The Purpose Driven Deal – Ethics and Fraud and Abuse

The Purpose Driven Deal – Ethics and Fraud and Abuse

Presented by Gregg M. Wallander, Esq.

Hall, Render, Killian, Heath & Lyman, P.C.

Agenda • Introduction • Think Before You Act • Recent Cases

– U.S. ex rel. Singh v. Bradford – U.S. ex rel. Drakeford v. Tuomey – U.S. ex rel. Baklid-Kunz v. Halifax – U.S. ex rel. Schubert v. All Children’s – U.S. ex rel. Heesch v. Infirmary – Health Diagnostic Laboratory, Inc.

• Ethical Issues and Attorneys • The Purpose Driven Deal • Practical Takeaways

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Introduction Q. It’s fair to say that the purpose of the noncompete agreement was to

protect that revenue stream [referrals from Dr. Saleh and Dr. Vaccaro]. A. The purpose of the noncompete, from my point of view, was to make

sure that Drs. Vaccaro and Saleh didn’t have a financial incentive to refer away from the hospital.

Q. Because if they didn’t have a financial incentive to refer away, they would refer it to you?

A. We could hope that they would, yes. Q. You did more than hope. You expected they would refer to you? A. Expected they would refer a good bit of it to us, yeah.

-- Deposition of George Leonhardt, CEO, Bradford Regional Medical Center

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“[The Valuation Firm] recognizes that this is an aggressive compensation plan that should be reviewed by a third party

periodically to ensure that the terms continue to provide total compensation that is within fair market value.”

-- Excerpt from Valuation Opinion prepared for Tuomey Regional Medical Center

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Introduction

“Halifax tracked the referrals generated by each medical oncologist. In February 2010, [The Chief Financial Officer] of

Halifax Hospital, questioned why Dr. Sorathia generated a comparatively low dollar value of referral services when he saw

more patients than any of the other medical oncologists.” -- U.S. ex rel. Baklid-Kunz v. Halifax, United States’ Complaint in Intervention

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Introduction

Introduction

“A strategic goal was achieved to affiliate Northside Clinic with Diagnostic & Medical to stop leakage to Springhill via referrals to Cardiology Associates and Pulmonary Associates. Diagnostic

and Medical successfully established Cardiology outreach to Monroeville, increased referrals to [Mobile Infirmary].”

--Email from Senior Management of Infirmary Health System, Inc.

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Be Careful with Communications

“We have worked with the ____ group in the past in an attempt to partner with them and to acquire their

referrals for MRI.”

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Think Before You Act…

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Hospital/Physician Arrangements

• Hospitals enter into a variety of compensation arrangements with physicians: – Employment – Recruitment – Practice Acquisitions – Medical Director – Personal Services – Management Agreements – Space/Equipment Leases – Professional Services Contracts – Etc.

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Hospital Issues • Volumes increasing • Controlling costs • Patient satisfaction • Healthcare reform implementation • Population health management • Personnel shortages • More competition

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Triumvirate of Questionable Deals

• Hospitals providing physicians with items or services for free or less than fair market value.

• Hospitals relieve physicians of financial obligations they would otherwise incur.

• Hospitals inflate compensation paid to physicians for items and services.

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Newer Problems • No written agreement • No signed agreement • Incomplete agreement – the deal does not match the

contract • Incorrect fair market value analysis • Bad statements of intent • Anti-Kickback issues are the foundation for real Stark risk

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Primary Considerations

• Federal Stark Law • Federal Anti-Kickback Statute • Civil Monetary Penalties Statute • Private Use/Tax-Exempt • State Fraud and Abuse Laws • Enforcement Actions (Bradford and Tuomey) • Legitimate Business Rationale • Fair Market Value • Commercial Reasonableness

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Intent Test

• Greber test – If one purpose of the arrangement or deal is to induce

referrals, the Anti-Kickback Statute is violated. U.S. v. Greber, 760 F.2d 69 (3rd Cir. 1985).

• The ACA test – There is no requirement of actual knowledge of or specific

intent to commit a violation of the Anti-Kickback Statute.

