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1©HEALTH CAPITAL CONSULTANTS
FairMarketValueandCommercialReasonableness:
PhysicianCompensationAgreements
WebinarBy:RobertJamesCimasi,MHA,ASA,FRICS,MCBA,AVA,CM&AA
PresidentHEALTH CAPITAL CONSULTANTS
June5,2012
2©HEALTH CAPITAL CONSULTANTS
ABOUTTHEPRESENTERRobert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, is Presidentof Health Capital Consultants, (HCC), a nationally recognized healthcarefinancial and economic consulting firm headquartered in St. Louis, MO. Mr.Cimasi has over twenty five years experience in serving clients, with aprofessional focus on the financial and economic aspects of healthcareservice sector entities including: valuation consulting; and capital formationservices; healthcare industry transactions including joint ventures, mergers,acquisitions, and divestitures; litigation support & expert testimony; and,certificate‐of‐need and other regulatory and policy planning consulting.
Mr. Cimasi holds a Masters in Health Administration from the University ofMaryland, has served as an expert witness on cases in numerous courts, andhas provided testimony before federal and state legislative committees. He isa nationally known speaker on healthcare industry topics, the author ofseveral books, including his latest, “The Adviser’s Guide to Healthcare” [2010– AICPA], numerous chapters, published articles, research papers and casestudies, and is often quoted by healthcare industry press. In 2006, Mr. Cimasiwas honored with the prestigious “Shannon Pratt Award in BusinessValuation” conferred by the Institute of Business Appraisers. In 2011, he wasnamed a Fellow of the Royal Institution of Chartered Surveyors (RICS) andserves on the Editorial Board of the RICS Modus Americas Journal.
3©HEALTH CAPITAL CONSULTANTS
INTRODUCTION
4©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
GrowthofPhysicianEmploymentbyHospitals
• Hospitalsfocusedonrecruitingprimarycarephysiciansduringthe1990s
• However,recentattentionhasturnedtospecialtypractitioners,resultinginagrowingnumberofspecialistsbeingemployedbyhospitals
• Hospitalsarealsoemployingphysiciansformedicaldirectorship,management,administrative,on‐callandexecutivepositions
• Physicianproviderscontinuetofacereimbursementdecreasesforprofessionalservicesaswellasgrowinglegislativeeffortstorestrictphysicianownershipinancillaryservicesandtechnicalcomponent(ASTC)revenuestreams
5©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
CompensationforHospital‐EmployedPhysicians
• Arrangementsmust:i. BeforBonaFideemploymentii. HavecompensationthatisFairMarketValue(FMV)andnot
relatedtoreferralsiii. BeCommerciallyReasonabletoavoidlegalimpermissibilityunder
theStark andAnti‐Kickback statutes
• ArrangementswhereeitherthresholdisnotmetcanalsobefoundlegallyimpermissibleundertheFederalFalseClaimsAct(FCA)• ProvidercannotknowinglysubmitaclaimforreimbursementtoagovernmententityforservicesundercompensationarrangementswhicharedeemedtobeStarkandAnti‐Kickbackviolations
• AsuitfiledundertheFCAisknownasa“whistleblowersuit”ora“quitamaction”
6©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
IncreasingScrutinyofPhysicianandExecutiveCompensation
• RebuttablePresumption:Ifallthreepartsaremet,executivecompensationispresumedtobeatFMV
• Compensationapprovedbyauthorizedbodywhosemembershavenoconflictsofinterest
• Compensationhasbeenbasedonreliablesetofdata
• AuthorizingBodydocumentedbasisforpay‐setting
• February2009:IRSReportonnot‐for‐profitexecutivecompensation
• Results:Compensationhighbut85%ofhospitalsfollowedRebuttablePresumption process(pay‐settingpracticesaredefensibleunderInternalRevenueCode)
“ExemptOrganizationsHospitalComplianceProjectFinalReport,”InternalRevenueService,February13,2009,www.irs.gov.
7©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
IncreasingScrutinyofPhysicianandExecutiveCompensation
• February2009:IRSReportonnot‐for‐profitexecutivecompensation
• Reportquestionsthevalidityofcomparabledataused
• VariationsinreportingandhighexecutivepayrateshavepromptedquestionsregardingtheuseofcomparablesaswellastheefficacyoftheRebuttablePresumptionprocessatsettingcompensationatFMV
• Significantvariationsinhowhospitalsaccountedforbaddebt;communitybenefit;and,uncompensatedcare
• Reportmakesnopolicyrecommendations,butitmaybeusedasabasisforexecutivecompensationreform(e.g.,executivepaycamps,similartotheonesrecentlycreatedforthefinancialsector)
“ExemptOrganizationsHospitalComplianceProjectFinalReport,”InternalRevenueService,February13,2009,www.irs.gov.
8©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
IncreasingScrutinyofPhysicianandExecutiveCompensation
• May2009:FraudEnforcementandRecoveryAct(FERA)
• Broadensdefinitionof“knowingly”usedintheFalseClaimsAct(FCA)
1. “Hasactualknowledgeoftheinformation;2. Actsindeliberateignoranceofthetruthorfalsityoftheinformation;or,
3. Actsinrecklessdisregardofthetruthorfalsityoftheinformation.”
• Reducesgovernment’sburdenofproof,nolongerrequiredtoprovide“proofofspecificintenttodefraud.”
• FERAwillfacilitateeasierprosecutionforviolationsoftheFCA
“PublicationofOIG’sGuidelinesforEvaluatingStateFalseClaimsActs,”71Fed.Reg.48553(Aug.21,2006).
9©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
IncreasingScrutinyofPhysicianandExecutiveCompensation
• 2009– $2.5billionwasrecoveredandreturnedtotheMedicareTrustFund
• 2009– DOJandHHScreateHealthCareFraudPreventionandEnforcementActionTeam(HEAT)
• Launchedover1,000investigations• Leadingto800indictments• Resultingin600convictions
• 2010 – Federalgovernmentestimatedtohavespent$1.7billion fightingfraudandabuse
• 2011– Fundingallocatedthroughhealthcarereformtofinancethecostoffraudandabuseinvestigationsbecomesavailableat$100millionannually
“HeatTaskForceOfficialWebsite,”stopmedicarefraud.gov,(accessed9/23/10).“Sebelius,Holder:NewHealthyReformLawWillHelpPreventMedicalFraud,”ByAndrewVillegas,KaiserHealthNews,May13,2010,http://www.kaiserhealthnews.org/Stories/2010/May/13/health‐fraud‐shorttake.aspx,(accessed9/23/2010).
10©HEALTH CAPITAL CONSULTANTS
FAIRMARKET VALUE (FMV)
11©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
DefinitionofFairMarketValue(FMV)StarkLaw
• “Thevalueinarm’s‐lengthtransactions,consistentwiththeGeneralMarketValue”
• GeneralMarketValue:“Thepricethatanassetwouldbring,astheresultofbonafide bargainingbetweenwell‐informedbuyersandsellerswhoarenototherwiseinapositiontogeneratebusinessfortheotherparty,orthecompensationthatwouldbeincludedinaserviceagreement,astheresultofbonafidebargainingbetweenwell‐informedpartiestotheagreementwhoarenototherwiseinapositiontogeneratebusinessfortheotherparty,onthedateofacquisitionoftheassetoratthetimeoftheserviceagreement.Usually,thefairmarketpriceisthepriceatwhichbonafidesaleshavebeenconsummatedforassetsofliketype,quality,andquantityinaparticularmarketatthetimeofacquisition,orthecompensationthathasbeenincludedinbonafideserviceagreementswithcomparabletermsatthetimeoftheagreement,wherethepriceorcompensationhasnotbeendeterminedinanymannerthattakesintoaccountthevolumeorvalueofanticipatedoractualreferrals.”
“StarkLaw:Definitions,”42C.F.R§ 411.351(2009).
12©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
DefinitionofFairMarketValue(FMV)CentersforMedicare&MedicaidServices(CMS)• CMS(f/k/aHealthCareFinancingAdministration)madethefollowingstatementsregardingwhenapaymentforservicesprovidedisatFMV:
• “[W]e believe the relevant comparison is aggregate compensation paid tophysicians practicing in similar academic settings located in similarenvironments. Relevant factors include geographic location, size of theacademic institutions, scope of clinical and academic programsoffered, and the nature of the local health care marketplace.”
• “. . . [We] intend to accept any method [for establishing FMV] that iscommercially reasonable and provides us with evidence that thecompensation is comparable to what is ordinarily paid for an item orservice in the location at issue, by parties in arm's‐lengthtransactions who are not in a position to refer to one another . . . Theamount of documentation that will be sufficient to confirm [FMV] . . . willvary depending on the circumstances in any given case; that is, there is norule of thumb that will suffice for all situations.” [emphasis added]
“StarkII,PhaseI,”66Fed.Reg.916,944(Jan.4,2001).
