Noncompete Case Underscores the Need for Right Wording

Noncompetition provisions are tricky.  Courts generally don’t like them; and the law is very particular about them.  Generally speaking, a noncompete is enforceable if it is well written and the employer has complied with the contract that contains it.  That said, since courts are not big fans of noncompetes and since the law is that a noncompete is to be strictly construed (against the party that drafted it), the devil is clearly in the details.  For instance, one court refused to uphold a noncompete when the wording was that it complied in the event the employment agreement was terminated, but in the case at hand the contract simply expired.  In other words, the contract said that it applied in the event the contract was terminated.  Since the contract simply ran out, the court refused to enforce the noncompete.

The same sort of thing has happened to a Florida veterinarian.  The employment agreement he signed prohibited the doctor from having anything to do with a competing business within a 35 mile radius, so the doctor located his practice outside that zone when the contract was terminated.  When the doctor provided services within the 35 mile zone, the employer sued…and lost.  Here’s why:  the contract did not prevent the doctor from practicing in the 35 mile zone.  It just prevented him from having anything to do with a competing business that practiced in that zone.  Tricky.

Husband and Wife Kickback Conviction Not Surprising

The convictions of a husband and wife were upheld on February 2nd by the Second Circuit Court of Appeals.  The couple was convicted of soliciting and receiving kickbacks, among other things.  They argued that, in fact, all they did was to recommend physicians refer patients to a certain imaging center.  Their argument was that the doctors used their own judgment in referring patients.  Audio and video records of their activities, however, supported the prosecution’s case that in fact the couple actually paid cash to referring physicians for referrals made by the doctors to the imaging center.  The couple will spend about two years in prison.  The court did not address the legal issue of whether or not commission based compensation arrangements for marketing services were permissible.

Medical Practice Healthcare Legal Audit

The Florida Healthcare Law Firm is proud to offer to our latest service – The Medical Practice Healthcare Legal Audit

Why have an audit?

State and federal regulators are investing billions to enforce even the most benign violations. We have seen what appears to be an honest, simple mistake lead to investigations by regulatory agencies and the imposition of monetary fines and penalties. The sting of any regulatory sanction is further compounded due to lost patient revenues from your practice because of the time and worry dedicated to dealing with government regulators. The end result is the need to spend tens of thousands of dollars, or more, of attorney fees and consulting fees to help undo the damage. Prevention is better than cure!

How it works:

Our Medical Practice Healthcare Legal Audit is comprehensive and can be performed on site at your facility for your convenience. We will conduct interviews with key staff and take a complete top-to-bottom look at your practice to determine if there are any issues that may cause exposure to actions by various regulatory bodies. In addition to identifying risk areas, we will also look for missed revenue opportunities that you may not be taking advantage of if you are unaware of certain key terms in an agreement. Depending on your individual situation our review can cover the following issues:

State licensing boards
Employment contracts
Managed Care Contracts
Medicare
Medicaid
State and Federal fraud and abuse laws
Vendor agreements
Equipment leases
Employment Practices to include: wage and hour compliance (overtime); eeoc compliance; employee handbook; proper classification of employees (exempt vs non-exempt); hiring and termination of employees
OHSA
DEA
Other applicable regulatory issues

What you get:

Once our review is completed we will provide you with a written report of our findings and suggest an action plan for correcting any items that we think may expose your practice. Additionally we can develop for your practice a complete compliance program; your guide to ensuring continued compliance. Did you know that having a written compliance program can be a mitigating factor in the assessment of fines and penalties by many regulatory agencies?

Call now to discuss how our Medical Practice Healthcare Legal Audit can help steer your practice in the right direction. We can tailor the audit to meet your specific needs and provide it at a convenient and reasonable flat rate.


Innovative Surgery Center Arrangements

While surgery centers generally follow the guidelines set forth in the federal Safe Harbor to the Anti Kickback Statute (AKS), not all do. In fact, there are some creative arrangements worth considering.

Some centers do not perform services which are compensated in any way by a state or federal healthcare program. As such, they don’t have to comply with the usual federal laws (e.g. AKS and Stark). That leaves the center to comply only with state regulation, which is usually far less restrictive than the federal laws. This works if the center intends, for instance, only to do work pursuant to Letters of Protection (LOP) or bodily injury suits. Though the pool of patients is very different in this type of center, the lid is nearly off when it comes to how creative the arrangements among the owners and referring physicians can be.

One of the more vexing challenges among all surgery centers is ensuring patient referrals by owner surgeons. While most centers will simply follow the federal Safe Harbor “one third test,” other centers go further and do things like: (1) making loans to owner surgeons, (2) creating “put” or “pull” periods during which time an investing physician can buy back out or be bought back out, and (3) even making exceptions to the restrictive covenants commonly contained in ASC documents.

