Stark Law and Anti-Kickback Diligence in Healthcare M&A

Start with the arrangement, not the label

A buyer reviewing a healthcare business needs to understand who receives money or other value from the target, what each party provides, and whether physicians or their immediate family members have financial relationships with an entity furnishing services. A seller preparing for diligence needs the same basic information to explain how arrangements were documented and performed. The purchase agreement can then address identified issues with advice from the appropriate counsel.

Calling an agreement an employment contract, lease, management agreement or consulting contract is a starting point. The review also needs the written terms, the actual payments, the services or property involved, and the way the parties operated. A document that describes one arrangement while the parties follow another gives counsel a different question to investigate. The relevant law and any exception or safe harbor must be evaluated against the actual facts.

The physician self-referral law, often called the Stark Law, and the federal Anti-Kickback Statute have different scopes and requirements. One arrangement may raise questions under both. The following framework is a diligence roadmap; it cannot determine whether an individual arrangement complies. Engage healthcare regulatory counsel early enough to assess the relationships and help the transaction team address the findings. For a broader transaction overview, see the healthcare M&A legal guide.

Understand the physician self-referral question

CMS describes the physician self-referral law as restricting certain physician referrals for designated health services payable by Medicare to an entity with which the physician or an immediate family member has a financial relationship, unless an applicable exception is satisfied. CMS also describes the related prohibition on claims for improperly referred services. The analysis begins with the actual relationship, referral, services and applicable exception.

Identify financial relationships

Ask for an inventory of physician ownership and investment interests and compensation arrangements. Relevant records may include employment and contractor agreements, medical director agreements, leases, amendments and payment records. Request the parties' names, effective dates, compensation terms and a description of services. Counsel can use the inventory to determine which relationships warrant analysis under the applicable law.

Confirm whether the written record reflects how the arrangement works. For example, if an agreement specifies services, compare it with available schedules, invoices and evidence of performance. If a term was amended, include the amendment and identify when the parties began following it. These checks help counsel identify questions; they do not establish a violation or a defense by themselves.

Test the applicable exception

The governing statute and regulations contain exceptions with specific conditions. 42 CFR 411.357 sets out exceptions for certain compensation arrangements. The relevant exception depends on the relationship and its facts. Counsel should review the requirements of the particular exception and the evidence for each element rather than assume that an agreement qualifies because it has a familiar title.

Some arrangements require analysis of compensation and commercial reasonableness. A valuation or written agreement can be useful evidence, but the review should examine the applicable rule and the full facts. If records are incomplete, identify the missing information and its effect on the diligence conclusion. Avoid assuming that a missing document can be repaired retroactively or that it necessarily proves a legal violation.

Examine a practice sale as an isolated transaction

42 CFR 411.357(f) sets out a physician self-referral exception for certain isolated financial transactions, including a one-time sale of a practice or property, when its conditions are satisfied. The conditions address fair market value, referral-related compensation, commercial reasonableness and subsequent transactions, including specified exceptions. Regulatory counsel should review the complete provision and the actual sale documents before concluding that an arrangement qualifies.

This isolated-transactions provision is a Stark exception. It is not an anti-kickback safe harbor. A sale and any related arrangements need separate analysis under the federal Anti-Kickback Statute and any applicable safe harbor. For example, a purchase agreement may be accompanied by employment or management arrangements that counsel should evaluate on their own facts. A conclusion about the sale alone does not resolve every relationship that will continue after closing.

Analyze anti-kickback risk separately

The federal Anti-Kickback Statute addresses knowing and willful remuneration intended to induce or reward referrals and other specified federal healthcare program business. The statute states that a person need not have actual knowledge of the section or specific intent to violate it. The statutory terms and the facts matter; an M&A checklist cannot resolve intent.

Review the economic relationship

Map what each party gives and receives. Compensation, ownership returns, free or discounted services, leased space and other benefits may require review depending on the facts. Identify who proposed the arrangement, the services or property exchanged, how amounts were determined and whether the documents match the way the parties acted. Ask counsel to evaluate the arrangement and its business purpose in context.

HHS OIG's guidance on fraud and abuse authorities explains that safe-harbor compliance is voluntary and that failing to satisfy a safe harbor does not automatically make an arrangement illegal. OIG also explains that fair market value alone does not eliminate every anti-kickback concern. A review should therefore consider the applicable safe harbor, if any, and the complete facts rather than stop at a single compensation figure.

