preparing for and defending stark law and anti-kickback...

Preparing for and Defending Stark Law and

Anti-Kickback Statute Compliance in

Hospital-Physician Transactions

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WEDNESDAY, MAY 15, 2019

Presenting a live 90-minute webinar with interactive Q&A

Kim Harvey Looney, Partner, Waller Lansden Dortch & Davis, Nashville, Tenn.

Michael E. (Mike) Paulhus, Partner, King & Spalding, Atlanta

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Deep Dive: Stark & AKS Compliance in

Hospital / Physician Transactions

May 15, 2019

PRESENTED BY:

Kim Harvey Looney Michael Paulhus

Partner, Waller Lansden Dortch & Davis LLP Partner, King & Spalding LLP

615.850.8277 404.572.2860

[email protected] [email protected]

Note: This presentation is subject to a non-exclusive license held by the American Health Lawyers Association. It was first published by the

American Health Lawyers Association in February 2019. Please contact the presenters regarding reproduction or use of this content.

Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 6

Agenda

• Exceptions and Safe Harbors that may apply (or not)

• Conceptual framework to evaluate how Stark commercial reasonableness and the facts and circumstances analysis of AKS intent overlap

• What is the difference between the case law’s concept of “hopes and expectations” of referrals and actions that cross the line?

• Discussion of practical guardrails in a transaction

• Hospital acquires a physician practice

• Hospital employs physicians prospectively post-transaction

Hypothetical Transaction


Key Stark Exceptions/AKS Safe Harbors Applicable to Hospital Transactions with Physician Groups

Relevant Issue Stark Exceptions / AKS Safe Harbors

Hospital

system’s

purchase

of the

practice

Stark: The Stark exception for isolated transactions.

42 U.S.C. § 1395nn(e)(6); 42 C.F.R. 411.357(f).

AKS: The safe harbor available for the sale of a

physician’s practice to a hospital. 42 C.F.R. 1001.952(e).

- This safe harbor is tailored very narrowly and only

applies in underserved areas.

- Safe harbor is not required.

Continued

employment of

the physicians

Stark: The Stark exception for employment arrangements.

42 U.S.C. § 1395nn(e)(2); 42 C.F.R. 411.357(c).

AKS: The bona fide employment exception and safe

harbor. 42 U.S.C. § 1320a-7b(b)(3)(B); 42 C.F.R.

1001.952(i).


• Purchase of the practice:

‒ Whether that transaction meets the terms of the

isolated transactions exception. 42 U.S.C. §

1395nn(d)(6); 42 C.F.R. 411.357(f).

‒ The indirect compensation arrangements exception

also may be applicable. 42 C.F.R. 411.357(p).

• Post-acquisition employment arrangement:

‒ Whether that arrangement meets the terms of the

bona fide employment exception. 42 U.S.C. §

1395nn(e)(2); 42 C.F.R. 411.357(c).

Applicable Stark Law Exceptions


• These Stark provisions include common

requirements:

‒ The remuneration under the arrangement must be

consistent with FMV.

‒ The remuneration is provided under an arrangement

that would be commercially reasonable even if no

referrals were made by the physician.

‒ The remuneration may not be determined in a manner

that takes into account the volume or value of any

referrals generated by the referring physician or other

business generated between the parties.

42 C.F.R. 411.357(c), (f).

Applicable Stark Law Exceptions


Stark exceptions that only apply to compensation

arrangements:

• Rental of office space

• Rental of equipment

• Personal services arrangements

• Fair market value compensation

• Indirect compensation arrangements

AKS Safe Harbors:

• Space rental

• Equipment rental

• Personal services and management contracts

Additional Stark Law Exceptions and AKS Safe Harbors


• The AKS safe harbors have never been intended to define the

only transactions that do not violate the AKS.

• The OIG adopted the AKS safe harbors at the direction of

Congress to describe precise, narrow arrangements that would

not be subject to criminal prosecution under the AKS.

• The OIG has acknowledged that the safe harbors do not

expand the scope of activities that the statute prohibits and that

it is “not possible to provide safe harbor protections for all

business arrangements that are not abusive.”

