In this episode, Jana Kolarik, a partner in 麻豆传媒鈥檚 Health Care Practice Group and Angie Caldwell, Principal and CFO of PYA, discuss the importance of work relative value units (WRVUs) and fair market value (FMV) under the Stark Law and what this can mean for how health care organizations pay their physicians.

For more information regarding the 鈥淟et鈥檚 Talk Compliance鈥� podcast series, please click here.

Please note that the interview copy below is not verbatim. We do our best to provide you with a summary of what is covered during the show. Thank you for your consideration, and enjoy the show!

Jana Kolarik

Hello and welcome to the Let’s Talk Compliance podcast series of Health Care Law Today, presented by 麻豆传媒 & Lardner and PYA. I’m your co-host, Jana Kolarik, a partner in 麻豆传媒’s health care practice group.

Angie Caldwell

And I’m your other co-host, Angie Caldwell, principal with PYA. We are excited to have you join us today. Before we begin our show, we want to remind you to subscribe to Health Care Law Today on your preferred podcast app. Please visit healthcarelawtoday.com or pyapc.com. For today’s show, Jana and I will be discussing some potentially problematic provider compensation topics.

I am excited to be podcasting with you today, Jana.

Jana Kolarik

Me too, Angie. So I think our first topic today is we’re going to talk through maybe work relative value units (wRVU) and productivity models. I think this has been a topic that you and I have spent a lot of time discussing. And I think just as a beginning structure issue, thinking through this particular issue with the lens from my perspective as a lawyer, thinking through personally performed services under the Federal Physicians Self-Referral Law, commonly known as Stark Law, and also sort of thinking through fair market value (FMV), which we’ll talk about as FMV under Stark as well. But also thinking through that personally performed aspect of WRVUs will kind of be peppered through this and is affected not only from a Stark perspective, but a kickback perspective. I mean, you and I have spoken about this in multiple different ways.

The concept as we were talking through this before the podcast of not all [w]RVUs are created equally was something that just struck me, frankly, people’s understanding and, frankly, physicians’ understanding of what work RVUs are, I think is important because it’s a component of how they are being paid by payers. And it’s again, also this component of how they’re being paid through their practices or through health systems.

But let’s talk a little bit about what we’ve seen as far as issues with inaccurate or inconsistent determinations of wRVUs. Do you want to kick us off on some things that you found and then let’s just talk through them?

Angie Caldwell

Absolutely. So if you think about the prevalence of the productivity model as a compensation model type, probably 70% of hospital employed physicians are on a productivity-based compensation model. So it is very important then to ensure that the input to the compensation model surrounding work RVUs is correct and accurate. So what most often happens when measuring the work RVUs is around ensuring that the work RVUs are modifier-adjusted and personally performed.

Systems have limitations. No system is entirely perfect, but what we’ve seen happen in several instances is a system might not be able to compute or handle modifiers. A system between the billing system and the provider compensation system, the modifiers might be dropped out of the calculus. There are many, many things that can happen related to computing those work RVUs. So it is incredibly important to ensure that they are correct.

Jana Kolarik

Right. And I think some of this is, so when we talk about modifier adjustment, those modifiers are present in the billing itself. So they’re there in how it’s billed with the Current Procedural Terminology (CPT) code. And sometimes there’s, I don’t know, a misunderstanding about whether or not to keep them or leave them off when it comes to the physician compensation. So obviously the modifier adjustments are reducing, in many cases, the wRVUs that are then attributed (or the work RVUs that are being attributed) not only from a billing context, but also from a compensation context. So by leaving them off, essentially you’re attributing more WRVUs, which is then attributing more compensation from a productivity perspective to that physician.

So thinking through the modifier adjustment issue and the systems issue that you’ve encountered, systems are obviously the best situation. So if it’s calculated through a system, through an electronic health record (EHR), through something that is not touched by human hands, it could be more accurate. But how do you verify or touch up against when you come into it, a new client, whether or not their wRVU calculations are accurate? How do you figure that out?

Angie Caldwell

Sure. And I know you and I have talked about effective compliance programs and compliance audits, and this is one of those areas that the compliance team or even the internal audit team can help an organization ensure that the work RVU computations are accurate and that the modifiers are included within that calculation. To the extent that they are not, and it does happen, then on the other end, accommodations/mitigations need to be made within the compensation plan design to ensure that the overstatement of work RVUs in one part of the mathematical formula is offset by a reduction in the compensation per work RVU in the other side of the formula so that the overall compensation then doesn’t run afoul of FMV and the applicable regulations.

One of the things here that I think often gets misunderstood/overlooked or even perhaps becomes a complication is that the multiple payment procedure reduction, of course, that is a modifier, but many payers, because of the sophistication of the billing systems and the way that the information transmits between the hospital and payer, that modifier is often not even required to be billed compliantly. And so the payer knows that a multiple procedure has been done, but perhaps the modifier has been left off internally for compensation purposes. And that’s one that frankly can have a significant impact on a work RVU determination.

But it is important, again, within the compensation design to ensure that what we are measuring from a work RVU perspective is as accurate as possible and includes all modifiers, including the multiple procedure payment reduction modifier.

Jana Kolarik

Yeah, that makes a lot of sense. To me, there’s two buckets here. There’s the systems accuracy, and then there’s the compliance overlay related to the accuracy of the data. So is your system spitting out data that is accurate with regard to the modifier inclusion, as you’ve just mentioned? And then is the base CPT or coding that’s present for that particular physician accurate based on compliance audits? So let’s touch on that really quickly, just because it can affect it. And I think sometimes is overlooked and thought of separately when it should be thought of as a combined issue.

So if you have a healthy compliance program and a healthy auditing function within that compliance program that is testing the billing and coding of claims, we’ve talked about individuals coding their own claims, belief that the work provided was very high and that the medical decision making was very complex and coding things at higher levels – level fives – which can spin off higher wRVUs. But if you have a coding and documentation expert come into that information and looking strictly at what the documentation can support, it’s possible that the coder can say, “Look, it’s not a level five, it’s a lower level code.”

So ensuring that that documentation is correct, which then documentation is reflective of what has been coded and billed is important because it then affects not only sort of accurate billing and coding, which is important from a payer perspective and from a overpayment rule perspective and False Claims Act (FCA) perspective, but is then important from a compensation perspective. And I think frequently, if you have an issue with your coding documentation, your error rates, that disconnect sometimes will happen without realizing how it is affecting physician compensation until somebody like you comes along, Angie, and those questions are asked and really pushed on to make sure that if there is a productivity model that takes into account wRVUs, are those true and accurate wRVUs?

Angie Caldwell

The old adage garbage in, garbage out.

And it really does start with the documentation in the record from which that bill is then coded and that CPT and modifier is then attached. Not every service is going to be a level five service. And that’s where effective compliance programs can help. An easy test is to compare the physician coding frequency to a normal frequency from Centers for Medicare & Medicaid Services (CMS). So CMS will show you the frequency of the CPT code by physician specialty. Comparing that frequency, comparing that bell curve from a standard bell curve to the physician in question is a really easy way to see if that billing is perhaps off. And if it is, if the bell curve is completely to the right showing all level fives and very few {level} ones, then it’s an opportunity to ask more questions and find out exactly what’s going on. But that is the first step in ensuring that the compensation model then doesn’t get awry as a result of that incorrect billing or perhaps coding irregularities that may happen.

Jana Kolarik

Absolutely. And so let’s talk a little bit about other things that may affect what is being attributed to a physician as a wRVU. So we’ve had, there’s a distinct difference between billing and what’s being attributed to a physician under their national provider identifier (NPI) from a billing context and what is considered to have been personally performed by that physician. So what comes into play there is something that you want, which is collaboration between physicians and advanced practice practitioners (APPs), including physician assistants and nurse practitioners. So in the incident to context, in the global surgery package context, in the split shared situation, you have things that may have been billed under the physician’s NPI that may have been worked by an APP.

So as you’re looking at a particular physician, and I think you and I have talked quite a bit about surgical specialties and the use of APPs and when they’re used and how they’re used, how do you take that into account when you’re trying to discern whether or not the wRVUs that are being attributed to a particular physician or physician’s NPI are truly worked or performed by that? Does that make a difference in kind of your assessment?

Angie Caldwell

It sure does. And what we’re trying to get to from evaluation perspective, of course, is measuring the physician’s personally performed work effort. The work RVUs and the way that the billing is designed may not always capture only personally performed work effort. For example, in the split shared billing that you spoke of, or perhaps in a global surgical package situation.

So first, it’s always important when collecting the population of work RVUs to apply to the compensation model is to start with work RVUs that are rendered by the physician. So most billing systems will show you the codes by a rendering provider or billing provider. First capture it by rendering provider which will strip out all of the incident-to services that are not personally performed by the physician. Then it’s a matter of assessing the use of the APP and frankly, how the physician uses the advanced practice provider. Are they using them as an extender to do those post-surgical examinations? How are they using them? Or does the APP have a separate and complete patient panel from the physician? It’s important to know how the physician is using the APP.

In those instances where the physician is using the APP as an extender, it’s then important to understand that the way the billing system works is different from how the personally performed service is being determined because the APP is part of some of those codes. And those global surgical packages, the APP’s work is part of that CPT code. So understanding that-

Jana Kolarik

Pre and post.

Angie Caldwell

Yes. And understanding that and understanding how that impacts physician compensation is important. And most often from a valuation perspective, some consideration is made either in assessing and valuing the compensation per work RVU (the conversion factor), or within looking at the total value of the work RVUs attributed to the physician themselves. So in other words, some discount is likely applied to one or the other to ensure that the compensation ultimately results in FMV and to really assess what the physician is personally performing.

Jana Kolarik

Yeah, makes a ton of sense. Talk to me about, because we’ve talked about this from time to time, a wRVU for everything. So I’m sure that that statement sends a thrill of just pain through you. But the belief that under a wRVU model or a component that if you’re performing a service, there should be some type of wRVU for that service that I’m performing, even if it’s not something that’s a true wRVU that’s been calculated, that’s been set up through the CPT and through WRVUs through CMS. So talk to me about what that looks like and some of the questions that have come up about that and what is maybe a more effective way to deal with that situation than really creating a wRVU for everything.

Angie Caldwell

Yeah. And you and I have had some conversations about this, about how work RVUs as part of the total value of the CPT code, it’s truly a reimbursement methodology and initially was not intended to be how physicians were paid and compensated. Because the work RVU, again, it’s easy to measure, it’s consistently measured, it’s agnostic as to payer, and so it has become a great measure of physician work effort. {However we} know that it was not intended to be the one and only way to compensate a physician, there is a desire by the industry to make everything a work RVU because it is consistently measured, consistently applied, agnostic into payer, all of those wonderful things, but it doesn’t always work.

So translating administrative services into work RVUs, for example, within a compensation model, in my opinion, I’ve seen that be a very dangerous approach simply because the risk and the value of that clinical and administrative time is so different. Proxy work RVUs for clinical services where perhaps CMS has not provided a work RVU value, those are other areas where I can get behind a proxy work RVU in some instances for clinical services, but there are others where it just simply does not make sense and perhaps a collections-based or a per-encounter-based compensation methodology would make more sense and frankly be easier administratively.

Jana Kolarik

Yeah, 100%. And you and I have sort of fixed modeling that dealt with that latter issue, so a 100%. So let’s talk a little bit, I want to talk a little bit about specialties and wRVU compensation models. And I’d like to talk a little bit also after that about the mismatch of compensation and productivity. So in looking at wRVU compensation models, you and I have had multiple discussions over the years related to why is that specialty or why are we trying to shoehorn a hospital-based specialty into wRVU compensation model?

So let’s talk a little bit about where that makes sense to say no, to say, let’s try this a different way because it doesn’t make sense in this particular context. So context of hospital-based physicians, can you talk to me a little bit about compensation modeling that makes more sense just based on kind of flow of patients and control of schedule, those types of things and sort of in that context?

Angie Caldwell

So if we think about hospital-based physicians, they are 鈥渃atchers.鈥� The universe is in control of who arrives in the emergency room that day, how many patients are on the floor, and how many patients are in the intensive care unit (ICU) unit. They are catchers and not immediately responsible, if you will, for driving the procedures, the visits, and the encounters. There’s so many other things at play for that hospital-based physician. So a productivity model then makes a lot of sense when the patient is in … Or I’m sorry, when the physician is in – control of that schedule, the number of procedures, the number – by reputation -the number of patients that are coming to them, all of those things, it makes a lot of sense.

In a hospital-based setting, it starts to make a little bit less sense simply because we talked a minute ago about not everything is a level five. So a physician in a more of a coverage type role, coverage, meaning coverage of the floor, coverage of the emergency department (ED), coverage of the ICU, again, if their compensation model is based upon productivity, then they are incentivized, just because of the way their compensation model is designed, to drive work RVUs. And that perhaps puts the incentive to making more level fives when there aren’t level fives. So it makes more sense in those hospital-based settings to have more of a coverage type, a shift-based model, and then perhaps consider some productivity incentive for surge times or other high volume times.

Jana Kolarik

Yeah, makes sense. And to that point, and to underline the point that you’re making as well, if you do have those types of productivity components for those particular types of specialties, then again, not the billing compliance is ever unimportant, but it makes it all the more important if you have, especially if you have physicians in some way coding their own work, to have that double check and that audit over it, just to make sure that that billing is tight and accurate.

Angie Caldwell

Absolutely. And a word on, I know you and I have talked frequently about when is a productivity incentive appropriate for a hospital-based specialty. And there are times. It’s a compensation design – it does get tricky – it’s a compensation design skill that needs to be carefully and thoughtfully applied. But the base for the physicians working in these hospital-based specialties should be the normal, the value of that base compensation should be based upon the normal environment, the normal flow, the normal census, the normal number of visits, and then understanding that that’s going to fluctuate up or down, but rewarding the physician. No one intends to create a compensation model that doesn’t reward the physician for their skill and hard work. So recognizing when perhaps a surge incentive or a productivity incentive is warranted is a good thing to add to a compensation plan.

And that could be, again, carefully designed so that you know when that surge is actually occurring within a unit. And it doesn’t even have to be based upon work RVUs and a traditional work RVUs times conversion factor kind of methodology. It could be based upon some kind of another incentive, an engagement incentive, or another incentive that’s valued a different way. So there are ways to accomplish it without the productivity being the main calculus of the compensation plan.

Jana Kolarik

Yeah, that makes total sense. And I do believe, and you and I have talked about this as well, there is kind of, I don’t know, this general pressure or belief among physicians that the productivity method of compensation is in some ways better than other ways. And I just want to say on this podcast that is not accurate, and I welcome your thoughts on that as well, because I do think there’s the pressure, internal pressure from physicians who should be paid the value of their work, and as you said, for their expertise, et cetera. But that pressure to believe that the WRVU methodology is in some way better than the others is something that just needs to be debunked. Thoughts on that?

Angie Caldwell

Absolutely. I’m with you. It’s not always the best model. I think it gets back to – it’s easy. It’s something to understand this times this equals that. And I think there’s a notion that the shift value or the salary value will be somehow be deflated because it’s not represented by the physician’s ({work RVU} work effort, but showing them and demonstrating to them that the compensation is fair, it’s FMV, it’s based upon the services provided, is important to help debunk that.

Jana Kolarik

Yeah. Fair. Thank you. So let’s talk a little bit about the mismatch of compensation and productivity and the belief and again, we’ve talked about this before, but there still is this clinging to the 75th percentile, this belief that that is really the amount that physicians in some way should be paid. And what does that look like though, this is the issue, when the productivity is not at the 75th percentile? And how do you deal with situations or how do you, as a valuation expert, deal with situations where you’re trying to educate your clients as to why the 75th percentile may not work with somebody who may is at the 25th percentile, they’re at the end of their career or they are just slower or less productive than others? How do you deal with those conversations? How do you explain that?

Angie Caldwell

Yes. And so it gets back to, number one, the myth that anything at lower than the 75th percentile is FMV. So number one, that’s just simply not true. But there are instances where the methodologies for determining FMV within an organization are based upon that threshold, that 75th percentile threshold, and nothing else.

Effective thresholds have more than one level of test, whether that be compensation per work RVU, whether it be a difference in the productivity level and the compensation level. Normally it’s a combination of those to determine if a physician’s compensation is within the range of FMV. In that testing and in determining the differential between productivity and compensation for a physician, there could be very good reasons as to why someone is compensated at the 75th, but producing at the 25th.

And I’ll give you a few of those reasons. So one is someone in a rural setting. So if you think about someone, a provider in a rural setting who may not have the volume simply because the population does not support volume for that physician, but that physician is needed desperately in a community. So to get the physician to that community to provide the service, sometimes 75th percentile compensation or more is required to provide them to the community to provide that service, but they will not have, likely, the productivity to support that level of compensation.

So again, understanding the facts and circumstances around that difference between productivity level and compensation level is extremely important.

Jana Kolarik

Yeah. So then it comes to the … And I think about this and the thing that strikes me as you’re going through the example, I think having folks internally at your practice, at your health system, at your hospital to evaluate compensation and then go out to valuation experts circumstantially. So let us rely on several different resources from a survey perspective. And then being able to know the point in time when it makes sense to then go to somebody like you to say, do we have enough behind this? We’re paying at the 75th, but their wRVUs or their productivity is much lower than that. Is there support for paying them at this level?

I mean, when you talk to clients about having those triggers in place for evaluation of compensation for their physicians, how do you talk to them about making sure that they’re careful in that analysis and when that trigger is frankly sprung for you to be brought in? How do you talk to folks about that? Because what you don’t want to obviously have happen is to not have a rule situation or not have an exception to this rule and have physicians paid at the 75th percentile, but producing at the 25th and not have the rationale around how that is still FMV for that particular physician. Talk to me about triggers.

Angie Caldwell

It is a very important conversation right now and one that PYA has advised on a lot lately because I think in the past, historically, the thought was is that every FMV opinion had to be generated by a third party valuator. And that’s simply not true. So much valuation work can be done internally by the organization created by, and that valuation work can be done through work of a compensation committee through an effective compliance program, and together then creating those thresholds that the organization can use to assess and determine a compensation valuation before sending something outside.

And so setting those parameters again, it’s organization-dependent, it’s going to be dependent upon an organization’s risk tolerance as to what they’re able to handle as an organization. And it’s going to be based upon, again, their location, their geography, their population. So we work with several organizations that have small urban facilities, but then they have very rural facilities in their system. And navigating the dynamics from an internal valuation threshold perspective of the two becomes complex. Having that active compliance program, having that active physician compensation governance committee is really important. And having more than one threshold, I think is also very important because just because it’s over the 75th doesn’t mean it’s not FMV, but being under the 75th doesn’t mean that it is. And so having multiple thresholds allows you to internally to better assess where your physicians are.

Jana Kolarik

Yeah, that makes total sense. I think that this has been a fantastic conversation just to key people into these issues with regard to these wRVU or productivity models and things that people should be thinking about. We’ll talk in another podcast about things that we can do and that we would recommend that folks do to add on to what you just said at the end of this conversation. What structures can you put in place? What are best practices with regard to compliance in this space? And I think that’ll be a nice second podcast in this series.

But I welcome final thoughts from you, Angie, on this. I mean, I think wRVU methodology, as you had mentioned, from my perspective, is something that is all over and that has come into spaces and specialties where it may not fit ideally, so has created issues from that. And from my perspective as well, the billing and coding and documentation issues can impact the compensation as can the use of physician extenders/APPs. So there’s a bunch of things in there from my perspective as a health care lawyer and from a compliance perspective that we can look at and be thoughtful about and work compliance around.

But from your perspective, what are the takeaways that you want to leave people with with regard to this particular topic?

Angie Caldwell

Absolutely. If your primary method of paying physicians is on a work RVU productivity basis, it’s imperative that the calculation process surrounding those work RVUs is excellent. It must be excellent. Notice I didn’t say perfect. I don’t know that any calculation process is going to be perfect, but it does need to be excellent to ensure that the overall compensation plan doesn’t run afoul of FMV.

Jana Kolarik

Yeah. Thank you. This has been a great conversation. Really always appreciate your thoughts and the discussion on these topics and hope that our listeners find it equally as instructive and helpful. Thank you.

Angie Caldwell

Thank you. Thank you, Jana.

Jana Kolarik

We want to thank our listeners for joining our Let’s Talk Compliance podcast series with Health Care Law Today, your connection to timely legal updates in the health care and life sciences industry. We encourage you to subscribe to this podcast and be sure to be on the lookout for part two of this series. Visit 麻豆传媒’s Health Care Law Today blog at healthcarelawtoday.com and pyapc.com. If you like the show, don’t forget to subscribe and be sure to rate us five stars. Until next time, I’m Jana Kolarik of 麻豆传媒 & Lardner.

Angie Caldwell

And I’m Angie Caldwell at PYA. Thanks for listening.

In this episode, Lauren Carboni, co-chair of 麻豆传媒鈥檚 Health Care Litigation Area of Focus, is joined by Chanda Hinton, Founder and Executive Director of The Chanda Center for Health, a pioneering nonprofit dedicated to empowering individuals with long-term physical disabilities. This episode highlights the significance of The Chander Center for Health for the long-term physically disabled community. They will discuss the Center鈥檚 bold advocacy efforts to make integrative and collaborative services accessible to those with long-term disabilities and to make disability competency the new standard in health care.

For more information regarding the 鈥淟et鈥檚 Talk Compliance鈥� podcast series, please click here.

Please note that the interview copy below is not verbatim. We do our best to provide you with a summary of what is covered during the show. Thank you for your consideration, and enjoy the show!

Judy Waltz

Hello and welcome to the Health Care Law Today podcast presented by 麻豆传媒 & Lardner. Each episode we’re joined by a different thought leader to discuss current legal trends in the health care and life sciences industry. I’m your host, Judy Waltz, partner and chair of 麻豆传媒’s Health Care Practice Group. We’re excited to have you joining us today. Before we begin our show, I want to remind you to subscribe to Health Care Law Today, either on iTunes or your preferred podcast app. Please visit our website at healthcarelawtoday.com. On today’s episode, Lauren Carboni, co-chair of 麻豆传媒’s Health Care Litigation Area of Focus is joined by Chanda Hinton, founder and executive director of the Chanda Center for Health, a pioneering nonprofit dedicated to empowering individuals with long-term physical disabilities. This episode highlights the significance of the Chanda Center for Health for the long-term physically disabled community. They will discuss the center’s bold advocacy efforts to make integrative and collaborative services accessible to those with long-term disabilities and to make disability competency the new standard in health care. Take it away, Lauren.

Lauren Carboni

Thanks so much, Judy. My name’s Lauren Carboni. I am a senior counsel with 麻豆传媒 & Lardner based in our Denver office. I’m also the co-chair of our Health Care Litigation Area Focus. I sit in our health care group and my practice is pretty diverse. I’m a regulatory and compliance attorney, and I also work with clients to respond to government enforcement actions and internal investigations dealing with a variety of issues, reimbursement, false claims act, you name it. So, on today’s episode, I’m speaking with Chanda Hinton, who is the founder and development director of the Chanda Center for Health. The Chanda Center for Health is a pioneering organization that’s redefining wellness through person-centered collaborative care, and they predominantly serve individuals with long-term physical disabilities. The center’s located in Lakewood, Colorado and offers a holistic approach that adapts to each participant’s evolving health care needs, ensuring that care is not only effective, but deeply meaningful.

The center really provides a sense of community for their participants in addition to all the medical needs and ancillary services that these individuals need. So under one roof, the center provides a wide range of on-site services including acupuncture, massage, chiropractic care, adaptive yoga, behavioral health, physical therapy, and primary care. These services are accessible through a variety of payment options such as Medicaid, worker’s compensation, private pay, and discount programs. Another really neat feature of the center is for individuals who are eligible that live more than 30 miles away from the center and can’t get there. There are remote services available in partnership with Palco, so participants can get acupuncture, massage, and chiropractic treatments away from the center as well, which is really neat.

And additionally, the center collaborates with Craig Hospital to provide free inpatient massage and acupuncture sessions to individuals who are recovering from spinal cord and brain injuries. For those who don’t know Craig Hospital, which Chanda can talk about this too, but Craig Hospital is an incredible resource, an incredible hospital based in Denver that provides care to individuals who have experienced spinal cord and brain injuries. So whether onsite or remote, the Chanda Center for Health is committed to empowering individuals with physical disabilities to live healthier and more independent lives. Now that I’ve teed that up, Chanda, I would love to introduce you. Please tell me a little bit about yourself.

Chanda Hinton

Hi, I’m so happy to be here. I’m Chanda Hinton, founder and senior development director over at the Chanda Center. As you had said, I am just really happy to be here to talk about all the various things within health care that are occurring in so many different directions regarding what we do at the Chanda Center, but some of the system pieces that live beyond us and how it truly just impacts our day-to-day impact on our participants. A little bit about myself is I have been in the position founder of this organization for the last 20 years, and it has stemmed from a personal experience that I went through that I’m sure you and I will touch base on, and just being able to take a personal situation and research and then advocate and deliver services for something that I felt was critical for the long-term physical disability community.

But quite frankly, essential and life-saving and definitely a portion of health care that I believe is often overlooked for all of us, not just those with disabilities, but is definitely a model of care that we shouldn’t embrace altogether just for so many different components of cost savings, of improved quality of life, of wanting to be social and engaging in the world, which that’s what humanity is all about. So I’m just really excited to be here and I’m excited to talk about all the things that this podcast can bring up that are just essential to understanding and discussing when it comes to this topic.

Lauren Carboni

Thanks, Chanda. I’m really excited about our conversation today. I think you and I have known each other now for, I want to say probably 10 years, which is crazy to me. And what you’ve built at the center is absolutely incredible. I had the opportunity to go to the center multiple times, and in my opinion, this is how health care should be delivered. It is accessible to everyone, and it’s just a welcoming, incredible place. I would love to hear the catalyst for why you founded the Chanda Center. I would love to hear your story if you’re comfortable sharing, but I really do think that without you, Chanda, this center would not have happened. And I mean, you were just such a force of nature, and I really want everyone to know why the center is there now and it starts with you.

Chanda Hinton

No, I appreciate that and I’m happy to share the details of that. So when I was nine years old, I accidentally was shot in the back of the neck, and so the bullet 22 rifle severed my spinal cord between C5 and C6. And so I was really just thrown into the medical model, and I do think that as humanity were always going to have some sort of connection with the health care system because we’re human. We’re going to have things that will go bad with our health from various times. And so with that being said, unfortunately mine was a little bit more catastrophic. And so I spent a good amount of time in rehab right after I was injured, and then I was sent home just like, “Chanda, here’s your power wheelchair, and here’s all the medications that you need to take as a result of your spinal cord injury. And these are secondary conditions and these will require this medication.”

And that was in ’91, so being semi, my mom, myself and my family, a bit naive about how do you really handle a spinal cord injury when you’re also in a rural community? What’s right? What’s wrong? You put your trust in your providers and your physicians. And so I just basically sat in my wheelchair from when I was nine until 21. I couldn’t get coverage for ongoing physical therapy for the rest of my life. I couldn’t get other types of services that my body probably at the time I didn’t know needed, but definitely needed. And so what happened is when I turned 21, I started having chronic pain. And so I go to the physician and they’re like, “Oh, yeah, that’s another secondary condition. Chronic pain comes with this particular situation.” And so this was right in 2003 during the peak of the opioid epidemic.

And so it was like, “Oh yeah, here’s some Percocet.” And so I got addicted to Percocet not knowing, so very unknowingly, but I became bed bound. I was 59 pounds. I wasn’t able to eat. So then what was really interesting is that I used the medical model when I was nine to save my life, but then I over utilized the medical model, which then landed me in severe acute care where I was basically failure to thrive. And so they saved my life again. And in that moment is where all of this really shifted and changed. And so when they saved my life, the physician who I had known since I was nine years old looked at myself and my family and was just like, “What’s the next step?” And that’s when my sister who had been studying yoga for a very, very long time, just spoke up and said, “Why aren’t we looking at things that are more proactive and more preventative and less invasive and less side effects like medication, those types of things that Chanda’s body deserves? Because before she was shot…”

I mean, I was very active. I was mobile, I was running around, I was healthy, I was never sick. “And so why aren’t we giving some of the things to her body that deserves such as movement and these various other components?” And we were like, “So what does that look like?” And again, we’re coming from a rural community. She was like, “Well, let’s talk about acupuncture and massage and chiropractic and ongoing physical therapy.” And, of course, we were open to the idea. And then there was also some other system pieces that made it like, “Well, yeah, that’s great. I can pay for all of that out of pocket and I will, especially if it’s going to keep me sustained and wellness, but what does that look like long term and financially, right-

Chanda Hinton

… if it did work?” But I went ahead and I tried it, and I always tell people, so Lauren, I’m talking to you. And as you mentioned, the center that we’ve created, the reason I’m talking to you is because integrative health care, integrative medicine literally saved my life. And from that moment, I was like, “This can’t be this way. This is so bizarre. Why are we keeping people sick, which is costing us more money? It’s causing even more complex issues.” I would call 911 probably every other day because my pain was so severe. I was in the ER all the time. And so it’s like it adds up. Cost is a lot, but yet, ever since I started the acupuncture, massage and chiropractic and actually moving my body, stopped calling 911, stopped going to the ER, stopped all those things. And Lauren, you’ll have to let me know when you kind of want me, because my first thing I knew right away was to research because I was like, “One, I need to research. I want to find out, is this just about me? Two…”

And when I found out it wasn’t about me, I was like, “Oh my goodness, this is not just my story. It’s so many people’s story within this long-term support, long-term disability community.” But I called up my Medicaid at the time and I just said, “Hey, you’ve been spending a lot of money on me, which feels more like reactive care, and I just have been participating in these really great services that are saving a lot of money, and I’m curious what can I swap out to get this versus this?” And the lady on the phone, she just said, “Oh, we don’t fund those things.” And I’m in my 20s, so I’m like, “Well, let me talk to your supervisor.” And that’s when she was like, “Well, it’s a legislative decision.” And so that’s where the light bulb went off.

And so from there, which we can get into in some other conversations, but from there, that was the catalyst. it was one my illness and finding the integrative therapies, but the second piece was actually feeling well enough and on fire to then learn that it wasn’t just me and that there was a way to change it. That’s what really sparked the fire even further to the point where I’m like, “All right, well, let’s go change some legislation and let’s get this covered and let’s really then look about how do we become a health clinic that can really do some deeper work in that area.”

Lauren Carboni

Yeah, absolutely. Thank you for sharing your story, Chanda, you’re truly inspiring. And it’s incredible that you took something that happened to you and figured out a way to feel better and wanted to share that with others and did it and are doing it. Let’s talk about the legislative piece first, and correct me if I’m wrong, but that’s what started, you went to the state, to Medicaid and advocated to get Medicaid to start covering these integrative services, and then the center came second, right?

