AHLA's Speaking of Health Law

Financial Analysis: Best Practices for Health Care Organizations

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Joe Wolfe, Attorney, Hall Render Killian Heath & Lyman PC, speaks with Stacy Bratcher, Vice President and General Counsel, Cottage Health, and Kelsey Jernigan, Partner, K&L Gates LLP, about compliant ways that health care organizations can analyze financial data related to referrals and other types of financial information. They discuss how health care organizations should approach financial analysis, some of the risks tied to analyzing financial data, and how to mitigate risk. Stacy and Kelsey authored an AHLA Bulletin on this topic last year. From AHLA’s Fraud and Abuse Practice Group.

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Speaker 1:

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Speaker 2:

This episode of AHLA speaking of Health law is brought to you by AHLA members and donors like you. For more information, visit American health law.org.

Speaker 3:

Welcome everyone to today's AHLA podcast where we will be talking about compliant ways that healthcare organizations can analyze , uh, financial data, perform a financial analysis of, of, of referrals, and other types of financial information. Uh, today's podcast is brought to you by the American Health Law Association's Fraud and Abuse Practice Group. Uh, I currently chair the Practice Group, and our mission is to help our members stay informed about healthcare fraud and abuse and compliance issues. Our vice chairs are doing a great job of developing webinars, publications, and other content to educate our members on important compliance developments and enforcement trends in the healthcare industry. Uh, today's question , uh, is a question that comes up often in my practice around , uh, how healthcare organizations should , uh, be approaching , uh, financial analysis. What are some of the risks tied to analyzing that financial , uh, an arra the financial data , um, with referring physicians and other referral sources. You know, what are the types of financial information that can be analyzed and how might controls be put in place to help , um, mitigate risk? Um, and today I have Stacy Bratcher and Kelsey Jernigan with me on, on this podcast to talk through some of the issues. Uh, Stacy and Kelsey , can you introduce yourselves?

Speaker 4:

Thanks, Joe . I'm Stacy Bratcher. I'm Vice President and General Counsel of Cottage Health. Cottage Health is , uh, the largest , uh, healthcare provider in the central coast of California. Um, we're a nonprofit health system dedicated to serving , uh, the community in Santa Barbara, San Luis Obispo and Ventura Counties.

Speaker 5:

Thanks , Stacy . This is Kelsey Jernigan . I am a partner at Cano Gates, RTP office. Um, I primarily counsel healthcare entities, hospitals, and health systems on fraud and abuse matters. So a large part of my day is spent , um, analyzing Stark and anti-Kickback statute matters.

Speaker 3:

