Super Groups: Legal Issues Associated with the Formation of Large Multi-site Medical Groups

1. Super Groups: Legal Issues Associated with the Formation of Large Multi-site Medical Groups a presentation for the Middlesex County Medical Society at Due Mari Restaurant, New Brunswick, N.J. by: Michael F. Schaff, Esq. WILENTZ, GOLDMAN & SPITZER, P.A. 90 Woodbridge Center Drive Woodbridge, NJ 07095 732-855-6047 MSchaff@Wilentz.com October 17, 2012

2. I. Overview • Changes in the Health Care Environment • Physician Associations • Are Super Groups the Answer? • Traps for the Unwary: Assessing prospective Groups • Questions & Answers

3. II. Changes in the Health Care Environment • Managed Care • market penetration • provider panels • reduced fees • consolidation • Greater Efficiency forced by Market • reduced fees • reduced staff • reduced overhead • greater patient volume

4. II. Changes in the Health Care Environment • Regulatory change & uncertainty • Accountable Care Organizations • Medicare/Medicaid will change • Reimbursement Changes

5. III. Physician Associations OPTIONS • Employment in private practice; no ownership • Employment by hospital or other entity • Solo practice • Group Practice • small; 2-5 Drs. • medium; 6-15 Drs. • large; 16- 25 Drs. • Super Groups; 26+ Drs.

6. III. Physician AssociationsYour CURRENT SITUATION • What do you want? • personal needs • financial needs • career needs • Current Likes & Dislikes • Characteristics • age • culture • personality

7. III. Physician AssociationsWHAT ALTERNATIVES EXIST? • All’s Fine • Sell Practice & Retire • Sell Practice & Work • Contract Away Administration • Management Service Organization (MSO) • Physician Practice management Company (PPMC) • Join Hospital • Merge or Combine Practice • Into existing Super Group? • Start a new Super Group?

8. III. Physician AssociationsMAJOR CONSIDERATIONS • Compensation • How much will you make? • Group Practice • Rights & Obligations • Control? • Centralized Management • Benefits • Costs

9. IV. Traps for the Unwary:Assessing Prospective GroupsWhy Form or Join a Group Practice? • Significant Benefits • Improved Negotiating • Increased Revenue Sources – Ancillary Revenue • Economies of Scale • Shared duties & info. • Coverage • Practice risks • Retirement

10. IV. Traps for the Unwary:Assessing Prospective GroupsWhy Form or Join a Group Practice? • Significant Disadvantages • Reduced Control • medical • financial • Possible change in compensation structure • Increased Costs- Higher Overhead • Culture “shock”

11. IV. Traps for the Unwary:Assessing Prospective Groups“Culture Shock” • Different styles • Demographics • age • specialties • culture/ethnicity • Decision Making • Support staff • Office Policies • Integration of Information Systems • Practice management systems • Electronic Health Records (EHR)

12. IV. Traps for the Unwary:Assessing Prospective GroupsBusiness Issues • Administrator & Management • Staff Satisfaction • Advisors • legal • accounting • consultants • Quality of Payer Contracts

13. IV. Traps for the Unwary:Assessing Prospective GroupsHoneymoon Period • May ease transition • Disassociation planning • Cost/profit center accounting

14. IV. Traps for the Unwary: Challenges in Combining GroupsLegal Hurdles • Anti-trust laws • limits mergers that reduce competition • limited exemption for health care professional coalitions • Concerns about the use of “pseudo-merger” to engage in illegal price fixing • Must do an analysis of increased market power vs. benefits of integration • There is a PULL between integration requirement vs. desire for independence • control (decision making) • sharing of profits and losses • clinical, operational and marketing integration

15. IV. Traps for the Unwary: Challenges in Combining GroupsLegal Hurdles • Self-referral law “group practice” requirements • centralized billing & management • single taxpayer ID • general sharing of overhead • Pension plan rules require coordination of plans • Taxability of transaction– be careful; structure may have significant tax ramifications

16. IV. Traps for the Unwary:Assessing Prospective GroupsLevel of Integration • Partially Integrated Medical Group “PIMG” • cost/profit centers • Fully Integrated Medical Group “FIMG”

