The Office of Inspector General and the Department of Justice have taken narrow views views concerning the application of the Medicare and Medicaid anti-kickback statute, 42 U.S.C. 1320a-7b(b), to certain types of situations involving the acquisition of physician practices. In these situations, the physician practices would be acquired either by a hospital or by another entity which would also acquire one or more hospitals (and potentially other health care providers as well). The physicians from these practices would continue to treat patients and be affiliated (through an employment relationship or otherwise) with the hospital or other entity which acquired their practices. The acquisition of the physician practices could arise through a number of different methods or arrangements and the resulting or ensuing relationships or affiliations could vary. However, the end result in each case would be the common ownership or control of both hospitals and physician practices by a single entity. We are responding to your inquiry in general terms and not in reference to any specific fact pattern(s).

Typically, in the case of the acquisition of a physician practice by a hospital or other entity, there is a large, up front payment to the physician, often of many hundreds of thousands of dollars or more. This sum is asserted to be payment for the purchase of the assets of the practice. There are also payments made to the physician subsequent to the sale of the practice where the physician becomes employed by the hospital or entity or otherwise enters into a contract to provide services to patients. These payments are asserted to be compensation for services rendered to patients by the physician.

The anti-kickback statute provides for penalties against anyone who knowingly and willfully solicits, receives, offers or pays remuneration, in cash or in kind, to induce or in return for:

A. referring an individual to a person for the furnishing or arranging for the furnishing of any item or service payable under the Medicare or Medicaid programs, or
B. purchasing, leasing or ordering or arranging for or recommending purchasing, leasing, or ordering any good, facility, service or item payable under the Medicare or Medicaid programs.

Persons who violate the anti-kickback statute are subject to criminal penalties and/or exclusion from participation in the Medicare and Medicaid programs. The anti-kickback statute sets forth certain specific exceptions to the general prohibition against remuneration, and specifically authorizes this Department to promulgate, by regulation, additional payment practices (known as "safe harbors") which will be immune from prosecution. The Department published "safe harbor" regulations (42 C.F.R. 1001.952, 56 Fed. Reg. 35,952) setting forth regulatory exceptions to the anti-kickback statute. Among the safe harbors included in the regulations were provisions relating to employees and sale of practitioner practices.

The OIG has published “significant concerns” under the anti-kickback statute. “Frequently, hospitals seek to purchase physician practices as a means to retain existing referrals or to attract new referrals of patients to the hospital. Such purchases implicate the anti-kickback statute because the remuneration paid for the practice can constitute illegal remuneration to induce the referral of business reimbursed by the Medicare or Medicaid programs.”

In particular, the OIG expressed concern that the remuneration paid in connection with or as a result of the acquisition of a physician's practice could serve to interfere with the physician's subsequent judgment of what is the most appropriate care for a patient. The remuneration could result in the delivery of inappropriate care to Medicare or Medicaid beneficiaries by inducing the physician to utilize the affiliated hospital rather than another hospital or less costly facility which may provide better or more appropriate care. It could also have the effect of inflating costs to the Medicare or Medicaid programs by causing physicians to overuse inappropriately the services of a particular hospital (or other affiliated provider). This higher cost could occur directly because of the higher rates of that hospital or the ordering of unnecessary serviced or indirectly as a result of lessened competition in the marketplace. Finally, these arrangements could significantly interfere with a beneficiary's freedom of choice of providers. All these considerations are the very abuses that the antikickback statute was designed to prevent.

Under the anti-kickback statute, payment could constitute illegal remuneration. This is because under the anti-kickback statute, the statute is violated if "one purpose" of the payment is to induce the referral of future Medicare or Medicaid program business. United States v. Greber, 760 F.2d 68, 69 (3rd Cir. 1985) cert. denied, 474 U.S. 988 (1985); United States v. Kats, 871 F.2d 105, 108 (9th Cir. 1989). Thus, it is necessary to scrutinize the payments (including the surrounding facts and circumstances) to determine the purpose for which they have been made.

As part of this undertaking, it is necessary to consider the amounts paid for the practice or as compensation to determine whether they reasonably reflect the fair market value of the practice or the services rendered, in order to determine whether such items in reality constitute remuneration for referrals. Moreover, to the extent that a payment exceeds the fair market value of the practice or the value of the services rendered, it can be inferred that the excess amount paid over fair market value is intended as payment for the referral of program-related business. United States v. Lipkis, 770 F.2d 1447 (9th Cir. 1985).

When considering the question of fair market value, the OIG would note that the traditional or common methods of economic valuation do not comport with the prescriptions of the anti-kickback statute. Items ordinarily considered in determining the fair market value may be expressly barred by the anti-kickback statute's prohibition against payments for referrals. Merely because another buyer may be willing to pay a particular price is not sufficient to render the price paid to be fair market value. The fact that a buyer in a position to benefit from referrals is willing to pay a particular price may only be a reflection of the value of the referral stream that is likely to result from the purchase.

Accordingly, when attempting to assess the fair market value (as that term is used in an anti-kickback analysis) attributable to a physician's practice, it may be necessary to exclude from consideration any amounts which reflect, facilitate or otherwise relate to the continuing treatment of the former practice's patients. This would be because any such items only have value with respect to the on-going flow of business to the practice.

According to the OIG, it is doubtful whether this value may be paid by a party who could expect to benefit from referrals from that ongoing practice. Such amounts could be considered as payments for referrals. Thus, any amount paid in excess of the fair market value of the hard assets of a physician practice would be open to question. Similarly, in determining the fair market value of services rendered by employee or contract physicians, it may be necessary to exclude from consideration any amounts which reflect or relate to past or future referrals or any amounts which reflect or are affected by the expectation or guarantee of a certain volume of business (by either the physician or the hospital).

Martin Merritt maintains a searchable database of federal court opinions, OIG and HHS rules and regulations, as well as Special Fraud Alerts, Letter Opinions and other pronouncements on allowable Sale of Practice arrangements. He is available for referrals or consultation in conjunction with business lawyers and professionals who simply need a Health Law consultation to facilitate the transaction.