Court Cases and Healthcare Valuation
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Court Cases and Healthcare Valuation

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Presentation at HCCA on recent court cases affecting fair market value compensation and commercial reasonableness

Presentation at HCCA on recent court cases affecting fair market value compensation and commercial reasonableness

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    Court Cases and Healthcare Valuation Court Cases and Healthcare Valuation Presentation Transcript

    • HCCA Compliance Institute 2012—Legal & Regulatory 706 I Thought FMV Was Supposed to be Bulletproof: Recent Court Decisions Involving Fair Market Value Jeff Fitzgerald, Shareholder, Polsinelli Shughart Curtis Bernstein, Director, Sinaiko Healthcare Consulting May 1, 2012
    • Outline of Presentation Case Studies  Employment  Payment for multiple services to a single physician  Campbell v. Campbell v. UMDNJ  Aggregate compensation  US v. Covenant Medical settlement  Acquisition  Employment of physicians  US ex rel. Drakeford v. Tuomey  Payments based on referrals  US ex rel. Singh v. Bradford Regional  Payment for intangible assets without cash flows  Carraci v. Commission and Bergquist v. Commissioner 2
    • Employment Case Study Facts Dr. Nice (cardiologist) hired by Typical Hospital  Comp: $50 per wRVU; Hospital used salary FMV report Three months later, Dr. Nice asked to be medical director for catheterization lab  Comp: $10,000 per month; hospital obtains outside FMV from its regular consultant Six months later, the physician practice administrator asks Dr. Nice to act as a liaison between the employed physicians and administration  Comp: $ 16,000 per month; practice administrator obtained FMV study from different outside FMV expert Later, Hospital realizes that Dr. Nice was not added to the call roster and amends employment agreement to add call coverage  Comp: $800 per day (consistent with what the hospital pays independent contractors) 3
    • Compliance Concerns Can the physician actually perform all of these services?  “Are there enough hours in a day?” Are multiple forms of compensation paid for services provided simultaneously?  The physician cannot provide call coverage 24 hours per day while providing clinical services and medical directorship services Does the aggregate compensation make sense?  Payment of employed physicians at the same rate as the independent contractors is inconsistent with a productivity based compensation plan 4
    • U.S. v. Campbell University Hospital (UMDNJ) wanted to grow its cardiology program  UMDNJ entered into part-time employment contracts with local community cardiologists in private practice to work at University Hospital as Clinical Assistant Professors, providing teaching, lecturing, and research in exchange for an annual salary Hospital employs, part-time, Dr. Campbell for $75,000 annually  Employment agreement lists 8 categories of services In 2009, UMDNJ settles with DOJ and pays $8.33 million DOJ sues Dr. Campbell under FCA and Stark Law  Dr. Cambell has FMV report supporting salary  Dr. Campbell “duly performed all of the services enumerated in the contract which he was given the opportunity to perform”  Dr. Campbell argues that he was only required to perform the services that the hospital asked him to perform, and he did 5
    • U.S. v. Campbell Court rules that Stark Law was violated  Dr. Campbell could not prove he met the employment exception  Dr. Campbell was at hospital frequently, but not performing services in agreement  Court held that compensation was not FMV if services were not rendered (regardless of FMV report)  “If there was no requirement to actually perform the duties of [employment agreement] then the compensation could not be the fair market value for those services…”  2011 U.S. Dist. LEXIS 1207 (1/4/2011) 6
    • U.S. v. Campbell Lessons  Services must be rendered in a manner generally consistent with the services valued  FMV report only as good as its assumptions  To be a basis for separate compensation, there should be separate service rendered 7
    • U.S. v. Covenant Medical Covenant Medical Center of Waterloo, Iowa paid $4.5 million to settle Stark Law and False Claims allegations (2009) DOJ claimed that payments to 5 employed physicians exceeded FMV  Two physicians paid more than $2M per year  Three others were paid more than $1M per year  Salaries were published on hospital’s form 990 Whether hospital relied upon FMV reports is unclear 8
    • U.S. v. Covenant Medical Lessons  Full time employment is subject to potential enforcement action  Beware of the Lake Wobegon effect (everyone is above average)  DOJ enforcement can depend on overall optics  Look at both the forest and the trees 9
    • Acquisition Case Study Local Physicians Group was recently awarded approval for a certificate of need to develop a new surgery center Fearing competition, City Hospital proposes to purchase this prospective ASC from Group In light of its lack of operating history, Hospital will purchase any fixed assets already purchased by Group and the CON Hospital will develop the ASC and offer the physicians part- time employment agreements at a fixed compensation per wRVU every time the physician performs a case in the ASC Hospital will pay Group’s physicians for a non-compete agreement Group’s accountant recommends that Group contribute any intangible value not purchased by Hospital to Hospital’s foundation 10
