TACKLING THE THREE CS: COMPENSATION, COMPLIANCE, AND COMMERCIALLY REASONABLE

Transcription

1 TACKLING THE THREE CS: COMPENSATION, COMPLIANCE, AND COMMERCIALLY REASONABLE 1 AHLA Fraud and Compliance Forum, October 5-7, 2016 Jennifer Johnson,CFA Robert Wade Albert Shay Managing Director Partner Partner VMG Health Krieg DeVault, LLP Morgan Lewis Jen.johnson@vmghealth.com rwade@kdlegal.com albert.shay@morganlewis.com

2 OVERVIEW Introductions Compensation Trends Regulatory Framework Recent Settlements What to look for in an Appraiser Valuation Guidance & Checklists Compliance Take-Aways 2

3 TRENDS IN PHYSICIAN COMPENSATION 3

4 Current Healthcare Landscape Increased regulatory scrutiny Huge surge in Qui Tam suits Federal funding for fraud and abuse investigations growing Numerous and material settlements over past several years Physician compensation focus both employed and independent contractor arrangements New Challenges FFS to P4P compensation models 4 Government and commercial payors continue to introduce alternative payment models at a rapid rate New arrangements include quality and cost savings Market data and regulatory guidelines for these payments scarce OIG Guidance - Creative arrangements must be carefully constructed MACRA is coming Increased Regulatory Scrutiny + P4P Models = Be Careful

5 Compensation Arrangement Types & Trends Administrative Services* Call Coverage* Co-management (fixed + variable)* Subsidy* P4P, Bundled, & ACO Payment models* PSA Model ($/WRVU + expenses)* Professional/ technical splits Clinical Services* 5 Billing and Collection Management/IT Development Medical Director* AMCs Tier 1,2,3 (Sunshine Provision) Telemedicine Hub to spoke Hub to provider System to Vendor HOT TOPICS in COMPENSATION DURING Internal processes for setting compensation 1 - P4P components newest challenges for determining FMV

6 Internal Processes for Setting Physician Compensation Many health systems have a partially or fully automated opinion process primarily for Medical Director On-call Coverage Clinical Compensation Shows consistency which is important *Survey licenses new issue Not all health systems are structured alike, FMV process differs based upon: Risk tolerance (may change with leadership as well as external market forces) where are thresholds, 75 th ok? Health system s approach to physician agreements (consistent -> each unique) Structure of physician alignment team and decision process Team dedicated to physician compensation Legal, business development, compliance, or facility-level decisions Decentralized or centralized opinion requests The 3 C s of FMV Deliverables must be understood and balanced when advising leadership Cost importance Compliance risk tolerance Convenience speed, need for assistance 6

7 P4P Background Quality payment focus primarily (sharing savings was a slippery slope) Hospital Quality Incentive Demonstration (HQID) for over 250 hospitals: Physician Group Practice Demonstration for ten physician groups: Third party payors and health systems start incentivizing for quality In 2008, the Robert Wood Johnson Foundation and California HealthCare Foundation reported results of a national program that tested the use of financial incentives to improve the quality of health care. Tested seven projects across the nation that adjusted compensation based on performance scores hospitals and physicians. Notable findings: Financial incentives motivate change Alignment with physicians is a critical activity for quality outcomes Public reporting is a strong catalyst for providers to improve care Savings alone (Capitation) no longer in the mix but ACOs emerge with savings and quality thresholds Multiple models and arrangements exist today beyond Commercial and Medicare ACOs Medicare Shared Savings Program Bundled Payments for Care Improvement Commercial payor P4P programs growing exponentially Government launching of numerous APMs 7 *Valuation process should considers regulatory guidance, governmental programs and third party payor models

