3/17/2015. Three related concepts. Why Do We Care About Commercial Reasonableness?

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1 The Ins & Outs of Commercially Reasonable and Stark Compliant Physician Relationships Health Care Compliance Association Compliance Institute, April 19-22, 2015 Robert A. Wade Partner Krieg DeVault LLP 4101 Edison Lakes Pkwy, Ste. 100 Mishawaka, IN Curtis H. Bernstein CPA, CHFP, ASA Managing Director Valuation and Transaction Services Altegra Health/Denver Office Jesse A. Witten Partner Drinker Biddle & Reath LLP 1500 K Street, N.W. Washington, D.C. Jesse.Witten@dbr.com Why Do We Care About Commercial Reasonableness? To satisfy a Stark Law exception If a hospital (entity) and physician (or family member) have a financial relationship, then the physician cannot refer Medicare patients to the hospital unless the relationship fits within an exception. And the entity may not bill for an unlawfully referred patient. 2 Three related concepts Fair market value Compensation may not vary with or be based upon value or volume of referrals or other business generated between the parties Commercial reasonableness 3 1

2 Real Estate Complexities: Office Space Rates Square foot measurement Real estate appraisals Gross lease v. triple net lease Payment of increases in operating expenses Tenant improvements Holdover Rent Exclusive use No percentage-based leasing arrangement No per click rental for referrals from lessor 4 Real Estate Complexities: Shared Space - Timeshares Must allocate all costs to set FMV Rental Rate Rental of space (Half or Full Day Slots) Vacancy Rate (Project 20% vacancy?) Supplies Utilities Staff (Registration, Nursing, etc.) Equipment 5 Real Estate - Shared Space (Example) Assume: $18 gross per square foot rental (exclusive use) 30% projected vacancy (in suite) 1,000 square feet in suite Building has 6,000 square feet, with 1,000 square feet of common area used by the suite (5,000 square feet usable space) Suite capable of being leased in half day increments (8:00 A.M. Noon; 1:00 P.M. 5:00 P.M.) 6 2

3 Furnished Shared Space (Example) Furniture and equipment in suite determined to be leaseable at $2,000 per year using independent third party leasing company. Miscellaneous medical/office supplies projected to be used in suite is approximately $5,000 annually if suite leased 70% of the time. 7 Shared Space Example allocating vacancy and common areas costs $18 (exclusive use rate) + 30% (vacancy) = $25.71 per square foot ($18.7 = $25.71) 1,000 square feet (suite) 5,000 square feet (building not including common area) = 20% (percentage of suite s usable space in building s usable space) 1,000 square feet (common area) x 20% (suite to building) = 200 square feet (common area allocated to suite) 8 Shared Space Example 1,200 square feet (suite plus allocated common area) x $25.71 = $30,852 $30,852 + $2,000 (furniture and equipment) + $5,000 (medical/office supplies) = $37,852 $37, (weeks) = $728 (weekly rate) $728 5 (business days in week) = $146 (daily rate) $146 2 = $73 (half day rate) 9 3

4 Shared Space Example Example becomes more complicated if: Part of suite is leased (as opposed to full suite) Staff is provided by landlord/hospital Specialized equipment is included but not used by all tenants Non-standardized supplies are used by a tenant 10 Time Share Issues Specific Days, # of Days What is Exclusive Use? What must be used exclusively? Is Lease Required? Hospital patients Can Hospital arrange for specialists to see Hospital s patients in Hospital space? If Hospital schedules the patient but does not bill providerbased can Hospital charge the physician the technical fee? 11 Employment/Independent Contractor Complexities Fair market value Benchmark Data Local Market Issues Reputation of Physician Physician s Productivity Compensation Methodology (fixed, productionbased, quality) Is the position commercially reasonable? Compensation stacking. Time record keeping (i.e., timesheets). Tracking commencement, renewal, and termination of arrangement. 12 4

5 Employment/Independent Contractor Complexities Payment consistent with contractual terms. Determining whether financial arrangement is a direct or indirect compensation arrangement, and whether the stand in the shoes requirement applies. Are the benefits commercially reasonable? Are requested reimbursements consistent with the independent contractor agreement (CME, memberships, honoraria, subscriptions). Volume or value limitations on compensation terms (based upon and/or varies with) 13 Varying Based Upon Volume or Value: What does this mean? Two standards: i) cannot vary with the volume or value, and ii) cannot be based upon volume or value. Four levels of volume and value: i. Paying a doctor for each referral of designated health services. Clearly prohibited. ii. iii. iv. Creation of a bonus pool that varies with either the gross revenue or net margin of a service line. Division of bonus pool based upon each physician s referrals of DHS. Clearly prohibited. Creation of a bonus pool that varies with either the gross revenue or net margin of a service line. Division of bonus pool based upon percentage of work RVUs in comparison with aggregate wrvus of all applicable physicians. Halifax case, but unlitigated. Fixed bonus pool or bonus based upon overall success of AMC, both financially and based upon quality metrics. Unlitigated. 14 Exceptions Requiring Commercial Reasonableness Rental of office space Rental of equipment Personal services FMV compensation Indirect compensation Isolated transactions 15 5

