Legal Landmines in Collaborative Oncology Ventures

1. Legal Landmines in Collaborative Oncology Ventures Presented by: Michael L. Blau, Esq. Foley & Lardner LLP 617.342.4040 MBlau@foley.com

2. Reductions to Physician Payment Radiation Oncology and Medical Oncology Cuts for 2010 Total Allowed Charge Impact for Work, Practice Expense, and Malpractice Charges, 20101 1 Changes to be implemented over a 4-year period. Source: CMS, “Medicare Program: Payment Policies Under the Physician Fee Schedule and Other Revisions to Part B for CY 2010,” available at: www.federalregister.gov, accessed November 3, 2009.

3. Physician Income Already at Risk Threatening Future Viability of Medical Oncology Delivery Model Drug Margins1 Profit per Patient Private Practice Medical Oncologists Private Practice Medical Oncologists 1 Measured as gross revenue divided by total number of patients. Source: McKesson, “Onmark 3rd Annual Benchmarking Survey Shows Community Oncology Practices Seeing More Patients, Makey Uses Profit Per Physician,” July 29, 2008, available at: www.mckesson.com, accessed September 2, 2009.

4. Collaborative Ventures • Hospital-Physician Collaboration • Physician-Physician Collaboration

5. Principal Legal Landmines • Stark Law • Anti-Kickback Statutes • Civil Monetary Penalty Law • False Claims Act • Reassignment Rules • Purchased Diagnostic Test/Anti-Mark-Up Rules • Provider-Based Status Rules • 340B Drug Pricing • Tax-Exemption Requirements • State Law Issues (License, CON, corporate practice, fee-splitting, etc.) • HIPAA, HITECH Act, and privacy/security rules • Antitrust/Unfair Competition Laws

6. Impact of Recent Legal Developments on Collaborative Ventures • Stark Law • Phase III rule (effective December 4, 2007) • Additional proposed rules; Incentive Payment and Cost Savings Exception • Additional final rules (effective Oct. 1, 2008; Oct. 1, 2009) • OIG Advisory Opinion 8-10 (August 19, 2008) • OIG Advisory Opinion 8-16 (October 14, 2008) • Anti-mark-up rules • Stimulus and Budget Bills • Health Reform?

7. Contracts Physician Employment Leased Employee Arrangements Recruitment Agreements Professional Service Agreements Practice Acquisition Agreements Practice Support Agreements Clinical Research Agreements Contractual Venture Models Block Leases Service-Line Co-Management Gainsharing Arrangements Center of Excellence Model Modified Under Arrangements Model (Hospital Outpatient Facilities) Practice Lease and Management Arrangements Non-Clinical Joint Ventures Ambulatory center facility development Equipment leasing companies Management companies HIT ventures Clinical Joint Ventures Cancer Centers ASCs Ambulatory Clinics Foundation Model Arrangements Hospital-Affiliated Group Practices 2nd Generation Practice Management Organizations Seeding practice integration Participating Bond Transactions Physician-Hospital Organizations (PHOs) Payor and P4P contracting Risk contracting Clinical Integration Captive Insurance Arrangements Multiple Models for Successful Collaboration

8. Hospital-Physician Collaboration

9. Trends in Hospital-Physician Collaboration • Employment • Practice acquisitions and charitable contributions • Community oncologists moving on-campus or into hospital-affiliated groups • Integration and alignment for quality and efficiency improvement and for multi-disciplinary care • Legal developments narrow somewhat options for collaboration

10. Physician Employment • Increase in employment by hospitals • Shortage of oncologists by 2010 • Change in attitude of younger physicians toward employment • 8/9 of 10 graduating residents prefer employment • Financial distress of community medical oncologists • Integrate, align and control destiny • Less legal risk

11. Hospital Employment of Oncologists Hospital Employment of Oncologists n = 126 No Plan to Employ CurrentlyEmploy Plan to Employ in Next 2-3 Years

12. Continued Interest in Collaborative Arrangements Percentage of Hospitals Having Implemented or Considering Alignment Models1 n = 107

