The Opinion provides insight on the OIG’s position on capital contributions and returns on investment to be enjoyed by ASC investors.

On July 29, 2009, the Office of Inspector General (OIG) released Advisory Opinion No. 09-09, addressing the development and operation of an ambulatory surgical center (ASC) to be owned by a hospital (Hospital) and seven orthopaedic surgeons (Surgeon Investors). The OIG concluded that it would not impose sanctions under the federal anti-kickback statute (42 U.S.C. §1320a-7b) (Anti-Kickback Statute), notwithstanding the fact that the proposed arrangement (Arrangement) would not qualify for safe harbor protection. While the Opinion does not deal with any novel issues, it does provide insight on the OIG’s position on capital contributions and returns on investment to be enjoyed by ASC investors.

Factual Background

Under the proposed Arrangement, each of the Surgeon Investors would own an equal portion of a limited liability company (Surgeon LLC), which, in turn, would establish a single-room ASC (Surgeon ASC). The Hospital would develop a single hospital operating room in a space adjacent to the Surgeon ASC. Each party would then contribute their respective assets (i.e., the Surgeon ASC and the Hospital operating room), plus cash to equalize values, to a new entity that would operate a two-room ASC (New ASC). Each of the Hospital and the Surgeon LLC would own 50 percent of the New ASC. The transaction was structured to allow the Surgeon Investors and Hospital to develop and operate the New ASC without having to obtain a certificate of need under state law.

The proposed Arrangement would not meet the Anti-Kickback Statute’s hospital/physician-owned ASC safe harbor because the amount of payment to the Surgeon Investors in return for their investment would not be directly proportional to the amount of their capital investment, the Hospital would be in a position to make or influence referrals to the New ASC, and the Surgeon Investors would not invest directly or through a qualifying group practice.

OIG Analysis

Although the OIG determined that the Arrangement would not qualify for safe harbor protection, it concluded that the Arrangement incorporated safeguards significant enough to minimize the likelihood of fraud and abuse.

Return on Investment

The OIG recognized that the Hospital and the Surgeon Investors could receive different returns on their investments in the New ASC depending upon the amount of their respective initial investments to develop their separate assets (i.e., the Surgeon ASC and the Hospital operating room), and the value of the tangible assets related to the Surgeon ASC and Hospital operating room at the time of the planned contribution to the New ASC. The OIG, however, concluded that the risk of abuse resulting from the variations in return on capital is low.

In reaching its conclusion, the OIG relied on the fact that the contributions to the New ASC, and the percentage interests owned by the Surgeon Investors and the Hospital, would be based solely upon the fair market value of the tangible assets being contributed, and that any differences in returns on capital enjoyed by the investors appear unrelated to their past or anticipated referrals. The OIG went on to state that “[its] conclusion might be different if the valuation of the respective contributions of the investors included intangible assets,” expressing concern had the valuation—and respective percentage ownership interests held by each investor—been based on a cash flow analysis of the Surgeon ASC and the Hospital operating room. Since the Surgeon Investors are referral sources to the ASC, such a cash flow based valuation could include the value of the Surgeon Investors’ referrals to the Surgeon ASC, which, in the opinion of the OIG, could result in the Surgeon Investors receiving a greater return on their capital investment than the Hospital.

Hospital Safeguards

The OIG also considered the fact that the Hospital would be in a position to make or influence referrals to the New ASC and to the Surgeon Investors. However, the OIG identified six safeguards that the Requestors identified in the Arrangement that would limit the ability to make or influence referrals:

  • Hospital Investor will not refer patients to the New ASC.
  • Hospital Investor will refrain from any activities to encourage or require members of its medical staff to refer patients to the New ASC or Surgeon Investors.
  • Hospital Investor will not track referrals to the New ASC or the Surgeon Investors.
  • Hospital Investor compensation to its medical staff will be fair market value and will not take into account the volume or value of referrals to the New ASC or the Surgeon Investors.
  • Hospital Investor will inform its medical staff annually of these measures.
  • Hospital Investor will continue to operate its own outpatient surgical facilities.

