Physician Compensation Agreements · Compensation Arrangements Role for the Valuation Concluding...

1©HEALTH CAPITAL CONSULTANTS

FairMarketValueandCommercialReasonableness:

PhysicianCompensationAgreements

WebinarBy:RobertJamesCimasi,MHA,ASA,FRICS,MCBA,AVA,CM&AA

PresidentHEALTH CAPITAL CONSULTANTS

June5,2012

ABOUTTHEPRESENTERRobert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, is Presidentof Health Capital Consultants, (HCC), a nationally recognized healthcarefinancial and economic consulting firm headquartered in St. Louis, MO. Mr.Cimasi has over twenty five years experience in serving clients, with aprofessional focus on the financial and economic aspects of healthcareservice sector entities including: valuation consulting; and capital formationservices; healthcare industry transactions including joint ventures, mergers,acquisitions, and divestitures; litigation support & expert testimony; and,certificate‐of‐need and other regulatory and policy planning consulting.

Mr. Cimasi holds a Masters in Health Administration from the University ofMaryland, has served as an expert witness on cases in numerous courts, andhas provided testimony before federal and state legislative committees. He isa nationally known speaker on healthcare industry topics, the author ofseveral books, including his latest, “The Adviser’s Guide to Healthcare” [2010– AICPA], numerous chapters, published articles, research papers and casestudies, and is often quoted by healthcare industry press. In 2006, Mr. Cimasiwas honored with the prestigious “Shannon Pratt Award in BusinessValuation” conferred by the Institute of Business Appraisers. In 2011, he wasnamed a Fellow of the Royal Institution of Chartered Surveyors (RICS) andserves on the Editorial Board of the RICS Modus Americas Journal.

INTRODUCTION

Introduction FairMarketValue(FMV)

CommercialReasonableness

EstablishingFMV&CR

OverviewofCompensationArrangements

RolefortheValuation

ConcludingRemarks

GrowthofPhysicianEmploymentbyHospitals

• Hospitalsfocusedonrecruitingprimarycarephysiciansduringthe1990s

• However,recentattentionhasturnedtospecialtypractitioners,resultinginagrowingnumberofspecialistsbeingemployedbyhospitals

• Hospitalsarealsoemployingphysiciansformedicaldirectorship,management,administrative,on‐callandexecutivepositions

• Physicianproviderscontinuetofacereimbursementdecreasesforprofessionalservicesaswellasgrowinglegislativeeffortstorestrictphysicianownershipinancillaryservicesandtechnicalcomponent(ASTC)revenuestreams

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

CompensationforHospital‐EmployedPhysicians

• Arrangementsmust:i. BeforBonaFideemploymentii. HavecompensationthatisFairMarketValue(FMV)andnot

relatedtoreferralsiii. BeCommerciallyReasonabletoavoidlegalimpermissibilityunder

theStark andAnti‐Kickback statutes

• ArrangementswhereeitherthresholdisnotmetcanalsobefoundlegallyimpermissibleundertheFederalFalseClaimsAct(FCA)• ProvidercannotknowinglysubmitaclaimforreimbursementtoagovernmententityforservicesundercompensationarrangementswhicharedeemedtobeStarkandAnti‐Kickbackviolations

• AsuitfiledundertheFCAisknownasa“whistleblowersuit”ora“quitamaction”

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

IncreasingScrutinyofPhysicianandExecutiveCompensation

• RebuttablePresumption:Ifallthreepartsaremet,executivecompensationispresumedtobeatFMV

• Compensationapprovedbyauthorizedbodywhosemembershavenoconflictsofinterest

• Compensationhasbeenbasedonreliablesetofdata

• AuthorizingBodydocumentedbasisforpay‐setting

• February2009:IRSReportonnot‐for‐profitexecutivecompensation

• Results:Compensationhighbut85%ofhospitalsfollowedRebuttablePresumption process(pay‐settingpracticesaredefensibleunderInternalRevenueCode)

“ExemptOrganizationsHospitalComplianceProjectFinalReport,”InternalRevenueService,February13,2009,www.irs.gov.

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

• February2009:IRSReportonnot‐for‐profitexecutivecompensation

• Reportquestionsthevalidityofcomparabledataused

• VariationsinreportingandhighexecutivepayrateshavepromptedquestionsregardingtheuseofcomparablesaswellastheefficacyoftheRebuttablePresumptionprocessatsettingcompensationatFMV

• Significantvariationsinhowhospitalsaccountedforbaddebt;communitybenefit;and,uncompensatedcare

• Reportmakesnopolicyrecommendations,butitmaybeusedasabasisforexecutivecompensationreform(e.g.,executivepaycamps,similartotheonesrecentlycreatedforthefinancialsector)

“ExemptOrganizationsHospitalComplianceProjectFinalReport,”InternalRevenueService,February13,2009,www.irs.gov.

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

• May2009:FraudEnforcementandRecoveryAct(FERA)

• Broadensdefinitionof“knowingly”usedintheFalseClaimsAct(FCA)

1. “Hasactualknowledgeoftheinformation;2. Actsindeliberateignoranceofthetruthorfalsityoftheinformation;or,

3. Actsinrecklessdisregardofthetruthorfalsityoftheinformation.”

• Reducesgovernment’sburdenofproof,nolongerrequiredtoprovide“proofofspecificintenttodefraud.”

• FERAwillfacilitateeasierprosecutionforviolationsoftheFCA

“PublicationofOIG’sGuidelinesforEvaluatingStateFalseClaimsActs,”71Fed.Reg.48553(Aug.21,2006).

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

• 2009– $2.5billionwasrecoveredandreturnedtotheMedicareTrustFund

• 2009– DOJandHHScreateHealthCareFraudPreventionandEnforcementActionTeam(HEAT)

• Launchedover1,000investigations• Leadingto800indictments• Resultingin600convictions

• 2010 – Federalgovernmentestimatedtohavespent$1.7billion fightingfraudandabuse

• 2011– Fundingallocatedthroughhealthcarereformtofinancethecostoffraudandabuseinvestigationsbecomesavailableat$100millionannually

“HeatTaskForceOfficialWebsite,”stopmedicarefraud.gov,(accessed9/23/10).“Sebelius,Holder:NewHealthyReformLawWillHelpPreventMedicalFraud,”ByAndrewVillegas,KaiserHealthNews,May13,2010,http://www.kaiserhealthnews.org/Stories/2010/May/13/health‐fraud‐shorttake.aspx,(accessed9/23/2010).

FAIRMARKET VALUE (FMV)

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

DefinitionofFairMarketValue(FMV)StarkLaw

• “Thevalueinarm’s‐lengthtransactions,consistentwiththeGeneralMarketValue”

• GeneralMarketValue:“Thepricethatanassetwouldbring,astheresultofbonafide bargainingbetweenwell‐informedbuyersandsellerswhoarenototherwiseinapositiontogeneratebusinessfortheotherparty,orthecompensationthatwouldbeincludedinaserviceagreement,astheresultofbonafidebargainingbetweenwell‐informedpartiestotheagreementwhoarenototherwiseinapositiontogeneratebusinessfortheotherparty,onthedateofacquisitionoftheassetoratthetimeoftheserviceagreement.Usually,thefairmarketpriceisthepriceatwhichbonafidesaleshavebeenconsummatedforassetsofliketype,quality,andquantityinaparticularmarketatthetimeofacquisition,orthecompensationthathasbeenincludedinbonafideserviceagreementswithcomparabletermsatthetimeoftheagreement,wherethepriceorcompensationhasnotbeendeterminedinanymannerthattakesintoaccountthevolumeorvalueofanticipatedoractualreferrals.”

“StarkLaw:Definitions,”42C.F.R§ 411.351(2009).

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

DefinitionofFairMarketValue(FMV)CentersforMedicare&MedicaidServices(CMS)• CMS(f/k/aHealthCareFinancingAdministration)madethefollowingstatementsregardingwhenapaymentforservicesprovidedisatFMV:

• “[W]e believe the relevant comparison is aggregate compensation paid tophysicians practicing in similar academic settings located in similarenvironments. Relevant factors include geographic location, size of theacademic institutions, scope of clinical and academic programsoffered, and the nature of the local health care marketplace.”

• “. . . [We] intend to accept any method [for establishing FMV] that iscommercially reasonable and provides us with evidence that thecompensation is comparable to what is ordinarily paid for an item orservice in the location at issue, by parties in arm's‐lengthtransactions who are not in a position to refer to one another . . . Theamount of documentation that will be sufficient to confirm [FMV] . . . willvary depending on the circumstances in any given case; that is, there is norule of thumb that will suffice for all situations.” [emphasis added]

“StarkII,PhaseI,”66Fed.Reg.916,944(Jan.4,2001).

