Health Care Update. National News. In this Issue. HUD Expands FHA Refinancing Options for Hospitals with FHA-Insured Loans

Transcription

1 National News In this Issue OIG Approves Compensation for On-Call Physicians...2 IRS Recognizes RHIOs as 1(c)(3)Organizations...3 The Healthcare Industry and Bankruptcy a Special Relationship...3 Current Options for Physician-Hospital Joint Ventures...4 HUD Expands FHA Refinancing Options for Hospitals with FHA-Insured Loans On July 1, 2009, the U.S. Department of Housing and Urban Development (HUD) issued a notice 1 announcing the expansion of its hospital mortgage insurance program. HUD will now permit refinancing of hospital mortgage debt with federally guaranteed loans under Sections 242 and 223(f) of the National Housing Act. Under Section 242 of the National Housing Act, HUD, through the Federal Housing Administration (FHA), may provide certain qualified lenders with insurance against loss on defaults under loans to for-profit, not-for-profit and government-owned hospitals. Through the Section 242 program, hospitals can obtain better access to long-term, low-interest, fixed rate, and non-recourse loans. New Illinois Retaliatory Discharge Case...4 Recent Stark Case Which Hospital GCs Should Know About...5 Pursuant to Section 223(f)(1) of the National Housing Act, the FHA is authorized to insure 100% refinancing and acquisition loans for existing hospitals (as well as existing nursing homes, assisted living facilities, or other types of health care facilities). However, to date, HUD has not exercised this authority with respect to the refinance of debt for existing hospitals. HUD believed that private capital was sufficiently available to assist hospitals in the refinance of their debt, and that demand was not as great as was the need for new construction, renovation and rehabilitation and equipment purchases. However, as a result of the downturn in the economy and increased demand for health care services, the lack of access to capital has made it difficult for hospitals to obtain financing. Accordingly, HUD is expanding its hospital mortgage insurance program to allow for refinancing of existing debt without conditioning such refinancing on new construction or renovation. August 2009

2 To be eligible, a hospital must have maintained an aggregate operating margin of at least 0.33% and an average debt service coverage ratio of at least 1.80% for the last three years. In addition, the hospital must have experienced an increase in its interest rate of at least 1% since January 1, 2008 as a result of the credit crisis or must demonstrate that such an increase is imminent. The maximum mortgage loan amount permitted under the new Section 242/223(f) program cannot exceed the cost to refinance the existing indebtedness, which includes the payoff amount, reasonable and customary legal fees, title and recording expenses, costs of any repairs totaling less than 20% of the new mortgage amount, fees paid to the HUD-approved lender and inspection fees. The new proposed amendments to the regulations contemplate that an insured loan may also be used to finance the costs of acquiring a hospital. HUD is publishing official amendments to its Section 242 program regulations implementing this expansion. The proposed amendments will be subject to public comment upon publication in the Federal Register hsgn.doc OIG Approves Compensation for On-Call Physicians In a recent advisory opinion, the Office of the Inspector General (OIG) approved a hospital s practice of compensating on-call physicians for providing services to uninsured patients. The OIG concluded that, although the arrangement could potentially generate prohibited remuneration under the Anti-Kickback Statute, it contained sufficient safeguards to reduce the risk of violation of the Anti-Kickback Statute. The requesting hospital is a non-profit acute care hospital, which is the sole provider of acute care, inpatient hospital services in its county. The hospital experienced a declining willingness of physicians to provide on-call coverage without compensation. Accordingly, the hospital proposed an amendment to its bylaws to allow for payment to physicians for services rendered to uninsured patients. The OIG noted that on-call coverage compensation potentially creates a risk that physicians may demand such compensation as a condition of doing business at a hospital, even when neither the services provided nor any external market factor support such compensation. The OIG focused on whether the compensation is: (1) fair market value in an arm s-length transaction for actual and necessary items or services; and (2) not determined in any manner that takes into account the volume or value of referrals or other business generated between the parties. OIG noted that the arrangement does not fit squarely within the safe harbor for personal services and management contracts, 42 C.F.R (d), because the compensation is not set in advance. However, the OIG concluded that the arrangement presents a low risk of fraud and abuse based on the totality of facts and circumstances.

