A recent Advisory Opinion[1] (“AO”) offers clarification on the group practice definition for purposes of Section 1877(h)(4) of the Social Security Act and 42 CFR §411.352 (collectively, the “Physician Self- Referral Law”). Under the Physician Self-Referral Law, a physician may not refer patients to an entity for certain designated health services if the physician (or a member of the physician’s immediate family) has a financial relationship with that entity, unless an enumerated exception is met. Such exceptions include the physician services exception and in-office ancillary services exception.[2] In order to comply with such exceptions, certain requirements must be satisfied, one of which is the requirement that the referrals take place between physicians who are members of the same group practice. However, the law states that a group practice “must consist of a single legal entity operating primarily for the purpose of being a physician group practice.”[3]

In the AO, Requestor, a physician practice, was seeking a determination as to whether or not it would continue to qualify as a group practice under the Physician Self-Referral Law following the acquisition of two subsidiary physician practices, which themselves did not meet the requirements to be considered a group practice. In affirming Requestor’s continued group practice status following the acquisition, the AO highlighted the following:

Requestor operates as a physician practice and satisfies all of the necessary requirements to qualify as a group practice under the Physician Self-Referral Law;

Post-acquisition, all of the clinical employees and contractors of the subsidiaries would become employees or contractors of Requestor and be designated to work at the subsidiaries’ practice locations; and

All revenues and expenses of the subsidiaries would become the revenues and expenses of Requestor, even though the subsidiaries would (i) continue to contract directly and remain credentialed/enrolled with Medicare and other payors and health plans, and (ii) use billing numbers assigned to them to bill payors and health plans (including Medicare) for designated health services furnished to patients covered by such payors and health plans.

In closing, the AO concluded that “furnishing designated health services through a wholly-owned subsidiary entity that is a physician practice but does not itself qualify as a group practice under 42 CFR § 411.352 would not preclude [the group practice’s] compliance with the requirement at 42 CFR § 411.352(a) that a group practice is a single legal entity.”[4]

By confirming that furnishing designated health services through wholly-owned subsidiary physician practices would not preclude compliance with the single legal entity requirement found at 42 CFR § 411.352(a), physician investors may have greater assurances that, post-acquisition, these newly formed entities can meet an applicable exception under the Physician Self-Referral Law, including the in-office ancillary services exception. With a sole focus on healthcare transactions, HealthCare Appraisers has the knowledge and experience to assist with all of your fair market value needs related to the acquisition of physician practices, including unmatched real estate, capital assets, and business valuation services.

  INTRODUCTION

Prior to the COVID-19 pandemic, many hospitals had begun to expand their outpatient service offerings, as a result of an increasing number of unoccupied inpatient beds.[1] Furthermore, with the number of Americans aged 65 or older expected to double between 2018 and 2060,[2] hospice agencies are expecting to see a significant increase in the demand for their services.[3] Naturally, an increasing number of partnerships between hospitals and hospice agencies seems inevitable, particularly in light of the recent increases in Medicare reimbursement for the highest levels of hospice care (including hospice services rendered in an approved, inpatient setting).[4]

HealthCare Appraisers has noticed an increased number of hospitals entering into arrangements with hospice agencies, whereby the hospitals agree to allow the agencies to utilize their inpatient beds (i.e., tenancy arrangements) and/or provide various inpatient services to patients of the hospice agencies (i.e., inpatient services arrangements) rather than letting their inpatient beds to go un- or under-utilized. For hospice agencies, these arrangements ensure their steady and reliable access to high quality inpatient care in an approved setting, with the added benefit of increased reimbursement from Medicare.[5,6]

As the demand for hospice services increases, such arrangements are expected to become even more commonplace and will likely grow to represent a larger share of hospital revenue. While these arrangements may confer many benefits to both hospice agencies and hospitals,[7] there are key compliance requirements the parties must meet to enter into such transactions. In this article, we describe the various types of arrangements between hospitals and hospice agencies, as well as areas that require special attention in order to ensure compliance with applicable healthcare fraud and abuse laws.

