Source: https://www.lilesparker.com/author/dparker/
Timestamp: 2019-10-22 23:46:14
Document Index: 380035124

Matched Legal Cases: ['§ 11101', '§11101', '§60', '§ 111151', '§40', '§30', '§8', '§300', '§405', '§405', '§362', '§362', '§1320', '§1320', '§1320', '§424', '§424', '§424', '§424', '§424', '§424']

David Parker - Experienced Corporate Attorney : Liles Parker PLLC
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Structural Denial of Due Process in HCQIA Peer Review Proceedings
October 12, 2015 by David Parker
(October 12, 2015): The Federal HCQIA peer review statute affords peer-reviewing bodies and their members legal immunity from liability from suits by the physicians they discipline, so long as their peer-review processes include certain due process rights for the accused physician. These due process rights are expressed as a right to a hearing, and are generally outlined in a hospital staff’s bylaws. In most US hospitals, however, these hearing and other due process rights arise only after a decision on the merits of the discipline case have been made, and therefore exist only at what is functionally an appeal level. At this later stage, any decision in the physician’s favor requires a finding of abuse of discretion or bad faith, and a heavy burden of proof is placed on the physician. So the due process rights in practice arise only after the point in the peer review when they can be of most benefit to the physician.
I. HCQIA Peer Review Basics:
The US Congress enacted The Healthcare Quality Improvement Act of 1986[1] (“HCQIA”, generally pronounced “Hick Kwah”) to address a perceived problem of misbehaving physicians travelling to new states and thus escaping notice of professional discipline actions taken against them[2]. The heart of the HCQIA peer review scheme is a mandatory national reporting scheme and database. Hospitals, their medical staffs, state medical boards and other bodies which discipline clinicians are required to report serious professional sanctions imposed by them to a nationwide database named the National Provider Data Bank[3], or “NPDB”. This database is accessible to other hospitals and boards, insurance carriers and other payers, and most institutions which hire and fire physicians[4]; and as contemplated by Congress, such persons now routinely consult the NPDB to look for a history of professional discipline before recruiting any clinician or granting privileges.
A feature of HCQIA is a grant of legal immunity to the bodies that conduct peer review of medical professionals, and their members, against legal liability for adverse actions they may take against the professionals in peer review proceedings, so long as the proceedings conform to certain basic due process requirements described in the statute. This legal immunity is so desirable that within a short time after enactment of the HCQIA legislation, hospital staffs and other peer reviewing bodies around the US revised their bylaws and other constituent documents to conform to HCQIA’s due process requirements and thus secure immunity. These procedures are normally set down in the hospital’s staff bylaws, and afford the affected physician a hearing where the due process rights apply. The bylaw provisions which set out this process and these rights have become notably uniform across the US.
II. HCQIA Peer Review Standards for Professional Review Actions:
Under HCQIA, hospitals may undertake a “professional review action”[5] against a physician alleged with misconduct or incompetence. This is any formal action can adversely affect the physician’s clinical privileges or membership in a professional society. Any such action must be based on the recommendations[6] of a “professional review body”, which is normally the hospital’s medical staff or a committee appointed by it to conduct professional review activity.
If the affected physician requests it, he or she must be afforded certain due process rights, in the form of a hearing. The hearing must be held before an independent intermediary such as a mutually acceptable arbiter, a hearing officer, or a panel of individuals appointed by the hospital but who are not in direct economic competition with the physician involved. In the hearing process the physician has the right to be represented by legal counsel, receive a statement of all charges against him, present evidence, and call, examine, and cross-examine witnesses. The physician may also submit a written statement at the close of the hearings and have a record made of the proceedings. At the conclusion of the hearing, the physician then has the right to receive the written recommendation of the arbitrator, officer, or panel, including a statement of the basis for the recommendations. Only if the professional review body follows these standards will it and its members receive immunity from damages under the law.
IV. The HCQIA Peer Review Process is Fundamentally Unfair:
On its face, this process appears to provide the affected physician with adequate due process rights. The statute states that any professional review action cannot be taken until after adequate notice and hearing procedures have been afforded to the doctor. In practice, however, the due process rights arise only at a point when they are of little use.
In the common form of peer review adjudication process provided under staff bylaws written to conform to HCQIA, after receiving complaints about a particular physician or otherwise having professional conduct brought into question, the medical staff, acting through its executive committee, will appoint an investigative or “ad hoc” committee to conduct an investigation into the matter and make a recommendation to the executive committee, which in turn will make a recommendation to the hospital board, about how the matter should be resolved. While technically neither is the executive committee bound to conform to the ad hoc committee’s recommendation, nor is the hospital board bound to conform to the executive committee’s recommendation, in practice most such recommendations are accepted. While these committees are charged to act as fact-finders, their authority normally goes much further, and they are empowered to restrict, suspend, revoke, or otherwise adversely affect the doctor’s privileges during the pendency of their proceedings. HCQIA is drafted so that the due process rights it requires are not obviously applicable to these ad hoc committee and executive committee stages of the peer review process, which amount to the merits determination point in the case. Modern staff bylaws invariably take advantage of this, and list several due process rights which the accused does not have at these stages, and are otherwise silent on what rights he does have at these stages.
Therefore, under most staff bylaws, by the time the accused can request a hearing before a professional review body and enjoy the basic due process rights mandated by HCQIA, the actual decision on his clinical privileges has already been made. Most bylaws make the hearing before a professional review body into nothing more than an appeal right, with grounds for review that are not a decision on the merits of the peer review decision. For the physician to prevail, most bylaws require a showing of absence of an evidentiary basis for the decision, or some form of bad faith. The standard is similar to that applied in a Federal court’s review of an administrative law judge’s decision. Most bylaws also impose the burden of proof on the accused, requiring that the affected physician to make his case by a preponderance of evidence. The process is carefully structured so the due process rights enumerated in HCQIA are not in effect when the actual merits of the peer review case are decided.
The common form of medical staff bylaws creates a procedure where an accused physician enjoys due process rights only at a stage when they can be of little or no use. The ad hoc committee of the hospital medical staff, and its executive committee, are in practice free to make determinations about medical staff privileges entirely without the basic procedural and related rights for the accused normally considered necessary for fundamental fairness. The list of due process rights in HCQIA creates an illusion of fair process. But as actually employed, they are nearly useless to the accused.
