Inside the Halifax Case: An Interview with the Government’s Expert Witness

© Husch Blackwell LLP
INSIDE THE HALIFAX CASE:
An Interview with the Government’s Expert
Witness
Thursday, April 24, 2014 – Noon – 1:00 PM (CST)
David B. Pursell

GOALS
 Understand the Fair Market Value and Commercial
Reasonableness issues in the Halifax case
 Understand the positions taken by Ms. McNamara in the
Halifax Valuation
 Understand the best practices in the roles we have on
Fair Market Value and Commercial Reasonableness
issues.
2

PARTICIPANTS TODAY
 Kathy McNamara, C.P.A
̶ Myers and Stauffer LC
 The remarks of Kathy McNamara in this presentation are her own opinions, and do not
represent the positions of the DOJ, OIG or any other governmental agency with respect to this
or any other matters.
 Kathy authored the Expert Report and was the testifying expert for the U.S. DOJ with respect to
the neurosurgeon employment agreements in the Halifax case.
 David W. Thompson, C.P.A.
 Kevin Walker, C.P.A.
̶ CBIZ MHM LLC
̶ David and Kevin acted as healthcare and valuation consultants for Ms. McNamara for this
case as well as others.
 David Pursell
 Husch Blackwell LLP
 Moderator for today’s program
3

KATHY MCNAMARA, CPA
 Kathy has spent over twenty years in healthcare and business
consulting, though today we are interested primarily in her
background acting as an expert witness in a number of
federal cases:
̶ U.S. ex rel. Baklid-Kunz v. Halifax Med. Center et al. (M.D. Fla.)
̶ U.S. ex rel. Drakeford v. Tuomey Healthcare System (D.S.C.)
̶ U.S. v. Campbell (D.N.J.)
̶ U.S. ex rel. Pogue v. Diabetes Treatment Center of America
(M.D. Tenn.)
̶ U.S. v. Bourseau et al. (S.D. Cal.)
̶ U.S. ex rel. Kaczmarczyk, et al. v. SCCI Health Services Corp. et
al. (S.D. Tex.)
4

DAVID W. THOMPSON, C.P.A.
KEVIN WALKER, C.P.A.
 David Thompson: has over 35 years of healthcare experience and has
reviewed or prepared hundreds of healthcare valuations, including those for
hospital/physician acquisition, employment or professional services transactions,
surgical hospitals, ambulatory surgery centers, imaging centers, clinical and
pathology labs, cardiac cath labs and physician practices.
 Kevin Walker: has over 25 years of healthcare experience has reviewed or
prepared hundreds of healthcare valuations, including those for hospital/physician
acquisition, employment or professional services transactions, surgical hospitals,
ambulatory surgery centers, imaging centers, clinical and pathology labs, cardiac cath
labs and physician practices.
5

THE THREE HATS
FOR ANALYZING TRANSACTIONS
 Transaction Design and Implementation
 Best Practices
 Risk Tolerance
 Relative Benefits
 Compliance Review
 Defensible Position
 Appropriate Corrections
 Litigation Defense
 Risk Tolerance
 Reasonable Defenses
6

HALIFAX BACKGROUND
 Initial Complaint filed under seal June 16, 2009 alleging
violations of the False Claims Act, including allegations
of claims resulting from improper admissions and claims
resulting from referrals from physicians whose
employment agreements were alleged to violate the
Stark Law and the Anti-Kickback Statute.
 U.S. filed its Complaint in Intervention November 4, 2011
only with respect to the Stark Law/FCA allegations
involving the Medical Oncologists and the
Neurosurgeons
7

INTERVENED CLAIMS
MEDICAL ONCOLOGISTS AGREEMENTS
 Numerous issues, none of which included FMV or
commercial reasonableness
 Principal Stark Law issue:
̶ Does the bona fide employee exception permit a bonus
pool that includes DHS revenue if allocated based on the
proportion of personally performed services of physicians
participating in the pool.
 Held: No; employee exception only permits a bonus to a
physician based on his or her own personally performed
services.
8

NEUROSURGEONS AGREEMENTS
 Three Neurosurgeons Agreements the subject of Ms.
McNamara’s Report
 We will discuss the valuation principles applied by Ms.
McNamara in general terms, then review her application
of these principals to the 3 agreements both for Fair
Market Value analysis and Commercial Reasonableness
analysis
9

REPORT CONCLUSIONS
 I believe that the compensation terms of the employment agreements
and HSI’s business arrangements with the neurosurgeons were not
commercially reasonable because absent the physicians’ referrals to
HHMC, there does not appear to be a legitimate business purpose for
entering into or maintaining the described physician employment
agreements. In my opinion, the employment agreements do not make
commercial sense, and would not have been entered into by a
reasonable entity of similar type and size.
 Based upon my findings I believe that HSI paid Drs. Vinas and Khanna
in excess of fair market value for their services for each year examined.
Except for the years 2003 and 2008, Dr. Kuhn’s compensation also
appears to fall outside the fair market value range.
10

