AHLA. Q. Taught by Experts: What the Expert Testimony in Tuomey and Halifax Tells Us about Physician Transactions Today

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1 AHLA Q. Taught by Experts: What the Expert Testimony in Tuomey and Halifax Tells Us about Physician Transactions Today William W. Horton Jones Walker LLP Birmingham, AL Timothy Smith Senior Managing Director Ankura Consulting Group LLC Dallas, TX Fraud and Compliance Forum September 27-29, 2015

2 AMERICAN HEALTH LAWYERS ASSOCIATION 2015 FRAUD AND COMPLIANCE FORUM TAUGHT BY EXPERTS: WHAT THE EXPERT TESTIMONY IN TUOMEY AND HALIFAX TELLS US ABOUT PHYSICIAN TRANSACTIONS TODAY Timothy Smith, CPA/ABV Senior Managing Director Ankura Consulting Group Dallas, Texas William W. Horton Partner Jones Walker LLP Birmingham, Alabama The Humpty Dumpty Approach to Stark/AKS Compliance Analysis "When I use a word," Humpty Dumpty said, in rather a scornful tone, "it means just what I choose it to mean neither more nor less." "The question is," said Alice, "whether you can make words mean so many different things." "The question is," said Humpty Dumpty, "which is to be master that's all. Lewis Carroll, Through the Looking Glass (and What Alice Found There) 1

3 Why We re Here FMV and commercial reasonableness are key concepts in Stark/AKS analysis of physician compensation relationships Government increasingly aggressive in challenging physician deals Tuomey, Halifax, others Government experts offer definitions of FMV and commercial reasonableness, that in turn get adopted as standards even where they may overstate what is generally understood Why We re Here Focus on government approach to FMV and CR, as shown in expert testimony of Kathy McNamara in Tuomey and Halifax Comparison of government methodology with valuation industry practice Potential for various provocative and/or snarky statements, depending on who s in the audience and how scary they look 2

4 FMV Definition under Stark The term fair market value means the value in arms length transactions, consistent with the general market value, and, with respect to rentals or leases, the value of rental property for general commercial purposes (not taking into account its intended use) and, in the case of a lease of space, not adjusted to reflect the additional value the prospective lessee or lessor would attribute to the proximity or convenience to the lessor where the lessor is a potential source of patient referrals to the lessee. 42 U.S.C. 1395nn(h)(3) FMV Methodology in Tuomey and Halifax FMV = median compensation ratios from survey data Compensation per wrvu Compensation to professional collections ratio Surveys: primarily MGMA, but also AMGA and SCA Median based on physician mobility in national marketplace In some cases, can use up to the 75 th percentile compensation ratios Significant community need Difficulty in recruiting Unique physician skill set Production and total compensation benchmarking should correlate No limit on total compensation as long as compensation ratio is appropriate, i.e., can exceed the 90 th percentile for total comp Practice losses considered as part of commercial reasonableness 3

5 Review of FMV Methodology State of the industry / appraisal profession has been under construction Compensation valuation is a newly emerging discipline But, established theory in business valuation for determining reasonable compensation for owners of small businesses, including physician practices Regulatory commentary from OIG and CMS claimed FMV under Stark and AKS was unique and required departures from standard appraisal methodology But, no substitute framework provided = conundrum Stark definition of FMV appears to focus on the use of market data Stark commentary appears to seek FMV based on a single method Review of FMV Methodology No grounding in standard appraisal methodology Consideration of three approaches to value: market, cost, and income Tuomey/Halifax reports rely solely on a single marketapproach method as an industry standard or practice Business valuation and tax practice have alternative approach involving net earnings or the independent investor test KM applies some of this framework in her commercial reasonableness analysis Compensation ratios are not the only available valuation methods/techniques in using survey data Production does not fully predict compensation levels in the MGMA data; less correlation than supposed MGMA does not support use of specific percentiles as reasonable approach to compensation setting 4

6 Review of FMV Methodology Use of the median as FMV Questionable use of the median from a statistical perspective Not supported by MGMA and AMGA new hire data Physician immobility is the norm in research studies MGMA indicates compensation ratios decline as production increases MGMA says too simplistic Surveys are not a statistically valid representation of US market Surveys do report local market compensation Commercial reimbursement rates vary widely across and within markets, resulting in widely varying levels of physician compensation Median rates generate losses in many markets, but underpay in others Use of the median to 75 th formula may create commercial reasonableness concerns Reimbursement & Comp Study Market Commercial to Revenue per Compensation Compensation to Market / Rate Level Medicare Ratio WRVU per WRVU Revenue % Milwaukee, WI - 75th percentile 223% $ $ % Milwaukee, WI - Standard 166% $99.79 $ % Cleveland, OH - 75th percentile 155% $98.62 $ % San Francisco, CA - Standard 108% $97.54 $ % Indianapolis, IN - 75th percentile 156% $96.47 $ % Richmond, VA - 75th percentile 145% $92.83 $ % Miami, FL - 75th percentile 110% $90.07 $ % National Average 125% $87.05 $ % Los Angeles, CA - Standard 92% $82.26 $ % Richmond, VA - Standard 112% $79.52 $ % Indianapolis, IN - Standard 110% $78.07 $ % Miami, FL - Standard 82% $77.15 $ % Cleveland, OH - Standard 101% $76.45 $ % 5

