Beware of below-value deals in joint ventures

Joint ventures between hospitals and physicians can be a breeding ground for tough anti-kickback penalties if dealings are below fair market value. One hospital got caught up in this trouble, reports the Healthcare Value Wire.

Case in point: A Montana hospital was in a joint venture with physicians to own and operate a medical office building on the hospital’s campus. The Department of Justice alleged that the hospital provided improper financial incentives to the physicians that made referrals to the hospital. These incentives were in the form of leases and other arrangements that were below fair market value. The hospital agreed to pay the federal government $3.85 million to resolve the allegations, according to a DOJ announcement.

The DOJ alleged that St. James Healthcare (Butte, Mont.) and its parent company, the Sisters of Charity of Leavenworth Health System (Denver), violated the anti-kickback statute, the Stark Law, and the False Claims Act because of the improper financial incentives. These incentives included a payment to the joint venture that increased the share values for the physicians and physician groups in the joint venture and resulted in lease rates for the physicians renting space in the medical office building that were below fair market value. Additional incentives provided by St. James and Sisters of Charity included lease rates for the land upon which the medical office building was constructed and other arrangements related to shared facilities, use, and maintenance that were below fair market value. The claims settled by the agreement are allegations only, and there has been no determination of liability.

Legal picture: The federal anti-kickback statute sets forth the general principle that healthcare providers cannot exchange remuneration in return for referrals of federal healthcare program business. The federal physician self-referral law (Stark Law) incorporates a similar principle by prohibiting certain physician referrals to entities that physicians have compensation arrangements with unless the arrangement meets an applicable exception by, among other things, not providing compensation based on the volume or value of referrals by the physician. Federal law prohibits payment by federal healthcare programs of medical claims that result from arrangements that violate the anti-kickback statute or the Stark Law.

“Improper financial arrangements between hospitals and physicians not only undermine the integrity of the decisions that doctors make, they raise the cost of health care for all of us,” says Stuart F. Delery, assistant attorney general for the Justice Department’s civil division. “The department has longstanding concerns about such conduct and is committed to working with health care providers that come forward to disclose their misconduct.”

There are a number of scenarios—in addition to joint ventures—in which referrals should be examined carefully. They include compensation arrangements, acquisitions of practices, and noncompete agreements. The BVR/AHLA Guide to Healthcare Valuation contains examples of contexts where you should avoid the attribution of value to referrals of federal healthcare program business when structuring and valuing business arrangements