Fair Market Value in     Hospital and Physician         Transactions    Jeff Fitzgerald, Shareholder, Polsinelli ShughartC...
Outline of Presentation   Legal Background   Noteworthy Judicial Determinations   Top Six Valuation Concerns   Ways to...
Legal Background   Anti-kickback Statute   Stark Law   Tax exempt status                            3
Legal Background - AKS   AKS prohibits any person from knowingly and    willfully offering, paying, soliciting, or receiv...
Legal Background - AKS   Many safe harbors have FMV as an element   PPACA expanded the False Claims Act to    include ci...
Legal Background - Stark   Prohibits payment to hospitals for    "designated health services" if physician    making the ...
Legal Background - StarkFair market value means the value in arm‟s-length transactions, consistent with thegeneral market ...
Legal Background – Stark   Additional Stark Law concept       Most exceptions also require compensation to        “not t...
Legal Background - Tax exemptstatus   Private inurement prohibits use of a charity‟s    assets to unreasonably benefit an...
Judicial Developments   What is FMV mean in health care space?       Caracci       Bergquist       Derby   What are t...
Caracci v. Commissioner(2006)   Home health companies converted from tax-exempt to for-profit   Companies sustained repe...
Caracci v. Commissioner   Tax Court findings     Rejected the net asset approach by Caracci‟s expert         The home h...
Caracci v. Commissioner   U.S. Court of Appeals       The appeals court considered certain undisputed facts           S...
Bergquist v. Commissioner (2008)   Background       University Anesthesiologists, P.A. (UA) was the exclusive        pro...
Bergquist v. Commissioner   Tax Court findings     UA should not be valued as a going concern because      the consolida...
Derby v. Commissioner (2008)   Background       Petitioner-physicians sold their practices to Sutter        Health and e...
Derby v. Commissioner   Tax Court findings       Physician‟s transfer of intangible assets        contingent on employme...
Judicial Developments   What are the fraud and abuse issues related    to FMV       Bradford       Tuomey       Covena...
U.S. ex rel. Singh v. Bradford Regional (2010)   Group of two physicians lease nuclear camera from    GE and perform serv...
U.S. ex rel. Singh v. Bradford Regional   District Court granted summary judgment    against the hospital       Court pl...
U.S. ex rel. Singh v. Bradford Regional   Lessons       FMV analysis and reports are useful, but courts        may look ...
U.S. ex rel. Drakeford v. Tuomey(2011)   Surgeons begin development of an ASC   Hospital hires surgeons as employees    ...
U.S. ex rel. Drakeford v.Tuomey   DOJ argues that compensation is not FMV    because “the hospital‟s motivation in enteri...
U.S. ex rel. Drakeford v.Tuomey   Lessons       Employment exception large, but not infinite       Motivation can color...
U.S. v. Covenant Medical(2009)   Covenant Medical Center of Waterloo, Iowa    paid $4.5 million to settle Stark Law and  ...
U.S. v. Covenant Medical   Lessons       Full time employment is subject to potential        enforcement action       B...
U.S. v. Campbell v. UMDNJ etal.   Background:       University Hospital was a Level 1 Trauma Center           Maintenan...
U.S. v. Campbell v. UMDNJ etal.   Findings:       If there was no requirement to actually perform        the duties of a...
Kosenske v. Carlisle HMA, Inc.   Background:       Anesthesiologists had an exclusive service arrangement with        ho...
VALUATION CONCERNS   THE TOP 6 LIST                     30
Number 6: Purchasing theAncillaries of a Practice   Certain physician practices have significant ancillary service lines ...
Number 5: Post TransactionCompensation    As a result of Derby v. Commissioner, the valuation community     has generally...
Using Benchmark Surveys     Specialty: General                              Compensation per wRVU     Cardiology          ...
Partnership Model                Compensation    wRVUs Compensation                                         per wRVU  Phys...
Statistical Analysis of PartnershipModel                       10th %ile   25th %ile   50th %ile   75th %ile    90th %ile ...
Number 4: GuaranteedCompensation   When assessing what level of guaranteed compensation to    pay a physician, historical...
Number 3: Call Coverage andMedical Director Compensation   Compensation for call coverage should account for the actual b...
Call Coverage Compensation   Procedure:       Determine number of FTEs required to provide call        coverage        ...
