When you're considering selling or syndicating equity in your surgery center, your decision should be based not only on your short- and long-term financial objectives, but also on compliance with regulatory requirements. Before signing on the dotted line, be sure you know the legal issues surrounding your deal.

Self-referral and kickback laws
The Stark Law, which covers physician self-referrals, is a strict liability law, which means that even unintentional violation results in liability. However, because ASC procedures are, in general, exempt from the Stark Law, physician ownership of ASCs is often outside the purview of Stark's draconian liability. The Anti-kickback Statute makes it a criminal offense for any person to knowingly pay or receive anything of value in exchange for referrals of items or services that are reimbursed by a federal healthcare program. Unlike the Stark Law, liability under the Anti-kickback Statute is based on the parties' intent. There are different safe harbors depending on whether an ASC is surgeon-owned, single-specialty, multi-specialty or co-owned with a hospital.

Adding physician-investors
If you plan to sell to new physician-buyers, it's wise to comply with the ASC safe harbor provisions. Satisfying these requirements, though not mandatory, would insulate an arrangement from Anti-kickback Statute liability. The important elements of these safe harbors are:

• fair market value price for the investment interest;
• investment terms that aren't related to the volume or value of an investor's referrals to the ASC, since ownership interest and buy-in terms can't vary based on past or expected use of the ASC;
• ensuring that physician-owners who refer to the ASC personally perform procedures there; and
• the one-third safe harbor rules, which require that at least one-third of the physician's medical practice income for the last year be derived from Medicare-covered ASC procedures, and (if the ASC is multi-specialty) at least one-third of such procedures be performed at the ASC.

With regard to the one-third rules, it's best for compliance purposes not to make any special exceptions for different specialties. Scrutinize investments by multi-specialty groups. It is the federal Office of Inspector General's position that indirect ownership by non-surgeons is impermissible, because it would let them profit from referrals to their surgeon-partners.

Existing surgery center owners should keep in mind that many states also regulate ASCs through certificate of need or licensure requirements. States may also have their own laws and regulations prohibiting physician self-referrals and kickbacks.

The right price
Regardless of the investor's nature, existing owners should ensure, for regulatory compliance purposes, that the purchase price is fair market value for the interest being purchased. To do this, hire a consultant to assess the purchase price. The purchase price should be paid up front to prevent the appearance of an impermissible loan, which would violate another safe harbor requirement. The financial terms should be the same for all investors. Physician-investors who'll be higher users of the ASC shouldn't get sweetheart deals or discounts.

Once you've selected the investors, a key consideration is the agreement that will govern the old and new owners of the ASC after the sale or syndication. This agreement is typically a shareholders agreement or an operating agreement that addresses decision-making authority, buy-sell terms and restrictive covenants.

Exit options
Certain events may trigger a mandatory buyout, such as a physician-owner's death, disability, retirement or relocation. Other buyouts may be triggered by such "bad conduct" as loss of license, failure to comply with the one-third safe harbor rules, conviction of a crime, exclusion from Medicare or violating a non-compete. Bad conduct typically results in a reduced buyout price. Your governing agreement should address under which conditions an owner can voluntarily leave the ASC, whether an owner can sell his interest to a third party and, if so, whether rights of first refusal or co-sale rights apply.

There are different ways to determine the buyout price, such as using an appraisal (which can be expensive and time-consuming) or by incorporating a buyout formula based on a multiple of the center's EBITDA, the owner's capital account, book value or some other financial calculation. Not all buyouts are the same. Prices commonly vary based on the reason for the buyout.

A non-compete is another important issue to consider when drafting a governing agreement. Non-competes prohibit ASC owners from owning an interest in another center within a specified geographic area and for a specified period of time. They must be reasonable in order to be enforceable.

New models
Variations on the traditional syndication-sale model continue to evolve. Recent trends include a combination of syndication and corporate party transactions, as well as non-equity joint ventures with hospitals to create hospital-based ASCs that can take advantage of higher hospital outpatient reimbursement rates. With so many legal considerations, it's important to work with experienced legal and financial advisors before you start selling equity interests in your surgery center.