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February 2015
Sharp Questions Dominate Supreme Court Oral Arguments Regarding the Challenge to the Availability of ACA Premium Tax Credits Federal Trade Commission Successfully Obtains Divestiture of Physician Group Previously Acquired by Hospital System New Medicare ACO to be Unveiled Soon
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Lauren D’Agostino Beth Fitzgerald Ian P. Hennessey Beth Kutscher J. Peter Rich Layout and Design - B&L Printing, Co. Inc. New Jersey Physician is published monthly by Montdor Medical Media, LLC., PO Box 257 Livingston NJ 07039 Tel: 973.994.0068 Fax: 973.994.2063 For Information on Advertising in New Jersey Physician, please contact Iris Goldberg at 973.994.0068 or at igoldberg@NJPhysician.org Send Press Releases and all other information related to this publication to igoldberg@NJPhysician.org Although every precaution is taken to ensure accuracy of published materials, New Jersey Physician cannot be held responsible for opinions expressed or facts supplied by its authors. All rights reserved, Reproduction in whole or in part without written permission is prohibited. No part of this publication may be reproduced or transmitted in any form or by any means without the written permission from Montdor Medical Media. Copyright 2010. Subscription rates: $48.00 per year $6.95 per issue Advertising rates on request New Jersey Physician magazine is an independent publication for the medical community of our state and is
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C O N T E N T S
Sharp Questions Dominate Supreme Court Oral Arguments Regarding King v. Burwell
6
CONTENTS
9
Federal Trade Commission Successfully Obtains Divestiture of Physician Group
Previously Acquired by Hospital System
11
New Medicare ACO to be Unveiled Soon
11
Prime Dropping Out of Daughters Deal
12
Accountable Care Organizations and Selling a Practice
13
Medical Practice Mergers and Acquisitions - Are You Prepared?
15
Contract Negotiations: Five Elements to Consider
17
Data Management and Accountable Care Organizations
17
Aetna, Virtua Announce New Accountable Care Pact
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Cover Story
Sharp Questions Dominate Supreme Court Oral Arguments Regarding the Challenge to the Availability of ACA Premium Tax Credits By: J. Peter Rich and Lauren D’Agostino
O
n March 4, 2015, the Supreme Court of the United States heard oral arguments in King v. Burwell, the highest profile challenge to the Affordable Care Act (ACA) since the Supreme Court’s 2012 decision to uphold the law. The oral arguments featured sharp questioning of both sides. A decision is anticipated in June to determine whether the high court will maintain the status quo with respect to the availability of premium tax credits to lower-income exchange customers in all states.
The Issue The plaintiffs in King seek to invalidate a May 2012 Internal Revenue Service (IRS) rule providing that health insurance premium tax credits will be available to all taxpayers nationwide, regardless of whether they obtain coverage through state-based exchanges or federally funded exchanges (FFEs).i The plaintiffs argue that the plain language of the ACA limits the availability of premium tax credits to health care insurance plans purchased through state exchanges. Only 13 states and the District of Columbia have established state exchanges for 2015;ii the other 37 states will use FFEs in 2015.iii The plaintiffs’ argument is based on statutory language providing that premium tax credits are available only for health care plans that are “enrolled in through an Exchange established by the State under section 1311 of the [ACA].”
Case History In 2013, two groups of individual taxpayers brought lawsuits contending that the IRS rule violates the plain language of the ACA. The government successfully defended the IRS rule before the U.S. District Court for the District of Columbia 6 Affiliated Practice
(in Halbig v. Burwell) and the U.S. District Court for the Eastern District of Virginia (in King) by asserting that the plaintiffs’ isolation of a phrase in the statute was inconsistent with the legislative history, structure and purpose of the ACA. The plaintiffs appealed both decisions to the U.S. Court of Appeals for the D.C. Circuit and the Fourth Circuit, respectively. On July 22, 2014, in Halbig, a divided three-judge panel of the D.C. Circuit struck down the IRS rule and held that the plain language of the ACA clearly restricted the availability of premium tax credits to consumers purchasing insurance through state-based exchanges. On that same day, a unanimous panel in the Fourth Circuit upheld the same IRS rule in King, concluding that it must defer to the government’s reasonable interpretation of the ACA reflected in IRS rule under Chevron.v Although the D.C. Circuit agreed to rehear Halbigen banc, which potentially could have rectified the circuit split, the Supreme Court granted the plaintiffs’ petition to hear King.
The Oral Argument at the Supreme Court STANDING BRUSHED ASIDE Although Justice Ginsburg raised the issue of standing within the first few seconds of the argument by Michael Carvin, counsel for the plaintiffs, the issue was brushed aside by the other justices and seems unlikely to be addressed by the Supreme Court. The government did not challenge the plaintiffs’ standing in its brief, and on the record before the Supreme Court there is no question that the challengers have standing. Mr. Carvin, counsel for plaintiffs, represented that there had been no factual change that would affect standing, and the Supreme Court appeared satisfied with his representation.
