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Professional Services Agreements:

A Physician-Hospital Integration Model Complying With Stark Law and Anti-Kickback Statute,

Protecting Tax Status, and Avoiding Key Deal Breakers

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

WEDNESDAY, MAY 25, 2016

Michael L. Blau, Partner, Foley & Lardner, Boston

Scott M. Safriet, Partner, HealthCare Appraisers, Delray Beach, Fla.

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Professional Services Agreements: Emerging Hospital-Physician Integration Model

Presented by:

Michael L. Blau, Esq. Foley & Lardner LLP 617.342.4040 [email protected]

Scott M. Safriet, CVA, MBA HealthCare Appraisers, Inc. 561.330.3488 [email protected]

Why PSAs?

Market imperative to integrate and align for quality and efficiency improvement

Need for team approach to disease and population health management

Aversion to employment of many historically independent physicians/medical groups

PSA preserves a modicum of practice independence and future strategic options for physicians.

Professional Services Agreements: A Physician-Hospital Integration Model 6 © Foley & Lardner LLP

Types of PSAs

Medical Director Agreements

Coverage Agreements

Hospital-Based Service Agreements

Leased Employee Agreements

Foundation Model Arrangements

PSA Staffing/Conversion Agreements

Co-Management Arrangements


PSA Staffing/Conversion Agreements

PSAs: Introduction

Professional Services Agreements

Have been powerful tools

To staff existing hospital service or develop new hospital specialty facility

To convert existing group sites to hospital licensed facilities paid at hospital outpatient payment rates

Integrate and align hospital and group to improve quality, efficiency and operations of hospital’s specialty service line


PSAs: Introduction (cont.)

Potential economic win-win

Group paid fair market value compensation on an aggregate fixed fee or work relative value unit (“wRVU”) basis

Eliminates risk of reimbursement reductions and collection risk (free care/bad debt)

Other: purchase of equipment, management services, employee lease?

Hospital establishes new satellite sites or facility and new book of oncology business

Good contribution margin due to combination of hospital rates and physician office cost structure

Potential 340B pricing opportunity

Recent legal developments erode economic advantage to hospitals of establishing or converting off-campus facilities

Potential economic losers

Payors—higher rates for “same” services

Higher patient co-pays

Impairs pharma profitability?


Professional Services Agreement


PSA Transaction

Avoid U/A transaction—Group cannot “perform the service”

Hospital could take assignment of Group leases from landlords

Hospital could purchase Group’s FFE and inventory at fair market value

Hospital would need to employ nurses/techs at off-campus locations (to meet Medicare provider-based status rules)

Group can provide all other staff

Physicians/NPs/PAs

Non-clinical staff at all sites

Nurses and techs at on-campus sites


PSA Transaction

Potential Transactional Elements

Professional Services Agreement (PSA)

Asset Purchase Agreement (APA)

Management Services Agreement (MSA)

Co-Management Agreement (CMA)?


Professional Services Agreement


Principal PSA Legal Issues

Provider-based Status Regulations

Within 35-mile radius

Hospital license requirements/Physical space standards

CON issues

Clinically, financially and administratively integrated

Hospital reporting lines

Hospital must directly employ mid-levels/techs at off-campus sites (other than NPs/PAs)

Medical group can lease non-clinical staff and NPs/PAs to Hospital


Principal PSA Legal Issues (cont.)

Section 603 of BiBA (2015)/”Site Neutrality”—eliminates Medicare hospital outpatient payment rates for new off-campus provider-based sites, beginning 1/1/17

Exceptions: The following off-campus provider-based facilities will continue to qualify to be paid by Medicare at hospital outpatient payment rates after January 1, 2017:

On-Campus Facilities—that is, facilities that are part of the main hospital building or that are located within 250 yards of the main hospital building. See 42 U.S.C. § 1395l(t)(21)(B)(1)(i)and(ii), and 42 C.F.R. § 413.65(a)(2)(definition of “campus”).

“Grandfathered” provider based sites—that is, sites that were established as provider-based sites on or before November 2, 2015 (the date of enactment of BiPA).

Dedicated emergency departments, as defined in 42 C.F.R. § 489.24(b).

No exception for transactions that were in the pipeline, but not completed, on November 2, 2015.

© Foley & Lardner LLP Professional Services Agreements: A Physician-Hospital Integration Model 16

BiPA/Site Neutrality

Will impact the economics of converting oncology practices from physician-office based to hospital-based arrangements

An un-level Medicare playing field will continue to persist for those hospitals that converted physician practices to provider-based sites before November 2, 2015, or fall in one of the other exceptions.

