Commercial Reasonableness in Hospital-Physician Transactions


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PYA Principals Lyle Oelrich and Darcy Devine presented “Commercial Reasonableness in Hospital-Physician Transactions” to the Health Care Fraud Working Group in Memphis, TN, April 10, 2013.

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Commercial Reasonableness in Hospital-Physician Transactions

  1. 1. Page 0Commercial Reasonablenessin Hospital-Physician TransactionsThe Health Care Fraud Working GroupApril 10, 2013Lyle Oelrich, PrincipalDarcy Devine, Principal
  2. 2. Page 1PYA Background• Founded in 1983• Top 20 healthcare management consulting firm• National focus with offices in Knoxville, Atlanta,Kansas City and Tampa• 200 professionals with audit, tax, valuation,management, compliance, and strategy expertise• 700 valuation engagements each year
  3. 3. Page 2DefinitionsCommercialReasonableness…GenerallyIn theory, most businesstransactions must be commerciallyreasonable or there would be noreason for them to occurIn HealthcareCompensation arrangements forphysicians‟ services (clinical &administrative) must be bothcommercially reasonable and atFMV to avoid liability (Stark, Anti-Kickback, False Claims Act)
  4. 4. Page 3DefinitionsHHS hasinterpreted“commerciallyreasonable”Stark II Phase II alsosuggestsAdditionally, OIGhas stated“An arrangement thatappears to be asensible, prudentbusiness agreement,from the perspectiveof the particularparties involved, evenin the absence of anypotential referrals”“An arrangement will beconsidered„commerciallyreasonable‟ in theabsence of referrals if thearrangement would makecommercial sense ifentered into by areasonable entity ofsimilar type and size anda reasonable physicianof similar scope andspecialty, even if therewere no potential DHSreferrals”In order to meet thethreshold ofcommercialreasonableness,compensationarrangements withphysicians should be“reasonable andnecessary”
  5. 5. Page 4DefinitionsCR = Prerequisite to FMVIf a financial arrangement isdetermined to be commerciallyunreasonable, there is no need todetermine fair market value or takefurther steps to set up thearrangement.
  6. 6. Page 5Commercial Reasonableness vs.Fair Market ValueCommercial reasonableness is slightly different thanfair market valueDoes the transaction make cents sense?Was this a good business arrangement to enter into inthe first place?Is there a legitimate business reason to enter into thisagreement?Was it commercially reasonable even if there are noreferrals between the parties?Do the underlying economics of the transaction makesense?Fair Market Value(NARROW)Commercial Reasonableness (BROAD)What is the range ofdollars you are going topay for thespace/services?
  7. 7. Page 6Commercial Reasonableness vs.Fair Market ValueThus, FMV assesses the reasonableness of the“range of dollars” while CR looks to thereasonableness of the business arrangementgenerallyBecause of this differentiation• A compensation arrangement may be at fairmarket value, but not the commercially reasonable
  8. 8. Page 7PYA AnalysisRefer to Commercial Reasonableness Outline HandoutPYAAnalysisBusiness Purpose AnalysisProvider AnalysisFacility AnalysisResource AnalysisIndependence & Oversight Analysis
  9. 9. Page 8Business Purpose AnalysisDoes the proposed arrangement represent a reasonable necessity that isessential to the functioning of the hospital or other healthcare provider?Is the proposed arrangement reasonably necessary to accomplish a rationalbusiness purpose?Is the specific purpose of the arrangement clearly identifiable andappropriately defined?Do the proposed services relate to the business and/or clinical plans andstrategies of the healthcare provider?Do the proposed services contribute to the provider’s profits and/or thedevelopment of a particular service line without requiring income fromproscribed referrals?Do relevant national, regional, and local economic conditions exist that mayaffect the appropriateness of the proposed arrangement?