13©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
DefinitionofFairMarketValue(FMV)CentersforMedicare&MedicaidServices(CMS)
• InStarkII,PhaseIII,CMSprovidedthefollowingguidanceforvaluingadministrativepositions:
• “A fair market value [FMV] hourly rate may be used tocompensate physicians for both administrative and clinical work,provided that the rate paid for clinical work is [FMV] for theclinical work performed and the rate paid for administrativework is fair market value for the administrative work performed.We note that the fair market value of administrative services maydiffer from the fair market value of clinical services.”
“StarkII,PhaseIII,”72Fed.Reg.51016(Sept.5,2007).
14©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
DefinitionofFairMarketValue(FMV)CaseLaw
• FMVisdefinedas“thepriceawillingbuyerwouldpayawillingseller...whenneitherisundercompulsiontobuyorsell.”
• ProvidingadiscountisnotevidencethatanagreementisbelowFMVifthereisnocomparisonbetweentheoriginalordiscountedratesandfairmarketvalue.Inaddition,theMedicarerateisnotnecessarilyequivalenttofairmarketvalue.
• AnIllinoisdistrictcourtnotedthatFMVmaydifferfromtraditionaleconomicvaluationformulas,whichtakeintoaccountreferrals.BecausetheAnti‐KickbackStatuteprohibitsanyinducementforthosereferrals,theymustbeexcludedfromanycalculationofFMV.
• ProvingthatanarrangementisfairmarketvalueisimperativeincomplyingwithrequirementsoftheStarkLaw.“Paymentexceedingfairmarketvalueisineffectdeemedpaymentforreferrals.”
Klaczak v.ConsolidatedMedicalTransport,458F.Supp.2d622(N.D.Ill.2006);U.S.exrel.Obert‐Hongv.AdvocateHealthCare,211F.Supp.2d1045(N.D.Ill.2002).AmericanLithotripsySocietyv.Thompson,215F.Supp.2d23(D.D.C.2002).
15©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
DefinitionofFairMarketValue(FMV)InternalRevenueService(IRS)
• 501(c)(3)enterprisesmustavoid“excessbenefit”transactions
• Equatesreasonablecompensationtothevalueofservicesprovided
• “[A]mount that would ordinarily be paid for like services by theenterprises (whether taxable or tax‐exempt) under likecircumstances”
• Valuationstandard(ascitedbyIRSRegulation)isFairMarketValue
• “[P]riceatwhichpropertyortherighttousepropertywouldchangehandsbetweenawillingbuyerandawillingseller,neitherbeingunderanycompulsiontobuy,sell,ortransferpropertyortherighttouseproperty,andbothhavingreasonableknowledgeofrelevantfacts”
“ExcessBenefitTransaction,”26C.F.R§ 53.4958‐4(2002).
16©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
StarkLawImplications• FMV isacriticalrequirementforcomplianceundertheStarkLaw
• StarkLawprohibitsaphysicianfrommakingreferralsfor“designatedhealthservices” thatmaybepaidforbyMedicareorMedicaidtoanentitywithwhichthephysicianhasafinancialrelationship,andprohibitstheentityfrombilling
• Designatedhealthservicesareclinicallaboratoryservices;physicaltherapyservices;occupationaltherapyservices;radiologyservices;radiationtherapyservicesandsupplies;durablemedicalequipmentandsupplies;parenteralandenteralnutrients,equipmentandsupplies;prosthetics,orthoticsandprostheticdevicesandsupplies;homehealthservices;outpatientprescriptiondrugs;andinpatientandoutpatienthospitalservices.
• Financialrelationshipscanbedirectorindirectownershipordirectorindirectcompensation
• NeedtofindanapplicableStarkLawException
17©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
RequirementsforException “Bona fideemploymentrelationship”
“Personalserviceagreements”
Theemploymentisforidentifiableservices(provided byphysiciantoentity) ⨯ ⨯Amountofremunerationunder theemploymentisconsistentwithFMVoftheservices ⨯ ⨯1
Amountofremuneration undertheemploymentisnotdeterminedinamannerthataccountsfor(directlyorindirectly)thevolumeorvalueofanyreferralsbythereferringphysician
⨯ ⨯Remuneration isprovidedunderanagreementthatwouldbecommerciallyreasonableevenifnoreferralsweremadetotheemployer ⨯Arrangement(whichmustbeatleast12months)specifies,inwriting,servicedcoveredandissignedbyboth parties ⨯Aggregateservices“mustnot exceedthosethatarereasonableandnecessaryforthelegitimatebusinesspurposesofthearrangement” ⨯Services providedmustnotinvolvepromotionofbusinessarrangementthatisaviolationofstateorfederallaw ⨯
StarkLawImplicationsStarkLawExceptions
ExemptedfromStarkLawundertheexceptionfor“bonafideemploymentrelationships”and“personalservicesagreements.”Usedinmedicaldirector,executive,on‐callandotherphysicianservicesarrangements.
Note:1. Compensationmustalsobesetinadvance
“HealthCareFraudandAbuse:PracticalPerspectives,”EditedByLindaA.Baumann,TheAmericanBarAssociation&TheBureauofNationalAffairs,Inc.,Washington,D.C.,(2002),pp.280;“Exceptiontothereferralprohibitionrelatedtocompensationarrangements,”42CFR411.357(Oct.12004).
18©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
StarkLawImplicationsStarkLawExceptions
• OtherexceptionsthatuseFMV
• MedicalOfficeLease
• EquipmentLease
• IndirectCompensation
• IsolatedTransaction
• FairMarketValueCompensation
• AcademicMedicalCenters
“Exceptionstothereferralprohibitionrelatedtocompensationarrangements,”42CFR411.357(Oct.12004).
19©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
StarkLawImplications
IndependentContractorsvs.GroupPracticePhysicians
• PrecedingdiscussionaboutFMV isrelatedtocompensationpaidtophysicianswhoareeitheremployedorperformingservicesonanindependentcontractorbasis,not compensationpaidordistributedtophysicianmembersofa“grouppractice”asdefinedwithinStarkLaw
• Compensationpaidwithinthe“grouppractice”settinghasfewerregulatoryrestrictions
GroupPractice,”42CFR411.352(Jan.4,2001).“StarkII,PhaseII,”69Fed.Reg.16067(March26,2004).
20©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
A B C D E F
1 TermsofExceptionGroupPracticePhysicians
[1877(h)(4);411.352]
BonaFideEmployment[1877(e)(2);411.357(c)]
PersonalServiceArrangements
[1877(e)(3);411.357(d)]
FairMarketValue[411.347(1)]
AcademicMedicalCenters
[411.355(e)]
2MustcompensationbeFairMarket
Value?No Yes‐ 1877(e)(2)(B)(i) Yes‐ 1877(e)(3)(A)(v) Yes‐ 411.357(1)(3) Yes‐ 411.355
(e)(1)(ii)
3 Mustcompensationbe"setinadvance"? No No Yes‐ 1877(e)(3)(A)(v) Yes‐ 411.357(1)(3) Yes‐ 411.355
(e)(1)(ii)
4 Scopeof"Volumeofvalue"restriction
DHSreferrals‐1877(h)(4)(A)(iv)
DHSreferrals1877(e)(2)(B)(ii)
DHSreferralsorotherbusiness‐ 1877(e)(3)(A)(v)
DHSReferralsorotherbusiness‐411.357(1)(3)
DHSreferralsorotherbusiness‐
411.355(e)(1)(ii)
5Scopeof
productivitybonusesallowed
Personallyperformedservicesand"incidentto,"plusindirect‐1877(h)(4)(B)(i)
PersonallyPerformedservices‐ 1877(e)(2)
Personallyperformedservices‐ 411.351("referral")and411.354(d)(3)
Personallyperformedservices‐ 411.351("referral")and411.354(d)(3)
Personallyperformedservices‐ 411.351("referral")and411.351(d)(3)
6 Overallprofitsharesallowed Yes‐ 1877(h)(4)(B)(i) No No No No
7 Writtenagreementrequired No No Yes,minimum1yearterm
Yes(Exceptforemployment),nominimumterm
Yes,writtenagreement(s)orother
document(s)
8
PhysicianIncentivePlan(PIP)exceptionforservicestoplan
enrollees?