THE MERITS: QUESTIONS FOR PLAINTIFFS’ sonable agency interpretations of ambiguous federal statutes. Justices Kennedy and Alito observed that applying COUNSEL The questions to Mr. Carvin primarily focused on two issues. First, Justices Breyer, Kagan, Ginsburg and Sotomayor repeatedly questioned Mr. Carvin concerning other provisions in the ACA that the government contends support its interpretation of the statute, read as a whole. In their questions, those justices made clear that they supported the government’s interpretation of the statute. Justice Breyer, in particular, outlined the statutory case in support of the government’s interpretation, noting that Section 1321 of the ACA required the federal government to establish “such Exchange within the state” in those states that did not do so—and that this language effectively meant that the back-up FFEs were “established by the State” for purposes of the Act. Second, Justices Sotomayor, Kagan and Kennedy asked whether the plaintiffs’ interpretation necessarily raised a serious constitutional question; specifically, they inquired whether the ACA (so read) unconstitutionally coerced the states into establishing exchanges in view of the very severe consequences flowing from their failure to do so. If so, that could implicate the doctrine of constitutional avoidance, under which a court—if confronted with two plausible interpretations of a statute—should choose the interpretation that would avoid the potential conflict with the U.S. Constitution.
THE MERITS: QUESTIONS FOR THE SOLICITOR GENERAL Like the questioning of counsel for the plaintiffs, the justices’ questioning of Solicitor General Donald Verrelli focused primarily on the meaning of the statute and whether the plaintiffs’ challenge implicated the doctrine of constitutional avoidance. As to the former, Justices Scalia, Alito and Kennedy expressed—to varying degrees—skepticism regarding the government’s interpretation of the statute. In particular, Justice Scalia repeatedly emphasized that it is not unusual for Congress to enact a poorly designed statute that produces unfortunate results, and that a statute should not be given an unreasonable interpretation in order to avoid unfortunate results. As to whether plaintiffs’ interpretation triggered the doctrine of constitutional avoidance because it resulted in the ACA coercing the states, Justice Alito observed that only six of the states that do not have state-based exchanges had made that argument. In other words, if the ACA were coercive by withholding tax subsidies from the residents of those states failing to establish exchanges, most of the states so coerced were not complaining about it. Justice Kennedy, however, quite directly stated that if plaintiffs’ argument is correct, the ACA coerces states to establish exchanges because declining to do so “is just not a rational choice.” That in turn, he observed, would trigger the doctrine of avoidance. Finally, the solicitor general was questioned by the justices regarding the government’s alternative argument that the IRS’s interpretation of the statute was entitled to deference under the Chevron case, under which courts defer to rea-
Chevron deference here would conflict with the Supreme Court’s cases holding that the tax code is to be construed narrowly against tax credits and deductions. Chief Justice Roberts—in his only merits-related statement of the entire argument—observed that, if Chevron applies here, the next presidential administration presumably could reverse course and withdraw tax subsidies for health plans purchased on the FFEs.
Potential Impact of a Ruling for the Plaintiffs The Supreme Court is anticipated to render its decision by late June. If the Supreme Court strikes down the IRS rule as contrary to the ACA, that would have significant financial consequences for millions of U.S. citizens receiving premium tax credits through the FFEs, which would reverberate throughout the entire health insurance market.
POTENTIAL IMPACT IN 2015 The vast majority (87 percent) of individuals selecting health care plans in the 37 states using the FFEs in 2015 qualify for premium tax credits. Insurers are concerned that a Supreme Court ruling that such insureds are ineligible to receive premium tax credits, whether or not it goes into immediate effect, may prompt consumers to drop their coverage mid-year. Insurers are already locked into their rates for 2015 and it is unclear whether insurers would be allowed to withdraw from the FFEs mid-year. During oral argument, Justice Alito noted that the Supreme Court could mitigate some of the immediate impact of such a ruling by delaying its implementation so that the states using the FFEs could set up exchanges, in order to preserve their citizens’ access to premium tax credits.
POTENTIAL IMPACT BEYOND 2015 One study has concluded that, if the Supreme Court rules against the government, about 9.3 million people living in FFE states would no longer receive subsidies by 2016. That study also projects that such a ruling would increase the number of uninsured people by 8.2 million, leaving only less-healthy consumers in the individual insurance marketplace and driving up 2016 average premiums 35 percent, a so-called health insurance “death spiral.” Because the Supreme Court will likely rule after insurers have made their regulatory filings for their 2016 health plans, some insurers are contemplating proposing alternative plan offerings and two different sets of rates—one for each potential outcome—with the intention to drop certain offerings before they are finalized. The Department of Health and Human Services has not publicly discussed any contingency plans. Three Republican senators pledged that they have a plan to provide financial assistance for a transitional period to individuals who may lose subsidies. Nevertheless, one can only speculate about what—if anything—Congress and the administration would do in that event.