13. Hospital/Health System AffiliatedGroup(Exempt) Payors LeasedPhysicians $ CommunityOncology (Division) Example 1: Leased Physicians: Enhanced Rates • Remain in community • Enhanced RVU-based compensation • Enhanced benefits

14. Example 2: Addressing Town/Gown Issues ChiefofMedicine Chief ofOncologyDivision Academic Hospital/HealthSystem CommunityOncologists AS&TSupport(Subsidy) • Board • Majority community • oncologists • Concurrent reserved powers • AMC reserved power over • amendments/budgets in • extraordinary circumstances Leaseassets New OncologyFoundation(Exempt) $ CommunityOncologyGroup $ CommunityOncologists Lease ortransferemployees • 1 year guaranteed comp @ enhanced • rate (based on base-line RVUs) • Productivity-based comp thereafter @ • enhanced, bracketed RVU rates • Cap at 90th percentile MGMA

15. Impact of Recent Legal Developments on Collaborative Arrangements • Affects space, equipment and block lease/sharing arrangements • Stark prohibition of percentage based space and equipment leases (411.357(a), (b) and (p), effective October 1, 2009) • Stark prohibition of per unit service (“per click”) arrangements (411.357(a), (b) and (p), effective October 1, 2009) • No more FMV exception for space leases (411.357(a) and (p), effective December 4, 2007) • Affects “next available room” shared space arrangements • Space lease must include period of exclusive use

16. Example 3: Private Practice Movingon-Campus Legal Issues • MO space lease not percentage-based or fee per use • Lab equipment should be valued on a cost basis, not business enterprise basis • All agreements must be fair market value • No CON, but facility license • Outpatient facility • Linear accelerators • Imaging (MRI, PET/CT) Hospital SpaceLease MO Group Payors MO/InfusionServices • Professional Services CommunityCancerCenter RO (Pro Fee)Services Payors • Employee Lease Lab Equipment • RT Technical • Component • Ancillaries • Hospital • services MOMedical Director ROGroup Ancillaries(Lab, Imaging) ROMedical Director

17. Impact of Recent Legal Development on Collaborative Arrangements • Affects investment in “under arrangements” entities and turn-key management or leasing companies • Stark prohibition on ownership interest in entity that performs the DHS (411.351, definition of “entity”, effective October 1, 2009) • Exception for ownership interests in rural providers and public companies • CMS declines to provide guidance on what it means to “perform” the service (i.e., what combination of providing space, equipment, supplies, non-physician clinicians, administrative staff, executive services) • Modified under arrangements ventures permitted

18. Example 4: Hospital (Modified) Under Arrangement Model Payors • Hospital provides: • License • Provider-based status • Equipment or mid- levels Notes: • Space and equipment provided on fixed fee or cost plus basis (cannot be per click or percentage based) • Medical directorship services provided on fixed fee basis • Physician staffing and management services provided on • Budget-based guarantee • Fee for service • Cost plus, or • Fixed fee basis • Must be fair market value (independent appraisal) • Financial terms can be adjusted annually or periodically within decision-making/deadlock resolution framework • Site of service differential for physician services provided in hospital space and billed by oncology group Hospital FacilityFees • Site of servicedifferential $ ProFees • Group provides: • Space • Equipment or mid-levels • Non-clinical staff • Medical directorship • Physician staffing services • Management services OncologyGroup Hospital Lease and Services Agreement Medical Directorand Physician Staffing CommunityCancer Center $

19. Hospital (Modified) Under Arrangements Model Two Variants of the Model Professional Services Agreement Hospital-Based Service Agreement • Hospital purchases and bills for all medical oncology services • Hospital is paid at hospital outpatient rates • Hospital pays medical oncology group for professional services • Hospital provides and bills for infusion services • Hospital is paid at hospital outpatient rates • Hospital purchases and pays oncology group for medical directorship and infusion supervision services • Oncology group bills separately for E&M services performed in outpatient department and is paid at physician rates with site of service differential Source: Foley & Lardner

