Fair Market Value in Health Care Transactions

Transcription

1 Fair Market Value in Health Care Transactions AMGA Council of Attorneys Annual Meeting October 15 18, 2013 James B. Platt, Esq Fredrikson & Byron, P.A.

2 Overview Laws that refer to fair market value ( FMV ) Definitions of FMV Case law examples 2013 Fredrikson & Byron, P.A.

3 Fair Market Value Issues Arise Under Many Laws Stark Medicare Anti-kickback Federal tax laws False Claims Act 2013 Fredrikson & Byron, P.A.

4 Stark Laws Prohibits an entity from billing Medicare or Medicaid for designated health services ( DHS ) referred by a physician that has a financial relationship with the entity unless an exception applies. Physicians in physician-owned practices stand-in-theshoes of financial relationships that their practices have with hospitals, imaging centers and other entities that bill for DHS (e.g., leases), necessitating an exception. Physicians and medical directors who are employees or contractors have a financial relationship with the health system, necessitating an exception Fredrikson & Byron, P.A.

5 Stark Laws, Cont d Numerous Stark exceptions require that remuneration be consistent with FMV E.g., Rental of office space Equipment leases Bona fide employment Personal service arrangements Isolated transactions Fair market value compensation General requirement: amount paid must be consistent with fair market value 2013 Fredrikson & Byron, P.A.

6 Stark Fair Market Value Definition Means the value in arm s-length transactions, consistent with general 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 a position to generate business for the other. Usually, the fair market price is the price at which bona fide sales have been consummated for assets of like type, quality and quantity in a particular market at the time of acquisition, or compensation included in bona fide service agreements with comparable terms at the time of the agreement Fredrikson & Byron, P.A.

7 For Leases of Equipment and Office Space FMV means the value of rental property for general commercial purposes. This value may not be adjusted to reflect the additional value the lessee or lessor would attribute to the proximity or convenience to the lessee when the lessor is a source of patient referrals. A rental payment does not take into account intended use if it takes into account costs incurred by the lessor in developing or upgrading the property or maintaining the property or its improvements. CMS comments that changes to lease terms that are material to the rental charges (e.g., the amount of space leased) may cause the rental charges to fall outside of FMV. CMS also notes that whether tenant improvements may be charged over the term of the lease vs. their useful life depends on the ability of the lessor to lease the space with the improvements to another tenant Fredrikson & Byron, P.A.

8 CMS Comments on Stark and Valuations A wide range of methods may be acceptable to determine FMV. The methods must be commercially reasonable and provide evidence of how compensation is comparable with what is ordinarily paid for the item or service by parties in an arm s length transaction in that area. A list of comparable leases for office space and independent appraisals may provide evidence of FMV. Cost plus a reasonable rate of return may be an acceptable methodology Fredrikson & Byron, P.A.

9 CMS and Valuations Reference to multiple, objective, independently published salary surveys remains a prudent practice for evaluating fair market value. Although good faith reliance on an independent valuation (such as an appraisal) may be relevant to a party s intent, it does not establish the ultimate issue of the accuracy of the valuation figure itself. Ultimately, the appropriate method for determining fair market value will depend on the nature of the transaction, its location, and other factors Fredrikson & Byron, P.A.

10 Medicare Anti-kickback Laws Prohibits payment of remuneration in exchange for referrals of persons for the furnishing of items or services paid for by a federal health care program. Requires intent. Courts and the Office of Inspector General ( OIG ) have said that if one purpose of a payment is to induce or pay for referrals, then the law is violated Fredrikson & Byron, P.A.

11 Medicare Anti-kickback, Cont d OIG has said that if a health care provider gives or receives something of value that is not at FMV, an inference may be made that the exchange was intended to induce or reward referrals. By fair market value, we mean value for general commercial purposes. However, fair market value must reflect an arm s-length transaction which has not been adjusted to include the additional value which one or both of the parties has attributed to the referral of business between them Fredrikson & Byron, P.A.

12 Medicare Anti-kickback, Cont d Anti-kickback law safe harbors protect space and equipment leases and personal services, but require that the aggregate payment be set in advance, is consistent with FMV in arm s length transactions, and is not determined in a manner that takes into account the volume or value of referrals. OIG Supplemental Guidance for Hospitals (January, 2005) notes that the OIG will ask whether FMV is based on a reasonable methodology uniformly applied and documented. If comparables are used, the hospital should be cautious of using ones where all providers of the service are physicians Fredrikson & Byron, P.A.

