OIG outlines antikickback landmines for mergers

An exclusive look at the OIG’s latest take on physician practice divestiture, PHOs and MSOs

The Department of Health and Human Services’ (HHS) Office of Inspector General (OIG) has yet to unleash its complete arsenal of civil remedies to enforce the antikickback statute, says Mac Thornton, chief counsel to the HHS Inspector General. But that day may come soon, he warns.

In particular, Thornton says, hospitals should carefully examine potential mergers and acquisitions for potential kickback violations before they enter any new deals.

Thornton outlined the key merger and acquisition arrangements that could trigger the antikickback tripwire. Here is an exclusive rundown in the OIG’s own words:

s Acquisition of physician practices. For years, Thornton says he has been talking about the role "intangibles" can play in establishing the "fair market value" of physician practices in mergers and acquisitions with hospitals. "Of course, I was talking about acquisition of physician practices by hospitals," he added. The current trend of hospital divestiture of physician practices has turned that on its head.

Speaking at the Practicing Law Institute conference on mergers and acquisitions in New York, Thornton illustrated his office’s current thinking with an actual case concerning two hospitals in the same locality. Hospital A decided to make an offer on Hospital B, which included a group practice. An evaluation firm estimated the hard assets at $4 million and the redirection of patients from Hospital B at $5 million.

Outside counsel for Hospital A directed the evaluation firm to perform a new evaluation not prescribing any value to the redirection of the flow of patients by the doctors at Hospital B. The report came back with the $4 million hard assets estimate, along with a list of payments for various intangibles such as the value of patient records and ongoing business, he says.

"Hospital A did acquire the group practice, but it was a little bit dumb about it," paying $12.5 million, Thornton reports. Thornton says this example illustrates the OIG’s primary concern in this area. "You can’t pay for the future value of the referrals from the doctor," he asserted. "And you can’t disguise it by pumping up the value of intangibles."

Today, valuation experts may reduce their estimates of intangibles based on the current health care environment, according to Thornton. "It may be true that physician practices were not nearly as profitable as the hospitals thought," he says. "And it follows that the intangibles are not worth nearly as much as they thought."

While that makes sense, Thornton says the same principle holds, and if the doctors will be sending the hospital patients, the deal still has to be based on fair market value. "It is going to be hard to justify giving the practice back to the doctors for a nominal value," he argued. "There is going to have to be some documentation that that is what the fair market value is now."

s Physician-hospital organizations. According to Thornton, hospitals and doctors that get together to bill managed care can also run into trouble. If the ownership and payout from the physician hospital organization is based on a 50/50 formula but the hospital puts up 90% of the capital to form the organization, the arrangement may violate the antikickback statute, Thornton warns.

"We would construe that as a transfer of something of value to the doctors," he asserted. "If the doctor is sending patients to the hospital, there is a problem." Thornton says he has also seen deals structured where each side puts up 5% and the remaining 90% is financed with a loan backed by the hospital. "That is okay," he says, "as long as the terms of the loan are at full fair market value accounting for the degree of risk on what is being financed."

s Management service organizations. Hospitals and the management service organizations that acquire certain assets of a physician practice should also be scrutinized for potential violations of the statute, according to Thornton. "The payment must be at no more than fair market value," he asserted.

If the management service organization is also rendering services such as billing services to the physician practice, Thornton says the doctors have to pay the full fair market value of those services. "You can’t give those services to the doctors and have the doctors send their patients to the hospital," he asserts.