Duane Morris Health Law

In order to facilitate social distancing measures during the COVID-19 pandemic, state and federal regulatory agencies are moving quickly to permit providers to continue to provide medical care through telemedicine. On March 16, 2020, Alex Azar, the Secretary of Health and Human Services, has declared a public health emergency and, therefore, activated the telemedicine allowance under 21 U.S.C. § 802(54)(D). Per the Secretary, this applies to all schedule II-V controlled substances in all areas of the United States for as long as the public health emergency declaration is in place so long as the following conditions are met: (1) the prescription must be issued for a legitimate medical purpose by a practitioner acting within his or her usual course of professional practice; (2) the telemedicine communication must be carried out using an audio-visual, real-time, two-way interactive communication system, and (3) the practitioner must act in accordance with all applicable state and federal laws.

In Pennsylvania, Act 96 of 2018 provides exceptions to electronic prescription requirements “in an emergency situation pursuant to Federal or State law and regulations of the department.” Each state regulates the prescription of controlled substances differently and will respond to this ongoing emergency in a different way. Although many restrictions have been eased, providers are urged to ensure that they comply with all applicable laws and regulations when prescribing controlled substances.

OCR began investigating the solo practitioner after his medical practice (the “Practice”) filed a breach report with OCR related to the Practice’s dispute with its electronic health record (EHR) provider. The Practice’s breach report alleged that the EHR provider was blocking access to the Practice’s medical records, until the Practice paid the EHR provider $50,000.

Upon receipt of the breach report, OCR initiated a compliance review of the Practice and found that the Practice demonstrated significant noncompliance with the HIPAA rules. Specifically, the OCR investigation determined that the Practice had never conducted a risk analysis at the time of the breach report, and despite significant technical assistance throughout the investigation, had failed to complete an accurate and thorough risk analysis after the breach and failed to implement security measures sufficient to reduce risks and vulnerabilities to a reasonable and appropriate level.

In addition to the $100,000 settlement, the Practice entered into a Resolution Agreement with OCR and Corrective Action Plan.

OCR issued a press release regarding the settlement stating: “All health care providers, large and small, need to take their HIPAA obligations seriously,” said OCR Director Roger Severino. “The failure to implement basic HIPAA requirements, such as an accurate and thorough risk analysis and risk management plan, continues to be an unacceptable and disturbing trend within the health care industry.”

The take away “All health care providers, large and small, need to take their HIPAA obligations seriously,” and maybe the age old wisdom, people in glass houses should not throw stones.

A recent whistleblower case led to the filing of a false claims act complaint against Community Health Network (CHN) by the United States of America Department of Justice on January 7, 2020. The complaint, filed in the U.S. District Court for the Southern District of Indiana, alleges that CHN compensated providers significantly over fair market value (FMV) in order to roll up referrals from the provider’s practices in violation of the Stark Law, which prohibits a hospital from billing Medicare for services referred by a physician with whom the hospital has a financial relationship that does not meet any statutory or regulatory exception.

In its complaint, the government alleges that CHN had employment relationships with numerous physicians that did not meet any Stark Law exception, because the compensation paid to the providers by CHN was well above FMV. In addition to the excessive compensation allegation, the complaint alleges that CHN conditioned the physician’s incentive or bonus compensation based on the physician meeting a target of hospital downstream revenue specific to the physician.

According to the complaint, CHN wanted to tie physicians with existing business in lucrative specialties to CHN. A number of the recruited physicians already had medical staff privileges at CHN hospitals and were already referring patients to CHN hospitals. The government complaint states that the physician integration strategy was defensive in nature meaning that CHN recruited and employed the providers to secure their referrals and out of concern that referrals would otherwise leak to CHN’s competition.

The whistleblower provided information to the government suggesting that CHN knew the compensation exceeded FMV and had withheld details of the proposed compensation from FMV consultants in order to obtain a more favorable FMV analysis. The whistleblower also claimed to have documentation showing that CHN executives calculated the provider’s excessive compensation based on the value of expected referrals. The January 6, 2020 amended complaint claims that CHN ignored the consultant’s warnings that the proposed compensation was in excess of FMV.

While the Stark law strictly prohibits a hospital from paying a physician in excess of FMV, the calculation of FMV is subjective and influenced by a wide variety of factors. There can be good reasons for paying a physician in excess of what other doctors are paid. The rationale for paying a physician in excess of what other doctors are paid should be objective, legitimate and well documented.

Hospitals should obtain a FMV analysis of physician compensation arrangements, make sure that the valuator has the necessary information and understands any unique circumstances. Hospitals should consider obtaining the FMV analysis in draft form under attorney-client privilege, in case the valuator failed to consider a relevant factor and meet with the valuator to discuss the valuation, before the analysis is finalized. Finally, it is imperative that hospitals consult with legal counsel throughout the valuation process to assure compliance with legal and regulatory requirements.