No,butrisk‐sharingarrangementexceptionat411.357(n)may
apply
No,butrisk‐sharingarrangementexceptionat411.357(n)mayapply
Yes,andrisk‐sharingarrangementexceptionat411.357mayalsoapply
No,butrisk‐sharingarrangementexceptionat
411.357(n)mayapply
No,butrisk‐sharingarrangementexceptionat
411.357(n)mayapply
StarkLawImplicationsCompensationPaidUnderExceptionstotheStarkLaw
“StarkII,Phase,II,”69Fed.Reg.16067‐68(Mar.26
21©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
Anti‐KickbackStatuteImplications• FMV isacriticalrequirementforcomplianceunderAnti‐KickbackStatute
• Anti‐Kickbackprohibits“knowinglyandwillfully”receivingpayments(directorindirect,cashorinkind)inreturnfor
a) “referringanindividualtoapersonforthefurnishingorarrangingforthefurnishingofanyitemorserviceforwhichpaymentmaybemadeinwholeorinpartunderaFederalhealthcareprogram,”or
b) “purchasing,leasing,orderingorarrangingfororrecommendingpurchasing,leasing,orderinganygood,facility,orservice,oritemforwhichpaymentmaybemadeinwholeorinpartunderaFederalhealthcareprogram”
“Anti‐KickbackStatute,”42USC§ 1320a‐7b(2008).
22©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
Anti‐KickbackStatuteImplications
ExceptionstoAnti‐KickbackStatute
• SafeHarborswhichprotectagivenarrangementfromAnti‐Kickback scrutiny,butnoperseAnti‐Kickbackviolationforarrangementsfallingoutsideasafeharbor.
• OIGAdvisoryOpinionsassumeFMV
23©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
Anti‐KickbackStatuteImplicationsAnti‐KickbackExceptions
EmploymentExceptions
• InadditiontotheAnti‐Kickbacksafeharbor,thereisanexception foranyamountpaidbyanemployer(whohasabonafideemploymentrelationshipwithsuchemployee)foremploymentintheprovisionofcovereditemsorservices
• TheIRSdefinitionof“employee” isutilizedbyboththeAnti‐KickbackStatute andStarkLawforpurposeofdetermining“employee”status
• TheIRSusesan11‐factortestfor“employee”statusbrokenintothreegeneralcategories:(1)behavioralcontrol,(2)financialcontrol,and(3)typeofrelationshipbetweentheparties
• Thesefactorsaretakentogetherasevidenceofabonafideemploymentrelationship;notallfactorsarenecessarytosatisfythetestandnosinglefactorisdispositive
24©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
Anti‐KickbackStatuteImplicationsIRSDeterminatesof“Employee”Status
BehavioralControl
1 Instructionsthatthebusinessgivestotheworker
2 Trainingthatthebusinessgivestotheworker
FinancialControl
1 Theextenttowhichtheworkerhasunreimbursedbusinessexpenses
2 Theextentoftheworker'sinvestment
3 Theextenttowhichtheworkermakeshisorherservicesavailabletotherelevantmarket
4 Howthebusinesspaystheworker
5 Theextenttowhichtheworkercanrealizeaprofitorloss
TypeofRelationship
1 Writtencontractsdescribingtherelationshipthepartiesintendedtocreate
2 Whetherornotthebusinessprovidestheworkerwithemployee‐typebenefits,suchasinsurance,apensionplan,vacationpay,orsickpay
3 Thepermanencyoftherelationship
4 Theextenttowhichservicesperformedbytheworkerareakeyaspectoftheregularbusinessofthecompany
25©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
Anti‐KickbackStatuteImplicationsAnti‐KickbackSafeHarbors
• Twosafeharborsapplytocompensationforphysicianclinical,on‐call,andexecutiveservices:
(1)“Employment”SafeHarbor
• PaymentscanbemadefromemployertoemployeeunderabonafideemploymentrelationshipforthefurnishingofanyitemorserviceforwhichpaymentmaybemadeunderMedicareorMedicaid
• NoFMVrequirement
26©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
Anti‐KickbackStatuteImplicationsAnti‐KickbackSafeHarbors
• Twosafeharborsapplytocompensationforphysicianclinical,on‐call,andexecutiveservices:
(2)“PersonalServiceandManagementContacts”SafeHarbor• Allowsforcompensationtobepaidtophysiciansandexecutivesthatareactingasindependentcontractors,providedthattheseconditionsaremet:
• Writtenagreementsignedbybothparties;• Termofatleastoneyear;• Agreementmustspecifyaggregatepaymentamountsandsuchpaymentamountsmustbesetinadvance;and,
• Compensationmustbereasonable,atFMV,anddeterminedthrougharm’slengthnegotiations
“Anti‐KickbackStatute,”42USC§1320a‐7b(2008).
27©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
Anti‐KickbackStatuteImplications
Anti‐KickbackSafeHarbors
• OtherSafeHarborsusingFMV:
• SpaceLease
• EquipmentLease
• PersonalServicesandManagementContracts
• AmbulanceReplenishing
• CantheopportunitytoearnaFMVreturnorpaymentviolatetheAnti‐KickbackStatute?
• ContractJointVentures
• ReadingPanels
28©HEALTH CAPITAL CONSULTANTS
COMMERCIAL REASONABLENESS (CR)
29©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
DefinitionofCommercialReasonableness
• DepartmentofHealthandHumanServices• Arrangement appears to be “a sensible prudent businessagreement from the perspective of the particular partiesinvolved, even in the absence of any potential referrals.”
• StarkII,PhaseII• “An arrangement will be considered ‘commercially reasonable’in the absence of referrals if the arrangement would makecommercial sense if entered into by a reasonable entity of similartype and size and a reasonable physician . . . of similar scope andspecialty, even if there were no potential DHS referrals.”
“StarkII,PhaseII,”69Fed.Reg.16093,16107(Mar.26,2004).
30©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
DeterminingCommercialReasonableness
QuestionstoConsider
• Isitnecessarytohaveaphysicianperformacertainservice?
• Isitnecessarytohaveaphysicianofthatspecialtyperformacertainservice?
Bothservices and payments mustbeconsideredcommerciallyreasonable forthe
arrangementtosurvivescrutiny
31©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
DeterminingCommercialReasonablenessIRS’sDeterminationofCommercialReasonableness
• FactorstheIRSconsiderswhendeterminingthecommercialreasonableness ofaphysiciancompensationarrangement
• Specializedtrainingandexperienceofthephysician
• Thenatureofdutiesperformedandtheamountofresponsibility
• Timespentperformingduties
• Sizeoftheorganization
• Thephysician’scontributiontoprofits
• Nationalandlocaleconomicconditions
“IntegratedDeliverySystemsandJointVentureDissolutionsUpdate,”ByCharlesF.Kaiser,etal,1995EOCPEText,InternalRevenueService,(1995).“PhysicianCompensationArrangements:Management&LegalTrends,”ByDanielK.Zismer,1999,p.204.
32©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
DeterminingCommercialReasonableness
IRS’sDeterminationofCommercialReasonableness• FactorstheIRSconsiderswhendeterminingthecommercialreasonableness ofaphysiciancompensationarrangement
• Timeofyearwhencompensationisdetermined
• Whetherthecompensationisinpartorinwholepaymentforabusinessorassets
• Salaryrangesforequivalentphysiciansincomparableorganizations
• Independenceoftheboardorcommitteethatdeterminesphysiciancompensationarrangement
“IntegratedDeliverySystemsandJointVentureDissolutionsUpdate,”ByCharlesF.Kaiser,etal,1995EOCPEText,InternalRevenueService,(1995).“PhysicianCompensationArrangements:Management&LegalTrends,”ByDanielK.Zismer,1999,p.204.
33©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
DeterminingCommercialReasonablenessIRS’sDeterminationofExcessBenefitTransactionRule
• FactorstheIRSconsiderswhendeterminingifanincentivearrangementhasviolatedtheexcessbenefittransactionrule:
• Whetherthecompensationarrangementwasestablishedbyanindependentboardofdirectors
• Whethertheincentivearrangementresultsintotalphysiciancompensationwhichisreasonable
• Whethertherewasanarm’s‐lengthrelationshipbetweenthephysicianandthehospital
• Whetherthereisaceilingonthecompensationarrangementwhichindicatesthemaximumthephysicianmayearntoprotectagainstprojectionerrorsorwindfallbenefits
“IRSFY2000ExemptOrganizationContinuingProfessionalEducation,”InternalRevenueService,July1999,p.30Note:TheIRS websitedesignatesthatthismaterialwasdesignedspecificallyfortrainingpurposesonlyandshouldnotberelieduponasauthorityforsettingorsustainingatechnicalposition.