3 In support of its finding, OIG explained that the hospital (a) certified that the compensation would be fair market value; (b) has a legitimate rationale for revising its on-call coverage policy; and (c) will offer compensation uniformly to all physicians and will impose tangible responsibilities on them. IRS Recognizes RHIOs as 501(c)(3) Organizations As part of the American Recovery and Reinvestment Act of 2009, Congress enacted legislation designed to promote health information technology development and information exchange. By enacting the new law, Congress recognized that facilitating health information exchange and technology is important to improving the delivery of health care and reducing the costs of health care delivery and administration. On April 7, 2009 the IRS announced that its Exempt Organizations division has an inventory of applications submitted by regional health information organizations (RHIOs) seeking exemption under section 501(c)(3), and that the IRS has recently issued favorable determinations under section 501(c)(3) to several RHIOs. The IRS announcement states that each determination is being made on a facts and circumstances basis in light of the requirements of section 501(c)(3) and the new legislation. The Healthcare Industry and Bankruptcy a Special Relationship Even during good times, many healthcare providers operate in a capital intensive environment where operating margins are low but debts and regulatory pressures are high. During hard times, low-flying healthcare organizations encounter economic turbulence that forces them into bankruptcy. Once in bankruptcy, healthcare entities are then exposed to recently enacted laws that single them out for special attention. At least two problems unique to healthcare can force a weak provider into bankruptcy. The first is that providers depend on payments predominantly made by the federal and state governments (through the Medicaid and Medicare programs). Government agencies can be notoriously unreliable payment makers. They are beyond the reach of the usual tools used to compel payment, including law suits. Financial unpredictability increases the cost of capital for healthcare providers. Government agencies also enjoy unique setoff rights that allow them to unilaterally withhold payments based on mere allegations of a countervailing debt owed to them. Setoff can take place before the government s claim is fully investigated or proven. The second special problem is that healthcare providers live and die based on their connections and reputations inside the local community. If the local community does not support the provider, or does not believe the provider provides quality service, the provider s business is doomed. Events that harm a provider s reputation cause damage that may not be reparable in time for the entity to recover and survive. Once inside the bankruptcy environment, healthcare providers will find that Congress has made special preparations. These laws generally make going bankrupt, which is already a costly prospect, all the more expensive for healthcare providers. For example, Section 333 of the Bankruptcy Code creates an ombudsmen to look out for the interest of patients in a healthcare bankruptcy case. Section 351 creates a system for dealing with medical records where the economic muscle to maintain them properly no longer exists. Section 704 controls how patients may be transferred from a bankrupt healthcare entity to a solvent one. Given the difficult economic climate, healthcare providers and those service providers that work with healthcare providers should be aware of these special considerations.

4 Current Options for Physician-Hospital Joint Ventures As medical reimbursement declines and operating expenses increase, hospitals and physicians are becoming increasingly interested in joint venture arrangements. For hospitals, a physician joint venture may enable the hospital to recapture lost ancillary income (e.g., imaging, physical therapy, laboratory) and may strengthen ties with, and secure a stream of referrals from community physicians. For physicians, a hospital joint venture provides access to startup and working capital and administrative support, as well as revenue from new ancillary services that may be difficult for the physicians to establish on their own. Nevertheless, the Centers for Medicare and Medicaid Services and the Office of Inspector General have raised significant concerns regarding hospital-physician joint ventures and any proposed arrangement must be in strict compliance with applicable regulations in light of this anticipated scrutiny. For physicians, the federal Stark law (Stark) prohibits certain referrals to entities with which physicians have direct or indirect financial relationships. Specifically, Stark prohibits the referral of designated health services (DHS), which include imaging, laboratory and physical therapy services, one or more of which are likely to be rendered by a hospitalphysician joint venture. Joint ventures for the provision of ambulatory surgical services are not directly impacted by this prohibition. The DHS joint venture creates a Stark issue if a new entity is created because DHS referrals from the owner physicians to the joint venture constitute referrals to an entity with which the owner physicians have a prohibited financial relationship. The Stark prohibitions also apply to hospitalemployed physicians who may intend to refer to the joint venture. One viable structure would be for the proposed joint venture services to be provided directly by the physicians group, as an extension of the physicians existing medical practice. Under this scenario, the services are billed under the physician group s tax identification number used for all other professional services rendered by the group. Such an arrangement would need to be structured to comply with the in-office ancillary services exception to Stark, which permits referrals of DHS by physicians within the confines of the physicians group practice, as long as such services are (i) provided in the medical group s physical space, (ii) billed under the group s tax identification number, and (iii) supervised by the medical group s physicians. This structure also provides an opportunity for hospital involvement, albeit not as an equity owner. The hospital can furnish space and clinical and non-clinical personnel, as well as various management functions, including billing/collection, back office support, purchasing and contracting assistance. The relationship will need to satisfy anti-kickback requirements, so any agreement must be in writing and the amount paid to the hospital for space, personnel and services must be consistent with fair market value. Such an alternative avoids the numerous pitfalls that can arise in a hospital-physician joint venture. Noteworthy Cases New Illinois Retaliatory Discharge Case In Turner v. Memorial Medical Center, Docket No (June 18, 2009), the Illinois Supreme Court affirmed the dismissal of plaintiff s retaliatory discharge claim, which was brought on a whistle blower/compliance theory. Plaintiff, a trained and licensed respiratory therapist, alleged that the hospital terminated him because he told an official from the Joint Commission on Accreditation of Healthcare Organizations (the Joint Commission ) that the Hospital s respiratory therapy department did not comply with the Joint Commission s standard of electronically charting a patient s file immediately after providing care to the patient and that this was a patient safety issue. The plaintiff alleged that he was terminated less than a week after he made the report to the Joint Commission.

