Medical Device Industry Update Overview of the Stark Laws 11/15/2018 Dickson Consulting Medical Device Industry Update Overview of the Stark Laws 11/15/2018 Dickson Consulting Dickson Consulting

Purpose of Stark Laws Hospital Doctor Device Company The Stark Laws address consulting and professional relationships among doctors, hospitals and companies. 11/15/2018 Dickson Consulting

Additional Information The Stark Laws and the business relationships between doctors, hospitals and medical device providers are complex. Accordingly, appropriate legal counsel should be consulted for opinions on specific situations. Interim Final Rule-Federal Register; Friday, March 26, 2004;16054 – 16146 Correction of Errors to Interim Final Rule-Federal Register; April 6, 2004; 17933 11/15/2018 Dickson Consulting

Helpful Websites www.complianceland.com www.amda.com/federalaffairs/stark2.htm www.starkcompliance.com (for fee web site) Law firms with health care practices web sites frequently contain newsletters and/or other information. 11/15/2018 Dickson Consulting

Stark Laws History Stark Law I Enacted in 1989 and effective January 1, 1992 Self referral ban for clinical laboratory services Prohibited entities from a making a claim for payment under the Medicare program for clinical laboratory services furnished pursuant to a prohibited referral. Stark Law II 1993 expansion of Stark Law I, effective January 1, 1995 Expanded to cover additional health care services 11/15/2018 Dickson Consulting

Stark Laws History Stark Law II, Phase II Addresses comments received on phase I and provided final regulations Interim Final Rule issued March 26, 2004 Effective July 26, 2004 Stark Law II, Phase III Final rules required within three years of Phase II rules Will address comments on Phase II 11/15/2018 Dickson Consulting

Stark Laws Basic Prohibitions (A Physician Cannot) Make a referral To an entity For the furnishing of “designated health services” The may be payable by Medicare or Medicaid (or insurance companies in some states) If the physician (or the immediate family member of the physician) Has a direct or indirect financial relationship with the entity Unless an exception to the Stark laws applies 11/15/2018 Dickson Consulting

What Is A Referral? A physician’s request for, ordering of, or certifying the need for, any “designated health service”…, A physician’s request that includes the provision of any designated service, the establishment of a plan of care that includes the provision of a designated health service or the certifying or recertifying of the need for such a designated health service. 11/15/2018 Dickson Consulting

Examples of Designated Health Services Clinical laboratory services Physical therapy, occupational therapy and speech language pathology Radiology and certain other imaging services Radiation therapy and supplies Durable medical equipment and supplies Prosthetics, orthotics and prosthetic devices and supplies Home health services Inpatient and outpatient hospital services 11/15/2018 Dickson Consulting

What is a Direct or Indirect Financial Relationship? A direct or indirect “ownership or investment interest” in the entity that furnishes designated health services A “compensation arrangement” between the physician and the entity 11/15/2018 Dickson Consulting

Requirements for “Personal Services Exemption” Requirements for personal services exemption = provisions of an agreement with a physician that must be included. 11/15/2018 Dickson Consulting

Requirements for “Personal Services Exemption Cover all of the services to be furnished and be in writing, be signed by the parties to the agreement and specify the services covered by the agreement. Cover all of the services to be furnished by the physician under the arrangement. If some services are covered in another agreement, the agreements must cross-reference each other or the entity furnishing the designated health service must maintain a master list of agreements. Cover aggregate services that do not exceed those that are reasonable and necessary for the legitimate purposes of the arrangement. (Requirements continued) 11/15/2018 Dickson Consulting

Requirements for “Personal Services Exemption”-Continued Be for a term of at least one year. If the agreement terminates before the end of the first year, the parties cannot enter into another arrangement for the substantially same services during the first year of the original term of the agreement. Provide for compensation to be set in advance, does not exceed “fair market value,” and not be determined by the volume or value of any referrals or other business generated between the parties. Not involve counseling or promotion of a business arrangement or other activity that violates any state or federal law, such as the federal Anti-kickback Statute. 11/15/2018 Dickson Consulting

What is “Fair Market Value” The value in arm’s length transactions, consistent with the general market value”. General market value means “the compensation that would be included in a service agreement as the result of bona fide bargaining between well-informed parties to an agreement who are not otherwise in a position to generate business for the other party” at the time of the agreement. 11/15/2018 Dickson Consulting

