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A TRAP FOR THE UNWARY By Introduction Health care entities regularly engage in diverse business transactions, from joint ventures to the acquisition of other entities. Transactions involving health care entities, however, require great care due to the highly-regulated nature of the industry. The need for caution is amplified by the increased scrutiny of health care entities and transactions from state and federal governments as they seek to control health care costs through heightened scrutiny of the expenditure of their health care dollars. As a result of such regulation and scrutiny, health care transactions must be carefully reviewed, and attorneys must be vigilant in searching for problems beyond those associated with ordinary business transactions. Moreover, attorneys experienced in general business acquisitions would be well advised to seek the assistance of an experienced health care attorney prior to negotiating such a transaction. While a complete discussion of the issues related to health care transactions is beyond the scope of this article, listed below is a brief description of some issues which generally warrant increased scrutiny in health care transactions. An important issue to consider in most health care transactions is the myriad of Medicare and Medicaid regulations which have been imposed by both federal and state governments in an effort to control costs and deter fraudulent and improper activity. Reassignment of Benefits/Security Interest Under the Medicare system, payment for services rendered is generally permitted to be made only directly to the physician or other provider actually furnishing the services. The payment or reimbursement may not be assigned to or be made subject of a security interest for the benefit of another party, unless one of a number of specific exceptions to this general prohibition is met. Provider Agreements To receive payments from Medicare and Medicaid, a provider must enter into a provider agreement with the government. In a business acquisition, a purchaser must choose between buying the stock or assets of the seller. If the purchaser chooses an asset purchase, the purchaser must determine whether it will assume the seller’s provider agreement(s), thereby assuming a potentially significant risk of past liabilities of the seller. The alternative of not assuming the provider agreement(s) must be evaluated from a business perspective, because although liabilities of the seller may be avoided, the purchaser may not be able to bill for Medicare/Medicaid services until new provider agreements are issued to the purchaser. The issuance of new provider agreements could take many months, creating significant cash flow and other financial problems. Proper planning may ameliorate such problems and should be taken into consideration when scheduling the closing of transactions of this type. Exclusion from Medicare/Medicaid The importance of being able to participate in Medicare and Medicaid for most health care enterprises requires a purchaser to ensure that the seller and its shareholders, officers and directors and/or any joint venture members have not been excluded from such participation. Therefore, counsel should check current lists of providers excluded from participation in Medicare and Medicaid. Fraud and Abuse The Medicare-Medicaid Fraud and Abuse Laws include numerous federal and state statutes and regulations. The primary effect of these authorities is to render illegal, and in some cases, criminalize transactions that would be considered to be "normal" and even preferred in the non-health care environment. The most often cited laws are the Medicare-Medicaid Anti-Kickback Statute, the Stark Law and the False Claims Act. A careful analysis of the impact of each of these laws should be performed in all health care transactions. Anti-Kickback Law The Anti-Kickback statute generally prohibits the offer, solicitation, payment or receipt of anything of value in return for patient referrals. A violation of this statute is a felony, and could result in exclusion from participation in Medicare and Medicaid, as well as imprisonment. Certain exceptions called, "Safe Harbors" exist within the law and must be carefully analyzed. Extraordinary caution must be exercised when providing advice in the structuring of health care business transactions. In July 1998, the federal government indicted and is currently criminally prosecuting two attorneys based upon advice rendered to their clients on how to structure a transaction that resulted in a transaction alleged to violate the anti-kickback laws. This unprecedented move by the government in a health care fraud case should send shivers down the spines of all attorneys. Stark Laws I & II The Stark Law generally prohibits the billing for certain designated health services, when the referring physician, or a member of that physician’s family, has a financial relationship with the entity. Such referrals are prohibited, unless an exception specified by the law applies. Violation of this law may result in penalties ranging from the denial of payment for claims to exclusion from participation in Medicare and Medicaid. False Claims Act The federal civil False Claims Act prohibits, among other things, knowingly presenting or causing to be presented, to any officer or employee of the United States a false or fraudulent claim for payment or approval. Violations are punishable by civil penalties of $5,000 to $10,000 per claim, plus treble damages and possible exclusion from participation in federal health care programs. A criminal version of the False Claims Act also exists and may result in fines and imprisonment. The government has broadly construed numerous types of conduct as violating the False Claims Act. For instance, billing the government with a reimbursement code that improperly describes the service rendered may constitute a false claim, as would billing for services that were not delivered, or were delivered in a substandard manner. Advisory Opinions When it appears a transaction may be impacted by the Anti-Kickback law, but such impact is not certain, an Advisory Opinion may be sought from the Office of the Inspector General of the U.S. Department of Health and Human Services. It should be noted however, that Advisory Opinions are somewhat rare, as less than 20 were issued in 1998. Advisory Opinions are also available (though likewise rarely obtained) from the Health Care Financing Administration ("HCFA") with respect to certain issues under the Stark law. Compliance Programs It is important to identify whether an entity being acquired has a corporate compliance program in place and to investigate whether any potentially wrongful conduct has been identified by such a program. The