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Forensic and Valuation

Issues in Healthcare

November 10, 2014

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Agenda and Learning Objectives

Section 1

Regulatory Framework, OIG Investigative Focus, and Recent Cases Against

Healthcare Providers 4

Section 2

Calculating Damages and Methodology Issues for Healthcare Companies 24

Section 3

Role of Financial Advisors 30

Section 4

Valuation Drivers in Acquiring Physician Practices 43

Appendix

Speaker Biographies 49

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Key Take-Aways

This session will assist in understanding the current

regulatory environment and areas of focus by

regulators in monitoring payments of healthcare

claims and enforcement of laws.

This session will assist in understanding healthcare

claim payment and valuation issues unique to the

healthcare industry and will cover how advisors can

assist counsel and clients in assessing false claim

investigations, addressing complex valuation

issues, assessing ability to pay and providing

analysis assistance and expert testimony.

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Section 1:

Regulatory Framework, OIG Investigative Focus, and

Recent Cases Against Healthcare Providers

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Anti-Kickback Statute, Stark Law and

False Claims

Anti-kickback statute is designed to prevent:

- Over-utilization

- Increased costs

- Corruption of medical decision-making

- Patient steering

- Unfair competition

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Anti-Kickback Statute

The Anti-Kickback Statute

• Prohibits

- Knowingly and willfully, directly or indirectly offering, paying,

soliciting, or receiving remuneration in order to induce or

reward the referral or purchase of items or services to be

paid for by federal healthcare benefit program

Violation is a felony:

• Criminal fines up to $25,000; prison up to 5 years

• Civil penalties, fines, exclusion

Statutory Exceptions

Regulatory Safe Harbors

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Stark Law

Stark Law (physician self-referral law)

Unless an exception applies, the physician self-

referral law prohibits:

• A physician from making referrals for certain designated health

services payable by Medicare to an entity with which he or she

(or an immediate family member) has a financial relationship.

• The entity from presenting or causing to be presented claims to

Medicare (or billing another individual, entity, or third party

payer) for those referred services.

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Sanctions and Penalties

A strict liability statute:

• Denial of payment for DHS provided in violation of the

prohibition

• Refund of money collected for DHS provided in violation of the

prohibition

Other penalties include:

• Civil monetary penalties (for knowing violations only)

• Exclusion from Medicare/Medicaid

• Potential civil False Claims Act liability

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Physician Self-Referral Analysis: Three

Questions

1. Is there a referral by a physician for a designated health

service (DHS) payable by Medicare?

2. If yes, does the physician (or an immediate family

member of the physician) have a financial relationship with

the entity furnishing the DHS?

3. If yes, does the financial relationship fit in an

exception?

• If the answer to the third question is “no,” then there is a

violation.

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Stark Exceptions: A financial relationship exists.

Now what?

Stark exceptions v. Anti-Kickback “safe harbors”

Three major categories of Stark exceptions

• General exceptions: both ownership/compensation

• Ownership exceptions

• Compensation exceptions

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False Claims Act

Federal statute imposes civil liability for submitting

false claims for payment to United States

• Submitting a claim for payment, or causing claim to be

submitted for payment by government funds

• Making or using, or causing to be made or used, false records or

statements material to a false claim

• Making or using, or causing to be made or used, false records or

statements material to an obligation to pay money or property to

the Government, or knowingly concealing or improperly avoiding

or decreasing an obligation to pay money to the Government

• Conspiring to defraud the Government by getting a false or

fraudulent claim paid

• All require “knowledge” of falsity/fraud

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Types of false claims

Direct False Claims: liability for submitting false

claims to the Government, or making false

statements to get false claims paid by the

Government

Reverse False Claims: liability for making false

statements to avoid paying money owed to the

Government

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Liability Based on Violation of Other Laws

The violation of a separate statute or regulation can

provide the basis for liability under the False Claims

Act

The underlying violation renders the claim false or

fraudulent, thus giving rise to the False Claims Act

violation

Three basic categories:

• Items or services were defective

• Claimant falsely expressly certified compliance with

statute/regulation

• Compliance was a condition of payment

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Risks & Liabilities for Violations of False

Claims Act

Treble damages

Civil penalties of $5,500 to $11,000 per claim

Likely that provider will be subject to a Corporate

Integrity Agreement

Risk of exclusion from federal healthcare programs

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Increased stakes with recent amendments

False Claims Act remained unchanged for almost thirty

years:

• Two recent major amendments to False Claims Act, expanding

reach of False Claims Act

• Fraud Enforcement and Recovery Act of 2009 (FERA).

