Impact of Compliance Issues on Alternative Risk Financing

1. Impact of Compliance Issues onAlternative Risk Financing A Thomas Pedroni, Jr., Esq. Steven R. Smith, Esq. Ober|Kaler

2. Impact of Compliance Issues onAlternative Risk Financing Overview Defining the problem: What is alternative risk financing and how does it implicate compliance issues in the health care context? Laws and Regulations Medicare/Medicaid Anti-Kickback Statute Stark Law False Claims Act Physician Incentives to Reduce/Limit Service IRS Standards Medical Malpractice Subsidy Issues Physician Recruitment

3. Impact of Compliance Issues onAlternative Risk Financing Overview (continued) • Hospital Sponsored Alternative Risk Financing • Fair Market Value • Special Participation Conditions

4. Impact of Compliance Issues onAlternative Risk Financing Alternative Risk Financing • Use of a vehicle, other than typical commercial insurance, to provide financial protection against a given risk of loss. • Examples include: • Captive insurance companies • Risk retention groups • Self-insured trusts • Easily accomplished for a single entity or group of entities that desire to provide financial protection (“insure”) against their own risks • More difficult and complex when seeking to include an unrelated third party as part of the group that makes up the “insured” (this is generally known as “third party risk”)

5. Impact of Compliance Issues onAlternative Risk Financing Alternative Risk Financing (continued) • The inclusion of third party risk in an alternative financing arrangement implicates numerous compliance and legal issues For hospitals, the usual third party being considered for inclusion is a private physician or physician group • Compliance risks include: • Loss of tax exempt status (for exempt entities) • Violation of the Stark statute • Violation of the Anti-Kick back statute • Violation of the statute prohibiting payments to physicians to reduce services • Violation of special rules regarding subsidizing malpractice insurance payments by physicians

6. Impact of Compliance Issues onAlternative Risk Financing Anti-Kickback Statute (AKS) • Criminal and Civil Penalties (Severe) • Felony up to 5 years imprisonment • Fines • Exclusion from Medicare/Medicaid • Against individual or entity that knowingly offers or pays any remuneration or solicits or receives any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in order to induce the referral or arranging for business reimbursable under Medicare or Medicaid • Extremely broad prohibition – not only referrals of patients but also remuneration intended to induce purchasing, leasing, ordering or arranging for any good, facility, service or item paid for under Medicare or Medicaid

7. Impact of Compliance Issues onAlternative Risk Financing • AKS (or Stark) violation can constitute false claims under the False Claims Act (FCA) under an implied false certification theory. • United States v. Greber (leading case) – If one purpose is to induce referrals, law is violated. Broad interpretation is clearly now the law • 42 CFR §1001.951(2) • OIG Advisory Opinion • Crux of Medicare fraud is inducement • If one purpose of an agreement is to induce referrals, then the statute has been violated. It is not enough that there are other legitimate purposes to the agreement.

8. Impact of Compliance Issues onAlternative Risk Financing • If payments exceed or fall short of fair market value for goods or services actually rendered, the difference may be sufficient to establish intent to induce referrals. • The existence of legitimate purposes is not a defense. It is not enough that a party actually renders some service, or that part of a payment or forbearance can be explained in relation to goods or services if the remainder cannot. • The statute is violated if there is an intent to induce referrals; no formal agreement to do so is necessary. • The fact that arrangements of a particular type are common is not a defense. • The lack of direct harm to the Medicare or Medicaid program is not a defense. • The prohibition applies equally to “offering or paying” illegal remuneration and to “soliciting or receiving” illegal remuneration. Both parties to the transaction are at risk.

9. Impact of Compliance Issues onAlternative Risk Financing Safe Harbors • Requirements so broad Safe Harbors required – virtually any contract could be illegal. • Safe Harbors – practices that are not subject to criminal prosecution under the AKS and will not provide basis for exclusion from Medicare/Medicaid programs. But failure to comply with Safe Harbor is not perse illegal. • First Safe harbors published July 1991. Others published at 42 CFR §1001.95.

10. Impact of Compliance Issues onAlternative Risk Financing • Some common AKS safe harbors • Employees • Space/Equipment Rental • Personal Services and Management Controls • Physician Recruitment • Sale of Practice • ASC’s • Obstetrical Malpractice – Insurance Subsidies

11. Impact of Compliance Issues onAlternative Risk Financing • OIG Advisory opinions also authorized to deal with the prohibited remuneration, safe harbors, sanctions. • Advisory opinions don’t deal with fair market value (FMV) and do not bind OIG except as to the requesting party. • Insurance options that create financial relationship between physician and entity to which physician admits patients or orders services have the potential to be viewed as having a purpose to induce referrals in violation of AKS.

12. Impact of Compliance Issues onAlternative Risk Financing Stark Law • Strict liability law • No physician referrals for designated health services (DHS) permitted to entity in which physician (or a family member) has a financial relationship unless an exception is permitted. • DHS includes, among others • Inpatient and outpatient services • Laboratory services • Diagnostic radiology • Physical therapy • Home health services • DME

13. Impact of Compliance Issues onAlternative Risk Financing • Financial relationship is broadly defined. Includes any ownership or investment interest (with stated exceptions) or any compensation arrangement including employment. If a financial relationship exists, an exception must exist to avoid liability. • Severe civil money penalties for violations • Stark violations can also constitute false claim under FCA based upon implied certification theory. • Alternative insurance option that creates a financial relationship between physician and entity where referrals go to DHS must meet an exception. • Common Stark exceptions exist.