February 2015 7
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Federal Trade Commission (FTC) Successfully Obtains Divestiture of Physician Group Previously Acquired by Hospital System I
n a significant groundbreaking victory, on January 24, 2014 after a bench trial, an Idaho federal district court judge upheld the FTC’s antitrust challenge to a hospital system’s (St. Luke’s) acquisition of a multispecialty physician group (Saltzer Medical Group) and ordered divestiture as a remedy. FTC v. St. Luke’s Health System, Ltd., (D. Idaho, Jan. 24, 2014). The case is notable in several respects. Particularly if upheld on appeal, it validates the increased antitrust scrutiny that physician consolidations and physician acquisitions by hospital systems are undergoing. Moreover, the hospital system defended the acquisition as a necessary step toward practicing integrated medicine and population health management—goals that underlie much of today’s health care reform. The district court, while acknowledging these beneficial objectives underlying the transaction to improve the quality of medical care, said those objectives were deemed not merger specific nor sufficient to trump the substantial risk of anticompetitive price increases, where the acquisition led to a 80 percent market share for primary care physicians (PCPs). The case involved the acquisition of Saltzer, a 41 physician multispecialty group, nearly three-quarters of whom provided primary care services, located in Nampa, Idaho. The acquiring system, St. Luke’s, operated an emergency clinic with outpatient services in Nampa. It had no hospital in Nampa, but had 7 hospitals in Idaho, including the 400-plus bed St. Luke’s Boise Medical Center. The relevant product market was not disputed—Adult Primary Care Services (Adult PCP services) sold to commercially insured patients. In many health care antitrust cases, particularly in hospital merger challenges, the relevant geographic market definition has been a contentious, often dispositive, issue. While not a hospital merger, it was an important issue here as well. The court determined the geographic market here by purportedly applying the “SSNIP test”—whether all the sellers would be able to impose a small but significant, non-transitory increase in price (5 to 10 percent) and still make a profit. Relying upon payer testimony, and the facts that Blue Cross of Idaho (BCI) attempts to have PCPs in-network in every zip code where they have enrollees and that 68 percent of Nampa residents obtain their primary care in Nampa, so that health plans must offer Nampa Adult PCP services to Nampa residents to successfully compete, the court concluded that Nampa PCPs could successfully band together and obtain a 5 to 10 percent price increase. Nampa was therefore found to be a relevant geographic market.
Those conclusions led the court to calculate market concentration numbers that set off alarm bells under the Horizontal Merger Guidelines. Combined, St Luke’s and Saltzer account for nearly 80 percent of Adult PCP services in Nampa. As a result of the merger, the Nampa PCP market has a post-merger HHI of 6,219, and an increase in HHI of 1,607, both of which are above the thresholds for a presumptively anticompetitive merger. Hence, the FTC received the benefit of the presumption of establishing a prima facie case under Section 7 of the Clayton Act, established in United States v. Philadelphia Nat’l Bank, 374 U.S. 321 (1963). The court did not stop there in making findings of anticompetitive effect. Looking at St. Luke’s hospitals, it found that St. Luke’s had leverage preacquisition, and if St. Luke’s chose not to contract with BCI, BCI would have an immediately unsustainable product. The court then concluded that the acquisition would increase St. Luke’s bargaining leverage. In Nampa, it found that St. Luke’s and Saltzer were each other’s closest substitutes. The court concluded that the acquisition adds to St. Luke’s market power and weakens BCI’s ability to negotiate with St. Luke’s. The court found this conclusion buttressed — cont’d
February 2015 9
by an internal St. Luke’s email suggesting that they could improve their financial performance through a price increase and by internal Saltzer documents suggesting that they would have increased bargaining leverage to win back concessions that they had made to BCI. The court also “found” that it is likely that St. Luke’s will exercise its enhanced bargaining leverage from the acquisition to charge at the higher hospital-based billing rates for more services. Finally, the court made findings of anticompetitive effects in that Saltzer referrals to St. Luke’s would increase. In the introduction to its 52-page opinion, the court acknowledged the cost and quality concerns in the health care delivery system and the need to move away from the fee-for-service reimbursement system. The court complimented St. Luke’s “foresight and vision” in being early to assemble “a team committed to practicing integrated medicine in a system where compensation depended on patient outcomes.” The court indicated: “The Acquisition was intended by St. Luke’s and Saltzer primarily to improve patient outcomes. The Court believes that it would have that effect if left intact, and St. Luke’s is to be applauded for its efforts to improve the delivery of health care in the [relevant market.] But there are other ways to achieve the same effect that do not run afoul of the antitrust laws and do not run such a risk of increased costs.” As a consequence, the court concluded that the “efficiencies” of enhancing coordinated care, accepting risk, and managing population health advanced by St. Luke’s did not outweigh the anticompetitive effects and save the acquisition. St. Luke’s argued that it believed that the best way to create a unified and committed team of physicians required to practice integrated medicine was to employ them. The court rejected that defense by making the following findings: •
There is no empirical evidence to support the theory that St. Luke’s needs a core group of employed primary care physicians beyond the number it had before the acquisition to successfully make the transition to integrated care.
