New Approaches to Physician Transactions

Transcription

1 Illinois Association of Healthcare Attorneys 2011 Annual Symposium New Approaches to Physician Transactions Neal T. Goldstein Seyfarth Shaw LLP Ethan E. Rii Katten Muchin Rosenman LLP

2 Current Trends in Healthcare Mergers and Acquisition (M&A) Activity Hospital industry continues to consolidate with increasing speed 2010 was the most active year of hospital consolidations since 2001 (a 73% increase from 2009). 1 Hospitals are increasingly purchasing medical practices and directly employing physicians More doctors want to be employed directly by hospitals, allowing them more job security without the hassles of running a business. 2 Independent hospitals are looking to find partnership opportunities The new health care law will demand more of every hospital, including expensive records systems and more attention to quality care, and meanwhile both the government and private insurers want hospitals to be more efficient. Those demands will make it difficult for many independent hospitals to remain independent. 3 1 Picking up speed, Modern Healthcare (January 17, 2011). 2 As more hospital systems consolidate, experts say health-care prices will jump, The Washington Post (September 25, 2010). 3 Georgia s independent hospitals hurting, The Atlanta Journal-Constitution (October 9, 2011). 2

3 Competing Interests in the Current Environment Hospitals Expand service area and address community need Economies of scale Protective measure ahead of reforms Physicians Gain leverage/clout Dealing with running a practice/legacy Pressures on rates/loss of ancillary revenue/rates Increase of government scrutiny FTC (e.g., ProMedica Health System merger with St. Luke's Hospital in Toledo market) Insurers (commercial) Loss of leverage Greater pressures to reimburse at higher rates 3

4 Typical Hospital-Physician Integration Options Limited Integration: Recruitment support (e.g., income guarantees) Call-Coverage (increase in specialized call panels) Management/administrative positions (e.g., medical directorships) PHOs Service-Line Integration: Joint Ventures (e.g., provider-based imaging JVs) Service Line Co-Management (e.g., Cardiovascular Co- Management Arrangements) Full Integration: Direct employment (with sale of medical practice) 4

5 The current focus: Employment by Hospital or Hospital Affiliates Hospital-owned practices were the most successful in attracting physicians (in 2009). More than half (65 percent) of established physicians were placed in hospitalowned practices and almost half (49 percent) of physicians hired out of residency or fellowship were placed within hospital-owned practices. 1 A September 2010 survey revealed that 74% of hospital leaders planned to increase physician employment within the next 12 to 36 months. 2 The current focus is to employ both specialists and PCPs: Strategically, hospitals with a robust employment strategy will be well positioned to compete under various reimbursement scenarios. If the fee-for-service system persists, large physician networks will provide hospitals with greater pricing power when they are contracting with health plans. This scenario favors greater hiring of specialists. Conversely, if payment systems move toward population health management and risk-based reimbursement, then large outpatient networks will allow a system to shift patients away from higher-cost hospitalbased care and recapture lost revenues as shared savings or capitation surpluses. This scenario favors greater hiring of PCPs. 3 1 See: 2 Physician Alignment in an Era of Change, HealthLeaders Media (September 14, 2010). 3 Hospitals' Race to Employ Physicians The Logic behind a Money-Losing Proposition, The New England Journal of Medicine (May 12, 2011). 5

6 Structural Options Bona fide employment by hospital (or hospital affiliate that does not qualify as a group practice) Physician and hospital services are truly integrated within one entity, but consider certain regulatory considerations (in order to meet the Stark Law exception for Bona Fide Employment): Compensation is for identifiable services Compensation is not determined in any manner that takes into account the volume of value of any referrals by the referring physician. Must be commercially reasonable even if no referrals were made to the employer (further discussed below) Under the Anti-kickback safe harbor, the only requirement is that employment is a bona fide employment relationship IRS definition of employee is used for bona fide employment IRS 11-factors test in 3 categories (previously the 20 factors test): (i) behavioral control; (ii) financial control; and (iii) type of relationship (e.g., benefits, compensation typical of employee relationship) There is no FMV or commercially reasonableness requirement 6

