For over a little more than a decade hospitals have been purchasing physician practices and then employing those physicians within their own medical groups. The rise of these practices has resulted in significant consolidation among markets. Further, this practice has resulted in a possible hidden danger for many health systems under the Stark Law.
From a historical standpoint, some articles point out that acquisitions have increased 128% since 2012. Further, others have argued that this practice actually increases costs for patients. Finally, there is at least one settlement related to the risk of acquisition and the Stark Law. We will cover more on that later.
The Basic Legal Issues
Acquisition of a Practice
Under the Stark Law, there is an exception that is primarily utilized for the acquisition of a practice. This exception is known as the Isolated Transaction Exception. It is important to remember that the exception must be met because there is an exchange of value with physicians. The exception requires the following:
(1) The amount of remuneration under the isolated transaction is – (i) Consistent with the fair market value of the transaction; and (ii) Not determined in a manner that takes into account (directly or indirectly) the volume or value of any referrals by the referring physician or other business generated between the parties.
Pretty straight forward, right? The money paid must be consistent with the value of the transaction (assets) and the amount cannot take into account the volume or value of referrals. In other words, if the building was worth $200,000 you could pay that amount but you could not pay an additional $100,000 because the physician built a great practice. Now, let’s get to the initial area of concern:
(2) The remuneration is provided under an arrangement that would be commercially reasonable even if the physician made no referrals to the entity.
Breaking this down, the arrangement itself must be commercially reasonable. Alright, so purchasing assets is a normal commercial transaction. However, it must be reasonable even if the physician made no referrals to the purchasing entity. That is a bit odd. What if a practice has no assets that you need but you continue to purchase it? What is a practice is failing and would fail but you continue to purchase it? What if the transaction would only occur if you knew that downstream revenue would result? All of these questions should raise alarm bells because most transactions make sense because of downstream revenue (at least that is one reason).
So the question truly is, if one or possibly the primary reason is because of referrals that you will receive downstream, does it automatically violate this exception? While there is no definitive answer, in United States ex rel. Schaengold v. Memorial Health, Inc., the purchase price of physician practices and compensation of physicians were claimed by the government to violate the Stark law where the purchaser and subsequent employer was a hospital or health system. The health system settled for nearly $10 million.
Employment After Acquisition of a Practice
Now that we have covered the acquisition of a practice, it is common for an acquisition to result in new employees. This is standard for any type of industry but certainly a motivating factor for physician practice acquisitions. In any event, the Stark Law also has another exception that must be met for purposes of employment. The Bona Fide Employment exception’s requirements are as follows:
(1) The employment is for identifiable services. (2) The amount of the remuneration under the employment is – (i) Consistent with the fair market value of the services; and (ii) Except as provided in paragraph (c)(4) of this section, is not determined in a manner that takes into account (directly or indirectly) the volume or value of any referrals by the referring physician. (3) The remuneration is provided under an arrangement that would be commercially reasonable even if no referrals were made to the employer. (4)Paragraph (c)(2)(ii) of this section does not prohibit payment of remuneration in the form of a productivity bonus based on services performed personally by the physician (or immediate family member of the physician).
As noted above, you can pay a physician under an employment arrangement so long as the remuneration is provided under an arrangement that would be commercially reasonable even if there were no referrals. Interesting. So if we continue with our questions, does that mean you can pay a physician under an arrangement that loses money directly? Are physician losses in an employment arrangement permissible? Even if compensation is fair market value, if one reason you enter into the arrangement is for referrals, is that enough to violate the law?
Some of these questions have not been answered and others have. First, there is an argument that is is fine to have losses on physicians. While this is true, it is highly dependent on the situation. Why do the losses exist? Are their action plans to mitigate losses? Is the arrangement sustainable? Putting it another way. If this is a new physician in a startup phase, then that would make sense. However, if this is a physician with 10 years in building the practice without any substantial changes in practice patterns from the acquisition and there are still losses, that is another problem.
Second, there are cases exploring this issue. For example, a settlement in Missouri revolved around the sale of infusion center owned by oncologists to the hospital. Allegedly the hospital then increased their compensation to take into account the loss of those ancillaries. In short, the hospital allegedly agreed to keep the physicians whole. Ultimately the situation resulted in a $34 million settlement.
Conclusion
There are a few issues for anyone reading to consider. First, whether an arrangement is Stark Law compliant is a legal defensibility analysis. Often organizations assume that if the surveys and a valuation find the arrangement as fair market value, we are compliant. That type of thinking can get organizations in significant trouble. Second, acquiring practices needs to be well thought out, strategic, and above all focus on ensuring a minimizing physician practice losses. Remember, private practices for the most party broke even. In most markets, the payor mix was no different once acquired. Therefore, there needs to be a strategic focus on practices paying for themselves, absent referrals. Finally, employment is a clinical coordination initiative. It can be executed well and executed poorly. However, do not create situations in which you are basing your entire physician enterprise on growth of referrals.