Wade, Goldstein, Landau & Abruzzo, P.C.

Non-Compete Laws: Applicability to Currently Existing Contracts

11/13/2019

Over the past several years, a number of states have enacted laws which significantly limit (or altogether ban) an employer’s ability to impose non-compete provisions on employees when their employment terminates. Often, these laws are only applicable to contracts entered into after the law’s effective date. However, the question remains whether amendments to or renewals of contracts entered into prior to the law’s effective date are subject to the non-compete law. If the non-compete provision remains unchanged, but the contract is otherwise amended, does the contract fall within the purview of the law’s non-compete limitations? Similarly, if a contract automatically renews after a certain term, is the contract considered a new contract that is subject to the non-compete law?

For some states, this determination is addressed by the law itself. A number of laws simply provide that any and all non-compete agreements (previously existing and new) are void as of the effective date. In others, the legislature foresaw the issue of amendments and renewals and addressed it within the law. For example, Connecticut, New Hampshire, New Mexico and Utah specifically provide that the non-compete law applies to new contracts, and amendments, extensions and renewals of previously existing contracts – it being the intention that eventually every contract will be subject to the law’s limitations. Other state legislatures, however, did not address the issue within the law, which leaves the determination to the courts in the event of a dispute.

Unfortunately, the courts have not yet addressed this issue. Therefore, an employer’s best chance of having a valid non-compete (in a state that does not ban non-competes altogether) is to draft it in a way that excludes it from the broadest interpretation of the law. Since any amendment to a currently-existing employment agreement could trigger applicability of the non-compete law, employers cannot go back and revise the language of currently existing non-compete agreements to ensure enforceable. That said, if you are in a state that has not yet passed a non-compete prohibition, there may be a way to increase the chances that your non-compete provision would survive the passage of a non-compete law that applies to amended, renewed and extended contracts. In order to avoid having your non-compete become nullified over time, you can set an indefinite term for the agreement such that no renewals or extensions are necessary (i.e., “This Agreement shall be effective as of the Effective Date and shall continue until terminated as set forth in Section ___ below.”). Note however, that this would not address the concerns surrounding amendments and therefore could limit your ability to amend, for example, the compensation under the employment agreement. However, by incorporating increased volume or automatic revisions into the compensation formula (i.e. percentage-based compensation or a base salary that automatically increases by x% each year), you can avoid the need to amend the agreement, thereby risking the application of a non-compete law.

In addition, you may be able to avoid the risk of having your non-compete agreement invalidated if you include the non-compete in a separate agreement entirely. The non-compete agreement can be a condition of employment under the employment agreement, but all terms pertaining to the non-compete should be included in a separately negotiated agreement. By doing this, you can amend, renew or extend the employment agreement without having any impact on the non-compete agreement. The non-compete agreement would reference employment and be in effect during the period of the individual’s employment with the practice, but it would otherwise remain intact despite any revisions to employment. However, if the non-compete is in a separate agreement and expected to remain independent of the employment agreement, it will need to be supported by separate consideration. The practice would need to provide the employee some benefit in exchange for his/her agreement to sign the non-compete agreement. Without such consideration, the non-compete agreement would likely be held invalid.

If you are concerned about your state’s non-compete law, or the possibility that a non-compete law is in your state’s future, contact our firm and we can assist you in drafting your agreement in a way that is most likely to protect your interests under such law.

Pennsylvania's New E-Prescribe Law

10/29/2019

Last Thursday, October 24, 2019, a Pennsylvania law went into effect concerning a provider’s duty to prescribe controlled substances electronically (i.e., e-prescribe). This e-prescribe requirement is mandated by Act 96 of 2018, signed into law in October 2018 as part of the state’s effort to combat the opioid epidemic. The intended purpose of this law is to minimize medication errors and reduce forgery, diversion and theft in Pennsylvania.