- Biggest impact on healthcare providers – amendment of

reverse false claims provision

• Patient Protection and Affordable Care Act of 2010 (Affordable

Care Act)

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Enforcement Trends

Civil enforcement through False Claims Act

Focused areas of enforcement

• Pharmaceutical manufacturers, especially off-label promotion

and kickbacks

• Devices, especially kickbacks

• Inpatient/outpatient hospital

• Hospice (patients’ medical eligibility)

• Financial relationships with physicians (kickbacks and Stark

Law, especially in Medicaid)

• Individuals

Increased enforcement by states

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Enforcement Trends

Recent amendments indicating support from the

legislature

The perfect storm for healthcare fraud enforcement

• Law Enforcement / Regulatory Agencies

• Fighting fraud and abuse is a priority

• More aggressive, coordinated, and successful

• HEAT: Health Care Fraud Prevention and Enforcement Action

Team

• Whistleblowers

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Enforcement Trends

Healthcare Investigations

Origination of Cases

• Qui Tam Lawsuits

• Proactive Investigations

• Referrals from HHS/OIG or Contractors

• Criminal prosecutions

Parallel Proceedings

• DOJ directive to pursue parallel civil and criminal

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What Does it All Mean?

What Does All of this Mean for the Healthcare

industry?

• Increased likelihood of facing enforcement actions.

• Increased likelihood of facing whistleblower complaints.

• Increased likelihood companies will undertake internal

investigations.

• Be proactive and stay off the radar.

• Compliance, compliance, compliance.

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Recent Cases

2014 on track to be a record-breaking year for

government recoveries in healthcare, alleging in

many cases violations of:

• False Claims Act

• Stark Law

• Anti-Kickback Statue

Justice Department recovered $3.8 billion from

False Claims Act cases in fiscal year 2013

Source: Becker’s Hospital Review & Department of Justice websites

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Section 2:

Calculating Damages and Methodology Issues for

Healthcare Companies

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Damages Analysis – Physician Practices

Claims for lost profits in connection with physician practices

are typically defined in terms of loss of compensation.

• For a small practice, lost profits analysis is similar to a physician’s claim

for lost earnings in a personal injury case.

Large practices and/or those with ancillary testing capability

(e.g., imaging and laboratory) have more traditional lost profits

damages claims such as violation of non-compete/non-

solicitation agreements

• Possible damages:

- Lost profits related to ancillary testing revenues, from losing the

violator’s patients, and/or overhead costs previously allocated to

former employee

- Recruiting and training costs to replace the lost employee

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Basic Compensation Analysis

A method for determining lost profits for a physician

Individual productivity and the rate per unit-of-service paid for

the various services are large drivers of physician profits and

compensation

• Productivity can be measured a number of ways such as work RVUs,

collections, encounters, etc.

• Trends in payer reimbursement should be considered. Large concentrations in

governmental payers will limit ability to grow rate per unit-of-service

Any claim for lost profits should consider the historical pattern

of work by physician(s) and the local market area

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Physician Supply and Demand

Relevance of local vs. national data used to benchmark

physician compensation is dependent upon supply and

demand and the recruiting market

Nationwide shortage of specialty and the relative equivalence

in compensation by area

Other factors

• Rates paid by insurers for services

• Cost of living differentials

• Relationship between physician with significant influence and

specialized training such as robotically trained surgeons

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Damages Analysis – Other Healthcare

Organizations

Larger healthcare organizations have more traditional lost

profits analyses based on loss of cash flow to investors

• Examples include hospitals, surgery centers, dialysis clinics, cancer

centers etc.

• Traditional “but for” analysis

• Also consider other contributing factors such as:

- Shifts in payer concentration

- Barriers to entry (i.e. Certificates of Need)

- Changes in technology

- Changes in governmental payer philosophy such as Medicare

changes in coverage decisions or payment rates

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Potential Lost Earnings Analysis

Experts should focus on

the following areas to

analyze potential lost

earnings:

Productivity Trends

Physician Supply and

Demand

Barriers to Entry

Medicare Changes

Payer Mix

Capacity Constraints

Other Factors

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Section 3:

Role of a Financial Advisor

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A financial advisor can assist a Client and its Counsel navigate

and address alleged false claims, other violations and related

damage matters

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The Role of a Financial Advisor

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Evaluation of Alternatives (Negotiation, Appeal, Bankruptcy, etc.)

