September 8, 2010 Physician Fair Market Value and Commercial Reasonableness- Lessons Learned from Tuomey Healthcare Investigation Presented By: Chad Stutelberg, Senior Vice President

1 Agenda I.Learn Why Physician Fair Market Value (FMV) and Commercial Reasonableness Matter II.Learn the differences between FMV and Commercial Reasonableness III.Learn how outside auditors assess physician compensation IV.Learn 5 key strategies to help ensure FMV/Commercial Reasonableness

SAMPLE SECTION DIVIDER SLIDE Why does FMV and Commercial Reasonableness Matter? 2

3 Legal Framework Healthcare organizations entering into, modifying, or renewing financial relationships with physicians and other providers must comply with multiple federal and state laws that regulate these relationships Key areas of review include: Taxpayer Bill of Rights 2 Anti-kickback Statute Stark Law

4 Historical Perspective Foundation for the governance of compensation in tax-exempt organizations § 501(c) of the Internal Revenue Code lists the types of organizations exempt from Federal income taxes u Private inurement  “No part of earnings... inures to the benefit of any private shareholder or individual”  Penalty for violation – revocation of tax-exempt status u General tests of physician compensation arrangements  No distribution of profits to physicians by tax-exempt hospital  Use of arm’s-length negotiations in determining physician compensation  Compensation must be reasonable

5 Taxpayer Bill of Rights 2 A call for change Passage of the Taxpayer Bill of Rights 2 (TBOR 2) in 1996 was influenced by the following: u Extreme nature of the penalty for violating private inurement laws, regardless of the severity of the infraction, and u Public pressure for more appropriate penalties for private inurement TBOR 2 authorizes the IRS to apply intermediate sanctions, rather than revoking an organization’s tax-exempt status, for any excess benefit transaction u Intermediate sanctions include taxes and penalties on individuals receiving excess benefits and anyone who knowingly approves an excess benefit transaction

6 Anti-Kickback Statute and Fraud & Abuse Anti-Kickback statute overview Prohibits the knowing and willful (i.e., intent required) payment or receipt of anything of value in exchange for: u Patient referrals for services reimbursable under a federal health care program (i.e., Medicare, Medicaid), and u Recommending the purchase of supplies and services reimbursable under a federal health care program Potential penalties u Violation constitutes a felony u Criminal fines u Civil penalties u Exclusion from federal health care programs

7 Stark II Stark II Overview Prohibits a physician from referring Medicare or Medicaid patients for “designated health services” (e.g., lab, PT/OT, drugs, radiology, etc.) to an entity with which the physician or an immediate family member has a financial relationship, unless an exception applies Potential penalties u Denial of payment u Civil fines on a per claim basis u Exclusion from federal health care programs What constitutes a financial relationship? Direct or indirect ownership or investment relationship, or Direct or indirect compensation arrangement between a referring physician and a hospital

8 Summary What all of this legislation has in common: The concepts of fair market value, commercial reasonableness, and reasonable compensation are embedded in all three Why does this matter? Criminal charges Civil Charges Huge Legal Fees Corporate Integrity Agreements List of organizations with Corporate Integrity Agreements u List of organizations/individuals that have faced federal/state enforcement actions u

SAMPLE SECTION DIVIDER SLIDE What are the Differences Between FMV and Commercial Reasonableness ? 9

10 What is Fair Market Value? For our work, we define the terms of fair market value, commercial reasonableness and reasonable compensation as follows : Fair Market Value Defined as the value in arms-length transactions consistent with the general market value. General market value means the price an asset would bring as a result of bona fide bargaining between well-informed buyers and sellers who are not otherwise in a position to generate business for the other party, or the compensation that would be included in a service agreement as the result of bona fide bargaining between well-informed parties to the agreement who are not otherwise in a position to generate business for the other party on the date of acquisition of the asset or at the time of the service agreement. Usually the fair market value is the compensation that has been included in bona fide service agreements with comparable terms at the time of the agreement, where the price or compensation has not been determined in any manner that takes into account the volume or value of anticipated or actual referrals.

11 What is Fair Market Value? (cont.) For our work, we define the terms of fair market value, commercial reasonableness and reasonable compensation as follows: Commercial Reasonableness Defined as an arrangement that would make commercial sense if entered into by a reasonable entity of similar type and size and a reasonable physician of similar scope and specialty, even if there were no potential designated health services referrals. Reasonable Compensation Described in Section 162 of the Internal Revenue Service (IRS), reasonable compensation is generally considered to be "...only such amount as would ordinarily be paid for like services by like enterprises under like circumstances."