34©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
DeterminingCommercialReasonablenessIRS’sDeterminationofExcessBenefitTransactionRule:
• FactorstheIRSconsiderswhendeterminingifanincentivearrangementhasviolatedtheexcessbenefittransactionrule
• Whetherthecompensationarrangementmaypotentiallyreducethecharitableservicesthattheorganizationmayotherwiseprovide
• Whetherthecompensationarrangementtakesintoaccountthequalityofcareandpatientsatisfactiondata
• Whetherthearrangementaccomplishestheorganization’scharitablepurposesiftheamountthephysicianearnsunderthearrangementdependsonnetrevenues,whichalsodictatehowmuchtheorganizationchargesforitsservices
• Whetherthearrangementtransformstherelationshipbetweentheorganizationandthephysicianintoajointventure
“IRSFY2000ExemptOrganizationContinuingProfessionalEducation,”InternalRevenueService,July1999,p.30Note:TheIRS websiteindicatesthatthismaterialwasdesignedspecificallyfortrainingpurposesonlyandshouldnotberelieduponasauthorityforsettingorsustainingatechnicalposition.
35©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
DeterminingCommercialReasonablenessIRS’sDeterminationofExcessBenefitTransactionRule
• FactorstheIRSconsiderswhendeterminingifanincentivearrangementhasviolatedtheexcessbenefittransactionrule:
• Whetherthearrangementdistributesprofitstopersonswhoareincontroloftheorganization
• Whetherthearrangementservesarealdiscerniblebusinesspurposewhichisindependentofanypurposetooperatetheexemptorganizationfortheimpermissiblebenefitofthephysicians
• Whetherthearrangementincludescontrolstoavoidabuse,unwarrantedbenefitsandunnecessaryutilization
• Whetherthearrangementrewardsthephysicianforservicesheactuallyperforms,orbasedonperformanceinanareawhereheperformsnosignificantfunction
“IRSFY2000ExemptOrganizationContinuingProfessionalEducation,”InternalRevenueService,July1999,p.30Note:TheIRS websitedesignatesthatthismaterialwasdesignedspecificallyfortrainingpurposesonlyandshouldnotberelieduponasauthorityforsettingorsustainingatechnicalposition.
36©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
DeterminingCommercialReasonableness
ViolationsofFMV&CR UnderStarkandAnti‐Kickback
• Increasingscrutinyofcompensationarrangements courtswillfocusonwhetherphysiciansareactuallyperformingtheservicesspecifiedinthearrangement
• Ifaphysicianisnot performingserviceswhicharerequiredwithinthescopeofthecompensationagreement,thearrangementwillnotmeetthethresholdofcommercialreasonableness
U.S.exrel.Robertsv.AgingCareHomeHealth,Inc.,474F.Supp.2d810,818(W.D.La.2007).U.S.v.Rogan,459F.Supp.2d692(N.D.Ill.2006).
37©HEALTH CAPITAL CONSULTANTS
ESTABLISHING FMV&CR
38©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
StarkLawStarkII,PhaseII:
• CMSwill“considerarangeofmethodsofdeterminingFMVandthattheappropriatemethodwilldependonthenatureofthetransaction,itslocation,andotherfactors.”
StarkII,PhaseIII
• Temporarycreationofvoluntarysafeharborforhourlypaymentstophysiciansfortheirpersonnelservices,butduetoinfeasibilityandimpracticality,theStarkII,PhaseII voluntary physicianhourlycompensationsafeharborwaseliminated inStarkII,PhaseIII
“StarkLaw:Definitions,”42C.F.R.411.351(2009).“StarkII,PhaseII,”69Fed.Reg.16092,16107(Mar.26,2004).“StarkII,PhaseIII,”72Fed.Reg.51015(Sept.5,2007).
39©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
U.S.vs.SCCIHospitalHouston(2004)
• QuiTamaction(eventuallysettled)
• U.S.challengedcommercialreasonablenessofthecompensationpaidbythehospitaltothethreephysicianmedicaldirectors
• Government’sfinancialexpertproposed:
• Commercialreasonablenessdependsontheagreementbeingessentialtothefunctioningofthehospital
• Inordertobecommerciallyreasonable,therehadtobesoundbusinessreasons forpayingmedicaldirectorfeestoreferringphysicians
“FairMarketValueinHealthCareTransactions,”ByLewisLefko,HaynesandBoone,LLP,July20,2007.
40©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
U.S.vs.SCCIHospitalHouston(2004)
• Government’sfinancialexpertassessed commercialreasonablenessthroughevaluatingthe:
• Sizeofthehospital,numberofpatients,patientacuitylevelsandpatientneeds
• Quality,activities,andinvolvementofmedicalstaffandtheneedformedicaldirection
• Numberofregularcommitteesandmeetingsthatrequirephysicianinvolvement
• Qualityofthehospitalmanagementandinterdisciplinarycoordinationofpatientservices
“FairMarketValueinHealthCareTransactions,”ByLewisLefko,HaynesandBoone,LLP,July20,2007.
41©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
U.S.vs.SCCIHospitalHouston(2004)
• Government’sfinancialexpertconcludedthatcommercialreasonablenessdependsonthehospital
• Performingaregularassessmentoftheactualdutiesperformedbythemedicaldirector
• Assessinghoweffectivelythemedicaldirectorisperforminghisdutiesandwhetherthereisabonafideneedforcontinuingtheservices
“FairMarketValueinHealthCareTransactions,”ByLewisLefko,HaynesandBoone,LLP,July20,2007.
42©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
CovenantMedicalCenter(2009)
August25,2009– CovenantMedicalCenter(Covenant)inWaterloo,IAhasagreedtopay$4.5milliontotheU.S.Governmenttosettlefraudallegations
AllegationsAgainstCovenant:• CovenantsubmittedfalseclaimstoMedicareforreimbursementoffivephysicianswhoreferredpatientstothehospital
• PayforphysicianswasfaraboveFairMarketValue andwasnotcommerciallyreasonable
• TheDepartmentofJusticeutilizedtheFalseClaimsAct(FCA)asatooltoprosecutethisviolationoftheStarkLaw,whichstatesthatpaymentmustbeatFMVandcommerciallyreasonablewithoutconsideringreferrals
“IowaHospitaltoPay$4.5Million”,BNA’sHealthLawReporter,August27,2009;“IowaHospitalPays$4.5MillioninFraudCase”, byNigelDuara,ChicagoTribune,August25,2009,http://www.chicagotribune.com/news/chi‐ap‐ia‐iowahospital‐frau,0,7910766,print.story(Accessed8/29/2009);“WaterlooHospitalPaysFeds$4.5Million”,byTonyLeys,DesMoinesRegister.com,August26,2009,http://www.desmoinesregister.com(Accessed8/29/2009);“CovenanttoPayFeds$4.5MtoSettleFraudAllegations”,byCourierStaff,August25,2009,WCFCourier.com(Accessed8/29/2009);“SettlementAgreementbetweentheUnitedStatesDepartmentofJusticeandCovenantMedicalCenter”,August25,2009.
43©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
CovenantMedicalCenter(2009)SettlementandNotes
• IRS990formsfrom2002showedthatCovenant’sfivehighestpaidphysiciansmadeanywherefrom$633,000to$2.1millionayear
• HowthegovernmentdeterminedFMV (orCR)isunknown,butpaymentrateswerefarabovethoseforphysiciansatotherhospitalsinIowa,andmorethantripledthecompensationpaidtosimilarlysituatedphysiciansattheMayoClinicinMinnesota
• U.S.AttorneyMattDummermuth:“It’sthecombinationofreferralswithoutbeingfair‐marketvalueandcommerciallyreasonable…[that]hasthepotentialtocompromisethemedicaljudgment,whenthere’simproperfinancialincentivespotentiallyatplay….”
• Covenantrevealedthatthephysicianswerespecialistswhohadbeenworkinginunderstaffedareas,butdeniedanywrongdoingandcitedthesettlementasabusinessdecision
• Thephysiciansfacenogovernmentsanctionsorcharges“IowaHospitaltoPay$4.5Million”,BNA’sHealthLawReporter,August27,2009;“IowaHospitalPays$4.5MillioninFraudCase”, byNigelDuara,ChicagoTribune,August25,2009,http://www.chicagotribune.com/news/chi‐ap‐ia‐iowahospital‐frau,0,7910766,print.story(Accessed8/29/2009);“WaterlooHospitalPaysFeds$4.5Million”,byTonyLeys,DesMoinesRegister.com,August26,2009,http://www.desmoinesregister.com(Accessed8/29/2009);“CovenanttoPayFeds$4.5MtoSettleFraudAllegations”,byCourierStaff,August25,2009,WCFCourier.com(Accessed8/29/2009);“SettlementAgreementbetweentheUnited StatesDepartmentofJusticeandCovenantMedicalCenter”,August25,2009.
