I have spent considerable time now studying the case (see post of 11/16). As those of us trained in tax law learn, court decisions are case-fact specific.  Without seeing the valuation report cited in the decision, it is not possible to know precisely what was done, but it seems clear that in the Court’s view, factors cited in the report were consistent with the purchase of referrals, e.g., “”These statements, however, do not counter the record evidence that the analysis in the [CPA Valuation] Report was  “based on the assumption that the Physicians would likely refer this business to the Hospital” and that Mr. Leonhardt‘s summary presentation showed an expected profit for BRMC from entering into the lease agreement that was based on receiving business from V&S.”

This suggests – although again we cannot be certain – that the valuation had as an underlying assumption that all the Nuclear Scans done in the physicians’ office would be referred post-transaction to the acquiring hospital.  If so, this suggests to me strategic value. Given the requirement of the Stark regulations defining the modifications to fair market value, a compliant Fair Market Value analysis would have considered the risk of the Hospital (and other potential competitors) not receiving all of the referrals, to wit:

420 CFR 411.351 states “Fair market value means the value in arm’s-length transactions consistent with 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; [emphasis added]

And from Stark II-Phase 2: ““Moreover, the definition of ‘‘fair market value’’ in the statute and regulation is qualified in ways that do not necessarily comport with the usage of the term in standard valuation techniques and methodologies. For example, the methodology must exclude valuations where the parties to the transactions are at arm’s length but in a position to refer to one another. In addition, the definition itself differs depending on the type of transaction: leases or rentals of space and equipment cannot take into account the intended use of the rented item; and in cases where the lessor is in a position to refer to the lessee, the valuation cannot be adjusted or reflect the value of proximity or convenience to the lessor.” [emphasis added]

Thus the cashflow analysis and the discount rate developed in connection with such a valuation would have to reflect something other than the actual relationship between purchaser and seller. The Court clearly believed that the actual relationship was the basis for the valuation. And, it is not clear from the Court’s opinion that the clear modifications to “fair market value” spelled out in the above two quotes from the Stark Regulations were taken into account.

The OIG’s office has long expressed concern with the sale of ancillary DHS owned by physicians to a Hospital or other buyer when the DHS will remain in the selling physician’s office and continue to be used by the physicians. Although it involved a surgery center, similar issues in the OIG’s perspective can be seen in Advisory Opinion No. 07-05.  As I (http://cpa.net/?p=245) and other observers noted at the time, this Advisory seemed to misconstrue fair market value, while emphasizing the focus on referrals.

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