forming physician multispecialty group practices: key...

Forming Physician Multispecialty Group

Practices: Key Legal ConsiderationsEvaluating Compensation Models, Negotiating Business Contracts, and Complying

With Federal and State Laws

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THURSDAY, JANUARY 24, 2019

Presenting a live 90-minute webinar with interactive Q&A

Derek E. Empie, Vice President – Legal Affairs & Systemwide Strategic Transactions,

Indiana University Health, Indianapolis

Roger D. Strode, Partner, Foley & Lardner, Chicago

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©2016 Foley & Lardner LLP • Attorney Advertising • Prior results do not guarantee a similar outcome • Models used are not clients but may be representative of clients • 321 N. Clark Street, Suite 2800, Chicago, IL 60654 • 312.832.4500

January 24, 2019

Formation of Multi-Specialty Group Practices

Roger Strode

Partner

Foley-Chicago, IL

[email protected]

Derek Empie

Vice President and System Wide Strategic Transactions

Indiana University Health

[email protected]

©2016 Foley & Lardner LLP

Physician Group Practices Settings

Practice Setting Practice Forms

Private Practice Professional or Service Corporation

Professional Association

Professional Limited Liability Company

Limited Liability Company

Hospital/Health System Non-Profit Corporation

“Friendly” Medical Group

Foundation Models

Private Equity “Friendly” Medical Group

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Private Practice

Medical Group

Entity

Medical Group

Entity

MDMDMDMD MDMD MDMD

Assets

and

Employees

Assets

and

Employees

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Friendly Medical Group

“Friendly”Medical Group


MDMDLimited

Clinical

Assets

(DHS)

Clinical

Employees

Limited

Clinical

Assets

(DHS)

Clinical

Employees

Management

Company

Management

Company

MD

Rollover

Entity

MD

Rollover

Entity

MDMD

MDMD

MDMD

MDMD

SponsorSponsor

Management Services

Management Fee

Assets

and

Employees

Assets

and

Employees

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Legal/Business Issues Driving Structure

■ Corporate Practice of Medicine

■ Anti-Referral Statutes

− Stark Law

− AKS

■ Compensation Issues

■ Tax Treatment of Distributions

■ Exit Strategies

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Corporate Practice of Medicine

■ Most states have some form of “corporate practice of medicine”

■ Physician owned organizations can use the PC, SC, PA, LLP models

■ In many states, hospital/health system owned organizations can be structured as nonprofit corporations. In some states, the friendly medical group structure is necessary

■ Private equity deals usually require the use of a “friendly” or “captive” professional entity

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■ Corporate Practice of Medicine

−New York State settlement with Aspen Dental Management

−New Jersey’s Allstate decision

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■ Significant risks can arise when a non-professional vendor is engaged to manage or consult a licensed professional or an entity comprised of licensed professionals.

■ Who is really in control of the practice, not just in control of clinical decision making?

■ How are management fees determined? Are they consistent with FMV?

■ Can the manager unilaterally discipline/fire licensed professionals?

■ What do the non-competes look like?

■ What impact does a loosening of control/restrictions and renegotiation of management fees have on purchase price?

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Anti-Referral Statutes

Stark Law

■ Quite common for multispecialty groups to own ancillary services (DHS)− Imaging− Lab− Physical Therapy− DME− Outpatient Prescription DrugsNOTE: ASC ownership doesn’t implicate Stark (only AKS)

■ Stark prohibits certain referrals by a physician for DHS reimbursed by Medicare unless the structure meets an exception

■ Generally requires a structure that preserves the so-called “in office ancillary services” exception

■ Failure to meet IOAS exception can make illegal physician referrals for DHS

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Stark Law

■ Meeting the IOAS requires the group to meet the definition of a “group practice”– certain compensation tests need to be met

■ DHS must be provided in the same building where the group practice maintains offices or in a centralized building

■ DHS must be provided utilizing the levels of supervision required under the Medicare COP

■ DHS must be billed by the practice

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Stark Law

■ In a private equity context the IOAS obviates the need to meet any other exception

■ The IOAS is a “service based” exception

■ Allows physician owners of a management company to receive distributions that fluctuate with the volume or value of their referrals and not have to meet the “indirect compensation arrangement” exception.

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Stark Law



DHS Assets

(Lab)

(Imaging)

(PT)

DHS Assets

(Lab)

(Imaging)

(PT)

Management

Company

Management

Company4. Management Services

5. Management Fee

Payers

Including

Medicare

Payers

Including

Medicare

2. Bill for DHS 3. Reimbursement

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MDsMDs

6. Distributions

1. DHS Referrals



Stark Law and AKS: Compensation

See compensation discussion for impact of Stark Law and AKS with respect to compensation in certain settings

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AKS Employment Safe Harbor

■Payments are excepted if they are made:− by employer to employee;

− under bona fide employment relationship with employer;

− for employment in furnishing of any item or service for which payment may be made under Medicare or Medicaid.

