Don’t Let Your ASC Suffer From Success
How to welcome new investors without undue regulatory scrutiny
You want your ASC to be a success. It benefits you and your patients if it is.
However, if you want to expand on that success, providing a way for new physicians to
invest in your facility can be difficult, to say the least. Any sale has the potential to raise
significant regulatory concerns, and the fair market value at which you would need to
sell shares may be prohibitively high.
You don’t want to lose out on adding a talented young surgeon who can’t make a
large capital investment, but providing ownership interests at fair market value is crucial
to avoiding that regulatory scrutiny. So how do you navigate the legal requirements and
your desire to grow your ASC? Here’s a look at the five acceptable strategies.
1. Fair market value. You must first determine the actual fair market value of units in
the company and sell them at this price. To be on the safe side, have an
independent, third-party appraiser establish this value; such an expert will be wellequipped to take into account lack of liquidity or minority discounts when
establishing unit value for a new investor. Documentation should clearly state the
nature and amount of any discounts. If you choose to set the price by doing an
internal analysis, you must have a clear, documented method of establishing the
valuation.
2. Loans for units. New investors may obtain loans from an unrelated party — a bank,
for example — in order to invest in the ASC. If the bank requires new investors to
pledge their units as collateral, either your operating agreement should specifically
allow this or the other owners should provide a written consent to permit such a
pledge.
3. Smaller initial purchase. To reduce the cost of a buy-in, you could allow a new
investor to buy a smaller number of units than existing investors own. For example, if
existing investors each own 10 units, the new physician investor might buy only two.
He would have proportionately less ownership and receive proportionately less
distributions than the other members. But the upshot is that he gets to be part of
your ASC and still pays fair market value — it’s just what he can afford at the time. If
subsequent offerings are made, he would still have the opportunity to buy more
shares, albeit at the new fair market value price. Just remember that such an
offering should generally be open to all physician owners with less-than-equal
ownership, regardless of the volume or value of referrals to the ASC.
4. Distribution of debt proceeds. You can also lower the price of the buy-in for a new
physician by recapitalizing the company. One way to do this is to increase your debt
through a loan or large purchase. You can then immediately distribute the proceeds
of the debt to existing members. When the fair market value is calculated thereafter
for a new physician, the share prices will be lower because of the increased debt —
making it easier for new investors to buy more units.
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The advantages of this strategy are that the existing physicians are provided with
immediate cash, and new physician investors may purchase a larger ownership share.
The disadvantage of this strategy is that you’ll have to have a long-term view; the debt
burden may take years to overcome. Furthermore, any substantial increase of debt
reduces company value, increases risk of default and decreases your ability to obtain
additional debt if you should need it. Paying down the principal of the debt also
negatively impacts later distributions and won’t generally provide corresponding tax
deductions to share holders. Finally, such an effort may be viewed as evidence that the
ASC doesn’t genuinely need new capital.
5. Buy-in price need not equal buy-out price. If a situation arises in which you’d
like to redeem units from existing members at or near the time units are offered to new
physician investors, there may be situations where you can offer the buy-in shares at a
lower (or higher) price than they buy-out shares. While the buy-in price should never be
below fair market value, the buy-out price is often calculated according to a valuation
formula in your operating agreement. This may result in a per-unit buy-out price that is
lower or higher than the per-unit buy-in price.
Alternatively, the per-unit buy-out price may in unusual situations be higher than the
fair market value buy-in price. In this situation, you may redeem several Units at a
higher price (as determined by the operating agreement) and bring in new investors at a
lower price (as determined by a legitimate fair market valuation). If the per-unit buy-in
price will be lower than the per-unit buy-out price, it’s particularly important that the buyin price be properly supported as reflecting the then-fair market value.
There are times when you don’t have the right to buy out members, such as if your
facility was formed before the ASC safe harbors were adopted and, therefore, your
operating agreement doesn’t provide for buy-out upon non-compliance. In this case, to
encourage the physician member to redeem his units entirely, it may be appropriate to
buy him out at a premium.
From the “what not to do” files
A word on strategies that are likely to be considered improper: Never discount or sell
shares for less than fair market value, whatever route you decide to take. While
investors should be allowed to take out loans in order to buy their shares, none of you,
your fellow share holders nor the company should act as the lender for this purpose.
Generally, you shouldn’t let a new physician purchase a small ownership interest for a
fair price with a guarantee that he’ll be able to buy incremental ownership interests
(such as one or two units each year) at the same price. The guarantee of additional
units at a set price is improper in the OIG’s eyes; any later offerings should be based on
the number available and the current fair market value price. Don’t give investors an
opportunity to buy extra units because of their past or expected abilities to refer
patients. Finally, ensure investors aren’t paid extraordinary returns on the investment in
comparison with the risk involved.
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New Faces Among the Usual Suspects
Guess what’ll cause you consternation in your attempts to extend other physicians
investment opportunities. That’s right: the Anti-kickback Statute. The OIG also has
released two relevant special communications on the topic. Here’s a quick look at how
those regulatory bits affect buy-ins.
• Anti-kickback Statute. You’ve heard it before, but it bears repeating: This statute
prohibits the knowing and willful solicitation, receipt, offer or payment of “any
remuneration (including any kickback, bribe or rebate) directly or indirectly, overtly or
covertly, in cash or in kind” in return for or to induce the referral, arrangement or
recommendation of Medicare or Medicaid business. Offering a discount on an item of
value, particularly an ownership interest in an ASC, may be considered remuneration
by the OIG and the courts. So may any gift, gratuity, relief from a financial obligation
(such as an interest-free or guaranteed loan) or benefit conferred by one party on
another, directly or indirectly, The OIG has promulgated several safe harbor
regulations to clarify and narrow the scope of the Anti-kickback statute:
- 42 CFR 1001.952(r), provides that return on an investment interest in an ASC will
not be considered remuneration so long as the terms of the investment are unrelated
to previous or expected volume of referrals and the return on investment is directly
proportional to the amount of capital investment.
- The commentary to the ASC safe harbor regulations, 64 Fed. Reg. 63536 (1999),
further clarifies that you cannot sell units to a primary care physician who would refer
patients to the ASC but not perform surgeries there, and that you should avoid jointly
investing in an ASC with physicians in other specialties who often refer to one another.
Remember, you must fully comply with them in order to gain the absolute defense to
prosecution they afford.
• Special Fraud Alert. In this document, the OIG identified what it considers the
features of suspect healthcare joint ventures: the selection of investors solely on the
ground that they are in a position to make referrals to the joint venture; offering greater
investment opportunities to investors likely to make a large number of referrals;
actively encouraging investors to make referrals; requiring only a small capital
investment by physician-investors or loaning the investment capital to physicianinvestors; and investments with disproportionately large returns compared to similar
investments with similar risk. The alert was issued in 1989 and was revalidated by the
OIG on Oct. 6.
• Special Advisory Bulletin. An April 2003 OIG communication addressing broader
concerns regarding joint ventures clarified that a discount is considered a form of
remuneration and that safe harbor protection relies on the use of fair market values as
determined in an arm’s length transaction.
— Scott Becker, JD, CPA, and Ronald Lundeen, JD
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