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Oncologist-Hospital Alignment: Framing and Transacting the RelationshipPresented by:• Michael Blau

Foley & Lardner LLPmblau@foley.com617-342-4040

• Scott Herbert, M.D.New Mexico Cancer Carescott.herbert@nmcancercare.com505-660-2627

• Kelley D. SimpsonOncology Solutions, LLCksimpson@oncologysolutions.com404-836-2000

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Case Summary

QUALITY CARE ONCOLOGY (pseudonym)

10 Medical Oncologists 4 APPs2 Radiation Oncologists

2 Linear Accelerators

*1 linear accelerator in need of replacement

4 Locations

MEMMORIAL CARE Health System and Medical Group (pseudonym)

Memorial Care Medical GroupEmployed Group of 150 with 2MOs and 1 RO 1 Linear Accelerator

3 Hospitals1 340B Provider

+ = 150

*1 medical oncologist nearing retirement

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Current State: Hospital System Oncology Service LineFY 2014 Memorial Care - Technical Services

Revenue & ExpenseCategories

Med OncInpatient

Surg Onc Inpatient

Onc-Related Ancillaries

Radiation Therapy

InfusionClinic

Caseloads/StatsICD-9 Codes 140-239

1,518Admits

24 Hrs or >

841Admits

24 Hrs or >

15,72323Hr or <

Encounters

400Courses of Treatment

600Med Oncology

New Pts

Gross Charges $38,255,188 $30,993,872 $52,650,701 $23,468,422 $42,972,490

Less: Non-Collectibles (24,304,646) (19,030,218) (35,357,762) (16,626,822) (30,136,816)

Net Revenues $13,950,542 $11,963,654 $17,292,939 $6,841,600 $12,835,674

Less: Direct Costs (9,584,500) (7,554,578) (9,311,928) (2,789,881) (7,272,722)

Direct Contribution $4,366,043 $4,409,076 $7,781,011 $4,051,720 $5,562,952

Less: Indirect Costs (3,964,545) (2,972,134) (5,792,917) (1,918,079) (3,613,199)

NET PROFIT/(LOSS) $401,498 $1,436,942 $2,188,094 $2,133,641 $1,949,752

FY 2014 TOTALS

1,678Analytic Cases

$188,340,673

(125,456,264)

$62,884,409

(36,513,609)

$26,170,802

(18,260,874)

$8,109,927

Per New Cancer Case: $4,833

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Current State: Quality Care Oncology PracticeCY 2014 Professional and Technical Services

CY 2014Medical

OncologyRadiationOncology

E&M ServicesPharmacueticalsIV Admin & InjectionsLab & ProceduresOther

$ 7,559,78772,161,602

9,758,9983,161,366

103,089

SimulationTreatment PlanningPhysics & Tx DevicesTreatmentsOther

$737,292346,527

1,442,7157,410,025

860,078

Gross Charges $92,744,840 Gross Charges $10,796,638

Less: Non-Collectibles (46,372,420) Less: Non-Collectibles (4,858,487)

Net Revenues $ 46,372,420 Net Revenues $5,938,151

Less: Operating Costs Staff Salaries & Benefits Drugs & Biologicals Rent & Leases General & Administrative

$ 5,714,28631,655,714

1,285,7141,571,429

Less: Operating CostsStaff Salaries & BenefitsSuppliesSpace & Equipment General & Administrative

$797,53043,408

1,940,328494,460

Operating Costs $ 40,227,143 Operating Costs $3,275,726

Income Distribution to Physicians $6,145,277 Net ProfitLess: Rad Onc CompLess: 10% RT Ops BudgetIncome Distribution Pool

$2,662,425(1,229,055)

(266,243)$1,167,127

CY 2014TOTALS

$103,541,478

(51,230,907)

$52,310,571 Revenues

$43,502,869 Costs

$8,807,702(266,243)

$8,541,460RT Ops BudgetCompensation

Per Medical OncologistClinical Compensation: $614,528RT Distribution: 97,260Total Income: $711,788