•
Integrated care—and risk-based contracting—do not require a large number of physicians because the health plans “manage the level of risk proportionate to the level of the provider organization.”
•
In Idaho, independent physician groups are using risk-based contracting successfully.
•
It is the committed team—and not any one specific organization structure—that is the key to integrated medicine.
•
Because a committed team can be assembled without employing physicians, a committed team is not a merger-specific efficiency of the acquisition.
Similarly, the court rejected the common electronic medical record (EMR) as a merger specific efficiency. While St. Luke’s touted its roll out of the EPIC EMR system, it acknowledged that it was developing an Affiliate Electronic Medical Record program that would allow independent physicians access to EPIC. Drawing on historical case law, the court recognized that divestiture is the “remedy best suited to redress the ills of an anticompetitive merger.” It was comforted by the fact that St. Luke’s had represented to the court that it “will not oppose divestiture on grounds that divestiture cannot be accomplished” and that “any financial hardship to Saltzer from divestiture would be mitigated by St. Luke’s payment of $9 million for goodwill and intangibles as part of the Acquisition, a payment that does not have to be paid back if the Acquisition was undone.” The court rejected St. Luke’s proposal to substitute separate negotiations by St. Luke’s and Saltzer with health plans as an alternative to divestiture. It also rejected the FTC’s proposal that St. Luke’s be ordered to give the FTC prior notice of all future proposed acquisitions. The court summarized its thinking in its conclusion. It acknowledged “health care is at a crisis point” and “the Acquisition is an attempt by St. Luke’s and Saltzer to improve the quality of medical care.” Nonetheless, the court determined that “the particular structure of the Acquisition—creating such a huge market share for the combined entity—creates a substantial risk of anticompetitive price increases.” It reasoned: “In a world that was not governed by the Clayton Act, the best result might be to approve the Acquisition and monitor its outcome to see if the predicted price increases actually occurred. In other words, the Acquisition could serve as a controlled experiment. But the Clayton Act is in full force, and it must be enforced. The Act does not give the Court discretion to set it aside to conduct a health care experiment.” St. Luke’s has already indicated it will appeal. For now, however, this case stands as an important precedent indicating that in situations with high market shares and evidence of price increases, efficiency claims and goals consistent with health care reform may not be a sufficient shield against traditional antitrust analysis. 10 Affiliated Practice
New Medicare ACO to be unveiled soon T
he government’s top health insurer has announced that providers could get a first look at a new type of Medicare accountable care organization this month. It has been modeled closely after a controversial managed care program and includes new waivers for skilled nursing facilities. While nursing homes aren’t likely to be transforming their operations en masse under an ACO model anytime soon, experts say they need to be trending that way and advise them to keep a close eye on new developments. ACOs are groups of clinicians and providers that voluntarily give coordinated, high-quality care to Medicare patients. Brought to life through the Affordable Care Act, ACOs distribute cost savings among members. The new healthcare model, which may be dubbed the Vanguard ACO will encourage greater participation by allowing providers to make the investments necessary to coordinate patient care, said Patrick Conway, the Center for Medicare & Medicaid Services’ deputy administrator for innovation and quality and chief medical officer. He added that the new ACO would offer a financial benchmark for providers that likely resembles the one in Medicare Advantage, the managed care program scrutinized heavily for upcoding issues and which the president has proposed cutting $36 billion in funding from over the next 10 years. Conway made the remarks during a special event sponsored by a bipartisan group known as Fix the Debt. At that event, the group released a report titled “Medicare Slowdown at Risk: The Imperative of Fixing ACOs.” The document argues that CMS should consider reforms that improve the financial structure of, and retain participation in, the ACO program, according to published reports. The president’s proposed 2016 fiscal budget, which would cut $100 billion from post-acute provider inflation updates over the coming decade, would incentivize nursing homes and home health agencies to deliver care more efficiently through the accountable care organization model. A CMS rule proposing sweeping changes to the Medicare accountable care model offers few incentives and could dissuade greater participation, 34 leading healthcare organizations and industry groups stated recently in a joint letter to CMS. The groups urged CMS to establish a more appropriate balance between risk and reward; adopt payment waivers to eliminate barriers to care coordination; modify the current benchmark methodology; provide better and timelier data; and strengthen the assignment of Medicare beneficiaries.
Prime dropping out of Daughters deal By Beth Kutscher
P
rime Healthcare Services is abandoning its bid for Daughters of Charity Health System in Los Altos Hills, Calif., citing “onerous and unprecedented conditions” from the California attorney general. California Attorney General Kamala Harris approved the controversial $843 million deal in late February but set more than 300 conditions that went beyond the original transaction terms. Critics of the deal—including a number of elected officials and the Service Employees International Union-United Healthcare Workers West—had put pressure on Harris to reject the takeover.