  TYPES OF ARRANGEMENTS OBSERVED

The scope of services outsourced by hospice agencies ranges from basic tenancy to full-service general inpatient care, and everything in between, as detailed below:

  Tenancy Only Arrangements: Under tenancy only arrangements, the hospital will provide dedicated inpatient beds to the hospice agency on a contingency basis. In addition to the use of the inpatient beds, tenancy of a hospice unit may include the hospice agency’s use of various spaces throughout the hospital such as nurse’s stations, break rooms, medication rooms, family waiting rooms, staff conference rooms, and other essential rooms that are typical of a hospice setting.

  Inpatient Services Arrangements: Under inpatient services arrangements, a hospital may provide: (i) all-inclusive patient care as per the hospice inpatient care standards, which may include 24-hour nursing services in accordance with the patient-specific hospice plan of care, as well as diagnostic lab and radiology services; and/or (ii) certain miscellaneous services, including room and board, meal service, oxygen, linens, housekeeping services, and internal hospital transportation.

  Hybrid Tenancy and Inpatient Services Arrangements: In other arrangements, the division of labor between the hospice agency and the hospital may be less clearly defined, with both entities providing discrete sets of services that are not readily categorizable under Medicare’s defined levels of care. For example, rather than bearing responsibility for all inpatient care included in the hospice patient’s plan of care, the hospital may only provide tenancy of the unit and limited inpatient procedures, with the hospice agency providing the bulk of the direct patient care services (e.g., 24-hour nursing services, pharmacy services, etc.).

  BILLING ISSUES AND TYPICAL COMPENSATION STRUCTURES

Hospice industry data suggest that the Medicare program is the primary payor of hospice services in the marketplace.[8] As such, hospice providers reasonably plan and structure their provision of hospice services to comport with Medicare requirements for payment. Medicare reimbursement for hospice care is set by CMS annually based on a prospectively-determined per diem payment rate adjusted by the Hospice Wage Index, a national survey of costs reported by hospice providers. The Medicare per diem payment rates are based on the level of care rendered by the hospice agency, which are: (i) Routine Home Care, (ii) Inpatient Respite Care, (iii) Continuous Home Care, and (iv) General Inpatient Care. Each level of care varies significantly not only in terms of the site of service (i.e., in the patient’s home or in a Medicare approved facility), but also in terms of the level of direct patient care provided, with Routine Home Care representing the lowest level of service and General Inpatient Care representing the highest level of service.

Under Medicare, the per diem payment is intended to cover the costs that a hospice agency incurs in furnishing the items and services identified in a patient’s plan of care that are necessary for the management of a hospice patient’s terminal condition.[9] As such, pursuant to the Medicare Benefit Policy Manual,[10] Medicare will generally not provide reimbursement for: (i) Hospice care provided by any hospice agency other than the hospice agency designated by the hospice patient,[11] or (ii) Medicare services that are related to the terminal condition (or related conditions) for which the hospice benefit was elected.[12]

As such, hospitals are generally unable to separately bill and collect from patients and/or payors for services rendered to a hospice patient when those services are related to the patient’s terminal condition.[13] Therefore, under an arrangement with a hospice agency for outsourced services, a hospital’s sole source of remuneration for services rendered must derive from the hospice agency. Below is a summary of some of the most common mechanisms for compensating hospitals for the delivery of hospice inpatient services observed by HealthCare Appraisers.

  Tenancy Only Arrangements: In the case of a tenancy only arrangement, the hospice agency will frequently compensate the hospital through either a per diem payment[14] for each occupied bed or a fixed monthly fee for the exclusive use of a designated number of beds.

  Inpatient Services Arrangements: In the case of an inpatient services arrangement, the hospice agency will typically compensate the hospital through an additional per diem payment for each day inpatient services are provided to a patient, which will typically vary based on the level and intensity of services rendered by the hospital.