44©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
U.S.exrel.Kosenskev.CarlisleHMA,Inc.(2009)• Hospitalenteredintoexclusiveservicearrangementwithanesthesiologygroupfortheprovisionof24/7anesthesiologyservices atthehospital
• Inexchange,hospitalprovidedphysicianswithfreespace,aswellasfreeequipmentandsuppliesreasonablynecessarytothephysicians’provisionofanesthesiologyservicesatthehospital
• 6 yearslater,hospitalopenedafreestandingPainClinicandgrantedanesthesiologygroupexclusiverighttoprovidepainmanagementservices topatientsintheclinic,aswellasprovidedphysiciansfreespace,equipment,andsupportpersonnel
• NonewwrittenagreementreachedregardingPainClinic,andoriginalagreementonlycontemplatedprovisionofanesthesiologyservicesatthehospital
U.S.exrel.Kosenskev.CarlisleHMA,Inc.,554F.3d88(3d.Cir.2009).
45©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
U.S.exrel.Kosenskev.CarlisleHMA,Inc.(2009)• ThirdCircuitCourtofAppealsfoundarrangementbetweenhospitalandphysicianswasaviolationofStarkLaw
• ArrangementdidnotqualifyforthepersonalservicesexceptionbecausenomentionofpainmanagementservicesorthePainClinicinthewrittenagreementbetweentheparties
• i.e.noevidenceofarm’slengthnegotiationsreflectingfairmarketvalueregardingthearrangementatPainClinic
• “Asalegalmatter,anegotiatedagreementbetweeninterestedpartiesdoesnot‘bydefinition’reflectfairmarketvalue.”
• FMVmustbeconsistentwiththe“generalmarketvalue,”whichisthepriceanassetwouldbringastheresultofbonafidebargainingbetweenwell‐informedpartieswhoarenototherwiseinapositiontogeneratebusinessfortheotherparty.
U.S.exrel.Kosenskev.CarlisleHMA,Inc.,554F.3d88(3d.Cir.2009).
46©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
TuomeyHealthcareSystem,Inc.(2010)
March29,2010‐ DistrictCourtofSouthCarolina
• Inaquitamsuit,TuomeyHealthcareSystem,Inc.wasfoundtohaveviolatedStarkLawbasedonemploymentagreementsthatprovidedcompensationinexcessoffairmarketvalue(FMV)to19part‐timephysicians
• Eachphysician:(1)paidanannualbasesalarythatfluctuatedbasedonthehospital’snetcashcollectionsfortheoutpatientservices,(2)paida“productivitybonus”equivalentof80%ofthenetcollections,and(3)eligibleforupto7%oftheproductivitybonusasanadditionalincentive
• TheagreementswereenteredintotopreventspecialistphysiciansfromredirectingtheirpatientsawayfromTuomey’soutpatientsurgerycentertoanewsurgerycenter
“TuomeyCaseRaisesImportantStarkLawQuestions,”ByJulieA.Knutson,BairdHolm,July30,2010;U.S.exrel.Drakefordv.TuomeyHealthcareSys.Inc.,675F.3d394(4thCir.2012)at399.
47©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
TuomeyHealthcareSystem,Inc.(2010)March29,2010– DistrictCourtofSouthCarolina
• Thegovernment’sexperttestifiedthatthecompensationpaidbyTuomeytothepart‐timephysiciansexceededFMV andwasnotcommerciallyreasonablebasedonfactorssuchas:• The10‐yeartermofthearrangements
• Thepart‐timecontractswereexclusiveandtheycoveredonlyoutpatientprocedures
• Givingfull‐timebenefitstopart‐timeemployeeswasinconsistentwithTuomey’snormalpolicies
• Thephysicianswerepaidmorethanphysiciansinotherhigh‐costareas
• Productivitybonus/incentivebonuseskickedinwiththefirstdollarearned,therebytyingthecompensationtothevolumeorvalueofreferrals
• Otheramenitiesprovided:healthcareinsurance,reimbursementforCME,periodicals,andcellphones
“TheTuomeyCase:LessonsLearned…andLessonstoCome?,”AmericanHealthLawyersAssociation,October28,2010,pp.19‐20.
48©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
TuomeyHealthcareSystem,Inc.(2010)
July13,2010‐ DistrictCourtofSouthCarolina
• Inapost‐trialhearing,theDistrictCourtorderedTuomeytopay$44.8millionplusinterestfortheStarkLawviolation
• OrderedanewtrialontheGovernment’sFCAactionduetorelevanttestimonybeingerroneouslyexcluded
TuomeyHealthCareSys.,Inc,No.3:05‐CV‐02858‐MJP,2010WL4000188,at*1.
49©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
TuomeyHealthcareSystem,Inc.(2012)
March30,2012‐ FourthCircuitCourtofAppeals
Afterhearingtheappealofthecase’s2010ruling,theFourthCircuitCourtofAppeals:
• Dismissedthecaseandorderedanewtrial
• Providedcommentaryonseveralissuesrelatedtowhatconstitutesa“referral”undertheStarkLaw.
U.S.exrel.Drakefordv.TuomeyHealthcareSys.Inc.,675F.3d394(4thCir.2012).
50©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
TuomeyHealthcareSystem,Inc.(2012)
March30,2012‐ FourthCircuitCourtofAppeals
StarkLawDefinitionofReferrals
• Asinterpretedbythecourt,physiciansaremakingreferralstothathospitalasdefinedbyStarkLawwhentheyadmitpatientstoahospitaltoundergooutpatientservicesthatthephysiciansthemselveswillperform
• Unlessthephysician‐hospitalarrangementqualifiesforaStarkexception,anyclaimsforfacilityfeesbasedonthosereferrals areprohibitedwhenafinancialrelationshipexistsbetweenthehospitalandthephysician
U.S.exrel.Drakefordv.TuomeyHealthcareSys.Inc.,675F.3d394(4thCir.2012)at407;“FourthCircuitVacatesStarkDamagesAward;ProvidesInterpretationofKeyStarkLawProvisions”McDermottWill&Emery,April19,2012,http://www.mwe.com/Fourth‐Circuit‐Vacates‐Stark‐Damages‐Award‐Provides‐Interpretation‐of‐Key‐Stark‐Law‐Provisions‐04‐19‐2012/(Accessed4/20/12).
51©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
TuomeyHealthcareSystem,Inc.(2012)March30,2012‐ FourthCircuitCourtofAppeals
StarkLawVolumeorValueStandard
• Government:Tuomeyviolatedvolumeorvaluestandardbecause“itincludedaportionofthevalueoftheanticipatedfacilitycomponentreferralsinthephysicians’fixedcompensation”
• Tuomey:Thevolumeorvaluestandardmerelyconcernedastowhetherthephysicians’compensation“takesintoaccountthevolumeorvalueofreferrals”butnotwhetherthepartiestotheagreementsconsideredreferralswhendecidingwhetherornottoenterintotheemploymentcontracts
U.S.exrel.Drakefordv.TuomeyHealthcareSys.Inc.,675F.3d394(4thCir.2012),at408‐409.
52©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
TuomeyHealthcareSystem,Inc.(2012)March30,2012‐ FourthCircuitCourtofAppeals
StarkLawVolumeorValueStandard‐ TheCourt’sConclusions
• CompensationbasedonthevolumeorvalueofanticipatedreferralsimplicatesthevolumeorvaluestandardunderStarkLaw.
• ContractswhichrequireaphysiciantoreferpatientstoaparticularproviderasaconditionofcompensationdonotviolatetheStarkLawaslongascertainconditionsaresatisfied:
• Mustbefixedinadvanceforthetermoftheagreement• MustbeconsistentwithFMV fortheservicesperformed
• i.e.,doesnottakeintoaccountthevolumeorvalueoftheanticipatedorrequiredreferrals
• MustotherwisecomplywiththerequirementsofoneoftheapplicableStarkLawexceptions
U.S.exrel.Drakefordv.TuomeyHealthcareSys.Inc.,675F.3d394(4thCir.2012),at408‐409.
53©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
TuomeyHealthcareSystem,Inc.(2012)March30,2012‐ FourthCircuitCourtofAppeals
StarkLawVolumeorValueStandard(continued)
• Hospitalsthatprovidefixedcompensationtoaphysicianmustbaseitsolelyonthevalueoftheservicesthephysicianisexpectedtoperform
• Compensationthattakesintoaccountadditionalrevenuethehospitalanticipatestoresultfromthephysician’sreferralstakesintoaccountthevolumeorvalueofsuchreferrals
• Evenwhenfixedcompensationdoesnotfluctuatewithreferrals,itmaystill“takeintoaccount”referralsifit:
• ExceedsFMV, and• Wasinflatedtocompensatethephysicianforgeneratingotherrevenue
U.S.exrel.Drakefordv.TuomeyHealthcareSys.Inc.,675F.3d394(4thCir.2012),at408‐409;“FourthCircuitIssuesDecisioninTuomeyDiscussingStarkLawIssues”ByJesseWitten,AmericanHealthLawyersAssociation,April10,2012,http://www.healthlawyers.org/Members/PracticeGroups/FA/EmailAlerts/Pages/FourthCircuitIssuesDecisioninTuomeyDiscussingStarkLawIssues.aspx(Accessed4/20/12);“FourthCircuitVacatesStarkDamagesAward;ProvidesInterpretationofKeyStarkLawProvisions”McDermottWill&Emery,April19,2012,http://www.mwe.com/Fourth‐Circuit‐Vacates‐Stark‐Damages‐Award‐Provides‐Interpretation‐of‐Key‐Stark‐Law‐Provisions‐04‐19‐2012/(Accessed4/20/12).
