Is It All About the Money? 10 Lessons on Fair Market Value From Halifax and Other Recent Cases

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1 Is It All About the Money? 10 Lessons on Fair Market Value From Halifax and Other Recent Cases Andrea Ferrari, JD, MPH Manager Adria Warren, Esq. Partner

2 Hospital-Physician Deals Transaction Drivers Move to control costs and improve patient experience Effective positioning in the face of uncertainty and developments with healthcare reform Create opportunities to build end-to-end continuum of care Positioning for convergence within the payor and provider arena Address physician shortages, capital needs Desire to integrate, align and control destiny 2

3 Fair Market Value (Why does it matter?)

4 Regulatory Issues Federal Issues Federal Anti-Kickback Statute Stark Law False Claims Act Civil Monetary Penalty Law Tax Exemption Issues Sunshine Act FCPA 4

5 Regulatory Issues Select State Law Issues State anti-kickback statutes State Stark laws Fee splitting Physician payment disclosure requirements Fiduciary issues 5

6 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 5 years in jail Exclusion 6

7 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 7

8 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, the parties should obtain an independent appraisal of fair market value 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 healthprogram business. U.S. v. Lipkis, 770 F.2d 1447, 1449 (9th Cir. 1985) 8

9 Stark Law Prohibits a physician who has a direct or indirect financial relationship with a DHS entity from referring patients to the DHS entity for "designated health services" for which payment may be made under the Medicare or Medicaid program; unless a specific exception applies. "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 $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 9

10 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 10

11 Key Health Regulatory Considerations 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. Adapted from OIG s Supplemental Compliance Guide for Hospitals (2005) 11

12 Key Health Regulatory Considerations Fair Market Value is central to the compliance analysis; payments must be FMV, commercially reasonable, and cannot vary with anticipated referrals. 12

13 FMV Why it Matters for Healthcare Transactions 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 State prohibitions on false government claims May increase financial exposure in the event of a qui tam suit Cooper Health System (settlement) Adventist /White Memorial Medical Center (settlement) All Children s Healthcare 13

14 FMV Why it Matters for Healthcare Transactions State Law Issues - Massachusetts No Stark law equivalent, but: New prohibition on physician self-referrals for clinical laboratory services; exception if requirements for a Stark Law exception are met State anti-kickback statute covers conduct prohibited by other anti-kickback laws State Anti-Kickback Statute Mass Gen. Laws Ch 175H, 3 Makes it a felony to solicit, receive, offer or pay any remuneration, including a bribe or rebate, for purchasing, leasing, ordering, arranging for or recommending the ordering of any good, facility service or item for which payment is made in whole or in part by a health insurer. Fines and civil liabilities for conviction No exceptions or safe harbors 14

15 FMV Why it Matters for Healthcare Transactions State Law Issues - Massachusetts Medicaid Anti-kickback Statute Mass. Gen. Laws Ch. 118E 41-46A Makes it a felony to solicit or receive remuneration in exchange for purchasing, leasing, ordering, arranging for or recommending the purchase, lease or ordering of any good, facility, service or item for which Medicaid/ another state healthcare program pays in whole or in part Exception for discounts Exception for bona fide employment arrangements (excepts any amount paid by an employer to an employee for employment in the provision of covered items and services 15

16 FMV Why it Matters for Healthcare Transactions State Law Issues - Massachusetts Massachusetts False Claims Acts Mass Gen Laws Ch 12 5A-5O Medicaid False Claims Law- Ch 118E 39,40,42 Whistleblower protections that apply to both 16

17 FMV Why it Matters for Healthcare Transactions 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 17

18 FMV Why it Matters for Healthcare Transactions Foreign Corrupt Practices Act (FCPA) Enacted to make it unlawful for persons and entities to bribe government officials to obtain or and retain business Its effect has recently been strengthened and broadened by countryspecific transparency and anti-bribery laws May be implicated by payments to physicians or other healthcare providers in countries that have government-run health systems A concern for hospitals and health systems that are seeking to develop facilities, affiliations or referral relationships in foreign countries A concern for healthcare product manufacturers that have business interests, research or consulting relationships in foreign countries General rule of thumb: To avoid FCPA scrutiny, payments should be FMV for goods and services actually provided 18

