BLOG: Pricing your transaction with regulatory restrictions in mind
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Key takeaways:
- Sellers must be aware of regulatory restrictions when setting a purchase price for their practice.
- The law requires that the price not take into account the volume or value of referrals between buyer and seller.
A pressing question on the mind of any practice owner when selling his or her practice is “how much money will I get?”
It’s important to remember, though, that there are regulatory restrictions to keep in mind when setting the purchase price. A recent settlement with the U.S. Department of Justice (DOJ) demonstrates just how important those restrictions can be.
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In September 2023, a Texas management company that operates dermatology practices agreed to pay $8.9 million to settle self-reported claims that it violated the federal Anti-Kickback Statute (AKS) and the Physician Self-Referral Statute (Stark Law).
You may remember from our earlier posts that the AKS is a federal criminal statute that prohibits the knowing and willful payment of “remuneration” to induce or reward patient referrals or the generation of business involving any item or service payable by federal health care programs (eg, drugs, supplies or health care services for Medicare or Medicaid patients). The Stark Law is a federal civil statute that prohibits physicians from referring patients to receive “designated health services” payable by Medicare or Medicaid from entities with which the physician or an immediate family member has a financial relationship, unless an exception applies. Both the AKS and the Stark Law are intended to ensure that the medical judgment of a provider is not compromised by improper financial inducements.
In the Texas matter, according to the settlement agreement, from January 2013 to July 2018, the management company acquired numerous dermatology practices across the United States. The management company filed a self-disclosure with the DOJ in September 2021, stating that it found evidence suggesting former senior managers agreed to increase the purchase price of 11 practices in exchange for an agreement by the provider to refer services to entities affiliated with the management company and private equity platform following the acquisition. Claims for certain of those referred services were later submitted to Medicare for payment. The government contends that this conduct violated the AKS and the Stark Law and resulted in the submission of false claims for payment to Medicare.
When setting a purchase price for a practice or other health care entity, federal law requires that the price not take into account, directly or indirectly, the volume or value of referrals between the buyer and seller.
Under the Stark Law, mergers and acquisitions must be structured to comply with the isolated transactions exception at 42 C.F.R. § 411.357(f). The isolated transactions exception shields from liability under the Stark Law certain one-time financial transactions, such as a sale of property or a practice, provided that the arrangement meets all of the following requirements:
- The amount of remuneration under the isolated financial transaction is consistent with the fair market value of the isolated financial transaction and not determined in any manner that takes into account the volume or value of referrals by the referring physician or other business generated between the parties.
- The remuneration is provided under an arrangement that would be commercially reasonable even if the physician made no referrals to the entity.
- There are no additional transactions between the parties for 6 months after the isolated transaction, except for transactions that are specifically excepted under the other provisions in the Stark Law and except for commercially reasonable post-closing adjustments that do not take into account the volume or value of referrals or other business generated by the referring physician.
If the sale does not meet these requirements, the arrangement may be considered a prohibited financial arrangement and all designated health services referred between buyer and seller after the sale would, therefore, not be payable by Medicare. The knowing submission of claims for such services could be considered a false claim, giving rise to potential liability under the False Claims Act.
Similarly, the AKS also requires that the deal be structured to ensure that no portion of the purchase price is paid with the intent to generate or reward referrals payable by a federal health care program. Although there is no specific exception or safe harbor that can provide an outline of guardrails to ensure compliance with AKS when selling a practice, generally, risk can be mitigated if:
- the transaction would be commercially reasonable even if the seller made no referrals to the buyer, and
- the purchase price is consistent with the fair market value of the target company and not determined in any manner that takes into account the volume or value of referrals or other business generated between the parties.
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