8 GOALS PER CMS FFS AND P4P CO-EXIST DURING TRANSITION o Financial Viability where the financial viability of the traditional Medicare fee-for-service program is protected for beneficiaries and taxpayers. o Payment Incentives where Medicare payments are linked to the value (quality and efficiency) of care provided. o Joint Accountability where physicians and providers have joint clinical and financial accountability for healthcare in their communities. o Effectiveness where care is evidence-based 8 and outcomes-driven to better manage diseases and prevent complications from them. o Ensuring Access where a restructured Medicare fee-for-service payment system provides equal access to high quality, affordable care. o Safety and Transparency where a value based payment system gives beneficiaries information on the quality, cost, and safety of their healthcare. o Smooth Transitions where payment systems support well coordinated care across different providers and settings. o Electronic Health Records where value driven healthcare supports the use of information technology to give providers the ability to deliver high quality, efficient, well coordinated care. 8

9 2014 RAND Report Measuring Success in Health Care: Value Based Purchasing Programs Overview U.S. Department of Health and Human Services requested study 129 VBP programs (91 P4P, 27 ACOs, 11 bundled payments) Measures: Clinical Quality, Cost, Outcomes, Experience Recommendations Set measurable goals, use national data Case-mix adjust outcomes measures, use broad set of measures, identify overtreatment measures, monitor Evolve from narrow process measures to broader set emphasizing outcomes Sponsor engage providers in design/implementation VBP sponsors should collect a common set of factors to find best working program Conclusion - Need More Information HHS should develop a structured research agenda to address gaps in VBP knowledge base CMS should study private-sector programs, program design information not available Study changes and investments, experiences and challenges 9

10 Evolution of P4P Arrangements What We Do Know Standard Process Leading Up to P4P Payments Common Factors Included in P4P Arrangements Recognized organization identifies quality metrics or average costs Reporting measures is required, or costs are tracked Benchmarking data is gathered Payments for outcomes or savings is observed in market 10 Lowering costs without sacrificing quality Quality outcomes payments individual, services line level, entire population Use of technology Use of care coordinators Justification for Payments Changing Valuation Drivers Payments for Reporting (i.e.: PQRI) Pay for Process Pay for Outcomes At risk for sub-par quality Outcomes New dollars coming in from 3 rd parties Understand service line, practice level or population

11 REGULATORY FRAMEWORK 11

12 Legal Framework The federal Physician Self-Referral Prohibition 42 U.S.C. 1395nn Anti-Kickback Statute - 42 U.S.C. 1320a-7b(b) Internal Revenue Code prohibition on 12Private Benefit/ Private Inurement Government s arguments and the Courts analyses of the Stark law are redefining the rules and changing the risk analysis of physician compensation

13 WHAT IS COMMERCIALLY REASONABLE? Many of the exceptions under the Stark Act require the payment to be commercially reasonable even no referrals 13 were made between the parties. 13

14 WHAT IS COMMERCIALLY REASONABLE? To be commercially reasonable, both the SERVICES and PAYMENT must be commercially reasonable

15 What Is Commercially Reasonable? Separate analysis from FMV Commercial reasonableness is more of a qualitative analysis than quantitative Many FMV reports specifically exclude 15 comment or opinion regarding CR Who determines if the transaction is CR? often nobody knows or is asking CR opinion provides a pre-transaction document demonstrating thought regarding CR Seeing more government activity in this area

16 What Is Commercially Reasonable? The following services may not be commercially reasonable Two medical directors over a department when only one is needed Commercial reasonableness is more of a qualitative analysis than quantitative Paying a physician for questionable consulting services 16 Renting a piece of equipment full-time when only used once a month (assuming rental for one day is less than full-time rental) Purchase of physician s medical office building with no intention to use building Large net losses to the hospital Rate may be FMV, but fail CR test

17 LEGAL/REGULATORY VIEW OF FAIR MARKET VALUE According to the Stark Act, fair market value is the value in arm s-length transactions, consistent with 17 the general market value. 17

18 LEGAL/REGULATORY VIEW OF FAIR MARKET VALUE General Market Value means the price that an asset would bring as a result of bona fide bargaining between well-informed buyers and sellers who are not otherwise in 18 a position to generate business for the other party, or the compensation that would be included in a service agreement as a result of bona fide bargaining between well-informed parties to the agreement who are not otherwise in a position to generate business for the other party, on the date of acquisition of the asset or at the time of the service agreement. 42 C.F.R

19 LEGAL/REGULATORY VIEW OF FAIR MARKET VALUE The Stark Act also defines Fair Market Value as the market price at which bona fide sales have been consummated for 19 like type assets in a particular market. 19

