Third Party Valuation No Silver Bullet in Health Care Deals


Drakeford v. Tuomey and U.S. vs. Bradford Regional Medical Center -

With the Affordable Care Act and market forces driving consolidation and creative transactions across the health care industry, health care professionals and deal makers have come to rely heavily on third party valuation reports to support compliance with the Stark Law, the federal Anti-Kickback Statute, the False Claims Act (“FCA”) and other health care regulatory requirements. However, even a strong valuation report does not shift the burden of proof to regulators; at best serving only as one persuasive fact. A valuation report that fails to take into account the stringent requirements of the Stark Law, including appropriate use of valuation methodologies, offers even less comfort, as illustrated by Drakeford v. Tuomey, CA No. 3:05-2858-MBS (US District Court, SC, 9/13/13).

In the Tuomey case, which was affirmed in federal court just this fall, Tuomey Healthcare System, Inc., a South Carolina hospital, entered into part-time employment agreements with 19 endoscopists paying them 131 percent of their net collected revenues in order to prevent them from moving from its ambulatory surgery center into lower cost competing locations. With compensation 31 percent in excess of collections from personally performed services and each service performed resulting in a facility fee payment to the hospital, this arrangement was found to violate the Stark Law’s physician self-referral prohibition and the FCA.

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