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

DefinitionofFairMarketValue(FMV)CentersforMedicare&MedicaidServices(CMS)

• InStarkII,PhaseIII,CMSprovidedthefollowingguidanceforvaluingadministrativepositions:

• “A fair market value [FMV] hourly rate may be used tocompensate physicians for both administrative and clinical work,provided that the rate paid for clinical work is [FMV] for theclinical work performed and the rate paid for administrativework is fair market value for the administrative work performed.We note that the fair market value of administrative services maydiffer from the fair market value of clinical services.”

“StarkII,PhaseIII,”72Fed.Reg.51016(Sept.5,2007).

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

DefinitionofFairMarketValue(FMV)CaseLaw

• FMVisdefinedas“thepriceawillingbuyerwouldpayawillingseller...whenneitherisundercompulsiontobuyorsell.”

• ProvidingadiscountisnotevidencethatanagreementisbelowFMVifthereisnocomparisonbetweentheoriginalordiscountedratesandfairmarketvalue.Inaddition,theMedicarerateisnotnecessarilyequivalenttofairmarketvalue.

• AnIllinoisdistrictcourtnotedthatFMVmaydifferfromtraditionaleconomicvaluationformulas,whichtakeintoaccountreferrals.BecausetheAnti‐KickbackStatuteprohibitsanyinducementforthosereferrals,theymustbeexcludedfromanycalculationofFMV.

• ProvingthatanarrangementisfairmarketvalueisimperativeincomplyingwithrequirementsoftheStarkLaw.“Paymentexceedingfairmarketvalueisineffectdeemedpaymentforreferrals.”

Klaczak v.ConsolidatedMedicalTransport,458F.Supp.2d622(N.D.Ill.2006);U.S.exrel.Obert‐Hongv.AdvocateHealthCare,211F.Supp.2d1045(N.D.Ill.2002).AmericanLithotripsySocietyv.Thompson,215F.Supp.2d23(D.D.C.2002).

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

DefinitionofFairMarketValue(FMV)InternalRevenueService(IRS)

• 501(c)(3)enterprisesmustavoid“excessbenefit”transactions

• Equatesreasonablecompensationtothevalueofservicesprovided

• “[A]mount that would ordinarily be paid for like services by theenterprises (whether taxable or tax‐exempt) under likecircumstances”

• Valuationstandard(ascitedbyIRSRegulation)isFairMarketValue

• “[P]riceatwhichpropertyortherighttousepropertywouldchangehandsbetweenawillingbuyerandawillingseller,neitherbeingunderanycompulsiontobuy,sell,ortransferpropertyortherighttouseproperty,andbothhavingreasonableknowledgeofrelevantfacts”

“ExcessBenefitTransaction,”26C.F.R§ 53.4958‐4(2002).

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

StarkLawImplications• FMV isacriticalrequirementforcomplianceundertheStarkLaw

• StarkLawprohibitsaphysicianfrommakingreferralsfor“designatedhealthservices” thatmaybepaidforbyMedicareorMedicaidtoanentitywithwhichthephysicianhasafinancialrelationship,andprohibitstheentityfrombilling

• Designatedhealthservicesareclinicallaboratoryservices;physicaltherapyservices;occupationaltherapyservices;radiologyservices;radiationtherapyservicesandsupplies;durablemedicalequipmentandsupplies;parenteralandenteralnutrients,equipmentandsupplies;prosthetics,orthoticsandprostheticdevicesandsupplies;homehealthservices;outpatientprescriptiondrugs;andinpatientandoutpatienthospitalservices.

• Financialrelationshipscanbedirectorindirectownershipordirectorindirectcompensation

• NeedtofindanapplicableStarkLawException

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

RequirementsforException “Bona fideemploymentrelationship”

“Personalserviceagreements”

Theemploymentisforidentifiableservices(provided byphysiciantoentity) ⨯ ⨯Amountofremunerationunder theemploymentisconsistentwithFMVoftheservices ⨯ ⨯1

Amountofremuneration undertheemploymentisnotdeterminedinamannerthataccountsfor(directlyorindirectly)thevolumeorvalueofanyreferralsbythereferringphysician

⨯ ⨯Remuneration isprovidedunderanagreementthatwouldbecommerciallyreasonableevenifnoreferralsweremadetotheemployer ⨯Arrangement(whichmustbeatleast12months)specifies,inwriting,servicedcoveredandissignedbyboth parties ⨯Aggregateservices“mustnot exceedthosethatarereasonableandnecessaryforthelegitimatebusinesspurposesofthearrangement” ⨯Services providedmustnotinvolvepromotionofbusinessarrangementthatisaviolationofstateorfederallaw ⨯

StarkLawImplicationsStarkLawExceptions

ExemptedfromStarkLawundertheexceptionfor“bonafideemploymentrelationships”and“personalservicesagreements.”Usedinmedicaldirector,executive,on‐callandotherphysicianservicesarrangements.

Note:1. Compensationmustalsobesetinadvance

“HealthCareFraudandAbuse:PracticalPerspectives,”EditedByLindaA.Baumann,TheAmericanBarAssociation&TheBureauofNationalAffairs,Inc.,Washington,D.C.,(2002),pp.280;“Exceptiontothereferralprohibitionrelatedtocompensationarrangements,”42CFR411.357(Oct.12004).

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

StarkLawImplicationsStarkLawExceptions

• OtherexceptionsthatuseFMV

• MedicalOfficeLease

• EquipmentLease

• IndirectCompensation

• IsolatedTransaction

• FairMarketValueCompensation

• AcademicMedicalCenters

“Exceptionstothereferralprohibitionrelatedtocompensationarrangements,”42CFR411.357(Oct.12004).

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

StarkLawImplications

IndependentContractorsvs.GroupPracticePhysicians

• PrecedingdiscussionaboutFMV isrelatedtocompensationpaidtophysicianswhoareeitheremployedorperformingservicesonanindependentcontractorbasis,not compensationpaidordistributedtophysicianmembersofa“grouppractice”asdefinedwithinStarkLaw

• Compensationpaidwithinthe“grouppractice”settinghasfewerregulatoryrestrictions

GroupPractice,”42CFR411.352(Jan.4,2001).“StarkII,PhaseII,”69Fed.Reg.16067(March26,2004).

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

A B C D E F

1 TermsofExceptionGroupPracticePhysicians

[1877(h)(4);411.352]

BonaFideEmployment[1877(e)(2);411.357(c)]

PersonalServiceArrangements

[1877(e)(3);411.357(d)]

FairMarketValue[411.347(1)]

AcademicMedicalCenters

[411.355(e)]

2MustcompensationbeFairMarket

Value?No Yes‐ 1877(e)(2)(B)(i) Yes‐ 1877(e)(3)(A)(v) Yes‐ 411.357(1)(3) Yes‐ 411.355

(e)(1)(ii)

3 Mustcompensationbe"setinadvance"? No No Yes‐ 1877(e)(3)(A)(v) Yes‐ 411.357(1)(3) Yes‐ 411.355

(e)(1)(ii)

4 Scopeof"Volumeofvalue"restriction

DHSreferrals‐1877(h)(4)(A)(iv)

DHSreferrals1877(e)(2)(B)(ii)

DHSreferralsorotherbusiness‐ 1877(e)(3)(A)(v)

DHSReferralsorotherbusiness‐411.357(1)(3)

DHSreferralsorotherbusiness‐

411.355(e)(1)(ii)

5Scopeof

productivitybonusesallowed

Personallyperformedservicesand"incidentto,"plusindirect‐1877(h)(4)(B)(i)

PersonallyPerformedservices‐ 1877(e)(2)

Personallyperformedservices‐ 411.351("referral")and411.354(d)(3)

Personallyperformedservices‐ 411.351("referral")and411.351(d)(3)

6 Overallprofitsharesallowed Yes‐ 1877(h)(4)(B)(i) No No No No

7 Writtenagreementrequired No No Yes,minimum1yearterm

Yes(Exceptforemployment),nominimumterm

Yes,writtenagreement(s)orother

document(s)

PhysicianIncentivePlan(PIP)exceptionforservicestoplan

enrollees?