Complying with the federal Safe Harbor applicable to surgery centers is clearly the most conservative way to go, in terms of regulatory compliance, since compliance means immunity from AKS violations. That said, Safe Harbor compliance is a little like horseshoes: coming close counts. The simple reason is that Safe Harbors are examples of conduct that complies with the AKS, but they are not all encompassing. There may be arrangements that do not violate the AKS which are simply not described in the Safe Harbors. Simply put, there are many other creative arrangements commonly employed in surgery centers. Since surgery center ownership and referral arrangements are hotly regulated, owners must be careful when considering veering off the straight course provided by federal law.


Clinical Research Organizations (CROs) and Referring Physicians

The two business drivers of CROs are (1) pharmaceutical companies that want studies, and (2) referring physicians.  Though CROs will enter into advertising programs designed to educate and attract study participants (often paid for by Pharma), CROs are often frustrated in generating community physician referrals.  One of the main obstacles is the federal Anti Kickback Statute (AKS), which forbids payment of any kind in exchange for patient referrals.  CROs will be glad to know, however, that one of the AKS regulatory exceptions (Safe Harbors) in particular, the “Personal Services Exception” does allow CROs to enter into compensation arrangements with referring physicians.  Though the purpose cannot be to induce patient referrals, if the Safe Harbor is complied with, the CRO can have a compensation arrangement with a physician who refers.

The Safe Harbor essentially requires the following:

  1. That the arrangement be for necessary services (not some cloaked way to pay for patient referrals);
  2. The doctor’s duties have to be in writing;
  3. There has to be a written agreement between the parties;
  4. The agreement must have a 12 month term (though it could be terminated within that period of time);
  5. Compensation must be set in advance, be consistent with fair market value and not vary based on the value or volume of business between the CRO and the referring doctor.


Haven’t Thought Much About Compliance Lately? The Government Has


It is estimated that health care fraud is a $60 billion a year business fueled by illegal conduct such submitting false claims and paying kickbacks to physicians and suppliers. Until recently, if large health care organizations were the targets of fraud investigations, these companies, as their penance, typically wrote a big check to the government and continued business as usual. Things have changed.

While indicting and convicting health care executives is not a new practice, officials at the Department of Health and Human Services (“DHHS”) and the Department of Justice (“DOJ”) are said to be frustrated with the frequent occurrence of repeat violations and they are ramping up their strategy. Lately there have been aggressive new initiatives rolling out to combat rampant health care fraud and the government is increasingly bringing criminal charges against executives even if they were not complicit in the fraud scheme, but could have stopped it if they had known.

What’s more striking is that in addition to civil monetary penalties and criminal indictments, the government is taking great efforts to exclude convicted executives from being involved in companies that do business with federal health programs. A recent bill introduced to Congress under the name of the “Strengthening Medicare Anti-Fraud Measures Act of 2011 (the “Act”), increases DHHS’ existing powers and allows them to seek to exclude owners, officers and mangers of companies that are convicted of health care fraud from federal healthcare programs even if they left the company prior to any conviction of the entity.

In addition to the expansion of the permissive exclusion afforded by the Act to DHHS, regulators and law enforcement officials are going to be increasingly utilizing current permissive exclusion remedies. DHHS’ bold move appears to be based on the rationale that the permissive authority of Secretary of DHHS or the Office of the Inspector General of DHHS to exclude individuals is a much easier process than criminal proceedings.

The impact of this aggressive new government strategy will likely have even further reaching consequences for convicted healthcare business owners and executives. For instance, an exclusion from being part of a business that works with federal health care programs would be a career ending blow for most executives. It should also be emphasized that smaller organizations are not in any way immune from enforcement activity. In fact, with newly increased enforcement budgets, authorities have the means and the time to target organizations of all sizes.

Law makers and regulators are hopeful that by ramping up the enforcement of existing laws and expanding the scope of DHHS’ power, it will act as a powerful deterrent against overt acts and will compel corporate executives to take proactive steps in preventing fraudulent activities and affirmatively addressing fraudulent practices when discovered. It is vitally important now more than ever, to have an active compliance program in place. A strong compliance program can not only detect and prevent fraudulent or negligent activities but also will typically be considered as a mitigating factor if an organization is culpable of fraudulent activity. The Florida Healthcare Law Firm works with health care organizations of all sizes to assist in the audit, development and implementation of effective compliance programs.


Considering Buying Into a Practice? You Need to Read This

ownerYou’re an employed physician in a small practice and all the practice revenue comes from treating patients in your office and in hospitals. You’ve been offered an opportunity to become an owner in the practice and you’re not sure how to view it.

