Is a Supergroup the Right Fit For You?

by Glenn P. Prives

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.

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New Jersey becomes Eighth State to Pass Death with Dignity Legislation

by Parampreet Singh

On March 25, 2019, both the New Jersey Assembly and the New Jersey Senate passed the Medical Aid in Dying for the Terminally Ill Act (the “Act”).  The final version of the bill was sponsored by Assemblyman John J. Burzichelli and Assemblyman Tim Eustace.  Governor Phil Murphy signed the bill into law on April 12, 2019 stating, “Today’s bill signing will make New Jersey the eighth state to allow terminally ill patients the dignity to make their own end-of-life decisions – including medical aid in dying.  We must give these patients the humanity, respect, and compassion they deserve.”

The Act “permits qualified terminally ill patient[s] to self-administer medication to end [their] live[s] in [a] humane and dignified manner.”  New Jersey is now only the eighth state in the country to allow competent, terminally-ill adults to exercise their “right to die.”  Under the Act, “terminally ill” is defined as a patient who “is in the terminal stage of an irreversibly fatal illness, disease, or condition with a prognosis, based upon reasonable medical certainty.” 

Furthermore, qualified patients choosing to exercise their rights under this Act will be required to submit their request in writing, stating, among other things, that they have been fully informed of any available alternatives.  Two individuals, one who must not be a relative, entitled to any portion of the patient’s estate, or the patient’s doctor, must witness and attest the voluntariness of the patient’s request. 

A “right-to-die” bill was first introduced in New Jersey in 2012.  Proponents of the Act believe it gives adults the right to control their lives, die with dignity if they so choose, and decrease their prolonged pain and suffering.  Proponents of the Act also believe that there are enough safeguards in place to protect vulnerable, elderly adults. For example, the Act requires a patient to make several requests prior to receiving a prescription.  Additionally, not all terminally-ill patients who request and receive the medication will actually end up self-administering the medication – some patients simply like having the option of requesting such medication. 

Opponents of the bill argue that once a “right-to-die” bill is passed, New Jersey will be unable to outlaw the practice.  Further, they argue that vulnerable adults may misuse the Act, while certain adults may feel pressured to end their lives, viewing themselves as burdens to their families.  A 2015 Rutgers-Eagleton poll found that sixty-three percent of New Jersey residents support the passing of a “right-to-die” bill. 

It will be interesting to monitor the effects of these statutes on physicians, psychologically and professionally.  It is debatable whether providing such medications to terminally ill patients in pain can be reconciled with a physician’s Hippocratic oath to do no harm.  It will also be interesting to see what, if any, pressure will be placed upon doctors to provide such services to patients given that many may have moral objections to administering such medications.

HHS Actually Takes Action to LOWER the Penalties For One Of Its Enforcement Laws

by John W. Kaveney

On April 29, 2019, the United States Department of Health and Human Services (“HHS”) announced in the Federal Register through a Notification of Enforcement Discretion that effective immediately, it would be exercising its discretion regarding the application of HHS regulations concerning the assessment of Civil Monetary Penalties (“CMPs”) under the Health Insurance Portability and Accountability Act (“HIPAA”) and the Health Information Technology for Economic and Clinical Health (“HITECH”) Act. Specifically, HHS has changed its uniform cumulative annual CMP limit across the four categories of culpability and replaced it with tiered annual CMP limits increasing as the categories of culpability increase in severity.

In 2009, HITECH established four tiers of culpability with increasing penalties based on increasing severity. Those categories included: (1) the person did not know (and, by exercising reasonable diligence, would not have known) that the person violated the provision; (2) the violation was due to reasonable cause, and not willful neglect; (3) the violation was due to willful neglect that is timely corrected; and (4) the violation was due to willful neglect that is not timely corrected.

At the time of enactment of the HITECH Act, discrepancies were identified in the descriptions of the penalty ranges and uncertainty existed surrounding whether the $1,500,000 annual cap on CMPs should be applied to all of the categories of culpability. In the final regulations implementing HITECH that were adopted by HHS in 2013, the $1,500,000 annual cap was confirmed by HHS to apply to all categories. And, ever since then, HHS has been issuing penalties under the following framework:

Culpability Min. Penalty per Violation Max. Penalty Per Violation Annual Limit
No Knowledge $100 $50,000 $1,500,000
Reasonable Cause $1,000 $50,000 $1,500,000
Willful Neglect  – Corrected $10,000 $50,000 $1,500,000
Willful Neglect – Not Corrected $50,000 $50,000 $1,500,000