Chanda Hinton

Yes. Yes. It wasn’t the kind of order that I anticipated because we were like, “Okay, let’s start a nonprofit.” We needed to start raising money for people to get these services now, because we didn’t know how legislative or systemic change can take a while. It could be plenty of no鈥檚 before there’s a yes, right? And so we came forward with approaching it at two angles as a nonprofit. The first was let’s raise money now so we can at least get some people getting the services while we also address the primary issue with Medicaid, covering it for the sake of cost-effectiveness, improved quality of life, all those pieces. So, I’m raising money simultaneously and changing legislation. And so yeah, the biggest components about running that legislation in Colorado was that I had some very specific ways that we approached it.

So I wanted to approach it from a consumer directed. So I didn’t really rally any providers in those spaces. I didn’t go to any of the associations that represent acupuncture, massage, and chiropractic, because I really wanted the legislators to hear that this is really coming from your constituents. This is really coming from Medicaid recipients who live with long-term disabilities and they know their health and they know what they need, and therefore, let’s drive that narrative and that movement through us and not providers. We always thought that it could make our legislators also just assume it’s another population of providers that are just trying to make money or whatever, but…

Lauren Carboni

Right, or another avenue for reimbursement?

Chanda Hinton

Yeah. But again, how many people are knocking on the door to become a Medicaid provider either, right?

Lauren Carboni

True, very true.

Chanda Hinton

So there’s those components to it. And then so we drove it that way, and we just simply just said to them, it’s like, “We are asking for you to do this as a pilot. We want it to be a waiver. We want to prove to you and show to you that it’s cost-effective.” And I know, and we even said, “We know that that’s what you guys care most about is the dollars. And then secondarily, you’re going to see a more vibrant community of those that you serve. Because if you have healthier folks on Medicaid and they become employed and now they get onto a Medicaid program where they’re now paying back Medicaid to be their insurance company, it’s kind of a win-win.” And so there was a lot of those discussions and we even mentioned that let’s do it small and then we can grow it later.

And that we recommended having an independent evaluator. So then that way, it wasn’t just very anecdotical, but that it was very much an independent evaluator could look at the claims cost for those that were doing it in various other things. So in 2009, we got it passed, and it still exists today. We’ve actually expanded it. It’s now the entire state of Colorado, and it represents a very diverse group of folks living with long-term support services, long-term disabilities with various neurological lack of mobility needs, and they can access acupuncture, massage and chiropractic under a pretty significant amount of units per year. And so we were excited to get that done. And then obviously as soon as that was done, there were some other things that came up that made us need to really identify like, “Well, a health center’s probably going to be the next step.”

Lauren Carboni

Yeah. So you’re referring to, it was originally called the Spinal Cord Injury Waiver, correct? That was what was passed in 2009?

Chanda Hinton

Yes. So it was spinal cord injury in 2009. It was around for 10 years in that particular kind of pilot, very restricted. And then when we renewed it in 2021, basically, that’s when we expanded it statewide to say, spinal cord, MS, CP, spina bifida, brain injury. But we also changed the name of it. I convinced our lobbyist who do pro bono work for us and some other folks that, “Could we please name a waiver that’s not named after a disability?” So we changed it to the complementary and integrative health waiver.

Lauren Carboni

Got it. And so it’s now the complementary and an integrative health waiver, CIH waiver., it was renewed and expanded statewide for those, I think it’s adults, who are 18 years old and have certain diagnoses including spinal cord injury, multiple sclerosis, brain injury, muscular dystrophy, and cerebral palsy. How long is the CIH waiver in effect for? Is it another 10 years?

Chanda Hinton

Well, it’ll be ongoing. Every other waiver in every state Medicaid programs, you have to renew them every five years. And that’s just an internal thing that the Colorado Health Care and Financing, the health department here in Colorado will just have to submit something to Centers for Medicare & Medicaid Services (CMS). But we don’t have to run legislation to do that unless there is any sort of budget issue to where the department might reach out and say, “Hey, you need to get your advocates rounded up just because when we’re in a crunchy time with the budget, they may be looking at things such as your waiver and other things to cut. And you all as advocates need to be aware of that.” But it should be just in

Lauren Carboni

Perpetuity.

Chanda Hinton

Yeah, there we go. So basically it’s like that in the sense of it should just be ongoing and there shouldn’t be any really more effort around the legislative side of it.

Lauren Carboni

Got it. That makes sense. Do you have a sense of how many Coloradans are able to utilize that waiver?

Chanda Hinton

It is extremely significant. It is right now… I mean, for me, I think it’s been a significant number. I think there was around a 30,000 individuals that were eligible for this waiver. That amount is not on the waiver right now because what we have also been struggling with is that the systems with Medicaid, since we passed the bill in 2009, there’s just been redesigning of the systems when it comes to the case management. There’s been internal system changes around how you submit claims and how the process of enrolling. So all of those systems changes every time. And quite frankly, sometimes the turnover in case management within the Medicaid systems oftentimes will allow for education that should be consistent and ongoing rather than one time, which I also believe the department’s trying to get better at. But it feels as though we keep having to really educate, educate, educate, because we will get case managers that have been at places for very long periods of time that still don’t know about the waiver.

And it’s, to some extent, really blows our mind. And so we as an entity in collaboration with the Department of Medicaid are working diligently to make sure that it gets pushed out there, that everybody’s aware of it, even primary care physicians should be aware of it for long-term support service populations. Because oftentimes, physicians don’t even recommend these services because they don’t even know about this waiver that exists that could help their patient with chronic pain. And so it’s like, we’re really trying to dial that in. And again, that can take time, that can take years just to get a message across, especially when it can be a lifesaver for a lot of folks.

Lauren Carboni

Yeah, absolutely. Yeah, that is definitely something important in trying to figure out how to get the message out. And hopefully, there’s other partners. I imagine Craig Hospital is probably one that is a good partner to try and get that message out.. I want to hear more about the center, now that I have an idea of how the waiver got in place, your role, the center’s role in getting the waiver in place. Let’s talk about the center itself. What year did the Chanda Center for Health open? And what services do you provide? Tell us about your participants. I want to hear it all.

Chanda Hinton

Yeah, absolutely. So we opened in 2017, the building itself, the Chanda Center where we’re at today. We were still doing direct services prior to that, but it was definitely in smaller spaces, not as much space for the ability for what is occurring today, which I’ll share with you, couldn’t really happen. And so we’re really excited about the fact that we were able to go from smaller spaces from when we first started to where we are today. And there’s a few reasons why we decided to become a Medicaid provider of that waiver, because typically at first, it felt very self-serving. Most people don’t create legislation, pass it and then be like, “Oh, yay, now I can benefit from that revenue.” So what happened is that when it occurred, there were not providers signing up. That was our first effort, was to get the word out there to let providers know that, “Hey, now there’s a new waiver. If you’re an acupuncturist, massage therapist, please sign up. Please start serving this population that is in much need of your services.”

And what happened is most individuals did not want to sign up as a Medicaid provider. And I could see that in the massage and chiropractic and acupuncture world, typically, some of these practitioners may only have a very small self-employed little clinic. You know what I mean? Where some of them may have larger ones. And so that became the first hurdle. And so with that being said, we came together as an entity, our board of directors and our staff, and just had the conversation about, “Well, what if we became a provider?” And the other component that we were also hearing is that for some of those that maybe wanted to enroll, they were also saying that, “Well, I don’t know much about folks with long-term disabilities. If they come into my office, how am I supposed to transfer them out of their wheelchair onto a treatment table? I feel like there was a lot of providers having… And for very good reason, maybe being scared of just not wanting to hurt anyone.

And at the same time, just not being exposed enough to realizing that there’s a lot of accommodations that they would have to do because this is a complex population. So not only in addition to becoming a provider of the waiver, we also wanted to take on that challenge of like, “Yeah, this population is who we love the most. we want our participants to come into this building and feel like they belong.” And I will say that right now, I mean, on an average day, I think that, and this could be very… I’m a very optimistic, so this is a very pessimistic view for work, but I feel like on an average day, about 80% of people will often feel like they do not belong in the world with their disability because there are so many barriers that happen day to day just from going to the grocery store to going to running errands and not automatic doors, all these things just within the public.

But for me, I was like, “It should never feel that way when you’re trying to access health care.” And that was what we wanted to do at the Chanda Center. So here at the Chanda Center when we opened, we’re a 6,000 square foot facility and all underneath one roof, we provide acupuncture, massage, chiropractic, physical therapy, care coordination, behavioral health, and primary care services. So that means all of our individuals, and that’s covered by Medicaid and Medicare. So the individuals that come into our building can access all of those services because we cater to that population because that population has had to unfortunately rely on those government programs. With that also said, the reason why we love having all of those services underneath one route is because it helps people with their transportation.

It helps people to not drive around the city to go see different providers, but it also, we’re meeting their needs in terms of accessibility. And so when they show up, there’s lots of wheelchair accessible parking, auto doors. When you come in, there’s a front desk that is not high, you actually get to check in and look at the reception in the eyes and say, “Hey, this is who I am.” And they will transfer you onto treatment tables. If your urine bag is full, everybody in the building knows how to empty a urine bag. There’s no stigma, there’s no weirdness. It’s just we’re so much about embracing health care and disability in this building. It just feels completely natural.

Lauren Carboni

It’s incredible, Chanda. I mean, this is how health care should be delivered. Health care should be accessible to everyone, every provider office should be set up so those in wheelchairs feel welcomed and that the providers are trained, or have disability competency training and know how to treat everybody. It’s just, I can’t echo enough how incredible the center is with what you’re doing, and I really want it to be a model for health care everywhere.

Chanda Hinton

Oh, I do too, Lauren, I appreciate you saying that because I think that our community struggles because we’re really trying to educate the health care community that unfortunately we need all of us to step up. And I always tell people that when you step up and you know how to care for people with disabilities well, it makes it so much easier for you to care for every walk of life, because when you can get complexity, all the rest is easy. And I always tell the folks that maybe are in the health care systems that maybe can’t make those bigger decisions. It’s like when you do advocate internally, or if you’re a private practice and you make the choice to do it, you’re advocating for your own self. Just know that your ability is temporary. We all ageIf you look at the stats, either you get a temporary injury in your life, people get long-term injuries, and then you’re aging.

So we’re all going to land in the need for accessible health care at some point, but for some reason that it remains out of sight, out of mind for people until they get there. But then once they’re there, nothing has been changed because there wasn’t enough people that wanted to change it prior, before you got there. So yeah, for us, it’s very much a heartfelt mission and we love our everyday work because we know that we’re meeting a critical need and we’re impacting people’s lives. And I think that we just hope that the other health care systems and models pick up on it because I think it’s essential to vitality and cost-effectiveness.

Lauren Carboni

Yeah, I agree. I guess, how can providers and medical professionals incorporate disability competency into their practices? Does the Chanda Center, do you provide education to providers who are interested in being able to provide accessible health care to everyone?

Chanda Hinton

Absolutely, Lauren, we have an online curriculum that we built specifically for physicians after we built it. We got, again, very little response because I think that one other component to this is when it comes to regulatory and other components of compliance for being a Medicaid or a Medicare provider, is that there’s really not a body that enforces these requirements. And so providers oftentimes will see that curriculum and some of them will love it, but I would say a majority of them have expressed to us like, “Well, I don’t serve people with disabilities So it’s very interesting But if you’re a Medicaid, Medicare provider, you should be educated on how to, and so the thing is that we keep that curriculum available because we do believe that there are those that want to impact people’s lives. We know that physicians have gone to become of an MD or NP or whatever because they wanted to help people.

Unfortunately, sometimes they get caught up in the systems about what can be covered, not covered. How much time can I spend with a patient? So I think that we do have it, this educational platform that we’ve built for that very purpose, and we want people to take it because it also shows you that you can spend zero money to be disability competent, and you can spend a little money and then you can spend a lot of money. So with that being said, we should all be doing it. But yes, we do educate providers, and it’s just a portal that we do online. We’ve also gone into places and assessed… Let’s say they’re building a new clinic and they want us to assess the accessibility, and we’ll go in and do an assessment for them just to be like, “Well, all of these things are great. Yeah, you’ve covered it by the code, but it’s not really accessible.”

Lauren Carboni

Right. Right. I mean, you made a good point. There are federal and state laws and regulations that do require businesses and providers to have accessibility to health care, but when it comes down to who’s enforcing that, it’s really challenging to figure that out. I mean, the laws are convoluted and it’s kind of a puzzle to figure out what exactly you need to comply with. But then if there’s a provider who’s not complying, or on paper they’re complying, but actually not providing disability competent care, who do you go to?

Chanda Hinton

Yeah, exactly.

Chanda Hinton

Well, and I think too, you can bring it up to your local Medicaid department, which we have. And so we have a great relationship with them and there’s good things that we work on with them. And then there’s things that we have to just make sure that we’re going through conflict resolution with them on in one of these and this piece is one of those, because we made it very clear that we are failing in that area here in the state of Colorado. And they even did a very intense kind of evaluation. The evaluation showed exactly everything that I was communicating to them, and I’m sure that that is just sitting on a shelf because nothing’s been done about it. And so it’s very interesting.

And again, right now, I’ve stepped away from advocating in that area just because there’s so much other things going on. But again, every time something more comes along, the disability competent care always gets pushed to the back. And I’m like, “So how long from the history of time, all the things that we’re all going to continue to come up against in the health care community, in the politics, in the Medicaid, the Medicare world, when is it ever going to happen?” Because something’s always going to come up. So it’s just become a priority at some point, and I’m just not sure when it’s going to, it definitely would need to have a pretty significant advocate kind of movement to occur.

Lauren Carboni

Yeah, I think you’re right. And I agree with you and it should be a priority, and maybe we can brainstorm some ideas to try and keep disability competent care as a priority for legislation. Let’s shift gears slightly. The majority of your participants are Medicaid or Medicare. There’s been a lot recently regarding the Medicaid program at the federal level, H.R. 1, the 2025 Budget Reconciliation Act was passed, that over time we’ll see a significant cut in Medicaid. I think I saw up to a trillion dollars. How are the cuts to the Medicaid program going to impact the center and your participants?

Chanda Hinton

Yeah, , in addition to those pieces that you just shared, here in Colorado, we’ve just gotten a budget that has been dropped by our governor, and it does look like the Medicaid department is going to be facilitating whatever cuts they can to not only meet some of those federal requirements, but some other components here. And some of that will be impacting our participants outside of the center as just an individual who is on Medicaid or Medicare, Medicaid specifically, such as those that would definitely get SNAP or individuals that are on certain programs where they rely on caregivers that get them up every morning and put them to bed every evening. There’s a provider rate that was increased during July of 2025, and that increase now has gone back. So they’re now having to navigate, oh goodness, if I just gave some raises to some of my caregivers, I’m either now taking that raise back or I’m going to have to reduce my caregivers.

And then again, that might result in, well, I’m sorry, I can’t work for you. If you just gave me a raise and now you’re taking, so it puts individuals with disabilities in some really awkward positions. The other component that I know is that with the governor’s budget that was just dropped to help make some of those Medicaid cuts is that there might be… The budget does say that there’s going to be another provider cut, doesn’t… It directly impacts the individual. I think that one thing about provider cuts versus what’s getting cut off to an individual, there’s so much cross reference between those two because one always impacts the other. And so there will be another one. They have not defined in specific details what that cut looks like. So our pro bono lobbyist is combing through the government’s budget, and we’re making sure that, one, the CIH, the complementary and integrative health waiver is not one that’s being considered the program at all, but then…

Lauren Carboni

Got it. Yeah. That’s still going to be maintained and that there’s not budget cuts to the waiver program itself.

Chanda Hinton

Yes, we’re working on just ensuring that that’s not one that would be coming down the radar and that whether when they talk about those additional provider cuts, because they’re giving kind of a formula that says that they have to meet a certain percentage to the cost of Medicare. And so there’s still a lot of unknown right now, but I would say that our participants are starting to see it as it’s related to their SNAP or their home health care services and any other providers that they’re seeing under Medicaid, they may not be giving them as much time for care because if they’re not getting paid as well, they may not be able to take on as many Medicaid patients. And so it’s going to be interesting to see how this all unfolds because it’s trickling and you’ll hear one thing after another kind of happens.

Lauren Carboni

Yeah. Yeah, there’s definitely a lot of unknowns, but I think there will be changes. And you’re right, I think with the cuts both at the state and the federal, I think we’re going to see pressure put on providers to try and navigate how to continue to provide care that’s either uncompensated care or those who are uninsured or that Medicaid no longer covers and those who are going to be directly harmed are the patients. I think we’re going to see an impact on access to care.

Chanda Hinton

Yeah, Lauren, the only other thing I would add to that too is being optimistic too, is that I do believe the population that we serve, those with long-term support services back in the day, that was what Medicaid was founded from. It was founded for the most vulnerable population. And so in some capacity, I will say, it’s such an oxymoron, the long-term support service population does have a level of protection because I do believe when the cuts happen, cuts do happen, they’re a population that might be the last on the line. And so I just wanted to mention that because I do think that there is some safety net there with a little bit of provider cuts that will trickle down to the consumer.

Lauren Carboni

Yeah, no, that’s a good point. We have just a few minutes left. I want to hear what are future plans for the center? More upbeat, right? Let’s switch it up. Setting aside the Medicaid and uncertainty with that aspect, what are future plans for the center?

Chanda Hinton

Yeah, let’s do this. Feels good. So center is growing, which is amazing. It’s very interesting that we’ve chosen the time to do it, but we’re going to get through it, because just with the uncertainty, I think funding sources through foundations and individuals that of wealth and that love to give to organizations, they even have senses of uncertainty. And so we’re in the midst of a capital campaign. We’re building an adaptive gym, an adaptive yoga room with some extra treatment rooms just so that we can really not only expand the services that we do today because we are growing to capacity on what’s the services we’re offering today, but that extra 6,000 square feet that we’re going to… Because we’re currently in a 12,000 square foot facility currently, we only use 6,000 of it. So we’re going to break the wall and go through and really add some more space, adaptive gym and adaptive yoga room, which we believe…

Lauren Carboni

That sounds amazing.

Chanda Hinton

Yeah, which is just another component for our participants. Again, we believe in movement. We always believe that movement is life, and we believe that the services that we offer and how it collaborates with, often people ask me about traditional care and I’m always like, “We’re the blend of the two. We don’t like to separate the traditional. We still want our primary care.” Having conversations with our massage therapists and our adaptive gym folks having access to our behavior, it’s all supposed to be working together. And so it’s exciting to add this component because this extra movement and rehabilitation that we can offer our participants is going to be just another layer of health maintenance that they deserve.

Because right now, they can’t go to just a… If they roll up to any sort of fitness gym, there’s very little… There’s probably not even one, but there are a few that maybe have something that you can try to do, but you can’t. You can’t independently work out or exercise on your own. And it’s so important to get your heart rate up every day. There’s endorphins that are released. Again, our bodies were really meant to have all those things and we’re going to create the opportunity for our participants to have that.

Lauren Carboni

Yeah, that’s incredible. And exercise is such a good preventative measure for whole body health, whole person health from physical and mental standpoint. That’s incredible. I don’t think I knew that you were in the process of doing that. I love that. I guess, so you’re in the middle of the capital raise, so can folks donate? How? If I want to donate, can I just go to the website and donate

Chanda Hinton

Yeah, our website, the chandacenter.org, there’s a donate button, you can donate in any capacity that you feel

Lauren Carboni

Awesome. Well, thank you so much for chatting with me today, Chanda. I really enjoyed our conversation. Is there anything else that we haven’t covered that you want to talk about?

Chanda Hinton

I’m sure there’s a lot, but I think that what we did was perfect. I think we touched on the pieces that I think were essential to today’s time. So thank you again so much for having me.

Lauren Carboni

No, thank you. And thanks to the Chanda Center for Health team. Keep doing the good work and ensuring that your participants get health care that they need, deserve, and keep putting up the good fight to make sure that those with long-term physical disabilities have a voice and a seat at the table, and hopefully we can push the needle in the direction of disability competent health care being the norm everywhere, not just at incredible centers like yours. But yeah, thank you again. Judy, back to you.

Judy Waltz

Thank you, Lauren, and a special thank you to Chanda Hinton of the Chanda Center for Health for a great discussion. We appreciate you taking the time to join us today. We want to thank everyone for listening to the Health Care Law Today podcast, your connection to timely legal updates in the health care and life sciences industry. We encourage you to subscribe to this podcast or to 麻豆传媒’s Health Care Law Today blog at healthcarelawtoday.com. If you like this show, don’t forget to subscribe and be sure to rate us five stars. Until next time on the Health Care Law Today podcast, I’m Judy Waltz at 麻豆传媒 & Lardner. We appreciate you joining us.

In this episode, Monica Chmielewski, vice chair of 麻豆传媒鈥檚 Health Care Practice Group and Shannon Sumner, Chief Compliance Officer and Nashville鈥檚 Office Managing Principal of PYA explore how supply chain compliance is affecting the health care industry and share the risks and penalties associated with not being in compliance.

For more information regarding the 鈥淟et鈥檚 Talk Compliance鈥� podcast series, please click here.

Please note that the interview copy below is not verbatim. We do our best to provide you with a summary of what is covered during the show. Thank you for your consideration, and enjoy the show!

Angie Caldwell

Hello and welcome to the Let’s Talk Compliance podcast series of Health Care Law Today presented by 麻豆传媒 & Lardner and PYA. I’m your co-host, Angie Caldwell, consulting principal of PYA.

Jana Kolarik

And I’m your other co-host, Jana Kolarik, a partner in 麻豆传媒’s Health Care Practice Group. We’re excited to have you join us today. Before we begin our show, we want to remind you to subscribe to Health Care Law Today, either on iTunes or your preferred podcast app. Please visit healthcarelawtoday.com or pyapc.com. For today’s show, Monica Chmielewski, vice chair of 麻豆传媒’s Health Care Practice Group, and Shannon Sumner, chief compliance officer in Nashville’s office managing principal of PYA explore how supply chain compliance is affecting the health care industry and share the risks and penalties associated with not being in compliance. I’m going to turn it over to Monica and Shannon to introduce themselves.

Monica Chmielewski

Thank you Angie and Jana again for that warm welcome introduction. As mentioned, my name’s Monica Chmielewski, and I am a partner with 麻豆传媒 & Lardner in our Chicago office and vice chair of the health care practice group. Shannon, I’m excited to be here today to speak with you regarding supply chain compliance, specifically in relation to the health care industry from both the provider and really the manufacturer vendor side. I think as most people are painfully aware, the health care industry is one of the most regulated industries out there, and there’s numerous laws, regulations and compliance considerations that affect hospital health system supply chain operations that a lot of, in my experience, vendors and manufacturers unaccustomed to conducting business and transactions with health care entities really aren’t aware of, and the risks of noncompliance with the health care laws carry with them certain penalties. And because of that, we see health care entities implementing, or they should be implementing various compliance and risk-based systems to help identify issues and address compliance. And I’m really excited to hear your thoughts on what you’re seeing, how you’re advising clients in this area.

But I thought before we jump specifically into that, I might provide a real quick overview of some of the laws and regulations that may be a bit more unique to the health care industry so that we can then understand, okay, what do you do in terms of a compliance program, mitigation risk assessment? How do entities address that and implement it?

To start with, as a real high-level overview, the health care industry is subject to numerous laws including the federal Anti-Kickback Statute. And individual states often have their own individual state kickback statutes, or all payers. There’s the Stark law, there’s numerous privacy laws and including HIPAA and individual state laws addressing privacy, cybersecurity, there’s laws addressing transparency and reporting as well. And each of those laws need to be complied with by health systems when they are entering into transactions with vendors, and manufacturers.

The Anti-Kickback Statute is probably the most known of the laws, and significantly it is a criminal law that essentially prevents kickbacks just like it sounds. It prevents a knowing or willful payment to induce or reward patient referrals through the generation of business. Now, there’s numerous safe harbors or exceptions that health systems will often require vendors to fit transactions within, including exceptions addressing discounts, rebates, the provision of warranties, there’s laws, and regulations.

There’s the Stark Law, which is similar in a vein to the Anti-Kickback Statute in that the Stark Law essentially prohibits again, improper transactions and arrangements for the referral of certain business, including the receipt of products between entities that are owned in part by physicians and health care providers. And then there’s various data and privacy considerations as well. And we’re seeing those impact supply chain arrangements and agreements in many ways, including in relation to the products that are bought and acquired. Many products these days have, whether it’s equipment or even medical devices, have the ability to collect and transmit protected health information, data, other information. And so because of all of these laws, we really see health systems trying to implement various compliance programs and require vendors to really adhere to protocols regarding risk assessments and implementation of the risk assessment protocols. But I’m going to pause there and ask Shannon, say, what are you seeing in terms of common compliance issues? How are you advising your clients to help put in place compliance programs, risk mitigation strategies in relation to data supply chain compliance, and really best practices right now?

Shannon Sumner

Well, Monica, it certainly is a pleasure to speak with you on this subject. As you’ve mentioned, certainly all the laws that you have discussed historically have been that main catalyst for supply chain or third-party risk mitigation through strong compliance programs. But really the health care industry, as you mentioned, is no stranger to third-party data breaches recently, supply disruptions, COVID, and increased scrutiny surrounding access to and disclosure of protected health information. So it’s really that perfect storm. And in our experience when we ask our clients the top risks that keep them up at night, making the top three, I would say certainly cybersecurity and breaches, but when we do a deeper dive, it’s really that third-party risk management and all the things that you’ve talked about related to supply chain.

So historically over the years, we’ve really thought about supply chain as really kind of procurement of goods and services. But really when you look at the broad spectrum of entities and relationships that health systems have, it’s more than just getting in those drugs and those other types of medical supplies. It’s really those individuals and groups and companies that you’re doing some type of partnership with. And really keep in mind really this enhanced emphasis on not just data security, but also supply chain risks really is coming on the heels of COVID where we all experience those supply chain shortages, whether it’s ventilators, protected health equipment, even saline. I think that exposed those vulnerabilities when we rely on third-parties.

So as it relates to a really strong risk mitigation function, compliance function, we are starting to see that evolution of what’s called third-party risk management programs within an organization. So it’s very, very closely tied to enterprise risk management (ERM), but it’s not the same. It’s a component of ERM, but it’s a very strong impactful component now that we are starting to see more and more of these relationships.

So as we think about really what does a third-party risk management program, it does extend beyond that traditional procurement and vendor assessments, but it is starting to compass the more holistic approach that incorporates governance, risk management and compliance and legal across that entire life cycle of third-party relationships. So if you think about onboarding a new provider, a new service, a new company, ongoing monitoring and offboarding, but really why is, when we think about all the things that you mentioned, not just from the legal perspective, the laws and the new regulations that are coming onboard, but really what are some of those other key drivers where risk related to third-parties is escalating?

You can kind of pinpoint, and these are some of the things that we hear when we talk to our clients when we do the compliance assessments is really during the recession, we think more organizations are starting to push those businesses out to third-parties for cost reduction purposes. The price of health care data is rising in the open market or on the dark web. If you think about all the things that are out there, I don’t even want to go there today, but how many health care organizations don’t have those internal resources to address, and they really need some trusted partners to help certify, host, maintain and support those health IT systems with really that modern cybersecurity capabilities, especially the rural providers. We’re not going to get into cybersecurity 101, but that’s really one of the big drivers for some of these risks escalating.

And then really the U.S. Department of Justice (DOJ) has actually come out with additional guidance on evaluation of corporate compliance programs on third-party risk management. And certainly with that combined with all the laws and regulations you just mentioned, I think it’s just ripe. It’s ripe for really thinking through do you have those proper channels, those proper risk mitigation strategies related to mitigation of vendor supply chain and third-party risk. But I’d really like to hear a little bit more about maybe some of the things that you’re seeing and how you’re advising your clients in terms of mitigating some of that risk.

Monica Chmielewski

Yeah, absolutely. And I think you’ve really identified some of the key issues that health system providers are facing in relation to this. And before I go into some things I’ve seen, I think one thing that you’ve said really struck me and resonated with me as a best practice in terms of these third-party risk management programs is the interaction of the governance, the risk management, compliance and legal. I think all of those are key components where if you leave out one component, if you don’t have a good process and communication chain, that leaves I think a system, a health care provider vulnerable for these compliance issues. And I think one of the things that we’re seeing and a lot of what we’re advising our clients as they are implementing or revamping their third-party risk management programs is, what is the scope of the program?

So when you are trying to address the supply chain challenges, and Shannon as you mentioned COVID, there’s product shortages. How are we going to be able to acquire products? We, right or wrong, saw a number of entities acquiring products from different channels, including from overseas vendors that maybe they had not, well, not, maybe they had not fully vetted to see, is this an entity that is able to comply with U.S. regulations? Do they have proper cybersecurity policies in place? Are they going through the proper IT reviews? Is the product that we’re acquiring, does it have all of the regulatory approvals that you need to actually market and sell a product within the United States? Have they received the appropriate U.S. Food and Drug Administration (FDA) clearances or approvals depending on the type of drug or if it’s a device, where are they getting it from?

And then even taking a further step, say you’re going through the process where you are vetting the vendors that you’re going to be working with, what about their subcontractors? Are they outsourcing? Is the vendor that you’re contracting with outsourcing to a company that is ex-U.S. that’s going to be handling data? Unfortunately, we saw a few cases where the vendor that had been contracted with, they then had a subcontractor who performed remote maintenance services on various medical devices and equipment within hospitals. Well, the equipment and devices that they performed from a remote maintenance on, of course housed protected health information (PHI). Not having that third-party subcontractor, having them vetted, they didn’t go through their IT reviews and the resulting data breaches. And so that leads to compliance issues.

So we’ve been advising clients to really take a look at their current third-party risk management programs, if they have one, if they don’t, to really implement one and to ensure that while understanding that there’s time pressures, it really should encompass legal compliance risk and have a solid governance structure. Because I think a hurdle of compliance is speed. There’s needs behind acquiring the products, getting the services in quickly. There’s patient need and patient demand. And so you have to have a program where you should be able to do these risk assessments and vetting quickly and efficiently because otherwise the potential penalties of non-compliance, not only from a potential criminal standpoint, from monetary penalties, but there’s also potential patient harm and reputational issues as well that these systems are facing.

Shannon Sumner

Yeah, Some of the things that you just mentioned related to speed, certainly the speed of getting in a supplier or even the fact that we’ve seen today just as early as late as today, some organizations, some health systems are actually having to stop some of their surgeries because they do not have the physicians, the anesthesiologist actually to provide those services. So when we think about the supply chain and speed of services, it’s also those providers that we work with every single day. They’re also challenged with maybe some staffing shortages so that will have a ripple effect on your organization.

And so as you think through what that third-party risk management program looks like, it’s really thinking about who’s involved, making sure you do have the right individuals involved in that program. And so certainly just from a legal and compliance perspective, yes, you do have to still operate as an organization, but if you bypass certain elements of a successful and internal control processes on reviewing the contracts, making sure those terms that you just mentioned about certain providers, particularly offshoring, and that’s one area I do want to talk a little bit about. It’s pretty clear that you have a relationship with an individual or a group or services or a company that’s outsourced, but sometimes you don’t and that’s where having a really strong third-party risk management program can help you really identify those elements and those processes that may not necessarily be so clear that they’re offshored.

