Building a Strategic Plan for Physician Employment and Practice Acquisition

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1 Building Practice Acquisition and Physician Employment Strategies that Will Last the Test of Time In a Changing Regulatory Environment David Lewis Vice President/Associate General Counsel LifePoint Hospitals Brentwood, TN david.lewis@lpnt.net Introduction The shift to physician employment by hospitals that was seen in the early 1990s has returned in full force. Some of the major factors influencing this trend are as follows: Rising health care costs Competition for physician services, both primary care physicians and specialists Increased demand for and perceived shortage of primary care physicians as a result of the implementation of the Accountable Care Act Physician desire to manage workload and maintain predictable level of compensation The cost of new medical technology and electronic medical record systems and difficulties with access to capital Difficulty of managing private practices Incentives for hospitals to coordinate care and payment with physicians; and Reductions in reimbursement by government and private payors. In addition, other integration models such as physician recruitment agreements, physicianhospital organizations, and independent practice associations have not been effective in achieving the desired level of integration. In addition, these models seem unprepared for the focus on quality, accountable care and value-based purchasing. This paper will discuss how hospitals and physicians can effectively develop alignment strategies that will meet the numerous regulatory challenges. Building a Strategic Plan for Physician Employment and Practice Acquisition Hospitals that are most successful in building networks of employed physicians do so by developing a strategic plan that includes specific goals for development, rather than merely responding to the physician or physician group that has decided to give up independent practice. In developing a strategic plan, the hospital should inventory the physician market and identify needed specialties and services in the community served by the hospital. The plan should also set forth priorities for specific projects. Care should be taken to identify strategies that the hospital is capable of executing. A Medical Staff Development Plan can assist the hospital in its strategic planning process.

2 Assembling the Project Team and Assigning Roles and Responsibilities The hospital s project team (the Team ) will typically involve representatives of administration, finance, development and the chief medical officer. The physician leaders and practice administrators of the practices being evaluated for potential acquisition will meet with the Project Team on a regular basis to identify if a future transaction furthers the strategic goals of both parties. The parties will execute a Non-Disclosure Agreement to facilitate the exchange of information necessary to evaluate the transaction. Each party to the transaction should select experienced health care counsel to negotiate a letter of intent. The letter of intent should establish the relationships that are to be negotiated and the anticipated timeframe for completion. A sample letter of Intent is attached hereto as Exhibit A. In addition to acquisition of fixed assets and employment of the physician(s) and the other employees of the practice, the transaction may contemplate a real estate transaction and post-acquisition relationships such as medical director or co-management agreements. These relationships should be well understood by both parties to the transaction and the attorneys and consultants involved in providing advice to the parties about the transaction. Once the basic structure of the transaction is established, the hospital must effectively communicate to the physicians the regulatory requirements that must be met, particularly the requirement of fair market value. The parties will have different perspectives on what constitutes fair market value and how the practice should be valued. Given the risks of regulatory scrutiny and potential litigation, it is advised that the valuation consultant that the hospital intends to rely upon be engaged by the hospital s legal counsel. Legal Requirements and Obstacles Applicable to Practice Acquisitions and Physician Employment Relationships Physician practice acquisitions and employment of physicians pose numerous regulatory compliance issues. These relationships must be evaluated under the Federal Anti-Kickback Statute, the Stark Law and state law issues such as self-referral laws and prohibitions on the corporate practice of medicine may also have to be addressed. The Anti-Kickback Statute. The Anti-Kickback Statute prohibits the payment of remuneration in exchange for referral of items or services covered by federal health programs, including the Medicare or Medicaid programs. It is an extremely broad statute, violation of which can result in fines, imprisonment and exclusion from federal health programs. Under the statute, compensation for a referral applies to almost anything of value. 2

3 Violations of the Anti-Kickback Statute may also subject the violator to civil monetary penalties and/or False Claims Act liability. The statute contains some statutory exemptions and safe harbors have been promulgated for certain common business arrangements and compliance with the safe harbor requirements eliminates the risk of investigation and prosecution under the Anti- Kickback Statute. Business arrangements that do not fit into a safe harbor are not necessarily illegal but must be evaluated on a case by case basis. The Anti-Kickback Statute is an intent-based statute, but courts have interpreted the intent requirement very broadly. Several courts have held that if one purpose of the financial relationship between the hospital and the physician is to induce referrals, the statute has been violated, notwithstanding the existence of other legitimate bases for the relationship. The Patient Protection and Affordable Care Act (the ACA ) changed the intent requirement standard of proof by providing that a person need not have actual knowledge of the statute or specific intent to commit an Anti-Kickback Statute violation in order for a violation to be proven. This change effectively eliminates the good faith defense and prior protective rulings of some courts. As it relates to physician practice acquisitions and physician employment, the following safe harbors may have potential application: (a) Employees - Remuneration does not include any amount paid by an employer to an employee, who has a bona fide employment relationship with the employer. There is no explicit fair market value requirement for this safe harbor. (b) Personal Services and Management Contracts - This safe harbor is met when the aggregate compensation is set in advance, is consistent with fair market value in arms-length transactions and not in a manner that takes into account the volume or value of referrals or business otherwise generated for which payment may be made under federal health programs. (c) Sale of Practice - Remuneration does not include any payment made to a practitioner by a hospital or other entity where the practitioner is selling his or her practice to the hospital or other entity, so long as the practitioner who is selling will not be in a position after completion of the sale to make or influence referrals to or otherwise generate business for the purchasing hospital or other entity for which payment may be made under federal health programs. 3