  Hybrid Tenancy and Inpatient Services Arrangements: Because the mix of services varies from contract to contract under hybrid arrangements, the compensation terms may likewise vary considerably. However, one of the more common compensation mechanisms for these types of arrangements involves a fixed, base payment for tenancy of the unit plus an additional per procedure fee for any inpatient ancillary services performed.[15]

  FMV PITFALLS – WHY AN EXPERIENCED VALUATOR IS ESSENTIAL

While Medicare specifies various levels of reimbursement for hospice care, the levels of reimbursement are not easily translatable into payment rates for tenancy and inpatient services that may be rendered by a hospital. In particular, the Medicare payment rates are specifically intended to cover the cost of all items and services needed to manage the hospice patient’s terminal condition. Therefore, regardless of the level of outsourcing by a hospice agency to a hospital, a hospice agency will always maintain responsibility for certain functions, such as responsibility for the overall hospice plan of care. As such, parties must exercise caution when tying payment rates for services rendered under such arrangements to the Medicare per diem rates to ensure that each party is appropriately compensated for the items and services rendered to the patient during the inpatient stay.

  FMV TAKEAWAY

Determining the FMV payment rate requires not only a deep understanding of the Medicare payment rates, but also the specific items and services provided by both the hospice agency and hospital under their applicable arrangement. Selection of an experienced valuator with detailed knowledge of hospice tenancy and inpatient services arrangements can ensure that arrangements are consistent with FMV and compliant with applicable healthcare fraud and abuse laws.

As hospitals and health systems prepare for all possibilities during the novel coronavirus (“COVID-19”) pandemic, a key recurring issue is preparation for an influx of patients that will require critical care, including ventilators. The Society of Critical Care Medicine has acknowledged that there may be a serious shortage of mechanical ventilators in hospitals given the projected volume of hospitalizations.[1] Of note, the New Orleans area is on track to run out of ventilators and hospital beds by April 4 and April 10, respectively, according to Louisiana Governor John Bel Edwards.[2] One of the solutions being pursued by the industry is the use of ambulatory surgical centers (“ASCs”) and hospital outpatient surgery centers to help handle the overflow caused by the pandemic.

Due to CMS guidelines recommending the cancellation of surgical procedures,[3] as well as outright mandated cancellations,[4] ASCs are facing a reduction in utilization. Nevertheless, ASCs possess three valuable resources that can contribute to combating the COVID-19 pandemic – space, staff, and equipment. Below are three potential ways in which these resources can be repurposed:[5]

1) Pursuant to CMS’ “hospital without walls” initiative announced March 30, 2020, “surgery centers can contract with local healthcare systems to provide hospital services, or they can enroll and bill as hospitals during the emergency declaration as long as they are not inconsistent with their State’s Emergency Preparedness or Pandemic Plan.”[6] With this regulatory flexibility, hospitals can partner with ASCs to perform essential surgeries in order to free up hospital capacity for COVID-19 patients.

2) ASCs can be converted into triage sites for less critical treatment of COVID-19 patients, with the pre-op and post-op areas used for hospital beds. A hospital and ASC may enter into a lease agreement for the use of the space, staff, and/or equipment of the ASC.

3) A shortage of ventilators to fill demand across the US is projected to the end of April, as Ford, General Motors, and other companies are ramping up production of ventilators under the Defense Production Act. As a short-term solution to fill demand, portable anesthesia machines can be converted into ventilators. According to Vice President Mike Pence, “…devices that anesthesiologists use for outpatient surgery can be converted with the change of a single vent to a very useful ventilator,” and “…there are tens of thousands of [anesthesia machines] that can be converted now.”[7] These converted anesthesia machines can be leased from ASCs to hospitals or used at ASCs in the aforementioned triage situation.

Despite the financial hardships likely to be faced by ASCs in the coming months, ASCs offer a rare opportunity to greatly assist patients with recovery, hospitals with obtaining access to much-needed resources, and ASC providers who might otherwise go unutilized.