Medical Directorships    “A fair market value hourly rate may be used to compensate     physicians for both administrativ...
Number 2: Co-ManagementAgreements   Incentive paid for quality measures must be    set based on improvement in quality as...
Relationship of Management Feeto Level of Services                                       100.0%                           ...
Relationship of Management Feeto Net Revenue of Department            $350.0 Millions            $300.0            $250.0 ...
Number 1: AggregateCompensation   Regardless of whether the individual    components are paid at FMV, the overall    comp...
Aggregate CompensationCalculationGeneral Cardiology                               At $45 per   At $55 per At $65 per      ...
Benchmarking AggregateCompensation                        At $45 per wRVU       At $55 per wRVU       At $65 per wRVUAggre...
WAYS TO MANAGE COMPLIANCE WITH FMV                                     46
Policies and Procedures   Improve policies on how FMV for services is determined internally       Include procedures on ...
Medical Directorship Form                                                               Med Dir Duty Physician            ...
Change the Payment Structure   Major concern in hospitals is the payment of stipends for    inpatient coverage that is to...
Monitor   Centralize the task of documenting FMV    compliance, ordering of FMV opinions, and    review of FMV opinions ...
FMV Reports   Review closely for seemingly immaterial    inaccuracies   Look at core financial assumptions   If possibl...
SUMMARY AND TAKEAWAYS                        52
   Make sure compensation arrangements with    referral sources comply with the FMV requirement    under various laws    ...
Fair Market Value in    Hospital and Physician        TransactionsJeff Fitzgerald, Shareholder, Polsinelli Shughart       ...
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FMV in Healthcare Transactions

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FMV in Healthcare Transactions

  1. 1. Fair Market Value in Hospital and Physician Transactions Jeff Fitzgerald, Shareholder, Polsinelli ShughartCurtis Bernstein, Director, Sinaiko Healthcare Consulting December 1, 2011
  2. 2. Outline of Presentation Legal Background Noteworthy Judicial Determinations Top Six Valuation Concerns Ways to Manage Compliance with FMV Summary and Takeaways 2
  3. 3. Legal Background Anti-kickback Statute Stark Law Tax exempt status 3
  4. 4. Legal Background - AKS AKS prohibits any person from knowingly and willfully offering, paying, soliciting, or receiving remuneration in exchange for or to induce the referral or any item or service covered by Medicare  Broadly interpreted by the courts to have been violated “if one purpose of the payment was to induce future referrals”  But, the criminal intent element requires proof that the defendant acted in a knowing and willful manner, meaning that the defendant knew his/her conduct was illegal or wrongful  PPACA tweaks but does not eliminate the intent element 4
  5. 5. Legal Background - AKS Many safe harbors have FMV as an element PPACA expanded the False Claims Act to include civil liability for a violation of the AKS If not FMV, then government theory  Amount paid in excess of FMV is a payment for referrals  All “tainted” claims are false 5
  6. 6. Legal Background - Stark Prohibits payment to hospitals for "designated health services" if physician making the referral has a financial relationship that does not meet an exception Strict liability – Medicare payment is prohibited regardless of intent False Claims Act liability – if noncompliance is “knowing” then penalties may apply Most exceptions require FMV 6
  7. 7. Legal Background - StarkFair market value means the value in arm‟s-length transactions, consistent with thegeneral market value. „„General market value‟‟ means the price that an asset wouldbring as the result of bona fide bargaining between well-informed buyers and sellerswho are not otherwise in a position to generate business for the other party, or thecompensation that would be included in a service agreement as the result of bonafide bargaining between well-informed parties to the agreement who are nototherwise in a position to generate business for the other party, on the date ofacquisition of the asset or at the time of the service agreement. Usually, the fairmarket price is the price at which bona fide sales have been consummated forassets of like type, quality, and quantity in a particular market at the time ofacquisition, or the compensation that has been included in bona fide serviceagreements with comparable terms at the time of the agreement, where the price orcompensation has not been determined in any manner that takes into account thevolume or value of anticipated or actual referrals. With respect to rentals and leasesdescribed in § 411.357(a), (b), and (l) (as to equipment leases only), „„fair marketvalue‟‟ means the value of rental property for general commercial purposes (nottaking into account its intended use). In the case of a lease of space, this value maynot be adjusted to reflect the additional value the prospective lessee or lessor wouldattribute to the proximity or convenience to the lessor when the lessor is a potentialsource of patient referrals to the lessee. For purposes of this definition, a rentalpayment does not take into account intended use if it takes into account costsincurred by the lessor in developing or upgrading the property or maintaining theproperty or its improvements. 42 CFR § 411.351 7
  8. 8. Legal Background – Stark Additional Stark Law concept  Most exceptions also require compensation to “not take into account the volume or value of referrals or other business generated between the parties”  Separate from FMV element but leads to ambiguous and circular logic  If not FMV, then takes into account referrals …  If takes into account referrals, then not FMV 8