Free-standing ambulatory care and surgical facilities may remain at an economic or competitive disadvantage in these situations.

May chill or kill deals in pipeline and adversely impact the ability of hospitals to develop and integrate lower cost ambulatory facilities to increase access and reduce cost.

Recent survey suggests that only about 25% of off-campus provider-based transactions that were in the pipeline at the time of enactment of BiPA will not go forward; 75% will proceed.

Medicare payment differentials are modest in comparison to commercial differentials; the question is whether, when and the extent to which commercial insurers will follow suit.


BiPA/Site Neutrality (cont.)

Depends on duration of existing commercial contracts and relative bargaining power of the parties

N.B. Hospitals and insurers usually negotiate on a global and not service line basis.



340B Drug Pricing Discount from average manufacturer price generally based on manufacturer’s best price

Applies only to outpatient drugs

Available to DSH hospitals, free-standing cancer hospitals, children’s hospitals, CAHs, RRCs, sole community hospitals, FQHCs, and certain special federal grantee programs

8% DSH for RRCs and SCHs; 11.75% for others

Not applicable to for-profits

Must be within 35 miles of main hospital/meet provider-based status standards

Effective after first cost report filed with CMS and enrollment with HRSA/OPA—up to 16 month process

Impact of Section 603 of BiPA: Can hospital include costs of new off-campus provider-based site after 1/1/17?


Proposed 340B Program Omnibus Guidance (RIN 0906-AB08)

Controversial: Pharma and independent medical groups v. hospitals

Hospital must bill for services “on behalf of” the employed or contracted physician who renders the professional component of the service as a hospital outpatient service; does not appear that a hospital-owned or affiliated group could bill for the service

Hospitals prohibited from billing for physician services by CPOM constraints in some states

Infusion visit only drugs not covered

Discharge drugs not covered

Drugs in Medicaid bundle not covered

Uncertain timeline for final Guidance

If enacted as proposed, would significantly impact the availability of 340B drug discounts for eligible hospitals; may further chill or kill medical group conversion transactions and establishment of ACCs, particularly in oncology


340B Program

MedPac recommends reduction in Medicare drug payments to 340B eligible hospitals by 10% of ASP

Redistribute to hospitals with the largest share of uncompensated care based on S-10 cost report data (budget neutral)

3-year phase-in

Requires legislation—controversial, opposed by AHA, and unlikely until at least after elections

Creates additional uncertainty about financial benefits of participating in 340B program, and may further chill transactions with a 340B component



Stark Law

Under arrangements prohibition: cannot have investment interest in entity (including own medical group) that “performs” the DHS service

Assign leaseholds/Sell equipment?

”Stand in the shoes”

Proposed regulations (2009) for quality improvement and cost savings programs never finalized

Personal services, fair market value or indirect comp exception: fair market value/independent appraisal advisable


Recent Stark Law Enforcement Cases

2014:

Halifax Hospital Medical Center - $85 million settlement

All Children’s Health System - $7 million settlement

Infirmary Health Systems - $24.5 million settlement

2015:

Columbus Regional Health System - $35 million settlement

Broward Hospital District - $69.5 million settlement

Adventist Health System-- $118.7 million settlement

Tuomey Healthcare System - $237 million jury verdict/$74 million settlement

23 © Foley & Lardner LLP Professional Services Agreements: A Physician-Hospital Integration Model

Takeaways From Recent Stark Law Enforcement Cases

Physician compensation arrangements are being subject to heightened Stark Law scrutiny.

The stakes are high, the burden of proof is on the hospital/physician to establish compliance, the government has significant leverage, liability exposure can be enormous, and settlements amounts can be eye-popping.

Potential FCA liability for Medicaid claims that arise from Stark Law violations further raises stakes.

Physicians who are party to non-compliant compensation arrangements are increasingly likely to be targeted along with deep-pocket hospitals.


Takeaways From Recent Stark Law Enforcement Cases (cont.)

Payments to physicians from a hospital’s DHS pool of funds, from hospital service line contribution margin, or from a pool of revenue generated by other physicians, are not payments based on personally performed services, and may be viewed as taking into account the volume or value of DHS referrals from the compensated physician.

Stark Law risk can be mitigated for physician employees and titular owners by structuring their compensation through an intermediate entity (e.g., an affiliated medical group) so that it falls outside of Stark Law.


Takeaways From Recent Stark Law Enforcement Cases (cont.)

