Presentation on theme: "Renaissance American Management, Inc. & Beard Group The Fourth Annual Physician Agreements & Ventures Paul R. DeMuro Partner Latham & Watkins LLP San Francisco."— Presentation transcript:
Renaissance American Management, Inc. & Beard Group The Fourth Annual Physician Agreements & Ventures Paul R. DeMuro Partner Latham & Watkins LLP San Francisco and Los Angeles, California (415) (213) John S. Howard VP and General Counsel St. Johns Mercy Health Care Corporate Hill Drive St. Louis, MO (314) Daryl P. Johnson Principal HealthCare Appraisers, Inc. 75 NW 1 st Avenue, Ste. 201 Delray Beach, FL (561) Chicago, Illinois November 1, 2007 JOINT VENTURES IN CANCER CENTERS (including Stereotactic Radiosurgery)
Radiation TherapySurgery and Radiation Therapy Stereotactic Radiosurgery and Radiotherapy The Types of Technology Which May Be Employed in Cancer Center Joint Ventures
Exposes all tissue in the general region of the tumorTreats tumor seen and not seen (treatment plus prophylaxis) Toxicity (complications) Conventional Radiation Treatment
How to Avoid Toxicity Avoid exposure Shield · Change the shape of the beam Fractionate Divide the treatment into multiple sessions
What is radiosurgery? Radiation Tissue destruction High metabolic activity, higher sensitivity Eg. cancer Radiation limited only to the target
Advantages of stereotactic radiosurgery Avoid critical structures Higher dose to the target Treatment of previously radiated region Avoid open surgery Outpatient
Types of Radiosurgery/Radiotherapy Stereotactic Radiosurgery (SRS) Usually with fixed cobalt source (i.e. gamma knife) Image Guided Radiotherapy (IGRT) IMRT with image guidance Image Guided Radiosurgery (IGRS) < 5 fractions (hypofractionation)
Types of Radiosurgery/Radiotherapy (Cont.) Intensity Modulated Radiotheraphy (IMRT) Standard radiation with shaped beam20 to 40 fractions Image Guided Robotic Radiosurgery (IGRRS)
Radiosurgery Procedures and Equipment SRS Multiple fixed source Gamma Knife – frame and intercranial only Image Guided Use of images to guide the treatment Cyberknife, Trilogy, and Synergy
Radiosurgery Procedures and Equipment (cont.) Radiosurgery Procedures and Equipment (cont.) Robotic Use of Equipment that moves (adjusts) for positioning the target with remote control from different room Beam Focusing Methods Multiple beams Shaped beam
Cyberknife Linear Accelerator Robot arm Robot table Xray with reconstructed 2D Image with fiducials Synergy and Trilogy Image Guided Treatment Robotic table Robotic extension of on board imaging (Trilogy) CT Image
Images in Image Guided Magnetic Resonance Imaging (MRI) Good for imaging soft tissue and detecting small lesions (because of its high resolution) Distorted with any metal in vicinity Computed Tomography (CT) Good for bone anatomy, and work with soft tissue Artifacts with metal
Images in Image Guided (cont.) Xray/fluoroscopy Can only see bones with reliability e.g. rarely see tumor in lung No reconstruction Depends on visible markers such as bone or fiducials
Neurosurgeons Radiation Oncologists Radiologists Nonradiologists Cardiothoracic Surgeons Neurologists Urologists Referring Physicians Physicists Hospitals Health Plans Equipment Manufacturers Wholesalers Salespersons Lenders/Financing Companies 3rd Party Management Companies Consultants Valuation Consultants Others Who Are the Potential Parties?
