United States: SINGH V. BRMC: Expanding The Meaning Of "Takes Into Account" Under Stark Law

On November 10, 2010, the United States District Court for the Western District of Pennsylvania (the "Court") issued a noteworthy opinion in United States, ex rel., Singh v. Bradford Regional Medical Center, et. al., 2010 WL 4687739 (W.D.Pa.), which may lead to the adoption of a profoundly expanded meaning of the phrase "takes into account" for purposes of the Stark Law. The Stark Law generally prohibits physicians from referring Medicare and Medicaid patients for the furnishing of certain "designated health services" to health care entities in which they or any of their immediate family members have direct or indirect ownership interests or other financial arrangements. These types of referrals are commonly known as "self referrals." There are several ownership and compensation exceptions to the self-referral prohibition, many of which include a prohibition against "taking into account" the volume or value of referrals or other business generated by the referring physician for the entity furnishing the designated health service.

Singh v. Bradford Regional Medical Center involved a hospital that subleased a nuclear camera from physicians, and accepted referrals of patients from such physicians. In its opinion, the Court addressed the issue of whether a fixed rent payment can be deemed to "take into account" the volume or value of referrals for purposes of the Stark Law. Ultimately, the Court held that if a designated health service entity considers the anticipated referrals from physicians that it enters into a financial relationship with (for example, if such anticipated referrals are accounted for in a fair market appraisal that such entity relies upon in establishing the price of a good or service provided by such physicians), then such entity has impermissibly "taken into account" the volume or value of referrals for purposes of the Stark Law.

To date, it has been relatively common practice for third-party appraisers to (i) analyze referral patterns of health care businesses in assessing a value to non-competition covenants from the seller/lessor of such a business, as well as (ii) determine the value of a health care business based upon a multiple of the projected net revenue of such business. Each of these practices has now been called into question by the Court in Singh.

Facts of the Case

Prior to 2001, Drs. Vacarro, Saleh, and their physician practice entity (collectively the "Physicians") were a significant source of referrals to Bradford Regional Medical Center (the "Hospital") for nuclear camera diagnostic services. In 2001, the Physicians entered into a 63-month lease with General Electric ("GE") for the lease of a nuclear camera (the "GE Lease"), and began to perform the nuclear camera diagnostic services at their clinic's office rather than referring such services to the Hospital. In response, the Hospital adopted a policy on physicians with competing financial interests and threatened to revoke the Physicians' medical staff privileges.

In 2003, the Hospital, in anticipation of negotiating a transaction with the Physicians involving the nuclear camera, engaged a third party appraiser to perform a fair market value analysis of the nuclear camera. The appraiser compared the Hospital's expected revenues assuming the Hospital successfully consummated a transaction with the Physicians versus the Hospital's expected revenues if the Hospital had not been able to consummate such a transaction. The appraiser concluded that the Hospital would generate $402,000 more in referrals from the Physicians if it were to enter into a transaction with the Physicians regarding the use of the nuclear camera. This conclusion was based upon the assumption that the Physicians would likely refer their nuclear camera diagnostic services to the Hospital if the Physicians did not have a financial incentive to refer such services elsewhere.

In October 2003, the Physicians and the Hospital entered into a sublease agreement (the "Sublease") pursuant to which the Hospital agreed to sublease the nuclear camera from the Physicians, and the Physicians agreed not to compete with the Hospital for the provision of diagnostic imaging services during the term of the Sublease. Under the terms of the Sublease, the Hospital agreed to pay (i) the monthly rent owed by the Physicians to GE under the GE Lease for use of the nuclear camera (i.e., $6,545), and (ii) an additional $23,655 per month for all other rights under the Sublease, including the Physicians' covenant not to compete. The Sublease required that the nuclear camera be relocated to the Hospital; however, it remained at the Physicians' clinic office.