Be careful with communications to avoid risk that illegal intent could be misconstrued!

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United States v. Bradford Regional Medical Center

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U.S. v. Bradford: Background • The Qui Tam Relators: Four physicians practicing in the community. • The Defendants: Bradford Regional Medical Center, a Pennsylvania

nonprofit corporation and two internists who jointly owned a physician group LLC.

• The Physicians had privileges at the Hospital. • Referrals from their Group equaled over 40% of the Hospital’s nuclear

imaging revenues. • The Group purchased a GE nuclear imaging camera for its office. • Hospital alleged Physicians violated internal policy against

conflicting financial interests; threatened to revoke privileges.

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• Resolution: – Hospital subleased GE camera from the Group. – Parties agreed to continue discussion regarding potential “under arrangements” deal. – The Group then entered into a lease for a new camera, which

included a “buy out” obligation for amounts Group owed on the original GE lease.

– Hospital guaranteed the Group’s “buy out” obligation. – This subsequent arrangement was never documented in a formal

written lease or agreement.

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U.S. v. Bradford: Background

U.S. v. Bradford: Fair Market Valuation

• Hospital requested an accountant prepare a fair market value assessment of the sublease.

• Accountant concluded: – Amounts to be paid were reasonable based on:

• Hospital revenues expected with sublease vs. Hospital revenues expected without sublease

– Revenue projections assume Physicians will refer imaging. – Hospital board approved sublease arrangement.

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U.S. v. Bradford: Opinion • As a matter of law, the agreements violated the Stark

Law. • However, there exist genuine issues of material fact as to

whether the Hospital violated the Anti-Kickback Statute or the False Claims Act (“FCA”). – Both require showing of intent, which is left to a jury; but – “The record evidence is not strongly in favor of Defendant,”

regarding the FCA.

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U.S. v. Bradford: Outcome

• Bradford Regional Medical Center settled with the government for $2.75 Million.

• The District Court ordered Bradford to pay Relator’s attorneys fees and expenses, totaling an additional $600,000.

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U.S. v. Bradford: Summary

• Technical Analysis: – No formal documentation.

• Intent Analysis: – Hospital threatened to revoke privileges. – Fair market value opinion accounted for referral business. – Hospital guaranteed lease secured by physicians in their

individual capacities.

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United States v. Tuomey Regional Medical Center

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U.S. v. Tuomey: Background • The Qui Tam Relator: Orthopedic surgeon at Tuomey. • The Defendants: Tuomey Healthcare System, Inc.; Tuomey Regional

Medical Center is a 301-bed hospital located in a MUA. • Physicians were employed on a part-time basis with a non-compete

clause and a use requirement. • Some physicians’ compensation exceeded collections. • Agreement contained a 10-year term. • Physicians’ compensation based on: base salary; % of collections; and

up to 7% productivity bonus. • Lawsuit alleged physician agreements violated Stark and FCA for being

above fair market value by taking into account the volume or value of referrals

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U.S. v. Tuomey: Outcomes • First Trial:

– The court held that an indirect compensation arrangement was created and that the Stark law (but not the FCA) was violated.

– Tuomey ordered to repay the government $45 Million plus interest.

• Appeal: – Fourth Circuit vacated the decision and sent the case back for retrial.

• Second Trial: – Jury found Tuomey in violation of the Stark Law and FCA. – Stark violations totaled $39.3 Million; verdict against Tuomey for $237.5

Million.

• Second Appeal: – Case currently pending in the Fourth Circuit. – Judge ordered Tuomey to pay bond of $30 Million and deposit $40

Million into escrow account until appeal is complete.

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U.S. v. Tuomey: Summary

• Technical Analysis: – Agreements were professional productivity agreements. – Total compensation alleged to exceed fair market value and to not

be commercially reasonable (unless referrals were considered).

• Intent Analysis: – Recordings of Board meeting minutes in which management and

Board members made comments regarding the intent and strategy surrounding the contracts.