14. Impact of Compliance Issues on Alternative Risk Financing Physician Inducements to Reduce/Limit Services • 42 USC § 1320(a)-7a(b) prohibits any hospital from knowingly making a payment to a physician as an inducement to reduce or limit services to Medicare/Medicaid beneficiaries. • Civil money penalty of up to $2000 per patient for violators. • Gainshairng arrangements prohibited – physician gets a percentage share of certain reduction in hospital costs for patient care attributable to physicians efforts. Applies only to payments from hospital to physician. • OIG notes the broad statutory prohibition and payment need not be tied to actual diminution in care if hospital knows the payment may induce physician to reduce or limit services. • Alternative insurance options tied to reducing or limiting services could result in violations. Many coinsurance programs tied to risk management responsibilities, important that risk management guidelines not have the effect of reducing or limiting services to Medicare beneficiaries.

15. Impact of Compliance Issues onAlternative Risk Financing IRS Standards • 501 (c)(3) tax-exempt organization operated primarily for charitable purposes and private benefit must be only coincidental to charitable purposes. • Private Inurement/Private Benefit • Excessive compensation • Excessive rent • Receipt of less than FMV in sales or exchanges of property • Inadequately secured loans • Alternative insurance options could trigger private inurement or private benefit • Physicians may be “insiders” subject to prohibition if they exercise control and have opportunity to use organization’s assets or income for personal gain. Transaction with insiders must be negotiated at arms length and reflect fair market value.

16. Impact of Compliance Issues onAlternative Risk Financing Intermediate Sanctions • IRS sanctions short of revocation of tax-exempt status. • Excise tax penalties on “disqualified persons” receiving excess benefits in transaction with exempt organization, and managers/board members who knew of the excess benefits. • Taxes imposed upon non-FMV transactions, on • Person receiving the excess benefit • Organization manager (deferred as any officer, director or trustee) • Disqualified person is any person in position to exercise substantial influence. Certain transactions entitled to “rebuttable presumption of reasonableness.” • Alternative insurance scenarios could expose a physician to intermediate sanctions if physician is disqualified and transaction could be liable for excise taxes.

17. Impact of Compliance Issues onAlternative Risk Financing Subsidy Issues - Medical Malpractice Any subsidy of a private physician’s insurance costs has the following implications: • It creates a financial relationship under Stark for which an exception must be present. • If one purpose of the subsidy is to induce referrals of Medicare or Medicaid patients, it can violate the Anti-Kickback Statute. • If the subsidy is attached to certain inducements that could reduce or limit care for Medicare beneficiaries, it could violate the Medicare law on such inducements.

18. Impact of Compliance Issues onAlternative Risk Financing (Subsidy Issues-Medical Malpractice – cont.) • If the subsidy is provided to a physician who is an “insider” (under the private inurement test) or a disqualified person (under the intermediate sanction test), it can subject the organization to loss of tax exemption, or the disqualified person and those organization manages who approved the transaction to excise taxes. • If the subsidy is provided to a physician who is not an insider or a disqualified person, it can still be found to provide a private benefit to the physician, thereby jeopardizing the tax exemption of the organization.

19. Impact of Compliance Issues onAlternative Risk Financing Subsidy Issues (Original 1999) • Safe harbor – 42 CFR §1001.952(o) protects a payment by an entity (including a captive or self-funded entity) for malpractice insurance (including a certified nurse mid-wife) who engages in obstetrical practice as a routine part of a medical practice in a primary care health profession shortage area (HPSA) so long as conditions are met. • The payment is made in accordance with a writtenagreement between the entity paying the premiums and the practitioner, which sets out the payments to be made by the entity, and the terms under which the payments are to be provided.

20. Impact of Compliance Issues on Alternative Risk Financing (Subsidy Issues – Original 1999 – cont.) • The practitioner must certify that for the initial coverage period (not to exceed one year) the practitioner has a reasonable basis for believing that at least 75 percent of the practitioner’s obstetrical patients treated under the coverage of the malpractice insurance will either— • Reside in a HPSA or medically underserved area; or • Be part of a medically underserved population. • Thereafter, for each additional coverage period (not to exceed one year), at least seventy-five percent of the practitioner’s obstetrical patients treated under the prior coverage period (not to exceed one year) must have— • Resided in a HPSA or medically underserved area; or • Been part of a medically underserved population.

21. Impact of Compliance Issues on Alternative Risk Financing (Subsidy Issues – Original 1999 – cont.) • There is no requirement that the practitioner make referrals to, or otherwise generate business for, the entity as a condition for receiving the benefits. • The practitioner is not restricted from establishing staff privileges at, referring any service to, or otherwise generating any business for any other entity of his or her choosing. • The amount of payment may not vary based on the volume or value of any previous or expected referrals to or business otherwise generated for the entity by the practitioner for which payment may be made in whole or in part under Medicare or a State health care program. • The practitioner must treat obstetrical patients who receive medical benefits or assistance under any Federal health care program in a nondiscriminatory manner.