However, in a sudden change of position, HHS’ guidance this past week states that upon further review of the statute, it believes a better reading of the statute is to provide a tiered annual limit. Thus, under HHS’ new interpretation, there are new maximum annual limits to HIPAA enforcement actions as follows:

Culpability Min. Penalty per Violation Max. Penalty Per Violation Annual Limit
No Knowledge $100 $50,000 $25,000
Reasonable Cause $1,000 $50,000 $100,000
Willful Neglect  – Corrected $10,000 $50,000 $250,000
Willful Neglect – Not Corrected $50,000 $50,000 $1,500,000

It is unclear how the “No Knowledge” category will work given that the maximum penalty per violation remains at $50,000 while the annual limit is only $25,000. A review of the Federal Register entry from HHS confirms these to be the numbers published by HHS, and thus, until HHS offers further guidance or begins applying these new figures to specific cases, there remains some uncertainty for this category of culpability.

Nevertheless, these changes should come as welcome news to providers and business associates trusted with protected health information (“PHI”) as a penalty for a HIPAA violation can add up quickly. Thus, these new annual limits will help to curb the financial sting of a violation, especially when the provider or business associate either is genuinely unaware of the violation or takes appropriate action in response to a violation. Only time will tell whether HHS’ clarification of its reading of the statute to require lesser annual CMP penalty caps marks a general shift toward lower penalties or fewer enforcement actions overall.

In the meantime, it would be wise for providers and business associates to continue demonstrating good faith compliance efforts to try and minimize the tier of culpability within which a particular penalty falls. Only through ongoing reviews, audits and assessments of privacy policies and procedures and general compliance programs will providers and business associates remain prepared and help to mitigate the penalty of a potential HIPAA violation.  Certainly with these new tiered annual CMP caps, those that handle PHI have an even greater incentive to remain focused on effective compliance efforts.

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HHS Announces New Payment Model for EMS Services

by Megan R. George

On February 14, 2019, the United States Department of Health and Human Services (“HHS”) announced the launch of a new payment model for emergency ambulance services, Emergency Triage, Treat, and Transport (“ET3”), with the goal of allowing emergency medicine services (“EMS”) and ambulance service providers to triage and treat Medicare beneficiaries more efficiently and effectively. According to HHS Secretary Alex Azar, “this model will create a new set of incentives for emergency transport and care; ensuring patients get convenient, appropriate treatment in whatever setting makes sense for them.”

Currently, Medicare regulations only allow EMS and ambulance service providers to obtain reimbursement for services only if the patient has been transferred to a hospital (including the emergency department), a critical access hospital, a skilled nursing facility or a dialysis center. Because of this restriction, Medicare patients that have dialed 911 for a medical emergency are transported to one of the aforementioned facilities even if that patient does not require the level of care that these destinations provide. For example, if a Medicare patient has a laceration on his or her wrist, the patient would likely be transferred to the closest emergency department for sutures or in some cases, a bandage.  Under the ET3 model, EMS providers and ambulance service providers will now have greater flexibility to address the health care needs of Medicare beneficiaries requiring medical transport for a medical emergency for which they have accessed 911 services. ET3 broadens the scope under which the Centers for Medicare and Medicaid Services (“CMS”) will reimburse the transportation provider by now paying for (i) patient transfer to a hospital emergency department, (ii) patient transfer to a primary care physician office or urgent care clinic, and (iii) any treatment provided by a qualified health care practitioner in place (i.e., emergency medical technician (“EMT”)) or via telehealth. In addition, ET3 will encourage the development of telephonic triage centers for low-acuity 911 calls in regions where Medicare enrolled ambulance suppliers and providers operate in an effort to improve the quality of care and lower costs by reducing unnecessary transports to hospital emergency departments and unnecessary hospitalizations. Along with lowering the cost to the government payor, the patient who received treatment at a lower acuity facility, on scene, or through telemedicine, may also save on out-of-pocket costs that are not covered by their Medicare plan. Using the prior example, under ET3, the patient with a laceration on his or her wrist could now be treated at an urgent care facility or receive sutures from a licensed EMT or paramedic, reducing the cost and also keeping a bed open in the emergency department for higher acuity patients needing such care.

