Hospital Purchase of Medical Practice
The hospital purchase of a medical practice is a complex endeavor that varies with the size and specialty of the practice. There are a number of ways to structure the transaction:
(i) The hospital may acquire the assets of the practice, retaining the physicians and staff as employees of the practice, with the practice retaining its identity as a separate legal entity;
(ii) The hospital acquires the assets of the practice, retaining the physicians and staff as employees of the hospital, and the practice ceases to exist; and
(iii) A hybrid model, where the staff becomes employees of the hospital, but the physicians remain with the practice which retains a separate existence.
Regulatory compliance issues must be addressed when structuring the sale of a medical practice including compliance with federal and state anti-kickback laws, self-referral legislation, anti-trust laws (not discussed herein), as tax considerations.
Anti-Kickback Statute
The federal Anti-Kickback Statute, 42 U.S.C. §1320-a7(b) prohibits payments or remuneration to any person in return for the referral of patients covered in whole, or in part, by Medicare or Medicaid.
The OIG has established 23 safe harbors under this statute, several of which are applicable to the sale of medical practices: (i) the equipment rental or office space safe harbor; (ii) the employment safe harbor; (iii) the personal services safe harbor; and (iv) the sale of physician practices to hospitals in underserved areas safe harbor.
It is important to note that failure to comply with a safe harbor doesn’t necessarily mean that the transaction violates the Statute. Instead, each transaction is subject to examination, on a case-by-case basis, to determine whether any portion of the payment was disguised as remuneration for the inducement of referrals.
STARK
The Stark Law (“STARK”) prohibits the making of referrals or the billing for payment for certain designated health services (“DHS”) covered by Medicare or Medicaid if there is a financial relationship between the referring physician (or an immediate family member of the physician) and the entity receiving payments for DHS, unless the relationship comes within one of the many enumerated exceptions. Unlike the Anti-Kickback Statute, STARK requires strict compliance (“strict liability”) with each exception. Any arrangement that does not meet each element of an exception constitutes a violation of STARK.
In a practice acquisition, payment of the purchase price creates a “financial relationship” between a physician-seller and the hospital-buyer. Therefore, any DHS referrals between the target medical practice and the hospital poses a potential STARK violation. While physician services are not DHS under STARK, it is important to consider whether such services are involved, either from the seller or buyer’s perspective, in order avoid penalties under the law.
Fair Market Value v. Commercial Reasonableness
Fair market value (“FMV”) is a business valuation concept that has significant implications for transactions involving healthcare providers. FMV is the price at which property would change hands between a hypothetical willing and able buyer, and a hypothetical willing and able seller, acting at arms-length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.
Commercial reasonableness is a separate analysis beyond that of fair market value. Several exceptions to the general prohibition under STARK require that arrangements be “commercially reasonable.” Whether a transaction is commercially reasonable requires a look into the underlying economics of the transaction, without taking into account the potential for referrals between the parties.
An arrangement will be considered ‘‘commercially reasonable,’’ in the absence of referrals, if the arrangement would make commercial sense if entered into by a reasonable entity of similar type and size and a reasonable physician (or family member or group practice) of similar scope and specialty.
Tax Exempt Issues
In a practice acquisition, either the seller or the buyer or, in rare instances, both may be tax exempt under Section 501(c)(3) of the Internal Revenue Code. To qualify for 501(c)(3) status, the agency must be organized and operated exclusively for exempt purposes, and none of its earnings may inure to any private shareholder or individual.
Accordingly, a non-for-profit hospital may acquire the private practice of a physician provided that such acquisition is consistent with the charitable purposes of the hospital, such as providing a community benefit, and the hospital pays no more than fair market value for the practice. Compliance with tax exempt requirements is essential to avoid losing 501(c)3 status as a result of the transaction.
Recommendations
Despite valiant attempts to remain compliant, copies of relevant documents should be retained by both parties to the acquisition in the unlikely event that the transaction is scrutinized by the OIG or IRS. Relevant documents include: (i) the Asset Purchase Agreement and Employment Agreements; (ii) copies of valuation reports performed by independent appraisers describing the methodology used to determine fair market value; (iii) all financial records indicating the amount of remuneration, the method of payment, and whether the amount was based on value or volume of referrals; and (iv) any documents which satisfy the requirements of an Anti-Kickback safe harbor, STARK exception, or 501(c)3 exemption.
Leslie Tar, Esq., LLM*
*Florida Health Law Attorneys, Florida Medical Board Defense Attorneys, Florida Medical License Defense Attorneys
* Office location in Port Charlotte, Florida with service to Sarasota, Ft Myers, Naples, Tampa, Orlando, Vero Beach, West Palm Beach, Boca Raton, Ft Lauderdale, Miami, Gainesville, Tallahassee, Pensacola and throughout Florida and nationally.