Oncology Business Transactional Issues At the Point of Transaction and Over the Life of an Affiliation

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2 Oncology Business Transactional Issues At the Point of Transaction and Over the Life of an Affiliation Adria Warren Foley & Lardner Tynan Olechny PYA Curtis Bernstein Pinnacle Healthcare Consulting

3 Fair Market Value Why it Matters Adria Warren Foley & Lardner

4 Fair Market Value In the health care context, -- FMV is generally defined to mean FMV for actual and necessary items furnished or services rendered, based upon an arm s length transaction, and without taking into account, directly or indirectly, the value of volume of any past or future referrals or the ability to influence the flow of business generated between the parties. (70 Fed. Reg., 4858, 4866 (2005)) -- Commercial Reasonableness is generally defined to mean a sensible, prudent business arrangement from the perspective of the particular parties involved, even in the absence of referrals (69 Fed. Reg (2004))

5 FMV Why it Matters Regulatory Framework Federal Anti-Kickback Statute Federal Stark Law False Claims Act Civil Monetary Penalty Law Tax Exemption Issues Private Benefit and Private Inurement Intermediate Sanctions State Laws

6 FMV Why it Matters Anti-Kickback Statute Prohibits knowing and willful offer or receipt of remuneration intended to induce or arrange for referrals of business paid for by Medicare/Medicaid programs Civil monetary and criminal penalties CMP of $50,000 per violation Criminal penalties: $25,000 per violation and/or up to five years in jail Exclusion

7 FMV Why it Matters Anti-Kickback Statute Any purpose test and problem of mixed motives ACA 6402(f)(2): violation does not require actual knowledge of AKS or specific intent to commit a violation ACA 6402(f)(1): claim for items or services resulting from AKS violation constitutes a false claim under the False Claims Act Safe Harbors provide immunity Safe harbors are not required Many safe harbors require FMV and commercially reasonable remuneration

8 FMV Why it Matters Anti-Kickback Statute Is the purchase price a disguised kickback from the buyer (overpayment) or seller (underpayment) to induce post-deal referrals? Valuation may help negate an adverse inference of improper intent To the extent that a payment exceeds FMV, it can be inferred that the excess amount over FMV is intended as payment for the referral of health-program business. U.S. v. Lipkis, 770 F.2d 1447, 1449 (9th Cir. 1985)

9 FMV Why it Matters Stark Law In general, if a physician has a direct or indirect financial relationship with a DHS entity : The physician may not make a referral to that entity for the furnishing of designated health services" ( DHS ) for which payment otherwise may be made under Medicare, and the entity may not bill Medicare, an individual or another payor for the DHS performed pursuant to the prohibited referral "Designated health services" includes all inpatient and outpatient hospital services, lab, imaging, pharmacy, DME, radiation therapy, PT, occupational and speech therapy, perenteral and enteral drugs, nutrients, and supplies, prosthetics, orthodics, and home health services unless a specific exception applies

10 FMV Why it Matters Stark Law $15,000 civil monetary penalty assessed against physician for each prohibited referral DHS entity must refund DHS billed pursuant to a prohibited referral $15,000 civil monetary penalty assessed against DHS entity for billing for service rendered pursuant to a prohibited referral, unless it can show that it did not have actual knowledge and did not act in reckless disregard or deliberate ignorance of the prohibited referral $100,000 civil monetary penalty for circumvention schemes Requirement to report to HHS financial relationships with physicians upon request; $10,000 penalty for failure to report Potential exclusion

11 FMV Why it Matters Stark Law Strict liability/zero tolerance law Burden of proof is on defendant Violations are not remedied until referring physician/dhs entity repays excess compensation or arrangement is terminated Exceptions: Isolated Transactions Personal Services Arrangements Bona Fide Employment Rental of Space, Equipment Fair Market Value Compensation Indirect Compensation Arrangements Multiple exceptions have fair market value requirement

12 FMV Why it Matters Stark Law MPFS Nov. 16, 2015 Helped reduce technical violations Clarifications: Existing policy Additional explanation where it appears stakeholders would benefit from clarification New Exceptions: Assistance to a physician to compensate a non-physician practitioner Timeshare arrangements Revisions to existing definitions, exceptions and other rules: Signature requirement Unlimited holdover arrangements Renewing arrangements that qualify for the exception for FMV compensation

13 FMV Why it Matters False Claims Act Permits private persons -- relators or whistleblowers, to recover damages on behalf of the United States from, any person who: knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval; knowingly makes, uses or causes to be made or used, a false record or statement material to a false or fraudulent claim; conspires to [defraud the government]; or knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the government or knowingly conceals avoids or decreases an obligation to pay or transmit money or property to the government. Violations of the FCA are punishable by up to $21,583 per claim, plus treble damages more than doubled in 2016.