54©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
TuomeyHealthcareSystem,Inc.(2012)
March30,2012‐ FourthCircuitCourtofAppeals
• Onretrial,jurywillhavetodetermineifthelanguageoftheemploymentcontractsindicatesthevolumeorvalueofanticipatedreferralsweretakenintoaccount
• Asofthistime,dateofthenewtrialhasnotbeenannounced
“FourthCircuitIssuesDecisioninTuomeyDiscussingStarkLawIssues”ByJesseWitten,AmericanHealthLawyersAssociation,April10,2012,http://www.healthlawyers.org/Members/PracticeGroups/FA/EmailAlerts/Pages/FourthCircuitIssuesDecisioninTuomeyDiscussingStarkLawIssues.aspx(Accessed4/20/12);“FourthCircuitVacatesStarkDamagesAward;ProvidesInterpretationofKeyStarkLawProvisions”McDermottWill&Emery,April19,2012,http://www.mwe.com/Fourth‐Circuit‐Vacates‐Stark‐Damages‐Award‐Provides‐Interpretation‐of‐Key‐Stark‐Law‐Provisions‐04‐19‐2012/(Accessed4/20/12);U.S.exrel.Drakefordv.TuomeyHealthcareSys.Inc.,675F.3d394(4thCir.2012),at408‐ 409.
55©HEALTH CAPITAL CONSULTANTS
OVERVIEW OFCOMPENSATION ARRANGEMENTS
56©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
GuidingEconomicConceptsRelatedtoValuingServices
PrincipleofUtility• Basisofalleconomic valuesderivefromtheusefulness,orutility,derivedfromtheuseofpropertiesorservices
• Accordingly,“Anobjectcanhavenovalueunlessithasutility”• Economicvalueanalysisshouldbebasedonbenefitsexpectedtobederivedfromtheutility ofthephysicianexecutiveservices
PrincipleofSubstitution• Whatnormallysetsthelimitofwhatwouldbepaidforagoodisthecostofanequallydesirablesubstituteoroneofequalutility
• Compensationarrangementshouldbebasedonthecostofanequallydesirablesubstitute,oroneofequalutility
“PrinciplesofEconomics”Tausig,TheMacMillanCompany,NewYork,1918.pg.120.
57©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
GuidingEconomicConceptsRelatedtoValuingServices
• OpportunityCost
• Compensationforphysicianmanagement,administrative,andexecutivepositionshasbeenbasedonthephysician’shistoricalclinicalpracticeearningsinthepast
• Increasingconcernthatpaymentbasedonlost“opportunitycost,”maynotmeetregulatoryscrutinyunderStarkLaw.
• Giventhatlost“opportunitycost”shouldnotbethesolebasisofdeterminingtheFMVofanagreement,thevaluatormustapplytheEconomicPrinciplesofUtilityandSubstitution
“BeyondAnti‐Mark‐up:‘StandintheShoes’andOtherPracticalImplications,”ByMichaelW.Paddock,Crowell&MoringLLP,(February2008).“HealthLaw:2007HighlightsandRemindersfor2008.”ByHanesboone,“HealthCareAlert,”(2008),p.3.
58©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
GuidingEconomicConceptsRelatedtoValuingServices
EconomicValueAnalysis
• EconomicValueAnalysisshouldfocusontheeconomicbenefitsexpectedtobederivedfromtheuse ofthephysicianexecutiveservicesinthefuture
• Adetailedexaminationoftheattributesofthephysicianexecutiveperformingtheadministrativeservicesmustbeundertaken;eachelementoftheattributesmustbe:
• Identified astotheirexistence
• Classifiedastothespecificfactorsandtraits(i.e.,task,duty,responsibility,accountability)whichwouldexhibitthemeansbywhichtheywouldreasonablybeexpectedtoprovideutilitytothehospital
59©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
GuidingEconomicConceptsRelatedtoValuingServices
EconomicValueAnalysis
• Intrinsictoidentifyingandclassifyingeachattributeisselectingtheappropriatemetrictobeutilizedinmeasuringtheutilityprovided
• Tasks andDuties:discretelyidentifiablemetrics(e.g.,physicianhourrequirements)
• Responsibility andAccountability:morecomplexmetrics
• Noteasilyquantified,despiteoftenbeingtheattributeofutilitythatproducesanequalorgreatereconomicbenefittotheorganization
• Valuerelatedto responsibility andaccountabilitywillprovidegreatereconomicbenefittothecontractingorganizationvis avistherisk/rewardcontinuumandthephysician’srelativeriskinundertakingthegivenresponsibility andaccountability attachedtothetermsofthecontract
60©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
GuidingEconomicConceptsRelatedtoValuingServicesWorkRVUasaFungibleCommodity
• “ANationalStudyofResource‐BasedRelativeValueScalesforPhysicianServices”,ByWilliamC.Hsiao,PhD,et.al.,(1988)
• BrokedownphysicianservicesintofungibleunitsknownasRelativeValueUnits(RVUs)
• TotalRVUcomprisedofthreeweightedinputs:• Work (52%)/PracticeExpense(44%)/MalpracticeCost(4%)
• Theory:bybreakingdownphysicianservicesintofungiblecommodities,equivalenceperunitofcareacrossphysicianservicesandspecialtiesmightensureequitable,reasonablereimbursementrateswhileadditionallyprovidingatoolforcostcontainment
• “Work”definedastime,mentaleffortandjudgment,technicalskillandphysicianeffort,andpsychologicalstressvariables
“ANationalStudyofResource‐BasedRelativeValueScalesforPhysicianServices,”ByWilliamC.Hsiao,et.al.,Cambridge,MA,1988,p.30.
61©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
GuidingEconomicConceptsRelatedtoValuingServices
HealthcareasaFungibleCommodity
“Moneyistheclassicexampleofthefungibleproduct.Itrepresentsrecognizedvalue,butonedollarbillisjustasgoodasthenext…thedoctor‐patientvisitasafungiblecommodity?Whynot?”
“CommodifiedCare,”byWilliamS.Andereck,CambridgeQuarterlyofHealthcareEthics,Vol.16,No.4,2007,p.401‐402.
62©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
GuidingEconomicConceptsRelatedtoValuingServicesHealthcareasaFungibleCommodity
“ [I]f health care is ‘fungible,’ then by implication the parts of health care arealso interchangeable. Practically speaking, this also includes providers andpatients as they are simply reduced to their identity and purpose within theconfines of a business relationship. Just as the seller is interested only inproviding that which the buyer needs (or desires) in so far as there issufficient financial reward, the buyer is only concerned with obtaining thedesired object (or service). Who they are makes no real difference.Commodification dictates that a physician is like any other, as long as theyare matched with respect to specialty. He or she ceases to be theindispensable community caregiver, and instead becomes the link betweencompany and profit, or shareholder and dividend. Patients, by the sametoken, are no longer seen as individuals with unique personalities and healthcare needs but as a source of revenue; they become “covered lives” and a“business asset whose value is inversely proportional to the cost of healthcare resources their care is predicted (statistically or otherwise) to consume.”
“HealthCareasaCommodity:TheConsequencesofLettingBusinessRunHealthcare,”ByTimothyP.Doty,March2008.
63©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
Enterprises?Assets?Services?
• FMV compensationforclinicalservicesshouldbepaymentforonlythosespecifiedservices(i.e.,wRVUs)
• Paymentforprofitfromenterpriserelatedactivities(e.g.ASTC)shouldnotbedisguisedasanincreased$perwRVUcompensation
AwRVUisawRVU!
