NEW YORK REAFFIRMS THAT THE CORPORATE PRACTICE OF MEDICINE DOCTRINE IS ALIVE AND KICKING

The New York Court of Appeals recently issued an opinion on the State of New York’s corporate practice of medicine prohibition, holding that medical practices that give too much operational and financial control to Management Service Organizations (“MSOs”) are “fraudulently incorporated” and thus, no-fault automobile insurers have no obligation to reimburse such practices.

In the case of Andrew Carothers, M.D., P.C. v. Progressive Insurance Company 2019 N.Y. Slip Op. 04643, a MSO provided management services to a New York professional corporation that performed magnetic resonance imaging services. Several no-fault automobile insurance carriers stopped paying the practice’s no-fault claims claiming that the practice was fraudulently incorporated, and in response, the practice sued the insurance carriers for non-payment of the insurance claims. A jury found that the owners of the MSO controlled the practice, and that the practice was fraudulently incorporated such that the insurance companies could rightfully deny payment of claims.

The Court of Appeals agreed with the jury and found that, due to certain terms of the MSO arrangement, the practice ceded control of the practice to the MSO. In making its determination, the court pointed to several aspects of the arrangement including:  (i) the MSO leased equipment to the practice at above fair market value; (ii) the licensed physician had a limited role in the clinical and administrative aspects of the practice; (iii) the executive secretary of the practice with ties to the owners of the MSO ran certain clinical aspects of the practice including the discipline of providers and the handling of physician referrals to the practice; and (iv) the MSO had the right to terminate each lease without cause, regardless of payment, however no similar provision allowed the practice to terminate the leases without cause.  The court stated that “[a] material breach of the foundational rule for professional corporation licensure—namely that it be controlled by licensed professionals—[is] enough to render [that party] ineligible for reimbursement.” See Slip Op at 16. While the holding of this case is limited in scope to no-fault insurance reimbursement, the court’s examination of the relationship between the MSO and the practice is an indication that New York courts will continue to closely monitor these MSO-practice relationships to ensure that the spirit of the corporate practice of medicine remains intact.

New York’s Business Corporation Law prevents unlicensed persons from exercising control of professional corporations.  All shareholders, officers, and directors must be licensed in the profession the entity is being incorporated to practice.  Ceding too much control to non-physicians violates the Business Corporation Law.  Similar concepts apply to professional limited liability companies.

This decision does not mean that medical practices or other professional entities in New York cannot enter into arrangements with MSOs.  Instead, the decision reaffirms that these arrangements must be carefully crafted and implemented and operated with care to stay within the bounds of the law.

Is a Supergroup the Right Fit For You?

As it gets harder and harder out there for an independent physician or a small, unaligned physician practice to survive, supergroups or group practices without walls continue to gain in popularity.  A supergroup is a group of physicians or physician practices coming together under a single employer identification number in the organization of a single legal entity.  Some supergroups focus on one specialty while others are multi-specialty.

Like everything in life, there are pros and cons to supergroups and whether or not a particular attribute is a pro or a con may vary from physician to physician.  This post reviews some of the most important advantages and disadvantages.

Pros

Supergroups allow physicians to share, and reduce, expenses.  This is most often done in the context of consolidating back office functions and non-clinical staff.  Sharing non-clinical staff can allow physicians to build a more sophisticated administrative operation and pool their resources to hire more experienced staff and executives.  It also generally allows physicians to further divest themselves from involvement in administrative services and focus more on clinical care, an aim of many physicians.  Moreover, physicians can utilize the existence of a centralized administrative office to reduce the amount of space that they lease in their individual offices.  Physicians can also gain greater power to negotiate with suppliers and purchase more supplies in bulk thereby saving more money.

Supergroups are generally, by their nature, large groups (hence the term “super”).  In this day and age, more physicians can translate into better leverage with payors which can translate into higher reimbursement rates.

Physicians can use their greater resources in a supergroup to invest in technology to keep up with the ever increasing burden of regulations and reporting systems that require extensive use of technology as well as hopefully deliver higher quality care by harnessing data.

