Physicians who are contemplating investing in an ASC often ask whether they should joint venture with a hospital. And we're seeing more and more hospitals approach physician-owned ASCs to buy into a venture. While a hospital partner can be beneficial, structuring the arrangement can be complex, particularly if the hospital is a tax-exempt entity. Some things to consider include:
- Cash. A hospital investor relieves physician-investors of having to raise all of the capital needed to finance the ASC. Plus, when physicians want (or need) to sell their shares, the hospital will usually have the cash to buy them which isn't always the case in a physician-only partnership. The safe harbor for ASCs under the federal anti-kickback statute requires that the hospital's capital contribution be proportionate to the hospital's ownership interest in the joint venture. Any infusion of capital that's not attributable to the hospital's ownership interest could also be an issue under the prohibition against private inurement if the hospital is a tax-exempt entity.
- Credibility. A hospital partner can bring clout and credibility to the ASC. Members of the community may feel a sense of security in having procedures performed at an ASC that's affiliated with the hospital. While it's helpful for the ASC name and signage to include a reference to the hospital, note that many hospital system policies require the hospital to have a requisite amount of ownership in a facility in order for the facility to use the hospital's name.
- Contracts. Due to the hospital's pre-existing relationships with third-party payors, it may be easier for the ASC to obtain payor contracts when the hospital partially owns the ASC. If the hospital provides contracting services on behalf of the ASC, the ASC must reimburse the hospital for such services at fair market value pursuant to a written contract in accordance with the applicable safe harbor under the federal anti-kickback statute and exception under the Stark Law. The provision of such services could also violate the prohibition against private inurement if the hospital is a tax-exempt entity. In addition, the hospital and the ASC must avoid any violation of the federal antitrust laws in contractual negotiations with payors.
- Certificate of Need. If the ASC's in a CON state, there's no better ally in the CON approval process than a hospital partner. The hospital can serve as an advocate rather than an adversary for the necessity of increasing the number of outpatient beds in the geographic region and can help the ASC navigate the CON political process.
- Control. Many physicians fear that a hospital investor will want control of the ASC by appointing a majority of the governing board members and by having certain veto rights. A non-profit hospital has legitimate reasons for making such demands, because it doesn't want the IRS to take the position that the charitable purpose of the hospital is subordinated by its for-profit partners. It may not be necessary for the hospital to have the final say in all decisions before the ASC's governing board; it's possible to negotiate a balance and let the physicians maintain control over decisions that are important to them, including certain clinical and operational decisions. For example, the physicians could have greater authority over the day-to-day operations of the ASC, such as the hours of operation, the choice of nurses and anesthesiologists, the equipment and supplies. The hospital may be more concerned with the center's mission, charitable activities, financial reporting, image and marketing.
- Contract provisions. Often a hospital will insist upon a provision in the ASC's operating agreement permitting the hospital to withdraw as a partner in the ASC if the hospital's tax-exempt status is threatened. And vice versa, physicians should request a provision that they be bought out if the regulatory environment changes to prohibit physician ownership. For example, if the hospital transfers any of its equipment, outpatient business or goodwill to the ASC, then the ASC should purchase that business and goodwill for fair market value. Otherwise, the IRS could construe such a transfer to be in violation of the private inurement proscription applicable to the hospital.