Introduction
Health care policy is contentious and ever-changing. There is constant debate over such key
issues as resource allocation, the respective roles of the public and private sector, ethical
restrictions, and the proper approaches to controlling cost, promoting quality and expanding
availability. Health care providers, suppliers, consumers and payors face great uncertainty,
with myriad decisions being made by a confusing array of administrative and legislative
bodies.
Implementation of a hospital-physician joint venture is very much susceptible to these varied
and sometimes warring influences. This article consists of some notes as to recent
developments in how hospital-physician joint ventures are attempting to deal with these, and
other, issues.
One Size Does Not Fit All/Competition
Each client must determine what structure is best for it. There is no cookie-cutter approach
especially since the personalities of the physicians, administrators, and investors involved in
each case will playa large role in what will work or not. Also a client always has to look at
whether someone else has a competing venture of the type being contemplated. If so the
client needs to ask how it can meet or outperform the competition before going forward with
the joint venture.
Increased Role of Outside Investors
Increasingly venture capital and private equity firms are looking at being involved as partners
in medical joint ventures. The financial professionalism and business acumen that such firms
can bring to a venture is a plus which cannot be ignored. On the other hand, of course, some
hospitals and physicians will find being subjected to the views of outsiders very difficult for
them to handle. It is vital that expectations and roles be very firmly established at the outset
and that any issues of culture clash be identified and managed. In some cases these clashes
may be real deal killers and, if so, this is best discovered as soon as possible.
A Risk Spreading Mechanism
Recently there have been changes to the revenue stream for physicians away from being
solely service providers to becoming owners of expensive medical technology and facilities
which can involve the physicians having to put considerable capital at risk. From the
physicians' point of view a joint venture with a hospital may decrease this risk while at the
same time allowing the physician to maintain an equity position in the profits from the capital
investment. This has an impact on increasing the number of partnerships.
In some cases, increased capital demands, the difficulties of dealing with insurance company
payors, and other factors increasing the overhead or the administrative burdens of medical
practice have led some physicians to opt to become hospital employees. In fact, employment
arrangements are coming back not only from a primary care standpoint, but also from a
specialty standpoint. This is also a lifestyle choice for the physician who will have a much
broader support system available to him or her in a partnership context with a medical facility
as opposed to being a stand alone business. From the hospital standpoint this may lessen
competition; basically if a hospital has a physician under contract then it owns his work.
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Effect and Limitations of Availability to Physicians of Liberalized Equipment Leases
Equipment vendors are offering doctors the opportunity to go out and engage in high capital
medical businesses on their own. Vendors are offering very creative low-risk options, leasing
options and equipment packages. Nonetheless, costs can still be very high. Additionally,
there are some regulatory limitations, e.g. how nuclear cameras may be owned and the
reimbursement around that. So the government plays a role in physician purchases and
what they can purchase and can give impetus to joint venture type solutions in situations
where individual physicians need hospital support.
Importance of Joint Ventures to Hospital Administrators
In healthcare, the partnering component with doctors, is the number two issue of hospital
CEOs. It is second to the financial challenge issues they have; the two issues go hand in
hand, actually.
The CEO of Catholic Health Initiatives recently said that physician relationships are the
greatest single challenge to be faced over the next two years. So joint ventures to nurture
these relationships are being looked at. 91% of hospital administrators have talked about
doing a joint venture over the next two years.
Feasibility Analysis
No joint venture can sensibly be implemented without a financial feasibility analysis first being
made. It will be necessary to make volume assumptions based on physician interviews and
hospital data. Reimbursement assumptions (discussed more below) include whether
hospital rates, as opposed to freestanding rates will apply. Capital requirements, including
the value of the "contributed" hospital business must be projected. Expense items such as
facility costs, staffing, supplies, management fees and billing expenses, and other operational
costs will need to be budgeted.
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Survey of laws to consider for Joint Ventures
Stark Self-Referral Rule
Under Stark, a physician can't refer Medicare or Medicaid patients for certain services
(known as DHS) that the physician or an immediate family member has a financial
relationship to, unless an exception applies.
The concept of DHS, which is an acronym for "designated health services" is key to Stark.