COMMERCIAL REASONABLENESS
 “Commercial Reasonableness” Definition:
̶ An arrangement is a sensible, prudent business
arrangement from the perspective of the parties involved,
even in the absence of potential referrals.
̶ Commercially reasonable in the absence of referrals if the
arrangement would make commercial sense if entered into
by reasonable parties even if there were no potential DHS
referrals.
 Stark Exceptions apply Commercial Reasonableness
standard to agreement as a whole
11

POTENTIAL FACTORS
Length of the term
Renewal/evergreen provisions
Termination for cause provisions
Termination without cause provisions
Full time/part-time employment
Compensation--fixed vs. production
Periodic review of compensation formula
Ability to adjust compensation/formula
Net cost of agreement to hospital
Eligibility for pension, welfare and fringe
benefits
Scope of duties
Requirements for documentation
(administrative vs. clinical time and
amount of time expended)
Duplication of services (multiple
agreements for same service)
Demonstrable need for service in
community
Demonstrable need for service at hospital
Justification for non-standard provisions
(A non-exhaustive list)
12

COMMERCIAL REASONABLENESS
 Conceptual Framework:
̶ Potential referrals will always exist in a hospital/physician
transaction.
̶ But, do the terms of the asset acquisition and/or
employment/independent contractor arrangement standing
alone make legitimate healthcare business sense, or does
the arrangement only make good business sense when
you consider the value of the referrals that the hospital will
be receiving from the physicians?
13

COMMERCIAL REASONABLENESS ISSUES
 For Most Years the Physicians’ Received 100% of their Collections
Derived from their Professional Services
Kuhn
Compensation& ProfitReviewBefore andAfterEmployment
Before Employment AfterEmployment
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Practice Receipts 826,042 1,234,975 1,212,453 1,020,449 900,985 923,741 1,114,911 1,268,106 1,138,702 1,227,211 1,063,597 844,683 754,396
W-2-Compensation 150,000 160,000 187,021 185,898 587,173 1,078,793 1,032,523 1,253,335 1,217,137 1,154,989 1,154,921 1,186,346 1,086,541
SubSDistribution 357,508 682,767 564,638 306,411
Total Compensation 507,508 842,767 751,659 492,309 587,173 1,078,793 1,032,523 1,253,335 1,217,137 1,154,989 1,154,921 1,186,346 1,086,541
Compensationasa% of Receipts 61.44% 68.24% 61.99% 48.24% 65.17% 116.8% 92.6% 98.8% 106.9% 94.1% 108.6% 140.4% 144.0%
Average Compensation% of receiptsbefore employment 59.98% Average Compensation% of receiptsafteremployment 107.50%
Average Compensation before employment 648,561$ Average Compensation afteremployment 1,083,529$
Average Collections before employment 1,073,480$ Average Collections afteremployment 1,026,259$
14

 HSI Incurred Material Financial Losses related to the
Neurosurgeons’ Practices
Physician
Income (Loss) After
Physician's Salary
and Benefits
Practice
Expenses
Direct
Practice
(Loss)
Facility
Contributio
n Margin
Overall
Neurosurgeon
Margin
Khanna $(338,853) $ 220,663 $(559,516) $2,412,176 $1,852,660
Vinas $(413,013) $ 388,626 $(801,639) $2,797,650 $1,996,011
Kuhn $25,949 $ 437,717 $(411,768) $3,116,078 $2,704,310
Total $(725,917) $ 1,047,006 $(1,772,923) $8,325,904 $6,552,981
15

 The Neurosurgeons were Favorably Treated in
Comparison to Other Employed HSI Physicians
̶ The neurosurgeons received a car allowance totaling
$10,800 per year. No other HSI employed physician
received any car allowance. When Dr. Kuhn practiced as
an independent physician, his car expenses were much
lower and ranged between $1,482 and $2,877 for the years
2000 through 2002. In later years Dr. Vinas’ car allowance
was increased to $13,500 per year.
̶ For those years that HHMC’s Federal Form 990s were
produced, each 990 listed each of neurosurgeons as one
of the five highest paid employees.
16

 The Neurosurgeons were Favorably Treated in Comparison to Other
Employed HSI Physicians
̶ On a HHMC spreadsheet outlining the neurosurgeons’
compensation arrangements, the following was noted:
̶ “Additional subsidy not provided to other physicians:
 200% of the Medicare Fee Schedule for all trauma patients
 Reimbursed for hospital employees workers comp claims
 Collection expense is not deducted from collections
 Bad debt expense is not deducted from collections
 80% of the Medicare fee schedule for district charity and self-pay
patients like non-employed physicians.”
17

