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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
(continued...)
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