20 LEGAL/REGULATORY VIEW OF FAIR MARKET VALUE For real estate, the Stark Act states that fair market value is the value of rental property for general 20 commercial purposes (not taking into account its intended use). In the case of a lease of space, this value may not be adjusted to reflect the additional value the prospective lessee or lessor would attribute to the proximity or convenience to the lessor when the lessor is a potential source of patient referrals to the lessee. 20

21 Legal/Regulatory View of FMV Stark regulations state that the definition of FMV is qualified in ways that do not necessarily comport with the usage of the term in standard valuation techniques and methodologies. Stark example: 21 Exclusion of market comparables between parties in position to refer Stark example: FMV can be established by any method that is commercially reasonable. OIG Anti-kickback statute example: Footnote 5 to Advisory Opinion cautioning the use of the Discounted Cash Flow (DCF) method for an ASC valuation

22 Avoid the FMV Definition Pitfall The Street perspective of FMV is generally not reliable for healthcare regulatory purposes but may provide useful information. Regulatory definition of FMV may limit or qualify FMV methods used in professional appraisal practice. FMV as determined under professional appraisal standards may be more rigorous than the regulatory requirements. 22

23 Avoid the FMV Definition Pitfall Appraisers don t give legal advice Appraiser should be versed in HC regulatory environment and impact on FMV Use of multiple appraisal methods is advisable Avoid inclusion of synergy value 23 Compensation that results in significant losses should be pause for concern (Citizens) FMV does not ensure Commercial Reasonableness Step back and take a 30,000 foot view

24 RECENT SETTLEMENTS AND TAKE-AWAYS 24

25 DOJ Statistics Settlements and Judgment 25

26 Who Are Qui Tam Litigants? Disgruntled/Former Employees Concerned Employees Physicians Hospital/Health System Executives Consultants Compliance Staff Members 26

27 DOJ Statistics Qui Tam Actions 27

28 U.S. ex rel. Parikh v. Citizens Medical Center, et al. Medical Directorship/Real Estate Arrangements Allegations: Relators alleged that the Hospital knowingly and willfully paid bonuses to emergency room physicians who referred to the chest pain center and the bonuses were paid by splitting the compensation between the hospital and the referring emergency room physicians 28 Relators also alleged above-market guaranteed salary and discounted office space rentals were used as incentives in exchange for Medicare and Medicaid patient referrals. Doctors were guaranteed many times more in salary than [they] earned in private practice and were able to rent office space at a significantly reduced rate below the fair market value

29 U.S. ex rel. Parikh v. Citizens Medical Center, et al. Medical Directorship/Stacking Arrangements Allegations (Cont.): Relators alleged a bonus system wherein gastroenterologists who participated in hospital s colonoscopy screening program received bonus compensation for referring patients to the hospital A gastroenterologist would be assigned29to a screening day and would perform the screenings for that day The gastroenterologist would then be compensated by billing any charges to the patients insurer, and the hospital would be compensated by billing separately for its charges The hospital also compensated the gastroenterologist an additional $1,000 directorship fee for each day the gastroenterologist participated in the screening program But Relators alleged that the gastroenterologist did not assume any additional work or oversight to receive the directorship fee [t]here are absolutely no director responsibilities or duties for participating physicians

30 TU.S. ex rel. Barker v. Tidwell Fair Market Value/Sale of Practice Issues Allegations: Radiation oncologist was using old equipment Legal question of whether the provider had sufficient knowledge of the equipment s effectiveness False Claims for Services Provided 30 Sale of clinic was allegedly higher than fair market value -- no appraisal done -- but Columbus paid $10 million Dollars for a clinic with outdated imaging equipment

31 U.S. ex rel. Barker v. Tidwell Follow-Up Notes Order on Motion for Summary Judgment June 2015 Following a summary judgment that was partly granted and partly denied Dr. Tidwell s Summary judgment motion was granted as to Barker s claim based on violations of the Stark Law but denied as to Barker s claims based diagnostic billing and the Anti-Kickback Statute Settlement was entered into by all parties in September Columbus Regional has agreed to pay $25 million, plus additional contingent payments not to exceed $10 million, for a maximum settlement amount of $35 million Dr. Pippas has agreed to pay $425,000 Indicative of the Yates memo and the DOJ s focus to go after wrongdoers individually