7 Structural Options Foundation Model Foundation Entity (subsidiary of hospital) owns/operates practice and provides infrastructure for practice operations (e.g., space, equipment, non-physician personnel, EMR, insurance, except for compensation/benefits) and holds all provider numbers/agreements Physicians will form new entity (e.g., PC, LLC), through which it shall establish governance/management structures and employ physicians Foundation Entity and Physician Entity will enter into an exclusive services agreement Foundation model provides some level of autonomy as Physician Entity is managed by the physicians, including how compensation is paid and allocated among the group Hospital-owned medical group model Very similar to the foundation model in that both hospital and physician services are brought within the same healthcare system by having physicians sell their practices to an entity that is an affiliate of the hospital The purchasing entity enters into employment agreements with the selling physicians Consider whether it makes sense to standardize the payment of compensation, such that only certain portions of compensation related to quality, administrative services or other areas unrelated to professional medical services as to limit possible swings of compensation between physicians and cause internal issues. 7

8 Reimbursement and Regulatory Considerations Provider-based billing Must meet all the provider-based requirements of integration (licensure, financial integration, clinical services integration, public awareness, location, etc.) See 42 C.F.R and other applicable requirements Attestation is not required, but consider penalties if all requirements are not satisfied A cottage industry on transitioning toward provider-based billing; but treating foundation/hospital-owned group practices as a provider based location needs to be fully vetted For example, clinical/financial integration requirements may conflict with group practice definition requirement that it remain an unified business under the Stark Law s definition of group practice. 8

9 Reimbursement and Regulatory Considerations FMV/Commercially Reasonable Parties must understand that simply obtaining a valuation that address FMV and commercial reasonableness is not sufficient (Bradford case, Tuomey case, Covenant Medical Center settlement) FMV is not the same as commercially reasonable and it is possible that a compensation arrangement may be FMV while at the same time not commercially reasonable (does the arrangement make commercial sense (sensible, prudent) even if there were no potential DHS referrals?) Counsel should stay involved in process and confirm that valuation is consistent with transaction (also, that paper reflects reality) As transactions are increasing, consider implementing a systematic process by which compensation structures are implemented consistently from physician to physician (also within same specialty) and reviewed periodically Some questions to ask Are the services for which payments are being made necessary (e.g., 3 medical directors for a single department)? Is the specialty appropriate for the service being provided? (misaligned specialties with service lines) 9

10 Reimbursement and Regulatory Considerations Understand what Stark Law exceptions and Anti-Kickback Safe Harbors are being applied Employed physicians or physicians performing services as an independent contractor will need to assure compensation is at FMV Compensation within a group practice (as defined under the Stark Law) does not require that compensation be FMV Hospital cannot form a group practice of its employed physician without organizing them into a separate entity Confirm all requirements are satisfied (42 CFR ) Flexibility in compensation includes share of overall profits (beyond personally performed services); productivity bonuses based on incident to services (e.g., midlevel services) 10

11 Compensation Issues Managing expectations regarding how an employed physician is paid As an independent practice, typically payments related to ancillary services, shareholder profits, and especially the use of midlevel providers generate additional compensation for physicians. In the hospital employment setting, these additional avenues for compensation are not available Physicians are no longer owners and therefore there are no profits to share. Unless physician is bearing the cost of midlevel services (salary, benefit), e.g., by employing midlevels at the foundation/group level, physicians will not be able to receive the benefit of those services Additional regulatory risk that compensation may take into account the volume of value of referrals Consider if any administrative/leadership value can be provided by physician 11

