Corridors - News for North Carolina Hospitals from the Health Care Attorneys of Poyner & Spruill LLP

April 2007

Click here to view a pdf.

In This Issue

Hospital-Physician Joint Ventures - Compliance Checklist for Governing Board

Are you a Lobbyist? Some Say You Are!

An Ounce of Prevention for HR Professionals

EEOC Issues New Guidance for Health Care Workers Under the ADA

Hospital-Physician Joint Ventures – Compliance Checklist for Governing Board

by Wilson Hayman

Declining reimbursement and rising malpractice and other costs have been pressuring physicians for years to seek alternative sources of revenue for their practices. Such potential profit centers for physicians have included ambulatory surgery centers, freestanding diagnostic centers for imaging or endoscopy, and oncology treatment centers, often with the assistance of outside, for-profit management companies. Such freestanding centers appeal to patients by generally providing less costly, more efficient and convenient care. However, hospitals see this competition and the resulting loss of profitable procedures as a potential threat to their economic viability and their ability to serve all citizens regardless of ability to pay. To avoid a significant loss of this revenue, many hospitals have sought to form joint ventures with physicians, even though such ventures often furnish the same services the hospitals themselves can generally provide on an outpatient basis at a higher level of reimbursement.

While such hospital-physician joint ventures can prove mutually beneficial to both parties in many respects, they pose a number of regulatory hurdles which must be crossed in order to avoid a risk of serious penalties to the hospital. In particular, federal and state fraud and abuse laws impose important limitations on physician ownership of such facilities. Moreover, since most community hospitals in North Carolina are 501(c)(3) organizations, the requirements for tax-exempt entities also dictate to some degree the structure of such arrangements for these organizations. If a hospital is considering such a joint venture, the hospital’s governing board has a responsibility to educate itself on these issues, to consider and evaluate the advice provided by administration and its advisers, and to ask questions where necessary to fully explore the benefits and risks of the planned course of action.

A checklist for the governing board of a hospital exploring a hospital-physician joint venture would inevitably include the considerations listed below.

Fraud and Abuse Laws - Medicare and Medicaid Anti-Kickback Statute. The arrangement should comply, or come close to complying with, the following regulatory safe harbors under the Anti-Kickback statute.

Physician investment should, if possible, come within the safe harbor for investment interests in small entities, which, among other things, limits to 40 percent the equity that may be held by physician investors in a position to make referrals to, furnish services or items to, or generate business for the entity.

The arrangement meets the safe harbor for ambulatory surgery centers (“ASCs”), one of which pertains to ASCs owned by a hospital and physicians. The requirements of that safe harbor include that (1) at least one-third of each physician investor’s medical practice income from all sources for the previous year were derived from the physician’s performance of procedures eligible to be performed within an ASC; (2) at least one-third of those “ASC eligible” procedures will in fact be performed by each physician investor in the proposed ASC; (3) the entity and any physician investors must treat patients receiving benefits under a federal health care program in a nondiscriminatory manner; and (4) physician-owners must disclose their ownership interest to their patients at the time they are referred to the entity.

Any management fee should satisfy, or come close to satisfying, the requirements of the safe harbor for personal services and management contracts, including that the aggregate compensation is set in advance, consistent with fair market value in arms-length transactions, and is not determined in a manner that takes into account the volume or value of any referrals or business generated between the parties.

In its Fraud Alert on Joint Ventures and a Special Advisory Bulletin on Contractual Joint Ventures, the Office of the Inspector General of the U.S. Department of Health and Human Services (“OIG”) has identified certain sensitive issues or “red flags” concerning joint ventures. These include joint ventures with physician or other referral sources in which the share of investment that investors are offered correlates to expected referrals; requirements that investors can be divested of their interests if they fail to refer; and contractual joint ventures in which physicians contract with an existing provider which “manages” the new business, while the business depends on referrals from the physician owners.

N.C. Anti-Referral Statute - The North Carolina anti-referral statute prohibits a physician or group practice from making referrals of care provided under a state-regulated health benefit plan to an entity in which that physician or a member of his or her group is an investor. However, the statute excepts from the prohibition any service that is provided by, or under the personal supervision of, the physician or a member of his or her group practice to the patients of that physician or group.

Law of Tax-Exempt Organizations - The IRS has also scrutinized joint ventures between tax-exempt hospitals and physicians or other for-profit entities and has sanctioned hospitals when it found that participation endangered the hospitals’ tax-exempt status. Thus, the governing board of an exempt hospital has a duty to ensure that these requirements have been met. Some of these considerations include the following.

• Participation must further a charitable purpose of the hospital, such as assistance to the poor, advancement of education or promoting health to a broad section of the community. The community benefits and charitable purposes of the venture should be stated in the new entity’s governing documents.

• The structure of the venture should provide no private inurement to “insiders,” which the IRS has viewed in the past as including any physician on the hospital’s medical staff. Any benefit conferred through the venture on private, for-profit partners must be solely incidental to the community benefits provided through the venture.

