New Frontiers in AMC Funding: Mission Support Alternatives Post-Halifax. Thomas N. Bulleit Partner, Ropes & Gray LLP

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1 New Frontiers in AMC Funding: Mission Support Alternatives Post-Halifax I. Introduction Thomas N. Bulleit Partner, Ropes & Gray LLP Lisa T. Wahler Associate Vice President and Deputy General Counsel Rutgers, The State University of New Jersey March 2016 A. What do we mean by Mission Support? 1. General Definition. Financial support from the revenue-generating parts of an AMC (typically the hospital) to the revenue-poor parts (typically the teaching and research functions) that are not tied to deliverables or to fair market value ( FMV ). a) Because the revenue-poor parts of the AMC generally employ or contract with physicians, the Mission Support payments indirectly support physician salaries. 2. OIG Definition. Funds flows from a hospital to a university whose employed and/or affiliated physicians provide referrals to the hospital where the hospital and university have a shared public and charitable mission and the funds are used to continue the organizations common mission in training physicians for, and providing quality medical care to, the people of [State.] OIG Adv. Op n No (Aug. 19, 2002). 3. CMS Definition. Transfers of money between components of the academic medical center [that] directly or indirectly support the missions of teaching, indigent care, research or community service. 42 C.F.R (e)(1)(iii)(A). 4. Out of Scope. As discussed in this presentation, Mission Support does not include other kinds of financial support that typically are tied to deliverables that are valuable, such as the following: a) federal Medicare and state Medicaid funds for GME, b) federal grants for research and clinical studies, c) industry grants for clinical studies, d) tax-exempt bond financing for capital improvements, e) industry payments for intellectual property developed at the medical school, and f) fee-for service payments (for medical directorships, consulting services, product development services). 1

2 B. Why Mission Support? 1. A Recognition of Shared Mission. a) CMS. The Centers for Medicare and Medicaid Services ( CMS ) recognized the importance of Mission Support payments from one component of an academic medical center ( AMC ) to another in the Stark Law s AMC exception (quoted above). CMS created this exception after recognizing that: Academic medical settings often involve multiple affiliated entities that jointly deliver health care services to patients (for example, a faculty practice plan, medical school, teaching hospital, outpatient clinics). There are frequent referrals and monetary transfers between these various entities, and these relationships raise the possibility of indirect remuneration for referrals. 66 Fed. Reg. 856, 916 (Jan. 4, 2001) (Stark Phase I Rulemaking). b) OIG. Similarly, the U.S. Department of Health and Human Services Office of Inspector General ( OIG ) has recognized in multiple advisory opinions that the relationships among components of academic medical centers are often organizationally and financially complex. In its advisory opinions addressing funds flows between academic medical center components, OIG has opined that funds flows from a hospital to a university whose employed and/or affiliated physicians provide referrals to the hospital may be appropriate when the organizations have a shared public and charitable mission and the funds are used to continue the organizations common mission in training physicians for, and providing quality medical care to, the people of [State.] See, OIG Adv. Op n No (Aug. 19, 2002); OIG Adv. Op n No (Oct. 6, 2000) 2. Other Sources of Medical Education Funding Are in Decline. a) Decline in Availability of Federal Grants for Research. Governmental sources of funding to AMCs have been in decline over recent years. For example, National Institutes of Health ( NIH ) grants, one of the major sources of support for biomedical research conducted at AMCs have decreased over the past decade, with the NIH budget being reduced by over 20 percent during that time period, excluding extra amounts that were made available in 2009 and 2010 through stimulus funding. See National Public Radio, By the Numbers: Search NIH Grant Data by Institution (Sept. 12, 2014), available at: This has had a particularly profound impact on younger researchers, with the average age of NIH grant recipients increasing from less than 38 years of age in 1980 to more than 45 years of age in 2013, making it difficult for AMCs to provide work to their current and recently graduated MD/Ph.D. students who are seeking careers in academic medicine. See Freezing out Young Scientists, 2