Whistleblowers/qui tam relators are likely to be corporate insiders or offerees who are concerned about the legitimacy of the proposed transaction.

Opinion-shopping for a legal opinion may undermine an “advice of counsel” defense. Hospital/physicians should provide all relevant facts and data to counsel to ensure a sound analysis from counsel on which the provider may reasonably rely.

Opinion shopping for a valuation opinion will probably be suspect.

Need to diligence appraisal.



Anti-Kickback Statute

Personal services and management contracts and/or space or equipment rental safe harbor: fair market value/ independent appraisal strongly advised

Some irreducible AKS risk: aggregate compensation not set in advance if wRVU based



Tax Exemption Considerations No inurement/private benefit

No excess benefit transaction

Rebuttable presumption of reasonable compensation process

Rev. Proc. 97-13 and private use of bond financed space or equipment/duration limitations (3 years/2 years out)

New IRS Notice 2014-67 (5 years for contracts with productivity awards based on quality if award is stated $ amount, periodic fixed fee or tiered)



HIPAA—OHCA/Business Associate

Reassignment exception Joint and several liability for refunds

Individual physician assignment agreements

Antitrust Sufficient clinical and/or financial integration for joint pricing?

Exclusivity and market power


Key PSA Deal Maker/Breaker Issues

Strategic Alignment

Trust/Relative Trust

Governance

Financial Terms/Valuation

Term/Duration

Termination

Restrictive Covenants/ROFOs

Unwind Rights

Addition of New Physicians

Break-Up Fees?

Arbitration/Dispute Resolution


PSA Conversion Model Valuation Considerations

Employment Agreements and PSAs: Recent Case Settlements

Eye-popping numbers….. qui tam lawsuits likely to escalate

FMV determinations are only as good as the underlying information provided to the valuator.

Numerous reasons that high compensation amounts may be FMV and commercially reasonable, and many reasons that physician practices experience losses. The “why” is key.

Consider the reasonableness of total compensation, not just base salary.

Professional Services Agreements: A Physician-Hospital Integration Model 32

Employment Agreements and PSAs

Employment continues at a feverish pace.

Hospital employment is on the rise. In 2014, 53% of physicians reported being employed by a hospital or medical practice, up from 44% in 2013, according to a 2014 Physicians Foundation study.

New physicians are overwhelmed by job opportunities, Merritt Hawkins' 2015 Final-Year Medical Residents Survey finds. Simply not enough physicians are coming out of training to fill the demand.

63% of residents have been approached with job opportunities by hospitals, medical groups and recruiting firms 51 times or more during the course of their training.

46% have been approached by recruiters 100 times or more.


Employment Agreements and PSAs: Landscape

Massive wave of private practice physicians moving into hospital-affiliated practices over the past five to six years

Some of the reported drivers of this trend include:

Reimbursement cuts

Lifestyle/focus on medicine

Hospital-physician alignment and formation of ACOs

Fear

Trend has resulted in significant changes in physician compensation models.

Appraisers continue to refine methods to address FMV in light of these changes.


Employment Agreements and PSAs: Landscape (cont.)

Employment agreements becoming more and more complex.

Example of actual contract language:

…full-time Physicians will be compensated at a base compensation of 75% of median compensation…minus $55,650 for producing 75% of median Work RVUs. If Physician works below the 75% of median Work RVUs required for his/her equivalent FTE, Physician’s base compensation will be reduced by the same percent by which WRVU threshold was not achieved.

In addition, if Physician produces above 75% of median WRVU’s …required for Physician’s full-time equivalent status, Physician will earn additional compensation in accordance with the Compensation Matrix…


Employment Agreements and PSAs: Landscape (cont.)

Example of actual contract language (cont.)

Physician will be eligible to earn up to 15% of time weighted average median compensation …for achievement of performance-based measures described below.

Physician will be eligible to receive gross compensation per annum if Physician remains current on outpatient documentation of clinical encounters...

Physician will be eligible to receive gross compensation per annum if Physician remains current on inpatient documentation of clinical encounters...

Physician will be eligible to receive gross compensation per annum for utilizing ambulatory electronic medical record software and qualifying for Stage 1 Meaningful Use established by CMS/Federal Government...

Physician will be eligible to receive gross compensation per annum for attainment of 30% of all inpatient orders…and/or attainment of 60% of all inpatient orders...

