Spine Intervention Society 25 th Annual Scientific Meeting July 22, 2017

1. Spine Intervention Society25th Annual Scientific MeetingJuly 22, 2017 Spot the Issues: Is Your Medical Business Operating Legally? W. Kenneth Davis, Jr.Katten Muchin Rosenman LLPChicago, Illinois312.902.5573ken.davis@kattenlaw.com

2. Disclosures • None.

3. Introduction • “60-day rule” for reporting and returning of overpayments. • Stark Law: the prohibition (and state law analogues). • Stark Law in-office ancillary services (“IOAS”) exception. • Stark Law non-monetary compensation exception. • Medicare anti-markup rule for diagnostic tests. • “Radar screen” issues for physician groups who focus on treating pain. • Transactions with physician practice management companies (“PPMCs”). • Mergers & acquisitions of physician groups.

4. “60-Day Rule” for Reporting and Returning of Overpayments

5. Affordable Care Act “60 Day Rule” • 60 Day Rule requires providers to report and refund overpayments within 60 days of “identification.” • “Overpayment’’ is defined in Section 6402 of the ACA as any funds a person receives or retains under Medicare or Medicaid to which the person, “after applicable reconciliation,” is not entitled.

6. Affordable Care Act “60 Day Rule”(cont'd) • An overpayment is “identified” when a person has or should have, through the exercise of reasonable diligence, determined that an overpayment was received. • “Reasonable diligence” is demonstrated by timely, good faith investigation, which CMS indicates is at most 6 months from the receipt of credible information regarding a potential overpayment absent extraordinary circumstances. • An overpayment is not “identified” until it is quantified (unless a provider fails to exercise reasonable diligence). • Overpayments identified by a probe sample need not be returned until the full overpayment amount is identified.

7. Affordable Care Act “60 Day Rule”(cont'd) • Failure to exercise reasonable diligence to investigate credible information regarding a potential overpayment will result in a violation of the 60 Day Rule under the “should have known” standard if an overpayment was received. • CMS advises providers to maintain records of their reasonable diligence efforts.

8. Affordable Care Act “60 Day Rule”(cont'd) • BE AWARE OF THE IMPLICATIONS FOR FAILURE TO COMPLY WITH THE 60 DAY RULE:Any overpayment retained past the deadline is an “obligation” under the reverse false claims provision of the False Claims Act (“FCA”). • FCA penalties are not less than $5,500 nor more than $11,000 per claim plus treble damages. • THIS MEANS: the old “fix it, move on, but don’t refund” approach is no longer viable.

9. Stark Law: The Prohibition (and State Law Analogues)

10. Stark Law Prohibited Activity “If a physician (or an immediate family member of such physician) has a financial relationship with an entity . . . then the physician may not make a referral to the entity for the furnishing of designated health services (“DHS”) for which payment otherwise may be made” under Medicare (and to some extent Medicaid) UNLESS AN EXCEPTION APPLIES.

11. Stark Law Penalties Denial of payment. Disgorgement. Fine of up to $15,000 for each service a person “knows or should have known” was provided in violation of Stark. Fine of up to $100,000 for attempting to circumvent Stark for each such circumvention or scheme. Exclusion from all federally-funded health care programs.

12. Stark Law Important Definitions Financial Relationship: Defined to include any type of ownership or investment interest and any compensation arrangement, i.e., any arrangement involving any remuneration between a physician and an entity, directly or indirectly, overtly or covertly, in cash or in kind.

13. Stark Law Important Definitions (cont'd) Remuneration: Defined to include any payment or other benefit made directly or indirectly, overtly or covertly, in cash or in kind, subject to certain limited exceptions.

14. Stark Law Important Definitions (cont'd) Designated Health Services includes in its definition (among other services of less relevance to the audience): Clinical laboratory services. Physical therapy, occupational therapy, and outpatient speech-language pathology services. Radiology and certain other imaging services. Outpatient prescription drugs. It does NOT include ambulatory surgery center services. But only items and services included in facility fee.

