forming physician multispecialty practices: key legal...

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Forming Physician Multispecialty Forming Physician Multispecialty Group Practices: Key Legal ConsiderationsEvaluating Compensation Models, Negotiating Business Contracts, and Complying With Federal and State Laws

T d ’ f l f

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, SEPTEMBER 8, 2011

Today’s faculty features:

Adam J. Rogers, Partner, McDermott Will & Emery, Miami, Fla.

William L. Weiner, Partner, Duane Morris, Cherry Hill, N.J.

Wallis S. Stromberg, Of Counsel, Davis Graham & Stubbs, Denver

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Forming Physician Multispecialty Group Practices: Key Legal ConsiderationsPractices: Key Legal Considerations

Strafford WebinarSeptember 8, 2011

Adam J. Rogers, Esq.McDermott Will & Emery LLP

www.mwe.com

[email protected]

Boston Brussels Chicago Düsseldorf London Los Angeles Miami Munich New York Orange County Rome San Diego Silicon Valley Washington, D.C.

© 2007 McDermott Will & Emery LLP. McDermott operates its practice through separate legal entities in each of the countries where it has offices.

Overview

Group Formation Considerations

Adding Physicians/Practices Through Mergers and AcquisitionsAdding Physicians/Practices Through Mergers and Acquisitions

Compensation Models and Regulatory Concerns

Hospital, Private Equity and Other Non-Physician Participation

Q & A

6

Group Formation ConsiderationsSample of Reasons For Forming or Joining a Physician Multispecialty Group Practice

– Ancillary Services – Bargaining Power– Synergies Between or Among Certain Specialties– “Diversified Portfolio”– Platform Ready-Made for Health Reform and Move Toward y

Integrated Care (e.g. ACOs)

7

Group Formation Considerations (Cont.) Preliminary Considerations

– Partners, Specialties, Level of Integration (e.g., Single Integrated Practice versus a “Group Without Walls”)

Choice of Entity Choice of Entity– Corporate Practice Limitations – Business Considerations

Tax Issues– Initial Election– Transaction Considerations

• “Begin With The End In Mind”

Governing Documents Governing Documents

Benefits Issues

EHR

8

EHR

Physician Multispecialty Group Practices: Key Legal Considerations

September 8, 2011

Wallis S. Stromberg, Esq.

Davis Graham & Stubbs LLP | www.dgslaw.com

Compensation Systems f M lti S i ltfor Multi-Specialty

Groups

• Purpose of a compensation system is to incentivize behavior and reward desired performance

• It’s hard to keep physicians happy in a single-specialty group – multi-specialty groups just add more complicationscomplications– The more diverse the specialties, the more the complexity

• Variations in reimbursement or payment– Procedures vs. Cognitive (E&M)– Payer and patient mix can have wide variations– Capitation and cost-saving programs cause divergent interestsCapitation and cost saving programs cause divergent interests


10

Compensation Systems f M lti S i ltfor Multi-Specialty

Groups, cont’d

• Variations in consumption of resources

– Overhead needs are different for primary care office-based specialists and proceduralists

– Overhead needs can be inverse of reimbursement levels– Overhead needs can be inverse of reimbursement levels

– Subsidizing others’ incomes


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Common Factors Looked t i C tiat in Compensation

Systems

• Industry surveys of compensation and work RVU’s (wRVU’s) by specialty

• Historic production• Equality of effect and participation• Personal productivity and incentives• Overhead allocations

Quality/Outcome measures• Quality/Outcome measures• Citizenship• Ancillary ServicesAncillary Services


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Stark Rules for Ph i i GPhysician Group

Practices

Generally:• Overhead expenses of and income from the practice must be• Overhead expenses of and income from the practice must be

distributed pursuant to a prospective methodology• Centralized decision-making on budget, compensation and

l isalaries• Location and specialty based compensation are permitted for

non-DHS revenues• No physician may be compensated in any manner that is

based, directly or indirectly on the volume or value of his or her referralsreferrals


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Stark Rules for Ph i i GPhysician Group Practices, cont’d