3 INSIDE HIGHER ED (Jan. 7, 2015), available at: b) Reduction in Graduate Medical Education Payments. In recent years, many proposals have been made to reduce the amount of graduate medical education ( GME ) payments made available to support medical residency programs. For example, the National Commission on Fiscal Responsibility and Reform, known popularly as the Simpson-Bowles Commission, which was charged with proposing policies to improve the federal fiscal situation, recommended capping direct graduate medical education ( DGME ) payments at 120% of the national average salary paid to residents and reducing the indirect medical education ( IME ) payment adjustment schedule. See Simpson-Bowles Facts Summary, ThePoliticalGuide.com (retrieved Feb. 3, 2016). The Medicare Payment Advisory Commission ( MedPAC ) has also recommended reducing the IME payment adjustment schedule. See MEDICARE PAYMENT ADVISORY COMM N, REPORT TO CONGRESS: ALIGNING INCENTIVES IN MEDICARE 103 (June 2010). Medicaid is the second-largest source of funds for GME, historically providing funds in the form of DGME and IME funds. The number of states providing DGME and/or IME payments through the Medicaid program has declined during the past decade, and many states that have moved Medicaid beneficiaries into managed care programs have not included DGME/IME payments as part of their managed care programs. See AAMC, MEDICAID DIRECT AND INDIRECT GRADUATE MEDICAL EDUCATION PAYMENTS: A 50-STATE SURVEY (2010). A reduction in the availability of federal research grants for AMCs coupled with uncertainty regarding the future of GME payments means that AMCs have an increased need for funding from other sources, such as Mission Support payments from the revenue-generating components of the AMC. II. c) Continued pressure on Medicare and Medicaid reimbursement for all hospitals and physicians. Traditional Legal Constraints On AMC Mission Support (Anti-Kickback Statute, Stark, IRS) A. Anti-Kickback Statute 1. Prohibition. The federal Anti-Kickback Statute ( AKS ) makes it a criminal offense, in part, to knowingly and willfully offer remuneration to induce a person to (i) refer an individual to a person for the furnishing or arranging for furnishing of any item or service for which payment may be made in whole or in part under a Federal health care program; or (ii) to purchase, lease, order, or arrange for or recommend purchasing, leasing or ordering any good, facility, service or item for which payment may be made in whole or part under a Federal 3

4 health care program. See Social Security Act 1128B(b); 42 U.S.C. 1320a- 7b(b). 2. AKS and Mission Support. The OIG has recognized that Mission Support provided by the hospital component to the university or medical school component of an AMC implicates the AKS because physicians employed by or affiliated with the medical school often refer patients to the hospital. Indeed, the OIG has stated in numerous advisory opinions that Mission Support arrangements are as straightforward as [they are] problematic because they involve a substantial [] donation by a hospital to a major referral source. See OIG Advisory Op n Nos , 02-11, OIG Guidance. Happily, OIG Guidance recognizes that within proper parameters, Mission Support is permitted under the AKS. We describe below some of the OIG s key advisory opinions in this area. a) Advisory Opinions. The OIG has addressed the issue of Mission Support in at least three advisory opinions. (1) Donation of Academic Building. In Advisory Opinion No , issued on September 29, 2000, the OIG addressed the situation of an entity consisting of (i) a state agency that oversees facilities, programs, and policies related to students, staff, and faculty at institutions within the state, (ii) a university that operates a medical school, and (ii) a faculty practice plan that was a tax-exempt, nonprofit corporation (collectively, Entity Y ). Physicians practicing at Entity Y ( Entity Y Physicians ) were employed by the faculty practice plan for clinical services and the medical school for academic services, receiving a fixed annual salary for academic services and a fixed annual salary, together with a productivity bonus, for clinical services. The Entity Y Physicians referred patients to Hospital X, a tax-exempt, nonprofit, academic medical center. (i) Hospital X proposed to donate an ownership interest in the academic space contained in a medical office building to Entity Y because Entity Y would suffer financial hardship and the potential for decreased service offerings if it had to continue to pay rent to Hospital X for use of the academic space. (ii) The OIG declined to impose sanctions on this arrangement because 1) Shared AMC mission in education and healthcare. The transaction was between components of an AMC that historically have shared both a common mission in training physicians for, and providing quality medical care 4

5 to, the people of the State and a common heritage as a public institution ; 2) Community benefit. The transaction conferred a community benefit on the residents of the city and state by permitting Entity Y to continue to provide primary care services to the rural, underserved areas of the state; and 3) Safeguards. Entity Y agreed to impose the protective measures described below in Section II.A.3.b of this outline. (2) Grant to Support Administration. In Advisory Opinion No , issued on August 12, 2002, the OIG analyzed a situation in which a public body that owned and operated the hospital component of an AMC (the Hospital Authority ) proposed to provide a $1.6 million grant to an association that secures donor contributions and manages and invests funds for the university component of the AMC (the Endowment Authority ). The university component of the AMC employed and contracted with physicians who make referrals to the hospital. (iii) The OIG declined to impose sanctions in this situation because: 1) Shared AMC mission. The grant was between components of an AMC that have historically shared both a common heritage as public institutions and a common mission in training physicians for, and providing quality medical care to, the people of [State] ; 2) State legislation/community benefit. The grant was consistent with state legislation establishing the Hospital Authority to support the education, research, and public service activities of the university s medical center; and 3) Safeguards. The university certified that it will impose the protective measures described below in Section II.A.3.b of this outline. (3) Donation of Physician Office Building. In Advisory Opinion No , issued on August 16, 2005, the OIG addressed a situation in which the for-profit owner and operator of the hospital component of an AMC proposed to donate a medical office building to the state medical school component 5