22. Impact of Compliance Issues on Alternative Risk Financing (Subsidy Issues – Original 1999 – cont.) • The insurance is a bona fide malpractice insurance policy or program, and the premium, if any, is calculated based on a bona fide assessment of the liability risk covered under the insurance. Costs of malpractice insurance premiums means: For practitioners who engage in obstetrical practice full-time, any costs attributable to malpractice insurance; or For practitioners who engage in obstetrical practice on a part-time or sporadic basis; the costs: • Attributable exclusively to the obstetrical portion of the practitioner’s malpractice insurance, and • Related exclusively to obstetrical services provided in a primary care HPSA.

23. Impact of Compliance Issues on Alternative Risk Financing Subsidy Issues – Informal Guidance • In 2003, hospital desired to implement temporary assistance in obtaining medical malpractice insurance to physicians on its hospitals’ medical staffs in West Virginia, Nevada, Florida, Texas. OIG referred to safe harbor but also noted that malpractice premiums could also fit into employee or physicianrecruitment safe harbors: • First, the arrangements will be provided on an interim basis for a fixed period in states experiencing severe access or affordability problems, although they may be extended if, at the end of the period there is a continuing disruption in a state’s malpractice insurance marketan event over which they have no control.

24. Impact of Compliance Issues on Alternative Risk Financing (Subsidy Issues-Informal Guidance – cont.) • Second, in the states where assistance is offered, only current active medical staff (or physicians joining the medical staff who are new to the locality or have been in practice for less than one year) will be eligible. • Third, the criteria for receiving assistance will not be related to the volume or value of referrals or other business generated. • Fourth, the criteria for receiving assistance will pay at least as much as he or she currently pays for malpractice insurance. • Fifth, participating physicians will be required to perform services for hospital and give up certain litigation rights. Value of such services and relinquished rights will be equal to the fair market value. • Sixth, insurance assistance will be available regardless of the location at which the physicians provide services, including, but not limited to, other hospitals. • Determinations are fact-specific and require an evaluation of totality of facts/circumstances.

25. Impact of Compliance Issues on Alternative Risk Financing OIG Advisory Opinions • OIG Advisory Opinion 04-11 (issued on September 2, 2004) • OIG Advisory Opinion 04-19 (issued December 30, 2004 • Bottom Line: Medical malpractice subsidy payments under the AKS are permissible if they meet the narrowexceptions in safe harbor. Outside of that, payments undergo strictscrutiny. Would like to have compelling, yet temporary, community need and protections against inducements to refer.

26. Impact of Compliance Issues on Alternative Risk Financing Stark Subsidy • Final Stark III rule expands current exception (effective October 1, 2008) - Protects arrangements that meet anti-kickback safe harbor for obstetrical malpractice insurance. • Final rule creates alternative to provide insurance subsides to physician - Applies to hospitals, FQHCs and rural health clinics - Physician routinely engages in obstetrics as part of practice located in either:

27. Impact of Compliance Issues on Alternative Risk Financing • Health professional shortage area; rural area; or area with demonstrated need as determined by advisory opinion or • An area comprised of patients at least 75% of whom live in a medically underserved area or medically underserved population • FMV, bona fide employment and personal services exception can be used to provide hospital malpractice insurance subsides if properly constructed. But the value of the salary and the insurance must be FMV for the services. • For example, malpractice insurance can be an employee benefit.

28. Impact of Compliance Issues on Alternative Risk Financing Physician Recruitment • Complex subject • AKS limited safe harbor – 42 CFR §1001.952(n) • Stark exception – 42 CFR §411.357(e) • IRS sanctions physician recruitment in limited circumstances in Revenue Ruling 97-21. • If permitted under AKS, Stark and IRS principles then malpractice subsidies are available incentives to recruit physicians. • Recruitment incentive should usually be: • Limited duration (not beyond 3 years) • Not a long-term solution

29. Impact of Compliance Issues on Alternative Risk Financing Hospital-Sponsored Alternative Risk Financing • Concept of Fair Market Value - FMV • Documentation of costs of participation and physicians pro-rata participation is critical. • Special Participation Conditions • Participation may be limited to actual medical staff, who make a certain number of admissions, or who certify a certain percentage of practice performed at hospital.

30. Impact of Compliance Issues on Alternative Risk Financing • Special Participation Conditions • Raises OIG concerns – must be unrelated to value or volume of referrals or other business generated and insurance available regardless of location at which physician provides services. • Conditions could be could be perceived as a inducement for physician to make referral in order to qualify-remember: the “one purpose” test. • Risk Management practices can serve as justifications • Rick management standards should be similar for shared risk • Document non-referral motives • Insurance available to physician regardless of practice location • Put in place real risk management strategies tied to participation in risk management program confirmed by objective underwriting criteria. No intent or purpose to induce referrals even in a single insurer program.

31. Impact of Compliance Issues on Alternative Risk Financing QUESTIONS?