  10. 10. Page 9Provider AnalysisDoes the proposed arrangement require a physician to perform the services?Does the proposed arrangement require a physician of a certain specialty toperform the services?Does any specialized training and/or experience of the provider exist thatshould be taken into account when evaluating the proposed arrangement?Are the particular nature of the duties and corresponding amount ofaccountability associated with the proposed arrangement clearly defined andreasonable?Is the amount of time demanded of the physician under the proposedarrangement reasonable?Do any salary considerations exist that should be evaluated in relation toproviders of similar specialty and experience in comparable organizations andpositions?
  11. 11. Page 10Facility AnalysisAre patient demand, the number of hospital patients,and/or the community need sufficient to justify theservices?Are patient acuity levels such that the proposed servicesare necessary?Do patient needs dictate the necessity for a separate anddistinct provider for the proposed services?Are the size of the hospital and the relevant departmentappropriate for the proposed services?
  12. 12. Page 11Resource AnalysisIs the proposed arrangement a necessary addition to the managerial andadministrative efforts already required by the medical staff bylaws?Have the number of committees and/or meetings that otherwise requirephysician attendance outside of the proposed arrangement been considered?If the healthcare entity is part of a larger health system, do patient careprotocols and procedures exist that can be coordinated among its facilities inlieu of the proposed arrangement?Does the proposed arrangement lend itself to the potential for duplication ormisuse?Does the healthcare entity maintain any features, controls, and/or safeguardsto reduce or eliminate the potential for risks of duplication or misuse?
  13. 13. Page 12Independence and OversightAnalysisDoes the provider entity currently evaluate the performance of its provider arrangements?Does the healthcare entity use its performance assessments to determine whether new or existingprovider arrangements should be reduced (e.g., hours condensed) or eliminated?Does the entity maintain a formal process for executive management and legal counsel to reviewand approve the proposed arrangement?Does the provider engage in appropriate monitoring to determine:• Whether services specified in similar arrangements are actually performed?• The total amount of funds spent for such services?• A verifiable outcome resulting from the arrangement?Will the entity engage in regular assessments of the proposed arrangement that clearly show itseffectiveness and demonstrate a legitimate need for continuation and/or renewal?Does sufficient independence exist related to the board or committee that establishes the proposedarrangement?Is there a written agreement that addresses the terms of the proposed arrangement?
  14. 14. Page 13• Project: Is “X” Medical Director Arrangement CR?• Key Provider Inquiries:– Is it necessary to have a physician perform a certain service?– Is it necessary to have a physician of that specialty perform a certain service?• Logic: The FMV compensation for a specialty is generally higherthan that of general practitioners and non-physician practitioners• Implication: If a specialized physician is receiving compensation withinthe higher range of FMV to perform duties that a less skilled practitionercould perform for less compensation, the arrangement may not bedeemed to be commercially reasonable despite the fact that it is withinthe range of FMV for that specialistExample Inquiry:Proposed MD Provider
  15. 15. Page 14Cases• U.S. ex rel. Drakeford v. Tuomey HealthcareSystem, Inc.– Part-time employment agreements for outpatientsurgery services• Compensation methodology• Aggregate compensation (benefits)• Compensation / production parity• Appraiser perspective and approach• Mission support
  16. 16. Page 15Cases• U.S. v. Campbell– Part-time employment of cardiologists for ClinicalAssistant Professor• Performance of duties• Qualifications of employee• $8m settlement by UMDNJ
  17. 17. Page 16Cases• U.S. ex rel. Kaczmarczyk v. SCCI HealthServices Corp.– Medical directorships paid by LTAC• Reasonable necessity• $7.5 million settlement
  18. 18. Page 17Cases• U.S. ex rel. Singh v. Bradford RegionalMedical Center– Sublease for nuclear camera between physiciansand hospital• Payment for lease and non-compete• Appraiser perspective and approach• Non-compete valued based on referral stream• $20m estimated settlement
  19. 19. Page 18Lyle Oelrich, PrincipalKnoxville, Tennessee(865) 673-0844loelrich@pyapc.comDarcy Devine, PrincipalAtlanta, Georgia(404)