This transcript has been auto generated
00;00;00;04 - 00;00;23;22
Jonathan Porter
Welcome to another episode of False Claims Act Insights. I'm your host, Jonathan Porter. Healthcare transactions are a huge potential source of risk in the False Claims Act world. In a past episode, we talked about the stark law and how health care providers can find themselves in a world of enforcement trouble by letting the volume or value of referrals seep into business decisions.
00;00;24;07 - 00;00;54;25
Jonathan Porter
And in a September episode, we talked with my friend Jim Mooney, who runs the Georgia Medicaid Fraud Division, about the Anti-Kickback statute and how that statute can have disastrous consequences for those who put a price tag on referrals and a host of other things that Congress has labeled as illegal conduct. But when flashy DOJ press releases start flying around, we at Hush Blackwell hear a lot from our health care clients who want to know whether their business decisions are somehow setting them up for enforcement
00;00;54;25 - 00;01;21;08
Jonathan Porter
disaster. How do we grow without crossing lines? How do we discuss basic business realities without those discussions touching on potential value of referral sources? A recent stark based false claims lawsuit against a Tennessee and North Carolina health system shows the consequences of crossing that line. And so we're going to talk about that case and how to maintain compliance in health care transactions.
00;01;21;16 - 00;01;43;04
Jonathan Porter
Today on the podcast. Joining me to talk about health care transactions is my friend and law partner, Hal Katz. Hal is a giant in healthcare. He's a former chair of the ABA Health Law section. He's a former chair of the State Bar of Texas Health Law Section. And those things are good. But what I really want to spread it out with is how he serves his clients.
00;01;43;16 - 00;02;03;28
Jonathan Porter
I met many of his clients over the past two years at conferences and the like, and Hal is more than a lawyer to his clients. He's a part of their team. It's a great trait that I've tried to replicate and most germane to today's conversation, how is a sought after health care deal lawyer? And so I'm excited to talk with Hal about this topic.
00;02;04;06 - 00;02;19;11
Jonathan Porter
And so coming to your digital airwaves from the Great city of Austin, Texas, is my friend Al Katz. So, Hal, thanks for coming on the podcast and telling our listeners about how to avoid false claims like liability when discussing financial issues in healthcare.
00;02;19;28 - 00;02;43;19
Hal Katz
Jonathan Porter uou are incredibly kind and it is a great privilege to be on your podcast. Thank you very much for that introduction and for being with you today. I'm a huge fan of yours as well. I've learned so much from you and always feel incredibly fortunate to have you and your expertize when needed. Thank you so much.
00;02;44;02 - 00;03;03;15
Jonathan Porter
Thanks, Hal. You're too kind. So as I mentioned a minute ago that we've talked about Stark and kickbacks before on this podcast, but rather than just telling our listeners to go back and listen to those episodes, they might not do that. So it might be more helpful if we give a short overview of those laws so that our listeners understand exactly why this is an issue in the first place.
00;03;03;24 - 00;03;15;19
Jonathan Porter
So how can you give us a brief overview of the Stark Law and the Anti-Kickback statute? Really, what are the most important things about those laws for those in the health care and life sciences industries to understand?
00;03;16;07 - 00;03;41;13
Hal Katz
Sure, Jonathan. It may be helpful, but it will be a little painful to, first of all, being familiar with the stark law and the Anti-Kickback statute are critical to ensuring compliance in health care, especially when physicians are involved. We'll start with the Stark Law, which specifically prohibits physicians from referring patients for designated health services. Now, DHS is a term of art, as you know.
00;03;41;13 - 00;04;21;11
Hal Katz
As others probably know, it's defined to include specific services, not everything. And it's those services payable by Medicare to entities they have a financial relationship with, unless there's a specific exception. And that's really important. That means that there's not a specific exception. It's going to violate the stark law of the stark law applies. The key element of compliance here is ensuring that any financial transaction with a physician is that fair market value and that it's commercial, reasonable without taking into account the volume or value of referrals.
00;04;22;10 - 00;04;59;14
Hal Katz
Then we've got the Anti-Kickback statute, a.k.a. yes, it goes a step further. It's not just applicable to physicians, it's applicable to everybody. It prohibits any form of remuneration in exchange for referrals or inducing business generation. It's designed to keep financial incentives from impacting medical decision making, trying to ensure that patients get the care they need objectively. Their needs are top priority, and any arrangement that appears to link the value of a business to referral patterns could trigger an X violation.
