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Government agencies send messages to physicians.

The Department of Justice (DOJ) and the Department of Health and Human Services (HHS) have recently sent to the provider community messages whose meaning is certain to be debated for some time to come.

Department of Justice

As previously reported in this column,(1) DOJ indicted and tried three dentists for criminal price-fixing violations of the antitrust laws. The conviction was upheld by a federal appeals court, but the court remanded the case for further proceedings that might have resulted in a new trial.

Facing the remand, DOJ elected to enter into a plea agreement with the defendants. The agreement resulted in dismissal of the indictments that had been lodged against the three dentists personally. Instead, the agreement called for the dentists' professional corporation to plead no contest to the charges and agree to perform 250 hours of community service. The court also imposed a $5,000 fine on the corporation.

The indictments had represented the first criminal prosecution of health providers in 50 years. Thus, some see DOJ's agreement to the plea bargain as a defeat for the enforcement agency. Others believe that DOJ's point was already made and that the agreement represents a prudent marshalling of enforcement resources.

Health and Human Services

The second "message" to the provider community came in the form of a response by HHS to an informal inquiry by the Internal Revenue Service regarding acquisition of physicians' practices by hospitals. D. McCarty Thornton, Associate General Counsel for the Inspector General Division of HHS, issued the opinion that some of these transactions may violate the Medicare and Medicaid antikickback law. Mr. Thornton voiced a concern that hospitals may be purchasing physicians' practices in order to retain existing referrals or to attract new referrals.

The IRS inquiry related to situations where a physicians' practice is acquired by a hospital or by a foundation or other entity that owns a hospital. The physicians become affiliated with the hospital or entity, usually through an employment arrangement, and continue to treat many of their former patients. The hospital or entity pays the physicians at the time of the transaction for the assets of the practice and makes subsequent payments for services rendered to patients. Mr. Thornton suggests that the fair market value of the practice or services rendered must be considered in order to determine if the antikickback law has been violated. Mr. Thornton believes that fair market value under the antikickback law is different from the fair market value normally considered in business transactions. In Mr. Thornton's view, amounts paid for the continuing treatment of the former practice's patients should be excluded from the practice's fair market value. These amounts could be considered payments by the hospital or entity for referrals.

Likewise, in Mr. Thornton's view, amounts paid to physicians for services rendered through an employment arrangement should exclude amounts that reflect or relate to past or future referrals or any amounts that reflect or are affected by the expectation or guarantee of a certain volume of business. Mr. Thornton outlines specific items for which payment may be questionable if there is a continuing relationship between the buyer and the seller and the buyer relies upon referrals from the seller. These items include payment for goodwill, payment for value of the ongoing business unit, payment for covenants not to compete, payment for exclusive dealing agreements, payment for patient lists, and payment for patient records. Mr. Thornton suggests that a comparison of physicians' overall financial welfare and referral patterns before and after the acquisition might be in order to assess potential violations of the antikickback law.(2)

In sum, Mr. Thornton believes that many arrangements between physicians and hospitals or other entities are merely attempts to share with referring physicians the profits of business at a hospital in order to induce the physicians to steer referrals to the hospital. Obviously, in view of these pronouncements, buyers and sellers of physicians' practices have more reason than ever to seek competent counsel to assist in negotiating and structuring acquisitions to avoid potential investigation and prosecution for violation of the antikickback law.


1. Neugebauer, J. "Antitrust Concerns in Managed Care Provider Negotiations." Physician Executive 19(1):44-5, Jan.-Feb. 1993.

2. This law provides for penalties against persons who solicit, receive, offer, or pay remuneration to induce or in return for "referring an individual to a person for the furnishing or arranging for the furnishing of any item or service payable under the Medicare or Medicaid programs, or purchasing, leasing, or ordering or arranging for or recommending purchasing, leasing, or ordering any good, facility, service, or item payable under the Medicare or Medicaid programs." Violations of the antikickback statute are punishable by criminal penalties and/or exclusion from participation in the Medicare and Medicaid programs.
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Author:Neugebauer, Edward
Publication:Physician Executive
Date:May 1, 1993
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