Structuring Physician Group Practices: Key Legal Considerations - - PowerPoint PPT Presentation

Structuring Physician Group Practices: Key Legal Considerations

Evaluating Compensation Models, Forming Practice Management Arrangements, and Navigating Corporate Practice of Medicine Issues

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Presenting a live 90-minute webinar with interactive Q&A

Joshua Kaye, Partner, DLA Piper, Miami Lucia Francesca Bruno, Principal S hareholder, Physicians’ Legal Group, Philadelphia

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Presented By:

Joshua Kaye, Esq. DLA Piper LLP (US) 305-423-8521 joshua.kaye@dlapiper.com

Strafford Webinars April 21, 2014

Structuring Physician Group Practices: Key Legal Considerations

The Value Agenda Proposition

• Providers are facing unprecedented reimbursement pressures, taking on risk vis-

à-vis accountable care organizations and related vehicles and are being asked to do more for less and to migrate from a fee for service system to one that is driven by benchmarks (quality, patient satisfaction, cost efficiency, etc.).

• The Strategy That Will Fix Health Care, by Michael Porter and Thomas H. Lee,

Harvard Business Review

• “It’s time for a fundamentally new strategy. At its core is maximizing

value for patients: that is, achieving the best outcomes at the lowest

• cost. We must move away from a supply-driven health care system
• rganized around what physicians do and toward a patient-centered

system organized around what patients need.

• We must shift the focus from the volume and profitability of services

provided—physician visits, hospitalizations, procedures, and tests—to the patient outcomes achieved. And we must replace today’s fragmented system, in which every local provider offers a full range of services, with a system in which services for particular medical conditions are concentrated in health-delivery organizations and in the right locations to deliver high-value care.”

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Health care delivery in next five years

• Delivery system comprised of shared risk between payors, hospitals and providers
• Greater focus on wellness and preventative care
• Patient-centric bundled payments
• Tiered providers based on quality, efficiency, cost comparisons, and severity

adjustments

• Seamless exchange of PHI vis-à-vis electronic health records

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A Transformative Healthcare Landscape

• Universal coverage and Medicaid expansion expected to cover 30 million

new insured

• Numerous strategic mergers, acquisition, and consolidation activity
• Private equity salivating for high return opportunities in a fragmented,

inefficient health market with revenue enhancement growth through consolidation and innovative technology

• Payors are diversifying risk and investing in providers and provider-based

technology driven by ACA’s Medical Loss Ratio rules

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Why form a physician-group

• Decreasing reimbursement and focus on quality and efficiency

means that physicians are being asked to do more with less

• More effectively compete in the market place
• A physician group will allow physicians to reduce total cost of care

through leverage and operating efficiencies

• A physician group will allow physicians to establish and participate in

ancillary services in a manner that complies with the Stark Law and

• ther applicable health care laws
• Payors and providers are seeking to better understand the cost of a

patient to the health care system and not just an individual provider

• Solo practitioners and small practices are being squeezed out of the

market place due to increasing costs and health system/hospital acquisitions

• “Winners” will be rewarded; “Losers” will be isolated and rendered

irrelevant

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What is a Physician Group – Stark Law

• Stark Law only applies to eleven categories of “Designated Health Services”
• Single legal entity
• At least two (2) physicians who are “members” (i.e., owner or employee but not

independent contractors)

• Each physician “member” of the group furnishes substantially the full range of “patient

care services” that the physician routinely furnishes

• At least 75% of the total “patient care services” of the group practice “members” are

furnished through the group and billed under a billing number assigned to the group, and the amounts received are treated as receipts of the group

• Members of the group personally conduct no less than 75% of the physician-patient

encounters of the group practice;

• The overhead expenses of, and income from, the practice are distributed according to

pre-determined methods prior to the receipt of payment for the services

• The group is a “unified business”
• No physician member of the group directly or indirectly receives compensation based
• n the volume or value of referrals by the physician, except under certain special rules

for profit shares and productivity bonuses

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Group Formation – Key Considerations

• Partners versus associates
• Specialties and other caregiver participation
• Choice of Entity, Tax planning
• Identify, analyze and address each and every item, service and financial

relationship

• Sublease of existing individual medical practice office space versus

assignment of space

• Billing and collection
• Personnel – clinical versus non-clinical
• Provision of additional items and services
• Employment agreements
• Governance
• Capital contributions, line of credit, advances and other funding mechanisms
• Terms of management agreement, if any

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Group Formation – Items to Consider

• Physician professional services and employment agreement
• compensation model – base salary, professional productivity,

hybrid)

• scope of services, term, termination, non-compete, etc.)
• Allocation of costs to Care Centers – pro rata share of overhead plus

direct costs

• EHR system
• Ancillary Services
• Bargaining Power with Payors
• Employee Benefits Issues (i.e. 401k plans, health care benefits)
• Malpractice insurance (captive insurance plan)

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Stark Law FAQs regarding structuring a physician group

Payor Hospital

$$$

Individual Medical Practice Dr. Dr.

