Historically there has been relatively little enforcement focus on the typical physician-owned ambulatory surgery centers (ASCs). A recent qui tam settlement involving a Nashville ambulatory surgery center indicates that qui tam relators are leaving no stone unturned as they look for new targets. Although the federal government declined to intervene in U.S. ex. rel Thomas Reed Simmons v. Meridian Surgical Partners, et.al (Civ. Act. 3:11-CV 00439), Meridian agreed to pay $5.1 million to settle False Claims Act allegations brought by a former employees whistleblower “to avoid the financial costs and distractions that would have come with further legal proceedings.” Meridian maintains that the charges were without merit.
The complaint alleged that several common aspects of the ASC’s’ ownership and operations constituted federal anti-kickback violations and, as a result, were false claims. The lawsuit focuses on the manner in which:
The ASC operating agreement defined buy-out “triggering events”: The relator argued that the “triggering events” in that operating agreement allowing the ASC to buy back physician investors’ interests upon the physician’s retirement, relocation, or exclusion from Medicare evidenced that the center was illegally requiring physician investors to refer Medicare patients as a condition of their investment.
The ASC’s purchase price was determined: The relator alleged that the purchase price that was based on a multiple of the center’s EBITDA (eight times the center’s 2006 earnings), rather than on asset value, was in effect a payment for the surgeons’ referrals to the center.
The ASC paid profit distributions: The relator alleged that because the purchase price was excessive, the distributions paid to physician partners in the center were “above-market distributions to referring shareholders,” constituting illegal kickbacks.
Minority interests were priced: The relator also argued that the price differential for minority and controlling interests evidenced a violation of the anti-kickback statute.
Many healthcare lawyers believed the case had little merit since many of the factors cited by the relator as evidence of kickback violations are fairly standard in the ASC industry. Buying back interests held by physician investors upon certain “triggering events” is the best way to maintain compliance with the ASC Safe Harbors to the federal anti-kickback statute. Likewise, pricing a center on a multiple of earnings is a commonly accepted methodology for determining fair market value. However, at least one OIG Advisory Opinion (AO 09-09) noted that valuing an ASC on a multiple of earnings could potentially be viewed as taking into account the volume or value of the physicians’ referrals in violation of the anti-kickback statute.
According to news reports, the whistleblower will receive approximately $900,000 under the settlement, which is likely to encourage similar suits. ASCs should proactively increase compliance strategies including compliance programs, exit interviews and adoption of a formalized valuation methodology for pricing surgery center acquisitions and physician interests. If a surgery center company uses a multiple of EBITDA for its pricing, the company would be better positioned to deflect challenges to its pricing if it has a consistently applied policy or methodology. Other compliance strategies include avoiding punitive buy-back or repurchase prices and clearly articulating to physicians and company employees the legitimate, clinical and quality-of-care rationales for the buy-back and other provisions of the ASC’s partnership or operating agreement.
With hungry qui tam relators looking for potential targets, adopting a rigorous compliance program and providing clear guidance and information about valuations and operating agreement requirements will go a long way toward forestalling legal attacks.