Here is what is happening with medical practices, value-wise. The values are the lowest in 25 years. A buy-in, for instance, typically consists of only the following: the fixed assets (usually a lower “book” value) and whatever your share of the receivables is (typically not purchased). The only additional amount paid is for the “good will” or “going concern” value when the practice generates “passive revenue,” such as physical therapy or diagnostic imaging. That means medical practices aren’t worth much and no one is really lining up to buy them.

So then why would an “older” or more established doctor bring someone in? First, you must know that the growth of practices has slowed a lot with the economy issues. Second, owners hope to (1) have a better lifestyle, (2) find someone to generate a profit until they insist on being an owner, (3) find someone who can share overhead expenses, and (4) find someone who can pay them to own a portion, then buy them out when they’re ready to retire. Without some younger physician on track to become an owner, older physicians really have (1) no way to make a profit, (2) no way to slow down, (3) no one to share overhead with, and (4) no one to buy their practices, which many thought would be their retirement money.

Once you agree on it, how does the purchase price get paid? Typically, buy ins are paid for in whole or in part via a salary offset so that you pay for it on a “pre tax” basis, meaning that the founder gets the money before you receive it. That way, for instance, you don’t have to generate $140K worth on income, pay taxes and have only $100K left over to pay the founder.

With all of this in mind, you need to know what the “standard” arrangement for buy-ins is. The employer will employ someone for 2-4 years before offering them ownership. When ownership is offered, here’s what the structure usually looks like (about 90% of the time, in my experience)—

1. The purchase price consists only of the depreciated value of the fixed assets;
2. Since there is no “passive” revenue, there is nothing added to the purchase price;
3. The purchase price is paid for in a combination of pre tax and post tax, meaning you write a check for some of it when you sign the documents (post-tax), and the rest is paid for on a salary offset (pre-tax);
4. The employee “leaves” his receivables, meaning whatever profit remains from his/her services stays with the employer and the employee/new owner starts accruing receivables from 0;
5. If there is a noncompete involved (there is about 50% of the time), it exists only when the buy in is being paid, unless all the owners are bound by one;
6. You become an equal owner right away;
7. You become a board member right away;
8. The “founder” has control over a select list of issues, typically in a tie breaker voting fashion;
9. The overhead is allocated between the owners on some combination of equally and based on their relative productivity (collections);
10. Income is typically on an “eat what you kill” basis;
11. Employment agreements are exactly the same (except for the noncompete during the buy in); and
12. In the rare event that someone receives extra compensation for management (maybe 20% of the time), the fees are about $50K/year.

More specifically—

The practice. practices typically only have one class of owners. If there are two specified, this may mean the income is double taxed. This is something you and your accountant need to discuss. This is nearly unheard of in this day and age (and for at least the past 15 years). As mentioned, owners are typically treated as equals, except with respect to the buy in and occasionally a noncompete during the buy in period.

Amount of stock. The amount of stock given to you means nothing in terms of how much each person makes. Stock pertains to how much profit will be distributed and how much each would receive if the practice was sold (not happening). Why? Because the issue of how much a person receives from practicing medicine is nearly always an issue of compensation (addressed in the employment agreement). A person could own 99% of the P.A. and only receive 1% of the income. Ownership and compensation have nothing to do with one another.

More stock. I have seen very few circumstances where the younger doctor received less than equal shares initially. There was, however, an escalator provision in the shareholder agreement that allowed him to get more so he would be equal once the income hit a certain target. Though this is an odd provision for a medical practice (for the reasons described—ownership does not = money), it certainly could be employed.

Direction and control. I have never seen a circumstance where a younger physician who becomes an owner is not on the board and has no say in any issues affecting the practice. I have, however, seen circumstances where the older physician has the deciding vote on such things as (1) whether to bring in a shareholder, and (2) whether to sell the practice.

Compensation. Here’s what I’m most accustomed to—each owner has income attributed to him/her and expenses allocated. For instance, against $1M in revenue, there might be “direct” expenses of $50K (e.g. automobile, health insurance, professional dues and such, entertainment); and “indirect” expenses (overhead) allocated some of it equally and some of it on the basis of productivity, meaning the one who earns more pays more of these expenses. The second most common arrangement is to split everything equally.

Extra money to the founding physician. It is rare, as described above. When it is done, they are set at some reasonable, flat level.

Employment contract differences. Never seen it. When one becomes an owner, there is the real and emotional issue of equality. Owners insist on it, though they understand that those who bring in more money receive more income.

Termination without cause. Here’s how I see it being handled—(1) it applies to all owners and generally requires the approval of a supermajority of the owners (when each owner has an equal vote); or (2) there is none. One can be terminated for cause only.

Malpractice. Practices (1) go bare; or (2) pay for each owner’s $250K/$750K coverage and tail; or (3) require it and allocate the expense to each owner.