Great. Uh, and again, thanks to both of you for being on , uh, today's podcast. Um, one of the reasons we are having Stacy and Kelsey on this podcast is they, they did author a bulletin , um, under the, the HLAs Fraud and Abuse Practice Group back in December 6th, 2022. Um, and it , it's a very straightforward , uh, discussion of this issue , um, of , of how to perform downstream financial analysis. It lays out some best practices , um, around , uh, performing and tracking potentially referrals , um, if you're going to do an analysis, some considerations , um, and , um, the importance of stark and kickback compliance , um, in this area and, and around transaction due diligence. And so I really encourage anyone listening into find that , um, that article. It , it's, it's excellent. And again, it's, it's, it's really straight to the point. Um, as I framed up earlier , uh, this financial analysis topic comes up often , uh, healthcare organizations , uh, as they operate, their organizations do have to have some aspect of an understanding of, of their, their financial performance. Um, and where this can present risks is , um, if, if you're entering into a transaction, you're trying to understand the overall financial impact, if that starts to get close to compensation decisions, I would say it , it presents , um, a heightened risk. And that's the , the heightened risk would be under the Stark Law and the anti-Kickback statute. And that's because under the anti-Kickback statute in particular , um, risk emerges under anti-kickback if the arrangement is entered into with an intent to , uh, induce referrals. And so, if a healthcare organization is analyzing , uh, financial data , um, it is a facts and circumstances analysis in many, many instances. If, if the, the , the background , um, includes a , an examination that's downstream referral data that may , um, increase the potential for anti-kickback risk. Uh, the Stark Law is a strict liability statute, but it has a couple of areas that may interact with, with financial analysis. Um, uh, two areas that come to mind for me is , uh, one, the volume or value standard under the Stark Law , uh, financial arrangement cannot include a physician's referrals of designated health services DHS as a variable , um, that, that standard has historically been, you can't take into account the volume or value of referrals. And so , uh, historically historic has been enforced. There have been arguments made that , um, conduct may trigger the volume and value standard. Now, that being said, the most recent adjustments and changes to Stark that went into effect in 2021, tighten that standard to say that , um, a, a physician's compensation model can't include referrals of DHS as a variable. Um, and so, I mean, as you talk about doing downstream financial analysis, I think it becomes harder to say just doing this analysis is including DHS referrals as a variable. But that, that's the issue. Um, the other area that comes to mind with respect to downstream financial analysis is the , uh, definition of commercial reasonableness. Um, you know, the , the definition of commercial reasonable now says an arrangement has to be sensible considering the characteristics of the parties. Um, at the end, there's a sentence that says, an arrangement may still be commercially reasonable, even if it does not generate a profit. Um, but, but that, that this type of financial analysis could drift into , um, sort of being part of the , uh, commercial reasonableness analysis. And so that, you know, at a high level is just highlighting where the risk may be here. And that's why organizations develop controls around financial analysis and why we see , uh, healthcare organizations trying to, in some ways, build , um, controls around the negotiation and development of compensation terms, and making sure that separate from , uh, financial projections data, making sure downstream data is not included as a variable in a physician's compensation , uh, trying to aggregate where possible or de-identify and use broader benchmark data , uh, using financial data , um, and, and trying to limit that usage and, and limit who has access to it using independent valuations. Um, making sure if practical individuals involved in establishing compensation don't have access to that data , um, making sure the record is reflecting the non-referral based rationale to arrangements as well. Those are just a couple of co that come to mind here. Um, and I don't want to , uh, you know, kind of belabor this, but that just shows you where the risk is. I think organizations have to perform financial analysis, but they wanna make sure they're not run , uh, going kind of , kind of headway into the risk areas. And that's why we have Stacy and Kelsey on , uh, they deal with this in their , um, in their, in-house and, and outside council roles. And , and now we're gonna get to hear some of their perspectives. So I think we'll just kinda start high level , you know, Stacy , in your role as in-house council , how does this come up and , and how do you , uh, how do you think about it and , and deal with it in your day-to-day? Well,

Speaker 4:

First, Joe, thanks for setting the table. I think , um, every time I talk with you or Kelsey , um, I'm just reminded as why we need really high quality , um, external fraud and abuse council to , um, be available to be that sounding board and, and help us navigate these issues. Um, I think that this comes, I, I , I haven't actually been in a , in a situation , uh, a per perspective deal where it hasn't come up. Um, I think , uh, especially with nonprofit organizations where you have , um, board members who are not from the healthcare , um, industry , um, you do the annual training for them, the compliance training, but I think that there's sometimes a disconnect between, you know, what you hear on , uh, compliance training versus, you know, in real, real life. And I'm always , uh, reminded of , uh, quote from Jim Sheen , who was , uh, ag , uh, deputy Ag , I think in New York, Sawm at a lot of HLA conferences. And he would always say, if it makes business sense, it's probably illegal in healthcare. And I use that , uh, quite a bit , uh, in when I'm presenting deals or talking with our board members or others about , um, per perspective deals. Um, so it comes up a lot , uh, especially with nonprofits. Um, and it's very widely , uh, publicized these days that nonprofits and most health systems are working with razor thin margins. Many are losing money, and so rightly the governance infrastructure wants to know , uh, why are we gonna make this investment , um, when we have limited resources? Um, is that a good investment? Is it sensible? Is it the right use of nonprofit resources? So , um, I've, I've, like I said, it , it , it, it's the rare circumstance where the question isn't asked. Um, but I'm very grateful to have resources like you and Kelsey that can help , uh, give me some , uh, some tools in the toolbox to help write the ship when those questions come up.

Speaker 3:

Great . Thanks , Stacy . Really appreciate that. Um, and Kelsey, you know, similarly, how does this come up in your practice? You know, I know you do outside council work, you support clients in this space. Um, you know, when does it come up and and how do you deal with it?