No,butrisk‐sharingarrangementexceptionat411.357(n)may

No,butrisk‐sharingarrangementexceptionat411.357(n)mayapply

Yes,andrisk‐sharingarrangementexceptionat411.357mayalsoapply

No,butrisk‐sharingarrangementexceptionat

411.357(n)mayapply

No,butrisk‐sharingarrangementexceptionat

411.357(n)mayapply

StarkLawImplicationsCompensationPaidUnderExceptionstotheStarkLaw

“StarkII,Phase,II,”69Fed.Reg.16067‐68(Mar.26

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

Anti‐KickbackStatuteImplications• FMV isacriticalrequirementforcomplianceunderAnti‐KickbackStatute

• Anti‐Kickbackprohibits“knowinglyandwillfully”receivingpayments(directorindirect,cashorinkind)inreturnfor

a) “referringanindividualtoapersonforthefurnishingorarrangingforthefurnishingofanyitemorserviceforwhichpaymentmaybemadeinwholeorinpartunderaFederalhealthcareprogram,”or

b) “purchasing,leasing,orderingorarrangingfororrecommendingpurchasing,leasing,orderinganygood,facility,orservice,oritemforwhichpaymentmaybemadeinwholeorinpartunderaFederalhealthcareprogram”

“Anti‐KickbackStatute,”42USC§ 1320a‐7b(2008).

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

Anti‐KickbackStatuteImplications

ExceptionstoAnti‐KickbackStatute

• SafeHarborswhichprotectagivenarrangementfromAnti‐Kickback scrutiny,butnoperseAnti‐Kickbackviolationforarrangementsfallingoutsideasafeharbor.

• OIGAdvisoryOpinionsassumeFMV

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

Anti‐KickbackStatuteImplicationsAnti‐KickbackExceptions

EmploymentExceptions

• InadditiontotheAnti‐Kickbacksafeharbor,thereisanexception foranyamountpaidbyanemployer(whohasabonafideemploymentrelationshipwithsuchemployee)foremploymentintheprovisionofcovereditemsorservices

• TheIRSdefinitionof“employee” isutilizedbyboththeAnti‐KickbackStatute andStarkLawforpurposeofdetermining“employee”status

• TheIRSusesan11‐factortestfor“employee”statusbrokenintothreegeneralcategories:(1)behavioralcontrol,(2)financialcontrol,and(3)typeofrelationshipbetweentheparties

• Thesefactorsaretakentogetherasevidenceofabonafideemploymentrelationship;notallfactorsarenecessarytosatisfythetestandnosinglefactorisdispositive

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

Anti‐KickbackStatuteImplicationsIRSDeterminatesof“Employee”Status

BehavioralControl

1 Instructionsthatthebusinessgivestotheworker

2 Trainingthatthebusinessgivestotheworker

FinancialControl

1 Theextenttowhichtheworkerhasunreimbursedbusinessexpenses

2 Theextentoftheworker'sinvestment

3 Theextenttowhichtheworkermakeshisorherservicesavailabletotherelevantmarket

4 Howthebusinesspaystheworker

5 Theextenttowhichtheworkercanrealizeaprofitorloss

TypeofRelationship

1 Writtencontractsdescribingtherelationshipthepartiesintendedtocreate

2 Whetherornotthebusinessprovidestheworkerwithemployee‐typebenefits,suchasinsurance,apensionplan,vacationpay,orsickpay

3 Thepermanencyoftherelationship

4 Theextenttowhichservicesperformedbytheworkerareakeyaspectoftheregularbusinessofthecompany

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

Anti‐KickbackStatuteImplicationsAnti‐KickbackSafeHarbors

• Twosafeharborsapplytocompensationforphysicianclinical,on‐call,andexecutiveservices:

(1)“Employment”SafeHarbor

• PaymentscanbemadefromemployertoemployeeunderabonafideemploymentrelationshipforthefurnishingofanyitemorserviceforwhichpaymentmaybemadeunderMedicareorMedicaid

• NoFMVrequirement

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

Anti‐KickbackStatuteImplicationsAnti‐KickbackSafeHarbors

• Twosafeharborsapplytocompensationforphysicianclinical,on‐call,andexecutiveservices:

(2)“PersonalServiceandManagementContacts”SafeHarbor• Allowsforcompensationtobepaidtophysiciansandexecutivesthatareactingasindependentcontractors,providedthattheseconditionsaremet:

• Writtenagreementsignedbybothparties;• Termofatleastoneyear;• Agreementmustspecifyaggregatepaymentamountsandsuchpaymentamountsmustbesetinadvance;and,

• Compensationmustbereasonable,atFMV,anddeterminedthrougharm’slengthnegotiations

“Anti‐KickbackStatute,”42USC§1320a‐7b(2008).

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

Anti‐KickbackStatuteImplications

Anti‐KickbackSafeHarbors

• OtherSafeHarborsusingFMV:

• SpaceLease

• EquipmentLease

• PersonalServicesandManagementContracts

• AmbulanceReplenishing

• CantheopportunitytoearnaFMVreturnorpaymentviolatetheAnti‐KickbackStatute?

• ContractJointVentures

• ReadingPanels

COMMERCIAL REASONABLENESS (CR)

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

DefinitionofCommercialReasonableness

• DepartmentofHealthandHumanServices• Arrangement appears to be “a sensible prudent businessagreement from the perspective of the particular partiesinvolved, even in the absence of any potential referrals.”

• StarkII,PhaseII• “An arrangement will be considered ‘commercially reasonable’in the absence of referrals if the arrangement would makecommercial sense if entered into by a reasonable entity of similartype and size and a reasonable physician . . . of similar scope andspecialty, even if there were no potential DHS referrals.”

“StarkII,PhaseII,”69Fed.Reg.16093,16107(Mar.26,2004).

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

DeterminingCommercialReasonableness

QuestionstoConsider

• Isitnecessarytohaveaphysicianperformacertainservice?

• Isitnecessarytohaveaphysicianofthatspecialtyperformacertainservice?

Bothservices and payments mustbeconsideredcommerciallyreasonable forthe

arrangementtosurvivescrutiny

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

DeterminingCommercialReasonablenessIRS’sDeterminationofCommercialReasonableness

• FactorstheIRSconsiderswhendeterminingthecommercialreasonableness ofaphysiciancompensationarrangement

• Specializedtrainingandexperienceofthephysician

• Thenatureofdutiesperformedandtheamountofresponsibility

• Timespentperformingduties

• Sizeoftheorganization

• Thephysician’scontributiontoprofits

• Nationalandlocaleconomicconditions

“IntegratedDeliverySystemsandJointVentureDissolutionsUpdate,”ByCharlesF.Kaiser,etal,1995EOCPEText,InternalRevenueService,(1995).“PhysicianCompensationArrangements:Management&LegalTrends,”ByDanielK.Zismer,1999,p.204.

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

IRS’sDeterminationofCommercialReasonableness• FactorstheIRSconsiderswhendeterminingthecommercialreasonableness ofaphysiciancompensationarrangement

• Timeofyearwhencompensationisdetermined

• Whetherthecompensationisinpartorinwholepaymentforabusinessorassets

• Salaryrangesforequivalentphysiciansincomparableorganizations

• Independenceoftheboardorcommitteethatdeterminesphysiciancompensationarrangement

“IntegratedDeliverySystemsandJointVentureDissolutionsUpdate,”ByCharlesF.Kaiser,etal,1995EOCPEText,InternalRevenueService,(1995).“PhysicianCompensationArrangements:Management&LegalTrends,”ByDanielK.Zismer,1999,p.204.

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

DeterminingCommercialReasonablenessIRS’sDeterminationofExcessBenefitTransactionRule

• FactorstheIRSconsiderswhendeterminingifanincentivearrangementhasviolatedtheexcessbenefittransactionrule:

• Whetherthecompensationarrangementwasestablishedbyanindependentboardofdirectors

• Whethertheincentivearrangementresultsintotalphysiciancompensationwhichisreasonable

• Whethertherewasanarm’s‐lengthrelationshipbetweenthephysicianandthehospital

• Whetherthereisaceilingonthecompensationarrangementwhichindicatesthemaximumthephysicianmayearntoprotectagainstprojectionerrorsorwindfallbenefits

“IRSFY2000ExemptOrganizationContinuingProfessionalEducation,”InternalRevenueService,July1999,p.30Note:TheIRS websitedesignatesthatthismaterialwasdesignedspecificallyfortrainingpurposesonlyandshouldnotberelieduponasauthorityforsettingorsustainingatechnicalposition.

