will form a new entity and purchase the assets of the ASC or purchase own- ership interests in the existing entity. Both liability and licensing concerns take precedence in this decision, as buying into an existing entity results in the PE assuming the liabilities of the ASC. It may be difficult, how- ever, and in some states prohibitive, for the ASC to obtain a new license. In those instances, a change of ownership application to the licensing department might be the easier path.

In connection with the purchase agreement, selling owners should expect restrictive covenants prohibit- ing them from owning or operating a competing facility within the catch- ment area. Since the selling physicians will remain owners, a new shareholder or operating agreement will be negoti- ated and drafted. This agreement will likely give significant decision-making authority to the PE firm. It will fur- ther restrict transferability of the phy- sicians’ ownership interests, set forth when their interest can be redeemed and impose expanded non-compete restrictions. Physicians also will be expected to make a commitment to the ASC of up to 10 years, with penalties for early withdrawal. Frequently, a PE firm will request or require that most of the current ASC owners roll over part of the proceeds or ownership interests into a new entity. Rollover equity may result in a sec- ond “pay day” for physicians, since a PE firm will look to sell its portfolio in about five years for a significant profit.

Legal Considerations in PE Transactions

State licensure and certificate of need regulations govern the ownership of ASCs. Compliance with these laws is essential to maintaining an ASC’s license in good standing. The ASC will need to navigate the notice and approval process of the applicable department for

to the entity and are not in a position to make or influence referrals to the ASC. Oftentimes, PE firms do, in fact, pro- vide management services or are con- sidered referral sources and, thus, their ownership in the ASC prevents physi- cians from meeting the AKS safe har- bor. Failure to meet the safe harbor is not fatal to an AKS analysis, but own- ership must be structured carefully to avoid a violation.

any change of ownership or new license as a result of a PE transaction. The ownership of, and referral to,

an ASC implicates the federal Anti- Kickback Statute (AKS), and likely any state counterpart. The AKS pro- vides “whoever knowingly and will- fully solicits or receives [or offers or pays] any remuneration (including any kickback, bribe or rebate) directly or indirectly, overtly or covertly, in cash or in kind—(i) in return for referring an individual to a person for the fur- nishing or arranging for the furnishing of any item or service for which pay- ment may be made in whole or in part under a Federal health care program . . . shall be guilty of a felony and upon conviction thereof, shall be fined not more than $25,000 or imprisoned for not more than five years, or both.” If an investor meets the AKS safe

harbor for ASCs, then any return on his or her investment will not be deemed impermissible remuneration. The safe harbor, however, only protects arrangements where the owners are physicians, group practices or own- ers who are not employed, are not in a position to provide items or services


Corporate practice of medicine (CPOM) laws state that it is illegal for a person or entity to employ a physi- cian or practice medicine and surgery without first having obtained a medi- cal license. Most state CPOM laws, however, permit ownership by lay persons of licensed facilities, such as ASCs. If an exception does not apply, the PE firm will usually form a man- agement company to provide space, equipment, non-clinical personnel and supplies to the ASC in exchange for a significant fee. Where physician owners get roll-

over equity in the ASC or management company, the rollover of proceeds or ownership is subject to both state and federal securities laws and regulations.

The Future of PE Investment It is likely that PE investment in ASCs will continue in 2020. PE has invested in many sectors of the healthcare field, including physician practices in oph- thalmology, dermatology, urology, urgent care and dentistry; lab and tox- icology companies; health IT compa- nies and behavioral health. As health- care spending continues to increase and more currently hospital-based pro- cedures are shifted to the ASC setting, PE’s interest in investing in ASCs is unlikely to slow down.

Michael F. Schaff and Alyson M. Leone are attorneys at Wilentz, Goldman & Spitzer, P.A., in Woodbridge, New Jersey. Write them at and

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