The Art of the ASC Business Deal

The Art of the ASC Business Deal

The legalities encircling an ASC business deal has been known to leave even the best of the best reeling in confusion. The many legalities and intricate moldings of an effective and profitable deal can be time consuming, complicated and bewildering. No matter if it is a start-up ASC or one that’s weathered a decade’s worth of storms, pitfalls can protrude in the business’ legalities. Identifying them — and remedying them — before they become a problem can not only secure the business venture, it also will provide peace of mind.

Scott Becker, JD, CPA, partner at McGuire Woods LLP, says the key legal pitfalls in ASC deals are several. He says those most pressing include:

• The means by which redemption events are triggered and the related valuation process 
• The means by which shares are sold to physicians and whether or not such sales comply with anti-kickback guidance 
• The use or misuse of safe harbor provisions in documents and in operation by ASCs 
• The handling of out of network patients and the legal and payor challenges as to how this is handled 
• The efforts to gain higher reimbursement through HOPD models Joshua M. Kaye, Esq., partner with McDermott Will & Emery LLP, further explains where discrepancies may lie. 

As Kaye points out, the ASC industry is essentially made up of three types of business deals:

• Sale of interest from one physician to another (often referred to as a syndication) 
• Sale of a controlling interest to a management company 
• Buying back a physician’s interest (i.e., should they retire, leave, be ousted, etc.) 

The more common pitfalls encircling these three types of deals include aspects such as ensuring that the physician that is buying in is buying in at fair market value. In other words, know the federal anti-kickback statue laws. But remember, ASCs do not have this problem on the buy back (No.3), according to Kaye. “This is a common mistake,” he asserts. “When buying back the interest, there is no fair market value requirement.”

The two big pitfalls for selling a controlling interest to a management company is the negotiation of minority protection rights and ensuring there are good checks and balances in place specific to what is expected of the management company. “State law generally provides that the holder of a majority of the ownership interests controls all decisions,” Kaye explains. “Thus, unless the ASC’s governing document provides otherwise, the management company, by virtue of having a majority interest, now controls the day-to-day operations and all of the decisions. While the doctors will likely enjoy giving up control of the day-to-day operations, it is advisable for them to have control or input over some of the more important decisions. For example, whether an individual should be admitted as a new physician partner.”

Kaye says a management company may simply look to a physician that can generate more revenue, “however, just because the doctor may be able to generate more revenue doesn’t necessarily mean he or she will fit into the culture of that surgery center with respect to the other owners. So one of the things that minority protection rights includes is the ability to continue to control, or at least require physician approval, on who can become a physician owner.”

Also, ensuring — through the management agreement — that adequate protections are included to bind the management company to deliver all that is promised in the deal also is important, Kaye adds. “Physicians may ask, ‘What I am I really getting in return for paying that management fee?’ All expectations should be spelled out in detail.”

Keeping all of the legalities in good functioning order throughout the life of the venture is more important than ever. Kaye says the No. 1 dedication needs to be in having a “state of the art” governing document. “If you’re working off of an operating agreement (OA) that you’ve had now for years, there have been substantial changes and guidance given by the federal government on what is permissible. There have been changes in interpretations. You definitely want to have your governing documents revisited to make sure it addresses one of the biggest issues — which is how to deal with nonproductive physicians.

“You also want to make sure you have good compliance planning in place, good policies in place, and that you actually administer the policies. It is not enough to just hire a consultant who comes with four or five binders worth of policies. You do want to implement those policies and make sure you are compliant with them.”

Becker interestingly notes that legal documents should be set up such that they can be amended by a vote that is not too high nor too low. “We often see 66 percent of a 70 percent vote,” he says. “Amendments to the documents should be considered and discussed generally every one to two years. This occurs as the leadership of the center has increased knowledge of how they would like the rules to read and as they have experience with specific issues that they want to assure are addressed in a particular way.” Changes can also be driven by a regulatory change, e.g. the implementation of the safe harbors, or other change which drives a change in the documents, Becker adds.

Kaye says it is imperative to continually review and revise a venture’s legal documents. “Annually would be the safest bet. There are enough changes on an annual basis that you would want a healthcare expert to take a look at it,” he points out.

“An operating agreement (OA) is a critical document in the development and management of a surgery center. It is helpful to have a corporate partner that can manage and enforce the legality of the agreement, but also have the expertise to structure the document to ensure the long-term success for the entity.

An OA should provide the framework for two critical questions: How the entity will be governed, and how the physician partners will appropriately participate in the center. The document should outline governance including the board structure, voting rights and tenure. The OA should also protect and ensure the long term viability of the entity which can be done by restrictive covenant provisions (non-competes) and buy-sell events.

Non-competes can help define boundaries for the physician partners and should include enforceable terms that are deemed reasonable by the state. Passive physician investment will slowly choke the life out of your surgery center so it is important that careful consideration is given to allowing the entity to purchase the ownership of a physician who may retire, leave the community or otherwise cease being an active practitioner in your surgery center.”
— Kevin Standefer, senior vice president, Nueterra Healthcare