[author: Bob Wade*]

Compliance Today - July 2024

Conducting due diligence for physician and provider compensation arrangements during a healthcare transaction is critical for the acquirer. Appropriate due diligence is necessary, regardless of whether the transaction is a stock or asset purchase. If inappropriate financial arrangements exist and continue post-transaction, the acquirer will assume liability under both acquisition scenarios. If the transaction is a stock purchase, the acquirer will literally “step into the seller’s shoes” and potentially assume all pre-transaction liability.

Scenario

A hospital is acquiring a multispecialty group practice (group practice). Post-transaction, the hospital conducts a billing review, including the claims submitted for services provided by orthopedist Dr. Amie Atu. When the hospital reviewed the reimbursement for claims submitted by Atu, both pre- and post-acquisition, the hospital discovered that approximately 25% of the claims submitted were not supported by the applicable medical records. Atu was compensated based on a work relative value units (wRVUs) compensation model. Atu was a high producer, with “personally performed” wRVUs at approximately the 90th percentile. In consultation with outside legal counsel, the hospital has determined it is possible that the group practice, pre-acquisition, and the hospital, post-acquisition, have received reimbursement from all payers—including Medicare and Medicaid—that may result in a 25% overpayment. Likewise, because Atu was paid on a productivity compensation based upon wRVUs, it is possible that Atu’s total cash compensation (TCC) exceeded what she should have been paid, possibly resulting in TCC that is above fair market value (FMV). Atu was and will continue to be a substantial referral source to the hospital.

When the hospital contacted its transactional attorneys, it was informed that Atu’s medical record documentation and corresponding reimbursement were not reviewed during due diligence. However, the transactional attorneys confirmed that Atu’s employment agreement was reviewed.

Problem

This scenario poses material risks under the Civil Monetary Penalties Law (CMP),^[1] Physician Self-Referral Law (Stark Law),^[2] Anti-Kickback Statute (AKS),^[3] and potentially the False Claims Act (FCA).^[4] The CMP is implicated as the group practice and hospital received reimbursement that has been determined not to be appropriately documented in the medical record or not to be medically necessary. The Stark Law is implicated because Atu potentially received TCC above FMV while Atu referred designated health services (DHS) to the hospital. The AKS could potentially be implicated if it was determined that either the group practice or the hospital intended to compensate Atu above FMV to induce Atu’s referrals. The FCA is potentially implicated since the hospital now has knowledge that (i) reimbursement was received from payers—including Medicare and Medicaid—that is not supported by applicable medical records, and (ii) all of Atu’s referrals of DHS to the hospital are potentially subject to repayment due to a potential violation of the Stark Law.

All of this could have been avoided if appropriate due diligence regarding Atu’s medical record documentation and compensation had been analyzed before the hospital acquired the group practice.

What is due diligence?

Due diligence is basically reverse engineering. According to Investopedia, it is “an investigation, audit, or review performed to confirm facts or details of a matter under consideration. In the financial world, due diligence requires an examination of financial records before entering a proposed transaction with another party.”^[5]

In the previous scenario, the acquiring hospital should have identified material risks related to the acquisition of the group practice. Because of the legal and regulatory requirements in the healthcare industry, the hospital should have appreciated the significant risks associated with reimbursement for physician professional services and physician compensation, including the aforementioned risks under the CMP, Stark Law, AKS, and FCA. The hospital should have understood that appropriate documentation in medical records is necessary to support the reimbursement received from all payers—especially the risks associated with reimbursement from Medicare and Medicaid. Therefore, as part of an appropriate due diligence process in transactions similar to the one previously described, the hospital should have performed at least a probe audit of the group practice’s employed and contracted physicians’ medical record documentation and the billing codes selected. If documentation and/or billing irregularities were noted based on the probe unit, a further review, including a potentially statistically valid audit, may have been required. If the hospital had performed such an audit to review and discover the documentation and/or medical necessity irregularities connected with Atu, the hospital could either have excluded Atu from the acquisition or implemented appropriate documentation oversight of her medical necessity determination and medical record documentation post-acquisition. The hospital could also require the group practice to indemnify the hospital for any liability related to Atu’s pre-acquisition medical record documentation and billing and corresponding potential Stark Law liability.