■Payments must be:− Fair Market Value

− Made pursuant to Arm’s Length Negotiation

− Commercially Reasonable

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Stark Law Employment Exception

■ Employment is for identifiable services.

■ Amount of remuneration under employment is: − Consistent with fair market value, reasonable, and determined

through arm’s length negotiations;

− Not determined in a manner that takes into account volume or value of referrals by referring physician; and

− Remuneration would be commercially reasonable even if no referrals were made to employer.

■ Productivity bonuses can be paid if based on services performed personally by the physician (i.e., wRVUs).

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Stark Law – Permitted

Employment Referrals

■ 42 CFR § 411.354(d)(4) - A physician’s compensation from a bona fide employer or under a managed care contract or other arrangement for personal services may be conditioned on the physician’s referrals to a particular provider, practitioner, or supplier, provided that the compensation arrangement meets certain criteria

■ Does not apply:− When patient expresses a preference for a different provider

− Insurance determines a different provider

− Physician’s judgment, referral is not in the patient’s best medical interest

■ There can be valid reasons for referral tracking:− Identify and correct potential issues; learn about areas for improvement

▪ Ex: Excess wait times for appointments; insufficient staffing

− Managing the full continuum of care▪ Implementing care delivery protocols

▪ Single, comprehensive EMR

▪ ACO

■ The compensation arrangement - must be FMV and does not take into account the volume or value of anticipated or required referrals

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AKS vs. Stark Law

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Intermediate Sanctions (IRS)

■ If a tax-exempt organization engages in an excess benefits transaction with a disqualified person:

− the organization’s directors and managers, and the disqualified person, could be subject to a tax of 25% on the excess benefit.

− Failure to correct the excess benefit transaction within the taxable period could result in an additional tax of 200% on the excess benefit.

■ A disqualified person is an officer, director, trustee, highly-compensated or high-level employee, department or project manager, or anyone in a position to exert substantial influence over the organization within the prior five years.

■ An excess benefit is one that exceeds fair market value for the benefit received by the tax exempt organization, or is not comparable (commercially reasonable) to similar benefits paid by similar tax-exempt organizations.

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What is Fair Market Value?

■ According to the Stark Law, fair market value is “the value in arm’s length transactions, consistent with the general market value.”

■ Benchmark Data Sources:− Sullivan, Cotter & Associates

− Medical Group Management Association (MGMA)

− Hay Group

■ Aggregate compensation v. each component of compensation− When analyzing fair market value compensation, must understand all

sources of compensation (Clinical; Call Pay; Administrative; Medical Director; Academic/Research; Forgivable Loan)

▪ Benchmark data includes all sources of compensation from respondents

■ Can a physician be more than a 1.0 FTE?

■ Other considerations:− Independent review

− Compensation Committee

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Fair Market Value Analysis

■ Legitimate factors that can cause higher

compensation include:

− Extremely high productivity

− High demand/low supply for specialty

− Thought leader in specialty

− Historic compensation above 90th percentile for

personally performed services (do not include revenue

from ancillary services or midlevel providers)

− Super sub-specialization or multi-specialty

− Nationally renowned program

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What is Commercially

Reasonable?

■ Separate analysis from FMV

■ Commercial reasonableness is more of a “qualitative” analysis

■ Many of the exceptions under the Stark Law (including the employment exception) require the payment to be “commercially reasonable even if no referrals were made” between the parties.

■ To be commercially reasonable, both SERVICES and PAYMENT must be commercially reasonable.

■ Examples of services that may not be commercially reasonable:

− Two medical directors over a department when only one is needed

− Paying a physician for unnecessary consulting services

− Purchase of a physician’s MOB with no intention of using the building

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Tax Structuring

■ Historically, group practices have been structured or operated to minimize income tax

− Subchapter S corporations

− “Zeroing out” income in Subchapter C corporations—unreasonable compensation issues

■ LLC and LLP structures

− De novo structuring easier

− Exits are more tax efficient

■ Legacy Tax Issues

− Impact of S Corporation Status on Rollover Equity

− Amelioration of Negative Tax Consequences

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Exits

■ Traditional exits v. Buyouts

■ Traditional exits generally involve retirements, relocations—nominal consideration based upon value of receivables or formulas

■ Buyouts (including private equity recapitalizations) present a higher degree of sophisticated structuring− S and C Corporations present particular issues

(described above)

− Pass-through entities allow for more tax efficient structuring

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