19 FMV Why it Matters for Healthcare Transactions Sunshine Laws The Sunshine provisions of the Affordable Care Act are intended to create transparency about payments flowing from Manufacturers to physicians and teaching hospitals Transparency makes seemingly inappropriate payments easier for government enforcement entities to identify Transparency raises the possibility of more vigorous government enforcement activity of the laws that are implicated by Manufacturer payments (AKS, Stark, FCA, etc.) Documentation that compensation paid is FMV has become more important 19

20 U.S. ex. rel. Drakeford v. Tuomey Health System The Players: Tuomey Health System Non-profit, 266-bed community hospital in Sumpter County, South Carolina Whistleblower Mike Drakeford, M.D. Orthopedic surgeon with whom Tuomey unsuccessfully attempted to negotiate an arrangement. 20

21 U.S. ex. rel. Drakeford v. Tuomey Health System The Facts: Hospital and 19 specialist physicians renegotiated engagement: Physicians stated plans to perform procedures at ASC Employment agreement terms: Ten-year term Base salary fluctuated based on net cash collections for outpatient procedures Productivity bonuses of up to 80% of net collections; additional incentive bonus up to 7% of productivity bonus Non-competition during employment, plus two years 21

22 U.S. ex. rel. Drakeford v. Tuomey Health System The Result: Eight years at trial $21 million in legal fees Court found Stark/FCA violated Orders Tuomey to pay $237 million in penalties and fines 22

23 U.S. ex. rel. Drakeford v. Tuomey Health System The Court Said: Facility fee constituted a referral under Stark 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 -- U.S. v. Tuomey Healthcare System, 675 F.3d 394 (4th Cir. 2012), at

24 U.S. ex. rel. Drakeford v. Tuomey Health System The Court Said: Evidence showed that Tuomey sought to influence, and later dismissed, independent advisor Indicated Tuomey s intent Discounted role of FMV opinion: Challenged by government Valuation itself did not document reasons/basis for opinion 24

25 U.S. ex. rel. Baklid-Kunz v. Halifax Hospital Medical Center The Players: Halifax Hospital Medical Center/ Halifax Saffing, Inc. Nonprofit hospital system based in Daytona Beach Operated 678-bed tertiary care center Safety net provider Whistleblower Elin Baklid-Kunz Halifax s Director of Physician Services 15-year employee 25

26 U.S. ex. rel. Baklid-Kunz v. Halifax Hospital Medical Center The Facts: Alleged excessive compensation of 6 oncologists, 2 psychiatrists, 3 neurosurgeons Oncologist incentive bonus pool: 15% of Medical Oncology Program operating margin Bonuses allocated based on volume of each physician s personally performed services 26

27 U.S. ex. rel. Baklid-Kunz v. Halifax Hospital Medical Center The Facts: November 2013 Partial Summary Judgment Ruling found the oncologists bonus program varied based on referrals for DHS by the physicians. No Stark exception available. Halifax motion for summary judgment on neurosurgeon compensation denied Court date set -- potential exposure of more than $1 billion, including treble damages under the FCA Parties settle for $85 million, 5-year CIA 27

28 U.S. ex. rel. Singh v. Bradford Regional Medical Center The Players: Bradford Regional Medical Centre Non-profit hospital serving McKean County in Western Pennsylvania V&S Medical Associates Group practice owned by Drs. Vaccaro and Saleh Drs. Singh, Kirsch, Nadella and Jacobs - Whistleblowers 28

29 U.S. ex. rel. Singh v. Bradford Regional Medical Center The Facts: Prior to 2001, Drs. Vaccaro and Saleh were significant source of referrals (including nuclear camera) Drs. Vaccaro and Saleh explore obtaining a nuclear camera and installing it in their office Hospital becomes concerned about potential negative financial impact and recruiting ability Parties explore joint venture; physicians go ahead with obtaining a nuclear camera 29

30 U.S. ex. rel. Singh v. Bradford Regional Medical Center The Facts: Hospital adopts Policy on Physicians with Competing Interests Sublease for nuclear camera: Equipment leased at cost -- $6,545/month Non-competition agreement, other rights -- $23,655/month Fair market valuation: Valuator considered anticipated revenues both with and without sublease (and non-compete) Found compensation FMV, commercially reasonable 30

31 U.S. ex. rel. Singh v. Bradford Regional Medical Center The Result: Sublease created a financial relationship between the parties under Stark No exception available Parties settle for $2.75 million Non-compete payments took into account the volume and value of referrals By definition, not FMV 31