Speaker 5:

Absolutely. So I think it comes up in a variety of ways. You know, one example, and as we talk about acquisitions, you know, hospital systems acquiring other hospital systems or individual physician practices, and it's just in the diligence process. And, you know, as we're assisting a client, look at the target, you know, entities practices in terms of physician compensation, physician recruitment, and we're reviewing those documents. We have seen, you know, certain situations where the target hospital was tracking margin and they were assessing downstream revenue. Um, and then, you know, it just raises the questions of that that we've talked about. Have they implemented safeguards? How, you know, far is the circle of individuals at the hospital that has access to that data? Has it impacted any of the physician compensation conversations and decisions? And so, you know, I think you see a glimpse of it when you're conducting diligence , um, into other entities. But it , it also comes up just on a day-to-day basis as we assist hospitals and health systems with physician contracting and, you know, communicating with hospitals about their contracting processes , um, employing a new physician, recruiting a new physician. And we just get a glimpse into the teams at each hospital that are making those decisions, who is deciding physician compensation , um, and making sure that they're aware and educated and trained about the various regulatory issues that impact that compensation decision process.

Speaker 3:

Thanks , uh, Kelsey , and , and thanks Stacy as well. You know, I , this comes up in , like I said at the beginning in my practice, you know , it's , it's in , it's interesting, you know, when we look at developing arrangements, so much of our tools seem very kind of methodical. You know, you're talking about trying to meet a stark exception, trying to meet an anti-kickback, safer , safe harbor, determining and documenting the big three fair market value, commercial reasonableness and the volume of value standard. But this, this, this sort of also drifts into something beyond the four squares of the conduct, kind of the behavior, the, the actions, the approaches that are taken as a transaction is, is , um, examined. And so it , some , sometimes you have to sort of set those tools to the side and just look at the facts and circumstances and see, you know, what, what might conduct here open you up to. So , um, again, it , it comes up , uh, often. Um, I wanted to go back to the, the article a bit and, and actually to your experiences. Um, a again, and you've already hit on this somewhat, but from your article or from your practices , uh, start with Kelsey . What are some of the best practices that you think healthcare organizations can follow to, to manage risk when performing a financial analysis?

Speaker 5:

So I think, you know, as a starting point, best practice, the guidance from the government is do not track contribution margin. Do not track downstream referrals, you know, impact reports. We've seen a lot of different terminology in the various government settlements that have pointed to, you know, a hospital's use of , um, these types of financial analysis. Um, to the extent that that's not practical, and, and Stacy can certainly speak to from an in-house operational perspective, as she mentioned, you know, leadership is asking these questions. Um, to the extent that's not practical to, to outright not perform these metrics, I think the key from our guidance is to implement operational structures so that any information that's generated in these financial metrics is isolated and siloed to an identified group of people. And make sure that there are firewalls in place between that small group of people, and particularly anybody at the institution that has any decision making capacity in terms of physician compensation, physician acquisition. Um, that strict operational firewall can help separate any information from, you know, downstream revenues to, you know, impacting at all position compensation decisions. So that's more of a structure, you know, making sure that that structure's in place on the front end so that there is no information shared. Um, and then, you know, from a process perspective, when you're looking at physician compensation and contracting, as you mentioned, Joe, making sure that you're absolutely confident on fair market value, getting a third party valuation to support compensation decisions , um, applying compensation on a uniform basis. You know, ideally you would have a physician comp plan that is uniform across all physicians in that specialty. Um, scrutinizing compensation decisions, when there's an in market acquisition, the government has, you know, looked cautiously upon huge jumps in compensation for a physician who's just staying in the same market, but joining a hospital versus being in, in private practice or switching their employment. And, you know, when there is that big jump, the question is often why. So I think, you know, just making sure you have strong processes in place to comply with the requirements of the stark exceptions and the kickback safe harbors , um, and making sure they're all being applied uniformly and without any communication from the small team who may have access to that downstream referral information.

Speaker 3:

Thanks, Kelsey, appreciate that. Um, you know , Stacy , from your, from your , uh, vantage point, do you, have you have thoughts on, on best practices in this space or ways to, to mitigate risk?