32 U.S. ex rel. Reilly v. North Broward Hospital District, et al. Fair Market Value Issues Allegations: The relator alleged that the compensation was excess of fair market value and commercially un-reasonable, because it was over the 90th percentile of total cash compensation as published in MGMA physician compensation surveys, and generated substantial practice losses 32 for Broward Broward tracked and evaluated inpatient contribution margins and outpatient contribution margins

33 U.S. ex rel. Reilly v. North Broward Hospital District, et al. Fair Market Value Issues Allegations (con t): For instance: One orthopedic surgeon was alleged paid at least $1,391, in 2008 and $1,557, in 2009 MGMA 90 th percentile compensation for orthopedic surgeons in the Southern U.S. was $1,209,569 in After evaluating the net revenue and expenses of the practice, Broward faced a net loss of $791,630 However after tracking inpatient contribution margins and outpatient contribution margins this surgeon contribution margin was a profit of $867,326

34 U.S. ex rel. Reilly v. North Broward Hospital District, et al. Fair Market Value Issues Allegations (con t): The physicians compensation was not financially self-sustaining from professional income alone, but would be self-sustaining if one added the value of facility fees, which Broward tracked The whistleblower argued that Broward s 34 Contribution Margin Reports, continually tracked referral profits and was used to take into account the volume and value of referrals when establishing compensation The complaint also alleged that Broward pressured physicians to limit charity care, even though Broward is a public entity, and to keep referrals in-house, even when physicians believed the patient s care needs were better served by another facility

35 U.S. ex rel. Reilly v. North Broward Hospital District, et al. Fair Market Value Issues Follow-Up Notes The settlement marked the largest ever reached without litigation under the Stark Law at the time Because of the settlement we don t know DOJ s thoughts on: The propriety of compensation that, in combination with practice overhead expenses, is in excess of collections from the physician s personally performed services 35 But we do know that a DOJ fair market value expert has asserted in litigation that physician arrangements, even for employed physicians, for departments that lose money are commercially un-reasonable while conceding that there is no statutory or regulatory basis for such an assertion And the DOJ has asserted that hospitals that tolerate practice losses because of the value of the employed physician s referrals to the hospital are suspect

36 Adventist Health System Fair Market Value Issues Compensation Exceeded Fair Market Value: Compensation formulas based on bottom line by incorporating Part A and Part B revenues (DHS revenues) such that compensation varied based on volume or value of referrals. For example, oncologists were paid in part with chemotherapy revenues so that 36 the more chemotherapy drugs a physician ordered, the more the physician was paid. This resulted in a high number of physicians exceeding the 90 th percentile with some making over $1 million/year. Bonus payments consisting of professional charges plus a significant portion, if not all, of the facility fee. The facility fee was paid outside of the contract language. Bonuses based on numbers of patients seen by the physician.

37 Adventist Health System Fair Market Value Issues Compensation Exceeded Fair Market Value: Employment agreements included caps on compensation that were not enforced. One interesting 37 example involved an oncologist whose total compensation was nearly $2 million and by contract was not to be paid in excess of the 99 th percentile. Other agreements required the physician not to be paid more than certain dollar figures or no more than the 90 th percentile and none were enforced. The Dorsey Qui Tam complaint included an exhibit listing 167 physicians whose compensation arrangements involved alleged Stark violations, 85 of those exceeded the 90 th percentile on MGMA Many physicians paid in excess of 90 th percentile fell below the 50 th percentile in work RVUs