13 Medicare Anti-kickback, Cont d While the OIG will not give advisory opinions whether remuneration is consistent with FMV, it has issued several that warn against the following: 99-2: Discounts below fully loaded costs and discounts less than the amount provided to others with similar volume but no referrals. 03-8: Per patient, per click and per order fees : Lost opportunity payments that do not reflect real lost income, payment arrangements when no identifiable services are provided, high on-call payments relative to a physician s regular practice income, and double-dipping - - compensation payments when the physician is also receiving payment from payors Fredrikson & Byron, P.A.

14 Internal Revenue Code Payments in excess of FMV may, in extreme cases, result in the IRS determination that the organization is no longer tax exempt. In less egregious cases, the IRS also has available tax penalties (intermediate sanctions) that apply to excess benefit transactions where an economic benefit is provided by an exempt organization to a disqualified person and the value provided exceeds the value of what was received Fredrikson & Byron, P.A.

15 Internal Revenue Code Cont d Exempt organizations may establish a presumption that the arrangement is reasonable if: objective, third party evidence (e.g., surveys or independent valuations) are obtained showing that the payment is FMV; results are reviewed and approved by outside, independent members of the Board of Directors; and the decision is well-documented The IRS has issued guidance for physician/hospital arrangements Fredrikson & Byron, P.A.

16 Internal Revenue Code Cont d Physician office leases in space provided by the hospital must have rent at fair market value and have commercially reasonable terms. Equipment leases from physicians to the hospital must be the result of arm s-length negotiations, consistent with FMV and be commercially reasonable. If the lease payment is significant, an independent valuation is recommended. Hospitals purchasing physician practices must be prepared to show that it did not overpay through a timely valuation of the assets. Such an appraisal should consider various valuation approaches; e.g., cost, market and income approaches Fredrikson & Byron, P.A.

17 Important Cases U.S. ex rel. Goodstein v. McLaren Regional Medical, 202 F.Supp. 2d 671(E.D. Mich. 2002) Government alleged hospital lease payments to physician building owners were in excess of FMV. Anclote Psychiatric Center v. Comm, T.C. Memo , aff d per curium 190 F.3 rd 541 (11 th Cir. 1999) Appraisals need to be timely (not years before the deal occurs); there may also be material intervening events. Arms-length negotiations alone are not enough Fredrikson & Byron, P.A.

18 Important Cases Covenant Medical Center and Wheaton Franciscan Healthcare Inc. Compensation payments vastly in excess of FMV to five physician specialists (here, 2 3 times market) resulted in a $4.5 million settlement of Stark violations and False Claims Act claims. U.S. ex rel Singh v. Bradford Regional Medical Center, 752 F.Supp. 2d 602 (W.D. Pa. 2010) Valuation of covenants not to compete are particularly tricky. Valuation consultants compared the hospital s expected revenues with the non-compete in place with the amounts that would be paid under the non-compete. This factor combined with other statements that the valuation was based on expected revenues Fredrikson & Byron, P.A.

19 Recent Cases U.S. ex rel. Kunz v. Halifax Medical Center U.S. ex rel Drakeford v. Tuomey Health Care 2013 Fredrikson & Byron, P.A.

20 Tuomey American Medical Group Association Council of Group Practice Attorneys Chicago Meeting October 15-18, 2013

21 Tuomey: The Facts Tuomey Healthcare System Anchored by Tuomey Regional Medical Center (301 total beds) Nonprofit charitable trust hospital dating back 100 years to 1913 Located in Sumter, South Carolina, a medically underserved and HPSA area, with a population of approximately 106,000 people living in the Sumter County Metropolitan Statistical Area Provides healthcare services to citizens in several surrounding counties 150 physicians on medical staff - 25 specialties represented

22 Tuomey: The Facts Sept 2002: Sumter Urological Center LLC gets C.O.N. for ASC Competition for Tuomey 2003: Tuomey projects loss $9.6 million in revenues over 13-year future period if GI docs move procedures from Tuomey Solution: Recruit area specialists for part-time employment at Tuomey outpatient center subsidiary where doctors can, and will, perform all outpatient surgeries/procedures Action: Tuomey recruits 19 doctors in various specialties using attractive, physician-friendly part-time employment contract.