• Board representation must be proportionate to ownership. However, in order to ensure that the venture will engage primarily in activities that further charitable purposes, the hospital must either (1) control the governing board of the joint venture entity, (2) retain more than 50 percent control, or (3) have voting power of at least 30 or more percent with reserve powers over certain decisions of a major nature and which affect the venture’s community benefit, such as the provision of care to charity, Medicare and Medicaid patients. The charitable purposes should override any duty of the venture’s governing board to maximize profits for the financial benefit of the owners.

• Income from the venture should be based on the relative contributions of the parties rather than “sweat equity,” and the venture should not make special allocations of tax benefits to the physicians.

• The hospital should not finance the acquisition of the interests of physician parties to the venture. Nor should it have a disproportionate exposure to liability, such as a guarantor of a disproportionate share of any loan to the venture.

• Beware ventures which do not establish any new facilities or services but involve the hospital’s contribution of existing “net revenue streams” to the venture, thus generating inurement and private benefit with little benefit to the public.

• Any management agreement should be for a reasonable term, with reasonable provisions for termination and renewal (i.e., the management company may not unilaterally renew). Control over the venture’s charitable purposes may not be ceded to a third party, for-profit manager.

• The structure and basic terms of the joint venture’s governing instruments must be approved by the hospital’s governing board on an independent and contemporaneous basis.

• Valuations should be performed by an independent appraiser contemporaneously with the transaction, preferably before the negotiation of a price or entering into a letter of intent that includes the price.

Reimbursement - Explore alternative structures which may affect the level of reimbursement and the attendant risks associated with the same. For example, an ASC located within 250 yards of the hospital and which meets certain requirements of integration with the hospital can be considered “under arrangements” and treated as a hospital outpatient department for billing purposes. Such an ASC could receive the higher Medicare reimbursement rates for hospitals rather than ASC rates.

Certificate of Need - The N.C. Certificate of Need law requires that a certificate of need (“CON”) be issued by the N.C. Department of Health and Human Services prior to the offer or development of a “new institutional health service.” Services requiring a CON include ambulatory surgery centers, GI endoscopy rooms, certain diagnostic centers, the purchase of medical equipment costing (along with any plans and activities required to make it operational) more than $750,000, and the purchase of certain identified medical equipment such as an MRI scanner, PET scanner or linear accelerator. The regulatory restrictions placed on a hospital’s ability to enter into joint ventures with physicians are significant, and the hospital’s governing board plays a key role in assessing the risks and benefits of such a proposal and in assuring compliance. If the parties are reasonable and remain sensitive to these issues, however, such undertakings can and do prove to be a “win-win” for all parties.

Wilson Hayman is Team Leader of Poyner & Spruill LLP’s Health Care Team and may be reached at 919.783.1140 or whayman@poynerspruill.com.

Top

Are You A Lobbyist? Some Say You Are!

By Steve Shaber and Tom West

Hospital administrators, medical staff leadership, and anyone else in a paid position might become a lobbyist without meaning to. This is courtesy of House Bill 1843, which – effective immediately – changes the law of state government ethics, legislative ethics, and lobbying. (See, N.C.G.S. Chap. 120, Art. 7; Chap. 120C & Chap. 138A.)

Now, some contacts with state executives are lobbying, just as some contacts with legislators are.

In addition, even modest gifts to some state officials – a ball point pen, a soft drink – may fall under these laws.

On the other hand, some of what has been said about the new law is overblown. In this article, we will explain some of the problems and safeguards.

Who’s Covered? The law covers legislators, legislative employees such as research staff and administrative assistants, some top and mid-level executives (known as “public servants”), and their assistants. It also covers their immediate families. Most government employees are not covered.

Is There a Way to See Who’s Covered? People know it when they are talking to legislators. Finding out which executives are “public servants” is harder. Happily, the N.C. State Ethics Commission website lists the names of public servants, as well as the boards that are covered (www.ethicscommission.nc.gov).

What’s Covered? That is, what is lobbying? Again, people understand when they are talking to a legislator, trying to influence legislation. But what does it mean to lobby the executive? Happily, most contact with executives is not lobbying. You can talk to any public servant about concrete cases, rights, and benefits; that’s not lobbying. Finding out what the rules are, whether they apply to your organization, and how to meet them is not lobbying.

Executive lobbying, though, is trying to get a public servant to make or change a regulation or policy.

Even cultivating good will in order to make or change laws, regs or policies can be lobbying.

Generally, Who’s a Lobbyist? Someone who is paid to lobby is a lobbyist and must register.

It’s Not My Main Job to Lobby; Am I a Lobbyist? Maybe. It all depends on how much time you put into lobbying, and if you get paid to do it. If you are paid to do your job, and as part of your job you spend more than 5% of your time in any 30 days lobbying legislators and executives, then you are a lobbyist. For example, if a hospital Vice President were to spend too much time in a 30 day period talking to the Director of DFS about changing a policy affecting the hospital, he is considered a lobbyist.

How much time is 5%? Consider there are 22 work days in a 30 day period, and the work days are eight hours, then 5% is a bit over eight hours. And remember, it’s a rolling 30 days, so five hours lobbying on April 30, plus five hours lobbying on May 1, makes one a lobbyist, even though these are different months.