32 U.S. ex rel Schubert v. All Children s Health System Qui tam action originally filed in 2012 Relator was Director of Operations for Pediatric Physicians Services, Inc. (PPS), which is responsible physician staffing at All Children s Hospital Relator s original and amended complaints all alleged excessive physician compensation by PPS 1/3 of 75 physicians received compensation in excess of the 75th percentile as reported by surveys, and in excess of PPS s internal compensation guidance (which capped FMV at the 75th percentile) 18 of 75 physicians received compensation in excess of the 90th percentile Relator s third amended complaint also included allegations that: Compensation resulted in a net operating loss for PPS (FMV/commercial reasonableness argument) Pediatric neurosurgeons offered and paid volume based bonuses that were intended to increase the physicians referrals to the hospital 32

33 U.S. ex rel Schubert v. All Children s Health System Allegations included violations of both the Federal FCA and Florida FCA Third amended compliant survived Motion to Dismiss In its denied Motion to Dismiss, Defendants argued that Stark regulates only referral of Medicare patients and does not apply to referral of Medicaid patients (complaint alleged violations of the False Claims Act through submission of tainted Medicaid claims) Court rejected the Defendants argument on the basis that a Medicaid claim submitted to a state government for reimbursement will be paid at least in part with Federal funds, and receipt of those federal funds through the Medicaid program requires a certification that the party is in compliance with Stark CMS cannot pay FFP for services provided under Medicaid if the payment would be prohibited under Medicare due to an illegal referral in violation of [Stark] Certifying compliance with the Stark Amendment to ensure that CMS pays FFP for Medicaid claims that violate the Stark Amendment would be a violation of the False Claims Act the same as certifying compliance for full reimbursement under Medicare would be. DOJ did not intervene in the case, but filed a Statement of Interest in favor of the plaintiff s argument on FCA liability from submission of Medicaid claims 33

34 U.S. ex rel Schubert v. All Children s Health System Defendants denied Motion to Dismiss also argued that plaintiff did not allege compensation in excess of FMV with the requisite particularity Court rejected the argument: Relator endeavored to create a fair market value benchmark by drawing from the median of three nationwide salary surveys and creating a competitive salary range. She then uses that information to allege a fair market value benchmark for all subspecialists identified in the complaint, and alleges that the salaries in the complaint exceed that benchmark. Assuming these allegations to be true, as required at this stage, they are sufficiently particular to satisfy Rule 9(b) Trial date set to address FMV claims and remaining claims regarding volumebased bonuses and other compensation Case settled for $7 million in April 2013, before trial Lessons: Stark/FCA liability can arise from Medicaid claims The level of particularity (and scientific rigor) needed to support a complaint alleging above FMV compensation is not substantial 34

35 U.S. ex rel. Hector Luque et al. v. Adventist Health et al Focused on compensation practices of affiliates of a teaching hospital in Los Angeles (White Memorial Medical Center) Qui tam suit filed by two physicians Claims made under both the Federal FCA and California FCA Foundation of Allegations: Below FMV transfers of medical and non-medical supplies and inventory Above FMV compensation for teaching services that the physicians provided for the family medicine residency program Government intervened, $14.1 million settlement and 5 year CIA $11.5 million to Medicare $2.6 million to California Department of Healthcare Services Lessons: Below FMV compensation for items to physicians is problematic, as well as above FMV compensation for services; physicians can be sour grapes relators; state FCAs can magnify financial exposure when Medicaid claims are involved 35

36 U.S. ex rel. DePace v. The Cooper Health System Qui tam case filed by a physician Claims made under the Federal FCA and NJ FCA, based on alleged violations of both Federal and state anti-kickback and self-referral laws Foundation of Allegations: From 2004 to 2010, community physicians were paid approximately $18,000 per year to serve on the Cooper Heart Institute Advisory Board (CHIAB) The physicians only duties were to attend four meetings per year Payments exceeded FMV for legitimate services At least one purpose of the payments was to induce referrals to Cooper, and payments did, in fact, induce referrals to Cooper Government intervened, $12.6 million settlement, CIA $10.2 million to Medicare $2.3 million to state of NJ Lessons: even a small amount of annual physician compensation can create substantial financial exposure if it is not FMV for legitimate services 36

