Preparing for and Defending Stark Law and
Anti-Kickback Statute Compliance in
Hospital-Physician Transactions
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
The audio portion of the conference may be accessed via the telephone or by using your computer's
speakers. Please refer to the instructions emailed to registrants for additional information. If you
have any questions, please contact Customer Service at 1-800-926-7926 ext. 1.
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
Tips for Optimal Quality
Sound Quality
If you are listening via your computer speakers, please note that the quality
of your sound will vary depending on the speed and quality of your internet
connection.
If the sound quality is not satisfactory, you may listen via the phone: dial
1-866-755-4350 and enter your PIN when prompted. Otherwise, please
send us a chat or e-mail [email protected] immediately so we can address
the problem.
If you dialed in and have any difficulties during the call, press *0 for assistance.
Viewing Quality
To maximize your screen, press the F11 key on your keyboard. To exit full screen,
press the F11 key again.
FOR LIVE EVENT ONLY
Continuing Education Credits
In order for us to process your continuing education credit, you must confirm your
participation in this webinar by completing and submitting the Attendance
Affirmation/Evaluation after the webinar.
A link to the Attendance Affirmation/Evaluation will be in the thank you email
that you will receive immediately following the program.
For additional information about continuing education, call us at 1-800-926-7926
ext. 2.
FOR LIVE EVENT ONLY
Program Materials
If you have not printed the conference materials for this program, please
complete the following steps:
• Click on the ^ symbol next to “Conference Materials” in the middle of the left-
hand column on your screen.
• Click on the tab labeled “Handouts” that appears, and there you will see a
PDF of the slides for today's program.
• Double click on the PDF and a separate page will open.
• Print the slides by clicking on the printer icon.
FOR LIVE EVENT ONLY
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
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 7
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).
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 8
• 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
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 9
• 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
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 10
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
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 11
• 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
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 12
• 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
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 13
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
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 14
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
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 15
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
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 16
• 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
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 17
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
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 18
• 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
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 19
• 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
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 20
• 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
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 21
“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
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 22
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
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 23
• 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”).
Case Law: “Hopes and Expectations” Are Legal Under AKS
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 24
• 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]”).
Case Law: “Hopes and Expectations” Are Legal Under AKS
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 25
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
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 26
• 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
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 27
• 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
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 28
• 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
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 29
• 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
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 30
• 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
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 31
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
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 32
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.)
Recurring Allegations and Issues in FCACases and Settlements
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 33
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.)
Recurring Allegations and Issues in FCACases and Settlements
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 34
• 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
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 35
• 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
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 36
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).
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 37
Questions
Deep Dive: Stark & AKS Compliance in Hospital / Physician Transactions 38
Kim Harvey Looney Michael Paulhus
Partner, Waller Lansden Dortch & Davis LLP Partner, King & Spalding LLP
615.850.8277 404.572.2860