38 U.S. ex rel. Drakeford v. Tuomey Healthcare System, Inc. Fair Market Value Issues In 2003, several local specialty groups told Tuomey they planned to perform surgical procedures in-office instead of at Tuomey's 266-bed hospital To allegedly avoid a reduction in surgical case volume, Tuomey employed the 19 specialists as part-time employees Each of the 10-year employment contracts included essentially the same terms. 38 Physicians required to perform outpatient procedures at a Tuomey hospital or facilities owned by Tuomey Tuomey billed and collected from patients and third-party payers, including Medicare and Medicaid Tuomey compensated physicians annual base salaries that hinged on Tuomey's net cash collections for outpatient procedures The physicians eligible for productivity bonuses equal to 80 percent of the net collections, along with an incentive bonus that could total up to 7% of the productivity bonus Finally, the contracts also included a non-compete clause, prohibiting the specialists from competing with Tuomey during the 10-year term and two years after the contract expired

39 U.S. ex rel. Drakeford v. Tuomey Healthcare System, Inc. Fair Market Value Issues Tuomey claimed that it had acted in good faith and sought/relied on advice from various outside law firms and consultants in connection with the employment agreements Legal Opinion Shopping Tuomey indicated that it believed the employment agreements were commercially reasonable and not in excess of fair market value given 39 a shortage of physicians in the community However, the Government discovered additional consultant reports suggesting potentially conflicting opinions as to the regulatory risk of the employment agreements The valuation Tuomey relied upon indicated productivity levels of the physicians were between the 50 th and 75 th percentiles Compensation levels exceeded the 90 th percentile

40 U.S. ex rel. Drakeford v. Tuomey Healthcare System, Inc. Fair Market Value Issues But the valuation did not take into account any full time benefits provided In addition to this valuation, Tuomey sought out the expertise of a former Department of Health and Human Services attorney who had experience with the Stark Law and who advised them the physician contracts were problematic and the terms could potentially expose liability under the Stark Law 40 Shortly after, Tuomey terminated the representation and sought advice from a new attorney The new attorney was placed in the position of providing guidance to Tuomey regarding compliance with the Stark Law This new attorney allegedly advised Tuomey that given the facts above, the Stark Law did not apply to the physician contracts

41 U.S. ex rel. Drakeford v. Tuomey Healthcare System, Inc. Follow-Up Major Question regarding the volume or value of referrals: Here is how the Fourth Circuit interpreted the compensation structure when remanding the case back to district court: It stands to reason that if a hospital provides fixed compensation to a physician that is not based solely on the value of the services the physician is expected to perform, but also takes into account additional revenue the hospital anticipates will result from the physician's referrals, that such compensation by necessity takes into account the volume or value of such referrals. 41 Important Takeaways from Tuomey: Virtually all FCA cases are resolved through settlement agreements due to potential ramifications of losing unusual that this case went to trial Physician employment does not necessarily insulate agreements from Stark liability If a proposed arrangement appears to have been developed in response to the fear of losing a referral stream, the government may look closely at issues of commercial reasonableness Long-term arrangements should be reviewed periodically for compliance Providers cannot blindly follow a fair market value or commercial reasonableness determination, its important to look at the analysis from a legal perspective

42 Varying Based on Volume of Value What does this Mean? Two standards: i) cannot vary with the volume or value, and ii) cannot be take into account 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. 42 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.

43 U.S. ex rel. Baklid-Kunz v. Halifax Hospital Medical Center Fair Market Value/Bonus Issues Allegations: Lawsuit brought by the former Director of Physician Services at Halifax Health alleges that contracts with six (6) oncologists violated the Stark law and other relevant Medicare laws. The government alleged that the prohibited referrals resulted in the 43 submission of 74,838 claims and overpayment of $105,366,000. Executed contracts with six medical oncologists that included an incentive bonus that improperly included the value of prescription drugs and tests that the oncologists ordered and Halifax billed to Medicare Bonus Pool = 15% of Halifax Hospital's "operating margin" from outpatient medical oncology services (i.e., pool includes revenue from "designated health services" referred by oncologists)

44 U.S. ex rel. Baklid-Kunz v. Halifax Hospital Medical Center Fair Market Value/Bonus Issues Allegations: Does not comply with Employment Exception (1) FMV and (2) Volume/Value referral prohibition Share of pool paid to individual 44 oncologists is based on each individual physician's personal productivity, not referrals However, pool includes "profits" from services referred, but not personally performed by oncologists. Complaint alleged that Halifax paid three neurosurgeons more than fair market value for their work.