WRVU Ranges

Low High WRVU Value

$/ WRVU

0% to 75% – 5,525 $0.00

75% to 90% 5,526 6,630 80% $41.13

90% to 110% 6,631 8,103 100% $51.41

110% to 165% 8,104 12,155 120% $61.70

>155% 12,156 above 80% $41.13


Compensation Matrix

Physician will be eligible to receive compensation for satisfactory performance on quarterly patient satisfaction surveys conducted by Press Ganey.

Employment Agreements and PSAs: Compensation Trends

Larger portion of total compensation being shifted to “quality bonus”

Compensation requested for previously uncompensated activities

Midlevel supervision

“Windshield” time

Excess on-call coverage


Employment Agreements and PSAs: Compensation Trends (cont.)

More and more hospitals focused on annual compensation ceilings

Can you support compensation as FMV if the practice loses money?

What is the compensation model?

What is the specialty?

Can the practice ever make money?


PSA Conversion Models (or “Synthetic” Employment Agreements)

Instead of traditional employment, increasing traction of this model, whereby physicians retain their own practice and are compensated on a productivity basis (generally per wRVU) for their clinical services.

Like a traditional employment arrangement, they still must also be commercially reasonable (i.e., cannot simply enter into one simply because a physician does not want to bill and collect).

The wRVU rate payable to the physician group is often a “grossed-up” rate that typically includes remuneration for:

Cash compensation

Taxes and benefits

“Retained” practice expenses (e.g., malpractice insurance, CPE costs, etc.)

These arrangements are generally full-time (and exclusive) in nature, coupled with hospital’s ability to control the physician’s schedule


PSA Conversion Models (cont.) (or “Synthetic” Employment Agreements)

FMV considerations – Generally the same as

employment arrangements, with additional

consideration given to the overall arrangement

FMV analysis should consider pre- and post-transaction

compensation.


PSA Conversion Models (cont.) (or “Synthetic” Employment Agreements)

Employment agreements have many moving parts…the “terms and features” are critically important.

As previously mentioned, can involve the purchase of physicians’ tangible assets and/or an employee leasing arrangement

In either case, it is key that these two components are consistent with FMV as well.


PSA Conversion Agreements Various Approaches

Market Approach

Compares a physician/practice against available benchmark data

Commonly seen metrics:

Work Relative Value Units (i.e., wRVUs)

Professional collections

Median comp per wRVU

Through a “percentile matching technique,” align each productivity variable with the expected level of compensation.


PSA Conversion Agreements Various Approaches (cont.)

Market Approach (cont.)

Make a “weighting” determination based on the unique facts of the particular arrangement and credibility of data.

For example, collections data may be incomplete or misleading; or there may be ambiguity in wRVUs (coding issues?)

Depending on the specialty and/or sources of physician data, it may be that one market indicator is more appropriate than another.



Cost and Income Approaches

Application of these two approaches can offset and mitigate limitations of the market approach.

Provide view into local marketplace

Allow analysis of full array of economic factors affecting physician compensation

Provide a reality check



Cost Approach

Normalized and adjusted historical compensation

Realistic numbers for the cost to recruit

Income Approach

Pro forma based on hypothetical-typical employer basis

Reflects future market conditions

Earnings Available for Physician Compensation (i.e., Calculate applicable overhead, deduct benefits and apply a cost of capital)

Synthesize all three approaches


PSA Conversion Agreements Caution Using Survey Data

Example of misuse of data, using current MGMA data for General Surgery

90th percentile cash compensation - $646,000

90th percentile wRVUs – 11,017

90th percentile compensation per wRVU - $94.70

Where is this going?

90th percentile wRVUs x 90th percentile compensation per wRVU = $1,043,000 (i.e., 160% of 90thP compensation)

MGMA states that there is an inverse relationship between physician compensation and compensation per wRVU

Median compensation (per wRVU) is a misnomer; no physician wants to be below the median!

Evaluate comp by quartile of production data; comp per wRVU declines as wRVUs increase


PSA Conversion Agreements Perils of wRVU Models

Providers implementing wRVU models have been observed to make errors related to:

“Total” vs. “Work” relative value units

GPCI adjustments

Assistant at surgery

Multiple procedures

Mid-level providers (i.e., “Incident to” or “at full rate”)

Use of “blended” rate for multiple specialties

CMS changes in wRVUs

New or discontinued CPT codes


PSA Conversion Agreements Physician Non-Salary Expense

Should certain payments be passed through or fixed, rather than as a component of a wRVU rate?