In its decision, Ontario, Calif.-based Prime called Harris’ terms “the most extensive and overreaching conditions in history.” “In essence, the attorney general is telling Prime Healthcare to operate the hospitals exactly as DCHS has and expect different results,” Prime General Counsel Troy Schell said in a news release. The conditions filled 78 pages. They included, for instance, the requirement to maintain the majority of services at Daughters’ hospitals for 10 years, or twice as long as Prime had committed to in the takeover agreement. Prime also — cont’d
February 2015 11
stressed that the requirement was twice as long as other hospital transactions approved in the state. The conditions also required Prime to maintain current insurance contracts, which the chain argued were well below fair-market value and neighboring hospital rates. The deal would have been the largest acquisition to date for Ontario, Calif.based Prime, which has traditionally grown by adding one hospital at a time but has been expanding rapidly across the country. It also was the largest hospital acquisition ever reviewed by the California attorney general. Prime has come under fire from opponents such as the SEIU-UHW, which has criticized its dealings with union employees, raised allegations of insurance overbilling and challenged its safety record. The chain, in turn, says it has been the victim of a smear campaign designed to force it to unionize its workforce, and is suing the SEIU chapter for its aggressive tactics.
Daughters of Charity Health System last month also sued the SEIU-UWH and its hand-picked suitor, private equity firm Blue Wolf Capital Partners, for conspiring to interfere with the sale process. The Daughters of Charity system is running low on cash and has warned bondholders that it may not be able to continue operating without facing bankruptcy. “We are disappointed that Prime Healthcare has decided not to go forward with the purchase of our hospitals,” the six-hospital system said in a statement. “We strongly disagree with Prime’s position on the attorney general conditions. We are confident that Prime could successfully turn around the DCHS hospitals. We remain committed to finding the best solution for our patients, communities we serve, physicians, employees, retirees and creditors.”
The SEIU-UHW, which counts 2,600 Daughters employees among its members, called on the system to “immediately designate another buyer.” It pointed out in a statement that a number of other parties remain interested in purchasing the hospitals, though not necessarily as a single entity. The deal’s terms allow Daughters to receive a $5 million termination fee if Prime walks away from the transaction due to unacceptable conditions from the attorney general. Daughters chose Prime in October from a field of four bidders. Its financial advisers understood the risks the deal could face but believed Prime was the only one with the financial strength to close the transaction. The $843 million price tag included a $394 million cash consideration and $449 million for assumption of the system’s debt. Prime also pledged to fund the system’s pension plan, including $280 million in underfunded liabilities.
Accountable Care Organizations and Selling a Practice Do I have to sell my practice to join an ACO? No, you don’t have to sell. But you should not be surprised to receive purchase offers. Family physicians and other primary care physicians are critical to the success of any ACO. • First, in many ACO programs, patients are attributed (assigned) to the ACO based on the provider of the plurality of primary care services. For an ACO to succeed, then, it needs to be built on a large primary care network. • Second, the typical ACO will cut costs by reducing avoidable utilization of high-cost delivery settings such as hospitals and emergency departments. These reductions are driven by strategies such as patient activation, chronic disease management, care coordination, management of care transitions, and effective prevention and wellness programs, all of which require high-quality, patient-centered primary care.
Alternatives to Selling If you wish to participate in an ACO, you have several alternatives to selling your practice. For instance, many successful ACOs are developed by independent physician associations (IPAs), with members in independent or employed 12 Affiliated Practice
practice. Other ACOs have grown out of pre-existing physician-hospital organizations where the hospital is aligned with independent physician practices. If you are not interested in selling, but an ACO in your area insists on contracting directly with participating primary care physicians, either of the following might be options: • Consider establishing a professional services agreement. With such an agreement, you could act as an independent contractor to the ACO, and your practice would remain legally and financially separate. • Consider a physician enterprise model (PEM) arrangement, wherein you would be employed through a third-party legal entity affiliated with the ACO. A PEM could allow you to retain full ownership of your practice. The imperative of ACOs is to clinically align disparate health care providers to ensure that care is being delivered in the most appropriate setting and at the most appropriate time to ensure optimal clinical outcomes. If you do not want to sell your practice, you should be able to find another way to achieve your goals and the goals of the ACO.
Medical Practice Mergers and Acquisitions – Are You Prepared? By Ian P. Hennessey
T
he past few years have seen increased activity in mergers and acquisitions involving medical practices. This trend is expected to continue over the next few years as the landscape of the health care sector continues to encounter significant changes. While every deal is unique, there are number of common elements that are important to understand and consider as part of any transaction involving the sale or merger of your medical practice.
Merger or Purchase Agreement The main deal document is the merger agreement or purchase agreement, as the case may be. In either case, the agreement will include all of the major terms of the deal, including the purchase price (and any conditions placed on payment of the purchase price), representations and warranties as to certain aspects of the medical practice, and the conditions that need to be met before the transaction can close. In many cases, the parties will agree to indemnify one another if certain representations and warranties are breached. Please note that if no merger or purchase agreement is forthcoming, the prospective arrangement may not be an actual merger or acquisition.