FMV of Hourly Payments An hourly payment for personal services is considered to be “fair market value” if the payment is established using either of the following two methodologies: The hourly rate is less than or equal to the average hourly rate for emergency room physician services in the relevant physician market, provided that there are at least three hospitals providing emergency room services in the market. The hourly rate is determined by averaging the 50th percentile national compensation level for physicians with the same physician specialty in a survey divided by 2,000 hours. 11/15/2018 Dickson Consulting

Physician Compensation Surveys Sullivan, Cotter & Associates, Inc.-Physician Compensation and Productivity Survey-www.sullivancotter.com Hay Group-Physician Salary Survey Report-www.haygroup.com ECS Watson Wyatt-Hospital and Health Care Management Compensation Report-www.watsonwyatt.com William. M. Mercer-Integrated Health Networks Compensation Survey-www.mercer.com Hospital and Healthcare Compensation Services-Physician Salary Survey Report Medical Group Management Association-Physician Compensation and Productivity Survey 11/15/2018 Dickson Consulting

Stock Options and Stock Ownership Options received as compensation are compensation-and not an ownership interest-until they are exercised. The past granting of options is not a problem if the entire compensation arrangement fits within the exception applicable to personal service exemption. Once the options become exercised, they become an ownership interest. The only Stark exceptions for ownership are: Publicly traded securities. Mutual funds. Certain providers (rural providers, a hospital in Puerto Rico, and a whole hospital-not a department or part thereof. In-office ancillary services. 11/15/2018 Dickson Consulting

FMV of a Stock Option Difference between FMV and exercise price. Black-Scholes and similar methodologies are difficult to apply for nonpublic companies Annual report footnote on accounting policies- Weighted average fair value of options granted during the year for employees=$.xx for 200x and 200x. Annual report footnote on stock option plans-At December 31, 200x, the fair market value was less than the exercise price (of $.00) and, therefore, no compensation expense was recorded for options. 11/15/2018 Dickson Consulting

Situations Where Stock Options Are a Problem Physicians total compensation from the company, including the stock options, is not at fair market value. Valuation does not take into consideration all relevant factors-for example, granting stock options if the Board has recently approved a plan to go public can affect the value of an option. A physician whose hospital is a larger customer is granted stock options, while a physician whose hospital is a smaller customer does not receive stock options, even though the physicians perform the same consulting work for the company. 11/15/2018 Dickson Consulting

Reporting Requirements Information that can be requested (by CMS or OIG): The name and identification of each physician who has a reportable financial relationship with the entity The name and identification of each physician who has an immediate family member who has a reportable financial relationship The covered services furnished by the entity 11/15/2018 Dickson Consulting

Documentation Requirements Entities and physicians relying upon the fair market value safe harbors for payment for a physician’s personal services should document compliance with the safe harbor. Parties entering into personal service arrangements must be documenting all separate arrangements between the parties either by incorporation by reference or maintaining a master list of the contracts. Parties that fall out of temporary compliance with and exception should document the reasons for the temporary non-compliance3 and the actions taken to rectify the situation 11/15/2018 Dickson Consulting

Penalties Associated With Violations Repayment of all amounts billed to the Medicare and Medicaid program that violate the Stark Law Civil penalty of $15,000 for each claim submitted plus two times the reimbursement claimed Monetary penalties up to $100,000 per scheme if an arrangement is found to have its principal purpose the intent to ensure physician referrals Exclusion from the Medicare and Medicaid programs 11/15/2018 Dickson Consulting

Penalties Associated with Violating the Federal Anti-kickback Statute Civil penalties Monetary penalty of $50,000 per violation Assessment of up to three times the remuneration involved Exclusion from participation in all Federal healthcare programs Criminal violation Five years in prison Fine up to $25,000 Mandatory exclusion from participation in all federal health care programs 11/15/2018 Dickson Consulting

Other Risks Liability under the U.S. False Claims Act Liability under states “mini Stark Laws”, which prohibit self-referrals for reimbursements by any payer, not just the Medicare and Medicaid programs 11/15/2018 Dickson Consulting

Tips On Complying Consult your legal counsel Key company personnel should have an understanding of Stark Laws Executive management should evaluate all business relationships with health care professionals Company should adopt a Code of Ethics on interactions with health care professionals Documentation policy should be established Establish a program for monitoring compliance 11/15/2018 Dickson Consulting

Disclaimers The information in this presentation is believed to be correct but no assurances are provided that the information is correct. Issues may exist that are significant that are not mentioned in this report. This information is not intended to provide legal advice. 11/15/2018 Dickson Consulting