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

                                                         September 8, 2010

  I.   Learn Why Physician Fair Market Value (FMV) and Commercial
       Reasonableness Matter

  II. Learn the differences between FMV and Commercial

  III. Learn how outside auditors assess physician compensation

  IV. Learn 5 key strategies to help ensure FMV/Commercial

Why does FMV and Commercial
  Reasonableness Matter?

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
  Key areas of review include:
    Taxpayer Bill of Rights 2
    Anti-kickback Statute
    Stark Law

Historical Perspective

   Foundation for the governance of compensation in tax-exempt
    § 501(c) of the Internal Revenue Code lists the types of organizations
     exempt from Federal income taxes
         Private inurement
            “No part of earnings . . . inures to the benefit of any private shareholder or individual”
            Penalty for violation – revocation of tax-exempt status
         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

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:
         Extreme nature of the penalty for violating private inurement laws, regardless of
          the severity of the infraction, and
         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
         Intermediate sanctions include taxes and penalties on individuals receiving excess
          benefits and anyone who knowingly approves an excess benefit transaction

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:
         Patient referrals for services reimbursable under a federal health care program
          (i.e., Medicare, Medicaid), and
         Recommending the purchase of supplies and services reimbursable under a
          federal health care program

    Potential penalties
         Violation constitutes a felony
         Criminal fines
         Civil penalties
         Exclusion from federal health care programs

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
          Denial of payment
          Civil fines on a per claim basis
          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


  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
   List of organizations/individuals that have faced federal/state enforcement

What are the Differences Between
     FMV and Commercial
       Reasonableness ?

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.

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

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:
         How the physician is paid (compensation model structure)
         The process that is followed to determine physician compensation
         What the physician is paid (compared to similar physicians)
         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:
         Market competitiveness -- other offers; history of recruiting/retaining
          physicians; competitive environment
         Community need -- staffing requirements; rural access
         Supply and demand for particular specialty
    Fair market value and commercial reasonableness are intertwined

FMV Typically relies heavily on review of survey data

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

Physician Data Analysis

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

Physician Data Analysis

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

Commercial Reasonableness Tests

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

How do outside auditors
   review physician
   compensation ?

Selection and Prioritization of Outside Reviews

    Federal government has indicated that they have over 500 qui tam cases –
     cases where there is a whistleblower
         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”
         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

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
         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”
         Difficult to determine what “market” they are using, but typically rely on standard
    Auditors are much better now at reviewing compensation, understanding
     physician relationships, and come much better “prepared” for their

5 Strategies to help ensure

5 Strategies to ensure FMV

  Strategy #1 – Limit use of e-mail/watch communications

    In every investigation we have involved in, e-mail communications were
     used by the government as a key component of their fact finding and
     building of their case
         Many physicians/executives will put certain statements in e-mail that they would
          not otherwise say in conversation
    If you have a “bad” chain of e-mails, actively and agressively address issue
     and document how the issue was addressed
    Train/educate your employees/physicians on proper use of e-mail
    Some clients have actually called off certain deals because of “bad” e-mails

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
         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
         The government spends alot of time looking at these issues, and in absence of
          documentation can assume the worst

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

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
    If auditors don’t understand compensation model they will assume the worst
     e.g., only for referrals

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
         More than 1.0 FTE services provided by a physician – not enough time in the day
         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.


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