This is the first in a six-part series on incentive design, deal structure, and how these issues surface in transactions and enforcement. Other relevant topics will be discussed in our upcoming presentation, Risks to Keep in Mind When Wearing the Ownership Hat, to be given at the American Alliance of Orthopaedic Executives on Tuesday, April 21.

Most physician organizations use structures they have seen before:

• ASC joint ventures
• Management agreements
• Co-management arrangements
• Productivity-based compensation

They appear familiar. Advisors reference similar models. Private equity buyers see versions of them across platforms.

Yet familiarity does not answer the real question: how the structure operates once incentives affect behavior.

Where Market Practice Falls Short

In deals and joint ventures, justification often sounds routine:

• Other groups use this model.
• Returns are within market range.
• The management fee is supported by a valuation.
• The structure mirrors comparable transactions.

Those points do not resolve risk.

Buyers, regulators, and plaintiffs’ lawyers focus on:

• Who receives economic benefit.
• What conduct the economics encourage.
• Whether compensation or distributions move with referral activity.
• How the arrangement functions in day-to-day operations.

If the economics track referrals in substance, market prevalence does not change the analysis.

The Operational Test

A structure that looks acceptable in a presentation can function differently once implemented.

Three recurring areas deserve attention.

1. Equity in Joint Ventures

Physicians invest in ASCs and ancillary ventures based on capital contributions and business risk. That is straightforward.

Over time, different questions arise:

• Do distributions reflect overall performance, or individual referral patterns?
• Is there pressure, formal or informal, to direct cases internally?
• Are new investors selected based on business need, or referral volume?

These issues rarely appear in the operating agreement. They appear in behavior.

If returns depend in practice on referral patterns, the exposure becomes obvious.

2. Management and Co-Management Agreements

Management fees are typically supported by valuation analysis. That step matters. But it does not end the inquiry.

Boards should understand:

• What services are provided in exchange for the fee.
• Whether compensation changes in ways that follow clinical volume.
• Whether overlapping ownership creates economic incentives tied to referrals.

In diligence, buyers trace ownership interests and payment flows. If the structure rewards referrals, the issue surfaces quickly.

3. Compensation Structures Near the Line

Productivity-based compensation is common in orthopedics and many other medical specialties.

The critical question is how the model operates.

• Are physicians paid for personally performed work only?
• Do adjustments increase compensation when cases are sent to affiliated facilities?
• Are there expectations about keeping cases within the system?

These details are often absent from the written formula but visible in practice and internal discussions.

How This Surfaces in Transactions

During the sales process, buyers evaluate two points:

1. Whether the structure fits within a statutory exception or safe harbor.
2. Whether the economic reality reflects a legitimate business purpose.

When structure and behavior diverge, the consequences are predictable:

• Enhanced diligence focused on referral data.
• Requests for internal communications about joint ventures.
• Tighter representations and indemnities.
• Pricing adjustments and larger escrows.

The transaction may still close, but the terms change.

Common structures do not avoid these outcomes. Clear structure and disciplined operation reduce risk.

Governance as a Control Function

Groups that avoid preventable issues tend to follow basic discipline:

• Document the business purpose for ownership and compensation decisions when they are made.
• Separate capital decisions from referral expectations in both structure and conduct.
• Review joint ventures periodically to confirm they operate as designed.
• Ensure the board understands actual economic flows, not just contract language.

This work is operational. It requires consistency.

Closing Observation

When evaluating a deal or joint venture, start with how the arrangement works in practice. Follow the money. Identify what conduct the economics encourage.

Routine structures receive close review once a transaction begins. Sound design and disciplined operation make that review manageable.

Next: how compensation design creates risk when incentives begin to track referrals.