General Legal Considerations Stark Laws Anti-kickback Statute State Anti-Self-Referral Laws Certificate of Need and Licensure Tax-Exemption Issues Antitrust Reimbursement Issues Securities Laws
Practical Planning for Hospital and Physicians Understanding the Hospitals Interests – Accretive to current business – Expansion of current therapies and modalities – Context of therapies in cancer centers – Equipment options l IGRT l IGRS l Gamma Knife l Cyber Knife –Physician leadership to enhance clinical services and treatment alternatives
Practical Planning for Hospital and Physicians (continued) Understanding the Physicians Interests –Complement to professional fees –Clinical leadership possibilities –Alternatives to other options within practice specialties (e.g., neurosurgery, general surgery, thoracic, radiation oncology) –Passive income consistent with value of services –Control of service line –Forging relationship of trust with hospital partner
Creating Physician Interest Clinical Opportunities –Genuine service to patients –Expansion of services –Consistent with reimbursement –Changing lives through salvage care –Gamma knife example –3 year continuation of care after terminal diagnosis
Creating Physician Interest Financial Opportunities –Professional fees –Investment opportunity for passive income –Meeting the four Rs for physician engagement l Recruitment l Retention l Redirection l Redeplyoment
Sample Relationship involving Hospital and Physician Company General Principles and Description –Physician and hospital investment opportunity to expand services and provide stereotactic radiosurgery (SRS) services to patients –The new company (Newco) would be responsible for purchasing equipment and potentially the shielding and/or building improvements and to provide services in support of the SRS care model at the Hospital.
Planning Considerations for Services and Physician Involvement Credentialing for new and expanded services (e.g., unique SRS services) Equipment options all require unique training –Sufficient current staff –Specialized treatment –Incentive for specialized training –Proctoring new physicians –Maintaining local proficiency (Joint Commission)
Planning Considerations for Relationship Governance of company –Hospital and physician shared governance model l Creates necessary alignment of clinical delivery –Hospitals control of services and departmental relationships (e.g., neurosurgery, radiation oncology) Understanding lease and service agreements for hospital-physician company
Sample Lease and Services Agreements Company will lease the SRS Equipment and related improvements to the hospital. Company, through its physician members, will provide medical/ administrative services to the hospital to support the SRS service line.
Sample Lease Agreement Determining method for payment under the lease: –Per click payments (every use) –Fee Schedule per click (fees based on type of click) –Per patient fee (shared risk) Newco will pay for improvements and the SRS Equipment Lease will have a term consistent with expected life of equipment. –Lease may be renewed on mutually agreeable terms. Hospital agrees that if it wants to acquire additional equipment to perform SRS that Newco will be granted a right of first refusal to provide such equipment.
Implications of a Default Consider managing default obligations in relationship to: –Equipment l Limited portability l Freestanding services may be prohibited by state law l Free standing services may not be compensable in the market l Free standing services may not be clinically appropriate –Improvements and shielding l Not portable l Problems of title for improvements
Services Agreement The Company, through its physician members, will provide medical/administrative services in order to establish, develop and operate the hospitals SRS Program. These services will include (but not be limited to): –Budgeting/Strategic Planning –Development and Implementation of clinical policies and protocols –Research and clinical trial services –Utilization Review –Performance Improvement –Quality Assurance Processes –Peer Review services by specialty
Services Agreement (cont.) The Company may identify certain physicians members to provide the following services : –Proctoring physicians seeking SRS privileges –Marketing/Outreach for the Community –Medical Director services if such are needed in terms of clinical/administrative leadership
Change in Law for Lease or Services Agreement In the event of a Change in Law that affects the legality of the Lease or Service Agreement, the parties will attempt to negotiate an amendment to comply with such change in law. If unable to agree on an amended agreement or lease, then Newco and the hospital will need to have prearranged for winding up the relationship.
Change in Law for Lease or Services Agreement (cont.) Consider the following: –Ownership of equipment and improvements –Pricing and value of equipment and improvements (book/fmv) –Continued administrative or clinical leadership services –Dissolution of non-competition provisions
Valuation Considerations Overview of Topics - FMV vs. Investment Value Commercial Reasonableness FMV Attributes of Per Click Arrangements Valuation Approaches Top down approaches
Investment Value vs. FMV The fair market value standard is a hypothetical willing buyer/willing seller scenario. No consideration is given to any unique attributes or synergies of either party in reaching a determination of value. The investment value standard takes into consideration the unique synergies or attributes that one or both parties may possess. –For example, if a hospital has more favorable reimbursement that will enhance the profitability of a diagnostic cath lab being considered for purchase by the hospital, any valuation consideration of this benefit would reflect investment value, and not FMV.