‒ 56 Fed. Reg. 35,952, 35,955 (July 29, 1991); 64 Fed. Reg.

63,518, 63,526 (Nov. 19, 1999) (“[A]s we have stated numerous

times, safe harbors do not define the scope of legal activities

under the anti-kickback statute.”).

AKS Issues in Transactions with Physician Groups


• In United States ex rel. Obert-Hong v. Advocate Health Care,

211 F. Supp. 2d 1045 (N.D. Ill. 2002), the Court approached

this analysis in a straightforward manner:

‒ “Safe harbors only become consequential if the conduct [i.e.,

acquisition of a physician practice] is otherwise proscribed. The

Anti–Kickback Act does not prohibit hospitals from acquiring

medical practices, nor does it preclude the seller-doctor from

making future referrals to the buyer-hospital, provided there are

no economic inducements for those referrals. To comply with the

statute, the hospital must simply pay fair market value for the

practice’s assets.” Id. at 1049.

AKS Issues in Transactions with Physician Groups


In the Obert-Hong case, the court clearly distinguished

between pre-acquisition payments and post-acquisition

payments/benefits provided by the hospital to the

physicians whose practice was purchased. Post-

transaction, the physicians were employees, and

benefits provided to them at that point were covered by

the bona fide employment exception.

‒ United States ex rel. Obert-Hong v. Advocate Health Care,

211 F. Supp. 2d 1045, 1049 (N.D. Ill. 2002)

AKS Bona Fide Employment Exception and Safe Harbor


Soc. Sec. Act § 1128B(b)(3)(I): “[R]emuneration between a

health center entity described under clause (i) or (ii) of

section 1905(l)(2)(B) and any individual or entity providing

goods, items, services, donations, loans, or a combination

thereof, to such health center entity pursuant to a contract,

lease, grant, loan, or other agreement, if such agreement

contributes to the ability of the health center entity to maintain

or increase the availability, or enhance the quality, of services

provided to a medically underserved population served by

the health center entity”

AKS Safe Harbor: Sale of Practice


42 C.F.R. 1001.952(e)(2): “[R]emuneration” does not include any payment made to a

practitioner by a hospital or other entity where the practitioner is selling his or her practice to

the hospital or other entity, so long as the following four standards are met:

(i) The period from the date of the first agreement pertaining to the sale to the

completion date of the sale is not more than three years.

(ii) The practitioner who is selling his or her practice will not be in a professional

position after completion of the sale to make or influence referrals to, or otherwise

generate business for, the purchasing hospital or entity for which payment may be

made under Medicare, Medicaid, or other Federal health care programs.

(iii) The practice being acquired must be located in a Health Professional Shortage

Area (HPSA), as defined in Departmental regulations, for the practitioner's specialty

area.

(iv) Commencing at the time of the first agreement pertaining to the sale, the

purchasing hospital or entity must diligently and in good faith engage in commercially

reasonable recruitment activities that:

– (A) May reasonably be expected to result in the recruitment of a new

practitioner to take over the acquired practice within a one year period and

– (B) Will satisfy the conditions of the practitioner recruitment safe harbor in

accordance with paragraph (n) of this section.

AKS Safe Harbor: Sale of Practice


• Intent under the AKS involves a facts-and-

circumstances analysis.

‒ The presence of FMV is clearly relevant, and may be

determinative.

‒ It is appropriate to consider the business rationale for

the transaction.

‒ Hopes, expectations, and beliefs regarding

downstream referrals do not establish intent and do

not violate the AKS.

AKS “Facts and Circumstances”Intent Analysis


In its 2005 Supplemental Compliance Program Guidance for Hospitals,

the OIG outlines inquiries that may be useful in analyzing an arrangement

under the anti-kickback statute. Some of this guidance is very similar to

the commentary surrounding the “commercial reasonableness” analysis

under the Stark Law and its compensation exceptions.

For example, the suggested inquiries include, “could one purpose of the

remuneration be to induce or reward the referral or recommendation of

business payable in whole or in part by a Federal health care program?”