The ET3 model will be available to all Medicare-enrolled ambulance service providers and hospital-owed ambulance providers.  As part of a multi-payor alignment strategy, CMS plans to encourage ET3 model participants to partner with other payors, including state Medicaid agencies to provide the benefit of the program to those not receiving Medicare fee-for-service benefits. CMS anticipates releasing a Request for Applications (“RFA”) in Summer 2019 to solicit Medicare-enrolled ambulance suppliers and providers.  Following the RFA, in Fall 2019, a Notice of Funding Opportunity (“NOFO”) will be issued as a tool to implement the triage lines for low-acuity 911 calls. This NOFO will be available to local governments, their designees, or other entities that operate or have authority over one or more 911 dispatches in geographic locations where ambulance suppliers and providers have been selected to participate. It is anticipated that there may be up to three rounds of RFAs/NOFOs issued to stagger start dates and allow for any improvements in the ET3 model. The anticipated start date for the first participants is January, 2020.

This change in payment structure signals that CMS is recognizing alternative models of patient care, including telemedicine, as it explores ways to decrease unnecessary costs while maintaining the quality of care offered to the patient.

CONSIDERATIONS FOR THE HEALTH CARE PROVIDER IN A PRIVATE EQUITY DEAL

by Glenn P. Prives

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.

Physician Impairment and Burnout: An Alternative Perspective

by John Zen Jackson

Thinking about physician impairment and burnout rarely leads to happy thoughts.  Another side of the topic’s coin, however, can be found.  Nonetheless, the difficulties presented by such matters are appropriate starting points for a blog such as this one. 

Pursuant to the Health Care Professional Responsibility and Reporting Enhancement Act (the “Act”), both health care entities and health care professionals in New Jersey have reporting obligations in the event a practitioner demonstrates impairment that would present danger to a patient or to the public.  Reporting to the New Jersey Board of Medical Examiners of such impairment or unprofessional conduct is codified in N.J.S.A. 45:1-37 and for health care entities in N.J.S.A.  26:2H-12.2b et seq.  Common overlapping regulations are found at N.J.A.C. 13:45E-1 et seq.  Such reporting can lead to an appearance before the Medical Practitioner Review Panel and action by the Board of Medical Examiners.

While the Act does not define “impairment,” the regulations set forth the following: “‘Impairment’ means an inability to function at an acceptable level of competency, or lacking the capacity to continue to practice with the requisite skill, safety and judgment, as a result of alcohol or chemical use, psychiatric or emotional disorder, senility or a disabling physical disorder.”  N.J.A.C. 13:45E-2.1.  Physician impairment can spill over and lead to disruptive behavior, which is itself potentially reportable when it is such that “a prudent health care professional reasonably would believe is likely to adversely affect the ability of another health care professional to safely render patient care for which he or she is responsible.”  Id.  There are judicial decisions in New Jersey upholding hospital privileging action based on disruptive behavior.  Nanavati v. Burdette Tomlin Hospital, 107 N.J 240, 254 (1987); Courtney v. Shore Memorial Hospital, 245 N.J. Super. 138, 140-41 (App. Div. 1990).  The test is not “actual harm to patients” but rather that specific conduct “will probably have an adverse impact on patient care.”

At least since its 2008 Sentinel Event Alert, the potential for “disruptive behavior” adversely affecting patient safety has been the subject of commentary in connection with The Joint Commission’s standards.  But it has also been recognized that disruptive behavior may arise from psychiatric or emotional conditions.  While substance abuse has long been known to lead to disruptive behavior, impaired patterns of professional conduct can also result from stress, burnout, and depression.  See generally Brown, Goske & Johnson, “Beyond Substance Abuse: Stress, Burnout and Depression as Causes of Physician Impairment and Disruptive Behavior,” 6 J. Am. Coll. Radiol. 479 (2009).  The concept that “physician burnout” contributes to physician errors has its critics and challengers.  See, e.g., Lawson, “Burnout is Not Associated with Increased Medical Errors,” 93 Mayo Clinic Proceed. 1683 (2018).

But unquestionably, there is extensive literature concerning physician burnout and possible interventions. See, e.g., West, Dyrbye & Shanafelt, “Physician burnout: contributors, consequences and solutions,” 283 J. Internal Med. 516 (2018); Tawik, Profit, Morgenthaler et al., “Physician Burnout, Well-being, and Work Unit Safety Grades in Relationship to Reported Medical Errors,” 93 Mayo Clinic Proceed. 1571 (2018). This includes greater attention to well-being.  Indeed, reviews of this topic with an emphasis on physician wellness and work-life integration are the focus of a recent issue of MDAdvisor which has a series of six articles dealing with different aspects.  