23 Turd in the Punchbowl: Dr. Michael L. Drakeford (Orthopaedic Surgeon)

24 The Tuomey Employment Contract Tuomey: The Facts Part-time employment covering only outpatient procedures Exclusive for outpatient procedures 10-year term (no cut), with a 2-year 30-mile non-compete Compensation: Base Salary (based upon previous year s collected revenue on outpatient procedures) Productivity Bonus (80% of collections) Incentive Bonus (up to 7% of Productivity Bonus, depends on achieving specified quality metrics) Result: 31% above actual collections! But wait there s more!

25 The Tuomey Employment Contract Tuomey: The Facts Healthcare insurance Tuomey paid all malpractice premiums (including premiums covering physicians for outpatient procedures, AND for office services AND inpatient services/surgeries) CME reimbursement Cell phone reimbursement Periodical/journal reimbursement Basically, part-time doctor-employees received full-time benefits Dr. Drakeford was not comfortable with the arrangement proposed to him. He sought counsel.

26 Tuomey: The Facts Dueling Counsel Opinions Drakeford counsel advised of concerns about arrangement BUT Tuomey attorney opined arrangement is O.K. AND Tuomey s FMV Report: Tuomey also received FMV report stating physician compensation is justifiable so long as it does not exceed 150% of the 90 th percentile. Seeking a Tiebreaker Opinion: Tuomey and Drakeford jointly retain Kevin McAnaney, formerly chief of the Industry Guidance Branch of HHS OIG he is to review and report on the proposed arrangement.

27 Tuomey: The Facts McAnaney concerns: red flags Appears docs are being paid in excess of FMV Physicians would be making referrals to Tuomey and referrals key Stark concerns Employment contracts have unusual provisions Risky - Government has litigated in similar cases Tuomey s Quest for Expert Opinions Tuomey rejects McAnaney assessment and opinion Stark is N/A: Physician are personally performing services, so there are no Stark referrals Tuomey: McAnaney was tainted by Drakeford s counsel Tuomey seeks a favorable opinion from another attorney, Steve Pratt

28 Tuomey First Trial and Appeal

29 Tuomey: The Facts Dr. Drakeford s Qui Tam Qui tam filed under seal in 2005: U.S. ex rel. Michael L. Drakeford, M.D. v. Tuomey d/b/a Tuomey Healthcare System, Inc. (D. SC) Government joined the action in 2007 by filing an amended complaint, claiming: Tuomey violated the Stark law. Tuomey violated the False Claims Act ( FCA ) by knowingly submitting claims for services performed by physicians whose contracts violated Stark. Tuomey committed common-law offenses: unjust enrichment, payment by mistake, accounting and disgorgement

30 Tuomey: The First Trial March 2010 Jury Verdict Tuomey violated Stark Law, BUT Tuomey did NOT violate FCA July 2010 post trial rulings: Set aside verdict with respect to FCA Ordered new trial BUT Enters $45 Million judgment based on Stark violation March th Circuit Opinion: Set aside entire jury verdict Set aside judge s $45 Million Jgmt (violates right to jury trial) Remands for new trial

31 Tuomey: The First Trial 4 th Circuit Dicta: issues likely to arise at retrial (1)TC of a hospital service = referral When a physician initiates DHS but performs it himself, the PC is not a referral BUT In the context of inpatient and outpatient hospital services, there is a referral of the TC/facility fee component. Physician personal performance does not negate referral Cite: 66 Fed. Reg. 856, at 941 (CMS commentary on the personal services regulatory exception in the Stark rule)

32 Tuomey: The First Trial 4 th Circuit Dicta: issues likely to arise at retrial (2) When does a compensation method consider volume or value of referrals? Contracts violate volume or value standard if physician compensation takes into account additional revenue a hospital anticipates realizing as result of future physician cases This is a jury question Cite: 66 Fed. Reg. 856, at 877: FMV standard is not met if compensation takes into account, in any manner, volume or value of actual or anticipated referrals. (CMS commentary in the Stark rule)

33 Tuomey Unlucky 2013

34 Tuomey: The Second Trial April-May month Retrial May 8, 2013 Jury Verdict Tuomey violated both Stark Law and FCA 21,730 claims submitted in violation of FCA/Stark $39.3 Million verdict against Tuomey On to the penalty phase U.S. moves for $237.4 Million. Other motions and briefs filed by both parties.