20. Example 5: Hybrid (Modified) Under Arrangement Model Payors HospitalFacility Fees $ ProFees Hospital CommunityOncologyGroup Lease andServices Agreement Medical Directorand physician staffing CommunityCancerCenter(Hospital) PrivatePracticeSpace $ • Notes: • Same as Example 4, except: • - Oncology Group retains private practice space in Cancer Center • - Oncology Group is responsible for practice overhead in private practice space • - No site of service differential for private practice services in private practice space

21. Impact of Recent Legal Developments on Collaborative Arrangements • Affects turn-key management contracts and contractual joint ventures • OIG Adv. Op. 8-10: Block Lease of IMRT equipment by oncology group to urologists, together with turn-key support services on a fixed, FMV basis, constitutes impermissible contractual joint venture that may violate anti-kickback statute • Providing opportunity for urologists to profit may be improper remuneration that is not safe harbored • Implications for turn-key block leases of imaging or IMRT services by hospital to oncologists (or vice versa)

22. Example 6: Leased Practice/Practice Management Hospital/Health System AffiliatedGroup(Exempt) Payors LeasedPhysicians &Techs $ PracticeMgm’t Services $ CommunityOncology Group (Division) CommunityCancer Center(Hospital) PracticeSpace • Nonclinical Staff $ Lease Assets • Legal Issues • Oncology group cannot “perform” the services • Asset lease cannot be on a percentage or per click basis

23. Impact of Recent Legal Developments on Collaborative Arrangements • New opportunities for quality and efficiency improvement ventures • Proposed Stark Law exception for Incentive Payment and Shared Savings Programs (411.357(x)) • Service Line Co-Management, gainsharing, pay-for-performance, pay-for-quality arrangements • OIG Adv. Op. 08-16

24. Service Line Co-Management Arrangements • The purpose of the arrangement is to recognize and appropriately reward participating medical groups/physicians for their efforts in developing, managing, and improving quality and efficiency of the hospital’s cardiology service line

25. Example 7: Hospital Service Line Co-Management $ MOGroup • Medical Director Services • Co-Management Services • Quality/Efficiency performance standards and targets HighlandHospital Service LineCo-ManagementAgreement ROGroup CancerCenter

26. Service Line Co-ManagementArrangements • The purpose of the arrangement is to recognize and appropriately reward participating medical groups/physicians for their efforts in developing, managing, and improving quality and efficiency of the hospital’s service line

27. Service Line Co-Management Arrangements • There are typically two levels of payment to oncologists under the service line contract: • Base fee – a fixed annual base fee that is consistent with the fair market value of the time and efforts participating oncologists dedicate to the service line development, management, and oversight process • Bonus fee – a series of pre-determined payment amounts contingent on achievement of specified, mutually agreed, objectively measurable, program development, quality improvement and efficiency goals • Pays participating oncologists 4-7% of service line revenues

28. Sample Medical Oncology Performance Standards Increase in percentage of patients with written treatment plans at start of infusion Increase in percentage of written treatment plans with indication of: Staging Intention of therapy Approved treatment regimen for tumor site/staging Increase in percentage of written treatment summaries at completion of course of treatment

29. Sample Medical Oncology Performance Standards Increase in patient satisfaction Increase in staff satisfaction Decrease in infusion site infections Substitution of lower cost drugs/items for drugs/items of equivalent efficacy and quality Increase in patient accruals for hospital clinical trials

30. Regulatory Considerations Legal constraints on Service Line Co-Management Agreements No stinting No steering No cherry-picking No gaming No payment for changes in volume/referrals No payment for quicker-sicker discharge Must be FMV; independent appraisal required Proposed Stark Law Exception for Incentive Payment and Shared Savings Programs

31. Regulatory Consideration • Key Constraints of proposed Exception: 16 detailed standards • Quality measures must be listed on CMS’ Specification Manual for National Hospital Quality Measures – too limited? • Applies to “cost savings resulting from reduction in waste or changes in physician or clinical practices” • Efficiency gains (e.g., turn-around times, on-time starts) that reduce unit cost, but not overall costs? • Performance measures to be judged against Hospital’s baseline historic and clinical data – Hospital may not have baseline information for some key measures • Targets developed by comparing to national/regional performance norms – may not be available benchmarks • At least 5 physicians must participate in each performance measure – service line may have less than 5 physicians