If the hospital had been aware of Atu’s medical record “issue” pre-acquisition and implemented appropriate compliance and corrective actions effective as of the acquisition closing, it would have eliminated the continuing potential liability under the CMP, Stark Law, AKS, and FCA.

The due diligence process

After the billing, coding, and medical record documentation has been reviewed, the hospital should have implemented the following five-step due diligence process:

1. Review of compliance program effectiveness.

2. Segregation of physician financial arrangements by arrangement type.

3. Segregate compensation arrangements based on methodology.

4. Review each physician’s financial arrangement based on an applicable Stark Law exception.

5. Review of payments made to analyze compliance with contractual arrangements.

Review of compliance program effectiveness

In this step of the due diligence process, the reviewer should examine the following to identify any compliance issues with the entity being acquired:

• Compliance committee minutes

• Physician arrangements committee minutes

• Board minutes

• Compliance tracking log

• FMV/commercial reasonableness processes and procedures

Segregation of physician financial arrangements by arrangement type

For this step, all physician financial arrangements should be divided based on compensation arrangement type:

• W-2 employee versus 1099 independent contractor

• Professional services arrangements

• Medical director/administrative services

• Call arrangement

• Leasing office space and equipment

• Purchase agreements

• Joint venture arrangements

• Management services

Segregation based on compensation methodology

During this step, each physician’s financial arrangement should be segregated by financial arrangement type listed above based on the following compensation methodology categories:

• Fixed salary

• Any type of productivity compensation (wRVU, patient encounters, charges, collections)

• Hourly rate

• Quality compensation

• Profit/margin distribution

• Value-based arrangement compensation

Review of each physician’s financial arrangement based on applicable Stark Law exception

At this point, each physician’s financial arrangement should be evaluated based on an applicable Stark Law exception. The most common exceptions involving physician financial arrangements are:

• Personal service arrangements^[6]

• Rental of office space and equipment^[7]

• Bona fide employment^[8]

• FMV^[9]

During this phase of the due diligence process, the reviewer may use the following checklist based on the Stark Law FMV exception:

1. Is there a written agreement?

2. Is the agreement signed by the parties?

3. Does the agreement specify the items or services (no real estate) to be covered?

4. Does the agreement specify a time frame (can be any period of time)?

5. Is the compensation to be paid set in advance?

6. Does documentation support the arrangement as FMV?

7. Is the documentation defensible to support that the compensation represents FMV?

8. Is the TCC benchmark below the 50th percentile? If “yes,” skip Question 9.

9. (As applicable) Is the compensation benchmark above the 50th percentile? If “yes,” is the difference between the TCC Medical Group Management Association (MGMA) benchmark percentage and the wRVU MGMA benchmark by more than 10%?

10. Is the calculated compensation per wRVU at or below the 60th percentile?

11. Is the compensation determined based on the volume or value of referrals or other business generated by the physician?

12. Does the agreement appear to violate any state or federal laws?

13. Is there any concern that the arrangement is not commercially reasonable?

14. Is the signature dated more than 90 days after the effective date?

During this review phase, the reviewer should be able to identify noncompliance with an applicable Stark Law exception based on the documentation in the written agreement being reviewed.

Review of payments made to analyze compliance with contractual arrangement

The final step of the process is to evaluate documentation regarding the payments made to ensure all such payments comply with an applicable Stark Law exception and are consistent with the written agreement.

This phase is extremely important as the written agreement could comply fully with an applicable Stark Law exception by the “four corners of the agreement”; however, the payments made during the tenure of the financial arrangement may violate either the written agreement or the applicable Stark Law exception. If violations are detected, they usually occur during the operationalizing of the financial arrangement, including payment processing or time validation.

