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Health Law News
LONG-TERM ACUTE CARE HOSPITAL DEVELOPMENT
Stephen M. Sullivan, Esq.
Following the adoption of the Medicare hospital-within-a-hospital (“HIH”) patient admission limitations in 2004, a significant number of companies have responded by pursuing alternative defensive strategies.
The primary alternative is to develop new long-term acute care hospitals (“LTACH”) that are not located in or on the campus of another hospital.
Because such a strategy is capital intensive, many of these new LTACHs are being developed as joint ventures that include physician investment. Physician investments, as a practical matter, are never in a safe harbor under the Federal Programs Anti-Kickback Act (“AKA”). Failure to be in a safe harbor does not mean the AKA is violated, it means one of three things: (1) the arrangement does not fall within the ambit of the statute, (i.e., the arrangement is not intended to induce a referral; so that there is no reason to comply with the Safe Harbor standards, and there is no risk of prosecution; (2) the arrangement has no Safe Harbor because it is a clear violation subject to prosecution; or (3) the arrangement is not in a Safe Harbor because it technically violates the statute in a less serious manner (in which case there is no way to predict the degree of risk of prosecution because such risk depends on an evaluation of the many factors which are part of the decision making process regarding case selection for investigation and prosecution.
If properly structured, a whole hospital investment by a physician is not only unlikely to be found to violate the AKA, and is also in an exception to Stark II.
It is our recommendation, among other measures, that any physician joint venture incorporate certain essential features that will substantially reduce the likelihood that the joint venture violates the AKA or Stark II, even though it does not qualify for safe harbor protection. Some of the essential features of a legitimate LTACH whole hospital joint venture are as follows:
1. Assure that all investment interests are purchased at fair market value;
2. Offer investment interests to a broad range of physicians in the community in which the LTACH is or will be located, not simply those physicians whose specialties or practice patterns suggest they will likely refer patients to the hospital;
3. Do not track the number of referrals made by any referring investor to the LTACH for purposes of determining purchase price or profit distributions;
4. Do not track the number of referrals try to determine the number of referrals made by a referring investor to a similar hospital as an element of determining whether to offer an investment interest to the physician;
5. Assure that ownership interests are sold on a first-come, first-served basis, with no preference to physicians who are expected to refer patients;
6. Assure that all profits are distributed pro-rata based on ownership;
7. Adopt policies and procedures that require the entity and LTACH management not to encourage any referring investor to refer to the LTACH;
8. As a condition of a referring investor’s ownership in the LTACH, the entity may require the referring investor to refrain from encouraging any referrals to the hospital;
9. Specify in the investment document that there is no requirement to arrange for referrals;
10. Assure that all referring investors contribute all money without any loan or loan guarantees from the entity or any other investor.
In order to determine fair market value, it is very helpful to obtain an evaluation from an independent evaluator who is familiar with health care institutions. Based on a pro forma prepared by the LTACH, a qualified evaluator can analyze the data utilizing cost, income and market approach analyses that help establish a unit price for the investment that does not consider the volume or value of referrals or other business that may be generated between the investor and the LTACH.
The only federal court case, Goodstein vs. McLaren, has analyzed fair market value in any detail. Even though Goodstein involved a lease, it provides important guidance for all providers who consider doing any business with a referral source. The Goodstein court stresses the over-riding importance of arms-length negotiations between providers and practitioners. In other words, even though an expert third party analysis is useful in determining fair market value, the actual negotiations between the parties has over-riding significance in determining whether fair market value was paid.
Finally, those companies that have embarked on a course of capital investment as a strategy to respond to the patient quota limitation should do so with caution. Congress is expected to adopt a demonstration project creating a three year program to be completed by January 1, 2008 to analyze costs and outcomes across different post-acute care settings following hospitalization. The program will provide participating patients and providers standardized tools to review and improve patient conditions for effective, focused post-acute care. Although the results cannot be predicted, it is highly unlikely that any new reimbursement system will increase LTACH reimbursement, much less provide reimbursement for the capital cost of new construction.
This article does not constitute legal advice. It is intended as an informational service to ALTHA members. All questions regarding its interpretation should be referred to your legal counsel.
69 Fed. Reg. 49240, Aug. 11, 2004.
Campus means the physical area immediately adjacent too the provider’s main buildings, other areas and structures that are not strictly contiguous to the main buildings but are not located within 250 yards of the main buildings, ands any other areas determined on an individual case basis, by the CMS regional office, to be part of the provider’s campus.”
42 USC § 1320a-7b(b)
42 USC § 1395nn
Goodstein vs. McLaren Regional Medical Center, 2002 U.S. Dist. LEXIS 3727
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