32. Regulatory Considerations • Key Constraints (Cont.) • Independent medical review prior to commencement and annually thereafter • Physicians must have access to same selection of items as before commencement of program – implications for standardization initiatives • Term of no less than 1 nor more than 3 years – implications for attractiveness, durability and continuous quality improvement • Re-basing – cannot pay for “maintenance” of quality/efficiency gains • Remuneration set in advance and cannot change during term – no opportunity to set new performance standards and reappraise during multi-year agreement

33. Regulatory Considerations • Cost savings metrics/incentives implicate Civil Monetary Penalty Law • Hospital cannot pay a physician to reduce or limit services to Medicare/Medicaid beneficiaries under the physician’s care • Cannot pay for reduction in LOS or overall budget savings • Can pay for cheaper not fewer items of equivalent quality1? • Potential to incent verifiable cost-savings from standardizing supplies or reducing administrative expenses as long as quality is not adversely affected and volume/case mix changes are not rewarded 1See OIG Special Advisory Bulletin on Gainsharing (July 8, 1999) and Clarification Letter (Aug. 19, 1999); See also OIG Adv. Ops. 01-1, 05-01-5, 06-22, 07-21, 07-22, 08-09, 08-15, 08-21, and 09-06

34. Regulatory Considerations • Volume/revenue based performance measures implicate the Anti-Kickback Statute and Stark law • Cannot reward increase in utilization, revenue, profits (or change in acuity)

35. Service Line Co-Management • Other Considerations: • Commits 3-6% of service line revenues • Requires active participation and real time and effort by busy physicians • Durability: need to periodically adjust performance standards and targets? • No accretion with additional physicians • Cost of independent appraisal and clinical monitor • Some irreducible legal risk

36. Example 8: Hybrid with Service Line Co-Management Agreement Payors Hospital Facility Fees ProFees $ Hospital CommunityOncologyGroup Lease and Services Agreement Service Line Co-Management Agreement PhysicianStaffing Agreement CommunityCancerCenter(Hospital) PrivatePracticeSpace $ • Notes: • Same as Example 5, plus • Service Line Co-Management Agreement (4-7% of Service Line revenue, which can be of both cancer center and hospital) • - Medical director component – fixed fair market value fee • - Co-management component – fixed fair market value fee • - Incentive component contingent on meeting specified quality and efficiency improvement standards – fixed FMV fee per • standard

37. Example 9: Pay-For-Quality Arrangement Payor P4P $ MDs Hospital Medical Staff Entity P4P Contract Up to 50% of P4P Dollars • OIG Adv. Op. 08-16 • Participating physicians are members of Medical Staff for at least one year • Participating physicians equally capitalize Medical Staff Entity • Quality targets are measures listed in CMS’ Specification Manual for Hospital Quality Measures • Payments to Medical Staff Entity are capped at 50% of base year P4P dollars (with inflation adjuster) • Quality targets and payments renegotiated annually • Monitoring to protect against inappropriate reduction or limitation in patient care services • Termination of physicians who change referral patterns (e.g., cherry pick patients) to meet targets • Maintain records of performance • Patients informed of Program in writing

38. Joint Ventures

39. Joint Ventures • Existing vs. new services • Joint ventures that cannibalize existing services rarely “make it up on volume!”* * Kaufman Strategic Advisors, LLC

40. Joint Ventures • Typical Hospital Joint Venture Strategies • Defensive • Free-standing cancer centers • 50% of high-end imaging in free-standing setting (30% margin) • 40% of outpatient surgery in non-hospital settings (20% margin) • Offensive • Market capture and growth • Win-Win ventures