00;04;59;29 - 00;05;19;12
Hal Katz
And, you know, you shared that that leads to both potential criminal and civil penalties. So together, these laws are designed to ensure health care providers remain focused on patient care, rather being influenced by a potential financial gain from referrals. Hope that helps frame our discussion.
00;05;19;21 - 00;05;38;19
Jonathan Porter
Yeah, I think it does. I appreciate that overview. I know it's hard to start a podcast episode with talking about, you know, the basics of starting okay. But it really is important for understanding why is it that we're going to talk about these issues today. And so the big thing to me about Stark is that it's a strict liability statute.
00;05;38;19 - 00;06;01;14
Jonathan Porter
So you don't have to have any particular mindset and in order to violate it and that's different from X. The Supreme Court earlier this month denied cert in a case in second circuit opinion that said that in order for someone to bring a false claim that case premised on the anti feedback statute, you've got to show that the person knew that what they were doing was unlawful.
00;06;01;15 - 00;06;19;18
Jonathan Porter
You've got to have plausible allegations that they knew what they were doing was wrong. So that's the big disconnect. Just for me to call out upfront is stark law. You don't have to have any particular mindset to violate it. Any kickbacks that you have to get violated willfully. You have to know that what you're doing is wrong. And that's a pretty important distinction.
00;06;19;18 - 00;06;43;21
Jonathan Porter
I want to call that out for our conversation right now because I think it's important. So how? Last month, you and I wrote an article that lays out what we're talking about today. And in our article, we talked about these concepts being important in the context of transactions. Help our listeners understand what that means and your experience, how what kinds of transactions might we see Stark or AKS risk?
00;06;43;22 - 00;06;44;23
Jonathan Porter
Give us some examples.
00;06;45;16 - 00;07;16;02
Hal Katz
Sure, Jonathan. It's what many of us have been reading about in the news. The trend in health care is around consolidation, around growth, vertical and horizontal integration. We'll start with selling a medical practice, selling a medical practice to a private equity buyer or a strategic buyer. In these deals, we have physicians who are trying to maximize the value of their practice while the buyer's trying to get a purchase price that will ensure that they get a nice return on their investment over time.
00;07;16;19 - 00;07;40;25
Hal Katz
Here, the risk is the purchase price could be viewed as compensation for future referrals if the buyer is anticipating that those referrals are going to drive revenue post-acquisition. So that's one example. Another example would be selling a portion of a surgery center to a national surgery center operator. So it's either a group of physicians or maybe it's non physicians who own the surgery center.
00;07;41;04 - 00;08;11;22
Hal Katz
And there's a publicly traded surgery center operator that is looking to to grow through acquisition but wants to keep the current operator in the game. So here we've got physicians also often an owner and they practice at the surgery center. They hold that that equity as mentioned as with the selling medical practice mentioned previously, both the physician owners and the investor are motivated to negotiate a competitive purchase price.
00;08;12;10 - 00;08;44;06
Hal Katz
However, the sale price is influenced by physicians expected future referrals. This will definitely raise concerns under HHS. A third example of the kind of transactions that I'm working on these days are the creation of a joint venture where a medical practice and a hospital come together to form a service line management company. Here, the joint venture presents additional risks, particularly when we have these physicians as owners.
00;08;44;23 - 00;09;12;09
Hal Katz
These arrangements often result in the physicians having a financial benefit because they're going to be owners of the management company. The management company manages the hospital service line, the service that the hospital pays the management company for those services. And the physicians are going to get some kind of distribution for that. So their capital contribution and that management fee under that management agreement must be consistent with fair market value and commercial reasonableness.
00;09;12;23 - 00;09;17;07
Hal Katz
So those are three examples, Jonathan, as to where these issues are rising.
00;09;17;18 - 00;09;44;03
Jonathan Porter
Thanks, Howard. Those examples are really helpful. I'm sure our listeners appreciated hearing exactly what type of situations we're seeing this risk analysis play out so you know how to meet what's tough about these laws is that they're really pushing against what would happen in a normal market economy. In other industries, lots of companies acquire smaller companies because they see business opportunities and adding the smaller companies, you know, customers, for example.