  9. 9. Legal Background - Tax exemptstatus Private inurement prohibits use of a charity‟s assets to unreasonably benefit an "insider"  Sanctions include loss of tax exempt status IRS Intermediate Sanctions provisions authorize excise taxes and penalties for the payment of excessive compensation to disqualified persons Compensation listed on form 990 9
  10. 10. Judicial Developments What is FMV mean in health care space?  Caracci  Bergquist  Derby What are the fraud and abuse issues related to FMV  Bradford  Tuomey  Covenant 10
  11. 11. Caracci v. Commissioner(2006) Home health companies converted from tax-exempt to for-profit Companies sustained repeated losses and at the end of fiscal year 1995, had a capital deficit of $1.4 million. Home health companies in Mississippi required a certificate of need and Mississippi issued a moratorium on new CONs Two appraisers valued the home health companies for purposes of the conversion and determined that liabilities exceeded the value of tangible and intangible assets  Intangible assets, including the CONs, would not result in positive fair market value because that assets had been consistently unprofitable IRS determined that the value of the assets transferred exceeded the value of liabilities by $18.5 million and imposed excise taxes and income tax deficiencies and penalties 11
  12. 12. Caracci v. Commissioner Tax Court findings  Rejected the net asset approach by Caracci‟s expert  The home health companies‟ expert dismissed the market approach in light of the difference between market comparable transactions and public companies  Tax court accepted that Commissioner‟s expert‟s use of the market approach but reduced the revenue to price multiple without a full explanation as to why  Based on the market approach, the tax court found that home health companies had value and excess economic benefit of $5.2 million was transferred  Tax court ordered the taxpayer to pay $69.7 million 12
  13. 13. Caracci v. Commissioner U.S. Court of Appeals  The appeals court considered certain undisputed facts  Sta-Home relied on Medicare for 95% to 97% of revenue for which Medicare only reimbursed up to actual cost and disallowed 0.7% of annual costs  As a result of this reliance on Medicare, the more services provided, the larger the losses of the company grew  The was no likely potential buyer for Sta-Home  The Tax Court incorrectly compared Sta-Home to solvent, publicly traded companies  The Tax Court‟s conclusion that Sta-Home had the potential to make a profit was erroneous  Tax court has a long standing position that unprofitable intangible assets do not contribute to FMV unless those assets produce net income or earnings  IRS Revenue Rule 59-60 requires the IRS to assign zero value to unprofitable intangible assets  The presence of goodwill and its value, therefore, rests upon the excess of net earnings over and above a fair return on the net tangible assets  The Tax Court clearly erred and violated its own prior rulings in failing to recognize that the unprofitable intangible assets – including the workforce, the licenses, the CONs, the Medicare dependent client base, and the aging and largely uncollectible accounts receivable – had little or no market value 13
  14. 14. 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 14
  15. 15. 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 15
  16. 16. Derby v. Commissioner (2008) Background  Petitioner-physicians sold their practices to Sutter Health and entered into employment contracts  Sutter Health was unwilling to pay anything for the intangible assets or goodwill  Physicians claimed that they each donated the intangible assets of their medical practice to Sutter (and estimated the value by an expert appraisal) 16
  17. 17. Derby v. Commissioner Tax Court findings  Physician‟s transfer of intangible assets contingent on employment agreement  No donation because transaction was “inherently reciprocal” and intangible assets were leveraged for employment compensation  Burden on physicians to show that the value transferred is greater than value received  Physicians could not show that future salaries not netted out of the contributions 17
  18. 18. Judicial Developments What are the fraud and abuse issues related to FMV  Bradford  Tuomey  Covenant 18
  19. 19. 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 19
  20. 20. 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 20
  21. 21. 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  Some things just can‟t be purchased 21
  22. 22. 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 22
  23. 23. 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 23
  24. 24. 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 comparable 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 24
  25. 25. U.S. v. Covenant Medical(2009) Covenant Medical Center of Waterloo, Iowa paid $4.5 million to settle Stark Law and False Claims allegations 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 25
  26. 26. 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 26
  27. 27. U.S. v. Campbell v. UMDNJ etal. Background:  University Hospital was a Level 1 Trauma Center  Maintenance of this license was dependent on the annual performance of a certain number of cardiac procedures, including cardiac catheterizations and cardiothoracic surgeries  Since 1995, University Hospital failed to perform the requisite number of cardiac procedures to maintain its Level 1 Trauma Center license  In Spring 2002, UMDNJ engaged in a cardiology recruitment initiative  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  Defendant Campbell states that he “duly performed all of the services enumerated in the contract which he was given the opportunity to perform, and that he was compensation until the contract was cancelled.