Additionally, as reimbursement continues to plateau or decrease, many physicians are looking at ancillary revenue streams.  However, to gain a share of this revenue, generally, a not insignificant capital investment is necessary.  Supergroups, with their greater resources, are better positioned to invest this capital as well as achieve savings by purchasing equipment that can be shared by multiple physicians in the group, thereby keeping costs down.

Joining a supergroup can also allow a physician to affiliate with a hospital without giving up much in the way of independence.  There are supergroups that are managed by a health system, but which otherwise generally allow the physicians to practice as they always have been.  The health system is usually paid a fair market value management fee for the management services provided to the supergroup.  Also, the affiliation of a supergroup with a hospital may give the supergroup more leverage in negotiations with payors, thereby providing an additional benefit to its member physicians.

Being a part of a supergroup may also allow a physician to establish a channel with private equity firms.  Many physicians want to enter into deals with private equity firms, but either are too small to gain notice or do not have a sophisticated enough back-office operation in order to appear attractive.  Supergroups can work on establishing more robust administrative operations, add physicians to grow larger and then approach private equity as a more attractive target with additional negotiation power.  

Cons

Despite the relative independence of physicians and profit centers in supergroups, there will still be some loss of independence.  A physician will no longer be his or her only boss as it is inevitable that some decisions will be made by a centralized board.  The extent of those decisions does vary by group.  Even if every physician is a member of the board (not advisable), each physician will have only one vote, and one vote will not be enough to carry the day.

A clash of cultures is a possibility as well.  Different physicians and practices have different ways of doing things, and given the centralization of some aspects of the group, fights over cultures do occur from time to time.

There is also a cost in forming a supergroup.  Practices will incur expenses in coming together to form the entity, develop governing documents, contribute assets, merge benefit plans and hire new management.  While these costs will hopefully be dwarfed over time by savings and higher profit margins, this is not a guarantee.

There will also be business and legal obstacles in coming together.  Some practices may be more profitable than others.  Some may carry higher overhead than others.  Some may be more productive than others.  Additionally, Stark law compliance is paramount in forming a supergroup, particularly if there are ancillary services involved that are considered “designated health services” under the Stark law.

Forming or joining a supergroup is a big decision and can be a daunting task for physicians.  It is important to consider all of the issues involved and assess the ramifications carefully before jumping completely into the pool.

CONSIDERATIONS FOR THE HEALTH CARE PROVIDER IN A PRIVATE EQUITY DEAL

As private equity investors continue to survey the market for health care deals, providers who were uncertain about their strategic plans or who had no plans are finding partners out there.  Entering into a private equity transaction may be a once-in-a-career move for a health care provider.  However, it is important for providers to give some thought to what they want to negotiate in such a deal before signing on the dotted line.

Here are some considerations for the health care provider in a private equity deal:

  • Type of Partner:  some private equity firms will be very hands-on managing the health care provider while others will provide capital, but otherwise play the role of passive investors.  Some firms will bring in a very experienced operations team to supplant or support current management.  Which type of partner do you want?
  • Strategic Plan:  some private equity firms may seek to use the platform to add on other providers of a similar nature to the platform provider, while others set their sights on multi-specialty platforms.  What is your strategic plan?
  • Liquidity Event:  the initial liquidity event may be structured to have a cash component and a rollover equity component.  There is no one-size-fits-all split between the two components.  While the firm may make an initial offer on such a split, the target provider needs to consider what split best suits its needs and desires.  That may start a debate amongst the various owners of a provider if the owners are in different stages of their careers.  Early and mid-career partners may want to put more into rollover equity including some, if the deal allows, into a “parent entity” that may have different strategic plans.  Late career partners may want a higher upfront cash liquidity event.
  • Post-Closing Compensation:  compensation post-closing for providers will undoubtedly look different.  Like the liquidity event, there is no one-size-fits-all approach to compensation.  These days, some compensation is likely to be productivity-based, and that is not unique to private equity backed transactions.  Once again, the split between productivity-based compensation and fixed compensation may spark a debate.  Early and mid-career partners may want more productivity-based compensation.  Late career partners may want a higher base salary.
  • Governance:  the platform provider will have representation on the governing board of the management company, but how much representation and voting rights depends upon the particular provider.  “Add on” providers may have to work harder to negotiate for board representation if that is important to the provider.

