I Thought FMV Was Supposed to be Bulletproof: Recent Court
Decisions Involving Fair Market Value
Jeff Fitzgerald, Shareholder, Polsinelli Shughart
Curtis Bernstein, Director, Sinaiko Healthcare Consulting
May 1, 2012
HCCA Compliance Institute 2012—Legal & Regulatory 706
Outline of Presentation
Case Studies Employment
Payment for multiple services to a single physician Campbell v. Campbell v. UMDNJ
Aggregate compensation US v. Covenant Medical settlement
Acquisition Employment of physicians
US ex rel. Drakeford v. Tuomey Payments based on referrals
US ex rel. Singh v. Bradford Regional Payment for intangible assets without cash flows
Carraci v. Commission and Bergquist v. Commissioner
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Employment Case Study Facts Dr. Nice (cardiologist) hired by Typical Hospital
Comp: $50 per wRVU; Hospital used salary FMV report Three months later, Dr. Nice asked to be medical director for
catheterization lab Comp: $10,000 per month; hospital obtains outside FMV from its
regular consultant Six months later, the physician practice administrator asks Dr.
Nice to act as a liaison between the employed physicians and administration Comp: $ 16,000 per month; practice administrator obtained FMV
study from different outside FMV expert Later, Hospital realizes that Dr. Nice was not added to the call
roster and amends employment agreement to add call coverage Comp: $800 per day (consistent with what the hospital pays
independent contractors)
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Compliance Concerns
Can the physician actually perform all of these services? “Are there enough hours in a day?”
Are multiple forms of compensation paid for services provided simultaneously? The physician cannot provide call coverage 24 hours per
day while providing clinical services and medical directorship services
Does the aggregate compensation make sense? Payment of employed physicians at the same rate as the
independent contractors is inconsistent with a productivity based compensation plan
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U.S. v. Campbell University Hospital (UMDNJ) wanted to grow its
cardiology program UMDNJ entered into part-time employment contracts with local
community cardiologists in private practice to work at University Hospital as Clinical Assistant Professors, providing teaching, lecturing, and research in exchange for an annual salary
Hospital employs, part-time, Dr. Campbell for $75,000 annually Employment agreement lists 8 categories of services
In 2009, UMDNJ settles with DOJ and pays $8.33 million DOJ sues Dr. Campbell under FCA and Stark Law
Dr. Cambell has FMV report supporting salary Dr. Campbell “duly performed all of the services enumerated in
the contract which he was given the opportunity to perform” Dr. Campbell argues that he was only required to perform the
services that the hospital asked him to perform, and he did
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U.S. v. Campbell Court rules that Stark Law was violated
Dr. Campbell could not prove he met the employment exception
Dr. Campbell was at hospital frequently, but not performing services in agreement
Court held that compensation was not FMV if services were not rendered (regardless of FMV report)
“If there was no requirement to actually perform the duties of [employment agreement] then the compensation could not be the fair market value for those services…”
2011 U.S. Dist. LEXIS 1207 (1/4/2011)6
U.S. v. Campbell
Lessons Services must be rendered in a manner generally
consistent with the services valued FMV report only as good as its assumptions To be a basis for separate compensation, there
should be separate service rendered
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U.S. v. Covenant Medical
Covenant Medical Center of Waterloo, Iowa paid $4.5 million to settle Stark Law and False Claims allegations (2009)
DOJ claimed that payments to 5 employed physicians exceeded FMV Two physicians paid more than $2M per year Three others were paid more than $1M per year Salaries were published on hospital’s form 990
Whether hospital relied upon FMV reports is unclear
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U.S. v. Covenant Medical
Lessons Full time employment is subject to potential
enforcement action Beware of the Lake Wobegon effect (everyone is
above average) DOJ enforcement can depend on overall optics
Look at both the forest and the trees
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Acquisition Case Study Local Physicians Group was recently awarded approval for a
certificate of need to develop a new surgery center Fearing competition, City Hospital proposes to purchase this
prospective ASC from Group In light of its lack of operating history, Hospital will purchase
any fixed assets already purchased by Group and the CON Hospital will develop the ASC and offer the physicians part-
time employment agreements at a fixed compensation per wRVU every time the physician performs a case in the ASC
Hospital will pay Group’s physicians for a non-compete agreement
Group’s accountant recommends that Group contribute any intangible value not purchased by Hospital to Hospital’s foundation
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Compliance Concerns
Compensating physicians only when performing a designated health service and not when performing office visits
FMV basis for intangible assets FMV basis for paying for non-compete
Is a non-compete distinguishable from an agreement to refer in this context?
