OIG Advisory Opinion No. 07-05

June 24th, 2007 | Regulatory Matters

Opinion No. 07-05 involves the sale of a 40% interest at fair market value in an existing ASC by certain physicians to a tax-exempt hospital.  The fact pattern includes 94% of the interest owned by orthopedic surgeons and 6% by gastroenterologists and anesthesiologists.  The subject 40% interest is owned by the orthopods; the sale proceeds would not be invested in the ASC entity itself but would go directly to the orthopods. 

The OIG concluded that the proposed transaction raised issues under the AKS since not all the physicians were selling interests and more importantly, “the return on the investment would not be directly proportional to the amount of the capital invested by each investor. The amounts payable to the investors would be proportional to their ownership interest in the Company; however, because the Hospital would pay more per ownership unit than the Orthopedic Surgeons paid, the Orthopedic Surgeons would receive a higher rate of return on their remaining shares than the Hospital would receive on its newly-purchased shares.”

On the surface, this Advisory raises serious concerns about sales of interests in ASCs (and just about anything else regulated by the AKS for that matter) since the OIG’s conclusion is that the transaction poses a risk under the AKS.  Particularly problematic from a valuation standpoint is the OIG’s failure to recognize one of the fundamental tenets of Fair Market Value: namely, that the cash proceeds of the sale are exactly equal to the present value of the future returns on the underlying investment.  Therefore, the premise for the OIG’s adverse conclusion that “the Orthopedic Surgeons would receive a higher rate of return on their remaining shares than the Hospital” for the OIG’s adverse conclusion” is entirely false.  ‘Return’ is based upon the fair market value TODAY of the underlying shares which is exactly what the Opinion states the hospital is paying and the orthopods are receiving.  ‘Return’ includes both cash distributions and appreciation.  The orthopods are receiving cash for the appreciation to date and foregoing future cash distributions on the portion sold.

 

One can only hope that something more was in the submitted documentation from those requesting the ruling that gave the OIG cause for concern.

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