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Key 2016 Business Drivers - Changing Payment Models, Information Technology and Stark

As has been humorously observed: "it is difficult to make predictions, especially about the future." Nonetheless, this article summarizes our fearless predictions regarding the hot areas for health law business transactions and counseling in 2016. We anticipate many of the trends from 2015 continuing into 2016 and beyond.

Mergers and Acquisitions

We expect to continue to see a host of mergers and acquisitions (M&A) among providers, with ever greater consolidation, as providers seek to gain the scale necessary to better position themselves to deliver on the marketplace demands for improved quality, cost-efficiency and patient-centered care. Increasingly, for hospitals, physicians, and other providers to achieve the quality and efficiency goals set by third party payors, so providers can maximize their potential compensation, the providers must invest in the infrastructure (including both technology and staff) needed to capture data to measure performance, produce real-time reporting to inform providers of their progress, and then actively train and counsel clinicians to drive improvements, while continuously monitoring their performance.

Many standalone providers, or smaller systems or organizations, do not have the financial resources needed to develop the type of infrastructure required to achieve these results. Accordingly, faced with the likelihood of declining reimbursement if inadequate infrastructure limits the ability to achieve metrics that result in greater reimbursement, many providers are merging and consolidating to achieve the size and scale necessary to make the requisite infrastructure investments demanded by the new payment paradigms. This has been and remains the primary driver of much of the M&A activity lately that we have seen and continue to see in the provider community, in 2016 and beyond.

Hospital/Physician Alignment

The drive to develop and implement innovative new models for clinical integration and hospital/physician alignment is a close cousin of the M&A activity that we have been seeing. As with M&A activity, the driver of clinical integration and hospital/physician alignment is often the need to respond to changing payment methods and models. Hospitals are recognizing that they need to be aligned with physicians to achieve improvements in quality and efficiency, and physicians are recognizing that they do not have the resources, on their own, to develop the type of infrastructure needed to engage in effective population health management, or maximize their reimbursement under the new payment methodologies.

At its core, alignment refers to the ability of hospitals and physicians to pursue common goals while limiting conflicts of interest, lack of trust, or other impediments to success. We are seeing many models for alignment, including more limited forms of engagement such as clinical co-management, gainsharing and pay-for-performance contractual arrangements, and we are seeing more advanced models, such as developing or expanding medical foundations as an aligned physician home, and providers creating clinically integrated networks and ACOs to contract with payors, often sharing financial risk.

These models help to align the participants' financial incentives, create opportunities to pursue common goals and values, and allow the constituent members to bring their respective areas of expertise together to develop innovative solutions to common problems. Generally, the best alignment models aim to achieve the following goals: (1) alignment of the parties' financial incentives; (2) enhanced reimbursement; (3) allow participants to focus on their core business; (4) fully integrate clinical practices by adhering to policies and protocols that help the parties to meet quality and safety goals; and (5) standardize systems and simplify documentation.

In addition to the many alignment models being negotiated, structured and implemented, there is also substantial activity being generated by mature hospital/physician alignment models, as they continue to grow and develop, and adjust to new payment methods, such as the new Medicare physician payment systems under MACRA, as well as developments from the Medicare and Medicaid Center for Innovation. To respond to changes in reimbursement, and remain compliant with Stark and other regulatory requirements, physician compensation arrangements must often be renegotiated and restructured every year or two.

Health Care Information Technology Deals

Given the critical importance to providers of robust health care information technology (including an electronic health records system, to qualify for meaningful use payments under Medicare and/or Medicaid, and to serve as the "central nervous system" of the provider's health care delivery system), it is no wonder that many providers will be negotiating the acquisition of technology from vendors in 2016, or exploring how to deploy technology to physicians on their medical staff or in the community in a way that complies with the complex health care regulatory maze. Both of these types of arrangements raise myriad legal issues.

Complex health care technology acquisition deals require experienced, skilled legal counsel to navigate issues regarding representations and warranties, term/termination and transition, remedies, dispute resolution, indemnification and limitation on liability provisions, as well as patient privacy (HIPAA) issues, data use and ownership, and licensing and intellectual property issues. Likewise, to properly analyze and structure the deployment of health care technology to physicians requires a sophisticated understanding of technology legal issues as well as the intricacies of applicable Stark law exceptions, the anti-kickback statute, and (for tax-exempt organizations) the proscriptions against private benefit and inurement. Other considerations may include Medicare reimbursement and conditions of participation, licensing and scope of practice issues (including the prohibition on the corporate practice of medicine), risk management / malpractice and medical staff issues. Despite the legal challenges, implementing technology is critical, and we continue to see a surge in these transactions.

Stark and Fraud and Abuse Issues 

Another area that likely will see great activity in 2016 is analysis of existing and proposed arrangements for compliance with the rapidly evolving standards of the Stark law and anti-kickback statute, as interpreted by recent cases, and through recent regulatory promulgations by CMS and OIG. The Stark and anti-kickback laws have long been known for their complexity and uncertain application to real-world facts. Recent developments have aggravated these challenges.

For example, several recent cases have cast doubt on the meaning of key terms as used in the health care fraud and abuse laws, such as "fair market value" and "commercial reasonableness," and seem to suggest that hospitals cannot permissibly enter into compensation arrangements with physicians when the hospital knows or expects it will lose money, when comparing the compensation paid to the physicians to the revenues generated directly by their professional services, minus associated expenses. Such subsidized relationships have proven especially vulnerable in recent court cases when they involve excessive compensation to the physicians, and when the compensation appears to have taken into account the expected referrals by the physicians to the hospital (even if the compensation does not fluctuate with referrals). Accordingly, compensation relationships resulting in losses to hospitals must be subject to even greater scrutiny and analysis as a result of recent court decisions, and must be carefully evaluated in light of their particular facts and circumstances.

Furthermore, the past year has seen a spate of proposed safe harbors under the anti-kickback statute and several new exceptions under the Stark law, which introduce additional variables when analyzing financial relationships in the health care world in 2016, all the more so given the increased level of deal activity, growth in creative hospital/physician alignment vehicles and deployment of innovative technology to physicians, all of which relationships must be carefully analyzed through the lens of health care regulatory compliance. Both CMS and OIG, in recognition of the need to create innovative provider relationships in response to changes in reimbursement, are likely to come out with further exceptions, safe harbors and waivers in 2016 that will foster greater innovation for those who take the time and make the effort to work with these new regulations.

For additional information, please contact Charles Oppenheim at 310.551.8111.

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