14 FMV Why it Matters Tax Exemption IRC 501(c)(3) Entities tax-exempt under this section must operate exclusively for tax exempt purposes and not engage in compensation practices that result in private inurement Penalties for non-compliance Intermediate sanctions Loss of tax exemption Many hospitals, health systems, academic medical centers are tax exempt General guidelines Compensation to physicians should be FMV for services provided Total compensation paid should be reasonable for the market and responsibilities IRC 162 reasonable compensation is the amount that would ordinarily be paid for like services by like enterprises under like circumstances

15 FMV Why it Matters State Laws State Law Issues State self-referral laws May apply to a broader scope of relationships than Stark (not just physician financial relationships) May apply to a broader scope of services than DHS State anti-kickback issues May apply with respect to all services, not just those payable by Medicare or other Federal healthcare programs May include fee splitting prohibitions

16 FMV Why it Matters 2005 OIG Supplemental Compliance Program Guidance for Hospitals Arrangements under which hospitals (1) provide physicians with items or services for free or less than fair market value, (2) relieve physicians of financial obligations they otherwise would incur, or (3) inflate compensation paid to physicians for items or services pose significant risk. In such circumstances, an inference arises that the remuneration may be in exchange for generating business. (70 Fed. Reg., 4858, 4866 (Jan. 31, 2005))

17 FMV Why it Matters Enforcement 2015 OIG Fraud Alert: Physician Comp Arrangements May Result in Significant Liability Physicians who enter into compensation arrangements, such as medical directorships, must ensure those arrangements reflect FMV for bona fide services the physicians actually provide Arrangement may violate AKS if even one purpose is to compensate the physician for referrals Government recently reached settlements with 12 individual physicians who entered into questionable medical directorship and office staff arrangements OIG believed it took into account referrals and did not reflect FMV because the physicians did not actually provide the services contemplated The Yates Memo (September 9, 2015) DOJ policy seeks individual accountability in corporate wrongdoing

18 FMV Why it Matters Fair Market Value is central to the compliance analysis; payments must be FMV, commercially reasonable, and cannot vary with anticipated referrals.

19 Outpatient Hospital Site Neutrality The Bipartisan Budget Act of 2015 (BiPA Section 603) Budget compromise of November 2015 contained key provision excluding any new off-campus hospital outpatient department (HOPD) from Medicare s outpatient hospital prospective payment system (OPPS) CMS Final Rule November 1, 2016

20 Outpatient Hospital Site Neutrality Highlights of the Final Rule Exempt (grandfathered sites): HOPDs in operation and billing Medicare under OPPS prior to November 2, 2015 OPPS billing permitted for new off-campus departments that are dedicated emergency departments Cancer hospitals Mid-build protection Minor protection for those few operational HOPDs that provided services but didn t bill prior to November 2, 2015

21 Outpatient Hospital Site Neutrality Highlights of the Final Rule Non-Exempt (non-grandfathered) off-patient sites: Will continue to be able to bill on an institutional bill Payment will be at 50% of OPPS rates, for now Lose outlier payments, SCH and other benefits Relocation kills exception! For addresses with multiple units, unit # is part of address Limited exceptions due to extraordinary circumstances (i.e., natural disaster) CMS states that non-exempted off-campus HOPDs would continue to be considered as part of the hospital and deemed provider-based HRSA position still important

22 Repeal, Replace or Retreat? Continuing relevance of the ACA? Medicaid & coverage expansion CMMI, other innovation models ACOs Other payment reform? MACRA? Antitrust & Transactions Enforcement Tax Reform, Cash Repatriation

23 Issues in Transaction Valuation Curtis Bernstein Pinnacle Healthcare Consulting

24 Issues in Transaction Valuation Standard of Value Ancillary Services Personally Performed Services Cash Flow v. Assets

