All Co-Management Arrangements are Not Created Equal: Understanding True Value-Drivers

Published by HFMA Advisor The trend towards improved quality and transparency in healthcare is shifting hospitals’ critical success factors from financial performance to efficiency and quality performance that are on par with national and industry standards. In order effectively to elevate performance and keep up with these standards, many hospitals and health systems are involving physicians by integrating them into governance and leadership positions. It has become abundantly clear that healthcare payment is making the shift from volume to value. As a result, physicians’ participation is vital for hospitals and health systems to achieve performance outcomes related to quality.

Introduction to Co-Management Arrangements

The quintessential co-management arrangement is a strategic agreement between a hospital and a group of physicians in order to align the physicians with the hospital for the physicians’ provision of improved quality and efficiency performance in exchange for compensation payable by the hospital. These arrangements can range in scope from a specific service line to an entire hospital or even multiple hospitals within a health system. They are most commonly seen for service lines such as orthopedic surgery and cardiology, but can be customized for nearly any service line or hospital program, from obstetrics/gynecology to neurosurgery to wound care. There are two primary arrangement types. The first is the direct contract co-management model, in which the physicians can be individually engaged or engaged as a group. The other co-management model is the limited liability company (“LLC”) model. In the LLC model, instead of the hospital contracting directly with the physicians, the hospital contracts with a management company, the LLC, which has been formed for the purpose of co-managing the subject service line. This LLC can be owned wholly by the physicians or jointly by the physicians and the hospital. Whether engaged directly or through a management company, the services provided by the physicians and the accompanying fee structure in co-management arrangements are relatively consistent throughout the market. Services can be categorized into two buckets:

1. Hourly Based
2. Performance-based

The hourly-based services are administrative in nature, such as as clinical management, program development, committee meeting attendance, etc. The performance-based services are clinical in nature and are provided via the achievement of certain pre-determined quality outcomes related to the performance of the subject service line. The fee structure corresponds with the services provided and is typically comprised of the following components:

1. A fixed fee, and
2. A variable fee

The fixed fee is usually an hourly rate payable to the physicians for their time spent performing the hourly-based duties described above. The variable fee is at-risk compensation payable to the physicians based on their achievement of certain service line performance thresholds, as described above. The atrisk compensation amount is variable in that, based on the service line performance, the physicians may receive any compensation amount from $0 up to a maximum incentive compensation amount typically determined by a third-party valuation firm. The following discusses the importance of setting compensation amounts that are consistent with Fair Market Value (FMV).

The Need for Fair Market Value

According to the Internal Revenue Service (“IRS”) Revenue Ruling 59-60, FMV is defined as: FMV, in effect, is the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. As it relates to the healthcare industry, and physician compensation arrangements in particular, federally mandated fraud and abuse legislation consider FMV the standard of value for physician arrangements. Therefore, the documentation and analytical process associated with an FMV opinion are crucial to have on record if an arrangement or facility is audited by government authorities. Specifically, since Medicare, Medicaid, or any other government program funding could trigger a review of transactions between referring parties (such as hospitals and physicians), legislation such as the anti-kickback statute, which prohibits compensation in exchange for patient referrals, and the Stark self-referral law, which limits certain physician referrals, guide healthcare’s legal and regulatory environment. The anti-kickback statute is a criminal offense, with some intent or some level of knowledge of wrongdoing, while the Stark self-referral law is a civil offense punishable by monetary fines. As a high-level overview, this legislation seeks to prevent payments to physicians based on the volume or value of referrals. Click here to continue to the full article.

Physician Practice Acquisition Valuations – A Primer on Fair Market Value

Published by ByrdAdatto In the era of healthcare reform, physicians are increasingly choosing to merge or sell their professional practices to larger groups or hospital affiliated entities instead of navigating the increasingly complicated regulatory environment on a stand-alone basis. Beginning in 2010, the Affordable Care Act (“ACA”), the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”), and the Centers for Medicare and Medicaid Services (“CMS”) have drastically reshaped the landscape of the insured population in the US and set in motion fundamental shifts in the way in which healthcare providers are paid for their services. Many solo practitioners are finding that the new regulatory environment has increased their administrative burden and are therefore increasingly considering selling or merging their practices as a way to remain competitive. When contemplating a transaction with a physician practice, the regulatory environment is not as straightforward as it used to be. The Stark Law (42 C.F.R. § 411.351), the federal Anti-Kickback statute (42 U.S.C. § 1320a-7b), and the Private Inurement Statute (Regs. 1.501(c)(3)-1(c)(2)) individually and collectively regulate the price at which a transaction can occur involving a physician practice and a larger physician practice, hospital, or health system (or other non-profit entities in the case of the Private Inurement Statute). Click to continue.