  28. 28. U.S. v. Campbell v. UMDNJ etal. Findings:  If there was no requirement to actually perform the duties of a CAP then the compensation could not be the fair market value for those services, and thus would serve some other purpose, such as compensation for patient referrals.
  29. 29. Kosenske v. Carlisle HMA, Inc. Background:  Anesthesiologists had an exclusive service arrangement with hospital in which group provided pain management services at an outpatient clinic.  Anesthesiologists were able to use office space, medical equipment, and personnel at no cost Finding:  Group received numerous benefits as a result of its relationship to hospital which constitutes remuneration for purposes of the Stark Law.  Established a compensation arrangement and financial relationship between group and hospital.  Arrangement did not qualify for the personal service arrangements exception from the restrictions of the Stark Law
  30. 30. VALUATION CONCERNS THE TOP 6 LIST 30
  31. 31. Number 6: Purchasing theAncillaries of a Practice Certain physician practices have significant ancillary service lines (e.g., EKG, nuclear medicine, PET, catheterization lab for cardiologists or MRI and physical therapy for orthopedic surgeons)  Hospital may choose to purchase the ancillary services lines only leaving the physician practice to remain a separate entity or enter into an exclusive professional services agreement with the physician practice. Questions that must be answered:  Does the ancillary business line have value outside of the practice?  For example, would a third party purchase an imaging business of an orthopedic practice knowing that the orthopedic surgeons are entering into an exclusive arrangement with another party?  The answer to this question may be no, but what if the imaging business was owned by Radiologists?  Must explore the specifics of the entity – for example, does the entity own a transferable certificate of need?  Will the physician owners earn the same or more compensation than they earned post transaction?  Under the model where the practice remains a separate entity with no PSA, the answer is generally no.  Under the model in which an exclusive PSA is entered into, the answer is generally yes.  Fallacy: So long as the compensation under the PSA is FMV, then the compensation does not need to be considered in the valuation of the ancillaries. 31
  32. 32. Number 5: Post TransactionCompensation As a result of Derby v. Commissioner, the valuation community has generally accepted that post transaction compensation must be considered in the valuation of a physician practice.  FMV assumes hypothetical buyer with knowledge of the transaction  Question – Is post transaction specific to the buyer or the transaction? Determining FMV of physician services  A number of hospitals still determine compensation through unadjusted direct application of the compensation per wRVU table presented in benchmark surveys  The physicians producing at the upper levels of productivity generally do not earn compensation per wRVU at the upper levels  Compensation within the benchmark surveys is aggregate compensation  All compensation paid to a physician (e.g., clinical, call coverage, medical directorship, etc.) must remain fairly consistent with market data  “Reference to multiple, objective, independently published salary surveys remains a prudent practice for evaluating fair market value.”** Federal Register, Volume 72, Number 171 page 51015 32
  33. 33. Using Benchmark Surveys Specialty: General Compensation per wRVU Cardiology 25th %ile 50th %ile 75th %ile 90th %ile Reported = $46.30 = $57.95 = $74.77 = $128.05 Compensation 25th %ile = 4,710 $218,073 $272,945 $352,167 $603,116 $309,469 50th %ile wRVUs = 6,634 307,154 384,440 496,024 849,484 431,740 75th %ile = 9,078 420,311 526,070 678,762 1,162,438 544,123 90th %ile = 12,092 559,860 700,731 904,119 1,548,381 700,736Source: Medical Group Management Association Physician Compensation and Productivity Survey: 2011 based on 2010 resultsNot an opinion of value – For illustrative purposes only 33
  34. 34. Partnership Model Compensation wRVUs Compensation per wRVU Physician A $575,000 26,000 $22.12 Physician B $550,000 15,000 $36.67 Physician C $525,000 9,500 $55.26 Physician D $550,000 12,500 $44.00 Physician E $600,000 14,000 $42.85 Physician F $575,000 18,000 $31.94 Total $3,375,000 95,000 $36.00 34
