Commercial Reasonableness in Hospital-Physician Transactions
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The document discusses the concept of commercial reasonableness in hospital-physician transactions, emphasizing that compensation arrangements must not only meet fair market value (FMV) standards but also be commercially reasonable to avoid legal liabilities. It outlines various analyses, including business purpose, provider, facility, resource, and independence assessments, to determine the appropriateness of such arrangements. Legal case examples illustrate the implications of non-compliance with commercial reasonableness standards.
Commercial Reasonableness in Hospital-Physician Transactions
- 1. Page 0 Commercial Reasonableness in Hospital-Physician Transactions The Health Care Fraud Working Group April 10, 2013 Lyle Oelrich, Principal Darcy Devine, Principal
- 2. Page 1 PYA Background • Founded in 1983 • Top 20 healthcare management consulting firm • National focus with offices in Knoxville, Atlanta, Kansas City and Tampa • 200 professionals with audit, tax, valuation, management, compliance, and strategy expertise • 700 valuation engagements each year
- 3. Page 2 Definitions Commercial Reasonableness… Generally In theory, most business transactions must be commercially reasonable or there would be no reason for them to occur In Healthcare Compensation arrangements for physicians‟ services (clinical & administrative) must be both commercially reasonable and at FMV to avoid liability (Stark, Anti- Kickback, False Claims Act)
- 4. Page 3 Definitions HHS has interpreted “commercially reasonable” Stark II Phase II also suggests Additionally, OIG has stated “An arrangement that appears to be a sensible, prudent business agreement, from the perspective of the particular parties involved, even in the absence of any potential referrals” “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 of similar scope and specialty, even if there were no potential DHS referrals” In order to meet the threshold of commercial reasonableness, compensation arrangements with physicians should be “reasonable and necessary”
- 5. Page 4 Definitions CR = Prerequisite to FMV If a financial arrangement is determined to be commercially unreasonable, there is no need to determine fair market value or take further steps to set up the arrangement.
- 6. Page 5 Commercial Reasonableness vs. Fair Market Value Commercial reasonableness is slightly different than fair market value Does the transaction make cents sense? Was this a good business arrangement to enter into in the first place? Is there a legitimate business reason to enter into this agreement? Was it commercially reasonable even if there are no referrals between the parties? Do the underlying economics of the transaction make sense? Fair Market Value (NARROW) Commercial Reasonableness (BROAD) What is the range of dollars you are going to pay for the space/services?
- 7. Page 6 Commercial Reasonableness vs. Fair Market Value Thus, FMV assesses the reasonableness of the “range of dollars” while CR looks to the reasonableness of the business arrangement generally Because of this differentiation • A compensation arrangement may be at fair market value, but not the commercially reasonable
- 8. Page 7 PYA Analysis Refer to Commercial Reasonableness Outline Handout PYA Analysis Business Purpose Analysis Provider Analysis Facility Analysis Resource Analysis Independence & Oversight Analysis
- 9. Page 8 Business Purpose Analysis Does the proposed arrangement represent a reasonable necessity that is essential to the functioning of the hospital or other healthcare provider? Is the proposed arrangement reasonably necessary to accomplish a rational business purpose? Is the specific purpose of the arrangement clearly identifiable and appropriately defined? Do the proposed services relate to the business and/or clinical plans and strategies of the healthcare provider? Do the proposed services contribute to the provider’s profits and/or the development of a particular service line without requiring income from proscribed referrals? Do relevant national, regional, and local economic conditions exist that may affect the appropriateness of the proposed arrangement?
- 10. Page 9 Provider Analysis Does the proposed arrangement require a physician to perform the services? Does the proposed arrangement require a physician of a certain specialty to perform the services? Does any specialized training and/or experience of the provider exist that should be taken into account when evaluating the proposed arrangement? Are the particular nature of the duties and corresponding amount of accountability associated with the proposed arrangement clearly defined and reasonable? Is the amount of time demanded of the physician under the proposed arrangement reasonable? Do any salary considerations exist that should be evaluated in relation to providers of similar specialty and experience in comparable organizations and positions?
- 11. Page 10 Facility Analysis Are patient demand, the number of hospital patients, and/or the community need sufficient to justify the services? Are patient acuity levels such that the proposed services are necessary? Do patient needs dictate the necessity for a separate and distinct provider for the proposed services? Are the size of the hospital and the relevant department appropriate for the proposed services?
- 12. Page 11 Resource Analysis Is the proposed arrangement a necessary addition to the managerial and administrative efforts already required by the medical staff bylaws? Have the number of committees and/or meetings that otherwise require physician attendance outside of the proposed arrangement been considered? If the healthcare entity is part of a larger health system, do patient care protocols and procedures exist that can be coordinated among its facilities in lieu of the proposed arrangement? Does the proposed arrangement lend itself to the potential for duplication or misuse? Does the healthcare entity maintain any features, controls, and/or safeguards to reduce or eliminate the potential for risks of duplication or misuse?
- 13. Page 12 Independence and Oversight Analysis Does the provider entity currently evaluate the performance of its provider arrangements? Does the healthcare entity use its performance assessments to determine whether new or existing provider arrangements should be reduced (e.g., hours condensed) or eliminated? Does the entity maintain a formal process for executive management and legal counsel to review and approve the proposed arrangement? Does the provider engage in appropriate monitoring to determine: • Whether services specified in similar arrangements are actually performed? • The total amount of funds spent for such services? • A verifiable outcome resulting from the arrangement? Will the entity engage in regular assessments of the proposed arrangement that clearly show its effectiveness and demonstrate a legitimate need for continuation and/or renewal? Does sufficient independence exist related to the board or committee that establishes the proposed arrangement? Is there a written agreement that addresses the terms of the proposed arrangement?
- 14. Page 13 • Project: Is “X” Medical Director Arrangement CR? • Key Provider Inquiries: – Is it necessary to have a physician perform a certain service? – Is it necessary to have a physician of that specialty perform a certain service? • Logic: The FMV compensation for a specialty is generally higher than that of general practitioners and non-physician practitioners • Implication: If a specialized physician is receiving compensation within the higher range of FMV to perform duties that a less skilled practitioner could perform for less compensation, the arrangement may not be deemed to be commercially reasonable despite the fact that it is within the range of FMV for that specialist Example Inquiry: Proposed MD Provider
- 15. Page 14 Cases • U.S. ex rel. Drakeford v. Tuomey Healthcare System, Inc. – Part-time employment agreements for outpatient surgery services • Compensation methodology • Aggregate compensation (benefits) • Compensation / production parity • Appraiser perspective and approach • Mission support
- 16. Page 15 Cases • U.S. v. Campbell – Part-time employment of cardiologists for Clinical Assistant Professor • Performance of duties • Qualifications of employee • $8m settlement by UMDNJ
- 17. Page 16 Cases • U.S. ex rel. Kaczmarczyk v. SCCI Health Services Corp. – Medical directorships paid by LTAC • Reasonable necessity • $7.5 million settlement
- 18. Page 17 Cases • U.S. ex rel. Singh v. Bradford Regional Medical Center – Sublease for nuclear camera between physicians and hospital • Payment for lease and non-compete • Appraiser perspective and approach • Non-compete valued based on referral stream • $20m estimated settlement
- 19. Page 18 Lyle Oelrich, Principal Knoxville, Tennessee (865) 673-0844 [email protected] Darcy Devine, Principal Atlanta, Georgia (404) 266-9876 [email protected]