Determining Reasonable Price for Physician Non-Compete Buyouts: One Size Does Not Fit All!

Published by Becker's Hospital Review Increasingly, physicians are choosing to enter employment relationships with larger practices or hospital-affiliated entities instead of owning their own practices. Employment contracts will often include non-competition covenants that restrict the employed physician from competing with the practice during and after the employment relationship has ended. Unfortunately, with the rise in physician employment, there has also been an increase in disputes when the employment is terminated and the physician chooses to compete with the practice.¹ Employment laws and covenant not to compete requirements vary from state to state. For example, in Texas, covenants not to compete are intended "...to protect the goodwill or other business interest of the promisee [which in most cases is the employer]".² Among other requirements specific to physicians, "the covenant must provide for a buy out of the covenant by the physician at a reasonable price, or, at the option of either party, as determined by a mutually agreed upon arbitrator or, in the case of an inability to agree, an arbitrator of the court whose decision shall be binding on the parties...".³ In some cases, the parties may choose to indicate a specific buy out price or formula for the covenant within the employment contract, such as 1 times the physician's annual salary. While convenient, setting a price upfront in this manner may not reasonably capture the value of the goodwill or other business interest at risk should the physician choose to compete. Alternatively, the parties may decide to state the buy out price will be based on a fair market value price to be determined at the time of termination, which can be complicated and beyond the capabilities of the parties to determine on their own. Therefore, parties often turn to appraisers to assist in determining the "reasonable price" for the buyout of a covenant not compete. Click here to continue to the full article on physician non-compete buyouts.

OIG Fraud Alert: Physician Compensation & Indirect Benefits

Published by Compliance Today The most recent Office of Inspector General fraud alert (OIG Fraud Alert), published June 9, 2015, cautioned referring physicians that entering into fraudulent medical directorship and office staff arrangements could result in criminal, civil, and administrative sanctions.1 The alert was aimed specifically at referring physicians, but there are compliance implications for hospitals and health systems as well, because these entities often drive the structure and terms of physician compensation agreements.

Back Ground and Alleged Violations

The alert noted that the OIG reached settlements with 12 individual physicians who had entered into questionable medical directorship and office staff arrangements. The compensation paid through the medical directorship arrangements was investigated due to alleged improper remuneration under the Anti-Kickback Statue (AKS). Allegedly, the compensation paid to the physicians took into account the volume or value of the physicians’ referrals and did not reflect fair market value for the services. In some cases, the physicians may not have actually provided the services called for under the agreements. Additionally, the OIG alert noted that some of the 12 flagged physicians had entered into arrangements under which the salaries of their front office staff were covered by the contracting entity.

Penalties

The OIG alert did not specifically note the parties involved, but the settlements were likely with physicians formerly associated with Fairmont Diagnostic Center and Open MRI Inc., an imaging facility in Houston, Texas (Fairmont). This case was originally investigated in 2012, resulting in a $650,000 False Claims Act settlement with Fairmont and its owner and operator, Dr. Jack L. Baker.2 Following the settlement, the OIG filed OIG Civil Monetary Penalties Law (CMPL) cases against 12 associated physicians, eventually collecting over $1.4 million in penalties ranging $50,000 to $195,016 per physician.3

Healthcare Compliance Tips

Several lessons can be learned from the latest OIG alert from a compliance perspective. When entering into medical directorship arrangements, hospitals and physicians should carefully consider the following:

• The business justification, commercial reasonableness, and necessity of the subject services should be discussed and documented. Typically, medical director services are required to facilitate efficient operations of the hospital and increase quality of care to better serve the community.
• The services outlined in the medical directorship agreement should match the services actually provided by the physician.
• There should be no unexplained overlap of medical director services provided by multiple physicians. If there are multiple physicians filling the same administrative role, the hospital should document why the overlap is necessary.
• Physicians should keep time sheets for the hours they spend providing medical director services.
• Physicians should not be billing, collecting, or performing procedural work during any hours logged under a medical directorship, because this could create a double payment.
• Physicians should bear the cost of any expense that directly benefits their practice, such as front office staff, rent, and equipment expenses.
• Payments made for medical directorships and/or benefits received (i.e., office staff) should be set at fair market value and should not be determined based on the value or volume of referrals.