00;09;44;03 - 00;10;09;29
Jonathan Porter
So for, for example, Google bought YouTube, not just for YouTube's individual profitability, but also because YouTube helps Google cross-sell other products. It helps Google get better at targeted advertising, all sorts of other stuff. There was value beyond YouTube's P channel in isolation, but in health care, there's real risk in paying for things that go beyond a target company's discrete profitability.
00;10;10;12 - 00;10;48;27
Jonathan Porter
We see this in the Justice Department's false claims. That complaint filed against Erlanger Health a couple of months ago, where DOJ says that Erlanger was paying physicians for the value of their referrals. In the DOJ complaint itself, DOJ cites to an interview that in Erlanger senior executive gave to modern health care. And the quote from the article is that Erlanger says, quote, Finances improved as a result of hiring more physicians because most of the new doctors ad revenue through increased referrals, especially if they're local, and bring an existing patient base with them, unquote.
00;10;49;00 - 00;11;10;22
Jonathan Porter
Now, I think if we have CFOs for companies outside of the health care industry listening to this, they're nodding their head saying, yeah, that makes sense because there really is value broad in the way that the Erlanger executives mentioned. So that's a big problem in health care, as evidenced by the fact that we're quoting this from a DOJ False Claims Act complaint.
00;11;10;22 - 00;11;20;29
Jonathan Porter
So how what are health care providers to do here? How can health care providers do business without crossing any lines as Erlanger may have done here?
00;11;21;13 - 00;11;51;02
Hal Katz
I know it is so frustrating to people within the health care industry, be it physicians operating their medical practice or owners of research center or senior executives within those companies as well as within the hospitals, there is a double standard. There's one standard for the health care industry and there's another standard for all other industries. And the first thing to do is maybe get a little therapy to let out some of the anger and let that go.
00;11;51;07 - 00;12;18;05
Hal Katz
And then the second thing is or the second step is to learn what the requirements are in health care for valuing a purchase or an investment in a health care business, or when looking to sell your business, you need to get up to speed on how you can calculate the purchase price for selling your business or a piece of your business.
00;12;18;05 - 00;12;51;18
Hal Katz
You know, to well how regulated this industry is, how high the risks are. If you don't do this properly. And there's there's no way around these laws. So understanding these laws will be incredibly important if you want to pursue either a sale or a purchase of one of these businesses, that's the first step. The second step is you'll get to it is as understanding that the expected volume or value of referrals cannot be calculated in the purchase price.
00;12;52;24 - 00;13;29;14
Hal Katz
From the seller's perspective, the valuation should be based on current revenue streams, operational efficiencies, market position without factoring the potential future referrals. This this needs to be documented that the seller doesn't usually engage a evaluator. That's something usually the buyer's going to do. But the more they can be prepared for what the seller is going to be looking at and needing in calculating the purchase price and what their evaluator is going to be expecting to provide a fair market value purchase price.
00;13;29;26 - 00;14;08;20
Hal Katz
The smoother this process is going to go and the less risk there will be some avoidable mistakes along the way. I know we're going to get to it in a little bit, but there can be some expressions of frustration early on in the negotiating process of why a seller doesn't think the purchase price is reasonable. You're not considering all these things and the buyers knows that they can't consider all these things that the the best seller may have just put in an email or in a text message that maybe a regulator or someone concerned about the transaction could misinterpret and use against the parties to the transaction down the road.
00;14;09;02 - 00;14;42;02
Hal Katz
So from the buyer's perspective, as I mentioned, while, you know, they're going to need to engage a evaluator to help in determining what the right purchase price can be for this, the good news is there can be future growth built into the purchase price calculation, but there are some specific requirements around how that is determined. It's not going to be based on what these individual physicians are going to be referring, and those individual physicians will not be directly rewarded for their individual referrals.
00;14;42;13 - 00;15;22;14
Hal Katz
The buyer's going to base this on those objective business factors operational improvements, service expansion, market penetration, things not tied to any anticipated referrals from those existing referral sources, be it physicians or otherwise. They'll also go through this extensive quality of earnings review that will further help support the purchase price by saying This is our know stable seller and their financial performance both past and projected and that will support any scrutiny or avoid a regulator or someone else not happy about the transaction.
