PYA Principal Carol Carden co-presented “Forensic and Valuation Issues in Healthcare” at the AICPA Forensic & Valuation Services Conference in New Orleans, LA, November 10, 2014.

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Forensic and Valuation
Issues in Healthcare
November 10, 2014

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Agenda and Learning Objectives
Section 1
Regulatory Framework, OIG Investigative Focus, and Recent Cases Against
Healthcare Providers 4
Section 2
Calculating Damages and Methodology Issues for Healthcare Companies 24
Section 3
Role of Financial Advisors 30
Section 4
Valuation Drivers in Acquiring Physician Practices 43
Appendix
Speaker Biographies 49
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Key Take-Aways
This session will assist in understanding the current
regulatory environment and areas of focus by
regulators in monitoring payments of healthcare
claims and enforcement of laws.
This session will assist in understanding healthcare
claim payment and valuation issues unique to the
healthcare industry and will cover how advisors can
assist counsel and clients in assessing false claim
investigations, addressing complex valuation
issues, assessing ability to pay and providing
analysis assistance and expert testimony.
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4. Section 1:
Regulatory Framework, OIG Investigative Focus, and
Recent Cases Against Healthcare Providers
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5. Anti-Kickback Statute, Stark Law and
False Claims
Anti-kickback statute is designed to prevent:
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- Over-utilization
- Increased costs
- Corruption of medical decision-making
- Patient steering
- Unfair competition
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Anti-Kickback Statute
The Anti-Kickback Statute
• Prohibits
- Knowingly and willfully, directly or indirectly offering, paying,
soliciting, or receiving remuneration in order to induce or
reward the referral or purchase of items or services to be
paid for by federal healthcare benefit program
Violation is a felony:
• Criminal fines up to $25,000; prison up to 5 years
• Civil penalties, fines, exclusion
Statutory Exceptions
Regulatory Safe Harbors
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Stark Law
Stark Law (physician self-referral law)
Unless an exception applies, the physician self-referral
law prohibits:
• A physician from making referrals for certain designated health
services payable by Medicare to an entity with which he or she
(or an immediate family member) has a financial relationship.
• The entity from presenting or causing to be presented claims to
Medicare (or billing another individual, entity, or third party
payer) for those referred services.
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Sanctions and Penalties
A strict liability statute:
• Denial of payment for DHS provided in violation of the
prohibition
• Refund of money collected for DHS provided in violation of the
prohibition
Other penalties include:
• Civil monetary penalties (for knowing violations only)
• Exclusion from Medicare/Medicaid
• Potential civil False Claims Act liability
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Physician Self-Referral Analysis: Three
Questions
1. Is there a referral by a physician for a designated health
service (DHS) payable by Medicare?
2. If yes, does the physician (or an immediate family
member of the physician) have a financial relationship with
the entity furnishing the DHS?
3. If yes, does the financial relationship fit in an
exception?
• If the answer to the third question is “no,” then there is a
violation.
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10. Stark Exceptions: A financial relationship exists.
Now what?
Stark exceptions v. Anti-Kickback “safe harbors”
Three major categories of Stark exceptions
• General exceptions: both ownership/compensation
• Ownership exceptions
• Compensation exceptions
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False Claims Act
Federal statute imposes civil liability for submitting
false claims for payment to United States
• Submitting a claim for payment, or causing claim to be
submitted for payment by government funds
• Making or using, or causing to be made or used, false records or
statements material to a false claim
• Making or using, or causing to be made or used, false records or
statements material to an obligation to pay money or property to
the Government, or knowingly concealing or improperly avoiding
or decreasing an obligation to pay money to the Government
• Conspiring to defraud the Government by getting a false or
fraudulent claim paid
• All require “knowledge” of falsity/fraud
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Types of false claims
Direct False Claims: liability for submitting false
claims to the Government, or making false
statements to get false claims paid by the
Government
Reverse False Claims: liability for making false
statements to avoid paying money owed to the
Government
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13. Liability Based on Violation of Other Laws
The violation of a separate statute or regulation can
provide the basis for liability under the False Claims
Act
The underlying violation renders the claim false or
fraudulent, thus giving rise to the False Claims Act
violation
Three basic categories:
• Items or services were defective
• Claimant falsely expressly certified compliance with
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statute/regulation
• Compliance was a condition of payment
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14. Risks & Liabilities for Violations of False
Claims Act
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Treble damages
Civil penalties of $5,500 to $11,000 per claim
Likely that provider will be subject to a Corporate
Integrity Agreement
Risk of exclusion from federal healthcare programs
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15. Increased stakes with recent amendments
False Claims Act remained unchanged for almost thirty
years:
• Two recent major amendments to False Claims Act, expanding
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reach of False Claims Act
• Fraud Enforcement and Recovery Act of 2009 (FERA).