15. Stark Law Important Definitions (cont'd) Referral: Defined more broadly than merely recommending a vendor of DHS to a patient; instead, it is defined as “the request by a physician for the item or service” or the “establishment of a plan of care by a physician which includes the provision of the designated health service.”

16. State Law Analogues to Stark Law Be sure to check applicable state law for Stark-like prohibitions. They are often “all payor” laws. And they can be quite different from the Stark Law, and potentially more burdensome.

17. Stark Law In-Office Ancillary Services (“IOAS”) Exception

18. Key Elements of IOAS Exception Who furnishes the service? Where is the service furnished? How is the service billed? Disclosure requirement for MRI, CT and PET.

19. In-Office Ancillary Services ExceptionExecution Risks • Why is the group practice definition important: It’s much more difficult for solo practitioners, and for physician practices that don’t satisfy the group practice definition, to then meet the requirements of the in-office exception. • Critical execution risks under group practice definition: • Single legal entity operating primarily for the purpose of being a physician group practice in any organizational form recognized by the State in which the group practice achieves its legal status. • 75% test (designed to attach GPWWs and OWAs). • Productivity-based compensation, what it can be based upon, and how it can be calculated.

20. In-Office Ancillary Services ExceptionExecution Risks (cont’d) • Who furnishes and/or supervises the service. • Note the roles of a member of the group practice or a physician in the group practice. • Both need a group practice to exist.

21. In-Office Ancillary Services ExceptionExecution Risks (cont’d) • Same building: • Be careful about “single street address as assigned by the U.S. Postal Service.” • If a full-time office (35 hrs./30 hrs.), easier to satisfy the exception. • If a part-time office (8 hrs./6 hrs.), then there is less flexibility under the exception. • Centralized building: • Be careful about the full-time and exclusive requirement.

22. In-Office Ancillary Services ExceptionExecution Risks (cont’d) • Who bills for the service? • Special rules for DME. • Possibility that another entity, in addition to the referring physician/group practice, furnished the designated health service. • Remember that “entity” also includes any person or entity that “performed” the service. • Disclosure requirement for MRI, CT and PET.

23. Stark Law Non-Monetary Compensation Exception

24. Stark Law Exception forNon-Monetary Compensation This exception applies to compensation from an entity in the form of items or services (not including cash or cash equivalents) that does not exceed an aggregate of $300 per year if certain conditions are satisfied. Amount is indexed to increase with the Consumer Price Index-Urban All Items (see http://www.cms.gov/PhysicianSelfReferral/50_CPI-U_Updates.asp#TopOfPage (the “CY $$$ Limit”). The CY $$$ Limit for calendar year 2016 was $392. The CY $$$ Limit for calendar year 2017 is $398. CMS has clarified that the dollar limitation is to be calculated on a calendar year basis.

25. Stark Law Exception forNon-Monetary Compensation (cont'd) All of the following conditions must be satisfied: The compensation is not determined in any manner that takes into account the volume or value of referrals or other business generated by the referring physician, The compensation may not be solicited by the physician or the physician's practice (including employees and staff members), and The compensation arrangement does not violate the anti-kickback statute.

26. Stark Law Exception forNon-Monetary Compensation (cont'd) The exception now has a limited repayment mechanism to preserve compliance. Where an entity has inadvertently provided nonmonetary compensation to a physician in excess of the dollar limit for that year, such compensation is deemed to be within the limit if: The value of the excess nonmonetary compensation is no more than 50 percent of the limit, and The physician returns to the entity the excess nonmonetary compensation (or an amount equal to the value of the nonmonetary compensation) by the end of the calendar year in which the nonmonetary compensation was received or within 180 consecutive calendar days following the date the excess nonmonetary compensation was received by the physician, whichever is earlier. This repayment mechanism may be used by an entity only once every 3 years with respect to the same referring physician. 25