Regarding this one purpose test, the OIG goes on to state: “Importantly,

under the anti-kickback statute, neither a legitimate business

purpose for the arrangement, nor a fair market value payment, will

legitimize a payment if there is also an illegal purpose (i.e., the

inducement of Federal health care program business).”

Stark and AKS Overlap


• However, the suggested inquiries for anti-kickback compliance

include consideration of just these two points – FMV compensation

and the legitimate business purpose of the arrangement:

‒ “Any remuneration flowing between hospitals and physicians should be

at fair market value for actual and necessary items furnished or services

rendered based upon an arm’s-length transaction, and should not take

into account, directly or indirectly, the value or volume of any past of

future referrals or other business generated between the parties.”

‒ A factor to be considered is whether the items and services obtained

from a physician are “legitimate, commercially reasonable, and

necessary to achieve a legitimate business purpose for the hospital

(apart from obtaining referrals)?” Assuming that the hospital needs the

items and services, do the items and services in the aggregate exceed

the hospital’s actual needs (apart from generating business)?

70 FR 4858, 4866 (Jan. 31, 2005) (emphasis added).

Stark and AKS Overlap


• In interpreting the “in return for/to induce” element of AKS, a number

of federal courts have adopted the “one purpose” test.

• This is mirrored in OIG’s 2005 Supplemental Compliance Program

Guidance for Hospitals.

• Under the “one purpose” test, payment for referrals does not have to

be the primary purpose of the payments received; it only had to be

one purpose (among many) of the business arrangement.

• If at least part of a hospital’s remuneration to a physician “was

‘intended to induce’ him to refer patients” to the hospital, then “the

statute was violated, even if the payments were also intended to

compensate for professional services.”

United States v. Borassi, 639 F.3d 774, 782 (7th Cir. 2011) (quoting

United States v. Greber, 760 F.2d 68, 72 (3d Cir. 1985))

“One Purpose” Test


• Hopes and expectations of referrals are legal under AKS.

• A hospital’s consideration of potential future referrals is not a violation

of the AKS if the hospital did not pay the physicians for those

anticipated referrals.

• In United States ex rel. Perales v. St. Margaret’s Hospital, 243 F.

Supp. 2d 843 (C.D. Ill. 2003), the court concluded that testimony of

the hospital’s CEO cited by the relator did not support that the

hospital paid for the value of future referrals in purchasing the

physician practices.

• Notably, the CEO “acknowledged that a desire to retain patient flow

from doctors that might take their patients to another hospital by

affiliating with a competitor was also a consideration.” Id. at 849.

Concept of “Hopes and Expectations” in Case Law


“During his deposition, Muntz [Tim Muntz, St. Margaret’s (SMH) CEO] did testify

that where a physician had always used more than one hospital, ‘part of our

planning was that some of that allegiance could switch to St. Margaret's in

that process.’ [. . . .] When the text surrounding this quotation is also

considered, it is clear that Muntz is speaking in conjunction with retaining

that physician as an employee after a practice purchase and not just with

respect to a practice purchase in and of itself. [. . . .] While Muntz

acknowledged that a desire to retain patient flow from doctors that might

take their patients to another hospital by affiliating with a competitor was

also a consideration, SMH's internal thought process that patients might

keep coming to SMH after a practice purchase and employment situation is

a far cry from an admission or even circumstantial evidence that SMH paid

for the value of future referrals in purchasing those practices.”

‒ United States ex rel. Perales v. St. Margaret’s Hospital, 243 F. Supp. 2d

843, 849 (C.D. Ill. 2003) (emphasis added).

Concept of “Hopes and Expectations” in Case Law


In United States v. McClatchey, 217 F.3d 823, 834 (10th

Cir. 2000), the Tenth Circuit approved a jury instruction

on the AKS that the defendant “cannot be convicted

merely because [he] hoped or expected or believed that

referrals may ensue from remuneration that was

designed wholly for other purposes.”