25 Issues in Transaction Valuation

26 Issues in Compensation Valuation Tynan Olechny PYA

27 Collaboration Opportunities Clinical Affiliation Agreement for organizations to collaborate on an initiative or to provide a specific service together that may involve local, regional or national partners Regional Collaborative Flexible umbrella structure for partnering on specific initiatives and building the foundation of potential future integration; often encompasses many independent organizations in a common geographic area Accountable Care Organization Independent entity formed for entering into risk based contracts; owned by constituent organizations; creates shared accountability among participating providers Clinically Integrated Healthcare Network Collection of hospitals that enter into joint payer contracts to improve care coordination and clinical outcomes Mergers & Acquisitions Formal purchase of one organization s assets by another or the combination of two organizations assets into a single entity

28 Multiple Models for Collaboration Employment Agreements Medical Directorship Agreements Educational Services Agreements Supervision Agreements On-call Agreements Consulting Agreements Professional Services Agreements Co-Management Agreements Quality Incentive Programs Shared Savings Arrangements Recruitment Incentive Programs Management Services

29 Physician Employment Considerations Base compensation wrvu or other productivity-based compensation model Professional net revenue model In office ancillary services Quality/performance compensation Chemotherapy administration supervision compensation Mid-level supervision compensation Practices losses

30 Physician Employment (continued) Compensation level entirely disproportionate to productivity level Example: productivity metrics (e.g., wrvus) below median, but total compensation exceeds 90 th percentile Unusual compensation Example: In addition to salary and incentive compensation, physician receives atypical forms of compensation (i.e., car payment paid by hospital) Compensation exceeds collections Example: Physician is compensated at levels that far exceed the collections associated with his/her personally performed services Consideration of benefits

31 Physician Employment (continued) Hematology/ Oncology Radiation Oncology Source: Medical Group Management Association

32 Professional Services Agreements (PSA) Arrangements by which hospitals enter into agreements with physicians to acquire necessary professional services Physicians retain practice entity Agreements for clinical services may include professional staffing, call coverage, clinical and risk management leadership, infusion and midlevel supervision Agreements may also include administrative services such as medical directorships, service line development, and/or coordination Other potential services may include clinical research, etc. Physicians provide professional services and hospital bills and collects for professional and technical services Hospital hires or leases clinical staff and purchases or leases space and equipment

33 Co-Management Agreement Hospital and physicians enter into an agreement where physicians are jointly responsible with hospital for managing a defined service line Purpose is to recognize and appropriately reward achievement of defined goals and responsibilities typically associated with developing, managing, improving service line quality and efficiency Compensation may not take into consideration the volume or value of referrals Benefits include Engages physicians Focus on quality, efficiency and outcomes Physicians have authority to implement change Physicians may remain independent and collect professional fees Physicians have greater day-to-day oversight Potential of physicians to have ownership interest in management company

34 Co-Management Legal Structures Direct contract model Agreement directly between physician/medical group and hospital Separate company NewCo or management company formed to execute the comanagement agreement with the hospital and to manage the service line May be physician-owned or a joint-venture with physicians/hospital Physicians provide initial capitalization of NewCo (or physicians and hospital if management company is to be jointly owned)

35 Co-Management Services Strategic Planning Development/ implementation of service line New program development Strategic planning process Leadership Medical Director Advisory Committee Coordinating & reporting to hospital Budget & Finance Budget development Financial oversight & monitoring

36 Co-Management Services (continued) Operations Service line operations Staffing & scheduling Patient & staff work flow Equipment procurement & materials management Credentialing Case management Policies & procedures Human Resources Review of staffing levels & recruitment & retention plans Input on the appointment & evaluation of clinical and nonclinical staff Other Medical staff related activities, including committee participation Patient & community outreach and education Assistance with accreditation

37 Co-Management Compensation Structures Base Compensation Hospital pays a fixed base fee for provision of pre-defined management services or limits compensation to a maximum amount based upon actual hours worked at a pre-determined rate Fee must be consistent with time and effort associated with the scope of services provided Incentive Fee or Bonus Hospital pays an at-risk incentive bonus if the service line meets predefined, mutually agreed upon, objectively measurable performance targets (quality, satisfaction, efficiency etc.)