Conclusion

With its 41% budget increase over the past two years (from $295 million in 2014 to $417 million in 2016),4 the OIG is likely to step up its enforcement of the Stark Law and Anti- Kickback Statute. With this increased scrutiny, vigilance in compliance efforts is as important as ever for hospitals and physicians.

Understanding the Implications of OIG Advisory Opinion 16-07

Published by Becker's Hospital Review The Office of Inspector General has posted a favorable Advisory Opinion (No. 16-07)1 today regarding a savings card program under which individuals who have prescription drug coverage under Medicare Part D and receive discounts on a drug that is statutorily excluded from coverage under the Program. The Advisory Opinion analyzed whether or not the arrangement violated the exclusion authority at section 1128(b)(7) of the Social Security Act, the civil monetary penalty provision at section 1128A(a)(7), as both sections relate to the commission of acts described in section 1128B(b), the Federal anti-kickback statute. According to the Advisory Opinion, the Requester (marketer and distributor of a U.S. Food and Drug Administration approved erectile dysfunction drug) has stated that the subject drug is covered by several private insurance plans and some Federal health care programs. However, the subject drug is currently excluded from coverage under Medicare Part D. Under the subject arrangement, Medicare Part D beneficiaries may utilize a savings card provided by the Requestor to receive drug prescription discounts. Under the savings program, Medicare Part D beneficiaries are eligible to receive discounts on out-of-pocket costs greater than $15, but not more than $75 per prescription, on up to 12 drug prescriptions. The advisory opinion makes it clear that co-payment coupons may induce the purchase of federally payable items in two ways. Click here to view the full article.

Payments and FMV Considerations in Reviewing Telemedicine Arrangements

Published by The Health Lawyer The growth in telemedicine adoption and demand for physician coverage services have raised a new challenge for healthcare providers and health systems alike. Navigating provider availability, access and the reimbursement environment, as well as the ever-changing state-by-state regulatory environment requires heightened diligence for health systems pursuing a telemedicine solution. Given these unique arrangements can often involve compensation between a hospital and physician or even between hospitals themselves, the need to ensure that these telemedicine arrangements are consistent with fair market value (“FMV”) and meet fraud and abuse standards is critical. A compliant and defensible telemedicine FMV analysis requires an understanding of the nuances in the telemedicine industry.

FMV Standard

Just as is the case when hospitals contractually pay physicians for traditional ED on-call coverage, or any other service for that matter, it is vital that those payment rates be set at FMV to avoid violating the Stark Law and/or the Anti-Kickback Statute (“AKS”). FMV is a key requirement in order to fall within an exception to the Stark Law’s prohibitions against certain types of referrals and is the standard which must be met in contractual arrangements within healthcare where at least one party is a physician or immediate family member with a financial interest in a party to the transaction.4 As defined by the International Glossary of Business Valuation Terms,5 FMV refers to: The price, expressed in terms of cash equivalents, at which a property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s-length in an open and unrestricted market, when neither is under compulsion to buy nor to sell, and when both have reasonable knowledge of the relevant facts. In relation to healthcare and particularly service agreements within healthcare, Stark guidance suggests: The compensation must be set in advance, consistent with fair market value, and not determined in a manner that takes into account the volume or value of referrals or other business generated by the referring physician.6 Additionally, telemedicine arrangements can run the risk of violating the federal AKS. The AKS indicates that the existence of any payment by a hospital to a physician could create the risk that the compensation was used as an inducement for that physician to remain on the medical staff or do business at the hospital. Additionally, AKS implications could arise when hospitals sell telemedicine services out to facilities in need of coverage. 7 Once again, FMV is a key safe harbor here to avoid AKS implication.8 Ensuring that telemedicine payment rates are set at FMV is a vital step in establishing a compliant telemedicine arrangement.