• A physician may be paid a share of the practice’s overall profits from DHSprofits from DHS

• A physician may be paid a productivity bonus for services personally performed or for services incident to personally performed servicesperformed services

• So long as the bonus or share is not determined in any manner that is directly related to the volume or value of the physician’s referrals for DHS


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O ll P fitOverall Profits

• The Group’s total profits from DHSor

• The profits from DHS from any component of the group that consists of at least 5 physicians

• Must be a verifiable and reasonable methodology for the division that is not related to the volume or value of DHS referrals

• Three “safe harbors”(1) A per capita division of profits(2) Proportionate to Group’s revenue that is not from DHS payable by either a(2) Proportionate to Group s revenue that is not from DHS payable by either a

federal program or a private payer(3) Revenues from DHS are less than 5% of Group’s total revenue and each

physician’s allocation is less than 5% of his or her total compensation


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P d ti it BProductivity Bonus

• Personal services or services incident to the physician’s services

• Calculated using a reasonable and verifiable• Calculated using a reasonable and verifiable methodology not related to the volume or value of DHS referrals

• 3 “safe harbors”(1) RVU based or by patient encounters(2) allocated by compensation from services that are not DHS payable(2) allocated by compensation from services that are not DHS payable

by a federal program or private payer(3) Revenues from DHS are less than 5% of Group’s total revenues

and each physician’s allocation is less than 5% of his/her total p ycompensation


16

Examples of Compensation SystemsCompensation Systems

for Multi-Specialty Practices

• Fixed salaries• Eliminates uncertainty for physician

• Puts all risk on group for overhead, insufficientPuts all risk on group for overhead, insufficient production or reduced reimbursement

• Have to have periodic recalculation, based on p ,actual revenues or productivity

• More common in very large groupsy g g p


17

Examples of Compensation SystemsCompensation Systems

for Multi-Specialty Practices, cont’d

• Classic “Eat What You Kill” compensation• Collected revenues for physician’s services less

allocated overhead• Methodology of allocating overhead becomes the focus• Methodology of allocating overhead becomes the focus

• Fixed vs. variable• Per capital divisionp• Productivity division


18

Examples ofExamples of Compensation Systems

• Base salary with productivity incentiveM t h f lti i lt• Most common approach for multi-specialty groups

• Base salary derived from historic revenue production or compensation surveysproduction or compensation surveys

• Median to 60th Percentile as base

• Incentive calculated from production in excess of th t d d d f th b lthe standards used for the base salary


19

Examples of C tiCompensation

Systems, cont’d

• Equality: “Everyone Contributes”• Some Groups will set aside a portion of revenue forSome Groups will set aside a portion of revenue for

equal division• Probably only minority

• Ancillary services profits• Surveys have indicated that most multi-specialty groups

use profit from ancillaries to lower general overheaduse profit from ancillaries to lower general overhead, and do not use as individual compensation

• “Incident to” ancillaries can be key piece of some specialists’ compensation (e g drug infusion profits)specialists compensation (e.g., drug infusion profits)


20

P d ti it MProductivity Measures

• Collections: all the bad incentives of FFS PaymentsFFS Payments

• wRVU’s:• Generally seen as fair among specialties, but

somewhat arbitrary

• Still subject to negotiation on dollars

• Not necessarily representative of the Group’s goals f i ti d ffor incentives and performance


21

Productivity Measures,Productivity Measures, cont’d

• Quality/Outcomes• Set targets and reward physicians

• Pool set aside for this (2-7%), percent of salary or assign wRVU’swRVU s

• Minority of Groups have used this measure in compensation system, though growing number adopting

• Outreach/Leadership• Stipends for participation or assign wRVU’s


22

N P f t S tNo Perfect System

• Every Group will have own solution• Need to review on regular basis• Hospital employment of physicians is bringing new

creativity to the problem• Doctors usually have no easy exit and little control so want• Doctors usually have no easy exit and little control, so want

better system• Incorporating concepts from Medical Directorships and Co-

Management into compensation planManagement into compensation plan• Assigning value to the management contributions doctors

bring to the table when full-time employees


23

Pl i f F tPlanning for Future

• ACO’s: “shared savings” probably not enough incentive to change behavior or compensationincentive to change behavior or compensation systems