0
200000
400000
600000
800000
1000000
1200000
1400000
1600000
1800000
2000000
Dr. Khanna Dr. Kuhn Dr. Vinas Medical
Oncology
Radiation
Oncology
Gynecology
Oncology
Urology Intensivist
Neurosurgeons Compared to Other Employed Physicians
Actual CY 2008 Compensation
Physician Group Compensation
is for highest paid physician
in the group.
MGMA 90th percentile for
Neurosurgery
With the exception of medical oncologists, the Neurosurgeons were the only employed specialist group who earn
compensation above or near the 90th percentile levels.
18

VALUATION PRINCIPLES
 FMV Definition:
The value in arm’s-length transactions, consistent with the
compensation that would be included in a services
agreement as a result of bona fide bargaining between
well-informed parties to the agreement who are not
otherwise in a position to generate business for the other
party, at the time of the service agreement.
19

VALUATION PRINCIPLES
 Cost Approach
 Income Approach
 Market Approach
̶ How are these methods applied in the valuation of
physician Compensation?
20

VALUATION CONCLUSION
 Based upon my findings I believe that HSI paid Drs.
Vinas and Khanna in excess of fair market value for their
services for each year examined. Except for the years
2003 and 2008, Dr. Kuhn’s compensation also appears
to fall outside the fair market value range.
21

VALUATION PRINCIPALS
Market Approach
Industry Weighted Average Median 75th Percentile
Neurosurgery 2011 552 66.43$ 84.73$
Neurosurgery 2010 523 63.72$ 80.00$
Neurosurgery 2009 439 65.25$ 85.72$
Neurosurgery 2008 214 66.08$ 85.52$
Market Data-Compensation Per WRVU
Industry Weighted Average Median 75th Percentile
Neurosurgery 2011 353 75.4% 104.1%
Neurosurgery 2010 366 68.3% 97.5%
Neurosurgery 2009 314 52.1% 96.6%
Neurosurgery 2008 150 68.0% 81.4%
Market Data-Compensation as a % of Collections
22

FMV RESULTS
Vinas
Neurosurgeon- Start Date-February, 2000
Total Compensation v Market Data
Specialty-Neurosurgery-Actual Pay
Year Vinas Vinas 1099-Misc Total
2011 1,430,798$ 1,430,798$ >90th
2010 1,617,383$ 1,617,383$ >90th
2009 1,933,717$ 1,933,717$ >90th
2008 1,896,437$ 1,896,437$ >90th
2007 1,443,407$ 1,443,407$ >90th
2006 1,984,833$ 1,984,833$ >90th
2005 1,440,589$ 1,440,589$ >90th
2004 1,098,403$ 81,500$ 1,179,903$ >90th
2003 1,004,248$ 5,437$ 1,009,685$ >90th
2002 951,365$ 51,861$ 1,003,226$ >90th
2001 n/a 46,500 46,500$
2000 n/a 32,000$ 32,000$
Source W-2's 03328250-259 0341706, 0341699
0341710, 0341695,
0341693
Median 75th % 90th % Median 75th % 90th %
979,846$ 792,887$ 602,130$ 254% 196% 159%
1,349,839$ 1,155,934$ 967,155$ 331% 249% 200%
1,334,369$ 1,152,506$ 968,389$ 337% 255% 204%
Industry Weighted Average Number Median 75th 90th
Neurosurgery 2010 919 637,537$ 824,496$ 1,015,253$
Neurosurgery 2009 835 583,878$ 777,783$ 966,562$
Neurosurgery 2008 726 562,068$ 743,931$ 928,048$
Market Data- Total Compensation
Excess over Market
23

FMV RESULTS
Khanna
Neurosurgeon- Start Date-July 7, 2001
Year Khanna
Khanna 1099-
Misc Total
2011 1,134,951$ 1,134,951$ <90th
2010 1,107,519$ 1,107,519$ <90th
2009 1,506,217$ 1,506,217$ >90th
2008 1,724,600$ 1,724,600$ >90th
2007 1,714,064$ 1,714,064$ >90th
2006 1,910,913$ 1,910,913$ >90th
2005 1,709,902$ 1,709,902$ >90th
2004 1,302,879$ 49,000$ 1,351,879$ >90th
2003 1,466,661$ 22,000$ 1,488,661$ >90th
2002 780,186$ 43,500$ 823,686$ <90th
2001 n/a
2000 n/a 58,500$ 58,500$
Source W-2's 03328210-219
0341691,
0341702-3&
0341707
469,982$ 283,023$ 92,266$ 178% 138% 112%
922,339$ 728,434$ 539,655$ 190% 142% 115%
1,162,532$ 980,669$ 796,552$ 268% 202% 162%
Neurosurgery 2010 919 637,537$ 824,496$ 1,015,253$
Neurosurgery 2009 835 583,878$ 777,783$ 966,562$
Neurosurgery 2008 726 562,068$ 743,931$ 928,048$
Excess over Market
24