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

DeterminingCommercialReasonablenessIRS’sDeterminationofExcessBenefitTransactionRule:

• FactorstheIRSconsiderswhendeterminingifanincentivearrangementhasviolatedtheexcessbenefittransactionrule

• Whetherthecompensationarrangementmaypotentiallyreducethecharitableservicesthattheorganizationmayotherwiseprovide

• Whetherthecompensationarrangementtakesintoaccountthequalityofcareandpatientsatisfactiondata

• Whetherthearrangementaccomplishestheorganization’scharitablepurposesiftheamountthephysicianearnsunderthearrangementdependsonnetrevenues,whichalsodictatehowmuchtheorganizationchargesforitsservices

• Whetherthearrangementtransformstherelationshipbetweentheorganizationandthephysicianintoajointventure

“IRSFY2000ExemptOrganizationContinuingProfessionalEducation,”InternalRevenueService,July1999,p.30Note:TheIRS websiteindicatesthatthismaterialwasdesignedspecificallyfortrainingpurposesonlyandshouldnotberelieduponasauthorityforsettingorsustainingatechnicalposition.

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

DeterminingCommercialReasonablenessIRS’sDeterminationofExcessBenefitTransactionRule

• FactorstheIRSconsiderswhendeterminingifanincentivearrangementhasviolatedtheexcessbenefittransactionrule:

• Whetherthearrangementdistributesprofitstopersonswhoareincontroloftheorganization

• Whetherthearrangementservesarealdiscerniblebusinesspurposewhichisindependentofanypurposetooperatetheexemptorganizationfortheimpermissiblebenefitofthephysicians

• Whetherthearrangementincludescontrolstoavoidabuse,unwarrantedbenefitsandunnecessaryutilization

• Whetherthearrangementrewardsthephysicianforservicesheactuallyperforms,orbasedonperformanceinanareawhereheperformsnosignificantfunction

“IRSFY2000ExemptOrganizationContinuingProfessionalEducation,”InternalRevenueService,July1999,p.30Note:TheIRS websitedesignatesthatthismaterialwasdesignedspecificallyfortrainingpurposesonlyandshouldnotberelieduponasauthorityforsettingorsustainingatechnicalposition.

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

ViolationsofFMV&CR UnderStarkandAnti‐Kickback

• Increasingscrutinyofcompensationarrangements courtswillfocusonwhetherphysiciansareactuallyperformingtheservicesspecifiedinthearrangement

• Ifaphysicianisnot performingserviceswhicharerequiredwithinthescopeofthecompensationagreement,thearrangementwillnotmeetthethresholdofcommercialreasonableness

U.S.exrel.Robertsv.AgingCareHomeHealth,Inc.,474F.Supp.2d810,818(W.D.La.2007).U.S.v.Rogan,459F.Supp.2d692(N.D.Ill.2006).

ESTABLISHING FMV&CR

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

StarkLawStarkII,PhaseII:

• CMSwill“considerarangeofmethodsofdeterminingFMVandthattheappropriatemethodwilldependonthenatureofthetransaction,itslocation,andotherfactors.”

StarkII,PhaseIII

• Temporarycreationofvoluntarysafeharborforhourlypaymentstophysiciansfortheirpersonnelservices,butduetoinfeasibilityandimpracticality,theStarkII,PhaseII voluntary physicianhourlycompensationsafeharborwaseliminated inStarkII,PhaseIII

“StarkLaw:Definitions,”42C.F.R.411.351(2009).“StarkII,PhaseII,”69Fed.Reg.16092,16107(Mar.26,2004).“StarkII,PhaseIII,”72Fed.Reg.51015(Sept.5,2007).

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

U.S.vs.SCCIHospitalHouston(2004)

• QuiTamaction(eventuallysettled)

• U.S.challengedcommercialreasonablenessofthecompensationpaidbythehospitaltothethreephysicianmedicaldirectors

• Government’sfinancialexpertproposed:

• Commercialreasonablenessdependsontheagreementbeingessentialtothefunctioningofthehospital

• Inordertobecommerciallyreasonable,therehadtobesoundbusinessreasons forpayingmedicaldirectorfeestoreferringphysicians

“FairMarketValueinHealthCareTransactions,”ByLewisLefko,HaynesandBoone,LLP,July20,2007.

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

• Government’sfinancialexpertassessed commercialreasonablenessthroughevaluatingthe:

• Sizeofthehospital,numberofpatients,patientacuitylevelsandpatientneeds

• Quality,activities,andinvolvementofmedicalstaffandtheneedformedicaldirection

• Numberofregularcommitteesandmeetingsthatrequirephysicianinvolvement

• Qualityofthehospitalmanagementandinterdisciplinarycoordinationofpatientservices

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

• Government’sfinancialexpertconcludedthatcommercialreasonablenessdependsonthehospital

• Performingaregularassessmentoftheactualdutiesperformedbythemedicaldirector

• Assessinghoweffectivelythemedicaldirectorisperforminghisdutiesandwhetherthereisabonafideneedforcontinuingtheservices

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

CovenantMedicalCenter(2009)

August25,2009– CovenantMedicalCenter(Covenant)inWaterloo,IAhasagreedtopay$4.5milliontotheU.S.Governmenttosettlefraudallegations

AllegationsAgainstCovenant:• CovenantsubmittedfalseclaimstoMedicareforreimbursementoffivephysicianswhoreferredpatientstothehospital

• PayforphysicianswasfaraboveFairMarketValue andwasnotcommerciallyreasonable

• TheDepartmentofJusticeutilizedtheFalseClaimsAct(FCA)asatooltoprosecutethisviolationoftheStarkLaw,whichstatesthatpaymentmustbeatFMVandcommerciallyreasonablewithoutconsideringreferrals

“IowaHospitaltoPay$4.5Million”,BNA’sHealthLawReporter,August27,2009;“IowaHospitalPays$4.5MillioninFraudCase”, byNigelDuara,ChicagoTribune,August25,2009,http://www.chicagotribune.com/news/chi‐ap‐ia‐iowahospital‐frau,0,7910766,print.story(Accessed8/29/2009);“WaterlooHospitalPaysFeds$4.5Million”,byTonyLeys,DesMoinesRegister.com,August26,2009,http://www.desmoinesregister.com(Accessed8/29/2009);“CovenanttoPayFeds$4.5MtoSettleFraudAllegations”,byCourierStaff,August25,2009,WCFCourier.com(Accessed8/29/2009);“SettlementAgreementbetweentheUnitedStatesDepartmentofJusticeandCovenantMedicalCenter”,August25,2009.

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

CovenantMedicalCenter(2009)SettlementandNotes

• IRS990formsfrom2002showedthatCovenant’sfivehighestpaidphysiciansmadeanywherefrom$633,000to$2.1millionayear

• HowthegovernmentdeterminedFMV (orCR)isunknown,butpaymentrateswerefarabovethoseforphysiciansatotherhospitalsinIowa,andmorethantripledthecompensationpaidtosimilarlysituatedphysiciansattheMayoClinicinMinnesota

• U.S.AttorneyMattDummermuth:“It’sthecombinationofreferralswithoutbeingfair‐marketvalueandcommerciallyreasonable…[that]hasthepotentialtocompromisethemedicaljudgment,whenthere’simproperfinancialincentivespotentiallyatplay….”

• Covenantrevealedthatthephysicianswerespecialistswhohadbeenworkinginunderstaffedareas,butdeniedanywrongdoingandcitedthesettlementasabusinessdecision

• Thephysiciansfacenogovernmentsanctionsorcharges“IowaHospitaltoPay$4.5Million”,BNA’sHealthLawReporter,August27,2009;“IowaHospitalPays$4.5MillioninFraudCase”, byNigelDuara,ChicagoTribune,August25,2009,http://www.chicagotribune.com/news/chi‐ap‐ia‐iowahospital‐frau,0,7910766,print.story(Accessed8/29/2009);“WaterlooHospitalPaysFeds$4.5Million”,byTonyLeys,DesMoinesRegister.com,August26,2009,http://www.desmoinesregister.com(Accessed8/29/2009);“CovenanttoPayFeds$4.5MtoSettleFraudAllegations”,byCourierStaff,August25,2009,WCFCourier.com(Accessed8/29/2009);“SettlementAgreementbetweentheUnited StatesDepartmentofJusticeandCovenantMedicalCenter”,August25,2009.

