September 8, 2010

Physician Fair Market Value and Commercial Reasonableness-Lessons Learned from Tuomey Healthcare Investigation

Presented By:Chad Stutelberg, Senior Vice President

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Agenda

I. Learn Why Physician Fair Market Value (FMV) and Commercial Reasonableness Matter

II. Learn the differences between FMV and Commercial Reasonableness

III. Learn how outside auditors assess physician compensation

IV. Learn 5 key strategies to help ensure FMV/Commercial Reasonableness

SAMPLE SECTION DIVIDER SLIDE

Why does FMV and Commercial Reasonableness

Matter?

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Legal Framework

Healthcare organizations entering into, modifying, or renewing financial relationships with physicians and other providers must comply with multiple federal and state laws that regulate these relationships

Key areas of review include: Taxpayer Bill of Rights 2 Anti-kickback Statute Stark Law

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Historical Perspective

Foundation for the governance of compensation in tax-exempt organizations § 501(c) of the Internal Revenue Code lists the types of organizations

exempt from Federal income taxes Private inurement

“No part of earnings . . . inures to the benefit of any private shareholder or individual”

Penalty for violation – revocation of tax-exempt status

General tests of physician compensation arrangements No distribution of profits to physicians by tax-exempt hospital

Use of arm’s-length negotiations in determining physician compensation

Compensation must be reasonable

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Taxpayer Bill of Rights 2

A call for change Passage of the Taxpayer Bill of Rights 2 (TBOR 2) in 1996 was influenced by

the following: Extreme nature of the penalty for violating private inurement laws, regardless of

the severity of the infraction, and Public pressure for more appropriate penalties for private inurement

TBOR 2 authorizes the IRS to apply intermediate sanctions, rather than revoking an organization’s tax-exempt status, for any excess benefit transaction

Intermediate sanctions include taxes and penalties on individuals receiving excess benefits and anyone who knowingly approves an excess benefit transaction

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Anti-Kickback Statute and Fraud & Abuse

Anti-Kickback statute overview Prohibits the knowing and willful (i.e., intent required) payment or receipt of

anything of value in exchange for: Patient referrals for services reimbursable under a federal health care program

(i.e., Medicare, Medicaid), and Recommending the purchase of supplies and services reimbursable under a

federal health care program

Potential penalties Violation constitutes a felony Criminal fines Civil penalties Exclusion from federal health care programs

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Stark II

Stark II Overview Prohibits a physician from referring Medicare or Medicaid patients for

“designated health services” (e.g., lab, PT/OT, drugs, radiology, etc.) to an entity with which the physician or an immediate family member has a financial relationship, unless an exception applies

Potential penalties Denial of payment Civil fines on a per claim basis Exclusion from federal health care programs

What constitutes a financial relationship? Direct or indirect ownership or investment relationship, or Direct or indirect compensation arrangement between a referring physician

and a hospital

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Summary

What all of this legislation has in common: The concepts of fair market value, commercial reasonableness, and

reasonable compensation are embedded in all three

Why does this matter? Criminal charges Civil Charges Huge Legal Fees Corporate Integrity Agreements

List of organizations with Corporate Integrity Agreements http://www.oig.hhs.gov/fraud/cia/cia_list.asp

List of organizations/individuals that have faced federal/state enforcement actions http://www.oig.hhs.gov/fraud/enforcementactions.asp

SAMPLE SECTION DIVIDER SLIDE

What are the Differences Between FMV and

Commercial Reasonableness ?

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What is Fair Market Value?

For our work, we define the terms of fair market value, commercial reasonableness and reasonable compensation as follows:

Fair Market Value

Defined as the value in arms-length transactions consistent with the general market value. General market value means the price an asset would bring as a result of bona fide bargaining between well-informed buyers and sellers who are not otherwise in a position to generate business for the other party, or the compensation that would be included in a service agreement as the result of bona fide bargaining between well-informed parties to the agreement who are not otherwise in a position to generate business for the other party on the date of acquisition of the asset or at the time of the service agreement. Usually the fair market value is the compensation that has been included in bona fide service agreements with comparable terms at the time of the agreement, where the price or compensation has not been determined in any manner that takes into account the volume or value of anticipated or actual referrals.

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What is Fair Market Value? (cont.)

For our work, we define the terms of fair market value, commercial reasonableness and reasonable compensation as follows:

Commercial Reasonableness

Defined as an arrangement that 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 designated health services referrals.

Reasonable Compensation

Described in Section 162 of the Internal Revenue Service (IRS), reasonable compensation is generally considered to be "...only such amount as would ordinarily be paid for like services by like enterprises under like circumstances."

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What is Fair Market Value?