Professional liability expense Benefits costs such as insurance coverage for medical, dental, vision or life insurance Benefits costs for what is normally an employer-contributed pension or retirement plan Employer’s portion of taxes for FICA Medicare and FICA Social Security Be wary of “fixed” versus “variable” expenses.

Need to account for each differently


PSA Conversion Agreements Physician Non-Salary Expense (cont.)

Since likely “baked” into the wRVU value, it is important to determine a “cap” on benefits

e.g., Tier out the wRVU value to accommodate the benefit ceiling

Is it commercially reasonable to have a non-exclusive arrangement? (i.e., physician gets to maintain certain aspects of the practice?)


PSA Conversion Agreements: Fifty Shades of Pay

Sign-on bonus

Productivity bonus

Medical directorship

Co-management agreement

Quality bonus

Retention bonus

Call pay

Tail insurance

Excess vacation

Relocation costs

Excess benefits


Beware of existing agreements that preceded the PSA, as well as other new terms.

Hybrid PSA/Service Line Co-Management Arrangements

What Is a Service Line Co-Management Arrangement?

Co-Management Agreement is an additional independent contractor relationship PSA purchases professional services of physicians and clinicians Co-Management Agreement purchases administrative and management services from physicians and clinicians Engage physicians as a business and clinical partner in managing, overseeing and improving service line quality and efficiency

No overlap in contractual duties between PSA and Co-Management Agreement (or other agreements)


Service Line Co-Management Direct Contract Model


Service Line Co-Management Joint Venture Model


Comparative Structural Considerations

Direct contract model is simpler and less expensive

Potential securities offering for JV Model

Physician holding company (for either Model)

JV Model better reflects relative roles/responsibilities of hospital/MDs?

JV Model provides opportunity to mitigate or eliminate Stark Law risk

Direct contract more remunerative?

Participating MDs performing disproportionate services/ Compensation based on relative efforts in direct contract Model vs. invested capital in JV Model?

Antitrust considerations (for bundled payments): JV Model more financially integrated?


Service Line Co-Management Arrangements

Typically two levels of payment to physician managers:

Base fee – a fixed annual base fee that is consistent with the fair market value of the time and effort participating physicians dedicate to service line development, management, and oversight

Bonus fee – a series of pre-determined payment amounts, each of which is contingent on achievement of specified, mutually agreed, objectively measurable, program development, quality improvement and efficiency goals

Aggregate payment generally approximates 2-3.5% of service line revenues

Fixed, fair market value; independent appraisal advisable


Additional Legal Considerations

There are legal constraints on Service Line Co-Management Agreements (i.e., CMP, AKS and Stark):

No stinting

No steering

No cherry-picking

No gaming

No payment for changes in volume/referrals

No payment for quicker-sicker discharge

No reward for changes in payor mix, case mix

Must be FMV; independent appraisal required


Additional Legal Considerations (cont.)

Adv. Op. 12-22 approving co-management arrangement Recent request (Oct. 3, 2014) by CMS for comments on proposed CMP rules for gain-sharing programs Some irreducible legal risk because aggregate compensation is not set in advance Minimize legal risk by:

Internal monitoring with compliance officer review

Independent FMV appraisal

Independent outside reviewer


Additional Legal Considerations: Civil Monetary Penalty Law (42 U.S.C. § 1320a-7a(b))

Cost savings metrics/incentives implicate CMP Law Hospital cannot pay a physician to reduce or limit services to Medicare/Medicaid beneficiaries under the physician’s care.

Previously interpreted by OIG to prohibit incentives to reduce even medical unnecessary services

Medicare Access and CHIP Reauthorization Act of 2015: amends CMPLaw to permit payments from hospitals to physicians to reduce or limit medically unnecessary services.

Opens door to shared savings and gainsharing payments from hospitals to physicians for achieving cost efficiencies from standardization of care, care coordination, substitution of less expensive but clinically equivalent items, reduction of medically unnecessary hospital admissions, or reduction in other medically unnecessary services.


Additional Legal Considerations: Anti-Kickback Statute

Volume/revenue-based performance measures implicate the Anti-Kickback Statute.

Should not reward increase in utilization, revenue, or profits of service line

Should not reward change in case mix

Should not reward change in acuity

Should obtain independent appraisal of FMV to help negate inference of improper intent

Advisory Opinions indicate that the AKS could be violated if the requisite intent is present, but that OIG would otherwise not seek sanctions.


Additional Legal Considerations: Anti-Kickback Statute (cont.)

Co-Management contract will not meet Personal Services and Management Contracts safe harbor if “aggregate compensation” is not set in advance.