In light of the above, an accused physician needs to avoid the comfortable fiction that the stages of peer review at the committee level are non-final, and a meaningful hearing with actual due process rights exists at a later stage. The hearing stage in modern peer review is hopelessly weighted against the accused, and once that stage is reached his fate in normally sealed. When a physician finds him or herself in the committee stage of peer review, all their efforts and resources need to be deployed. While most bylaws forbid an accused physician from bringing counsel to committee “meetings” at the committee stage, they cannot prevent his consulting and taking advice from experienced counsel, and the prudent physician will do just that. If he waits to engage counsel for the hearing stage, it is probably too late.
[1] 42 U.S.C. §§ 11101 – 11152.
[2] The Congress finds …(t)here is a nationwide need to restrict the ability of incompetent physicians to move from State to State without disclosure or discovery of the physician’s previous damaging or incompetent performance.” 42 USC §11101(3)
[3] The data bank was given its name and current form in HHS regulations adopted under HCQIA and codified at 45 CFR §60.1.
[4] The NPDB is not, however, accessible to direct consumers of medical services i.e. the general public.
[5] HCQIA defines “professional review action” as “an action or recommendation of a professional review body which is taken or made in the conduct of professional review activity, which is based on the competence or professional conduct of an individual physician (which conduct affects or could affect adversely the health or welfare of a patient or patients), and which affects (or may affect) adversely the clinical privileges, or membership in a professional society, of the physician. Such term includes a formal decision of a professional review body not to take an action or make a recommendation described in the previous sentence and also includes professional review activities relating to a professional review action.” § 111151(9).
[6] HCQIA contemplates the existence of a medical staff at hospitals and other provider institutions, which is the body of all licensed clinicians practicing at the institution. Although it is something of a legal fiction, as most medical staffs are not incorporated and aren’t otherwise legal persons, HCQIA treats the medical staff as a legal person to whom certain tasks are delegated by the hospital, namely the administration and adjudication of professional quality control in the form of peer reviews. The medical staff in turn appoints a committee to perform its adjudications. But since the hospital’s board is normally the only body with actual legal authority to perform a legal act like termination of privileges, HCQIA, and therefore most bylaws written with HCQIA in mind, couch the decision-making of the medical staff as a recommendation to the hospital’s board of directors.
Tags: due process, HCQIA, medical board, National Provider Data Bank, NPDB, Peer Review Action, peer-review, The Healthcare Quality Improvement Act of 1986
Peer Review: How HCQIA Due Process is a Fiction
September 3, 2014 by David Parker
(August 31, 2014): The Healthcare Quality Improvement Act of 1986[1] (“HCQIA”, generally pronounced “Hick Kwah”), affords peer-reviewing bodies and their members legal immunity from liability from suits by the physicians they discipline, so long as their peer-review processes include certain due process rights for the accused physician. Unfortunately, the provider peer review process is irrevocably broken. HCQIA due process safeguards intended to protect the rights of physicians, nurse practitioners, physician assistants and other medical professionals simply doesn’t work. If you have worked as a licensed professional for more than a few years, you likely know one or more physicians or other medical professionals who will readily share their stories of how the “system” is rigged in favor of the institution. This article provides an overview of HCQIA and outlines several sad realities of what you should expect if you are called before a peer review committee. It also emphasizes the fact that you should engage qualified legal counsel at your earliest opportunity in the process so that you can achieve the most favorable outcome possible.
I. Overview of HCQIA Due Process Rights:
Under HCQIA, a physician’s due process rights are typically expressed as a right to a hearing, and are generally outlined in a hospital staff’s bylaws. Most hospitals in the United States have structured the process so that a physician’s hearing and other due process rights arise only after a decision on the merits of the discipline case have been made, and therefore exist only at what is functionally an appeal level. At this later stage, any decision in the physician’s favor requires a finding of abuse of discretion or bad faith, and a heavy burden of proof is placed on the physician. So the due process rights in practice arise only after the point in the peer review when they can be of most benefit to the physician.
II. HCQIA and Peer Review:
Congress enacted HCQIA in 1986 purportedly to prevent a misbehaving physician from traveling to a new state, thereby possibly escaping notice of professional discipline actions taken against them[2]. The heart of HCQIA is a mandatory national reporting scheme and database. Hospitals, their medical staffs, state medical boards and other bodies which discipline clinicians are required to report serious professional sanctions imposed by them to a nationwide database named the National Provider Data Bank[3], or “NPDB”. This database is accessible to other hospitals and boards, insurance carriers and other payers, and most institutions which hire and fire physicians[4]; and as contemplated by Congress, such persons now routinely consult the National Practitioner Data Bank (NPDB) to look for a history of professional discipline before recruiting any clinician or granting privileges.
A feature of HCQIA is a grant of legal immunity to the bodies that conduct peer review of medical professionals, and their members, against legal liability for adverse actions they may take against the professionals in peer review proceedings, so long as the proceedings conform to certain basic due process requirements described in the statute. This legal immunity is so desirable that within a short time after enactment of the HCQIA legislation, hospital staffs and other peer reviewing bodies around the country revised their bylaws and other constituent documents to conform to HCQIA’s due process requirements and thus secure immunity. These procedures are normally set down in the hospital’s staff bylaws, and afford the affected physician a hearing where the due process rights apply. The bylaw provisions which set out this process and these rights have become notably uniform across the US.
III. HCQIA Standards for Peer Review Actions:
Under HCQIA, hospitals may undertake a “professional review action”[5] against a physician alleged with misconduct or incompetence. This is any formal action can adversely affect the physician’s clinical privileges or membership in a professional society, and generally includes any adverse outcome in any serious physician peer review action. Any such action must be based on the recommendations[6] of a “professional review body”, which is normally the hospital’s medical staff or a committee appointed by it to conduct peer review activity.
IV. A Lack of “Real” HCQIA Due Process Rights Has Resulted in a System that is Fundamentally Unfair:
On its face, this process appears to provide the affected physician with adequate due process rights in his peer review. The statute states that any professional review action cannot be taken until after adequate notice and hearing procedures have been afforded to the doctor. In practice, however, the due process rights arise only at a point when they are of little use.
The common form of medical staff bylaws create a procedure where an accused physician enjoys due process rights only at a stage when they can be of little or no use. The ad hoc committee of the hospital medical staff, and its executive committee, are in practice free to make determinations about medical staff privileges entirely without the basic procedural and related rights for the accused normally considered necessary for fundamental fairness. The list of HCQIA due process rights you supposedly have creates an illusion of fair process. But as actually employed, they are nearly useless to the accused.