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United States v. Halifax Hospital Medical Center

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U.S. v. Halifax: Background • The Qui Tam Relator: Director of Physician Services. • The Defendants: Halifax Hospital Medical Center. • The government alleges that Halifax committed years of Stark

violations concerning the employment of referring physicians based on compensation that: – was not fair market value; – was not commercially reasonable; and/or – took into account the volume or value of referrals or other

business generated by the referring physician.

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U.S. v. Halifax: Summary • Technical Analysis:

– The medical oncologists’ incentive bonuses were based on the operating margin of the medical oncology program, and this revenue included fees for designated health services (“DHS”) that were not personally performed.

– As a result, the medical oncologists’ remuneration varied based on referrals for designated health services.

• Intent Analysis: – Internal communications. – Halifax tracked referrals generated by each medical oncologist.

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U.S. v. Halifax: Outcome

• November 2013: – The court determined, in summary judgment, that Halifax’s

oncology bonus compensation payments violated the Stark law.

• March 2014: – Before jury selection started for trial, Halifax announced a $85

million settlement with the Department of Justice. – This settlement is notable because of its size. Given the possibility

of treble damages and civil penalties, Halifax faced a possible damage award in excess of $1.1 Billion.

• July 2014: – All remaining claims settled for $1 Million.

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United States v. All Children’s Health System, Inc.

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U.S. v. All Children’s: Background

• The Qui Tam Relator: Former Director of Operations • The Defendants: All Children’s Health System, Inc. • The government alleges that All Children’s committed Stark and False

Claims Act violations relating to physician compensation. Allegations were based on: – lack of Fair Market Value; – management’s aggressive physician recruiting; and – failure to follow All Children’s compensation plan.

• Court ruled that as a threshold matter, the Stark Law applies to Medicaid.

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U.S. v. All Children’s: Summary • Technical Analysis

– Relator created a competitive physician salary range by developing a fair market value for physician salaries from three nationwide surveys. The plan disallowed physician compensation to exceed the 75th percentile of the survey data.

– Allegedly, one-third of physicians were paid above this salary range and at least 18 physicians’ compensation exceeded the 90th percentile of the salary data.

• Intent Analysis – Defendants began “aggressively recruiting” physicians and pediatric

groups before Relator’s compensation plan was completed or approved.

– Relator advised Vice President that salaries he had contracted far exceeded FMV and would cause the company to lose money; VP told Relator to proceed as directed

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United States v. Infirmary Health System, Inc.

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U.S. v. Infirmary: Background

• The Qui Tam Relator: Former cardiologist with Diagnostic Physician Group (DPG).

• The Defendants: Infirmary Health System, Inc.; DPG; and two Infirmary-affiliated clinics.

• Infirmary bought the two clinics from DPG in 1988. Clinics made agreements to pay DPG a share of the clinics’ revenues, including Medicare revenues from diagnostic imaging and lab tests. DPG paid bonuses to individual physicians for referrals.

• First case to interpret the in-office ancillary services (IOAS) exception for services performed by a “group practice.” – Infirmary believed its group practice arrangement was in accordance

with IOAS; government found that there were several different physician groups—not operating together.

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U.S. v. Infirmary: Summary • Technical Analysis:

– Infirmary paid DPG a percentage of collections on services performed or referred by physician group, including designated health services:

• performed by Infirmary personnel, • with equipment owned by Infirmary, and • billed to Medicare by Infirmary.

– Physician group paid bonuses to individual physicians for referrals of diagnostic tests and designated health services to Infirmary.

• Intent Analysis: – Internal documents illustrating purpose of the arrangement was to

direct patients to Infirmary. – Evidence that Infirmary’s attorney told Infirmary that it was violating

the “group practice” definition.

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Health Diagnostic Laboratory, Inc.

Health Diagnostic Laboratory, Inc.: Background

• Virginia-based laboratory service – Specializing in cardio-biomarker testing – Paid doctors for sending patients’ blood for testing – Collected hundreds of millions from Medicare program

• Fraud investigations by government – Special Fraud Alert from HHS: warning that remittances presented a

substantial risk of fraud and abuse under Anti-Kickback Statute – HDL’s payments “might inappropriately affect some physicians’

decisions.”