Maximum and minimum compensation may be set in advance, but aggregate compensation may not be.

Joint venture probably will not meet small investment safe harbor 40/40 tests.

More than 40% of interests held by persons in a position to refer

Analyze under AKS “one purpose” test; some irreducible legal risk


Co-Management Arrangements Valuation Considerations

Typical Features of a Co-Management Arrangement

Compensation for the manager’s services is typically comprised of a base fee and an incentive fee.

However, for small service lines and/or in unique instances when the services are very limited in scope (e.g., sleep labs, wound care centers), there may only be a base fee.

The co-management arrangement may or may not involve the creation of a new entity (i.e., a JV, which may or may not be owned in part by the hospital).

Whether a JV, or solely owned by physicians, the valuation process is largely the same regardless.

Nuances abound however; for example, if solely owned by physicians, Hospital must extricate itself from all committee meeting settings.

The co-management agreement will require replacement or redefinition of existing medical director agreements to accommodate the services provided by the managers. Any remaining medical directors must be paid from the base fee portion of the management fee.


Typical Features of a Co-Management Arrangement (cont.)

The agreement stipulates a listing of core management/ administrative services to be provided by the manager (for which the base fee is paid).

The agreement includes pre-identified incentive metrics coupled with calculations/weightings to allow computation of an incentive payment (which can be partially or fully earned).

Usually tiered in terms of level of accomplishment and associated payouts.

Must demonstrate some level of improvement over “current state” in order to receive the “top tier” of compensation (i.e., 100%).

Can provide some level of compensation for maintaining current state, if at national benchmark or better.

Compensation is directed towards accomplishments rather than hourly-based services

Though certain clients elect to “disburse” the earned Base Fee on an hourly basis.


Valuation Process – Riskiness of Co-Management Arrangements

Among the spectrum of healthcare compensation arrangements, co-management arrangements have a relatively “high” degree of regulatory risk if FMV cannot be demonstrated.

By design, these agreements exist between hospitals and physicians who refer patients to the hospital.

Available valuation methodologies are limited and less objective as compared to other compensation arrangements.

The “effective” hourly rate paid to physicians may be higher than rates which would be considered FMV for hourly-based arrangements (since a significant component of compensation is at risk).


Valuation Process – Approaches to Value

Available valuation approaches include:

Cost Approach

Market Approach

Income Approach

In considering these valuation approaches, an income approach can likely be eliminated since the possible or expected benefits of the co-management agreement may not translate directly into measurable income.


The Cost Approach

The Cost Approach can be used to estimate the “replacement” or “replication” cost of the management/administrative services to be provided by the manager.

Key drivers of this approach include:

Identification of the sub-services lines to be managed

Summary of net revenue and case volume for each sub-service line

Indications of whether services managed at one location or several

Consider adjustments for low score on Market Approach

Allows the valuator to establish guidelines of reasonable annual administrative hours required in absence of the arrangement

Important that all sub-service lines are represented by physicians from each indicated specialty

Otherwise, management entity can sub-contract out, or the valuator may make an “adjustment” to the findings.


The Market Approach

The Market Approach recognizes that that there are certain management / administrative requirements associated with every service line management arrangement.

Each one is unique

Key drivers of this approach include:

Annual net revenue (i.e., collections) attributable to Part A services

Specific tasks and responsibilities of the managers must be identified.

Adjustments for possible overlapping positions

Indications of whether services managed at one location or several

An indication of value of the management services is then established by comparing the “scoring” of the subject agreement to other service arrangements in the marketplace.


Valuation Synthesis

The Cost and Market valuation methodologies should be reconciled to arrive at a final conclusion of value.

The Cost Approach may “underestimate” the value of the arrangement because in the case of joint ventures, the Cost Approach only considers physician participation (i.e., medical directors).

The Market Approach may “overestimate” the value of the arrangement depending on the sources of annual net revenue (e.g., high % of spine revenue in an Ortho arrangement)

While it may be appropriate to give equal weighting to the two approaches, the valuator may conclude that one method should be weighted more heavily than the other.

Make an assessment regarding the split between the base fee and incentive fee components.

Make applicable adjustments based on review of metrics

The FMV of the base fee must encompass payment of any medical director fees or administrative services related to managing the service line.


What Drives Value?

As a percentage of the service line net revenues, the total fee payable under a co-management arrangement typically ranges from 2% to 3.5% (on a calculated basis).

The fee is fixed as a flat dollar amount, including both base and incentive components, for a period of at least one year.