• Risk sharing through global payments or capitation from private payers or government will force Groups to rethink compensationwill force Groups to rethink compensation


24

C t t I f tiContact Information

Wallis S. Stromberg, Esq.

ll t b @d [email protected](303) 892-7478

Davis Graham & Stubbs LLP1550 Seventeenth Street, Suite 500

Denver, Colorado 80202-1500


25

Addi Ph i i Th hAdding Physicians Through Mergers and Acquisitionsg q

www.duanemorris.com27

Determining Purchase Price

• Typically, no consideration paid to h i i / ti th t j i b t i t fphysicians/practices that join, but in event of

departures, buy/sell provisions shall control Wh t i th l f d ti h i i ’• What is the value of a departing physician’s ownership interest?

( ) (• Various (re)purchase price methodologies (is goodwill included ?)


Determining Purchase Price(Cont’d) ( )

– Fixed pricep– Book value (plus goodwill as a percentage of

collections?)– Appraised value– Interest in specific assets

Prior compensation– Prior compensation


Determining The Purchase Price: (Cont’d) ( )

• Which of the above is most acceptable to i h i i ?merging physicians?

• Determine length of payout– Typically, 3-5 years, with downpayment, monthly

installments, and interest– Group may obtain life insurance to fund purchase price– Group may obtain life insurance to fund purchase price

in event of departure due to death– Payments cease in event of competition following

www.duanemorris.com

departure

30

What Are The Key Deal Terms/Issues?

• Partial retirement• Confidentiality/letter of intentConfidentiality/letter of intent

– “No shop” clause

• Name• Name• Governance/management

Board of directors– Board of directors– Practice management vs. clinical decisions

• Equity interests/voting rights

www.duanemorris.com

• Equity interests/voting rights

31

What Are The Key Deal Terms/Issues? (Cont’d)( )• Compensation – different models

– Fixed salary– Salary and bonus– Individual collections and pro rata share of overhead– Individual collections minus equal share of fixed

expenses and pro rata share of variable expensesIndividual collections minus equal share of fixed– Individual collections minus equal share of fixed expenses less pro rata share of variable expenses less direct expenses

www.duanemorris.com

– Equal share32

What Are The Key Deal Terms/Issues?(Cont’d)( )

• Financial models?– What will the new group look like?

– Ancillary services – sharing of revenue/expenses

P l• Personnel– Reducing/compensating staff

Single administrator– Single administrator– Employee benefits/policies



• Joint billing and collection activities– Need for integration– Centralized billing and collections, including location,

staffing and network computerized billing system withstaffing and network computerized billing system with other offices

• Contributions of accounts receivable/accountsContributions of accounts receivable/accounts payable



• Other operational issues – New provider numbers– Notification of third party payers

M l ti i– Malpractice carrier– Electronic medical records system



• Bailout provisions– Pros and cons– Used to gain support, but can discourage cooperation

and compromiseand compromise– May wish to include length of term to exercise penalty-

free bailout

• Restrictive covenants


Physician Employment Contract –Salient Issues• Initial term/renewal

Probationary period?– Probationary period?

• Scope of dutiesCall coverage– Call coverage

– Administrative duties

• Compensation• Compensation– Fair market value of entire compensation package,

including benefits, demonstrating reasonable

www.duanemorris.com

g , gcompensation

37

Physician Employment Contract –Salient Issues (Cont’d)( )

• Vacation and sick leave/CME credits• Professional liability insurance

– Type and amount to be paid

• Right to fees• Managed care agreements• Patient records

– Post-termination access


Physician Employment Contract –Salient Issues (Cont’d)( )

• Reps and warranties– Pre-employment liabilities– Pre-employment liabilities

• Reporting obligations• Termination• Termination

– For cause– Without cause– Without cause– Upon death or disability

• Non-competition/non-solicitation/non-

www.duanemorris.com

Non competition/non solicitation/nondisparagement

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Promoting Associates To Partners –Equity Statusq y

• Typically, employment arrangements with h i i d ti i t d d t l d tphysician-owned practices intended to lead to

partnership/ownership in exchange for building patient basepatient base– Provide for regular performance reviews (annually or

semi-annually)se a ua y)– Provide for time period prior to end of employment term

that physician shall be notified as to whether he or she h ll b ff d it t k

www.duanemorris.com

shall be offered equity stake

40

Promoting Associates To Partners –Equity Status (Cont’d)q y ( )

– Employment agreement may provide for percentage of it t k if ff d b t tequity stake, if offered, but no guarantee.

