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.

Will the Broadly Drafted Eliminating Kickbacks in Recovery Act Lead to Compliance Complications for Providers?

by Megan R. George

As opioid use continues to rise in the United States and the number of opioid related deaths increases year over year, the federal government and some state governments have enacted legislation to deal with an array of opioid related topics including, but not limited to, patient treatment and provider regulations. On October 24, 2018, Congress enacted the Substance Use-Disorder Prevention that Promotes Opioid Recovery and Treatment (“SUPPORT”) for Patients and Communities Act as a comprehensive bill to combat opioid use. One component of the SUPPORT Act is the Eliminating Kickbacks in Recovery Act of 2018 (“EKRA”), eliminating kickbacks in arrangements with clinical treatment facilities, sober living homes, and laboratories or “patient brokering.” While similar to the current federal Anti-Kickback Statute (the “AKS”) that prohibits the knowing and willful payment of remuneration to induce or reward patient referrals of federal health care program business, the EKRA is not limited to services payable by federal health care programs. EKRA makes it a criminal offense to engage in the following: (a) solicit or receive any remuneration, directly or indirectly, in return for referring an individual to a clinical treatment facility, recovery home, or laboratory; or (b) offer or pay a kickback to induce a referral of an individual to a recovery home, clinical treatment facility, or laboratory, or in exchange for an individual using the services of a recovery home, clinical treatment facility, or laboratory.

While the intent of the EKRA seems straight-forward, the language contains many ambiguities leaving providers uncertain as to its scope. For example, EKRA adopts the definition of “laboratory” as used in the statute governing federal licensure of clinical laboratories, including facilities used to examine biological, microbiological, hematological, and pathological materials derived from the human body. Because EKRA chose to define laboratory in such a way, criminal liability under EKRA could extend to any clinical laboratory, even those that do not provide services related to substance abuse. Similarly, the definition for “clinical treatment facility” is overly broad. Under that definition, any facility that provides detoxification, risk reduction, outpatient treatment and care, residential treatment, or rehabilitation for substance use can be considered a clinical treatment facility. Like with laboratories, a medical provider could be subject to criminal charges due to the referral of patients to another medical provider that provides these types of treatments to patients.

The EKRA contains many safe harbors similar to those in the AKS. Most notably, the EKRA contains safe harbors for the following: (a) a payment to a bona fide employee or independent contractor, if the payment is not tied to the number of individuals referred, number of tests or procedures performed, or amount billed to or received from the referred individual’s health care benefit program; (b) a payment made as compensation under a personal services and management contract that meets the requirements of 42 C.F.R. § 1001.952(d); (c) a waiver or discount of any coinsurance or copayment by a health care benefit program if it is not routinely provided and is provided in good faith; and (d) discount or price reduction under a health care benefit program if properly disclosed and appropriately reflected in the costs claimed or charges made by the provider or entity.

Unlike the AKS, which allows for incentive based compensation for employees, the safe harbor under the EKRA explicitly states that payment to bona fide employees or independent contractors cannot vary based upon the number of individuals referred, the number of tests performed, or the amount billed or received. Because of this narrow safe harbor, laboratories that were mentioned above (i.e., those that do not perform substance abuse testing) could be in violation of the EKRA while still in compliance with the AKS. Because of this potential compliance issue, clinical laboratories must be aware of the EKRA and ensure compliance with the strict requirements or risk violation of the statute. Clinical laboratories should evaluate their relationships with all referral sources to ensure that there is no remuneration in exchange for patient referrals. Similarly, laboratories should ensure that employees are not being paid on a per test performed basis or receive a bonus payment based on the number of tests performed or the amount billed for testing.

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Recognized Complications of Treatment and Informed Consent Evidence

by John Zen Jackson

It is axiomatic that negligence ordinarily will not be presumed from the occurrence of injury, but must be proven and with the burden in this regard being on the plaintiff. The standard jury charge for medical malpractice cases in New Jersey continues to reflect long-standing case law: “The law recognizes that the practice of medicine is not an exact science. Therefore, the practice of medicine according to accepted medical standards may not prevent a poor or unanticipated result.” Model Civil Jury Charges 5.50A. See, e.g., Schueler v. Strelinger, 43 N.J. 330, 346 (1964).  The poor outcome may be the result of a deviation from accepted standards of care – negligence in its most basic sense.  But when the physician has not disclosed the potential for an adverse event or complication, the doctrine of informed consent can be invoked.  Informed consent is considered a form of medical negligence. Teilhaber v. Greene, 320 N.J. Super. 453, 463 (App. Div. 1999).  New Jersey permits pleadings with alternative and inconsistent theories. R.4:5-6. In many instances, both theories are pursued.  But in some cases involving a treatment complication, no claim for lack of informed consent is advanced.