Commonly, the base fee equals 50-70% of the total fee.

The extent and nature of the services drive their value. Thus, the valuation assessment is the same whether the manager consists of only physicians or physicians and hospital management.

Determinants of value include:

What is the scope of the hospital service line being managed?

How complex is the service line? (e.g., a cardiovascular service line is relatively more complex than an endoscopy service line)

How extensive are the duties being provided under the co-management arrangement? How many physical locations are being managed?


What Drives Value? (cont.)

Size adjustments based on service line revenue: Large programs may be subject to an “economies of scale” discount.

Small programs may be subject to a “minimum fee” premium.

Consider the appropriateness of the selected incentive metrics:

Is the establishment of the incentive compensation reasonably objective?

Consider the split of base compensation and incentive compensation.

Who is responsible for monitoring and “re-basing” the metrics?


What Drives Value? (cont.)

Arrangements that are paid on an “hours worked” basis.

Run the risk that the Base Fee is paid in its entirety but only a portion of the assigned tasks were completed


Other Key Service Line Co-Management Issues

Performance standards and targets Validation

Achievability

Reset

Term/durability Rev. Proc. 97-13 (5/3 years if 50%+ fixed)

Dilutive effect of adding physicians due to fixed FMV fee for services rendered Cost of independent monitor, valuation, security offering (for JV) Some irreducible legal risk


PSA/Co-Management Lessons Learned


Payor pushback – site of service differential for hospitals may be temporary

Medicare site neutrality effective 1/1/17

Commercial insurance contract expiration/negotiation

Pharma pushback on 340B pricing Proposed Omnibus Guidance by HRSA would significantly reduce the scope of the 340B program

MedPac has created additional uncertainty with proposal to reallocate 340B savings based on relative share of uncompensated care



Co-management requires active participation and real time and effort by busy physicians

Hours-based v. task-based arrangements/valuation methods

Documentation requirements

PSA exclusivity, right of first opportunity for new sites/programs, and significant role in governance of service line

Available to larger, more dominant oncology groups; may not be available to smaller groups in competitive market

Large group may have footprint that aligns with multiple hospitals/systems (complementary v. competitive markets)



Limited opportunity to have PSAs with multiple hospitals

Not available to smaller groups in market with multiple groups

Generally all service-line oncologists participate in co-management arrangement because participating physicians are responsible for performance of all service line physicians.



Governance issues

Board seats?

Joint operating committee: composition and authority

Regional councils: Group role

Medical directorship/sub-directorships?

Reporting may be through a middle manager (service line administrator) and not to hospital decision-makers



PSA operational integration issues

IT integration, interfaces and adoption; and associated impact on productivity

Disruption for leasehold improvements to meet hospital license requirements for physical space

Split staff (off-campus) and salary/benefit differentials

Union issues



PSA/wRVU issues

Changes in wRVU values over time v. lock-in base year wRVU values

Addition/deletion of CPTs/RVUs over time

Impact of sequestration on payments tied to Medicare Physician Fee Schedule payment methodology

Difference of opinion regarding how to pay for supervision of ancillary services (e.g., chemo administration)

Will Group get credit for NP/PA wRVUs?

Benefit costs and change in benefit expenses over time

wRVU may not cover other continuing Group overhead expenses (e.g., legal, accounting, insurance)

wRVUs may not be available for certain ancillary services (e.g., imaging)

Access to books/records to confirm wRVU count



Adding additional physicians to co-management arrangement is dilutive to existing physicians

Other PSA Compensation Issues Will hospital provide base compensation guarantee for transition period (e.g., 85% of base year compensation for 2 years, if Group provides at least 80% of wRVU productivity)?

Will hospital provide anti-dilution protection to protect against internal competition? Loss of referral sources from PCPs associated with competing systems



PSA Compensation Issues (cont.)

New physician ramp-up/guaranteed compensation or wRVU credits for new physicians

Compensation caps for tax exempt hospitals

Harmonizing PSA compensation method with new shared savings, bundled payment, capitation and risk based payments

What is tipping point to trigger change in compensation methodology? Who decides?



Non-competes, restrictive covenants and unwind rights

Unwind right is key to preserving leverage and future options.

Hospitals hate unwind rights and will try to limit them.

Least common denominator is unwind to private practice—not to a competing health system

Negotiation over unwind triggers: failure to offer FMV compensation; failure to renew; termination without cause; change of ownership; change in law; material decrease in compensation

Generally, no unwind due to Group breach or Group non-renewal without cause



Unwind rights (cont.)