presence of a suitable compliance program that has been carried out in accordance with its terms can be vital in demonstrating the absence of improper intent if a violation of any of the health care regulatory programs is found to have occurred. Government Investigations With the increased scrutiny of health care entities by both state and federal governments, it is important to determine whether any government entity has threatened to investigate, or is currently investigating, the entity to be acquired. The presence of such actual or contemplated investigation would indicate potential liabilities that unless provided for, could accrue to purchaser. LICENSURE, ACCREDITATION, CERTIFICATION, NOTICE, REGISTRATION AND PERMITS State Licensure Issues Most health care entities must be licensed or registered to operate within the State of Ohio. Many licenses are neither assignable nor transferable, and a purchaser may need to obtain its own license, registration or permit prior to assuming control of the entity, whether by purchase, lease, management agreement or otherwise. Surveys (inspections by governmental agencies) may also be required prior to or concurrent with the closing of the transaction. Certificates of Need Until 1995, the State of Ohio required many health care entities to obtain a Certificate of Need ("CON") to engage in a multitude of different health care activities. Today, CON approval is still required to relocate nursing home beds or build a new nursing home. A commonly litigated issue today concerns disputes over the ownership of nursing home beds and its business, versus ownership of the nursing home building, equipment and land. Notices Most health care facilities are required to formally notify the State of Ohio and/or Health Care Financing Administration, of changes in ownership, services or capacity which may affect a health care facility, 60 to 90 days prior to the closing of a transaction or the implementation of the change. Leases or management arrangements may trigger a change in ownership. Special attention should be focused on ancillary state and federal permits, such as those issued by the Drug Enforcement Agency and the Nuclear Regulatory Commission. Valuations In health care transactions, more so than in other business transactions, it is often critical to ensure that the price paid or service provided is at fair market value. The failure to base the transaction on fair market value could result in violations of the Fraud and Abuse Laws, or negatively impact a provider’s tax-exempt status. In addition, state laws may require the purchaser of a non-profit health care business to gain government approval of the purchase, with such approval being contingent, in part, on a fair market value analysis. Therefore, an independent appraiser should be engaged prior to or during negotiations, to ensure that the purchase price is in line with fair market value. Reimbursement The manner in which a transaction is structured, i.e., a purchase or a lease, can have significant Medicare and Medicaid reimbursement implications to both parties to a transaction. Similarly, the allocation of the purchase price to particular assets may also significantly impact reimbursement. Accountants and financial consultants specializing in the particular type of health care reimbursement involved in the transaction should be consulted prior to finalizing the structuring of any health care transaction. Corporate Practice of Medicine Ohio law generally prohibits a for-profit or non-profit corporation from "practicing" medicine. Furthermore, only natural persons are eligible to be licensed as physicians within the State of Ohio and as such, corporations cannot obtain such licenses and entities not owned by medical professionals generally cannot employ physicians or other licensed health care professionals. While Ohio’s corporate practice of medicine doctrine has not been strictly enforced, recent cases in other states which invalidated certain employment and management agreements invoked the corporate practice of medicine prohibition, suggesting that the issue should not be ignored in Ohio. Community Benefit Joint ventures between for-profit and non-profit health care entities must be carefully scrutinized to ensure that the venture promotes community benefits and does not impact the non-profit’s powers or purpose. Inurement/Private Benefit To obtain and maintain a tax exempt status, organizations must not permit any of their earnings to inure to the benefit of any private shareholder or individual. Intermediate Sanctions Until recently the only legal remedy against an organization which violated the inurement/private benefit prohibition, was revocation of the organization’s tax-exempt status. In 1996, Congress created a means by which the IRS could penalize an excess benefit transaction without revocation of tax-exempt status through the imposition of intermediate sanctions. The health care industry has recently witnessed a marked increase in consolidation and strategic rearrangements among competitors. Such transactions must be scrutinized under applicable antitrust laws. The Antitrust Division of the U.S. Department of Justice and the Federal Trade Commission have jointly issued "Statements of Antitrust Enforcement Policy in Health Care," which provide guidelines to the health care community on mergers, joint ventures and other strategic combinations. The guidelines provide helpful analysis of particular health care combinations, and offer hypothetical examples of permissible ventures. This article has attempted to highlight only some of the many issues which must be addressed in transaction involving health care entities. It is important to understand, however, that health care transactions which initially appear to be straight-forward are nevertheless affected by many complex rules and regulations and may become a trap for the unwary. As the industry continues to consolidate, the need to identify potential problems will be essential. To that end, an attorney involved in such a transaction must carefully review the documents, agreements and practices of the parties involved to ensure compliance with the relevant laws and regulations. The sheer volume of regulations and the potential for the imposition of severe civil and criminal liabilities suggests that an attorney unfamiliar with the health care industry would be wise to consult with an experienced health care practitioner when engaged in such transactions. Ira S. Goffman is a principal in the firm of Roth, Rolf & Goffman Co., LPA, which concentrates its practice in the area of representing health care institutions and providers. He is a board-certified health care law specialist by the Florida Bar Association.
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