1. Super Groups: Legal Issues Associated with the Formation of Large Multi-site Medical Groups a presentation for the Middlesex County Medical Society at Due Mari Restaurant, New Brunswick, N.J. by: Michael F. Schaff, Esq. WILENTZ, GOLDMAN & SPITZER, P.A. 90 Woodbridge Center Drive Woodbridge, NJ 07095 732-855-6047 MSchaff@Wilentz.com October 17, 2012

2. I. Overview Changes in the Health Care Environment Physician Associations –Are Super Groups the Answer? Traps for the Unwary: Assessing prospective Groups Questions & Answers

3. II. Changes in the Health Care Environment Managed Care –market penetration –provider panels –reduced fees –consolidation Greater Efficiency forced by Market –reduced fees –reduced staff –reduced overhead –greater patient volume

4. II. Changes in the Health Care Environment Regulatory change & uncertainty –Accountable Care Organizations –Medicare/Medicaid will change –Reimbursement Changes

5. III. Physician Associations OPTIONS Employment in private practice; no ownership Employment by hospital or other entity Solo practice Group Practice –small; 2-5 Drs. –medium; 6-15 Drs. –large; 16- 25 Drs. –Super Groups; 26+ Drs.

6. III. Physician Associations Your CURRENT SITUATION What do you want? –personal needs –financial needs –career needs Current Likes & Dislikes Characteristics –age –culture –personality

7. III. Physician Associations WHAT ALTERNATIVES EXIST? All’s Fine Sell Practice & Retire Sell Practice & Work Contract Away Administration –Management Service Organization (MSO) –Physician Practice management Company (PPMC) –Join Hospital Merge or Combine Practice –Into existing Super Group? –Start a new Super Group?

8. III. Physician Associations MAJOR CONSIDERATIONS Compensation –How much will you make? Group Practice –Rights & Obligations –Control? Centralized Management –Benefits –Costs

9. IV. Traps for the Unwary: Assessing Prospective Groups Why Form or Join a Group Practice? Significant Benefits Improved Negotiating Increased Revenue Sources – Ancillary Revenue Economies of Scale Shared duties & info. Coverage Practice risks Retirement

10. IV. Traps for the Unwary: Assessing Prospective Groups Why Form or Join a Group Practice? Significant Disadvantages Reduced Control –medical –financial Possible change in compensation structure Increased Costs- Higher Overhead Culture “shock”

11. IV. Traps for the Unwary: Assessing Prospective Groups “Culture Shock” Different styles Demographics –age –specialties –culture/ethnicity Decision Making Support staff Office Policies Integration of Information Systems –Practice management systems –Electronic Health Records (EHR)

12. IV. Traps for the Unwary: Assessing Prospective Groups Business Issues Administrator & Management Staff Satisfaction Advisors –legal –accounting –consultants Quality of Payer Contracts

13. IV. Traps for the Unwary: Assessing Prospective Groups Honeymoon Period May ease transition Disassociation planning Cost/profit center accounting

14. IV. Traps for the Unwary: Challenges in Combining Groups Legal Hurdles Anti-trust laws –limits mergers that reduce competition –limited exemption for health care professional coalitions –Concerns about the use of “pseudo-merger” to engage in illegal price fixing –Must do an analysis of increased market power vs. benefits of integration –There is a PULL between integration requirement vs. desire for independence control (decision making) sharing of profits and losses clinical, operational and marketing integration

15. IV. Traps for the Unwary: Challenges in Combining Groups Legal Hurdles Self-referral law “group practice” requirements –centralized billing & management –single taxpayer ID –general sharing of overhead Pension plan rules require coordination of plans Taxability of transaction– be careful; structure may have significant tax ramifications

16. IV. Traps for the Unwary: Assessing Prospective Groups Level of Integration Partially Integrated Medical Group “PIMG” –cost/profit centers Fully Integrated Medical Group “FIMG”

17. IV. Traps for the Unwary: Combination Models Top to Bottom Merger is a complete merger. Division Model is a way to allow existing groups to retain control over various existing elements of their practice, such as staff and billing. Leasing Assets vs. Merger or Contributions –tax issues

