February 17, 2020

February 17, 2020

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Orthopedic Practice Recapitalizations: Critical Legal Issues

With the pace of orthopedic medical practice recapitalizations showing no signs of slowing, it is appropriate to review certain of the most critical legal issues that any buyer considering a transaction must take into account. Failure to account for these issues may not only subject the practice to regulatory liability, but the fines, penalties, and damages resulting from those liabilities have the potential to cause significant loss to the buying entity.

Orthopedic practices are among the most highly leveraged medical practices; well run, sophisticated practices that rely heavily on investments in ancillary services, which may include ownership in ambulatory surgery centers or, in some cases, physician owned hospitals, imaging, physical therapy, orthotics, and durable medical equipment (DME). The ownership or investment in any of these facilities or services can bring with it legal risk if the ownership, investment in, referrals to or billing for, the services or goods attendant to those ancillaries are not structured properly.

In addition to ownership of ancillaries, these practices have significant relationships with other providers, most especially hospitals. Those relationships carry with them additional issues that require vetting by counsel to buyers to avoid unnecessary risk.

Finally, billing and coding mistakes can have an adverse effect on earnings, value, and create compliance concerns. 

Ambulatory Surgery Center Investments

It is quite common for orthopedic surgeons to own interests in one or more ambulatory surgery centers (ASC). While ASC investments do not implicate the self-referral provisions of the Stark Law (found at 42 U.S.C. Section 1395nn) an investment by an orthopedic surgeon, or a practice owned by orthopedic surgeons, implicates the Federal anti-kickback statute (AKS)(found at 42 U.S.C. Section1320a-7b). 

Common recapitalization structures often involve the purchase by the buyer of a portion of the physician investment in the ASC. Thus, compliance with the AKS is vital to the health of the overall relationship. In this regard, it becomes important that any buyer consider:

  • Whether or not any physician was granted his or her interest in exchange for future referrals?
  • Whether or not any physician paid for his or her interest and, if so, was the payment consistent with fair market value?
  • Whether or not the ASC or any other investor loaned any physician the money to acquire his or her interest in the ASC?
  • Are distributions paid to each physician proportional to his or her percentage ownership interest in the ASC? 
  • Does each physician regularly perform ASC-type procedures and, if so, what percentage of those procedures does each physician perform in the ASC?
  • Under what circumstances must any of the physicians sell or surrender his or her ownership interest in the ASC?
  • Is the ASC owned individually by physicians or by the practice and, if so, are there any owners of the practice who do not use the ASC, and why not?

In addition to concerning oneself with AKS matters, any investor in an orthopedic practice that involves an ASC will want to look at matters such as “out of network” billing and relationships with anesthesia providers. For example, a buyer should ascertain whether or not the ASC bills “out of network,” and, if so, are the ASC’s billing and collection practices compliant with relevant state law regarding commercial insurance billing? This is especially important given proposed Federal inquiries regarding “surprise billing.” In addition, it is important to determine the sorts of arrangements the ASC has with anesthesia providers. For example, one should determine whether the anesthesiologists bill for their own professional fees, or whether their services are subcontracted through the ASC or the group, which then bills for them? If the anesthesiologist’s services are subcontracted through the ASC or group, are the fees paid to the anesthesiologists consistent with fair market value?

Ancillary Services Regulatory Issues

As described above, many orthopedic practices maintain at least one, or more, of the following ancillary services, imaging (e.g., MRI), physical therapy, DME, and orthotics. The ownership of these services by an orthopedic practice may implicate the Stark Law, a federal anti-referral statute that prohibits certain referrals by a physician of the above described ancillary services (defined as “designated health services” or “DHS”) to any entity with which the physician has a financial relationship, whether through ownership of the entity or a compensation arrangement, with the entity. The entity is also prohibited from billing Medicare or, possibly, Medicaid for such referrals. This broad prohibition, however, has a number of exceptions that allow for such referrals so long as the conditions for the exception is fully and precisely met. Violations of the Stark Law can render referrals to the practice illegal and can negate the practice’s billings to Medicare and possibly Medicaid (because they are not payable if billed in violation of the Stark Law), requiring repayment to the Centers for Medicare & Medicaid Services along with possible penalties and fines. In addition, the practice can find itself alleged to be in violation of the Federal False Claims Act or Civil Monetary Penalties Law,, which carry their own fairly harsh penalties.

The good news is that the Stark Law recognizes that physician group practices, including orthopedic practices, own and their shareholders refer to, DHS. The bad news is that it is incumbent upon the practice to ensure that it meets at least one exception to allow for the referrals and to allow the group to bill for the services referred. The most common exception used is the “in office ancillary services (IOAS) exception,” a complex set of rules that (i) looks to where the services are provided, (ii) looks to how the services are accounted for and billed and (iii) whether or not the practice is a so-called “group practice,” the definition of which contains a separate set of requirements that need to met with specificity. Assuming all conditions for the IOAS exception are met, the exception protects referrals of ancillaries (excepting most DME) within a group practice, regardless of whether the referral comes from an owner or an employed/contracted physician. It is noteworthy that requirements of the IOAS, including compliance with the definition of “group practice” are well beyond the scope of this discussion, but should be reviewed, in depth, with counsel knowledgeable with them. As noted above, non-compliance with the Stark Law’s requirements can be costly.

Hospital Relationships

In addition to referrals within the group, orthopedic physicians have significant referral relationships with hospitals, such as space or equipment rental arrangements, medical directorships, on-call arrangements, co-management arrangements, and joint ventures. These relationships can implicate both the AKS and the Stark Law and must be reviewed to ensure that they comply with relevant AKS safe harbors and Stark Law exceptions in order to avoid putting the group at legal and financial risk.

Billing and Coding Compliance

Mistakes in coding and the billing of procedures or services affect the quality of an orthopedic practice’s earnings (if one assumes that these practices will trade somewhere about 10x trailing twelve months earnings, a dollar of miscoded earnings will cost $10+ in value) and create compliance concerns. Common errors can include billing for physician assistants, i.e., billing their services as “incident to” the physician service without the proper supervision or when otherwise inappropriate, improperly describing and coding visits, procedures and related items and services, and incorrect levels of supervision over in-office ancillary services such as imaging or physical therapy. An audit by an outside party is often merited to assure that risks in this area are minimized. 

Takeaways 

Orthopedic practice recapitalizations are evolving at a steady pace. Given the multiples at which these practices will trade, vetting critical legal issues is crucial to ensure buyers of legal and regulatory compliance and maintaining value for the prices to be paid. 

© 2020 Foley & Lardner LLP

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About this Author

Roger D. Strode, Foley Lardner, health care business transactions lawyer, mergers and acquisitions attorney
Partner

Roger Strode is a partner and health care business lawyer with Foley & Lardner LLP where his practice focuses on health care business transactions, including mergers, acquisitions, corporate restructurings and joint ventures, general corporate matters and health care regulation. His experience includes the representation of institutional health care providers (hospitals, health systems and integrated delivery systems), large physician groups, specialty providers (ASC development organizations), health care private equity firms and industry consultants. Mr. Strode is...

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