By: Mathew J. Levy, Esq. & Stacey Lipitz Marder, Esq.
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As the healthcare industry evolves and reimbursement rates from third party payors decrease, many physicians are quickly realizing that they must ban together in order to survive. In addition to joining or forming large group practices, many physicians are being drawn to offers to join or form independent practice associations (IPAs) and similar organizations. The formation and participation in IPAs and similar organization is growing rapidly as physicians recognize that they can take advantage of having more leverage with respect to negotiating reimbursement rates with third party payers, while being able to continue to operate their medical practices independently. Physicians must recognize that there are a number of legal issues associated with the formation of IPAs, and failure to address and resolve these issues can jeopardize an IPA’s success. We have addressed a few issues that must be addressed when forming an IPA below.
When evaluating what type of entity to form for the IPA, physicians must consider several factors including whether all of the owners of the IPA will be physicians and whether the IPA will render professional services, as well as tax and liability considerations. In the event that an IPA will provide or arrange for professional services, the IPA must be set up as a professional entity (ie a PC or PLLC). However, in the event the IPA is set up as a messenger model where professional services will not be rendered, the IPA can be formed as a lay entity (ie an Inc or LLC). It is generally not recommended that an IPA be formed as a general partnership as there would be increased general liability. Physicians must also take into consideration issues involving pension plans (ie will the IPA be considered “affiliated” as per the Internal Revenue Code), and requirements under the securities law (specifically if the IPA will have a lot of members and will issue securities).
Once an IPA determines what type of entity to form, either a Certificate of Incorporation or Articles of Organization would have to be drafted. The IPA would also have to draft either a Shareholders’ Agreement or Operating Agreement dictating the terms of the relationship between the owners. Physicians should note that not all of the members of an IPA have to be owners. The relationship between the members and the IPA would be memorialized in a Members’ Agreement. As such, it is often recommended that ownership be limited to fewer individuals. Prior to the entity being formed, the IPA would have to get consent from the Department of Health, Education Department and the Division for Financial Services (formerly known as the Insurance Department) which can take several months.
Since physicians participating in an IPA are essentially competitors, it is imperative that the IPA be in compliance with the applicable anti-trust rules and regulations in order to ensure that the physicians do not engage in “anticompetitive behavior”. As per the Federal Trade Commission (FTC), in order to avoid anti-trust violations the IPA would have to be integrated, either through financial risk sharing or clinical integration between the physicians. Examples of financial risk include accepting a capitated rate (per member/per month fee based upon the number of patients assigned to a physician), agreement to provide certain services for a pre-determined percentage of revenue, use of financial incentives (ie a financial withhold), and a significant investment subject to risk of loss.
Clinical integration on the other hand involves the establishment of systems and procedures that encourage greater interdependence and joint responsibility in managing the cost and quality of care rendered by the IPA’s physicians. Elements of clinical integration include physicians establishing goals, standards and protocols to govern treatment and utilization of services by the physicians, both individually and as a group. Furthermore, physicians would be required to actively review performance and take corrective action if necessary. Becoming clinically integrated is a very involved process which may require significant time and money.
Physicians should also consider adding additional safeguards to the IPA to withstand antitrust scrutiny including making the arrangement nonexclusive, creating mechanisms so that competitors are not using the IPA as a means of price fixing through communication of their price structures, and ensuring that the IPA offers a product that is different from what the physicians can offer individually. Furthermore, when discussing the formation of an IPA, physicians should avoid engaging in conversations which can be perceived as anticompetitive.
Physicians must also be aware of the Federal and state laws which prohibit remuneration in exchange for referrals. As such, any cross-referrals which occur through the IPA need to be analyzed in order to ensure compliance with applicable rules and regulations governing this area.
Physicians must also ensure that the IPA is compliant with applicable state insurance regulations. Depending on how the IPA is structured, the IPA may be deemed to be an insurer or HMO, and the IPA would therefore have to comply with additional rules and regulations.
Prior to entering into arrangements with third party payers, it is imperative that physicians understand and address the risks associated with the different financial arrangements including capitation. Credentialing, quality assurance, utilization management and use of data can often times help IPA’s mitigate risk.
Prior to forming IPAs, physicians must also consider how the IPA will be governed and managed. For instance, physicians must discuss who will manage the IPA and how will that person be compensated. Additionally, it is imperative that physicians discuss how the IPA will make decisions, as well as how members can be added or terminated. Furthermore, physicians need to determine upfront what the annual fees will be for physician members, as well as how distributions will be made to the members of the IPA.
Forming an IPA can be a very exciting prospect; however, there are many issues that need to be evaluated both from a business and legal standpoint. To that end, it is in the best interest of the physician to retain a team of professionals specializing in health care to help address the issues raised with respect to the formation of an IPA.
About the Authors:
Mathew J. Levy is a Partner of the firm and co-chairs the Firms corporate transaction and healthcare regulatory practice. Mr. Levy has particular experience in advising health care clients with respect to contract issues, business transactions, practice formation, regulatory compliance, mergers & acquisitions, professional discipline, healthcare fraud & billing fraud, insurance carrier audits including prepay and post payment review, litigation & arbitration, and asset protection-estate planning. You can reach Mathew Levy at 516-926-3320 or email: email@example.com.
Stacey Lipitz Marder is an associate at Weiss Zarett Brofman Sonnenklar & Levy, PC., with experience representing healthcare providers in connection with transactional and regulatory matters including the formation and structure of business entities, negotiating and drafting contracts and commercial real estate leases, stock and asset acquisitions and general corporate counseling. Ms. Marder also has experience advising healthcare clients on a wide range of regulatory issues including Stark, the Anti-Kickback Statute, fraud and abuse regulations, HIPAA, reimbursement and licensing matters.
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 Certain activities including price fixing, group boycotts, and division of markets are considered “per se” violations of antitrust as they constitute anti-competitive behavior.