In light of the above, an accused physician needs to avoid the comfortable fiction that the stages of peer review at the committee level are non-final, and a meaningful hearing with actual due process rights exists at a later stage. The hearing stage in modern peer review is hopelessly weighted against the accused, and once that stage is reached his fate in normally sealed. When a physician finds him or herself in the committee stage of peer review, all their efforts and resources need to be deployed. While most bylaws forbid an accused physician from bring counsel to committee “meetings” at the committee stage, they cannot prevent his consulting and taking advice from experienced counsel, and the prudent physician will do just that. If he waits to engage counsel for the hearing stage, it is probably too late. For a free consultation, call David at: 1 (800) 475-1906
David Parker serves as Managing Partner at Liles Parker, PLLC, a boutique health care practice with offices in Washington, DC, Baton Rouge, LA, Houston, TX and McAllen, TX. David represents health care providers and suppliers around the country in peer reviews, post-payment audits, prepayment reviews, and enrollment suspension and revocation actions. Do you have a question regarding any of the above? If so, please give David a call for a complimentary consultation. He can be reached at: 1 (800) 475-1906.
[6] HCQIA contemplates the existence of a medical staff at hospitals and other provider institutions, which is the body of all licensed clinicians practicing at the institution. Although it is something of a legal fiction, as most medical staffs are not incorporated and aren’t otherwise legal persons, HCQIA treats the medical staff as a legal person to whom certain tasks are delegated by the hospital, namely the administration and adjudication of professional quality control in the form of peer reviews. The medical staff in turn appoints a committee to perform its adjudications. But since the hospital’s board is normally the only body with actual legal authority to perform a peer review act like termination of privileges, HCQIA, and therefore most bylaws written with HCQIA in mind, couch the decision-making of the medical staff as a recommendation to the hospital’s board of directors.
Tags: HCQIA, Healthcare Law, HQCIA De Process, peer-review
Medicare ALJ Appeals of Denied Home Health Claims
February 11, 2014 by David Parker
(February 11, 2014): Has a Zone Program Integrity Contractor (ZPIC) denied your home health claims? If you believe that these denials are unwarranted, your home health agency (HHA) may challenge the denials through Medicare’s administrative appeals process. Medicare’s appeals process provides five levels of appeal. The first four levels of appeal are before different administrative bodies. The fifth level of appeal requires that an aggrieved provider file suit in federal court. The levels include: Redetermination (conducted by the Medicare Administrative Contractor); Reconsideration (conducted by a Qualified Independent Contractor, or QIC); after reconsideration, a dissatisfied provider may file for ALJ appeal; next, a provider may seek review by the Medicare Appeals Council; and finally, an appeal to federal court. The purpose of this article is to describe certain considerations peculiar to the ALJ review process from the point of view of a Home Health Agency (HHA), or its legal representative. The article focuses on the initial steps to be taken before an ALJ hearing and how to proceed during the hearing.
I. Engaging a Qualified Expert to Challenge an Extrapolation of Damages Related to Home Health Claims:
The extrapolation of alleged overpayment amounts using an error rate calculated by statistical sampling is one of the most powerful weapons a ZPIC can bring to bear against a home health provider. In our experience, it is often difficult for Medicare contractors to properly conduct sampling in the statistically-valid manner required by law.[1] Where extrapolation is used in Medicare enforcement audits, long-standing CMS program materials and Federal caselaw require that the sample in which the error rate is determined to be from established in a statistically valid manner. See HCFA Ruling 86-1 at 4, and Ratansen v. California 11 F.3d 1467 at 1471 (CA 9 1993).
If alleged overpayment amount in your case is large enough to justify it, a home health agency should engage a statistician familiar with Medicare’s processes to examine and critique any extrapolation that have been applied by a ZPIC. If significant flaws are identified, the home health agency may be able to have the extrapolation reversed by the ALJ. In order to assess and critique the extrapolation, the expert must be able to review the statistical data and methodology used in the sampling.[2] The home health agency’s representative should communicate in writing with the ZPIC or other audit contractor to request in all of the statistical sampling data and records used by the ZPIC when calculating the extrapolation of damages. If the requisite data is not forthcoming, your attorney should extend its requests to all administrative and appeals contractors who enter into the audit or appeals process. Although reversals of extrapolations are infrequent at the redetermination and reconsideration levels of appeal, they are possible. Our firm has succeeded in getting extrapolations thrown out at every level of administrative appeal.
Occasionally the Medicare contractors involved in an audit and a subsequent appeal will refuse or merely fail to provide the extrapolation sampling data sufficiently for an expert to evaluate and challenge the extrapolation. When this happens, a home health agency has an argument for the reversal of the extrapolation entirely independent from issues of statistical validity. The contractors inevitably supply claim-line and similar spreadsheets which, while irrelevant to statistical sampling, can bear a superficial similarity to sampling data. The provider must therefore never assume that the absence of extrapolation and sampling data from the documents produced by the contractors will be conceded by the CMS parties, and must be prepared to prove that absence in its appeal just like any other disputed fact.
With this in mind, in any case where the full set of necessary data is given to the provider in an untimely manner or not at all, the statistical expert should examine all data provided by the contractors, and report in writing on its sufficiency for determination for determining statistical validity. The expert should be ready to testify about sufficiency in these cases, and his reports and testimony must be kept separate from those addressing the merits of statistical validity.
II. Engage a Skilled Nurse Expert to Report & Testify on Clinical Issues:
Unless the dollars at issue are small, or the issues in an appeal are exclusively legal in nature, a home health agency can benefit from engaging a skilled nurse as an expert witness. The nurse expert can provide written reports on clinical issues for submission to the ALJ, and testify at the hearing. If the home health agency has a skilled nurse on staff, he / she may be able to perform these tasks. Otherwise, forensic nurses can be engaged for this purpose who are familiar with home health Medicare claims. In any case, the nurse expert should have education, other training and work experience sufficient to survive a challenge of their qualifications at the hearing.
Because the ALJ’s review in an appeal is a determination de novo of all legal and clinical issues of payability of each claim appealed,[3]the nurse expert’s written report should address all clinical issues in each claim, not just those cited as a grounds for denial in the decision being appealed. Accordingly, the nurse expert’s report should address the homebound status of the beneficiary, and the medical necessity of the services billed to Medicare.
