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

Fair Market Value and Hospital – Physician Relationships Kevin Walker Andrew D. Kloeckner CBIZ Baird Holm LLP kwalker@cbiz.com akloeckner@bairdholm.com 816.945.5598 402.636.8222

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

Why Is FMV Important? • Stark • Anti-Kickback • Tax Exemption/Governmental Status

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

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)

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

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

National Enforcement Environment • 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 of FMV

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

Anti-Kickback Statute • Rule: Compensation may not induce or 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

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

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

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

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

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

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 own – Know your facts

What is FMV? • Typical scenarios – Practice acquisitions – Professional services

What is FMV? • Practice Acquisitions – Asset Approach – Market Approach – Income Approach

Practice Acquisitions • For the physician practice to have value in excess of 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 19

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 20

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 21

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. of the hospital) and the implications of practice losses – Commercial reasonableness 22

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

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

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

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

Estimated Market Positions: Family Practice with OB 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 Current Year Average $ 267,644 $ 338,738 $ 403,427 Current Year Weighted Average $ 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 Current Year Average 4,930 6,101 7,307 Current Year Weighted Average 4,923 6,072 7,288 27