And so when we think about what are some of those commonly offshored services, well, certainly audit can be, we see internal audit, external audit, billing, coding, payment posting, call centers. I mean, how many of us have actually called maybe personally to an organization and it truly is offshoring, data storage, utilization review, transcription. So a lot of those areas can certainly be hidden in some of those master services agreements that you might have.

But thinking about really the first step in having that comprehensive third-party risk management program is thinking about, what’s our inventory? So who are we actually utilizing from a third-party service? And some of those examples that we have, worked with clients, it relates to what you said earlier, medical device manufacturers, IT service providers, telehealth platforms, electronic health records, cloud service providers, third-party administrators. I mean, the list can go on and on. Even your marketing and your website service providers, lab services, supply chain, the list goes on and on.

And so when you think about having that multi-disciplinary approached to third-party risk management, you really want to think about who is going to be on a committee, those individuals that really should be part of that committee structure. So what we’ve seen, it’s internal audit, compliance, legal, quality, risk management, supply chain, it’s really looking at those processes that are very significant to your operations and thinking about some of those subject matter experts. Also, if you’re outsourcing management of a service line, for example, do you have the right individuals involved in evaluating that processes.

So when we think about what that committee’s roles and responsibilities would be, it’s really overseeing what we call a third-party risk management life cycle. And Monica, you had touched about on this earlier, but it really starts with that onboarding, initiating that relationship with the vendor, including the appropriate legal and due diligence review of establishing that contract. It’s that risk assessment. It’s evaluating potential risks such as compliance, financial, operational. So when we talked earlier about enterprise risk management, it’s ensuring that that component is also factored into that roles and responsibilities of that committee.

We also talk about the next phase of monitoring, which is that ongoing oversight of that relationship. And before I came back to PYA, one of my career points was serving internal audit. And we did a great job of having some amazing contracts, but sometimes, quite frankly, they would fail upon execution and so that’s where I think having this really strong internal audit component to ongoing monitoring and auditing of those specific contract and those contractual requirements. And that does include that performance evaluation, so really looking at those vendor deliverables, those service levels against those expectations.

And then unfortunately, sometimes you have to think about off-boarding. What happens when you terminate that relationship or it just comes to its natural conclusion. Where do a lot of those risks lie once you have off-boarded that particular vendor?

So one area that we work very closely with Monica, with legal counsel is really looking at from a due diligence perspective. So when we think about, okay, we know we have this service, we know we need to possibly outsource this service or partner with a third-party, these are some of the elements that we work with law firms specifically, but wanted to get your perspective, but we look at have they had any particular data privacy breaches in the past? Are they under a corporate integrity agreement? Are they on the watch list? Have they had any type of settlement arrangements, any cybersecurity incidents, or now there’s security ratings that actually are real-time related to an organization’s infrastructure for managing and maintaining information security. We look at conflicts of interests. We look at the compliance program for an organization. If you’re partnering with an organization, do they have a strong compliance program? When was the last time it was audited? And do you have any information regarding that?

And then finally, a couple of other elements related to financial and operational stability as well as a basic block and tackling one, are they an excluded provider for participation in government programs?

But Monica would love to get your perspective in terms of when you all get involved with your clients, what are some of the things that you’re helping them in terms of vetting third-party risk?

Monica Chmielewski

Absolutely. And you’ve absolutely touched on the key things. And one, before I go into what we’re helping them vet, what you said regarding a contract failing upon execution. I want to highlight that, that is critical. You can have, and we’ve seen clients have phenomenal contracts with wonderful terms and conditions that address third-party vendor compliance with most of the applicable laws. The Anti-Kickback Statute, it will fit within the discount safe harbor. It will address HIPAA, it will address individual state laws. For example, California has their own very strict privacy law (CCPA (California Consumer Privacy Act)), which is not too dissimilar to GDPR (General Data Protection Regulation), will it address cybersecurity? You can have that wonderful seemingly airtight contract, but if an entity has not done the proper diligence on the vendor prior to entering into that contract, the contract is going to potentially be breached the moment it is executed by the vendor.

Because if a vendor will sign a contract but doesn’t actually have the ability to comply, potentially you have an argument for breach. But what’s that going to get to you? Because the damage has been done. Because Shannon, to your point, what we really help clients with and what we see as a main focus in terms of performing diligence on vendors are exactly the things that you highlighted in terms of non-exclusion. Has the vendor ever been excluded? Do they have a process in place where they perform exclusion checks for their employees? Are they party to a corporate integrity agreement, that relates to auditing. These types of things are important, especially with respect to health care entities, because if a health care entity actually contracts with a vendor that’s been excluded from participation in any health care program, the health care system itself could face penalties for contracting with an excluded entity.

HIPAA privacy cybersecurity is an extremely important part of the due diligence, making sure that the vendor goes through a health system standard, IT review for security purposes, again, a vendor and their subcontractor, because again, we could have wonderful terms and conditions in the contract that address compliance, require compliance with national, international privacy laws, if a vendor doesn’t have those capabilities and there’s been a breach and leak of data, again, there’s damages there. You can potentially have breach of contract claims, but the damage has been done. So having this robust risk management program is really important. And the due diligence stage is I think one of the most critical.

And I think one of the ways, and in a way, one thing that we’ve advised clients when we’re helping put these programs together is to engage and involve key stakeholders who are going to help promote the value and the necessity of these programs. We often see, and we’ll use in example, a system where you’ll have physicians, key opinion leaders who want a certain medical device manufacturer to be on contract, they want items that are brought into the operating room (OR), they’re trying to push the items through because they may be, I don’t know, a physician preface items, something like that.

But if the vendor itself has not been vetted and gone through the standard supply chain process, which really should be encompassed, Shannon, as you pointed out, in this overall third-party vendor risk program where it goes across different disciplines, that vendor, use of that equipment that’s been brought in or use of those services could potential liabilities for the health system. And if a entity is able to involve some of these key opinion leaders, these physicians as key stakeholders in this risk program, risk assessment program, those individuals really help in promoting the program and are really supportive in helping their colleagues and the other employees, contractors within the health system embrace and understand the importance of this risk management program.

And in addition to that, it’s also providing education on what the program is intended to do and why it’s important and how it actually helps the entire health system. And because we’re talking about health systems, how it’s really designed to further help patients and ensure patient safety, whether it’s safety in terms of use of a product that you’re acquiring or protection against data breaches, protection against your personal information being disseminated, having a way to introduce or socialize or re-educate individuals within an organization as to the function, the purpose, and the importance of this third-party vendor risk mitigation program really goes a long way to, from what we’ve seen, ensuring compliance and ensuring that individuals, when they want to engage in bringing in a third-party service provider, are you going to outsource operation of billing? Do you want to engage a new telehealth platform? When you’re thinking about the IT components associated with that.

It really makes people pause and say, “Has this been vetted? Has it gone through our program to make sure that the vendor meets our standards? Not only the vendor meets our standards, but do we know who this vendor is?” Meaning is it just the vendor? Do they use subcontractors? Where are they located? Is their offshoring of data, what technologies do they use? What does their compliance program look like?鈥� You really have an understanding of who it is that you are engaging and who you are entrusting your operations with, entrusting your data with and entrusting your technology with. I think that it’s really important, and it’s something that we’re seeing a lot of clients really embrace, including to the point where if they already have a third-party risk vendor evaluation system, they’re going back and they’re re-evaluating it and they’re looking for ways to make it stronger.

And that’s where Shannon, I would bet you’re seeing this, but do tell me, we’re seeing clients engage you and then they’d like you to perform audits, to perform reviews and assessments to say, “Is our third-party vendor risk management system program sufficient?” With everything that’s going on today and the climate that we’re living in, because technology is changing so quickly, including with the introduction of a lot of Artifical Intelligence (AI), how are you helping clients evaluate their systems, what they have in place right now? What are you telling them to consider?

Shannon Sumner

That’s a great question because we are starting to see more and more health systems, primarily academic medical centers that have created what’s called innovation centers. So it’s where certainly some providers and others, they’re really bringing into the table some of those maybe new medical devices, maybe new ways of providing patient care. It’s new systems and tools and unique ways of partnering with other types of organizations downstream and certainly AI has been a catalyst as well. As we think through all of those nuances of health care that weren’t in place years ago, new parties of doing business with, where we have helped organizations is thinking through this through their risk management, their risk assessment processes.

So really taking a look at, do we have an inventory? Do we know where all our data is? Do we know who we are connected with? And that’s probably one of the most eye-opening exercises because when you think about all the dependencies that an organization has, and I really think that came to light with some of the issues with the change health care, the cyber breaches, the ransomware. I think it brought to light how many parties that we partner with and how if you have all of your eggs in one basket, it can really cause major, major disruptions to business. So it’s really that multi-pronged approach, whether you think of a compliance program or if you think about disaster recovery desktop exercises. We think sometimes it had been, “Well, if something happens within the four walls of our facility or within our organization,” and now we really have to think broadly, well what about if a significant business associate had a breach that we count on, whether it’s a data center, whether it’s a third-party administrator.

Those are the areas that we’re really starting to see greater emphasis on that education, as you mentioned, making sure we know who we’re in business with. And for our purposes of helping clients it’s, are we aware, do we include those in our either internal audit compliance, ERM risk mitigation exercises, whether it’s auditing and monitoring and then are we taking advantage of some of the additional guidance and research that’s out there?

And for example, one of the things that I mentioned earlier is certainly the DOJ is involved in wanting to ensure that certainly the prosecutors is part of their evaluation of corporate compliance program guidance back in March of 2023, had a section on third-party management expectations. And so when we advise our clients, we advise them to make sure internally they’re asking, 鈥渉ave we integrated our risk-based processes with procurement and vendor management processes? Are we ensuring that we have the appropriate business rationale for entering into those relationships with third-parties? So that goes back to Monica to your doing your due diligence. And do those contract terms specify and identify those services to be performed? Yes. I mean, most of our agreements specify that, but how are we monitoring that? How are we auditing that?鈥�

And then finally, the areas that we are emphasizing is that governance oversight and that governance structure that you mentioned. And so we provide a list of some of the questions that either board members should be asking about the organization’s third-party risk management program, and also including that as part of the ongoing questions to be answered if you serve on a committee internally related to third-party risk management. And so a lot of these questions circulate, for example, 鈥渉as that committee been created? Who is involved? How are third-parties selected? Are conflict of interest evaluated? How are they audited, monitored, by whom? Has the organization considered and analyzed those compensation structures for third-parties against those compliance risks? So do you know how those entities are compensated or incentivize and could they be doing something that could directly or indirectly impact you from a risk perspective?鈥� Back to some of those laws that you mentioned earlier about Stark and Anti-Kickback false claims.

And then finally a big area is how are those due diligence red flags identified and mitigated? So for example, we identified a red flag with a vendor. We feel like we’ve got some mitigation strategies in place, we bring them on, and then that due diligence, just kind of hate to say, sits on a shelf because not anything is on a shelf anymore, but have we done anything with it? We know it, we knew it, we engaged with this third-party, and now if there is an issue, guess what? The government’s going to know that and they’re going to identify that as a problematic for you in terms of litigation, in terms of settlement obligations, because you should have known, because you did know. So those are the things that we’re helping our clients to really put that structure related to mitigation of those risks that have been identified.

Monica Chmielewski

I think that’s so important, what you just said in terms of if you’re going to conduct the due diligence, if you’re going to have the information, which you should, you need to act on it when there’s issues because regulators, the DOJ, Office of Inspector General (OIG), whoever it is that’s coming in, they want to understand and they want to see our entities in compliance. There is a major focus on health care in terms of fraud and abuse, and really some of these supply chain relationships can be seen as almost low-hanging fruit for these governmental regulators. If you have an arrangement that is not in compliance with the Anti-Kickback Statute or with the Stark Law, you can be facing criminal penalties, civil monetary penalties, false claims. I mean, the damages can go up in the hundreds of millions.

We had unfortunately an instance where an entity, and rightfully so, they would collect information on vendors as part of their risk management assessment, as to is there any physician ownership in the vendor?

Are there any relations between any of our physicians and the vendor for conflicts of interest purposes? Well, as part of the due-diligence process information was obtained that the vendor, not only did it have some substantial physician ownership, but there was also relations between that and some of the entities employed physicians. And what that showed was the arrangement needed to be structured so that it fit within one of these safe harbors or one of the exceptions to the Stark Law. Unfortunately, there was a breakdown in the process where that information then sat on the shelf, as Shannon mentioned, even though there aren’t shelves anymore, but the process fell down and that information didn’t get to legal and it didn’t get to compliance and because of that, you had an arrangement that was going on for over a year that was not structured in a compliant manner, and it could have been. Penalties were imposed, there ended up having to be self disclosures that were put in place to the government. All of that could been avoided had the established risk evaluation process been followed.

There’s ways to mitigate this. There’s ways to identify and to mitigate the risk, as Shannon was pointing out, but it’s just to me as important to, if you’re going to do this and you should do this, you need to act on the information. You can’t have footfalls in the process because that’s going to lead to additional liabilities. So it’s really important to follow through with the process, to monitor it, to ensure that there’s audited for compliance purposes, because otherwise you could both sides the vendors and the health system provider be subject to various penalties and sanctions, including corporate integrity agreements all the way up to exclusion.

Shannon Sumner

So Monica, as we come to a close on this podcast, where would you say an organization should start? What would be, “Okay, we haven’t done this. We know we have an enterprise risk management program, we have a compliance program, we have internal audit program, but we don’t know where to start.鈥� What would you recommend the first steps?

Monica Chmielewski

The first steps that we recommend is to one, identify, as you just said, they identify that they need this type of program in place, whether it’s specific to supply chain or enterprise-wide. Then to identify who are going to be the champions of this program, of getting this in place and involve key stakeholders from the different areas. We always see it’s important to have a level of vice president of materials management, supply chain or president, depending on what the titles are, somebody from IT, somebody from legal, somebody from compliance, but then also if it’s going to include other areas, perhaps the chief of the medical staff, because you also want the physician buy-in.

So you start with identifying who are going to be the key stakeholders, who are going to be the champions of this program. Then it’s working to understand, where are you? Do you have a program in place that needs to be expanded or are you starting from scratch? At which point you then need to identify, you do a review, do a gap assessment, see what type of compliance program you have, can that be built off of, and then you engage, you, Shannon, somebody like you in conjunction with legal to help build out the program, provide education and training on it, and then implementation and rollout. I mean, that’s really at a high level what we’ve seen in terms of how you start it and what you do with it. Do you see the same thing? Is that what you would recommend as well?

Shannon Sumner

Absolutely, and I would say the next layer to that would be governance. So if we have any listeners that are on a governance committee of the board or even a governance committee within their organization, just to think through, do we have this? And I think the first step is always the hardest, and it’s always the hardest to recognize how many organizations that you may be contracted with and may not necessarily know. But I would say that would be really the first step is having the conversation, understanding what the risks are and how are they being mitigated. And I think we can never predict all the risks and we can never manage all the risks.

But I think an organization that has a strong desire to serve their communities, to serve patients, and to serve their employees and just be good stewards of resources, I think this is obviously the best step to ensure that that does take place. And so, Monica, it’s been a pleasure talking to you about third-party risk, and we really have enjoyed spending time with our listeners today, and I hope everyone has a great day.

Monica Chmielewski

Yes, agreed. And Shannon, thank you. Likewise. It’s been a pleasure and I hope everybody found this interesting and informative and helpful.

Shannon Sumner

All right, thank you.

Monica Chmielewski

Thank you.

Angie Caldwell

Thank you Monica and Shannon for a great discussion. We appreciate you taking the time to join us today. We want to thank our listeners for joining our Let’s Talk Compliance podcast series with Health Care Law Today, your connection to timely legal updates in the healthcare and life sciences industry. We encourage you to subscribe to this podcast, visit 麻豆传媒’s Health Care Law Today, blog at healthcarelawtoday.com and at pyapc.com. If you like this show, don’t forget to subscribe and be sure to rate us five stars. Until next time, I’m Angie Caldwell at PYA.

Jana Kolarik

And I’m Jana Kolarik at 麻豆传媒 & Lardner, thanks so much for listening.

In this episode, Let鈥檚 Talk Compliance Hosts Jana Kolarik a partner of 麻豆传媒鈥檚 Health Care Practice Group and PYA principal Angie Caldwell, discuss physician compensation plans and the latest trends in physician compensation of 2024.

For more information regarding the 鈥淟et鈥檚 Talk Compliance鈥� podcast series, please click here.

Please note that the interview copy below is not verbatim. We do our best to provide you with a summary of what is covered during the show. Thank you for your consideration, and enjoy the show!

Angie Caldwell

Hello and welcome to the Let’s Talk Compliance podcast series of Health Care Law Today presented by 麻豆传媒 & Lardner and PYA. I’m your co-host, Angie Caldwell, managing principal of the Tampa office for PYA.

Before we begin our show, we want to remind you to subscribe to Health Care Law Today, either on iTunes or your preferred podcast app. Please visit healthcarelawtoday.com or pyapc.com. For today’s show, my co-host, Jana Kolarik, partner in 麻豆传媒’s Health Care Practice Group, and I will explore physician compensation plans and the latest recent trends in physician compensation of 2024.

Jana, I’m so excited to do this. With Let’s Talk Compliance, we work together of course, to bring other topics throughout the year to our listeners. And then in doing so, you and I often have sidebar conversations about recent trends and other things that we’re seeing in the industry. And so today, we are going to be talking about those trends with our audience and more broadly.

And specifically, most recently, you and I have both experienced many questions around compensation planning, and how do organizations really get off to the right start and set the right foundation around their compensation plans, their compensation documents, as well as their contracts. So, from your perspective, what are the key things that organizations should be doing to set the right foundation for their compensation plans?

Jana Kolarik

Thanks, Angie. I think this is something that you and I have been discussing a lot. We just did a recent blog that mentioned the physician compensation compliance planning, just as a highlight –  here are things to pay attention to. And then we did highlight some current trends that we’ve been dealing with. I’m happy to be doing this podcast here today to sort of round out some of that stuff.

So, as we were talking about this, in my mind there’s certain things, highlights that I am going to mention here at the beginning and then we can flesh these things out. Number one is guardrails. So, as you’re thinking about your compensation plan document and planning for compliance, you need to be thinking about guardrails.

Number two, you need to be thinking about communication, and that’s internally with the physicians related to these compensation plans and how you’re communicating things internally.

Number three, how do you operationalize it [the plan]? And that can be, there we’ll talk about contracts. There, we’ll talk about communication that’s happening on an ongoing basis with your physicians to make sure they understand what’s happening not only at the beginning, which is super important, and that transparency be there, but also throughout the process. So, there are no surprises. People get very agitated (as you and I both know) when compensation is not expected or changes in a compensation are not expected.

And then as a fourth point, we talked about clawbacks. I think the more politically correct (PC) term for that is reconciliations, and how are you dealing with that reconciliation process such that the things that we’ve talked about, the guardrails, the communication, the operationalization, all of those things come down to a potential reconciliation. And you don’t want those things to be a surprise to anybody who is going to be subject to reconciliation. So, all those things build up into that process.

From a guardrail perspective, we talked about creating a policy internally from a compliance perspective, so that it’s part of the framework, it’s part of the fabric of your compliance program. And as part of that, so you talk about one, how agreements are requested just as a very beginning. Who’s requesting them? That goes to and how they’re requesting them and papering that. That goes to the commercial reasonableness piece that we talk about frequently.

Number two, who is drafting and reviewing those agreements to ensure legal and operational compliance? Three, and this, we’re going to blow this out in this discussion, how fair market value is determined? Four, who’s executing the agreement? Are you having different levels of authority make different decisions based on how much money is at play? And five, how are the agreements being tracked with regard to term and termination provisions, which becomes important. A lot of organizations have software that does that for them, which is super helpful.

So, in just talking about fair market value (FMV), I want to talk to you and get your thoughts on the use of surveys versus people like you, valuation consultants, and when do you get that assistance. So, we’ve talked in the past about, but I want your initial thoughts about what does that look like in that policy. And I think getting your input on how to bake that into your plan, into your policy is important.

Angie Caldwell

Yes, [we have talked about] that policy and determining when to go outside for a fair market value opinion. And as you and I have discussed, not every single arrangement needs an outside fair market value opinion. There’s so much that can be done internally within the organization provided that the guardrails are set appropriately, and that the organization then follows those guardrails and documents the outcome of following those guardrails around fair market value. Really, it becomes a part of the policy. And then that policy is based upon the risk tolerance of the organization.

We work with some organizations where the risk tolerance is not very high for their reasons and they understand those reasons. And so, they might send everything out for a fair market value opinion where the total stacked compensation, and I know we’re going to come back to that word here in a minute, is maybe greater than the 60th percentile total, or the 75th percentile, or even perhaps the 90th percentile. Again, it’s all based upon the organization’s risk tolerance, and also what their internal policy and the guardrails that they’ve set include.

I do think it’s important from an FMV perspective, because there are many good reasons why a physician is compensated in excess of the 75th. I know Jana that you and I have commented on this many times in articles and in perhaps even another podcast and at other times that the 75th percentile is not a bright line. It’s not a yes or a no. And so, because of the notion that it is a bright line, it often ends up in a policy or procedure as the 鈥渆nd all.鈥�

I want to say that that [the 75^th percentile] probably shouldn’t necessarily be the cause or the direction of the policy. While 75th percentile is one measure, there should also be other measures that include perhaps compensation per work relative value unit (wRVU), or productivity, or hours worked, or some other guardrails or combinations of guardrails, thresholds within the policy to determine when something goes out for an FMV opinion.

With that, thinking about the stacking then, we are talking about just how you’re determining that threshold and what that total cash compensation is – to really think about that total stack of compensation. Jana, I know you and I have had discussions about this, and I want your thoughts on that – what is your definition of stack? What should the definition of stack be? Because we’ve also talked about using the same terms and the same definitions when describing compensation and the guardrails is very important. What is your definition of stack?

Jana Kolarik

So my definition of stack, and that’s super helpful background. I think my definition of stack is when you’re dealing with a physician who obviously has a clinical life, but also on top of that has a medical directorship, has call pay, has a variety [of compensation]. So you look at the stacking of the compensation.

I think one of the things that’s important to remember with physician compensation, when you’re dealing with the Federal physician self-referral law and you’re dealing with the Anti-kickback Statute, and you’re talking about fair market value, it is a continuing obligation.

When you look at fair market value, you look at the total, as you said, the total compensation that’s going to that physician, and is the total compensation for the physician fair market value for services rendered?

One of the things that we’ve dealt with is: If you have a physician who has a clinical life and then they have a medical directorship, some of this is taken care of if in that medical directorship, for example, you have an hourly component and the physician is turning in time sheets, and so you can track that. You know that hourly piece is fair market value on an hourly basis, and then you understand the clinical life of the physician. And at the beginning, that’s sort of set and they stay at the same production level. So you’re monitoring it. You’re not having to adjust it because they’re staying fairly busy and the same busy as they have been.

But I think as you add more things to that, as you add the call pay, and that was one of the things that we discussed in our blog, and we should probably just mention as a side note here, because it can become important. Call pay is something from a health system perspective, a hospital perspective, it’s frequently expected that if you are an employee, that you will do a certain amount of call pay. That’s generally reflected in your medical [staff] bylaws that have a certain expectation of a certain amount of call. Sometimes that’s deferred to the specialties to make decisions on a more granular basis about what their call will be from an employed physician perspective. But frequently it’s left loose.

So how tight that is, and what the expectations are, and the fact that they be communicated effectively to the physicians and that it be across the board, it’s important that that be generated and understood at the beginning. We’ve dealt recently, and you and I have had many discussions about 鈥渄ay one鈥� call pay.

So paying call to community physicians for specialties is common, so they’re not employed by the health system. And there’s not otherwise maybe an employment agreement that has baked into base compensation, a certain amount of call frankly, from that perspective as well. So you’re paying outside people for call. That’s expected.

For some reason, I get the sense that that expectation of call has bled into some of the other specialties, even if they’re employed physicians. And I want you to talk to us a little bit about how that may affect the compensation if you’re not attuned to the fact that some of this [call] may be included in what you’re already paying. So can you suss that out a little bit for us?

Angie Caldwell

Absolutely. And I’m going to tie it back to what you were saying at the beginning of our discussion today about ensuring that guardrails are set, that definitions are set. That again, from a compliance perspective, all of this needs to be really tied up tight in the contract and within the compensation plan. What we mean by call pay, and what are the terms surrounding call pay.

And then this also ties back into the notion and the definition of stacked compensation, because we want to include call pay on day one, or we’re thinking about call pay on day one rather.

So if you think about survey data, and again, something from a transparency perspective, which was one of your key elements at the top of our discussion. You think about transparency, we also need to think about what surveys an organization is using to determine compensation, analyze compensation, compare compensation for the physician so they know where they are performing against their peers. Within that survey data, call pay is an included element.

So even the surveys are considering total cash compensation (TCC) stacked. It is in there. So when you’re looking at a TCC total cash compensation metric from any of the surveys, it is all-inclusive. So then if as a hospital employer of physicians, you are then adding day one call pay, you have potentially double counted call pay.

So from a stacking perspective then, [if you add in call pay to the survey TCC,] you’ve double counted call. So your stack just got bigger than when comparing and analyzing that physician compensation against your guardrails, and also then determining fair market value compensation.

It’s really important from a definitions perspective, and from a terms perspective, and from a transparency perspective to know what’s in the survey data. And to make sure that the physician understands that when you analyze compensation for FMV, you’re analyzing total compensation for FMV, as well as the individual parts. The individual parts sum up to the total, but we’re also looking at total compensation for that stacked amount.

Jana Kolarik

So what does that look like? If you as a hospital system is using, and best practice is to use more than one survey, so you’re using a couple of surveys. You’re looking at a surgeon, you’re looking at one of the surgical specialties, and you’re pulling [data]. And that particular physician is at the 75th percentile with regard to his or her productivity. So as you’re sort of approaching something and somebody says, “Look, they’re at the 75th percentile.” To me, the questions then that are asked are, what are you looking at when you look at productivity?

Okay, so are you looking at does that physician use advanced practice providers (APPs)? You and I have talked about this multiple times. And then what type of [work relative value unit](wRVUs) are you using to figure out that data?

Because the surprise to me recently was a client who had been using wRVU data and communicating it with physicians, but it wasn’t quite the most accurate wRVU data. Why don’t you take it from there? Those two issues just teed up from a productivity perspective as your approach with this sort of, okay, well the 75th, it should be this. And then we’re going to put on top of that some call pay. And look, it’s market here locally to pay day one call pay. What is your initial reaction to just that out of the gate?

Angie Caldwell

Right. And there’s a lot to that. And my first reaction is, okay, we need to understand what the physician is actually doing. The surveys measure 75th percentile productivity, and that’s measured in wRVUs. But we all know that physicians do more than things that are just measured by wRVUs, including providing call, including all of the things that come into that compensation stacking analysis. So really, it gets down to understanding what the physician is doing, what the minimum work standard is for the physician, and then really adding all of those things together.

And you mentioned APPs. There’s also a supervision of APP element. We know that in many cases a physician is supervising an APP. And so then how does that interplay into the productivity of a physician? So how that interplays is that many times the APP is acting as an extender for the physician’s clinical services. And I know that we’ve written about this and we’ve spoken about this before. Just that from a wRVU productivity perspective, not talking about the other elements of productivity that a physician has, but thinking about that APP and how those extended services show up in the physician’s productivity.

Jana Kolarik

And show up in the billing data to be very clear.

Angie Caldwell

Exactly, show up in the billing data. And then as a result, show up in the physician productivity data. So it’s very important related to your compensation plan as well as your contractual agreement to ensure that wRVU is defined as personally performed, modifier adjusted. And I’m going to let you comment on that specifically, and that everybody understands what that means. Because then that becomes very important then in determining that physician compensation. So Jana, if you could comment a little on terms, and defining wRVU, and what best practices are.

Jana Kolarik

That’s right. You can have things that are billed under your national provider identifier (NPI). And frankly, global surgical packages that include the services, clinical services before, the clinical services after, as well as the surgery itself. You can have situations where you’re billing under the physician NPI in situations of incident-to or split shared. And figuring out or having a sense of who’s actually performing those services. And if you’re using multiple APPs, figuring out the clinical piece of it that is actually being performed by somebody else. And understanding that going into a compensation [plan] for a physician is important.

So if you have a surgeon who’s using four APPs, then you’ll just understand out of the gate that there may be some inflation of the wRVUs at issue because that physician uses [APPs] appropriately, right? Appropriately uses those APPs as extenders for that practice, and it’s showing up under the billing data for that particular physician.

And you mentioned, so that needs to be, when you’re compensating somebody, what’s being billed under that NPI is not necessarily what you compensate that physician for. And that’s one of the things that the Centers for Medicare and Medicaid Services (CMS) made clear in one of the more recent Federal Register issuances where they said, Look, we think that this is being conflated, these concepts of billing versus compensation, and you need to make sure that you’re paying people for the services that they’re performing.

As part of that, when you get your wRVU data, if it’s stripped of the modifiers, then it’s stripped of the things that actually impact wRVUs and will decrease the amount of wRVUs attributable for that particular service. I’ll just give the example of a multiple procedure situation in a surgery. You’re not going to pay the… Well, nobody pays that particular surgeon for doing each one of those procedures for the full [reimbursement] amount during that surgery. There is a modifier adjustment to it. And so the wRVUs are adjusted accordingly.

They should also be adjusted in transparency with the physician so they [the physicians] understand that the true wRVUs being attributed to them are not only adjusted for the APP issue, but also adjusted by modifier. So that’s one of the things that came up recently when we realized that some of the data that had been provided to the physicians at issue had not been modifier adjusted, and so had been frankly inflated and they thought that they were more productive than they really were.

Angie Caldwell

So at the top of our discussion, you mentioned transparency, and it’s a word that I think you and I have both used since then a couple of times. From your perspective, thinking about transparency, what can an organization do to ensure transparency? And I’ll comment upon this as well. But from your perspective, what are some of the best practices you’ve seen?

Jana Kolarik

That’s a great, great, great question. So I think fundamentally, the communication from the beginning of the compensation planning. Look, we’re reviewing the compensation. Who’s at the table, right? So lawyers, I’m a lawyer. I like lawyers. I think lawyers have a seat at the table. Counsel has a seat at the table. And is it inside [or] outside counsel? I think it depends on the complexity of the issue sometimes.

Valuation folks should be at the table, the physician compensation folks should be at the table. Whether you bring in valuation consultant, I think again, depends on the complexity. The outside resources are a complexity-driven issue.