41. Example 10: Equity Joint Venture ProFees ROGroup MOGroup Hospital • HospitalOutpatient Rates Payors $ DevelopCoLLC CancerCenter • RT/Infusion equipment • Leasehold improvements • Non-clinical staff • Hospital licensed MO/RO services • Non-physician clinicians (Infusion nurses, RTs) LeaseAgreement Legal Issues • New or upgrade vs. existing service • DevelopCo cannot “perform” the technical component of the RO/MO services • Lease agreement cannot be percentage-based or per-click for equipment or leasehold improvements • Lease agreement must be fair market value • Site of service differential on pro fees if professional services provided in hospital space

42. Example 11: Mid-West MO Group RT Facility Joint Venture Hospital MO Group $ SpaceLease • Leasehold improvements • IMRT Equipment PET/CT Equipment • Nonclinical Staff • Supplies MOGroup RT FacilityDevelopmentLLC $ Payors Lease &Service K $Global 25% $95/read RadiologyGroup ROGroup • Notes: • MO group can have ownership interest if LLC does not “perform” RT services • Equipment lease can be on percentage or per-click basis if aggregate compensation to MOs does not vary with or reflect volume or value of referrals to Hospital • Purchased professional services

43. Other JV Compliance Considerations • Anti-Kickback Statute – OIG Special Fraud Alert on Joint Venture Arrangements (Dec. 19, 1994): Suspect features include: • Investors are chosen because they are in a position to make referrals • Physicians who are expected to make a large number of referrals may be offered a greater investment opportunity in the joint venture than those anticipated to make fewer referrals • Physician investors may be actively encouraged to make referrals to the joint venture, and may be encouraged to divest their ownership interest if they fail to sustain an “acceptable” level of referrals • The joint venture tracks its sources of referrals, and distributes this information to investors

44. Other JV Compliance Considerations • Investors may be required to divest their ownership interest if they cease to practice in the service area, for example, if they move, become disabled or retire • Investment interests may be nontransferable • One of the parties may already be engaged in the particular line of business, and the joint venture is a “shell” • Investment returns are disproportionately high relative to typical investment in a new business enterprise • Physician investors invest only a nominal amount ($500-$1,500) • Physician investors borrow money for the investment from the joint venture (or from co-venturers) and repay out of joint venture distributions

45. Other JV Compliance Considerations • Non-Profit/For-Profit JVs: Preserving Tax Exemption • Where substantial charitable assets/activities are contributed by an exempt hospital: • Hospital must have majority control of board • Charitable purposes must take priority over profit opportunities • JV should not be managed by the for-profit investor on a long-term, lock-in basis • Transactions with for-profit investor must be at arm’s-length and FMV • Private use of tax exempt space must meet Rev. Proc. 97-13 durational limits (i.e., generally 2-3 years)

46. Permissible Collaborative Ventures • Employment/Leased Employee Arrangements • Block Lease Arrangements (e.g. Chesapeake Potomac Regional Medical Center) • Joint Venture ASCs (e.g. Clarian Health System) • Equipment Joint Ventures (e.g., Center for Cancer and Blood Disorders; Green Bay Oncology) • Hospital/Clinic-Based Staffing Agreements • Foundation Model Arrangements (e.g., Palo Alto Medical Foundation) • “Modified” Under Arrangements Model (e.g., Cancer Care Northwest)

47. Permissible Collaborative Ventures • Physician Lease/Management Arrangements (e.g., New England Hematology/Oncology Associates) • Quality and Efficiency Improvement Ventures (Service Line Co-management, Gainsharing, P4P, Pay for Quality Arrangements) (e.g., Hematology Oncology Patient Enterprises; Baycare Hospital; Parkview Health System)

48. Impermissible Joint Venture Hospital Oncologists PET/CT Provider (IDTF) Payors • May violate Stark Law • May violate Anti-Kickback Statute

49. Top 5 Reasons to Redouble Your Regulatory Compliance Efforts 5. If it makes sense in any other industry, it is probably illegal in healthcare 4. If you are sure you have it legally right,you have probably overlooked something 3. As soon as you truly have it right, the law can and will change 2. Just because everyone else is doing it doesn’t mean you won’t get caught 1. I can assure you that you do not want to do time cleaning toilets with Bernie Madoff at San Quentin

50. Practice Consolidation