45 U.S. ex rel. Baklid-Kunz v. Halifax Hospital Medical Center Fair Market Value/Bonus Issues Bonus = 100% of collections after covering base salary, no expense sharing Total Compensation = As much as double neurosurgeons at 90 th percentile 45

46 U.S. ex rel. Baklid-Kunz v. Halifax Hospital Medical Center Commercial Reasonableness/Loss Arrangements DOJ asserts that paying physicians more than the professional collections they generate exceeds FMV, is not commercially reasonable, and takes referrals into account "Given that each neurosurgeon was paid total compensation that, Defendants could not reasonably have concluded that the compensation arrangements in those contracts were fair market value for the neurosurgical services or were commercially 46 reasonable." But, there is no requirement that providing physician services must be profitable: If compensation is FMV and is not adjusted for referrals, it should satisfy the Stark Law Some service lines have unprofitable payor mixes or low demand CMS recognizes the legitimacy of subsidizing physician compensation, e.g. in the E.D. Likewise, call coverage and hospitalist services often require subsidies

47 U.S. ex rel Schubert v. All Children s Health System Allegations: Relator alleged that, despite the compensation plan she developed such that pediatric neurosurgeons would paid between 25 th and 75 th salary percentile, hospital executives overcompensated these physicians. Physician group operated at a loss while hospital saw financial boon due to 47 referrals Nearly 1/3 of recruited physicians were paid above the 75 th percentile Does any of this really matter? Court ruled that the relator sufficiently alleged financial relationship that took into account anticipated referrals and ability of physicians to generate business

48 U.S. ex rel Schubert v. All Children s Health System Court ruled that the relator sufficiently alleged financial relationship that took into account anticipated referrals and ability of physicians to generate business FMV benchmark created by drawing form the median of 48 three nationwide salary surveys and creating a competitive salary range. Relator used that information to allege an FMV salary benchmark and alleged the salaries paid to recruited physicians exceeded that benchmark. The Court rules that this was sufficient to satisfy Rule 9(b).

49 U.S. ex rel. Villafane v. Solinger et al. Relator alleged that Kosair Children s Hospital submitted false claims to the Medicaid program as a result of non-compliant financial relationships with members of a faculty practice plan. Academic service agreements with physicians were shams since no adequate time-keeping 49 documentation and hospital and university failed to have adequate written agreement in place. Relator s valuation expert alleged that physician salaries exceeded fair market value. Question before the Court was whether the parties complied with the Academic Medical Center exception

50 U.S. ex rel. Villafane v. Solinger et al. Court ruled that the hospital met elements of AMC exception, which were broad and intended to allow flexibility. Court stated [a]ny distribution of salaries in a marketplace will show some higher or lower than others. Provided a salary is well within a statistical distribution 50 defining the market as a whole, it seems difficult to argue that it is not fair market value. Court noted that [a]ny definition of fair market value that would automatically deem anything over the median or indeed, anything at the 80 th percentile, as necessarily not being fair market value would seem illogical.

51 WHAT TO LOOK FOR IN AN APPRAISER 51

52 Benefits of Independent Valuations Avoids Concerns of Government with Internal Valuations (e.g., bias and manipulation, and helps ensure rigor and consistency) Helps creates rebuttable presumption under IRS Intermediate Sanctions But not under Stark and AKS Can be relavant to a party s intent Protection for Riskier Transactions (e.g., high dollar amounts or transactions with larger referral sources) Protection of DHS entities that have Stark law liability 52

53 Who Determines FMV? We agree that there is no requirement that parties use an independent valuation consultant for any given arrangement when other appropriate valuation methods are available. However, while internally generated surveys can be appropriate as a method of establishing fair market value in some circumstances, due to their susceptibility to manipulation and absent independent verification, such surveys do not have strong 53evidentiary value and, therefore, may be subject to more intensive scrutiny than an independent survey. 66 Fed. Reg. 945 (January 4, 2001). While good faith reliance on a proper valuation may be relevant to a party s intent, it does not establish the ultimate issue of the accuracy of the valuation figure itself. 69 Fed. Reg (March 26, 2004).