But McClatchey recognized “that it may be difficult for a

jury to distinguish between a motivating factor and a

collateral hope or expectation.” Id. at 834, n.7.

Case Law: “Hopes and Expectations” Are Legal Under AKS


• United States ex rel. Young v. Suburban Homes

Physicians, No. 14-CV-02793, 2017 WL 6625940, at *3

(N.D. Ill. Dec. 28, 2017) (granting Defendant’s motion to

dismiss, noting that “a mere hope, expectation or belief

that referrals may ensue from remuneration for legitimate

services is not a violation of the Anti-Kickback Statute”

where relators “allege no facts to elevate their claim

beyond hope or belief”).



• United States ex rel. Ruscher v. Omnicare, Inc., 663 Fed.

App’x 368, 374 (5th Cir. 2016) (“There is no AKS violation

. . . where the defendant merely hopes or expects

referrals from benefits that were designed wholly for other

purposes.”)

• United States ex rel. Williams v. Health Mgmt. Assocs.,

Tenet Healthcare, No. 3:09-cv-00130-CDL, 2014 U.S.

Dist. LEXIS 85273 (M.D. Ga. June 24, 2014) (ruling on a

motion to dismiss and citing McClatchey for the principle

that “the mere hope or expectation of future referrals may

not make an otherwise legitimate business relationship

illegal under the [AKS]”).



Important question for decision makers: can you plan for a

transaction by creating pro formas modeling future technical and

professional fee billings?

• Broadly consider: who’s on first? And when will they be involved?

• More specifically, who is involved in the discussion?

‒ Hospital strategy team

‒ Board members

‒ Executives responsible for assessing physician compensation

‒ Valuation firm

• When?

‒ Close in time to adjustments to purchase price?

Deal Planning


• Maybe . . .The responsible course is to understand, predict, and plan

for future patient volume.

• Aside from compliance with Stark/AKS (and other applicable

healthcare regulations), healthcare company decision makers must

also fulfill their respective duties under the business judgment rule.

‒ Officers, directors, managers, and other agents of a corporation may be

immune from personal liability to the corporation for losses incurred in

corporate transactions conducted within their authority and made in

good faith.

• E.g. under the CMS Conditions of Participation (CoPs) a hospital

must provide adequate licensed nursing staff to provide 24-hour care.

See 42 C.F.R. 482.23. Therefore, hospital management must

anticipate resulting referrals and new patient influx that may result

post-transaction in order to satisfy this obligation.

Deal Planning: Business Judgment Rule


• Articulate the business rationale for the transaction and

memorialize it in terms of:

‒ quality,

‒ competition,

‒ efficiency, and

‒ community need.

Practical Guard Rails in aTransaction – Do


• If relators allege no facts to elevate their claim beyond

hope or belief, there is no AKS violation.

‒ Alleging improper referrals without alleging an illegal exchange

between the parties is not sufficient for an AKS violation. (Young

at 8)

‒ Offering prompt payment discounts to induce prompt payment,

without other evidence that the discounts were to induce

referrals, is not a violation of the AKS. (Omnicare at 375)

• Parties should avoid the appearance of “FMV forum

shopping,” which occurs when they obtain multiple FMVs

or regularly change valuators; this gives the implication

that they are seeking a higher valuation.

Practical Guard Rails in aTransaction – Do


• United States ex rel. Williams v. Health Mgmt. Assocs.:

‒ Specific facts that were alleged and survived a motion to dismiss

arguing that a hospital entered into sham agreements to provide

prenatal services in order to generate referrals, including:

▪ Facility CEO stated that he expected Medicaid referrals in

exchange for the services agreement.

▪ Facility CEO demanded 30 deliveries per month from the

clinic.

▪ Facility executives sought at least 50 deliveries per month in

return for the Clinic management fee.

▪ Offers were made to pay thousands of dollars per month in

return for 30 deliveries per month.

Practical Guard Rails in aTransaction – Don’t


• Broward Health settlement:

‒ If physician referrals to the hospitals were not considered,

Broward Health compensated physicians to generate losses.