12 Compensation Issues While the typical structure (base compensation, productivity (wrvu) or a combination of the two) is available, consider implementing additional concepts Unfunded deferred compensation plan Creates an incentive to stay employed with hospital for an extended period of time Can be provided to employees without regard to nondiscrimination requirements (confirm ERISA compliance) Provides flexibility (different benefit amounts for different categories of employees based on circumstances) Unlike current cash compensation (taxed when earned), physician can defer taxes until a future time Alternative to typical retention payments (e.g., paid out annually, taxed when paid out) Quality and Outcomes Joint operating/governance committee that will develop goals tied to improved quality and patient satisfaction Develop weight to each of the goals Incorporate triggers that would permit payment that relate to meeting overall health system targets (e.g., hospital operating expenses less than budgeted hospital operating expenses; hospital meets other benchmarks of overall financial health) 12

13 The Sale of a Medical Practice Managing Expectations: Hospitals are one of few potential buyers of medical practices, and likely the most viable (other than small, independent practices that are sold from physician to physician, e.g., upon retirement) Performing an initial due diligence/kick the tires review of financials, productivity are helpful on the front end to gauge whether performance reflects reality ( I generate 50,000 wrvus/year ) Purchase Price: As with physician compensation, merely relying on a valuation consultant is not sufficient to determine the purchase price Parties competing after a practice should keep in mind, that in addition to FMV, commercial reasonableness needs to be met Why would a hospital buy a piece of equipment from a medical practice if it owns one already and is only going to lease it back to the practice to lease or manage the equipment on an exclusive basis at a fair market value lease rate? (Bradford) While the discounted cash flow methodology is the typical valuation methodology it may not be applicable in all instances (e.g., acquiring tangible assets is acceptable for solo or small practices) 13

14 A Few Items to Keep In Mind Tax impact of transaction Most deals are assets deals (rather than stock) Double tax for corporations (once upon sale, again upon distribution/liquidation) Tax issues are not usually deal killers, but they can be (again, managing expectations) Holdbacks vs. Escrow Smaller acquisitions avoid escrow frees by holding onto a portion of the purchase price Typically not needed unless there are prospects of post-closing liabilities or insufficient diligence prior to closing Coding/Billing Compliance A sampling/review of charts have become more common even where billing numbers are not assumed; in some cases, third-party review may be appropriate Consider whether any remediation (if needed) should be addressed as a preclosing item How many physicians will need to be employed to make the deal viable? A closing condition may be added in larger practice acquisitions such that a certain number of physicians need to execute employment agreements in order for the deal to close (e.g., 90% of group physicians) 14

15 A Few Items to Keep in Mind Repurchase Option Some physicians want the option to repurchase the assets Parties should consider notice, time frames and purchase price methodology ahead of time Also consider EMR, asset replacement, new technologies or other aspects of affiliations that may make untangling a practice difficult Noncompetition As part of the transaction, typical non-compete provisions (within service area for X years post-termination) are negotiated into the employment agreement Typical carve-outs upon termination of the employment agreement include employer s breach, bankruptcy, employee s death, permanent disability, and the like Additional flexibility can be added by providing a window during which physician can repurchase the practice asset, or limiting the scope of the repurchase option by having the non-compete apply unless physician remains an independent, unaffiliated practice in the service area Liquidated damages (e.g., with tiers, reduced annually) may be a way to buy out the noncompete. 15

16 Negotiated Provisions Healthcare specific provisions have expanded to include disclosures regarding HIPAA compliance (greater focus on privacy/security policies), coding/billing compliance Addressing transition of professional liability coverage/tail insurance 97% of private M&A transactions (deals) include a no undisclosed liabilities representation (shift risk of unknown liabilities to seller) with rarely a knowledge qualifier 1 70% of deals contained accuracy of representations at signing and at closing 2 59% of deals had escrows larger than 10% of purchase price 3 59% of deals contain post-closing purchase price adjustments 4 Stand-alone material adverse effect provision commonly used (buyer walks away if there is a MAE prior to closing), but courts have viewed the standard to walk away very high and burden of proof is on the buyer, so include objective targets (e.g., financial dips of X%) SRS M&A Deal Terms Study, Shareholder Representative Services LLC. 2 Id. 3 Id. 4 Id. 16

