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Corporate Practice of Medicine, Antikickback and Stark Analysis After the AAEM-PG and Envision Settlement

The American Academy of Emergency Medicine Physician Group (AAEM-PG) recently settled a lawsuit in United States District Court for the Northern District of California against Envision Healthcare and Envision Physician Services, accusing them of violating the corporate practice of medicine (CPOM) laws in California.[1] The lawsuit alleged the “friendly physician” model used by Envision to control medical practices through management services agreements interfered with the medical judgment and autonomy of the medical entities Envision served. The model is commonly used in physician practice transactions with private equity investors.[2] The suit was unusual in that it was a private entity, not a government entity, requesting relief and asked the court to find models and those alike illegal in California.
 
While the popular model has avoided further scrutiny with the settlement for now and private investors may continue using the model to invest in the healthcare industry, the case reminds that these models do not automatically demonstrate compliance and practitioners and investors should reexamine ventures in the healthcare industry for common CPOM, fee splitting statutes, and related regulatory requirements and pitfalls.
 
What is CPOM And Fee-Splitting Statutes?

CPOM laws prohibit corporations from practicing medicine or employing physicians to provide medical services. The purpose of these laws is to protect the independence and integrity of the medical profession and to prevent conflicts of interest, fraud, and abuse. Fee splitting statutes are related to CPOM laws and prohibit licensed practitioners from sharing revenues with non-licensed entities or individuals. These statutes aim to prevent the influence of financial incentives on medical decision-making and to ensure fair compensation for professional services. While the Envision case focused on corporations interfering with medical judgment, it is important to note that references to CPOM issues usually encompass more than just protecting medical practice and, in many states, extends into other healthcare services, such as dentistry.
 
Common Models Used to Comply
 
To comply with CPOM laws and fee splitting statutes and still allow private entities to enter the market, healthcare entities often use alternative models to structure their relationships with physicians and healthcare providers. One common model is the “friendly physician” model, which involves a physician-owned professional corporation (PC) that contracts with a non-physician management services organization (MSO) for non-medical support. The MSO typically provides services such as billing, accounting, staffing, purchasing of equipment and office supplies, scheduling, accounting, managed care contracting, administrative management, human resources and receives a management fee from the PC. In the case of Envision, its business model was to provide staffing to hospitals. While the fee can also include payment for marketing, it is important to analyze the state regulations and attorney general opinions as certain states forbid such payments and marketing payments usually raise anti-kickback and self-referral concerns. The PC retains control over the medical aspects of the practice, such as hiring and firing physicians, setting clinical policies and protocols, and determining the scope and quality of care.
 
Another common model is the “foundation” model, which involves a non-profit foundation that contracts with a physician-owned PC for medical services. The foundation typically owns and operates the facilities, equipment, and staff, and pays the PC a fee for the professional services of the physicians. The PC retains control over the medical aspects of the practice, similar to the “friendly physician” model.
 
Characteristics of CPOM Compliant Models
 
To ensure compliance with CPOM laws and fee splitting statutes, healthcare entities should follow some common features and best practices when structuring and reviewing their transactions and models. Some of these features include:
 

• Having a licensed medical professional own and control the PC and the clinical aspects of the practice.
• Having a clear separation of duties and responsibilities between the PC and the MSO or the foundation and avoiding any interference or influence by the non-physician entity on the medical decision-making of the PC. Incorporating expressed language into the management service agreement that reflects this element is essential for documenting compliance.
• Having a written agreement that specifies the scope, term, and compensation of the services provided, and that complies with all applicable laws and regulations.
• Having an independent valuation of the FMV of the services provided and ensuring that the compensation is reasonable and commensurate with the value of the services.
• Having periodic reviews and updates of the agreement and the FMV to reflect any changes in the market conditions, the services provided, or the laws and regulations.

 
Setting Management Fees
 
There is no established cap on management fees, but the set fee or formula  must be based on real data and facts applicable to operations at issue.
 
Commons MSO fee structures include:

1. Flat Fee
2. Percentage Fee
3. Cost Plus
4. Profit Sweep

 
The flat fee is set in advance, paid periodically, and revised periodically, usually annually to comply with anti-kickback, Stark, and self-referral laws. Percentage fee has the percent of a metric set in advance, usually such as gross revenue or net revenues. Cost Plus utilizes a multiple set-in advance against the actual costs incurred by the MSO. Profit Sweep is a management fee that is an amount equal to whatever revenue is left in the practice after certain expenses are paid through the practice. Other fee structures include a combination of the above and certain fees that are incentive based and allow the fee to grow if certain metrics are met. Not all fee arrangements are acceptable in each state, using Illinois again, they strictly prohibit a percentage fee on gross revenues.
 
