Of all the elements of the ambulatory surgery center safe harbor, perhaps the least understood is the One-Third Rule, and there are actually two:

1. The One-Third of Income Rule applies to all ASC joint ventures and is designed to ensure that all physician-investors are surgeons.

2. The One-Third of Cases Rule applies only to multi-specialty ASCs. It is designed to ensure that each physician-investor in a multi-specialty facility is actively using the center in his practice rather than profiting from referrals to other surgeons. Single-specialty surgery centers are not subject to this rule because the government assumes that all of the investors are competitors and not likely to make cross-referrals. Here's what physician-owners need to know about both facets of the One-Third Rule.

The income test
At least one-third of each physician-investor's medical practice income from all sources during the past fiscal year or 12-month period must be derived from the performance of procedures on the list of Medicare-approved ASC procedures - regardless of where the procedures are performed.

Anesthesiologists and plastic surgeons may not meet this test because they do not perform Medicare-covered surgical procedures. While a plastic surgeon or anesthesiologist's investment in a surgery center may prevent the surgery center from fitting within the ASC safe harbor, there is little risk the surgery center will be prosecuted under the Anti-Kickback statute because of investment by an anesthesiologist or a plastic surgeon as long as each such physician generates one-third of his medical practice income from outpatient surgical procedures.

The procedures test
The one-third of procedures test requires each physician-owner of a multi-specialty ASC to perform at least one-third of his Medicare-covered procedures for the past fiscal year or 12-month period at each surgery center in which he invests.

Obviously, investors in a start-up surgery center cannot meet this one-third test on the date they invest in the new center. Under such circumstances, most counsel require a representation from each investor that he intends to meet the one-third test in the first year of the new center's operations.

Just what income and which cases count toward these one-third tests? If a case is on the list of Medicare-covered procedures for ASCs, that case, and any income from that case, will count toward the required one-third - even if the patient is not a Medicare patient.

What about retired and deceased physician owners? The one-third test only applies to physicians who are actively practicing medicine. It is not a violation of the safe harbor for a retired physician, or the heirs of a deceased physician, to continue to own an interest in a surgery center joint venture.

Well-drafted governing documents for ASC center joint ventures require each physician-investor to meet the applicable one-third test(s) and require each physician-investor to annually certify compliance with the applicable one-third tests. Physician investors who do not meet the one-third test(s) or who fail to certify compliance with the one-third test(s) should be contractually obligated to sell their interest in the surgery center.

If a surgery center joint venture is an impermissible kickback transaction, both the physician-owners and the facility could be excluded from the Medicare program and subject to criminal and civil penalties. Additionally, the government could seek to recover all Medicare billings by the facility, plus penalties and interest, taking the position that these billings constitute false claims.

Investments that do not meet all the elements of a safe harbor are not necessarily illegal, but will need to be examined on a case-by-case basis.