By Jessie Bekker

The Office of Inspector General (“OIG”) of the U.S. Department of Health and Human Services recently issued a favorable advisory opinion on a proposed estate-planning strategy that would allow a physician to distribute, by sale and gift, his ownership interests in an ambulatory surgery center (“ASC”) to a nonphysician spouse and physician children. The Advisory Opinion highlights how bona-fide estate planning strategies can provide avenues for physicians to take unconventional approaches to the disposition of their ASC ownership interests at the end of their careers.

In Advisory Opinion 26-04, the OIG evaluated a three-phase arrangement where, in each phase, ownership interests in the ASC and financial distributions from the ASC would be transferred among the requesting physician’s wife (a nonphysician) and his two children (both physicians in the same specialty) and potentially other future physician investors. It is important to note that, while an Advisory Opinion can provide a glimpse into the federal government’s evaluation of a type of arrangement, its scope is limited only to the exact facts of the Advisory Opinion and does not apply to any other person.

The three-phase proposed arrangement would proceed as follows:

First Phase: In the first phase, the physician would: (a) gift Class A interests in the ASC to his wife; (b) provide the option to purchase Class A interests in the ASC at fair market value to his two physician children, who practice in the same specialty as the requesting physician; (c) retain the remaining Class A interests; and (d) retain Class B Interests for potential investment by other physicians in the future.

Second Phase: In the second phase, the physician would offer the Class B interests to potential investing physicians at fair market value if approved by the Board of the ASC. During the second phase, the physician would retire from the practice of medicine. At this point, the ASC could become a multi-specialty ASC depending on the medical specialties of the future investing physicians.

Third Phase: The third and final phase of the proposed arrangement would commence upon the death of the physician and his nonphysician wife. In the third phase, each of their ownership interests would transfer as a gift to their two physician children.

As part of the description of the proposed arrangement, the retiring physician made several certifications to the OIG, including that he would not directly or indirectly influence patient referrals to the ASC or maintain any role in administration or governance of the ASC after retirement. The retiring physician also presented several additional facts aimed at demonstrating to the OIG that the arrangement posed a low risk of fraud and abuse, including that:

The investment interests would be offered to potential investors without regard to the investors’ previous or expected volume of referrals;

At least one-third of the physician investors’ medical practice income would be derived from the physicians’ performance of procedures;

During the second and third phases of the proposed arrangement, at least one-third of the procedures performed by physician investors would be performed at the ASC;

Neither the ASC nor any of its investors would loan funds or guarantee a loan for an investor to buy interests in the entity;

Returns paid to investors would be proportional to each investor’s investment; and

During each phase, the physician investors would be in a position to refer patients directly to the ASC and perform procedures on the referred patients, while the nonphysician investors would not perform procedures on the referred patients, but would also not be in a position to make or influence patient referrals to the ASC.

The OIG found the proposed arrangement would implicate the Anti-Kickback Statute (“AKS”) if the intent to induce or reward prohibited referrals was present. Further, although the factors presented by the requesting physician met some of the elements of the single-specialty (in phase one) or multi-specialty (in phases two and three) ASC safe harbor, the proposed arrangement could not, in its totality, meet the requirements needed to take advantage of safe harbor protection. Specifically, the gifting of shares from the retiring physician to his wife and the sale of Class A interests to the physician children at fair market value pursuant to an option to purchase in the first phase would not satisfy the elements of a safe harbor. Likewise, the sale of Class B interests to future physician investors in the second phase and the transfer of ownership interests to the physician children upon their parents’ deaths in the third phase also fell outside safe harbor protection.

Nonetheless, the OIG stated it would not take enforcement action against the requesting physician in connection with the proposed arrangement, finding the risk of fraud and abuse to be sufficiently low. The OIG noted that the gifts of interests from a husband to wife without a clinical background would not likely generate prohibited referrals under the AKS. Additionally, while the purchase of Class A ownership interests by the physician children pursuant to an option to purchase and the purchase of Class B ownership interests by future physician investors would not satisfy a safe harbor, the purchases would all be made at fair market value. Importantly, at each phase, the OIG noted the proposed arrangement represented a bona-fide estate planning strategy with documentation to show long-term succession planning, which helped to mitigate the risk of fraud or abuse.

ASC entities often require that physician owners meet the requirements of an applicable ASC safe harbor as a condition to ownership. Therefore, upon a physician’s retirement, ASC governing documents might require an owner physician to sell their ownership interest back to the entity or the other members. The OIG’s new Advisory Opinion suggests the federal government may view alternative retirement-planning strategies favorably under certain circumstances.

Jessie Bekker is an Associate at Burr & Forman LLP practicing exclusively in the firm’s Health Care Practice Group. Jessie may be reached at (205) 458-5275 or jbekker@burr.com.