Pursuant to this law, all healthcare practitioners are required to issue electronic prescriptions for Schedule II-V controlled substances unless they meet one of the following eleven (11) statutory exceptions:

Prescriptions by a veterinarian;
E-prescribing is not available due to a temporary technological or electrical failure;
The dispensing pharmacy is located out of state;
The prescribing practitioner either does not have internet access or does not have an electronic health record system (“EHR”);
Prescriptions for patients treated in an emergency department or other health care facility where the practitioner reasonably believes that e-prescribing a controlled substance would be impractical for the patient or cause an untimely delay resulting in an adverse impact on the patient’s medical condition;
Prescriptions for a patient enrolled in a hospice program or residing in a nursing home or residential health care facility;
For compounded prescriptions and prescriptions containing certain elements required by the FDA or another government agency that are not able to be accomplished via e-prescribing;
Prescriptions pursuant to an established and valid collaborative practice agreement between a practitioner and pharmacist, a standing order or a drug research protocol;
Prescriptions issues in an emergency situation pursuant to federal or state law and regulations of the PA Department of Health;
The dispensing pharmacy is not set up to process electronic prescriptions; or
Prescriptions for controlled substances that are not required to be reported to the Prescription Drug Monitoring Program (“PDMP”) system administered by the PA Department of Health.

The PA Department of Health has published helpful guidance in the form of frequently asked questions (“FAQ”) (available here) to assist practitioners in determining whether they are required to comply with the e-prescribing mandate, and the specific elements necessary to meet the statutory exceptions. If a practitioner is subject to the e-prescribe mandate but is unable to comply, he/she may apply for a temporary exemption from the mandate based upon economic hardship, technical limitations or other exceptional circumstances. Practitioners are notified via electronic mail whether their exemption is approved. The PA Department of Health directs practitioners to allow the Department at least five (5) business days to respond, which time-frame may be extended based on the volume of requests received. If the practitioner is approved for the exemption, such exemption will expire one (1) year after the date of approval and the practitioner will be required to re-apply for the exemption on an annual basis, as needed.

For those practitioners that do not meet a statutory exception and are not approved for an exemption, failure to comply with the e-prescribe mandate comes with administrative penalties in the amounts of: (1) $100 per violation for the first through tenth violations, and (2) $250 per violation for the eleventh and any subsequent violations, up to a maximum cumulative fine per calendar year of $5000. On a positive note, the assessment of any such penalties will not be reported, and need not be self-reported, to the practitioner’s licensing board, nor will they be considered a disciplinary action.

If you are unsure whether you are subject to this new e-prescribing mandate, would like assistance applying for an exemption, or simply want to better understand your prescribing duties moving forward, please contact our firm.

The Trump Administration’s Proposal to Amend the Physician Self-Referral and Kickback Laws

10/18/2019

Yesterday (October 17, 2019), the Office of Inspector General (“OIG”) and the Centers for Medicare and Medicaid Services (“CMS”), in conjunction with the U.S. Department of Health and Human Services’ (“HHS”) Regulatory Sprint to Coordinated Care, proposed long-awaited updates to the physician self-referral law (also known as “Stark”); the Anti-Kickback Statute (“AKS”); and the beneficiary inducements provision of the Civil Monetary Penalties Law (“CMPL”). The proposed rules seek public comment on: (1) modifications to current AKS and CMPL safe harbors and exceptions for EHR items and services, warranties, local transportation and personal services and management contracts and (2) new AKS safe harbors and CMPL/Stark exceptions granting protections to physicians and entities affiliated with one another through value-based arrangements. The new and modified safe harbors and exceptions are intended to account for and incentivize the transition of the delivery of healthcare from fee-for-service to pay-for-performance by permitting information sharing, care coordination, and joint resources among value-based enterprise participants. In addition, the proposed rules aim to eliminate the need for fraud and abuse waivers for various CMS-sponsored payment models (as currently in effect for the Medicare Shared Savings Program) by including a specific safe harbor and exception for such models.

The proposed rules, if finalized, would apply prospectively only. They would not apply to value-based compensation arrangements engaged in prior to the effective date of the final rule. Comments on the proposed rule are due by December 31, 2019. To review the proposed rules and instructions to submit comments, visit the following sites: https://www.federalregister.gov/documents/2019/10/17/2019-22027/medicare-and-state-healthcare-programs-fraud-and-abuse-revisions-to-safe-harbors-under-the (OIG Proposed Rule) and https://www.federalregister.gov/documents/2019/10/17/2019-22028/medicare-program-modernizing-and-clarifying-the-physician-self-referral-regulations (CMS Proposed Rule).