These are services that are considered to be particularly susceptible to over utilization as
result of physician financial interests. DHS includes clinical laboratory services; physical
therapy services; occupational therapy services; radiology services (including MRI, CAT
scans, and ultrasound services); radiation therapy services and supplies; durable medical
equipment and supplies; parenteral and enteral nutrients, equipment and supplies;
prosthetics, orthotics., and prosthetic devices and supplies; home health services; outpatient
prescription services; and inpatient and outpatient hospital services.
There are multiple exceptions to the self referral rules of Stark and these exceptions are in
continual change. An arrangement can be valid under Stark at a present time only to find
itself invalid at some future time. So clients must have Stark exit strategies in place in any
medical partnership arrangements.
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Anti-Kickback Statute (Federal)
The anti-kickback statute prohibits a party from soliciting, receiving, or offering, or paying
directly or indirectly any remuneration in return for making referral for Medicare or Medicaid
covered services. Unlike Stark this is an intent based statute that is not limited to physician
ownership or DHS.
There are many safe harbors which have been established by the Office of the Inspector
General ("OIG")which administers the statute. In joint venture models, possible safe harbors
include: ambulatory surgery centers, small entity investments, and small entities located in
underserved areas.
Several safe harbors protect certain types of compensation arrangements such as personal
service and employment arrangements, as well as space and equipment leases. Generally,
compensation must be "set in advance" at its fair market value. To satisfy safe harbor
requirements "per click" services arrangements do not meet safe harbor, because
aggregate compensation is not set in advance.
OIG Advisory Opinion 04-17 reflects OIG concerns with "contractual joint ventures" where
physicians bill for services obtained contractually (e.g. lease of imaging components) from an
entity that could provide the services directly. Factors increasing the risk are: the lessor is an
established provider of imaging services, the physicians bear little financial risk, and "turnkey"
arrangements.
Medicare and Medicaid Reimbursement (Federal)
A client needs to know what type of provider it would be under a joint venture arrangement.
For example, can a client continue to be a hospital-based provider, or does it turn into a free
standing independent diagnostic facility. The reimbursement implication from Medicare, Medicaid, and commercial payors is very different depending upon the arrangement put in
place.
In this regard, an ambulatory surgical center can only bill for surgical procedures on a
Medicare-approved list. An independent diagnostic center can only bill for diagnostic and not
therapeutic services. In contrast, hospitals can bill for all types of hospital inpatient and
outpatient services.
Reimbursement for imaging services furnished in a physician office or diagnostic testing
facility was capped at the amount paid to the hospital for the same services, effective January
1, 2007 under the Deficit Reduction Act. Consequently, hospital reimbursement for imaging
services will be at least as good as physician office or independent diagnostic testing facility
reimbursement and possibly better. The change results in substantial percentage declines in
reimbursement from 2006 Medicare payment rates for a number of services.
Hospital-based facilities that provide physical, occupational, and/or speech therapy must now
meet Medicare's "provider-based requirements" to be exempt from therapy caps. Hospitals
are not subject to the caps unlike independent therapy providers who are. To assure full
payment for any therapy services, hospital-based therapy facilities must be "provider based,"
or face significantly diminished reimbursement. There are host of tests that must be met.
One test is that CMS requires that provider-based entities not on the campus of the main
provider hospital be operated wholly owned and controlled with their main providers (i.e. no
off-campus provider-based joint ventures are permitted). To comply with this requirement, the
entity must be subject to the same bylaws and organizational documents that govern the
provider. In addition, the provider must have the final authority to approve or reject decisions
impacting the entity. For example, a hospital would have the authority to determine which
personnel and medical staff could work at the hospital's provider-based entity. The entity
must function as a department of the main provider. As a department, the entity should
commonly use the same equipment, service personnel, and, where possible, buildings of the
main provider on a daily basis.
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Tax Exempt Status
There can be tax implications to joint ventures, especially for hospitals with tax exempt status
or hospitals that have financed some or all of the facility with tax-exempt bonds. There are
regUlations about how much of the facility can be used that may have profits allocated to it
when treated as if it were a stand alone accounting entity.
With an ancillary service venture, the issue will generally be limited to whether there is
unrelated business income ("UBI") rather than a threat to tax exempt status. However,
sufficient hospital control is required to assure that the revenue stream to a hospital is tax
exempt. In this regard, the conservative position is for the hospital to maintain control
including having majority representation on the board. As an alternative structure, some
utilize a 50-50 board representation with hospital reserve powers to ensure that the venture
operates to further charitable purposes.
