The Office of Inspector General (OIG) has released an alert declaring physician compensation agreements that exceed fair market value may violate federal fraud statutes. This is an issue the OIG is not taking lightly and has gained funding in order to investigate and prosecute potential violators. It is imperative that both existing and future compensation agreements be reviewed for compliance.
Potential penalties from past cases have reached as extreme as nearly three times the net asset value of a firm. Prison sentences up to 5 years per violation are also possible for individuals. More than $24 billion has been recovered from False Claim cases since 2009, and more is expected to come.
Go through the valuation process that supports transactional healthcare FMV requirements by performing:
• Detailed situational assessments
• In-depth fact-finding and interviews
• Market analysis, including compensation surveys and data
• Extensive financial modeling
• Rigorous valuation methodologies
Conducting such a review through an independent, third-party appraisal expert can prove beneficial for both financial and reputational purposes.
On June 9, 2015, The Office of Inspector General (OIG) released an alert declaring physician compensation agreements that exceed fair market value may violate federal fraud statutes and be subject to stiff financial penalties and prosecution. For purposes of Stark Law in Title 42 of the Code of Federal Regulations, section 411.351, fair market value is defined as: “the value in arm’s length transactions, consistent with the general market value. ‘General market value’ means the price that an asset or services would bring as a result of a bona fide bargaining between well-informed buyers and sellers who are not otherwise in a business to generate business for the other party . . . on the date of acquisition of the asset or services rendered.” To ensure compliance and protection from financial penalties and/or litigation, a comprehensive review of all existing and future compensation arrangements should be performed by a qualified and experienced appraiser.
Twelve settlements have recently been reached in cases involving alleged violations. Since 2009, more than $24 billion has been recovered through False Claims cases. In U.S. ex rel. Drakeford v. Tuomey Healthcare Systems, Inc., Tuomey Healthcare Systems was found guilty of violating Stark Law and the False Claims Act and faced over $350 million in potential penalties, nearly three times the value of net assets.i Amedisys, Inc. was also affected by the False Claims Act, settling its allegations for $150 million in April of 2014.ii Five-year prison sentences per violation are also a possibility for violators of the Anti-Kickback Statute. Such financial and reputational disasters can be avoided through an independent, third party review/appraisal of your clients’ compensation agreements/plans.
Stark Law and Anti-Kickback compliance are some of the most challenging issues in physician compensation today. Compensation agreements in compliance with Stark Law generally include the following characteristics:
There are various arrangements, in which a physician may legally perform services in exchange for compensation, including:
The key in valuing physician compensation arrangements is to match the compensation paid for services expected to be provided. An appraiser must carefully consider factors such as time requirements, type of arrangement, administrative duties, and supervisory responsibilities.
Fair market value (FMV) reviews of physician service arrangements for clients range from large, multi-state health systems to independent physician practices. Enlisting a firm that specializes in healthcare business valuations for buy-sell and joint venture transactions, tax, and financial reporting purposes can be beneficial.
Going through the valuation process that supports transactional healthcare FMV requirements entails performing:
A market-based method is often used in the fair market value appraisal of a physician compensation arrangement. The best source of market data for comparative analysis is physician compensation surveys. The surveys include data from physician-owned practices and those owned by a health system and are provided by location and type of service. The major providers of survey data are Medical Group Management Association (MGMA), Sullivan, Cotter and Associates, Hospital & Healthcare Compensation Service, American Medical Group Association (AMGA), and Towers Watson Data Services. An appraiser will assess the comparability of the market data with the subject agreement. Productivity is often the primary factor in a benchmarking analysis. Market-based methods based on productivity include the percentile matching technique, median rate technique, compensation by quartile technique, and workload analysis.
The cost approach may be utilized to recreate the cost of providing the same or similar services as outlined in the compensation agreement. A cost buildup method may include market-based data or historical costs that were previously negotiated in an arm’s length transaction. An appraiser may rely upon the historical compensation of a physician as a comparison for compensation under an employment contract. Adjustments can be made depending on similarities or differences in the scope of services provided in the past compared to the proposed arrangement. For example, the employment agreement may include hospital call coverage or administrative responsibilities.
The earnings-based methods analyze the revenues associated with physician services less the cost of providing those services. The physician’s net earnings can be an indication of the value of a physician’s services to an employer. The income approach can be utilized to determine the present value of future economic benefits received by either party to the compensation agreement.
Drakeford v. Toumey Healthcare Systems, Inc.
U.S. v. Campbell
OIG Case against Fairmont Diagnostic Center and Open MRI (Houston)
Baklid-Kunz v. Halifax Hospital Medical Center
Parikh v. Citizens Medical Center
Schubert v. All Children’s Hospital System
Ameritox, Ltd. v. Millennium Laboratories, Inc.
ValueScope’s knowledge of the broader healthcare industry adds valuable insight to the risks and benefits of a sale, acquisition, or services agreements.
ValueScope’s team conducts full audits of billing and compensation processes to determine the effectiveness of Medicare/Medicaid compliance efforts. The healthcare team is adept at working with counsel and financial managers to identify problem areas and create billing, compensation, and compliance solutions. Our team includes experienced economists (PhDs, MSs, and MBAs), Certified Public Accountants, Chartered Financial Analysts, and Certified Valuation Analysts.* We are active members in the National Society of Certified Healthcare Business Consultants and the Medical Group Management Association.
ValueScope clients include:
We have dealt with critical issues such as Medicare cost reporting, cost shifting, reimbursement rate adjustments, beneficiary limits, sequential billing rules, CMS/RAC Audits, “Operation Restore Trust,” platform holding rules, line item limitation rules, HIPAA rules, OIG issues, Stark Law, prospective payment systems, HMO/PPO reimbursement structures, and the continued restructuring of government eligibility and payment rules.
The information presented here is not nor should it be treated as legal, financial, or tax advice and is not intended to be used to make legal or tax decisions.
*ValueScope is not a licensed CPA firm.
PRINCIPAL
ValueScope is a team of experienced valuation experts, management consultants and Chartered Financial Analysts. We are Certified Public Accountants*, statisticians, creative and strategic thinkers. We are PhDs, board members, and former corporate executives.
*ValueScope is not a licensed CPA firm.
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