Use of Voice-Assistant Devices in the Office

8/13/2019

Do you allow your staff members to use smart devices in the office (i.e., smart phones, smart watches, smart speakers)? Do you have a policy in place to safeguard patient information from access by those smart devices?

In an era where technology continues to advance at an exponential rate, the healthcare industry (along with most industries) is constantly “playing catch up.” Chances are that most, if not all, of your staff members use a smart phone while at work. In addition, some staff members may use smart watches, and others (likely fewer) may use, or have inquired about using, smart speakers to listen to music in the office. Given the voice-assistant capabilities of those devices, there are safeguards that must be put in place to prevent potential HIPAA violations and/or breaches. Below are the three (3) most common smart devices and the patient privacy issues that should be addressed in an internal office policy if you are going to permit staff members to use those smart devices in the office:

Smart phones: Given the ubiquitous nature of smart phones in our society, prohibiting the use of the devices in the office is not realistic. That said, usage policies should be implemented which limit, or negate, the ability of such devices to access patient information. While prohibiting the use of phones during work hours is one step, it is likely not enough to sufficiently protect patient information. For staff that use the voice-assistant capabilities of their devices (i.e. Siri, Cortana, Google), their devices are always “listening” to communications occurring when the capability is activated. However, there are methods by which this capability can be deactivated, at least when the phone is “locked”. By requiring such deactivation, combined with the prohibition of phone use during work hours, you can more effectively prevent staff members from inadvertently giving their devices’ access to patient data.
Smart watches: Smart watches are less prevalent than smart phones, but their usage rate continues to grow. Smart watches generally have the same capabilities as their complementary smart phone (i.e., phone calls, texting, voice-assistant). Additionally, these devices also have the ability to deactivate the voice-assistant capability. Accordingly, if smart watches are permitted in the office, your internal office policy should contain the same limitation on the use of the smart watch’s voice-assistant during work hours.
Smart speakers: Smart speakers are most often used in the privacy of individuals’ homes. However, some staff members may desire to use the speaker in the office to play music, set reminders and perform other tasks. Although the speakers have the capability of working without using the voice-assistant technology, it is rare for individuals to use the speaker without such technology. Accordingly, we generally recommend that smart speakers be prohibited from use in the physician office. Unlike smart phones and (potentially) smart watches, smart speakers are not necessary for staff members’ daily living. Further, given the intended use of the speakers (i.e. to play music, research miscellaneous facts, set reminders), it does not make practical sense to use the devices without the voice-assistant capability. As a result, any policy that prohibits use of the voice-assistant during work hours would be futile and negate the convenience of the device itself.

As advancements in technology continue and new smart devices are developed, you will need to revisit whether the use of those devices post a threat to your patients’ privacy rights and your office’s HIPAA compliance. Your internal policies should be reviewed periodically to ensure that they address any new risks that are created by use of such devices.

If your office is interested in developing and implementing a device policy, please contact our firm.

MIPS and the Impact on Billing Arrangements

5/23/2019

Pursuant to the new Merit-based Incentive Program System (“MIPS”), payment adjustments are applied to Medicare fee-for-service claims for practices’ performance on certain quality, improvement, information technology and cost measures. We are now seeing the first payment adjustments being applied to 2019 claims based on 2017 performance. Prior to the payment adjustments occurring, practices probably did not consider how such adjustments would impact their relationships with vendors, specifically those that they may rely on to achieve the performance requirements and that are compensated based on a percentage of the collections impacted by the adjustments – i.e., billing companies.