Exclusive services Consideration Services

Physician group holding company (non-practicing) Dr.

1) Ownership of a physician group by an individual, trust, or legal entity 2) Exclusive contracting arrangements 3) Federal anti-kickback statute group practice investment safe harbor 4) State Law self referral and medical practice considerations

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Organizing the Physician-Group Structure Transition from Existing Individual Practices to a Single Practice

Parent Single Physician Group Management Company

$$$

Individual Medical Practice Dr. Dr. Dr.

Sublease, Items and Services

Rent and Fees Sublease, Items and Services Rent and Fees Assets and Non- Clinical Personnel Consideration Management Services

Multiple Doctors

1) Stark Law exceptions include in-office ancillary services exception, space rental exception, equipment rental exception, personal services exception, bona-fide employment exception, and fair market value exception 2) AKS safe harbors include group practice investment, space rental, employment, and personal services and management contracts

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Operating a Physician Group Structure

Parent Physician Group Management Company

Ancillary Mgmt. Services, Sublease, Items and Services $$$

Physician Partners Physician Equity Participation Investors

Care Center One Care Center Two Care Center Three

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Stark Law special rules and flexibility w ith profit distributions and productivity bonuses

• Stark Law prohibits a group practice physician from being

compensated directly or indirectly based on the volume or value of the member’s referrals for DHS

• Stark Law governs how a group practice may pay physicians a

share of “overall profits”

• “Overall profits” with respect to DHSs is defined as either: (A)

all of the group’s profits derived from DHSs; or (B) the profits derived from DHSs of any component of the group consisting

• f at least five (5) physicians
• A group practice may segregate its DHS revenues or profits

from its other revenues or profits for purposes of compensating physicians but all DHS must be pooled together

• Inapplicable to profits not derived from DHS

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Physician group ancillary services

• In Office Ancillary Services Exception
• Stark Law key exception for ancillary services within a group
• Billing test, physician supervision test, and location test
• Recent guidance on IOAS exception
• Pathology arrangements
• Solo practitioners
• Technical component, professional component, global
• Shared lab arrangements and OIG guidance re AKS statute
• Anesthesia arrangements
• Opinion 12-06 and subsequent OIG opinions
• Maryland House Bill 441
• Critical to incorporate appropriate safeguards into arrangement
• Not simply an opportunity to profit from passive referrals
• Structure to comply with state corporate practice of medicine and fee splitting laws
• State law considerations

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How To Participate?

• Sign Confidentiality Agreement
• Execute an Expression of Interest
• Complete application
• Meaningful deliberation and discussions
• Transaction Documents

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Case Study – Sale of a Group Practice

• Physician Group
• 60 physician member group comprised of multiple physician care centers
• Diagnostic imaging, clinical laboratory and other in-office ancillary services

generating $2.5-5 million in EBITDA

• Ownership in multiple ambulatory surgery centers
• Health System
• Leading hospital developing centers of excellence
• Growing footprint with desires to continue to capture greater market share through

hospital/physician alignment strategies

• Result
• Sale of physician practice assets including ancillaries (but not ASCs) for 3-4x --

Stark Law Isolated Sales Transaction Exception

• Physician group exclusive provider of professional services through professional

services agreement

• Physician group and hospital participating in ICO with payment benchmarks and

shared savings component

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Case Study

Health System Parent

Physician Practice Hospital

Professional Services

Physician Practice Physicians

Sublease, Items and Services Rent and Fees Assets and Non- Clinical Personnel Purchase Price (3-4x) FMV Fee

Physicians

Care Centers

ICO Shared Risk Quality and Efficiency Benchmarks EHR Platform

Payor(s)

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Innovation needs to be balanced w ith regulatory considerations

• Increased anti-trust scrutiny
• Increased whistleblower activity
• Halifax
• Davita
• OIG Guidance
• Patient Privacy enforcement
• Meaningful expansion of HIPAA’s web commencing in September

2013

• Increased enforcement activity

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Presented By:

Joshua Kaye, Esq. DLA Piper LLP (US) 305-423-8521 joshua.kaye@dlapiper.com

Strafford Webinars April 21, 2014

Structuring Physician Group Practices: Key Legal Considerations

Physic ia n Pra c tic e Ma na g e me nt Co mpa nie s (PPMs)

 Typically owned by non-physician investors  Prohibited from involvement in patient care and

clinical decision-making

 Manage physician practices of all types and sizes,

including primary care, single-specialty, multi- specialty, and hospital-based practices

 When structured properly can result in financial gain

for PPMs and provide significant benefits to physicians

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Be ne fits o f PPMs

.