35 Tuomey: The Second Trial September 3, 2013 South Carolina A.G. Opinion Tuomey Healthcare may not indemnify its trustees or officers from personal liability (they were not parties to lawsuit) South Carolina statutory law and common law do not have provision to indemnify a non-party. PLUS, prior AG Opinion opined that S.C. statutory immunity, if otherwise available, would not generally serve to protect those persons from liability for federally created claims. Tuomey Bylaws provide for indemnity BUT pursuant to bylaws, Tuomey can only indemnify its officers and trustees to the full extent permitted by S.C. Nonprofit Corporation Act. Should it be determined by a court that Tuomey officers and board members breached their fiduciary duties, committed a breach of trust or violated the law in some other manner, then they cannot be indemnified by Tuomey because a court would have found that they were personally at fault or that their personal negligence contributed to causing injury. In such event, indemnification would be unwarranted.

36 Tuomey: The Second Trial September 26, 2013 Resignations Tuomey President & CEO (28 years in job) Executive VP & COO September 30, 2013 Judgment & aftermath Opinion by Senior Judge Margaret B. Seymour $237,454,195 judgment entered against Tuomey Notice of Appeal filed October 1st BUT prospects for reversal appear dim at 4 th Circuit Observers think company will press for settlement, BUT Willingness of Government to settle after enduring a long trial is unknown

37 Issues and Rulings Tuomey: The Second Trial 1. Physician Contracts not subject to Stark No proof that compensation varied with volume or value of referrals Court Ruling: U.S. evidence: Tuomey acknowledged that each time a physician performed a legitimate procedure on Medicare patient at Tuomey facility, physician compensation increased AND Tuomey received a facility fee! Reasonable jury could find in favor of U.S. on issue Tuomey s argument is without merit.

38 Issues and Rulings Tuomey: The Second Trial 2. Physician Contracts not subject to Stark No proof that physician compensation calculation took into account volume or value of referrals Tuomey NPV expert claimed she simply evaluated potential financial impact of employment decisions. Court Ruling: U.S. had multiple witnesses stating that compensation paid by Tuomey did take into account volume or value of referrals AND jury could judge credibility of Tuomey NPV expert who testified that her work was not used to build a compensation plan. Reasonable jury could find in favor of U.S. on issue Tuomey s argument is without merit.

39 Issues and Rulings Tuomey: The Second Trial 3. Physician Contracts not subject to Stark Insufficient proof of referrals since physicians who did work were not named in hospital claim forms just terms like attending physician or operating physician Court Ruling: Physicians themselves testified that they treated Medicare patients at Tuomey s facility Reasonable jury could find in favor of U.S. on issue Tuomey s argument is without merit.

40 Issues and Rulings Tuomey: The Second Trial 4. No Guilty Knowledge for FCA liability Tuomey relied on advice of counsel that reliance negates scienter required for FCA liability Court Ruling: Potential problems with arrangement raised by various counsel and consultants, especially McAnaney and his red flags raised when he was engaged as tiebreaker AND Tuomey-counsel s undercut good faith claim ( s are quoted in Opinion footnote) Teplitzky s Theorem: E in stands for Evidence Reasonable jury could find in favor of U.S. on issue Tuomey s argument is without merit.

41 Issues and Rulings Tuomey: The Second Trial credible evidence was presented at trial from which a jury could reject Tuomey s advice of counsel defense once Tuomey determined to disregard McAnaney s admonitions in favor of moving forward with the physician contracts. The court cannot say that the jury verdict is against the clear weight of evidence. Tuomey s argument is without merit.