00;15;22;24 - 00;15;32;22
Hal Katz
Spending too much time challenging the transaction because the buyer and therefore the seller will have a well-supported and documented valuation of the business.
00;15;33;06 - 00;15;54;20
Jonathan Porter
Thanks. How? Yeah, that's really helpful. So yeah, totally agree. Find someone who who does this. There's a big market out there of people who know how to help you with fair market value. They know what factors to calculate in and they know what factors to calculate out. And so don't wing this. I think most experienced people in the health care industry know not to wing it.
00;15;54;21 - 00;16;17;20
Jonathan Porter
So that's good. But no, I appreciate how you also focusing on the need to document what you're doing as the person who comes in and cleans up this for people who do it wrong. Let me tell you how important it is to document your evaluation process. It's super critical. I need a document to take to the Justice Department or to a potential whistleblower and say, this is how we got to the number.
00;16;18;01 - 00;16;41;00
Jonathan Porter
Here's how you can know that no referral based considerations influenced the transaction. And that's how we should. That's how we show you got to document what you're doing. That's critical and how. Thanks for telling our listeners how important that is because it is so how I think a lot of sophisticated health care providers understand where the lines are, what they can pay for and what they cannot and why that line exists.
00;16;41;18 - 00;17;01;07
Jonathan Porter
But even when you follow the right, fair market value processes, there's always the chance that someone comes along and second guesses you. There's always the chance that someone within your organization says the wrong thing. Even when the organization tried very hard to do the right thing. And that may have happened in the earlier case. Erlanger is a large, sophisticated health system.
00;17;01;07 - 00;17;15;18
Jonathan Porter
It's possible they did the right thing, but one person gave an interview saying the wrong thing. So now what are health care providers to do here? What are some of the best practices for communicating both internally and externally in a way that reinforce?
00;17;15;18 - 00;18;10;19
Hal Katz
Is compliance charted on the provider's side? It's so important to be formal, intentional with communications, and it starts with putting together a ideal team regardless of the kind of transaction, especially if it's a larger transaction. There needs to be a formal team appointed who will be responsible for all aspects of the transaction, and that includes communications. It will include the early stages of getting ready to go to market in how things are communicated internally within the team, more broadly, internally, within the organization and then outside the organization, be it with a broker, if that's the course or the strategy the provider decides to use engaging a broker to help go to market, to negotiating the
00;18;10;22 - 00;18;39;15
Hal Katz
LOI, going through the due diligence process, and then keeping everybody up to date. Therefore, the deal team needs to be the one coordinating all of that. They need to be the one who appoints the person who will answer questions from internally within the organization, who will update the larger group. And there needs to be an understanding that those communications need to be in formal channels.
00;18;39;27 - 00;19;17;27
Hal Katz
Email can be a formal channel. Text messaging is not a formal channel. Of course, social media is not a formal channel. One on one conversations throughout the organization is not considered a formal channel. So emails and reports, partner meetings, committee meetings, that's what I mean by formal communications. And when they're talking about financial performance or key parts of the deal, that's especially sensitive information and being very thoughtful on how those communications could be misinterpreted should always be on people's minds.
00;19;18;06 - 00;19;48;25
Hal Katz
Physicians, senior management. These people are very busy. They are managing their day job. In addition to being involved on this team, they are operating on patients. They are taking care of patient needs, which are very demanding. And so when it comes to updates, questions on the deal, it's tempting to give short, quick answers. We're trying to get as much as we can for that new location or we're trying to get Dr. So-and-so happy and we're going to try to get him more money.
00;19;49;02 - 00;20;28;28
Hal Katz
Those kind of communications can be easily misinterpreted, so we really want to be formal with that communication. And this is an issue for not just the sellers but for the buyers. But historically it's been more challenging and more of an issue on the seller side. But related to that, you know, when the buyer has a team of its own and the buyer has team members reaching out to different representatives within the sellers organization that may not be on the designated team, there needs to be an understanding that those communications need to be redirected to the designated people.
00;20;28;28 - 00;20;38;09
Hal Katz
As hard as that is, as tempting as it is to get that real time information and get the behind the scenes update, those communications really need to be redirected.