Per Radiation OncologistClinical Compensation: $614,528RT Distribution: 97,260Total Income: $711,788

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Always Begin With a Cliché…

“If you know your enemies and know yourself, you will not be imperiled in a hundred battles…if you do not know your enemies nor yourself, you will be imperiled in every single battle.” –Sun Tzu

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Know Your Enemies…

• Competition landscape– Other groups in town and state– Other hospitals in town and state

• Referral patterns– Primary care vs specialists– Understand the effect of employment on your referring physicians– “Care coordinators”

• Payer landscape – Number of payers– Are there any payer/delivery system combinations?– Are you seeing any types of value-based/quality reimbursement projects in your area?

• Is there interest?

• Community characteristics and demographics– Community growing/shrinking, changes in age, changes in industry?– Dominant company providing insurance to its employees? Can this change?

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Know Yourself…• Deal timeline

– In healthcare, planning 5 years in advance is probably the sweet spot: further is just not possible, and less doesn’t give you time to accomplish much

• Understand your practice situation– What are the ages and goals of the partners?– If we do NOTHING, what is the outcome and timeline?– How do others see the practice (both the hospital and referring physicians)?– What are your strengths and weaknesses?– What is your asset arrangement and partner equity? Do you have a sound

succession plan?

2015 2016

2019

1-2 years to complete and fully operationalize deal

2017 2018

2-3 years to mine meaningful operationaldata for the project (financials, productivity, etc.)

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Develop the “Perfect Practice Environment”

• Paint a clear picture of your desired practice– Make sure that all of the partners participate.– Be as specific as possible related to practice environment,

facility structure and workflow, practice patterns (use of NP’s, research, etc.), ancillary services, and marketing.

– Remember, the model reflects YOUR plans. Don’t let your plans be dictated by the model.

– Having everyone participate gets crucial buy-in and gives you a touchstone for difficult times in the future.

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Attempt to Understand the Hospital’s Perspective

• What are the hospital’s options?– Are there other groups that the hospital could partner with?– How strong is the hospital’s medical group?

• Do they recruit and retain with ease?

• What are the hospital’s goals?– Financial?– Community opinion/pressure?– What are the sources of revenue that they are most interested in?

You should be able to calculate volume/contribution of your practice in relation to each of these areas.

• Chemotherapy• Radiation• Inpatient admissions• Laboratory/Pathology• Radiology• Surgical oncology

Memorial Care Health SystemStrategic, System-Wide Service Line Development

• Leading up to considering alignment with Quality Care Oncology, Memorial Care:– An oncology service line 5-year strategic plan – Initiated a system-wide service line executive and medical leadership

structure– Branded cancer across the system: “Memorial Cancer Care”– Embarked on clinical program development/expansion

• Spanning preventive, research, diagnosis and treatment services through survivorship and end-of-life care

• Surgical sub-specialization and tumor-specific programs with key surgical recruitments into the Memorial Care Medical Group

– Conducted facilities and technologies assessments and developed conceptual plans for a single, comprehensive integrated cancer center in collaboration with Quality Care Oncology

– Launched physician alignment discussions with Quality Care Oncology

Why Hospital-Oncologist Alignment?

• Collaborative Mission“Memorial Cancer Care fosters a culture of excellence within a collaborative environment. We actively seek innovative solutions, technologies and partnerships to support sustainable financial growth and to ensure communities we serve have access to a comprehensive continuum of integrated cancer services that meet their present and future health care needs.”

• Core elements driving integration:– Quality– Patient experience/coordination of care– Facility expansion and technologies investment– Competition– Financial integration – Informatics integration– Performance measures and outcomes reporting

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DO THE PICTURES MATCH?

Hospital Alignment Transaction Process

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Goals of the Transaction• Strategic?• Business/financial?