  VALUATION ISSUES

Healthcare Appraisers, Inc. (“HAI”) has recently been contacted by multiple health systems struggling to understand what, if any, fair market value (“FMV”) issues are present when repurposing ASCs, anesthesia machines, and staff, particularly in those instances where the ASCs have physician ownership. While CMS has issued waivers to Section 1877(g) of the Social Security Act (as also known as the physician self-referral law or “Stark” law),[8] these transactions may still require FMV support. The following sections summarize recent examples of FMV considerations analyzed by HAI in connection with repurposing of ASCs to assist in the fight against COVID-19.

  ASC SPACE

Given the current moratorium on elective surgeries, ASCs may either be sitting idle, or performing a limited number of non-elective surgeries. ASCs, similar to hospitals, contain the infrastructure required to treat high acuity (i.e., COVID-19) patients, specifically, the pre- and post-operative bed areas that contain medical gas. Hospitals will likely be looking to transfer patients for a short-term duration (several weeks to several months) to handle the overflow of patients within their facilities. We believe it is reasonable to consider adjustments to the FMV rental rates to account for both the short-term duration of the leases and functional use (or lack of surgical use) of ASCs during this time period.

  ASC EQUIPMENT

If a health system or hospital desires to enter into an arrangement with an ASC for triage or overflow space, the parties must determine the precise equipment to be included in the lease arrangement, which could include patient monitors, stretchers, regulators, defibrillators, crash carts, EKG machines, office equipment, computers, and furniture, among others. Typical considerations that may need to be added to a lease payment include maintenance, property tax, and insurance on the equipment.

FMV Considerations unique to this type of arrangement include higher interest rates and higher depreciation rates on the equipment. Interest rates may be higher due to the risk of the patient population, expedited turnaround time, and the short-term duration of the leases. Depreciation rates on the equipment may be higher than usual due to the utilization rate of the equipment, going from a typical utilization rate of 50% to 70% during normal business hours, to a utilization rate of closer to 100% in a triage setting.

  PORTABLE ANESTHESIA MACHINES

The determination of FMV lease rates for the use of portable anesthesia machines as ventilators poses unique challenges. Some considerations that HAI has taken into account in recent analyses include:

• The market cost of anesthesia machines often exceeds that of ventilators. The FMV lease rates should be based on the ultimate use of the device, which may, in some instances, involve deviation from the market rates for both anesthesia machines and ventilators.
• Mobile anesthesia machines used in ASCs are typically utilized during normal business hours. When anesthesia machines are used as ventilators they would be used on a continuous basis at all hours of the day. This revised form of use would impact the useful life and, ultimately, the depreciation of the anesthesia machines over the length of the lease.
• The maintenance costs associated with utilizing an anesthesia machine as a ventilator may differ from the maintenance costs for an anesthesia machine utilized for its intended purpose.
• The lessor may incur costs associated with converting a modified anesthesia machine back to its full anesthesia capabilities upon return of the equipment.

  STAFF

The medical and administrative personnel within an ASC can be utilized to assist in the triage of patients, while registered nurses and surgical techs can assist physicians and advanced practice professionals in the treatment of patients. Furthermore, medical assistants can record vital signs and assist in performing medical histories, while front-office staff can be used for recordkeeping, scheduling, and billing activities. As the employer of record, an ASC may apply a “lease rate” to the direct expenses (i.e., salary and benefits) associated with the staff, which will vary depending on how the staff is deployed pursuant to the lease arrangement and the employer’s obligations. Common considerations include: (i) the ASC’s obligations to adjust staffing during periods of low or high volume; (ii) the ASC’s obligations to secure replacement staff in the event of illness; (iii) term of the arrangement; and (iv) the average cash compensation of the staff.