37 Where Are We Today? Top Ten Takeaways

38 Adria s and Andrea s Top Ten Lessons 1. It s (all?) about the money! High dollar values are a flame to the relator moth. High compensation draws attention, scrutiny, jealousy Whether compensation is excessive, above FMV or not FMV are questions of fact that are likely to survive motions for dismissal and summary judgment FMV is a jury/expert question 12(b) standard does not require substantial particularit Perhaps for these reasons, excessive or otherwise non-fmv compensation is a primary allegation in most recent qui tam cases involving physician compensation, even when issues include or are ultimately decided on other factors such as commercial reasonableness, or payment based on volume or value of referrals. 38

39 Adria s and Andrea s Top Ten Lessons 2. Ministering to the Poor Does Not Absolve Paying Too Rich. No exception to Medicare Fraud and Abuse Laws for safety net providers Halifax Medicare fraud and abuse laws may be applied to Medicaid claims All Childrens The physician down the street and grass is greener approaches to FMV are not always reasonable or supported by data Data does not always support common perceptions Data trumps common perceptions 39

40 Adria s and Andrea s Top Ten Lessons 3. A few dollars of good FMV analysis early could save millions of dollars later. Stakes are higher than ever before Halifax Tuomey Bradford Compare Covenant v. Cooper Hindsight is generally not 20/20 Parties are at a disadvantage if they do not have a record of the facts and circumstances that reasonably influence FMV Obtaining/ reviewing a valuation report may force parties to examine facts and circumstances and creates a record of them FMV is a question of fact that is generally based on expert opinion A good FMV analysis from an expert analyst could defeat a relator claim before it reaches a courtroom (or even gets on paper), but 40

41 Adria s and Andrea s Top Ten Lessons 4. Opinions are like... (You know the expression ) Bradford define independence Tuomey - clash of the experts Halifax - where s the beef? In the healthcare world: Not all valuation experts are created equal No payment for volume or value of referrals Potential conflict with common valuation approaches 41

42 Adria s and Andrea s Top Ten Lessons 5. The Devil is in the Detail... Arrangements that are FMV may not be commercially reasonable (and vice versa) A + B + C = FMV? Inherently suspect: Payment for goodwill, non-competes, records Incentive payments Trade-off of compensation/price Stacking 6. But the big picture matters, too 42

43 Adria s and Andrea s Top Ten Lessons 7. If at first you don t succeed... Sometimes it s best not to try again Opinion shopping Cherry picking Red flags Counsel in Tuomey: I share your concerns and have already tried to steer [regulatory advisor] towards your desired outcome Different from examining work product and communicating facts to ensure addressed 43

44 Adria s and Andrea s Top Ten Lessons 8. Don t assume we have a can opener. Joke from introduction to economics textbook: Paraphrase of one variation of this joke: A chemist, physicist and economist are stuck on a desert island with a can of beans and no other supplies. They want to open the can to eat its contents. The chemist goes to work with oils in plant leaves to try to break the seal on the can. The physicist goes to work to build a natural catapult to hurl the can against a tree with enough force to break it open and capture its contents on an edible leaf. The economist sits on a log and says, Let s assume we have a can opener. Inaccurate, unreasonable or inappropriate assumptions can make good FMV analysis go bad in the event of a qui tam suit or government investigation. Assumptions that don t fit the facts Assumptions that implicate regulatory prohibitions Assumptions that ignore the elephant in the room. Challenge for clients and counsel: critically review valuation reports to ensure assumptions are appropriate, without undermining the critical valuator independence 44

45 Adria s and Andrea s Top Ten Lessons 9. Memories Fade, But Documents Can Last Forever. We did not coin this phrase, but we have adopted it because it illustrates our point. Good FMV analysis can be defeated by bad facts. AKS one-purpose test In recent Stark cases, bad facts influenced outcome Documents can be evidence of facts. Be aware of protections and limits on attorney-client privilege and attorney work product doctrine Be aware of smoking gun documents Be aware of exonerating documents 45

46 Adria s and Andrea s Top Ten Lessons 10. Stark is a strict liability statute; Intent does not matter (except when there are bad facts) Bad facts = bad outcome Bad facts may be: Setting policy or obtaining advice and not following it Explicitly or implicitly expressing intent to pay for referrals ( s, public statements, opinion shopping) Unreasonable reliance on advice or opinions that don t fit the facts or the regulatory constraints Role for counsel (inside or outside) for managing a transaction Attorney-client privilege Neutral parties managing information flow 46

47 Questions?

48 Is It All About the Money? 10 Lessons on Fair Market Value From Halifax and Other Recent Cases Andrea Ferrari, JD, MPH Manager (561) Adria Warren, Esq. Partner (617)