Preferred Strategic Partner• Serial discussions under Confidentiality Agreements, or• RFP process, seeking bids to Quality Care’s specifications (requires

Confidentiality Agreement, description of practice, transaction specifications, opportunity for preliminary due diligence, and interview process

Standstill Agreement with preferred strategic partner

Define

Identify

Execute

Hospital Alignment Transaction Process (cont.)

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NegotiateLetter of Intent

• Schedule regular meetings with preferred strategic partner• Meetings focus on LOI key business terms and transactional hurdles

Conduct DueDiligence

• During LOI negotiation period, parties conduct preliminary due diligence- Hospital will issue data request list- Reverse due diligence?

EngageValuation Firm

• During LOI negotiation period, valuation consultant engaged• Preferably engaged under attorney-client privilege• Firm issues data request and completes preliminary valuation

TransactionalConsultants Engaged

• During LOI period, other consultants, if any, engaged to provide financial, operational, technology advisory services

• Preferably under attorney-client privilege (e.g., financial, operational, technology advisory services)

Establish Operational Integration Teams

• As necessary to develop preliminary operational integration plans

Finalize Deal• Develop definitive agreements• Finalize collaborative business plans• Finalize operational integration plans

Close Deal• Execute agreements• Implement the transaction

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Principal Structural Options For Transaction

• Convert to Memorial Care hospital (provider-based) oncology services (MO and RO) at all sites

Provider-Based Services All Sites

• Convert to Memorial Care affiliated medical group oncology services at all sites

Memorial Care affiliated medical group

• Convert to Memorial Care hospital (provider-based) services for infusion and radiation therapy only; and,

• Provide E&M/consultation services through either:| (i) Memorial Care affiliated medical group, or (ii) Directly by Quality Care Oncology

Hybrid1 2 3

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Principal Structural Options For Transaction (cont.)

• Form NewCo joint venture for RT services– Memorial Care

• Contributes 1 linac and RT staff• Leases/licenses outpatient space at its 3 hospitals to NewCo• Memorial Care leases or transfers its 1 rad onc to Quality Care

– Quality Care• Contributes 2 linacs and staff (other than radiation techs) to NewCo

• NewCo sub-leases/licenses space at all sites, linacs and staff to Quality Care in exchange for a FMV fee

• Quality Care provides all ambulatory RO/RT services (globally), and bills/collects for services under the Stark Law in-office ancillary services exception

• Memorial Care provides inpatient services using NewCo and Quality Care services “under arrangements” OR NewCo contracts with Memorial Care and all technical/facility fees are billed/collected as HOPD services by Memorial Care; Quality Care provides professional services with a site of service payment differential

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Memorial Care Provider-Based Conversion Value to Quality Care:

Maintains “independence” Higher compensation at FMV Elimination of drug

inventory/cash flow liabilities Reduced exposure to

reimbursement fluctuations Eliminates collection risks Purchase of equipment,

management services, employee lease, medical directorships, co-management

Value to Patients: Single treatment

environment Improved care

coordination Increased clinical

efficiency 340B savings contributes

to program development for supportive care services, new cancer care technologies, etc.

Value to Memorial Care: More coordinated

oncology services Beneficial revenue flow at

provider-based rate with cost containment within a private practice environment

Captive referral source for downstream services

340B pricing opportunity New satellite sites

Potential Losers: Payers—higher

rates for “same” services

Higher/double patient co-pays

Pharma companies

SLIGHTLY WORSE

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Memorial Care Provider-Based Conversion (cont.)

• Potential Transactional Elements– Professional Services Agreement (PSA)– Asset Purchase Agreement (APA)– Management Services Agreement (MSA)– Co-Management Agreement (CMA)

Memorial Care Provider-Based Conversion (cont.)

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MSA/BillingAgreement

Memorial Care Payors

Quality CareOncology Sites/Service Line

Hospital provides:• License• Provider-based status• 340B pricing• Space/equipment• Nurses/techs (off-campus)

ProfessionalServicesAgreement

$/wRVU

$

Group provides:• Physicians/NPs/PAs• Non-clinical staff• Nurses/techs (on-campus) • Management services?