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

U.S.exrel.Kosenskev.CarlisleHMA,Inc.(2009)• Hospitalenteredintoexclusiveservicearrangementwithanesthesiologygroupfortheprovisionof24/7anesthesiologyservices atthehospital

• Inexchange,hospitalprovidedphysicianswithfreespace,aswellasfreeequipmentandsuppliesreasonablynecessarytothephysicians’provisionofanesthesiologyservicesatthehospital

• 6 yearslater,hospitalopenedafreestandingPainClinicandgrantedanesthesiologygroupexclusiverighttoprovidepainmanagementservices topatientsintheclinic,aswellasprovidedphysiciansfreespace,equipment,andsupportpersonnel

• NonewwrittenagreementreachedregardingPainClinic,andoriginalagreementonlycontemplatedprovisionofanesthesiologyservicesatthehospital

U.S.exrel.Kosenskev.CarlisleHMA,Inc.,554F.3d88(3d.Cir.2009).

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

U.S.exrel.Kosenskev.CarlisleHMA,Inc.(2009)• ThirdCircuitCourtofAppealsfoundarrangementbetweenhospitalandphysicianswasaviolationofStarkLaw

• ArrangementdidnotqualifyforthepersonalservicesexceptionbecausenomentionofpainmanagementservicesorthePainClinicinthewrittenagreementbetweentheparties

• i.e.noevidenceofarm’slengthnegotiationsreflectingfairmarketvalueregardingthearrangementatPainClinic

• “Asalegalmatter,anegotiatedagreementbetweeninterestedpartiesdoesnot‘bydefinition’reflectfairmarketvalue.”

• FMVmustbeconsistentwiththe“generalmarketvalue,”whichisthepriceanassetwouldbringastheresultofbonafidebargainingbetweenwell‐informedpartieswhoarenototherwiseinapositiontogeneratebusinessfortheotherparty.

U.S.exrel.Kosenskev.CarlisleHMA,Inc.,554F.3d88(3d.Cir.2009).

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

TuomeyHealthcareSystem,Inc.(2010)

March29,2010‐ DistrictCourtofSouthCarolina

• Inaquitamsuit,TuomeyHealthcareSystem,Inc.wasfoundtohaveviolatedStarkLawbasedonemploymentagreementsthatprovidedcompensationinexcessoffairmarketvalue(FMV)to19part‐timephysicians

• Eachphysician:(1)paidanannualbasesalarythatfluctuatedbasedonthehospital’snetcashcollectionsfortheoutpatientservices,(2)paida“productivitybonus”equivalentof80%ofthenetcollections,and(3)eligibleforupto7%oftheproductivitybonusasanadditionalincentive

• TheagreementswereenteredintotopreventspecialistphysiciansfromredirectingtheirpatientsawayfromTuomey’soutpatientsurgerycentertoanewsurgerycenter

“TuomeyCaseRaisesImportantStarkLawQuestions,”ByJulieA.Knutson,BairdHolm,July30,2010;U.S.exrel.Drakefordv.TuomeyHealthcareSys.Inc.,675F.3d394(4thCir.2012)at399.

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

TuomeyHealthcareSystem,Inc.(2010)March29,2010– DistrictCourtofSouthCarolina

• Thegovernment’sexperttestifiedthatthecompensationpaidbyTuomeytothepart‐timephysiciansexceededFMV andwasnotcommerciallyreasonablebasedonfactorssuchas:• The10‐yeartermofthearrangements

• Thepart‐timecontractswereexclusiveandtheycoveredonlyoutpatientprocedures

• Givingfull‐timebenefitstopart‐timeemployeeswasinconsistentwithTuomey’snormalpolicies

• Thephysicianswerepaidmorethanphysiciansinotherhigh‐costareas

• Productivitybonus/incentivebonuseskickedinwiththefirstdollarearned,therebytyingthecompensationtothevolumeorvalueofreferrals

• Otheramenitiesprovided:healthcareinsurance,reimbursementforCME,periodicals,andcellphones

“TheTuomeyCase:LessonsLearned…andLessonstoCome?,”AmericanHealthLawyersAssociation,October28,2010,pp.19‐20.

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

July13,2010‐ DistrictCourtofSouthCarolina

• Inapost‐trialhearing,theDistrictCourtorderedTuomeytopay$44.8millionplusinterestfortheStarkLawviolation

• OrderedanewtrialontheGovernment’sFCAactionduetorelevanttestimonybeingerroneouslyexcluded

TuomeyHealthCareSys.,Inc,No.3:05‐CV‐02858‐MJP,2010WL4000188,at*1.

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

March30,2012‐ FourthCircuitCourtofAppeals

Afterhearingtheappealofthecase’s2010ruling,theFourthCircuitCourtofAppeals:

• Dismissedthecaseandorderedanewtrial

• Providedcommentaryonseveralissuesrelatedtowhatconstitutesa“referral”undertheStarkLaw.

U.S.exrel.Drakefordv.TuomeyHealthcareSys.Inc.,675F.3d394(4thCir.2012).

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

StarkLawDefinitionofReferrals

• Asinterpretedbythecourt,physiciansaremakingreferralstothathospitalasdefinedbyStarkLawwhentheyadmitpatientstoahospitaltoundergooutpatientservicesthatthephysiciansthemselveswillperform

• Unlessthephysician‐hospitalarrangementqualifiesforaStarkexception,anyclaimsforfacilityfeesbasedonthosereferrals areprohibitedwhenafinancialrelationshipexistsbetweenthehospitalandthephysician

U.S.exrel.Drakefordv.TuomeyHealthcareSys.Inc.,675F.3d394(4thCir.2012)at407;“FourthCircuitVacatesStarkDamagesAward;ProvidesInterpretationofKeyStarkLawProvisions”McDermottWill&Emery,April19,2012,http://www.mwe.com/Fourth‐Circuit‐Vacates‐Stark‐Damages‐Award‐Provides‐Interpretation‐of‐Key‐Stark‐Law‐Provisions‐04‐19‐2012/(Accessed4/20/12).

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

TuomeyHealthcareSystem,Inc.(2012)March30,2012‐ FourthCircuitCourtofAppeals

StarkLawVolumeorValueStandard

• Government:Tuomeyviolatedvolumeorvaluestandardbecause“itincludedaportionofthevalueoftheanticipatedfacilitycomponentreferralsinthephysicians’fixedcompensation”

• Tuomey:Thevolumeorvaluestandardmerelyconcernedastowhetherthephysicians’compensation“takesintoaccountthevolumeorvalueofreferrals”butnotwhetherthepartiestotheagreementsconsideredreferralswhendecidingwhetherornottoenterintotheemploymentcontracts

U.S.exrel.Drakefordv.TuomeyHealthcareSys.Inc.,675F.3d394(4thCir.2012),at408‐409.

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

StarkLawVolumeorValueStandard‐ TheCourt’sConclusions

• CompensationbasedonthevolumeorvalueofanticipatedreferralsimplicatesthevolumeorvaluestandardunderStarkLaw.

• ContractswhichrequireaphysiciantoreferpatientstoaparticularproviderasaconditionofcompensationdonotviolatetheStarkLawaslongascertainconditionsaresatisfied:

• Mustbefixedinadvanceforthetermoftheagreement• MustbeconsistentwithFMV fortheservicesperformed

• i.e.,doesnottakeintoaccountthevolumeorvalueoftheanticipatedorrequiredreferrals

• MustotherwisecomplywiththerequirementsofoneoftheapplicableStarkLawexceptions

U.S.exrel.Drakefordv.TuomeyHealthcareSys.Inc.,675F.3d394(4thCir.2012),at408‐409.

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

StarkLawVolumeorValueStandard(continued)

• Hospitalsthatprovidefixedcompensationtoaphysicianmustbaseitsolelyonthevalueoftheservicesthephysicianisexpectedtoperform

• Compensationthattakesintoaccountadditionalrevenuethehospitalanticipatestoresultfromthephysician’sreferralstakesintoaccountthevolumeorvalueofsuchreferrals

• Evenwhenfixedcompensationdoesnotfluctuatewithreferrals,itmaystill“takeintoaccount”referralsifit:

• ExceedsFMV, and• Wasinflatedtocompensatethephysicianforgeneratingotherrevenue

U.S.exrel.Drakefordv.TuomeyHealthcareSys.Inc.,675F.3d394(4thCir.2012),at408‐409;“FourthCircuitIssuesDecisioninTuomeyDiscussingStarkLawIssues”ByJesseWitten,AmericanHealthLawyersAssociation,April10,2012,http://www.healthlawyers.org/Members/PracticeGroups/FA/EmailAlerts/Pages/FourthCircuitIssuesDecisioninTuomeyDiscussingStarkLawIssues.aspx(Accessed4/20/12);“FourthCircuitVacatesStarkDamagesAward;ProvidesInterpretationofKeyStarkLawProvisions”McDermottWill&Emery,April19,2012,http://www.mwe.com/Fourth‐Circuit‐Vacates‐Stark‐Damages‐Award‐Provides‐Interpretation‐of‐Key‐Stark‐Law‐Provisions‐04‐19‐2012/(Accessed4/20/12).

