5 Key Legal Issues Affecting Surgery Center Joint Ventures

Scott Becker, JD, CPA, partner with McGuire Woods LLP, discusses five issues that can affect the legality of hospital/physician ASC joint ventures.

1. Percentage of hospital ownership. According to Mr. Becker, there are several different arguments about the necessary percentage of hospital ownership of a joint venture ASC. Generally, a hospital, whether a for-profit or not-for-profit, does not need to own 51 percent of the joint venture, though that level of ownership can help in managed-care contracting and tax-exempt concerns. Tax-exempt concerns can generally be addressed through control of management rather than ownership, he says.

"Some hospitals will say, 'We're told by our lawyers that we have to own more than 51 percent to make sure this doesn't harm us from an exempt income standpoint,'" Mr. Becker says. "The much more important issue is: Does the hospital have sufficient control to ensure the joint venture serves community/charitable purposes?" He says the IRS is primarily concerned with whether the hospital can exert control over the surgery center to force it to serve and prioritize community/charitable purposes.  

Mr. Becker says in some cases, an ASC management company and the hospital set up a venture together that facilitates hospital control. For example, the hospital might own 51 percent of the hospital-management company venture (holdco), which, in turn, owns 51 percent of the ASC joint venture. While the hospital may only own 26 percent of the joint venture overall, the hospital attempts to maintain sufficient control of the ASC by controlling the venture through the holdco.

2. Anti-trust issues. A key issue is whether a hospital and ASC can jointly contract to obtain better rates from managed care payors. Increasingly, payors examine the ownership of the hospital in the ASC and the extent of clinical and financial integration between the hospital and ASC.

Under case law, it has traditionally been perceived that 80 percent or more hospital ownership makes it impossible for the hospital and surgery center to conspire with each other, while 50-80 percent hospital control may meet different determinations from region to region. A hospital that owns less than 50 percent of a surgery center must demonstrate significant control or clinical and/or financial integration if the two entities are to be able to approach payors together.

Mr. Becker also notes that payors may react very differently in dealing with managed care contracting for hospital/ASC joint ventures. "If the hospital is a core provider that works extensively with the payor, the payor may immediately be very receptive," he says. "Other payors say unless the hospital owns a large percent, the ASC and the hospital have to be treated as totally separate."

3. Determining fair market value. If the surgery center is being formed from an existing hospital department, the valuation placed on the new free-standing joint venture must be fair market value, Mr. Becker says. There are multiple ways of determining fair market value, but the hospital must make sure the fair market value price has been researched and can be defended.  Further, as units are sold to new physicians, they also must be sold at not less than fair market value.

4. Medical staff relations. In forming a hospital/physician ASC joint venture, the hospital and center must determine how medical staff issues will be handled by each entity. Most joint ventures keep medical staff for the surgery center entirely separate from the hospital. Others require that the surgery center physicians take call at the hospital. According to Mr. Becker, many joint ventures use two separate medical staff but require that physicians on staff at the surgery center hold admitting privileges at the hospital so that patients can be transferred easily in case of an emergency at the surgery center. There may also be an overlap in credentialing between the two facilities.

5. Physician acquisition and investment. A more recent issue for hospital/physician ASC joint ventures concerns the acquisition of physicians in the local community. If the hospital starts employing physicians, will those physicians still be allowed to invest in the surgery center? "Many hospitals do not allow it," Mr. Becker says. "We believe that as long as the physician has to meet the same requirements as other physicians and isn't forced to invest in the center or helped to invest in the center, it should largely be acceptable." If acquired physicians are not allowed to invest in the surgery center, that could prove fatal for the center's business in some situations, he says.

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