Health Diagnostic Laboratory, Inc.: Summary

• Technical Analysis – Paid $20 per blood sample to doctors ordering tests, much higher than

average – Some physician practices made several thousand dollars per week – Billed Medicare for procedure to separate blood particles

• In 2012, HDL collected $11.9 Million from Medicare for this procedure • In 2012, 35 other labs collected a total of $850,000 for same procedure

• Intent Analysis – Executive e-mail: “Fyi To all I want to refocus that this is a ph [processing and

handling] fee not a draw fee. One word makes it legal the other illegal.” – When questioned on the difference between P&H fee and draw fee, CEO

stated that the extra $17 was for packaging

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Unanswered Questions • Could Bradford/Tuomey/Halifax encourage/allow the

government to allege that a “taking into account referral” violation existed solely on the grounds of “normal” behavior, for example: – Simply stating a desire (or hope) for future referrals; – The fact that the hospital will logically receive the

physician’s referrals given that the hospital is the only one in town; or

– Projecting referrals from physicians in order to properly operate the hospital.

• Infirmary takeaway: Listen to your attorney! • All Children’s/Health Diagnostic: Beware of evidence of

intent

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Ethical Issues and Attorneys

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Does Privilege Exist?

• Attorney-Client Privilege is commonly defined as: (1) Where legal advice of any kind is sought (2) from a professional legal adviser in his [or her] capacity as such, (3) the communications relating to that purpose, (4) made in confidence (5) by the client, (6) are at his [or her] instance permanently protected (7) from disclosure by [the client] or by the legal adviser, (8) except when the protection is waived. Source: 8 JOHN HENRY WIGMORE, EVIDENCE IN TRIALS AT COMMON LAW § 2292, at 554 (McNaughton 1961 & Supp. 1991).

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What Is NOT Privileged? • In Halifax, the court recently ruled that emails and other

documents to and from Halifax’s in-house counsel were not privileged. – If the “To” line was addressed to both in-house counsel and non-

lawyers, the judge determined that the email could not have a primary purpose of seeking legal advice.

– The judge made the same conclusions if the attorney was only listed on the “cc:” line, and not the “To” or “From” line of the email.

• General business advice is not privileged because it is not a communication of legal advice.

• Labeling a document as privileged does not automatically make it protected by attorney-client privilege.

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What Is NOT Privileged?

• The privilege-status of in-house counsel’s communications is determined on a case-by-case basis, depending upon the subject matter of each specific communication.

• Only in-house counsel’s communication relating to his/her legal role are subject to privilege protections (business functions are NOT protected).

• Notes of business meetings are not privileged simply because an attorney was present.

• Copying in-house counsel on emails does not make the content of the email privileged.

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Are Communications with Consultants Protected by Privilege?

• The analysis of privilege regarding consultants is very jurisdiction-specific. • Some jurisdictions have determined that disclosing information to a

consultant waives the attorney-client privilege; however, some have determined that the information remains privileged. – Indiana: Attorney-client privilege attaches to communications

between client and agent of the attorney, as long as: • 1. the communication involves the subject matter about which

the attorney was consulted and • 2. the agent was retained by the attorney for the purpose of

assisting the attorney in rendering legal advice or conducting litigation on behalf of the client (Brown v. State, 448 N.E.2d 10, 14 (Ind. 1983)).

• Waiver of attorney-client privilege is typically a very fact-specific analysis.

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• Considerations: – Ask yourself if the consultant is being brought in to

facilitate the communication between attorney and client, or if the consultant is simply providing his/her own advice.

– If the consultant is providing his/her own advice, the disclosure of confidential information is likely to waive privilege protections.

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• There are no guarantees that involving a consultant will or will not waive the attorney-client privilege.

• Best practices when engaging a consultant: – The client should consult the attorney; then, the attorney should

engage the consultant. – Retainer agreements and bills with consultants should describe

the role as facilitator/translator, not “consulting services.”

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Does Due Diligence Waive Privilege?