‒ Broward Health tracked and monitored the value and volume of

referrals from each physician, and deliberately planned and

budgeted for operating losses.

‒ Physicians were allowed to inflate their relative value unit (RVU)

numbers to increase their compensation.

Practical Guard Rails in aTransaction – Don’t


A recurring argument (supported by the government expert in

the Tuomey case) is that the professional fee collections of

employed physicians are not sufficient to cover their

compensation; thus, the employer entity (considered on a

stand-alone basis) suffers substantial practice losses.

Practice losses are allegedly unreasonable in the absence of

referrals for DHS within the system, and revenue generated

from referrals is assumed to cover losses suffered by

employment of the physicians.

See, e.g., United States ex rel. Drakeford v. Tuomey

Health System, 792 F.3d 364 (4th Cir. 2015).

Recurring Allegations and Issues in FCACases and Settlements


Consideration of contribution margin resulting from

downstream referrals of DHS by the employed physicians is

alleged to bolster the arguments that the compensation paid

to the physicians (for the asset purchase and/or employment)

(1) takes into accounts referrals, and (2) is not commercially

reasonable in the absence of referrals.

See, e.g., United States ex rel. Barbera v. Tenet

Healthcare, No. 97-CV-06590 (S.D. Fla.)



Tracking of referrals by employed physicians, coupled with

sanctions or threats of sanctions for not directing referrals to

the employer and its affiliates, is alleged to support the

argument that the compensation paid to the physicians takes

into account the volume and value of referrals.

See, e.g., United States ex rel. Reilly v. North Broward

Hospital District, No. 10-60590 (S.D. Fla.)



• Issue of tracking referrals and revenue by specialty

• General tracking of referrals and revenue is not, ipso facto, a violation

of AKS.

• However, once the tracking becomes specific enough that it can be

used to calculate referrals/revenue resulting from the actual

transaction, then it may raise red flags.

• Additionally, if a hospital starts tracking care line-specific collections

and professional fee payments, and collections are less than

payments → red flag

‒ E.g. Hospital acquires a practice and engages the former members of

that practice through a professional services agreement.

‒ If the hospital then calculates that collections post-transaction are less

than payments to those physicians under the PSA → implication is that

the hospital is receiving some other benefit (i.e. referrals) and is

compensating the physicians to account for those referrals.

Post-Transaction Considerations


• AKS safe harbors generally are tailored narrowly.

• As OIG has stated, safe harbors were not designed to accommodate

all business arrangements that are not abusive of the AKS.

• Intent under the AKS involves a facts-and-circumstances analysis.

‒ The presence of FMV is clearly relevant.

‒ It is critical to consider and document the business rationale for the

transaction.

‒ Hopes, expectations, and beliefs regarding downstream referrals do not

establish intent and do not violate the AKS.

▪ Devil is often in the written file about what was said and by whom

• The Stark law exceptions of isolated transactions and employment

must be met.

Summary: AKS/Stark Issues in Transactions with Physician Groups


Key Stark Exceptions/AKS Safe Harbors Applicable to Hospital Transactions with Physician Groups

Relevant Issue Stark Exceptions / AKS Safe Harbors

Hospital

system’s

purchase

of the

practice

Stark: The Stark exception for isolated transactions.

42 U.S.C. § 1395nn(e)(6); 42 C.F.R. 411.357(f).

AKS: The safe harbor available for the sale of a

physician’s practice to a hospital. 42 C.F.R. 1001.952(e).

- This safe harbor is tailored very narrowly and only

applies in underserved areas.

- Safe harbor is not required.

Continued

employment of

the physicians

Stark: The Stark exception for employment arrangements.

42 U.S.C. § 1395nn(e)(2); 42 C.F.R. 411.357(c).

AKS: The bona fide employment exception and safe

harbor. 42 U.S.C. § 1320a-7b(b)(3)(B); 42 C.F.R.

1001.952(i).


Questions


Kim Harvey Looney Michael Paulhus

Partner, Waller Lansden Dortch & Davis LLP Partner, King & Spalding LLP

615.850.8277 404.572.2860

[email protected] [email protected]

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