How to avoid fraud and abuse in hospital mergers

Health care attorney Patricia Meador says hospitals involved in or contemplating mergers and acquisitions should note several key fraud and abuse developments that have unfolded in recent months.

While there has been a renewed enthusiasm for the False Claims Act, Meador says the Department of Health and Human Services (HHS) Office of Inspector General (OIG) has yet to employ its array of administrative remedies to prosecute kickback violations under the civil monetary penalty law.

To head off legal trouble deriving from a merger or acquisition, Meador recommends paying particular attention to the following areas:

1. Due diligence. On the legal side, the most important consideration for hospitals approaching this area is heightened attention to adequate due diligence, says Meador, of the Durham, NC-based Womble, Carlyle Sandridge & Rice.

"When you look at what providers are continuing to pay out in settlement of false claims, it makes it increasingly important that you know what it is you are buying and what possible contingent liabilities are associated with that provider," she asserts.

2. E-health commerce. The second area to watch closely is the emerging area of e-health commerce. But Meador says it is not yet clear how the application of the fraud and abuse rules might restrict or limit the way e-health companies can conduct business as compared to their counterparts outside of health care.

For example, Meador says most e-commerce advertising that offers links from one site to another are based on a percentage of products sold. If health care providers are linking their site to the site of a health care provider that might be in a position to steer patients or make referrals, the fraud and abuse rules might limit whether they can pay on a percentage basis without violating the antikickback statute.

Meador says the first threshold is what they are delivering. "Are they providing health education or are they actually providing medical care in the form of physician or nursing consults?" she explains.

"What we are seeing is mostly enforcement at the state level," Meador reports. If the companies are delivering medical services, most state Attorneys General are suing for practicing medicine without a license, she says.

3. Hospital/physician relationships. Meador says the third major area for concern is hospital/physician relationships — specifically the rise and fall of gainsharing and the divestiture of physician practices.

One important area regarding these relationships stems from the final safe harbors for ambulatory surgery centers (ASC) that came out last year. That safe harbor changes the way physician ownership must be structured in order to comply with the antikickback statute. Meador says that had an impact on hospital/physician-owned ASCs as well as physician-owned ASCs.

Meador notes there used to be no requirement that the physician used the facility. There were also no "buy-out" provisions stipulating that if the physician retired or left the area that his or her interest must be bought out by the partnership.

Under the new rules, to fall under a safe harbor, in many instances you must demonstrate that your physician owners use that facility at least one-third of the time, says Meador. "You now have to rethink the fact that if a physician retires or moves, you may have to buy out their interest or reevaluate the selection of physician investors to those who actually are going to be users," she says.

Meador also warns that those new principles can’t be applied to other physician-owned ventures such as cardiac cath labs, sleep labs or other joint ventures that hospitals and physicians enter into.

"What is not clear is the distinction between a physician-owned ASC and a physician-owned cardiac cath lab in terms of the potential abuse the might result," she explains. "It is not clear why the government is treating ASCs specially but not applying those same rules to other physician-owned therapeutic joint ventures."

4. Medicare reimbursement. The fourth major area for hospitals to watch is the massive changes taking place in Medicare reimbursement. For example, skilled nursing facilities are moving to a consolidated billing payment structure and that will dramatically impact the incentives that exist between ancillary providers and skilled nursing facilities.

"Nursing homes now have to look at their relationships with ancillary providers very differently," warns Meador. She says the government believes there is some "swapping" taking place, where ancillary providers are willing to provide services to the nursing home that are covered under the nursing home’s resource utilization group (RUG) for less than fair market value in exchange for the referral of other business to the ancillary provider that can be billed to Medicare separately.

She also points to the OIG’s report released in March that examined nursing home billing and concluded that in a large number of claims, nursing homes were violating the consolidated billing rules by billing for things outside the RUG payment. "There will likely be further audits to make sure nursing homes are following those rules," she predicts.