Some additional considerations are that the venture needs to participate in
Medicare/Medicaid and provide indigent care and the venture should maintain an open
medical staff, if applicable. Financial arrangements should be on arm's-length terms and at
fair market value. Arrangements with for-profit parties should be for limited terms and should
be terminable for cause over the objections of interested parties. Leasing arrangements may
generate unrelated business taxable income ("UBTI").
Any transfer to a joint venture of hospital assets, including existing hospital businesses, must
be appropriately valued. The venture should compensate the hospital for the value of
transferred assets. Valuation methodology will emphasize discounted cash flow, taking into
account relevant assumptions, including alternatives for physician investment that may cause
a shift in volume.
Joint ventures using tax exempt bond financed facilities or equipment will constitute an
impermissible private use, unless space or equipment can be allocated to funds reserved for
nonexempt use.
State laws
There are a plethora of laws at state level and state law can override the federal laws. In
some cases there are states that have moratoriums on specialty hospitals - not just
certificates of need but moratoriums saying a client can't build. There are certificates of need
laws at the state level - that can also prohibit the development of a partnership model.
Moreover states can have their own variations on anti-referral and anti-kickback laws. State
securities laws also have to be considered in some joint ventures.
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Some implications of Stark III
The Center for Medicare and Medicaid Services ("CMS") on July 2, 2007 published their
comments relating to the impending Stark III rules. The Stark III rules tend to tighten up
referral restrictions rather than add additional opportunities. While many proposed changes
make sense given potentially abusive activities, the changes will not be viewed as physician
friendly.
A brief discussion of the more prominent changes follows:
Anti-Mark-Up Rule. Several types of imaging services are subject to certain anti-markup
rules. For example, a physician cannot purchase an image or an MRI and resell it to
Medicare or Medicaid and profit from such resale. CMS proposes to expand the anti-markup
restrictions to apply to a wider variety of services; for example, the restrictions currently only
apply to the purchased technical component of imaging service not to a purchase
professional component (i.e. a purchased interpretation). CMS proposed regulations would
subject the professional component of a purchased test to the anti-markup rule as well. Also
there are three criteria being suggested to bill that technical charge in a physician's office; and
those three ways are actually outlined within this new regulation. For example, the
performing physician's net billed charge to the billing entity cannot include any space or
equipment lease payments from the performing physician to the billing entity. That is, the
new rules will prevent a leasing physician from "charging back" his lease costs to the billing
entity in order to inflate his "net charge". This is all up for comment but will affect the technical
charge and how it is being billed.
In-office ancillary services. Generally. notwithstanding Stark, physicians can provide
designated health services (DHS) as referrals within their practice at either the location of the
regular practice or a centralized location. CMS raises concerns that many physician groups
use a centralized building location to meet the in office ancillary services exception but really
have almost no resources there. That is, the group simply outsources the various
components of the services (e.g. testing) to contractors who have virtually no relationship to
the group practice. There is no recommended change but comments are being solicited
around how the regulators may want to change this. Regulators do see some fraud and
abuse potentially occurring as they believe that some of these centralized locations are
nothing more than enterprises established for the self referral of DHS.
Per-Click Leases. Another area being examined is the unit of service per click for space and
equipment. CMS is suggesting, you can no longer do charge on a per click or by volume, but
it has to be a set fee. So CMS is looking for comment on that - the whole idea is that fees
can't be on a by volume referral basis.
Under Arrangements. The under arrangement model (discussed more below) has really
taken off quite a bit over the last three to four years. However, in the view of CMS, it appears
that the use of these arrangements may be little more than a method to share hospital
revenues with referring physicians in spite of unnecessary costs to the program and the
beneficiaries. CMS outlines what that they believe is over utilization and paying for referrals.
With that in mind CMS is looking to change the terms of the ban to not only a financial
relation with who is doing the billing as the entity, but also to a relation with the person that is
performing the service as also the entity; so therefore the latter arrangement would not be
allowed under Stark anymore. Basically the intent of this particular provision is that under
arrangements would go away.