Except in those few states that prohibit percentage-based arrangements for billing companies, the majority of healthcare billing contracts provide for services in exchange for a percentage of collections. Before MIPS, this made sense. The more claims submitted by the billing company, the more services the billing company had to provide, and the more money the practice collected. However, now that reimbursement for claims (at least Medicare claims) is being adjusted based on performance metrics of the practice, practices may begin to wonder whether it still makes sense to pay the billing company a percentage of all collections. Below are three (3) key issues to take into consideration when negotiating compensation rates for billing companies given the new MIPS payment scheme:

Reporting method. Practices have a number of options available for purposes of reporting their MIPS data. One of these options is through their Medicare Part B claims submissions, thereby requiring assistance from their billing company. The other four (4) options do not involve the submission of claims and therefore do not require the assistance of the billing company. Further, only small practices (i.e., with 15 or less providers) can use the claims reporting mechanism, and that mechanism can only be used for certain quality measures (and not for improvement, information technology or cost measures). Accordingly, it does not make sense for the billing company to get a percentage of any positive payment adjustment that a practice receives. Even if the practice chooses to submit data via Part B claims, such submissions have a limited impact on the practice’s achievement of the positive adjustments. It may make more sense to carve out any payment adjustment reimbursement before calculating the percentage-based fee due to the billing company. To the extent that the billing company is legitimately performing additional services, the practice can pay the billing company an additional, reasonable flat fee for those services.
Liability for failure to meet benchmarks. This issue is two-fold. First, the billing company may, in some instances, be directly responsible for the practice’s failure to receive a positive adjustment (or for the receipt of a negative adjustment) if the billing company performed the claims submissions and erred in doing so. In such instance, should the sole remedy to the practice be that the billing company receives a lesser reimbursement for those claims due to the negative or neutral adjustment? Or, should the billing company be penalized further for those errors? For instance, should the billing company be required to provide a performance guarantee related to the MIPS submissions, and if so, what is the penalty for failing to fulfill those guarantees? Second, in the event that the practice does not use the billing company to submit data, and the practice’s performance results in a negative payment adjustment due to its own failures, should the billing company be entitled to some remedy for the lower reimbursement that they will receive as a result of such adjustment?
Addressing retrospective re-adjustments. As practices may have already seen, there may be instances in which CMS makes incorrect adjustments to a practice’s claims and is required to retrospectively re-adjust the claims to account for such error. In those instances, chances are that the billing company has already received their compensation based on the incorrect adjustment amount. The practice is now forced to “chase” after the billing company for a refund of any overpaid fees. Had the practice carved out the adjustments before calculating the billing company’s fees, this could have been avoided.

These three (3) issues only touch on the impact that MIPS has on billing company arrangements. Further, similar considerations may apply to other vendor arrangements (e.g., EHR vendors responsible for tracking performance data). Accordingly, practices must not only dedicate resources to achieving MIPS incentives, but also to reviewing and possibly renegotiating agreements that are impacted by their MIPS performance.

If you are concerned about the impact that MIPS has on your practice’s vendor agreements, contact our firm for assistance.

HIPAA Enforcement: A Rise in OCR Sanctions?

5/10/2019

In recent years, we have focused our HIPAA compliance guidance on the HITECH-driven HIPAA enforcement audits. However, as a result of leadership vacancies at the Office for Civil Rights (“OCR”) and a reduction in funding allocated to OCR, the HIPAA audits have come to a halt (at least temporarily). Practices must be careful not to use this inaction as an excuse to become lax in their HIPAA compliance efforts. OCR remains legally obligated to investigate: (1) all HIPAA breaches involving the protected health information (“PHI”) of 500 or more patients and (2) any complaints that, if substantiated, would constitute a violation of HIPAA due to willful neglect. Further, OCR is incentivized to investigate and sanction practices for HIPAA violations since it is permitted to re-allocate a portion of the funds that it receives through those enforcement actions (i.e., through monetary penalties, sanctions and settlements) for its operations. As a result, while practices are likely safe from HIPAA audits for the foreseeable future, their risk of OCR investigations and sanctions as a result of self-disclosed breaches or patient, staff or other third party complaints may have increased. The 2018 statistics for HIPAA enforcement supports this proposition. OCR set a new record for enforcement activity in 2018 with a total of $28.7 million charged against covered entities and business associates in the form of settlements and judgments. This amount represents a 22% increase from the previous enforcement record of $23.5 million set in 2016. The variance in the enforcement actions also makes clear that OCR’s enforcement is not limited to a specific type of entity or only those entities which are likely subject to large fines. The settlements/judgments by OCR in 2018 ranged from $100,000 to $16 million dollars and included business associates and covered entities, DME providers and private practices, and medical centers and insurance plans. Accordingly, all entities and individuals subject to HIPAA are at risk for OCR investigation and sanction. Therefore, it is critical that practices and other entities covered by HIPAA continue to take HIPAA compliance seriously and implement and enforce policies and procedures to prevent violations of HIPAA and breaches of PHI.