But with regard to the transparency, it should be, physician leadership needs to understand it at the executive level, but also the physician leader of the specialty to understand the nuances and the communication that may be fomenting, being stirred up, related to the physicians [and the compensation plan/planning]. So those things can be addressed and the communication can be effective from the very beginning.

So number one, transparency from the beginning as you’re looking at compensation plans. And then I think transparency with regard to, I mean these issues that we’ve talked about – the continuing fair market value obligation and clearly defining terms. And I want you to comment on all this stuff too, or the things that you find the biggest issues from your perspective. Touch bases – when are the check-ins with the physicians with regard to that compensation that they have during the year? And then that whole issue of reconciliation and being very transparent from the very beginning.

And the last pieces that I’ve mentioned are all things that need to be in the contract. So when you’re baking in concepts into your agreement, whether or not it’s in the agreement itself or it’s in a plan that’s referred to in that agreement, some of these issues need to be very clearly defined and in front of the physicians.

Again, surprises are bad, so no surprises. And that physicians are following along, they’re following the trail of what’s happening with them so that they, again, no surprises from the very beginning. So being at the table, who do you see when you’ve dealt with effective planning? Who’s at the table during that discussion?

Angie Caldwell

Yes, absolutely. And you hit so many good points there, Jana. Again, just from a transparency perspective. But really at the table, you have to have the physician contract or the provider contract administrator and their team. The recruiter needs to also understand the elements of the arrangement. They need to be at the table. Your data analyst needs to be at the table, again, because they are the ones pulling the data or pulling information out of the system for the administrators and for the leaders. They need to understand that, again, the definitions and the terms from a consistency perspective, and counsel. And then like you said, to the extent external consultants are needed, then they’re also at the table.

And so I rattled off five or six folks. And your real goal is that if they are asked about how compensation is determined, if you asked any one of those five or six people for your organization, would they answer the same way and use the same words [terms]? That’s really what you’re trying to get to. Because so many times, organizations will come together and they’ll use different words to describe the same thing, which then actually ends up creating confusion.

And then when that team goes to discuss the agreement, discuss the plan with the physician, if you’re still using different terms, then that leaves the definition of those terms and the use of those terms open to the interpretation of the physician. And as we all know, I would do it – we would all do it – we see the contract or the plan document once, we put it down. And we’re not going to pick it up again until we’re angry and there’s a problem.

So you want to make sure that everyone is using the same language, and then that language is matching what is in the plan document and what is in the contract. So that if (heaven forbid) that does happen [a problem], they’re able to go look at those definitions within those documents. They are hearing the same thing. They’ve heard it across all five or six people within the organization. And it just lessens the confusion, and frankly, opportunity for frustration and opportunity for error within those discussions.

Because as we know, physicians are scientists, and they are looking for anomalies. They are looking for things that don’t meet the pattern/that fall out. And so again, if there’s a rogue term, or a rogue definition, or rogue data in the process, they’re going to find it and they’re going to question it as you would hope that they do.

So Jana, when we’re talking about that, you and I aligned exactly as far as who should be at the table from a best practice perspective, and really focusing on those terms from a consistency perspective.

And along with that, it’s the cadence of the communication as well. I mean, you and I have talked about, gosh, not everybody has the luxury of being able to have a system that reports out monthly, or quarterly, or semi-annually. And so if that luxury is not yours, then the compensation plan document and the contract become your cornerstone for everything.

And then with that, best practice of course would be to communicate with a physician from a transparency perspective more often, which leads me to another point of you have to make sure that the systems that are supporting your reporting for that transparency are doing the right thing, which then ties back to the wRVU.

Jana Kolarik

Correct.

Angie Caldwell

[Tying back to] the discussion we had a moment ago because it seems simple 鈥� the organizations that we work with have been computing wRVUs for a decade or more at this point. But it does happen when systems break down, when payer requirements change, when systems don’t interface correctly, that whole wRVU determination process sometimes breaks down. And that’s not caught until very late in the process.

Which gets us to one of the very last topics that you brought up at the beginning of our discussion about clawbacks. So what do you see as best practices from a contractual perspective related to clawbacks?

Jana Kolarik

It’s a good question and excellent points. I think the contract needs to emphasize the continuing fair market value obligation. And that if it falls outside of fair market value for any reason, then a reconciliation will need to occur. So that, it needs to be just stated in the agreement.

And as you said, one of the pieces that I just want to make a note of, and you and I are on the same page with regard to this as well, is who’s at the table is important, because you need to make sure that these plans of a compensation for a particular specialty, in the grand scheme is doable from an operational perspective. Can you operationalize it? And if you don’t have all the staff that you need in order to operationalize it, that needs to be a consideration from the get-go. And those people who are in charge of monitoring this [compensation/wRVUs] need to be able to operationalize it.

So when you talk about what should be in the contract. –  ideally that reconciliation as I said, continuing fair market value obligation. From a process perspective, I don’t know that it needs to be in the contract, but it should be in the plan that you’re doing it however frequently you can do it. We’ve talked monthly. Monthly is great. If you can do monthly, and you can keep people at least understanding what’s happening. And then you can have the reconciliation happen, for example, quarterly, so that they understand, “Look, we’ve paid you, but you’ve not tracked,” and that 鈥測ou [physician have] seen this in the monthly statements or you’ve seen this now in the quarterly statement.” And so we will be keeping compensation from you, or you [physician] will be paying back compensation at that point in time.

And look, reconciliation can happen for a number of reasons, and you and I have experienced it. It can be a downturn in productivity. Or for whatever reason, it can be somebody who needs to take an extended vacation – e.g., because of family. It can be somebody who just has decided that they’re in the latter part of their career, and so they’ve decided to step off the gas a little bit.

But whatever that looks like, it’s important that there be, as you said, mechanisms in place in the contract. And it needs to be very clearly stated because people, again, we’ve said no surprises. And people do get sued. Physicians will sue you sometimes, unfortunately, if it isn’t clear and they believe that the contract is to their benefit and not reflecting the reconciliation that you’ve done at the end of a contract or that they haven’t been paid.

So making sure that all that is very clear what they will be paid, when the reconciliation will happen, and getting that information in front of them is important.

Tell me what you’ve seen or what you’ve seen be effective with regard to those reconciliations or those check ins that are happening. Because ideally, if there’s software – that’s beautiful – it can update them on a monthly basis.

If there isn’t, it’s this whole, can you meet, can you check in with them on the quarterly basis face-to-face or at least send an email and have open hours for them to come talk to you? What have you seen be effective there? Talk to me about effectiveness with regard to planning.

Angie Caldwell

To your point, software is wonderful provided that it is working as intended.

Jana Kolarik

Yes, agreed.

Angie Caldwell

And reflects reality, right? And things happen. Things happen with data input. Things happen with schedules, because I know QGenda is a very popular software out there that folks use for scheduling, especially in hospital-based specialties as well as with call coverage.

And so it’s great if it’s keeping up with the last minute changes that occur because a physician’s child is sick, and they need to stay home, and all of those things. So again, thinking about the process, we’ve got to make sure that we’re reconciling with that.

So really [we need to be sure] systems [are] working correctly. Making sure that the check-ins, as you said, are regular. It’s transparent when they’re going to happen, so that the physician knows when to expect the data for the reconciliation so that it just doesn’t show up out of the blue, and they’re expecting it at the sixth month, they’re expecting it at the eighth month, whatever your procedure is. So they know when to expect that.

And it’s really important. Again, we talked about guardrails at the top of our discussion. Ensuring that from a compliance perspective, you have a plan before the horse is too far out of the barn, that you’re able to corral the problem before it becomes a bigger problem.

All of that’s really important. They need to know when it’s coming. They need to know why it’s coming. They need to understand how the information and the data is pulled together, so that they can have a meaningful discussion around that reconciliation. And if the contractual agreement and compensation plan has been documented thoroughly, they will then understand what’s going to happen if their reconciliation is out of whack.

And frankly, it provides the administrators a great opportunity to check their data. If wRVUs are popping out for half of the year, and the physician has 30,000 wRVUs, then likely you know something is wrong in your wRVU computation determination process. So it [the reconciliation] also provides you an opportunity to do a bit of a self audit, if you will, as part of that mechanism and that check-in with the physician throughout the year.

So Jana, just thinking about all of the topics that we’ve discussed, what have we missed that you thought that we should discuss today, or should we wrap for our listeners and talk about some key takeaways?

Jana Kolarik

I think we should talk about key takeaways. One of the things that I want to mention just as a footnote to what we’ve discussed about the reconciliation process is when I say we mentioned Stark, we mentioned Kickback, and fair market value being a continuing obligation, especially if you’re an employee (looking at Stark primarily). If you’re outside of fair market value, that is an obligation for your employed physicians. So, you’ve got to fix that.

So the reconciliation is just part of the compliance process. And if you aren’t, then there are Stark implications for being outside of fair market value, which affect the claims at issue, which can be astronomical [numbers] if you’re dealing with some of these specialties.

So keeping ahead of that and keeping on top of it is important not only for relationships with your physicians, which is hugely important, but also from a compliance perspective to keep things tight and to keep you from having to do self-disclosures, having to explain things a couple of years in when you’ve been outside of fair market value for a number of years, and now you’re having to have those much more difficult discussions with physicians about paying back money. Or you risk losing those physicians because they’re not willing to? So I just wanted to put that as a footnote that the implications of this are relationships, right? But they’re also hugely impactful from a compliance perspective.

Angie Caldwell

Yes. And if I could footnote to your footnote related to… you made such a good point about relationships and about, again, we’ve talked a lot about making sure that everything is documented, and transparent and consistent, and everyone knows what’s going on. If you are in an organization and you find that your physicians are coming to you frustrated constantly about the cadence of communication, about the transparency, about the process – notice I didn’t say about the amount of compensation – that’s a different issue.

But if they’re coming to you with those concerns and expressing frustration, then as an organization, it is time to sit down and think about the compensation plan, the process, the design, and what could be improved.

Because like you said, those relationships are so important. And from a time perspective, it becomes time intensive [issue] to deal with the frustration of the physician. So it’s better to have that plan in place from a consistency and a communication perspective. So key takeaways for our listeners, Jana?

Jana Kolarik

I think I mentioned them at the beginning, but I do think one of the key takeaways is that you have a written policy and plan in place. I mean verbally, us talking through this, you talking through it internally is important. But documenting it and documenting these key things that we’ve mentioned here today, you need to have it in writing, and you need to follow it, and it needs to be available for others to see what the process is. And for others to understand, again, from a relationship perspective and from a compliance perspective. So that would be to me, the big key takeaway. But I mentioned those four things at the beginning of the discussion, and those are fundamentally my key takeaways.

Angie Caldwell

Absolutely. And I would add too that making sure that the process is working as intended. So once you have that document in place, what’s in the document becomes your roadmap for check ins, communication, and process. So making sure that the process is aligning with that document then becomes critical to the organizations that are administering physician compensation.

Jana Kolarik

Agreed. Totally agree. And I just want to do a quick reminder too of our Let’s Talk Compliance annual event, which is happening January 23rd and 24th. So for our listeners, please stay tuned and definitely sign up to get our updates. But we’re going to do two days and we’re going to have CLE, CPE, and CEUs, for the compliance professionals as well. So lawyers can attend, compliance professionals can attend. And we’ll be doing a neat variety of topics this year. So I always look forward to it, so I just want folks to keep that in the back of their mind. It’s coming up!

Angie Caldwell

Absolutely. Our seventh annual. So exciting.

Jana Kolarik

That’s right. It is. It is. So thank you, Angie. You know I always enjoy these discussions and I hope others enjoy as well. It’s always good to get together and thank you. Thank you for this.

Angie Caldwell

You’re very welcome. Thank you.

Jana Kolarik

We want to thank our listeners for joining our Let’s Talk Compliance podcast series with Health Care Law Today 鈥� your connection to timely legal updates in the health care and life sciences industry. We encourage you to subscribe to this podcast. Visit 麻豆传媒’s Health Care Law Today, blog at healthcarelawtoday.com and pyapc.com. If you like this show, don’t forget to subscribe and be sure to rate us five stars. Until next time, I’m Jana Kolarik of 麻豆传媒 & Lardner.

Angie Caldwell

And I’m Angie Caldwell at PYA. Thanks for listening.

In this episode, partner Jana Kolarik of 麻豆传媒鈥檚 Health Care Practice Group and PYA principal Angie Caldwell host Heidi Jeffery, a partner in 麻豆传媒鈥檚 Finance and Financial Institutions Practice Group and Matt Stuart, a Principal in PYA鈥檚 Audit Assurance Service Line, discuss the latest trends in the bond market and the bond compliance pitfalls that organizations should avoid.

For more information regarding the 鈥淟et鈥檚 Talk Compliance鈥� podcast series, please click here.

Please note that the interview copy below is not verbatim. We do our best to provide you with a summary of what is covered during the show. Thank you for your consideration, and enjoy the show!

Angie Caldwell

Hello and welcome to the Let’s Talk Compliance podcast series of Health Care Law Today presented by 麻豆传媒 & Lardner and PYA. I鈥檓 your co-host, Angie Caldwell, consulting principal with PYA.

Jana Kolarik

And I鈥檓 your other co-host, Jana Kolarik, a partner in 麻豆传媒鈥檚 Health Care Practice Group. We’re excited to have you join us today. Before we begin the show, we want to remind you to subscribe to Health Care Law Today, either on iTunes or your preferred podcast app.Please visit healthcarelawtoday.com or pyapc.com.

For today’s show, Heidi Jeffery, a partner in 麻豆传媒’s Finance and Financial Institutions Practice Group, and Matt Stuart, a principal in PYA’s Audit and Assurance Service Line, discuss the latest trends in the bond market and the bond compliance pitfalls that organizations should avoid. I’m going to turn it over to Heidi and Matt to introduce themselves.

Matt Stuart

Thank you, Angie and Jana, and appreciate everybody’s attention and letting us spend a few minutes with you today, wherever you may be listening, as we talk about risks and pitfalls with bond compliance. Again, as mentioned, my name is Matt Stuart, and I’m an audit principal with PYA, and I’m headquartered in our Knoxville, Tennessee office, and pleased to be here with Heidi Jeffery with 麻豆传媒 & Lardner. And Heidi, would you like to introduce yourself?

Heidi Jeffery

Great. Thanks, Matt. I’m Heidi Jeffery. I’m a partner with 麻豆传媒 & Lardner. I happen to be in our Chicago office, and I’m a member of the firm’s Finance Group. My practice really is focused on public finance matters, including bond issuances and also counseling senior living and other health care providers on compliance matters.

Matt Stuart

Yeah, that’s great, Heidi. So kind of our first question here just to break the ice and get going. What is a typical day like for you in your practice?

Heidi Jeffery

So, Matt, I spend quite a bit of time, as mentioned, counseling clients in the health care area. As we emerge from COVID and we have so many health care providers now wrestling with new realities facing staffing changes, inevitably, a lot of those questions revolve around counseling both in terms of financial covenant compliance, the development of compliance procedures. But we also talk about continuing disclosure, how to talk with investors and other credit providers, and also spend a lot of time, frankly and unfortunately, working with clients in developing waivers as well as forbearance agreements.

We’ve also lately been spending a lot of time, and my day-to-day focus is quite a bit on calls, relating to consultant call-ins and other matters just to make sure that senior management and staff at health care institutions are well-versed in what their compliance responsibilities are and, frankly, helping them navigate some of the trickier issues facing them today.

Matt Stuart

That’s great, Heidi. Thank you for the information. And just to piggyback on that, so in my role at PYA as an audit principal, I oversee a large number of the firm’s audits of clients across all industries. But in particular, my practice focuses very heavily on the health care industry, and that ranges from small physician groups to health care startup companies that need an audit or consulting advice as they’re maybe getting going all the way up to large multi-billion dollar health care systems.

And as you might imagine, the larger the entity, typically the more debt that they have, maybe the higher leveraged that they are. And that’s really where we come in as a firm on the audit side, is looking at the bond compliance and the debt covenants during the course of our audits of those systems. And as we go a little bit further into the discussion, we’ll discuss that in greater detail. But yes, we are very keenly aware as auditors just how bond compliance and debt covenants can certainly play a large role both in an organization’s financial statements as well as their operational health.

Heidi Jeffery

Well, it sounds like our days are very similar to one another in terms of the focus on compliance.

Matt Stuart

Absolutely. So the next question we wanted to discuss for a few minutes is, what type of trends have you noticed in the bond market lately? And if it’s all right, I’ll actually take this one first. So, as I mentioned, we spent a lot of time working with audits of large health systems that have a significant amount of bond debt. And what we’ve noticed over the past four years, and gosh, it’s hard to believe that we’re coming up on five years since the start of COVID-19 so time really has flown by.

But one of the trends that we noticed when COVID happened, and the government issued the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and with it, of course, came a lot of Provider Relief Fund (PRF) money, is that some organizations that prior to 2020 may have been in distress with their bond covenants or right at the cusp of failing them, with that additional PRF money that came in, some organizations almost got a what I’ve kind of jokingly called as a 鈥済et out of jail free card鈥� for a few years with the influx of the Provider Relief Fund money.

So organizations that maybe had a tighter debt-to-equity ratio or things like earnings before interest, taxes, depreciation, and amortization (EBITDA) margins that were maybe slim before that, the influx of the COVID-19 CARES Act money certainly was a life preserver to a lot of these organizations. What we’re seeing now, especially as we go into audits for organizations for years that ended in 2023 and then going forward, is that the government supplements from the CARES Act are largely gone at this point.

So some of those organizations that maybe were able to have some extra time with the Provider Relief Fund money coming in are now at a point where some of them are honestly back to where they were in 2019 and prior with some of their debt covenant compliance issues. So that is a trend that we’ve noticed from doing an audit on health care entities is that some of these organizations that maybe had a reprieve for a few years are unfortunately back in a situation to where debt covenant compliance is a matter that they need to be concerned about.

Heidi Jeffery

I think that’s a great observation, Matt. And I’d also add, it’s almost as though there’s been a double whammy because as we’ve seen the reduction in the supplemental government aid, and I think at the same time, we saw a dramatic shift in the labor market, and that impacted health care systems and senior living systems dramatically. So at the same time that we’ve seen supplemental dollars roll off, we’ve seen an increase in the cost for providing staffing and an increase in the cost of supplies, and that’s just led to a much more attenuated financial situation for so many of our health care clients.

And so we’re seeing more and more questions around system finances and operations, generally speaking from the legal standpoint, we are talking more and more with clients about distressed credit situations and compliance where whether it’s day’s cash metrics or coverage ratio metrics. We’re fielding more calls around those two topics and those types of compliance, we’re finding ourselves engaging with senior management in ways to think about covenant compliance and be a bit more proactive in terms of speaking to their investor base.

Matt Stuart

That’s a great point, Heidi. And as we’re all probably aware, this is a presidential election year in 2020, so certainly, I think there could be some major shifts both in the stock market and then just the overall economy as a whole as we go through the next several months and beyond.

So, potentially, we could be in for a buckle-up situation if things change dramatically, but that’s great advice for everybody to be aware of. So Heidi, kind of going off of what we just talked about, if you could give one piece of advice to an organization getting ready to do a bond issuance, what would it be?

Heidi Jeffery

So Matt, thanks. Great question. For me, in terms of the piece of advice, it really would be focusing on who your team is going to be, both internal and external to the organization. We frequently counsel clients on developing robust procedures as it relates to disclosure and as it relates to bond compliance. But knowing who your team internally is, is absolutely critical. Is your team comprised of just your treasury team? Is it treasury and legal? Is it treasury, legal, and accounting?

Who best within your organization is going to be primed and ready to build robust disclosure and also be willing to sign off on covenant demands and investor questions about covenant compliance? So as you get ready to do a bond issuance, making sure you know who your internal team is as well as your external team, making sure that you have an outside legal team and financial advisory team that’s ready to walk with you through the bond issuance process, I think that is absolutely key. And so again, the one piece of advice I would give is know who your team is both internally and externally, and walk with that team through the debt process.

Matt Stuart

Yeah, that’s great advice, Heidi. And one of the things I was hearing you say in there is that for something as complex as doing a debt issuance, especially in this day and age, you don’t want a firm or an advisor who is just kind of a generalist across a lot of areas. You really want to be engaging with a team that specializes in doing these types of bond issuances. One of the things that we focus on as auditors of an organization when they go out to the bond market is, a lot of times, we are asked to give what’s known as a comfort letter on the Appendix A.

And the Appendix A and bond issuances is typically where you have a lot of the financial information, both statistical analysis as well as historical financial information, and sometimes some organizations even include some pro forma forward-looking or historical pro forma information in there. So one of the things obviously that we would advise as the auditors and the Certified Public Accountants (CPAs) for these organizations is, to the extent that you’re able to, please include us in those conversations as early as you feel comfortable doing so. We’re often able to give advice on what we are able to give assurance on related to the Appendix A versus something that falls outside of the purview of what a CPA can attest to.

So again, like Heidi was saying, I think, the key is to just make sure that you have your ducks in a row before you actually kind of set out on this path of doing a bond issuance. Make sure you talk to legal counsel, make sure you talk to your auditors, and really make sure you have the team lined up and ready to go before you hit the start button. Because what we see is once you start down that path, there’s a lot of moving pieces. So having a good team in place and having the roadmap set out at the start of journey is much preferred as opposed to trying to build a plane while you’re flying.

Heidi Jeffery

And Matt, to add to that, I think one of the key ingredients of a successful financing starts early with board engagement and management engagement, making sure that senior leadership has a pipeline to the board and making sure that the board is both engaged and is properly advised as to the benefits and risks of a transaction.

We work frequently with finance committees or executive committees that then, in turn, are making recommendations to boards. So I think board engagement early on in the process is also a very key ingredient to a successful financing.

Matt Stuart

Heidi, that’s a great point, and honestly, it made me think of another item I wanted to mention as well. A lot of our not-for-profit system clients issue bonds through a health care authority. So, in other words, a governmental body that allows these bonds to have tax-exempt status for the purchasers of these issuances. So certainly, to Heidi’s point about engaging the board early on, it’s also important to make sure that there’s good communication with that health care authority.

If that’s not an organization that either meets frequently or you have regular contact with, make sure that they’re in the loop early as to exactly what the funds are going to be used for, the amount that the organization is looking to raise, those type of things. Because yes, Heidi, to your point, the last thing you want to do is spend months coming up with a wonderful plan, but then either having the board or a health care authority say, “No, we’re probably not on board with that.”

Heidi Jeffery

Thanks, Matt. Yep, all good points.

Matt Stuart

Great. Well, so now we’ve spent a few minutes talking about what are some of the good things that an organization can do getting ready for bond issuance. So let’s kind of turn the tables here and go to the other side on what are some bond compliance pitfalls that you would advise others to steer clear of?

Heidi Jeffery

Oh gosh, lots of lessons learned, having done this for quite some time. Two pitfalls. And these are very practical items and I think easily rectified, but the first pitfall, Matt, would be forgetfulness, to be honest. We’re all busy. There’s a natural letdown once a team closes a deal, but I think that, frankly, is one of the best times to take stock of where the deal landed and what the compliance responsibilities are now of your organization.

So I frequently recommend that actually once the deal closes, instead of taking that deep breath that we all want to take, that the team actually develops a checklist of compliance covenants, whether they’re focused from the tax agreement, from a continuing covenant agreement with a bank, with the loan agreement with your state bond issuer. There are a whole host of covenants that accompany a typical bond issue.

And so taking stock immediately after the deal closes or a couple of days after the deal closes, I think that that is key in terms of avoiding major bond compliance pitfalls.

And the second pitfall that we frequently see with organizations are pitfalls around not having proper procedures in place. And I mentioned earlier, we work with organizations to develop secondary market procedures in terms of continuing disclosure.

As we all know, the U.S. Securities and Exchange Commission (SEC) has put out a list of listed events of which organizations that are bound by continuing disclosure rules need to follow and give notice about. So having procedures in place that both serve to educate the health care system, health care organization, having procedures in place that serve as the basis for both education but also knowing when the organization needs to take action.

So whether this is around material mergers and acquisitions or about defaults relating to covenant compliance, having procedures in place that then can be followed, to then alert the investor community, I think those types of procedures, typically if they’re followed and if folks are trained and educated around them, those procedures really can help an organization avoid major bond compliance pitfalls. Matt, what are you seeing in this area?

Matt Stuart

Thank you, Heidi, and that’s great information that you just shared. So in our role as auditors, we’re often coming in after the fact, after the fiscal year has ended, and during the course of the audit, of course, the debt compliance covenants are one of the key areas that we focus on because as we’re going through the audit and conducting our procedures, as auditors, we’re always aware of the risk that in addition to the normal kind of fraud risks that we’re all aware of, right, there’s typically the risk to overstate revenue, understate expenses, or particularly for personal gain or for individual bonuses and things like that, that, of course, we’re all aware of.

We’re also aware of the risk that an organization could manipulate reserves in addition to the income statement in order to meet their bond debt compliance. So one of the things that we see that’s a common compliance pitfall, and again, our role as auditors, I’ve often joked with folks that we’re kind of like the people that come in after the battle, and bayonet the wounded, right. The year-end is done. There’s not much you can do at that point. And then we come in and start passing judgment as to what’s been done or not done during the year. But one of the pitfalls that we see quite often is that maybe there’s a MTI, a master trust indenture that’s several years old and it’s not been revisited in some time.

So one of the examples that I can give that we’ve seen several times in the past couple of years is there was a new accounting standard a few years ago regarding leases, and it used to be that only certain types of leases were put onto the balance sheet and the other types of leases were off-balance sheet. Now, for almost the entirety of organizations, whether they’re for-profit, not-for-profit, or governmental, those leases are required to be on the balance sheet as a gross up to assets and then as a gross up to debt. One of the things that we saw with some of our clients that had MTIs that had not been revisited in some time was that the language in there was speaking to debt to equity ratios, and it just said something to the effect of, “All long-term debt on the balance sheet.”

Well, if you’re doing a debt-to-equity ratio and then all of a sudden one year you don’t have $10 million of lease liabilities on the balance sheet, but the next year because of a new accounting standard you do, that’s obviously something that can cause a lot of heartache and then quite frankly, scrambling to get things corrected after the fact. So that’s one of the things we try to advise our clients on, and certainly, us, as auditors, do our best to keep our clients apprised of these things. But really take a look every so often at the language in the MTI and see if it’s still holding water with the current regulatory environment as well as the current accounting environment.

And if you see something in there that you’re like, “You know what? I read this thing that says there may be a new lease standard coming. I wonder if that’s going to really affect how much debt we have on the balance sheet.” Would definitely advise you to reach out to your legal counsel or your auditors, or probably the best method is to reach out to both parties and let’s have a discussion early before we get past a year-end period and there’s definitely more limitations on what can be done after the fact at that point. So that is something that we’ve seen several folks fall into a pitfall of not paying attention to the MTI. The language has been set, and they forget about it. So that, and honestly, just another pitfall is not monitoring those debt covenants throughout the year.

If I had a dollar for every time that we do an audit and we’re asking a client for their debt covenant calculations, and they say, “Well, I don’t know. Let me do those, and I’ll give those to you.” That kind of just makes me wince a little bit because it’s like, “Oh gosh, you all really should be tracking these throughout the year to make sure that you’re in compliance with them.” And that’s something that certainly would advise folks to just keep an eye on those. You don’t have to check it every day, but at least a couple of times a year it’s good just to have a level set on those debt covenant calculations to make sure that things are staying where you would like for them to. And if not, then certainly reach out and discuss it with counsel or your auditors.

Heidi Jeffery

Absolutely agree, Matt. And to your point, I think a good set of procedures, whether it’s in the form of a checklist so that you know what monthly, quarterly, annual reporting requirements and covenant compliance you have, it’s a good set of procedures, a good checklist that summarizes what your covenants are, can go a long way in avoiding some of those pitfalls you mentioned.

Matt Stuart

Yes, absolutely. Well, Heidi, as we come to the close of our talk together today, we’re just going to ask for your advice on when should an organization talk to an advisor about compliance matters.

Heidi Jeffery

Well, I would say it’s an ongoing dialogue. But the sooner you have the view that your organization is going to run into a compliance matter as, for instance, as an organization gets ready to close its books on a quarter or on the year, I think that organization and senior leadership team is going to have a good handle on whether or not they’re trending towards a covenant violation.

So our counsel there would be, rather than wait until that certificate of compliance is due, rather than wait for that reporting period to approach, be proactive and engage with your outside advisors, whether it’s your auditing team or your legal counsel, engage and start discussing strategy with them. And so I think that that is a very good rule of thumb prudent approach to keep your counselors in mind as you go through the year-end process and closing of the books.

Matt Stuart

Absolutely, Heidi. And I’ll second that and say, as far as from the audit team goes, please talk to us early and often relating to these type of compliance issues. It’s one thing to find out about it after the end of the year. Like I’ve mentioned, I think a few minutes earlier, there’s limited things that can be done at this point. Usually, you’re asking for forgiveness from whoever the bond issuer is at that point.

If we can have a conversation during the year, there’s certainly more leeway for us to work with counsel. And then work with the bond issuer to come up with a resolution, whether that’s a waiver or some sort of forbearance or other things that are certainly easier to do during the year as opposed to just kicking the can down the road and not looking at things until the end of the year.

So certainly, as your auditor would definitely advise you to reach out to your CPA, and I think that’s a good practice, whether we’re talking about bond compliance or just financial questions in general, is to reach out to your auditor anytime you have questions instead of just waiting until close to the end of the year. So, Heidi, I appreciate the time and the conversation today. I think this was very interesting and will be helpful to the audience. Where can people reach you if they have further questions or would like to discuss this topic more with you?

Heidi Jeffery

Sure, Matt. My information is on our 麻豆传媒 website, foley.com, again, Heidi Jeffery. And thank you so much, Matt, for speaking with us today.

Matt Stuart

Absolutely. Heidi, thank you for your time. And again, my name is Matt Stuart and my information is also on our website at pyapc.com. And with that, again, thank you to all of our listeners today for giving us the time, and I’ll turn it back over to Angie and Jana to close us out.

Angie Caldwell

Thank you, Heidi and Matt, for a great discussion. We appreciate you taking the time to join us today. We want to thank our listeners for joining our Let’s Talk Compliance podcast series with Health Care Law Today, your connection to timely legal updates in the health care and life sciences industry.

We encourage you to subscribe to this podcast, visit 麻豆传媒’s Health Care Law Today blog at healthcarelawtoday.com and pyapc.com. If you liked this show, don’t forget to subscribe and be sure to rate us five stars. Until next time, I’m Angie Caldwell at PYA.

Jana Kolarik

And I’m Jana Kolarik at 麻豆传媒 & Lardner. Thanks so much for listening.

In this episode, Benjamin Dryden, vice chair of 麻豆传媒鈥檚 Antitrust & Competition Practice Group and David McMillan, managing principal of consulting and chief financial officer at PYA, discuss the recent July 3^rd ruling on the U.S. Federal Trade Commission鈥檚 (FTC) Non-compete Ban and how this will affect the health care & life sciences industry.