17 Negotiated Provisions Indemnification Sandbagging (the right of a party to bring an indemnity claim based on known breaches) is typically left silent; anti-sandbagging is where if a party knew (or sometimes should/could have known) then indemnity is barred But anti-sandbagging rarely used and agreed by parties (only 5% of deals) 1 Survival: Certain representations (tax, benefits, healthcare) should have longer/unlimited survival periods or applicable statue of limitations (or SOL + X days) Damages/Losses are usually left silent (usually 50-60% of deals) 2 Baskets First dollar vs. Deductible (60% of deals are first dollar) 3 Carve-outs (e.g., fraud, intentional breach, taxes) are typical (only 5% of deals had no carveouts) 4 ADR/Arbitration: Most deals still do not contain ADR provisions (69% do not) SRS M&A Deal Terms Study, Shareholder Representative Services LLC. 2 Id. 3 Id. 4 Id. 5 Id. 17

18 A Word About Financial Incentives Financial incentives are at the core of many physician-hospital joint ventures Theory aligning the interests of the parties to produce optimal outcome The Dark Side of Incentives Professor Barry Schwartz Incentives tend to remove the moral dimension from decision making Why does a person decide to become a doctor Seyfarth Shaw LLP

19 Opportunities Under Affordable Care Act Medical Home Accountable Care Organizations Bundled Payments Seyfarth Shaw LLP

20 Medical Home Section 3024 of Affordable Care Act Independence at Home Demonstration Project Physician and NP directed home-based primary care teams Aimed at reducing expenditures and improving health outcomes Testing whether specified objectives can be achieved Begins 1/1/12 and runs for 3 years Seyfarth Shaw LLP

21 Seyfarth Shaw LLP

22 Seyfarth Shaw LLP

23 Accountable Care Organizations Section 3022 of Affordable Care Act Medicare Shared Savings Program ACOs that successfully meet quality and savings requirements share a percentage of achieved savings Final Regulations published October 20, 2011 Less stringent than proposed regulations Number of quality measures lowered from 65 to 33 EHR Meaningful Use requirement eliminated (but retained as a quality measure) Seyfarth Shaw LLP

24 Bundled Payments Section 3023 of Affordable Care Act National Pilot Program on Payment Bundling Begins January 1, 2013 Runs for 5 years Section 3021 Establishment of Center for Medicare and Medicaid Innovation within CMS ("CMI" or "Center for Innovation") CMI's job is to test payment and service delivery models to determine their effect One such testing is the "Bundled Payments for Care Improvement Initiative" announced 8/23/ Seyfarth Shaw LLP

25 Bundled Payment Initiative Four Models Models 1 and 4 inpatient stay Model 3 post-discharge services Model 2 inpatient stay and post discharge services Best model for a physician-hospital venture/collaboration Seyfarth Shaw LLP

26 Model 2 Financial Structure Identify a single episode of care, such as heart bypass surgery or hip replacement Propose and agree upon a target price for the relevant services Participants are reimbursed through traditional FFS payments, less a discount If reimbursed amount is less than the target price, Medicare pays the participants the difference If reimbursed amount is greater than the target price, participants pay Medicare the difference Seyfarth Shaw LLP

27 Model 2 Enrollment Requirements By November 4, 2011 submit Non-binding letter of intent Research request packet Data Use Agreement By March 15, 2012 submit Bundled Payments for Care Improvement Application Data Tables Seyfarth Shaw LLP

28 Benefits of Participating Have a voice in how payment bundling will be structured Gain valuable insights on the payment system, while staying ahead of the curve Access to data Gain control over costs Strengthen the physician-hospital relationship by focusing on the core purpose of each Seyfarth Shaw LLP

29 Downsides of Participating Discounted FFS payments Risk of reimbursed amount exceeding the target price Costs, both out-of-pocket and opportunity Seyfarth Shaw LLP

30 For Further Information Seyfarth Shaw LLP

31 Illinois Association of Healthcare Attorneys 2011 Annual Symposium Questions?