• Ab ility to ma ke c a pita l inve stme nts

(so phistic a te d so ftwa re , e q uipme nt, a nd pro c e ss-ma na g e me nt syste ms)

.

• Administra tive e ffic ie nc y, c linic a l e ffe c tive ne ss,

a nd c o st-e ffic ie nt ma na g e me nt o f the “b usine ss” o f pra c tic ing me dic ine

.

• Adva nc e d pa tie nt-a c q uisitio n me tho ds, po pula tio n

he a lth a nd risk ma na g e me nt (Ac tuarial suppo rt to ide ntify the patie nt po pulatio ns and tre nds that drive me dic al-c o st inflatio n)

• Ne g o tia te Hig he r Re imb urse me nt Ra te s

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Ba sic Struc ture T ype s

Full Service Relationship

• Ordinarily a “full service relationship” begins with

the PPM “acquiring” an existing physician practice. This includes purchasing all of the practice’s assets, (office and equipment leases) all of which are leased back to the practice.

• In a “full service relationship” the PPM provides the

physician practice with a full suite of management, administrative, financial, and operational support services necessary for the practice to operate on a day-to-day basis.

• Note: Ordinarily, physicians receive payment as

consideration for the sale of the practice’s assets at the time of the affiliation.

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Ba sic Struc ture T ype s

(c o ntinue d)

De novo or “New” Physician Entity

 PPMs recruit individual physicians from an existing

practice or residency and arrange for office space, equipment, staff, etc…. to be provided to a new physician practice entity formed by the PPM.

 In a “New” or “De novo” Entity – The newly formed

physician practice is governed by a long-term management agreement (usually10 years or more).

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L e g a l Pitfa lls o f PPMs

Legal Considerations to Take Into Account:

• 1. Corporate Practice of Medicine

(CPOM) Doctrine

• 2. State Law Fee-Splitting Prohibitions

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Co rpo ra te Pra c tic e o f Me dic ine Do c trine

Ove r vie w:

Pro hib its a b usine ss c o rpo ra tio n fro m pra c tic ing me dic ine o r e mplo ying a physic ia n to pro vide pro fe ssio na l me dic a l se rvic e s. So me sta te s, inc luding Ne w Yo rk, Ne w Je rse y, Co lo ra do , a nd I llino is, ha ve c a rve d o ut c e rta in c o rpo ra te e mplo ye rs a s e xc e ptio ns to the CPOM pro hib itio n, suc h a s ho spita ls, he a lth ma inte na nc e

• rg a niza tio ns, a nd o f c o urse , pro fe ssio na l

c o rpo ra tio ns.

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Co rpo ra te Pra c tic e o f Me dic ine Do c trine

Public Polic y:

T he CPOM pro hib itio n ma nife sts itse lf in a va rie ty o f sta te la ws, re g ula tio ns, a nd c o urt o pinio ns a ddre ssing o wne rship o r c o ntro l o f he a lthc a re pro vide rs b y individua ls o r c o rpo ra tio ns tha t c a nno t dire c tly pro vide he a lthc a re se rvic e s. So me sta te s me re ly pro hib it the pra c tic e o f me dic ine witho ut a lic e nse o r the sha ring o f fe e s b e twe e n lic e nse d a nd unlic e nse d individua ls, while

• the r sta te s fla tly pro hib it the o wne rship o f me dic a l

pra c tic e s o r e mplo yme nt o f pro fe ssio na ls b y no npro fe ssio na ls.