6 of the AMC to allow the school to relocate its existing family medicine clinic, which served a high-proportion of Medicaid beneficiaries and uninsured patients. The building would revert back to the hospital if it were not used as a family medicine clinic staffed by teaching physicians, residents, fellows and medical students in support of the University s educational, research, and clinical services mission. (iv) The OIG declined to impose sanctions in this situation because 1) Shared AMC mission. The donation continued the common mission of the university and hospital in training physicians for, and providing quality medical care to the people of the state; 2) Community benefit. The donation conferred a community benefit on the clinic s patients by providing medical services in a medically underserved area; and 3) Safeguards. The university proposed to institute the protective measures described below in Section II.A.3.b of this outline. b) Key Requirements. In each of these three advisory opinions the OIG declined to impose sanctions, citing three factors: the components of the AMC shared a mission in medical education and delivering healthcare, the community benefit, and the presence of certain safeguards to minimize the danger that the Mission Support was serving as a proxy referral fee: (1) Shared AMC mission. Both the component of the AMC providing the Mission Support and the component receiving the Mission Support have historically shared both a common heritage as public institutions and a common mission in training physicians for, and providing quality medical care to, the people of [State]. (2) Community benefit. Supporting the goals of medical education, research, and community benefit/public service activities, including serving medically underserved populations. (3) Safeguards: (a) Compensation paid to the physicians was not related to the volume or value of referrals by such physicians to the hospital or any other institution, and the compensation ultimately paid to the physicians was 6

7 consistent with fair market value in arm s-length transactions. (i) Note. These are the irreducible minimum requirements; no Mission Support will be permissible if the amounts paid are based on volume or value of referrals or if the resulting physician compensation exceeds FMV. This is the key element potentially affected by the Halifax decision (discussed below). (b) The medical school and/or faculty practice plan did not require or encourage its employed or affiliated physicians to refer patients to the hospital that provided the transfer of funds. (i) Caveat: There is a certain sleight of hand in OIG s reasoning here. A medical school cannot function without a steady stream of patients ( teaching material ) admitted to the AMC hospital so that students, residents and fellows can observe and participate in treatment. Likewise, the proximity of the teaching hospital and its facilities make the AMC hospital the natural recipient of most patient referrals. Finally, the Stark law exceptions allowing for certain required referrals (discussed below) focus on relief from the requirements where medical judgment, patient preference, or insurance coverage counsel otherwise. This requirement is therefore probably best read to mean no unreasonable requirements for referral, consistency with the Stark law s special rule for required referrals, in light of the mission of the AMC. (c) The medical school and/or faculty practice plan did not track referrals made by its physicians to the hospital. (i) Caveat: The OIG included a footnote in the latest-dated of the three cited advisory opinions (No ) stating that tracking of referrals would be permissible if (i) accreditation and similar requirements for undergraduate and/or graduate medical education programs require the medical school to keep records of where teaching physicians, residents, fellows, and medical students perform services and procedures, and (ii) the medical school certifies that it does not use such records for any purpose relating to setting teaching 7

8 physician compensation or influencing choice of hospital. B. Stark 1. Stark Law Prohibition a) No DHS referrals. The Stark Law, stated broadly, prohibits a physician who has a financial relationship with an entity that furnished designated health services ( DHS ), such as a hospital, from making referrals of DHS payable by Medicare to such entity unless an exception applies. See Social Security Act 1877; 42 U.S.C. 1395nn; 42 C.F.R b) DHS Includes Hospital Services. DHS is defined to include, among other things, both inpatient and outpatient hospital services, thus meaning that most of the services that a physician would refer to the hospital component of an AMC constitute DHS. c) Financial Relationships. A financial relationship may consist of either an ownership/investment interest or compensation arrangement, and may be direct or indirect. With respect to AMCs, the relationship between the hospital and the referring physician generally creates an indirect compensation arrangement. (1) Indirect compensation arrangement. An indirect compensation arrangement exists when (i) between the referring physician and the entity furnishing DHS, there exists an unbroken chain of any number of persons or entities that have a financial relationship between them, (ii) the referring physician receives aggregate compensation from the entity in the chain of relationships having a direct financial relationship with the physician that varies with, or takes into account, the volume or value of referrals generated by the referring physician for the entity furnishing the DHS, and (iii) the entity furnishing DHS has actual knowledge of, or acts in reckless disregard or deliberate ignorance of, the fact that the referring physician receives aggregate compensation that varies with, or takes into account, the volume or value of referrals or other business generated by the referring physician for the entity furnishing DHS. See 42 C.F.R (c)(2). d) Indirect Compensation Arrangement Analysis. When a hospital makes a Mission Support payment to an AMC component such as a medical school or university which in turn provides compensation to physicians who make referrals to the hospital, an indirect financial relationship is created between the hospital and the physician if the physician s aggregate compensation from the medical school or university varies with the volume or value of referrals that the physician makes to the 8