AKS, Stark, and Self- Referral Pitfalls of Management Fees
 
Another reason why fees must be based on data and applicable facts is the business models are subject to AKS, Stark, and state self-referral laws.
 
AKS prohibits knowingly and willfully offering, paying, soliciting or receiving remuneration to induce referrals for items or services covered by government programs unless the transaction fits within a regulatory safe harbor.[3] Anti-Kickback Statute applies if one purpose of the remuneration is to induce referrals even if there are other legitimate purposes.[4] Parties should consider AKS if the PC bills government programs and the MSO will be marketing the PC as a part of the management fee. The Office of Inspector General for the Health and Human Services, that pursues AKS violations, has opined in advisory opinions its positions that The [Anti-Kickback Statute] on its face prohibits the offering or acceptance of remuneration, inter alia, for the purposes of “arranging for or recommending the purchasing, leasing, or ordering of any […] service or item payable under Medicare or Medicaid. It is OIG’s position that many marketing and advertising activities may involve at least technical violations of the statute.”[5]
 
In certain private equity deals with MSOs, physicians have ownership or some sort of interest in the MSO along with the investors. In such arrangement, Stark and similarly drafted state self-referral laws (although these can be more or less restrictive than Stark in some states) could be violated as the MSO would regularly be marketing a partly provider owned MSO, or soliciting, referral that would go to the PC, resulting in a self-referral.[6]
 
AKS, Stark, and state self-referral laws have safe-harbors and exceptions that allow models to operate. Common safe harbors and exceptions include fair market value arrangements and independent contractor arrangements.
 
The management fee or the professional services fee in these models must be consistent with fair market value (FMV) and not based on the volume or value of referrals or business generated between the parties. FMV is the price that would be paid by a willing buyer to a willing seller in an arm’s length transaction, without any undue influence or coercion. There are different methods to determine FMV, such as the cost approach, the market approach, and the income approach. The FMV process and considerations may vary depending on the type, level, and risk of the services provided, as well as the market trends and the term of the agreement. Additionally, to meet Stark, the arrangement must be examined for commercial reasonableness which the Centers for Medicare and Medicaid Services, the entity that handles Stark violations, defines as furthering a legitimate business purpose of the parties to the arrangement and is sensible, considering the characteristics of the parties, including their size, type, scope, and specialty.
 
Questions to Analyze Models

Some important questions to consider when reviewing transactions and models for compliance include:
 

• What is the legal and regulatory environment of the state where the transaction or model is taking place, and what are the specific CPOM and fee splitting rules and exceptions that apply?
• Are the CPOM regulations regularly enforced?
• What is the ownership and governance structure of the PC and the non-physician entity, and who has the ultimate authority and responsibility for the medical aspects of the practice? Is the authority clearly documented in the management services agreement?
• What are the services provided by the non-physician entity to the PC, and how are they documented, monitored, and evaluated?
• How is the compensation determined and paid by the PC to the non-physician entity, or vice versa, and what is the basis and methodology for the FMV of the services?
• How often is the agreement and the FMV reviewed and updated, and what are the triggers and mechanisms for termination or modification of the agreement?
• Does the entity PC or medical group operate in more than one state such that different models would need to be used in each state?
• What is the priority of payments in the agreement and what position in priority does the management service fee have? Best practice is to have the MSO fee last in order of payments.
• Are any of the MSO services duplicative of services already being handled by the PC?
• How long is the valuation good for that is being used to set the MSO fee? Should the valuation be redone to account for any market change or essential practice changes?

 
Please note this article is not a comprehensive review of all considerations needed to set up compliant models from investors. For example, additional considerations include using the “double lock box” payment approach to stay compliant with Medicare anti-assignment provisions. Note again, each state has its owns CPOM, state AKS, and state self-referral laws that must be examined. It is important to have knowledgeable counsel to review proposed models and transaction documents to analyze the issues stated in this article and check for other nuanced issues specific to the proposed venture. If you have questions regarding proposed healthcare businesses, restructuring, or transactions, please contact Rachel Carey at rcarey@whitefordlaw.com.