- Biggest impact on healthcare providers – amendment of
reverse false claims provision
• Patient Protection and Affordable Care Act of 2010 (Affordable
Care Act)
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Enforcement Trends
Civil enforcement through False Claims Act
Focused areas of enforcement
• Pharmaceutical manufacturers, especially off-label promotion
and kickbacks
• Devices, especially kickbacks
• Inpatient/outpatient hospital
• Hospice (patients’ medical eligibility)
• Financial relationships with physicians (kickbacks and Stark
Law, especially in Medicaid)
• Individuals
Increased enforcement by states
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Enforcement Trends
Recent amendments indicating support from the
legislature
The perfect storm for healthcare fraud enforcement
• Law Enforcement / Regulatory Agencies
• Fighting fraud and abuse is a priority
• More aggressive, coordinated, and successful
• HEAT: Health Care Fraud Prevention and Enforcement Action
Team
• Whistleblowers
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Enforcement Trends
Healthcare Investigations
Origination of Cases
• Qui Tam Lawsuits
• Proactive Investigations
• Referrals from HHS/OIG or Contractors
• Criminal prosecutions
Parallel Proceedings
• DOJ directive to pursue parallel civil and criminal
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What Does it All Mean?
What Does All of this Mean for the Healthcare
industry?
• Increased likelihood of facing enforcement actions.
• Increased likelihood of facing whistleblower complaints.
• Increased likelihood companies will undertake internal
investigations.
• Be proactive and stay off the radar.
• Compliance, compliance, compliance.
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Recent Cases
2014 on track to be a record-breaking year for
government recoveries in healthcare, alleging in
many cases violations of:
• False Claims Act
• Stark Law
• Anti-Kickback Statue
Justice Department recovered $3.8 billion from
False Claims Act cases in fiscal year 2013
Source: Becker’s Hospital Review & Department of Justice websites
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21. Section 2:
Calculating Damages and Methodology Issues for
Healthcare Companies
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22. Damages Analysis – Physician Practices
Claims for lost profits in connection with physician practices
are typically defined in terms of loss of compensation.
• For a small practice, lost profits analysis is similar to a physician’s claim
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for lost earnings in a personal injury case.
Large practices and/or those with ancillary testing capability
(e.g., imaging and laboratory) have more traditional lost profits
damages claims such as violation of non-compete/non-solicitation
agreements
• Possible damages:
- Lost profits related to ancillary testing revenues, from losing the
violator’s patients, and/or overhead costs previously allocated to
former employee
- Recruiting and training costs to replace the lost employee
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Basic Compensation Analysis
A method for determining lost profits for a physician
Individual productivity and the rate per unit-of-service paid for
the various services are large drivers of physician profits and
compensation
• Productivity can be measured a number of ways such as work RVUs,
collections, encounters, etc.
• Trends in payer reimbursement should be considered. Large concentrations in
governmental payers will limit ability to grow rate per unit-of-service
Any claim for lost profits should consider the historical pattern
of work by physician(s) and the local market area
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Physician Supply and Demand
Relevance of local vs. national data used to benchmark
physician compensation is dependent upon supply and
demand and the recruiting market
Nationwide shortage of specialty and the relative equivalence
in compensation by area
Other factors
• Rates paid by insurers for services
• Cost of living differentials
• Relationship between physician with significant influence and
specialized training such as robotically trained surgeons
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25. Damages Analysis – Other Healthcare
Organizations
Larger healthcare organizations have more traditional lost
profits analyses based on loss of cash flow to investors
• Examples include hospitals, surgery centers, dialysis clinics, cancer
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centers etc.
• Traditional “but for” analysis
• Also consider other contributing factors such as:
- Shifts in payer concentration
- Barriers to entry (i.e. Certificates of Need)
- Changes in technology
- Changes in governmental payer philosophy such as Medicare
changes in coverage decisions or payment rates
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Potential Lost Earnings Analysis
Experts should focus on
the following areas to
analyze potential lost
earnings:
Productivity
Trends
Physician
Supply and
Demand
Barriers to
Entry
Medicare
Changes
Payer Mix
Other
Factors
Capacity
Constraints
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Section 3:
Role of a Financial Advisor
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28. A financial advisor can assist a Client and its Counsel navigate
and address alleged false claims, other violations and related
damage matters
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The Role of a Financial Advisor

29. Roles for CPAs and FAs in Chapter 11 Bankruptcy
Assistance to Legal Counsel and Clients related to false claims
allegations, other asserted violations and judgments may include:
Evaluation and Calculation of the Alleged Damages and Penalty
Assessment and Testing of Claims
Evaluation of the Ability to Pay
Evaluation of Alternatives (Negotiation, Appeal, Bankruptcy, etc.)