4 The Stark Law. The Stark Law prohibits a physician from referring Medicare/Medicaid patients to an entity for designated health services ( DHS ) if the physician has a financial relationship with the entity and the DHS entity cannot bill for the DHS services unless an exception applies. DHS includes inpatient and outpatient hospital services as well as most ancillary services. Financial relationships can be in the form of ownership interests or compensation arrangements. Unlike the Anti-Kickback Statute, the Stark Law is a strict liability statute and proof of intent is not required to establish that a violation has occurred. Compliance with all requirements for an exception is mandatory. While many Stark exceptions bear similarity to the Anti-Kickback safe harbors, most Stark Law exceptions applicable to practice acquisitions and physician employment have fair market value and commercial reasonableness requirements, including the bona-fie employment exception, the personal services arrangement exception and the fair market value exception. What is Commercial Reasonableness? Although there is statutory guidance, the enforcement agencies have indicated that it is an arrangement that would make commercial sense if entered into by a reasonable entity of similar type and size and a reasonable physician (or family member or group practice) of similar scope and specialty, even if there were no potential DHS referrals. (69 Fed. Reg ) Any reasonable valuation method is acceptable Determination should be based upon the specific business in which the parties are involved (66 Fed. Reg. 919) CMS would have serious question as to commercial reasonableness if paying referring party more than it would pay non-referring party or taking an action (leasing equipment versus purchasing) absent good business justification. (73 Fed. Reg ) Current Enforcement Climate Over the past few years, there has been increasing scrutiny of physician-hospital transactions, even physician practice acquisition and physician employment, which were once considered safer transactions due to the safe harbor for bona fide employment and the Stark exception for bona fide employment. However, recent enforcement indicates an increased focus on the fair market value and commercial reasonableness analysis conducted in such arrangements. The government will look behind the transaction documents and look to the intent of the parties in entering into the transaction and strictly applying commercial reasonableness requirements. 4

5 U.S. ex rel. Singh v. Bradford, 752 F. Supp. 2d 602 (W.D. PA, 2010). Relators argued that arrangement between hospital and referring physicians for the sublease of a nuclear camera violated Stark Law, Anti-Kickback Statute and False Claims Act. The government did not intervene. The district court concluded that the sublease was inflated to compensate the defendant physicians for their ability to generate referrals and accordingly did not reflect fair market value, even though it provided for fixed payments. The accounting firm which prepared the FMV analysis compared the revenues the hospital expected to generate with the lease in place with the revenues expected without the lease in place. The projections were therefore based on the expectation that the physicians would refer diagnostic business to the hospital. Tuomey Hospital, (4 th Cir. 2012). A physician brought a qui tam action alleging that the compensation Tuomey paid under part-time employment agreements with 19 specialists exceed FMV, was not commercially reasonable and took into account the volume of value of referrals. Jury found Tuomey violated Stark, but not the False Claims Act. The district court set aside the False Claims Act verdict and ordered a new trial. The Fourth Circuit concluded that Tuomey s rights to a jury trial had been violated and ordered a new trial. The compensation methodology contained three components: base salary adjusted based on net collections for outpatient procedures; production bonus of 80 % of net collections and incentive bonus of up to 7 % of production bonus. In essence, the compensation was designed to pay 131% of professional collections. The agreements also provided for full-time employee benefits, and contained a ten year term with a two year post-termination covenant not to compete. The Fourth Circuit addressed Stark issues likely to recur on retrial. It held that the facility component of the services performed by the physicians for which Tuomey billed a facility fee constituted a referral within the meaning of Stark. Halifax Medical Center. Halifax is a qui tam action brought by the Director of Physician Services of a Halifax affiliate that employs physicians. The government intervened with respect to allegations Halifax violated the Stark Law, the Anti-Kickback Statute and the False Claims Act. The government alleged that contracts with three neurosurgeons and six medical oncologists were improper because they paid more than fair market value, were not commercially reasonable or took into account the volume or value of physician referrals for DHS. Oncology bonus pool included an amount based on operating margin of hospital s oncology program and the overall bonus was over twice the amount of their base salary. The neurosurgeons were paid 100 % of their collections, additional compensation for call coverage and trauma care, bonus compensation based in part on professional services of physician extenders and total bonus compensation ranged from 2-6 times base salary. Government s 5

6 position was the productivity compensation took into account the volume or value of referrals and a bonus for services performed by others does not constitute bona fide employment with a bonus for personally performed services. All physicians were paid in excess of 90 th percentile and in excess of collections. Taken together, Tuomey and Halifax point toward an emerging enforcement trend that hospitals which go into physician transactions expecting to lose significant money will be challenged on commercial reasonableness grounds. It seems clear that if a hospital enters an employment arrangement with a physician expecting to lose money, the hospital must be prepared to defend the commercial reasonableness of the arrangement because the government may ask why. 6