9 hospital. Any referrals of DHS from the physician to the hospital would therefore be prohibited unless an exception applies. 2. Applicable exceptions (1) Caveat: Note that no indirect compensation arrangement is created unless the compensation paid to the physician by the medical school in the aggregate takes into account the volume or value of referrals (DHS) or other business (private pay) generated by the referring physician for the hospital. Accordingly, Mission Support payments that are fixed annually and not dependent on referrals from the faculty physicians arguably do not implicate the Stark prohibition at all. (a) However, it may also be argued if, for example, an annual block grant is arrived at based on the hospital s prior year financial performance, that the physician s salaries do take into account the volume or value of referrals or other business. See also Halifax discussion below in Section IV of this outline. Fortunately, there is one key Stark Law exception that will protect most properly-structured Mission Support arrangements. a) Indirect compensation exception. CMS has created a regulatory exception for indirect compensation arrangements. See 42 C.F.R (p). CMS recognized in the preamble to the Stark Phase III rulemaking that this exception may apply to AMCs, stating that [t]he definition of indirect compensation arrangement at (c)(2) and the exception for indirect compensation arrangements in (p) are potentially applicable to arrangement involving academic medical centers and physicians. See 72 Fed. Reg. 51,012, 51,038 (Sept. 5, 2007). This exception requires that the following elements be satisfied: (1) The compensation arrangement is set out in writing, signed by the parties, and specifies the services covered by the arrangement, except in the case of a bona fide employment relationship (no writing required). (2) The compensation received by the referring physician is fair market value for services and items actually provided and not determined in any manner that takes into account the volume or value of referrals or other business generated by the referring physician for the entity furnishing DHS. (a) Caveat 1: under the special rules for compensation arrangements, per-unit of service payments are not deemed to take into account the volume or value of referrals as long as the amount per unit does not change during the term. 42 C.F.R (d)(4). 9

10 (b) Caveat 2: Certain required referrals permitted. Note that the Stark Law permits a physician s compensation from a bona fide employer or under a managed care contract or other contract for personal services to be conditioned on the physician making referrals to a particular provider, practitioner, or supplier, e.g., a hospital, if certain conditions are met. See 42 C.F.R (d)(4). (i) The required referrals must relate solely to the physician s services covered by the scope of the employment or the contract, (ii) The referral requirement must be reasonably necessary to effectuate the legitimate business purposes of the compensation arrangement, (iii) The compensation arrangement must not violate the AKS, or any Federal or State law or regulation governing billing or claims submission, (iv) The compensation arrangement must be (a) set in advance for the term of the agreement, (b) consistent with fair market value for the services performed, (c) otherwise compliant with a Stark law exception, (d) contained in a written agreement signed by the parties. (v) Caveat: The requirement to make referrals to a particular provider, practitioner, or supplier must not apply if (a) the patient expresses a preference for a different provider, practitioner, or supplier, (b) the patient s insurer determines the provider, practitioner or supplier, or (c) the referral is not in the patient s best medical interests in the physician s judgment. Practice pointer. As discussed above in Section A.3.b), OIG has stated in advisory opinions that to minimize the possibility that Mission Support payments will be seen as violating the AKS, they should be designed 10

11 such that the AMC component making the payment does not require referrals from physicians who receive compensation from the AMC component. It seems likely, however, that OIG would not take issue with a referral requirement that meets the requirements of CMS s referral requirement exception, absent some lurking abuse. b) AMC Exception. There is also a separate exception applicable to the referral of services furnished by an AMC, but in light of the indirect compensation exception, this exception has little practical importance. For completeness, the requirements of the AMC exception are attached as an Appendix. c) Other Applicable Exceptions. (1) Compensation Exceptions. The direct compensation exceptions set forth at 42 C.F.R may also be available if the AMC chooses to avail itself of the stand-in-the shoes rules, which allow a physician to stand in the shoes of his or her physician organization and thereby create a direct financial relationship between the hospital and the physician (c)(2)(iv)(B). (a) Caveat: this works only if there is a single link in the chain of financial relationships between the physician and the hospital. This often will be the case if the hospital makes payments directly to the physician s faculty practice plan. It generally would not be the case if the physician is employed directly by the university, because the university has not been formed for the purpose of operating a physician practice. See 42 C.F.R , (a). Where the stand-in-the shoes rules do not apply, the only available exception will be the indirect compensation exception. See 72 Fed. Reg. 51, 012, 51,062 (Sept. 5, 2007) (Phase III Rulemaking) ( Where, after applying the stand in the shoes provision, an arrangement still meets the definition of an indirect compensation arrangement in (c)(2)..., the only available exception is the indirect compensation exception. As we explained in Phase I and Phase II, indirection compensation arrangements cannot fit in any of the direct compensation arrangements exceptions; the only available exception for an arrangement that meets the definition of an indirect compensation arrangement is the indirect compensation arrangements exception (66 FR 866,867, 69 FR ). ). 11