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Co rpo ra te Pra c tic e o f Me dic ine Do c trine

Author

ity:

 Co rpo ra te e mplo yme nt o f a lic e nse d pro fe ssio na l ha s b e e n

pro hib ite d o n the g ro unds tha t suc h a re la tio nship “te nds to the c o mme rc ia liza tio n a nd de b a se me nt o f tho se pro fe ssio ns” (Ba rto n v. Co ding to n Co untry, 2 N.W. 2d 337, 343 (S.D. 1942))

 Unde rmine s the physic ia n-pa tie nt re la tio nship a nd the

physic ia n’ s e xe rc ise o f inde pe nde nt me dic a l judg me nt in the so le inte re st o f the pa tie nt (Se e Ga rc ia v. T e xa s Sta te Bd. o f Me d. E xa m’ rs, 348 F . Supp. 435, 437 (W.D. T e x. 1974)

 Ca use s the g e ne ra l intrusio n into the pra c tic e o f me dic ine b y

c o rpo ra te e ntitie s tha t a re no t lic e nse d a nd the re fo re no t sub je c t to the sa me pro fe ssio na l sta nda rds o r re g ula to ry c o ntro l a s lic e nse d e ntitie s. Se e , e .g ., Sta te v. Bo re n, 219 P.2d 566, 568-69 (Wa sh. 1950); F unk Je we lry Co . v. Sta te e x re l. L a Pra de , 50 P.2d 945, 945-47 (Ariz. 1935)

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F lynn Br

• s, Inc . v. F

ir st Me dic al Assoc s., 715 S.W.2d 782 (T e x. App. 1986)

 Texas Court of Appeals found that the CPOM doctrine had

been violated under the Texas Medical Practices Act, holding that a PPM through a practice management agreement, retained the right to a majority of the practice’s profits, commingled the practice’s and funds with the PPM and pledged the practice’s assets as collateral for the PPM’s debt. Furthermore, under the management agreement retained the right to hire staff for the practice to use in hospitals where the practice contracted to provide services.

 In this case, the court looked beyond the form of the

arrangement and found that the practical effect was that the physician was an “employee” of the PPM, and allowed the PPM to indirectly practice medicine, both impermissible under the Texas Medical Practices Act.

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F e e -Splitting

 AMA Opinion 6.02 - Any payment by or to a physician solely

for the referral of a patient is “fee splitting” and is “unethical.”

 State Statutes - The prohibition of “Fee-splitting” is commonly

included in state statutes relating: (i) licensure of medical professionals; (ii) unethical; or (iii) professional misconduct.

(New York State: BOTH Statute and Regulation)

 The legislative intent behind fee-splitting prohibition was to

remove any improper financial incentive from a physician’s consideration when diagnosing and treating patients.

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NY E

duc a tio n L a w §6530 & N.Y.C.R.R. §29.1(b )

• Directly or indirectly offering, giving, soliciting, or receiving or agreeing to

receive, any fee or other consideration to or from a third party for the referral of a patient or in connection with the performance of professional services;

• Permitting any person to share in the fees for professional services,
• ther than: a partner, employee, associate in a professional firm or

corporation, professional subcontractor or consultant authorized to practice medicine, or a legally authorized trainee practicing under the supervision of a licensee….

• This prohibition shall include any arrangement or agreement whereby

the amount received in payment for furnishing space, facilities, equipment or personnel services used by a professional licensee constitutes a percentage of, or is otherwise dependent upon, the income

• r receipts of the licensee from such practice……

Definitions of Professional Misconduct:

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Virg iliu Ne c ula , Pe titio ne r, v. Ma ry E . Gla ss, a s Co mm. o f So c ia l Se rvic e s o f T he Sta te o f NY, Re spo nde nt 231 A.D.2d 457 (1996) 647 N.Y.S.2d 501 I n Ne c ula v. Glass a physic ia n ha d b e e n e xc lude d fro m Ne w Yo rk’ s Me dic a id pro g ra m a fte r he wa s fo und to ha ve e nte re d into c o ntra c ts with ma na g e me nt c o mpa nie s tha t pro vide d him with “fa c ilitie s, supplie s, e q uipme nt a nd no n- physic ia n sta ff ne c e ssa ry to o pe ra te his ra dio lo g y pra c tic e [a nd pa id] the c o mpa nie s a fixe d pe rc e nta g e o f his re c e ipts fo r billing se r

vic e s a nd a fixe d do lla r a mo unt fo r

e a c h pro c e dure pe rfo rme d.” T he c o urt fo und this to b e ille g a l fe e -splitting a nd uphe ld his e xc lusio n.

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T ime s a re Cha ng ing ………

 THEN - When the fee-splitting prohibitions were enacted,

most physicians did their own billing using a secretary or billing clerk.