Employment Agreements In most cases, a provider who plans to continue working for the medical practice (or its successor) after the closing date will require some form of written agreement either extending the existing relationship or establishing a new one. In many cases, a new agreement will be executed between the parties. Sometimes an existing agreement will be assigned or otherwise carried over post-closing, often with some amendments. Although the merger or purchase agreement is the main transaction document, equal attention should be paid to the employment or independent contractor agreement as it will guide the individual relationship with the provider going forward. Key provisions include compensation and benefits, term and termination, and restrictive covenants. If a provider’s existing employment agreement is terminated at closing, the parties may consider having the provider execute a release agreement extinguishing any claims by the provider against the medical practice as of the closing date.
Non-Compete Restrictions Many physicians are familiar with the requirements for non-compete provisions in physician employment agreements. Generally, under Tennessee law, non-compete provisions in physician employment agreements are enforceable if the restriction is for two years or less and the geographical area of the restriction is the greater of either a ten-mile radius from the physician’s primary practice site or the county in which the primary practice is located. Depending on the circumstances, a physician may be restricted from practicing at any facility at which the physician provided services during the term of the employment agreement. Tennessee also permits physician non-compete agreements in conjunction with the sale of a medical practice, which are merely required to be “reasonable under the circumstances.” Moreover, there is a rebuttable presumption that such “deal non-compete” provisions are enforceable. If a buyer is a hospital, the non-compete provision must also include a clause permitting the physician to buy back his or her medical practice. If the medical practice is repurchased from the hospital, the non-compete provision is void. Therefore, it is important to consider any proposed restrictive covenants in light of existing relationships as of the closing date as well as with future plans in mind.
Tail Coverage and Outstanding Debt Although the medical practice to be merged or acquired is likely to live on in some form after the closing, the parties often find it advisable to utilize a malpractice tail policy to handle any pre-closing malpractice claims. In many cases, the cost of a medical practice’s tail policy and any outstanding debt held by the medical practice is paid at closing using proceeds from the purchase price.
Consents Prior to closing, the parties may be required to obtain consent to assignment (or, in some cases, change of control) with respect to certain contracts held by the medical practice. This situation often arises in the case of professional services — cont’d
February 2015 13
agreements with hospitals, leases, and managed care contracts. It is important to be aware that, depending on the circumstances, the process of obtaining required consents may open up existing contracts to renegotiation.
Legal Representation This article is not an advertisement. However, any attempt to create a checklist for medical practices considering a merger or acquisition would be incomplete if there was no
14 Affiliated Practice
mention of obtaining legal representation. While business considerations are at the heart of any potential deal leading to the merger or acquisition of a medical practice, there are also serious legal implications and ramifications that require careful review and analysis to achieve a deal with which all parties can be satisfied. Please consult with an attorney familiar with issues involved in a merger or acquisition, ideally at the beginning of the process, but in any event prior to closing the deal.
Contract Negotiations: Five Elements to Consider Five Key Elements of a Physician Employment Agreement
I
f you’re considering a position as an employee of a hospital, health system, or physician group, it’s important to know the basics before you negotiate an employment agreement. These five elements are just the starting point; there are a number of other important contract-related considerations to take into account. A health care transactional attorney can help you review a specific employment agreement in detail to be sure it is fair and appropriate and represents your best interests. In contract negotiations, it is useful to find out whether the compensation you’re being offered is comparable to that of physicians with similar skills and experience in your region. As a result of our Practice Profile survey, the AAFP has data on family physician individual income (before taxes). You can find that data, segmented by employment status, primary employer, practice size, number of years since residency, region, and primary location (i.e. metropolitan versus non-metropolitan) on the Mean and Median 2012 Individual Income of Family Physicians table.
Ensure that your base salary is guaranteed for as long as possible without adjustment. For physicians coming directly out of training, this period may only be one year, while physicians who are joining a health system as part of a practice sale may be able to negotiate a longer period of guaranteed base salary (three to five years). Find out whether the compensation you’re being offered is comparable to that of physicians with similar skills and experience in your region. Survey reports on physician compensation are available to help you to determine how much family physicians in your area earn. You can also ask employed colleagues who are in similar practice situations how they are compensated. If an employer offers a base salary plus incentive compensation, look closely at how you would qualify for incentive payments and how they are calculated. Many incentive models are still based on collections or work relative value units (wRVUs). However, these models are evolving to support higher quality, better coordination of care, and improved efficiency through clinical integration and accountable care organizations (ACOs). If you will be eligible for meaningful use incentive payments and other types of bonus money that may be available, get specific information about the criteria the employer will use to disburse these payments.
•
1. Compensation: Am I being compensated fairly? Will I be able to earn incentive compensation under the terms of the agreement?