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The Role of a Financial Advisor
Negotiation Assistance and Support
Expert Report and Testimony
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30. Evaluation and Calculation of the Alleged
Damages and Penalty
Review the asserted claim, underlying support of the claim and the
methodology to calculate the total claim
• Size of the claim
• Asserted actual vs. estimated claim amount
• Procedural testing issues
Review the nature of the claim and testing performed related to the
medical record and respective billing statement
• Improper payments to physicians for referrals – all referrals from physicians
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may be disallowed
• Review of medical necessity (e.g., treatment was deemed not medically
necessary)
• Improper characterization of patient status – billed as ‘inpatient,’ but should
have been ‘observation’ (e.g. one-day stay)
• Alleged up-coding of care
• Missing physician order for admission or certain ancillary procedures
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31. Evaluation and Calculation of the Alleged
Damages and Penalty (cont.)
Financial advisor may need to work with clinical and medical
record professionals in assessing the alleged claim
Per The Health Insurance Portability and Accountability Act of 1996
(HIPAA) requirements, a Business Associate Agreement is required
for a consultant to review detailed patient medical and billing
records
Financial advisor will work closely with legal counsel to determine
the assistance needed and may be engaged directly by counsel to
protect the confidentiality of work product and findings
After understanding the nature and size of the claim and
consultation with client and counsel, the next step is to:
• Determine how the government calculated the alleged total claim amount
• Conduct detail testing of claims the government (and its contractor)
reviewed and potentially expand the testing of claims to defend against
asserted claims and mitigate claim payment due
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32. Calculation of Claim Damages/Overpayments
Statistical sampling has been used by Centers for
Medicare & Medicaid Services (CMS) for over 40 years
as an accepted method of estimating overpayments
• CMS adopted this process due to the enormous administrative
burden and costs of auditing on an individual claim-by-claim basis
• CMS utilizes contractors to performs a detailed review of the medical
records and respective billing statements to identify any potential
inaccurate and false claims and related overpayments
• CMS and its contractor use an extrapolation methodology to
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calculate its estimated claim overpayment amount
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33. Calculation of Damages/Overpayments (cont.)
The methodology for statistical extrapolation has many
issues which include:
• A sample of as few as 30 Medicare claims may be statistically valid, but may not
be representative of the entire claims population; a larger sample size,
identification of proper claim population or actual testing of the full claims
population will likely have a different outcome (precision of overpayment estimate
may be questionable)
• Provider bears the burden of providing sufficient and timely information,
otherwise claim may be deemed inaccurate and is counted as an actual claim
error and is included in the extrapolation estimate for the total claim amount
• During the appeals process, if an initial determination is reversed, the
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extrapolation needs to be adjusted
• The sample tested may have unreliable results if the sample is not stratified
- Service line/service (e.g. cardiology, orthopedics, inpatient, outpatient, etc.)
- Nature of the claim (e.g., patient file missing the physician order for
admission to hospital differs from the file missing an order for a lab test –
partial incompletion of file may lead to disallowance of the entire claim)
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Assessment and Testing of Claims
On August 22, 2013, the Government Accountability
Office (GAO) released a report to Congress noting
several issues with the CMS review process, including:
• Varying post-payment review requirements across the different
contractors in claims selection, timeframes for provision of
documentation, communications to providers about the reviews, and
quality assurance processes
• Inaccurate claims determinations
• Concerns that the contingency fee payment structure creates
incentives for Recovery Audit Contractors (RAC) to be too
aggressive in determining improper claims, resulting in a significant
provider burden
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Overturning CMS Rulings
Challenging a CMS determination can be beneficial
as financial advisors may determine inaccuracies in
CMS findings
RAC Region
# of Claims With
Identified
Overpayments
# of
Overpayment
Identifications
Appealed*
% of
Overpayment
Identifications
Appealed
# of Appealed
Overpayment
Identifications
Overturned
% of Appealed
Overpayment
Identifications
Overturned
% of Appealed
Overpayment
Identifications
Overturned out
of Claims
Identified with
Overpayments
A 131,037 3,588 3% 955 27% 1%
B 110,468 15,726 14% 6,303 40% 6%
C 335,338 9,928 3% 3,612 36% 1%
D 490,168 35,956 7% 17,945 50% 4%
Total 1,067,011 65,198 6% 28,815 44% 3%
Source: OIG analysis of CMS appeals data, 2012, see http://oig.hhs.gov/oei/reports/oei-04-11-00680.pdf
*Because the outcomes could not be linked to specific RAC regions, these numbers exclude 3,968 unspecified appeals that were adjudicated by Administrative Law Judges.