54 Role of the Lawyer in FMV Analyses Selecting the valuator Framing the valuation issue Understanding the valuation process/methodology Should the valuation be done under privilege? 54 Does the methodology match the exception the parties are relying on? Employment Exception IOAS Exception Reviewing the valuation and asking questions

55 VALUATION GUIDANCE & CHECKLISTS 55

56 Commercially Reasonable Recap Pre-cursor to determining FMV An arrangement will be considered commercially reasonable in the absence of referrals if the arrangement would make commercial sense, even if there were no potential DHS (designated health services) referrals. (69 Federal Register (March 26, 2004), Page 16093) Arrangement must make business sense absent considering referrals 56 Hospital leadership must understand this standard since they will primarily be the individuals who assess CR. Sample considerations: Operational assessment does the community need this service/number of specialists? Physician requirements are the number of hours required? Financial options can you lease equipment from a third party vendor at a better rate than from a physician group? Counsels role did hospital leadership walk through the business considerations? Valuation firm role is the compensation at FMV?

57 Fair Market Value Recap Agreements should carefully be constructed Compensation should not be tied to expected or actual referrals. This is important when establishing compensation or when setting mechanism to drive compensation. Carefully construct alternative payment models (gainshare, MSSP, ACO, bundled payments) since often tied to other (nonphysician) income 57 streams. Do not determine FMV based on What the hospital next door is paying. Non-comparable services and associated fees (ie: management vs. co-management). Solely on opportunity cost of the physician performing a different service, or their going rate (surgery vs administrative work).

58 Valuation Starting Point 1. Commercially Reasonable confirm 2. Agreement terms must be understood and are sometimes unclear at valuation stage, define: What services will be provided? How will parties be compensated? There are no published standards for physician compensation valuations and P4P has limited data 4. Appraisal firm should understand Healthcare regulations Valuation principles Fair Market Value Data considerations

59 Medical Director Services - Valuation Cost Approach Considers the cost of the physician s time based on clinical compensation Considers multiple, published compensation surveys Likely not what they earn during an hour of surgery Market Approach typically preferred approach Considers compensation data for similar services Considers multiple, published medical director compensation surveys Subject to some limitations (referral relationship) 59

60 Call Coverage Services - Valuation Market Approach Considers available market survey data for call coverage services Currently, there are two prevalent market surveys Market Approach is subject to significant shortfalls, burden of call unknown, limited respondents, large variability. Use with caution. Cost Approach typically preferred approach Considers clinical compensation data and applies a beeper rate % Meant to reflect burden of call as suggested by OIG opinions Payor mix, volume of call, acuity, trauma designation, supply/demand of physicians is considered 60

61 Clinical Services - Valuation Common benchmarking mistakes include: Including mid-level provider productivity Benchmarking total RVUs to reported work RVUs Benchmarking total collections to reported professional collections Common mistakes in using the reported compensation per work 61 RVU: Per MGMA, an inverse relationship exists between work RVU volume and compensation per work RVU Paying a highly productive physician the 75th to 90th percentile compensation per work RVU may result in compensation outside of FMV. See illustration on the following page.

62 Example, misuse of reported compensation per work RVU data Solo practitioner specialized in general orthopedic surgery No in-office ancillaries or mid-level providers Annual work RVU volume of 13,867 Hospital employer proposed MGMA 90th percentile compensation per work RVU 62 MGMA Physician Compensation and Production Survey Compensation per Work RVU 25th Median 75th 90th Compensation per work RVU - Orthopedic Surgery: General $47.74 $60.39 $77.39 $95.48 Times: Physician's Annual Work RVU Volume (equal to MGMA 90th) 13,867 Equals: Annual Physician Compensation $1,324,021 Physician Compensation 25th Median 75th 90th Total Compensation - Orthopedic Surgery: General $372,437 $497,088 $658,842 $825,044 Annual Physician Compensation is more than 160% of the 90th percentile!!! $1,324,021