 NOW - Today many physicians use electronic billing services

and pay them based upon a percentage of billed fees or collections; thereby conflicting with statutory law. Fee Splitting Exceptions (Billing Arrangements) Public Act 96-0608 (Section 22.2) to the Illinois Medical Practice Act

E xc e ptio n fo r me dic a l b illing a rra ng e me nts a llo ws pa yme nt b y a physic ia n (o r physic ia n pra c tic e ) fo r the pe rfo rma nc e o f b illing , a dministra tive pre pa ra tio n, o r c o lle c tio n o f c la ims fo r pro fe ssio na l fe e s, b ut o nly if thre e re q uire me nts a re sa tisfie d: F irst, the pa yme nt o f c o mpe nsa tio n must b e c o nsiste nt with fa ir ma rke t va lue . Se c o nd, the physic ia n o r physic ia n pra c tic e must c o ntro l the a mo unt o f fe e s c ha rg e d a nd c o lle c te d. T hird, a ll c o lle c tio ns fo r pro fe ssio na l c ha rg e s must e ithe r b e pa id dire c tly to the physic ia n (o r physic ia n pra c tic e ) o r de po site d dire c tly into a n a c c o unt in the na me a nd unde r the so le c o ntro l o f the physic ia n (o r physic ia n pra c tic e ), o r into a trust a c c o unt b y a lic e nse d c o lle c tio n a g e nc y.

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Physic ia n Pra c tic e Ma na g e me nt Arra ng e me nts (PPMAs)

 PPMAs - Are arrangements between licensed physicians and a

business entity owned by non-licensed persons.

 PPMAs - Set forth the services to be provided by the PPM and

the rights and obligations of the parties during the relationship.

 PPMAs - Typically require physicians enter into employment

agreements with the practice (or amend the physicians’ existing employment agreement) to contain a restrictive covenant that prevents the physicians from leaving the practice and directly competing with the practice.

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PPMAs – K e ys Are a s o f Co nc e rn fo r Co unse l

 Parties’ obligations and deliverables  Management company costs and pass through costs  Calculation of revenue and handling of collections  Real estate (bricks and mortar) of the transaction  Default provisions and balance of power  Buy-out provisions  Termination and Term

38

PPMAs – Othe r I ssue s o f I nte re st

 HIPPA / BAAs  Billing and Collection Services  How the occupational licenses are titled  Medicare Provider Number (Location)

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Pro b le m Avo ida nc e – PPMA

Check…Check & Double Check

Ownership

• Lay Corporation / Non-Professional - The CPOM doctrine can dictate

the form of physician entity to be used in a physician practice management arrangement.

• CPOM doctrine prohibits a lay corporation (i.e., one that is owned by

nonprofessionals) from practicing medicine.

• Friendly Physician –Many States require that a “Friendly” physician be

the officer, director, or employee of the PPM. In this scenario the “Friendly” Physician assumes sole or majority ownership of the physician practice. “Friendly” physician MUST be licensed in each state where the PPM provides services. Employment

• PPMAs can implicate the CPOM doctrine if the form of the physician

entity (e.g., corporation, limited liability company, professional corporation) is not one that can lawfully employ physicians. (See, state-specific exceptions)

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Pro b le m Avo ida nc e – PPMA

(c o ntinue d)

Check…Check & Double Check

Payments

• Payments should be structured as either a flat fee, or on a fee-

for-item or fee-for-service basis. Payments based simply on a percentage of the medical practice’s gross or net revenue are prohibited as “fee-splitting” and can void the entire arrangement. Control

• PPMs can exercise too much control over the practice, which

could infer that the PPM is effectively engaged in the practice

• f medicine. (See, Flynn Bros, Inc. v. First Medical Assocs.,

715 S.W.2d 782 (Tex. App. 1986).

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I mpo rta nt T a ke a wa ys



PPMAs o fte n implic a te sta te la ws o n CPOM do c trine a nd fe e - splitting pro hib itio ns.



T he CPOM do c trine c a n dic ta te the fo rm o f physic ia n e ntity to b e use d in a physic ia n pra c tic e ma na g e me nt a rra ng e me nt.



F e e -splitting pro hib itio ns ma y pre ve nt c e rta in ma na g e me nt fe e struc ture s tha t a re c o mmo n to physic ia n pra c tic e ma na g e me nt a rra ng e me nts.



L a ws va ry fro m sta te to sta te , so the se la ws sho uld b e e xa mine d fo r e a c h sta te in whic h se rvic e s will b e pro vide d unde r a PPMA.



Vio la tio n o f CPOM o r fe e -splitting pro hib itio ns c a n le a d to se rio us c o nse q ue nc e s fo r b o th the physic ia n pra c tic e ma na g e me nt c o mpa ny a nd the physic ia ns invo lve d in a n a rra ng e me nt.

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Francesca Bruno, J.D., LL.M., M.B.A., C.H.C. Physicians Legal Group, LLC (Philadelphia) lbruno@physicianslegalgroup.com

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