More information about OCR’s 2018 enforcement actions is available here.

Thinking of Hiring a Nanny? - Three Key Considerations

3/22/2019

Having a child is one of the most joyous and exciting times in a person’s life. Unfortunately, it can also be one of the most stressful times. As if being a new parent is not hard enough, many families have the added stress of finding a childcare option that works for their situation. For some families, this means hiring a nanny or other domestic work (referred to throughout this article as “nanny”). Through the years, clients have contacted us requesting guidance on hiring a nanny privately, without the assistance of a pre-established nanny agency. Although hiring a nanny privately may seem straightforward, there are many aspects that must be taken into consideration before deciding to take this route. Below, we discuss what we view as the top three items to keep in mind when hiring a nanny:

Tax Considerations: When hiring a nanny, many people are inclined to do so “under the table” and not treat their nanny as an employee, thereby avoiding the payment of taxes related to such employment. However, if you have control over the specifics of your nanny’s position (e.g., the hours your nanny works, how your nanny does his/her job, etc. – as is the case for most nanny positions), then your nanny would most likely be categorized as an employee by the IRS. The penalties and fines at risk for mis-categorizing your nanny can be substantial. Therefore, we recommend treating and compensating your nanny as an employee. Although there is some paperwork that goes along with employment, there are many services that can streamline this process and ensure that you are managing payroll for your nanny properly. It is worth spending the money to obtain these services in order to avoid scrutiny and costly sanctions from the IRS.
Insurance Considerations: This is one area that clients are often surprised by. There are several types of insurance that you should consider obtaining when employing a nanny:

Homeowners/Renters Insurance: Depending on its limits and terms, homeowners or renters insurance policies can protect you from significant financial losses related to: (i) damage to and/or theft of your property by your nanny and (ii) injuries suffered by your nanny while on your property. However, because these policies typically have significant deductibles and inadequate coverage limits, it may be advisable to obtain an umbrella policy which you can use to supplement your liability coverage. That said, there are additional concerns with homeowners/renters insurance policies. In many states, injuries suffered by nannies while on duty are not covered under homeowners/renters insurance policies. Rather, the family-employer must obtain workers’ compensation policies to cover such incidents (discussed below). Further, in states where nannies can be covered under homeowners/renters insurance policies, the policy typically limits coverage to injuries suffered at the covered residence and would not apply if the nanny is injured while, for example, out running errands or at the park with the children.
Workers’ Compensation: Some states require you to obtain workers’ compensation insurance if you hire a nanny. If you are in one of those states, your homeowners/renters insurance will not cover costs related to your nanny’s injury. Even in states that do not require workers’ compensation insurance and where homeowners/renters insurance may provide some coverage, it is best practice to obtain workers’ compensation insurance for your nanny. The premiums for these policies are typically less than $1,000 per year and cover all medical and lost wage expenses that could stem from your nanny getting injured. Also, workers’ compensation insurance applies even if your nanny is injured while away from your home, so long as he/she is performing services related to his/her position when injured. For example, if your nanny takes your child to the park and trips and breaks his/her ankle while playing with your child, the workers’ compensation policy would likely cover this injury, whereas your homeowners/renters insurance likely would not.
Automobile Liability Insurance (“Car Insurance”): If you plan to have your nanny drive your car, you need to add your nanny to your car insurance policy. Depending on how often your nanny will be using your vehicle, you may only need to name him/her as an occasional driver, which in many cases will not raise your rates. You may also consider obtaining an umbrella policy for your car insurance. If your nanny causes an accident while in your vehicle, you could be held liable for damages to those involved and you want to have sufficient insurance to cover any such liability. If your nanny will be driving your children in his/her own vehicle, you want to ensure that he/she has car insurance with sufficient coverage, which may require an umbrella policy. You may consider paying or reimbursing your nanny for the cost of this coverage to ensure that it is maintained at an adequate level. You should require your nanny to include you and your spouse as “additional insureds” on the policy and require that the nanny provide you with proof of the policy from time to time, as well as notice in the event that any policy is reduced, suspended, or terminated.