For more information regarding the 鈥淟et鈥檚 Talk Compliance鈥� podcast series, please click here.

Please note that the聽interview copy below is not verbatim. We do our best to provide you with a summary of what is covered during the show. Thank you for your consideration, and enjoy the show!

Jana Kolarik

Hello, and welcome to the Let鈥檚 Talk Compliance podcast series on Health Care Law Today, presented by 麻豆传媒 & Lardner and PYA. I鈥檓 your co-host, Jana Kolarik, a partner in 麻豆传媒鈥檚 Health Care Practice Group.

Angie Caldwell

And I鈥檓 your other co-host, Angie Caldwell, consulting principal with PYA. We鈥檙e excited to have you join us today. Before we begin our show, we want to remind you to subscribe to Health Care Law Today, either on iTunes or your preferred podcast app. Please visit healthcarelawtoday.com or pyapc.com.

For today鈥檚 show, Ben Dryden, the vice chair of 麻豆传媒鈥檚 Antitrust and Competition Practice Group and David McMillan, PYA鈥檚 managing principal of consulting and chief financial officer, are discussing the July 3^rd ruling on the FTC鈥檚 Non-compete Ban and how this will affect the health care industry. I鈥檓 going to turn it over now to Ben and David to introduce themselves.

Ben Dryden

Thank you Angie and Jana. I am Ben Dryden. I’m a partner in the Antitrust & Competition practice group of 麻豆传媒. I’m based in Washington D.C. My practice focuses on the antitrust issues that arise in mergers and acquisitions, as well as providing day-to-day and event-driven antitrust counseling for clients in the health care sector with a particular focus on antitrust issues involving labor and employment.

David McMillan

Thank you Ben. And I’m David McMillan, a principal with PYA located in Knoxville, Tennessee. Ben and I are happy to be with you here today to continue our previous conversation where we were talking in advance of the July 3rd ruling regarding the FTC’s Non-compete Ban. And so now we want to sort of unpack where we are on the other side of a recent court decision. So Ben, can you begin by telling us who made the ruling, what did we hear? And maybe unpack a little bit for us a summary of what we heard from the courts.

Ben Dryden

Happy to. So just to contextualize what the July 3rd ruling was, it was a preliminary ruling, and the idea is if you are challenging a regulation like the FTC’s Non-compete Ban, you can go into court and say, 鈥淚 need emergency preliminary relief to be granted before the court reaches the ultimate merits of the case. In other words, before the court rules on every last issue that resolves the case in its finality, I need the court to issue emergency preliminary relief.鈥� And that’s a fairly extraordinary remedy and it is a high barrier to make that showing to establish that you’re entitled to preliminary relief.

That’s what the plaintiffs did. They said this Non-compete Rule is going to impose irreparable injury on the business community by forcing businesses to expend money and compromise their ability to enforce or enter into non-compete agreements. So court, we need you to issue a preliminary injunction barring the enforcement or implementation of the Non-compete Rule before the court reaches the ultimate merits and issues a final decision that resolves every last issue in the case. So that’s what the July 3rd ruling was.

The ruling went before US District Judge Brown out of the Northern District of Texas in Dallas, and Judge Brown ruled that preliminarily, based on her review of the record so far, she believes it is likely that the plaintiffs who are challenging the Non-compete Rule are going to establish that the Non-compete Rule is unlawful. And the judge found two separate grounds for reaching that determination.

One, the judge said that just looking at the language of the FTC Act, the law that gives the FTC the power to take any action, she said the FTC Act does give the FTC some ability to make rules with respect to unfair methods of competition. But examining the history and the structure of the Act, she said, they can’t make substantive rules. They can’t define certain sets of business practices as substantively constituting unfair methods of competition. Rather, the FTC’s power to make rules of procedure are truly just procedural rules鈥斺�渉ousekeeping rules,鈥� she called them, rules of practice and rules of procedure鈥攏ot actual rules defining what is or is not an unfair method of competition.

So in the first instance, the judge said, the FTC just does not have substantive rulemaking authority, which really is what the plaintiffs who are challenging this rule are trying to establish. They care about the Non-compete Rule, but they care more broadly that the FTC is not a legislature. The FTC should not be in the business of making substantive rules; rather, they’re a law enforcer. So on the big issue that the plaintiffs are trying to prevail on, it was a favorable ruling for the plaintiffs.

The judge also said, even looking specifically at the Non-compete Ban, that ban is likely to be arbitrary and capricious, meaning the agency didn’t properly consider other alternatives and it didn’t engage in a sufficiently reasoned decisionmaking to support a broad categorical ban on non-competes from coast to coast.

So based on those two preliminary findings, the judge said the plaintiffs are likely to succeed on the merits in this case. 鈥淚 find preliminarily that the plaintiffs are probably going to win this case.鈥� But having reached that preliminary determination, that’s just one part of the puzzle. The court then has to pivot to, okay, so what’s the remedy for that? What can the court in a preliminary order do to prevent further implementation of this rule? And the court said that the plaintiffs had not made a sufficient showing at this preliminary stage to justify broadly invalidating the Non-compete Ban for every single business in the country. Rather, the judge said, 鈥淚 find that the plaintiffs are likely to prevail, so I’m going to prevent the FTC from enforcing the non-compete Rule or implementing the Non-compete Rule with respect to the plaintiffs.鈥�

So what that means in practice is, one of the plaintiffs is the US Chamber of Commerce. The court’s order prevents the FTC from suing the US Chamber of Commerce in the US Chamber of Commerce’s capacity as an employer of employees, some of whom are presumably bound by non-competes. So if, say, some employee of the US Chamber of Commerce has a non-compete agreement and the Chamber of Commerce tries to enforce that, the FTC is enjoined from going after the Chamber of Commerce for enforcing a non-compete against the Chamber of Commerce employee. But for any run-of-the-mill business in the country that may or may not even be a member of the US Chamber of Commerce, the court’s order does not apply to that company. The court’s order only applies to the plaintiffs in this case.

Now that could certainly change, and in fact we’re recording this on Thursday, July 11th, just yesterday, Wednesday, July 10th, the plaintiffs moved the court for reconsideration to say no, this was not the proper remedy. The proper preliminary remedy needs to be more broad. It needs to be universal. It’s got to be a preliminary remedy staying the implementation of the Non-compete Ban with respect to every business in the country because otherwise what are we achieving here? But as it stands right now, the court’s order only applies to the named plaintiffs in that case. It’s a pretty surprising turn of events.

David McMillan

That is interesting, Ben. So if I could quickly summarize, and you keep me honest here in my summary, that number one, this was a temporary ruling. Is that a correct statement?

Ben Dryden

It’s temporary. It’s pending a final decision on the merits, which the court has said will come on or before August 30th.

David McMillan

Okay. Secondly, the judge ruled that the FTC can’t make substantive rules, right?

Ben Dryden

Correct.

David McMillan

And as a result, the plaintiffs are likely to prevail on the merits of their case and therefore they enjoined the FTC from suing the US Chamber of Commerce from pursuing any non-competes it may have with its employees until such time that the ruling is final. So if you’re not the US Chamber of Commerce, you’re still sitting with an FTC ban that has not been struck down yet by the courts. But if you were in Vegas laying odds, this temporary ruling tends to suggest that it will be struck down when the court gets around to issuing its final ruling. We don’t know that for certain, but it seems that’s the way the compass is pointing. I know I’m not going to put you on the spot to make that prediction, but can you just give the listeners any thoughts from your perspective about whether you believe the court will respond to this latest, latest motion filed by the plaintiffs and or where we go from here?

Ben Dryden

Yeah, so a couple of reactions. One is I agree that the compass is pointing in the direction of the court ultimately issuing a broader ruling than the narrow ruling that issued on July 3rd. It’s still unclear whether a broader ruling would apply truly universally, and if it would be a categorical order that the Non-compete Rule is no longer in effect and the remedy would be vacating the Non-compete Rule in its entirety with respect to any business or any employee in the entire country. That’s certainly what the plaintiffs want to get. But there’s some footnotes and discussions and just reading between the lines in the court’s opinion, they stake out the possibility of a slightly narrower middle ground whereby the court might just order that the Non-compete Rule is vacated with respect to companies that are bona fide members of the plaintiffs.

So the plaintiffs are, there’s one individual business, it’s a tax preparation firm in Texas. That tax preparation firm is going to be able to enforce its non-competes. Other than that one specific business, the plaintiffs are the US Chamber of Commerce, the Business Roundtable, the Texas Association of Business, and the Longview, Texas Chamber of Commerce. It is possible that the court might order that the Non-compete Ban is only vacated with respect to companies that are bona fide members of those four trade organizations. And I will abstain from handicapping what the likelihood is of that outcome. But there is a possibility that businesses, to take advantage of an ultimate decision, will need to, if they’re not currently members of, say, the US Chamber of Commerce, they might have to join and become dues-paying, bona fide members of the US Chamber of Commerce to take advantage of a broader ruling. But we’ll know more at the latest by August 30th. Between then and now, the court, as I’ve mentioned, has been asked to, on an expedited basis, reconsider its ruling and the plaintiffs have asked for a decision by Wednesday, July 17th on whether to amend the scope of the preliminary order.

It’s also possible that the Fifth Circuit gets involved and this case gets appealed, because a preliminary injunction can be appealed even while there’s still litigation going on at the trial court. So this can still go in several different directions.

The other piece to this is there’s another lawsuit pending in Pennsylvania where there was a hearing just yesterday before Judge Hodge. And Judge Hodge is a Biden appointee, whereas Judge Brown in Texas was a Trump appointee. Judge Hodge at the hearing seemed fairly skeptical of the plaintiff in that case’s arguments challenging the Non-compete Rule. So there is a distinct possibility that we have one federal court, in Texas, that issues a relatively broad ruling, invalidating or enjoining the enforcement of the Non-compete Rule. But then we have the conflicting decision from another federal court, in Pennsylvania, saying that the Non-compete Rule is valid. And this is a chaos scenario that creates a lot of uncertainty for a lot of businesses.

David McMillan

Wow, that’s really interesting. Thanks for sharing that additional context, Ben. At the risk of definitely getting outside of my lane, not being an attorney, I wanted to go back for just a moment to the statement in the ruling about the FTC not having the authority to make substantive rules.

Ben Dryden

Sure.

David McMillan

You mentioned in your comments the FTC can鈥檛 create legislation. Many of us have been reading about some of the decisions being handed down in various courts across the country since we last spoke. One, of particular import was the Supreme Court’s decision recently as they contemplated the impact of the Chevron decision from 1984. So, is there any linkage between that statement made by Judge Brown that the FTC can’t make substantive rules, in essence can’t put itself in the position of creating legislation, and what we’re trying to process in light of the Supreme Court’s decision, which happened after our last podcast as well, with respect to that 1984 Chevron precedent?

Ben Dryden

There’s absolutely a connection there. In fact, the Supreme Court’s decision reversing the Chevron framework, that decision was Loper Bright Enterprises vs. Raimondo. The judge in Texas cited that decision even though the ink was barely dry on the decision, the judge cited that as authority to help support her conclusion that the FTC does not have substantive rulemaking authority. I’ll say it’s an indirect connection.

The concept of Chevron is if the Congress passes a law that is ambiguous and an executive agency is charged with administering or interpreting that law, then Chevron gave that executive agency the ability to make reasonable inferences and interpretations of any ambiguity in the congressionally enacted legislation. That’s an issue here, because what we’re talking about is a statute that has a relatively vague provision in it that gives the FTC the ability to adopt rules of practice and procedure.

And so, there was always an atmospheric argument that if there’s some ambiguity in whether Congress has given this power to the FTC, then that ambiguity, it is reasonable for the FTC to interpret that ambiguity in the way that the FTC finds will best serve its purpose of preventing unfair methods of competition. But it’s an ancillary issue, and the court really didn’t have to make a Chevron determination, because the court just looked at the statute and said, 鈥淗ey, I’m reading the statute just as a judge reading a statute, and there’s not an ambiguity in here for me to interpret. Just based on the clear structure of the statute the FTC does not have the ability to just write laws for itself.鈥� And so the court wasn’t squarely faced with the Chevron issue, but these things are all very interconnected.

David McMillan

Interesting. Thank you for connecting those two dots for many of us who were struggling to keep up with what’s coming down from our judiciary branch right now and trying to navigate, especially in our world of health care, which as we all know has a substantive body of regulation within which to navigate. It helps us all to better understand what we’re hearing. As we move from this initial ruling to what’s next, do we have any advice to give our listeners that will help them navigate the here and now? It’s easy enough for us to say, well, the latest motion expects or asks for some clarification by the 17th, and that Judge Brown said that they would have the complete ruling done by the 30th. And it’s easy enough for us to say, oh, that’s just a couple of weeks or six weeks away. But in the meantime, employment situations, employment matters come and go daily and folks are being recruited and hired and folks are leaving and the world continues to turn.

So is there any advice or thoughts that you would want to share with our listeners as they try to navigate this very uncertain time they find themselves in as an employer?

Ben Dryden

Yes. A few practical pointers come to mind. And this all comes from just the high-level lay of the land that we seem to be drifting in a direction that will result in a relatively broad order vacating the FTC’s Non-compete Ban. But we don’t know that that’s going to be the case. And the scope of the ultimate remedy really is unclear and businesses should care not only about, 鈥淎m I going to get sued by the FTC for an unfair method of competition?,鈥� but what businesses really care about is, 鈥淚f I have a non-compete with my employee and my employee breaches that, can I successfully enforce my non-compete against that employee? Or, is that employee going to be able to tell a court that the non-compete agreement is void for public policy because the Federal Trade Commission has found it to be an unfair method of competition?鈥�

So I unfortunately think that businesses need to assume that there’s going to be some holes in the ultimate order that the court adopts. And we can’t just assume that this Rule is going to be broadly invalidated. It really might be broadly invalidated; that’s a distinct possibility. But until we see it in writing, we need to assume that some vestige of the FTC’s Non-compete Ban is going to survive.

So what do you do with that? I have a couple ideas. One is the first thing that would be required if the Non-compete Rule is to stand, either in whole or in part, the first action that’s required is that businesses are required under the FTC’s Non-compete Rule to affirmatively notify current and former employees who are subject to non-compete agreements and give them notice that their non-compete agreements are no longer going to be enforced. So that notice has to be made by September 4^th, 2024.

The court, again, will issue an order no later than August 30^th, so a few days before the deadline to give notice. But it’s going to take some time to just compile the contact list to figure out who are the employees, the current and former employees who are subject to non-compete agreements, and what is the last known mailing address or email address or cell phone number to allow us to give the notice to those employees if it turns out that we are required to give that notice. So I would say between now and let’s say August 30^th, businesses should start to undertake that effort to compile the information of who are the employees who are subject to non-competes and what is their last known contact information? I wouldn’t send out any notice until after August 30^th, let’s see what the court’s ultimate ruling is, but it’s going to take some time to compile that information. So we should get the ball rolling on that information compilation now.

The other thing I would say is, and again this is something that could probably wait until after August 30^th but before September 4^th, is businesses might need to join the US Chamber of Commerce. If it turns out that the judge鈥檚 order only applies to bona fide, dues-paying members of these plaintiff associations, then that’s going to mean if you want to enforce your non-compete agreements, you have to be a bona fide, dues-paying member of the US Chamber of Commerce. So I’m not going to say write a check to the Chamber of Commerce immediately, but be prepared to do so in short order after August 30^th if that’s the direction that the court takes.

The last point that I would make 鈥� and this is just, there’s so many issues to unpack in the Non-compete Rule. This is one we haven’t spoken about yet, but there’s a big exception in the Non-compete Rule that is relevant to this audience, the listeners of this podcast, which is that due to probably an historical accident, the Federal Trade Commission doesn’t have jurisdiction to prevent unfair methods of competition against bona fide nonprofits.

And so, to the extent listeners of this podcast represent a not-for-profit health care system, that not-for-profit health care system falls outside the FTC’s jurisdiction on this issue. Now sometimes there’s some wrinkles to that or complications to that. The classic example is you have a not-for-profit health care system that’s the parent organization, but it has set up a for-profit medical group subsidiary, which is the vehicle for employing physicians or other caregivers. If there’s a for-profit legal entity that is the employer of record, then that for-profit legal entity probably is subject to the FTC’s jurisdiction. And the Non-compete Rule probably will apply to that entity. But for listeners who represent or are members of true, bona fide not-for-profits, where every employer of record within the corporate hierarchy is a bona fide not-for-profit, you can sit tight because the Non-compete Rule doesn’t apply to those types of organizations, due to an historical error in how the FTC Act was drafted.

David McMillan

Well, that is a fascinating tidbit and likely very important for a number of our listeners; to make sure that they comprehend that and understand it. And just to reiterate the point, just because the parent corporation is nonprofit, the exception that prevents the FTC from having jurisdiction over nonprofits would not extend to any for-profit subsidiary of that nonprofit, to the extent that for-profit subsidiary was an employer of record. Should the FTC ban on non-competes be upheld through the judicial process, that for-profit subsidiary would still be subject to that ban. I just want to make sure that I said that correctly and so that our listeners hear that a couple of times.

Ben Dryden

Yeah, you said that correctly. I should say that the parameters of where the FTC’s jurisdiction begins and ends with respect to nonprofits and for-profits is very hazy. And so I think the line that if it’s a bona fide not-for-profit parent, but it has a for-profit subsidiary, I think that line is sound. That鈥檚 certainly the position that the FTC has taken publicly that, in that case, the FTC does have jurisdiction over the for-profit subsidiary. But these issues have not really been litigated and there’s sometimes unique facts and unique cases that need to be considered.

The other situation that comes up with some regularity is you have a bona fide, not-for-profit health care system that contracts with a staffing company, and the staffing company is actually providing locums or traveling nurses or what have you. If the staffing company is a for-profit 鈥� which, they all are for-profits 鈥� in that case it could be a not-for-profit hospital, but the doctor’s employer is the for-profit staffing company, and in that case, the non-compete agreement between the staffing company and the doctor or the nurse or whoever is presumably subject to the FTC’s authority.

David McMillan

Interesting. Thank you for that clarity as well because as we all know, especially since the pandemic, the use of staffing companies such as travelers for clinical caregiving has increased dramatically. And so I’m sure a lot of our listeners find themselves in that particular circumstance. So Ben, anything else that we want to make our listeners here aware of as we continue to wait for the courts to clarify this temporary or initial response that we received on July 3^rd?

Ben Dryden

I don’t know how satisfying of a conclusion this is going to be for listeners, but we are really in a chaos scenario here where it seems quite plausible that we’ll have one decision from one federal court that conflicts with another decision from another federal court. The one federal court that is likely to rule that the Non-compete Ban is illegal, it’s unclear what remedy is going to be imposed there and how many businesses will be able to take advantage of that remedy. So this remains a fast-moving situation where there’s briefing, there could be emergency appeals or could well be a conflict between one court and another court. So this is one to just really stay tuned on, but we unfortunately do have to assume the worst and be prepared for the possibility, even if it’s a small possibility, but be prepared for the possibility that this Non-compete Rule gets implemented come September 4^th.

David McMillan

So just to remind our listeners, if you’re an employer who would otherwise be subject to the FTC’s Non-compete Rule, it’s best to go ahead and be making that listing of current and former employees and their last known point of contact. Having that pulled together just in case you do need to make that notification to be compliant with whatever decision comes down with respect to the ban. So that was good advice and I wanted to repeat it for our listeners as they think about the next few weeks and what they need to be doing.

Ben Dryden

That’s right.

David McMillan

Well, in our first episode, Ben, you made the comment that, prior to this ruling, employers were faced with this patchwork of state law for those employers who have employees in multiple states, and that those employers have to navigate this patchwork of state regulation as it relates to non-competes or other types of restrictive covenants and employment agreements. It sounds like all we’ve done is added another layer of uncertainty and patchwork at the federal level to that existing state regulation. And so, like a lot of difficult situations, this seems to be getting more complex before it gets easier. We’ll hope that there’s something easier on the other side of August 30th, but we’ll prepare as if there isn’t. Is that a fair statement?

Ben Dryden

That’s fair. What I’ll say is the only solution to the complexity and the patchwork and there being 46 different sets of rules across the country, the only solution there is a federal solution, a uniform rule of non-competes. And so it’s a question whether the FTC is the proper source of that rule or instead whether that rule needs to come from Congress. And I think just to tie everything up, given what the Supreme Court said in the Loper Bright case, if there’s a solution to be had here to achieve federal uniformity on non-competes, the onus is on Congress to make that happen.

David McMillan

Well, that’s well said, Ben. And so for our listeners, we hope you’ll stay with us. Ben and I will be back as we hear more from our judicial system and as we learn more about the forthcoming decisions. As Ben has already referenced, we’ll be back to unpack that with you as those are known. We hope that you will join us again to hear Ben’s perspectives on those new rulings. Obviously, he is an expert whose counsel in this area is valuable, and we’re happy to have the opportunity to provide these particular installments of Let’s Talk Compliance in the midst of what Ben referred to as chaos. So stay tuned. We’ll be back with you just as soon as we have some more clarity. We thank you for listening again today, and now we’ll turn this back over to Angie and Jana. Thanks so much, Ben.

Ben Dryden

Thank you.

Jana Kolarik

Thank you, Ben and David for another great discussion. We appreciate you taking the time to join us today. We want to thank our listeners for joining our Let鈥檚 Talk Compliance podcast series with Health Care Law Today, your connection to timely legal updates in the health care and life sciences industry. We encourage you to subscribe to this podcast, and visit 麻豆传媒鈥檚 Health Care Law Today blog at healthcarelawtoday.com, and pyapc.com. If you liked this show, don鈥檛 forget to subscribe and be sure to rate us five stars. Until next time, I鈥檓 Jana Kolarik at 麻豆传媒 & Lardner.

Angie Caldwell

And I鈥檓 Angie Caldwell with PYA. Thanks so much for listening.

In this episode, Benjamin Dryden, vice chair of 麻豆传媒鈥檚 Antitrust & Competition Practice Group and David McMillan, managing principal of consulting and chief financial officer at PYA, discuss the FTC鈥檚 most recent decision to ban non-competes and how this ban will affect the health care & life sciences industry.

For more information regarding the 鈥淟et鈥檚 Talk Compliance鈥� podcast series, please click here.

Please note that the聽interview copy below is not verbatim. We do our best to provide you with a summary of what is covered during the show. Thank you for your consideration, and enjoy the show!

Angie Caldwell

Hello, and welcome to the Let’s Talk Compliance podcast series on Health Care Law Today, presented by 麻豆传媒 & Lardner and PYA. I’m your co-host, Angie Caldwell, consulting principal of PYA.

Jana Kolarik

And I’m your other co-host, Jana Kolarik, a partner in 麻豆传媒’s Health Care Practice Group. We’re excited to have you join us today. Before we begin our show, we want to remind you to subscribe to Health Care Law Today, either on iTunes or your preferred podcast app. Please visit healthcarelawtoday.com or pyapc.com.

For today’s show, Ben Dryden, the vice chair of 麻豆传媒’s Antitrust and Competition Practice Group and David McMillan, PYA’s managing principal of consulting and chief financial officer, are discussing the U.S. Federal Trade Comission鈥檚 (FTC) most recent ruling on banning non-competes and how this will affect the healthcare compliance industry. I’m going to turn it over to Ben and David to introduce themselves.

Ben Dryden

Thank you, Angie and Jana. I’m Ben Dryden. I am an antitrust partner in the Washington D.C. office at 麻豆传媒, where my practice focuses on antitrust issues that arise in mergers and acquisitions as well as antitrust issues facing the health care sector and antitrust issues in labor and employment.

David McMillan

And I’m David McMillan. I’m a principal of PYA leading our consulting practice. I’ve spent time with primarily health care providers throughout the last three decades working on transactions and various other opportunities and compliance matters. I have had the great fortune of working with our friends at 麻豆传媒 for almost three decades, and happy to be with you here today.

So as we get started, Ben, since the FTC’s non-compete rule was released, there’s been all sorts of discussion and literature and podcasts so we want ours to be a little bit different. We’re going to dive a little deeper into some of the background behind non-competes in general. Talk about some things like ethics and some things that are maybe just a little different than what our listeners may have heard in other podcasts, but then we absolutely want to finish with looking ahead to this July 3^rd ruling and what we might expect there. So with that as a brief agenda, Ben, why don’t you get us started by just highlighting what is this FTC non-compete rule all about for those who might be listening and have heard about it but perhaps don’t have any context to process some of what we might talk about today?

Ben Dryden

Sure. Thank you, David. First things first, we’re talking about employee non-compete agreements, which are agreements between an employer and an employee that prevent that employee from working for a competitor after the end of their employment or starting a new competing business after the end of their employment. And employee non-compete agreements go back centuries. They’re enforceable in 46 of the 50 states under various levels of scrutiny that vary on a state by state basis. They’re very common.

The Federal Trade Commission came out and in one fell regulatory swoop banned non-compete agreements. They said that, in their view, employee non-compete agreements are an unfair method of competition prohibited by the Federal Trade Commission Act and the FTC has voted to adopt a regulation that in black letters bans non-competes on the basis of them being unfair methods of competition.

They’ve made a little bit of an exception for non-compete agreements with senior executives, which they define as people who have C-suite authority and who make at least $151,164 a year. But the focus is really on C-Suite authority. And they say for non-compete agreements entered into with senior executives, those people have a little bit more bargaining power than, say, employees making minimum wage. So for senior executives, the FTC has said, going forward, we are going to ban non-compete agreements, but if non-compete agreements are already in place with senior executives, we won’t retroactively invalidate those. But otherwise, for the 99 plus percentage of workers who are not senior executives as defined by the FTC, their non-compete agreements will be banned by this FTC rule effective September 4^th.

David McMillan

So, when we look back at the Federal Trade Commission Act itself, which I think is the basis for the interpretation that the FTC is taking today, that act was signed into law in 1914. So this interpretation is a new interpretation of a very old, if we will, piece of legislation. Is that right, Ben?

Ben Dryden

That is right. And the history here really is fascinating. I mean, going back to 1914, the Federal Trade Commission was established, and they were given this charge of preventing unfair methods of competition. And for their first 50 some odd years of existence, the FTC would go about identifying and stopping unfair methods of competition on a case-by-case enforcement basis. They would see something out in the marketplace being done by a particular company, and they would sue that company alleging that that company is engaged in an unfair method of competition. Well, starting in the ’60s and going into the ’70s, the FTC came to the view that they have a broader power than just bringing case-by-case enforcement actions. In the ’60s and in the ’70s, the FTC started to pass regulations that would identify certain types of conduct as unfair methods of competition.

And these regulations were very, very just hyper-specific. I mean, one example was The Tablecloth Rule. They said that if a tablecloth manufacturer didn’t disclose the cut and finished sizes of the tablecloth, then that’s an unfair method of competition. So there was nothing that broadly applied to the entire American economy. But the FTC, what they’re arguing today is that, hey, they set this precedent in the ’60s, that they have the power to pass regulations. And the FTC’s view is that this is just a continuation of that power from the ’60s and ’70s to adopt substantive regulations defining what an unfair method of competition is.

Now that raises the question, well, what’s happened since the ’60s and ’70s, and the answer to that question is the FTC after about 10 years of very aggressive rulemaking faced a very strong backlash in Washington, where the Chamber of Commerce was calling the Federal Trade Commission the second most powerful legislative body in the United States, and it prompted a backlash.

And so Congress scaled back some of the FTC’s powers and just through the political process and through regulatory self constraint, the FTC stopped for about 40 years doing these regulations that define business conduct to be unfair methods of competition. But what the FTC is doing here is they’re rediscovering this power that they just haven’t flexed for 50 years. And it’s a very live issue whether this power that they flexed in the ’60s and ’70s was valid back then or whether it’s still valid today. And so this is drifting into litigation, which you previewed, but it’s a very live issue whether the FTC has this power or not.

David McMillan

So to be specific, on the 23^rd of April, they flexed their muscle and put this rule into place pertaining to the prohibition against non-competes and decided to make that prohibition effective as of September 4^th of this calendar year, which doesn’t give a lot of runway between the actual vote and the effective date, as you mentioned, for this litigation to occur. So it sounds like things have been moving pretty quickly since the rule was voted and adopted by the FTC back at the end of April.

Ben Dryden

That’s exactly right. And the history here is kind of funny. The FTC first began this rulemaking process early in 2023, and right off the bat groups like the U.S. Chamber of Commerce more or less threw down the gauntlet and said that [this] poses an existential threat to the rule of law for businesses in this country. So the Chamber of Commerce made clear over a year ago, if the FTC goes forward with a rule like this, they’re going to take it all the way to the Supreme Court. And so this has been simmering for over a year and there was a rulemaking process and tens of thousands of comments were submitted with thoughtful comments in favor of the ban and very thoughtful comments opposing the ban.

Well, in the middle of April, the FTC put out a press release, “One week from today we’re going to vote on the proposed non-compete rule.” And so the vote was on a Tuesday, the Monday before the vote, the Chamber of Commerce held a press conference and they said, “We are going to file a lawsuit on Wednesday, two days from today, on Wednesday we’re going to file a lawsuit challenging whatever rule the FTC might adopt on Tuesday.” So jump forward to the next day the FTC votes in the afternoon to go forward with this rule to adopt the rule. Everyone knew the Chamber of Commerce was going to file a lawsuit within 24 hours, but in the intervening 24 hours, some other party filed a lawsuit in a different court. It was a tax preparation firm represented by Gibson, Dunn & Crutcher and a former secretary of the Department of Labor, they wanted to be the first in court.

And so that’s the case that’s actually the leading case. The Chamber of Commerce case filed the next day ended up getting more or less consolidated with the case brought by the tax preparation firm, but everyone was moving at breakneck speed and they immediately filed a motion for a preliminary injunction. And the court said, pursuant to the local rules of that court, there is a set schedule that the court has to rule on a motion for a preliminary injunction. And under that schedule set forth under the court’s local rules, July 3^rd is the date. So by July 3^rd of this year, we will know whether the court is granting a preliminary injunction to block this rule or whether this rule will be allowed to move forward. And if the decision from the judge is to allow this rule to move forward the effective data is set for September 4^th.

David McMillan

Interesting, and thanks for all that history. That’s really helpful. And for the process itself, it’s sort of fascinating to understand how this has unfolded so quickly since the 23^rd. Like you said, there have been comments in the process that certainly predated that for the better part of the year.

Well, before we go any further, there may be some folks listening to this that are wondering, “Gosh, I may have some sort of restrictive agreement or I am aware of clients of mine who utilize restrictive agreements.” When we look at non-competes through the broader lens of restrictive agreements such as non-solicitation agreements and perhaps others, can you give us just a little bit more color there? Is this particular rule specific to non-competes, or is it broader and does it cover some of those other types of restrictive agreements? And in answering that, Ben, do you mind to introduce our listeners that may not be familiar with it, with maybe some other types of restrictive agreements and whether they鈥檙e included or not?

