When you sell your practice, you enter a new world of financial and legal frameworks. As we discuss in our main guide on what actually happens after you sell your medical practice, regulatory compliance becomes a central focus for the acquiring entity. Getting it wrong can unravel a deal, trigger massive penalties, or even lead to criminal charges. Understanding these rules isn’t just for lawyers; it’s essential for any physician-owner looking to secure their legacy and ensure a smooth transition.
Stark Law vs. Anti-Kickback Statute: What’s the Difference?
Though often mentioned together, Stark Law and the Anti-Kickback Statute are distinct regulations with different rules and consequences. At their core, both are designed to prevent financial incentives from corrupting medical judgment.
The Anti-Kickback Statute (AKS) is a criminal law based on intent. It forbids knowingly and willfully offering, paying, soliciting, or receiving anything of value to induce or reward patient referrals for services covered by federal healthcare programs like Medicare and Medicaid. A violation can occur even if just one purpose of the payment is to induce referrals.
The Stark Law, or Physician Self-Referral Law, is a civil statute based on strict liability. This means intent doesn’t matter. It prohibits physicians from referring Medicare or Medicaid patients for certain “designated health services” (DHS) to an entity with which the physician (or an immediate family member) has a financial relationship, unless a specific exception applies.
| Feature | Anti-Kickback Statute (AKS) | Stark Law |
|---|---|---|
| Nature of Law | Criminal (Intent-based) | Civil (Strict Liability) |
| Prohibition | Forbids offering/receiving “remuneration” to induce referrals for any federally covered service. | Forbids self-referrals for “designated health services” (DHS) only. |
| Key Question | Was one purpose of the payment to influence referrals? | Does a financial relationship exist, and was a referral for DHS made? |
| Penalties | Fines, prison time, and exclusion from federal programs. | Repayment of claims, fines, and exclusion from federal programs. |
| Compliance Path | Structure arrangements to fit within a “safe harbor.” | Structure arrangements to fit within an “exception.” |
Why Compliance Becomes Critical During a Practice Sale
During an M&A transaction, every financial component of the deal is placed under a microscope. Acquirers perform intense due diligence because when they buy your practice, they may also inherit your pre-existing compliance liabilities.
Here’s where the risk lies:
* Purchase Price & Earnouts: If the valuation or future payments (earnouts) could be interpreted as payment for future referrals, they can trigger AKS scrutiny.
* Employment Agreements: Your post-sale compensation must be at fair market value (FMV) and not take into account the volume or value of your referrals.
* Leases & Service Agreements: Arrangements for office space, equipment, or management services must be commercially reasonable and at FMV to avoid being seen as a disguised kickback.
Top 5 Compliance Red Flags in Healthcare M&A Deals
Buyers and their legal teams are trained to spot potential violations. Here are the most common red flags they look for during due diligence:
- Compensation Structures Not at Fair Market Value (FMV): Paying physicians a salary that is significantly above or below what the market dictates for their specialty, location, and workload raises immediate suspicion that the payment is for something else—like referrals.
- Productivity Bonuses Tied Directly to Referrals: Compensation formulas that directly reward physicians for the volume or value of referrals for designated health services are a clear violation of Stark Law. Compliant physician compensation models post-PE must be based on personal productivity or other permissible factors.
- Improperly Structured Service Agreements: Payments for roles like a medical directorship must reflect real work performed at a fair market rate. If a physician is paid a high stipend for minimal duties, it looks like a kickback. This is why properly structured Professional Services Agreements (PSAs) are crucial.
- Below-Market Lease Arrangements: If your practice leases space from a hospital or other entity to which you refer patients, that lease must be at fair market value. A “sweetheart” deal on rent is a classic red flag for an illegal inducement.
- Overlooking Ancillary Service Relationships: Financial ties to labs, imaging centers, or physical therapy clinics are common sources of Stark Law risk. These relationships must be structured to fit squarely within a Stark exception.
The Due Diligence Playbook: Uncovering Risk Before It’s Too Late
For both buyer and seller, thorough due diligence is the best defense against compliance failures. As a seller, preparing for this scrutiny in advance can accelerate your deal and build buyer confidence.
Your diligence file should be ready to demonstrate compliance across these key areas:
* Physician Employment and Service Contracts: All compensation terms, including salary, bonuses, and benefits, should be clearly documented and supported by FMV analysis.
