients," he writes in a recent newsletter.
He also maintains that his investments are of little consequence. "I own such a small percentage of the centers that I have an ownership interest in, that we don't end up with our colleagues and partners getting jealous or upset about my ownership," says Mr. Becker. "It's very common for lawyers to invest in the businesses they represent. Some firms allow it, some firms don't."
Without exception, the lawyers we talked to (see "What Other Lawyers Are Saying") feel that lawyer-client equity transactions could undermine the independence of the lawyer's advice to clients and strain the relationship between them.
"A lawyer can't serve two masters, especially when one of the masters is your own self interest," says Lawrence Wojcik, Esq., chair of the Illinois State Bar Association Committee on Professional Conduct. Rule 1.8 of the Illinois State Bar places many restrictions on lawyers taking equity interests in their clients, but doesn't forbid them. Mr. Wojcik says most law firms carefully scrutinize such business interests in clients because "there is an inherent conflict of interest in serving as both the attorney and having an investment."
Even an ethical investment can create the appearance of a conflict of interest, says a prominent healthcare lawyer who spoke on the condition of anonymity. "To avoid charges by another party — an investor in a deal with the client, for example — that this has been hidden, lawyers who invest typically feel compelled to disclose their investments to those who do business with the client and this can be awkward," he says.
In his "annual conflict of interest disclosure" printed in March-April's ASC Review, Mr. Becker pointed out that he always pays for any units in cash, that he discloses his investment fully to the ASC's partners and he advises the partners to have independent counsel review and negotiate the agreements. He said he's never traded interests for advice or services of any sort, and that he provides legal and counseling services exclusively through McGuireWoods.
Mr. Becker says he's made other such disclosures, both by word of mouth ("Most of our disclosure is done directly: center by center and client by client," he writes in an e-mail) and in a 2007 edition of his newsletter. We searched every Becker's ASC Review back to 2001, however, and couldn't find another such disclosure.
In his disclosure, Mr. Becker also points out that he doesn't own interests in any management and development companies — with the exception of one that he chose not to name. That would be Physicians Endoscopy. Mr. Becker says he owns less than 1 percent of PE. "Unfortunately, it's not a large amount because it's a very well-managed company," he says of PE, which currently operates 14 partnered facilities — and plans to open five additional facilities in the next 12 months — and boasts that its centers regularly deliver a greater-than-50 percent profit margin. Mr. Becker also serves on Physicians Endoscopy's board of directors.
Mr. Becker often praises Physicians Endoscopy in his publication. He named three members of PE's executive management team to his "Fifty People to Know in the Ambulatory Surgical Center Industry" (July-August 2006) and included PE in his "Forty Companies to Watch in 2008" (January-February 2008). "In all of our lists, we make sure we broadcast a lot of people," says Mr. Becker. "We say very nice things about a whole lot of companies that do no business with us."
— Dan O'Connor
What Other Lawyers Are Saying
The issue of lawyers taking equity interests in their clients is not a new one. Back during the dot-com boom, many start-ups paid their law firms with shares of stock in lieu of regular legal payments. But you don't hear much about lawyers investing in healthcare ventures. We asked a few lawyers to share their thoughts.
Incentive or Independence?
Hospital Offers ASC-bound Surgeons More Control
In an effort to defuse the competition that a proposed freestanding surgery center would create, a California hospital is offering surgeons attached to the project a greater share of control over its own ORs.
Petaluma Valley Hospital in Petaluma, Calif., has presented 18 doctors with a contract that would give them partial management and administration over the hospital's surgical operations as well as increased compensation for the procedures they perform there. In exchange, the contract would require the doctors to relinquish financial interests or participation in any ambulatory surgery center.
The offer follows the doctors' 2007 request to build an affiliated surgery center on the hospital's campus — a request that was denied by St. Joseph Health System, which operates Petaluma Valley Hospital — and their continuing search for a suitable site.
A hospital official says at least 10 doctors would need to agree to the contract in order to close the deal.
— David Bernard
Study Examines Physician-Owners' Referrals
Physicians who have strong relationships with physician-owned ASCs send nearly half of their Medicaid patients to hospital outpatient departments for surgery instead of to ASCs, according to a study published online by the journal Health Affairs last month. With ASCs accommodating the higher-paying commercial payor cases, hospitals are as a result missing out on the profitable cases which would help to subsidize the cost of treating Medicaid and uninsured patients, say researchers.
Researchers found that Medicaid covers 11 percent of patients in the region studied, but that only 3 percent of the cases handled by the area's physician-owned ASCs involved Medicaid patients.
— Kent Steinriede
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