These are just a few of the considerations for health care providers exploring a private equity deal.  Certainly, there’s much more to be done before a deal can be struck.  It is, therefore, important for a provider to contemplate what is most important to the provider as this may be one of the provider’s biggest strategic moves in his or her career.

Hospital-With-Hospital Joint Ventures

In an era of uncertain reimbursement, increasing value-based care and consolidations, some hospitals have looked to joint venture with other hospitals on specific service lines or specific projects. Most common are independent community hospitals working with other community hospitals or community hospitals working with smaller health systems. Joint venturing allows hospitals to draw on the expertise of other hospitals, pool capital resources, achieve efficiencies and aim for better outcomes. Another reason may be to avoid merging with, or being purchased by, a larger system.

Examples of areas where hospitals have pursued joint ventures are oncology service lines, outpatient facilities, home health, rehabilitation facilities, imaging and skilled nursing facilities. Some systems have formed “across-the-board” joint ventures to partner on a number of projects over time with each hospital having the ability to “opt in” or “opt out” of individual ventures.

As with nearly everything in health care, legal and regulatory pitfalls abound, and it is important that hospitals consider the risks before sealing the deal. Some of those issues are as follows:

• Certificate of Need and Licensing: will the venture require a certificate of need to proceed? Is a license required? How much lead time is required for the applications and inspections? Which hospital will take the lead on pursuing the applications and licenses? Will the venture involve using space in one of the hospitals? That may trigger a transfer of a license.

• Contributions: Is one or more of the partners contributing assets, but others are not? Who will take the lead in obtaining valuations for the assets? Is intellectual property one of the assets being contributed? How will that be valued? Do the non-contributing partners have cash to make corresponding capital contributions? Or will the non-contributing partners allow redirecting of initial profits, if any and if permitted by applicable laws, until their contributions are paid off?

• Non-profit Considerations: Are there a mix of for-profit and non-profit partners? Has the non-profit partner ensured that there are the appropriate charitable considerations built into the venture’s governing documents? How will decision-making for the venture be affected? Does the venture fit into each non-profit partner’s charitable mission?

• Governing Document Considerations: What are the exit rights for the venture? What is the composition of the governing board? How are decisions made? Are there competitive restrictions?

• Anti-Kickback Considerations: Besides the regularly applicable federal Anti-Kickback Statute, do not forget state anti-kickback laws and regulations as well, although some folks sometimes think certain laws and regulations apply when they do not. It can be frustrating to automatically assume that a law applies and devise an overly complicated structure when it may not be necessary. Generally, any type of venture requires fair market value considerations and careful examination of how profits and losses will be shared to avoid running afoul of anti-kickback laws and regulations. If physicians will be involved in the venture, then the Stark Law as well as state self-referral laws may apply, but again, do not make that assumption. Remember that the Stark Law only applies to designated health services, and even within those eleven categories, only certain types (i.e. not every imaging service is a designated health service). The same can be true of certain state self-referral laws.

The above are merely some examples of the legal and regulatory issues for hospital-with-hospital joint ventures. A full description is beyond the scope of this blog post. However, given the popularity of these ventures, many projects that hospitals are now considering have likely already been done before, and there are folks out there who bring the experience to the table to help with construction. While this may be new to your hospital, it is likely not new to the world.

Beware of the Corporate Practice of Medicine Doctrine In Pennsylvania

Like many states, Pennsylvania has an established a corporate practice of medicine (“CPOM”) doctrine.  Like many states, Pennsylvania has particular details in its prohibition that can be traps for the unwary.

