I Thought FMV Was Supposed to be Bulletproof: Recent Court

Decisions Involving Fair Market Value

Jeff Fitzgerald, Shareholder, Polsinelli Shughart

Curtis Bernstein, Director, Sinaiko Healthcare Consulting

May 1, 2012

HCCA Compliance Institute 2012—Legal & Regulatory 706

Outline of Presentation

Case Studies Employment

Payment for multiple services to a single physician Campbell v. Campbell v. UMDNJ

Aggregate compensation US v. Covenant Medical settlement

Acquisition Employment of physicians

US ex rel. Drakeford v. Tuomey Payments based on referrals

US ex rel. Singh v. Bradford Regional Payment for intangible assets without cash flows

Carraci v. Commission and Bergquist v. Commissioner

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Employment Case Study Facts Dr. Nice (cardiologist) hired by Typical Hospital

Comp: $50 per wRVU; Hospital used salary FMV report Three months later, Dr. Nice asked to be medical director for

catheterization lab Comp: $10,000 per month; hospital obtains outside FMV from its

regular consultant Six months later, the physician practice administrator asks Dr.

Nice to act as a liaison between the employed physicians and administration Comp: $ 16,000 per month; practice administrator obtained FMV

study from different outside FMV expert Later, Hospital realizes that Dr. Nice was not added to the call

roster and amends employment agreement to add call coverage Comp: $800 per day (consistent with what the hospital pays

independent contractors)

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Compliance Concerns

Can the physician actually perform all of these services? “Are there enough hours in a day?”

Are multiple forms of compensation paid for services provided simultaneously? The physician cannot provide call coverage 24 hours per

day while providing clinical services and medical directorship services

Does the aggregate compensation make sense? Payment of employed physicians at the same rate as the

independent contractors is inconsistent with a productivity based compensation plan

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U.S. v. Campbell University Hospital (UMDNJ) wanted to grow its

cardiology program UMDNJ entered into part-time employment contracts with local

community cardiologists in private practice to work at University Hospital as Clinical Assistant Professors, providing teaching, lecturing, and research in exchange for an annual salary

Hospital employs, part-time, Dr. Campbell for $75,000 annually Employment agreement lists 8 categories of services

In 2009, UMDNJ settles with DOJ and pays $8.33 million DOJ sues Dr. Campbell under FCA and Stark Law

Dr. Cambell has FMV report supporting salary Dr. Campbell “duly performed all of the services enumerated in

the contract which he was given the opportunity to perform” Dr. Campbell argues that he was only required to perform the

services that the hospital asked him to perform, and he did

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U.S. v. Campbell Court rules that Stark Law was violated

Dr. Campbell could not prove he met the employment exception

Dr. Campbell was at hospital frequently, but not performing services in agreement

Court held that compensation was not FMV if services were not rendered (regardless of FMV report)

“If there was no requirement to actually perform the duties of [employment agreement] then the compensation could not be the fair market value for those services…”

2011 U.S. Dist. LEXIS 1207 (1/4/2011)6

U.S. v. Campbell

Lessons Services must be rendered in a manner generally

consistent with the services valued FMV report only as good as its assumptions To be a basis for separate compensation, there

should be separate service rendered

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U.S. v. Covenant Medical

Covenant Medical Center of Waterloo, Iowa paid $4.5 million to settle Stark Law and False Claims allegations (2009)

DOJ claimed that payments to 5 employed physicians exceeded FMV Two physicians paid more than $2M per year Three others were paid more than $1M per year Salaries were published on hospital’s form 990

Whether hospital relied upon FMV reports is unclear

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U.S. v. Covenant Medical

Lessons Full time employment is subject to potential

enforcement action Beware of the Lake Wobegon effect (everyone is

above average) DOJ enforcement can depend on overall optics

Look at both the forest and the trees

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Acquisition Case Study Local Physicians Group was recently awarded approval for a

certificate of need to develop a new surgery center Fearing competition, City Hospital proposes to purchase this

prospective ASC from Group In light of its lack of operating history, Hospital will purchase

any fixed assets already purchased by Group and the CON Hospital will develop the ASC and offer the physicians part-

time employment agreements at a fixed compensation per wRVU every time the physician performs a case in the ASC

Hospital will pay Group’s physicians for a non-compete agreement

Group’s accountant recommends that Group contribute any intangible value not purchased by Hospital to Hospital’s foundation

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Compliance Concerns

Compensating physicians only when performing a designated health service and not when performing office visits

FMV basis for intangible assets FMV basis for paying for non-compete

Is a non-compete distinguishable from an agreement to refer in this context?