27. Medicare Anti-Markup Rule for Diagnostic Tests

28. Anti-Markup Rule • “[I]f a physician or other supplier [such as the physician’s group] bills for the technical component (TC) or professional component (PC) of a diagnostic test that was ordered by the physician or other supplier (or ordered by a party related to such physician or other supplier through common ownership or control as described in §413.17 of this chapter) and the diagnostic test is performed by a physician who does not share a practice with the billing physician or other supplier, the payment [by Medicare] to the billing physician or other supplier (less the applicable deductibles and coinsurance paid by the beneficiary or on behalf of the beneficiary) for the TC or PC of the diagnostic test may not exceed the lowest of the following amounts: • (i) The performing supplier's net charge to the billing physician or other supplier. For purposes of this paragraph (a)(1) only, with respect to the TC, the performing supplier is the physician who supervised the TC [i.e., who satisfied the Medicare supervision requirements], and with respect to the PC, the performing supplier is the physician who performed the PC. [or] • (ii) The billing physician or other supplier's actual charge [i.e., the amount the group charges for the diagnostic test]. [or] • (iii) The [Medicare Physician] fee schedule amount for the test that would be allowed if the performing supplier billed directly.”

29. Anti-Markup Rule(cont’d) • The implications for physician groups who globally bill Medicare (i.e., who bill Medicare for both the technical component [“TC”] and the professional component [“PC”]) for diagnostic tests, particularly for radiology and other imaging services. • Analysis: • Does the rule apply? • To the TC? • To the PC? • Alternatives for addressing the impact of the rule.

30. “Radar Screen” Issues for Physician Groups Who Focus on Treating Pain

31. What Are “Radar Screen” Issues? • Issues that we know from experience are at the “center of the radar screen” for regulators and enforcement agencies.

32. Issues for Physician Groups Who Focus on Treating Pain • Prescription of opioids. • According to the Federal government, “Opioid abuse is a serious public health issue.” • Urine and blood testing.

33. Transactions with Physician Practice Management Companies (“PPMCs”)

34. Tactics: How PPMCsDo What They Do • Identify “high value” groups. • What does this mean? • It’s all in the eyes of the beholder.

35. Tactics: How PPMCsDo What They Do(cont'd) • Engage in dialogue. • Emphasize the PPMC’s value proposition for the physician group. • Today the “sell” by the PPMC is less about current monetization for the physicians of future earnings, rather . . . • The PPMC tends to focus on the additional revenue that the PPMC believes it can help generate for the group. • Beware of simply accepting the PPMC’s propositions: challenge the assumptions. • Emphasize the level and types of control that the physicians will retain. • Beware: the devil’s in the details. • To a certain extent, play to the insecurities, if not outright paranoia, of the physician group. • The physician group must have a realistic sense for its strengths and weaknesses, and for its relative position in the market served by the physician group. • Beware of starting down the path to a deal with a PPMC, because it can be very difficult to turn around. • Connect the target with other physician groups who are affiliated with the PPMC. • Beware of groups who have financial incentives to “gild the lily” (such as “founding groups”).

36. Tactics: How PPMCsDo What They Do(cont'd) • Determine a value for the practice (a “price”) and for the ongoing relationship (the “compensation”). • Beware of the “bait and switch.” • Develop preliminary structure for the transaction. • TAX, TAX, TAX (more in a later slide)! • Don’t assume that certain structures won’t work. • Persuade (co-opt?) the physician group’s key leadership. • Enter into a letter of intent (“LOI”) with a binding “no shop” provision. • Query how much effort should be put into the LOI?

37. Tactics: How PPMCsDo What They Do(cont'd) • Prepare documents. • Beware of “these are our documents, and we can’t move off of them.” • Beware of “trust us, that’s never going to happen.” • And beware of signing anything that’s: • Incomprehensible, • Just doesn’t make sense, or . . . • Potentially illegal. • If it’s important or needs more clarity, then put it in the documents. • Negotiate the deal. • Beware of artificial pressure. • At the same time, remember that today’s world of medicine is much different from what it was 20, 10 or even 5 years ago. • Close.

