PYA Principal Lyle Oelrich presented “Demystifying Commercial Reasonableness in Physician/Hospital Transactions” at the Georgia Society of Certified Public Accountants’ (GSCPA) 2016 Healthcare Conference, February 11, 2016, in Atlanta, Georgia.

1. Page 0February 11, 2016
Prepared for the Georgia Society of CPAs Healthcare Conference
Demystifying Commercial
Reasonableness in Physician/
Hospital Transactions
Presented by:
W. Lyle Oelrich, Jr., Principal
Pershing Yoakley & Associates, P.C.
The Georgia Society of CPAs
Health Care Conference
February 11, 2016

2. Page 1February 11, 2016
Prepared for the Georgia Society of CPAs Healthcare Conference
Introduction – Why Are We Here Today?

3. Page 2February 11, 2016
Prepared for the Georgia Society of CPAs Healthcare Conference
Commercial Reasonableness
Definition
An
HHS has
interpreted
“commercially
reasonable”
Stark II Phase II also
suggests
Additionally, OIG
has stated
“An arrangement
that appears to be a
sensible, prudent
business agreement,
from the perspective
of the particular
parties involved,
even in the absence
of any potential
referrals.”
“An arrangement will be
considered ‘commercially
reasonable’ in the
absence of referrals if
the arrangement would
make commercial sense
if entered into by a
reasonable entity of
similar type and size and
a reasonable physician
of similar scope and
specialty, even if there
were no potential DHS
referrals.”
In order to meet the
threshold of
commercial
reasonableness,
compensation
arrangements with
physicians should be
“reasonable and
necessary.”

4. Page 3February 11, 2016
Prepared for the Georgia Society of CPAs Healthcare Conference
Commercial Reasonableness vs.
Fair Market Value
Commercial Reasonableness vs.
Fair Market Value
Commercial reasonableness is slightly different from
fair market value.
Does the transaction make cents sense?
Was this a good business arrangement to enter into in
the first place?
Is there a legitimate business reason to enter into this
agreement?
Was it commercially reasonable even if there are no
referrals between the parties?
Do the underlying economics of the transaction make
sense?
Fair Market Value
(NARROW)
Commercial Reasonableness (BROAD)
What is the range of
dollars you are going
to pay for the space/
services?

5. Page 4February 11, 2016
Prepared for the Georgia Society of CPAs Healthcare Conference
Assessing Commercial
Reasonableness
Unique Facts
and
Circumstances
Commercial
Reasonableness
Definition and
Regulations
Court
Guidance

6. Page 5February 11, 2016
Prepared for the Georgia Society of CPAs Healthcare Conference
Judicial Guidance Involving
Commercial Reasonableness
United States ex. rel., Kaczmarczyk v. SCCI Hospital Ventures
Outcome: $10,000,000 Settlement
Key Background
 Qui tam action
 Entered into medical
directorship relationships
across multiple hospital
campuses within the
system
Key Findings
 Low patient census did
not warrant multiple
medical directors
 Certain paid duties
overlapped with medical
staff bylaw requirements
 Inadequate oversight and
enforcement of
compliance measures

7. Page 6February 11, 2016
Prepared for the Georgia Society of CPAs Healthcare Conference
Judicial Guidance Involving
Commercial Reasonableness
United States v. Campbell
Outcome: $8,330,000 Settlement
Key Background
 According to the published
opinion, hospital partnered
with local cardiologists to
secure referrals
 Offered part-time positions to
provide principally academic
services
Key Findings
 Physicians were not required to
perform the majority of duties
outlined in agreement
 Lack of qualifications to be a
professor
 Court reasoned that physician’s
title and compensation were
commercially unreasonable,
regardless of whether the
compensation was fair market
value

8. Page 7February 11, 2016
Prepared for the Georgia Society of CPAs Healthcare Conference
Commercial Reasonableness Approach
Five Part
Analysis
Business Purpose Analysis
Provider Analysis
Facility Analysis
Resource Analysis
Independence & Oversight Analysis

9. Page 8February 11, 2016
Prepared for the Georgia Society of CPAs Healthcare Conference
Business Purpose AnalysisBusiness Purpose Analysis
What environment (i.e., mission, vision, service area, service line,
organizational history) will the proposed arrangement operate?
Does the arrangement being pursued address any unmet community need or
service?
Does the proposed arrangement effectuate a legitimate business purpose that
is essential to the functioning of the entity?
Are the services contemplated in the proposed agreement related to the
business and/or clinical plans and strategies of the entity?
Do the proposed services contribute to the provider’s profits and/or the
development of a particular service line without requiring income from
proscribed referrals?

10. Page 9February 11, 2016
Prepared for the Georgia Society of CPAs Healthcare Conference
Provider AnalysisProvider Analysis
Does the proposed arrangement require a physician to perform the services?
Does the proposed arrangement require a physician of a certain specialty to
perform the services?
Does any specialized training and/or experience of the provider exist that
should be taken into account when evaluating the proposed arrangement?
Are the particular nature of the duties and corresponding amount of
accountability associated with the proposed arrangement clearly defined and
reasonable?
Is the amount of time demanded of the physician under the proposed
arrangement reasonable?
Do any salary considerations exist that should be evaluated in relation to
providers of similar specialty and experience in comparable organizations and
positions?

11. Page 10February 11, 2016
Prepared for the Georgia Society of CPAs Healthcare Conference
Facility AnalysisFacility Analysis
Are patient demand, the number of hospital patients,
and/or the community need sufficient to justify the
services?
Are patient acuity levels such that the proposed services
are necessary?
Do patient needs dictate the necessity for a separate and
distinct provider for the proposed services?
Are the size of the hospital and the relevant department
appropriate for the proposed services?

12. Page 11February 11, 2016
Prepared for the Georgia Society of CPAs Healthcare Conference
Resource AnalysisResource Analysis
Is the proposed arrangement a necessary addition to the managerial and
administrative efforts already required by the medical staff bylaws?
Has the number of committees and/or meetings that otherwise require
physician attendance outside of the proposed arrangement been considered?
If the healthcare entity is part of a larger health system, do patient care
protocols and procedures exist that can be coordinated among its facilities in
lieu of the proposed arrangement?
Does the proposed arrangement lend itself to the potential for duplication or
misuse?
Does the healthcare entity maintain any features, controls, and/or safeguards
to reduce or eliminate the potential for risks of duplication or misuse?

13. Page 12February 11, 2016
Prepared for the Georgia Society of CPAs Healthcare Conference
Independence and Oversight
Analysis
Independence and Oversight
Analysis
Does the healthcare entity use performance assessments to determine whether new or
existing provider arrangements should be reduced (e.g., hours condensed) or
eliminated?
Does the entity maintain a formal process for executive management and legal counsel
to review and 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 its effectiveness and demonstrate a legitimate need for continuation and/or
renewal?
Is there a written agreement that addresses the terms of the proposed arrangement?

14. Page 13February 11, 2016
Prepared for the Georgia Society of CPAs Healthcare Conference
W. Lyle Oelrich, Jr., Principal
Pershing Yoakley & Associates, P.C.
loelrich@pyapc.com