LOCALIZACION 1 Macro localización

At one point, it was common for hospitals to permit third parties, including physician owned entities, to manage hospital departments or hospital based ambulatory surgery centers. With regard to physician o this has become significantly less common as a result of a variety of rulings enactments in various sectors, including GCM 39,862, the Stark Act, and Revenue Procedure 97-13.92

To permit physician management, it is critical that valid purposes be developed and be supportable as to why a physician owned entity will serve as the manager. First, for example, the often touted expertise of physicians in management may be viewed as an excuse to share revenues or induce physician referrals. Second, it is unclear as to whether management services provided by a physician owned manager that is not a group practice qualify under the Stark Act or HCFA proposed Stark regulations. Third, the amounts payable should equate to fair market value. Particularly in the physician context, although industry custom may indicate other- wise, payments should not be tied to the value of business or profits. Fourth, the agreement should comply with Revenue Procedure 97-13

90 _{See Id. at 5333.4.}

91 _{See Priv. Ltr. Rul. 98-22-004 (May 29,1998) and Arthur DeVaux, MSO Loses Tax-Exempt Status, Health}

Care Monthly (Oct. 1998), for a more complete discussion of these issues.

if the hospital or provider has been financed with tax-exempt financing.-Revenue Procedure 97-13, in short, dictates as follows:

 Not greater than 10% of an issue may be used for private business use.93  Certain management and use agreements will be deemed to create private

business use.94

The compensation requirements of Revenue Procedure 97-13 are as follows:

The contract must provide for reasonable compensation for services rendered with no compensation based, in whole or in part, on a share of net profits from the operation of the facility.95 _{. . . [R]eimbursement of the service provider for actual}

and direct expenses paid by the service provider to unrelated parties is not by itself treated as compensation.96

To be permissible under Revenue Procedure 97-13, the management contract must be described in section 5.03(1), (Z), (3), (4), (5), or (6) of this Revenue Procedure.97 These are more specifically indicated as follows:

95 percent periodic fixed fee arrangements. At least 95 percent of the compensation for services for each annual period during the term of the contract is based on a periodic fixed fee. The term of the contract, including all renewal options, must not exceed the lesser of 80 percent of the reasonably expected useful life of the financed property and 15 years. For purposes of this section 5.03(1), a fee does not fail to qualify as a periodic fixed fee as a result of a one time incentive award during the term of the con- tract under which compensation automatically increases when a gross revenue or expense target (but not both) is reached if award is equal to a single, stated dollar amount.98

80 percent periodic fixed fee arrangements. At least 80 percent of the compensation for services for each annual period during the term of the contract is based on a periodic fixed fee of the contract, including all renewal options, must not exceed the lesser of 80 percent of the reasonably expected useful life of the financed property and 10 years. For purposes of this section 5.03(2), a fee does not fail to qualify as a periodic fixed fee as a result of a one time incentive award during the term of the con- tract under which compensation automatically increases when a gross revenue or expense target (but not both) is reached if that award is equal to a single, stated dollar amount.99

93 _{Id. at §2.01(1).} 94 _Id. 95 _{Id. at §2.01(6).} 96 _{Id. at §2.01(7)(d).} 97 _{Id. at 55.03.} 98 _{Id. at §5.03(1).} 99 _{Id. at §503.(2).}

Percentage of revenue or expense fee arrangements in certain 2 year contracts. All the compensation for percentage of fees charged or a combination of a per unit fee and a percentage of revenue or expense fee.-During the start u riod, however, compensation may be based on a percentage of either gross revenues, adjusted gross revenues, or expenses of a facility. The term of the contract, including renewal options, must not exceed 2 years. The contract must be terminable by the qualified user on reasonable notice, without penalty or cause, at the end of the first year of the contract term. This section 5.03(6) applies only to:

(a) Contracts under which the service provider primarily provides services to third parties (for example, radiology services to patients); and

(b) Management contracts involving a facility during a start up period for which there have been insufficient operations to establish a reasonable estimate of the amount of the annual gross revenues and expenses (for example, a contract for general management services for the first year of operations).100

Revenue Procedure 97-13 further states:

Management contract means a management, service, or incentive payment contract between a qualified user and a service provider under which the service provider provides services involving all, a portion of, or any function of, a facility. For example, a contract for the provision of management services for an entire hospital, a contract for management services for a specific department of a hospital, and an incentive payment con- tract for physician services to patients of a hospital are each treated as a management contract.101

Periodic fixed fee means a stated dollar amount for services rendered for a specified period of time. For example, a stated dollar amount per month is a periodic fixed fee. The stated dollar amount may automatically increase according to a specified, objective, external standard that is not linked to the output or efficiency of a facility. For example, the Consumer Price Index and similar external indices that track increases in prices in an area or increases in revenues or costs in an industry are objective external standards. Capitation fees and per unit fees are not periodic fixed fees.102

The more the agreement articulates a fixed price for services, the less concern the IRS has that the agreement provides private parties with control and use of the assets.

Concerns for turning over facility operations to non-physician-owned management companies are similar, but certain differences exist. First, Stark concerns should not be an

100 _{Id. at §5.03(6).}

101 _{Id. at 53.03; see also Income Tax Regs. 51.141-3(b)(4)(ii) and 1.145-2.} 102 _{Id. at 3.05.}

issue. Second, fraud and abuse issues should not be a concern as long as the manager does not provide marketing or referral services. The agreement should state that these are not the roles of the manager. The management contract should still be structured such that it does not share profits and such that it complies with Revenue Procedure 97-13. Moreover, efforts should be made to ensure that owners and executives of the manager do not have inside or other relationships with the tax-exempt entity.

The third-party management of the ASC joint venture should be carefully structured to assure that (1) it does not prevent the hospital from ensuring that the ASC serves community purposes (i.e., it should have enough control over the exercise of manager powers and decisions), (2) it should be for a reasonable time period, (3) it should be at fair market value. A higher level of concern presents itself where physician managers will serve as the managers of the joint venture but do not have demonstrated capacity or expertise to provide management services to the ASC.