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U.S. ex rel. Drakeford v. Tuomey (2011)
Surgeons begin development of an ASC Hospital hires surgeons as employees
Part-time; during surgical procedures; surgeons maintain office practice separately
Fixed salary, plus 80% of collections, plus quality incentives
DOJ alleged that compensation exceeded 100% of actual collections (and was up to 140% of collections)
Hospital internal documents project losses on all employment agreements
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U.S. ex rel. Drakeford v. Tuomey
DOJ argues that compensation is not FMV because “the hospital’s motivation in entering into these part-time agreements was to avoid losing the referrals” While Stark Law is strict liability, the DOJ looked
at motivation of parties At trial, jury concludes Stark Law violated, but
not False Claims Act Jury awards DOJ $49.4 million New trial ordered on False Claims issues
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U.S. ex rel. Drakeford v. Tuomey
Lessons Employment exception large, but not infinite Motivation can color FMV analysis Risk exists where employment compensation not
based upon survey or objective data Long term physician employment losses could
receive more scrutiny Basis for losses needs to be justified or presumption
is that the loss is tied to referrals
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U.S. ex rel. Singh v. Bradford Regional (2010)
Group of two physicians lease nuclear camera from GE and perform services in office rather than in hospital
Hospital rents camera from Group (with non-compete); camera remains in Group’s office Hospital pays $23,655 per month, an amount derived from
Group’s revenue from use of the camera ($6,500 per month related to prime lease from GE)
Per Stark, fixed rental rate not take into account volume or value of referrals 66 Fed. Reg. at 877 (before per click rule)
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U.S. ex rel. Singh v. Bradford Regional
District Court granted summary judgment against the hospital Court placed burden of proof to show FMV on
hospital Found that amount of compensation was arrived
at by taking into account the anticipated referrals of the physicians
Found that if price takes into account referrals, then price is not FMV
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U.S. ex rel. Singh v. Bradford Regional
Lessons FMV analysis and reports are useful, but courts
may look behind at the underlying purpose/terms Need to identify clear non-referral related basis
for intangible assets or counterintuitive FMV terms
Purchase price needs to make sense from a non-referral basis
Some things just can’t be purchased
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Bergquist v. Commissioner (2008)
Background University Anesthesiologists, P.A. (UA) was the exclusive
provider of anesthesiology to Oregon Health & Science University Hospital
In 1998, Hospital formed OHSU Medical Group as a 501(c)(3) and required all physician groups that wished to remain affiliated with Hospital to consolidate into the group by Jan. 2002
In Sept. 2001, anesthesiologists in UA donated stock in UA to a charity and claimed a charitable donation UA’s valuation expert used going concern value Charity valued donated stock at $0
On Jan. 1, 2002, anesthesiologists became employed by OHSU Medical Group
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Bergquist v. Commissioner
Tax Court findings UA should not be valued as a going concern because
the consolidation of UA into OHSU Medical Group was foreseeable at the date of donation UA would not have donated the stock without the
consolidation Commissioner’s expert valued UA at net asset value
Value estimated to be less than 10% of that claimed by Bergquist
Court agreed with Commissioner’s findings Court concluded that no reasonable buyer would have
paid at a going concern rate for UA stock knowing that UA was being consolidated
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Make sure compensation arrangements with referral sources are FMV for services rendered Have policy in place to appropriately document FMV
for services provided using reasonable approaches as discussed throughout this webinar
Monitor compliance with policies Review third party opinions for completeness,
accuracy, and reasonableness Review services actually provided to those
required under agreements Check all line items on medical director time sheets Verify time spent providing co-management services
Use common sense in determining if compensation could be viewed as related to referrals Learn from Covenant, Bradford and Tuomey
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Summary and Takeaways
I Thought FMV Was Supposed to be Bulletproof: Recent Court
Decisions Involving Fair Market Value
Jeff Fitzgerald, Shareholder, Polsinelli [email protected]
Curtis Bernstein, Director, Sinaiko Healthcare [email protected]
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