In her testimony at the hearing, however, the nurse should avoid mention of clinical issues that aren’t being argued. The home health agency’s attorney or other representative conducting the hearing must communicate in advance so the nurse expert knows what clinical issues he expects to argue about, can organize her testimony to be concise and effective on those issues, and avoid other topics. The balance of the nurse expert’s report will be in the record if a contractor or the ALJ strays off into clinical issues not addressed by the QIC. If that happens, of course, she should be ready to give verbal testimony on the additional issues as well.
Often during an ALJ hearing, questions will arise about the real-world practices of a home health agency. The nurse expert can be useful to offer advice and explanations in such cases to the ALJ. This boosts the judge’s trust and confidence in the nurse, and tends to enhance her credibility on clinical issues.
III. Preparation For Hearing: Planning a Method to Streamline the Hearing of Clinical Issues:
Home health cases appealed to the ALJ level typically involve a large number of home health claims. Most ZPIC overpayment audits employ statistical sampling, where a sample of home health claims is audited, and the resulting error rate (as determined by the ZPIC), is applied to all billings by the home health agency over a multi-year period. To constitute a statistically valid random sample, the sample usually consists of 30-90 individual home health claims. Although individual home health claims may be relatively small, it may not appear to be cost-effective to file an appeal. We recommend you challenge single claim denials if you believe that the services qualify for coverage and payment. This can help keep your overall error rate low and reduce the likelihood of future audits and reviews.
Medicare ALJs strive to conclude all appeal hearings in a single day; and every hearing will require at least two hours of arguments on procedural, statistical and legal issues of general application to all claims. Meaningful oral arguments on medical necessity of a single home health claim denial will consume 10-20 minutes. So an actual hearing of oral arguments on medical necessity issues in 30 or more individual claims would simply be too time-consuming to be feasible. Accordingly, most ALJs will seek to establish a method early in the hearing by which separate oral arguments on each claim at issue can be avoided. Working with your attorney, a home health agency may be able to formulate a method of grouping its claims into a small number of categories, so that representative claims in each category can be argued exhaustively. The separate written arguments on the various claims will remain for separate consideration by the ALJ, but in this way a favorable impression in a stronger claim can be extended to a weaker one.
Meritless arguments run the risk of getting noticed here, in which case they will harm a home health agency’s credibility on the stronger claims. There is little chance a meritless argument will prevail, and having them present hurts the persuasiveness of a home health agency’s other arguments.
An appeal to the ALJ is, strictly speaking, an appeal of the denial reason cited by the QIC in its reconsideration decision. Nevertheless, since the ALJ level of appeal is a de novo review, you must be prepared to address the alleged errors identified by the ZPIC and the MAC if requested to do so by the judge.
IV. The ALJ’s Record — Consider Citing Risk of Change Factors in Prior Episodes of Care:
Where a home health agency is supporting the medical necessity of skilled nursing services for Observation and Assessment by pointing to factors in the medical record which show a “likelihood of change” as defined in Medicare Program Benefit Manual Ch. 7, §40.1.2.1, dangerous and unstable medical conditions evident in the Beneficiary’s medical record are often cited. If the episode in question is a follow-on episode, it is more convincing to point to dangerous and unstable conditions in earlier episodes. This is because medical necessity must be determined as of the date of the physician’s order for the skilled care in question.[4]Conditions which were already documented in the record at the time of the order will be more persuasive in establishing the reasonableness of the physician’s judgment.
To do this, obviously the records of the prior episodes must be available for review and submission to the appeal record; but the need for this sort of argument won’t normally be evident at the start of the case when medical records are being gathered. So for this and for other reasons, it is wise to gather the records of all episodes of care for the Beneficiaries in the appeal, not just the episodes at issue.
The handling of medical records by contractors in Medicare enforcement audits and appeals is notoriously sloppy. Although audit denials are generally based on an audit contractor’s review of medical records it receives from a provider or seizes, and CMS regulations require each contractor handling an appeal to turn over its entire file to the provider upon request,[5]contractors evidently find it impossible to comply. For this reason, providers appealing an overpayment determination must include a full set of all medical and billing records at issue, provided separately with each redetermination, reconsideration, and ALJ appeal filing.
A home health agency should therefore collect all medical billing and other records pertaining to all beneficiaries in the relevant audit sample, “Bates Label” them at the start of the appeal, and include the Bates labeled set with each appeal filing . The same labeling must be used at every level of appeal. Efforts to organize each set of records in a logical and consistent manner will pay off later as well. The nurse expert and statistical expert must use Bates references for all document identification in their reports and live testimony. Judges always appreciate this, as it vastly speeds and simplifies testimony on any records.
V. Keep Your Experts’ Live Testimony Short and Concise:
The live hearing before the ALJ is no place for a verbose treatment of a technical subject. Make sure each expert handles his written report, which can and should be a complete coverage of all issues, very differently from his verbal testimony which will be most effective if short. Complex subjects can seldom be communicated exhaustively in a 1-day hearing, and the expert will quickly lose the ALJ if he insists on trying to do that. Make sure your experts plan their testimonies accordingly.
CMS contractors can and do participate in ALJ hearings, but they can do so only as non-parties. Medicare regulations require non-parties to give notice of their intent to participate within 10 days of an ALJ’s notice of a hearing date.[6] When contractors give late notice, or appear at a hearing without notice, your legal representative may choose to object on the record at the start of the hearing. These objections will be more successful if the representative can plausibly argue that he would have prepared differently for the hearing if timely notice had been given.
A sizable appeal to an ALJ may involve submissions to the judge after the filing of the initial appeal. In any case, evidence submitted subsequent to the issuance of the reconsideration decision can be admitted to the ALJ record only on a motion and showing of good cause.[7 Keep in mind, it is getting more difficult each year to show the requisite requirement of “good cause.” Therefore, every effort should be made to submit relevant evidence into the record BEFORE the QIC has issued its reconsideration decision.
A seldom-addressed issue in Medicare enforcement audits is non-physicians being allowed to challenge, years after the fact, the medical judgment of physicians who saw the patients and have cared for them. Ostensibly, payment denials for lack of medical necessity are based on “lack of adequate record,” but in practice Medicare audits involve just this sort of second-guessing. The provider’s representative should try to make this point occasionally during the hearing, and not let the ALJ forget that the treating physician’s medical judgment is reflected in the medical records he is reviewing.