Roles for CPAs and FAs in Chapter 11 Bankruptcy

Assistance to Legal Counsel and Clients related to false claims

allegations, other asserted violations and judgments may include:

The Role of a Financial Advisor

Negotiation Assistance and Support

Evaluation of the Ability to Pay

Expert Report and Testimony

Evaluation and Calculation of the Alleged Damages and Penalty

Assessment and Testing of Claims

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Evaluation and Calculation of the Alleged

Damages and Penalty

Review the asserted claim, underlying support of the claim and the

methodology to calculate the total claim

• Size of the claim

• Asserted actual vs. estimated claim amount

• Procedural testing issues

Review the nature of the claim and testing performed related to the

medical record and respective billing statement

• Improper payments to physicians for referrals – all referrals from physicians

may be disallowed

• Review of medical necessity (e.g., treatment was deemed not medically

necessary)

• Improper characterization of patient status – billed as ‘inpatient,’ but should

have been ‘observation’ (e.g. one-day stay)

• Alleged up-coding of care

• Missing physician order for admission or certain ancillary procedures

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Financial advisor may need to work with clinical and medical

record professionals in assessing the alleged claim

Per The Health Insurance Portability and Accountability Act of 1996

(HIPAA) requirements, a Business Associate Agreement is required

for a consultant to review detailed patient medical and billing

records

Financial advisor will work closely with legal counsel to determine

the assistance needed and may be engaged directly by counsel to

protect the confidentiality of work product and findings

After understanding the nature and size of the claim and

consultation with client and counsel, the next step is to:

• Determine how the government calculated the alleged total claim amount

• Conduct detail testing of claims the government (and its contractor)

reviewed and potentially expand the testing of claims to defend against

asserted claims and mitigate claim payment due

Evaluation and Calculation of the Alleged

Damages and Penalty (cont.)

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Calculation of Claim Damages/Overpayments

Statistical sampling has been used by Centers for

Medicare & Medicaid Services (CMS) for over 40 years

as an accepted method of estimating overpayments

• CMS adopted this process due to the enormous administrative

burden and costs of auditing on an individual claim-by-claim basis

• CMS utilizes contractors to performs a detailed review of the medical

records and respective billing statements to identify any potential

inaccurate and false claims and related overpayments

• CMS and its contractor use an extrapolation methodology to

calculate its estimated claim overpayment amount

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Calculation of Damages/Overpayments (cont.)

The methodology for statistical extrapolation has many

issues which include:

• A sample of as few as 30 Medicare claims may be statistically valid, but may not

be representative of the entire claims population; a larger sample size,

identification of proper claim population or actual testing of the full claims

population will likely have a different outcome (precision of overpayment estimate

may be questionable)

• Provider bears the burden of providing sufficient and timely information,

otherwise claim may be deemed inaccurate and is counted as an actual claim

error and is included in the extrapolation estimate for the total claim amount

• During the appeals process, if an initial determination is reversed, the

extrapolation needs to be adjusted

• The sample tested may have unreliable results if the sample is not stratified

- Service line/service (e.g. cardiology, orthopedics, inpatient, outpatient, etc.)

- Nature of the claim (e.g., patient file missing the physician order for

admission to hospital differs from the file missing an order for a lab test –

partial incompletion of file may lead to disallowance of the entire claim)

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Assessment and Testing of Claims

On August 22, 2013, the Government Accountability

Office (GAO) released a report to Congress noting

several issues with the CMS review process, including:

• Varying post-payment review requirements across the different

contractors in claims selection, timeframes for provision of

documentation, communications to providers about the reviews, and

quality assurance processes

• Inaccurate claims determinations

• Concerns that the contingency fee payment structure creates

incentives for Recovery Audit Contractors (RAC) to be too

aggressive in determining improper claims, resulting in a significant

provider burden

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Overturning CMS Rulings

Challenging a CMS determination can be beneficial

as financial advisors may determine inaccuracies in

CMS findings

RAC Region# of Claims With

Identified Overpayments

# of Overpayment Identifications

Appealed*

% of Overpayment Identifications

Appealed

# of Appealed Overpayment Identifications

Overturned

% of Appealed Overpayment Identifications

Overturned

% of Appealed Overpayment Identifications

Overturned out of Claims

Identified with Overpayments

A 131,037 3,588 3% 955 27% 1%

B 110,468 15,726 14% 6,303 40% 6%

C 335,338 9,928 3% 3,612 36% 1%

D 490,168 35,956 7% 17,945 50% 4%

Total 1,067,011 65,198 6% 28,815 44% 3%

Source: OIG analysis of CMS appeals data, 2012, see http://oig.hhs.gov/oei/reports/oei-04-11-00680.pdf

*Because the outcomes could not be linked to specific RAC regions, these numbers exclude 3,968 unspecified appeals that were adjudicated by Administrative Law Judges.