12 (2) Service Exceptions. Note that where an indirect compensation exception exists, the service exceptions of 42 C.F.R (e.g., in-office ancillary services, the AMC exception) may still be available. See 66 Fed. Reg. 856, 867 (Jan. 4, 2001) ( [When an indirect compensation arrangement exists] referrals of DHS that do not fit into a services-based exception would be prohibited unless the indirect compensation arrangement fits in the new exception for indirect compensation arrangements. ). C. Internal Revenue Code: Tax Exempt Organizations 1. Context: These provisions of the IRC are unlikely to cause trouble for Mission Support unless there is a Stark or AKS problem. See Section II. C.5 below. 2. Exempt Organizations Must Use Funds For Exempt Purposes a) Section 501(c)(3) of the Internal Revenue Code provides for the exemption from federal income tax of organizations organized and operated exclusively for charitable, educational, scientific, or certain other purposes, no part of the net earnings of which inures to the benefit of any private shareholder or individual. b) One such charitable purpose is the promotion of health to benefit the community. See, e.g., IHC Health Plans, Inc. v. C.I.R., 325 F.3d 1188, 1197 (10th Cir. 2003); Rev. Rul (1983). Medical education itself is another such purpose. 3. Private Inurement and Private Benefit. Under the no part of the net earnings of which inures... limitation in the section 501(c)(3) requirement, there must be no private inurement (to insiders) or private benefit (to anybody). a) Private inurement and private benefit defined: (1) Private inurement rule: No tax-exempt organization may unjustly enrich its insiders those with an ability to substantially influence the direction of an organization. See 26 C.F.R (c)(3)-1(c)(2) ( An organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals. ). Any transactions with insiders must be negotiated at arm s length and for fair market value. (2) Private benefit rule: No more than an insubstantial portion of an organization s activities may further a private interest regardless of whether the private interest is with insiders or outsiders. b) Insiders defined. The IRS has dispensed with the idea that all doctors are insiders at a hospital (an idea that the IRS had endorsed in guidance from the early 1990s, see G.C.M (1991)), so now it is 12

13 effectively a facts and circumstances determination as to whether a physician is an insider so long as the physician does not meet any of the per se insider categories (i.e., presidents, chief executive officers, or chief operating officers, and their family members, are always deemed to have substantial influence over an organization and are therefore subject to the private inurement rule). See 26 C.F.R (c), (e). 4. Intermediate Sanctions. Intermediate sanctions (sanctions less severe than loss of tax-exempt status) available against a disqualified person who has engaged in an excess benefit transaction with a 501(c)(3) organization. a) A disqualified person is someone who is, or in the past five years was, in a position to exercise substantial influence over the affairs of a taxexempt organization. (1) This includes physicians who serve in an officer or director role, or who oversee significant functional areas, admit large numbers of patients, etc. b) An excess benefit transaction has occurred if a disqualified person has received something of value from a 501(c)(3) organization (subject to the caveat below) that is greater than what the organization received in return. (1) However, the excess benefit transaction regulation does not apply to a tax-exempt organization that is exempt under Section 115, notwithstanding that it may also be exempt under Section 501(c)(3). 26 C.F.R (a)(2)(ii). Section 115 organizations are state organizations or political subdivisions thereof. See 26 U.S.C c) However, a safe harbor exists for even insider comp: a procedure that, if followed, creates a rebuttable presumption that there has been no excess benefit transaction. The requirements of the safe harbor include: (1) No member of the committee or board reviewing the arrangement has a conflict of interest with respect to that arrangement; (2) The committee or board reviews and relies on data about comparable arrangements in making its decision; and (3) The deliberations are appropriately documented. 5. AKS and Tax Exempt Status. The IRS has commented that a health care institution that enters into arrangements that trigger anti-kickback concerns may also be jeopardizing its tax exempt status. See G.C.M. 39,732 (1987). a) Three concerning factors articulated in the GCM: (1) Transaction causing hospital s net earnings to inure to benefit of private individuals; 13

14 III. (2) Private benefit stemming from such a transaction cannot be considered incidental to the public benefits achieved; and (3) Transaction may violate federal law. b) However, at the end of its memorandum, the IRS provided commentary suggesting that it is not interested in assessing whether the Federal anti-kickback statute may have been violated in the first instance, but instead that any tax-exempt status issues would be a tag-along issue in situations where the anti-kickback statute is triggered: Common Mission Support Strategies A. Fixed amounts (1) [W]e have good reasons for believing that net revenue stream purchase joint ventures may violate the anti-kickback statute. However,... we need not, even for Service purposes, actually decide their lawfulness here. Where the courts and the administrative agency responsible for administering a non-tax statute have not spoken to its application to a particular arrangement, we should not rush to do so unnecessarily. 1. Block grant. Amount set annually based on prior year s financials, but amount not tied to hospital revenues or operating margin. 2. Donation of capital assets. Two OIG advisory opinions have declined to impose sanctions in situations where health system components of an AMC donated capital assets to academic components. See Section II.A.3 above. a) OIG Adv. Op n No (Oct. 6, 2000) (academic space in hospital-owned building). b) OIG Adv. Op n No (Aug. 16, 2005) (medical office building for use as a family medicine clinic). 3. Targeted support B. Variable amounts a) Faculty recruitment/retention where there is demonstrable community or academic need. b) Sponsored research (1) without concomitant IP/royalty rights (2) with IP/royalty rights (a) may have the advantage of making a FMV analysis available in some circumstances c) Amounts flagged for particular areas of capital investment (e.g., annual support to the medical library; annual commitment for research infrastructure). 1. Funding tied to hospital financial performance. 14

