In the healthcare industry, some of the biggest policy compliance issues and violations can go unnoticed for too long — until it’s too late.
Just ask Timothy J. Fry, today’s guest on The Professor’s Corner. As someone who worked in the healthcare policy world for five years, including nearly two years as a staffer at the Centers for Medicare & Medicaid Services, Timothy has seen just about every mistake in the business.
As a current Partner at McGuireWoods, that experience gives him a unique perspective on healthcare regulatory compliance.
So when it comes to some of the most common mistakes like Stark Law violations or billing and coding issues, is the smartest strategy to self-disclose to the government, or to settle with indemnity? The answer isn’t as simple as you might think.
Tim joins us on this episode of The Professor’s Corner to talk about the most common mistakes he sees in healthcare policy compliance, the potential consequences, and the smartest ways to resolve these issues.
Name: Timothy J. Fry
What he does: As a Partner at McGuireWoods, Tim helps clients navigate compliance and regulatory issues in the healthcare industry. As a former staffer at the Centers for Medicare & Medicaid Services, he has unique insight into healthcare policy from the perspective of policymakers.
Words of wisdom: “Today, it is very much a market position of many of these transactions, as they trade for self-disclosure to take place. And so as a buyer, if you don't cut it off at the time you do your transaction, it is very likely you're going to get pushed into it. And you have to bear that expense during that recap opportunity.”
Top takeaways from this episode
★ Stark Law violations often go unnoticed. Also known as the physician self-referral law, it’s common for healthcare groups to make mistakes on revenue splits for referrals. Unfortunately, these mistakes are often not caught until a client begins working with counsel.
★ Indemnity is not always an option. That’s because the Stark Law has the potential to trigger the False Claims Act, which comes with exorbitant fines. To avoid triggering the False Claims Act and a potential whistleblower situation, the best thing healthcare companies can do is self-disclose to the government.
★ For billing and coding violations, go with indemnity. Unlike Stark Law violations, common billing and coding mistakes should be settled with indemnity or smaller repayments rather than full self-disclosure. These settlements often offer some flexibility based on the scale of the issue.
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This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.
This is The Professor's Corner, a McGuireWoods series, exploring business and legal issues prevalent in today's private equity industry. Tune in with McGuireWoods partner, Geoff Cockrell, as he and specialists share real world insight to help enhance your knowledge.Geoff Cockrell (:
Thank you for joining another episode of our Corner series, where we bring together thought leaders and deal makers in the healthcare, private equity investing universe, and talk through issues that relate to those sorts of transactions. I am thrilled to be joined by my good friend and partner, Tim Fry, who's truly one of the sharpest legal minds I've encountered in my career. And he helps us navigate a lot of some of the thornier issues in healthcare investing. But Tim, maybe introduce yourself and your practice and then we'll jump into some questions.Tim Fry (:
Geoff, thank you for your kind introduction. Again, Tim Fry. I'm actually a former CMS staffer before law school at Northwestern and then joining McGuireWoods now nearly a decade ago. And from that background, I definitely come at it from a healthcare regulatory, healthcare policy perspective. And I've been honored to work with so many clients of yours Geoff, and others at the firm that are investing in healthcare private equity and being able to kind of lend that insight. How a policy maker may think about things. How do we address the rules coming out of Washington in such a way to accomplish transactions? And I spend all my time in kind of that healthcare regulatory space and it keeps me busy, but it also is a lot of fun and enjoyable to kind of work with such wonderful people, so smart at what they do and investigate and kind of lend our abilities as well.Geoff Cockrell (:
So Tim, you see probably more transactions than anyone given that you're connecting for parts of them. And you have a pretty good bird's eye view of the areas where people can really get in trouble. And one of the dynamics with healthcare regulatory concerns is someone can make a small mistake that accumulates up to a big potential exposure. But what would you say are one or two of the areas where people, you find them getting kind of tripped up on their regulatory compliance?Tim Fry (:
Yeah. Thank you, Geoff. And you're right. I spend a lot of time supporting our teams in kind of small issues that come up and often in compensation of physicians and that's one where maybe it's more starting to answer your question. The physician compensation ends up implicating the federal Physician Self-Referral Law. It's commonly known as the Stark Law, named after the author of that law. And it's this strict liability statute, which intended to get rid of a physician's incentive to refer 10 categories of what it calls designated health services, things like imaging, x-ray, clinical lab services, physical therapy, a few others. Places where physicians can kind of make money without the work. It started as a simple concept, but it became very complex. And in kind of the physician practice space, that means it governs kind of the nitty gritty of how every dollar is allocated within a practice.Tim Fry (:
And it's very easy to make footfalls such that in a fair number of our buy side deals Geoff, we end up spending time talking about these compensation issues and the Stark Law. The way the Stark Law wants ancillary revenue to be split is in a manner that doesn't impact who referred the business. So if you have a practice, a target and it's 10 orthopedists, they're going to have a lot of imaging, x-ray, DME revenue. What in a pure vanilla circumstance, the Stark Law would bless is for those 10 physicians to take that profit and just split it in 10s. That isn't always seen as the fairest approach. Different people contribute differently to practices, some work harder, see more patients, maybe founded the practice, maybe helped coach people. And so groups come up with all kinds of ways to split that revenue. And at the end of the day, it's okay to deviate from that equal split, but it has to avoid effectively rewarding the person who made the referral.Tim Fry (:
And so things like if you have a group of 10, you either need to share it across the 10, or you could split into two groups of five. But if you instead split based on locations and you have three locations such that you no longer have groups of five splitting that revenue, the Stark Law steps in and says, it's a violation. So it's really easy to do these footfalls. And unfortunately, it's usually not discovered if the group hasn't worked with council until a transaction, and that's where on buy side, we often see it.Geoff Cockrell (:
And so on the buy side context, when you encounter this, let's stay with your example of orthopedic practice and let's say they were doing a bilocation. So groups of less than five, which is going to be problematic. What's the order of magnitude of that problem?Tim Fry (:
So the challenge becomes, and this is why it pushes us to certain decisions. And in a transaction, Geoff you'll often ask me, can we just rely on indemnity? And this is one where we often cannot, and that's because the Stark Law triggers potentially False Claims Act exposure. And for those listening that maybe haven't come across the False Claims Act in their day to day, the threat is three times what you received from Medicare plus a per claim fine that can be an excessive $20,000. And so what we often see, let's take this orthopedics group if it's in violation and they may have thousands of lab claims for less than a $100 each, they could be facing False Claims Act exposure that can quickly add up into the seven, eight, nine figures.Tim Fry (:
And so kind of just relying on indemnity, just relying on, Hey, maybe we never get investigated, tends to be something that's very hard to stomach with that headline exposure. And so we often end up kind of looking at things like self-disclosing the conduct to the federal government instead because these Stark issues tend to be settled for a very small amount. We say cents on the dollar and not on the exposure I just suggested, but instead cents on the dollar of the actual amount received from Medicare. And so when you kind of put those next to each other, a lot of people make the choice to say, this is one that's worth self disclosing, and we can put it behind ourselves.Geoff Cockrell (:
Right. The sellers are often frustrated with that answer. They see this as even if it's a theoretically high magnitude problem, they view it as a low probability of that liability ever coming home. And I always tell people that high magnitude, low probability problems are some of the more difficult ones to resolve. An indemnity and an escrow, especially if you're trying to use an escrow, it's not a conducive remedy, because are you going to escrow this massive amount that is your theoretical liability? Are you going to hold it maybe forever? It just becomes a difficult solution. From a buyer's perspective, we always have an eye both on kind of controlling that risk for ourselves and also with an eye towards, especially in the private equity universe, everything that we buy at some point we're going to look to sell, and the next buyer's going to have something to say about this as well. And if we don't close off that exposure at the front end, we'll probably be getting pushed to close off that exposure on the back end when it's in our hands.Geoff Cockrell (:
And so resolving that on the front end is a significant benefit. And then one other note that we often see is that if you go through the process of that self-disclosure, you can avoid kind of whistleblower suits. You get some resolution from that. So you can avoid whistleblower suits, which can be super time consuming and can go on for a long period of time where your kind of dead in the water while government investigations going on. There's a lot of reasons to really think about kind of fronting the issue, even though it's painful in the context of a deal.Tim Fry (:
Geoff, I thought that was very well said. And your point in the private equity context of the exit or the recap transaction is very foremost in our mind. It is now, maybe it wasn't five to 10 years ago, but today it is very much a market position of many of these transactions as they trade for a self-disclosure to take place. And so as a buyer, if you don't kind of cut it off at the time you do your transaction, it is very likely you're going to get pushed into it. And you have to bear that expense then during that recap opportunity.Geoff Cockrell (:
So we've talked a little bit about issues that can arise based on how the physicians are sharing ancillary service revenue. What are some other kind of hotspots that come up pretty regularly on transactions Tim?Tim Fry (:
Not a surprise in the healthcare space when you're talking about money, billing issues come up often. Now we're often not the ones that discover it. As you know, Geoff, our clients will hire a billing and coding auditor and discover that the practice was billing for nurse practitioners at the same rate that they were billing physicians and not having the appropriate processes in place in order to do that. Under Medicare, that's known as incident two billing. Or they'll discover that a practice pattern is to build a evaluation in management service on the same day as a surgical service in violation of some of the surgery rules.Tim Fry (:
There's all kinds of very nuanced billing rules that the billing and coding companies will discover. And that's a situation Geoff, where things like indemnity or smaller repayments and not a full self-disclosure can be utilized, or you can have discussions around risk and materiality with a lot more ability and flexibility in the deals. But when the billing and coding auditors find problems, I'm often spending a lot of time trying to find out is this one that's an automatic repayment, so to speak, and that it's just so wrong for Medicare rules. Or are there are colorable arguments that are kind of industry norms that we can kind of use things like indemnity, or discussions, or change patterns in the future while accepting the historic risk.Geoff Cockrell (:
Right. And we spend a lot of time kind of differentiating between shades of gray, recognizing that the problem can still arise later on. But if, like you said, if you can avoid a conclusion that there's a point blank violation that requires a point blank reimbursement to the government, you've got some flexibility in how you approach it. Other steps along the way and that is to figure out how out of the order of magnitude of the problem, because if you've isolated some issues in say the chart review, you need to figure out okay, if they were doing this on a wider scale than what these few charts show what kind of potential reimbursement number would we be talking about? So if you can put a fence around the topic of magnitude, then you can take those two components of magnitude and probability or the degree of gray that you're looking at and start to frame yourself into a solution that might still enable you to get the deal done.Tim Fry (:
I think that's well stated, Geoff and quite honestly, that kind of thought pattern is also very much the case for things like Anti-Kickback Statute concerns or beneficiary inducement concerns at the federal level or state equivalent where the Anti-Kickback Statute is a criminal law barring referral incentives, but there is often an ability to ring fence it in a more typical corporate way than the Stark Law and physician compensation issues that we talked about before. Not because the penalties can't be so large, but the ability to look at shades of gray, help sellers come up with the stated rationale for why they entered into things. Even if it's something that leaves some risk, it often can be addressed in a more typical MNA risk sharing context then some of the things we started with.Geoff Cockrell (:
I think we'll leave it there for this episode. Tim, thanks for joining me. And we'll have to do this again sometime. It's a ton of fun.Tim Fry (:
I'll look forward to it, Geoff. And thank you to all of your listeners for spending some time with us today.Voiceover (:
Thank you for joining us on this installment of The Professor's Corner. To learn more about today's discussion, please email host Geoff Cockrell at firstname.lastname@example.org. We look forward to hearing from you. This series was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this series you acknowledge that McGuireWoods makes no warranty guarantee or representation as to the accuracy or sufficiency of the information featured in this installment. The views, information, or opinions expressed are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This series should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.