On June 12, 2007, the OIG issued an unfavorable advisory opinion relating to the sale, by physician owners of an ambulatory surgery center (ASC), of a portion of their ownership interest to a local hospital. OIG Advisory Opinion 07-05. The fairly short opinion describes a proposed arrangement in which three orthopedic surgeons who currently own 94 percent of a multi-specialty ASC would sell some of those ownership units. After the transaction, the hospital would own a 40 percent interest in the ASC. The remaining physician owners, two gastroenterologists and two anesthesiologists who own a total of 6 percent of the ASC, would not sell any of their ownership units.

The requestors certified that the amount paid by the hospital to the orthopedic surgeons for the ownership units would be at current fair market value. This amount, however, would be greater than the initial investment by the orthopedic surgeons, who were the founding members of the ASC several years ago.

The hospital acknowledged that it was in a position to make or influence referrals directly or indirectly to the ASC or to the physician investors in the ASC. Accordingly, the hospital certified that it would agree to limit the ability to make such referrals in the same way that other requestors had proposed in arrangements that received favorable advisory opinions from the OIG. These limitations were: (i) physicians employed by the hospital would be prohibited from making referrals to the ASC; (ii) the hospital would take no action to require or encourage medical staff members to refer to the ASC or the physician investors; (iii) the hospital would not track referrals to the ASC; (iv) any compensation paid to the hospital’s physicians would be fair market value and not take into account the volume or value of referrals to the ASC or the physician investors; (v) the hospital would notify its medical staff of these limitations; and (vi) the hospital would continue to operate its own outpatient facilities for ASC procedures.

In Advisory Opinion 97-5, the OIG had explicitly stated that if such conditions were met, referrals from physicians with staff privileges at the hospital would not be attributable to the hospital.

In this newest advisory opinion, the OIG found that the proposed arrangement failed to meet all of the criteria set forth under the safe harbor for a hospital/physician-owned ASC. The OIG explained that the arrangement would not meet the criterion that the amount of payment to an investor in return for the investment must be directly proportional to the amount of the capital investment of that investor. 42 C.F.R. § 1001.952(r)(4)(iii). The OIG indicated that while each investor would receive a return on investment proportional to the investor’s ownership share, the return would not be proportional to the capital invested.

The OIG then analyzed the proposed arrangement to determine whether the arrangement would pose only a minimal risk under the antikickback statute. The OIG cited both to the 1989 Special Fraud Alert on Joint Venture Arrangements (reprinted in the Federal Register in 1994) and to the Special Advisory Bulletin, “Contractual Joint Ventures” (April 23, 2003), as the basis for its long-standing concerns regarding joint venture arrangements. It is interesting that the OIG appears to view the guidance contained in the Special Advisory Bulletin on contractual joint ventures as applicable to equity joint ventures—which is the subject of Advisory Opinion 07-05. This seems to indicate that the OIG places little importance on the fact that physicians incur risk by investing in an equity joint venture, while little or no such risk may exist in a contractual joint venture.

The OIG notes in its analysis that the hospital is purchasing shares of the ASC from physician investors rather than from the ASC itself. It does not explain why this distinction affects the antikickback analysis, except to say that by purchasing the shares from the physicians, the ASC receives no benefit from the investment. The OIG seems to expect that any additional investment in an ongoing operation would be appropriate only if it infuses the entity with capital that would be used to expand or enhance the facility or fund its operations. Accordingly, it is questionable whether, if the physicians had sold their shares back to the ASC and then the ASC sold the shares to the hospital, the OIG would have rendered a positive opinion.

Advisory Opinion 07-05 focuses heavily on the fact that the orthopedic surgeons would realize a gain on their investment because the fair market value of the shares of their stock had increased since their initial investment. The OIG completely discounts the fact that the requestors certified that the amount paid by the hospital would be fair market value. The opinion leaves unanswered the question of how to value ownership units of an ongoing entity, if the fair market value of the entity has increased since its inception.

This is particularly curious in light of Advisory Opinion 01-21, issued November 16, 2001, in which the OIG looked favorably on a similar arrangement. In Advisory Opinion 01-21, a medical center was purchasing an ownership interest in an operating ASC. The OIG held there that the capital contribution of the hospital would be commensurate with fair market value and the profits and losses would be distributed in direct proportion to each investor’s percentage of equity ownership in the ASC. In Advisory Opinion 01-21, the hospital agreed to virtually the same limitations proposed in Advisory Opinion 07-05. Notably, while the OIG was cautious with respect to the price-per-unit varying with different purchasers because the original purchasers paid a different amount than later purchasers, the OIG concluded that there was a reasonable basis for the different prices that was not related to the volume or value of referrals, but rather reflected the appreciation in value of the ongoing ASC. Accordingly, even though the distributions were not made in direct proportion to their capital investment, the OIG concluded that this did not increase the risk of fraud and abuse. Advisory Opinion 07-05 is silent with respect to whether there is any factual distinction from this earlier opinion that would account for the inconsistent analysis.

In addition, the OIG expressed its discomfort with the “financial gain to a subset of the physician investors [i.e., the orthopedic surgeons] whose referrals may be particularly valuable.” Presumably, the OIG may be concerned that the hospital was attempting to reward the physicians for their referrals. What the OIG did not acknowledge, however, was the existence of other nonsuspect reasons for this approach, including the fact that the investment interests held by the other physician investors were too small to permit the hospital to reach its desired level of investment.

What is the impact of this opinion? Should it be relied on instead of Advisory Opinion 01-21 because Advisory Opinion 07-05 is more recent? Advisory Opinion 07-05 does not declare a moratorium on all joint ventures as per se violations of the antikickback statute. In fact, the OIG goes out of its way to state that none of the factors, “whether standing alone, or taken in combination, necessarily indicates fraud or abuse.” Nonetheless, without knowing why the orthopedic surgeons decided to sell their shares to the hospital and why the other physicians did not, the reasoning behind the opinion is little more than conjecture. If the OIG were to provide such information in future negative opinions, advisory opinions would provide greater utility to the industry as reference points for other similar arrangements. In summary, Advisory Opinion 07-05 may have an intended—or unintended—chilling impact on the potential resale of any joint venture interests, even for those arrangements involving legitimate, non-referral-based commercial decision-making.