June 14, 2017
4 min read

Establish fair market value when dealing with industry

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Many surgeons have consulting, design and other relationships with orthopedic manufacturers. How are industry and surgeons to judge the appropriate market value of time and service delivered by a surgeon consultant? This is relevant since the health care industry has been under increasing scrutiny.

The Health Insurance Portability and Accountability Act established a national Health Care Fraud and Abuse Control Program designed to coordinate federal, state and local law enforcement activities with respect to health care fraud and abuse. In 2006, for example, the FBI investigated 2,423 health care fraud cases which resulted in 588 indictments, 532 convictions and $2 billion in recoveries. Also in 2006, the Office of Inspector General for the HHS excluded 3,425 individuals, and conducted 472 criminal actions and 272 civil actions related to federally-funded health care programs. The pace of this activity has continued.

Lawrence H. Brenner

Lawrence H. Brenner

Like all aggressive government actions, there is the risk of discouraging legitimate and desirable conduct. Laws relating to health care fraud are broadly written. The definition of illegal conduct can leave targeted parties anxious and confused.

Proof of criminal intent

Establishing proof of criminal intent on the part of a physician is difficult. Outside of health care fraud, some court rulings have focused on intent, for example. In the 2012 case of Ratzlaf v. United States, the appellate court held that to establish that a casino operator willfully violated a law related to structured payments, the prosecution must prove the defendant acted with knowledge that his conduct was unlawful, ie, the defendant must know of his legal requirement and must have a demonstrable, specific intent to violate this requirement/commit the crime. While Ratzlaf remains good law, its reach may be limited to cases of structured payments rather than health care fraud, where a public interest is more readily identifiable.

Illegality can frequently be inferred or implied from the facts surrounding a transaction. The 2002 case of United States Ex Rel. Goodstein v. McLaren Regional Medical, et al, shows how the U.S. District Court in Michigan interpreted the meaning and intent of the anti-kickback law. McLaren started as a civil whistleblower action that was eventually litigated by the federal government against defendants McLaren Regional Medical Center, an orthopedic group and several orthopedic surgeons. The government alleged the medical center and surgeons had violated Stark II and the anti-kickback statute when the medical center paid the surgeons more than fair market value to lease space for physical therapy services. The government claimed a part of the lease payment was paid solely for referrals by the surgeons to the hospital’s physical therapists. In addition to market data, the government introduced evidence of an exclusivity provision that prohibited the surgeons from leasing building space to other physical therapy providers.


In the bench trial (a trial to the court without a jury) that followed, the government presented expert testimony to show the medical center was paying approximately $4 per square foot above the market value to lease the space. This evidence was introduced to show the orthopedic surgeons violated the law by setting lease rates to take into account the value of patient referrals or other business generated by the parties. The orthopedic surgeons and the medical center countered that the leasing negotiations had taken place during a 9-month period; there were differences between the parties in terms of the lease agreement; and furthermore, the negotiations were “intense” and “absolutely arms-length.” The lease agreement provided many favorable terms for McLaren Regional Medical Center.

B. Sonny Bal

B. Sonny Bal

Defendants also introduced their own experts to show the lease rates were consistent with market values and did not incorporate a hidden payment for patient referrals. The court, finding in favor of the defendants, stated that “...the government has failed to present any evidence to establish that because of potential patient referrals, McLaren paid a higher rental rate than it otherwise would have paid or that...the defendant physicians received a higher rental rate than they would have otherwise received because of any patient referrals that McLaren might have received from the...physicians.”

Following the verdict, defendants petitioned the court for fees and costs related to the trial of about $650,000. The court denied the petition.

Definition of illegal

The McLaren decision is noteworthy for at least two reasons. One, the court focused solely on what the statute defined as illegal, ie, a lease payment that was partially based on the value of patient referrals. The facts supported the position that the hospital selected the orthopedic office as the site of its physical therapy center because it was, in part, desirable to have therapy close to the surgeons. In addition, the hospital was obviously an excellent and stable tenant for the orthopedic group. In rejecting the government’s claim, the court implicitly recognized that making lucrative business decisions is not illegal, so long as the parties comply with the law’s requirement that there be no payments for patient referrals.

Two, the defendants in the McLaren case were able to show arms-length negotiations and offered expert testimony to show the medical center was paying fair market value. This outcome should alert every orthopedic surgeon or device manufacturer to ensure that, in business transactions, the orthopedic surgeons provide and the manufacturers receive “fair market value” for services provided.


McLaren left unanswered whether the failure to provide fair market service in and of itself establishes a criminal or corrupt intent. Even so, the decision offers the following useful pointers:

  1. Lease agreements and real estate transactions between hospitals and orthopedic groups (or therapists and orthopedic groups) are subject to government scrutiny;
  2. Utmost care must be used to avoid even the appearance of impropriety in the form of an above fair market lease agreement;
  3. To accomplish the above (2), one can commission three independent realtors to establish the fair market value of the lease. Negotiations would be based on eliminating the highest lease rate, lowest lease rate and then selecting the middle rate among the three; and
  4. Failure of the court to reimburse the defendants for their costs in the McLaren case suggests a process as mentioned above (3) could reduce the risk of a costly government prosecution, since not all cases brought by the federal government are meritorious.

Disclosures: Bal and Brenner report no relevant financial disclosures.