18. IV. Traps for the Unwary: Division Model Operation as a single legal entity with a single billing number and payroll (referred to as the “LLC”) Several divisions (one for each existing group) that are not separate legal entities. Operational control over each division by governance at the division level –each division determining their own method of division-level governance –but subject to the LLC final approval

19. IV. Traps for the Unwary: Division Model (con’t) Billing and collection is done in the name of the LLC Buy/sell terms and obligations at –Division-level (for Division Assets) and –Centralized Level (Common Asset Level)

20. IV. Traps for the Unwary: Division Model (con’t) Cash distributions: –allocated to divisions based on agreed upon mechanism allocation of division-specific costs and revenues to the division –concerns STARK LAWS & distribution of DHS Revenue unless division has >5 members allocation of common overhead costs to all divisions based on agreed upon formula –per capita vs. per division vs.per owner vs. per FTE vs. revenue vs.# of staff –allocation of distributions at the division level determined by division-level governance

21. IV. Traps for the Unwary: Division Model (con’t) Joint exposure to liability –malpractice –overpayment –billing fraud, etc.. Assets may be kept in existing entities owned by members of a division and leased to the LLC –lease payments will be allocated to the division (should be a wash for the Members of the division) –unwind provision allows for termination of leases during “honeymoon period” or beyond –bank loans secured by an exiting group’s guarantees continue to be secured by those member’s guarantees

22. IV. Traps for the Unwary: Payor Contracting In general, payor contracts would be at the LLC level While existing contracts with third party payors must be reviewed in the due diligence process, if the combination of the groups is accomplished by creating the LLC as a new entity (and not by merging the existing entities into the LLC), the pre-combination contracts should not apply to services provided through the LLC.

23. IV. Traps for the Unwary: Assessing Prospective Groups Determination of Ownership Value of existing practices Adjustments? Equal? Other? Significance of Ownership –control, compensation & equity

24. IV. Traps for the Unwary: Assessing Prospective Groups Allocation of Control Centralized Control –Executive or Management Committee Control at Division Level for daily items Protection for minority members Corporate ethics Business decisions Medical decisions

25. IV. Traps for the Unwary: Assessing Prospective Groups How is Compensation Determined? Cost/income allocation –division level –full integration Activities & status –production –seniority or ownership –non-medical activities Mechanics –formula –committee

26. IV. Traps for the Unwary: Assessing Prospective Groups How can Employment be Terminated? Voluntary withdrawal –retirement –honeymoon period Without Cause Cause –loss of license, etc... Disability Different Standards? Appeal Procedure?

27. IV. Traps for the Unwary: Assessing Prospective Groups Post-Termination Payments How Determined? –Business Valuation –Formula How Allocated? –Ownership Interests –Teermination/Deferred Compensation (Tax issues) –Restrictive Covenant Funding Issues

28. IV. Traps for the Unwary: Assessing Prospective Groups Applicability of Restrictive Covenants Area and Duration Prohibited activities Liquidated Damages Vs. Injuction Trial period affect

29. IV. Traps for the Unwary: Assessing Prospective Groups Agreements with Related & Unrelated Parties Management Employment –Non-medical staff –Medical staff Billing & collecting Equipment Leasing Real Estate Labs & ancillary services

30. IV. Traps for the Unwary: Assessing Prospective Groups Agreements with Related & Unrelated Parties -- Concerns Who owns entities? Are certain members benefiting disproportionately? Are non-members benefiting? Are terms “arms length”? Do transactions comply with laws & regulations?

31. V. QUESTIONS AND ANSWERS

32. Super Groups: Legal Issues Associated with the Formation of Large Multi-site Medical Groups a presentation for the Middlesex County Medical Society at Due Mari Restaurant, New Brunswick, N.J. by: Michael F. Schaff, Esq. WILENTZ, GOLDMAN & SPITZER, P.A. 90 Woodbridge Center Drive Woodbridge, NJ 07095 732-855-6047 MSchaff@Wilentz.com October 17, 2012