– Due to ever-changing and unpredictable practice environment do not include formula for calculatingenvironment, do not include formula for calculating buy-in price

• Ramifications of buy-in pricey p– Affects entire practice, not just physician’s employment


Promoting Associates To Partners –Equity Status (Cont’d)q y ( )

– If practice makes money from physician’s period of employment, buy-in price might be lower, but if practice’s net return is low, buy-in price may be higherIf physician negotiates lower buy in price buy out price– If physician negotiates lower buy-in price, buy-out price for retiring physicians may be affected – could cause resentment among senior physicians ready to retire

– Could also affect future capital obligations of group by reducing reserve needed to buy out retiring partners


WILLIAM L WEINERWILLIAM L. WEINERPartnerDuane Morris LLPS it 200Suite 2001940 Route 70 EastCherry Hill, NJ 08003USAUSA

Phone: +1 856 874 4212F 1 609 228 5930Fax: +1 609 228 5930Email: [email protected]


Forming Physician Multispecialty Group Practices: Key Legal ConsiderationsPractices: Key Legal Considerations

Strafford WebinarSeptember 8, 2011

Adam J. Rogers, Esq.McDermott Will & Emery LLP

www.mwe.com

[email protected]

Boston Brussels Chicago Düsseldorf London Los Angeles Miami Munich New York Orange County Rome San Diego Silicon Valley Washington, D.C.

© 2007 McDermott Will & Emery LLP. McDermott operates its practice through separate legal entities in each of the countries where it has offices.

H it l P i t E it d Oth NHospital, Private Equity and Other Non-Physician ParticipationConfluence of Events Have Led to a Surge in Healthcare Investments and M&A Generally

Multispecialty Group Practices Can Position Themselves Well as the Landscape of Healthcare Changes

– State of the (U.S. Healthcare) Union:I 2009 T t l H lth E dit R h d $2 5 T illi Whi h T l t t• In 2009 Total Health Expenditures Reached $2.5 Trillion, Which Translates to 17.6 Percent of the Nation's Gross Domestic Product*

• According to a June 2010 Commonwealth Fund Report, Americans Spend Twice as Much as Residents of Other Developed Countries on Healthcare, but Get Lower Quality and Less EfficiencyGet Lower Quality and Less Efficiency

– Providers Will Be Asked to “Do More With Less”– Multispecialty Physician Practices and Their Investors Can Benefit from

Shift Toward Greater Clinical Integration

45

*http://www.cms.gov/NationalHealthExpendData/02_NationalHealthAccountsHistorical.asp#TopOfPage

H it l P i t E it d Oth NHospital, Private Equity and Other Non-Physician Participation (Cont.)Hospitals

– Currently, the Most Active Player in Multispecialty Physician Practice Mergers, Acquisitions and Affiliations/Investments

– Not Limited to For Profit Hospitals/Systems– Not Limited to For Profit Hospitals/Systems– Potential Antitrust Issues

Private Equity– Physician Practice Investments Have Generally Been Focused on

Hospital (or Facility)-Based Physicians (e.g., Anesthesia, Radiology, Hospitalists)

– Focus on Healthcare Increasing and Uptick in Hospital Investment Will E I t t M P ti A i iti d O t itiExpose Investors to More Practice Acquisitions and Opportunities

Other Investors

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R l t B i t N Ph i iRegulatory Barriers to Non-Physician ParticipationCorporate Practice of Medicine