A definitely more uplifting approach to the issue of physician burnout and impairment with a different vantage point is provided in the March 14, 2019 issue of the New England Journal of Medicine:  Schor, “When Sparks Fly – Or How Birding Beat My Burnout,” 380 N.E.J.M. 997 (2019).  The author is a geriatrics specialist who wrote that the part of him that had “long reveled in making a ‘great diagnosis’” was burning out and depriving him of professional satisfaction because of the felt need to balance professionalism and compassion.  The intellectual high in making an esoteric but lethal diagnosis so to give the physician a great day was repressed in view of what was possibly the worst day for the patient. 

He describes the fortuitous circumstance of discovering birding while having stopped during a bike ride in Sandy Hook, New Jersey.  The generosity of an experienced birder having loaned him the use of his binoculars provided a new vista and set him on a path to diagnose different species of birds and to once again feel the joy of a differential diagnosis that worked out well.  Dr. Schor provides an elegant illustration of this phenomenon:

The least sandpiper and the semipalmated sandpiper are almost identical “peeps,” but for the slightly richer, chocolatey brown back on the former and the darker legs on the latter. Similarly, distinguishing two closely related vasculitides, such as Behçet’s and Buerger’s diseases, depends on the caliber of the blood vessel that’s inflamed. Making such fine distinctions is what birders and diagnosticians have in common.

            Hopefully his suggestions take wing and soar.

DSH UNCOMPENSATED CARE COSTS LITIGATION CONTINUES

by Paul L. Croce

On January 10, 2010, the Centers for Medicare and Medicaid Services (“CMS”) posted answers to frequently asked questions (“FAQ”) regarding disproportionate share hospital (“DSH”) audit reporting requirements on its website. In those FAQs, CMS indicated that revenues received from private insurance companies (FAQ 33) and Medicare (FAQ 34) for Medicaid eligible patients must be deducted from costs when determining “uncompensated care costs.”

As a result of the policies enunciated in these FAQs, a deluge of litigation was commenced. Numerous hospitals asserted challenges, in various courts across the nation, asserting that FAQs 33 and 34 were unlawful amendments to the existing regulations which made no reference to the inclusion of Medicare and private insurance payments in the calculation of uncompensated care costs.  Each court that has addressed the issue has found the FAQs invalid, and issued either preliminary or permanent injunctions prohibiting their enforcement, on the basis that CMS violated the Administrative Procedure Act (“APA”) by failing to properly adopt the policies embodied therein in accordance with the notice and comment provisions of the APA. See Texas Children’s Hospital v. Burwell, 76 F. Supp.3d 224 (D.D.C. 2014); New Hampshire Hospital Ass’n v. Burwell, 2017 WL 822094 (D.N.H. Mar. 2, 2017); Children’s Hosp. of the King’s Daughters, Inc. v. Price, 258 F.Supp.3d 672 (E.D. Va. 2017); Tennessee Hosp. Ass’n v. Price, 2017 WL 2703540 (M.D. Tenn. June 21, 2017); Children’s Health Care v. Centers for Medicare & Medicaid Servs., 2017 WL 366758 (D. Minn. June 26, 2017).

Thereafter, on June 2, 2017, following a notice and comment period, CMS issued a final rule which incorporated the policies enunciated in the previously issued FAQs (the “Final Rule”). The Final Rule provides that uncompensated care costs “[a]re defined as costs net of third-party payments including, but not limited to payments by Medicare and private insurance.” 42 C.F.R § 447.299(c)(10)(i).

The adoption of the Final Rule, however, has not stopped the challenges to CMS’ policy. Since the Final Rule’s adoption, two additional courts have addressed the calculation of uncompensated care costs. These courts not only found that CMS’ failure to follow the notice and comment provisions of the APA made the policies in FAQs 33 and 34 unenforceable, they also held the Final Rule invalid because it contradicts the plain language of the Medicaid statute. See Missouri Hospital Ass’n v. Hargan, 2018 WL 814589 (W.D. Mo. Feb. 9, 2018); Children’s Hosp. Ass’n of Texas v. Azar, 300 F. Supp.3d 190 (D. D.C 2018).  

Both courts looked to the Medicaid statute, which states that DSH payments cannot exceed:

[t]he costs incurred during the year of furnishing hospital services (as determined by the Secretary and net of payments under this subchapter, other than under this section, and by uninsured patients) by the hospital to individuals who either are eligible for medical assistance under the State plan or have no health insurance (or other source of third party coverage) for services provided during the year. 42 U.S.C. § 1396f-5(g)(1)(A).