6 Commercial reasonableness CMS (1998) We are interpreting commercially reasonable to mean that an arrangement appears to be a sensible, prudent business agreement, from the perspective of the particular parties involved, even in the absence of any potential referrals. 63 Fed. Reg. 1659, 1700 (Jan. 9, 1998). 16 Commercial Reasonableness CMS (2004) 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 not potential DHS [designated health services] referrals. 69 Fed. Reg , (March 26, 2004). 17 Halifax DOJ s proposed jury instruction An arrangement is commercially reasonable if the arrangement would make commercial sense if entered into by a reasonable hospital of similar type and size and a reasonable physician of similar scope and specialty, even if there were not potential referrals. United States ex rel. Baklid-Kunz v. Halifax Hospital Medical Center, No. 6:09-cv (M.D. Fla. Feb. 14, 2014) [Dkt ] at

7 Halifax -Battle of the Experts Were the compensation arrangements between Halifax and three neurosurgeons commercially reasonable? United States and Halifax each retained an expert to opine on FMV and commercial reasonableness. Her 9 th time testifying for the USA. 19 Halifax USA s Expert I believe the neurosurgeons compensation arrangements with [Halifax] are not commercially reasonable, because absent the physicians referrals, the arrangements as they stand today do not represent sound business reasoning. 20 Halifax USA s expert Neurosurgeons treated favorably in comparison to other employed Halifax physicians $10,800 car allowance. Neurosurgeons were each among the top five compensated employees. With exception of oncologists, neurosurgeons were only Halifaxemployed physicians with compensation near 90 th percentile. Other subsidies not provided to other physicians. 21 7

8 Halifax USA s Expert After hospital collects cash to cover physicians base pay, the neurosurgeons got to collect 100% of additional collections for professional services. No overhead collected (no money withheld to reflect rent, office personnel, etc.) This guarantees that the practices will operate at a loss. While in private practice, one physician s compensation was 60% of collection (40% overhead), but at Halifax his compensation was 107% of collections. 22 Halifax USA s expert Incurring material financial losses related to neurosurgeons practices. Document showed projected $1.8 million in 2010 direct practice losses, but an overall margin of $6.5 million after referrals were factored in. Paying employed physician for normal on-call is unsual and not commercially reasonable. Only payment for excessive call is commercially reasonble. 23 Halifax s Expert IRS factors in assessing commercial reasonableness of physician compensation: Specialized training and experience Nature of duties and amount of responsibility Time spent performing duties Size of organization Physician s contributions to profits National and local economic conditions Time of year when compensation is determined Whether comp is in part payment for a business or assets Salary ranges for equally qualified physicians in comaprable organizations 24 8

9 Halifax Expert Contributions to profits Although physicians received compensation in excess of their collections, the doctors are practicing at a public hospital that cares for low-income, uninsured and Medicaid population. MGMA data reflect that it is not unusual to pay neurosurgeons more than the amount collected. Florida regulations required that a neurosurgeon always be on call and able to arrive promptly 24/7. National and local shortage of neurosurgeons (outmigration for non-emergency inpatient neurosurgery care was 46%) 25 Qualitative Factors Development of a particular service line or introduction of new service Achievement of higher quality targets and patient satisfaction OIG Opinion Improve departmental efficiencies Reduction of overcrowding within emergency of operating department Subspecialty hospitalist programs 26 OIG Opinion Outline prohibited conduct in contract Stinting on patient care Increasing referrals to hospital Cherry picking favorable patients Accelerating patient discharge Maintain compliance through audits by independent reviewers Compensation set at FMV 27 9

10 OIG Opinion Utilize specific and objective performance based measures Supported by nationally recognized standards Do not limit patient care and choice Avoid compensation measures that vary based on value or volume of referrals Prohibit physicians from distributing compensation based on individual performance Limit both the total compensation paid and the duration of the co-management agreement 28 Quantitative Factors Hospital service line continually sustains losses Lack of volume to support number of providers being compensated Staffing on a non-levered basis 29 Fair Market Value for Physician Relationships Understanding data is imperative Published benchmarks do not always present information consistently Market data might not be comparable Apply data correctly All physicians cannot earn the 75 th percentile compensation per work RVU Operating margin, gross margin, net margin, etc. are not all the same Paying for quality, efficiency, and patient satisfaction 30 10

11 Administrative Factors Physicians receive compensation for services they do not provide U.S. v. Campbell Hospitals entering into or continuing an arrangement without proper documentation and approval Physicians providing services under agreements for which there are no performance reviews or determination of continued need