A recognized goal of home health care is keeping beneficiaries out of nursing homes and other long-term care facilities; and Medicare Benefit Policy Manual Ch. 7, §30.5.2 expressly provides that the number of re-certification periods for Home Health Care is unlimited as long as the beneficiary remains qualified. CMS contractors however often look askance at successive recertification periods, and suggest they are disfavored[8]. Providers’ representatives should not allow a suggestion along those lines at an ALJ hearing to go unchallenged, and be prepared to explain why and by what authority home health care is not limited to any specific time period.
[2]. Medicare Program Integrity Manual Ch. 8, §8.4.4.4.1. lists the extrapolation statistical data which the contractor must preserve in its files and make available to the provider.
[3]. 42 CFR 405.1032(a). The ALJ cannot however re-open claims in an audit which are not appealed to him.
[5]. See Medicare Claims Processing Manual Ch. 29, §300.3
[6]. See 42 CFR §405.1010(b)
[7]. See 42 CFR §405.1018 & 1028
[8]. Several CMS contractors disseminate program materials which state, without citing any authority, that Home Health Care should be provided only for short periods. For example, one enforcement contractor in the Southwest includes in its standard form Educational Letter on Medicare HHC the statement “We must preserve …HHC services [for] people who, for a short period of time, are too… infirm to leave their homes…to receive physician…services.”
Tags: ALJ Appeals, Denied Home Health Claims, Healthcare Law, Home health, Home Health Claims
October 19, 2012 by David Parker
(October 19, 2012): This article addresses the case where an individual or “natural person” owns an interest in a Medicare health care provider which is incorporated[1] under the laws of a state, as a corporation, limited liability company, limited partnership, or another type of legal person. The individual may be a shareholder, member, limited partner, or some corresponding term for an owner of the company, but in all these cases the common factor is limitation of liability of owners. Owners of providers facing ZPIC or other Medicare contractor audits or appealing an overpayment demand often ask what risk they face of being held personally liable for the overpayment claims, or otherwise punished personally, if their appeals are unsuccessful.
I. Hypothetical Case:
The hypothetical situation addressed here is a common one, namely a provider organized as a corporation or LLC (the “Company”) with one or more individual owners (i.e. individual shareholders or members) is enrolled with Medicare, has provided services to Medicare beneficiaries over a substantial period of time, and has received payments from one or more Medicare contractors. Then, a ZPIC or similar contractor selects the Company for post-payment audit. After reviewing a sample of records, the contractor determines that overpayments have occurred and issues an audit results letter assessing an amount claimed to be overpaid in the sample, and an extrapolated (much larger) amount deemed to be overpaid in all of the Company’s Medicare receipts during the period under review. The Medicare Administrative Contractor (the “MAC”) then makes a written formal demand for refund by the Company of the extrapolated amount.
Our hypothetical assumes the Company either fails to appeal the above overpayment determination (referred to as an “Initial Determination”), or appeals and loses. Either way the Company owes the full extrapolated amount to CMS, plus interest from the date of the formal demand by the MAC. Assume further that this sum amounts to several years’ gross revenues for the Company; and it has no means to repay it. The MAC begins recoupment from payments of new Medicare billings by the Company, and the Company shuts down as it exhausts its funds available to cover payroll and operating expenses. Finally, assume (as is commonly the case) that the Company has no significant assets which CMS can seize and liquidate to satisfy the overpayment.
Given the above, the question presented is whether the individual owner or owners of the Company are on the hook for the unpaid amount of the CMS overpayment claim? Are other provider entities owned by the same individuals on the hook? Phrased another way, under what circumstances can CMS or its contractors lawfully collect the above overpayment from the individual owners or their other provider companies? And what other sanctions can the Government apply against the individuals and affiliates in such a case?
II. Concept of Limited Liability:
In the US and most Western legal systems the concept of incorporation of a business is available to shield its owners from claims for the business’s debts. This is the concept of limited liability, meaning the owners’ personal liability for the debts of the business is usually limited to the amount of the capital they have invested in it. If the business owes money to a creditor, the creditor will have recourse to the business, meaning the money and other assets the business itself owns. In this way, the creditor can collect the capital the owner has bound up in the business; but the creditor has no right to make the owner pay from his own assets.
III. Threshold Rule of Limited Liability; Exceptions and “Piercing the Corporate Veil”:
The general rule of limited liability applies to CMS and its contractors when dealing with shareholders of incorporated health care providers, just as it does to other creditors. No statute or case law makes owners of incorporated Medicare health care providers personally liable for their companies’ debts to CMS, except in certain very narrow circumstances which apply to all debtors and creditors. And nothing about the health care industry makes these circumstances more likely to arise than in other industries.
The principal exceptions to the rule of limited liability of shareholders are collectively known as piercing the corporate veil. Under certain circumstances, courts will allow creditors of an insolvent corporation, LLC or other legal entity to reach through the corporate structure and collect their debts from shareholders or similar owners. Numerous factors have been cited by courts to justify imposing liability of shareholders for corporate debts, and an exhaustive discussion of this topic is beyond the scope of this article; but common examples of circumstances which can justify veil piercing are as follow:
(a) Defective Incorporation. Failure to meet legal the statutory requirements for organizing the corporation or LLC can and will result in shareholders being liable for corporate debts. A better statement of this rule is that, without compliance with the requirements for incorporation, no corporation ever exists in the first place to shield the shareholders from liability.
(b) Ignoring the Separateness of the Corporation. Entering into contracts and otherwise transacting business variously in a corporate name and an individual name can justify piercing the corporate veil. Likewise, commingling corporate and individual assets, or transferring assets without formalities between company and owner, or company and sister company, can give the same result.
(c) Significant Undercapitalization. A requirement of incorporation is injecting money or other capital into the new company reasonably sufficient to pay its expected debts. Failure to do this is called undercapitalization, and is grounds to impose liability on the shareholders. The adequacy of capital, however, is judged at the time it is injected, not when the liability arises, and courts tend to defer to any good-faith estimate of how much capital will be needed, so undercapitalization is normally difficult to prove.
(d) Excessive Dividends or Other Payments to Shareholders. When owners are actually working for a corporation they can in most cases pay themselves whatever compensation is even remotely fair, as long as it is clearly characterized as salary or wages. Dividends and other non-compensation distributions, however, are judged very differently, and can safely be taken out by shareholders only to the extent of profits. When shareholders take non-compensation distributions in excess of profits, they constitute a return of capital and can give rise to an undercapitalization claim by any corporate creditor who is subsequently not paid[2]. If such distributions are made when the corporation is actually insolvent, the creditors’ claims against the shareholders will be almost impossible to defend.