Sometimes, in major organizations, the payments made to referring physicians may either come through accounts payable or payroll, depending upon the nature of the compensation arrangement. If any component of the arrangement is based upon productivity, documentation regarding the physician’s productivity must be evaluated. By way of example, if a physician is compensated based upon wRVUs for personally performed services, the reviewer must obtain evidence that all compensated wRUVs have been personally performed by the applicable physician and not performed by another ancillary personnel either “incident to” or as part of a shared/split service. Also, for example, if the physician is paid by the hour, does the paying entity have documentation regarding the actual hours worked? If so, the reviewer should evaluate it to ensure that the services performed were reasonable, necessary, and consistent with the terms of the written agreement. As another example, if the written agreement with a medical director does not permit compensation for the hours attending a continuing medical education event, it would be inappropriate for the physician to document such hours and be paid by the contracting entity.

If the organization is large or has a significant number of physician financial arrangements being reviewed, it may be important to have a lead reviewer oversee multiple reviewers so that when issues are identified, they can be reported to the lead reviewer for further investigation and review during the due diligence process.

It should be noted that as part of the due diligence process, all reviewers should be familiar with how physician financial arrangements are analyzed by the government or potential qui tam relators and have a working understanding of the intricacies of the CMP, Stark Law, AKS, and FCA. It is also essential that the reviewers understand the Stark Law definitions of FMV and commercial reasonableness.

Houston, we have a problem

If reviewers identify issues during the due diligence process, the parties must negotiate a resolution either pre- or post-transaction if claims are to be repaid or self-disclosures are to be made. The parties must clearly understand which party will take the lead in resolving the problems identified. The parties should also negotiate which is responsible for any repayment, fine, or penalty. The disclosure pathway for resolution of issues could simply be a repayment to the payer, such as the Medicare administrative contractor, or more formalized processes, including self-disclosure to the Centers for Medicare & Medicaid Services through the self-referral disclosure protocol,^[10] the U.S. Department of Health and Human Services Office of Inspector General self-disclosure protocol,^[11] or a self-disclosure made directly to the U.S. Department of Justice.

Conclusion

If thorough due diligence by well-qualified legal counsel is not performed as part of a healthcare transaction, the acquiring entity may assume significant liability either for the seller’s past actions or its own actions if it continues noncompliant arrangements post-transaction. Obviously, there is a cost to the due diligence process in terms of time and money. However, performing due diligence can help acquiring entities avoid substantial financial harm due to the significant fines and penalties under the CMP, Stark Law, AKS, and FCA.

Takeaways

• Conducting due diligence for physician and provider compensation arrangements during a healthcare transaction is critical for the acquirer.

• Due diligence, according to Investopedia, is “an investigation, audit, or review performed to confirm facts or details of a matter under consideration.”

• Performing due diligence helps acquiring entities avoid substantial financial harm from significant fines and penalties under the Civil Monetary Penalties Law (CMP), Stark Law, Anti-Kickback Statute (AKS), and False Claims Act (FCA).

• Due diligence should be performed with legal counsel as part of any transaction to avoid the acquisition of significant liability for past actions or continued noncompliance.

• Performing due diligence helps acquiring entities avoid substantial financial harm from significant fines and penalties under the CMP, Stark Law, AKS, and FCA.

1 42 U.S.C. § 1320a-7a.

2 42 U.S.C. § 1395nn.

3 42 U.S.C. § 1320-7b(b).

4 31 U.S.C. § 3729.

5 James Chen, “Due Diligence,” Investopedia, updated January 18, 2024, https://www.investopedia.com/terms/d/duediligence.asp.

6 42 C.F.R. § 411.357(d).

7 42 C.F.R. § 411.357(a) and (b).

8 42 C.F.R. § 411.357(c).

9 42 C.F.R. § 411.357(l).

10 Centers for Medicare & Medicaid Services, “CMS Voluntary Self-Referral Disclosure Protocol,” OMB No. 0938-1106, December 2022, https://www.cms.gov/medicare/fraud-and-abuse/physicianselfreferral/downloads/cms-voluntary-self-referral-disclosure-protocol-original.pdf.

11 U.S. Department of Health and Human Services, Office of Inspector General, “Self-Disclosure Information,” accessed June 5, 2024, https://oig.hhs.gov/compliance/self-disclosure-info/.

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