Commercial Reasonableness Commercial reasonableness and FMV must go hand in hand. An independent valuator should opine with respect to FMV and commercial reasonableness
Examples of arrangements that may not be commercially reasonable A physician group leases employees from a hospital so that the group can enter into a turn key service arrangement with the hospital. A hospital enters into a one-year lease of physician- owned equipment at a short-term rate premium, but the lease continues to renew year after year. The flip of an existing entity / service line into an under-arrangement structure where little changes (other than the physicians access to higher reimbursements). A physician group leases to a hospital equipment which the hospital reasonably should own
FMV Attributes of Per Click Arrangements Commercial reasonableness is paramount Iffy per click arrangements may cast a shadow on all per clicks transactions Uncertainty with respect to normal or projected volumes presents valuation challenges (particularly in the context of a new service) Consider the possibility of (i) a descending payment structure; (ii) a fixed fee plus a per click; and/or (iii) a payment cap to avoid windfall payments should volume escalate. Consider how FMV may be reassessed after the initial year(s)
Factors that Support the Commercial Reasonableness of Stereotactic JVs The technology is relatively new, expensive and complex. A limited number of procedures are expected to be performed each year. The parties to the JV each bear substantial risk. A hospital reasonably might be disinclined to offer these services without commitment from participating physicians.
Generally Accepted Valuation Approaches The following generally accepted valuation approaches can be used for valuing per click and other types of businesses/arrangements: – Income Approach – Cost Approach – Market Approach
Income Approach The use of an income approach in evaluating a per click arrangement may appear to give consideration to the value of possible referrals among the parties.
Market Approach A Market Approach is generally not suitable in valuing per click arrangements due to the lack of comparability from one arrangement to the next. For example, the following may be different – –the type and cost of equipment involved –whether dosimetry and/or medical director services are included –Procedure volume
Cost Approach A Cost Approach can be used considering -The exact services that will be provided by the JV -A target operating margin derived from market sources -Consideration should be given to the economic outcomes in relationship to the respective risks assumed
Top Down Approaches Non-traditional agreements are emerging related to outpatient surgical departments, cath labs and other hospital services. A top down approach passes through all of the hospital's reimbursement, less a portion retained by hospital related to billing, collections, and other hospital services. This approach leaves open significant opportunity for challenge. –The actual services provided under the arrangement must be FMV, and the valuation approach should primarily consider the value of such services –The level of reimbursement received by a hospital may have no bearing on the FMV of the services –Consider a crosswalk to non-healthcare scenarios
Preferred Structures For Joint Ventures 1.Investor Contributions 2.Pro Rata Guarantees 3.Execute Debt Guarantees 4.Adding Joint Venture Parties After Formation 5.Expenses of the Joint Venture
6.Same Form of Contribution 7.Debt Guarantees for New Investors 8.Non-Physician Investors 9.Directorship Agreement 10. Earn-Ins
11. Modalities 12. Percentage Lease Agreements and Purchased Service Agreements 13. Management Fees 14. Retirement
Recommendations for New Joint Ventures in this Increasingly Hostile Regulatory Climate A.Capital Contributions B.Distributions C.Multiple Modalities D.Selection of Investors E.Marketing F.Managed Care Plan Considerations
Overall OIGS Guidelines 1.Is a healthcare provider in one line of business (owner) expanding into a related health care business by contracting with an existing provider of a related item or service (e.g. manager/supplier) to provide the new item or service to the providers existing patient population? 2.Does the owner operate the new line of business itself?
3. Does the owner commit substantial financial capital, or human resources to the venture? Or does it merely contract out substantially all the operations of the new business? 4.Are non-competition covenants involved? 5.Is the owners actual business risk minimal because of the owners ability to influence substantial referrals to the new business? 6.Is the manager/supplier an established provider of the same line of services as the owners new line of business?
7. Does the manager/supplier take its share in the form of payments under various contracts with the owner? 8.Do aggregate payments to the manager/supplier typically vary with the value of volume of business generated for the new business by the owner?
Special Regulatory Issues Found As A Result of the Referral Issues Presented in Cancer Joint Ventures Distinguish from imaging and ASC joint ventures where a physician who refers to the joint venture refers for the test or surgical procedure There may be a number of alternatives for treatment of cancer medication, surgical intervention, radiation therapy, different types of stereotactic radiosurgery or radiotherapy
Special Regulatory Issues Found As A Result of the Referral Issues Presented in Cancer Joint Ventures (cont.) Need for double checks/quality indicators Business and healthcare reasons for the physician joint venture partners