17. IV. Traps for the Unwary: Combination Models • Top to Bottom Merger is a complete merger. • Division Model is a way to allow existing groups to retain control over various existing elements of their practice, such as staff and billing. • Leasing Assets vs. Merger or Contributions • tax issues

18. IV. Traps for the Unwary:Division Model • Operation as a single legal entity with a single billing number and payroll (referred to as the “LLC”) • Several divisions (one for each existing group) that are not separate legal entities. • Operational control over each division by governance at the division level • each division determining their own method of division-level governance • but subject to the LLC final approval

19. IV. Traps for the Unwary:Division Model (con’t) • Billing and collection is done in the name of the LLC • Buy/sell terms and obligations at • Division-level (for Division Assets) and • Centralized Level (Common Asset Level)

20. IV. Traps for the Unwary:Division Model (con’t) • Cash distributions: • allocated to divisions based on agreed upon mechanism • allocation of division-specific costs and revenues to the division • concerns STARK LAWS & distribution of DHS Revenue unless division has >5 members • allocation of common overhead costs to all divisions based on agreed upon formula • per capita vs. per division vs.per owner vs. per FTE vs. revenue vs.# of staff • allocation of distributions at the division level determined by division-level governance

21. IV. Traps for the Unwary:Division Model (con’t) • Joint exposure to liability • malpractice • overpayment • billing fraud, etc.. • Assets may be kept in existing entities owned by members of a division and leased to the LLC • lease payments will be allocated to the division (should be a wash for the Members of the division) • unwind provision allows for termination of leases during “honeymoon period” or beyond • bank loans secured by an exiting group’s guarantees continue to be secured by those member’s guarantees

22. IV. Traps for the Unwary:Payor Contracting • In general, payor contracts would be at the LLC level • While existing contracts with third party payors must be reviewed in the due diligence process, if the combination of the groups is accomplished by creating the LLC as a new entity (and not by merging the existing entities into the LLC), the pre-combination contracts should not apply to services provided through the LLC.

23. IV. Traps for the Unwary:Assessing Prospective GroupsDetermination of Ownership • Value of existing practices • Adjustments? • Equal? • Other? • Significance of Ownership • control, compensation & equity

24. IV. Traps for the Unwary:Assessing Prospective GroupsAllocation of Control • Centralized Control • Executive or Management Committee • Control at Division Level for daily items • Protection for minority members • Corporate ethics • Business decisions • Medical decisions

25. IV. Traps for the Unwary:Assessing Prospective GroupsHow is Compensation Determined? • Cost/income allocation • division level • full integration • Activities & status • production • seniority or ownership • non-medical activities • Mechanics • formula • committee

26. IV. Traps for the Unwary:Assessing Prospective GroupsHow can Employment be Terminated? • Voluntary withdrawal • retirement • honeymoon period • Without Cause • Cause • loss of license, etc... • Disability • Different Standards? • Appeal Procedure?

27. IV. Traps for the Unwary:Assessing Prospective GroupsPost-Termination Payments • How Determined? • Business Valuation • Formula • How Allocated? • Ownership Interests • Teermination/Deferred Compensation (Tax issues) • Restrictive Covenant • Funding Issues

28. IV. Traps for the Unwary:Assessing Prospective GroupsApplicability of Restrictive Covenants • Area and Duration • Prohibited activities • Liquidated Damages Vs. Injuction • Trial period affect

29. IV. Traps for the Unwary:Assessing Prospective GroupsAgreements with Related & Unrelated Parties • Management • Employment • Non-medical staff • Medical staff • Billing & collecting • Equipment Leasing • Real Estate • Labs & ancillary services

30. IV. Traps for the Unwary:Assessing Prospective GroupsAgreements with Related & Unrelated Parties -- Concerns • Who owns entities? • Are certain members benefiting disproportionately? • Are non-members benefiting? Are terms “arms length”? • Do transactions comply with laws & regulations?

31. V. QUESTIONS AND ANSWERS

32. Super Groups: Legal Issues Associated with the Formation of Large Multi-site Medical Groups a presentation for the Middlesex County Medical Society at Due Mari Restaurant, New Brunswick, N.J. by: Michael F. Schaff, Esq. WILENTZ, GOLDMAN & SPITZER, P.A. 90 Woodbridge Center Drive Woodbridge, NJ 07095 732-855-6047 MSchaff@Wilentz.com October 17, 2012