64©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
Enterprises?Assets?Services?SummaryofTransactions
65©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
Intellectual Property
Cash
SuppliesIntangible AssetsNon‐physical items that grant certain specified property rights and privileges of ownership and that have or promise economic benefits to the owner(s) of the subject enterprise
Tangible Assets Items owned by the
subject enterprise that possess a physicality (i.e.,
they can be seen or touched)
Enterprises?Assets?Services?ClassificationofTangibleandIntangibleAssets
66©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
EmploymentCompensationArrangementsMayInclude
• Basesalary
• Productivity‐basedcompensation
• Acombinationofequalpayandproductivity‐basedcompensation
• Compensationbasedonaper/RVUmethod
• Incentivebonusbasedonproductivity
• Anannualstipendforperformanceofadministrativeservices
• Incentivepaymentsbasedonachievingqualityofpatientandbeneficialoutcomesbasedonagreeduponmeasures
• Fixedbasesalaryplusanincentivebonuspaidbasedontheenterprisevalue
• Incentivepaymentsbasedonspecifiedpermissiblegainsharingarrangements,e.g.,achievingcertaincostsavingsandefficiencies
• Incentivepaymentspaidbasedonthecontributionsandeconomicinputsoftheemployedphysician(s)toachievespecifiedenhancementoftheperformanceoftheenterprise,e.g.,developmentofa“CenterofExcellence”
67©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
PhysicianCompensationExpenseAllocation
• Compensationpaidforphysicianclinical,on‐call,andadministrativeservicesisdistinctfrom reimbursement byathirdpartypayorforphysicianclinicalservicesperformed
• Compensationisaneconomicexpenseburdenallocatedagainsttherevenuestreamgeneratedfromtheprofessionalphysicianservicesperformedbytheemployedphysicians
• Economicexpensesburdenrelatedtothephysician’smalpracticeinsuranceexpenseburdenmustbeproperlyallocatedandaccountedforindeterminingFMV andcommercialreasonablenessofproposedphysiciancompensationtransactionalarrangements
68©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
CompensationBenchmarkingSourcesGenerallyacceptedbenchmarkingdatarelatedtovaluationofphysicianandexecutivecompensationforclinical,administrative,andon‐callservices
A B C D E
Name Publisher Clinical MedicalDirector On‐Call
1 MedicalGroupCompensationandFinancialSurvey AmericanMedicalGroupAssociation ⨯ ⨯2 CostSurveyforSingle‐SpecialtyPractices MedicalGroupManagementAssociation ⨯3 PhysicianCompensationandProductivitySurveyReport SullivanCotterandAssociates,Inc. ⨯ ⨯ ⨯4 PhysicianCompensationSurvey NationalFoundationforTraumaCare ⨯5 PhysicianExecutiveCompensationSurvey AmericanCollegeofPhysicianExecutives ⨯6 PhysicianCompensationandProductionSurvey MedicalGroupManagementAssociation ⨯7 PhysicianSalarySurveyReport:Hospital‐BasedGroupHMOPractice JohnR.ZabkaAssociates ⨯ ⨯8 SurveyReportonHospitalandHealthcareManagementCompensation WatsonWyattDataServices ⨯9 CostSurveyforMultispecialtyPractices MedicalGroupManagementAssociation ⨯10 HealthcareExecutiveCompensationSurvey IntegratedHealthcareStrategies ⨯11 PhysicianOn‐CallPaySurveyReport SullivanCotterandAssociates,Inc. ⨯12 ManagementCompensationSurvey MedicalGroupManagementAssociation ⨯13 SurveyofManagerandExecutiveCompensationinHospitalsandHealthSystems SullivanCotterandAssociates,Inc. ⨯14 ExecutiveCompensationAssessor EconomicResearchInstitute ⨯
15 TopManagement andExecutive AbbottLangerAssociation,EconomicResearchInstitute,andSalariesReview ⨯
16 ExecutivePayintheBiopharmaceuticalIndustry Top5DataServices,Inc. ⨯17 ExecutivePayintheMedicalDeviceIndustry Top5DataServices,Inc. ⨯18 HospitalSalary&BenefitsReport,2007‐2008 JohnR.ZabkaAssociates,Inc. ⨯19 USIHNHealthNetworksCompensationSurveySuite Mercer,LLC ⨯20 Intellimarker AmericanAssociationofAmbulatorySurgeryCenters ⨯ ⨯21 MedicalDirectorshipandOn‐CallCompensationSurvey MedicalGroupManagementAssociation ⨯ ⨯
69©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
PhysicianClinicalServicesGainsharing
• Arrangement“underwhichahospitalgivesphysiciansashareofthereductioninthehospital’scosts(thatis,thehospital’scostsavings)attributableinparttothephysicians’efforts.”
• Historically,gainsharinghasbeenfoundtoviolatetheCivilMonetaryPenaltyStatute (prohibitshospitalforprovidingapaymenttoaphysicianasaninducementtoreduceservices)andAnti‐KickbackStatute
• 2005:OIGbegantoapprovegainsharingarrangementsduetobenefitsofdecreasedcostsandincreasedquality
• 2009PhysicianFeeSchedulesolicitedcommentsregardingapossiblenewexceptiontoStarkLawforsharedsavingsprograms(despiteCMS’sownconcernforpotentialabuse)
“2009PhysicianFeeScheduleProposedRule,”73Fed.Reg.23692‐94(Apr.30,2008).
70©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
PhysicianOn‐CallServicesGrowingNeedforCompensationforProvisionofOn‐callServicesDueto:
• PhysicianshortageandincreaseddemandduetoagingBabyBoomers
• Agingphysicianworkforce
• Physiciansdemandingmore“regular”workhours
• Physiciansincreasinglybuildingpracticethroughparticipationinambulatorysurgerycentersandphysician‐ownedspecialtyhospitals
• Physiciansoftenreceiveinadequatepaymentforservicesprovidedwhileon‐callaspatientsintheEDareoftenuninsuredorunder‐insured
“OIGAdvisoryOpinionNo.07‐10,”OfficeoftheInspectorGeneral,DepartmentofHealthandHumanServices,September2007,www.oig.gov.“OIGAdvisoryOpinionNo.09‐05,”OfficeoftheInspectorGeneral,DepartmentofHealthandHumanServices,May2009,www.oig.gov.
71©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
PhysicianOn‐CallServicesOIGApprovalofOn‐CallCompensationArrangements
• May2009(Opinion09‐05)
• Physicianspaidon‐callcompensationforservicestopatientsineligibleforMedicaid/otherstatehealthinsuranceprograms‐paymentcoveredphysicianfees,emergency&inpatientservices
• Valuationmethodologyforcompensationconsideredpatientacuity,averagelengthofstay,andphysiciantime
• On‐callarrangementhadsufficientsafeguardstopreventFraud–almostmetthePersonnelServicesandManagementSafeHarbor
• Paymentstophysiciansforservicesrendered,ratherthanavailability(e.g.,“lostopportunity”)
OIGAdvisoryOpinionNo.09‐05,”OfficeoftheInspectorGeneral,DepartmentofHealthandHumanServices,May2009,www.oig.gov.
72©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
PhysicianOn‐CallServices
OIGApprovalofOn‐CallCompensationArrangements
• September2007(Opinion07‐10)
• Firstadvisoryopinionaddressingon‐callcompensationarrangements
• Physician’spaidper‐diemrateforon‐callduties
• On‐callarrangementhadsufficientsafeguardstopreventFraud– almostmetthePersonnelServicesandManagementSafeHarbor
• PerDiemratestailoredtophysician’sburdenandlikelihoodofresponse
• IndependentthirdpartydeterminedperdiemrateswereatFMV
• Paymentnotaffectedbyvolumeorvalueofreferrals
• Allphysicianshadequalon‐callcoverage,paymentnothigherforcertainspecialties
OIGAdvisoryOpinionNo.07‐10,”OfficeoftheInspectorGeneral,DepartmentofHealthandHumanServices,September2007,www.oig.gov.
73©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
PhysicianOn‐CallServicesOIGGuidelinesforSettingOn‐CallCompensationArrangementsatFMV
• Conductindependent,thirdpartyanalysistodetermineifarrangementisatFMV
• Ensureallphysiciansareeligibleandpaymentisnotbasedonthevolumeorvalueofreferralsprovidedtothehospital
• Ensureequaldivisionofon‐calldutiesamongallphysicians
• Demonstratethatthehospitalhasa“legitimate,unmetneed,”foron‐callcoverageandthatcompensationwillamelioratethesituation
• Avoidpaymentsfor“lostopportunity,”whenservicesarenotactuallyprovided
“OIGAdvisoryOpinionNo.07‐10,”OfficeoftheInspectorGeneral,DepartmentofHealthandHumanServices,September2007,www.oig.gov.“OIGAdvisoryOpinionNo.09‐05,”OfficeoftheInspectorGeneral,DepartmentofHealthandHumanServices,May2009,www.oig.gov.
74©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
PhysicianAdministrativeServices
AssessingFMVofMedicalDirectorships
• Employershoulddocument themethodologyusedtosetcompensation
• Beneficialforemployertotrackanddocumenttheactualnumberofhoursthemedicaldirectorspendsperformingtheservices,aswellastomakesurethedocumentationisconsistentwiththehoursoutlinedinthemedicaldirectoragreement
• “Justifyingtheneedformedicaldirectorservicesgoeshand‐in‐handwithshowingthattheservicesareactuallyfurnished.”
