Renaissance American Management, Inc. & Beard Group
The Fourth Annual Physician Agreements & Ventures
JOINT VENTURES IN CANCER CENTERS
(including Stereotactic Radiosurgery)
John S. Howard
VP and General Counsel
St. John’s Mercy Health Care
12800 Corporate Hill Drive
St. Louis, MO 63131
(314) 364-3382
email:
howajs@stlo.mercy.net
Paul R. DeMuro
Partner
Latham & Watkins LLP
San Francisco and
Los Angeles, California
(415) 395-8180
(213) 891-7330
email:
paul.demuro@lw.com
Daryl P. Johnson
Principal
HealthCare Appraisers, Inc.
75 NW 1st Avenue, Ste. 201
Delray Beach, FL 33444
(561) 330-3488
email: DJohnson@hcfmv.com
Chicago, Illinois
November 1, 2007
The Types of Technology Which May Be
Employed in Cancer Center Joint Ventures
■
Radiation Therapy
■
Surgery and Radiation Therapy
■
Stereotactic Radiosurgery and
Radiotherapy
Conventional Radiation Treatment
￭
Exposes all tissue in the general region
of the tumor
Treats tumor seen and not seen
(treatment plus prophylaxis)
￭
Toxicity (complications)
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
beam
▪
20 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
(con’t.)
￭ 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 (con’t.)
■ 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
Who Are the Potential Parties?
Neurosurgeons
Health Plans
Radiation Oncologists
Equipment Manufacturers
Radiologists
Wholesalers
Nonradiologists
Salespersons
Cardiothoracic Surgeons
Lenders/Financing Companies
Neurologists
3rd Party Management Companies
Urologists
Consultants
Referring Physicians
Valuation Consultants
Physicists
Others
Hospitals
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 Hospital’s Interests
–
–
–
–
Accretive to current business
Expansion of current therapies and modalities
Context of therapies in cancer centers
Equipment options
 IGRT
 IGRS
 Gamma Knife
 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 R’s for physician engagement
 Recruitment
 Retention
 Redirection
 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.
Sample Relationship
Payment for Services
Lease Payments
SRS Equipment
Lease
SRS, LLC
Services
Agreement
Ownership Interests
Physician
Investor
Physician
Investor
Hospital
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
 Creates necessary alignment of clinical delivery
– Hospital’s 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
 Limited portability
 Freestanding services may be prohibited by
state law
 Free standing services may not be
compensable in the market
 Free standing services may not be clinically
appropriate
– Improvements and shielding
 Not portable
 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 hospital’s 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 (con’t.)
■ 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 (con’t.)
■ 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 physicianowned 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 OIG’S 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 owner’s actual business risk minimal
because of the owner’s 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
owner’s 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 (con’t.)
■ Need for double checks/quality indicators
■ Business and healthcare reasons for the
physician joint venture partners
Conclusions