    • Compliance Concerns Compensating physicians only when performing a designated health service and not when performing office visits FMV basis for intangible assets FMV basis for paying for non-compete  Is a non-compete distinguishable from an agreement to refer in this context? 11
    • U.S. ex rel. Drakeford v. Tuomey(2011) Surgeons begin development of an ASC Hospital hires surgeons as employees  Part-time; during surgical procedures; surgeons maintain office practice separately  Fixed salary, plus 80% of collections, plus quality incentives  DOJ alleged that compensation exceeded 100% of actual collections (and was up to 140% of collections) Hospital internal documents project losses on all employment agreements 12
    • U.S. ex rel. Drakeford v.Tuomey DOJ argues that compensation is not FMV because “the hospital’s motivation in entering into these part-time agreements was to avoid losing the referrals”  While Stark Law is strict liability, the DOJ looked at motivation of parties At trial, jury concludes Stark Law violated, but not False Claims Act  Jury awards DOJ $49.4 million  New trial ordered on False Claims issues 13
    • U.S. ex rel. Drakeford v.Tuomey Lessons  Employment exception large, but not infinite  Motivation can color FMV analysis  Risk exists where employment compensation not based upon survey or objective data  Long term physician employment losses could receive more scrutiny  Basis for losses needs to be justified or presumption is that the loss is tied to referrals 14
    • U.S. ex rel. Singh v. Bradford Regional (2010) Group of two physicians lease nuclear camera from GE and perform services in office rather than in hospital Hospital rents camera from Group (with non- compete); camera remains in Group’s office  Hospital pays $23,655 per month, an amount derived from Group’s revenue from use of the camera ($6,500 per month related to prime lease from GE)  Per Stark, fixed rental rate not take into account volume or value of referrals 66 Fed. Reg. at 877 (before per click rule) 15
    • U.S. ex rel. Singh v. Bradford Regional District Court granted summary judgment against the hospital  Court placed burden of proof to show FMV on hospital  Found that amount of compensation was arrived at by taking into account the anticipated referrals of the physicians  Found that if price takes into account referrals, then price is not FMV 16
    • U.S. ex rel. Singh v. Bradford Regional Lessons  FMV analysis and reports are useful, but courts may look behind at the underlying purpose/terms  Need to identify clear non-referral related basis for intangible assets or counterintuitive FMV terms  Purchase price needs to make sense from a non- referral basis  Some things just can’t be purchased 17
    • Bergquist v. Commissioner (2008) Background  University Anesthesiologists, P.A. (UA) was the exclusive provider of anesthesiology to Oregon Health & Science University Hospital  In 1998, Hospital formed OHSU Medical Group as a 501(c)(3) and required all physician groups that wished to remain affiliated with Hospital to consolidate into the group by Jan. 2002  In Sept. 2001, anesthesiologists in UA donated stock in UA to a charity and claimed a charitable donation  UA’s valuation expert used going concern value  Charity valued donated stock at $0  On Jan. 1, 2002, anesthesiologists became employed by OHSU Medical Group 18
    • Bergquist v. Commissioner Tax Court findings  UA should not be valued as a going concern because the consolidation of UA into OHSU Medical Group was foreseeable at the date of donation  UA would not have donated the stock without the consolidation  Commissioner’s expert valued UA at net asset value  Value estimated to be less than 10% of that claimed by Bergquist  Court agreed with Commissioner’s findings  Court concluded that no reasonable buyer would have paid at a going concern rate for UA stock knowing that UA was being consolidated 19
    • Summary and Takeaways Make sure compensation arrangements with referral sources are FMV for services rendered  Have policy in place to appropriately document FMV for services provided using reasonable approaches as discussed throughout this webinar  Monitor compliance with policies  Review third party opinions for completeness, accuracy, and reasonableness Review services actually provided to those required under agreements  Check all line items on medical director time sheets  Verify time spent providing co-management services Use common sense in determining if compensation could be viewed as related to referrals  Learn from Covenant, Bradford and Tuomey 20
    • I Thought FMV Was Supposed to be Bulletproof: Recent Court Decisions Involving Fair Market Value Jeff Fitzgerald, Shareholder, Polsinelli Shughart jfitzgerald@polsinelli.com Curtis Bernstein, Director, Sinaiko Healthcare Consulting curtis.bernstein@sinaiko.com 21