Buying out. The most common thing in practices is that retiring owners walk away with their share of the fixed assets (on a depreciated basis) and their receivables. If by that time you have passive revenue sources, such as an MRI in the practice, then typically you would pay an anticipated portion of those profits to him for some period of time (no more than one year). The shares are bought for maybe $1/share. The value of the medical practice is the ability of a physician to earn a living while there. That’s really all there is in today’s market. When you remove the physician, the value goes away with them, since there is no one to pay the overhead and no one to generate patient referrals. Disability is typically handled the same way, though death usually comes with it life insurance, which passes through to his estate and “pays for” his shares.

Now, let’s take a step back: why are you becoming an owner? If it does not appear that the employer wants you to be one, you have to ask whether it make sense. What do you receive for becoming an owner? Do you get more out of being an owner than being an employee? Does not make more sense to just respond by saying “Hey, I realize you don’t really want me to be an owner, so why not just keep me as an employee and give me [a raise]?”

How to look at these opportunities. Very simple. With people who have lots of experience. That usually means an accountant and a lawyer. Even then, you have to understand how to approach these opportunities. There are three stages: (1) discussions; (2) agreements; and (3) negotiation. Many physicians think you just get legal documents and hire someone to review them. This doesn’t make any sense because you could read them yourself and see whether or not they reflect your business understanding or expectation. You have to have detailed conversations (away from patients) to see if you are conceptually even on the same page; and you ought to consult with experienced professionals in this stage or you may miss an important conceptual issue. Only once you are sure that you see eye to eye does it make sense to look at documents.

When you get the documents, be prepared for them not to read they way you expected. Miscommunication between lawyers and clients is common and some clients and/or lawyers, as a way of negotiating, intentionally provide documents that don’t reflect the deal. The best way to use your hired consultants is for you to review the documents first and to discuss with the employer any discrepancies you notice. Only then should you have the lawyer and/or accountant provide their detailed comments.

Finally, you have to remember that the deal is yours. Once the accountants and lawyers are gone, you still show up every day and “live” in that practice. For that reason, you have to maintain your composure. The buy in process is a process and it can be upsetting in moments. Focus on practicing medicine and let your advisors advise you. At the end of the day though, you have to make the decision about what’s best for you, not your lawyer or accountant. Let them advise you, but don’t let them drive the bus.

FHLF Attorney Jeff Cohen recently presented a live webinar on the topic of “Physicians Becoming Employed.” You can download a copy of his informative presentation here! 

What To Consider When Buying A Medical Practice

As physicians retire and the era of healthcare reform rocks physicians, opportunities to purchase practices will likely surge, and not just for entities that employ physicians, like hospitals.  The big issues generally break down like this:

  1. What to pay;
  2. How to structure it; and
  3. How to pay for it.

The Price

It depends on what you’re buying.  If all of the practice income is from personal services performed by the selling physician, the answer is generally “not a lot.”  The price typically consists of (1) the value of the fixed assets (e.g. equipment, furniture), and (2) maybe a little more in order to avoid the cost of starting up a new practice from scratch.  In the event, however, the practice also generates income from services that are not personally provided by the selling doctor, the price is increased to account for this “passive revenue.”  How much?  Maybe the amount of one year’s profit from that ancillary service.

Structure

Practice purchase take one of two forms:  (1) stock purchase, or (2) asset purchase.  Buyers that buy the stock of a medical practice are rare because the buyers get all the liabilities associated with the stock of the selling practice.  Most practice purchases are asset purchases, which makes it easier to say what you’re buying, what you’re not buying, which liabilities you want to assume (e.g. leases) and which ones you don’t want to assume.  Sellers often prefer stock purchases because the seller gets better tax treatment on the purchase price (capital gains instead of ordinary income) than sellers who sell just their assets.

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Medical Practices Using Independent Contractors Beware

Though it is customary for many medical practices to pay its physicians as 1099 independent contractors (instead of W-2 employees), doing so can be very expensive because the IRS is expected to increase its investigations and enforcement actions in this area.

Small to mid-sized employers (especially in the areas of hospital based specialties) have traditionally had a very relaxed attitude about how their staff is paid. They figure “What’s the big deal? What difference does it make if I pay someone as an independent contractor versus withholding taxes and paying them as a W-2 employee?” The answer: Plenty! Why? Because if the IRS determines a person is wrongfully characterized by the employer as an independent contractor, the employer would be responsible for all the employer related taxes plus penalties.

Determining whether or not a person would be viewed as a W-2 employee instead of an independent contractor is not a simple thing. The “20 Point Test” typically used to guide the determination is not cut and dry. And tax advisors often advise “When in doubt, characterize the person as a W-2 employee, not as an independent contractor.” That advice has never been more true than now, when our government is actively seeking ways to soothe our financial woes.

Though characterizing people as W-2 employees will impact retirement plans (given the discrimination testing requirements), mistaking employees for contractors will definitely sting!