00;20;39;02 - 00;21;03;12
Jonathan Porter
Thanks out. Yeah. So communications are a big deal in my world. So it's amazing how people don't understand when they're writing emails, how important that email could be down the line. There's such a small bit that is needed for a whistleblower or the Justice Department to get over the threshold and get to a jury on one of these cases.
00;21;03;12 - 00;21;34;14
Jonathan Porter
If someone's going to say that you've done something wrong in a transaction, all they need is just like an email that can be taken potentially out of context in order to get from no jury to a jury and for you to go from a manageable situation to a really bad situation. So think of things. I'm just sort of stunned that the emails I saw when I was at DOJ, where people are typing away late at night or whatever from their iPad saying Here's what we're going to do, and it just creates this big issue.
00;21;34;29 - 00;22;01;04
Jonathan Porter
And the problem with emails or text messages is that there is context behind it that gets lost over time. I've got a lot of clients who aren't doing anything wrong, but they are writing emails and you could view it in one way or you could view it another way, and it's just it's hard to regain that context. So I think one of the most important things in any deal is convincing the people around you, hey, we we're not doing anything wrong.
00;22;01;11 - 00;22;22;11
Jonathan Porter
But let's also be smart about the way that we are communicating what we're doing, because context is important. And when you lose that context, there could be disaster. So how thanks for telling our listeners about that and emphasizing how important that is. So how we've been talking mostly about these issues in the context of deals, transactions, but these actually these concepts, they apply in other settings too.
00;22;22;12 - 00;22;44;19
Jonathan Porter
There are all types of ventures that health care organizations may choose to support. For example, you know, a few decades ago, payers started pushing more and more surgeries out of hospitals and into ambulatory surgery centers. And so groups of physicians have responded to payers by building and operating ambulatory surgery centers. Those are business endeavors, and they only work if you can keep the lights on.
00;22;44;21 - 00;23;05;11
Jonathan Porter
That means that there are financial considerations. But if you're treating Medicare patients or Medicaid patients, there are lines you cannot cross when discussing those financial considerations. And so how close us out by telling our listeners how those running in our example surgery centers can keep the lights on without crossing any compliance lines?
00;23;05;27 - 00;23;33;17
Hal Katz
Jonathan It's tough. It's tough. Whether it's it's a surgery center and the physicians happen to be the owners of the surgery center or even non physicians are owners of the surgery center. And they're relying upon physicians to bring cases to the surgery center in order to cover the costs associated with keeping the surgery center open or having the best anesthesia staff or having the latest operating room equipment.
00;23;33;23 - 00;24;04;24
Hal Katz
The CRM, the MRI, having physical therapy available within the surgery center. But that is the same issue within a medical group, a physician medical group that is also trying to be competitive. It is trying to have all the services necessary to meet the patient's needs so the patient doesn't have to go just to them for services. And then go across town for lab work or diagnostic work or physical therapy.
00;24;05;02 - 00;24;36;17
Hal Katz
How do the medical groups add additional services, incur those expenses if they aren't able to ensure that they're going to have the revenue to cover those costs? So, I mean, that is the challenge here, too. It is very important that communications be thoughtful, be formal and come from a management team and not indirectly from the management team through physician physicians who might know what the issue is.
00;24;36;17 - 00;25;02;12
Hal Katz
The physician there might be a surgeon for example, in the surgery center who really wants a piece of equipment but understands that the surgery center isn't going to purchase the equipment unless the surgery center can have some projections on the case volumes for that kind of procedure on a monthly basis. So these informal communications between a physician and another physician who's trying to get this equipment purchased can be misinterpreted.
00;25;02;12 - 00;25;23;21
Hal Katz
You've got to bring all your cases here so we can provide this service and we're going to make more money, you know, as owners of the surgery center, if we're able to provide these additional services. So the information around the services provided by the surgery center and the desired services to be added should be included in a business plan.
00;25;24;03 - 00;25;55;26
Hal Katz
The business plan is adopted by the governing board after making a recommendation from the management team. The management team and putting together that recommendation can interview the current referring providers to understand their case volumes, their projections. But this is a really intentional and well documented process to understand the current needs in the market and potential future growth based in the community and the standard of care that can be documented.