Pennsylvania’s CPOM doctrine originally grew out of the Neill v. Gimbel Brothers, Inc. case.  In that case, a department store leased space to a partnership, which operated the store’s optical department.  The rent payable to the store included a portion of the optometry practice’s revenue, the store could terminate the practice’s employees, including the optometrists, and the store set and collected the practice’s fees.  The Pennsylvania Supreme Court determined that this effectively allowed the department store to practice the profession of optometry.

The theme of the CPOM doctrine in Pennsylvania is similar to that of other states:  namely, physicians cannot be employed by non-physicians, and an entity that practices medicine may only be owned by licensed physicians.  There are, of course, some exceptions.  One particular exception permits health care practitioners to practice medicine as an employee or independent contractor of a health care facility or an affiliate of a health care facility established to provide health care.  A similar exception exists in other states as well, but it is important to keep in mind what can be considered a “health care facility.”

The CPOM doctrine is still alive in Pennsylvania today as evidenced by some recent case law.  While the case law is in the dental field, it is logical to think that the same pronouncements by the court in recent case law would carry over to the medical field.

In Apollon v. OCA, the Eastern District of Louisiana, applying Pennsylvania law, determined that a business services agreement between a dental practice and a management company was illegal due to the sharing of its profits by the dental practice with the management company under the agreement.  The court reasoned that the sharing of profits was akin to establishing a partnership between the practice and the management company, which would be illegal since only licensed persons, under Pennsylvania law, could own shares in a professional corporation.

Business service agreements between professional practices and non-licensee owned management companies are quite common across the country.  Many states have laws (statutes, regulations, case law, opinions, advisory opinions or otherwise) that govern the contents of these types of agreements.  Pennsylvania is clearly no exception.  Thus, it is crucial that parties entering into arrangements in Pennsylvania that may implicate the CPOM doctrine pay careful attention to the details of their relationships.

CMS Proposes Significant Changes to the Medicare ACO Program

Recently, the Centers for Medicare & Medicaid Services (“CMS”) issues a proposed role that would force Medicare accountable care organizations (“ACO”) to begin risk sharing at a faster pace. This is being referred to as the “Pathways to Success” program.

Currently, Medicare ACOs may participate for up to six years without taking on any risk.  These ACOs are eligible for shared savings, but do not bear any responsibility for increased costs.  The large majority of Medicare ACOs currently do not participate in risk sharing.  Further, based upon performance of Medicare ACOs thus far, Medicare spending has increased.  The “Pathways to Success” program aims to change this.

CMS has proposed to reduce the aforementioned six year non-risk track to two years and replacing all tracks with the Basic Track and the Enhanced Track.  Under the Basic Track, an ACO would participate for five years, except ACOs that start in the Basic Track on July 1, 2019 (more on this date below) would participate for five-and-a-half years.  All ACOs that elect the Basic Track would have no risk sharing for the first year (or the first year-and-a-half of ACOs that start in the Basic Track on July 1, 2019).  ACOs could continue with no risk sharing for the second year except that ACOs that have previously participated in the old Track 1 would have to move to risk sharing in the second year.  The amount of risk sharing would gradually increase each year to a maximum of fifty percent in the fifth year.

As for the Enhanced Track, it is essentially based on the existing Track 3.  All Basic ACOs would have to move to the Enhanced Track after five years (or five-and-a-half years for ACOs that start in the Basic Track on July 1, 2019) with the exception of certain low revenue ACOs, which might be permitted to renew a Basic Track agreement for another five years.

To give ACOs additional time to consider whether they want to continue participating in the Medicare ACO program, CMS has proposed that a six month extension for all ACOs whose agreements expire on December 31, 2018 and a special one-time July 1, 2019 start date (as opposed to January 1) with an application period during spring 2019.

 

New Jersey Health Care Services Firms Now Required to Obtain Accreditation

Last month, the New Jersey Department of Human Services (“DHS”) adopted a rule that requires all health care service firms to become accredited by an accrediting body recognized by DHS as an accrediting body for homemaker agencies participating in the Medicaid program.

Health care service firms essentially have a twelve month period to come into compliance with the new rule. Existing registered health care service firms must provide evidence of accreditation to DHS with their first registration renewal on or after May 21, 2019.  A health care service firm that obtained its initial registration less than twelve months prior to renewal of registration will not be required to submit evidence of accreditation when renewing its registration for the first time.

