We are in the midst of a trend involving the “outsourcing” of certain outpatient and ambulatory services by hospitals and health systems. These outsourcing transactions often involve partnerships with for-profit, specialty  providers, such as imaging, ambulatory surgery, home health and hospice, physical therapy or urgent care businesses—partners with focused expertise—designed to enhance service offerings to hospital outpatients. These partnerships allow hospitals to focus on what they do best—inpatient care—while at the same time freeing up capital, sharing risk (of the outpatient venture) and better managing the outsourced service offering.  Many hospitals consider the cost of giving up a certain level of revenues and control over the ventured service lines well worth the benefits gained thereby. These ventures can be true “win-wins” for all involved, but carry with them a certain business and legal complexities that need to be carefully considered.

Transaction Structure

The typical outsourced relationship structure is generally driven by the service line(s) to be ventured, preferred manner of reimbursement, how the deal is to be managed and the types of parties to be involved (e.g., will physicians be involved?). For example, imaging ventures are often structured to avoid status as independent diagnostic testing facilities and to take advantage of physician fee schedule billing. Such a structure may, or may not, however, allow for ownership of the provider entity by the hospital or the venture partner and, rather, may call for ownership by a physician organization. Ambulatory surgery centers, on the other hand, can be structured to allow for ownership by the ancillary service provider, the hospital and physicians. In addition, central to each of these structures is, generally, a long-term, incentive-based management contract with the ancillary service provider thereby leveraging that partner’s expertise in running the outpatient service.

Legal and Regulatory Issues

Carve-out ancillary deals can be riddled with legal and regulatory issues. For example, a relationship structured to take advantage of hospital rates will implicate Medicare’s provider-based billing rules, which are filled with traps for the unwary.  Transactions designed to be billed as physician practices, such as certain outpatient imaging or physical therapy arrangements, may bring into play a particular state’s corporate practice of medicine doctrines. And, structures that include referring physician investment will necessarily require compliance with Federal physician self-referral laws (Stark) and the Federal anti-kickback statute. This list is not exhaustive, but is illustrative of the need to carefully consider the intersection between desired transaction structure and reimbursement and the laws, rules and regulations implicated thereby.

Key Takeway

The burgeoning hospital ancillary services outsourcing trend remains robust. These ventures allow each partner to do what they do best: hospitals are able to focus on inpatient care and the ancillary services providers are able to bring capital and management expertise to the arrangement. However, the deals are complex and, we advise, the parties to these structures should understand how to balance their business objectives against the laws, rules and regulations implicated thereby. Seasoned health care transaction counsel should be consulted before moving too far forward with any such deal.