(e) Misrepresentation and other Unfair Dealings with Creditors. Dishonesty and false statements to corporate creditors, asset concealment and other deceptive practices, can make shareholders liable for corporate debts.
(f) Absence or Inaccuracy of Records. If corporate records go missing or prove to be inaccurate, they can form a basis to pierce the corporate veil, especially if they hinder a creditor’s collection efforts against the corporation.
(g) Failure to Maintain Ongoing Legal Requirements. Each state’s statutes impose annual franchise fees and various report-filing requirements on corporations and similar entities. Although these have generous grace periods and cure provisions, if they are neglected long enough, the corporation or LLC will legally cease to exist and shareholder liability will result[3].
Given any of the above fact circumstances, CMS and its Medicare contractors can seek to pierce the Company’s corporate veil and collect the overpayment from the Company’s owners in our hypothetical. These circumstances however are not typical for health care providers, and are easily avoided. Veil piercing depends on facts which by their nature are difficult to prove in a court of law, often involve subjective judgments, and in most cases are subject to dispute. The burden of proving the facts is always on the creditor. Correspondingly, courts tend to disfavor veil-piercing claims and narrowly construe the applicable law, so veil piercing has a reputation as a difficult remedy to invoke successfully.
IV. Rules in Bankruptcy:
While CMS does enjoy certain advantages and unique rights under US Bankruptcy laws, this doesn’t include any advantage over other creditors in reaching the pockets of shareholders of a bankrupt company. A basic rule in Bankruptcy is that filing a petition automatically halts or “stays” all acts by creditors to collect debts which pre-date the petition[4]. Since 2005, this “automatic stay” has been ruled not to impair CMS’s right to exclude providers from its programs[5]. Additionally, Federal case law appears to hold that the automatic stay does not prevent CMS and its contractors from recoupment against new Medicare billings by a provider in bankruptcy[6]. But no bankruptcy law gives Government health care programs special debt collection rights against shareholders of providers, so CMS and its contractors, like other creditors, can collect Medicare overpayments from shareholders and other owners of a bankrupt entity only in the Veil Piercing circumstances described above, which are narrowly-drawn and strictly interpreted against the creditor.
V. Federal Agency Practice on Pursuing Individual Liability:
Federal agencies are not as a rule aggressive in collection of their debt claims, and CMS is no exception. For example, in government loan programs where shareholders are required personally to guarantee the debt, once corporate assets are exhausted in default cases, Federal agencies rarely pursue the guarantors’ personal credit, and discourage their contractors and even private holders of Government-guaranteed loans from doing so. With this in mind, it should be no surprise that most Federal agencies seldom if ever seek to pierce any corporate veil[7]. As was noted, veil-piercing involves lots of gray areas and disputed facts and is hard to do successfully; and Government agencies are reluctant to risk the time and money required. Government agencies also fear the adverse publicity that regularly arises from collection efforts against individuals. While Federal authorities could be moved to pursue such remedies in an extreme case or under the glare of unusual publicity, they are otherwise unlikely to do so. In 30+ years of representing participants in Federal programs, I have never been involved in any case where such a remedy was sought against a client or any other individual.
VI. Successor Liability:
In our hypothetical, the individual owners won’t be able to continue in the health care industry using the Company itself as a practice vehicle. They may wish to organize and capitalize another entity to provide the same or a similar type of services. In what circumstances can new entities organized by the owners after the Company’s demise be held liable for the Company’s overpayment obligation? This area of the law is referred to as successor liability, and it provides remedies which do indeed allow creditors to pursue the new entity in some cases. Like veil piercing, this remedy is an exception to the general rule of limited liability of corporate owners, is available to creditors generally in certain narrow circumstances, and is not specific to Government creditors or health care provider debtors.
Simply stated, successor liability flows from state statutes and state court case rulings which allow the creditors of a debtor company to collect their debt claims from another company to which one or more assets of the debtor have been transferred, if it is a successor to the original debtor. The exact circumstances which make the other company a successor vary from state to state. In most states the law gives a list of elements which can establish successor status, but uses a balancing test, meaning there is no hard and fast rule of which or how many elements have to be present to prove the claim. The creditor sues the transferee company to initiate such a claim, and the court hearing the case decides not only which elements are present, but also whether they are enough to make the defendant a successor[8]. But if a creditor can prove enough of them, it can make the transferee pay the debt.
Elements commonly listed to impose liability on the transferee of a debtor’s assets include, (i) common ownership (whole or part) between the original debtor and the separate company; (ii) the transferee was established to hinder the creditors of the debtor; (iii) the original debtor and the transferee company provide the same goods or services; (iv) the same or recognizably similar company name or DBA; (v) same business location; (vi) same customers or customer sources; (vii) same officers or managers; (viii) same employees; and (ix) the transferee pays other debts of the original debtor, or states that it will do so. In most cases, one or two elements alone will usually be insufficient to establish liability[9].
Successor liability is not as uniformly disfavored in courts as is veil piercing, but remains uncommon in practice. Like veil piercing, it is rarely if ever used by Federal agencies and contractors. Whether any specific circumstances will make a transferee company liable as a successor to another is beyond the scope of this article; but asset transfers between commonly-owned companies occur frequently, and many not easily be identifiable as such to a non-lawyer. In our hypothetical, the Company’s owners may be sorely tempted to use the same business location or same employees or managers in the new provider as in the Company, and may wish to have the new entity collect unpaid receiveables. Any of these steps could subject the new entity to the overpayment, or to any other creditor claim. Successor liability can be invoked against pre-existing entities under common ownership with the Company as well. Owners of health care providers having other companies which are subject to any Medicare contractor collection action need to avoid any such transfers scrupulously, and bear in mind that they can make their other provider liable in common for an overpayment claim.
VII. Other Government Sanctions Against Owners and Affiliates for Non-payment by an Incorporated Provider:
Pursuing owners personally for repayment of a provider’s overpayment liability isn’t the only sanction CMS and its contractors might logically seek to apply to punish non-payment. Excluding related persons and companies from health care program participation comes to mind. This could take at least 3 forms, each of which we will examine in turn.