5 The Court found that even assuming that all of the facts alleged in the complaint were correct, plaintiff failed to properly allege a retaliatory discharge claim because he did not allege that his discharge violated a specific expression of public policy. A specific expression of public policy concerns a matter that strike[s] at the heart of citizen s social rights, duties and responsibilities. Plaintiff had alleged that by reporting to the Joint Commission that the hospital was not following its standards, his discharge violated the public policy of patient safety. He claimed that the Joint Commission s standards, the Hospital Report Card Act and the Medical Patients Rights Act all established the existence of this public policy. The Court rejected this argument, concluding that plaintiff s concern regarding when during a shift a chart is electronically updated is not significant enough to rise to an expression of a public policy concern. Simply put, the Court found that while good medical care by hospitals is in the public interest employees are not immune from the general at-will employment rule simply because they claim to be reporting on issues that they feel are detrimental to health care. The Court further found that nothing in the Joint Commission s standards or the Medical Patients Rights Act referenced a public policy of patient safety with respect to the preparation of patient records, and noted that plaintiff forfeited his argument regarding the Hospital Report Card Act because he did not reference this statute in his complaint or in response to the Hospital s motion to dismiss. This is a good decision for health care employers in Illinois. The Illinois Supreme Court has stated on many occasions that the tort of retaliatory discharge is to be narrowly construed, and has thus only applied the public policy exception in a few circumstances, including retaliatory discharge for asserting worker s compensation claims and retaliatory discharge for providing information regarding a colleague to law enforcement. Nonetheless, it is not unusual for terminated health care employees to contend that they raised compliance issues during their employment, and then try to make out a case for whistle blowing discharge. Here, the Illinois Supreme Court decided that the issues the plaintiff raised were simply not significant enough to rise to the level of a public policy concern, but were essentially business practice issues. Note: Health care employers should continue to review disciplinary decisions to make sure they are not unfairly implicating employees who have raised issues under the discrimination, safety, workers compensation or other compliance laws to minimize risk. Recent Stark Case Which Hospital GCs Should Know About A Pennsylvania federal appeals court case that came out earlier this year underscores the importance to hospitals of maintaining a sound contract management system. The case, United States ex rel. Kosenske v. Carlisle HMA, Inc. et al., 554 F.3d 88, 94 (3d Cir. 2009), was a whistleblower suit brought by Dr. Ted Kosenske, an anesthesiologist who practiced with a group called Blue Mountain Anesthesia Associates, P.C. Dr. Kosenske claimed that an arrangement between the group and their hospital, Carlisle Hospital in Carlisle, Pennsylvania, violated the federal Stark law. The lower court granted summary judgment in favor of the hospital, finding that while the arrangement did implicate the Stark law, it did not violate Stark because the personal service exception under Stark had been met. The appeals court reversed that decision, finding that the exception had not been satisfied. Because there are relatively few published opinions interpreting Stark, this case is worth paying attention to. The relevant facts of Kosenske are as follows. In 1992, Dr. Kosenske s anesthesia group entered into a traditional exclusive contract with Carlisle Hospital pursuant to which the group would provide 24/7 anesthesia coverage at the hospital s main in-patient facility. At the time the contract was entered into, the hospital was not offering pain management services. Recognizing that the hospital might open a pain management facility in the future, the contract gave the