Keep safe harbors and Stark exceptions distinct

A Stark exception and an anti-kickback safe harbor are different legal provisions. Their conditions are not interchangeable, and the availability of one does not establish the result under the other. Ask regulatory counsel to identify the provisions relevant to each arrangement, the factual support for their analysis and any unresolved questions. OIG maintains the safe-harbor regulations and related materials.

Build a practical diligence record

Request the records needed to assess performance

Start with a list of current and historical arrangements relevant to the proposed review period. Request signed agreements and amendments, ownership records, compensation schedules, invoices and records showing the services or space provided. Ask about related parties and arrangements outside the target's standard contract repository. A list of missing items helps the buyer and seller understand what remains uncertain.

For each arrangement, record the contracting parties, dates, economic terms, relevant services and source documents. Add questions for the target and the person responsible for answering them. If the business changed a payment method or scope of work, request the corresponding approval and supporting records. Healthcare counsel can then distinguish questions that need further facts from issues requiring a substantive legal assessment.

Review the target's response to known issues

Ask whether the target has identified, investigated or addressed relevant compliance concerns, and request appropriate records through counsel. The review may include prior audits, corrective actions, communications with government agencies and material settlement obligations where available. Handle privilege and confidentiality questions with counsel before requesting or sharing sensitive materials.

Document what was reviewed, what could not be obtained and who will follow up. If an issue remains unresolved, explain the uncertainty to the transaction team so that it can evaluate its effect on timing and negotiation. A clean-looking summary is less useful than an accurate record of what the team knows and what it still needs to establish.

Address findings in the transaction documents

The purchase agreement can allocate responsibilities for providing information, obtaining approvals and addressing identified matters. Depending on the transaction and negotiation, the parties may consider representations, covenants, closing conditions, indemnification or a holdback. The terms should reflect the facts and the legal advice rather than assume that a contract between buyer and seller controls a government agency's rights.

Separate a known issue from a possibility that requires more investigation. The agreement can identify who will perform an agreed task, provide records or cooperate with a review. If a proposed condition depends on a third party or agency, ask counsel to define the condition and consequences carefully. A proposed closing date should leave time for questions that need answers before the parties decide whether to close.

Deal structure can affect which entity continues and which obligations may follow. An assumption of a Medicare provider agreement can also have consequences under the applicable rules. 42 CFR 489.18 addresses qualifying provider changes of ownership and assignment; counsel should assess its application alongside the transaction documents and the facts. Avoid using a purchase agreement's indemnity language as a substitute for that analysis.

Evaluate disclosure and remediation with counsel

If diligence identifies a potential problem, preserve the relevant documents and establish who will investigate. Counsel can assess the facts, applicable obligations, any need to stop or modify an arrangement, and the timing of further steps. The seller and buyer may have different roles and interests; each should understand its own representation and responsibilities.

CMS's Self-Referral Disclosure Protocol provides a process for providers and suppliers to disclose actual or potential physician self-referral violations. OIG's Health Care Fraud Self-Disclosure Protocol addresses potential fraud within its stated scope, including certain conduct implicating the anti-kickback statute. These are separate processes; their applicability and current instructions require case-specific review.

Disclosure is not an automatic outcome for every diligence finding, and a particular settlement or repayment result should not be assumed. Ask counsel to evaluate the evidence, available procedures and obligations before the parties decide what to do. If the transaction proceeds, the integration plan should identify the owner of each agreed corrective action and how completion will be documented.

Review any corporate integrity agreement

Ask whether the target is subject to a corporate integrity agreement and request the agreement, amendments and records relevant to ongoing obligations. HHS OIG describes corporate integrity agreements and provides access to agreements. Their requirements are defined by their terms; counsel should examine the particular document and any applicable transaction or notice provisions.

For diligence, identify the entity bound by the agreement, remaining reporting or review obligations and the people responsible for carrying them out. Ask healthcare regulatory counsel how the proposed transaction affects the agreement and whether communications, notice or other steps are required. Avoid assuming that a stock or asset structure automatically transfers or eliminates every obligation. Record any agreed follow-up in the closing and transition plan.

Plan the post-closing review

Before closing, identify arrangements that will continue, end or change. The transaction team can prepare an inventory of the relevant agreements and assign responsibility for obtaining legal review of proposed changes. A new compensation structure or management arrangement should be evaluated on its own facts before implementation, including the services expected and the way payments will be documented.

After closing, compare the transition plan with what actually happens. Track outstanding documents, contract changes and agreed follow-up. Escalate new facts that alter the regulatory analysis to healthcare counsel. This gives the buyer a practical way to connect the diligence findings to the business's operations without assuming that a pre-closing review settles every future question.

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