– Most States Still Have Laws Prohibiting, to Varying Degrees, the “Corporate Practice of Medicine” (“CPOM”)Practice of Medicine ( CPOM )

– CPOM States Generally Prevent Unlicensed Lay Entities from Employing Physicians or Otherwise Contracting with Physicians to Furnish Medical Care

– CPOM Laws May Limit the Flexibility of Physicians and Non-Physicians to St t O hi d E l t A tStructure Ownership and Employment Arrangements

Some States with Strong CPOM Laws (e.g., California, Nevada, and Texas) Even Prohibit Hospitals from Employing Physicians, but HaveTexas) Even Prohibit Hospitals from Employing Physicians, but Have Laws Permitting Nonprofit “medical foundations” to Engage Physicians (e.g., Through Their Existing Medical Group) Indirectly to Provide Medical Care

47

R l t B i t N Ph i iRegulatory Barriers to Non-Physician Participation (Cont.) Fee-Splitting

– Typically Defined to Include Unearned Division of Professional Medical Fee with Layperson/Lay Entity and/or Payment for Referrals

– Some States Without CPOM Prohibition Still Have Fee-Splitting Limitations that Can be Triggered by Certain Non-Physician Participation Models (e.g. Florida)D t ti f F i M k t V l f S i i K– Documentation of Fair Market Value of Services is Key

Others

Investments and Business Models in States with These Barriers Will Require Careful Regulatory Analysis to Minimize Regulatory Risk

48

Management Model

Non-Physician Investor(s)

Friendly Physician1

100% ownershipLong-Term Management

Services Contract (“MSC”) 2

Management Multispecialty

100% ownership

Fair Market Value Management Fee

Management Company Physician

Practice3

1 Physician licensed in applicable state, generally will enter into a stock transfer restriction agreement (or have same incorporated into MSC), but stock transfer restrictions are prohibited in some jurisdictions (e.g., New York)2 Management Company is typically either the former practice entity (and medical assets are spun out into new practice entity), which is acquired by the non-physician investor(s) or is a NEWCO that acquires the non-medical assets It then provides the Mutlispecialty Physician Practice with use of those assets

49

physician investor(s) or is a NEWCO that acquires the non medical assets. It then provides the Mutlispecialty Physician Practice with use of those assets (typically including real estate – whether owner or leased) and turnkey management and administrative services 3 Has provider number(s), payor contracts, employs and/or contracts with physicians

Management Model (Cont.)

Management Agreement Terms are Key to Success of Arrangement

ProsPros– In CPOM States, Allows for Non-Physician “Ownership” of Practice– Subsequent Transactions at Management Company Level Have Minimal

Impact on PracticeImpact on Practice

ConsRisks of Friendly Physician– Risks of Friendly Physician

– Can Be Limitations On Management Fees

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E l f Di t P ti A i itiExample of Direct Practice Acquisition (Asset Deal)

Health Care System

Hospital HAPGMultispecialty

Physician Practice

FMV Purchase Price

p Physician PracticeAssets

EmployeesPhysicians Become Employees of Hospital Affiliated Physician Group

51

Physician Group

E l f Di t P ti A i itiExample of Direct Practice Acquisition (Asset Deal) (Cont.)

Asset Purchase– Physician Employee Model

– Foundation Model

Stock PurchaseStock Purchase

Mergerg

52

Foundation Model

Affiliated Hospital

100% Membership

Medical FoundationThird Party Managed Care

PSA

Medical Foundation PayorsContracts

PSA PSA

Multispecialty Group

P ti

Group Practice

Group Practice

53

Practice PracticePractice

Foundation Model (Cont.)

Pros:– Physician Practices (and Physicians) Retain Their Provider Numbers and

the Practice Retains its Relationships with Owners and Physicians– The Foundation Bills for the Professional Services and Compensates the

Physician Practice Pursuant to An Agreed Upon FormulaCons:

– It May Be More Difficult for the Practice to Return to the “status quo,” as Certain Third-Party Payor Contracts and Provider Numbers May Expire

– Integration is Not as Complete as with Regard to Other Joint Venture or Employment Models

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Question and Answers

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