  35. 35. Statistical Analysis of PartnershipModel 10th %ile 25th %ile 50th %ile 75th %ile 90th %ile Compensation $537,500 $550,000 $562,500 $575,000 $587,500 wRVUs 11,000 12,875 14,500 17,250 22,000 Compensation per wRVU $27.03 $33.13 $39.76 $43.71 $49.63 Mathematically, multiplying the 90th percentile wRVUs times the 90th percentile compensation per wRVU results in compensation of approximately $1.1 million, which significantly exceeds the compensation of any physician in the group. We can note that because of the “partnership model” of this group, Physician A takes significantly lower compensation per wRVU than Physician C. We also note that compensation per wRVU is decreasing as the number of wRVUs performed increases. If each physician was paid a consistent compensation per wRVU, the average compensation per wRVU is $36, which approximates the 40th percentile. 35
  36. 36. Number 4: GuaranteedCompensation When assessing what level of guaranteed compensation to pay a physician, historical compensation may be a good starting point  The health system must remember that historical compensation is aggregate, which means that it may include compensation for clinical and administrative services.  Accordingly, application to clinical services only may not make sense  Historical compensation may include “other income.” For example, certain physicians may take a lower compensation in the current year to purchase a partnership interest in the practice resulting in higher compensation to shareholders.  Historical compensation may be lower than market because of income tax strategies like tax-deferred compensation and retirement plans, agreements not at FMV between related parties (e.g., rent), etc. 36
  37. 37. Number 3: Call Coverage andMedical Director Compensation Compensation for call coverage should account for the actual burden to the physician providing coverage.  OIG Opinion 07-10 outlined the following issues that must be considered in determining FMV compensation:  Severity of illness typically encountered by that specialty in treating a patient presenting at the ED;  Likelihood of having to respond when on-call at the ED;  Likelihood of having to respond to a request for inpatient consultative services for an uninsured patient when on-call; and  Degree of inpatient care typically required of the specialty for patients that initially present at the ED. Depending on the compensation structure and actual compensation paid, compensation for call coverage paid to independent contractors may not always equal the amount paid to employees  The risk of reimbursement gets shifted from the physician to the health system  The cost of benefits is generally paid separately from call compensation by the health system but is included in the payment to independent contractors 37
  38. 38. Call Coverage Compensation Procedure:  Determine number of FTEs required to provide call coverage  Not strictly based on hours on call; Must be adjusted in light of the limited number of hours required to actually provide clinical services  Determine FMV for clinical services for the specialty  Reduce expected collections from the provision of coverage from the product of FTEs and compensation  Include any reimbursement for services provided on indigent patients (i.e., hospital may pay 100% of Medicare for these services) 38
  39. 39. Medical Directorships “A fair market value hourly rate may be used to compensate physicians for both administrative and clinical work, provided that the rate paid for clinical work is fair market value for the clinical work performed and the rate paid for administrative work is fair market value for the administrative work performed. We note that the fair market value of administrative services may differ from the fair market value of clinical services. A fair market value hourly rate may be used to determine an annual salary, provided that the multiplier used to calculate the annual salary accurately reflects the number of hours actually worked by the physician.”* Time sheet should be checked diligently prior to compensating a physician for his or her services.  Payment for non medical director services has been a key enforcement area for the federal government*Federal Register, Volume 72, Number 71, page 51016 39
  40. 40. Number 2: Co-ManagementAgreements Incentive paid for quality measures must be set based on improvement in quality as opposed to maintenance Services must actually be provided and compensation must be for the level of services provided 40
  41. 41. Relationship of Management Feeto Level of Services 100.0% 90.0% 80.0% Percent of Traditional Services 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 3.0% 4.0% 5.0% 6.0% Percent of RevenueNot an opinion of value – For illustrative purposes only 41