Telemedicine Industry Overview

According to the American Telemedicine Association (“ATA”), telemedicine refers to the exchange of medical information from one site to another through electronic communications to improve a patient’s health.1 Telemedicine is an attractive option for hospitals, physicians and patients alike. Hospitals leverage telemedicine as a means to reduce emergency department (“ED”) hospital utilization costs and improve access to care. The ATA reports that over half of all U.S. hospitals now use or offer some form of telemedicine.2 Physicians are able to expand their patient reach without incurring traditional brick and mortar practice expenses. Physicians also enjoy being able to set their own scheduling by incorporating telemedicine work as they see fit in their day. From patients’ perspectives, traditional barriers such as mobility, distance and time constraints are less of a challenge with telemedicine. The focus is on consumer choice, whereby patients can select their own healthcare practice, provider and pharmacy. Click here to continue to the full article on Telemedicine FMV.

Fair Market Value: Gaining Attention Within Life Sciences

Published by ABA Health eSource As the count and monetary value of fraud and abuse settlements and judgments in the healthcare sector continues to rise year over year, the federal government has sought to keep pace through investing in infrastructure and legislating requirements of increased transparency on the part of healthcare entities, specifically companies in the life sciences industry. These investments and legislative changes are driven by a high return on investment for the federal government, as the Department of Health and Human Services (HHS) has reported that for every dollar invested in healthcare fraud and abuse investigations, approximately $7.70 has been recovered in settlements and other legal outcomes.1 New guidelines from the Department of Justice (DOJ) suggest that individuals, including employees and physician contractors of life sciences companies, will be targeted in civil and even criminal suits alongside the DOJ’s investigation of a company.2 Since federal law prohibits the payment of compensation to physicians in excess of fair market value (FMV),3 and any excess payment to a physician may be construed as an inducement for referrals and may result in litigation, it is imperative that life sciences companies develop a robust internal approach toward payments to physicians for necessary and legitimate consulting services.

The Federal Government Raises the Stakes

The government’s successes in fighting healthcare fraud and high return on investment in the area has spurred it to increase its investment accordingly. A representative with the HHS Office of Inspector General (OIG) announced in June of 2015 that the OIG is in the process of hiring additional lawyers in order to combat healthcare fraud,⁴ specifically fraud on the part of physicians providing services to healthcare entities under questionable payment arrangements.⁵ Increased scrutiny by the OIG suggests that the agency is no longer willing to wait for whistleblowers to bring qui tam suits,⁶but intends to seek out and prosecute physician fraud on its own.⁷ This initiative by the OIG is surprising given that over 700 whistleblower lawsuits were filed in 2014, representing an increase of approximately 75 percent over 2009 levels,⁸ and clearly illustrates that the agency is not content with the current (albeit increased) rate of healthcare fraud prosecution. Additionally, the OIG has focused in recent years on the utilization of data analytics in its pursuit of Medicare fraud cases, resulting in “almost $15 billion in investigative receivables and more than 2,700 criminal actions in the past 3 years [since 2012].”⁹ These developments indicate that an even greater increase in healthcare fraud and abuse cases will arise in the near future. This prosecution trend is worrisome for life sciences companies in particular, which already face a greater percentage of qui tam lawsuits than other segments within the healthcare sector. For instance, in 2015, pharmaceutical giant Johnson & Johnson reached a $2.2 billion settlement with the DOJ to settle claims that, among other infractions, involved the payment of monetary kickbacks to physicians. Omnicare, a leading provider of pharmaceuticals to long-term care facilities and nursing homes, also settled for $116 million in connection with the Johnson & Johnson kickback payments.¹⁰These settlements highlight the significant risk that life sciences companies run when accused of paying kickbacks to physicians. It is important to emphasize that illegal kickbacks do not need to follow the classic form of separate and identifiable direct payments for referrals, but can be implied (and therefore prosecuted) in compensation that exceeds FMV for otherwise verifiable and legitimate physician services. In the 2015 case of Daiichi Sankyo, Inc., the pharmaceutical company paid $39 million to settle kickback claims that originated from paying physicians for speaker fees.¹¹ As all compensation transactions between life sciences companies and physicians move into the crosshairs of government agencies, it is imperative that life sciences companies develop a robust internal methodology to ensure that physicians are compensated at FMV for verifiable services that further a legitimate business purpose of the company. With the institution of the Physician Payments Sunshine Provision of the Patient Protection and Affordable Care Act (also known as the Open Payments program),¹² applicable life sciences companies are required to report all payments to physicians annually on a public website.¹³ While certainly geared towards increasing transparency and aiding the decision-making process of informed healthcare consumers, the Sunshine Provision reporting requirement also provides a golden opportunity for the OIG and others to collect and analyze physician payment data from many life sciences companies, providing the first step in identifying individual arrangements in which a payment to a physician may exceed FMV.

