An August 31, 2023 Department of Justice (“DOJ”) Press Release states the following:

Watermark Retirement Communities LLC, a senior living community operator based in Tucson, Arizona, that manages 79 retirement homes across the country, agreed to pay $4.25 million to resolve allegations that it violated the False Claims Act by soliciting and receiving a kickback from a nationwide home health agency (HHA) operator in order to facilitate referrals from Watermark retirement homes.

The United States alleged that the HHA operator purchased two of Watermark’s HHAs in Arizona to induce referrals of Medicare beneficiaries living in Watermark residential communities. The scheme was designed around eight Watermark retirement homes in five states (Arizona, Connecticut, Delaware, Florida and Pennsylvania) where the two companies had overlapping operations.  The United States alleged that from Jan. 1, 2014 through Oct. 31, 2020, Watermark caused the HHA operator to submit false claims for payments to Medicare for services provided to Medicare beneficiaries referred as a result of the kickback transaction. The Antikickback Statute prohibits parties who participate in federal health care programs from knowingly and willfully soliciting or receiving any remuneration in return for referring an individual to, or arranging for the furnishing of any item or services for which payment is made by, a federal health care program.

“It is imperative that decisions about the care provided to federal health care beneficiaries are not undermined by the payment of kickbacks,” said Principal Deputy Assistant Attorney General Brian M. Boynton, head of the Justice Department’s Civil Division. “Today’s resolution demonstrates that the Department is committed to holding accountable not only those who offer kickbacks but also those who receive them.”

“Whether you pay them or receive them, kickbacks undermine the integrity of our health care system,” said U.S. Philip R. Attorney Sellinger for the District of New Jersey. “Patients need to know the health care referrals they receive are in their best interest, not in the best interest of someone else’s bottom line. Our office will always be on guard to prevent unscrupulous operators from trying to take financial advantage of our health care system.”

The settlement announced today includes the resolution of claims brought under the qui tam or whistleblower provisions of the False Claims Act by David Freedman, who was the former director of strategic growth for the HHA operator between 2009 and 2016. The qui tam provisions permit a private party to file an action on behalf of the United States and receive a portion of any recovery. As part of today’s resolution with Watermark, Freedman will receive approximately $765,000.  In September 2021, the HHA operator entered into a settlement with the United States to resolve the claims against it arising out of the same transaction.

The HHA operator, referenced in the August 31, 2023 Press Release, is Bayada Home Health (“Bayada”). The whistleblower, David Freedman, worked for Bayada. The 2021 settlement pertains to an enforcement action by the DOJ against Bayada that was resolved with the payment of $17 million by Bayada.

According to the August 31, 2023 Press Release, in consideration of the purchase price by Bayada, Watermark agreed to facilitate referrals to Bayada. This type of “quid pro quo” violates the federal anti-kickback statute (“AKS”). If the price paid by Bayada to Watermark for the HHAs was greater than fair market value (“FMV”), the violation of the AKS is even more clear.

Other Enforcement Actions

According to other DOJ press releases, recent enforcement actions against parties to a transaction include:

• DaVita –

According to the DOJ, DaVita would offer a targeted physician or physician group a lucrative opportunity to enter into a joint venture involving DaVita’s acquisition of an interest in dialysis clinics owned by the physicians, and/or DaVita’s sale of an interest in its dialysis clinics to the physicians. To make the transaction financially attractive to potential physician partners, the DOJ contended that DaVita would manipulate the financial models used to value the transaction. According to the DOJ, these manipulations resulted in physicians paying less for their interest in the joint ventures and realizing returns on investment that were extraordinarily high.

• Prime Healthcare Services (“Prime”) –

Prime allegedly paid kickbacks by overpaying for a physician’s practice and surgery center because Prime wanted the physician to refer patients to Prime’s Desert Valley Hospital in Victorville, California. According to the DOJ, the purchase price, exceeded FMV and was not commercially reasonable. The DOJ contended that the  acquisition violated the AKS because (i) the price paid   by Prime took into account the volume and/or value of the physician’s referrals to Prime’s Desert Valley Hospital, (ii) the purchase price exceeded FMV, and (iii) the acquisition and immediate closure of the surgery center was not commercially reasonable.

