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LEGAL ISSUES RELEVANT TO HEALTHCARE EQUIPMENT

FINANCINGMike Tobak

GE Healthcare Financial ServicesMay 2007

Note: the discussion in this outline is not complete and should not be construed as legal advice.

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Understanding the Legal Framework

Essentially every business transaction in the healthcare industry is governed by some federal law or regulationFederal government regulates through Medicare and Medicaid programsStates also regulate:– Medicaid program– Insurance laws and regulations– Licensure laws and regulations– Patient safety and protection

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Overview of Legal Issues

Stark Law (Physician Self-Referral Law)Applies to physician referrals of Medicare patients for certain types of services

Federal Anti-kickback StatuteApplies to all programs with any federal funding

Many states have laws that regulate the same types of practices with respect to Medicaid and/or non-federally-funded health care programs

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Risks to Equipment FinancierRisks to equipment financier if arrangement does not meet legal requirements– Nonpayment– Damage to reputation– Potential civil and criminal penalties – Potential exclusion from governmental programs,

effectively preventing providers from doing business with equipment financier

– Risks to enforceability of financing agreementsGovernment may assert that diligence in approving financing terms puts equipment financier on notice of customer’s improper arrangements

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Stark LawRestricts the ability of a physician to refer Medicare patients for designated health services (“DHS”) to an entity with which the physician has a financial relationship unless an exception appliesWill be extended to include Medicaid patients as wellElements of the offense– Physician (broadly defined)– Referral– Designated health service– To an entity with which the physician has a financial

relationship– Medicare reimbursement

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Stark LawPenalties– Denial of payment– Obligation to refund any payments made– Civil money penalty of up to $15,000 per service– $100,000 civil money penalty for circumvention schemes– Exclusion from the Medicare and Medicaid programs

Each of these penalties could have a material impact on the creditworthiness and enforceability of equipment financing arrangement with a customerAny financial arrangement between a referring physician and an entity that provides DHS must meet an applicable Stark exceptionThe Stark Law will never be directly applicable to a transactionbetween the financing company and a physician because there is no referral relationship

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Stark Law-Exceptions

Stark has a special rule that applies to radiologistsRadiologists can generally own or lease imaging equipment without violating StarkMust be careful, however, if the radiologists are involving other types of physicians in the transaction

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Stark Law-ExceptionsExample 1: Group practice purchases or leases imaging equipment for use on the practice’s own patientsMay be properly structured under “in office ancillary services exception” (provided the physician group is a bona fide “group practice” under Stark)Example 2: Physician leases imaging equipment to or from a hospital or another entity with whom the physician has a referral relationshipMay be properly structured under a Stark exception relating to permissible compensation arrangements

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Stark Law-ExceptionsExample 3: Imaging equipment is owned or leased by an imaging center that is owned by physicians or co-owned by physicians and a hospital or other partyIn general, a physician who refers imaging services cannot own an interest in an imaging center and comply with Stark unless:– The physician is a radiologist– The imaging center is located in a rural area (an area

not classified as a Metropolitan Statistical Area)– The imaging center is a publicly traded entity– The physician does not refer Medicare patients– The imaging center provides services “under

arrangements” to a hospital

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Anti-kickback StatuteUnlike Stark Law, Anti-Kickback Statute is intent-based statute that is not limited to DHS– Prohibits offer, solicitation, payment or receipt of

remuneration if intent is to induce referrals of patients or other business paid for in whole or in part by a federal health care program

Not limited to arrangements involving physiciansPenalties:– Felony conviction: fined not more than $25,000 or

imprisoned for not more than five years, or both, for each violation

– Exclusion from the federal health care programs – Civil monetary penalties of up to $50,000 and three times

the amount of the remuneration for each violation

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Anti-kickback StatuteSafe Harbors

OIG has published a variety of safe harbors that protect certain financial relationships which generally provide protection from prosecution (e.g. space rental and equipment rental safe harbors)Often difficult to satisfy all elements of a safe harbor Arrangements not covered by safe harbor are not “per se” illegal, but must be analyzed based on all relevant facts and circumstancesA transaction that complies with Stark may still have legal risk under the Anti-kickback Statute

