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Court Cases and Healthcare Valuation
1. HCCA Compliance Institute 2012—Legal & Regulatory 706
I Thought FMV Was Supposed
to be Bulletproof: Recent Court
Decisions Involving Fair
Market Value
Jeff Fitzgerald, Shareholder, Polsinelli Shughart
Curtis Bernstein, Director, Sinaiko Healthcare Consulting
May 1, 2012
2. Outline of Presentation
Case Studies
Employment
Payment for multiple services to a single physician
Campbell v. Campbell v. UMDNJ
Aggregate compensation
US v. Covenant Medical settlement
Acquisition
Employment of physicians
US ex rel. Drakeford v. Tuomey
Payments based on referrals
US ex rel. Singh v. Bradford Regional
Payment for intangible assets without cash flows
Carraci v. Commission and Bergquist v. Commissioner
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3. Employment Case Study Facts
Dr. Nice (cardiologist) hired by Typical Hospital
Comp: $50 per wRVU; Hospital used salary FMV report
Three months later, Dr. Nice asked to be medical director for
catheterization lab
Comp: $10,000 per month; hospital obtains outside FMV from its
regular consultant
Six months later, the physician practice administrator asks Dr.
Nice to act as a liaison between the employed physicians and
administration
Comp: $ 16,000 per month; practice administrator obtained FMV
study from different outside FMV expert
Later, Hospital realizes that Dr. Nice was not added to the call
roster and amends employment agreement to add call coverage
Comp: $800 per day (consistent with what the hospital pays
independent contractors)
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4. Compliance Concerns
Can the physician actually perform all of these services?
“Are there enough hours in a day?”
Are multiple forms of compensation paid for services provided
simultaneously?
The physician cannot provide call coverage 24 hours per
day while providing clinical services and medical
directorship services
Does the aggregate compensation make sense?
Payment of employed physicians at the same rate as the
independent contractors is inconsistent with a productivity
based compensation plan
4
5. U.S. v. Campbell
University Hospital (UMDNJ) wanted to grow its
cardiology program
UMDNJ entered into part-time employment contracts with local
community cardiologists in private practice to work at University
Hospital as Clinical Assistant Professors, providing teaching,
lecturing, and research in exchange for an annual salary
Hospital employs, part-time, Dr. Campbell for $75,000
annually
Employment agreement lists 8 categories of services
In 2009, UMDNJ settles with DOJ and pays $8.33 million
DOJ sues Dr. Campbell under FCA and Stark Law
Dr. Cambell has FMV report supporting salary
Dr. Campbell “duly performed all of the services enumerated in
the contract which he was given the opportunity to perform”
Dr. Campbell argues that he was only required to perform the
services that the hospital asked him to perform, and he did
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6. U.S. v. Campbell
Court rules that Stark Law was violated
Dr. Campbell could not prove he met the
employment exception
Dr. Campbell was at hospital frequently, but not
performing services in agreement
Court held that compensation was not FMV if
services were not rendered (regardless of FMV
report)
“If there was no requirement to actually perform the
duties of [employment agreement] then the
compensation could not be the fair market value for
those services…”
2011 U.S. Dist. LEXIS 1207 (1/4/2011) 6
7. U.S. v. Campbell
Lessons
Services must be rendered in a manner generally
consistent with the services valued
FMV report only as good as its assumptions
To be a basis for separate compensation, there
should be separate service rendered
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8. U.S. v. Covenant Medical
Covenant Medical Center of Waterloo, Iowa
paid $4.5 million to settle Stark Law and
False Claims allegations (2009)
DOJ claimed that payments to 5 employed
physicians exceeded FMV
Two physicians paid more than $2M per year
Three others were paid more than $1M per year
Salaries were published on hospital’s form 990
Whether hospital relied upon FMV reports is
unclear 8
9. U.S. v. Covenant Medical
Lessons
Full time employment is subject to potential
enforcement action
Beware of the Lake Wobegon effect (everyone is
above average)
DOJ enforcement can depend on overall optics
Look at both the forest and the trees
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10. Acquisition Case Study
Local Physicians Group was recently awarded approval for a
certificate of need to develop a new surgery center
Fearing competition, City Hospital proposes to purchase this
prospective ASC from Group
In light of its lack of operating history, Hospital will purchase
any fixed assets already purchased by Group and the CON
Hospital will develop the ASC and offer the physicians part-
time employment agreements at a fixed compensation per
wRVU every time the physician performs a case in the ASC
Hospital will pay Group’s physicians for a non-compete
agreement
Group’s accountant recommends that Group contribute any
intangible value not purchased by Hospital to Hospital’s
foundation 10
11. Compliance Concerns
Compensating physicians only when
performing a designated health service and
not when performing office visits
FMV basis for intangible assets
FMV basis for paying for non-compete
Is a non-compete distinguishable from an
agreement to refer in this context?