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Ability to Pay Alleged Claim and Settlements

CMS expects corrective action and payment of claim and penalty

Financial settlements on False Claims Act allegations can be

negotiated and alleviate some financial burden; however, ability to

pay and liquidity issues may still exist

Financial advisors can assist providers with determining the ability

to pay the alleged claim or a potential settlement amount – How

much can a provider pay and still be viable?

• Identify excess cash on hand and cash needed to be maintained for current

and future operations

• Forecast excess future cash flow

• Identify unencumbered assets for potential collateral for debt or possible

asset sale to generate cash for payment of alleged claim or settlement

• Determine debt capacity and ability to borrow (e.g., issue bonds, bank loan)

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Evaluate Strategic Alternatives

Based on: (i) the nature and size of the claim, (ii) clinical, financial

and legal findings from claim analyses, (iii) expanded testing and

extrapolation review findings, and (iv) ability to pay and preliminary

negotiation and appeal results- the alternatives may vary.

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Current and

Evolving Situation Court Proceeding and Appeal

Pay Claim Damages/Settlement

Administrative Appeal

Negotiate Settlement and Payments

Chapter 7 or 11 Bankruptcy or

Restructuring/Sale/Liquidation

Sale/Merger/Closure

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Appeal Claim;

Negotiate,

Assess

ability to

pay

Conduct

testing &

analyses

Is

there a

capital/cash

crisis?

Can Funds

be Raised

for Payment

Is

stabilization

possible?

Negotiate/Appeal

Claim;

Consider

stabilization

activities

Consider

options

Chapter 11

Chapter 7

Negotiate/Appeal

Claim;

Conduct business

and financial

analysisConsider

options for

Payment of

Claim or

Settlement

Pay Claim or

Settlement

Chapter 11

Meet

management

& legal

counsel

Yes

Yes

Yes

No

No

No

Exit strategies:

Merger/Sale

Exit strategies:

Merger/Sale

Initial Diagnostic: Decision Tree

Understand the alleged claim as well

as client issues and objectives

Evaluation of Alternatives

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Negotiation Assistance and Support

Financial advisors can help healthcare providers reach

potential settlements and implement government

required changes by:

• Reviewing policies, internal process controls and payments made:

payments to physicians, lease arrangements, bonus compensation

and teaching arrangements to resolve and possibly prevent Stark

Law and Anti-Kickback Statute allegations

• Issuing recommendations for corrective action, changes in policies

and assisting to implement proper controls and best practices

• Conducting internal investigations to compare to agency findings

• Conduct extensive cash flow forecasting and capital advisory

assistance to determine ability to pay

• Evaluate alternatives including filing for bankruptcy to restructure all

obligations including government claim or financial settlement

• Traditional negotiation assistance regarding terms of settlement

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Section 4:

Valuation Drivers in Acquiring Physician Practices

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Value Drivers

Patient demographics form the core of the data for any medical

institution:

• Allow for the identification of a patient and his/her categorization into

categories for the purpose of statistical analysis

• Certain medical conditions are more prevalent for particular patient

groups

- For example, cardiology practices need a concentration of older

patients where pediatrics need more families

• Need to understand how far patients are willing to travel for medical

care – as an example dialysis clinic patients

Patient Demographics

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Value Drivers cont.

Healthcare professionals who may make a referral:

• Physicians

• Nurse practitioners (NP)

• Physician assistants (PA)

• Certified nurse midwives (Midwives)

What are the ages of referral sources?

Are referral sources concentrated?

Referral Sources

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Value Drivers cont.

Healthcare professionals other than physicians who provide

healthcare services to patients (NP, PA, & Midwives)

Allows the organization to leverage the care model

MLPs may provide services under the direct supervision of a

physician

If properly utilized, can result in additional margin to the

organization

Midlevel Providers (MLPs)

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Value Drivers cont.

Concentration in a market of commercial health insurers (e.g.,

Blue Cross, United, Aetna, Cigna)

• The more concentrated the market in terms of health insurers, the less

likely a healthcare services provider will be able to negotiate favorable

contracts.

- Market control over pricing is held by these few insurers, thus

leading to an expectation of lower profits

- In some markets, commercial payers are less than Medicare

If rates are favorable, are they locked in for a number of years?

Are there automatic inflators built in?

Payer Environment – Who is Footing the Bill?

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Value Drivers cont.

Allows for revenues to be generated from something other than a

physician’s personal effort

• Technical Component (TC):

- Paid in connection with ownership of equipment, provision of a technologist

to operate the equipment, supplies and general overhead.

• Professional Component (PC):

- Paid to the physician specifically for personal efforts like reading a test

If properly utilized, can drive additional value, otherwise can be a

deterrent to value

Can be barriers to entry here

Ancillary Services

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