The courts found that the Medicaid statute’s reference to “payments under this subchapter” was a specific reference to payments made by Medicaid. Because the Medicaid statute makes no reference to subtracting any other payments made on behalf of Medicaid eligible patients (other than payments by uninsured patients) from the total costs incurred, the courts concluded that CMS exceeded its authority in adopting the Final Rule.  Accordingly, the Missouri Hospital Ass’n court enjoined the enforcement of the Final Rule, and the Children’s Hosp. Ass’n of Texas court vacated the Final Rule in its entirety. Missouri Hospital Ass’n, 2018 WL at *10-13; Children’s Hosp. Ass’n of Texas, 300 F. Supp.3d at 205-211. 

In light of these court decisions, as of December 30, 2018, CMS has withdrawn FAQs 33 and 34 and will accept revised DSH audits that cover hospital services furnished before June 2, 2017, when the Final Rule was adopted.  Moreover, CMS has indicated it will not enforce the Final Rule as long as the decision in Children’s Hospital Ass’n of Texas remains in effect.  That decision is currently pending appeal before the United States Court of Appeals for the D.C. Circuit. We will be keeping a close eye on the Children’s Hospital Ass’n of Texas case and will provide an update once a decision is issued.

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United States Department of Health and Human Services Pushes for the Elimination of Certificate of Need Laws among States in an Effort to Decrease Healthcare Costs

by Parampreet Singh

In December 2018, the United States Department of Health and Human Services (“HHS”) issued a report entitled “Reforming America’s Healthcare System Through Choice and Competition” (the “Report”) in which HHS recommended “state action to repeal or scale back Certificate of Need laws.”  This recommendation was motivated by HHS’s desire to decrease healthcare costs through competition, by allowing additional competitors into certain healthcare markets. 

Most states adopted Certificate of Need laws following the enactment of the Health Planning Resources Development Act of 1974 (the “Act”).  The Act required states to create agencies or programs to oversee the creation or expansion of healthcare facilities.  The enactment of the Act was motivated by the assumption that healthcare costs were rising due to the overbuilding of healthcare facilities.  Specifically, due to an abundance of hospitals and other healthcare facilities, these facilities were unable to fill their beds, resulting in fixed costs being met through higher charges to patients.  Therefore, under the Act, a Certificate of Need would only be issued following the demonstration of actual need or demand by the entity seeking to expand an existing facility or build a new facility.  

Congress repealed the Act in 1986 for various reasons.  To date, fifteen states have eliminated their Certificate of Need requirements altogether.  New Jersey continues to maintain its Certificate of Need requirements.  Furthermore, between 2011 and 2016, the items covered under New Jersey’s Certificate of Need laws increased from twelve (12) to twenty-six (26), placing it amongst the top five most restrictive states when it comes to issuing a Certificate of Need. 

Based on the Report, Certificate of Need laws, in actuality, impose costs, including loss of beneficial competition; fail to improve healthcare quality or access; and foster unintended competition problems.  According to the Report, repealing Certificate of Need laws leads to “greater competition [which] incentivizes providers to become more efficient” and “hospitals faced with a more competitive environment have better management practices.”  Further, “evidence suggests [Certificate of Need] laws are ineffective,” and “[t]here is no compelling evidence suggesting that [Certificate of Need] laws improve quality or access, inefficiently or otherwise.”  Lastly, Certificate of Need laws impose costly barriers to provider entry and interfere “with market forces that normally determine the supply of facilities and services,” which can lead to the suppression of supplies, misallocation of resources, and shielding of “incumbent healthcare providers from competition from new entrants.” 

Since the publication of the Report, several states, including Georgia, South Carolina, Virginia, and Alaska, have proposed legislation to either reduce the scope of Certificate of Need laws or to repeal them altogether.  Interestingly enough, moving in the opposite direction, Indiana has introduced legislation that would create a new Certificate of Need law. 

With legislators across the aisle concerned about the increasingly high costs of healthcare, and the Report’s arguments that Certificate of Need laws have been ineffective, the Report may serve as a catalyst to repealing individual Certificate of Need requirements in various states, including New Jersey. 

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New Jersey Supreme Court’s Decision in Kernahan v. Home Warranty Administrator of Florida, Inc. May Be Another Step Towards the Evolution Away From the Courts and State Law Remedies

by Robert B. Hille

New Jersey recently acknowledged the diminished judicial role in contract disputes presented by arbitration clauses and federal preemption. 