Notes:• FMV for assets and QC retains cash and A/R• PSA on fair market wRVU basis (with performance incentives)• MSA on a fixed fee or budgted cost plus fair market mark-up basis;•Billing services at fair market percentage of collections or fixed fee per claim

Asset sale

Affiliated Medical Group Conversion

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MSA/BillingAgreement

Memorial Care/ Medical Group

Payors

Quality CareOncology Sites/Service Line

MCMG provides:• Space/equipment• 2 MOs/1 RO? Professional

ServicesAgreement

$/wRVU

$

Quality Care provides:• Physicians/NPs/PAs• Non-clinical staff•Nurses/techs•Management services?

Notes:• FMV for assets and QC retains cash and A/R• PSA on fair market wRVU basis• MSA on a fixed fee or budgeted cost plus fair market mark-up basis;•Billing services at fair market percentage of collections or fixed fee per claim

Asset sale

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Principal Differences

• No hospital outpatient rates• No 340 B drug pricing• Quality Care can provide all staff, including

nurses/techs at off-campus sites• Quality Care clinicians become part (a Division) of

Memorial Care Medical Group• Different leadership/governance of Memorial Care

Medical Group than Memorial Care hospitals?

Hybrid: Hospital/Affiliated Medical Group Conversion

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MSAs/BillingAgreements

MCMG Hosp Payors

Quality CareInfusion/RT Services

Memorial Care provides for infusion/RT services:• License• Provider-based status• 340B pricing•Space/equipmentMCMG provides:• 2 MOs/1 RO?

ProfessionalServicesAgreements

$/wRVU

$

Quality Care provides:• Physicians/NPs/PAs• Non-clinical staff•Nurses/techs•Management services?

Notes:• 2 APAs: FMV for assets and QC retains cash and A/R• 2 PSAs (with Hospital and MCMG) on fair market wRVU basis• 2 MSA (with Hospital and MCMG) on a fixed fee or budgeted cost plus fair market mark-up basis• 2 Billing service agreements (with Hospital and MCMG) at fair market percentage of collections or fixed fee per claim

Asset sales

E&M/ConsultServices

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Principal Differences

• Hospital outpatient rates for infusion/RT only; physician office rates for E&M/consult services

• “Separation” issue for licensure purposes?• Lower co-pay on E&M/consult services• 340B drug pricing available• Quality Care cannot provide nurses/techs (under

MSA) for infusion services at off-campus sites• Quality Care clinicians become part (a Division) of

Memorial Care Medical Group for E&M/consult services

• Need to coordinate governance with multiple parties

Principal PSA/Conversion Legal Issues

• Fraud & Abuse/Tax Exemption• Under arrangements prohibition: cannot have investment

interest in entity (including own medical group) that “performs” the DHS service• Assign leaseholds/Sell equipment?

• Stark Law personal services, fair market value or indirect comp exception

• Some irreducible AKS risk: aggregate compensation not set in advance if wRVU based

• Tax exemption and reasonable compensation• Key to compliance is fair market value and commercial

reasonableness--independent appraisal strongly advised

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Principal PSA/Conversion Legal Issues (cont.)

• Additional Tax Exemption Consideration– Rev. Proc. 97-13 and private use of bond financed space or

equipment/duration limitations (3 years/2 years out)• Provider-Based Status Regulations

– Within 35-mile radius– Hospital license requirements/Physical space standards– Clinically, financially and administratively integrated– Hospital reporting lines– Hospital must directly employ mid-levels/techs at off-

campus sites (other than NPs/PAs)

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Principal PSA/Conversion Legal Issues (cont.)