00;25;55;26 - 00;26;25;12
Hal Katz
Then I think we have low risk when the organization starts tracking expenses and cases and revenues and puts out general reports on how the expenses, how the revenue, how the financials of the service line or the overall surgery center or the facility or the practice are doing to encourage people or to utilize services that are available within the organization if medically necessary.
00;26;25;12 - 00;26;55;19
Hal Katz
And the patient chooses that as their side of service. It's really about education. It's really about understanding what services are available. And I'd be really interested, Jonathan, in your thoughts on where that line is, in how to promote a service, promote capacity, communicate capacity within the surgery center or whatever facility we're talking about without it being perceived that physicians are being encouraged to refer for a kickback.
00;26;56;07 - 00;27;17;27
Jonathan Porter
Yeah. Thanks for throwing the hard question back at me. You know, I don't think there's there's a really good answer. It's really tough because things like surgery centers or joint ventures, they only work if you have business. You know, the the payers have caused a lot of shift in health care and you're not seeing things in the hospital anymore.
00;27;18;00 - 00;27;43;29
Jonathan Porter
You're seeing physicians need to perform things in surgery centers a lot more. You're seeing a lot of alternatives to hospitalization. Those are things largely caused by payers. Physicians are responding and health systems are responding. But it's hard because you've got to keep the lights on. I mean, physicians are not running charities. They're not going to invest in something that's going to be a dumb investment.
00;27;44;07 - 00;28;03;26
Jonathan Porter
And so it's hard. You've got to talk about what our capacity is at the surgery center. You've got to talk about the economic realities of it. But I totally agree with you how you've got to do it in a smart way, where you're where you're not crossing lines and saying, hey, when you invested in this, you agreed to do 17 procedures a month and you've only been doing two.
00;28;04;02 - 00;28;30;29
Jonathan Porter
It's hard for you to talk about the business realities, but being mindful of the fact that this could be second guessed, this could be seen as putting undue pressure on people to do procedures that they otherwise wouldn't choose to do. It's hard. It really is. I feel for those that I talk with in the health care industry about these issues, because I don't think anyone's going into these situations saying, let's go get a bunch of money that we're not entitled to.
00;28;31;00 - 00;28;43;28
Jonathan Porter
How do we run this? And in a wise way, in a prudent way. And it's just it's really hard. So I'm glad that there are people like you who are guiding clients through these hard decisions. And I just get to come in on the back end of.
00;28;44;28 - 00;28;48;20
Hal Katz
It and I will run. That's for me. I'm on the front end. You're on the back end.
00;28;48;20 - 00;29;13;23
Jonathan Porter
Yeah. But I really want to thank you for coming on the podcast. You know, this really is a tough enforcement landscape. Like we said at the beginning, the stark law is a strict liability statute. And so that interview we talked about in the Erlanger case, where the executive talked about how they were going to profit from adding physicians because they're going to get all the referrals that's actually not required in order to maintain, you know, a false claim premised on the stark law.
00;29;14;00 - 00;29;42;02
Jonathan Porter
It's a strict liability statute. There's some knowledge elements in there that you've got to deal with. But in general, it's a scary enforcement landscape when you're talking about Stark and you're seeing an uptick in Stark enforcement. You're seeing a big Indiana settlement earlier this year, record breaking settlement. You're seeing this big Erlanger false claims complaint. I think you've got to be very mindful of how you're doing, your valuations, how you're handling business realities.
00;29;42;13 - 00;30;03;00
Jonathan Porter
And so this is something that we're going to continue to focus on in the podcast and other thought leadership for hush like, well, if you're in house somewhere with a physician group or a health system life sciences company, make sure you're staying on top of this. We'd love to be your source for getting you that thought leadership. So continue to monitor our writings.
00;30;03;14 - 00;30;15;26
Jonathan Porter
Continue to listen to the podcast because this is a serious time from an unfortunate landscape and we're here to guide you through it. So again, thanks to Hal for being our guest and we will see you next time.
00;30;16;01 - 00;30;20;00
Hal Katz
Thank you. But Jonathan, you're amazing and you're providing a great service to everybody.
00;30;20;11 - 00;30;22;18
Jonathan Porter
Thanks, Hal.