* Lease and Equipment Rental Agreements: Collect all lease documents. Be prepared to show they reflect commercially reasonable, arm’s-length terms.
* Vendor and Supplier Agreements: Any financial relationship with a vendor to whom you also refer patients must be reviewed for AKS compliance.
* Referral and Payer Data: Buyers will analyze referral patterns to see if they correlate with any questionable financial arrangements.
Navigating this process effectively often requires specialized expertise. The role of legal counsel in M&A is indispensable for identifying and resolving these complex issues before they jeopardize your transaction.
Structuring Your Deal for Compliance: Key Exceptions and Safe Harbors
The goal is not to avoid all financial relationships but to structure them to fit within the protective “exceptions” of Stark Law and “safe harbors” of the AKS. For M&A transactions, a few are particularly important:
- Bona Fide Employment Exception (Stark) / Employee Safe Harbor (AKS): This is the most common path to compliance for physicians who become employees of the acquiring entity. To qualify, compensation must be at fair market value, be for identifiable services, and not be determined in a way that accounts for referral volume or value.
- Personal Services and Management Contracts: This exception/safe harbor allows for payments to independent contractors (like medical directors) if the arrangement is documented in writing, specifies the services, has a term of at least one year, and features compensation that is set in advance and at fair market value.
- MSO Structures: Partnering with a Management Services Organization (MSO) can also provide a compliant framework. By having the MSO structure handle the non-clinical business operations, it helps separate the business side from clinical decision-making, reducing the risk of improper financial influence over referrals.
Finally, these federal laws exist alongside state regulations. Many states have their own anti-kickback laws and rules like the Corporate Practice of Medicine Doctrine, which can further dictate how deals must be structured.
Your Go-Forward Compliance Strategy
Closing the deal doesn’t end your compliance obligations. The acquiring organization will implement ongoing monitoring to ensure all financial relationships remain compliant. This includes periodic reviews of compensation, leases, and referral patterns.
Proactively addressing Stark Law and AKS issues before and during your practice sale is not just about avoiding penalties. It is about protecting the value of the business you built and ensuring a secure, successful exit. A clean compliance record is a sign of a well-run practice, making it a more attractive target for sophisticated buyers.
If you are preparing to sell your practice, you need an advisory partner who understands these rules inside and out. Contact SovDoc to discuss how we can help you navigate the complexities of healthcare M&A with confidence.
Frequently Asked Questions
What is the primary difference between Stark Law and the Anti-Kickback Statute in medical practice sales?
The Anti-Kickback Statute (AKS) is a criminal law based on intent that forbids knowingly offering or receiving anything of value to induce patient referrals for federally covered services. In contrast, the Stark Law is a civil statute based on strict liability that prohibits physician self-referrals for certain designated health services unless an exception applies. AKS looks at the intent behind payments, while Stark Law focuses on the existence of a financial relationship regardless of intent.
Can a physician receive compensation based on referral volume after selling their practice?
No, post-sale compensation tied directly to the volume or value of referrals violates both the Stark Law and Anti-Kickback Statute. Employment agreements after the sale must be at fair market value and structured so compensation does not account for referrals. Compliance requires compensation models based on personal productivity or other permissible factors, not referral metrics.
How do lease agreements affect compliance during a practice sale?
Lease arrangements must be commercially reasonable and reflect fair market value, especially if the lease involves entities to which physicians refer patients. A below-market lease can be viewed as an illegal kickback or inducement, creating compliance risks under both Stark Law and AKS. Proper documentation and FMV analysis are essential to avoid triggering regulatory scrutiny.
What are common compliance red flags buyers look for during due diligence in healthcare M&A deals?
Key red flags include: 1) Compensation not at fair market value; 2) Productivity bonuses tied to referral value; 3) Improperly structured service agreements such as medical directorships with minimal duties but high pay; 4) Below-market lease arrangements involving referral sources; and 5) Overlooking ancillary service relationships that may violate Stark Law exceptions.
How can the sale of a medical practice be structured to comply with Stark Law and the Anti-Kickback Statute?
Structuring the deal to fit within legal exceptions (Stark Law) and safe harbors (AKS) is critical. Common strategies include using the Bona Fide Employment Exception where compensation is at fair market value and not referral-based, properly documented personal services and management contracts, and using a Management Services Organization (MSO) structure to separate clinical and business functions. Ensuring compliance with these frameworks helps avoid penalties and facilitates a smoother transaction.
