Myths and More on the Safe Harbor

Hospital SignDuring a healthcare transaction, ASCs and other entities are faced with the option of following the conditions of a safe harbor to help prevent scrutiny of the business once the transaction is said and done.  The Ambulatory M&A Advisor examines some of the details and myths involved in a safe harbor and its inner workings in a healthcare M&A Transaction

Gary Herschman, Partner with the law firm Epstein, Becker, Green says that when it comes down to it, a safe harbor is just what it is, a safe harbor, it is not a set of conditions that are required.

“An ASC does not have to meet a safe harbor, but if it does, then there is comfort that its arrangement complies with the Anti-kickback Statute (AKS).  A lot of ASCs that are joint ventures with physician owners like to be structured in a way that meets the safe harbor so that they are in a “compliance comfort zone” with respect to the AKS. Most ASCs in present day do structure their physician ownership consistent with ASC safe harbors so as to comply with the AKS,” Herschman says.

“In my experience most ASC operating agreements require that physician owners comply with“eligibility conditions” which mirror the ASC safe harbor requirements.  The physician members then have to certify that they comply with such conditions on an annual basis, and some ASCs require that they also submit supporting documentation confirming such compliance.”

Herschman goes on to reiterate that again, meeting the safe harbor is not absolutely required and failure to do so does not mean that the ASC’s structure is illegal; rather, it just puts the arrangement into a “darker gray” compliance zone.  With that being said, Herschman says if the safe harbor requirements are incorporated as conditions into an ASC’s operating agreement, then it is important that the agreement be followed.

“It is not illegal to be outside of a safe harbor.  If you satisfy all of the requirements to be under the safe harbor, then you are protected from scrutiny or prosecution under the Anti-Kickback statute.  The safe harbor is voluntary, so if you are outside of the safe harbor, all that means is that you are going to be evaluated based on all facts and circumstances, and it is possible that you might be viewed as doing something wrong,” Charles Oppenheim, partner with the law firm of Hooper, Lundy, & Bookman says adding that there are lots of ASCs that are not within a safe harbor, in fact, most that he has ever seen are not within a safe harbor.

“When not in a safe harbor although it is not illegal for the ASC, aside from the obvious amounts of scrutiny that an ASC can face, there is a whole other spectrum of risk involved.

There are many ASCs outside the safe harbor that present very low risk to the participants.  Then, depending on what you are doing, how far from the safe harbor you get and what other stuff is going on in the ASC, you could potentially put yourself at risk,” Oppenheim says.

“It is like any other conduct that is evaluated by its facts and circumstances, the intent of the participants, etc.  There is everything from the very lightest shade of gray, to medium gray, to the very darkest shade of gray.”

Some operating agreements allow members flexibility to obtain Board permission if they veer (insubstantially) from the requirements, as long as there is a reasonable and acceptable explanation; but if an ASC allows physician owners to veer from the safe harbor requirements, it is important to do so in a manner that is reviewed and approved by competent healthcare legal counsel in order to avoid the ASC putting itself into high risk of AKS noncompliance.

“For example, let’s say that there are a lot of procedures that urologists can do (and prefer to do) in their office instead of an ASC of which they are part-owners, and therefore, they don’t perform one-third of their procedures at such ASC.  If there is a rational basis for not adhering to the safe harbors, and the variance is not significant (e.g., 25% instead of 33.33%), then there may be only a low risk of noncompliance,” Herschman says.

“On the other hand if there is a physician owner of the ASC who performs just five percent of his or her cases at the ASC (in which he or she has an ownership interest), then there would be much higher risk of noncompliance.  Or, if the ASC were to allow primary care physicians to be owners, and they refer to the surgeons who perform cases at the ASC, then such arrangement likely would violate the AKS (or present a very major issue of noncompliance); the safe harbor is expressly geared toward surgeons who actively practice and perform surgeries at a center.”

Further Stark Issues and Safe Harbor

Jeff Moore, partner at Phelps Dunbar LLP says that for hospitals and physicians, with respect to Stark, there is a bit of a break in that ASC facility fees, the technical component of ASC procedures, are generally not considered designated health services under Stark if those fees are billed to Medicare under the ASC composite rate.

“Services generally billed by an ASC are at the composite rate, not considered to be designated health services.  This is good from a Stark standpoint because that reduces some of the possible Stark issues in a hospital/physician joint venture related to an ASC.  That doesn’t solve the issue with respect to the Anti-Kickback Statute analysis.  Anti-Kickback applies to any items or services reimbursed by a federal healthcare program whether they were referred by a physician or anyone else,” Moore says.

“Although the Stark analysis may be more minimal with respect to these hospital ASC joint ventures, you still certainly need to look at the Anti-Kickback statute and determine whether or not the joint venture arrangement is going to meet an Anti-Kickback safe harbor.  The OIG came up with additional safe harbors under the Anti-Kickback statute in late 1999.  They came up with a number of safe harbors applicable to ASCs.”

Moore explains that some safe harbors deal with investment interests in ASCs and they cover single specialty ASCs, meaning surgery centers that may only provide GI services or an ASC that provides only Orthopedic services.  Moore adds that there are also safe harbors that serve to multi-specialty ASCs that are entered into by different groups of specialists.

“There is specifically a safe harbor related to hospital physician ASCs that is applicable if at least one investor in the joint venture is a hospital.    That would be the one that is most applicable to the hospital physician joint ventures with respect to ASCs.  There are a number of criteria that must be met to be under that safe harbor,” Moore says.

“For example, the terms on which the investment interest is offered to the investor must not be related to the previous or expected volume of referrals that they are going to make to that ASC joint venture.  You can’t pick investors just because you think they are going to be high referrers to the ASC.

The entity or any investor must not loan funds to or guarantee a loan for an investor if the investor uses a part of such loan to obtain their investment interest.  Meaning, the hospital could not loan funds to physicians to become investors in the ASC or vice versa.  The government wants them to invest their own capital and resources and be at risk in the venture rather than have other parties in the venture loan them the funds to obtain their ownership interest.”

As far as other areas that ASCs need to be concerned with, Oppenheim says there are other potential compliance issues.  One of the things that can potentially be viewed as billing, coding, medical necessity issues; there are ASCs that have had questions raised about whether or not all of the procedures are medically necessary, whether they are up coding, those types of things which are potential areas of risk for anybody within the healthcare industry.

“Other issues to look out for include relationships with vendors.  This could be an area of issue if someone is selling the ASC supplies and sometimes sales people can be overly aggressive and want to pay somebody in order to buy supplies from them instead of a competitor; so those types of relationships can be questionable.  There can be overly aggressive marketing of referral sources.  You could have a marketing person going out and talking to doctors who would potentially refer to the surgery center and doing stuff they shouldn’t be doing like overzealous wining and dining.  There are lots of areas where providers can get into a lot of trouble.  These rules apply to not only ASCs but to the healthcare system as a whole,” Oppenheim says.

If you would like to learn more about the concepts covered in this article, want to sell your business or discuss how Ambulatory Alliances, LLC might be able to help you out, contact Blayne Rush, (469)-385-7792, or

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