This has led to a substantial body of case law that holds, in broad terms, that in the absence of a claim for lack of informed consent, evidence of disclosure of risks to the plaintiff patient is irrelevant and should be excluded.  With the decision in Ehrlich v. Sorokin, 451 N.J. Super. 119 (App. Div. 2017), New Jersey joined what has become the majority view.  This was reiterated in a more recent New Jersey decision that was not approved for publication and as to which the Supreme Court denied certification on January 23, 2018. Granovsky v. Chagares, 2017 WL 3480771, 2017 N.J. Super. Unpub. LEXIS 2074 (App. Div. Aug. 15, 2017), certif. denied, 232 N.J. 85 (2018).

The patient in Ehrlich, experiencing back pain and rectal bleeding, had undergone a diagnostic colonoscopy procedure by Dr. Sorokin in 2003 that identified the presence of a polyp in her colon. The patient declined a recommendation for surgery and elected to undergo removal with a colonoscope.  This was done by a different gastroenterologist who referred the patient back to Dr. Sorokin for follow-up monitoring and surveillance of her GI status.  Several procedures were done by Dr. Sorokin for recurrent polyps using different techniques.  Following one of these procedures in which an electric charge was used to vaporize the polyp, the patient was found to have a perforation of her colon and peritonitis.  She underwent surgery to remove a portion of her colon.

Plaintiff intended to proceed at trial only on the assertion of a deviation from accepted standards of care in the manner in which the defendant gastroenterologist had performed this particular procedure.  Plaintiff’s counsel moved in limine to exclude informed consent evidence.  The motion was denied.  The patient was cross-examined with the signed consent form that stated that the procedure could result in injury with perforation and hospitalization for further care.  The jury returned a verdict that the defendant did not breach the standard of care.

In reversing, the Appellate Division found that in the absence of an allegation of lack of informed consent, the information concerning risk disclosure was irrelevant and prejudicial.  Drawing on the analysis developed in various out-of-state cases, the court indicated that a jury’s knowledge of a treatment’s risks, where lack of informed consent is not an issue, does not help the plaintiff prove negligence. Nor does it help the defendant show he was not negligent. In such a case, the admission of evidence concerning a plaintiff’s consent could only serve to confuse the jury because the jury could conclude that consent to the surgery was tantamount to consent to the injury which resulted from that surgery. In effect, the jury could conclude that consent amounted to a waiver of liability for negligence, which is plainly wrong. A patient does not consent to being treated negligently.  Similarly, in Granovsky, the surgeon did an operation to remove the patient’s gallbladder through a laparoscopic cholecystectomy procedure.  In the course of the operation, the common bile duct was cut.  The defense experts stated that common bile duct injuries were known complications of this type of surgery that occur in the absence of negligence.  The defendant also introduced and relied on the signed surgical consent which made reference to possible injury to the common bile duct requiring surgical repair.  The Appellate Division reversed.  It followed the reasoning of Ehrlich that the patient’s knowledge of the risk of bile duct injury was irrelevant to whether the defendant had performed the operation in accordance with accepted standards of care with the risk of confusing the jury.

Neither Ehrlich nor Granovsky established an absolute prohibition on presenting evidence of known risks of a surgical procedure in general as opposed to the discussions with the particular patient.  Indeed, the Granovsky panel noted that in support of an argument that common bile duct injuries can occur in the absence of negligence, a defendant could present evidence of the known risks of a surgical procedure.  The documented presence of the complication on the patient’s surgical consent limits the perception that the claim of “recognized complication” was an after-the-fact excuse.  It also provides a very tangible piece of physical evidence to be used in cross-examining an opposing expert who denies the status of the outcome as a recognized complication of the procedure.

But the Appellate Division indicated that such evidence should be presented “through the testimony of a defense expert regarding the risks of procedure, without reference to what advice the expert provides or what plaintiff was told of the risks of the surgery.” 2017 WL 3480771 at *9, 2017 N.J. Super. Unpub. LEXIS 2074 at *27-28. See also Hayes v. Camel, 927 A.2d 880, 890 (Conn. 2007); Waller v. Aggarwal, 688 N.E.2d 274, 276 (Ohio Ct. App. 1996).  In Brady v. Urbas, 111 A.2d 1155, 1162 (Pa. 2015), the Pennsylvania Supreme Court had seemed to agree with the admissibility of evidence of general risks and complications in a medical negligence claim.