15 a) Net operating margin or revenue target as trigger, but percentages previously set. Examples: (1) Stepped payments from the health system to the university based on level of operating margin. E.g., (A) When net operating revenues are positive and between [0-3%] of net patient service revenues, a payment of [5%] of net operating revenues shall be made; (B) when net operating revenues are between [3% and 5%] of net patient service revenues, a payment equal to A above plus [10%] of the incremental net operating revenues above [3%] shall be made; (C) etc. (additional incremental tiers). (2) Payments increase over time but are not tiered. E.g., Mission Support payment of [1%] of net patient service revenues in year one of the agreement, [2%] in year two, [3%] in year three, and [4%] each year thereafter. b) Pure percentage of revenue, without margin triggers. E.g., the medical school shall receive a Mission Support payment from the health system equal to [5%] of system net patient service revenue of the prior fiscal year. c) Percentage amounts with partial guarantees. E.g., a Mission Support payment from the health system to the dean of the medical school of [2.3%] of the system s net patient service revenues. However, the health system guarantees an annual payment floor of $1 million under this Mission Support provision. d) Net operating margin trigger with a guaranteed base payment and then a contingent payment tied to a financial performance measure. (1) E.g.: three-tiered payment system: (a) Dean s Tax of [5%] of overall system net service patient revenues. (b) Modest annual fixed grant (less than [0.5%] of the entire system funds flow) from the clinical enterprise to the dean of the school of medicine to be used for furthering the academic mission of the school. (c) Net operating margin tier, where school of medicine receives no payment if the annual adjusted operating margin of the clinical enterprise is less than [6%], but if the adjusted operating margin is: (i) between [6% and 7.5%], than school receives [10%] of the increment over [6%]; (ii) between [7.5% and 9%], than school receives [25%] of the increment over [6%]; (iii) etc. (additional incremental tiers). 15

16 2. Equalization amounts. In some systems, the ultimate goal is having the same margin in each of the AMC components, i.e., the hospital and the university. Funds are transferred from one component to the other as needed to equalize the operating margins between the two institutions. C. Collaborations. Some Mission Support arrangements (most commonly where the health system and academic components are closely aligned, such as when they are part of the same university parent and/or have identical boards) call for the two parties to either negotiate the annual amount or to meet and work in good faith if the health system component determines that the allocated amount is overly burdensome. This tends to work best when there is a good deal of trust among the parties, such that the AMC can be confident that the hospital will not make sudden changes in the size of the Mission Support payment. Examples include: 1. Fixed amount unless. Annual base payment from health system to medical school to increase annually based on higher of CPI or a fixed percentage, but: a) Some or all of the payment may be subject to good faith negotiation at a high level of responsibility, somewhat distanced from onthe-ground referrals, in the event of revenue shortfall: (1) The health system shall promptly notify the university in writing in the event that it learns that existing revenues will no longer be available in amounts or from sources sufficient to permit the health system to make the supplemental payment to the university in any given fiscal year. The president of the university and CEO of the health system shall meet in good faith within thirty days (30) of said notice and shall fully discuss and explore the availability of potential alternative sources of revenues. 2. Annual adjustments within corridors. Annual aggregate block payment from health system to university subject to an annual adjustment mechanism. However, beginning in the fifth year of the agreement, payment will be reviewed by the parties to determine sustainability; if they cannot agree on an annual level, it is subject to a dispute resolution mechanism provided that the annual payment in years six through twenty-five of the agreement will not be lower or higher than an agreed corridor. D. Additional Considerations 1. Recipient of Mission Support Payment. Those responsible for drafting an agreement involving Mission Support payments should consider what entity should receive the Mission Support payments. This may matter for purposes of the Stark stand-in-the shoe rules, and for purposes of the attenuation of physician compensation from volume/value of referrals. Possibilities include: a) The university. 16

