Super Groups: Legal Issues Associated with the Formation of Large ...

Super Groups: Legal Issues Associated with the Formation

of Large Multi-site Medical Groups

a presentation

at Fornos of Spain Restaurant, 47 Ferry Street Newark, N.J.

by:

Michael F. Schaff, Esq.

WILENTZ, GOLDMAN & SPITZER, P.A.90 Woodbridge Center Drive

Woodbridge, NJ 07095

732-855-6047

[email protected]

May 22, 2012

I. Overview

• Changes in the Health Care Environment

• Physician Associations– Are Super Groups the

Answer?

• Traps for the Unwary: Assessing prospective Groups

• Questions & Answers

II. Changes in the Health Care Environment

• Managed Care

– market penetration

– provider panels

– reduced fees

– consolidation

• Greater Efficiency forced by Market

– reduced fees

– reduced staff

– reduced overhead

– greater patient volume

II. Changes in the Health Care Environment

• Regulatory change & uncertainty

– Accountable Care Organizations

– Medicare/Medicaid will change

– Reimbursement Changes

III. Physician Associations OPTIONS

• Employment in private practice; no ownership

• Employment by hospital or other entity

• Solo practice

• Group Practice– small; 2-5 Drs.

– medium; 6-15 Drs.

– large; 16- 25 Drs.

– Super Groups; 26+ Drs.

III. Physician AssociationsYour CURRENT SITUATION

• What do you want?

– personal needs

– financial needs

– career needs

• Current Likes & Dislikes

• Characteristics

– age

– culture

– personality

III. Physician AssociationsWHAT ALTERNATIVES EXIST?

• All’s Fine

• Sell Practice & Retire

• Sell Practice & Work

• Contract Away Administration– Management Service

Organization (MSO)

– Physician Practice management Company (PPMC)

– Join Hospital

• Merge or Combine Practice– Into existing Super Group?

– Start a new Super Group?

III. Physician AssociationsMAJOR CONSIDERATIONS

• Compensation– How much will you make?

• Group Practice– Rights & Obligations

– Control?

• Centralized Management– Benefits

– Costs

IV. Traps for the Unwary:Assessing Prospective Groups

Why Form or Join a Group Practice?

• Significant Benefits

• Improved Negotiating

• Increased Revenue Sources – Ancillary Revenue

• Economies of Scale

• Shared duties & info.

• Coverage

• Practice risks

• Retirement


Why Form or Join a Group Practice?• Significant

Disadvantages

• Reduced Control

– medical

– financial

• Possible change in compensation structure

• Increased Costs- Higher Overhead

• Culture “shock”


“Culture Shock”• Different styles

• Demographics– age

– specialties

– culture/ethnicity

• Decision Making

• Support staff

• Office Policies

• Integration of Information Systems– Practice management systems

– Electronic Health Records (EHR)


Business Issues• Administrator & Management

• Staff Satisfaction

• Advisors

– legal

– accounting

– consultants

• Quality of Payer Contracts


Honeymoon Period

• May ease transition

• Disassociation planning

• Cost/profit center accounting

IV. Traps for the Unwary:Challenges in Combining Groups

Legal Hurdles• Anti-trust laws

– limits mergers that reduce competition– limited exemption for health care professional coalitions– Concerns about the use of “pseudo-merger” to engage in illegal

price fixing – Must do an analysis of increased market power vs. benefits of

integration– There is a PULL between integration requirement vs. desire for

independence• control (decision making)• sharing of profits and losses• clinical, operational and marketing integration

IV. Traps for the Unwary:Challenges in Combining Groups

Legal Hurdles

• Self-referral law “group practice”requirements

– centralized billing & management

– single taxpayer ID

– general sharing of overhead

• Pension plan rules require coordination of plans

• Taxability of transaction– be careful; structure may have significant tax ramifications


Level of Integration

• Partially Integrated Medical Group “PIMG”

– cost/profit centers

• Fully Integrated Medical Group “FIMG”

IV. Traps for the Unwary:Combination Models

• Top to Bottom Merger is a complete merger.