Contractual Considerations: The question that we receive most often from our clients is whether they need a formal agreement with their nanny. We would recommend having a formal agreement in place. Without one, there are many important matters that go unaddressed, which could lead to issues with your nanny down the road. If you do opt for a contract with your nanny, you will want to make sure that the terms and duties are clear so that you and your nanny are on the same page regarding your expectations of the nanny’s services. Some web sites offer standard contracts that can be used for this purpose. However, many of those contracts contain vague terms that could lead to misunderstandings if not further clarified. As with any “standard” agreement, you want to review it carefully and tailor it to your specific needs. The following are key provisions you want to have within the agreement:

Work Schedule
1. What time do you expect your nanny to arrive/begin work?
2. Is he/she expected to work weekends and/or holidays?
3. Is he/she expected to be “on-call” when you have to take call?
Duties
1. What is expected of your nanny (e.g., cooking; cleaning; errands; giving children baths; caring for an infant vs. older children)?
2. Do you expect your nanny to have any type of certification/training (e.g., CPR, First Aid, etc.)? If so, who will pay for this certification?
Pay
1. How much and how frequently will you pay your nanny?
2. Will you reimburse your nanny for any expenses (e.g., gas expenses, health insurance allowance, cell phone)?
Time off
1. If your nanny is full-time, how much time can he/she take off? Is this time paid?
2. How must time off be scheduled with you?
Exclusivity
1. Are you sharing your nanny with another family?
2. Is your nanny permitted to obtain employment with other families? If so, are there limits to this employment? For example, if you live in an apartment building, do you want your nanny working for others within the building?
Travel
1. Is your nanny expected to drive your children around or pick them up from school each day? If so, whose vehicle will he/she be using? Who is responsible for the car insurance?
2. Is your nanny permitted/expected to drive other children (i.e. carpool)?
3. Do you expect your nanny to go on vacation with you? If so, will he/she receive additional pay? What will his/her hours be while there?
Termination
1. How much, if any, notice is needed to terminate the relationship?
2. Will you compensate the nanny for a certain period if you are the one who terminates the agreement?

All three of the issues discussed above are extremely important when hiring a nanny and should be taken very seriously. The added responsibilities and considerations that come along with hiring a nanny are a significant part of why many people choose to send their children to daycare or use an organized service to hire the nanny. By doing so, they eliminate some or most of those concerns.

If you have hired or plan to hire a nanny for your children and you want to ensure that you are taking the steps necessary to protect you from liability, please contact our firm.

Estate Planning and Digital Assets

2/14/2019

Do you use online banking? How about Venmo? Cryptocurrency? If you answered yes to any of these questions, you need to ensure that those digital assets are protected in the event of your death or incapacitation.

Most people use some form of digital/virtual banking in their everyday lives. While those digital assets can often be used in the same manner as cash and credit, they need to be addressed in a unique manner when it comes to estate planning. Most people with estate documents have not accounted for how their loved ones will access their digital assets should something happen to them.

Typically, access to digital assets requires a specific username, PIN, and/or password. If those access codes are not provided to a loved one before your death, your loved one may be required to jump through numerous hoops to access such assets, or your assets could die with you. To avoid this, the issue of digital assets should be addressed in your estate documents. Your power of attorney should grant your agent the power to access and manage your digital assets, and your will should reference your digital assets and contain the access codes for purposes of probating such assets.

Making future plans for your digital assets becomes even more important when it comes to cryptocurrency. Cryptocurrency is a virtual currency that uses cryptography for security. The most popular form of cryptocurrency is Bitcoin. Unlike other digital assets, cryptocurrency is not maintained by banks or the federal government. Cryptocurrency is typically anonymous; it does not require a name in order to obtain. Rather, owners of cryptocurrency have a special key that must be used to access the currency. If a loved one does not have this key when you die or become incapacitated, your cryptocurrency may be lost to them. Unlike online banking accounts and mobile banking apps, there is no customer service department to call if an individual is unable to access your cryptocurrency in the event of your death.