17 IV. b) The school of medicine. c) The dean of the school of medicine. d) A particular department (chair). 2. Formula for Distribution. For both AKS and Stark law purposes, the amount actually paid to the physician must be FMV and not take into account the volume or value of referrals. The above discussion has focused on the hospital contribution to other components of the AMC. However, the formula for distribution to the physicians by the AMC component receiving the Mission Support payment is equally important. It is commonplace to give a certain amount of incentive funding to Department Chairs for distribution to the physicians in their departments. Scrutiny of the formula used by the Chairs is an important part of a compliance program. a) Intra-School Referrals. Not only must the incentive payments not take into account referrals to the hospital, such payments also generally may not take into account the volume or value of the physician s referrals for DHS provided within the medical school departments (e.g., clinical laboratory, imaging). b) Group Practice. In these circumstances consider whether there is a faculty practice plan that meets the definition of group practice, and the availability of the Stark Law s physician services and in-office ancillary services exceptions. See 42 C.F.R (a)-(b). Halifax and Other Legal Developments Relevant To Mission Support A. The Halifax Conundrum: When is Mission Support Unlawful Remuneration? 1. Case Summary. The 2013 federal district court opinion in United States v. Halifax Hosp. Med. Ctr., 2013 WL (M.D. Fla. Nov. 13, 2013) granting summary judgment to the government, while not itself addressing a fact pattern involving an AMC, raises concerns for the analysis of AMC arrangements that rely on the indirect compensation exception. The facts of the case are as follows: a) Incentive compensation at issue. Six medical oncologists were employed by Halifax Staffing, Inc., an instrumentality of Halifax Hospital Medical Center ( Halifax Hospital ). A portion of the compensation paid to the medical oncologists was drawn from an incentive compensation pool equal to fifteen (15) percent of the operating margin of Halifax Hospital s medical oncology program. b) Operating margin. The operating margin of the Hospital s medical oncology program consisted in part of revenue from (1) the technical component of services personally performed by the medical oncologists at Halifax Hospital, and (2) outpatient oncology drugs ordered by the 17

18 medical oncologists, both of which the court concluded constitute DHS. 1 The only pre-requisite to the funding of the incentive compensation pool was the existence of a positive operating margin. c) Personal productivity. The incentive compensation pool was divided among the medical oncologists on the basis of their personal productivity. 2. DOJ Allegations. The case was brought as a qui tam in which the U.S. Department of Justice ( DOJ ) intervened. The DOJ advanced the following arguments in its briefing to allege a Stark Law violation: a) Indirect compensation arrangement. The relationship between the medical oncologists and Halifax Hospital was an indirect compensation arrangement because Halifax Staffing, Inc. functioned as an intermediary between the physicians and the hospital. b) Takes into account volume or value of referrals. Because the operating margin from which the incentive compensation pool was drawn consisted of revenue derived in part from referrals made by the medical oncologists to Halifax Hospital, the operating margin necessarily took into account the volume or value of referrals. c) Operating margin not set in advance or per click. The government cited CMS s Stark Phase I commentary stating that a compensation arrangement does not take into account the volume or value of referrals if the compensation is fixed in advance and will result in fair market value compensation. This can include a per service, per use or per time period amount if the per click amount is set in advance and does not take into account the volume or value of referrals or other business generated between the parties. However, compensation that is determined by calculating a percentage of a fluctuating or indeterminate amount, such as revenues, collections, or expenses, is not fixed in advance. See 66 Fed. Reg. 856, (Jan. 4, 2001). The government argued that this is the case even when the pool of revenue obtained through the percentage calculation is divided based on a physician s personal productivity. (1) Practice pointer. Note that the government s argument takes one example of an arrangement that does not take into account volume or value of referrals if the compensation is set in advance and turns it into a requirement. Notably, the indirect compensation exception does not have a set in advance requirement in its text. 1 See 42 C.F.R (defining DHS). While a service that is personally performed by the referring physician does not constitute a referral under the Stark Law, see id., courts have held that the technical component of a personally performed services does constitute a referral for hospital inpatient services or hospital outpatient services, both of which are DHS under the Stark Law. See United States ex rel. Drakeford v. Tuomey Healthcare Sys., 675 F.3d 394, (4th Cir. 2012). 18

19 3. Halifax defenses. In its briefing, Halifax Hospital argued the following to defend the relationship. a) Direct compensation arrangement. The relationship between Halifax Hospital and the medical oncologists is a direct compensation arrangement that qualifies for the Stark Law s exception for bona fide employment relationships. b) Personal productivity. The compensation received by an individual medical oncologist did not vary with his or her referrals to Halifax Hospital because the amount he or she was paid was determined based on the services that he or she personally performed. c) Not take into account volume or value of referrals. The relationship between the size of the incentive compensation pool and referrals made by the medical oncologists was extremely attenuated because the operating margin on which the incentive compensation pool was based included revenues other than those stemming from referrals by the medical oncologists, and such revenues were offset by a number of expenses to determine the final operating margin. 4. District Court decision. The district court reached the following conclusions in its summary judgment opinion: a) Direct or Indirect Compensation Arrangement Distinction not Relevant. Analysis of the arrangement would be identical under the indirect compensation exception or the exception for bona fide employment relationships because to qualify for either exception, the compensation received by the physician cannot vary with or take into account the volume or value of referrals to the entity furnishing DHS. b) Effect of Operating Margin on Incentive Pool is Relevant to Ultimate Amount Paid to Physician. The compensation arrangement at issue failed to meet the relevant Stark Law exceptions because additional referrals of DHS by the medical oncologists to Halifax would be expected to increase the size of the pool [from which bonuses were paid], and [a]ll other things equal, this would in turn increase the size of the [bonus] received by the referring [physician]. Accordingly, the compensation received by the medical oncologists took into account the volume or value of the medical oncologists referrals to Halifax Hospital. c) Personal productivity does not save an incentive pool that takes into account volume or value referrals. It did not matter that the actual bonus amounts paid to each physician were determined based on the physician s personal productivity, because this cannot alter the fact that the size of the pool (and thus the size of each oncologist s bonus) could be increased by making more referrals. 5. Settlement. The Halifax case was set to go to trial on the issues of the amount of damages, but settled in the spring of 2014 for $85 million. 19