But the Pennsylvania intermediate appellate court in Mitchell v. Shikora, 161 A.2d 90 (Pa. Super. 2017), rejected the admissibility of such evidence even when presented through experts:

The fact that one of the risks and complications of the laparoscopic hysterectomy, i.e., the perforation of the bowel, was the injury suffered by Mitchell does not make it more or less probable that Dr. Shikora conformed to the proper standard of care for a laparoscopic hysterectomy and was negligent. … Moreover, the evidence would tend to mislead and/or confuse the jury by leading it to believe that Mitchell’s injuries were simply the result of the risks and complications of the surgery. … Thus, the risks and complications evidence was immaterial to the issue of whether Defendants’ treatment of Mitchell met the standard of care. Accordingly, we hold that the evidence was inadmissible.   [Id. at 975.]

The Pennsylvania Supreme Court agreed to review this decision and whether it conflicted with the earlier Brady v. Urbas ruling. 174 A.2d 573 (2017). Oral argument took place on October 23, 2018. The forthcoming opinion is something to watch for. Some commentators have remarked that without being able to introduce evidence that a complication occurs in the absence of negligence, the potential is created that the medical negligence claim will be turned into one of strict liability. The occurrence of the complication without the context of how it occurs without breach of the standard of care would effectively create a presumption of liability. Such an outcome in the Mitchell case would represent a tectonic shift in principles of medical liability law.

Dental Practice and Private Equity-backed Dental Support Organization Settle With Government Regarding Allegations of Improper Billing and Violations of the Corporate Practice of Dentistry

by Parampreet Singh

ImmediaDent of Indiana, LLC (“ImmediaDent”), the operator of nine dental care practices in Indiana, and Samson Dental Partners, LLC (“Samson”), the provider of administrative support services to ImmediaDent, have agreed to pay $5.1 million to settle allegations of improper Medicaid billing and violations of the Indiana corporate practice of dentistry.  As part of the settlement, the two companies will pay approximately $3.4 million to the federal government and $1.78 million to the State of Indiana.

ImmediaDent owns and operates thirty-three dental locations in Indiana, Kentucky, and Ohio.  Kansas-based Samson provides management, administrative, and other support services to ImmediaDent, but does not have an ownership interest in ImmediaDent.

The U.S. Attorney’s Office intervened in this matter after Dr. Jihaad Abdul-Majid filed a qui tam, or whistleblower, suit in February 2013 against ImmediaDent and Samson in federal court.  According to the complaint, Dr. Abdul-Majid worked for ImmediaDent from July 2011 to March 2012.  His efforts to speak out against the alleged false billing practices he witnessed resulted in the termination of his employment.

Allegations constituting improper Medicaid billing by the two entities included billing tooth extractions as surgical extractions and billing for “deep cleanings” that were never performed or were not medically necessary.  Further, Samson was accused of violating Indiana’s law prohibiting the corporate practice of dentistry, Ind. Code §25-14-1-23.  See also Orthodontic Affiliates, P.C. v. OrthAlliance, Inc., 210 F. Supp. 2d 1054, 1059 (N.D. Ind. 2002).  Specifically, it was alleged that Samson improperly influenced ImmediaDent’s medical professionals and staff by rewarding employees for reaching production goals, disciplining employees for failing to meet production objectives, and exerting influence over staff in a manner that compromised their clinical judgment.

According to the U.S. Attorney’s Office, both companies refused to enter into corporate integrity agreements, which would have required oversight of the company by the United States Department of Health and Human Services, Office of Inspector General (“OIG”).  Corporate integrity agreements typically last for a period of five years and require companies to hire additional compliance staff, develop compliance training, have annual external reviews performed, and submit performance reports to the OIG.  Due to both entities’ refusal to enter into corporate integrity agreements, the OIG has determined that ImmediaDent and Samson “pose a continuing high risk to the federal health care programs and their beneficiaries.”

There is a small, but growing trend, of federal and state governments filing claims against management companies of medical and dental practices, and, in some instances, the private equity firms that invest in these management companies, for the alleged misdeeds of the billing providers.  Even though the firms do not have direct equity interests in the providers themselves, federal and state governments are more closely scrutinizing the influence that the firms have in the providers through the management relationships and trying to argue that such influence is so great that the management companies and the firms should also be liable for the liabilities of the providers.  It is important that management companies and private equity firms take great care in their relationships with health care providers to remain at arms’-length, so as to try to avoid being implicated in these actions.

Beware of the Corporate Practice of Medicine Doctrine In Pennsylvania

by Glenn P. Prives

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.