Select Market Factors Select Market Factors Declining real wages - - PDF document

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Practice Consolidation, Practice Consolidation, Aggregation and Joint Ventures Aggregation and Joint Ventures

Michael L. Blau, Esq. Partner, Foley & Lardner LLP Anthony M. Berson, M.D. Radiation Oncology, St. Vincent’s Comprehensive Cancer Center

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Select Market Factors Select Market Factors

• Declining real wages
• Increasing practice costs/costs of living
• New technology costs to remain state-of-art
• Payor Pressures

– Lower rates (drugs, drug administration, radiology)

• More competition for ancillary, outpatient, and

ambulatory surgical services

• Administrative burdens
• Regulatory burdens
• Need for capital

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Why Integrate? Why Integrate?

Medical Oncologist Other

Percentage Radiation Oncologist Referrals by Physician Specialty

Source: The Advisory Board

50% 50%

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Why Integrate? Why Integrate? (cont

(cont’ ’d) d)

• 1. Number of new cancer cases

per medical oncologist

• 2. 60% of new cancer patients

will receive RT

• 3. 50% of RT referrals come

from medical oncologists

• 4. Average of 23 treatments per

RT course

• 5. Convert treatments per year

into patients per day

= 7 RT patients per day ÷ 250 working days per year 1,725 RT treatments per year x 23 75 RT referrals per year x 50% 150 RT patients per year x 60% 250 new cancer cases per year

TYPICAL MEDICAL ONCOLOGIST

Bottom Line: Two to three medical oncologists support a linear accelerator

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Why Integrate? Why Integrate? (cont

(cont’ ’d) d)

• Revenue enhancements
• Bargaining power with payors and vendors
• Access to clinical trials
• Access to capital/capital reserves
• Economies of scale
• Technology deployment and ancillaries
• Quality improvement
• Quality of life
• Affiliations and joint ventures
• Captive insurance arrangements

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Integration Partners Integration Partners

• Physicians/Medical Groups
• Hospitals
• MSOs/Practice Management

Organizations

• Developers
• Insurers

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Case Report: Market Factors in Case Report: Market Factors in New York City New York City

Background – URORAD Integrated urology practice Long Island 2005

• MSO Managed
• Centralized office overhead
• Negotiated insurance/procedure rates

Ancillary Services

• Lithotripsy
• Pathology
• Radiology
• Radiation oncology

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NYC Multispeciality Group Practice NYC Multispeciality Group Practice

• Freestanding Manhattan Radiotherapy

facility

• Pressure from Urology
• Proposal to form an integrated group

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Physician Issues for Integrated Physician Issues for Integrated Practice Practice

• Legal
• Governance
• Operational
• Finance
• Clinical
• Contracting
• Billing
• Practical: autonomy, trust, leadership

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Integration Continuum Integration Continuum

Physician - Physician

Solo Practice IPA (Nonrisk) MSO Group Practice Without Walls Single Specialty Group (Fully Integrated) IPA (Risk) Clinical Integration Multi-Specialty Cancer Center (Fully Integrated) Joint Ventures

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Fully Integrated Group Fully Integrated Group

Stockholders NewGroup

Services Real Estate RT Infusion Imaging ASC Lab

Governance

• Democratic vs. founders reserve

powers

• Income partners
• Part-timers

Compensation

• Equal or productivity
• By specialty
• Profit centers?
• Revenue/expense allocation

Buy-In/Buy-Out

• Transfer events
• Cross purchase vs. redemption
• Liquidation value vs. goodwill
• Succession planning

Restrictive Covenants

• Stark Law – In-office ancillary services and employment exceptions
• DHS technical revenue cannot be allocated based on referrals
• Anti-Kickback Statute – Group practice and employment safe harbors

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Group Practice Without Walls Group Practice Without Walls

NEWCO, LLP MO Division I MO Division II RT Division III Specialist Division IV Class A Voting Class B Non- Voting

• co-equal

voting

Members

• Each Member receives 1

Class A Unit; Class B Units based on relative value of contributed practice Member Actions

• Supermajority voting

Board

• Representative of constituent

interests

• Central authority

Board Voting

• Routine - majority
• Major Actions - supermajority

Divisions

• Profit center accounting
• Delegated authority for day-to-

day operations

• Cross-indemnity for divisional

deficits?