Other Guidance
Office of Inspector General (“OIG”) guidance closest to being on point is a 1992 letter from D. McCarty Thornton, Associate General Counsel for the OIG. The letter discusses potential kickback issues arising from a hospital (or entity that owned a hospital) purchasing a physician group:

Frequently, hospitals seek to purchase physician practices as a means to retain existing referrals or to attract new referrals of patients to the hospital. Such purchases implicate the anti-kickback statute because the remuneration paid for the practice can constitute illegal remuneration to induce the referral of business reimbursed by the Medicare or Medicaid programs.

We believe the same concerns raised by hospital purchases of physician practices could also arise where another entity (such as a foundation) purchases a physician practice, when such foundation also owns or operates a hospital which benefits from referrals from those physicians.

Specific items that we believe would raise a question as to whether payment was being made for the value of a referral stream would include, among other things:

— payment for goodwill,

— payment for value of ongoing business unit,

— payment for covenants not to compete,

— payment for exclusive dealing agreements,

— payment for patient lists, or

— payment for patient records.

Payments for the above types of assets or items are questionable where, as is the case here, there is a continuing relationship between the buyer and the seller and the buyer relies (at least in part) on referrals from the seller.

We believe a very revealing inquiry would be to compare the financial welfare of the physicians involved before and after the acquisition. (One can expect to find projections on this subject among materials given to prospective physician participants in these arrangements.) If the economic position of these physicians is expected to significantly improve as a result of the acquisition, it is likely that a purpose of the acquisition is to offer remuneration for the referrals which these physicians can make to the buyer.

In a follow-up letter that clarified the position of the OIG, the OIG acknowledged that payments for intangible assets are not “per se illegal,” but it maintained that they must be scrutinized, and made the point that how the parties characterize such payments “is not determinative” of whether they are, in fact, being made in exchange for referrals. The OIG has since appeared to soften this hardline stance on the issues that would arise in the purchase of a physician practice with the expansion of the safe harbor for the acquisition of physician practices. However, the expansion does not encompass all transactions for “fair market value” and every transaction’s valuation should be scrutinized to ensure that it is not acting as a disguise to induce referrals.

Conclusion
While asset purchases normally present low kickback risk, it is important that the transaction be carefully structured. Warning signs in a transaction that indicate the need for special caution are (i) questionable valuations of intangible assets, (ii) a seller that will remain in business to some degree and, therefore, be able to refer patients to the buyer, and (iii) instances where commercial reasonableness may be difficult to objectively assess.

In the Bayada/Watermark transaction, both parties (buyer and seller) were liable under the FCA. Bayada was liable because it (i) submitted claims to federal health care programs (“FHCPs”) and (ii) allegedly paid kickbacks to Watermark in the form of purchase prices in excess of FMV. Watermark was liable under a collusion theory (i.e., Watermark’s action in referring FHCP patients to Bayada helped facilitate the submission of alleged false claims by Bayada).

In structuring an acquisition (asset or stock), it is important that if the seller is in the position to refer FHCP patients to the buyer after closing, (i) the purchase price is FMV, (ii) the purchase price does not take into account anticipated future referrals by the seller, and (iii) while the seller may refer post-closing FHCP patients to the buyer, the seller has no obligation to do so.

Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato, PC, a law firm based in Texas with a national health care practice. He represents pharmacies, infusion companies, HME companies, manufacturers, and other health care providers throughout the United States. Mr. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization and can be reached at (806) 345-6320 or [email protected].

AAHOMECARE’S EDUCATIONAL WEBINAR

Six-Year Lookback Audits: What the Law Requires

Presented by: Jeffrey S. Baird, Esq., Brown & Fortunato and Denise M. Leard, Esq., Brown & Fortunato

Wednesday, September 27, 2023

1:30-2:30 p.m. CENTRAL TIME
The Affordable Care Act includes the 60-day overpayment rule that requires DME suppliers to refund overpayments within 60 days of identification. What many suppliers are not aware of is that if an overpayment is identified, either internally or externally, suppliers are mandated by law to perform a six-year lookback audit. If suppliers do not comply with this rule, they are at risk for false claim penalties. This webinar will (i) discuss the 60-day overpayment rule and the six-year lookback obligation; (ii) discuss steps that suppliers can take to reduce the risk of being subjected to the 60-day overpayment rule; and (iii) set out the steps the supplier should take to successfully fulfill its obligations under the rule. 

Register for Six-Year Lookback Audits: What the Law Requires on Wednesday, September 27, 2023, 1:30-2:30 p.m. CT, with Jeffrey S. Baird, Esq., and Denise M. Leard, Esq., of  Brown & Fortunato.

Members:  $99
Non-Members:  $129