Physician Investment Vehicle

Finally, the OIG addressed the fact that the Surgeon Investors (or their group practice) will not directly invest in the New ASC but, rather, invest through the intermediary Surgeon LLC. The OIG noted that they have previously expressed concern that intermediate investment entities “could be used to redirect revenues to reward referrals or otherwise vitiate the safeguards provided by direct investment,” but concluded that the use of a “pass-through” entity in this case will not substantially increase the risk of fraud or abuse.

In light of the foregoing, the OIG opined that the lack of compliance with the three elements of the safe harbor for hospital/physician-owned ASCs did not raise a substantial risk of fraud and abuse.


In issuing Advisory Opinion 09-09, the OIG demonstrates flexibility in permitting joint ownership of ASCs by physician and hospital investors outside of the strict confines of the ASC safe harbors as long as appropriate measures are taken to reduce the potential for improper inducements for referrals, and, further, sheds additional light on its position on capital contributions and returns on investment to be enjoyed by ASC investors.

It is important to read Advisory Opinion 09-09 in contrast to Advisory Opinion 07-05 (June 19, 2007), in which the OIG issued an unfavorable opinion regarding a proposed joint hospital-physician ASC where the hospital investor paid a subset of the physician investors directly in return for an ownership share in an existing ASC. In that Opinion, less than all of the physician owners of an existing ASC proposed to sell a portion of their ownership interests to a hospital investor in return for direct payments from the hospital. The OIG concluded that such a sale would raise a heightened risk of fraud or abuse because the hospital’s investment was in the form of payments of cash to the physician investors directly, rather than an investment of capital in the company; not all of the physician investors in the ASC would sell their interests, and those that were to sell would do so at an appreciated price, which (in the OIG’s opinion) could be interpreted as rewarding the selling investors for referrals; and the returns on investment enjoyed by the investors would not be directly proportional to the capital investment due to the appreciation in value of the ASC, which resulted in the hospital investor paying a higher price for its investment than did the physician investors.

Under both Advisory Opinions, returns on investment to be enjoyed by the various investors would be disproportionate to the capital invested by each. The favorable result in Opinion 09-09, however, clearly indicates that a lack of proportionate investment return alone should not raise the risk of fraud or abuse. Rather, it would appear that the circumstances surrounding the disproportionate return tips the scales in the view of the OIG. For example, unlike the situation in Advisory Opinion 07-05, the Arrangement in Opinion 09-09 would not involve payments to the Surgeon Investors but, rather, a direct capital investment in the Company, and all of the Surgeon Investors (rather than simply a subset of those investors) would equally participate in the Arrangement. This, it would seem, helps avoid any perceived “reward” to the physician investors (which, in Opinion 07-05, the OIG found troublesome).

In addition to the above, Opinion 09-09 provides insight as to the OIG’s views on valuations. The OIG implies that the result in 09-09 might have been different had the parties valued their relative contributions taking into account intangible assets (namely the values of the cash flows), rather than tangible assets, and the disproportionate investment returns had resulted from the differences in the values of those intangible assets. This cautionary statement warrants close attention.

Although the OIG stopped short of declaring the use of the cash flow method of valuation as violative of the Anti-Kickback Statute, the OIG did caution that such a valuation approach may reflect the value of referrals by the Surgeon Investors to the New ASC. In the current economic environment, a number of physician-owned ASCs are considering transactions, including acquisitions, joint ventures, mergers and sales of equity in existing centers. Valuations are central to these transactions, and cash-flow based analyses are commonly employed methods of arriving at value. Although the OIG does not go so far as to say that the income method of valuation violates the Anti-Kickback Statute, the OIG’s statements cannot be ignored and will need to be considered in connection with future ASC transactions. That said, it is important to note that the OIG’s analysis of the Arrangement was developed on the basis of the specific facts of the situation and, as noted by the OIG, has “no application to, and cannot be relied upon by, any other individual or entity.” Any application of the rationale of the OIG to different circumstances should be carefully evaluated by counsel experienced in ASC transactions.