By Hal Katz and Jonathan Porter, Husch Blackwell
Engaging in management and investor conversations about maintaining and growing a business is critical, no matter the industry. Whether you’re discussing normal business sustainability, organic growth, or contemplating a sale, these discussions become more complex when physicians are the revenue generators and the industry is healthcare. These conversations must be handled carefully to comply with the spirit and strict requirements of healthcare fraud and abuse laws. To ensure your discussions are both productive and compliant, it’s essential to navigate these complex regulations effectively.
Why It Matters:
Stark Law Compliance: The Stark Law prevents physicians from referring patients for certain designated health services payable by Medicare to an entity with which they (or an immediate family member) have a financial relationship, unless specific exceptions apply. One key requirement is that any transaction must be at “fair market value” and not take into account the volume or value of referrals. The transaction must also be commercially reasonable and must not intend to induce referrals. Understanding and adhering to these rules is critical to avoid severe penalties.
Anti-Kickback Statute Compliance: The Federal Anti-Kickback Statute (AKS) prohibits offering, paying, soliciting, or receiving any form of remuneration in exchange for referrals or to induce the generation of business. This statute ensures that financial incentives don’t influence medical decisions, keeping the focus on patient care rather than financial gain. Any suggestion that the value of a healthcare entity is tied to referral patterns could be viewed as a violation of the AKS, leading to potential criminal and civil penalties.
How to Stay Compliant:
- Stick to Fair Market Value: In any transaction context, ensure that all business terms are based on objective metrics such as earnings, comparable transactions, and industry benchmarks. Avoid any suggestion that the value of the transaction depends on or will change based on the volume or value of expected referrals from the physician owners.
- Document Valuation Processes: Keep thorough documentation of how fair market value was determined, including the methodology and sources used. This documentation should clearly show that no referral-based considerations influenced the transaction and that all parties acted in compliance with both Stark Law and AKS requirements.
- Be Intentional with All Communications: Be formal and thoughtful when communicating the financial performance of the business and its affiliated physicians. These communications should come from management and follow normal communication channels. Avoid singling out individual physicians for not meeting financial targets, as this could be seen as pressuring them to increase referrals. Instead, focus on group-level performance and metrics unrelated to referrals.
- Use Compliant Language: When discussing financial performance or providing updates intended to motivate behavior, always use language that aligns with regulatory requirements. Focus on objective performance metrics, such as patient satisfaction, clinical outcomes, and operational efficiency, rather than referral volumes.
Important Note: Be cautious not to single out individual physicians who fall below targeted or budgeted numbers of procedures or encounters. This could be seen as pressuring them to increase their referral volumes, which may create compliance risks under the AKS. Instead, focus on group-level performance and other non-referral-related metrics.
Example: Instead of saying, “Dr. Smith, your surgeries are below target, and we need to see those numbers improve,” consider saying, “The surgery center is below its revenue target for the current measurement period and has capacity for more procedures. We are working with the ASC’s physicians to identify how we can best support their patients’ needs for scheduling procedures at times most convenient for both the physician and the patient.”
Compliant vs. Non-Compliant Communication:
Compliant
Discuss: Valuation/compensation based on the practice/facility’s historic earnings and market comparisons.
Discuss: The target’s current income, quality metrics, and growth potential based on industry standards and historical performance.
Discuss: The importance of increasing capacity, patient satisfaction, and clinical outcomes in driving the success of the practice or business.
Discuss: The opportunity to invest in new medical equipment or service lines, with the corresponding need to support it with internal referrals where medically appropriate and in the patient’s best interest.
Non-Compliant
Avoid: Linking valuation or compensation to expected increases in referrals, e.g., “We may be able to get/pay more if they increased their referrals to the business/practice.”
Avoid: Statements like, “If the spine physicians increase their cases by 10%, the buyer will increase its purchase price.”
Avoid: Suggesting that focusing on increasing referral volumes will lead to higher financial rewards or enhanced valuations.
Avoid: Implying that the primary goal of expanding services is to generate more revenue for the affiliated physicians.
Practical Examples:
- For Physicians: Avoid suggesting that increasing referrals will improve the value of a practice, hospital, or surgery center. For example, do not say, “We need you to bring more of your patients here so that we can increase its valuation.”
- For Negotiations: When discussing the purchase or sale of a practice, hospital, or surgery center, focus solely on current financial metrics, projections based on historic performance, and market comparables. Avoid suggesting that the valuation should be adjusted based on expected increases in referrals. For instance, do not say, “Our facility is worth more because we anticipate increased referrals.”
- For Internal Discussions: Let the management team initiate and lead conversations about valuations and expected financial performance. Discourage, if not restrict entirely, informal conversations (e.g., text messages or casual meetings) among physician owners regarding financial performance. Do not base discussions on potential referral increases. For example, avoid statements like, “Our distributions will all go up if you send all your cases to the group and don’t send them to anyone else in the community.”
In Summary: Ensure all discussions and communications about valuations are grounded in objective financial metrics and market data, free from any pressures or incentives tied to increasing referral volumes. This approach not only aligns with Stark Law and AKS requirements but also reinforces ethical practices, reducing the risk of noncompliance and safeguarding your organization from potential legal scrutiny.