• Similar to consultants, this analysis is also very jurisdiction and fact-specific.

• A common legal interest may allow for due diligence to be conducted while maintaining attorney-client privilege; however, there are no guarantees regarding the preservation of privilege.

• Indiana: – Indiana courts have allowed the common legal interest

doctrine to prevent waiver of otherwise privileged documents; but must apply to a common legal defense

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Who Does the Attorney Represent? • The organization, not the officers, is the attorney’s client. • MRPC 1.13: (a) A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.

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Who Does the Attorney Represent? • MRPC 1.13 – cont’d: (b) If a lawyer for an organization knows that an officer, employee or other person associated with the organization: • is engaged in action, • intends to act or refuses to act in a matter related to the

representation that is a violation of a legal obligation to the organization, – or a violation of law that reasonably might be imputed to the

organization, – and that is likely to result in substantial injury to the organization,

• then the lawyer shall proceed as is reasonably necessary in the best interest of the organization.

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Who Does the Attorney Represent? • MRPC 1.13(b) – cont’d: Unless the lawyer reasonably believes that it is not necessary in the best interest of the organization to do so, the lawyer shall refer the matter to higher authority in the organization, including, if warranted by the circumstances to the highest authority that can act on behalf of the organization as determined by applicable law.

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Who Does the Attorney Represent? • MRPC 1.13 – cont’d:

(c) Except as provided in paragraph (d), if (1) despite the lawyer’s efforts in accordance with paragraph (b) the highest

authority that can act on behalf of the organization insists upon or fails to address in a timely and appropriate manner an action, or a refusal to act, that is clearly a violation of law, and

(2) the lawyer reasonably believes that the violation is reasonably certain to result in substantial injury to the organization,

then the lawyer may reveal information relating to the representation whether or not Rule 1.6 permits such disclosure, but only if and to the extent the lawyer reasonably believes necessary to prevent substantial injury to the organization. (d) Paragraph (c) shall not apply with respect to information relating to a

lawyer’s representation of an organization to investigate an alleged violation of law, or to defend the organization or an officer, employee or other constituent associated with the organization against a claim arising out of an alleged violation of law.

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Does a Conflict Exist?

• An attorney can represent an organization and its officers, directors, employees in their individual capacities under particular circumstances.

• MRPC 1.13: (g) A lawyer representing an organization may also represent any of its directors, officers, employees, members, shareholders or other constituents, subject to the provisions of Rule 1.7. If the organization’s consent to the dual representation is required by Rule 1.7, the consent shall be given by an appropriate official of the organization other than the individual who is to be represented, or by the shareholders.

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Does a Conflict Exist?

• An attorney cannot represent multiple parties in a negotiation where the parties’ interests are “fundamentally antagonistic” (see MRPC 1.7, Comment 28).

• MRPC 1.7: (a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if:

(1) the representation of one client will be directly adverse to another client; or (2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.

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Does a Conflict Exist? • MRPC 1.7 – cont’d.

(b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if:

(1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; (2) the representation is not prohibited by law; (3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and (4) each affected client gives informed consent, confirmed in writing.

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The Purpose Driven Deal

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General Rule of Thumb

• Any remuneration flowing between hospitals and physicians should be at fair market value for actual and necessary items furnished or services rendered based upon an arm’s length transaction and should not take into account the volume or value of referrals.

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Applying the General Rule of Thumb

• Legitimate Business Purpose • Fair Market Value • Commercially Reasonable

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Legitimate Business Purpose

• Lawful purpose • Reasonably calculated to further the hospital’s business /

charitable purposes • Hospital needs the service or item • Hospital intends to utilize service or item • Hospital does utilize service or item in furtherance of

commercially reasonable business objectives

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Fair Market Value • Stark Definition/Tax-Exempt Guidelines • Burden of establishing “fairness” of an agreement generally

rests with the parties involved • Burden of establishing FMV rests with the organization

– Internal governance and documentation • Be careful with reliance on comparables that involve entities

and physicians in a position to generate business • Be careful with comparables if lack of competition in

marketplace – look for alternative valuation methodologies, such as cost plus reasonable rate of return on investment

• Document beforehand! Internally and externally!

