Charles A. and Marian L. Derby, et al. - Page 15

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          design of a new, state-of-the-art Sutter Davis Hospital scheduled           
          to open in September 1994.                                                  
               B.  Negotiations                                                       
               Negotiations between SMF and physician representatives of              
          UHMG began in 1993 and continued through most of 1994.  The                 
          discussions covering the consideration that petitioners would               
          receive for their medical practices were protracted and sometimes           
          acrimonious.  Unlike Foundation, Sutter Health was unwilling to             
          pay anything for the intangible assets, or goodwill, that might             
          be associated with petitioners' medical practices.  Sutter Health           
          was unwilling to do so for two reasons:  First, and principally,            
          because Sutter Health's management believed that doing so might             
          constitute a crime under the Medicare and Medicaid antikickback             
          statute, 42 U.S.C. sec. 1320a-7b(b), prohibiting payments for               
          referrals of patients eligible for Medicare or Medicaid;12 and,             

               12 Sutter Health's nonprofit, tax-exempt subsidiaries,                 
          including SMF, provided substantial goods and services for which            
          payment was made under Medicare and Medicaid.  The Associate                
          General Counsel of the U.S. Department of Health and Human                  
          Services had written a letter on Dec. 22, 1992, in response to a            
          request from the Internal Revenue Service Office of the Associate           
          Chief Counsel for Employee Benefits and Exempt Organizations for            
          the Department's views concerning the application of the Medicare           
          and Medicaid antikickback statute, 42 U.S.C. sec. 1320a-7b(b), in           
          the case of transactions involving the acquisition of physician             
          practices by tax-exempt hospitals and other health care                     
          providers.  The letter, widely circulated in the nonprofit health           
          care sector, had expressed the view that payments made in                   
          connection with the acquisition of physician practices that were            
          in excess of the fair market value of the "hard assets" of the              
          practice, including payments for goodwill, patient lists, or                
          patient records, might be considered payments for patient                   

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