Speaker 4:

Yeah, absolutely. Um, you know, we're, as nonprofits, we're lucky , um, that we are , um, we do a conduct a community health needs assessment every three years. So that gives us a really good , um, overview of what the needs of the community are , um, around , uh, the different disease states. Um, and I always counsel , um, board and leadership to look to that to show , um, the mission reason or the, the community need reason why we're pursuing a particular , uh, project. Um, I think that really goes a long way. And, and I , uh, will tell you here at Cottage Health, it's, it's actually legit. Like this is, we really are here for the community. So , um, it's not a hard sell. Um , the se the second thing that , um, I've, I , one thing I , a strategy I've done, because it is important, I think for , um, leadership , uh, especially I, I had this kind of pressure from CFOs, they wanna know where the money's spent. They wanna know, you know, they're authorizing, you know, x millions of dollars to do a deal or whatever. They wanna know what you're using that money for. Um, and as Kelsey and, and, and you have laid out, we really wanna have some hygiene around who gets that, that information. So one strategy I've used is to set , uh, set up a physician compensation committee , um, that includes those folks that , uh, you would wanna have , uh, walled off from kind of the , uh, the financial metrics of a particular deal and give them input over the structure and methodology of physician compensation , uh, typically from a spec at even a specialty level so that they have input , um, they are aware of, you know, what it costs to recruit doctors. I don't think any of us , uh, I think everyone is aware that there's a major shortage of, of physicians throughout the country . And so , um, those , uh, and there's a very competitive environment in terms of recruiting, so it is helpful for them to see that. Um, and then third, I think you both touched on this, this is, you know, kind of health law 1 0 1 is to have that independent valuation , um, and, and picking , uh, a firm that is going to be , um, gonna stand up. 'cause I always say that the valuation's really an insurance policy. You want, you want a firm that will be there to testify if, or be part of a , an investigation or, or whatever, if that should come up. And so that there are people that are gonna stand behind the work that they do, and they're not just going to agree with whatever number you put out your business team puts out. So those are some , uh, some concrete things , um, that I've done.

Speaker 3:

Great. Thanks. The two of you , the , the , those are, are great , uh, strategies to help mitigate risk. Um, I, I would add, and , and I think I'm reiterating some of what the two of you said already, but , um, I think appropriate personnel having education on this issue is, can be very helpful. Just so they understand why , um, what's in PowerPoints and what's in letters and what's in term sheets is, is very important that that immediately becomes a part of the record. And , um, at least giving your business people some exposure to this risk area may make that more likely that they bring that PowerPoint to legal or compliance or, or involve you in the process. Because you know , it , it's that saying you can't put the toothpaste back in the tube. Um, once it's in the record, it's in the record. So , um, also really continuing it in , in my mind, if there's gonna be financial analysis, it, it goes to whether the deal makes sense, but to the extent it helps , um, solve operational needs, I think it's, it's, it's even stronger. Like if, if the, the analysis is needed in order to ensure that facilities, equipment, and other capital needs can be met , um, that you have the appropriate nursing and staffing in place and supplies. Um, it that it's part of a clinical strategy related to community need. I , and as Stacy touched on that in particular, or it's getting at quality and patient SA safety , I think it's actually helping , um, en enhance the, the record . So the extent that the record reflects that this is about quality access to care strategy and operational planning, I think even better. And also that, that allows your whole team to get behind the, the , the , the clinical aspect or the strategy , um, around whatever model you're developing and why that's enhancing care and advancing some non-referral based rationale is, is definitely a better , uh, the , the best record you can help create as part of this. Um, Stacy and Kelsey, thank you so much for your time today. Um, thanks to all of you that tuned into the podcast. Uh, please tune into our other podcast. We recently , uh, recorded a session on the super value case , um, a false Claims Act, settlement trend , uh, update. Um, we're , and I think this today is , is just been, well, well, well , this will be well received as well. Uh, we're always looking for volunteers, so please reach out to me on LinkedIn , um, or , uh, via email. Um, if, if you'd like to be on a future episode or if you have an idea that you think we should cover or if you just want to get involved in , in AHLA , we'll find a way to get you into the mix. So thanks again , uh, uh, uh, Stacy and , and Kelsey and, and have a great day.

Speaker 2:

Thank you for listening. If you enjoyed this episode, be sure to subscribe to AHLA speaking of health law wherever you get your podcasts. To learn more about AHLA and the educational resources available to the health law community , visit American health law org .