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U.S. ex rel. Drakeford v. Tuomey (2011)

Surgeons begin development of an ASC Hospital hires surgeons as employees

Part-time; during surgical procedures; surgeons maintain office practice separately

Fixed salary, plus 80% of collections, plus quality incentives

DOJ alleged that compensation exceeded 100% of actual collections (and was up to 140% of collections)

Hospital internal documents project losses on all employment agreements

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U.S. ex rel. Drakeford v. Tuomey

DOJ argues that compensation is not FMV because “the hospital’s motivation in entering into these part-time agreements was to avoid losing the referrals” While Stark Law is strict liability, the DOJ looked

at motivation of parties At trial, jury concludes Stark Law violated, but

not False Claims Act Jury awards DOJ $49.4 million New trial ordered on False Claims issues

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U.S. ex rel. Drakeford v. Tuomey

Lessons Employment exception large, but not infinite Motivation can color FMV analysis Risk exists where employment compensation not

based upon survey or objective data Long term physician employment losses could

receive more scrutiny Basis for losses needs to be justified or presumption

is that the loss is tied to referrals

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U.S. ex rel. Singh v. Bradford Regional (2010)

Group of two physicians lease nuclear camera from GE and perform services in office rather than in hospital

Hospital rents camera from Group (with non-compete); camera remains in Group’s office Hospital pays $23,655 per month, an amount derived from

Group’s revenue from use of the camera ($6,500 per month related to prime lease from GE)

Per Stark, fixed rental rate not take into account volume or value of referrals 66 Fed. Reg. at 877 (before per click rule)

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U.S. ex rel. Singh v. Bradford Regional

District Court granted summary judgment against the hospital Court placed burden of proof to show FMV on

hospital Found that amount of compensation was arrived

at by taking into account the anticipated referrals of the physicians

Found that if price takes into account referrals, then price is not FMV

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U.S. ex rel. Singh v. Bradford Regional

Lessons FMV analysis and reports are useful, but courts

may look behind at the underlying purpose/terms Need to identify clear non-referral related basis

for intangible assets or counterintuitive FMV terms

Purchase price needs to make sense from a non-referral basis

Some things just can’t be purchased

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Bergquist v. Commissioner (2008)

Background University Anesthesiologists, P.A. (UA) was the exclusive

provider of anesthesiology to Oregon Health & Science University Hospital

In 1998, Hospital formed OHSU Medical Group as a 501(c)(3) and required all physician groups that wished to remain affiliated with Hospital to consolidate into the group by Jan. 2002

In Sept. 2001, anesthesiologists in UA donated stock in UA to a charity and claimed a charitable donation UA’s valuation expert used going concern value Charity valued donated stock at $0

On Jan. 1, 2002, anesthesiologists became employed by OHSU Medical Group

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Bergquist v. Commissioner

Tax Court findings UA should not be valued as a going concern because

the consolidation of UA into OHSU Medical Group was foreseeable at the date of donation UA would not have donated the stock without the

consolidation Commissioner’s expert valued UA at net asset value

Value estimated to be less than 10% of that claimed by Bergquist

Court agreed with Commissioner’s findings Court concluded that no reasonable buyer would have

paid at a going concern rate for UA stock knowing that UA was being consolidated

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Make sure compensation arrangements with referral sources are FMV for services rendered Have policy in place to appropriately document FMV

for services provided using reasonable approaches as discussed throughout this webinar

Monitor compliance with policies Review third party opinions for completeness,

accuracy, and reasonableness Review services actually provided to those

required under agreements Check all line items on medical director time sheets Verify time spent providing co-management services

Use common sense in determining if compensation could be viewed as related to referrals Learn from Covenant, Bradford and Tuomey

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Summary and Takeaways

I Thought FMV Was Supposed to be Bulletproof: Recent Court

Decisions Involving Fair Market Value

Jeff Fitzgerald, Shareholder, Polsinelli Shughartjfitzgerald@polsinelli.com

Curtis Bernstein, Director, Sinaiko Healthcare Consultingcurtis.bernstein@sinaiko.com

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