63 Checklist Traditional Arrangements Medical Directorships - Document services and track time, pay hourly Call coverage understand the burden of call per OIG opinions, caution on surveys Clinical services and employed compensation Benchmark productivity average productivity warrants average compensation Losses in a practice - understand reason (safety net hospital, restricted coverage, coordinated care costs) Stacking total dollars and hours make sense? Best Practice - internal policies for compliance: A consistent process to determine FMV, including written agreements 2. Internal thresholds with triggers when a 3 rd party appraisal may be needed 3. Monitor to ensure that services were performed 4. Review agreement to verify the need for services still exist 5. Understand and verify the assumptions underlying any valuation

64 Common Topics in the Boardroom with P4P Evolutionary Process, Seen one, seen one Allocation of payment methodologies Retain for infrastructure and/or responsibility Primary care versus specialists 64 Year 1 versus Year 2+ Care coordinators needed and who pays for them? Risk taking Choosing Metrics and thresholds for payout

65 FMV & P4P VALUE DRIVERS AND GUIDANCE Co-Management/Service line Understand and value each service Identify savings or quality metrics Suggest benchmarking Consider OIG s gainshare and co-management opinions Bundled Payments/Individual Understand market reimbursement for physician services and quality Identify risk and responsibility of all parties Consider caps ACO Type Model/Population Balanced approach for overall model should be assessed o Opinion on allocation to parties (physicians, hospital) o Opinion on distribution among physicians Value 65 Drivers: Third party funded or from hospital Infrastructure cost recovery Buy-in or participation Fee Time spent/effort hourly rate paid/existing compensation model Split of savings existence of minimum savings threshold Split of quality - benchmarks utilized, targets tough Upside and downside risk Care coordinator payments i.e.: Nurse care manager Available data key to determining support for individual performance payments

66 3 LARGEST VALUE DRIVERS FOR P4P MODEL TO IMPACT COMPENSATION 1. Follow the money - understand if the payments are self-funded from the health system or coming from third party. There is more flexibility with compensation if third party generated and the commercially reasonable standard is easier to meet. If self-funded, additional compensation based on a portion of any savings may be 66 easier to support compared to quality payments because financial support is not required. 2. Responsibility of parties parties who have a demonstrable impact on quality and/or cost savings may warrant more of the payment received under a VBP model. Need to understand metrics and who is impacting them (physicians vs. health system employees) Primary care versus specialist 3. Risk of parties parties who take on risk may earn more, while those with limited risk may have limited upside potential.

67 CHECKLIST P4P ARRANGEMENTS Quality Payments Metrics outlined Primarily outcomes metrics (versus process or reporting) Be careful with low hanging fruit metrics Benchmark performance against medical 67credible evidence Ensure physician(s) will have demonstrable impact on quality Check for overlap of payments from co-management, bundled payments, etc Shared Savings No cherry picking or lemon dropping Identify separate identifiable cost savings opportunities in advance Ensure physician(s) will have demonstrable impact on cost savings Consider cap methodology applied in CMS models Understand the risk and responsibility of parties prior to determining split of quality or savings payments

68 SUMMARY - FMV & PHYSICIAN COMPENSATION 1. Outline what commercially reasonable services will be provided and how parties will be compensated 2. Valuation should match the agreement - may require several valuations for one agreement (clinical, administrative, oncall, P4P) 3. Thorough valuation process to establish compensation should be tied to each of the services provided 4. Establish and monitor a compliant and consistent process for establishing FMV 68 Understand recent settlements beware of documentation regarding referrals or no documentation regarding services Reference to multiple, objective, independently published salary surveys remains a prudent practice for evaluating Fair Market Value Valuation method and benchmarking is important Consider regulatory guidance and OIG opinions (shared savings, on-call beeper rate) Methods that won t hold up Compensation models built on referrals What hospital next door is paying 5. New challenge transition to compensate physicians on quality and cost-saving outcomes rather than being reimbursed solely for services and procedures. There is a lack of survey data and guidance here.

69 AVOID THE FMV DEFINITION PITFALL Appraisers don t give legal advice Appraiser should be versed in HC regulatory environment and impact on FMV 69 Use of multiple appraisal methods is advisable Avoid inclusion of synergy value Compensation that results in significant losses should be pause for concern (Citizens) FMV does not ensure Commercial Reasonableness Step back and take a 30,000 foot view