Ben Dryden

Absolutely. And the short answer is going to be it depends and it鈥檚 not entirely clear, but let me try to unpack that. So the rule that the FTC is adopted applies to non-compete clauses, which there鈥檚 a definition for in the rule, it鈥檚, 鈥淎 term or a condition that prohibits, penalizes, or functions to prevent a worker from either seeking or accepting a job in the United States with a different employer at the end of their employment, or operating a business in the United States after the end of their employment.鈥�

So it doesn鈥檛 have to be a freestanding contract that says at the top 鈥淩estrictive Covenant鈥� or 鈥淣on-Compete Agreement.鈥� It doesn鈥檛 have to be that at all. It could be a single paragraph in a 100-page agreement There鈥檚 no requirement to revise or reform the 100-page agreement, just the effect of the FTC rule is that one paragraph in the larger agreement can no longer be enforced and you can鈥檛 represent that it can be enforced. In fact, you鈥檙e obligated to inform an employee that that clause cannot be enforced.

So that鈥檚 the idea that they鈥檙e preventing non-compete clauses, not necessarily non-compete agreements. Where this gets very messy is it happens all the time that a non-compete clause will be included in an agreement that has other restrictive covenants, and so you give the example of a non-solicitation agreement. There鈥檚 a lot of different species of non-solicitation agreements, but a classic one is, 鈥淓mployee, after you leave this company, after your time here, you won鈥檛 solicit any of the customers who you interacted with during your employment,鈥� and we call that a customer non-solicit clause. Another type of clause is, 鈥淓mployee, after the end of your employment here, you won鈥檛 solicit any of your former coworkers.鈥� We call that an employee non-solicitation clause. You won鈥檛 solicit your former coworkers to join you to whatever future organization you鈥檙e going to after the end of your employment.

So non-solicitation clauses of either species probably are not non-compete agreements as defined, but I say probably because the FTC and the rulemaking notice said, 鈥淲ell, we have to think about them. We have to look at a case-by-case basis.鈥� They give an example, not of a non-solicitation agreement, but a non-disclosure agreement, something that prohibits an employee from disclosing company trade secrets after the end of their employment, or if not trade secrets, other confidential company information. The FTC said, sometimes you鈥檒l see a nondisclosure agreement that鈥檚 written just breathtakingly broadly to prohibit an employee from using information that they may have learned in the course of their employment to benefit a future employer. Even if that鈥檚 publicly available information that they鈥檙e just learning about how the industry works, sometimes employers will aggressively say, 鈥淣o, you can鈥檛 use anything that you learned while you were an employee of me to go benefit a competitor.鈥� And the FTC said, in that situation, that might be a non-compete. If it functions to prevent an employee from taking another job after the end of their employment, that鈥檚 the test under the FTC rule.

So they鈥檝e not been very clear about where the line begins and ends, and I think it probably is ultimately going to be a case-by-case judgment call.

David McMillan

Fascinating, really helpful information, Ben, and I hope that folks listening to this episode of our podcast are finding this really practical information helpful to them as well.

So let’s keep digging and pulling on that thread just a little bit. So, “it depends鈥�, which is everybody’s least favorite answer from any of us providing professional services, is very real, right? This 鈥渋t depends鈥� answer also applies to the July 3^rd ruling, and what that might mean in terms of the landscape we’re operating under today. “It depends鈥� also depends on what state you’re in, because as an employer there’s this tapestry of different rules, regulations, and legislation on a state- by- state basis that employers need to be aware of as it relates to restrictive agreements and non-compete agreements. Anything you want to add to that perspective for those that may be listening that have employees in multiple states?

Ben Dryden

Absolutely. One of the issues that’s really animating the FTC here is that the FTC has cited research that finds that even in states that ban non-competes, the classic example is California. California has banned employee non-compete agreements for over a century, but the FTC found that even California or other states that ban non-compete agreements, you still see non-compete agreements. You’ll have these multi-state employers that just have a template employment agreement that they ask everyone to sign and sometimes employers aren’t good about tailoring those from state to state to state. Or maybe an employee moves in the course of their employment and they thought that they were governed by the same contract but by virtue of moving locations, a new state’s law applies.

And so there is a tremendously complicated patchwork of laws and it varies from state by state by state by state. There are four states that broadly ban non-compete agreements. There are some states that have no statute at all on the books, but just evaluate the enforceability of a non-compete on a classic, common law, case-by-case basis, and that is the quintessential, 鈥渋t depends鈥� situation where it just depends on the facts, it depends on this particular employee and you really don’t know what the result is until you get it before a judge. In a very real sense it depends on the judge.

Other states still have adopted statutes that might draw clear lines. And as a lawyer, I like clear lines;it allows me to give clients advice other than 鈥渋t depends.鈥� What’s really interesting, and I think germane for this audience is a lot of states have passed statutes like this setting clear lines for when non-competes can be enforced or not that are specific to the health care sector. So it’s something like 20-odd states have laws that are specific about when a non-compete agreement can be signed with a physician. Because in the case of physicians, the non-compete agreement affects more than just the doctor, it affects the doctor’s patient and it affects the health of the overall community. So a lot of states have come to recognize that health care is special, health care is different, and the rules for non-compete agreements in health care need to be specially tailored for these special problems.

David McMillan

So probably the best advice we can give to those listening who are not experts in this area and have employees in multiple states, is contact a good counsel who has experience in this area before you get too deep into a one size fits all approach on your restrictive agreements.

Ben Dryden

This is the quintessential situation where one size does not fit all. Under current state law there is a very diverse patchwork of approaches, and you need to know which state’s law applies, what are the particulars of this employee, what is the legitimate business purpose that’s being served by the non-compete? And you just have to think through all these issues before you bind someone to a non-compete agreement.

David McMillan

Great. I understand. So we’ve talked a lot about the rule, the regulation, the body of law that have sort of been building over the course of many years surrounding restrictive agreements and this most recent rule from the FTC, that’s really the subject that’s resurfaced all this dialogue. But underlying all of this is certainly business ethics and the idea of, well, just because something is legal doesn’t mean it’s right, or just because something’s illegal doesn’t mean that it’s not right. And so I would imagine that all of this dialogue around restrictive agreements and non-competes have begun to surface some of those old ethical arguments or perspectives as it relates to non-competes and other types of agreements, and maybe fostering conversation about new ethical considerations. Can you give us a glimpse into what you’re hearing and what you’re experiencing with respect to not simply the regulation, but just the idea of, hey, let’s look at this from a more holistic perspective?

Ben Dryden

Absolutely, and I’ll approach this two ways. I’ll talk about the economic literature and then I’ll talk about ethics, right and wrong and good and bad. So the economic literature in this area is relatively new. And what’s prompted this, there have been a number of states over the past, I’ll say 20 years, that have tinkered with their non-compete rules. They’ve either restricted the parameters where a non-compete can be enforced or they draw up categories where, such as physicians, we are going to say non-competes are no longer permissible for this set of employees, or they’ll draw a salary band above $100,000 is only where a non-compete is enforceable. That change on a state-by-state basis has enabled a new area of economics where academic economists are now able to study, okay, what are the actual empirical effects of non-competes. When a state changes its non-compete law, what does that mean for the people who work in the state?

And I’m not an economist, but I’ve read the literature pretty well and I’m not yet persuaded that the methodology is terribly sound. But, there have been some interesting results and these results are really what are animating the FTC here. I’ll just say what the FTC has found to be the teachings of the economic literature: According to the FTC, banning non-compete agreements is going to result in between $400 billion and $488 billion in increased wages over the next decade, which translates to over $500 per worker per year. They’re saying that employees make more money when there are no non-compete agreements. Interestingly, the FTC finds that that effect holds whether an employee is bound by a non-compete agreement or not. In other words, the FTC is finding that even if you’ve never signed a non-compete agreement, you will make more money if non-compete agreements are banned because that just means there’s more competition out in the marketplace for jobs in general. And the view of the FTC is that there’s going to be a rising tide that lifts all boats.

The FTC has also found that banning non-competes is going to result in 8,500 new businesses being created each year, tens of thousands of additional patent filings being made each year. So the FTC’s view is that this is going to be just a tremendous, tremendous stimulus for the American economy. It is going to result in not only a larger economy but more wealth trickling down to the people who need it the most.

Now, one thing the FTC has also found is that physician spending is going to go down, they estimate, by between $74 billion and $194 billion over the course of the next decade. What I would posit right there is, well, how can that be that wages go up, but spending on physician services goes down? How can that be? Either there’s something wrong in the math, or there’s just a tremendous market failure where health care systems are pocketing money that should be going to physicians. Those are the two possible explanations.

And I would suggest based on my own independent read of the academic literature that the FTC’s analysis is wrong. Because there’s only been one study done that’s really looked at an apples-to-apples basis, just asking the simple question, okay, doctors, how much money do you make? How much money have you made over your career? And are you subject to a non-compete? There’s only one study that that was the methodology, just direct surveys to primary care physicians. And they did this across five different states. And the authors of that study found that doctors actually make more money when they are subject to non-competes, a lot more money, 14% more money to start. And, doctors enjoy greater earnings growth over time when they are subject to a non-compete agreement.

And intuitively you say, “Well, how could that be? How can someone make more money when they’re bound by a non-compete?” The authors鈥� theory is, well, the nature of a medical practice is it’s not so much the doctor that goes out and attracts the patients, it’s the practice that runs ads on buses or on television, and it’s the practice that generates the patient relationships and gets the patients in the door. And then once the patient’s foot’s in the door and meets their doctor, then the relationship really translates to the doctor, it becomes a true personal relationship. But to allow a practice to have the confidence to make those investments of running advertisements, the doctor has to be bound by a non-compete. In other words, the practice needs to be confident that the doctor’s not going to just ramp up a panel of patients, get really busy and then immediately bolt, go across the street and poach all the patients. So the theory is that non-compete agreements, at least in the business of medicine, create a win-win that benefits both the employer and the employee. So that’s a pretty interesting finding.

Pivoting to the ethics of the question, meaning good/bad, right/wrong, the economics is certainly informative of what’s good/bad and right and wrong. But I’m a lawyer. I just have to begin with the observation that it’s long been the rule that for lawyers, non-compete agreements are unethical. And the reason is that lawyers are adversarial agents for their clients. And anything that restricts the ability of an independent adversarial agent from switching jobs has an indirect effect on the client. And so to protect clients, lawyers have agreed that it is a rule of ethics that lawyers will not be bound by non-competes.

And you can make the exact same argument for doctors. Because as we’ve been discussing, non-competes for doctors or other health care providers affect more than just the worker, they also affect the patients. And in fact, the American Medical Association (AMA) has a provision in their Code of Medical Ethics about non-competes. And it doesn’t ban non-competes, but according to the AMA Code of Medical Ethics, “Physicians should not enter into covenants that unreasonably restrict the right of a physician to practice medicine after the end of their relationship.鈥� And, physicians also 鈥渟hould not enter into covenants that do not make reasonable accommodation for a patient’s choice of physician.” Now those rules of ethics don’t have the force of law and doctors aren’t going to get, they’re not going to lose their license if they sign a non-compete that’s overbroad. But it’s interesting that that is a fairly longstanding provision in the AMA Code of Medical Ethics.

David McMillan

That is pretty fascinating. And I like the way that you described the reasoning for attorneys’ view on the ethics of a non-compete and how that might have some similarities to the physician/patient relationship.

I think the one thing that might deserve a little more explanation whether we do this now or in a future episode following the July 3^rd ruling, is whether that non-compete is for the entirety of professional services within a prescribed geography or a subset of those services. For example, if I’m an owner-physician that has ownership interest let’s say in some sort of outpatient venture, an ambulatory surgery center, is a non-compete associated with my ownership in that ambulatory surgery center, is that restrictive covenant reasonable because the patient has choice about where they might receive that service even if I’m the one providing it as opposed to the entirety of my professional services within a geography? So Ben, I don’t want to put you on the spot by trying to answer that today, but I think to your point about it, it depends, there are nuances within these restrictive covenants that have to be considered.

Ben Dryden

Yeah, well, what I would say about that just quickly is it’s not immediately clear whether that form of a non-compete agreement, that’s just a clause in the limited liability company agreement that makes the doctor a partner of the ambulatory surgery center, however that’s structured, that’s not necessarily a non-compete clause within the meaning of the FTC rule because the FTC rule is focused on non-compete agreements with employees, but there’s a whole species of non-compete agreements that apply outside of the employee/employer context. A quintessential example is a staffing agreement. If I’m hiring a staffing firm, I can expect that staffing firm not to compete with me in my primary business. If I’m going to bring in employees to come in and treat my patients, I can expect those staffing employees not to turn around and poach the patients, and that’s not going to be affected by the FTC rule. So I mean, there’s certainly a whole other podcast we could do on that topic, but it鈥檚 a really interesting point.

David McMillan

Well, it is interesting. And for firms like PYA who are involved in compensation plan design, certainly compensation valuation opinions associated with various professional services and certainly a vast majority of those being services provided by physicians and other providers, these issues are very real because as you mentioned in the empirical evidence cited in the study that you were referencing, oftentimes the presence of a non-compete can be and often is of interest to a valuator and trying to apply judgment with respect to whether that value is, like you were just most recently mentioning, the value of an interest in a business or whether that has to do with the value of compensation associated or between an employer and an employee, in this case of physician. These promulgations, these regulations from a force of law standpoint have one perspective, but I think the audience and I certainly appreciate your perspective about when you’re thinking through the ethics, did the economics in terms of how the marketplace rewards that sort of restrictive covenant, consistent with the philosophy underpinning the law that’s trying to create an equal playing field.

And so all of that is to say there’s a very real possibility if on July 3^rd the rule is upheld that through economic forces, some physicians and others that might’ve been subjected in the past to a restrictive covenant that is now no longer released, I think what we hear the empirical evidence saying is in time we might see that that’s actually a depression of wages on those providers. I know that’s not anything that’s for certain, but is it a fair statement to make that that’s a possibility that we might see emerge over time?

Ben Dryden

It’s absolutely a fair statement to say that that’s a possibility. I go back to the California example, where non-compete agreements have been banned in California for over a century. And doctors are able to make a living in California. So I don’t think this is necessarily going to be a 鈥渟ky is falling鈥� situation, but on the margins, it’s going to have an effect. And effects do happen on the margins. So if that means that doctors make a little bit less money after graduating from med[ical] school, well that’s going to mean there are that many fewer doctors applying to school or fewer qualified doctors applying to med[ical] school. And in a country that has tremendous physician shortages as it is, that’s a cause for concern.

David McMillan

I appreciate that logical thinking. Well, as we start to wrap up our time together here with our audience today, we started our podcast with an overview of the FTC proposed rule, and we’ve tried to give our listeners some more context within which to process not just the rule itself, but some of the challenges that are surfacing to the rule. Can you give our listeners in anticipation of July 3^rd, what are some things to potentially look for in that ruling or just some other material that a practitioner and employer may want to keep in mind while we wait on this July 3^rd ruling?

Ben Dryden

Sure, I’ll begin with this litigation’s very interesting, and it has the potential to turn into a seminal Supreme Court case about the separation of powers because it really is an issue where Congress has decided not to pass a law. I mean, Congress has considered non-compete legislation every term going back years and years and years, and there’s never been the political will to do something. So Congress has declined to act. The states have tremendous historical and current regulation of non-competes, but the executive branch has come in and with one stroke of a pen purported to do something that Congress has never done and to override the laws of 46 states. So now it’s falling on the courts to say what is the power of the executive branch in comparison to 46 states and in a situation where the legislative branch has declined to take action for failure to achieve political consensus.

And so it’s a fascinating separation of powers question, and we can get really, really in the weeds. I’ll say that the parties that filed their lawsuit within hours after the FTC vote, they have a certain political agenda. They don’t just want to stop the non-compete rule. They want it to be the case that it is a settled principle of law that the FTC does not have the power to pass any substantive regulations, and they’re trying to get the court to do something more than just prevent this non-compete rule from taking effect. And when you reach farther than you need to reach, you are taking a risk of overreaching.

And so it’s going to fall on this judge to decide, does the FTC have the statutory authority under the FTC Act? Do they have the power to do this? If they do, does that pose some constitutional separation of powers issue?

David McMillan

It is certainly going to be interesting, and as you mentioned, it has the potential to be a seminal case that I think as you’re sort of referencing, whose implications might go further than the FTC’s ability in the future to do rulemaking like this, but really to the beginning of your comment could impact the executive branch’s ability to do this outside the reach of Congress. Did I understand you correctly in case there are other non-attorneys listening who are trying to interpret that?

Ben Dryden

That’s right. And the phrase the Supreme Court has used over the past three terms is 鈥渕ajor questions.鈥� When the Supreme Court is asked to review major rulemakings or major regulatory actions by federal agencies such as the decision to forgive student loans, the Supreme Court has asked, is this a major policy question? And if the answer is yes, this is a major policy question, the Supreme Court says, okay, if a regulatory agency is making a major regulatory policy decision, they’re asked to be, at a minimum, a very, very clear congressional delegation of authority from Congress to the regulator to allow the regulator to make that policy decision. Congress has to be very clear that the regulator is authorized to make this decision, and that’s the test that the Supreme Court has articulated. But I can’t say that direction clearly controls the outcome of this case. It’s going to be really interesting to see.

David McMillan

Well, it’s a fascinating topic. Thank you for sharing your expertise with me and with our audience today, Ben. We certainly welcome any feedback from our audience and questions. You should be able to look Ben’s name up on the 麻豆传媒 website and get to his contact information, you can do the same on the PYA website to get to me. We’re all looking forward to what happens next.

And the optimist in me says, “Hey, look, no matter what direction this comes down on July 3^rd, we know that there’s a chance that the litigation and the legal process is going to continue up to and including a Supreme Court ruling,” but the dialogue… we’re all better for the dialogue. We’re more informed. It’s making us think more critically about these matters, both in terms of contract law for contracts between employees and employers, but as we’ve talked about today, the ethical issues surrounding it, and the economics that surround this matter. Like I said, the optimist in me says, “Hey, we’re better for the conversation.” And so Ben, we’re better for your expertise today in the conversation that you’ve led us through, and we thank you for your time.

Ben Dryden

Well, thank you, David, and thanks to PYA and to 麻豆传媒 for having me.

David McMillan

Absolutely. Well, with that, Jana and Angie, we’ll turn it back over to you.

Angie Caldwell

Thank you, Ben and David for a great discussion. We appreciate you taking the time to join us today. We want to thank our listeners for joining our Let’s Talk Compliance podcast series with Health Care Law Today, your connection to timely legal updates in the health care and life sciences industry. We encourage you to subscribe to this podcast. Please visit 麻豆传媒’s Health Care Law Today blog at healthcarelawtoday.com, and pyapc.com. If you liked this show, don’t forget to subscribe and be sure to rate us five stars. Until next time, I’m Angie Caldwell at PYA.

Jana Kolarik

And I’m Jana Kolarik at 麻豆传媒 & Lardner. Thanks so much for listening.

In this episode, Jason Kohout, chair of 麻豆传媒鈥檚 Family Office鈥檚 Practice Group, and Tax, Benefits & Estate Planning associate Emmaline Jurgena, are joined by Kevin Melvin, legal counsel of Mayo Clinic鈥檚 Office of Gift Planning. This episode dives into what you could expect to see as you navigate health care philanthropy, with respect to restrictions, naming gifts, and other concerns.

For more information regarding the 鈥淟et鈥檚 Talk Compliance鈥� podcast series, please click here.

Please note that the聽interview copy below is not verbatim. We do our best to provide you with a summary of what is covered during the show. Thank you for your consideration, and enjoy the show!

Jason Kohout

Hello everyone, this is Jason Kohout. I’m an Estate and, Tax, Trust partner in the 麻豆传媒 & Lardner Milwaukee office. I’m here with my colleague, Emmaline Jurgena and Kevin Melvin at Mayo Clinic. I’ll let them introduce themselves before we get to today’s topic.

Kevin Melvin

Hi, everyone. This is Kevin Melvin. I work in the Office of Gift Planning at Mayo Clinic, and I have the privilege to work with benefactors that want to support Mayo Clinic’s mission and patient care research and education.

Emmaline Jurgena

And I’m Emmaline Jurgena. I am in the Estates and Trusts planning department at 麻豆传媒 & Lardner in the Milwaukee office. And I also work with charitable organizations like Mayo Clinic and also charitable donors to make the kind of gifts that we’ll be talking about today.

Today we’re talking about things that come up when we’re navigating health care philanthropy, specifically restrictions, naming gifts and other things like that. So, Kevin and Jason, I thought we would just get right into it.

When you’re working with donors to either develop the terms of their gifts to charity on your end, Jason, or when Mayo Clinic is working to take in a gift, what kind of restrictions are you seeing? Are they restrictions on purpose or do donors sometimes not have restrictions? And how do you deal with that?

Jason Kohout

Kevin, what do you see?

Kevin Melvin

Well, thank you for the question, Emmaline and Jason. We see it all over the board. Of course, we want to make sure that we can use the gift. So, we’re learning from the benefactor. We’re learning about their passions and how they want to support Mayo Clinic’s mission. And usually, they have some kind of idea, some affinity towards a particular disease area or an activity at Mayo Clinic that they’re interested in. And we want to try to align with that passion and help make their philanthropy become a reality at Mayo Clinic.

If it’s a gift that’s going to be in perpetuity through an endowment, then we want to make sure that the restriction is something that can be used 10, 20, 25 50 years, 100 years from now. So, we want to make sure that some flexibility. And usually, benefactors understand that if you’re talking long-term, that the gift restriction should really be high level and flexible. But there are times where a benefactor might be really quite passionate about a certain disease area and they want to see a certain outcome, and we basically try to listen to their goals and their objectives and try to figure out a way we can mutually benefit each other’s activities and goals.

Jason Kohout

As a planner, it’s really interesting. Our experience runs the gamut. I will have clients who sign $50 million gift agreements and I’ll read about it in the newspaper. They have not restricted any of it. Or if they’ve restricted it, they have not talked to their attorney. And then we have clients who are homed in on a particular vision for what they want for their gift. And it’s three or four pages of very specific, “This is what I want you to do with the gift” and we have so very tight purpose restrictions and how you’re going to do it and that sort of thing.

I would say we are increasingly working with our private clients on things like endowments. There’s very much a concept of permanence of, “I want this to outlive me. I want this to be my legacy.” So that would be funds that will be around, hopefully in perpetuity, to fund a chair of a department or some ongoing research or fellowship.

I would say in addition, we’ve had an uptick in building like capital expenditure and then recognition grant. So, saying things like, “I’ll make a gift for the building, but I want it to have my name on it.” That’s something that’s fairly attractive. And I think it looks like in philanthropy there’s really can be a focus on recognition, making sure that someone’s name on the building or whatever the naming opportunity is.

Kevin Melvin

Right. So, recognition is important to benefactors, and they want to understand and have clarity about what that recognition might look like, but they’re also guided by the impact that they want to have and what activities will be in that building or that capital projects. So, I think perpetuity is a long time. When we talk about gifts to charity, we want to make sure that medicine or whatever the charity activity might be, that there’s some opportunity to pivot as times change. Medicine is changing rapidly today, and so we want to make sure that if we’re going to have some funds, that there is some flexibility to be able to meet the current times and really ensure that these funds are spent and not being idle in a way that is not achieving the benefactor’s goal or the charity’s goal. So, it’s really a deep and rich conversation when those things come up.

Emmaline Jurgena

Yeah. So, what I’m hearing from both of you is that honoring the donor’s purpose, but also allowing for changes and/or modifications if the circumstances arise, where those are needed is important. Related to that, I was hoping you could talk about if you don’t have something in the gift agreement or if you haven’t worked out something with the donor, or maybe you’re dealing with an older gift that was taken in before you developed some of your modification policies, what other options do you have to modify a gift if it’s needed to serve the purpose of the donor or to adapt with the times?

Jason Kohout

Emmaline, you make a good point there. So, in modern gift agreements, I would say there’s very much a push by charities to I’d say put language into the gift agreement or the policy that governs that gift to be flexible to say something like, “Hey, the future may change. We may solve polio. How are we going to go forward?” Sometimes donors really… Clients, private clients and donors, can I think sometimes have a bad reaction to that language. But I have to tell you, as a person who advises individuals, I usually tell people like, “You should be trusting the organization that you’re giving these funds to. If you’re not, these restrictions are not going to be worth it. You need to have faith in the organization that you’re making a gift to.” Sometimes there’s some education about that and some thinking about that. So, we have our clients think a little bit about that. And oftentimes they come to the conclusion, “You’re right. We need to have some flexibility here because medicine especially does change.”

Kevin Melvin

Yeah. Jason, I would agree with that, but also I think it’s important to remember that even the modern gift agreement probably addresses these issues really early on in the conversation so people can get on the same page, but it’s really the older gift arrangements that have come in that we tend to struggle with about how to make sure that that gift is still impactful and meaningful and really helping the constituents of that charity.

And so, one thing that we should always remember no matter what is to always honor our commitments and honor whatever commitments were made at that time. And if something is happening in the future or in the present time where that’s being frustrated, then seek out a conversation if the benefactor is still available or maybe the foundation is still available to have that conversation and ask for a modification of use. And then if there isn’t anybody around, maybe it’s been 30, 35 years and there’s just nobody left to have that conversation with to make a modification to the gift agreement, then there are some legal mechanisms you can attempt to have a court maybe lift or modify or pivot the restriction a little bit and keeping the spirit of the original intent in mind as well.

Jason Kohout

Kevin, when you’ve had to go to court, has it been easy? Hard? So, what Kevin’s referring to everyone is that when there is a restriction or organization comes to the conclusion that the purpose is impossible or impractical, sometimes you go to court to lift the restriction. Ultimately, the court has the ability to do that usually with notice to the attorney general. So, you’ve got 2/3 parties. When you’ve had to do that in general, what’s your approach there and what’s your experience?

Kevin Melvin

It’s not easy. It is also very, I don’t know if sacred is the right word, but you want to be very careful and keep in mind that you made a commitment to the benefactor, you want to honor that as much as possible. So, you develop a petition for the court and then you seek a notice to the attorney general. Sometimes the attorney general might have some feedback or some questions about the arrangement. And then it’s heard by the court and the judge may have some additional questions as well. It is never completely lifting the original restriction. It is just modifying it enough to make the funds spendable to make sure that we can still use the funds. So, it is as close as possible to the original intent of the benefactor. I’ve never seen it in a situation where the court has lifted the restriction completely. It’s just enough of a modification to carry on the original intent of the benefactor.

Emmaline Jurgena

I wanted to note too is the reason that you worry about the original intent and the benefactor and that you have these gift agreements and documentation is because there is a mechanism in the law for these agreements to be enforced. And either that’s outlined in the gift agreement. I assume you see that sometimes, Kevin. Like you said, maybe you go back to the original donor or their foundation. And if it’s not, then it’s going to be enforced by the attorney general who has the power to enforce these charitable gift agreements.

Kevin Melvin

Yeah. Yes, that’s right. The attorney general is an interested party, and so they will look at the original gift agreement and all the facts and circumstances surrounding that. But sometimes you will see, you alluded to this, you will see that benefactors will nominate or put a term in the gift agreement that will provide that their foundation or maybe it’s next of kin will have standing to be able to have input and participate at a court hearing if it becomes necessary.

Emmaline Jurgena

Right. And that brings me to my other question. I’m sure you have donors that don’t necessarily need to enforce the gift agreement or have an issue with how it’s being used, but they do want to have an ongoing relationship with the gift or the program that they’re funding or ongoing input on the administration of the gift. Do you see that and how do you deal with that?

Kevin Melvin

Sure. In modern times, you are seeing more engagement from benefactors. They want to be part of the solution finding. They want to be engaged, they want to understand how the funds are being spent, and they want to receive not only annual reports, but maybe quarterly reports.

Sometimes they will set up, depending on the type of charity that we’re working with or that you’re working with, if it’s a scientific charity, a medical organization, there might be an independent scientific board that will review the outcomes of what this gift is supposed to be accomplishing. And sometimes this board might be made up of internal people to the charity and also external people selected by the benefactor that have a scientific background.

So, you’ll see that kind of, I don’t know if it’s checks and balances, but more of making sure that the funds are being maximized to the full potential and obtaining the results that are intended by the benefactor to really push, in our case, medicine forward. And what does that mean? That means treating patients better or finding cures to save lives for our patients. So, it’s really passionate work that our benefactors feel strongly about, and they want to make sure that we’re doing everything we can with the funds that they provided to push medicine forward.

Emmaline Jurgena

So, we’ve been talking about gift agreements and restrictions and enforcing those. On the flip side, I am sure you both maybe have people come to you and say, “We do trust this charity and a gift agreement just seems too formal. We don’t need one. We’ll just have some emails and maybe some verbal conversations.” How do you deal with that? Do you tend to steer donors away from doing that? I would think probably so.

Kevin Melvin

I can comment a little bit on that, and I’m sure Jason might have some further thoughts on it. There was a time where gift agreements weren’t used broadly across the industry and that the thought was that perhaps that would be off-putting to the benefactor, too legalistic. Why put a document in front of them that has a lot of legal terms in it, and it would just kind of silence the philanthropic conversation. And that just the opposite really has occurred.

You’ll find that gift agreements are used by many charities. Sometimes charities will have a threshold, so maybe they won’t use a gift agreement unless it’s $25,000 or more or depending on the scope and size of the charity. Some charities require a gift agreement in all scenarios. And what it does is it clarifies, oftentimes there are conversations back and forth and excitement and people get excited about what the funds could be used for, but we really want to make sure there’s a meeting of the minds and the understanding about how the funds will be used. And so, you have that situation going on.

And then there are other situations where benefactors, they don’t want to sign a gift agreement, they’re just not… A handshake is good enough for them, but emails, correspondence back and forth, all taken together could form a gift agreement under UPMIFA (Uniform Prudent Management of Institutional Funds Act).

Jason Kohout

You know, there’s a saying that-

Emmaline Jurgena

Yeah, that’s a good point.

Jason Kohout

… your time travel isn’t possible. But everybody on this call gets to hop in our time machine and go back to 1992 when there’s a gift, there’s a fund, and nobody signed up the gift agreement. And so, we’re struggling to put pieces together about email, letter, handwritten notes. I think we’ve looked at those. What was this fund about? What was this person… What did we say that a hospital would do? What would this donor want? And it comes down to trying to do the best job you can, but it wasn’t done with the gift agreement, a clear documentation or thinking about these poor people in 2024 that are going to have to figure out what to do with this money.

And so, I mean, I could see biggest reason to do a gift agreement is to very clearly and succinctly say, “What are these funds for? What are they to do?” If I was talking to a charity, I would absolutely talk about the default rules are not great because the default rule is you’re stuck with this purpose, and you might be stuck with some rules about how these funds are used that you don’t want to live with. Many times, the gift agreement, even a very short one, would say something to the effect of, “If these funds are impractical because we cure polo, you can use them for something that’s as close as possible in the discretion of the board of directors.”

