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.
• OberKaler

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 per se 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
• ASCs
• 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 dont 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 organizations 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 physicians 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 written
  agreement 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
  practitioners 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 practitioners 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 practitioners 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 physician recruitment 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 states 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 narrow exceptions in safe harbor.
  Outside of that, payments undergo strict
  scrutiny. 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?