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Commercially Reasonable

• Centers for Medicare/Medicaid Services: An arrangement will be considered “commercially reasonable” in the absence of referrals if the arrangement would make commercial sense if entered into by a reasonable entity of similar type and size and a reasonable physician (or family member or group practice) of similar scope and specialty, even if there were no potential referrals.

• Burden of establishing CR rests with the organization – Internal governance and documentation

• Stark exceptions – commercially reasonable even if no referrals are made.

• Deal should be able to stand on its own. 60

Ethics & Purpose

Reject the mentality of

“We all know what we’re trying to do here…”

• Have good purposes and document them! • But is it good business?

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Built to Last – Shattered Myths

• The most successful companies exist first and foremost to maximize profits. Visionary companies pursue a cluster of objectives, of which making money is only one, but they are equally guided by a core ideology – core values and sense of purpose beyond just making money. – Is focus on referrals good business?

Source: JAMES C. COLLINS & JERRY I. PORRAS, BUILT TO LAST: SUCCESSFUL HABITS OF VISIONARY COMPANIES (3d ed. 2004).

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• Visionary companies share a common subset of “correct” core values. There is no “right” set of core values for being a visionary company. The crucial variable is not the content of the ideology but how deeply the company believes its ideology and how consistently it live it and expresses it.

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• The only constant is change. A visionary company almost religiously preserves its core ideology – changing it seldom, if ever. Core values in a visionary company form a rock solid foundation and do not drift with the trends and fashions of the day.

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• The blue-chip companies play it safe. Visionary companies may appear straight-laced and conservative to outsiders, but they are not afraid to make bold commitments to “Big Hairy Audacious Goals.” Visionary companies use these goals to stimulate progress, create immense forward momentum, and blast past other companies.

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• Visionary companies are great places to work, for everyone. Only those who “fit” extremely well with the core ideology and demanding standards of a visionary company will find it a great place to work. Visionary companies are clear about what they stand for and what they’re trying to achieve. Those unwilling or unable to fit these standards will not have room at the company.

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• Highly successful companies make their best moves by brilliant and complex strategic planning. Visionary companies make some of their best moves by experimentation, trial and error, and opportunism. What looks in retrospect like brilliant foresight and preplanning was often the result of “Let’s just try a lot of stuff and keep what works.”

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• The most successful companies focus primarily on beating the competition. Visionary companies focus primarily on beating themselves. Success and beating competitors comes to the visionary companies not so much as the end goal, but as a residual result of relentlessly asking the question “How can we improve ourselves to do better tomorrow than we did today?”

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• You can’t have your cake and eat it too. Visionary companies do not brutalize themselves with the “tyranny of the OR” – the purely rational view that says you can have either A OR B, but not both. For example, they reject having to make a choice between stability OR progress, making money OR living according to values and purpose. Instead, they embrace the “Genius of the AND.”

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• Companies become visionary primarily through visionary statements. The visionary companies attained their stature not so much because they made visionary pronouncements (although they often did so). Nor did they rise to greatness because they wrote one of the vision, values, purpose, mission, or aspiration statements that have become popular in management today (although they wrote such statements more frequently and before it became fashionable). Creating such statements can be a helpful step, but it is only one step in expression of the company’s fundamental characteristics.

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Hospital Business Initiative Process

• Core Ideology. What is the hospital’s core ideology?

• Big Hairy Audacious Goals. What are the hospital’s needs? What are the hospital’s goals? What things does the hospital want to try?

• Service / Collaborative Opportunities. What opportunities exist with physicians to achieve these goals? Is the hospital willing to try new things and create new opportunities?

• Good Purpose. Are these opportunities consistent with law and the hospital’s charitable purpose?

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Board / Administration Roles • Administrative Review. Hospital administration conducts appropriate

due diligence with respect to services, service lines and collaborative opportunities and reports to the Board regarding the results of such review. Legal should be consulted!

• Board Review. The Board should undertake a review of administration’s recommendations and determine whether such opportunities are consistent with the hospital’s legitimate and charitable purposes.