• Departing physicians

responsible for guaranteeing pro rata share of divisional long term debt?

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Transactional Structures Transactional Structures

• Merger
• Asset contribution
• Asset sale

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Practice Merger Practice Merger

• Liabilities assumed
• Group A/B contracts retained

– Group A provider numbers

• Tax-free reorganization
• No goodwill issue
• Carry-over basis in assets

Group A Group B

Merge

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Asset Contribution Asset Contribution

• No assumption of liabilities
• Recontracting
• Tax-free contributions
• Deemed distribution of goodwill?
• Carry-over basis in assets

Group A Group B NEWCO, LLC

• Liquidate/distribute

NewCo equity to MDs

• Liquidate/distribute

NewCo equity to MDs

• Contribute Assets
• Contribute Assets

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Asset Sale Asset Sale

MDs MDs Group A Group B NEWCO, LLC

A s s e t s

Promissory Note

N

• m

i n a l C

• n

s i d e r a t i

• n

N

• m

i n a l C

• n

s i d e r a t i

• n

Units Units

• Select liabilities
• Recontracting
• Minimize tax (goodwill) risk; but

sales tax in some states (e.g., NY)

• Step-up in basis of assets

Assets

Promissory Note

• Partial or complete

liquidation

• Partial or complete

liquidation

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Legal Considerations Legal Considerations

• Stark II Phase III Rules – In-Office Ancillary Services

Exception

– Single legal entity – Range of care – substantially full range of services physician routinely performs

• Joint use of shared office space, facilities, equipment, personnel

– Unified business test - - Permits profit center accounting

• Centralized decision making by a body representative of the group

that maintains effective control over the group’s assets and liabilities

• Consolidated billing, accounting, and financial reporting
• Centralized utilization review

– Common billing number

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Legal Considerations Legal Considerations (cont

(cont’ ’d) d)

• Stark II Rules – In-Office Ancillary Services

– Methods of compensation set in advance – Profit distributions and productivity bonus

• Cannot distribute technical component of DHS based on referrals
• 5%/5% rule
• Productivity bonus - personally performed (including “incident” to

services) directly related to DHS referrals, or based on patient encounters, RVUs

• Profit distributions generated by 5 or more physicians distributed per

capita, or based on non-DHS productivity

• Other reasonable and verifiable methods not directly related to DHS

referrals

– Ancillaries in same building/centralized building

• Same building (same postal address) at which group provides

substantially full range of services

• Centralized building used exclusively by group

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Legal Considerations Legal Considerations (cont

(cont’ ’d) d)

• Anti-Kickback Statute

– Group Practice Safe Harbor/Unified Business Test

• Equity must be in the practice or group itself, and not some

subdivision of the practice or group

• Meet Stark Bill definition of group practice
• Unified business with centralized decision-making, pooling of

expenses and revenues, and a compensation/profit distribution system that is not based on satellite offices

• perating substantially as if they were separate enterprises
• r profit centers

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Legal Considerations Legal Considerations (cont

(cont’ ’d) d)

• Antitrust

– Price fixing/boycott

• Adequate financial, clinical and administrative integration

– Monopoly

• Physician Network Joint Venture Safety Zone

– 20% exclusive – 30% non-exclusive

• Precedents – 45-55%
• Tax

– Tax free reorg rules – State sale tax issues

• Securities offering/exemption?

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Other Key Integration Issues Other Key Integration Issues

• Divisions

– Credentialing – Allocation of central/divisional revenues and expenses – Divisional compensation methods? – Divisional buy-sell? – Divisional restrictive covenants? – Embedded physicians/expense sharing arrangements

• Buy-sell provisions
• Commitment window?