That means that you don’t have to go to court, which is, as I think Kevin alluded to, it’s not something that anybody roose doing. I mean, it’s usually at least a six-month process. You get to show up, notice all kinds of things in which we usually try to avoid, and it can go awry pretty easily. So anyway, I mean, kind of the selling point for the gift agreement is that it does usually, the default language in a gift agreement, usually gives you some pretty good flexibility and also avoids this problem of, “Wow, we’ve got this fund here, but we don’t know what it was actually for, what the rules were, or better yet, what was the recognition that we owe this donor, but what exactly did we agree to?”

Kevin Melvin

Mm-hmm. That’s a really good point. And I just want to underscore that language that you’ll find in the typical gift agreement says something to the effect the donor, “If the use has become impossible and practical and not in the best interest of the charity, the board may modify it in a way that the board determines as reasonable and as close as possible to the original intent.” So, it is not a blank check and it’s not something that can be easily done. You have to take it to the board of trustees and there’s a number of people looking at it. So, it’s not something that accounting office can do, or the fundraising shop can do. It really defines a process that has to take place, and it is not a blank check.

So, a lot of times, benefactors will misinterpret that language or even current staff of a charitable organization. And what I want to just clarify is it is a process and it’s not a blank check. And that with these kinds of checks and balances in place, hopefully we ended up in a place of really honoring the benefactor’s intent and ascertaining their intent as well if there’s not a gift agreement in place.

Emmaline Jurgena

So, I’d like to pivot a little bit. We have talked about these restrictions and gift agreements, and they could apply to many charities, but one thing that’s interesting about hospitals is they go through these M&A transactions, and they merge with each other, and they expand, and they change. There are sometimes in the news or in case law, some issues with these restricted gifts that hospitals take in when they go through these M&A transactions. So, could you speak to some of the issues or risks or just things to be aware of there?

Jason Kohout

Yeah, I mean, every time that we’re engaged with a client that there’s going to be some sort of change of control transaction with a hospital that has been doing fundraising, there’s a question. And oftentimes it’s like a community hospital that’s going to become affiliated with a larger system. Some of that type of activity or some hospitals are going to move from one system to the other, that sort of thing. You do, just like any other contract, you would look at funds, any restricted funds to see, “Are these funds, are they able to be moved or is there some sort of issue that this restriction applies and it’s now going to become impossible to carry out that restriction?” And if that’s the case, then the funds or something has to be done, right? We have to take a look and say, “Wait a minute. If that MRI machine was bought with these funds with a certain restriction on it, can that MRI machine transfer?” Or if there’s a fund that’s been set aside for X and that purpose is not going to be met after the transaction, those funds may have to be sent elsewhere.

Kevin Melvin

Yeah. And I don’t know if I have much more to add to that except just understand what obligations and responsibilities you have signed up to do. An inventory of those gift agreements and the commitments that you’ve made will be important in that transaction so that you have that all up front and you can address it on the front end before the transaction is finalized.

Jason Kohout

Yeah, transactions in which then there’s somebody after the fact has to go through and do the cleanup, do these trust transfer over, do these restricted gifts transfer over or what’s going on here. But certainly, better documentation helps quite a bit.

One thing, Emmaline, that we’ve kind of come into or had a question about I’d say repeatedly is let’s say there’s been… I mean there’s been significant fundraising at an organization, but they typically have not used gift agreements. They’ve probably been doing a lot of general fundraising, I would say, but they’d done it in a community or a metropolitan area. And now they’re going to affiliate with a larger organization or just an organization in which the service area will be larger. I mean, there’s been some questions about essentially, “Well, did you have some sort of implied gift agreement that you raise these funds in Milwaukee and now you’re affiliated with this organization that goes across the Midwest, for example, are those funds limited to Milwaukee or can they be used in the entire new operating area or what?”

And so, there’s not really a gift agreement. And you could put yourself in the shoes of those donors. It’s not entirely clear what they would’ve said, right? They gave money to the hospital organization and it’s merging with another or merging into an affiliated organization.

It seems to me, and I think we’ve looked for authority on this, that that doesn’t trigger much of a restriction. Just the concept that, “Yeah, well, when we raised the money, we were this small type of organization. Now we might be a part of a bigger organization.” I think we’ve come to the conclusion that that’s not really much of a restriction. And there’s not a whole lot of authority out there on it.

Typically, you might go to the attorney general when you have a transaction like that and get the entire thing blessed. And as part of those conversations, you might sneak in this concept that, “Yeah, we’re affiliating and the fundraising and all the funds that are coming or that came with the prior organization can come forward. We don’t have to do any sort of cleanup or send the funds to another organization or something like that.” That’s a little, I would say, from what I can tell in the actual authority out there, our authority to say, that there’s very limited authority in that type of area. But on the other hand, that also means that we have not seen a whole bunch of people that we haven’t seen necessarily significant instances where that has become an issue.

Kevin Melvin

I was wondering that myself, Jason, is because the solicitation that was used for those collections of those donations probably doesn’t exist if it’s been a long time or the charity can’t find it, but they have some kind of accounting record that the gift came in, it’s supposed to be used for X. I’m wondering, is this a lesser issue too if the funds have been spent down and they’re not, for example, in a perpetual endowment?

Jason Kohout

Right. Hopefully they solved it the old-fashioned way, they just spent it. It’s not there anymore. But here I’m thinking of, it’s kind of basically, “Look, this organization’s always operating in this geographic area. We fundraised for the general purposes of this organization, never really put a restriction on it, but of course the service area was X,” right? I mean, everybody knew the funds would be used in X when they made the gift. Does that mean that there’s an implied sort of restriction that occurs when the service area is now 10X, Right? It’s quite a bit bigger. And I think the answer there is that no.

Now, on the other hand, in hospital M&A, I think probably on another podcast they’ll be talking about how attorney generals have become much more involved in just general hospital affiliations for a whole host of different reasons. I’m not seeing this as the big avenue for them to do that, but I think that’s probably something to be wary about, which is, but that’s on another… That’s a different podcast.

Emmaline Jurgena

Yes. And I agree there’s not that much authority out there. I will say it seems to be a bit of a more difficult case if a hospital organization is leaving the community entirely or leaving the states, then an attorney general might be more liable to get involved and say, “Hey, your assets were contributed at least in part for staying in this community.” But for a lot of the hospital M&A transactions we see, they’re simply getting bigger, but they are staying in their service area in some part. So, it seems like that is okay based on the limited authority that we have.

I think we’re wrapping up here, so I just wanted to get your thoughts, Kevin, and you too, Jason. We talked about having flexibility built into the document and modification provisions. How else do you ease the way for donors and these restricted gifts and yourself as the charity? I’m thinking, do you have gifting policies or gift acceptance policies or other ways that you streamline the process and make sure that the donor’s needs are met and that you can make sure you suss out their purpose and restrictions?

Kevin Melvin

Yeah, it’s a good question. Of course, we have lots of policies and procedures and gifting policy and gift acceptance and things like that at Mayo Clinic. One of the best advice I could give any charity is that when somebody’s thinking about making a donation, whether it’s small, big, medium, there’s a lot of excitement. And people at the charity are excited about it, the donor’s excited about it, but you really have to work hard in making sure that everybody’s on the same page. So, you have the fundraising department and the donor that is excited about the gift, and then you have to bring in other people.

So, in our situation, maybe it’s a gift that’s going to impact the Cardiovascular Department or the Cancer Research Department. We want to make sure the people responsible for spending that money understands the intentions behind the gift and are participating from almost the very beginning to make sure that there’s a meeting of the minds.

And one way you can help ensure that there’s clarity before the gift is accepted is to route an internal MOU, kind of summarizing the conversations and getting agreement from the stakeholders about how the gift will be used in their respective departments. Because if they’re not on board with it, that money may not be spent. It may just sit there for a while until somebody figures out a different kind of approach or how to discuss it with the department or the benefactor. So, I find that using an internal MOU, a memorandum of understanding with the charity stakeholders will help improve that understanding about how the gift will be used. And then from there, you would use that to draft the gift agreement to give back to the benefactor for their review with their counsel.

Jason Kohout

I think less so for bigger organizations, but smaller organizations going to fundraising for the first time. If you’re going to put limitations on certain things, like for example, you’re allowed to… We’ll recognize you for giving a gift to this building for 20 years. If you’re going to do that type of thing, which I highly recommend that you do, do it in a policy so that the first time someone asks, you can say, “Nope, it’s that way for everybody. It’s our policy.” I think it’s a lot easier to say no or to put limits on things when there’s a policy that’s been established. I think just clients and donors, they just tend to go along when there’s not a rejection of something they asked for. It’s just a statement of how we do things. I think that’s probably organizations getting into fundraising as opposed to the larger organizations probably have those policies in place. But as you begin to do that, you would think about that.

Kevin Melvin

I agree with that, Jason, because if you do have a policy in place, and for that policy to be there, there had to be some thought and consideration by various individuals. So, there’s probably a rationale behind it. So, you can cite the policy and then the why, the rationale behind the policy. And that will help keep the discussion with the donor on par and explain… It actually will enrich the relationship if you can kind of explain the rationale and the reason behind the particular policy too.

Emmaline Jurgena

Right. Well, thank you so much, Kevin and Jason. I think that’s all we have time for.

Jason Kohout

So, it’s my turn to say we’re going to send this back to Judy. Thanks, everybody. Kevin, thanks for joining us. And Emmaline, thanks for moderating. I’m going to turn this back to Judy now. Thanks everybody for joining.

In this episode, partner Jana Kolarik of 麻豆传媒鈥檚 Health Care Practice Group and PYA principal Angie Caldwell interview partner Kyle Faget, co-chair of 麻豆传媒’s Health Care Practice Group and co-chair of the firm鈥檚 Health Care & Life Sciences Sector鈥檚 Medical Device & Equipment Area of Focus, and PYA consulting principal on medical device company arrangements with physicians. Specifically, we’ll be discussing arrangements that can raise compliance issues and how to potentially mitigate some of those compliance issues.

For more information regarding the 鈥淟et鈥檚 Talk Compliance鈥� podcast series, please click here.

Please note that the interview copy below is not verbatim. We do our best to provide you with a summary of what is covered during the show. Thank you for your consideration, and enjoy the show!

Angie Caldwell

Hello and welcome to the Let’s Talk Compliance Podcast series of Health Care Law Today, presented by 麻豆传媒 & Lardner and PYA. I’m Angie Caldwell, PYA consulting principal. My co-host for the Let’s Talk Compliance series is Jana Kolarik, a partner in 麻豆传媒’s Health Care Practice Group. Before we begin our show, we want to remind you to subscribe to Health Care Law Today either on iTunes or your preferred podcast app. Please visit healthcarelawtoday.com or pyapc.com. Jana, tell us about our topic today.

Jana Kolarik

Great, thanks so much, Angie. For today’s show, Angie and I will be interviewing Kyle Faget, a partner in 麻豆传媒’s Health Care Practice Group, and Tynan Kugler, PYA’s consulting principal.

Our broad topic today is medical device company arrangements with physicians, and specifically, we’ll be discussing arrangements that can raise compliance issues and how to potentially mitigate some of those compliance issues. We’re going to spend some time with PODs or physician-owned distributorships, key opinion leader physician arrangements, and other physician arrangements, frankly – speaking, consulting royalties 鈥� and then how systems, hospitals, and physician practices can really look at those arrangements and audit those arrangements. And then we’re also going to spend some time on the Open Payments or other people know it as the Sunshine Act and how it should be used by device companies and how it can be used as a tool. So with that, Kyle, please provide a brief introduction of yourself in your area of practice.

Kyle Faget

Thank you, Jana. Hi, I am Kyle Faget. I’m a partner in 麻豆传媒 & Lardner’s Boston office, and I am also the co-chair of our health care and life sciences practice group here at 麻豆传媒. I advise a number of medical device companies on compliance-related issues. I help build and scale and execute compliance programs, and I also do quite a bit of work in the clinical trial research-related areas and a lot of work in digital health and telemedicine.

Jana Kolarik

Fantastic. Thank you, Kyle. And Tynan, tell us a little bit about yourself.

Tynan Kugler

Thank you, Jana. I’m Tynan Kugler. I’m a principal in our Atlanta office. I spend my time in our valuation practice specifically related to service valuations. I work with both physicians in the hospital/health system space but have been spending a good bit of time in med device, pharma, and med tech related to some of the topics we’re going to be talking about today.

Jana Kolarik

Awesome. Thanks so much, Tynan. All right, so let’s just dive into this, physician-owned distributorships. So Kyle, what is a POD?

Kyle Faget

Yeah, good question. I guess we should all know what we’re talking about before we jump off the cliff here. So physician-owned distributorships are physician-owned entities that derive revenue from selling or arranging for the sale of implantable medical devices ordered by their physician-owners for use and procedures by those physician owners who perform their procedures on their own patients at hospitals or ambulatory surgical centers.

Jana Kolarik

Yeah, and there’s been a focus on PODs or physician-owned distributorships 鈥� we’re just going to call them PODs 鈥� for a number of years. We had the 2013 special fraud alert on physician-owned entities. Why don’t you tell us a little bit about that concern or that focus by the U.S. Department of Health and Human Services Office of Inspector General (OIG)?

Kyle Faget

Sure. So OIG’s concern is that there exists a strong potential for improper inducements between and among the physician investors, the entities, device vendors, and device purchasers. And OIG has stated that these ventures should be closely scrutinized under the fraud and abuse laws. So recall that the Anti-Kickback Statute exists to protect patients from inappropriate medical referrals or recommendations by health care professionals who may be unduly influenced by financial incentives. So the opportunity for referring physicians to earn a profit, including through an investment in an entity for which they generate business could constitute illegal remuneration under the Anti-Kickback Statute.

So OIG expressed concerns about arrangements that exhibit questionable features with regard to the selection retention of investors, the solicitation of capital contributions, and the distribution of profits. So things that OIG is zeroing in on here are selecting investors because they’re in a position to generate substantial business for the entity, requiring investors who cease practicing in the service area to divest their ownership interests, and distributing extraordinary returns on investment compared to the level of risk involved in the investment.

Jana Kolarik

I hear you. But to be clear, physician ownership in and of itself is not prohibited?

Kyle Faget

No, not at all. In fact, there exists a small entity investment safe harbor to the Anti-Kickback Statute that requires that no more than 40% of an entity’s investment interest be held by investors in a position to make or influence referrals, furnish items or services to or otherwise generate business for the entity. So we do see physician investors, we definitely do. That’s fairly normal course of business, particularly in the medical device space. But I think the issue becomes, as OIG pointed out, you don’t want a situation where you’ve almost got a closed loop where you’ve got physician investor and an entity and then the physician utilizing the products from that exact entity, thereby generating revenue for the entity. The idea of course being that physicians should be selecting products that are in the best interest of their patients and it’s the right medical device to be used with the patient not because the physician is going to generate a profit from use of that particular device.

Jana Kolarik

So what steps? Because I know OIG and the focus on this is definite, and I know there have been cases where some of these PODs actually have even had U.S Department of Justice (DOJ) scrutiny. What steps can an organization take to either evaluate relationships with PODs or address if there are some POD arrangements?

Kyle Faget

Yeah, so PODs are not inherently wrong per se, right? I mean, in this special fraud advisory alert, obviously, OIG has actually said that these types of arrangements deserve close scrutiny. But in 2022, there was an advisory opinion 22-07 that addressed how physician-owned entities that the government indicated there, there are ways to structure these arrangements such that they don’t raise fraud and abuse concerns. And in fact, in that advisory opinion, OIG clarified that that special fraud alert should not be read to mean that the physician ownership of a medical device maker without something more presents a significant risk under the Anti-Kickback Statute. So just to be clear, it doesn’t mean that per se a POD, an investment in a POD, is necessarily fraudulent. The concern again is that the physician-owned distributors that derive revenue from selling or arranging for the sale of implantable medical devices ordered by their physician-owners for use in procedures that physician owners perform on their own patients.

Jana Kolarik

So talk to me about some of those inherently suspect sort of characteristics of PODs. If an organization is supposed to sort be looking at it, how do they look at it? How do even physicians or device companies as they’re entering into arrangements with physicians need to assess risk related to those arrangements?

Kyle Faget

Sure. So OIG actually enumerated a number of these inherently suspect characteristics, and they include the size of the investment opportunity offered to each physician varying with the expected or actual volume or value of devices used by the physician; distributions not being made in proportion to ownership interest or physician owners being paid different prices for their ownership interests because of the expected or actual volume or value of devices used by the physicians; physician owners conditioning their referrals on the purchase of the PODs devices through coercion or promises or by requiring an exclusive purchasing arrangement; physician owners being required, pressured or actively encouraged to refer, recommend, or arrange for purchase of the PODs devices or being threatened with negative repercussions for failing to use the PODs devices for their patients; the POD retaining the right to repurchase a physician owner’s interest for failing to refer; the POD being a shell entity that doesn’t conduct appropriate product evaluations, maintain or manage sufficient inventory in its own facility or employer or otherwise contract with personnel necessary for operations; the POD not maintaining continuous oversight of all distribution functions; the physician owners failing to disclose their ownership interest to a hospital or to the ambulatory surgical center customers.

And these characteristics, I mean, that’s a mouthful, right? So those are the things you want to look at. And probably not any one of these is necessarily dispositive, although you can imagine that some of these characteristics are worse than others. But you can avoid these characteristics by structuring an arrangement carefully. So for example, the physician and other members of their medical group should not be the sole or even primary users of the POD’s products and generating a very limited and steadily decreasing amount of the company’s business. So you saw that as one of the elements in the advisory opinion – that characteristic was present and there should be no requirement to make or maintain any level of referrals to hold the ownership interests. 

And no repercussions should exist for not using the company’s products. So in other words, you shouldn’t have divestiture requirements or company repurchase rights in the arrangement. The profit distribution should be based only on ownership percentages. And you can even add as an additional safeguard that the company reduces any profit distributions to the trust by the amount of revenue resulting from orders from the physicians and the medical group to which they belong. So you’re actually then cutting out that direct closed loop where if I use the product, I’m going to generate revenue for myself – you excise that piece. The patients and purchasers should be informed of the ownership interests.

And that’s not going to be enough, obviously just to disclose to your patient, “Hey, I’m a part owner of the company that we’re actually using the device that we’re going to implant in you.” That’s fair because how many patients are going to raise their hand and say, “Oh, well never mind. I’m going to look for a different surgeon then.” But it is important to be forthright about it, and it will cause even physicians to think about, “Well, what am I exactly investing in? Is this something that I want to represent to my patients that I’m doing?”

Another one of these sort of careful structuring element is the physicians being empowered to order company products for their own surgeries and recommending the company products to others, but not otherwise attempting to influence hospitals or ASCs to purchase the company’s products and not conditioning referrals on the purchase of the company products via shifting or threatening to shift their business or requiring minimum or exclusive purchase arrangements. And then the company being a legitimate manufacturer, so not that shell that I mentioned earlier, so not a shell that doesn鈥檛 conduct appropriate evaluations, manage inventory, or employer contract with appropriate personnel.

Jana Kolarik

No, that鈥檚 super helpful. And the details are super helpful there, obviously. And I think one of the things that I know we鈥檝e advised clients, especially hospitals and health systems as well as ASCs on, are conflict of interest forms to kind of dig into some of those details. Tynan, I know maybe you have some insight into that type of audit or that type of review.

Tynan Kugler

Yeah, I thought I would just touch on several of the things that we look at from just, I鈥檒l say an audit or sort of pressure testing because interestingly enough, just last week I got a question 鈥� timing was interesting 鈥� on a potential issue with a POD. There are a couple of things that we look at. One of them is theoretically an organization should be able to know whether there鈥檚 ownership in a distributorship. But getting back to Kyle鈥檚 point about sort of the shell company, I think sometimes that can be difficult to track down. You can start with Secretary of State websites, start with a company鈥檚 website, but oftentimes that鈥檚 not going to give you the information you need.

Jana, you hit on the annual conflicts of interest [forms] from providers. One of the other things we see, and a lot of internal audit departments will do this, but they鈥檒l review vendor purchases. So they鈥檒l look for upticks or abnormal levels of vendor purchases or physicians that are using products more than others as just sort of a red flag. The other thing, I think we had an instance of this several years ago where there were compliance hotline calls. So there was some suspected overutilization because of a potential relationship, and that made its way through the compliance hotline. So I guess that speaks to how beneficial your compliance processes can be, not just for the things that we typically think about, but for also these kinds of things. And then it鈥檚 going back and looking at your vendor policies. So have you refreshed your vendor policy for physician practices for what you expect of physician ownership and/or has it been appropriately communicated? So we鈥檒l touch on some of the Open Payments issues in a few moments, but that just potentially gives a little bit more sort of granular 鈥� what do I do if I need to pressure test a couple of things?

Jana Kolarik

We鈥檒l talk a little bit, now that we鈥檙e segueing from PODs, sometimes those physicians who are part of PODs are key opinion leaders. And we鈥檙e going to talk generally about physician arrangements and also about key opinion leaders. So Tynan, what are some current compliance trends that you鈥檙e seeing with respect to physicians, and if different, key opinion leaders? Are there any that really surprise you and are you seeing increased scrutiny really related to that?

Tynan Kugler

Yeah, it鈥檚 interesting because I think we鈥檙e really seeing in the last year or two an increase in requests for valuations or reviews of arrangements with physicians that have relationships with med device, health tech, so electronic medical record (EMR) companies, or other software companies that are engaging physicians to provide expertise. It鈥檚 not just limited to physicians. I mean, we鈥檙e seeing advanced practice providers, we鈥檙e seeing practice managers. If it鈥檚 a med tech issue where somebody鈥檚 coming to a practice to see how an EMR works or a product is working, we鈥檝e got more than just the physicians who are being paid on behalf of a med device or health tech or pharma company.

For a while there, it was not something that I thought we were going to see a lot of 鈥� it sort of was flying under the radar, but I think my guess is what鈥檚 happening is with everything that was bombarding all of us in 2020, just like Kyle talked about the POD regs coming out a little bit earlier, there was a Special Fraud Alert. It was in November of 2020 and it really highlighted speaker programs. But November 16, 2020, is not exactly when everybody was going straight and looking at their fraud alerts for what speakers were doing. They were a little more concerned about other things.

So my guess is that what鈥檚 happening now is we鈥檙e starting see folks pay a little bit more attention to that now that the dust has settled. And curious to what Kyle鈥檚 seeing as well. But I went back and looked. And from 2021 to 2023, just in a list of settlements related to med device and pharma, I counted nine settlements ranging from $9.75 million to $900 million for a slew of different allegations that were related to payments to health care providers for inducement of products, consulting arrangements, speaker programs, training programs, royalty payments. That kind of solidified and kind of made me understand that what maybe we were seeing in our practice is really truly playing out with what鈥檚 taking place with some of these companies.

Kyle Faget

Yeah, I agree with that. I see on my end a real uptick in clients asking for these types of arrangements, the drafting of them, putting them together. And honestly, post-COVID, we鈥檙e back on the speaker circuit, right? So people are traveling again, people are engaging again. I think with that uptick in in-person availability, we’re seeing companies want to use Key Opinion Leaders (KOL) again and get them out there and promoting the products and educating on the products. And let me just even be clear, promoting, there’s a piece of it that’s that even though it’s supposed to be based in education.

So yeah, I mean we are seeing an uptick for sure in use of KOLs and the need for those kinds of consulting arrangements. I think what’s interesting from my perspective is we’re almost back to, I’m seeing a lot more of, which is interesting to me in light of that special fraud alert, arrangements being structured in some of the ways that were previously disfavored, and I’m entering into a lot of conversations with clients about proper structuring of these kinds of consulting and KOL-type arrangements.

Tynan Kugler

Yeah, the other thing I’ll say is that when you think about what COVID did for the speed of clinical trials, and this kind of gets back to some of your other experience, Kyle, is I think the speed with which clinical trials are now able to be brought to fruition, I think that’s also going to have an impact on maybe the volume of these that we see just because of that particular path.

Angie Caldwell

I was just thinking about the compliance considerations for these things. So Tynan, if you can walk us through some of the compliance considerations for those consulting arrangements, those ownership arrangements, royalties, all of those things.

Tynan Kugler

Yeah, I think honestly one of the best places to start is understanding what the government called 鈥渟uspect characteristics.鈥� Again, that seems to be a theme in fraud alerts, is you get a good menu of suspect characteristics because there’s a really good list in there that helps organizations, I think, both the operators and those that are advising them. But one of the examples that they gave was a company sponsors a speaker program; they pay a physician or a key opinion leader, but there’s little to no substantive information that’s presented. So essentially, it’s a gathering that’s being sponsored with really no substantive knowledge sharing. Sometimes they’re held at locations that aren’t conducive to exchange of information. So that’s another one from a compliance perspective, looking at if we’re holding a speaking event at a football game, that’s likely not going to be conducive to clinical knowledge sharing or otherwise.

The other thing, and we talked a little about this with PODs, but it’s the relationship between the sales and marketing and the business units and their selection of speakers. So make no mistake, what ends up happening oftentimes in these is the business operators are the ones that are coming to the attorneys and the compliance folks saying, “This is the physician, or this is the advanced practice provider that I want to do this speaker program,” and one of the things to look for is making sure that the payment to that provider is not tied inherently to the dollars that provider’s generating for that business operator or that salesperson. And then one thing near and dear to Angie and my heart is always looking and ensuring that companies are paying at fair market value, which a lot of the companies will say, “We’ve done a fair market value opinion or an analysis,” the provider accepts that. But again, I think it’s don’t be sorry, be safe, and make sure that you’ve vetted it if you’re either paying or if you’re receiving payment.

Kyle Faget

So you mentioned this concept of fair market value and something I’m seeing quite a bit on my end with… And this is what I was referencing with the structuring piece of these arrangements is 鈥� younger companies, particularly younger companies, want to pay the physician consultants or the advanced practice individual with royalties or stock or options. And first of all, understanding, “Well, what’s the difference? When is it appropriate to actually pay with royalties or stock or options? And then what’s the difference between stocks and the options?”

And I think, let me just say at the outset, where I think it does make sense to pay with royalties is in the context of intellectual property, that’s where you would see a compliant use of royalties. But paying royalties in the context of KOL arrangements is disfavored. And I’m seeing more requests for those kinds of arrangements. And then the other place that I’m seeing a number of requests are paying through stock and options. And obviously, stock, you can value it upon issuance, but that stock can change over time. And then the options, right? Options obviously are quite different from stock insofar as you have an option to purchase, right? And that when you choose to vest, again, what that option will be worth when you vest that option or when it becomes capable of being vested can change over time. So it’s very difficult. And I try to explain this to clients, if you’re trying to set your payment to HCPs based on fair market value, it becomes almost impossible to do that when you start using equity as a means of paying those HCPs.

Angie Caldwell

Absolutely. And I think that’s then the hundred thousand dollars question, Tynan, how do we determine fair market value related to these types of arrangements?

Tynan Kugler

There are a couple different ways that we approach it. And Kyle, I agree with you 100%. I think one of the things that we’re talking about here are services that are being provided, right?

So one of the things that we see pretty consistently, and this isn’t anything new, is how lots of organizations, large organizations, smaller organizations, they want a consistent approach to how they apply their compensation model. So before we even get to what’s the fair market value or how do we address the actual compensation, it’s kind of the concept of how do I set up my comp model?

We’ll often see those still structured based on rate ranges specific to how a KOL or a health care provider has experience. So if somebody just is experienced at a local level or a regional level or a national level or an international level, we鈥檒l often have rate ranges that give some flexibility within fair market value there. But Angie, to get really granular in valuation speak on everybody, I won’t totally geek out, but you look and you say, “Okay, I’ve got my three approaches that I can value a service or a business or a house or anything on 鈥� market, cost, and income.”

Typically, we’ll use the market approach and the cost approach, the market approach most usually though. And the market approach can take a lot of forms. One is I go out and I say, “What are other companies paying for a similarly situated service?” There is data that you can look at. There’s data that you can find on that, but the difficulty there sometimes is really understanding, is it an apples-to-apples comparison? So while that kind of market data is good, I think there’s sometimes concern that it either could be tainted or not be an apples-to-apples comparison.

One of the other things from a market approach, and I know Kyle will talk about this in a minute, is Open Payments data. Open Payments data is really helpful, but it’s difficult to get to something like an hourly rate. You can look at what somebody’s gotten paid for a consulting service, but you can’t really track it back to what the effective hourly rate is because there are no hours that somebody has to report. It’s just the total payment. So where does that leave us? We will then typically start with survey benchmark data. And then to that benchmark data, we’ll make an allocation for benefits, so nominal allocation typically for benefits, and then there’s a premium that will often apply to those benchmarks because we know these are known experts in their field, they’re typically providing these services outside business hours.

 And there are a number of other considerations that we take that we look at. So just like a call coverage arrangement, we do the same thing and say, “What’s the scope and burden of the services? Is there a shortage of providers? Is there subspecialty knowledge?” I’m sure all of us have had the company that says, “Well, this physician is the most known expert in their field, and therefore they’re deserving of the highest amount we can possibly pay.” Well, not everybody can be the international expert in their field, but there are some. And that’s why when we do these, we poke and prod probably a little bit more than people would like, but it really does help us refine where a physician or a provider is going to fall. And in the rare instance, we have an outlier. It helps support if we have to do a separate valuation for that outlier so that not everybody then becomes the outlier, which then calls into question the compliance, the nature of your program itself. So probably a little bit more than you wanted, Angie, but hopefully helpful for the listeners.

Angie Caldwell

That’s terrific. And you touched on the Open Payments registry. So, Kyle, we are going to ask the question, what is the Open Payments registry, and who is in scope to report data to the registry?

Kyle Faget

Fair question. And my answer is, it is the bane of everybody’s existence. That’s what it is. No, it is. It is considered quite burdensome. So what is it? First, let’s just talk about who does it even apply to? So let’s figure out if it’s applicable or not first and foremost. So an entity operating in the United States that’s engaged in the production, preparation, propagation, compounding, or conversion of a covered drug, device, biological or medical supply, but not if that covered product is solely for use by or within the entity itself or by the entity’s own patients or an entity under common ownership with such an entity. So basically, if you’re in the world of producing, preparing, propagating, compounding, or conversion of drugs, devices, biologics, and medical supplies, and you’re operating in the US, you are an applicable manufacturer.

And the next question becomes, and this is where I get a lot of questions, “Okay, what is a covered drug, device, biological or medical supply?” And that’s actually a really important question because it’s in that particular analysis that you may find you’re not subject to Open Payments at all. What are these covered products? A drug or biological that by law requires a prescription to be dispensed. Or in the context of a device, important for our listeners, including medical supplies, it’s a device that by law requires pre-market approval by or pre-market notification to the FDA and for which payment is actually available under the Social Security Act or under a state plan. So it has to have a federal or state payer, government payer to be in scope.

