Expansion Challenges Owners May Face
Expanding an urgent care or ambulatory surgery center business into new locations and states is a great way for a company to branch out, an spread its brand of care to new patients and further exposure. However, as with all ventures, there can be some significant challenges that owners may face along the way. From regulatory to operational, The Ambulatory M&A Advisor takes a look at some of the challenges that can be encountered during expansion, and how owners can handle these snags if they latch onto their plans.
Tom Anthony, Chair of the Healthcare Practice with the law firm Frost, Brown, Todd says that when looking at expanding, some of the legal complications he sees for Urgent care are different from ASCs when people try to expand them. The legal issues that have to be considered for ambulatory surgery are somewhat easier at the federal level because ASCs are covered by the anti-kickback statute, but not covered by the Stark Law. That makes the federal regulatory compliance a little easier.
Anthony says that since the Anti Kickback Statute is the only federal law to comply with, and since AKS has safe harbors that can be met, this situation gives a higher level of comfort for people becoming involved with ASC’s.
“At the state level, ASCs are governed on a state by state basis, and require compliance with life and safety codes, and other rules and regulations that are specific to surgery centers. They are challenging to meet but not impossible by any stretch. The state laws present legal hurdles to get over, but not a gigantic obstacle,” Anthony says.
Switching over to urgent care, he says urgent care centers would be covered by the Stark Law in addition to Anti-kickback if they are owned by physicians or if physicians have compensation arrangements with them. Anthony says as a result, the ownership structures, the investment arrangements and the compensation arrangements must fully comply with the exceptions that exist within the Stark Law.
“When those requirements are met, in almost every case that will place the arrangement in an Anti-kickback safe harbor, or very close to it. The federal compliance would be focused principally on the Stark Law.
Switching to the state laws, they are very inconsistent in the way they regulated urgent care centers,” he says.According to Anthony, many states don’t regulate them at all and almost view these urgent care centers like a doctor’s office.
“Other states treat urgent care centers very much like an emergency department in a hospital. Anybody who is expanding an urgent care needs to take a close look at the state laws that affect that unique arrangement and make sure that they achieve compliance with that set of state laws. In urgent care, there are also urgent care association guidelines. The associations are highly influential and provide very helpful information about how urgent care centers should be structured and operated,” he says, adding that usually the influence by the association is very positive since a lot of careful thought and planning go into the guidelines produced by the associations.
In an example looking at the shifts from state to state, Anthony says states like Texas and California are both Southwestern states that are governed by specific laws that make them similar to each other, reducing the probability of challenges during an expansion. However in comparison to Texas moving into Massachusetts or Illinois, those states have foundation differences that owners would have to look at.
Anthony says that anybody expanding would simply want to look into their state’s statutes and make the decision on whether they will need to start fresh with a new corporation as opposed to trying to take their current organization, and register it as a foreign business. Anthony says that while this decision may seem daunting, it is not always the case.
“Many times when an organization has an ASC or urgent care center, they have Medicare provider numbers, Medicaid numbers; they have got credentialing with commercial payors and numerous relationships that they want to preserve and not have to start fresh in the new state. They want to go to commercial payors and say “We are just expanding.” They don’t want to have to say, “We started a new LLC, we have a new entity, and we have to credential it from ground zero.” All of those things take a fair amount of time, and time of course, is money. You can’t operate, you can’t bill, you can’t do things, until you get everything properly qualified. In many cases, there is a lot of motivation to just expand using the existing corporate entity,” Anthony says.
Lee Resnick, MD, CMO of WellStreet Urgent Care says his views on the issue of expansion challenges comes from a bit of a different perspective as an operator and a clinician.
Resnick says that the challenges he sees come from the operational angle in the forms of “org structure,” and ”work flow.” Resnick explains that in org structure, the providers expanding or creating a joint venture for expansion essentially have to have an organizational structure to support the relationship.
“It is hard to gage exactly what that means and how many more resources you need to service that relationship. A lot of that depends on whether you are the sole provider of urgent care services or one of many,” Resnick says. He adds that the bottom line of the challenge with joint ventures and expansion is that there is a significant cost to conserving the relationship.
“You have to consider that cost moving in because you want to understand what the return is on that investment,” Resnick says.
Laura Andrew, partner and Chair of the Healthcare Practice at Smith Gambrell, and Russell LLP says in her experience the main issues that leaders always run into is state and federal issues under Stark and Anti-kickback.
“Primarily, the ownership rules are the issue. Oftentimes it is a non –physician that wants to invest in a business and they want to get referrals from existing physician groups. They come up with something that would be related to their practice, but is separate. That is where they really run into issues related to referrals or percentage of ownership interest of non-physicians,” Andrew says.
Some solutions she offers to work through the process revolves around understanding that the process itself is very individualized.
“You just have to look at the ownership interest and make sure that they comply with the applicable statutes and with regards to referrals, oftentimes they have to structure it differently, or they have to, in many cases, give notice to the fact that there is an ownership interest in the second business,” she says.
“The other alternative is that in the new business, they decide that they are not going to accept insurance of any kind; Medicare, Medicaid, etc.”
Andrew says that this decision will avoid a lot of the issues that an owner looking to expand can run into.
“That is one of the easy ways to avoid a lot of the issues, though it won’t necessarily get around all of the referral issues. Unfortunately, those are very much state by state endeavors. You really have to look carefully at each state; which makes sense. If you think about it from a macro level it makes sense that people should know whether or not they are being referred to an organization that the referral source has an ownership interest.”
If you have an interest in learning more about the subject matter covered in this article, the M&A process or desire to discuss your current situation, please contact Blayne Rush, Investment Banker at 469-385-7792 or Blayne@AmbulatoryAlliances.com.