            In Kernahan v. Home Warranty Administrator of Florida, Inc., A-15-17 (079680), decided on January 10, 2019, the New Jersey Supreme Court “sidestepped” an opportunity to confront whether its treatment of the validity of arbitration clauses collides with federal preemption under the United States Supreme Court decision in Kindred Nursing Ctrs, L.P. v. Clark, 137 S. Ct. 1421 (2017) and the Federal Arbitration Act, (“FAA”) 9 U.S.C. §§1-16. 

            New Jersey’s approach is embodied in Atalese v. U.S. Legal Services Group, L.P., 219 N.J. 430 (2014).   There, the New Jersey Supreme Court refused to enforce an arbitration provision in a consumer contract for debt adjustment services.  Applying contract law, the Court concluded that the arbitration agreement lacked mutuality of assent because it failed to adequately explain to a reasonable consumer that they waived their right to sue.

            Atalese can be viewed as the New Jersey Supreme Court’s effort to flex its jurisdictional muscle to control the review over contract disputes in response to the proliferation of arbitration clauses, especially in consumer contracts. Atalese can also be viewed as the Court’s effort to protect state law remedies against limits imposed in arbitration clauses.

            As a result, Kindred raises the question of whether New Jersey’s approach in Atalese has been overruled.

Unfortunately, Kernahan is not helpful in answering this question because the arbitration clause there had contradictory and confusing language that could not pass muster under ordinary contract principles.  The Kernahan arbitration provision was buried in a section entitled “Mediation” despite a basic difference between the two concepts. The section also contained smaller font size than that required by New Jersey’s Plain Language Act.  N.J.S.A. 56:12-1 to 13.  In recognition of these failures, the proponent of arbitration withdrew its challenge that Atalese was overruled by Kindred.  The result was that the New Jersey Supreme Court was able to invalidate the agreement in the context of that consumer contract because the parties lacked mutual assent to waive access to the courts and limit state law remedies.

            While Kernahan suggests that Atalese has survived for the time being, the tension between federal hostility toward invalidation of arbitration agreements and the states’ protectiveness over its consumers is palpable. 

            The FAA favors arbitration agreements, and Kindred prohibits states from targeting arbitration agreements and subjecting them to separate treatment and greater scrutiny. Federal law can require arbitration even on the question of whether the parties agreed to arbitrate.  Henry Schein, Inc v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019).

 This resulting tension will require courts, including New Jersey’s, to dance around Kindred when exercising jurisdiction over contract disputes. 

            Given the proliferation of arbitration agreements, a direct challenge to New Jersey’s ability to determine these disputes pursuant to Atalese is inevitable. 

Kindred and the FAA have likely already led to a significant reduction in state court litigation. Kindred and Kernahan provide instruction on how to structure arbitration agreements to withstand challenges to their validity. 

Kindred also compels a review of current legal restrictions that have singled out arbitration clauses.  

            For instance, a question of validity may exist for the New Jersey Supreme Court’s discouragement of arbitration clauses in attorney engagement agreements. It could be argued that restrictions on such agreements unfairly single out arbitration provisions in violation of the holding in Kindred.  Another example is whether the limited scope of the attorney fee arbitration rules discriminates against the use of more expanded arbitration agreements between attorneys and clients and therefore violates the holding in Kindred.

            This tension in the law will fuel an eventual collision between government protections and the private sector’s desire to avoid courts and legal remedies.

This most likely will occur where a consumer wants to reject an arbitration provision, but is required to do so by the services or goods provider.  Ordinarily, a consumer is presented with only two choices when purchasing a service or product. One is “I agree.” The other is “I do not agree” to the seller’s terms. By checking “I do not agree,” the consumer is ordinarily denied the benefit of what is offered.  Absent is a selection for “amendment” and any ability to negotiate any of the terms.  Kindred offers nothing to suggest a different approach to enforcement would be permitted in such “take it or leave it” circumstances.

            As certain companies control an ever bigger piece of what we use and do, such clauses will enable them to limit consumer rights and entitlements and redirect the resolution of disputes away from the courts to a system they control. 

            The basic question to all of this is whether Kindred is another step in the evolutionary process away from courts entirely and whether Kernahan is New Jersey’s recognition of its limited ability to redirect that evolutionary process. 

            This is a story to be continued……

Hospital-With-Hospital Joint Ventures

by Glenn P. Prives

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.