And again, for drugs and devices, there’s this piece of it that it has to be a drug that requires a prescription or a biologic that requires a prescription. And then on the device side, we’re really only talking about devices for which pre-market approval or pre-market notification to FDA is required. So again, it’s that analysis where some products fall out.

So what is this? Open Payments is the requirement that these applicable manufacturers report direct and indirect payments or other transfers of value to covered recipients.

So who are the covered recipients? Well, as long as this is not a bona fide employee of the applicable manufacturer, we’re talking about physicians, physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists, or certified nurse midwives. All the people that are in the position, quite frankly, to use and/or recommend the use of one of those covered products.

Angie Caldwell

So Kyle, are there state requirements too?

Kyle Faget

There are. This comes as a surprise to many companies that I end up talking to. Everybody at this point seems to know about the federal Open Payments, whether or not they’re in scope or is perhaps another question. But I think it’s general knowledge at this point that the Sunshine Act exists and that there’s this big database and there’s annual reporting requirements and people fret about that. But then I’ll get on the phone with them and I’ll say, “Hey, there are state corollaries to this as well.” And that’s where people’s hearts start jumping out of their chest. “Wait, are you kidding me? There are state-level requirements?” Yes, there are. And it’s not just for pharmaceuticals, it’s also for medical devices.

Now, granted, it isn’t the lion’s share of states, but there are states like Connecticut, Massachusetts, California, just by way of example, that have transparency requirements for spend, for [health care professional] HCP spend, and the states look a little bit different, right? So not every state has the same kinds of requirements. And I’ll just raise California as an example. So California doesn’t impose actually specific reporting requirements per se but instead requires that companies annually declare in writing that they’re in compliance with California’s Comprehensive Compliance Program, and then also California’s Health and Safety Code section 119.402. So this is a written declaration that has to be made available to the public on the company’s website, and the company must operate a toll-free phone line where a copy of the written declaration can be obtained.

So what does this mean? It means for companies that are operating in California, that these companies are required to adopt a comprehensive compliance program that’s consistent with PhRMA Code and OIG’s compliance program for pharma manufacturers and must include specific annual dollar limits on gifts, promotional materials, or items or activities that the company may provide to medical or health care professionals. And so you might say, “Okay, Kyle, great, you’re talking about PhRMA Code and you’re talking about OIG’s compliance program guidance for pharma manufacturers. Does that mean that device companies get a pass?” Nope, they don’t.

Now, granted, you might end up talking to counsel about how to structure your compliance so that it’s consistent with PhRMA Code being a medical device manufacturer, but no, medical devices don’t get a pass because in California, the reference is to dangerous drugs. And 鈥渄angerous drugs鈥� include devices that may only be dispensed pursuant to a prescription. So medical device companies are in scope. And in fact, if you go to some of the larger medical device companies, you will actually see on their public-facing websites, this declaration is readily available on those larger manufacturer’s websites.

Angie Caldwell

So there’s a ton of information out there available publicly. And Tynan, if you could speak a little bit to how the data is used, how people should be using the Open Payments data to understand what people are getting paid for all of the services that we’ve spoken about today, speaking, consulting, advisory board participation, all of the things.

Tynan Kugler

So it kind of works bi-directionally, but when you think about a compliance officer who’s doing a look-see to see who is getting paid, we typically recommend that Open Payments, that the data and the registry be reviewed at least annually because that then helps determine if there are any potential conflicts of interest or violations of company policies. And then they can be addressed through an internal vetting process. We also see health care organizations either through compliance or counsel monitoring disclosures of that outside data or outside financial interests. And they typically will do that sometimes as part of an onboarding process. So not only if you’re a provider that’s participating with one of these device or pharma companies, you might, during the year, have to attest annually or disclose what you have and have not done. But prior to onboarding, so if you’re a physician or a provider that’s doing some of this work, it’s kind of get your ducks in a row before you enter into an employment arrangement.

And then sort of the bi-directional piece is if you’re a physician or a provider that is subject to the reporting of this data, it’s equally as important for you to go in or for those individuals to go in on a routine basis and look at the accuracy of what’s being published. Because to Kyle’s point, it’s out there. That data is out there and anybody can go look and see if their physician or their provider or somebody they see is getting money from a drug or device company. And it’s released to the public annually, typically around June 30, and then it has to be updated annually. So lots of different things that can occur there, Angie, but I think the key is just staying on top of it because we know it’s there and there’s no sign – at least I haven’t seen any sign 鈥� that the sun is going to set. It’s continuing to be out there.

Kyle Faget

I also think that we’re going to see regulators using this data more and more for enforcement purposes. So it’s always been out there as a threat that, “Hey, what’s this data out there for?” And sure, it absolutely is out there so that the public can log on and say, “Is my physician receiving money for the pills that I’m being prescribed?” Yes, absolutely. That exists there. But there’s also ways that regulators can take that data and crunch that data and look to see, “Well, what’s industry standard, and who are our outliers?” It becomes readily apparent. Even in California where you’re required to set a limit, well, did the company adhere to the limit that they’ve set or no? I mean, you can easily do that math looking at Open Payments, for example.

Angie Caldwell

So Tynan, speak a little bit about the accuracy of what’s reported in Open Payments. I know initially there were some concerns voiced about whether the data was accurate and if it should be audited. And then I know that there was an audit done of the data, and the results were good. The results were good, that the information being reported was fairly accurate. Have either of you had any follow-ups on that or any other awareness around the accuracy of the data being reported?

Kyle Faget

Tynan, you may know more than I do about this. I know when I’m advising clients on Open Payments issues, which I do all the time, and we’re starting to get to that time of year pretty soon where the questions will come in. I think that the tendency, at least with my clients, is to over-disclose. And there is a process that physicians can undertake for corrections as well. So I think, Angie, like you said, I think what’s in there is relatively accurate. I think physicians are correctly incentivized to check to make sure that what’s reported about them is accurate.

And again, I think that companies are… Particularly because we’ve seen enforcement now under Open Payments where for a number of years there weren’t any enforcement actions, so people thought, “Okay, I’m going to go through all of these hoops, and for what exactly what’s going to happen on the other end if we don’t do this correctly?” And then again, we saw some enforcement in this area. And so now I think that’s had people say, “Well, wait a minute, they’re not actually kidding around. We have to do this and we have to do it correctly.” So when in doubt, I’m always in favor of over-disclosing as opposed to under-disclosing and then utilizing the assumptions document so that you can explain why it is you made certain decisions that you made along the way with your reporting.

Tynan Kugler

I would agree with Kyle. I don’t think we’ve had any specific concerns about the accuracy, but I think like everything else, it’s the data that’s going into the system. So there’s a lot of that work. You’re making an assumption on the front end, for example, that the company is paying consistent with what the value of that service is. So there’s kind of everything that goes along with how it gets reported and what gets reported is, to me, I think kind of the devil’s in the details there. And that’s not something that Open Payments is necessarily going to find or not find. It’s only going to be kind of looking yourself and maybe questioning it or having just robust compliance programs for determination of compensation before you even get to the reporting stage that I think will continue to be a focus and will potentially play out like we’ve been seeing first part of this year or so.

Angie Caldwell

Before we wrap up today’s episode, do either of you have any parting thoughts?

Kyle Faget

Clients, it isn’t easy. It’s just not. There’s a lot of things to think about. And when I work with companies, they think that there is such a thing. And in fact, this has been recognized by regulators even more so recently that there is a right sizing to compliance programs, right? So a young company doesn’t need the same exact bells and whistles as really large companies, but there are some basic compliance considerations that should be taken into account upon pre-commercialization, but definitely by the time you’re out there with a commercial product and Open Payments is one of them, consulting with KOLs, and then again if you have clinicians who are involved in PODs, that needs to be carefully scrutinized. It’s just important.

Tynan Kugler

Well, and we talked about this a little bit at one point, but the nature of the physicians that are providing and the providers that are providing these services, they’re inherently entrepreneurial. You’re getting some energy and some enthusiasm and some want to think outside the box anyway. And so I think that’s what makes the right sizing all the more important, is it’s important to sort of rein some of that in, but not quash the entrepreneurial spirit that frankly the opinion leaders are there to help with. So it’s the balance I think.

Jana Kolarik

All right. Thanks so much. And again, thanks Angie, as always. Appreciate you Kyle and Tynan for the great discussion on this topic and taking the time to join us today. So we want to thank our listeners as well for joining our Let’s Talk Compliance Podcast series with Health Care Law Today, your connection to timely legal updates in the health care and life sciences industry. We encourage you to subscribe to this podcast. And to do so, visit 麻豆传媒鈥檚 Health Care Law Today blog at healthcarelawtoday.com, and pyapc.com. Thanks so much, guys.

In this episode, partner Jana Kolarik of 麻豆传媒鈥檚 Health Care Practice Group interviews partner Roger Strode of 麻豆传媒鈥檚 Health Care and Transactional Practice Groups and , managing principal of PYA’s Strategic and Transaction Solutions on how compliance issues impact the health care transaction process.

For more information regarding the 鈥淟et鈥檚 Talk Compliance鈥� podcast series, please click here.

Please note that the interview copy below is not verbatim. We do our best to provide you with a summary of what is covered during the show. Thank you for your consideration, and enjoy the show!

Angie Caldwell

Hello and welcome to the Let’s Talk Compliance Podcast series of Health Care Law Today, presented by 麻豆传媒 & Lardner and PYA. I’m your co-host, Angie Caldwell, consulting principal with PYA. Before we begin our show, we want to remind you to subscribe to Health Care Law Today, either on iTunes or your preferred podcast app. Please visit healthcarelawtoday.com, all one word, or pyapc.com. For today’s show, my co-host Jana Kolarik, a partner in 麻豆传媒’s Health Care Practice Group, is interviewing Roger Strode, a partner in 麻豆传媒’s Health Care and Transactional Practice Group, and Michael Ramey, managing principal of PYA’s Strategic and Transaction Solutions for an informative discussion on compliance issues that impact health care transactions. Take it away.

Jana Kolarik

Thanks so much, Angie. This is Jana Kolarik. I’m a partner with 麻豆传媒’s Health Care Practice Group. And as Angie said, I’ll be interviewing Michael Ramey from PYA and Roger Strode from 麻豆传媒 & Lardner. Michael, why don’t you tell us a little bit about yourself?

Michael Ramey

Thanks, Jana. As she mentioned, Michael Ramey of PYA. I lead our strategic and transaction solutions program and a part of that we’re helping to facilitate transactions and even more so perform due diligence on various different transactions.

Jana Kolarik

Fantastic. And Roger, give us some details about you.

Roger Strode

Hi, Jana. Hi Michael. Happy to be here. Thank you for having me. I am Roger Strode. Jana and I are partners. We are both in the health care practice group at 麻豆传媒 & Lardner. My office is out of our Chicago office. My practice is primarily a transactional-based practice. I represent both for-profit and not-for-profit buyers and sellers of health care service providers focused on hospital and health system transactions, private equity transactions, and ancillary service providers, imaging, ambulatory surgery, physical therapy, telemedicine, et cetera. And I’m happy to be here. Thank you for having me.

Jana Kolarik

Wonderful. Great to have both of you guys. So today we’re going to be talking really about compliance issues that affect health care transactions. So in thinking, you guys, about your past experiences with transactions, how do compliance issues really factor into the deal? Michael, why don’t you start us off?

Michael Ramey

Sure, Jana. From my perspective of leading due diligence engagements over decades, compliance matters can have the biggest impact on whether a deal actually moves forward. If we find through a quality of earnings assessment that the financials have fallacies, that has certainly stopped deals mainly because expectations for value are no longer aligned between the buyer and the seller. But those issues can be overcome barring some pervasive controls on fraud issues that may be found and there’s a chance to recut the deal on the new earnings.

But compliance issues are the reasons that I see more buyers walk away from a deal, that and reputational issues that may come up during the course of a deal process. So I think it’s because there’s a lot of uncertainty around compliance issues, how much a regulator’s going to penalize a provider upon discovery of those issues, or even self-disclosure. We’ve seen those penalties can be pretty extreme. We all have our stories, but in the hospital segment, I’ve seen penalties completely cripple a hospital. Timelines are long also to know what those penalties can be, so that can really frighten a buyer whenever they’re looking at that. Roger, what are your thoughts?

Roger Strode

Yeah, Michael, in my experience, I’m on both the, as I mentioned earlier, on both the for-profit as well as the not-for-profit sides of both buying and selling health care providers. And I agree with you, compliance, while not my bailiwick and not my background, really do on the front end of deals drive both price and timing. And from a price perspective, if you take for example, and I think you alluded to this on the whole Q of E example, if you assume that say you’ve got a physician recapitalization transaction where the physician practice is going to trade at some double-digit multiple of earnings, call it 10 times, trailing 12 months earnings or 10 times projected earnings, and you find out that there’s a compliance issue because a particular service has been miscoded and you were billing incorrectly for that service and it’s a million dollar hit to earnings, well, that million dollar hit just got multiplied by 10, and all of a sudden that million dollar hit is a $10 million hit to value. That can be very disturbing for buyers and even more so for sellers.

On the not-for-profit side hospital transactions, I see it probably not necessarily… I’ve not seen it cripple transactions, but I have seen it pop up where hospital buyers will say, “This has got to get cleaned up before we take over.” And one of the reasons really, there’s multiple reasons for that, but in both of those transactions, you’re taking on the provider number of the entity being sold. When you take on that provider number of the entity being sold, the government really doesn’t care if that problem happened on your watch. All they care is that it happened and someone has to pay for it. So from that perspective, I see it, again, becoming both a price and a time issue.

Finally, with respect to certain transactions, especially for profit in the private equity space, it becomes particularly acute because private equity buyers are very, very precise when they go in and they price a deal and the returns that they expect. So they get very, very skittish once they find or if they find a compliance issue. And the other reason it’s important to them is they never buy an entity without a view towards an exit. These are not buy and hold companies. These are companies that buy, aggregate, build up and sell, and if a compliance issue is found, it needs to be cleaned up prior to closing and they need to ensure that they’re not going to perpetuate a mistake because it’ll make their exit tougher.

Michael Ramey

Yeah, Roger, I agree with all of those points. I’m glad also you mentioned about the provider number because in most all transactions for health care providers, we see that provider number come across even if it’s an asset deal. Because if they don’t, the risk of foregone or delayed reimbursement while setting up a new provider number is usually just economically untenable to be able to do that. So in many cases, most all cases we see that they do have to assume that risk. So that’s why it’s important to have that thorough due diligence process to uncover potential compliance risks.

But those improprieties following the provider number, if we see similar to what you’re saying, whether it’s a short period or even a longer period of let’s say overcoding without supporting documentation to substantiate the bill that’s coded, we’ll see buyers get very skittish. And there’s also, I think, where there’s smoke, there’s fire mentality for buyers and definitely for consultants who are doing due diligence. I know if our team sees that management or providers are lackadaisical in one area, it raises the concern on whether there may be other areas that may have issues and our level of professional skepticism rises as well.

Jana Kolarik

That’s super helpful, you guys. So from each of your perspectives and sort of drilling down a little bit and we got some detail there, but what are the most prevalent compliance issues that you guys have encountered? And really have you seen those change over time? Because I know you both have been in industry for a while.

Roger Strode

Yeah, maybe I’ll take that one, Jana. In the deals that I work on, the umbrella issue almost always starts with a P and its physician. The relationships between the entity and the physicians, whether they be the physician owners or physician employees, are almost always the predominant issues that I run into when it comes to compliance concerns. And I think partly is, and it may be a function of my practice, but I deal with a lot of Stark law issues and designated health services issues. And anyone who works in the health care industry and works around physicians understands that the Stark Law is a very complicated and very byzantine set of statutes and rules that compliance with those can be extraordinarily difficult.

And on the physician practice side, the reason it becomes so is because physician practices oftentimes don’t have the resources behind them, whether it’s legal resources or compliance resources, to ensure that they’re always in compliance with some of these rules. And when I say physician practices and problems, what kind of problems do I see? I see anything from physicians who own interests in an entity that provides designated health services, but the interests that they own or their relationship doesn’t meet a necessary exemption. I also see physicians who believe that they’re complying with the… Physician practices, I should say, who believe that they’re complying with the in-office ancillary services exception, but yet they don’t realize how complicated that exception is and that meeting all of the tests is necessary. They believe that they’ve met the tests, for example, the way they might carve up profits amongst physicians just as an example, and they believe that they’ve been in compliance with it, and yet they find out in the course of a deal that they’ve been out of compliance for maybe a decade. So those are the types of things.

And then finally, I find billing and coding issues oftentimes are a problem where physician practices believe that they’re billing something correctly and that they have been billing it correctly, but they find out that they’re using the wrong modifier to bill it, or they find out that billing rules around it have changed and they haven’t kept up with it. And I guess one last thing that I see from time to time is physicians who believe that they aren’t involved in a designated health service when in fact they are. And how does this happen? Again, I think it happens really because the physician practices themselves, again, don’t have the resources or they will reach out to what they believe to be an expert in the area on a one-off basis, they then sally forth after that, and they never check back in, or they never confirm with whoever it is that they’ve checked with, whether it’s a compliance expert or whether it’s legal counsel. They never check back in to make sure that they’re doing it correctly. So there’s that.

On the not-for-profit, the hospital side where we see issues around physicians is usually, again, it can be AKS and it can be as well as it can be Stark Law. And oftentimes it’s either overpayments where they’re paying the physicians too much, they’re paying the physicians too much compensation, or they have arrangements that aren’t fair market value arrangements with physicians, or they have failed to adequately document those to meet the Stark Law and the anti-kickback, either the anti-kickback safe harbors or the Stark Law exceptions.

Jana Kolarik

Yeah. And you and I have encountered those together, Roger, so completely, completely agree with you. So Michael, from your perspective, and I think some of your experience may be a little bit different than ours, so curious about what you consider the most prevalent issues that you’ve encountered from a compliance perspective?

Michael Ramey

Yeah, I would say from a prevalence perspective… Well, let me back up. I want to echo Roger’s comments about those areas that are definitely more complex or thorny. Anything that touches the provider number, physician compensation, coding, any of that is definitely, those are the harder ones. I would say sometimes when you’re talking about frequency, it may be some other adjacent areas, real estate being one.

I had a partner once who actually was in front of a not-for-profit board who was evaluating a particular opportunity and setting the stage for some news that was going to be delivered, said if there was ever a contest to find the first compliance issue, he’d run straight to the real estate office because you have so many different just areas where you can trip up. Now, the regulations have softened some, but there’s still a lot of non-compliant leases out there with entities or individuals that have the ability to refer.

So in hospital transactions, this is almost always an issue. It can be inconsistency between the contract and the rent roll that’s being administered. It can be an expired lease that was never renewed, but still occupying the space or lease rates that haven’t been reviewed in years and may not be within fair market value in today’s market. So there’s a lot of opportunity there for some thorny compliance matters and potentially voluminous ones that may lead to some type of rectifying issue prior to close or self-disclosure.

Other areas also include IT. We think about this in terms of Stark and anti-kickback from a compliance perspective, but areas that can be extremely challenging for a buyer who’s assessing the risk is the level of IT security compliance, because how secure is… Is their network housing PHI? Are they vulnerable to cyber attacks? Or even worse, have they had a breach and not performed an appropriate disclosure mitigating actions? Those are things that can quickly, quickly torpedo a transaction if those come up.

So all these things we’ve thrown out there. What we have found is most important to look at is to look at these matters holistically. So don’t piecemeal the analysis on various different due diligence. Any particular issue can possibly be overcome. We can address it. Roger, I know you’ve got ways that you’ve done that from a legal perspective in the past, but whenever you kind of see the preponderance of issues, that’s what really I think can sink a deal. So that’s why my opinion, my experience is that assessing that enterprise wide risk through due diligence is so imperative. We’re fortunate enough at PYA to have a breadth of services. We can look into all these different areas, be it coding compliance, medical necessity, compliance program management, physician compensation, IT security, real estate, other areas that can lead to compliance issues in addition to the financial matters so that we can help our clients to really assess this from a comprehensive risk perspective.

Jana Kolarik

That’s super helpful. Thanks, Michael and Roger. And I think what’s interesting is the breadth of the issues that you guys touched on. And we’ve talked about sort of sinking deals, but I think a lot of these things can be worked through. So how do you solve for those issues from a deal context? And Roger, let’s start that discussion with you.

Roger Strode

Yeah. I mean there’s several ways obviously. If in a transaction during diligence, and these almost always pop up, they will pop up during diligence because you’ve got guys like Michael’s group who come in and will diligence a business, or they’ll call in billing and coding specialists from different firms. Or just legal diligence, it’ll pop up when you’re starting to do reviews of, again, leases and physician compensation arrangements, et cetera. And it will really depend. It depends upon the timing and how quickly you want to get the deal done. Obviously, the first thing that the buyer will do is insist that the seller stop doing whatever it is that they’re doing. And usually sellers, once they see it, will stop doing whatever it is that they’re doing. Then you have to decide under the Stark law, “Is this is self-disclosure problem? Should we go ahead and get a self-disclosure done and get it rolling?”

And that’s oftentimes done and it’s been done. Jana and I are working on a deal right now where it’s been done. I’ve worked on several physician recap deals in PE where we’ve done it and you do it during the course of the deal, and oftentimes the buyer won’t close until that particular self-disclosure is taken care of, and at least we get rolling on it with the CMS. T.

Hen you deal with it through the deal documents. The way we deal with it through the deal documents is if it’s a known problem… For those who do a lot of deal work, you understand that in a for-profit deal, you generally will have an indemnification provision in your purchase agreement that says that if we run into problems and specific types of problems, “Hey, you seller are going to indemnify us for those problems. They’re your problems, we’re buying into them. And if we find out we buy into them, you’re going to take care of us.”

There are generally two types of indemnities that you have in these arrangements. One are called sort of general indemnities, and a general indemnity would be one that would pop up in the representations and warranties that are in the purchase agreement. And I can tell you that I’ve not ever done a health care deal where there’s not a robust set of representations and warranties around billing and coding around physician compensation, around compliance with, again, cybersecurity compliance, HIPAA compliance, high-tech compliance. Generally, these purchase agreements are replete with these types of representations and warranties. And so, if something pops up post-closing, it’ll generally be covered by one of these. If it’s a known problem before you close, we usually will draft what we call a very specific indemnity.

So again, take my example where you found a problem with a billing and coding problem or a Stark Law problem, and in the Stark Law you’ve made a disclosure to the CMS under the self-referral disclosure protocols. What you will do is set up a specific indemnity that says, “Whatever happens here, you’re going to take care of it. It won’t be subject to usually caps, it won’t be subject to baskets. There won’t be any discussion about whether or not there’s been a breach of a representation in warranty because it’s set forth directly in that agreement.” And then oftentimes what you do is you will buttress that with an escrow where the parties will make some sort of a good faith estimate of what they think the penalties are going to be and you’ll escrow those amounts. So that’s normally how I see these things taken care of.

And I just wanted to echo something that Michael said, and Michael is right. I have been involved in situations where there’s such rampant non-compliance that it makes the buyer nervous that we won’t find everything and we may not have enough resources left over, so deal needs to be off until you guys go back and clean up your shop, then we’ll come back and see you.

Michael Ramey

Roger, you raise a good point. I was actually going to mention this. Part of it is address the issue before it becomes a transaction issue. So we also work on not-for-profit and private equity backed deals on health care services. And on those private equity deals, we’re seeing more sellers, and for that matter, sellers advisors, be attuned to the compliance matters than they were say maybe five years ago. So our coding compliance team is getting pulled in more and more by sellers of physician practices and their advisors and various other ambulatory service providers before they go to market.

So this is usually an investment banker, an attorney urging to do this, but know what you’re dealing with before you go to market. We’re doing that along with sell-side Q of E to get ahead of potential issues so they can be addressed. Roger, to your point, clean up the house first before you go through a lengthy process to go to market, find a preferred partner and go through the due diligence and negotiation process only to find out that there’s something fundamental underneath it that’s going to jeopardize the transaction on the expectations that you have. So we’re seeing more and more of that as well.

Roger Strode

Yeah, I think that really runs too, Michael, that old saying that we have, that once you ink a deal, that the deal never gets better for the seller. It can only get worse whether it’s through time, whether it’s through problems being unearthed. And I do agree with you, we are seeing more sellers begin to make sure that there are not skeletons in their closets that they don’t know about in the… I would say I’m going to sound like an old guy, but in the old days we were always told, “We’re clean, everything’s good. We have great lawyers, we have great compliance. We’ve never had an issue.” And I can almost always tell you when I hear those words, there’s going to be an issue.

Jana Kolarik

Yeah, too complicated a landscape. You guys mentioned, and Roger, rep and warranties being sort of important obviously in the purchase agreement. Because we’ve heard more and more about rep and warranty insurance, why has that become so important?

Roger Strode

It’s kind of changed the landscape and deals a little bit. Representations and warranties that kind of the uninitiated here are promises that a seller makes with respect to its business to the buyer. A good example is you’ll make a promise that, “At no time during the last six years have we materially miscoded or materially misbuild for a matter that is reimbursable in whole or in part under a federal health care program.” That might be one. Or, “We are in compliance with all material Stark law rules or all Stark law rules and have been so over the past six years.” Those are promises you make.

What has happened is buyers and sellers have either created, or insurers have created a market to ensure against those risks and to ensure those promises. And you have found, and it really didn’t come out of health care, it came out of the general M&A market where there was a market to go out there for buyers to say, “Listen, I’m going to make this attractive to a seller because I’m going to insure against the risk of loss here, and maybe I’ll split the premium. We’ll go out and hire an insurance company. That insurance company will come in due diligence on the business right along with us, and we will pay them a premium in exchange for coverage.” Oftentimes, that coverage is somewhere around 10 to 15% of the total enterprise value of the seller. There’ll be, of course a deductible and some retention of risk by the buyer and the seller, but they can insure against it.

And again, the insurance companies have saw a market for it. Buyers saw the fact that they were willing to do it because if you think about it, if you’re in an auction for a business and you go to a seller and say, “Listen, we’re going to reduce what you have to put into escrow, we’re going to reduce your exposure for any post-closing indemnification because we’re going to go out and get this insured by a third party insurer,” if you can do that, you’re going to make yourself much more attractive to a buyer in that instance, especially if you’re in a competitive bid situation.

So we are seeing a lot of representation in warranty insurance. And for a while, they wouldn’t insure over health care risks. As they’ve gotten more sophisticated, they’ve been more amenable to ensuring over health care risks. And what that really does from both a buyer and a seller’s perspective is it puts a little less pressure on your reps and warranties. You as a seller are going to be more amenable to a broader rep or warranty on, say, a health care compliance matter. If you feel as though it’s going to be insured. Of course, they won’t insure over fraud and they won’t insure over known risks. But that’s what we’re seeing and that’s what we’re seeing in the health care M&A market.

Michael Ramey

Yeah, I agree. It’s definitely picked up. In fact, it’s picked up to the point that in the peak of transactions in health care in 2021, 2022, towards the end of that, it started getting hard to find reps warranty insurance because so much had been committed already. But it certainly is helping get the deals done. And I would say there are certainly efficiencies. There’s also somewhat of a shift in the focus and for them having the back and forth that may happen during a transaction lifecycle because while it helps mitigate the strain and challenges of negotiating and defining the reps and warranties in the definitive agreement, the insurance provider is going to require a level of due diligence, Roger, just like you said, to be able to underwrite that policy.

So that may be additional due diligence on top of what the buyer’s doing. So depending upon when it’s pulled in, and we’d recommend if there’s a deal, try to pull in as quickly as possible, sometimes it requires some additional back and forth. But all in all, I do think it’s more efficient to be able to get the deal done just a little bit more lifting during the diligence phase.

Roger Strode

Yeah. And I agree with that in getting it sooner. There’s always that push and that pull, because as a seller, you want to see that commitment sooner because that influences and informs how hard you’re going to negotiate on the indemnity provisions because you have to build the concept of rep and warranty insurance into your indemnity provisions and how hard you’re going to negotiate on the reps and warranties themselves. But yet the insurer wants to see, they don’t want to oftentimes commit the resources to try to underwrite that risk until they know there’s going to be a deal. So there’s a little bit of chicken and egg that goes on. Usually we meet it, but what we do as sellers councils, we usually say to the buyer, “We’re not going to sign off 100% on this agreement until we see that commitment from that insurer.” And most buyers understand that, and they’re trying to get as much coverage as they can possibly get as well.

Jana Kolarik

So as a final note, are there any sort of issues that you want to flag for our listeners who may be contemplating selling their business or contemplating buying a business as far as sort of last thoughts? Roger, why don’t you start?

Roger Strode

There are several things that I think that have arisen that are going to become more and more frequently addressed. One in pure compliance, corporate practice of medicine. We are seeing a lot more enforcement by states around arrangements that may not be compliant with the corporate practice of medicine, the corporate practice of dentistry, the corporate practice say of physical therapy, et cetera. So we see that. While not a compliance issue, I think you’re going to start to see, depending upon states you’re in, your employment agreements may be out of compliance with state law because of non-competes. As we see more and more states putting in statutes that are going to vitiate non-competes, especially in physician agreements, Indiana, Minnesota, Connecticut. You’re looking still at this looming FTC action. So we’re seeing I think a great deal of that. And then finally, antitrust. While not compliance, we have an FTC that is very activist and we’re starting to see state AGs become a little bit more emboldened and activist as well.

Jana Kolarik

Yeah. And Michael, your final thoughts for us?

Michael Ramey

Sure. Just within the lane of compliance, it really does require very competent counsel as you’re going through this, whether you’re a seller or a buyer. So making sure you’ve got those individuals who have deep understanding of these regulations. And there’s a lot of regulations out there, but having that deep understanding of those regulations to help navigate you through that is really important. I know the way that we kind of approach it, and I appreciate that 麻豆传媒 does this as well, while we aren’t physicians we kind of view ourselves as operating akin to a clinical care model where you gather all the experts in the respective fields and then you look at the situation and you collaboratively diagnose the matter. It’s that type of approach with the expertise in health care and transactions that are going to be necessary to be able to navigate these. Otherwise, you’re going to wake up one day and see, “Oh my goodness, I’ve got an issue. How do I address this?”

Jana Kolarik

Yeah, love that teamwork concept as the final note. So I want to thank you, Michael and Roger, so much for participating in the podcast today. Thank you guys. Appreciate it.

Roger Strode

It’s my pleasure. Thank you for having me.

Michael Ramey

Jana, thank you so much.

Angie Caldwell

Thank you Roger and Michael for a great discussion. We appreciate you taking the time to join us today. We want to thank our listeners for joining our Let’s Talk Compliance Podcast series with Health Care Law Today, your connection to timely legal updates in the health care and life sciences industry. We encourage you to subscribe to this podcast. Visit 麻豆传媒’s Health Care Law Today blog at healthcarelawtoday.com, and pyapc.com. If you liked this show, don’t forget to subscribe and be sure to rate us five stars. Until next time, I’m Angie Caldwell at PYA.