  CONCLUSION

In light of the immediate need for increased medical resources as a result of the COVID-19 pandemic, ASCs maintain valuable resources that can be repurposed to increase capacity for medical care across the country. However, repurposing of space, equipment and staff of an ASC presents unique FMV considerations. Although CMS has issued certain waivers to address various Stark law requirements, the need for an FMV opinion may be ever present pursuant to various other federal and state laws and regulations.

A recent ruling by the U.S. Court of Appeals for the Eleventh Circuit may put new focus on the importance of documenting fair market value (“FMV”) in transactions between healthcare referral sources, including transactions between physicians and health systems. In Thomas Bingham v. HCA, Inc. (No. 16-17059 (11th Cir. 2019), Bingham alleged that among other things, HCA Healthcare (“HCA”) violated the federal Anti-Kickback Statute (the “AKS”), the Stark Law, and Federal False Claims Act through arrangements involving receipt of non-FMV rent through “sweetheart deals to physician tenants who leased space in medical office buildings (“MOB”) developed by HCA in exchange for patient referrals from those physicians.” On July 31, 2019, the Eleventh Circuit Court of Appeals ruled in favor of HCA, affirming the district court’s grant of judgment in favor of HCA. FMV documentation was a key focus in the decision.

One of the allegations brought forth by Bingham was in reference to the development of a new MOB involving Centerpoint Medical Center in Independence, MO. To develop the MOB, HCA hired a third-party developer, Tegra Independence Medical Surgical, L.C. (“Tegra”), while separately engaging an independent appraiser to determine the FMV of the rental lease terms. Bingham claimed that HCA provided subsidies to Tegra, which the developers passed on to the physician tenants to provide benefits in the form of free office improvements, low initial lease rates, restricted use waivers, and cash flow participation agreements for physician tenants signing a ten-year lease. In turn, Bingham alleged HCA received $260 million in Medicare and Medicaid payments in the form of patient referrals due to the benefits provided. Bingham alleged that HCA violated the AKS which prohibits remuneration in exchange for services payable by a federal healthcare program.

For a violation to the AKS to take place, there must be remuneration offered or paid at the transaction in place. With respect to healthcare business transactions, the Eleventh Circuit found that remuneration “can only be quantified by reference to its fair market value.” While HCA’s third-party appraisal showed rental rates were at the low end of fair market value, the Court concluded that Bingham failed to demonstrate that HCA provided benefits in excess of FMV for either the relatively low rental rates or space improvements. Among the factors considered in the Court’s affirmation of the original summary judgment were the HCA-obtained appraisals of market rents for the arrangements in question which contributed to its conclusion that “Relator has not shown that HCA conveyed any remuneration to physician tenants of the Centerpoint MOB, and therefore that Relator’s AKS claim fails on summary judgment.”

Additional claims addressed in the appeal by Bingham related to another HCA MOB in Aventura, FL. Included were allegations that incentives were offered and paid to referring physicians to maintain and/or relocate their offices to Aventura Hospital in order to safeguard the referrals from the physicians to the HCA hospital. The Court found that Bingham’s characterizations of the terms of the ground leases (e.g., “did not reflect fair market value”, are “grossly undervalued”, or include “overly generous terms”) were not justified by Bingham’s own calculations regarding the value of the land offered as support. To this end, the Court stated, “Relator does not state with any particularity how HCA conveyed remuneration directly or indirectly to specific tenants of the Aventura MOB…Similarly, Relator’s allegations that leases entered into between HCA and Greenfield did not reflect fair market value are supported, if at all, only by Relator’s own calculations regarding the value of the land.” As the claims were based on “information and belief” rather than specific details or evidence, the Court agreed with the original dismissal finding that the allegations did not meet the heightened pleading standard of Rule 9(b) of the False Claims Act which requires a claim of fraud or mistake be stated with particularity.

Ultimately, the Eleventh Circuit’s decision in Bingham v. HCA highlights the importance of FMV documentation in False Claims Act cases, including and significantly those based on alleged violations of the AKS.