As physician practices, health care entities, private equity and venture capital firms consider physician practice investments and acquisitions, the players need to address the unique nature of physicians and physician practices in order to assure a successful deal. Peter Drucker is quoted as saying that “Only three things happen naturally in organizations: friction, confusion and underperformance. Everything else requires leadership.” With respect to physician practice investments and acquisitions, communication is key to the ultimate success of the transaction.

Understanding The Deal: Case Study One

Effective communication is absolutely essential. Too often, physician practices view a practice merger or acquisition as easy access to cash, without understanding that the cash comes with a price.

A physician group was selling their practice to a publically traded company. A few members of the group believed that each physician would walk away with a substantial amount of cash with no strings attached. Those physicians told the rest of the group not to worry about the written agreements, as the agreements were just words put on paper by lawyers who did not understand the “real deal”. The “real deal” as described by those physicians was that the non-compete was not enforceable and that there would be no changes to the group or the way the group practiced medicine, despite the written agreement.

Legal counsel, who continuously tried to get the group to focus on the terms of the agreement, was viewed as an obstacle to the cash prize. The group’s legal counsel repeatedly told the group that the buyer would not spend millions of dollars to purchase the practice and then not enforce the non-compete and furthermore, according to the written agreements, there would be changes to the group and the way the group practiced medicine.

The deal makers for the buyer were soft-pedaling the non-compete and the proposed changes in order to make the deal and purchase the practice. Finally, at the urging of the group’s legal counsel, the buyer’s legal counsel stepped in and made it clear to the group that the non-compete would be enforced and that there would be changes.

Once the group understood that the deal on paper was the “real deal”, the physician group negotiated a higher sales price, the physicians who opposed the sale of the practice were provided with a pre-closing exit plan option and the transaction closed. Years later, the practice continues to be successful, because the sellers and the buyers understood the deal and had a meeting of the minds.

What Not To Do: Case Study Two

A health system hospital acquired a large multi-specialty practice. The practice was responsible for the majority of admissions to the hospital. However, the practice had a number of underperforming physicians. Day one after the acquisition, based on the advice of a recent business school graduate, the health system sent 120-day contract termination notices to every one of the practice’s physicians and advised the physicians to reapply for their jobs. The termination notice stated that the physicians were not guaranteed employment and that individual physicians would be notified within 90 days, if they were being rehired. The notice also stated that the terms and conditions of employment, including compensation, would likely be substantially different.

What happened next should not have been a surprise. Many of the physicians immediately began looking for new positions outside the health system. Many physicians, including the entire OB/GYN practice, ended up at a nearby hospital, owned by a competing health system. The acquiring health system went to court seeking an injunction to enforce the non-compete and the providers and their patients went to the media and the court of public opinion. At the preliminary injunction hearing, several pregnant women testified that enforcement of the non-compete would cause irreparable harm to them and furthermore the hospital no longer had the capacity to care for the pregnant women as all of the OB/GYN providers had been terminated by the health system.

In order to avoid an adverse decision, the health system withdrew their preliminary injunction complaint and ceased efforts to enforce the non-compete. While a few physicians stayed with the health system, most went elsewhere and took their patients with them. The physician group disintegrated. The health system lost money and suffered substantial collateral damage from the public outcry.

“The most important thing in communication is to hear what isn’t being said.” Peter Drucker. The health system never shared their plan to terminate all physicians and then selectively rehire physicians post-closing and the physicians assumed that it would be business as usual post-closing. Both the health system and the practice failed to communicate and that failure to communicate quickly doomed the practice acquisition.

The Dog And The Tail: Case Study Three

A large orthopedic practice that owned a specialty hospital, received an unsolicited proposal from a health system to purchase a minority interest in the hospital. The physicians entered into negotiations with the health system. The physicians were in the driver’s seat with respect to negotiations, because the health system wanted the transaction and the physicians did not need the cash. The physicians and their attorney were tough negotiators. At one point, the health system CEO was exasperated and declared that the health system was not going to let the tail wag the dog. The physician’s attorney tried not to laugh-out-loud, but the CEO observed the attorney’s amusement and repeated that the tail was not going to wag the dog. The attorney agreed, but pointed out that while the health system’s CEO was accustomed to being the dog, in this case, the health system was the tail and the physician group was the dog. The transaction closed on the physician’s terms.

The Take Away

Ideally in physician practice investments and acquisitions, neither party feels like the dog or the tail. All parties to the transaction must understand the deal and effectively communicate and agree on plans for the future. Post-closing with respect to physician practice investment and acquisition, the buyer and the seller will continue to work together. Effective communication will minimize the risk of friction, confusion and underperformance.