Tips for Life Sciences Company Compliance Programs

How can a life sciences company proactively demonstrate compliance with government regulation in order to avoid investigation and eventual litigation? Before establishing an internal methodology for FMV compensation to physicians, compliance personnel should adhere to the following practical guidelines regarding physician service agreements:

1. Determine that a legitimate business need for the arrangement exists (absent potential referrals);
2. Fully understand the services being provided as outlined in a written agreement (which should detail payments for identifiable services and be executed before services are performed);
3. Determine necessary qualifications for the position such as specialty, credentials, and experience level;
4. Identify and screen candidates based on the qualifications above; and
5. Offer the position to the best candidate.

Click here to continue to the full article.

3 Interesting Valuation Issues for Hospital Leadership

The following article was published by Becker's Hospital Review

A number of healthcare valuation trends have emerged in recent years, some of which are centered on the complexity of compensation under a value-based healthcare model.

During a recent teleconference hosted by McGuireWoods, Scott Becker, JD, partner at McGuireWoods and publisher of Becker's Healthcare, asked the speakers to discuss the most interesting issues in healthcare valuation they're seeing. Below are some of the issues the speakers identified.

Telemedicine Arrangements: Trends & Fair Market Value Considerations

Published by Compliance Today Compensating physicians or hospitals for telemedicine service has become a new challenge for health systems across the country. Attempting to evaluate a highly fragmented reimbursement setting, a multi-practitioner-and-patient relationship, and the various services and technology involved highlight the complications for establishing these payments. Based on regulatory guidance and the inherent referral relationship within most of these arrangements, compensation between hospital and physician, as well as between two hospitals, must be set at fair market value (FMV).

FMV Standard

FMV is the standard which is pertinent for arrangements between hospitals and physicians, as well as arrangements between two hospitals. As defined by the International Glossary of Business Valuation Terms, FMV refers to “the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.” It is important to note that determining compensation under healthcare regulations may not always be consistent with generally accepted appraisal standards and may include additional guidelines. For example, a notable definition for compensation set at FMV as stated in the Stark law includes: “The compensation must be set in advance, consistent with fair market value, and not determined in a manner that takes into account the volume or value of referrals or other business generated by the referring physician.”3 These guidelines are important to consider when establishing compensation for any telemedicine arrangement to maintain compliant with regulatory guidelines. In summary, the methodology and data points for determining FMV may not consider other referral relationships. This further complicates the process for establishing FMV.

Industry Overview

According to the American Telemedicine Association, telemedicine refers to the exchange of medical information from one site to another through electronic communications. More than half of all hospitals in the United States utilize some form of telemedicine as of May 2014. As illustrated below, a study on digital health markets published by Frost & Sullivan indicates that home and disease management/remote patient monitoring and video telemedicine are top growth areas throughout the next four years (see Figure 1 on page 50). In general, telemedicine can be classified as real-time (“synchronous telemedicine”), store-and-forward (“asynchronous telemedicine”), or remote monitoring.1 Synchronous telemedicine requires live communication amongst all parties via videoconferencing, whereas asynchronous telemedicine involves the gathering and transmission of medical data, such as sending a medical image to a medical practitioner for interpretation. Remote monitoring consists of an external monitoring center for healthcare providers to monitor a patient remotely. All of the aforementioned services are often used interchangeably with “telehealth,” which represents the broader umbrella under which telemedicine resides. Click here to continue to the full article.

Imaging Transaction Trends: Out With Acquisitions, In With Strategic Partnerships

Published by ImagingBiz Reimbursement cuts over the past 18 months have caused financial strain for numerous freestanding imaging centers and a slowed pace in imaging center transactions. These changes have brought on acquisitions of struggling imaging centers by health systems and multi-site operators at depressed EBITDA multiples or even at value of tangible assets. Although freestanding imaging center transactions have slowed, observations show an increase in multi-center transactions between multi-site operators and health systems. Because the facilities involved are large, imaging transaction structures have moved away from acquisition and shifted toward strategic partnerships. Matt Strother further explains in this article how these new strategic partnerships are beginning to form regional imaging networks. Click to continue to the full article.