12 What is Fair Market Value? Fair Market Value is not a single number but a range of values and, for physician compensation, is generally considered to include : u How the physician is paid (compensation model structure) u The process that is followed to determine physician compensation u What the physician is paid (compared to similar physicians) u On-going management of the contract e.g., documentation, benchmarking future compensation to market, incentive payments Commercial reasonableness relies more heavily on “facts and circumstances”, and factors impacting determination of reasonableness include : u Market competitiveness -- other offers; history of recruiting/retaining physicians; competitive environment u Community need -- staffing requirements; rural access u Supply and demand for particular specialty Fair market value and commercial reasonableness are intertwined

13 FMV Typically relies heavily on review of survey data The following represent the most reliable and comprehensive sources for physician compensation and productivity data u Medical Group Management Association (MGMA) u American Medical Group Association (AMGA) u Sullivan, Cotter & Associates (SCA) u Integrated Healthcare Strategies For academic positions, we also use the following sources: u Association of American Medical Colleges (AAMC) u Association of Administrators in Academic Pediatrics (AAAP) Other sources of data: u Merritt Hawkins (physician recruiting incentives) u Daniel Stern (Emergency Department data)

14 Physician Data Analysis Compensation data for each physician should be broken out by the various elements of compensation: u Base salary/draw u Productivity incentive u Teaching pay u Research pay u Administrative pay u Compensation for mid-level supervision u Non-production clinical incentives u Other pay u Benefits expenditure Value administrative, academic and/or clinical efforts separately and in total

15 Physician Data Analysis Calculate clinical cash compensation for each physician u Base salary/draw + productivity incentive + non-production clinical incentives + other clinical pay Break out productivity data by physician as follows: u Charges – ancillary, professional, and total u Collections – ancillary, professional, and total u Work Relative Value Units (WRVUs) Calculate compensation per productivity ratios by physician u Clinical compensation per WRVUs u Clinical compensation per professional collections u Clinical compensation per professional charges Compare total cash, productivity metrics and compensation ratios to market data u Productivity comparisons are typically the most defensible mechanism for supporting FMV

16 Commercial Reasonableness Tests There is no one standard in the industry for commercial reasonableness tests However, we typically examine the following: u Increase in compensation u Impact to practice financials u Cost benefit analysis u Replacement cost analysis u Service line necessity

SAMPLE SECTION DIVIDER SLIDE How do outside auditors review physician compensation ? 17

18 Selection and Prioritization of Outside Reviews Federal government has indicated that they have over 500 qui tam cases – cases where there is a whistleblower u Of these cases, it is estimated that a physician is the relator over 80% of the time The government cannot investigate every case, but is prioritizing the cases to go after those they are sure they can “win” u Hospitals have to make a determination of whether or not it is worth pursuing defending the claim  Legal fees in these cases typically range from $20 to $45 million  Penalties and fines can range from $5M (Covenant, IA) to over $100 million (Christ Hospital/Health Alliance – OH) Government also comes across cases from their RAC audits, Medicare reviews, and other investigations OIG now “sharing” cases with DOJ and others to make sure all “legitimate” claims are investigated – might get calls from multiple areas

19 Process for Outside Review Government gathers a great deal of data/information up front from relators, physicians and others in community Many times hospitals are not aware of an investigation until it is too late The government will request a tremendous amount of data u Erlanger case resulted in our reviewing over 450 agreements going back as long as 10 years Outside auditors will focus on intent of agreement (reviewing documentation) and examination of payments to “market” u Difficult to determine what “market” they are using, but typically rely on standard sources Auditors are much better now at reviewing compensation, understanding physician relationships, and come much better “prepared” for their investigations

SAMPLE SECTION DIVIDER SLIDE 5 Strategies to help ensure FMV 20

21 5 Strategies to ensure FMV Strategy #1 – Limit use of /watch communications In every investigation we have involved in, communications were used by the government as a key component of their fact finding and building of their case u Many physicians/executives will put certain statements in that they would not otherwise say in conversation If you have a “bad” chain of s, actively and agressively address issue and document how the issue was addressed Train/educate your employees/physicians on proper use of Some clients have actually called off certain deals because of “bad” s

22 5 Strategies to ensure FMV Strategy #2 – Document Intent/Business Case/Community Benefit Too often when we review an agreement there is little in the file regarding why the agreement is necessary, supports the hospital’s mission and improves patient access and care u This can result in “selective amnesia” Documenting the intent of the agreement and how it benefits the community is a key component to ensuring fair market value u The government spends alot of time looking at these issues, and in absence of documentation can assume the worst

23 5 Strategies to ensure FMV Strategy #3 – Use qualified counsel/consultants and limit number of negotiators Too often hospitals create physician agreements without the help of qualified healthcare legal counsel and consultants In some instances the hospitals that are investigated relied on outside advice – turns out it was bad advice Limit number of individuals that can negotiate physician contracts – keeps consistency and helps prevent deals from getting done in back room and on golf course

24 5 Strategies to ensure FMV Strategy #4 – Keep it simple Many of the agreements that get reviewed are overly complex Complexity can appear as if you are trying to “back into a number” and/or raise commercial reasonableness concerns If physicians don’t understand how they are paid they are more likely to complain If auditors don’t understand compensation model they will assume the worst e.g., only for referrals

25 5 Strategies to ensure FMV Strategy #5 – Have a contract management database/system Most hospitals have no idea how many agreements they have Hospitals can get in trouble when they realize that they have more than one contract with a physician group – e.g.,“stacking” - or find out that they have multiple contracts for the same service u More than 1.0 FTE services provided by a physician – not enough time in the day u Contracts for similar/same services e.g., two Sleep Medicine Directors Some hospitals have forgotten when contract expires, when compensation needs to be updated/adjusted, or when other contract terms change such that when the agreement is reviewed it is out of compliance This type of system allows you to monitor payments - one client paid a physician for services for one year after they were dead – set up in A.P. Continually update file as changes are made to compensation, strategy, business model etc.