38. Threshold Issues • What’s the deal that’s on the table? • Purchase price and then ongoing compensation? • Carefully analyze any earnout because they are generally disfavored under the law. • Form of consideration, i.e., cash, equity and/or debt? • TAX CONSIDERATIONS, PARTICULARLY AS THEY PERTAIN TO THE INITIAL “SALE,” MUST BE ADDRESSED AT THE OUTSET OF THE STRUCTURING PART OF THE DIALOGUE. • AND REMEMBER ANY TAX/ACCOUNTING “SKELETONS IN THE CLOSET” THE PHYSICIAN GROUP MIGHT HAVE.

39. Threshold Issues(cont'd) • Critically important to “connect the dots.” • The interplay of all of the documents and all of the moving parts of the arrangement, on a going forward basis, can disguise somewhat insidious consequences for the physicians. • So, put it all together and understand exactly what the physician group is agreeing to and what the potential consequences are.

40. Threshold Issues(cont'd) • How much commitment is the PPMC making to the physician group? • Are they willing to put it in writing? • Restrictive covenants? • Exclusivity and/or rights of first refusal?

41. Document Issues • Purchase Agreement. • Likely will be transacted as an asset purchase. • In certain states, might be able to transact as an equity acquisition. • Form of consideration , i.e., cash, equity and/or debt. • Earnout (if any). • Reps and warranties. • Indemnification. • Escrow (if any). • Restrictive covenants.

42. Document Issues(cont'd) • Management Services Agreement. • Why it’s used? • And when it might not be as important? • What is the PPMC supposed to do? • What does it control? • What is the physician group supposed to do? • What does it control? • How does the PPMC get paid? • Need a “waterfall” provision describing order of priority for payments. • Should clearly state (not subject to amendment) that the physicians get paid first, under their respective employment agreements, before the PPMC gets paid. • Restrictive covenants? • For physician group? • For PPMC? • Amendments? • Beware if the PPMC has deployed a “friendly physician model” (see subsequent slide).

43. Document Issues(cont'd) • Employment Agreements. • What they require of each physician? • What does the group retain control over and what does the PPMC have control over? • How is compensation calculated and paid? • Base? Incentive? Draw plus bonus? • Regulatory compliance? • Expenses? • Professional liability insurance? • Obligation upon termination of the employment agreement? • Restrictive covenants? • Ability of physicians to “talk among themselves.” • Term and termination? • Are they terminable without cause, and if so, is that desirable? • Amendments? • What if a single physician wants to terminate and/or amend her/his employment agreement?

44. Document Issues(cont'd) • Option Agreement. • Implements the “friendly physician model.” • What is this? • Why and how it accomplishes this? • When it might not be necessary. • Beware of how this agreement interacts with all of the other “going forward” agreements. • Management Services Agreement. • Employment Agreements.

45. Mergers & Acquisitions of Physician Groups

46. “To combine or not to combine,”and how? • Do the groups want, and are they ready, to truly “merge” their practices? • Would the groups prefer to come together in a way that is something less than a full merger? • If so, how? What are the alternatives? • What functionalities do they want to share, and what ones do they not want to share?

47. It’s about control and economics • Combining tends to be more about the process and about developing creative solutions for addressing control and economics. • It usually is less about traditional legal and regulatory issues. • Everyone must address and resolve the control and economic issues up front before getting too far into the process.

48. Definitional Assumption • For purposes of this presentation, the term “merger” is assumed to include both a true merger (in the corporate law sense) as well as asset purchases (that effectively achieve the same business objectives as a full merger).

49. Full Merger • A full merger results in a single surviving entity (the merged group) with single tax identification number and single provider number. • Physician ownership and governance is only in the merged group. • Physicians become employees of the merged group.

50. Full Merger (cont’d) • Merged group is the party to and holds all: • Payor contracts. • From the group’s perspective, the merged group holds any provider agreements (such as coverage agreements or management services agreements) with hospitals.