If a health care service firm loses its accreditation, it is required to notify DHS in writing within ten days of the loss.

The rule also provides for a new audit requirement.  Every three years, beginning with May 21, 2021, every health care service firm must submit an audit to DHS when renewing its registration.  The audit must:

  1. Be conducted by a certified public accountant licensed in New Jersey and shall include an examination of the health care service firm’s financial records, financial statements, the general management of its operations and its internal control systems;
  2. Include an audit report with an unqualified opinion and shall be accompanied by any management letters prepared by the auditor in connection with the audit commenting on the internal controls or management practices of the health care service firm; and
  3. Be divided into two components of which:
  • One is a compliance component that evaluates the health care service firm’s compliance with laws and rules governing health care service firms; and
  • One is a financial component that includes an audit of the financial statements and accompanying notes, as specified in the Statements on Auditing Standards issued by the American Institute of Certified Public Accountants.

Many critics had complained for years that health care service firms had lax regulatory oversight as compared to other health care entities. While these new requirements are not as strict as the regulatory scheme that applies to many other types of health care entities, they are big changes for health care service firms, particularly ones that are small businesses.  This rule may be just the beginning in a new effort to closely supervise health care service firms.

DOJ Files Suit Against Private Equity Firm That Owns and Manages Compounding Pharmacy For Kickbacks

The United States recently filed a complaint in intervention against Diabetic Care Rx LLC d/b/a Patient Care America (“PCA”), a compounding pharmacy alleging that the pharmacy paid illegal kickbacks to induce prescriptions for compounded drugs reimbursed by TRICARE.  The government has also brought claims against two pharmacy executives and Riordan, Lewis & Haden Inc. (“RLH”), a private equity firm, which manages both the pharmacy and the private equity fund that owns the pharmacy, for their involvement in the alleged kickback scheme. PCA is a portfolio company of RLH.

The government alleges that the defendants paid kickbacks to marketing companies to target TRICARE beneficiaries for prescriptions for compounded pain creams, scar creams and vitamins that were not medically necessary.  Additionally, the defendants and marketers are further alleged to have paid telemedicine physicians to prescribe the creams and vitamins without seeing the patients, and also paid the patients themselves to accept the prescriptions. Moreover, the formulations of the creams allegedly were manipulated to ensure the highest possible reimbursement from TRICARE irrespective of patient need.

The complaint outlines RLH’s involvement in PCA. RLH has a controlling investment in PCA, and two RLH partners are officers of PCA. In addition, PCA is managed by another company controlled by RLH. The complaint alleges that the two RLH partners guided the strategic direction of PCA and knew and approved of the potentially problematic marketing arrangements.

The lawsuit was originally filed by two former employees of PCA under the qui tam or whistleblower provisions of the False Claims Act. The government then chose to intervene in the suit.

Despite a strict regulatory scheme, health care is an attractive industry for private equity and family office investors.  Experienced investors are typically aware of the tough environment in health care, but are not necessarily up to speed on how they should be managing their portfolio companies given all of the applicable laws. As the government works harder to prosecute health care fraud, it has made an increasing effort to go after parties who are typically not top of mind in terms of responsibility.  RLH may not be the party that was billing for services, but the government believes that it should be accountable for how it managed PCA.  Consequently, private equity firms should ensure that they understand the regulatory requirements to which their portfolio companies are subject. Additionally, while compliance due diligence prior to investment is critical, just as important is a focus on compliance throughout the term of investment.

The facts alleged in this complaint appear to be quite egregious, so one cannot jump immediately to the conclusion that this is the start of a government health care fraud crusade on private equity firms. Nonetheless, firms should exercise caution in light of the complaint as they continue to investment in the health care industry.

