[PPT] - Fair Market Value and Hospital Physician Relationships Kevin PowerPoint Presentation

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Fair Market Value and Hospital – Physician Relationships

Andrew D. Kloeckner Baird Holm LLP akloeckner@bairdholm.com 402.636.8222 Kevin Walker CBIZ kwalker@cbiz.com 816.945.5598

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Agenda

Why Is FMV Important?
Roles in Determining FMV
Current State - What Is FMV?
Proposed Regulatory Changes
Best Practices

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Why Is FMV Important?

Stark
Anti-Kickback
Tax Exemption/Governmental Status

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Stark

A financial relationship with a referring

physician must meet an exception to the Stark Law

Relevant exceptions require:

– Identifiable services – Consistent with FMV (all compensation) – Not determined in a manner that takes into account, directly or indirectly, the volume or value of referrals by the physician – Remuneration would be commercially reasonable even if no referrals were made

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Commercial Reasonableness

It’s not just FMV
Stark definition of “commercially

reasonable”

– Makes commercial sense in absence of referrals – A reasonable entity, similar type and size – A reasonable physician of similar scope and specialty (But see proposed regulatory changes…discussed later)

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Stark

Penalties: Significant penalties for

violation

– Refund of all Medicare claims due to referrals from improper relationship – False Claims Act liability (treble damages) – Stark CMP of $24,253 per claim – Potential exclusion from the Medicare program

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National Enforcement Environment

Unprecedented number and size of recent

settlements involving compensation issues

All start as qui tam (whistleblower) cases

– Typically not the result of government investigations – Disgruntled employees or physicians – Whistleblower can earn 15-25% if U.S. intervenes; 25-30% if not, plus attorney fees and costs

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Tuomey (South Carolina)

– $237 million judgment; $72.4 million settlement – $1 million settlement for CEO

Citizen’s Medical Center (Victoria, Texas)

– $21,750,000 settlement (whistleblowers received almost $6 million) (Qui tam brought by three cardiologists) – Physician bonuses and compensation in excess

f FMV

National Enforcement Environment

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National Enforcement Environment

OIG Fraud Alert, June 19, 2015

– Focus on physicians receiving inappropriate medical director payments

Yates Memo, September 9, 2015

– Focus on individual accountability, no longer just secondary targets

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Anti-Kickback Statute

Rule: Compensation may not induce
r encourage referrals of Medicare

and Medicaid business to the hospital

– Intent based statute

– But, intent can be inferred

– “One purpose test” – Could have 99 purposes for remuneration that are not related to referrals, but if reason #100 is to induce or reward referrals, then the statute is violated

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Anti-Kickback Statute

Criminal statute

– 10 years or $100,000 fine per claim or both – Civil monetary penalties - $100,000 per claim

Subject to potential FCA/qui tam suits
Voluntary safe harbors

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IRS Issues

Rules:

– Earnings cannot inure to the benefit of a private individual – Compensation must be "reasonable"

Penalties:

– Potential intermediate sanctions/excise tax – Potential loss of 501(c)(3) status

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IRS Issues

Compensation - not excessive
Process is important

– Independent board – Subject to conflict of interest policy – Based on compensation studies of comparables

Ongoing compliance
No incentive to reduce charitable

services/benefit

Not a joint venture or distribution of profits

– Bonuses based on profitability can be a problem

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FMV Roles & Responsibilities

Hospital Health System Leadership

– Obtain FMV guidance from Legal Counsel and Valuator – Responsible for commercially reasonable decision

Legal Counsel

– Compliance – Not FMV experts – Commercial reasonableness guidance

Valuator

– Ensure amounts are FMV – Commercial reasonableness guidance

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The Three Hats For Analyzing Transactions

Transaction Design and Implementation
Best Practices
Risk Tolerance
Relative Benefits
Compliance Review
Defensible Position
Appropriate Corrections
Litigation Defense - Retrospective
Risk Tolerance
Reasonable Defenses

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What is FMV?

Fair Market Value is:

– FACTS and CIRCUMSTANCES based – A defendable position – A range, not an exact number

Each transaction takes on a life of its
wn

– Know your facts

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What is FMV?

Typical scenarios

– Practice acquisitions – Professional services

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What is FMV?