7 Reimbursement and Comp Study Market / Rate Level Model Compensation per wrvu MGMA Median Compensation per wrvu Variance per wrvu Total Practice Impact Milwaukee, WI - 75th percentile $80.40 $52.41 $27.99 $2,399,017 Milwaukee, WI - Standard $57.75 $52.41 $5.34 $457,549 Cleveland, OH - 75th percentile $56.58 $52.41 $4.17 $357,262 San Francisco, CA - Standard $55.50 $52.41 $3.09 $264,688 Indianapolis, IN - 75th percentile $54.43 $52.41 $2.02 $172,972 Richmond, VA - 75th percentile $50.79 $52.41 ($1.62) ($139,034) Miami, FL - 75th percentile $48.03 $52.41 ($4.38) ($375,610) National Average $45.01 $52.41 ($7.40) ($634,472) Los Angeles, CA - Standard $40.22 $52.41 ($12.19) ($1,045,052) Richmond, VA - Standard $37.48 $52.41 ($14.93) ($1,279,914) Indianapolis, IN - Standard $36.03 $52.41 ($16.38) ($1,404,202) Miami, FL - Standard $35.11 $52.41 ($17.30) ($1,483,061) Cleveland, OH - Standard $34.41 $52.41 ($18.00) ($1,543,062) Commercial Reasonableness Definition Under Stark Nothing in statute or regs Stark II Proposed Rules preamble: We are interpreting commercially reasonable to mean that an arrangement appears to be a sensible, prudent business agreement, from the perspective of the particular parties involved, even in the absence of any potential referrals. (63 Fed. Reg (Jan. 9, 1998)) Stark Phase II Interim Final Rule preamble/comment response: An arrangement will be considered commercially reasonable in the absence of referrals if the arrangement would make commercial sense if entered into by a reasonable entity of similar type and size and a reasonable physician (or family member or group practice) of similar scope and specialty, even if there were no potential DHS referrals. (69 Fed. Reg (Mar. 26, 2004)) 6

8 Commercial Reasonableness Definition Under Stark The Existential Problem But does one size fit all? Determining commercial reasonableness in the absence of referrals makes sense in the case of specific purpose exceptions space leases, equipment leases, personal services agreements Not commercially reasonable to hire four medical directors where one is needed, or to lease unneeded space from a doc (or lease to a doc on below market terms) But when is it ever going to be (commercially) possible to ignore referrals in an employment arrangement? Hospitals employ physicians to integrate care, ensure scope of services consistent with community need, move services to HOPD status, etc. Employed physician practices not necessarily meant to run like independent private practices Commercial Reasonableness Methodology in Tuomey and Halifax Multiple qualitative factors considered Usual and customary terms in contracts Community need for services Comparison to other employees, including employed physicians Did the arrangement make business sense apart from the VOVOR Key quantitative analysis: practice losses Did the arrangement lose money? Did the compensation formula allow the possibility for the employer to break even or make money? Do the compensation and benefits exceed collections? 7

9 Commercial Reasonableness Methodology in Tuomey and Halifax But, losses alone are not determinative of commercial reasonableness Addressing unmet community need may necessitate losses for legitimate business reasons not involving the VOVOR In Tuomey, the physicians indicated they were staying in the community; thus, McNamara says, no community need But what about community need for a viable hospital? Example of employing medical oncologists Moving drugs to HOPD will create losses in the physician practice Physician compensation will exceed professional collections Industry issue: how many health systems view the losses on their physicians as a serious compliance issue? McNamara s CR Concerns in Halifax Neurosurgeons received car allowances; other employees didn t. Car allowance was substantially more than the car expenses one of them had incurred in independent private practice Neurosurgeons were among 5 highest paid employees on Halifax s Form 990 Neurosurgeons were the only employed specialists, other than medical oncologists, whose compensation was near the 90 th %ile of market (as determined by McNamara) Neurosurgeons got other subsidies that other employed docs didn t get Neurosurgeons comp was 100% of net collections, so practices always incurred losses on a stand alone basis The neurosurgeons received call pay for normal call, not just excessive call Other aspects of the neurosurgeons contracts favored the neurosurgeons in ways that McNamara found unusual 8

10 But Car allowances are just comp should look at total comp, not how pieces are described Average neurosurgeon is likely to make more than other docs, and more than hospital administrators 90 th %ile comp may be justified if right factors are present Nothing says that all docs have to get the same comp components was it reasonably necessary to provide the subsidies to get the neuros? Unprofitable practice not determinative e.g., may be necessary for hospital to absorb losses to attract or retain docs for which there is community need Normal call vs. excessive call? Seriously? Commercial reasonableness of an arrangement cannot be dependent on whether the valuator has seen it before or not the standard CMS stated is what s sensible and prudent in particular circumstances, which is not dependent on valuator s personal experience Review of Commercial Reasonableness Methodology No standard methodology in the industry Professional appraisers have no body of knowledge, standards, or authoritative literature for determining commercial reasonableness Current discussion among valuation practitioners Relationship between FMV and commercial reasonableness Scope of work to determine commercial reasonableness Technical expertise needed: legal, operational, financial, and clinical Many cite McNamara s approach in Tuomey and Halifax or prior cases 9

11 Review of Ultimate Conclusions Using standard appraisal methodology or additional approaches/methods would most likely not have supported FMV in either Tuomey or Halifax One can argue use of the median to 75 th percentile compensation ratios is aggressive from a valuation perspective No agreed standard on commercial reasonableness CR evaluation should be based on more than just what the valuator has personally seen but it may not be Difficult to assess technical issues in light of the totality of facts in both cases What are the long term implications and unintended consequences of such a formulaic approach as utilized in these cases? Questions? Tim Smith: tim.smith@ankuraconsultinggroup.com Bill Horton: whorton@joneswalker.com 10