•
2. Benefits: What benefits does the employer offer? Should I ask for any additional benefits?
•
3. Schedule and call: What are my call and coverage obligations?
•
4. Terms and termination: What is the actual term of the employment agreement? What are the termination provisions?
Specific requirements regarding all of the activities and metrics (e.g., collections, productivity, quality, meaningful use) that will affect your compensation should be included in the employment agreement or in an established written policy that is applicable to all similarly-situated physician-employees, not subject to the employer’s discretion. Consider what benchmarks you will be measured against and how data will be collected and submitted, and ensure that the benchmarks are stipulated in the agreement.
•
5. Restrictive covenants: If my employment ends, will I be able to practice in this area?
2. Benefits: What benefits does the employer offer? Should I ask for any additional benefits?
1. Compensation: Am I being compensated fairly? Will I be able to earn incentive compensation under the terms of the agreement?
Employers typically offer health insurance for the physician employee (and possibly for family members), license fees, — cont’d
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medical staff dues, and a stipend for continuing medical education (CME). Many employers also provide a retirement plan. In general, hospitals and health system employers offer a better range of benefits and more retirement options than private practices. It’s not unusual for physician employees to get three to four weeks of paid vacation and CME time. It is less common for employers to offer paid sick leave. More employers are combining vacation, CME time, and sick leave into a “paid time off” concept. Be sure that your employment agreement specifies the amount of paid time off to which you’re entitled. If not, changes to your employer’s leave policy could reduce your benefits without your consent. If your compensation is based in part on productivity, you should analyze how your income may be affected when you take paid time off. Most employers pay for malpractice insurance. As an employee, it’s preferable to have occurrence-based coverage (for incidents that happen during the coverage year, regardless of when a claim is filed). If you have claims-made coverage (for claims filed during the coverage year), you will need a reporting endorsement (“tail coverage”) when your employment ends. This covers incidents that happen during employment but aren’t litigated until after employment ends. If the employer offers a claims-made policy, your employment agreement should specify whether the employer will pay for part or all of your tail coverage upon termination of employment. If you’re considering a position in a different area, ask the employer whether a moving expense allowance is available. 3. Schedule and call: What are my call and coverage obligations? Employers often leave scheduling provisions loose so that physician employees have the flexibility to deal with the needs of their patients and the practice. Be open about your schedule expectations to ensure that they align with the employer’s requirements. If the employer makes any promises about your schedule (e.g., you won’t have to work more than one night per week or one Saturday per month, you can work a flexible schedule), try to incorporate the specifics into the employment agreement. Call and coverage obligations should be spelled out in the employment agreement. Be sure that your call responsibilities are not more burdensome than other family physicians employed under similar terms. Also, find out whether the employer offers compensation for taking call, which usually only occurs for taking additional call beyond that which you are already required to provide. If you’re only working part-time, be specific about your schedule in the employment agreement, especially if you’re paid on a salary basis. This prevents the employer from taking advantage of you by requiring you to work more hours than agreed upon.
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4. Terms and termination: What is the actual term of the employment agreement? What are the termination provisions? Many employers (especially physician groups) include a “without cause” termination provision in the employment agreement. This allows you or the employer to terminate your employment without cause. A notice provision that requires written notice 30 to 90 days prior to termination is typical. Almost all physician employment agreements allow the employer to terminate for cause. Be sure the agreement requires your employer to give you written notice of the cause for termination and an opportunity to “fix” alleged breaches or deficiencies within a reasonable period of time (typically, five to 30 days). Keep in mind that termination provisions set the term of the agreement, regardless of the stated term. If you or the employer can terminate the agreement without cause, the actual term of the agreement is the length of the notice period (e.g., 30 to 90 days). Some hospitals and health systems will guarantee a minimum one-year term. Be aware that if you agree to this, you’re contractually obligated to stay for the full term. 5. Restrictive covenants: If my employment ends, will I be able to practice in this area? Some states do not permit restrictive covenants, or they limit an employer’s ability to enforce them. However, many states do enforce them, even if there are limits imposed by state law. In general, these states require that restrictive covenants must be limited in duration and geographic scope to reasonably protect the employer’s interest against competition. Most restrictive covenants last for one to two years following termination of employment. A reasonable geographic radius for a restrictive covenant depends on where you practice. A restriction of 25 miles might be appropriate in a rural area, whereas a one-mile radius might be enforced in an urban setting. Ask if the employer will agree to limit the instances in which the restrictive covenant is enforced. For example, the employment agreement could specify that the restrictive covenant will not be enforced if you terminate your employment for cause. Non-solicitation provisions go hand-in-hand with restrictive covenants. States that don’t enforce restrictive covenants often allow provisions that prevent you from soliciting former patients, employees, and referral sources after your employment ends.