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12. U.S. ex rel. Drakeford v. Tuomey
(2011)
Surgeons begin development of an ASC
Hospital hires surgeons as employees
Part-time; during surgical procedures; surgeons maintain
office practice separately
Fixed salary, plus 80% of collections, plus quality
incentives
DOJ alleged that compensation exceeded 100% of actual
collections (and was up to 140% of collections)
Hospital internal documents project losses on all
employment agreements
12
13. U.S. ex rel. Drakeford v.
Tuomey
DOJ argues that compensation is not FMV
because “the hospital’s motivation in entering
into these part-time agreements was to avoid
losing the referrals”
While Stark Law is strict liability, the DOJ looked
at motivation of parties
At trial, jury concludes Stark Law violated, but
not False Claims Act
Jury awards DOJ $49.4 million
New trial ordered on False Claims issues
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14. U.S. ex rel. Drakeford v.
Tuomey
Lessons
Employment exception large, but not infinite
Motivation can color FMV analysis
Risk exists where employment compensation not
based upon survey or objective data
Long term physician employment losses could
receive more scrutiny
Basis for losses needs to be justified or presumption is
that the loss is tied to referrals
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15. U.S. ex rel. Singh v. Bradford Regional (2010)
Group of two physicians lease nuclear camera from
GE and perform services in office rather than in
hospital
Hospital rents camera from Group (with non-
compete); camera remains in Group’s office
Hospital pays $23,655 per month, an amount derived from
Group’s revenue from use of the camera ($6,500 per
month related to prime lease from GE)
Per Stark, fixed rental rate not take into account volume or
value of referrals 66 Fed. Reg. at 877 (before per click rule)
15
16. U.S. ex rel. Singh v. Bradford Regional
District Court granted summary judgment
against the hospital
Court placed burden of proof to show FMV on
hospital
Found that amount of compensation was arrived
at by taking into account the anticipated referrals
of the physicians
Found that if price takes into account referrals,
then price is not FMV
16
17. U.S. ex rel. Singh v. Bradford Regional
Lessons
FMV analysis and reports are useful, but courts
may look behind at the underlying purpose/terms
Need to identify clear non-referral related basis for
intangible assets or counterintuitive FMV terms
Purchase price needs to make sense from a non-
referral basis
Some things just can’t be purchased
17
18. Bergquist v. Commissioner (2008)
Background
University Anesthesiologists, P.A. (UA) was the exclusive
provider of anesthesiology to Oregon Health & Science
University Hospital
In 1998, Hospital formed OHSU Medical Group as a
501(c)(3) and required all physician groups that wished to
remain affiliated with Hospital to consolidate into the group
by Jan. 2002
In Sept. 2001, anesthesiologists in UA donated stock in UA
to a charity and claimed a charitable donation
UA’s valuation expert used going concern value
Charity valued donated stock at $0
On Jan. 1, 2002, anesthesiologists became employed by
OHSU Medical Group
18
19. Bergquist v. Commissioner
Tax Court findings
UA should not be valued as a going concern because
the consolidation of UA into OHSU Medical Group was
foreseeable at the date of donation
UA would not have donated the stock without the
consolidation
Commissioner’s expert valued UA at net asset value
Value estimated to be less than 10% of that claimed
by Bergquist
Court agreed with Commissioner’s findings
Court concluded that no reasonable buyer would have
paid at a going concern rate for UA stock knowing that
UA was being consolidated
19
20. Summary and Takeaways
Make sure compensation arrangements with
referral sources are FMV for services rendered
Have policy in place to appropriately document FMV
for services provided using reasonable approaches
as discussed throughout this webinar
Monitor compliance with policies
Review third party opinions for completeness,
accuracy, and reasonableness
Review services actually provided to those
required under agreements
Check all line items on medical director time sheets
Verify time spent providing co-management services
Use common sense in determining if compensation
could be viewed as related to referrals
Learn from Covenant, Bradford and Tuomey
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21. I Thought FMV Was Supposed to be
Bulletproof: Recent Court
Decisions Involving Fair Market
Value
Jeff Fitzgerald, Shareholder, Polsinelli Shughart
jfitzgerald@polsinelli.com
Curtis Bernstein, Director, Sinaiko Healthcare Consulting
curtis.bernstein@sinaiko.com
21