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36. Ability to Pay Alleged Claim and Settlements
CMS expects corrective action and payment of claim and penalty
Financial settlements on False Claims Act allegations can be
negotiated and alleviate some financial burden; however, ability to
pay and liquidity issues may still exist
Financial advisors can assist providers with determining the ability
to pay the alleged claim or a potential settlement amount – How
much can a provider pay and still be viable?
• Identify excess cash on hand and cash needed to be maintained for current
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and future operations
• Forecast excess future cash flow
• Identify unencumbered assets for potential collateral for debt or possible
asset sale to generate cash for payment of alleged claim or settlement
• Determine debt capacity and ability to borrow (e.g., issue bonds, bank loan)
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37. Pay Claim Damages/Settlement
Administrative Appeal
Negotiate Settlement and Payments
Sale/Merger/Closure
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Evaluate Strategic Alternatives
Based on: (i) the nature and size of the claim, (ii) clinical, financial
and legal findings from claim analyses, (iii) expanded testing and
extrapolation review findings, and (iv) ability to pay and preliminary
negotiation and appeal results- the alternatives may vary.
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Current and
Evolving Situation Court Proceeding and Appeal
Chapter 7 or 11 Bankruptcy or
Restructuring/Sale/Liquidation

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Evaluation of Alternatives
Appeal Claim;
Negotiate,
Assess
ability to
pay
Conduct
testing &
analyses
Is
there a
capital/cash
crisis?
Is
stabilization
possible?
Can Funds
be Raised
for Payment
Negotiate/Appeal
Claim;
Consider
stabilization
activities
Consider
options
Chapter 11
Chapter 7
Negotiate/Appeal
Claim;
Conduct business
and financial
analysis
Consider
options for
Payment of
Claim or
Settlement
Exit strategies:
Merger/Sale
Pay Claim or
Settlement
Chapter 11
Meet
management
& legal
counsel
Yes
Yes
Yes
No
No
No
Exit strategies:
Merger/Sale
Initial Diagnostic: Decision Tree
Understand the alleged claim as well
as client issues and objectives
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39. Negotiation Assistance and Support
Financial advisors can help healthcare providers reach
potential settlements and implement government
required changes by:
• Reviewing policies, internal process controls and payments made:
payments to physicians, lease arrangements, bonus compensation
and teaching arrangements to resolve and possibly prevent Stark
Law and Anti-Kickback Statute allegations
• Issuing recommendations for corrective action, changes in policies
and assisting to implement proper controls and best practices
• Conducting internal investigations to compare to agency findings
• Conduct extensive cash flow forecasting and capital advisory
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assistance to determine ability to pay
• Evaluate alternatives including filing for bankruptcy to restructure all
obligations including government claim or financial settlement
• Traditional negotiation assistance regarding terms of settlement
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40. Section 4:
Valuation Drivers in Acquiring Physician Practices
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Value Drivers
Patient Demographics
Patient demographics form the core of the data for any medical
institution:
• Allow for the identification of a patient and his/her categorization into
categories for the purpose of statistical analysis
• Certain medical conditions are more prevalent for particular patient
groups
- For example, cardiology practices need a concentration of older
patients where pediatrics need more families
• Need to understand how far patients are willing to travel for medical
care – as an example dialysis clinic patients
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Value Drivers cont.
Referral Sources
Healthcare professionals who may make a referral:
• Physicians
• Nurse practitioners (NP)
• Physician assistants (PA)
• Certified nurse midwives (Midwives)
What are the ages of referral sources?
Are referral sources concentrated?
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43. Midlevel Providers (MLPs)
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Value Drivers cont.
Healthcare professionals other than physicians who provide
healthcare services to patients (NP, PA, & Midwives)
Allows the organization to leverage the care model
MLPs may provide services under the direct supervision of a
physician
If properly utilized, can result in additional margin to the
organization
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44. Payer Environment – Who is Footing the Bill?
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Value Drivers cont.
Concentration in a market of commercial health insurers (e.g.,
Blue Cross, United, Aetna, Cigna)
• The more concentrated the market in terms of health insurers, the less
likely a healthcare services provider will be able to negotiate favorable
contracts.
- Market control over pricing is held by these few insurers, thus
leading to an expectation of lower profits
- In some markets, commercial payers are less than Medicare
If rates are favorable, are they locked in for a number of years?
Are there automatic inflators built in?
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Value Drivers cont.
Ancillary Services
Allows for revenues to be generated from something other than a
physician’s personal effort
• Technical Component (TC):
- Paid in connection with ownership of equipment, provision of a technologist
to operate the equipment, supplies and general overhead.
• Professional Component (PC):
- Paid to the physician specifically for personal efforts like reading a test
If properly utilized, can drive additional value, otherwise can be a
deterrent to value
Can be barriers to entry here
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