Fair Market Value is not a single number but a range of values and, for physician compensation, is generally considered to include: How the physician is paid (compensation model structure) The process that is followed to determine physician compensation What the physician is paid (compared to similar physicians) On-going management of the contract e.g., documentation,

benchmarking future compensation to market, incentive payments

Commercial reasonableness relies more heavily on “facts and circumstances”, and factors impacting determination of reasonableness include: Market competitiveness -- other offers; history of recruiting/retaining

physicians; competitive environment Community need -- staffing requirements; rural access Supply and demand for particular specialty

Fair market value and commercial reasonableness are intertwined

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FMV Typically relies heavily on review of survey data

The following represent the most reliable and comprehensive sources for physician compensation and productivity data Medical Group Management Association (MGMA) American Medical Group Association (AMGA) Sullivan, Cotter & Associates (SCA) Integrated Healthcare Strategies

For academic positions, we also use the following sources: Association of American Medical Colleges (AAMC) Association of Administrators in Academic Pediatrics (AAAP)

Other sources of data: Merritt Hawkins (physician recruiting incentives) Daniel Stern (Emergency Department data)

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Physician Data Analysis

Compensation data for each physician should be broken out by the various elements of compensation: Base salary/draw Productivity incentive Teaching pay Research pay Administrative pay Compensation for mid-level supervision Non-production clinical incentives Other pay Benefits expenditure

Value administrative, academic and/or clinical efforts separately and in total

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Physician Data Analysis

Calculate clinical cash compensation for each physician Base salary/draw + productivity incentive + non-production clinical

incentives + other clinical pay

Break out productivity data by physician as follows: Charges – ancillary, professional, and total Collections – ancillary, professional, and total Work Relative Value Units (WRVUs)

Calculate compensation per productivity ratios by physician Clinical compensation per WRVUs Clinical compensation per professional collections Clinical compensation per professional charges

Compare total cash, productivity metrics and compensation ratios to market data Productivity comparisons are typically the most defensible mechanism for

supporting FMV

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Commercial Reasonableness Tests

There is no one standard in the industry for commercial reasonableness tests

However, we typically examine the following: Increase in compensation Impact to practice financials Cost benefit analysis Replacement cost analysis Service line necessity

SAMPLE SECTION DIVIDER SLIDE

How do outside auditors review

physician compensation ?

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Selection and Prioritization of Outside Reviews

Federal government has indicated that they have over 500 qui tam cases – cases where there is a whistleblower

Of these cases, it is estimated that a physician is the relator over 80% of the time

The government cannot investigate every case, but is prioritizing the cases to go after those they are sure they can “win”

Hospitals have to make a determination of whether or not it is worth pursuing defending the claim Legal fees in these cases typically range from $20 to $45 million

Penalties and fines can range from $5M (Covenant, IA) to over $100 million (Christ Hospital/Health Alliance – OH)

Government also comes across cases from their RAC audits, Medicare reviews, and other investigations

OIG now “sharing” cases with DOJ and others to make sure all “legitimate” claims are investigated – might get calls from multiple areas

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Process for Outside Review

Government gathers a great deal of data/information up front from relators, physicians and others in community

Many times hospitals are not aware of an investigation until it is too late The government will request a tremendous amount of data

Erlanger case resulted in our reviewing over 450 agreements going back as long as 10 years

Outside auditors will focus on intent of agreement (reviewing documentation) and examination of payments to “market”

Difficult to determine what “market” they are using, but typically rely on standard sources

Auditors are much better now at reviewing compensation, understanding physician relationships, and come much better “prepared” for their investigations

SAMPLE SECTION DIVIDER SLIDE

5 Strategies to help ensure FMV

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5 Strategies to ensure FMV

Strategy #1 – Limit use of e-mail/watch communications

In every investigation we have involved in, e-mail communications were used by the government as a key component of their fact finding and building of their case

Many physicians/executives will put certain statements in e-mail that they would not otherwise say in conversation

If you have a “bad” chain of e-mails, actively and agressively address issue and document how the issue was addressed

Train/educate your employees/physicians on proper use of e-mail Some clients have actually called off certain deals because of “bad” e-mails

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5 Strategies to ensure FMV

Strategy #2 – Document Intent/Business Case/Community Benefit

Too often when we review an agreement there is little in the file regarding why the agreement is necessary, supports the hospital’s mission and improves patient access and care

This can result in “selective amnesia”

Documenting the intent of the agreement and how it benefits the community is a key component to ensuring fair market value

The government spends alot of time looking at these issues, and in absence of documentation can assume the worst

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5 Strategies to ensure FMV

Strategy #3 – Use qualified counsel/consultants and limit number of negotiators

Too often hospitals create physician agreements without the help of qualified healthcare legal counsel and consultants

In some instances the hospitals that are investigated relied on outside advice – turns out it was bad advice

Limit number of individuals that can negotiate physician contracts – keeps consistency and helps prevent deals from getting done in back room and on golf course

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5 Strategies to ensure FMV

Strategy #4 – Keep it simple

Many of the agreements that get reviewed are overly complex Complexity can appear as if you are trying to “back into a number” and/or

raise commercial reasonableness concerns If physicians don’t understand how they are paid they are more likely to

complain If auditors don’t understand compensation model they will assume the worst

e.g., only for referrals

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5 Strategies to ensure FMV

Strategy #5 – Have a contract management database/system Most hospitals have no idea how many agreements they have Hospitals can get in trouble when they realize that they have more than one

contract with a physician group – e.g. ,“stacking” - or find out that they have multiple contracts for the same service

More than 1.0 FTE services provided by a physician – not enough time in the day Contracts for similar/same services e.g., two Sleep Medicine Directors

Some hospitals have forgotten when contract expires, when compensation needs to be updated/adjusted, or when other contract terms change such that when the agreement is reviewed it is out of compliance

This type of system allows you to monitor payments - one client paid a physician for services for one year after they were dead – set up in A.P.

Continually update file as changes are made to compensation, strategy, business model etc.