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Internal Presentations • Reviewed by Legal. Internal presentations should be reviewed by

legal in order to ensure that they do not contain harmful information.

• Education. It is important to educate the organization’s business leaders regarding the documentation of good purposes and the avoidance of statements and presentations that may later “kill” a deal or lead to a government investigation.

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Process is Important • Governing Documents. Hospital administration and legal counsel

prepare and review of appropriate documents and other information potentially establishing a service or collaborative opportunity.

• Approvals. The Board and administration work to ensure appropriate approvals and authorizations of service and collaborative opportunities.

• Legal Counsel Review. Service and joint venture opportunities should be reviewed by legal counsel for compliance with applicable law and regulation.

• Minutes. Board committee and meeting minutes should be taken with care and only contain an overview of the discussions that occurred during the meeting. Privileged communications should not be detailed in meeting minutes.

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Finding the Right Purposes

• What are things to consider? – Mission and vision – Strategic planning – Continued viability and ability to respond to the needs of the

community with appropriate and quality health care services – Charitable purposes – Quality – Population management – Development of a multi-specialty medical group

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Favorable Features • Expand or improve scope of services to the community • Improve quality of services to the community • Respond to the needs of the community • Raise investment capital for needed services or equipment • More effective and efficient care • Safeguard the provision of medically necessary services • Commercially reasonable and fair market value payments • Integrity of legal structure • Improve access to care for patients

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Practical Takeaways

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Fair Market Value Analysis

• Analysis needs to be expressly based on the Stark Law definition: 1. Bona fide bargaining between well-informed parties

to the agreement; 2. Who are not otherwise in a position to generate

business for the other party; and 3. Compensation does not account for the volume or

value of anticipated or actual referrals. (42 C.F.R.§311.351)

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Valuing Anticipated Referrals

• CMS: may be permissible to value anticipated referrals if: – a physician practice acquisition; – the valuation is of Designated Health Services (“DHS”) which fit an

exception prior to the transaction (such as in-office ancillary services); and

– the purchase agreement (and price) is not dependent upon future referrals from the selling physician(s) (66 Fed. Reg. 877)

• But application beyond the facts of Bradford/Tuomey/ Halifax is unclear – it may be that any valuation of anticipated referrals a risk.

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OIG Compliance Guidance

• Compensation Arrangements with Physicians. Are the items and services obtained from a physician legitimate, commercially reasonable, and necessary to achieve a legitimate purpose of the hospital (apart from obtaining referrals)?

• Assuming the hospital needs the items and services, does the hospital have multiple arrangements with different physicians, so that in the “aggregate” the items or services provided by all physicians exceed the hospital’s actual needs (apart from generating business)?

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• Does the compensation represent fair market value in an arm’s length transaction for the items and services?

• Could the hospital obtain the services from a non-referral source at a cheaper rate or under more favorable terms?

• Does the remuneration take into account, directly or indirectly, the value or volume of any past or future referrals or other business generated between the parties?

• Is the compensation tied, directly or indirectly, to Federal health care program reimbursement?

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• Is the arrangement properly and fully documented in writing?

• Are the physicians documenting the services they provide? • Is the hospital monitoring the services?

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The Purpose Driven Deal

• Purpose Driven Deal: – Start with good purposes; document your good

purposes. – Engage in business planning that references and is

based on good purposes. – Execute the deal based on good purposes.

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Ethical Considerations

• The government continues to look to the involvement of legal counsel when investigating health care fraud and abuse.

• Involve legal to consider the MRPC and other ethical guidelines when making organizational decisions.

• The organization’s attorney is counsel for the organization, not its officers, employees or directors. The attorney must consider the obligation to report any officer misconduct to the appropriate person within the organization.

• Not all attorney communications may be privileged – keep this in mind when sending emails and other documents.

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Gregg M. Wallander, Esq. Hall, Render, Killian, Heath & Lyman, P.C. One American Square, Suite 2000 Indianapolis, IN 46282 (317) 977-1431 [email protected]