“Stark” reality setting in with physician-hospital relationships
Medical Practice and Healthcare Entity Valuation, Medical Practice Management
Jan 23

“Stark” reality setting in with physician-hospital relationships

 

As you probably know, the government has been ramping up enforcement especially regarding Stark Law compliance issues. For example, according to the U.S. Department of Health and Human Services’ Office of Inspector General’s semiannual report to Congress for fiscal year 2013, the OIG is on pace to recover $3.8 billion for the first half of fiscal year 2013. Under cases involving Stark Law violations, the government has enforced actions and settlements ranging from $10 million to nearly $40 million in the first half of 2013. These cases highlight a new effort toward Stark Law violations and ultimately, a change in the way organizations should approach fair market value issues.

The OIG deals with “fraud and abuse” issues that include the False Claims Act and the Stark Law; however the FCA requires intent. The Stark Law is a strict liability offense enabling the government to enforce this law against an easier target than most FCA violations. In addition, there is no exception for technical violations even though such violations may be harmless. The primary concern for health care organizations is that once any violation occurs, the government views all referrals thereafter as prohibited. The federal Stark Law is continuing to be a powerful method for the government’s enforcement of fraud and abuse laws. In particular, since late 2012, the federal government has recovered large amounts of Medicare reimbursements through Stark Law enforcement actions including one recovery of nearly $40 million in repayments.

The following Stark Law enforcement actions highlight this increase in activity:

HCA Inc., September 2012 — $16.5 Million Intermountain Healthcare Inc., March 2013 — $25.5 Million Adventist Health/White Memorial Medical Center, May 2013 — $14.1 Million Tuomey Healthcare System, May 2013 — $39.3 Million or More

Although some of the cases mentioned above settled predominately due to technical violations of the Stark Law, fair market value issues were implicated in every case. With respect to both Adventist Health and Tuomey, both violations occurred due to alleged above fair market value compensation for physicians. These cases not only represent increased enforcement activity, but they also represent a transition in the way organizations should approach arrangements which require fair market value and commercial reasonableness.

The Tuomey case provides an example of how the government analyzes such contracts and employment agreements for fair market value and commercial reasonableness issues. First, in the Tuomey case, a consulting firm evaluated the contracts for purposes of the fair market value requirement at the inception of the arrangement. Once the fair market value was established, multiple law firms were retained to bless the transaction as being Stark compliant. The federal government alleged that there was a disconnect between the financial valuation and the legal analysis. The end result was that Tuomey was ordered to repay nearly $40 million and may be liable for up to $300 million in damages.

Above all, health care organizations dealing with Stark issues should realize that any and all fair market value and commercially reasonable opinions must be defensible. The keyword here is defensible. The Tuomey arrangements were alleged to have not been defensible in a court of law due to this disconnect between attorneys evaluating the arrangements and valuation experts analyzing fair market value portions of the arrangement. In order to ensure that financial arrangements such as these are defensible, compliance and legal officers should analyze opinions to determine whether sufficient analysis exists to defend the arrangement in a court of law.

This change in the way valuations must be approached results in a more connected and defensible analysis for health care organizations.

About Reed Tinsley, CPA

As a top advisor to physicians, I help increase practice profits by delivering hands-on, expert medical accounting/tax support, practice counsel, and revenue-building strategies. Read more →