This article by Forbes provides deeper insight into the issue of estate planning and digital assets, including cryptocurrency. If you already have an estate plan, now is a good time to revisit it to ensure that it accounts for your digital assets, especially if you have invested in cryptocurrency. If you do not yet have an estate plan in place, now may be a good time to create one.

Please contact our firm with questions or to discuss your digital estate planning needs.

Update on Minority Shareholders' Dissenters Rights

1/30/2019

In early July 2018, we posted a brief article regarding a minority shareholder’s right to dissent to a private equity (“PE”) deal and force the corporation or the other shareholders to purchase his/her shares in lieu of going along with the deal. In that article, among other things, we raised the issue of how a court would appraise the value of the minority shareholder’s shares and whether the court would take into account the purchase price offered by the PE company. In other words, if a shareholder exercised his/her right under the law to have his/her shares redeemed by the group rather than participate in the PE deal, at what price would the group be required to purchase those shares? Would a court or arbitrator look to the group’s internal buy-out agreements to determine value? Would they look to the PE price as indicia of value? Would they rely on a third party appraisal? We also raised the issue that, in addition to financial considerations, dissenting shareholders must take into account the impact, if any, that the merger will have on their restrictive covenant. Although these issues have not been addressed at the national level, one recent Colorado appeals court decision suggests that: (1) the PE offer may not be relied upon to determine the fair value of the shares, but (2) a non-compete agreement may be deemed unenforceable if the dissenting shareholder was forced to cease employment with the practice as a result of his/her dissent.

Fair Value of Shares
In Crocker v. Greater Colorado Anesthesia, P.C. (2018), the Colorado Court of Appeals held that the purchase price offered by U.S. Anesthesia Partners (“USAP”) to acquire the assets of Greater Colorado Anesthesia, P.C. (“GCA”) did not reflect the fair value of Dr. Crocker’s (the dissenting shareholder) shares. In reaching this decision, the court relied on: (1) the statutory definition of “fair value” in a dissenters’ rights action and (2) the basis for USAP’s purchase price calculation. Although the statutory definition will vary by state, a number of states define fair value similarly to Colorado - “the value of the shares immediately before the effective date of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action except to the extent that exclusion would be inequitable.” CO Rev. Stat. s. 7-113-101(4) (emphasis added). Accordingly, at least in those states having a statutory definition similar to that of Colorado, courts may look to the Crocker decision and hold that fair value is determined BEFORE the PE deal closes.

In determining whether the USAP amount offered to GCA shareholders was an adequate representation of the fair value of the shares BEFORE the merger-acquisition took effect, the court looked at what exactly USAP was getting in exchange for such purchase price. The court found that USAP was not merely compensating the shareholders for the value of their shares. Rather, USAP was also compensating the shareholders for their willingness to enter into new employment agreements with a 5-year commitment and a 21.3% reduction in compensation. Accordingly, the purchase price was significantly inflated and could not be relied upon to determine the value of a dissenting shareholder’s shares where such shareholder was not tied to an employment commitment and did not face a significant reduction in compensation. Because most PE deals require a significant employment commitment and a reduction in compensation, this case provides courts around the country with some guidance as to whether to rely on the PE offer in determining the fair value to be paid to a dissenting shareholder.

Enforceability of Non-Compete
Although the Colorado court did not grant Dr. Crocker the benefit of the PE purchase price as fair value for his shares, the court did hold that the non-compete provision in his employment agreement with GCA was unenforceable as a result of Dr. Crocker’s exercising his right to dissent to the merger.

The Colorado court acknowledged that, generally speaking, a non-compete would survive a merger with the right to enforce such non-compete vesting in the surviving entity. However, in this case, Dr. Crocker’s exercise of his dissenter’s rights resulted not only in his loss of shareholdership in GCA, but also his employment with GCA because the agreements did not permit him to remain an employee of GCA without also remaining a shareholder. Accordingly, if the non-compete were enforceable, Dr. Crocker would be forced to choose between his statutory right to dissent to GCA’s merger and his ability to continue practicing (and living) in the area. As the court stated, the intention of dissenter’s rights is to protect minority shareholders from oppression by the majority. Rather than protecting him from majority action, enforcement of the non-compete against Dr. Crocker would penalize him for exercising those rights. For this and other reasons, the court deemed the non-compete to be unenforceable against Dr. Crocker.