20 6. Implications for AMC Mission Support Payments a) Significance of the incentive pool. Although the Halifax case did not involve Mission Support payments between components of an AMC, it bears similarity to some Mission Support arrangements in that a pool of funds that was calculated based on some amount earned by the Hospital was made available to the employer of referring physicians (i.e., Halifax Staffing) and used for physician compensation the pool included revenue earned from DHS referrals by the referring physicians. (1) Volume or Value. Holding all else equal, the referring physicians could increase the size of the pool available for their compensation by increasing their referrals of DHS to Halifax Hospital. b) Possible distinctions from Mission Support. (1) Operating margin. The funds from which the incentive pool were drawn were in essence profits, or revenues after expenses. The case did not consider whether an incentive pool based on some other departmental performance measure, e.g., reduced cost per case, might not have taken into account v/v referrals. (a) A corollary is that the Halifax case says nothing about Mission Support that is not based on the hospital s financial performance, e.g., annual block grants that are based on Medical School expenses, payments that are based on patient outcomes or patient satisfaction. (2) Single Department. In the Halifax case, the arrangement under scrutiny involved an incentive compensation pool for a single department consisting of six physicians. Although the Halifax court rejected arguments that the relationship between the oncologist referrals and their compensation was sufficiently attenuated to avoid taking into account volume or value of referrals, the court was not presented with facts involving many more revenues from many more sources divided over many more uses. (3) Use of hospital contribution. In addition most Mission Support payments would almost certainly be used for purposes beyond physician compensation. For example, funds may be used to cover research expenses or to provide indigent care, two purposes that CMS has recognized as being an appropriate use of a Mission Support payment. See 42 C.F.R (e). c) Given the distinctions discussed above, it is not clear if the court would have reached the same conclusion had it been presented with the more complex situation of an AMC s funds flows. 20

21 7. Other Cases and Commentary. As noted, the Halifax case failed to articulate any limiting principal discussing when the relationship between referrals of DHS and funds available for physician compensation becomes sufficiently attenuated such that the compensation paid to a physician can no longer be said to take into account the volume or value of a physician s referrals to a DHS entity. The court did not seem receptive to arguments advanced by Halifax Hospital that the relationship between referrals of DHS and the size of the operating margin from which the incentive compensation pool was drawn was attenuated due to the number of factors involved in determining the size of the operating margin, e.g., the department s costs. a) Cautionary Commentary. One leading resource on interpretation of the Stark Law has stated that in the wake of Halifax, compensation that is tied to the success of an entire hospital can carry risk, though less than where compensation is tied to the operations of an individual department. See Douglas M. Mancino, A Guide To Complying with Stark Physician Self-Referral Rules, (Nov. 2014). b) Tuomey. The well-publicized case of United States v. Tuomey Healthcare System, 675 F.3d 394 (4th Cir. 2012), the court addressed an arrangement in which Tuomey Healthcare System ( Tuomey ) made payments to limited liability companies owned by Tuomey that employed 19 physicians who made referrals to Tuomey. The contracts with the limited liability companies required the physicians to provide outpatient procedures at Tuomey and reassign their billing rights for these procedures to Tuomey. Tuomey paid the physicians a base salary that fluctuated based on Tuomey s net cash collections for outpatient procedures, a productivity bonus based on net collections, and an incentive bonus that could total up to seven percent of the productivity bonus. On appeal following a jury trial, the Fourth Circuit concluded that (i) the technical component of services personally performed by the physicians at Tuomey constitutes a referral for purposes of the Stark Law, and (ii) taking into account the volume or value of anticipated referrals can result in compensation that varies with the volume or value of referrals. See id. at (1) The case advises caution whenever a pool from which physician compensation is derived includes funds generated by the technical component of services ordered by physicians. It also makes clear that creation of an intermediate entity to employ physicians will not in and of itself offer protection. V. Implications and alternatives for future Mission Support strategies A. Implications for previously described models of Mission Support 1. Limitations of Decision. It is important to remember that at this time, Halifax applies only in one federal district court jurisdiction. However, relators counsel and DOJ likely will advance the arguments made in the Halifax case in other jurisdictions. Thus, below we outline each of the common forms of existing 21