– Vesting of redemption price/deferred compensation? – Unwind rights?

• Practice protections

– External and internal competition

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Other Key Integration Issues Other Key Integration Issues

(cont (cont’ ’d) d)

• Debt consolidation
• Common benefits

– Work force salary differentials

• Payor rate differentials
• Inter-divisional liabilities
• Terminating physicians
• Dispute resolution

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Practice Management Arrangements Practice Management Arrangements

Management fee issues

• Aligned vs. nonaligned incentives
• Avoiding corporate practice of medicine and fee-splitting
• Percentage based management fees coupled with marketing/business expansion =

arranging for referrals? (OIG Adv. Opinion 98-4; Bakarania)

• State anti-solicitation statutes
• State clinic licensure issues

Oncology PPM Medical Group Operating Committee

Business Issues

• Management contract vs. Captive PC
• Management services
• GPO services
• IS/EMR
• Recruitment
• Business expansion
• Ancillary care facility development
• Access to clinical trials
• Capital partner
• Exclusive?
• Cost of capital
• Depreciation
• Budget process
• A/R pledge and lockbox
• Accrual accounting issues
• Transparency
• Term/Termination
• Dispute resolution
• Unwind
• Succession

Asset Sale Management Contract D e s i g n e e s Designees 24

Equity Model MSO Equity Model MSO

Oncology PPM Medical Group NewCo LLC Medical Group

CEO Executive Management Capital IS 51% 49% S u b c

• n

t r a c t

• Dedicated space
• Dedicated assets
• Dedicated staff

Management Contract

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Other Joint Ventures Other Joint Ventures

• Same models as hospital-physician joint

ventures

– Block lease to medical group – Same building imaging ventures – Equipment/technology JV leasing companies – Real estate JVs – Under arrangements to medical group – Whole hospital ventures – Participating bond transactions

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Joint Venture Leasing Joint Venture Leasing Companies Companies

Physician Stockholders Holding Company Oncology Group

Imaging Equipment RT Equipment Lab Equipment ASC Cancer Center

Radiologists Specialists RTs Pathologists Surgeons Developers Developers Specialists

Surgeons Specialists

Block Lease Space Lease Leases Leases

• Fair market value
• Fixed Fees
• No per click fees for imaging or lab
• Independent appraisal

Business Issues

• Coordination/control
• Corporate administration
• Contract administration
• Partner disputes
• Succession planning

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Preliminary Considerations Preliminary Considerations

• Common vision
• Physician leadership
• Common will
• Trust
• Build trust

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Planning Phases Planning Phases

• Pre-Development Phase
• Design Phase
• Documentation Phase
• Implementation Phase

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Planning Phases Planning Phases (cont

(cont’ ’d) d)

• Pre-Development Phase

– Select physicians – Form Steering Committee – Agree on goals – Select consultants – Confidentiality agreement – Pre-development commitment

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Planning Phases Planning Phases (cont

(cont’ ’d) d)

• Design Phase

– Develop governance structure – Develop transactional structure – Develop operational plan – Develop financial plan – Present and approve/refine structure and plans

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Planning Phases Planning Phases (cont

(cont’ ’d) d)

• Documentation Phase

– Prepare legal documents – Select vendors/suppliers – Line-up financing – Recruit, as necessary – Technical review by personal lawyers/ consultants

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Planning Phases Planning Phases (cont

(cont’ ’d) d)

• Implementation Phase

– Sign documents – Consummate financing – Start-up operations

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Contact Us Contact Us

Michael L. Blau Partner Foley & Lardner LLP 111 Huntington Ave., 26th Flr. Boston, MA 02199 Tel: 617.342.4040 mblau@foley.com Anthony M. Berson, M.D. Radiation Oncology

• St. Vincent's Comprehensive

Cancer Center 325 W. 15th St. New York, NY 10011 Tel: 212.604.6081 berson@nyc.rr.com