Negotiation over what Group gets back in unwind: space and TIs, assets and new or upgraded equipment, staff, medical records, data, cooperation and orderly transition

Hospital may try to negotiate opportunity to solicit physicians starting at notice of unwind

Unwind should be exception to non-competes



Durability: Term/Termination

Duration of valuation opinion/periodic revaluation

Revaluations have generally retained or increased wRVU rates and co-management fees

History may not be accurate predictor of future.

Periodic reset of performance standards and targets

Continued payment for optimized standards?

Rev. Proc 97-13 limits on duration of use of tax exempt bond financed space and equipment

Potential for breach, change in ownership/control, change in law, change in market and circumstances



Need good dispute resolution process to focus the parties on maintaining relationship

Escalating dispute resolution: CEO meeting, mediation, arbitration is preferable

Parties should continue to perform during dispute process.

Change in administration/leadership can change everything—can test relationship and contracts.

Good working relationship is key to overcoming speed-bumps as they arise.



Mitigate legal risk by:

Good contract/structure

Good valuation

Good expert/peer monitor

Validate standards and targets

Verify performance

Confirm “no gaming”

Good execution


Professional Services Agreements: Emerging Hospital-Physician Integration Model

Presented by:

Michael L. Blau, Esq. Foley & Lardner LLP 617.342.4040 [email protected]

Scott M. Safriet, CVA, MBA HealthCare Appraisers, Inc. 561.330.3488 [email protected]

Appendix

Adv. Op. 12-22: Service Line Co-Management Arrangement

On January 7, 2013, the OIG issued Adv. Op. 12-22 approving a co-management agreement for cardiac catheterization (“CC”) services under the CMP and AKS statutes

Requestor was large hospital in a remote, medically underserved area.

16-physician cardiology group was only provider of CC services in town and only cardiologists on Requestor’s medical staff

Requestor agreed that if other cardiologists joined medical staff it would consider extending arrangement to them

Requestor pays (1) a guaranteed, fixed payment, and (2) potential annual performance fees in quarterly installments

Direct contract model: Payment is made to the Group, which then distributes dividends based on each shareholder’s pro rata share of ownership after payment of medical director fees

Performance Fee based on (1) Requestor’s employee satisfaction (5%); (2) patient satisfaction with Requestor’s CC Labs (5%); (3) improved quality of care within the CC Labs (30%); and (4) cost reduction measures (60%)

Graduated targets: 50% for threshold; 75% for mid-point; 100% for target



OIG finds that the Fixed Fee, employee satisfaction, patient satisfaction, and quality components do not implicate the CMP Statute, but the cost savings component does.

Standardization of devices and supplies and limiting use of specific stents, contrast agents and medical devices, might induce physicians to alter their current medical practice and reduce or limit services.

However, OIG will not seek sanctions because of sufficient safeguards.

First, Requestor certified that the arrangement has not adversely affected patient care, and that it engaged an independent reviewer to monitor both the performance of the Group under the arrangement and its implementation of the cost savings component to protect against inappropriate reduction or limitation in patient care.

Second, the risk that the arrangement will lead the physicians to apply a specific cost savings measure, such as the use of a standardized or bare metal stent, in medically inappropriate circumstances is low. Each of the physicians has access to the device or supply he or she determines to be most clinically appropriate for each patient.

Third, the Performance Fee is limited in duration and amount; it is subject to a maximum annual cap and the term of the arrangement is limited to three years.

Fourth, receipt of the Performance Fee is conditioned upon the physicians not: (1) stinting on care; (2) increasing referrals to Requestor; (3) cherry-picking; or (4) accelerating patient discharges.



OIG finds low risk of AKS violation because: First, Requestor certified that the compensation paid to the Group is fair market value for substantial services provided, based on an independent appraisal;

Second, the compensation paid to the Group does not vary with the number of patients treated, so there is no incentive to increase patient referrals to Requestor;

Third, because Requestor operates the only cardiac catheterization laboratories within a fifty-mile radius, and because the Group does not provide cardiac catheterization services elsewhere, the arrangement is unlikely incent the physicians to refer business to Requester from any competitor;

Fourth, the specificity of performance metrics helps ensure that the purpose is to improve quality, rather than reward referrals; and

Fifth, the agreement is limited in duration (3-year term).


Documents

Professional Services Agreements: A Physician-Hospital …media.straffordpub.com/products/professional-services... · 2016-05-20 · The audio portion of the conference may be accessed