Practice Acquisitions

– Asset Approach – Market Approach – Income Approach

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Practice Acquisitions

For the physician practice to have value in excess
f net assets, the accepted method of

demonstrating value is through a Discounted Cash Flow, reflecting post- acquisition compensation

We anticipate compensation offers in excess of

current compensation will result in post-transaction losses

Result is normally the application or use of the Asset

Approach

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Practice Acquisitions

Asset Approach

– Determine which assets will be acquired

Supplies inventory
Furniture, fixtures and equipment
Trained and assembled workforce

– Assets not typically acquired

Cash
Accounts receivable

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Practice Acquisitions

Supply Inventories – normally an estimate

based on industry inventory turnover rates

Furniture and Fixtures – Appraisal
Trained and Assembled Workforce

– Replacement cost per employee – Industry based % cost for employee turnover – Specific position replacement costs

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Practice Acquisitions

Challenges in the Industry

– Consideration of the implication of ancillary profits on practice value – Relationship with ongoing compensation – Future profitability of practice (as a subsidiary or dept.

f the hospital) and the implications of practice losses

– Commercial reasonableness

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What is FMV?

Professional services

– The harder you work, the more you make – FMV range centers around Median – Must have justifiable reasons to approach 75th Percentile – Facts and circumstances are needed to support comp/wRVU > Median – Must be commercially reasonable

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FMV Defenses

Multiple Indicators for FMV:

Income Approach

– Profitability of the physician (or lack thereof)

Market Approach

– Total Cash Compensation (TCC) – Compensation per wRVU – TCC as a % of Professional Collections

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Use of Market Data to establish FMV of Physician Compensation

Proper understanding and use of survey data

(Compensation per wRVU, TCC as % of Professional Collections ratio, etc.)

Reliance on data from multiple surveys versus one

survey

What data points are represented/included in

each survey?

wRVU data and the “match” to compensation

percentiles

Is there a “safe” percentile for compensation –

50th percentile/75th percentile? (recent settlements suggest: perhaps not)

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Industry Data Sources

Medical Group Management Association (“MGMA”) -

Physician Compensation and Production Survey

American Medical Group Association (“AMGA”) -

Medical Group Compensation and Financial Survey

Sullivan Cotter and Associates (“SCA”) - Physician

Compensation and Productivity Survey Report

Other Published Industry and Specialty Society Support
Market information gained from experience throughout

the country

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Estimated Market Positions:

Family Practice with OB

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Compensation N Median 75th % 90th %

Family Practice (w/ OB) MGMA 2019 622 268,954 $ 332,594 $ 406,515 $ Family Practice (w/ OB) MGMA 2018 1,030 242,932 $ 309,261 $ 382,482 $ Family Practice With OB AMGA 2019 472 279,148 $ 365,232 $ 405,409 $ Family Practice With OB AMGA 2018 550 263,190 $ 314,734 $ 392,988 $ Family Medicine With Obstetrics SCA 2018 871 254,830 $ 318,387 $ 398,358 $ Family Medicine With Obstetrics SCA 2017 527 245,286 $ 295,917 $ 360,000 $

Estimated Market Position 265,000 $ 335,000 $ 405,000 $

267,644 $ 338,738 $ 403,427 $ 265,142 $ 334,136 $ 402,634 $

WRVUs N Median 75th % 90th %

Family Practice (w/ OB) MGMA 2019 485 4,900 6,343 7,961 Family Practice (w/ OB) MGMA 2018 918 4,819 5,974 7,371 Family Practice With OB AMGA 2019 447 5,048 6,347 7,154 Family Practice With OB AMGA 2018 512 5,063 6,171 7,576 Family Medicine With Obstetrics SCA 2018 554 4,843 5,613 6,806 Family Medicine With Obstetrics SCA 2017 433 4,790 5,749 6,940

Estimated Market Position 4,900 6,200 7,400

4,930 6,101 7,307 4,923 6,072 7,288

Current Year Average Current Year Weighted Average Current Year Average Current Year Weighted Average

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Estimated Market Positions:

Family Practice with OB, cont’d

28 Comp per WRVU N Median 75th %

Family Practice (w/ OB) MGMA 2019 476 55.76 $ 66.94 $ Family Practice (w/ OB) MGMA 2018 901 51.72 $ 62.98 $ Family Practice With OB AMGA 2019 447 55.31 $ 73.91 $ Family Practice With OB AMGA 2018 512 52.18 $ 60.57 $ Family Medicine With Obstetrics SCA 2018 554 54.43 $ 64.78 $ Family Medicine With Obstetrics SCA 2017 433 51.15 $ 60.89 $

Estimated Market Position 55.00 $ 68.00 $

55.17 $ 68.54 $ 55.12 $ 68.24 $

Comp as a % of Collections N Median 75th %

Family Practice (w/ OB) MGMA 2019 86 67.1% 94.6% Family Practice (w/ OB) MGMA 2018 205 79.8% 94.4% Family Practice With OB AMGA 2019 192 63.7% 94.9% Family Practice With OB AMGA 2018 244 63.9% 87.3% Family Medicine With Obstetrics SCA 2018 184 63.7% 84.9% Family Medicine With Obstetrics SCA 2017 125 65.6% 95.1%

Estimated Market Position 65.0% 92.0%

64.8% 91.5% 64.3% 90.9%

Current Year Weighted Average Current Year Average Current Year Average Current Year Weighted Average

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Relationship Between Production and Comp/wRVU

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75th % wRVUs x 75th % Comp/wRVU ≠ 75th % Compensation

2019 MGMA: Family Practice with OB Median 75th % 90th %

Total Compensation 268,954 $ 332,594 $ 406,515 $ wRVUs 4,900 6,343 7,961 Compensation per wRVU 55.76 $ 66.94 $

Example: "I produce at the 75th percentile; therefore, I should get paid 75th percentile compensation per wRVU." 75th Percentile wRVUs (MGMA) 6,343 75th Percentile Comp/wRVU (MGMA) 66.94 $ 424,600 $ Result: Compensation in excess of reported total compensation at the 75th (and 90th) percentiles.

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Use of Regional Data

Issues with Regional Data:

– Lower sample sizes – Data anomalies

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Comp per WRVU N Median 75th %

Family Practice (w/ OB) MGMA 2019 476 55.76 $ 66.94 $ Family Practice (w/ OB) MGMA 2018 901 51.72 $ 62.98 $ Family Practice With OB AMGA 2019 447 55.31 $ 73.91 $ Family Practice With OB AMGA 2018 512 52.18 $ 60.57 $ Family Medicine With Obstetrics SCA 2018 554 54.43 $ 64.78 $ Family Medicine With Obstetrics SCA 2017 433 51.15 $ 60.89 $ Family Practice (w/ OB) MGMA 2019 - Midwest 320 56.15 $ 67.00 $ Family Practice (w/ OB) MGMA 2018 - Midwest 438 50.42 $ 59.15 $ National Midwest

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Relationship Between Production and Comp/wRVU

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Common Compensation Issues for Other Services

Medical Directorships
Commercial Reasonableness
Best Practices
Predetermined time requirements/needs
Documented time sheets
FMV hourly rate
Call Coverage
Quality Add-ons
Outreach
Physician Extenders
Stacking

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Proposed Regulatory Changes

Revisions proposed to definitions of "fair

market value" and "commercial reasonableness" under Stark and AKS

– Fair market value

Permits consideration of generally accepted

valuation principles

May permit more flexibility based on facts and

circumstances of the provider

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Proposed Regulatory Changes

Revisions proposed to definitions of "fair

market value" and "commercial reasonableness" under Stark and AKS

– Commercial reasonableness

CMS expressly acknowledges that profitability of

an arrangement is not dispositive

"Does the arrangement further a legitimate

business purpose of the parties?"

Still must be considered in the absence of referrals

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Best Practices

Engage valuator if anything other than tangible

asset value is to be paid in an acquisition

Develop a physician compensation policy

consistent with organization’s goals and values

Validate amounts against external studies
Periodically review physician compensation with

FMV consultant

Separately review compensation of high earners

with FMV consultant more frequently

Ensure compensation is not related to volume or

value of referrals

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Best Practices

Use objective standards (including incentive

compensation standards) that can be evaluated by a court or arbitrator

Board or board committee review

– All elements of compensation – Document executive and board review for reasonableness – Watch for conflicts

Evaluate all acquisitions and compensation

arrangements for commercial reasonableness

Keep focus on community benefit and

charitable/governmental purpose

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