• Division Model is a way to allow existing groups to retain control over various existing elements of their practice, such as staff and billing.

• Leasing Assets vs. Merger or Contributions– tax issues

IV. Traps for the Unwary:Division Model

• Operation as a single legal entity with a single billing number and payroll (referred to as the “LLC”)

• Several divisions (one for each existing group) that are not separate legal entities.

• Operational control over each division by governance at the division level– each division determining their own method of

division-level governance

– but subject to the LLC final approval

IV. Traps for the Unwary:Division Model (con’t)

• Billing and collection is done in the name of the LLC

• Buy/sell terms and obligations at

– Division-level (for Division Assets) and

– Centralized Level (Common Asset Level)


• Cash distributions: – allocated to divisions based on agreed upon mechanism

• allocation of division-specific costs and revenues to the division

– concerns STARK LAWS & distribution of DHS Revenue unless division has >5 members

• allocation of common overhead costs to all divisions based on agreed upon formula

– per capita vs. per division vs.per owner vs. per FTE vs. revenue vs.# of staff

– allocation of distributions at the division level determined by division-level governance


• Joint exposure to liability – malpractice

– overpayment

– billing fraud, etc..

• Assets may be kept in existing entities owned by members of a division and leased to the LLC– lease payments will be allocated to the division (should be a wash

for the Members of the division)

– unwind provision allows for termination of leases during “honeymoon period” or beyond

– bank loans secured by an exiting group’s guarantees continue to be secured by those member’s guarantees

IV. Traps for the Unwary:Payor Contracting

• In general, payor contracts would be at the LLC level

• While existing contracts with third party payorsmust be reviewed in the due diligence process, if the combination of the groups is accomplished by creating the LLC as a new entity (and not by merging the existing entities into the LLC), the pre-combination contracts should not apply to services provided through the LLC.


Determination of Ownership

• Value of existing practices

• Adjustments?

• Equal?

• Other?

• Significance of Ownership– control, compensation

& equity


Allocation of Control• Centralized Control

– Executive or Management Committee

• Control at Division Level for daily items

• Protection for minority members

• Corporate ethics

• Business decisions

• Medical decisions


How is Compensation Determined?• Cost/income allocation

– division level

– full integration

• Activities & status

– production

– seniority or ownership

– non-medical activities

• Mechanics

– formula

– committee


How can Employment be Terminated?• Voluntary withdrawal

– retirement

– honeymoon period

• Without Cause

• Cause

– loss of license, etc...

• Disability

• Different Standards?

• Appeal Procedure?


Post-Termination Payments• How Determined?

– Business Valuation

– Formula

• How Allocated?– Ownership Interests

– Teermination/Deferred Compensation (Tax issues)

– Restrictive Covenant

• Funding Issues


Applicability of Restrictive Covenants

• Area and Duration

• Prohibited activities

• Liquidated Damages Vs. Injuction

• Trial period affect


Agreements with Related & Unrelated Parties

• Management

• Employment

– Non-medical staff

– Medical staff

• Billing & collecting

• Equipment Leasing

• Real Estate

• Labs & ancillary services


Agreements with Related & Unrelated Parties -- Concerns

• Who owns entities?

• Are certain members benefiting disproportionately?

• Are non-members benefiting? Are terms “arms length”?

• Do transactions comply with laws & regulations?

V. QUESTIONS AND

ANSWERS

Super Groups: Legal Issues Associated with the Formation

of Large Multi-site Medical Groups

a presentation

at Fornos of Spain Restaurant, 47 Ferry Street Newark, N.J.

by:

Michael F. Schaff, Esq.

WILENTZ, GOLDMAN & SPITZER, P.A.90 Woodbridge Center Drive

Woodbridge, NJ 07095

732-855-6047

[email protected]

May 22, 2012

Super Groups: Legal Issues Associated with the Formation of Large ...

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