• 340B Drug Pricing– Discount from average manufacturer price generally based

on manufacturer’s best price– Applies only to outpatient drugs– Available to DSH hospitals, free-standing cancer hospitals,

children’s hospitals, CAHs, RRCs, sole community hospitals, FQHCs, and certain special federal grantee programs

– 8% DSH for RRCs and SCHs; 11.75% for others– Not applicable to for-profits– Must be within 35 miles of main hospital/meet provider-

based status standards– Effective after first cost report filed with CMS and

enrollment with HRSA/OPA—up to 16 month process

Key PSA Deal Maker/Breaker Issues

• Strategic Alignment• Trust/Relative Trust• Governance• Financial Terms/Valuation• Right of First Opportunity• Addition of New Clinicians• Term/Duration/Termination• Restrictive Covenants• Unwind Rights• Arbitration/Dispute Resolution

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Combined PSA/Service Line Co-Management Arrangement

• Co-Management Agreement is an additional independent contractor relationship– PSA purchases professional services of physicians and

clinicians– Co-Management Agreement purchases administrative and

management services from physicians and clinicians– Engage physicians as a business and clinical partner in

managing, overseeing and improving service line quality and efficiency

– No overlap in contractual duties between PSA and Co-Management Agreement (or other agreements)

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Service Line Co-ManagementDirect Contract Model

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Designees

Payors Hospital

ServiceLine

Hospital-licensedservices Other

Group(s)

Group II

Oncology Group Co-ManagementAgreement

• Two, or multi-party contract• Specifically enumerated services• Allocates effort and reward between groups

OperatingCommittee Designees

$

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Service Line Co-Management Joint Venture Model

Payors Hospital

ServiceLine

Specialists/Groups

JV Management

CompanyCo-ManagementAgreement

Profit Distribution $

• Capital Contributions• Management Infrastructure

Profit Distribution

Service Line Co-Management Arrangements

• Typically two levels of payment to physician managers:– Base fee – a fixed annual base fee that is consistent with the

fair market value of the time and effort participating physicians dedicate to service line development, management, and oversight

– Bonus fee – a series of pre-determined payment amounts, each of which is contingent on achievement of specified, mutually agreed, objectively measurable, program development, quality improvement and efficiency goals

– Aggregate payment generally approximates 2-3% of service line revenues

• Fixed, fair market value; independent appraisal advisable

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CMA Legal Considerations

• There are legal constraints on Service LineCo-Management Agreements (i.e., CMP, AKS and Stark):– No stinting– No steering– No cherry-picking– No gaming– No payment for changes in volume/referrals– No payment for quicker-sicker discharge– No reward for changes in payor mix, case mix– Must be FMV; independent appraisal required

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CMA Legal Considerations

• Adv. Op. 12-22 approving co-management arrangement

• Some irreducible legal risk because aggregate compensation is not set in advance

• Minimize legal risk by:– Internal monitoring with compliance officer review– Independent FMV appraisal– Independent outside reviewer– Good contract– Good execution– Good documentation

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Radiation Therapy Joint Venture

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NewCoLLC

Quality CareRT Center

Quality Care Memorial Care

Payors

$

Technical ServiceAgreement

• ROs/RTs

• Space•RT equipment•Leasehold improvements•Non-clinical staff

Notes• New sites or upgrade vs. existing sites/services•NewCo cannot “perform” the technical component of the RT services•Constraints on non-profit/for-profit JVs• Technical Services Agreement payment must be FMV, but can be percentage-based if structured to be outside of Stark Law•Antitrust considerations: market concentration and joint pricing

• Physician office rates

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Radiation Therapy Joint Venture

• NewCo could contract with either Quality Care or with Memorial Care

• If NewCo contracts with Memorial Care– Within Stark Law—can’t be per-click or percentage of

revenue fee for space/equipment– Site of service differential on pro fees if professional

services

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Deal Killers

• Compare the pictures• Physician champion (the sacrificial lamb)• List at the beginning, never waiver, never add to the list.

– Examples:• Dictating referral patterns• Research• Upper-level management HR control

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Common Pitfalls (with catchy names)

• “Who’s this guy?”– Deal negotiator hands off to the implementation team

• “Everybody’s from Missouri: The Show-Me State”– During implementation, “hospital regulations” become an often cited

reason to do things the hospital way• “Can I borrow some data for that?”