Stark III is a very hot topic indeed in the medical business community. Stark is complex in the
extreme. The foregoing is only a brief summary of some of its implications.
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Forms of Joint Venture
General
Exhibit A shows what forms are available and shows risk/return from simple to complicated.
The spectrum runs from an employment model to other type of arrangements all the way to
specialty facilities - the latter being much more complicated than the former. The more
complex models share the technical side of the business. Many regulatory concerns of the
type discussed above apply to the more complicated models, but no model is devoid of such
concerns.
As a guiding principle, patients should be kept in mind first, when putting a structure together.
Horror stories abound regarding physician owned and joint venture facilities that have
patients running through hoops to get their care to meet the criteria of the arrangement. So it
is important to step back and know that the patient must come first. Once a client does that
everything else will tend to fall into place.
Specialty Hospitals (See Exhibits B,C)
Specialty hospitals continue to be evaluated and attributes under specialty orthopedics or
cardiology and so forth reviewed by the regulators. Regulations did come out on August 8,
2006 around the specialty hospitals. Once the prior moratorium on specialty hospitals was
lifted CMS said it will go ahead with granting provider status to specialty hospitals. Specialty
hospitals are required to disclose to CMS their compensation and investment relationships
with physicians on new Medicare enrollment forms.
Some criteria were put into place around what CMS expected a specialty hospital to do and
actually defined a specialty hospital. A specialty hospital is generally defined as one serving
patients with a cardiac condition, orthopedic condition or patients receiving a surgical
procedure. One of the things that is important is the whole need for transparency regarding
investments, e.g. who are the investors. Moreover, the hospital has to provide care for the
patients when they do present regardless of the ability to pay.
The 2006 specialty hospital report set out to determine whether physician investments in
specialty hospitals are non-bona fide. For example, are the hospitals' distributions to
physician investors proportional to their contributions? Nonproportional returns on
investment violate Stark and are suspect under the anti-kickback statute. A ballpark figure
could be a 1% investment with a 5% to 6% return on investment (ROI). In short, there are a
whole list of things a specialty hospital must consider now with the new rulings that came out
in August of 2006.
From a business standpoint, when a client does look at specialty hospital, the client does
have to look hard at the ownership structure, how will it be arranged, if it is a deal between
physician and hospital. From a hospital standpoint, will a facility be closed, and if it does will it
move over to the new hospital or will it stay back at the current place and really compete
against the new hospital. And it must examine who the services are being offered to and
who are the key stakeholders it would be looking to. The client needs to look to see how it
can drive new market share to this facility. Also what's in and what's out - what kind of cases
is the client going to have to have within that hospital. That can be partly about where the
hospital will be positioned, will it be a stand alone 10 miles away from its current facility, or
will it be attached to the current facility, and be able to capitalize on some of the ancillary
services available there.
It is a 24/7 operation - a specialty hospital - and that's an immense undertaking. Those who
have gone down that route know it can take a lot of time and effort in order to get something
like this going.
Also, whenever the client does look at having a piece of a hospital close does that piece of
the hospital them become part of their investment or the equity piece for the hospital. Then
fair market value of that carved out piece has to be determined. Valuation does get very,
very complex.
A client may also need to understand what the control will be from a board level. Again that
can playa part in the client's tax exempt status. So the client will want to make sure that
some of that is talked about very early on before it goes too far down a path of
implementation.
There are the legal implications: Stark, potential anti-kickback issues, separate licensure
501 (c) (3) issues, reimbursement and managed care contracting issues, certificate of need
(CON) in some states, and a host of legal issues that potentially limit or restrict physician
ownership.
It is very important to note who the client payors will be and what the contracts will be. If a
client shunts this off to the side, what can happen is that the client may not be able to obtain
some of the anticipated payor contracts, and therefore not able to achieve the level of
reimbursements as anticipated.
As a client looks at year one when planning all the way to year four, whenever the client is up
and running or year three when the client is up and running, all must know that know things
can change. In some cases, for competitive reasons, hospitals have actually bought out
participating physicians in the development stage. Flexibility is a key with so many moving
parts.