Based on this case, minority shareholders must consider the impact of dissenting to a PE deal, both from a financial standpoint and a practical standpoint. Although, based on the Colorado case, minority shareholders should not expect to receive the same financial pay out should they choose to dissent to a merger, there is a possibility that such dissent may invalidate their restrictive covenant. Given the long-term employment commitment typically expected from PE companies, the ability to get out of a non-compete may be more lucrative to some physicians than receiving the additional compensation.

Upcoming Comment Deadline on the 2019 Medicare Physician Fee Schedule Proposed Rule

9/6/2018

On July 27, 2018, Medicare released its proposed rule for the 2019 Medicare Physician Fee Schedule (full text available here) (the “Proposed Rule”). Whereas Medicare makes revisions to the physician fee schedule every year, there are two (2) changes proposed this year which are likely to have a significant impact on practice revenue: (1) changes to billing and reimbursement for Evaluation and Management (“E/M”) codes and (2) changes to the Quality Performance Program (“QPP”) under MACRA.

E/M Coding
Medicare proposes to simplify E/M coding and documentation requirements. Under the current billing methodology, physicians have the option of coding office visits between a Level 1 and a Level 5, depending on the complexity of the patient’s visit. The reimbursement for the office visit increases as the level of complexity increases. However, under the Proposed Rule, all Level 2 through Level 5 physician office visits would be coded at the same level and paid at a single reimbursement rate (between the current Level 3 and Level 4 rate). Given the decrease in reimbursement that will occur for the higher level visits, Medicare also proposes limiting the documentation standards to those currently set for a Level 2 visit.

While this proposal may seek to streamline documentation requirements and E/M coding, it will significantly impact those specialists who often bill for office visits at the higher Level 4 and Level 5 reimbursement levels. In support of this proposal, CMS Administrator Seema Verma stated that “most specialties would see changes in their overall Medicare payments in the range of 1-2 percent up or down from this policy, but we believe that any small negative payment adjustments would be outweighed by the significant reduction in documentation burden.” The estimated impacts cited by CMS apply to Medicare payments within specialties; they do not assess the impact on individual physicians or group practices (e.g., those sub-specialty practices that bill Level 4 and 5 E/M codes on a regular basis). Further, based on the estimated impacts table published with the Proposed Rule, CMS expects some specialties (i.e., OB/GYN) to see a 4% increase while others (i.e., podiatry and dermatology) would face a 4% cut.

QPP Revisions
In addition to losing reimbursement on E/M codes, providers also face reimbursement cuts as a result of proposed revisions to the QPP. The QPP is the new value-based incentive program established under MACRA, which imposes positive and negative payment adjustments on providers based on their participation in the Merit-based Incentive Payment System (“MIPS”) or an Alternative Payment Model (“APM”). As the QPP is rolled out, new parameters are proposed every year. There are several proposed changes in the Proposed Rule that could significantly impact providers. These changes include:

Cutting the bonus points that small practices can earn;
Revising the Promoting Interoperability (“PI”) category to be more consistent with the all-or-nothing (as opposed to sliding scale) methodology under its former Meaningful Use counterpart, making it harder for providers to achieve participation points;
Requiring practices to use the latest version of Certified EHR Technology (“CEHRT”) to meet the PI requirements, which a number of EHR vendors do not yet support;
Increasing the requirements to earn credits for participation in qualified registries; and
Eliminating credits (at a future date) earned for participation in certain registries (e.g., the IRIS Registry).

Whereas CMS is keeping other QPP provisions that assist practices in meeting the thresholds for positive payment adjustments, the changes in the Proposed Rule will make it more difficult to achieve those thresholds.

Comments to the Proposed Rule are due by September 10, 2018. Understandably, a number of societies have or will be submitting comments in opposition to the Proposed Rule. However, if you would like to submit your own comment, you can do so here.

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