In 2004, the Physicians entered into a five-year lease with Philips Medical ("Philips") for a new nuclear camera (the "Philips Lease"). Pursuant to the terms of the Philips Lease, Philips paid GE the balance that was owed for the remaining term under the GE Lease, and the Physicians agreed to repay Philips said balance in 60 monthly installments. The new camera was installed at the Hospital. The Hospital executed a guaranty of the Physicians' obligations under the Philips Lease, and also began to reimburse the Physicians for their payments under the Philips Lease (while continuing the monthly payments of $23,655 to the Physicians under the Sublease).

The Holding and its Reach

The Court held that the Sublease constituted an "indirect financial relationship" between the Physicians and the Hospital because the payments from the Hospital to the Physicians, although fixed in amount, "took into account" anticipated referrals from the Physicians to the Hospital. The appraisal, which was conducted to determine the "fair market value" of the Physicians' non-compete covenant, was based upon the anticipated revenues from the nuclear medicine diagnostic services that the Physicians would likely refer to the Hospital. The appraiser and a representative from the Hospital testified that although the Physicians were not required under the terms of the Sublease to refer nuclear camera cases to the Hospital, it was the Hospital's expectation that the Physicians would so refer if they did not have a financial incentive to do otherwise. The Court concluded that the portion of the Sublease payments made with respect to the covenant not to compete "took into account" the volume of referrals from the Physicians to the Hospital, and thus constituted an "indirect compensation arrangement" for purposes of the Stark Law.

The Court was not swayed by arguments that the Sublease did not "take into account" referrals because it (i) provided for fixed payments, (ii) was commercially reasonable, and (iii) was not proven to be above "fair market value." The Court, citing 42 C.F.R. § 411.354(c)(2)(ii), pointed out that the first appropriate inquiry with respect to the Sublease under Stark analysis is whether an indirect compensation arrangement exists, which only requires an assessment of whether the compensation "takes into account" referrals, and does not require an analysis of "fair market value." The Court noted that the "fair market value" of the arrangement is not to be considered unless and until the defendant raises it in defense as an exception under the Stark Law.

The Court then dismissed the argument presented by the Physicians and the Hospital that the Sublease qualified for protection under the Indirect Compensation Arrangement Exception set forth in 42 CFR § 411.357(p) because one of the requirements for such exception is that the compensation must be set at "fair market value." The Court maintained that a compensation arrangement that "takes into account" anticipated referrals, such as the Sublease, "will necessarily be greater than what would be paid by parties who are not in a position to refer business to each other," and thus would not reflect fair market value. The Court recited the definition of "fair market value" set forth in 42 CFR § 411.351:

"Fair market value means the value in arm's-length transactions, consistent with the general market value. 'General market value' means the price that an asset would bring as the result of bona fide bargaining between well-informed buyers and sellers who are not otherwise in a position to generate business for the other party . . . where the price or compensation has not been determined in any manner that takes into account the volume or value of anticipated or actual referrals."

Therefore, since the Court held that an indirect compensation arrangement existed, and no exception was applicable, the Court found that the Hospital and the Physicians were in violation of the Stark Law.

Takeaway

The complex nature of the Stark Law, and the regulations interpreting it, require that the courts charged with the task of applying it must conduct fact-intensive reviews of the arrangements under consideration. The circumstances surrounding the negotiation and execution of the Sublease are only briefly summarized in this bulletin; however, the facts are described and analyzed at great length in the Court's opinion. The unique facts surrounding a particular arrangement between a referral source and an entity that furnishes "designated health services" will inevitably color a court's judgment of the arrangement in question. Thus, opinions construing the Stark Law are often times of limited precedential value. Nevertheless, the Court's relatively broad construction of the phrase "take into account" in Singh is certainly cause for concern in the health care community. If other courts and districts follow suit, it would call into question the permissibility of certain health care asset valuation methodologies that had, prior to Singh, enjoyed near universal endorsement and adoption. Unless and until CMS publicly comments on the Singh decision, parties considering transactions that utilize any such valuation methodologies are advised to consider the Singh opinion before proceeding.

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