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OIG Guidance on Joint Ventures

OIG has identified suspect features of a joint venture, including:– Investors chosen due to status as referral source– Disproportionate investment opportunity to investors expected to

make more referrals– Minimal capital investment by referral sources, with extraordinary

returns relative to risk– Tracking of referrals by venture– Loss of investment interests threatened if referral targets not met– Investors able to borrow their capital investments from other

venture participant(s)OIG Advisory Opinion 04-17 demonstrates continuing OIG concern with “contractual joint ventures” where physicians bill for services obtained contractually from an entity that could provide the services directly

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Recent scrutiny of leasing arrangements

Florida medical imaging center chain under investigationArrangements included services leased to physicians, allegedly discounted equipment leases, and payments for medical director and other services allegedly in excess of the value of services actually performed

Louisiana State Board of Medical Examiners advised physicians that it considers it to be an illegal kickback where a physician refers patients to an imaging center providing MRIs for a fee paid by the referring doctor and the MRIs are billed by the referring doctorIllinois Attorney General intervened in cases to declare a “per click” lease of imaging equipment, personnel for non-Medicare patients illegal under state law (insurance fraud and consumer protection statute)

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Factors increasing risk in leasing arrangements

Lessee physicians do not perform interpretations themselves or otherwise add “value” to the arrangement other than referralsLessor could provide the services to patients itselfArrangements do not fit within safe harborsLease is “per click” rather than fixed compensationLease is not on a fixed block of time basisPhysicians make a profit from the arrangement that is large in comparison to what they add to the arrangement

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Red flags

Arrangements that appear designed to encourage referralsArrangements that provide unnecessary profits to referring physicians (e.g., leasing from referring physicians at a mark-up)Leasing arrangements involving providers as lessors

2007 ELFA LEGAL FORUM

Healthcare Financing

Kevin J. Baum Blank Rome LLP

Regulatory

• Licensing/HIPAA • Imaging Joint Ventures Model/Hospital Service Models • Stark/Anti-kickback

Business Climate

• Expansion and contraction • Reimbursement rates

Workouts

• Limitations on remedies • Unitary creditor theory • Update on bankruptcy amendments/bankruptcy ombudsman

HEALTHCARE INTELLIGENCE OVERVIEW

Healthcare FinanceMarket Overview

CIT Healthcare LLCMay 6, 2007

Cole SilverVice President, Senior Counsel

HEALTHCARE INTELLIGENCE OVERVIEW

Healthcare Finance – Long Term

Outlook for 2007 and beyond• The long-term projection for Healthcare in the United States is for continued growth.• Spending and growth in leasing and secured lending as a means of financing the capital spending

should expand.

• Healthcare Finance Trends and Analysis• Healthcare will be shaped by governmental programs, reimbursement and an aging population. • Government is in complete control and can change the rules at any time.• Risks to Lenders include reimbursement, credit, legal, regulatory, and asset risk.• With the growth of healthcare exposures, can you afford NOT to be in the industry?

Healthcare Intelligence • Healthcare spending could top 11% by 2030.• What will Washington do?• What rules will change? • Is National HC in the cards? • Ask President Hillary Clinton!

HEALTHCARE INTELLIGENCE OVERVIEW

Outlook For Lenders and Lessors

HEALTHCARE INTELLIGENCE OVERVIEW

Healthcare Specific Trends and Analysis

Top Major Items

– Aging Population will demand medical services and more products

– The healthcare market will experience a shortage of workers.

– Hospitals will continue to be difficult to operate against the ASC model.

– Financing healthcare is a unique and growing area

– Not typical leasing or lending due to:

– Reimbursement Rules

– Due diligence on licensing, credit quality and stark anti-

kickback

– Asset recovery is difficult

– Workouts are unique

– Technological obsolesce

– Industry expertise is essential to success

HEALTHCARE INTELLIGENCE OVERVIEW

Healthcare Specific Trends and Analysis

National Healthcare Expenditures

National Healthcare Expenditures 1999-2015

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Source: CMS