FMV RESULTS
$ Compensation Over (Under)
Kuhn
Neurosurgeon- Start Date-February 14, 2003
Year Kuhn
Kuhn 1099-
Misc Total
2011 1,086,541$ 1,086,541$ <90th
2010 1,186,346$ 1,186,346$ <90th
2009 1,154,921$ 1,154,921$ >90th
2008 1,154,989$ 1,154,989$ >90th
2007 1,217,137$ 1,217,137$ >90th
2006 1,253,335$ 1,253,335$ >90th
2005 1,032,523$ 1,032,523$ >90th
2004 1,032,407$ 46,386$ 1,078,793$ >90th
2003 504,302$ 82,871$ 587,173$ <75th
2002 n/a 158,363$ 158,363$
Source W-2's 0338220-228
0341708,
0341701,034
1704
548,809$ 361,850$ 171,093$ 170% 132% 107%
571,043$ 377,138$ 188,359$ 203% 153% 123%
592,921$ 411,058$ 226,941$ 205% 155% 124%
Actual Compensation % of Market
Neurosurgery 2010 919 637,537$ 824,496$ 1,015,253$
Neurosurgery 2009 835 583,878$ 777,783$ 966,562$
Neurosurgery 2008 726 562,068$ 743,931$ 928,048$
Excess over Market
25

-
5,000
10,000
15,000
20,000
25,000
30,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Vinas WRVUs
Vinas Median 75th
-
5,000
10,000
15,000
20,000
25,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Kuhn WRVUs
Kuhn Median 75th
27

ADDITIONAL FACTORS
 Physicians’ Time Analysis:
 E&M codes, for instance, critical care codes, are time based codes for which a physician’s time must be
documented in the medical record. Physicians routinely determine which level of E&M to code based on
the amount of time they spend with a patient. Generally, more time spent with a patient equates to a
higher level code, and higher reimbursement levels.
 Neurosurgeons’ WRVUs associated with E&M services were compared to WRVUs reported by family
practice physicians (because almost all of a family practice physicians’ work is associated with E&M
services). Each of the neurosurgeon’s E&M services alone are positioned near or materially above the
median levels reported by full time family practitioners. In 2007, Dr. Khanna’s WRVUs associated solely
with his E&M services were 3.25 times higher than a full time family practice physician at the median
level and more than 2 times higher than 90th percentile amounts. This means that even without
accounting for all of the time he spent in surgery, Dr. Khanna billed over three times more for his E&M
services than the median family practice physician.
 HHMC engaged an independent consultant to perform a practice analysis for Dr. Vinas and Dr. Kuhn.
After analyzing each of the physicians WRVUs by CPT code, one of the consultant’s findings was that Dr.
Vinas was working an estimated 8,749 hours a year, and Dr. Kuhn 6,931 hours a year (there are 8,760
hours in a 365 day year). By using 2,080 hours to equate the consultant’s estimated hours to full time
equivalents (“FTEs”), this equals 4.2 FTEs and 3.33 FTEs, respectively. An internal HHMC email showed
that through August 2010, Dr. Khanna had taken 55 days off, Dr. Vinas 38 days and Dr. Kuhn 22 days off
for the year.
28

ADDITIONAL FACTORS
Physicians'E&MCodesOnly MarketData-FamilyPractice %ofMarketMedian %to75thPercentile
Vinas Kuhn Khanna Survey N Median 75th 90th Vinas Kuhn Khanna Vinas Kuhn Khanna
2011 4,588 4,971 3,424 Family Practice(without OB)MGMA 2012 4886 4,815 5,897 7,082 95.29% 103.24% 71.11% 77.80% 84.30% 58.06%
29

CONTACT INFO
HUSCH BLACKWELL LLP
David B. Pursell
Partner
HUSCH BLACKWELL LLP
4801 Main Street, Suite 1000
Kansas City, MO 64112-2551
Direct: 816.983.8190
Fax: 816.983.8080
David.Pursell@huschblackwell.com
huschblackwell.com
CBIZ MHM, LLC
David W. Thompson | Managing Director
p: 913-234-1025
dthompson@cbiz.com
Kevin Walker | Managing Director
P: 913-234-1023
kwalker@cbiz.com
CBIZ MHM, LLC
11440 Tomahawk Creek Parkway
Leawood, KS 66211
MYERS AND STAUFFER LC
Kathy McNamara, CPA
Senior Manager
MYERS AND STAUFFER LC
kmcnamara@mslc.com
phone # 515-259-4082
cell # 913-568-5375
31

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