Four Types of Transactions Most Affected by Self-Referral Laws

June 1, 1995

WASHINGTON--Physicians and hospitals have good reason to learn as much as possible about the expanded Stark self-referral law, which went into effect last January, and federal anti-kickback legislation. The penalties if convicted under these measures can be large, and the federal government is committed to their enforcement.

WASHINGTON--Physicians and hospitals have good reason to learnas much as possible about the expanded Stark self-referral law,which went into effect last January, and federal anti-kickbacklegislation. The penalties if convicted under these measures canbe large, and the federal government is committed to their enforcement.

In fact, Attorney General Janet Reno has stated that health-carefraud is her department's number two initiative after violentcrime, Clifford D. Stromberg, Esq., said in his talk at the meetingof the Association of Community Cancer Centers (ACCC).

Mr. Stromberg has served as deputy executive secretary of theUS Department of Health and Human Services and as a consultanton health anti-trust issues for the Federal Trade Commission.He is currently a partner in the Washington, DC, firm of Hogan& Hartson.

The anti-kickback law prohibits referral arrangements in whichthere is remuneration, meaning anything of value. "A varietyof safe harbors are provided, because otherwise the standardswould encompass virtually everything in the health-care system,"Mr. Stromberg said.

The Stark self-referral law says basically two things: First,a physician may not refer a patient to an entity with which thephysician or an immediate family member has a financial relationship,which means either an investment interest or a compensation arrangement;and second, a physician or anyone else cannot present for paymentany bill that arose out of a prohibited referral.

Selling a Medical Practice

Mr. Stromberg outlined four types of medical transactions thatare affected by these laws. The first is the acquisition of amedical practice by a facility such as a hospital. "Obviously,if there is a payment to a physician to acquire his or her practice,then one could infer there is a payment to that person to referto that facility. For strategic reasons, oncology is a high targetbecause it is so multidisciplinary and feeds a lot of other services,"he said.

The only safe harbor is for sale of a practice by a retiring physicianwho will not be in a position to refer to the facility more thana year after the transaction.

The law makes it illegal to pay for many of the elements of valueof a practice: good will, the value of ongoing business, exclusivedealing arrangements, patient lists, patient records, and covenantsnot to compete. "What's left is the value of the used equipmentand Xerox machine," Mr. Stromberg quipped.

He also emphasized that a physician cannot be paid a small amountfor a practice with an offer of a much larger future compensation.

Mr. Stromberg believes that practice acquisitions are still viable,but expectations have come down. One solution is to try to pusha little more value into the remaining lawful elements, such asaccounts receivable. "A new player may be more energeticin collecting than a physician group, so the collection rate couldgo up and the value of the accounts receivable would be higher,"he said.

Joint Ventures

The second major transactions affected by these laws are jointventures, for example, an oncology center that is partly ownedby a hospital, partly by physicians. "This is probably thenail that was sought to be hit by the sledgehammer of the anti-kickbacklaw," he said.

The only safe harbor is for transactions in which no more than40% of the investors are people in a position to refer to thefacility. To qualify for this safe harbor, the investment opportunitymust be offered to the nonreferral investors on the same basisas the referral investors, ie, with a return proportional to theinvestment.

"If a transaction involving an oncology center offers pediatriciansand psychiatrists investment opportunities on the same basis asoncologists, it may not be wise, but it's more likely to be lawful,"Mr. Stromberg said.

He warned physicians involved in joint ventures not to rewardinvestors by the number of referrals or admonish those who makefewer referrals, or require a physician to divest if he doesn'tmake enough referrals. In fact, he said, such ventures shouldnot even track referrals.

Compensation Quandaries

The third category of transactions involves hospital inducementsto attract physicians to their facility by providing clinicaland/or management services. Fortunately, he said, both the anti-kickbackand Stark laws have specific exceptions for personal servicesand management contracts, if the arrangement is in writing, hasa duration of at least a year, and is otherwise lawful.

"The aggregate amount of the services has to be reasonable;that is, I cannot pay a medical director of my oncology service$150,000 a year for working one afternoon a week," he said.

A key standard is that the compensation to be paid over the termof the arrangement is set in advance, doesn't exceed fair marketvalue, and is not determined in a manner that takes into accountthe volume or value of referrals.

Fixed fees set in advance are lawful but economically risky forthe physician, who might end up seeing more patients than thecompensation is worth. Rather, Mr. Stromberg advises setting themethodology for determining the compensation in advance.

It would be illegal, for example, to pay a physician 1% of everybill that goes through the center, because the physician willbe a significant referrer. But the doctor can be paid based ona range of the number of patients seen.

For example, a contract might state that if the number of patientsper year is 100 to 200, the medical director will receive $25,000/year.If the number is 200 to 500 patients, the director will get $50,000,because of the greater level of time and work required.

Recruitment Incentives

The fourth cluster of transactions is physician recruitment incentiveplans, which have a very narrow safe harbor for payments madeto a physician who begins his practice in, or relocates his practiceto, a rural area. "This doesn't apply to many physicians,"Mr. Stromberg said.

There are levels of risk for hospitals when recruiting. No onequestions paying for the physician and spouse to visit the hospitaland take a look at the community, he said. More risky are inducementssuch as payment of CME courses and loan guarantees. The highestlevel of risk would be income guarantees and offers of free officespace.

Although common, these practices will be heavily scrutinized inthe future. "You'll find hospitals doing less and less ofit or doing it in a more creative way," he said.

Physician incentive plans based on productivity are permissibleif the compensation is determined in a manner that does not takeinto account the volume or value of referrals. Such plans aremore likely to be legal if the physician's performance is pooledwith that of many other physicians, he said. "That is, youdon't get a dollar more in your pocket for every dollar you save,but a dollar more in your pocket if everybody is efficient."

Such plans are also less likely to come under scrutiny if theincentive periods are longer rather than shorter, that is, notevery week but over the course of the year. This ensures that"at 5 pm on Friday, the physician is not tempted to avoidordering a test that would cause him to lose out on the risk poolfunds for the week," Mr. Stromberg said. He added that theamount of the bonus should not be a significant percentage ofthe physician's total compensation.

When a hospital leases office space to a physician, there maybe problems in both directions. "If the hospital chargesyou too little, they may be thought to be subsidizing you to referpatients there, but if they're charging you too much, then youhypothetically are paying them to send their outpatients to you.So you're supposed to hit spot on the market rate." The bestway to do that, he said, is to let a real estate agent determinethe value.

In a nutshell, Mr. Stromberg advised physicians to avoid "bizarredeals, Rube Goldberg type arrangements in which nobody can explainwho's getting paid for what or why."

He cautioned physicians to have realistic expectations, use externalvaluations to tie down what things are worth, get a decent lawyerand accountant, and, finally, remember Mark Twain's line: "Alwaysdo what is right. This will gratify some people and astonish therest."