– The practice is responsible for metrics that depend on accurate and timely data from the hospital

• “The apple doesn’t fall far from the tree”– Who’s culture will prevail in the oncology clinic (front desk, nursing, back

office, etc.)?• “It’s not broken enough to fix”

– Will the hospital be interested in, and continue to fund, practice improvement if the bottom line is already met?

• If possible, address these issues in the Letter of Intent

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Issues Related to Deal Structure

• You may want as many moving pieces as possible: Management agreement, professional services agreement, employee lease, co-management agreement, medical directorship, call agreement, billing agreement, real estate ownership/leases, etc.

• Ownership and control of employees– Location of clinics (on vs off campus)– Employee benefits

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Consequences and Back-up Plans

• What is your exit strategy?– If this fails, you will likely become an employee (or a

consultant).– Could you partner with someone else?– Are you willing to buy back your assets?

• Asset allocation– Patients– Office space (buildings, leases, etc.)– Equipment (radiology equipment, linear accelerators, lab, etc.)

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Quality Care Financial Elements of the TransactionExecutingProfessionalServicesAgreement

ValuingExistingTechnicalBusinessStreams

ExecutingBilling andManagementServicesAgreements

DefiningAdditionalPotential Ops& FinancialArrangements21 3 4

$8,541,459($711,788 per MD)

To$9,822,678

($818,557 per MD)

• Clinical compensation for professional medical and radiation oncology services at FMV rate per wRVU

• Percentage (usually 5-20%) of clinical compensation reliant upon performance metrics

• Value and buyout of the ongoing technical businesses of radiation therapy, imaging, lab, retail pharmacy and clinical trials

• FMV payment/buyout at calculated multiple of EBITDA within industry comparatives and standards

• No buyout of RT• Lab and research

valued at $500,000

• Billing services• Management

services• Medical leadership

svcs• FMV payment for

medical leadership at comparable industry hourly rates

• FMV payment for billing and management services at % above cost within industry standards≈$3,250,000

• Space purchase or lease

• Durable medical equipment and furnishings asset purchase or lease

• Staff employment or lease

• FMV payment for purchase or lease arrangements based on industry comparatives

Dependent upon purchase vs lease

decisions

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Current State: Hospital System Oncology Service LineFY 2014 Memorial Care - Technical Services

Revenue & ExpenseCategories

Med OncInpatient

Surg Onc Inpatient

Onc-Related Ancillaries

Radiation Therapy

InfusionClinic

Caseloads/StatsICD-9 Codes 140-239

1,518Admits

24 Hrs or >

841Admits

24 Hrs or >

15,72323Hr or <

Encounters

400Courses of Treatment

600Med Oncology

New Pts

Gross Charges $38,255,188 $30,993,872 $52,650,701 $23,468,422 $257,109,475

Less: Non-Collectibles (24,304,646) (19,030,218) (35,357,762) (16,626,822) (146,433,018)

Net Revenues $13,950,542 $11,963,654 $17,292,939 $6,841,600 $110,676,457

Less: Direct Costs (9,584,500) (7,554,578) (9,311,928) (2,789,881) (81,864,314)

Direct Contribution $4,366,043 $4,409,076 $7,781,011 $4,051,720 $28,812,143

Less: Indirect Costs (3,964,545) (2,972,134) (5,792,917) (1,918,079) (5,829,034)

NET PROFIT/(LOSS) $401,498 $1,436,942 $2,188,094 $2,133,641 $25,198,944

FY 2014 TOTALS

1,678Analytic Cases

$402,477,658

(241,752,466)

$160,725,192

(111,105,201)

$49,419,993

(20,476,709)

$31,359,119

Per New Cancer Case: $18,688

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The Deal is Done…What Next?

• Implementing the relationship, beginning with establishment of a Joint Operating Committee

• Immediately following this session Track A at 11:30am

QUESTIONS?

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