The business of health care Featured

8:00pm EDT September 25, 2009

Health care is an important part of the economy, comprising more than 15 percent of the gross national product. However, the industry does not follow normal economic trends because of investment by governmental reimbursement programs, such as Medicare, in the delivery of health services. The government’s role in health care has led to the development of many federal statutes and regulations that govern the business aspects of health care. Many business investments and arrangements that are perfectly legal in other industries are illegal in the health care sector and can even possibly lead to criminal indictments.

“You need to understand the complexity of the law governing health care business transactions if you’re involved in them or you may find yourself in trouble with governmental regulators,” says Tom Baker, shareholder with Baker, Donelson, Bearman, Caldwell & Berkowitz, PC.

Smart Business spoke with Baker about health care business transactions and the statutes and regulations that dominate the health care industry.

What makes health care business transactions different from other transactions?

Approximately 50 percent of all direct health care spending comes from the federal government. Because of this investment, the federal government has enacted numerous statutes and regulations that affect providers and independent suppliers of goods and services to the health industry. State laws also can govern health care business transactions, such as certificate of need and licensure laws. All health care business transactions, even transactions that do not directly involve health care providers, require substantial regulatory due diligence.

What are the statutes and regulations in place for the health care industry?

The regulations are directly tied to payments by the government for services rendered. The laws were designed to protect the public from fraudulent transactions. When the government pays for something, devious people create ways to cut the corners and get money improperly. For example, Medicare dominates the health care industry and is unique because it’s still a fee-for-service program. Nothing can happen without a physician referral, so the statutes and regulations that govern the industry are focused on referral relationships.

The first major statute is the Ethics in Patient Referral Act, or Stark law. This law is a blanket prohibition of physician referrals for certain ‘designated health services’ that are payable by the Medicare program to any entity with which the physician has a financial relationship, including either an ownership interest or compensation arrangement. Stark is absolute, so it’s the first filter you send a transaction through to make sure it complies with statutes and regulations. You have to determine if a physician is involved and whether there is a referral for a designated health service to an entity with which the physician has a financial relationship. If so, then you need to determine whether there is a statutory or regulatory exception that permits the referral.

The Anti-Kickback Statute is the second major law governing referrals. This law is broader than Stark and prohibits the payment or receipt of any remuneration of any kind for the referral of any item or service that is payable by any governmental reimbursement program. It also applies to the ‘arranging for’ such referrals. Therefore, certain relationships that are permissible in almost any other business, such as independent contractor agreements to pay for distribution of a produce or service, could get you in trouble in health care.

How has the consolidation of markets affected transactions?

Health care is an inefficient market, and inefficient markets consolidate. The health care payor market, particularly the provider organization market, has already consolidated. PPOs cover more Americans than any other form of health insurance — 193,000 individuals or about 69 percent of the population. Consolidation over the last five years has led to substantial market power in four PPOs: Blue Cross/Blue Shield, United, Cigna and Aetna. This has accelerated provider market consolidation, causing a ground swell of midmarket health care transactions.

What are the disadvantages of an unintegrated market?

Under antitrust laws, entities that are not clinically or financially integrated cannot collectively negotiate payment rates with the PPOs and other private payors. Independent provider networks can provide some bargaining benefits, but it’s impossible to collectively negotiate price terms unless you achieve some kind of integration. The provider market is integrating in order to gain marketing power. Integration strategies can be either horizontal, through mergers and acquisitions of providers that provide the same or similar services, or vertical, through the combination of several different aspects of the health industry.

The most prominent vertical integration strategy is the acquisition of specialty medical practices, particularly cardiovascular services, orthopedics, or oncology, by hospital systems. Hospital systems are striving to develop centers of excellence as a survival strategy, and vertical integration is required to implement those business plans.

How will the current debate in Washington affect health care transactions?

Health care providers can expect a decrease in payment from government reimbursement programs, even if the public option is not passed. This fact, along with the consolidated PPO market, will continue to drive health care business transactions. There will be no end to midmarket health care mergers and acquisitions over the next two to three years.

Tom Baker is a shareholder with Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, and teaches a course on The Legal Aspects of Health Care Business Transactions in the Auburn University Physicians Executive MBA Program. Reach him at (404) 221-6510 or