demystifying commercial reasonableness in physician/hospital transactions

February 11, 2016

Prepared for the Georgia Society of CPAs Healthcare Conference

Demystifying Commercial Reasonableness in Physician/

Hospital TransactionsPresented by:

W. Lyle Oelrich, Jr., PrincipalPershing Yoakley & Associates, P.C.

The Georgia Society of CPAsHealth Care Conference

February 11, 2016

February 11, 2016


Introduction – Why Are We Here Today?

February 11, 2016


Commercial Reasonableness Definition

AnHHS has interpreted

“commercially reasonable”

Stark II Phase II also suggests

Additionally, OIG has stated

“An arrangement that appears to be a sensible, prudent business agreement, from the perspective of the particular parties involved, even in the absence of any potential referrals.”

“An arrangement will be considered ‘commercially reasonable’ in the absence of referrals if the arrangement would make commercial sense if entered into by a reasonable entity of similar type and size and a reasonable physician of similar scope and specialty, even if there were no potential DHS referrals.”

In order to meet the threshold of commercial reasonableness, compensation arrangements with physicians should be “reasonable and necessary.”

February 11, 2016


Commercial Reasonableness vs. Fair Market Value

Commercial Reasonableness vs. Fair Market Value

Commercial reasonableness is slightly different from fair market value.

Does the transaction make cents sense?

Was this a good business arrangement to enter into in the first place?Is there a legitimate business reason to enter into this agreement?Was it commercially reasonable even if there are no referrals between the parties?Do the underlying economics of the transaction make sense?

Fair Market Value (NARROW) Commercial Reasonableness (BROAD)

What is the range of dollars you are going to pay for the space/ services?

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Assessing Commercial Reasonableness

Unique Facts and

Circumstances

Commercial Reasonableness

Definition and Regulations

Court Guidance

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Judicial Guidance Involving Commercial Reasonableness

United States ex. rel., Kaczmarczyk v. SCCI Hospital Ventures

Outcome: $10,000,000 Settlement

Key Background Qui tam action Entered into medical

directorship relationships across multiple hospital campuses within the system

Key Findings Low patient census did

not warrant multiple medical directors

Certain paid duties overlapped with medical staff bylaw requirements

Inadequate oversight and enforcement of compliance measures

February 11, 2016


Judicial Guidance Involving Commercial Reasonableness

United States v. Campbell

Outcome: $8,330,000 Settlement

Key Background According to the published

opinion, hospital partnered with local cardiologists to secure referrals

Offered part-time positions to provide principally academic services

Key Findings Physicians were not required to

perform the majority of duties outlined in agreement

Lack of qualifications to be a professor

Court reasoned that physician’s title and compensation were commercially unreasonable, regardless of whether the compensation was fair market value

February 11, 2016


Commercial Reasonableness Approach

Five PartAnalysis

Business Purpose Analysis

Provider Analysis

Facility Analysis

Resource Analysis

Independence & Oversight Analysis

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Business Purpose AnalysisBusiness Purpose AnalysisWhat environment (i.e., mission, vision, service area, service line, organizational history) will the proposed arrangement operate?

Does the arrangement being pursued address any unmet community need or service?

Does the proposed arrangement effectuate a legitimate business purpose that is essential to the functioning of the entity?

Are the services contemplated in the proposed agreement related to the business and/or clinical plans and strategies of the entity?

Do the proposed services contribute to the provider’s profits and/or the development of a particular service line without requiring income from proscribed referrals?

February 11, 2016


Provider AnalysisProvider AnalysisDoes the proposed arrangement require a physician to perform the services?

Does the proposed arrangement require a physician of a certain specialty to perform the services?

Does any specialized training and/or experience of the provider exist that should be taken into account when evaluating the proposed arrangement?

Are the particular nature of the duties and corresponding amount of accountability associated with the proposed arrangement clearly defined and reasonable?

Is the amount of time demanded of the physician under the proposed arrangement reasonable?

Do any salary considerations exist that should be evaluated in relation to providers of similar specialty and experience in comparable organizations and positions?

February 11, 2016


Facility AnalysisFacility AnalysisAre patient demand, the number of hospital patients, and/or the community need sufficient to justify the services?

Are patient acuity levels such that the proposed services are necessary?

Do patient needs dictate the necessity for a separate and distinct provider for the proposed services?

Are the size of the hospital and the relevant department appropriate for the proposed services?

February 11, 2016


Resource AnalysisResource AnalysisIs the proposed arrangement a necessary addition to the managerial and administrative efforts already required by the medical staff bylaws?

Has the number of committees and/or meetings that otherwise require physician attendance outside of the proposed arrangement been considered?

If the healthcare entity is part of a larger health system, do patient care protocols and procedures exist that can be coordinated among its facilities in lieu of the proposed arrangement?

Does the proposed arrangement lend itself to the potential for duplication or misuse?

Does the healthcare entity maintain any features, controls, and/or safeguards to reduce or eliminate the potential for risks of duplication or misuse?

February 11, 2016


Independence and Oversight Analysis

Independence and Oversight Analysis

Does the healthcare entity use performance assessments to determine whether new or existing provider arrangements should be reduced (e.g., hours condensed) or eliminated?

Does the entity maintain a formal process for executive management and legal counsel to review and approve the proposed arrangement?

Does the provider engage in appropriate monitoring to determine:

• Whether services specified in similar arrangements are actually performed?

• The total amount of funds spent for such services?

• A verifiable outcome resulting from the arrangement?

Will the entity engage in regular assessments of the proposed arrangement that clearly show its effectiveness and demonstrate a legitimate need for continuation and/or renewal?

Is there a written agreement that addresses the terms of the proposed arrangement?

February 11, 2016


W. Lyle Oelrich, Jr., PrincipalPershing Yoakley & Associates, P.C.

[email protected]