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Under Arrangement (See Exhibit D)
An "under arrangement" arrangement is where the physicians and potentially the hospital
form a new company and that new company purchases or leases equipment, staff, and
supplies and is responsible for those functions that it has said it is responsible for. This new
company is in contract with a hospital to provide a service; that service is really under
arrangement with the hospital. The hospital will continue to bill and collect under Medicare
and other third-party payors. That is the important dimension; this arrangement is a service
contract.
This is generally seen as a two-year, or at the longest, a three-year, contract between the
Newco and the hospital to provide the service. Newco is paid a fair market value for the
services that it will provide for that technical component. The technical component would be
the equipment, the staff, and supplies.
With that in mind, there has to be a really detailed analysis done to determine, what would be
the fair market value for the services. Some clients have the notion that since I'm getting paid
x because I'm a hospital-based provider for the service that as a Newco I'll be paid x too. That
is not the case. The client has to look at this as fair market value for that service. Le. that is
what if Newco were a freestanding facility what would it be paid and not looking at hospital
reimbursement. The readjustment in thinking takes a lot of education and training for those
sitting at the negotiating table.
On the legal side the whole per click per unit is a real issue around Stark. If a client can stay
clear of that to a certain degree and get more into fixed costs for that service, it would find
itself in a better position from a legal standpoint.
The ownership of joint venture is not subject to Stark, under current law (no referral of DHS to
this entity); but, as discussed above, Stark III may change this. Generally a purchased
service agreement between the hospital and joint venture is structured to meet the
compensation exception under current Stark regulations; Stark allows "per unit"
compensation. The anti-kickback safe harbor protection is not available. The key factors to
minimizing legal risk of the joint venture is a "real company" providing new or expanded
services; fee arrangement at fair market value; investment returns cannot be based on
referrals. Under Medicare rules, the hospital must retain administrative control over services.
Provider based rules may impact the location of services.
Management services arrangements (Exhibit E)
This is where the physician and, potentially, the hospital form a management company to
provide management and administration services. This management company then hires or
leases personnel to provide the services. The amount that can actually be paid for the
services is fair market value. There have been abuses of excessive charges, and this is
where some of the changes to Stark are coming into play.
The amount to be paid should be a fixed amount. A client is better off to structure fees in
that manner, as opposed to a fixed percentage of revenues that can be tied back to volume.
Charges can include some performance incentives. Such incentives can not only be around
outcomes, but also around quality of service - customer service. There are some legal
components to this also and the key is that there needs to be some demonstrable benefit to
be able to move to this comanagement model.
Other legal issues: potential anti-kickback remains an issue with percentage management
fees. The fee paid must be commercially reasonable -- this is the fair market value concept.
Finally, many clients must consider the need to comply with Rev. Proc. 97-13 (permitted
use of facilities financed with tax exempt bonds).
Example: clinical comanagement model of a vascular service line bringing three specialties
into a vascular comanagement model. The idea is to allow the three to work together in a
common vision and really be aligned together. A key point on this is that there are specific
performance criteria that were being set: education, outreach, quality outcomes, program
management, and looking at that line by line to understand what it would mean, what the
value would be, how much that service would be worth and then rolling that together into
base revenues and some opportunities for incentives.
Another example: a full-service line was put together as a comanagement model. Medical
CT/CV ICUs, 4 labs, chest pain ER - oversight of the whole heart hospital. This was within
the hospital itself. It did create its own entity and its own staff. They really get into the LLC,
generating new revenue by being able to bill some professional services and do some
outreach as part of this comanagement agreement as outreach was part of the initiative that
they were charged in doing. This comanagement agreement actually started back in 2003. It
was an arrangement between the physicians and the hospital. It contained a medical director
role and strategic plan - all the components that were needed in order to develop the
structure. But it was a structure that was a managed both by the hospital and physicians. In
2006, the hospital moved into a contract with just the physicians to manage. Initially, the
hospital felt it was too new and the trust factor was lacking. They weren't sure if the
physicians could get the management done. The hospital found that they could so they
moved it into a full physician management model.
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Freestanding Facility
A freestanding facility continues to be an opportunity. A client does form a Newco and the
physicians and hospitals develop this new LLC. And this new LLC is freestanding. It is not
hospital-based and it is reimbursed under the rules of freestanding facility. It hires or leases
its own employees. It provides services, and bills its technical component to that. As long as
this is not a DHS it will fit under the Stark regulations. The way these are set up can have a
significant reimbursement implications. A client needs to have enough volume in these kinds
of models for it to make business sense; so, a client needs to be able to cover the cost, and
produce a return to the investors. If not, one should step back and say why does the client do
this. In some cases, the structure actually creates unneeded capacity.