“FairMarketValueSupportRequired:PhysiciansinAdministrativeRoles,”ByJenJohnson,AmericanHealthLawyersAssociation,ArticlesandAnalyses,June2008.“HealthCareFraudandAbuse:PracticalPerspectives,”EditedBy:LindaA.Baumann,TheAmericanBarAssociation&TheBureauofNationalAffairs,Inc.,Washington,D.C.,(2002),pp.281.
75©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
DocumentationperTypeofPhysicianService
Notes:1. E.g.,employer'smedicaldirectorshipagreement(s)withannualhourrequirementsandannualcompensationpaidtoeachdirector.2. Intheformofclinicalproductivity(measuredinwRVUs,grosscharges,netrevenue,orcountbyCPTcode).3. Morespecifically,thatemployerassessestheeffectiveness(asopposedtoproductivity)ofthephysicianexecutiveatperforminghis/hertasks,at
leastannually(asopposedtoeverytwoyears).
A B C D
ValuationAnalysisInformationRequest
TypeofPhysicianService
Clinical On‐CallAdministrative,Executive,Management
1 Proposedagreementforservices ⨯ ⨯ ⨯2 Numberofshifts/weekandhours/weekanticipatedunderproposedagreement ⨯ ⨯
3 Numberoftimescurrenton‐callphysicianwas(a)paged;and(b)requiredtobepresentatemployerforpasttwoyears ⨯
4 Allotheragreementsforsimilarpositionsattheemployerentity ⨯ ⨯ ⨯1
5 Curriculumvitae(CV)forthephysicianperformingtheclinicalservices ⨯ ⨯
6 Documentationofboardcertification,qualifications,tenureofphysicianperformingservicesunderallsimilaragreements ⨯ ⨯ ⨯
7 Employer'smedicalstaffbylawsandroster ⨯ ⨯ ⨯8 Documentationofhistoricalproductivityforpasttwoyears ⨯2 ⨯2 ⨯3
9 Documentationofoffersmadetopreviousphysicianexecutives ⨯10 Documentationastothemedicalstaffsneedforadministrativedirection ⨯11 Timesheetrecordsoftimeandworkspentoneachadministrativefunction ⨯
12 Sizeoremployer,numberofpatients,acuitylevelsofpatients,specificneedsrelatedtoaparticularserviceline ⨯
13 Numberofcommittees/meetingsthatrequirephysician'sinvolvementorattendanceandaveragefrequencyanddurationofeachmeeting ⨯
14 Descriptionofqualityprograms,includingcentersofexcellenceand"neverevent"committees ⨯
76©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
ValuationMethodologyforPhysicianServices
Notes:1. e.g.,charges,collections,RVU,etc.
2. e.g.,hourly,weekly,daily,annualmetrics
3. Restricted:physicianisrequiredtostayonpremisesduringcallUnrestricted:physicianisnotrequiredtostayonpremisesduringcall
4. MaybebeneficialtousethePrincipleofSubstitutionandPrincipleofUtility(e.g.,StarkII,PhaseIII:Hourlyratemaybeusedifitissetat FMV)
5. PercentageofCollections:maybehighincentivetotreatpatientswithhigherpayingpayorsPercentageofGrossCharges:beneficialasitisnotbasedonpatientpayormix,butmaycausephysiciancompensationtofluctuatePerRVUBasis:beneficialascompensationisbasedonproductivity,butcarefulconsiderationshouldbepaidtoaccountforwhethercompensationisbasedonatotalRVUbasisorsolelyonaworkRVUbasis
“StarkII,PhaseIII,”72Fed.Reg.51015‐16,September5,2007.
A B C D
ValuationMethodology:ElementsforConsideration Clinical On‐Call Administrative
1 Range(percentile)ofcompensationmeasured ⨯ ⨯ ⨯
2 Specialtyorsubspecialtyneedtobematched ⨯
3 Metricofcomparabilitymustbeselected ⨯1 ⨯2 ⨯
4 Howthehourlyrate(ifapplicable)andfull‐timeequivalency(FTE)arecalculatedmustbedetermined ⨯
5 Whetheron‐callservicesarerestrictedorunrestricted3 ⨯
6 DeterminationofFMVforspecifictasks,duties,responsibilities,andaccountabilitiesrequiredforservices4 ⨯ ⨯ ⨯
7 Determinewhetherproductivity‐basedcompensationisbasedon: (1)percentageofcollections;(2)percentageofgrosscharges;or,(3)perRVUbasis5 ⨯
77©HEALTH CAPITAL CONSULTANTS
ROLE OF THE VALUATION TEAM
78©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
RoleoftheValuationAdvisor
• LegalcounseltypicallydoesnotprovidealegalopinionastotheFMVorcommercialreasonablenessofacompensationarrangement
• LegalcounselwillmostlikelyobtainanindependentvaluationconsultanttoprovideacertifiedvaluationopinionastotheFMVand/orcommercialreasonablenessofacompensationarrangement
• CourtshavefoundthoroughvaluationsofbothleaseandcompensationarrangementsaspersuasiveevidenceofFMV asagainstalessthoroughvaluationofagovernmentexpertwitness
“U.S.exrel.Goodsteinv.McLarenRegionalMedicalCenter,”202F.Supp.2d671(E.D.Mich.2002).“U.S.exrel.Villafanev.Solinger,”543F.Supp.2d678(W.D.Ky.2008).
79©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
RoleofLegalCounsel
• Adviseastothelegalpermissibilityoftheunderlyingtransaction
• Draftphysicianemployment/independentcontractoragreements
• Includeall physiciandutiesintheagreement
• Serveasliaisonbetweenvaluationconsultantandhospitalhealthsystem
• Ensurevaluationisconsistentwiththetransactiondocuments
• Attempttomaintainattorney‐clientprivilege
“U.S.exrel.Goodsteinv.McLarenRegionalMedicalCenter,”202F.Supp.2d671(E.D.Mich.2002).“U.S.exrel.Villafanev.Solinger”,543F.Supp.2d678(W.D.Ky.2008).
80©HEALTH CAPITAL CONSULTANTS
CONCLUDING REMARKS
81©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
AdherencetoCommercialReasonablenessThresholds
• PhysiciancompensationagreementscanbeatFMV whilesimultaneouslynot becommerciallyreasonable
• FailuretocomplywithcommercialreasonablenessthresholdsinexecutingphysiciancompensationarrangementsmayresultinafindingoflegalimpermissibilityundertheStarkLawandAnti‐KickbackStatute
• SubmittingsuchclaimsforreimbursementmayalsobefoundtobelegallyimpermissibleundertheFalseClaimsAct
82©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
OIGComplianceProgramGuidelines• EffectivecomplianceprogrammayhelpavoidpotentialviolationofStarkLaw,Anti‐KickbackStatute,andFederalFalseClaimsAct
• Buildon‐goingcomplianceintotheagreements,e.g.periodicallyassessFMVandperiodicallyauditcompliancewithdutiesrequiredbytheagreement.
• Thesesevencomponentsprovideasolidbasisforavoluntarycomplianceprogram:1. Conductinginternalmonitoringandauditing;2. Implementingcomplianceandpracticestandards;3. Designatingacomplianceofficer;4. Conductingappropriatetrainingandeducation;5. Respondingappropriatelytodetectedoffensesanddeveloping
correctiveaction;6. Developingopenlinesofcommunication;and7. Enforcingdisciplinarystandardsthroughwell‐publicizedguidelines.
“OIGComplianceProgramforIndividualandSmallGroupPhysicianPractices,”Notice,65Fed.Reg.59434‐35(Oct.5,2000).
83©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
SummaryofCRCompensationArrangements
• Compensationarrangementsarelikelytobedeemedcommerciallyreasonableiftheyare:
• AtFMV;
• Thearrangementslisttheactualdutiesbeingperformedbythephysician;
• Thoseservicesarereasonablynecessarytotheproviderbasedonthedetailsofthesituation;and
• Theservicescouldnotbeadequatelyperformedforlesscompensation.
84©HEALTH CAPITAL CONSULTANTS
Introduction FairMarketValue(FMV)
CommercialReasonableness
(CR)
EstablishingFMV&CR
OverviewofCompensationArrangements
RolefortheValuation
ConcludingRemarks
ImportanceofDocumentationandObtainingaCertifiedOpinionofValue
• CriticaltoobtainandmaintaindocumentationthatthecompensationarrangementisbothofatFMV andcommerciallyreasonableinordertowithstandscrutinyfromOIGandtheIRS
• AcertifiedopinionbyindependentvaluationconsultantastowhethertheproposedtransactionisatFMV andcommerciallyreasonablewillenhancetheeffortsofhealthcareentitiesandprovidersinestablishingthattheirproposedcompensationarrangementisincompliance