(a) Exclusion of Individual Owners. The authority for HHS to exclude both companies and individuals from involvement in its health care programs has been established at the statute, regulation, and policy manual levels. The basic authority for exclusion is granted to the Secretary of HHS under Sections 1128 and 1156 of the Social Security Act.[10] These sections list all the grounds for which a party may be excluded[11]. Most of these sections are written so that if an entity commits acts which are grounds for exclusion, the owners are likewise at risk[12]. Most of the grounds for exclusion are not relevant here, such as conviction for felonies, or health care related misdemeanors. Three grounds for exclusion however are listed which relate to providers’ services, namely submitting charges to any Federal health care program in excess of the provider’s usual charges, furnishing services in excess of the needs of patients, and furnishing services of a quality not meeting recognized professional standards[13]. The lack of medical necessity grounds for denial which appear in most overpayment cases, corresponds to the furnishing services in excess of the needs of patients grounds for exclusion. So the question is whether lack of medical necessity of our Company’s services is, in and of itself, valid grounds to exclude it, and therefore also exclude its owners? These service-related grounds for exclusion are addressed in the Medicare Program Integrity Manual (the “PIM”) in Chapter 4, Sec. 4.19. This section states that in order to prove such cases, the PSC and the ZPIC BI unit shall document a long-standing pattern of care where educational contacts have failed to change the abusive pattern. Isolated instances and statistical samples are not actionable. Medical doctors must be willing to testify.[14] Only this service-related grounds for exclusion could plausibly be applied to the facts of our overpayment hypothetical, without serious wrongdoing being present beyond simple failure to repay. The contractor documentation in a typical post-payment audit would not appear to satisfy the PIM requirement of “document[ing] a long-standing pattern of care where educational contacts have failed to change the abusive pattern”. No practitioner at this health care law firm has seen exclusion attempted or threatened against the provider or its owners in a simple overpayment case. Accordingly, exclusion of the provider and its individual owner does not appear to be a substantial risk in our hypothetical situation.
(b) Bars to Subsequent Applications. In our hypothetical, the individual owners won’t be able to continue in the health care industry using the Company itself as a practice vehicle. They may wish to organize and capitalize another entity to provide the same or a similar type of services. If our hypothetical is extended to such a case, what are the risks that CMS and its contractors might punish the Company’s failure to satisfy its proven overpayment demand, by barring the enrollment application of the owner’s new provider entity? In order to bar a new provider owned or controlled by owners of our hypothetical defaulting provider, however, CMS and its contractors must be aware of the relationship between the 2 companies. So our initial inquiry must be whether the new-provider enrollment process will itself call the attention of CMS or its contractors to the relationship between the non-paying Company and the new applicant. This process is largely embodied in the enrollment application document. The current form of Medicare enrollment application for most incorporated providers, CMS-855A (07/11)[15] requires disclosure of any “Adverse Legal Actions/Convictions” of individuals with ownership or control of the entity (in Sec. 6), and so would clearly be required for the Company’s owners in our hypothetical. The listing of adverse adjudications which constitute Adverse Legal Actions/Convictions is at page 16 in the CMS-855A, and includes most criminal convictions, state license and Government program revocations, suspensions, exclusions and debarments, and also 4. Any current[16] Medicare payment suspension under any Medicare billing number.
This form does not require the new applicant’s owner to disclose the problems of the Company in our hypothetical, or even mention its existence, for 2 reasons. First, “payment suspension” is a very specific Medicare sanction, and usually not present in an overpayment demand case. Second, the disclosure is explicitly directed at the individual owner, and its wording does not extend it to other entities under the owner’s ownership or control. The operative text at Section 6 is:
1. Has the individual in Section 6A, under any current or former name or business identity, ever had a final adverse legal action listed on page 16 of this application imposed against him/her?
New program developments in Medicare, however, may change the above situation and extend required disclosures to entities under common ownership or control with new applicants. In the HHS OIG Work Plan for FY 2012, under Part IV: Legal and Investigative Activities Related to Medicare and Medicaid, there is an item captioned Providers and Suppliers with Currently Not Collectible Debt.
In sum, the established legal rule of limited liability of owners of incorporated businesses appears to be alive and well in the Medicare service provider area, and Federal agencies and their contractors by and large respect it. The separateness of legally-distinct incorporated businesses under common ownership also remains in effect. These rules however have significant exceptions.
Owners of incorporated health care provider entities, absent some written agreement to the contrary, are insulated from personal liability for overpayment obligations owed by their companies to Federal health care authorities by the same state laws which insulate them from their companies’ other debts. Generally, Federal health care laws do not change these rules. If your company’s assets are insufficient to satisfy its debts, procedures exist for Federal claimants (like other creditors) to try to reach through your company and pursue your personal credit to satisfy their claims. But this requires a lawsuit to be filed against you personally; and the laws of the states specify only certain narrow circumstances where they can be successful. Accordingly, creditors rarely try to “pierce the corporate veil”, and this is probably more true of Federal creditors than private ones.
The most likely situation where an insolvent provider’s creditor can successfully reach the personal credit of the owner is when the owner has taken dividends and other sums from the company which cannot be characterized as salary or compensation for employment, at times when the debtor company was already insolvent. Likewise, the most likely way a new provider company being organized by an existing provider’s owner can become liable to its creditors is for assets to be transferred from the old provider to the new. Owners of multiple providers should consult legal counsel to examine all dealings between them for successor liability and similar issues whenever one provider becomes liable for overpayments, because many risk-creating activities will not be recognizable as such without legal training.
Apart from debt collection risks, procedures exist for HHS to exclude owners of providers from Federal programs, which will operate to exclude other provider entities under common ownership. The available grounds for exclusion, however, do not normally arise in an overpayment case. Similarly, HHS regulations provide for the revocation of the enrollment of health care providers in certain cases. The grounds for revocation do not include a defaulted overpayment by a separate provider under common control.
The main area of risk for the affiliates of a defaulting provider subject to an overpayment appears to be the enrollment application by a new provider entity under common ownership. While the strict wording of the current enrollment application forms does not compel disclosure of the overpayment situation in our hypothetical, and overpayment by a commonly-owned provider is not currently a listed basis for denial of the new enrollment, in practice the existence of a defaulted overpayment obligation poses a substantial risk to any related party’s enrollment. Initiatives are under way inside HHS which could change these risks to certainties.
David Parker is an attorney practicing at Liles Parker PLLC, a health care and business law firm in Washington D.C. Mr. Parker was formerly a partner at Dickstein Shapiro in Washington, DC. Before entering private practice, Mr. Parker served for 16 years as the in-house general counsel of Allied Capital, a publicly-traded group of mezzanine finance companies headquartered in Washington. For more information, contact David at (202) 298-8750.
