1. © 2010 Smith Moore Leatherwood LLP. ALL RIGHTS RESERVED. Hospital Employment of Physicians Presented by: Tobin N. Watt Jennifer Pritzker Sender Smith Moore Leatherwood LLP 1180 West Peachtree St., Ste. 2300 Atlanta, GA 30309 T: (404) 962-1026T: (404) 962-1035 F: (404) 962-1238F: (404) 962-1240

2. © 2010 Smith Moore Leatherwood LLP. ALL RIGHTS RESERVED. Where do we put them? Organizational Structure Direct Employment Group Practice Rural Health Clinic/FQHC

3. © 2010 Smith Moore Leatherwood LLP. ALL RIGHTS RESERVED. Direct Employment Physicians employed in the entity that is the hospital itself – i.e., non-profit corporation, authority, hospital district, etc., or by a subsidiary corporation. Services by employed physicians billed under the hospital’s provider number. Advantages: simplicity; direct and immediate control over physician employees; some reimbursement advantages. Disadvantages: complications in accounting for physician revenues and costs, Joint Commission accreditation required, hospital bureaucracy. Physicians who are transitioning from independent practice may encounter significant “culture shock.”

4. © 2010 Smith Moore Leatherwood LLP. ALL RIGHTS RESERVED. Group Practice A separate entity, controlled by hospital, that meets the Stark definition of a group practice (see following page). Billing of physician services under a group number. Advantages: easier to account for physician revenues and costs; flexibility in compensation for physicians; Joint Commission accreditation is optional; possibly an easier transition from independent practice setting. May appear to patient to be a typical physician practice. Disadvantages: may introduce governance/control complications; there may be reduced reimbursement for certain diagnostics. Compensation flexibility involves treatment of in-office ancillary revenues (revenues from diagnostics and therapies that meet the “in-office” requirement). In a group practice setting, those revenues may be allocated to the physicians.

5. © 2010 Smith Moore Leatherwood LLP. ALL RIGHTS RESERVED. Stark requirements for a Group Practice See 42 C.F.R. §411.352 An entity recognized by state law (i.e., corporation or non-profit corporation). An entity formed primarily to be a physician practice. A “unified” business having centralized decision-making and consolidated financial reporting. Physicians in the group provide substantially their full range of services for the group.

6. © 2010 Smith Moore Leatherwood LLP. ALL RIGHTS RESERVED. See 42 C.F.R. §411.352 Substantially all their services are billed through the group. Group members conduct at least 75% of the patient encounters. Expenses and income are allocated according to pre- arranged formulas. Physicians may not be compensated based on “volume or value” of referrals of DHS (except for permitted profit or productivity bonuses).

7. © 2010 Smith Moore Leatherwood LLP. ALL RIGHTS RESERVED. RHC Hospitals in health professional shortage areas or medically underserved areas may elect to treat their primary care physicians (family practice, internal medicine, pediatrics, and OB/GYN) as a “rural health clinic.” See Rural Health Clinic Services Act of 1977 (Public Law 95-210) A RHC is not necessarily a separate entity; physicians employed directly by the hospital or in a group practice may qualify. RHC’s involve specific staffing requirements, RHC’s receive special enhanced reimbursement. Another option is a federally-qualified health center (FQHC). These require special governance arrangements and will be a separate entity from the hospital. Because of the governance requirements, physicians employed in a FQHC will not be under the control of the hospital

8. © 2010 Smith Moore Leatherwood LLP. ALL RIGHTS RESERVED. Show Me the Money! Compensation –Tax-Exempt Employers/Section 501(c)(3) –Stark/AKS/Civil Monetary Penalties –Incentive Compensation

9. © 2010 Smith Moore Leatherwood LLP. ALL RIGHTS RESERVED. Compensation Phase I – pay physicians a salary. Phase II – pay physicians on a productivity basis. Phase III - ?? In an Accountable Care environment, will they be paid on a new basis?

10. © 2010 Smith Moore Leatherwood LLP. ALL RIGHTS RESERVED. Requirements for Tax Exempt Employers May pay “reasonable” or “fair market value” compensation to employees. May pay incentive compensation if the incentive aids in accomplishing a goal of the organization and isn’t excessive or unreasonable. Compensation may not constitute a “dividend-like” distribution from an organization or a department. Note:many employed physicians will be “highly-compensated employees” or possibly persons with “substantial influence” for purposes of the Intermediate Sanctions Regulations and contracts with these persons should be handled according to procedures described in those Regulations. IRS Reg. §53.4958

11. © 2010 Smith Moore Leatherwood LLP. ALL RIGHTS RESERVED. Anti-Kickback Statute; Stark Regulation; Civil Monetary Penalties Law Anti-Kickback Statute 42 U.S.C. §1320a-7b(b) provides broad exception for “bona fide employment.” Stark Law, 42 U.S.C. §1395nn, and Stark Regulations 42 C.F.R. §411.350-357 provide exception for “bona fide employment” with multiple conditions; conditions include fair market value compensation and avoidance of payment based on volume or value of referrals. Civil Monetary Penalties Law, 42 U.S.C. §1320a-7a prohibits payment to a physician intended to restrict or limit services to a federally-reimbursed patient; no exception for employment.

12. © 2010 Smith Moore Leatherwood LLP. ALL RIGHTS RESERVED. Compensation Methodologies Salary – permissible as long as the amount is reasonable. Production – Compensation based on personal productivity criteria like RVUs, patient visits, or dollars generated from personal services are permissible. Amount must be reasonable. Other Incentivizing Criteria – –Quality Measures (OP or IP) –Patient Satisfaction –Financial Performance of Practice Unit –Financial Performance of Hospital Service Line or Clinical Department –Financial Performance of Health System Must navigate among several regulatory requirements and is legally sensitive Incentive with regard to cost reduction – approach with care!

13. © 2010 Smith Moore Leatherwood LLP. ALL RIGHTS RESERVED. Good Doc, Bad Doc Operational Issues –Referrals –Quality/Performance –Motivating Employed Physicians –Termination

14. © 2010 Smith Moore Leatherwood LLP. ALL RIGHTS RESERVED. Operational Issues A.Referrals – “May the hospital control the referrals from its employed physicians?” 42 C.F.R. § 411.354(d)(4) Consider the implications of other referral-oriented issues, like directing ER physicians to refer consults to hospital-employed physicians. B.Clinical Privileges/Clinical Quality A Medical Staff matter or an executive decision? Potential dangers in handling outside the formal Medical Staff processes.

15. © 2010 Smith Moore Leatherwood LLP. ALL RIGHTS RESERVED. Operational Issues C.Physician Discipline Separate employee performance and behavior from clinical performance. D.Effort What are barriers to motivation? E.Termination May the hospital impose a non-compete? Is it wise?