  42. 42. Relationship of Management Feeto Net Revenue of Department $350.0 Millions $300.0 $250.0 $200.0 $150.0 $100.0 $50.0 $- 6.0% 5.5% 4.0% 3.0% 2.0% 1.5% Percent of RevenueNot an opinion of value – For illustrative purposes only 42
  43. 43. Number 1: AggregateCompensation Regardless of whether the individual components are paid at FMV, the overall compensation must still make sense. Compensation data provided in benchmark surveys present aggregate compensation.  May include compensation for clinical services, transition, quality and other incentive bonuses, call coverage, medical directorships, and other administrative services. 43
  44. 44. Aggregate CompensationCalculationGeneral Cardiology At $45 per At $55 per At $65 per wRVU wRVU wRVUClinical Compensation (10,000 wRVUs x $ $450,000 $550,000 $650,000per wRVU)Quality Incentive 25,000 25,000 25,000Call Coverage (73 days x $500 per day) 36,500 36,500 36,500Medical Directorship (20 hours per month x$150 per hour) 36,000 36,000 36,000Total Aggregate Compensation $547,500 $647,500 $747,500wRVUs 10,000 10,000 10,000Effective Compensation per wRVU $54.75 $64.75 $74.75 Not an opinion of value – For illustrative purposes only 44
  45. 45. Benchmarking AggregateCompensation At $45 per wRVU At $55 per wRVU At $65 per wRVUAggregate 68th Percentile 85th Percentile 106 x 90thCompensation PercentilewRVUs 76th Percentile 76th Percentile 76th PercentileCompensation per 44th Percentile 52nd Percentile 58th PercentilewRVU Not an opinion of value – For illustrative purposes only 45
  46. 46. WAYS TO MANAGE COMPLIANCE WITH FMV 46
  47. 47. Policies and Procedures Improve policies on how FMV for services is determined internally  Include procedures on when an external FMV opinion is required  Include procedures on acceptable approaches to determining FMV (e.g., FMV based on what the physician is paid by the hospital across town is generally not sufficient documentation) Implement standard forms to track services provided including time sheets for medical directorships  Improve policy on sign off by multiple executive staff Review policies and procedures around physician compensation on a regular basis Educate board of directors on FMV compliance and proper methods for determining FMV for various services (i.e., most agreements will require board approval before agreements are executed). 47
  48. 48. Medical Directorship Form Med Dir Duty Physician ExecutiveDate Description of Service Provided Reference* Initials Initials* Enter line number reference from exhibit in medical director agreement to which duty corresponds 48
  49. 49. Change the Payment Structure Major concern in hospitals is the payment of stipends for inpatient coverage that is too high  Change the structure to pay per FTE, per shift, per wRVU, per ASA unit, etc.  Straight variable structures are not recommended because the group will need some minimal staff (e.g., if volumes increase so that another physician is required, the group may not be able to hire a 0.1 FTE physician) For co-management structures, explore compensating the base rate on a hourly compensation for actual time provided (e.g., attending meetings)  Incentive compensation cannot exceed fixed compensation paid (see Revenue Ruling 97-13) For call coverage or inpatient coverage, look at paying a fixed amount per encounter (e.g., 100% of Medicare for services to indigent patients) 49
  50. 50. Monitor Centralize the task of documenting FMV compliance, ordering of FMV opinions, and review of FMV opinions Have an effective compliance team in place to monitor all compensation arrangements  Compliance team will review internal documentation and approve requests for third party appraisals 50
  51. 51. FMV Reports Review closely for seemingly immaterial inaccuracies Look at core financial assumptions If possible document basis for key assumptions that drive conclusions Check timeliness of data and report Retain in location where can be found in the future 51
  52. 52. SUMMARY AND TAKEAWAYS 52
  53. 53.  Make sure compensation arrangements with referral sources comply with the FMV requirement under various laws  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 pays for referrals  Beware of Bradford and Tuomey 53
  54. 54. Fair Market Value in Hospital and Physician TransactionsJeff Fitzgerald, Shareholder, Polsinelli Shughart jfitzgerald@polsinelli.com Curtis Bernstein, Director, Sinaiko Healthcare Consulting curtis.bernstein@sinaiko.com 54

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