Surgical Practices Must Now Be Licensed as Ambulatory Surgical Centers in New Jersey

Surgical practices in New Jersey will now be required to become licensed by the New Jersey Department of Health (“DOH”) as ambulatory surgical centers, with existing ones required to do so by January 16, 2019.  Previously, surgical practices had to be registered with the DOH, and oversight was jointly shared by the DOH and the New Jersey Board of Medical Examiners.  Now, oversight will be the sole province of the DOH.

Surgical practices that are certified by the Centers for Medicare and Medicaid Services (“CMS”) will be exempt from the physical plant and functional requirements set forth in the New Jersey licensing regulations for ambulatory surgical centers.  Existing surgical practices not certified as such, but which are accredited by an accrediting body recognized by CMS, will also be exempt.  Those surgical practices that do not fall in one of the foregoing categories will have to comply with the requirements.

Surgical practices will also be exempt from the New Jersey ambulatory care facility assessments unless they expand to include any additional room dedicated for use as an operating room.

Surgical practices may now also combine with each other or with ambulatory surgical centers to form a larger licensed ambulatory surgical center consisting of an aggregate number of operating rooms up to the total number of operating rooms that both facilities contained prior to the combination.

These changes mean more for surgical practices than the mere language of the law would suggest.  As licensed facilities, anyone, not just New Jersey licensed physicians, can now be an owner of a one room facility.  This will make it easier for outside investment directly in one room centers.  Those who are not New Jersey licensed physicians and who are currently managing one room facilities can now seek to become direct owners of those facilities, which was previously prohibited.  Additionally, any New Jersey licensed physician will now be able to perform a procedure at a one room center, not just owners of the center.

Outside investment and mergers and acquisitions in the New Jersey ambulatory surgical center market have been active for years, with recent increased movement due to the influx of private equity dollars into health care.  The level of activity will now increase even more.

CMS Issues The 2018 MACRA Quality Payment Program Final Rule

The Centers for Medicare and Medicaid Services (“CMS”) recently published the 2018 Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”) Quality Payment Program (“QPP”) final rule.  CMS maintained that it is listening to feedback and concerns from providers and that what it has heard is reflected in many of the provisions of the rule.

Among the many changes in the final rule are the following:

  • For 2018, CMS will exempt providers and groups with less than $90,000 in Medicare Part B allowed charges or that care for less than 200 Medicare Part B patients. These providers would be exempt from participating in the QPP altogether.
  • Small practices (those with fifteen or fewer practitioners) can earn five additional points to their Merit-Based Incentive Payment System final score if they submit data on at least one performance category. Further, CMS will award providers up to five bonus points if their patient population is deemed particularly complex, as measured by a combination of Hierarchical Conditions Category risk scores and the number of dually eligible patients treated.
  • Providers are allowed to continue using 2014 Edition Certified Electronic Health Record Technology (“CEHRT”), rather than upgrading to 2015 Edition technology, to report the Advancing Care Information (“ACI”) transition measures.  Providers that exclusively use 2015 CEHRT to report the ACI objectives and measures (the Stage 3 equivalent measure set) could be eligible for a ten percent bonus score.
  • The reporting period for quality performance, which was ninety days during 2017, which was the transition year, is now the full calendar year.
  • Solo practitioners and small practices can form a virtual group without specialty or location limitations to participate in MIPS.  While it was previously known that virtual groups would be an option, more detail on how those groups can be formed and can apply for treatment as virtual groups is now available.
  • CMS will implement a MIPS measurement option that allows hospital-based clinicians to use their hospital’s value-based purchasing results for the MIPS cost and quality categories.  However, this option will not be available until calendar year 2019.
  • Providers will be assessed on cost measures for 2018.  This was originally a 2019 requirement under the proposed rule.  The cost category will be weighted at ten percent of the MIPS final score in 2018 and will increase to thirty percent in 2019.

The 2018 final rule is emblematic of CMS’ continued approach to tinker with MACRA’s obligations and burdens on providers of all sizes.  From the beginning, it has been clear that MACRA would be a work in progress that would evolve, especially in the early years.  Thus, it is important that providers continue to pay attention to additional MACRA-related rules to ensure that they are current on the latest requirements, especially those that may be beneficial.