Employment - Pay-for-performance.
This is a contract between the hospital and physician. The hospital is being told that they
need to perform and the physician needs to perform to the quality standards that are being
addressed and being benchmarked up against them.
One of the key components is that a client needs excellent IT systems to substantiate any
pay-for-performance arrangement. The hospital and physician do set some quality measures
and have a baseline to those measures and have a goal. And there is a set amount of
dollars that are set aside to pay for performance. If the physician achieves and steps through
that matrix he/she can earn additional dollars under a pay-for-performance plan.
True pay-for-performance arrangements tend to be unassailable. It is pretty hard for the
regulators to argue against quality.
The hospital does needs to push this data to other agencies. If a hospital can successfully put
a pay-for-performance program into action, it would hope that this would also inherently help
its ratings to be much better than they were pre-program.
Example, a surgeon was looking to negotiate with a hospital around four or five different
things. One of the issues that he had was that he wanted some on-call payments for being
on-site during angioplasty when the best practice was that he did not really need to be there
anymore. The hospital felt it too much to pay for a practice that was not really very good. They moved into this type of pay for performance mode and used a third-party partnership as
a benchmark to develop a baseline and also develop goals for the physician to meet and
really reward for performance and best practice.
Diagnostic center model. (Exhibit F)
Some clients may do this though timeshares or leases. This is where a hospital will own the
center and the physician will lease block time from the hospital. In the timeshare
arrangement, the parties could include the physician's supplies, and the staff of the physician,
so that when the physician is in occupancy he can in turn build that technical component.
This is designed to fit into the Stark in office ancillary services exception. All transactions
must be at arms length. You have to make sure that you keep this at a risk. If a hospital has
a physician that blocks three hours, and he comes over 20 minutes or half an hour. Hospital
just can't bill this is another half-hour. The hospital has to put him a little at risk and make him
block six or eight hours. It's up to the physician to fill that block time.
Medical Directorships.
These generally need to be much more enforced than is the practice to really be valid. There
is a need to have job descriptions around a medical directorship. The physicians need to be
accountable for what they are doing, and what they been asked to do and are being paid to
do.
Most medical directorships are set up on a departmental basis. Some of the key job
description items on a departmental basis are to provide leadership and oversight to enhance
quality and cost effectiveness; to lead and participate in quality and performance
improvement committee; to collaborate with all medical directors, and the executive
leadership in developing, planning and facilitating an integrated marketing and strategic plan;
to assist and support the recruitment and retention of qualified personnel; and provide
education and training to medical staff and hospital personnel.
However, some medical directorships are oriented toward the region where the facility is
located. On a regional level, regional medical directors can be asked to initiate educational
forums and outreach areas; collaborate with all medical directors and executive leadership in
developing outreach opportunities; support "best practice" as a standard in the community;
participate in strategic planning efforts for the hospital; engage in networking activities with
neighboring physicians; and act as hospital's ambassador in the assigned region.
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Governance Issues
A client does need to look at a governance structure that would go hand in hand with the
economic models. For example, who would be on a client's board.? How that would that
board be put together? What is the accountability within the board? If this is a board in
support of a financial joint venture then they are accountable for their operations as being
financial stewards. So issues of "d&o" (director and officer) coverage and indemnification
arise as well.
In some cases, for example, in the comanagement model, a client may want an advisory
structure put in place to be able to provide some of the accountability to the key interests in a
program. The client has to think about the roles that are related to this. How people get on
the board off the board, what a rotation may look like. A client needs to keep directors on the
board long enough to educate them what to do and really be there to be able to create some
meaningful oversight. There are bylaws that have to go with this and any of those standard
committees (e.g. quality, education, audit, compensation) that one would need to have as
part any board structure.
Committees should be customized to organization as to what's key to them. So if there is a
new project a client may need to have a committee that is focused on that particular project.
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Return to Exhibit A Description
Return to Exhibit B Description
Return to Exhibit C Description
Return to Exhibit D Description
Return to Exhibit E Description
Return to Exhibit F Description
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