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

• Onretrial,jurywillhavetodetermineifthelanguageoftheemploymentcontractsindicatesthevolumeorvalueofanticipatedreferralsweretakenintoaccount

• Asofthistime,dateofthenewtrialhasnotbeenannounced

“FourthCircuitIssuesDecisioninTuomeyDiscussingStarkLawIssues”ByJesseWitten,AmericanHealthLawyersAssociation,April10,2012,http://www.healthlawyers.org/Members/PracticeGroups/FA/EmailAlerts/Pages/FourthCircuitIssuesDecisioninTuomeyDiscussingStarkLawIssues.aspx(Accessed4/20/12);“FourthCircuitVacatesStarkDamagesAward;ProvidesInterpretationofKeyStarkLawProvisions”McDermottWill&Emery,April19,2012,http://www.mwe.com/Fourth‐Circuit‐Vacates‐Stark‐Damages‐Award‐Provides‐Interpretation‐of‐Key‐Stark‐Law‐Provisions‐04‐19‐2012/(Accessed4/20/12);U.S.exrel.Drakefordv.TuomeyHealthcareSys.Inc.,675F.3d394(4thCir.2012),at408‐ 409.

OVERVIEW OFCOMPENSATION ARRANGEMENTS

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

GuidingEconomicConceptsRelatedtoValuingServices

PrincipleofUtility• Basisofalleconomic valuesderivefromtheusefulness,orutility,derivedfromtheuseofpropertiesorservices

• Accordingly,“Anobjectcanhavenovalueunlessithasutility”• Economicvalueanalysisshouldbebasedonbenefitsexpectedtobederivedfromtheutility ofthephysicianexecutiveservices

PrincipleofSubstitution• Whatnormallysetsthelimitofwhatwouldbepaidforagoodisthecostofanequallydesirablesubstituteoroneofequalutility

• Compensationarrangementshouldbebasedonthecostofanequallydesirablesubstitute,oroneofequalutility

“PrinciplesofEconomics”Tausig,TheMacMillanCompany,NewYork,1918.pg.120.

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

• OpportunityCost

• Compensationforphysicianmanagement,administrative,andexecutivepositionshasbeenbasedonthephysician’shistoricalclinicalpracticeearningsinthepast

• Increasingconcernthatpaymentbasedonlost“opportunitycost,”maynotmeetregulatoryscrutinyunderStarkLaw.

• Giventhatlost“opportunitycost”shouldnotbethesolebasisofdeterminingtheFMVofanagreement,thevaluatormustapplytheEconomicPrinciplesofUtilityandSubstitution

“BeyondAnti‐Mark‐up:‘StandintheShoes’andOtherPracticalImplications,”ByMichaelW.Paddock,Crowell&MoringLLP,(February2008).“HealthLaw:2007HighlightsandRemindersfor2008.”ByHanesboone,“HealthCareAlert,”(2008),p.3.

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

EconomicValueAnalysis

• EconomicValueAnalysisshouldfocusontheeconomicbenefitsexpectedtobederivedfromtheuse ofthephysicianexecutiveservicesinthefuture

• Adetailedexaminationoftheattributesofthephysicianexecutiveperformingtheadministrativeservicesmustbeundertaken;eachelementoftheattributesmustbe:

• Identified astotheirexistence

• Classifiedastothespecificfactorsandtraits(i.e.,task,duty,responsibility,accountability)whichwouldexhibitthemeansbywhichtheywouldreasonablybeexpectedtoprovideutilitytothehospital

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

EconomicValueAnalysis

• Intrinsictoidentifyingandclassifyingeachattributeisselectingtheappropriatemetrictobeutilizedinmeasuringtheutilityprovided

• Tasks andDuties:discretelyidentifiablemetrics(e.g.,physicianhourrequirements)

• Responsibility andAccountability:morecomplexmetrics

• Noteasilyquantified,despiteoftenbeingtheattributeofutilitythatproducesanequalorgreatereconomicbenefittotheorganization

• Valuerelatedto responsibility andaccountabilitywillprovidegreatereconomicbenefittothecontractingorganizationvis avistherisk/rewardcontinuumandthephysician’srelativeriskinundertakingthegivenresponsibility andaccountability attachedtothetermsofthecontract

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

GuidingEconomicConceptsRelatedtoValuingServicesWorkRVUasaFungibleCommodity

• “ANationalStudyofResource‐BasedRelativeValueScalesforPhysicianServices”,ByWilliamC.Hsiao,PhD,et.al.,(1988)

• BrokedownphysicianservicesintofungibleunitsknownasRelativeValueUnits(RVUs)

• TotalRVUcomprisedofthreeweightedinputs:• Work (52%)/PracticeExpense(44%)/MalpracticeCost(4%)

• Theory:bybreakingdownphysicianservicesintofungiblecommodities,equivalenceperunitofcareacrossphysicianservicesandspecialtiesmightensureequitable,reasonablereimbursementrateswhileadditionallyprovidingatoolforcostcontainment

• “Work”definedastime,mentaleffortandjudgment,technicalskillandphysicianeffort,andpsychologicalstressvariables

“ANationalStudyofResource‐BasedRelativeValueScalesforPhysicianServices,”ByWilliamC.Hsiao,et.al.,Cambridge,MA,1988,p.30.

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

HealthcareasaFungibleCommodity

“Moneyistheclassicexampleofthefungibleproduct.Itrepresentsrecognizedvalue,butonedollarbillisjustasgoodasthenext…thedoctor‐patientvisitasafungiblecommodity?Whynot?”

“CommodifiedCare,”byWilliamS.Andereck,CambridgeQuarterlyofHealthcareEthics,Vol.16,No.4,2007,p.401‐402.

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

GuidingEconomicConceptsRelatedtoValuingServicesHealthcareasaFungibleCommodity

“ [I]f health care is ‘fungible,’ then by implication the parts of health care arealso interchangeable. Practically speaking, this also includes providers andpatients as they are simply reduced to their identity and purpose within theconfines of a business relationship. Just as the seller is interested only inproviding that which the buyer needs (or desires) in so far as there issufficient financial reward, the buyer is only concerned with obtaining thedesired object (or service). Who they are makes no real difference.Commodification dictates that a physician is like any other, as long as theyare matched with respect to specialty. He or she ceases to be theindispensable community caregiver, and instead becomes the link betweencompany and profit, or shareholder and dividend. Patients, by the sametoken, are no longer seen as individuals with unique personalities and healthcare needs but as a source of revenue; they become “covered lives” and a“business asset whose value is inversely proportional to the cost of healthcare resources their care is predicted (statistically or otherwise) to consume.”

“HealthCareasaCommodity:TheConsequencesofLettingBusinessRunHealthcare,”ByTimothyP.Doty,March2008.

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

Enterprises?Assets?Services?

• FMV compensationforclinicalservicesshouldbepaymentforonlythosespecifiedservices(i.e.,wRVUs)

• Paymentforprofitfromenterpriserelatedactivities(e.g.ASTC)shouldnotbedisguisedasanincreased$perwRVUcompensation

AwRVUisawRVU!

