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Valuation and Regulatory Issues in Healthcare: What You Should Know

Valuation requires the consideration of a multitude of far-ranging factors, from fluctuations in revenue to the dependence on a key supplier. Valuation in the healthcare arena is even more complex given the number of regulatory issues that exist. Adding further intricacy is the usage of the term “fair market value”, which has different meanings depending on the source.

Typically, when a valuation is being performed, reference is made to “fair market value” (FMV). In this context, FMV usually refers to Revenue Ruling 59-60, which defines it as “the price at which the property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”

Since the focus of Stark and Medicare Fraud and Abuse “laws” is on the prohibition of payments for referrals, the definition of fair market value is not entirely the same. As a result, CMS defines FMV as, “the value in arms-length transactions consistent with general market value,” which is further defined as, “the price that an asset would bring as the result of bona fide bargaining between well informed buyers and sellers who are not in a position to generate business for the other party…”(42 CFR Sec.411.351). It is important to note the phrase, “not in a position to generate business for the other party”.

It’s necessary to remember that anti-kickback statutes, prohibit payments, or other transactions are made in an effort to obtain referrals. If it is determined that the price paid for a practice exceeds its fair market value, the differential could be considered payment for referrals. Transactions must be at “arms-length”. Violation of anti-kickback statutes can result in criminal prosecution, civil monetary penalties and/or exclusion from participation in Medicare and other federal programs. Even the acceptance of “small” gifts can give rise to potential criminal liability.

Stark II prohibits physicians from making referrals to entities in which they have an ownership interest for the performance of certain designated health services for which payment would be made by either Medicare or Medicaid. Stark Law violations may include civil monetary penalties and possible exclusion from participation in Medicare. If claims are submitted to government agencies that violate the Stark Law, the claims can be rendered false or fraudulent, thereby creating a potential liability under the False Claims Act.

The False Claims Act prohibits anyone from presenting a claim for payment or approval to the federal government that was false or fraudulent and the defendant knowingly violated the statute. The term “knowingly” includes having actual knowledge, deliberate ignorance of the truth or falsity of the information and acting in reckless disregard of the truth or falsity of the information. Penalties are generally no less than $5,500 but no more than $11,000 for each claim, plus up to three times the amount of damages.

As a result, it is extremely critical to understand the differences in the definition of Fair Market Value. Further, it is necessary to be mindful of the prohibitions against paying for referrals and to be aware of the penalties associated with violation of each. Lastly, even in daily practice, one must be cautious to accept gifts and should ensure that violations are not occurring.

If you have any questions or concerns around valuation in healthcare or regulatory issues within the industry, fill in the form below and a member of Withum’s Forensic and Valuation Services and Healthcare team will be in touch.

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