1. Best Practices in Navigating Emerging ASC Legal Challenges Carol K. Lucas, Esq. 213.891.0700 clucas@buchalter.com

2. SELECTED ASC TOPICS  Stark and Anti-Kickback Law  Physician Buy-Ins  Physician Buy-Outs  Noncompetition Agreements  To Contract or Not to Contract  Hospital Joint Ventures

3.  Stark Law –Prohibits referral by  a physician  to an entity with which the physician has a financial relationship  for “Designated Health Services”  to be paid by Medicare or Medicaid  Unless an exception applies –Generally does not apply to ASCs

4.  Stark Law Designated Health Services : Clinical laboratory Physical/occupational therapy Radiology (incl. MRI, CT, ultrasound) Radiation Therapy DME Parenteral and Enteral Nutrients Prosthetics/Orthotics Home health Outpatient prescription drugs Inpatient and outpatient Hospital services

5.  Stark Law –The “third rail” of health care laws  No intent requirement-strict liability  A referral that falls within it, if no exception applies 100%, is a violation of the Stark Law  Penalties include repayment of all amounts paid, plus penalties of up to $15,000 per service, plus possible exclusion from Medicare

6.  Anti-Kickback Law –Criminal Statute-Felony –Conviction carries – Fine of up to $25,000 – Imprisonment up to 5 years

7.  Anti-Kickback Law –Prohibits  The knowing and willful  Solicitation or receipt of remuneration  By any person  In return for a referral  For an item or service that will be paid for by the Medicare or Medicaid programs –Applies to physician ownership in ASCs

8.  Anti-Kickback Law –Safe Harbors – Most relevant are  Ambulatory Surgery Centers  Investment Interests

9. Anti-Kickback Law- Ambulatory Surgical Center Safe Harbor  1/3 Rule (Surgeon-owned or single specialty)  1/3, 1/3 Rule (Multi-Specialty)  “Real” investment-no loans from entity or owners  Terms offered unrelated to volume or value  No discrimination against Federal program patients  Return directly proportional to amount of investment

10. Anti-Kickback Law- Investment Interest Safe Harbor  Cap of 40% held by referral sources  Cap of 40% on revenue generated from investors  Terms for referral sources and others the same  Terms offered unrelated to volume or value  No requirement of referrals  Return directly proportional to amount of investment

11.  Physician Buy-Ins  ASC Safe Harbor requirements  Amount offered  Pricing – Cannot be less than fmv  Governance/Structure-Make sure the ground rules are clear at the outset

12.  Buy-Outs of Physician Investors  Redemption Rights – Triggering events – Medical staff membership – Violation of Covenants (including non compete) – Establishing compliance  Redemption Price  Problems with granting waivers

13.  Adjustment of Physician Ownership  Difficult to justify  Other ways to satisfy a disgruntled surgeon – Medical directorship – Participation in Management Company  Highly risky  If done, do on a basis other than volume or value

14.  Non-Competition Agreements  Business & Professions Code §§ 16600, 16601  During the term vs. after termination  What does price have to do with it? (Answer: everything)  Definition of Competing Business  Who is covered?

15.  To Contract or Not to Contract  Offered rates are likely to be unattractive  Volume may not materialize  Disincentives of OON may outweigh In-Network drawbacks: –Payment delays, audits –Physician retaliation –Non-recognition of assignment of benefits – Lawsuits

16.  To Contract or Not to Contract  Aetna, Cigna, United vs. BASM  Claims relate to: – Interests sold far below fmv – Inflated charges – Routine waiver of copayments and deductibles so patients unaware of charges  Other actions based on high charges alone

17.  To Contract or Not to Contract  Is there a way to have the best of both worlds?  Theoretically yes, but requires work

18.  If You Contract  Rate is not everything-other terms can impose significant costs  Make sure language is clear and unambiguous-ambiguous contract language invites disputes-Implants included in procedure cost?  Know your costs for each procedure

19.  Health System Joint Ventures  Stark Law adds Complexity – Price – Physician arrangements  Safe Harbor requirements  Generally a purchase of approximately 1/2 – Non compete implications – Governance

20.  Health System Joint Ventures  How to Prepare – Make sure all corporate records are in order – Make sure that all arrangements with physicians and administrative personnel are documented –Review contracts, leases, etc. to determine which require consent

21.  Health System Joint Ventures  Transaction Issues – Who makes reps and warranties – Earn-out? How much? How long? Criteria? – What if not all physician owners want to participate? – Closing timing-before or after CHOW approved? –Exit?

22. Best Practices in Navigating Emerging ASC Legal Challenges Questions?