Know the Federal Laws that Apply to Buying and Selling Oncology Practices

Wayne Kuznar

February 2012, Vol 2, No 1 - Cancer Center Business Summit

Chicago, IL—Financial relationships between hospitals and physicians after acquisition of practices must comply with the federal antikickback statute and physician self-referral laws (Stark Law).

Legal and regulatory considerations in practice acquisitions were offered by Alan H. Einhorn, of counsel with Foley and Lardner, LLP, Boston, at the 2011 Cancer Center Business Summit.

Awareness of antikickback statutes and safe harbors is a must. Anti­kickback statutes prohibit the knowing and willful payment to induce one party to refer to another for items and services covered by a federal healthcare program. Penalties can be up to $25,000 for each violation.

Safe harbors can provide immunity for certain practice acquisition arrangements, Mr Einhorn said, but most practice acquisitions are not safe-harbored. In the case of hospitals acquiring practices, safe harbors are sales completed within 3 years, where a seller is not in a position to refer after the sale completion and there are diligent and good faith efforts by the purchaser to recruit a successor within 1 year to take over the practice.

Failure to satisfy a safe harbor does not mean that the statute is violated. If a safe harbor is not met, the question is whether the purchase price is a disguised kickback from the buyer (overpayment) or the seller (underpayment) to induce referrals after the sale.

“Valuation is key,” said Mr Einhorn. “To help negate any inference of improper intent, the parties should obtain an independent fair market value appraisal.”

Fair market value is defined as the value in arm’s-length transactions consistent with the general market value. This value is the price that an asset would bring as the result of bona fide bargaining between well-informed buyers and sellers who are not otherwise in a position to generate business for the other party at the time of the acquisition or service agreement.

The 3 approaches to valuing physician practices are market, cost, and income, according to James R. Hills, CPA/ABV, Partner at Health-Care Appraisers, in Chicago. All 3 are valid, Mr Hills said, but a market approach is generally of little value because of the lack of comparability and reliable data. A cost approach restates the entity’s balance sheet, specifically the identified intangible assets, such as the workforce in place. An income approach discounts (or capitalizes) expected future cash flows to the buyer.

The Office of the Inspector General (OIG) views with suspicion payments for intangibles that reflect past or future referrals or are affected by the expectation of a certain volume of business. In a letter concerning the application of Medicare and Medicaid antikickback statute 42 U.S.C. 1320a-7b(b), the OIG noted that specific items that could raise a question as to whether a payment reflects the value of a referral stream includes payment for:

  1. 1. Goodwill
  2. 2. Value of ongoing business unit
  3. 3. Covenants not to compete
  4. 4. Exclusive dealing agreements
  5. 5. Patient lists or patient records.

The Stark Law
The Stark Law prohibits a physician from making referrals for Medicare-reimbursable designated health services to an entity with which he or she (or an immediate family member) has a financial relationship, unless an exception applies.

Penalties for Stark violations can be payment denial or recoupment by Medicare and Medicaid, as well as civil monetary penalties of up to $15,000 per the prohibited service or billing.

Financial relationships include both ownership/investment interests and compensation relationships.

If a physician has a financial relationship with a designated health services entity, he or she cannot refer to it for Medicare-covered designated health services, and the entity cannot bill for the referred services, unless an exception applies.

“Acquisitions of physician practices create a financial relationship that will prohibit referrals to the hospital buyer, unless a Stark exception applies,” Mr Einhorn said.

One requirement for an isolated transaction exception is that aggregate payments be fixed in advance and the amount of remuneration is consistent with fair market value of the transaction, similar to the valuation issues under the antikickback statute. Furthermore, “remuneration can’t take into account volume,” Mr Einhorn said.

Remuneration must be commercially reasonable and absent of any referrals. Only Stark-excepted transactions and commercially reasonable postclosing adjustments can occur for 6 months after the acquisition.

Any associated transactions, such as employment, consultations, or lease agreements, must also meet a Stark exception. “All rely heavily on fair market value,” Mr Einhorn added.