Data Management and Accountable Care Organizations Accountable Care Organizations (ACOs) and Data Management Data is the lifeblood of an accountable care organization (ACO). One of the fundamental principles of the ACO model is that participants engage in seamless electronic sharing of relevant clinical data to ensure all health care providers can deliver “population health.” Moreover, ACOs that participate in the MSSP must report 33 quality measures, so good data management is doubly important.
The Data-Integration Challenge Unfortunately, the obstacles here are formidable. The typical ACO may be assembled from a variety of practices, hospitals, and other organizations using a variety of record systems – some electronic and some paper – with no established way of pooling data or storing or analyzing the pooled data. Most ACOs cannot aspire to seamless data sharing in the short term, but every ACO needs a good, well-funded plan for moving quickly in that direction. Ask the ACO how it intends to make enough progress to achieve shared savings in the course of a three-year contract – and ask where the funding is coming from. Will you be required to contribute? Health information exchanges – data management systems designed to connect different electronic health records (EHR) systems for clinical alignment – are on the market, but establishing these systems in any given ACO is extremely complicated and often expensive. If the ACO is unable to lay out clearly how your practice data will be extracted or how aggregated clinical data will be made available to you, be extremely cautious about moving forward.
Standardization of Technology The ACO might require you to convert from your current paper or electronic system to a specified EHR. If so, be sure you know what costs you would incur, how much practice disruption you could expect, and how the ACO would support your practice financially and otherwise in making the change and in adopting the appropriate practice workflows and processes. Even if the ACO does not require you to change your recordkeeping system, be sure to ask how your practice is expected to integrate into the data aggregation and reporting infrastructure, what support the ACO will offer, and so on.
Aetna, Virtua announce new accountable care pact By Beth Fitzgerald
T
he movement toward “value-based” health care, in which health care providers are compensated for better managing cost, quality and the patient experience, moved forward Tuesday with the announcement of a new accountable care agreement between the health insurer Aetna and the Virtua Medical Group in southern New Jersey. Aetna said the accountable care organization, or ACO, expands on the current Medicare collaboration with Virtua that has served about 2,000 Aetna Medicare Advantage Members since July 2012. The new ACO aims to improve the coordination and delivery of patient care, and provide a better patient experience, for more than 16,000 Aetna commercial members in Camden, Burlington and Gloucester counties. — cont’d
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The Virtual Medical Group primary care practices in the agreement include more than 95 physicians and other care providers. The practices are recognized as “patient-centered medical homes” by the National Committee for Quality Assurance, which awards the PCMH designation to medical practices that provide coordinated medical care to improve population health. The VMG primary care practitioners are supported by Virtua specialty physicians and by the three-hospital Virtua health care system. Aetna members who receive care from VMG primary care physicians will be served under the new agreement. VMG will be accountable for cost, quality and patient satisfaction for the health care they provide. Aetna nurse case managers will work with physicians and the hospitals to assist in care coordination, outreach and follow-up services for Aetna members. The goal is to provide more highly coordinated care, particularly for those patients with chronic or complex conditions.
Richard P. Miller Virtua chief executive
“We are delighted to expand our existing Medicare collaboration with Virtua under this new agreement, and to bring the benefits of this value-based model of care to our members in southern New Jersey and southeastern Pennsylvania,” said John Lawrence, president, Aetna – New Jersey. He said Aetna looks forward to expanding the agreement even further over the coming months. Lawrence said the ACO “aligns with the federal government’s recently announced goal of expanding value-based agreements to more people over the next several years.”
Richard P. Miller, Virtua chief executive, said, “Virtua and Aetna share a common vision for providing a continuum of care for our patients in a value-based delivery model that emphasizes clinical excellence and effectiveness, coordinated access, and excellent customer service.” Miller said the expanded relationship with Aetna “is a demonstration of our overall mission to help patients be well, get well and stay well.” Aetna members who have been treated by VMG affiliated physicians over the past 24 months will be covered by the ACO. Their benefits will not change, but they will receive highly coordinated, personalized care. The agreement went into effect Jan. 1 for fully insured customers and will be effective May 1 for self-insured customers. The agreement includes a shared savings model that rewards Virtua physicians for meeting certain quality and efficiency measures, such as: •
The percentage of Aetna members who receive recommended preventive care and screenings;
•
Better management of patients with chronic conditions such as diabetes and heart failure;
•
Reductions in avoidable hospital readmission rates; and
•
Reductions in unnecessary emergency room visits.
Aetna said it is working with health care organizations nationwide to develop products and services that support valuedriven, patient-centered care. The company said that, nationwide, about 3.2 million Aetna members now receive care from doctors committed to the valuebased approach, and 28 percent of Aetna claims payments go to doctors and providers who practice value-based care. Aetna said it is committed to increasing that to 50 percent by 2018 and 75 percent by 2020. Aetna said that, in New Jersey, about 21 percent of its members, or nearly 230,000 members, are in value-based collaborative arrangements, including ACOs. Aetna said its goal is to increase that to 35 percent, or 400,000 of its New Jersey members, during 2015.
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