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

Enterprises?Assets?Services?SummaryofTransactions

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

Intellectual Property

SuppliesIntangible AssetsNon‐physical items that grant certain specified property rights and privileges of ownership and that have or promise economic benefits to the owner(s) of the subject enterprise

Tangible Assets Items owned by the

subject enterprise that possess a physicality (i.e.,

they can be seen or touched)

Enterprises?Assets?Services?ClassificationofTangibleandIntangibleAssets

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

EmploymentCompensationArrangementsMayInclude

• Basesalary

• Productivity‐basedcompensation

• Acombinationofequalpayandproductivity‐basedcompensation

• Compensationbasedonaper/RVUmethod

• Incentivebonusbasedonproductivity

• Anannualstipendforperformanceofadministrativeservices

• Incentivepaymentsbasedonachievingqualityofpatientandbeneficialoutcomesbasedonagreeduponmeasures

• Fixedbasesalaryplusanincentivebonuspaidbasedontheenterprisevalue

• Incentivepaymentsbasedonspecifiedpermissiblegainsharingarrangements,e.g.,achievingcertaincostsavingsandefficiencies

• Incentivepaymentspaidbasedonthecontributionsandeconomicinputsoftheemployedphysician(s)toachievespecifiedenhancementoftheperformanceoftheenterprise,e.g.,developmentofa“CenterofExcellence”

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

PhysicianCompensationExpenseAllocation

• Compensationpaidforphysicianclinical,on‐call,andadministrativeservicesisdistinctfrom reimbursement byathirdpartypayorforphysicianclinicalservicesperformed

• Compensationisaneconomicexpenseburdenallocatedagainsttherevenuestreamgeneratedfromtheprofessionalphysicianservicesperformedbytheemployedphysicians

• Economicexpensesburdenrelatedtothephysician’smalpracticeinsuranceexpenseburdenmustbeproperlyallocatedandaccountedforindeterminingFMV andcommercialreasonablenessofproposedphysiciancompensationtransactionalarrangements

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

CompensationBenchmarkingSourcesGenerallyacceptedbenchmarkingdatarelatedtovaluationofphysicianandexecutivecompensationforclinical,administrative,andon‐callservices

A B C D E

Name Publisher Clinical MedicalDirector On‐Call

1 MedicalGroupCompensationandFinancialSurvey AmericanMedicalGroupAssociation ⨯ ⨯2 CostSurveyforSingle‐SpecialtyPractices MedicalGroupManagementAssociation ⨯3 PhysicianCompensationandProductivitySurveyReport SullivanCotterandAssociates,Inc. ⨯ ⨯ ⨯4 PhysicianCompensationSurvey NationalFoundationforTraumaCare ⨯5 PhysicianExecutiveCompensationSurvey AmericanCollegeofPhysicianExecutives ⨯6 PhysicianCompensationandProductionSurvey MedicalGroupManagementAssociation ⨯7 PhysicianSalarySurveyReport:Hospital‐BasedGroupHMOPractice JohnR.ZabkaAssociates ⨯ ⨯8 SurveyReportonHospitalandHealthcareManagementCompensation WatsonWyattDataServices ⨯9 CostSurveyforMultispecialtyPractices MedicalGroupManagementAssociation ⨯10 HealthcareExecutiveCompensationSurvey IntegratedHealthcareStrategies ⨯11 PhysicianOn‐CallPaySurveyReport SullivanCotterandAssociates,Inc. ⨯12 ManagementCompensationSurvey MedicalGroupManagementAssociation ⨯13 SurveyofManagerandExecutiveCompensationinHospitalsandHealthSystems SullivanCotterandAssociates,Inc. ⨯14 ExecutiveCompensationAssessor EconomicResearchInstitute ⨯

15 TopManagement andExecutive AbbottLangerAssociation,EconomicResearchInstitute,andSalariesReview ⨯

16 ExecutivePayintheBiopharmaceuticalIndustry Top5DataServices,Inc. ⨯17 ExecutivePayintheMedicalDeviceIndustry Top5DataServices,Inc. ⨯18 HospitalSalary&BenefitsReport,2007‐2008 JohnR.ZabkaAssociates,Inc. ⨯19 USIHNHealthNetworksCompensationSurveySuite Mercer,LLC ⨯20 Intellimarker AmericanAssociationofAmbulatorySurgeryCenters ⨯ ⨯21 MedicalDirectorshipandOn‐CallCompensationSurvey MedicalGroupManagementAssociation ⨯ ⨯

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

PhysicianClinicalServicesGainsharing

• Arrangement“underwhichahospitalgivesphysiciansashareofthereductioninthehospital’scosts(thatis,thehospital’scostsavings)attributableinparttothephysicians’efforts.”

• Historically,gainsharinghasbeenfoundtoviolatetheCivilMonetaryPenaltyStatute (prohibitshospitalforprovidingapaymenttoaphysicianasaninducementtoreduceservices)andAnti‐KickbackStatute

• 2005:OIGbegantoapprovegainsharingarrangementsduetobenefitsofdecreasedcostsandincreasedquality

• 2009PhysicianFeeSchedulesolicitedcommentsregardingapossiblenewexceptiontoStarkLawforsharedsavingsprograms(despiteCMS’sownconcernforpotentialabuse)

“2009PhysicianFeeScheduleProposedRule,”73Fed.Reg.23692‐94(Apr.30,2008).

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

PhysicianOn‐CallServicesGrowingNeedforCompensationforProvisionofOn‐callServicesDueto:

• PhysicianshortageandincreaseddemandduetoagingBabyBoomers

• Agingphysicianworkforce

• Physiciansdemandingmore“regular”workhours

• Physiciansincreasinglybuildingpracticethroughparticipationinambulatorysurgerycentersandphysician‐ownedspecialtyhospitals

• Physiciansoftenreceiveinadequatepaymentforservicesprovidedwhileon‐callaspatientsintheEDareoftenuninsuredorunder‐insured

“OIGAdvisoryOpinionNo.07‐10,”OfficeoftheInspectorGeneral,DepartmentofHealthandHumanServices,September2007,www.oig.gov.“OIGAdvisoryOpinionNo.09‐05,”OfficeoftheInspectorGeneral,DepartmentofHealthandHumanServices,May2009,www.oig.gov.

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

PhysicianOn‐CallServicesOIGApprovalofOn‐CallCompensationArrangements

• May2009(Opinion09‐05)

• Physicianspaidon‐callcompensationforservicestopatientsineligibleforMedicaid/otherstatehealthinsuranceprograms‐paymentcoveredphysicianfees,emergency&inpatientservices

• Valuationmethodologyforcompensationconsideredpatientacuity,averagelengthofstay,andphysiciantime

• On‐callarrangementhadsufficientsafeguardstopreventFraud–almostmetthePersonnelServicesandManagementSafeHarbor

• Paymentstophysiciansforservicesrendered,ratherthanavailability(e.g.,“lostopportunity”)

OIGAdvisoryOpinionNo.09‐05,”OfficeoftheInspectorGeneral,DepartmentofHealthandHumanServices,May2009,www.oig.gov.

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

PhysicianOn‐CallServices

OIGApprovalofOn‐CallCompensationArrangements

• September2007(Opinion07‐10)

• Firstadvisoryopinionaddressingon‐callcompensationarrangements

• Physician’spaidper‐diemrateforon‐callduties

• On‐callarrangementhadsufficientsafeguardstopreventFraud– almostmetthePersonnelServicesandManagementSafeHarbor

• PerDiemratestailoredtophysician’sburdenandlikelihoodofresponse

• IndependentthirdpartydeterminedperdiemrateswereatFMV

• Paymentnotaffectedbyvolumeorvalueofreferrals

• Allphysicianshadequalon‐callcoverage,paymentnothigherforcertainspecialties

OIGAdvisoryOpinionNo.07‐10,”OfficeoftheInspectorGeneral,DepartmentofHealthandHumanServices,September2007,www.oig.gov.

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

PhysicianOn‐CallServicesOIGGuidelinesforSettingOn‐CallCompensationArrangementsatFMV

• Conductindependent,thirdpartyanalysistodetermineifarrangementisatFMV

• Ensureallphysiciansareeligibleandpaymentisnotbasedonthevolumeorvalueofreferralsprovidedtothehospital

• Ensureequaldivisionofon‐calldutiesamongallphysicians

• Demonstratethatthehospitalhasa“legitimate,unmetneed,”foron‐callcoverageandthatcompensationwillamelioratethesituation

• Avoidpaymentsfor“lostopportunity,”whenservicesarenotactuallyprovided

“OIGAdvisoryOpinionNo.07‐10,”OfficeoftheInspectorGeneral,DepartmentofHealthandHumanServices,September2007,www.oig.gov.“OIGAdvisoryOpinionNo.09‐05,”OfficeoftheInspectorGeneral,DepartmentofHealthandHumanServices,May2009,www.oig.gov.

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

PhysicianAdministrativeServices

AssessingFMVofMedicalDirectorships

• Employershoulddocument themethodologyusedtosetcompensation

• Beneficialforemployertotrackanddocumenttheactualnumberofhoursthemedicaldirectorspendsperformingtheservices,aswellastomakesurethedocumentationisconsistentwiththehoursoutlinedinthemedicaldirectoragreement

• “Justifyingtheneedformedicaldirectorservicesgoeshand‐in‐handwithshowingthattheservicesareactuallyfurnished.”