6 anesthesia group the opportunity to be the exclusive pain management provider at such facility. The applicable provision in the contract reads, in relevant part, as follows: In the event that Hospital obtains, opens, or operates another facility or location at which anesthesiology or pain management services are required or offered, Hospital shall offer (the anesthesia group) the opportunity to provide exclusive anesthesiology and pain management services at such new facility or location under the same terms and conditions as provided in this agreement, to the fullest extent that the Hospital is able to contract with (the anesthesia group) to provide such services on the same terms and conditions as set forth herein. In 1998, the hospital built a new pain management facility located three (3) miles from the hospital s main campus. From the day the pain clinic opened, Blue Mountain Anesthesia was the exclusive provider of pain management services at the clinic. The hospital billed Medicare and the other payers the facility fee for the pain management, and Blue Mountain Anesthesia billed the professional component. The space, equipment and personnel of the pain clinic were provided by the hospital to the anesthesiologists free of charge. The 1992 contract between Carlisle Hospital and Blue Mountain Anesthesia was not amended to reflect that Blue Mountain Anesthesia was now providing pain management services at the new pain clinic. This lack of amendment turned out to be the deciding fact in the case. The Stark law prohibits a physician from making a referral of a Medicare/Medicaid patient, for certain designated health services, to an entity with which the physician has a financial relationship, unless an exception applies, and the Stark law prohibits the entity receiving such a referral from billing Medicare/Medicaid for those services. Let s break down each of the underlined elements to see how Stark applied to this case. Physician: The anesthesiologists of Blue Mountain Anesthesia. Referral: The anesthesiologists referral of patients under their care to Carlisle Hospital for certain tests and other services. Designated Health Services: The tests and other services for which the patients were referred to Carlisle Hospital by the anesthesiologists. These tests and services are included in the Stark definition of Designated Health Services. Financial Relationship: The compensation arrangement between Carlisle Hospital and Blue Mountain Anesthesia under which the anesthesiologists were the exclusive providers of pain management services, with the space, equipment and personnel of the pain clinic furnished by the hospital to the anesthesiologists free of charge. Many people are under the mistaken belief that in order for there to be a compensation arrangement, money needs to change hands. That is not the case. Essentially, all that is required for a compensation arrangement (and thus a financial relationship) to exist under Stark is for one party to receive something of value from another party. In this case, the right to be the exclusive providers of pain management at the new pain clinic, and the free space, equipment and personnel provided by the hospital to the anesthesia group at the pain clinic, were all items that had value to the anesthesia group. Exception: The personal services exception under Stark. The court found that this exception had not been met, and it was on this basis that they reversed the lower court s decision, as discussed in more detail below. The Health Care Team continues to monitor the various health care reform debates and pending legislation. We will provide further information once something is passed.

7 The personal services exception under Stark requires, among other things, that there be a signed written agreement between the parties which specifies the services covered by the arrangement, and which covers all of the services to be furnished by the physician. Carlisle Hospital argued that the original 1992 agreement with Blue Mountain Anesthesia satisfied this requirement. The court disagreed, holding that the arrangement involving Blue Mountain Anesthesia and the new pain clinic fell outside of the terms of the 1992 agreement. Without a written agreement in place addressing the Blue Mountain Anesthesia/new pain clinic arrangement, the personal services exception was not satisfied. Unless the hospital can find another Stark exception to fall within (which is unlikely), the hospital s arrangement with the anesthesia group relative to the pain clinic will be found to have violated Stark. While probably most hospitals maintain some type of contract management system, it is a good idea for the hospital general counsel to randomly select and review physician contracts, on a periodic basis, to make sure that the system is working. As we learned from the Kosenske case, all it takes is one out-of-date provision to trigger a multitude of prohibited referrals under Stark. The ramifications of violating the Stark law are very significant for Carlisle Hospital. At a minimum, the hospital would be required to refund to Medicare/Medicaid the amount it received from every service provided pursuant to a prohibited referral from the anesthesiologists. This could cover, for example, every hospital diagnostic test ordered by the Blue Mountain anesthesiologists beginning in In addition, the hospital could be liable for civil monetary penalties equal to $15,000 per each service rendered pursuant to a prohibited referral. Carlisle Hospital could have avoided this liability if it had entered into a simple amendment to the 1992 agreement, which stated that the scope of services to be provided by the anesthesiologists was expanded to include pain management at the new pain clinic. Attorney Advertising. This Health Care Update is a periodical publication of Seyfarth Shaw LLP and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult a lawyer concerning your own situation and any specific legal questions you may have. Any tax information or written tax advice contained herein (including any attachments) is not intended to be and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer. (The foregoing legend has been affixed pursuant to U.S. Treasury Regulations governing tax practice.) 2009 Seyfarth Shaw LLP. All rights reserved.