42 Tuomey: The Second Trial. Issues and Rulings 5. Government failed to prove damages Speculative calculations presented to jury AND Government received what it paid for ( value in exchange for its payments ) therefore, no damages sustained Cite: U.S. ex rel Harrison v. Westinghouse Savannah River Co., 352 F.3d 908, 913 (4 th Cir. 2003) Court Ruling: Harrison distinguished as solely an FCA case Tuomey finds FCA liability based on Stark violations, which prohibit any payment of an impermissible claim Evidence showed 21,730 claims & $39.3 million paid Reasonable jury could find in favor of U.S. on issue Tuomey s argument is without merit.

43 Issues and Rulings Tuomey: The Second Trial Tuomey does not argue that the court erred in allowing the Government to present summary evidence based upon inadmissible data, that it was precluded from cross-examining Steck [government expert], or that it was precluded from introducing its own expert testimony to counter Steck s computations. Rather, Tuomey pursued a trial strategy of denying application of the Stark Law in the first instance. Consequently, Tuomey elected not to challenge the Government at trial with respect to underlying data, or to present an alternate methodology by which the jury could assess Steck s computations. The court cannot say that the jury verdict is against the clear weight of the evidence. Tuomey s argument is without merit."

44 Issues and Rulings Tuomey: The Second Trial 6. Government s demand for trebling verdict damages, plus trebling civil fines (seeking total of $237 Million), violates 8 th Amendment ( excessive fines clause ) Court Ruling: Supreme Court has ruled that treble damages have a compensatory side, serving remedial purposes in addition to punitive objectives. Cook County v. U.S. ex rel Chandler, 538 U.S. 119, 130 (2003) The court cannot say the civil penalties are grossly disproportional to the gravity of Tuomey s offense. Tuomey s conduct as found by the jury calls into question the efficacy of administering the Medicaid and Medicare programs and promotes self-interest to the detriment of federal taxpayers. Tuomey s contention is without merit.

45 Tuomey Sequella

46 Tuomey: The Aftermath While Tuomey was still awaiting second trial, others moved to settlements: September 2012: HCA settles Stark/FCA/AKS complaint against Parkridge Medical Center and HCA Physician Services for $16.5 million. Parkridge leased office space from referring physicians at a rental rate in excess of FMV. March 2013: Intermountain Healthcare settled voluntary disclosure technical violations of Stark involving bonus structures, lease agreements not at FMV, and other inappropriate financial relationships with referring physicians spanning nearly a decade settled for $25.5 million. May 2013: Adventist Health/White Memorial Medical Center settled FCA violations involving inappropriate asset transfers to referring physicians at less than FMV, and compensation to doctors for teaching services at more than FMV settled for $14.1 million.

47 Tuomey: The Aftermath Post-trial Tuomey Tweets : If get a negative opinion, take it very seriously. Can be sure the whistleblower and government will. Never get a tiebreaker opinion unless willing to live with the result. Is there an inherent conflict to have same firm construct arrangement and then evaluate? OIG built with separation. For meaningful and useful review, need to present all facts and assumptions. Ensure adequacy of materials. Need to ask questions about proposals and need to care about compliance. Compliance officer needs to be able to voice concerns and at times be heard to same degree as CEO. Source: AHLA

48 Tuomey: The Aftermath From Here What s Next? What Lessons? : Financial arrangement between providers is risky! FMV opinion letters may not immunize parties firms that issue cursory or thin reports with little research and analysis, or that conclude with a result that the paying requester apparently is asking to see will be discredited and rejected. Expert qualifications, experience, detail, clarity of assumptions and depth of explanations and judgments will be important. Is the emerging standard to use different firms to structure arrangement, value the arrangement, and then evaluate the entire arrangement? (avoiding conflicts of interest)

49 Tuomey: The Aftermath From Here What s Next? What Lessons? : Relying on counsel advice offers only limited protection from liability if any counsel/expert challenges the arrangement, fully explore/evaluate/address the challenges. No summary dismissals/rejections. Is emerging standard to abide by tiebreaker evaluator? Better double-check on D&O indemnity coverage. Going to Trial in a Stark case is high risk proposition consider settlement because if you lose, you are likely to lose BIG. That seems to be lesson derived from post-first trial actions by HCA/Parkridge, Intermountain, and Adventist.

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51 The Jackson Clinic Professional Association Serve the patient Kevin P. McMahon General Counsel 616 West Forest Avenue Jackson, Tennessee (731)

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