38 Incentive Compensation Achievement of quality, operational efficiency, patient/satisfaction goals Baseline levels determined using the facility s historical and clinical data and/or comparable national or regional data, with incentives paid to reflect incremental improvement May be targeted towards identified areas of need Can be based on improvement or on achievement of specific targets Incentives should be objective, verifiable, supported by credible medical evidence and individually tracked Provide for partial payment for attainment of incremental goals

39 Key Considerations Hospitals and other organizations continue to utilize complex compensation models, often with multiple layers of compensation for multiple services sometimes referred to as stacking Common elements include: Base compensation Productivity threshold (i.e. wrvu level) Incentive compensation for productivity Incentive compensation for quality outcomes Sign on or retention bonus Compensation for excess call coverage Compensation for supervision or teaching services Administrative compensation

40 Assessing the Risk How risky is this agreement? More moving parts Higher total compensation Ensuring the correct benchmarks are considered Assessing each part and the whole package =

41 Employment Considerations Proper understanding and use of survey data (compensation per wrvu, compensation-to-collections ratio, etc.) Reliance on data from one survey versus multiple surveys What data are represented/included in each survey? wrvu data and the match to compensation percentile Is there a safe percentile for compensation 50 th percentile/75 th percentile? (settlements of the last year say: perhaps not) Historical compensation- what does it mean for FMV? Commercial reasonableness Compensation exceeds collections Ex: Physician is compensated at levels that far exceed the collections associated with his/her personally performed services Unusual compensation Ex: In addition to salary and incentive compensation, physician receives atypical forms of compensation (i.e., car payment paid by hospital)

42 PSA and Co-Management Considerations Ensuring that compensation matches duties (e.g. clinical versus administrative) Increased demand on physicians The 80 hour work week Compensation for identifiable services Are we paying for the same thing twice? Survey data do they include compensation for everything for which we are planning to pay? Using the correct survey(s) Commercial reasonableness

43 Compensation for Research/Consulting Activities Sunshine reporting requirements when compensation originates from a manufacturer (pharma, medical device, etc.) Importance of clinical research activities in the current world e.g., to meet Cancer Center Standards Defining the scope of a physician s activities - e.g., investigator versus physician who merely identifies subjects for a study; speaker versus advisor on product development Source of compensation affects the stakes pharma funding, hospital/health system funding, laboratory service provider (registry study), etc. Keeping in mind guidance from OIG advisory opinions and compliance guidance Reasonable payment structure e.g., annual or monthly stipend, per subject amount, percentage of research budget, fee for service, hourly compensation, etc.

44 Top 10 Pitfalls for 2017

45 Alternative Payment Models 10 (Oncology Care Model)

46 Task vs. Time-Based Valuations Need to align incentives for providers Fee for service does not work in a world of bundled payment reimbursement Quantifying actual time spend managing costs is impossible Outside of meetings and other administrative only time Determining the ability to reduce cost has been studied by actuaries, regulators, hospitals and providers Limited data on tying improved performance to reduced cost 9

47 Task vs. Time-Based Valuations 9

48 Task vs. Time-Based Valuations 9 Emergency Room Visits in Last 30 Days of Life 10% 20% Metrics for improvement Develop interventions to decrease ED usage Develop tools to analyze admissions within 21 days of chemo Proper use of palliative care

49 Establishing Metrics Quality measures 8 CMS Specialty organizations (ACoS, ASTRO, ASCO, ACP) AMA PCPI (Physician Consortium for Performance Improvement) NCCN NCQA NQF Private payers Satisfaction measures Patient satisfaction survey results Staff satisfaction survey results Program development Achievement of identified milestones (not measured by volumes) Process of care measurements

50 Midlevel Supervision Compensation 7 Considerations for midlevel supervision compensation Number of midlevels supervised (i.e., state requirements) Midlevel productivity Number of hours spent supervising Benchmark considerations Prevalence of supervision Number of midlevels supervised Method of compensation

51 Infusion Supervision Compensation 6 Considerations for chemotherapy administration supervision Service providers (i.e., MDs or MLPs) Scope of practice requirements Oncology and non-oncology (i.e., rheumatology, GI) services Location and number of infusion centers supervised Infusion center hours Infusion center volumes Multiple groups providing services Benchmark considerations

52 How high is high? 5

53 4 Value of Data Cost to compile reports Personnel/Staffing Technology/Software Expenses Start-up/Infrastructure Costs Key Drivers of Value for Data Type of Data Providing Breaking Down the Record Aggregated Categorical Data Observation Variable Data Amount of Data Provided

54 3 Valuing Other Intangible Assets Work Force In Place Medical Records / Data Brand Names Licenses Non-Competes

55 Read the fine print 2 Valuation: Duration Assumptions

56 How does it all stack up? 1