“FairMarketValueSupportRequired:PhysiciansinAdministrativeRoles,”ByJenJohnson,AmericanHealthLawyersAssociation,ArticlesandAnalyses,June2008.“HealthCareFraudandAbuse:PracticalPerspectives,”EditedBy:LindaA.Baumann,TheAmericanBarAssociation&TheBureauofNationalAffairs,Inc.,Washington,D.C.,(2002),pp.281.

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

DocumentationperTypeofPhysicianService

Notes:1. E.g.,employer'smedicaldirectorshipagreement(s)withannualhourrequirementsandannualcompensationpaidtoeachdirector.2. Intheformofclinicalproductivity(measuredinwRVUs,grosscharges,netrevenue,orcountbyCPTcode).3. Morespecifically,thatemployerassessestheeffectiveness(asopposedtoproductivity)ofthephysicianexecutiveatperforminghis/hertasks,at

leastannually(asopposedtoeverytwoyears).

A B C D

ValuationAnalysisInformationRequest

TypeofPhysicianService

Clinical On‐CallAdministrative,Executive,Management

1 Proposedagreementforservices ⨯ ⨯ ⨯2 Numberofshifts/weekandhours/weekanticipatedunderproposedagreement ⨯ ⨯

3 Numberoftimescurrenton‐callphysicianwas(a)paged;and(b)requiredtobepresentatemployerforpasttwoyears ⨯

4 Allotheragreementsforsimilarpositionsattheemployerentity ⨯ ⨯ ⨯1

5 Curriculumvitae(CV)forthephysicianperformingtheclinicalservices ⨯ ⨯

6 Documentationofboardcertification,qualifications,tenureofphysicianperformingservicesunderallsimilaragreements ⨯ ⨯ ⨯

7 Employer'smedicalstaffbylawsandroster ⨯ ⨯ ⨯8 Documentationofhistoricalproductivityforpasttwoyears ⨯2 ⨯2 ⨯3

9 Documentationofoffersmadetopreviousphysicianexecutives ⨯10 Documentationastothemedicalstaffsneedforadministrativedirection ⨯11 Timesheetrecordsoftimeandworkspentoneachadministrativefunction ⨯

12 Sizeoremployer,numberofpatients,acuitylevelsofpatients,specificneedsrelatedtoaparticularserviceline ⨯

13 Numberofcommittees/meetingsthatrequirephysician'sinvolvementorattendanceandaveragefrequencyanddurationofeachmeeting ⨯

14 Descriptionofqualityprograms,includingcentersofexcellenceand"neverevent"committees ⨯

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

ValuationMethodologyforPhysicianServices

Notes:1. e.g.,charges,collections,RVU,etc.

2. e.g.,hourly,weekly,daily,annualmetrics

3. Restricted:physicianisrequiredtostayonpremisesduringcallUnrestricted:physicianisnotrequiredtostayonpremisesduringcall

4. MaybebeneficialtousethePrincipleofSubstitutionandPrincipleofUtility(e.g.,StarkII,PhaseIII:Hourlyratemaybeusedifitissetat FMV)

5. PercentageofCollections:maybehighincentivetotreatpatientswithhigherpayingpayorsPercentageofGrossCharges:beneficialasitisnotbasedonpatientpayormix,butmaycausephysiciancompensationtofluctuatePerRVUBasis:beneficialascompensationisbasedonproductivity,butcarefulconsiderationshouldbepaidtoaccountforwhethercompensationisbasedonatotalRVUbasisorsolelyonaworkRVUbasis

“StarkII,PhaseIII,”72Fed.Reg.51015‐16,September5,2007.

A B C D

ValuationMethodology:ElementsforConsideration Clinical On‐Call Administrative

1 Range(percentile)ofcompensationmeasured ⨯ ⨯ ⨯

2 Specialtyorsubspecialtyneedtobematched ⨯

3 Metricofcomparabilitymustbeselected ⨯1 ⨯2 ⨯

4 Howthehourlyrate(ifapplicable)andfull‐timeequivalency(FTE)arecalculatedmustbedetermined ⨯

5 Whetheron‐callservicesarerestrictedorunrestricted3 ⨯

6 DeterminationofFMVforspecifictasks,duties,responsibilities,andaccountabilitiesrequiredforservices4 ⨯ ⨯ ⨯

7 Determinewhetherproductivity‐basedcompensationisbasedon: (1)percentageofcollections;(2)percentageofgrosscharges;or,(3)perRVUbasis5 ⨯

ROLE OF THE VALUATION TEAM

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

RoleoftheValuationAdvisor

• LegalcounseltypicallydoesnotprovidealegalopinionastotheFMVorcommercialreasonablenessofacompensationarrangement

• LegalcounselwillmostlikelyobtainanindependentvaluationconsultanttoprovideacertifiedvaluationopinionastotheFMVand/orcommercialreasonablenessofacompensationarrangement

• CourtshavefoundthoroughvaluationsofbothleaseandcompensationarrangementsaspersuasiveevidenceofFMV asagainstalessthoroughvaluationofagovernmentexpertwitness

“U.S.exrel.Goodsteinv.McLarenRegionalMedicalCenter,”202F.Supp.2d671(E.D.Mich.2002).“U.S.exrel.Villafanev.Solinger,”543F.Supp.2d678(W.D.Ky.2008).

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

RoleofLegalCounsel

• Adviseastothelegalpermissibilityoftheunderlyingtransaction

• Draftphysicianemployment/independentcontractoragreements

• Includeall physiciandutiesintheagreement

• Serveasliaisonbetweenvaluationconsultantandhospitalhealthsystem

• Ensurevaluationisconsistentwiththetransactiondocuments

• Attempttomaintainattorney‐clientprivilege

“U.S.exrel.Goodsteinv.McLarenRegionalMedicalCenter,”202F.Supp.2d671(E.D.Mich.2002).“U.S.exrel.Villafanev.Solinger”,543F.Supp.2d678(W.D.Ky.2008).

CONCLUDING REMARKS

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

AdherencetoCommercialReasonablenessThresholds

• PhysiciancompensationagreementscanbeatFMV whilesimultaneouslynot becommerciallyreasonable

• FailuretocomplywithcommercialreasonablenessthresholdsinexecutingphysiciancompensationarrangementsmayresultinafindingoflegalimpermissibilityundertheStarkLawandAnti‐KickbackStatute

• SubmittingsuchclaimsforreimbursementmayalsobefoundtobelegallyimpermissibleundertheFalseClaimsAct

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

OIGComplianceProgramGuidelines• EffectivecomplianceprogrammayhelpavoidpotentialviolationofStarkLaw,Anti‐KickbackStatute,andFederalFalseClaimsAct

• Buildon‐goingcomplianceintotheagreements,e.g.periodicallyassessFMVandperiodicallyauditcompliancewithdutiesrequiredbytheagreement.

• Thesesevencomponentsprovideasolidbasisforavoluntarycomplianceprogram:1. Conductinginternalmonitoringandauditing;2. Implementingcomplianceandpracticestandards;3. Designatingacomplianceofficer;4. Conductingappropriatetrainingandeducation;5. Respondingappropriatelytodetectedoffensesanddeveloping

correctiveaction;6. Developingopenlinesofcommunication;and7. Enforcingdisciplinarystandardsthroughwell‐publicizedguidelines.

“OIGComplianceProgramforIndividualandSmallGroupPhysicianPractices,”Notice,65Fed.Reg.59434‐35(Oct.5,2000).

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

SummaryofCRCompensationArrangements

• Compensationarrangementsarelikelytobedeemedcommerciallyreasonableiftheyare:

• AtFMV;

• Thearrangementslisttheactualdutiesbeingperformedbythephysician;

• Thoseservicesarereasonablynecessarytotheproviderbasedonthedetailsofthesituation;and

• Theservicescouldnotbeadequatelyperformedforlesscompensation.

EstablishingFMV&CR

RolefortheValuation

ConcludingRemarks

ImportanceofDocumentationandObtainingaCertifiedOpinionofValue

• CriticaltoobtainandmaintaindocumentationthatthecompensationarrangementisbothofatFMV andcommerciallyreasonableinordertowithstandscrutinyfromOIGandtheIRS

• AcertifiedopinionbyindependentvaluationconsultantastowhethertheproposedtransactionisatFMV andcommerciallyreasonablewillenhancetheeffortsofhealthcareentitiesandprovidersinestablishingthattheirproposedcompensationarrangementisincompliance

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