Also, lobbying is not limited to a particular official or issue. Four hours lobbying legislators about the CON laws plus four hours lobbying the Director of DMA about Medicaid rules make eight lobbying hours - and you are a lobbyist!

What If I Go Over My Limit? Lobbied too long? Register the next day electronically, and follow up as the law requires.

What About Gifts? Two rules here: (1) No public servant, legislator, or legislative employee shall accept a gift from a lobbyist or lobbyist principal, and (2) no public servant shall accept a gift from any person who is doing business with the public servant’s agency, is engaged in activities that are regulated by the public servant’s agency, or has personal financial interests that may be affected by the public servant’s actions. Of course, there are too many exceptions to mention in this article.

A gift is considered anything of value that’s given without getting fair value in return. The key word here is “anything.” A cup of coffee meets the definition just as surely as a round of golf. The issue of gifts can come up unexpectedly; for example, if you invite a legislator to a hospital open house and serve food.

If Gifts are Out, What About Campaign Contributions? Lobbyists cannot make campaign contributions, period. Conclusion. Three points to carry away: (1) You might be a lobbyist when you talk to the executive branch. (2) Don’t give gifts to legislators and public servants. (3) If you want to do something that might come under the law, check carefully for the right way to do it.

Steve Shaber and Tom West are both members of the Health Care Law Team of Poyner & Spruill LLP. They can be reached, respectively, at 919.783.2906 or sshaber@poynerspruill.com or 919.783.2897 or twest@poynerspruill.com.

Top

HR News

An Ounce of Prevention for HR Professionals

By Nancy Brower

Diligence Required to Escape the Section 409A Tax Bite. If violated, Internal Revenue Code Section 409A subjects certain compensation to an additional 20% income tax. Because Section 409A applies only to “deferred compensation,” some employers mistakenly think they do not have to worry about Section 409A. What they don’t realize is that Section 409A does not use a traditional narrow definition of deferred compensation; rather it defines deferred compensation very broadly. Therefore, deferred compensation often can be found in employment agreements, severance agreements, severance plans and policies, and bonus plans, and not just in traditional deferred compensation plans, such as Section 457(f) plans. Employers only have until December 31, 2007 to bring any documents containing deferred compensation into compliance with Section 409A.

Unlike some other areas of benefits law, there is no opportunity to remedy a failure to have documents brought into compliance by the deadline. If the documents are not compliant, the additional 20% tax will apply, even for inadvertent errors, and the hospital must report the Section 409A violations to the IRS and the affected employee. If Section 409A is triggered, it can cause the employee to become taxable on the deferred compensation even before it is payable to the employee. Because of the scope and complexity of Section 409A, it is recommended that hospitals consult with employee benefits counsel to determine whether Section 409A applies.

Retention of Employees Eligible for Retirement Benefits. Facing staffing shortages, hospitals may want certain employees to delay retirement. Some employees are willing to work at least part-time if they can also begin to draw retirement plan benefits. While employed participants may receive in-service distributions from a profit sharing plan, 401(k) plan or a 403(b) plan once they reach age 59½ (even earlier from matching and profit sharing funds), a similar rule did not apply to defined benefit plans. The Pension Protection Act changed this effective 1/1/2007 by allowing defined benefit plans to pay benefits once an employee is 62, even though the employee remains employed by the plan sponsor. In evaluating such a change, hospitals should remember that once they offer this type of in-service distribution, they cannot later amend the plan to eliminate it entirely. As always, although the law now allows these in-service distributions, the distributions cannot be made until the plan documents have been amended to allow in-service distributions.

Nancy Brower is a member of the Employee Benefits Team of Poyner & Spruill LLP and may be reached at 704.342.5275 or nbrower@poynerspruill.com.

Top

EEOC Issues New Guidance for Health Care Workers Under the ADA

By David Woodard

The Equal Employment Opportunity Commission has issued a new Q&A guide titled “Questions and Answers about Health Care Workers and the American With Disabilities Act.” In its preface to this Q&A, the EEOC noted that:

• Health care is the largest industry in the American economy and has a high incidence of occupational injury and illness.

• Health care jobs often involve potential exposure to airborne and blood borne infectious diseases, sharps injuries and other dangers, and many health care jobs can be physically demanding and mentally stressful.

• Health care workers with an illness or injury may face unique challenges because of societal expectations that health care providers should be free from any physical or mental impairment.

The Q&A addresses basic questions that health care employers face under the Americans With Disabilities Act, such as who is an employee, what constitutes a substantial impairment, what is a disability, what accommodations are reasonable, what is an undue hardship, and how employers should determine if an impairment constitutes a direct threat to the safety of the employee, patients or co-workers.

This recent Q&A suggests an increased focus by the EEOC on disability issues in the health care arena and highlights how the EEOC might review disability discrimination claims. Health care employers would be well advised to review the entire Q&A guide, which can be found on the EEOC’s website at: www.eeoc.gov/facts/health_care_workers.html.

David Woodard is a member of the Employment Law Team of Poyner & Spruill LLP and may be reached at 919.783.2854 or dwoodard@poynerspruill.com.

Top