[1] The term incorporated will be used here to refer to the legal process of creating any form of legal entity providing limited liability to its owners (e.g. limited partnerships and LLCs) not just to the creation of a corporation.
[2] This practice is harder to defend than a claim for initial undercapitalization, because in this case there is evidence that at the time of organization, the owners believed the capital later taken out was needed in the business.
[3] Failure to hold annual meetings, and failure to keep corporate minutes have seldom been the basis for shareholder liability.
[4]. 11 U.S.C. §362.
[5] 11 USC §362(b)(28)
[6] See In re Slater Health Center, Inc. 398 F.3d 98 (C.A. 1 2005). The US Bankruptcy Code does not explicitly address recoupment, and the Slater ruling may not apply in all circumstances. Among other things, its application turns on the overpayment and the new billing being part of the “same transaction.” Otherwise, the contractor’s claim against the new billing is a setoff which is specifically addressed in the Code and is generally halted in bankruptcy by the automatic stay. See for example In re University Medical Center 973 F.2d 1065 (C.A.3 1992).
[7] The notable exception to this rule is the Internal Revenue Service’s pursuit of shareholders to collect corporate tax liability. The IRS has in recent years successfully pierced the corporate veil in a number of well-publicized cases.
[8] See e.g. Cab-Tek v. E.B.M. Inc. 153 Vt. 432 (Vt. 1990).
[9] Typical statements of states’ successor liability rules can be found in Marks v. Minn Mining & Mfg. Co 187 Cal. App. 3d 1429 (Cal. Ct. App. 1986) and Sweatland v. Park Corp 587 NYS 2d 54 (App. Div. 1992).
[10] Codified in 42 USC §§1320a-7 and 1320c-5
[11] A convenient chart provided by HHS summarizing the various grounds on which exclusion from Federal health care programs may be based, can be found here.
[12] The recurring text appears, for example, in 42 USC §1320a-7(b)(6). That section provides that the Secretary of HHS may exclude “Any individual or entity that the Secretary determines… has furnished or caused to be furnished … items or services to patients substantially in excess of the needs of such patients….” Since owners of a provider entity are normally in control of it, if the entity has done the described act, the owner can be said to have caused the act, and is therefore subject to the same grounds for exclusion [emphasis added].
[13] 42 USC §1320a-7(b)6)
[14] PIM Ch. 4 Sec. 4.19.2. Similar procedural requirements for exclusion appear at 4.19.2.2 and 4.19.2.3.
[15] Other versions of CMS-855 (used for other types of providers and entities) contain sections corresponding to Sections 6, page 16 and Section 15 of CMS-855A, discussed herein.
[16] Sec. 15 of CMS-855A extends the required disclosure to all subsequent periods, effectively making it an Evergreen requirement.
[17] For example, CMS-855 program application forms have long required owners of all applicants to be identified by name and Social Security Number. A simple cross-checking of these identifiers against identifiers of owners from the CMS-855 of defaulting debtors could easily be implemented.
[18] Grounds for denial of enrollment are repeated, but not expanded, in the Medicare Program Integrity Manual in Chapter 15.8.
[19] 42 CFR §424.530(2).
[20] 42 CFR §424.530(6). The regulation defining the term owner includes holders of 5% and greater ownership interests. Grounds for denial of enrollment based on payment suspension are set forth in nearly identical language in §424.530(7)
[21] See 42 CFR §424.535. Note that this revocation regulation includes a grounds for revocation corresponding to §424.530(a)(2) [felony conviction, debarment or suspension by the provide, its owner or key personnel] but no grounds for revocation corresponding to §424.530(a)(6) [existing overpayment by the provider or its owner].
Tags: False Claims, Health Care Attorney, Health Care Law, Health Care Lawyer, individual liability for Medicare overpayment, Medicare Overpayments, ZPIC
Guide to Efficient Business Transactions: Part III
July 6, 2012 by David Parker
(July 6, 2012): This article is a continuation of our discussion on how a business person can manage attorneys and other professionals in the legal process of his business transactions, to minimize the costs and risks. A link to Part II is provided: Click here for Part II.
I. Efficient Business Transactions, Continued:
(k) Conform to Conventions about Roles of Parties in Transactions. In most transactions, the buyer, investor or lender (i.e. the money side of the deal) will expect their legal counsel to produce the first draft of most documents in the transaction, on which the other side will make comments and negotiate changes. While this means the documents start out skewed in favor of the money side, there are sound reasons why the seller or issuer side should allow this. If the seller, say, insists on providing a first draft document, the process of the buyer negotiating it into a form signable by his side will add more time and expense to the closing for all concerned than will be justified by any drafting advantage.
(l) Understand what Legal Documents are involved in your Deal, and What Function Each Serves. The day is long past (if it ever came) when a business person can turn an important transaction over to legal counsel, say “Close this deal for me please”, and walk away. By now the reader will see that his or her relationship with their professionals should be less like a patient’s relationship with a physician than a boss’s relationship with highly-skilled employees. Your transaction counsel may have been through a hundred transactions, and you through none, but you still need to play a leadership role, and make business (i.e. economic) decisions. While you don’t need to know all the law to do these things, you do need to understand the basics, and know the functions on a business level of all significant documents.
(m) Respect the Negotiation Process. Store up Credits when you Concede a Point. Table small negotiating items, and Trade them down the road for a bigger point you Know Is Coming. Westerners often view the process of negotiation with disdain. I have had clients approach a negotiation saying “I will just open with my bottom line number, and let them take it or leave it. We will cut to the chase.” This is seldom effective. Business people of all cultures hate to take a first offer in any important matter. Rigid intransigence in negotiation usually repels the other side. And humans seldom view any decision as binary, with a fixed bright-line dollar amount where it stops being desirable. The prudent business person allows for this, starts every negotiation a bit away from his bottom number, and assumes the other side is doing likewise.
In section (g) above I mentioned the psychological bonding that usually arises when parties negotiate. There is a natural tendency for a party winning a point in negotiation to feel softer about the next point. Bear this human trait in mind, and use it.
If you are communicating well with your professionals, they will alert you to issues they expect to emerge in the transaction process which may be serious problems for you. Every significant deal has hurdles. One of your biggest challenges will be to keep track of these matters and plan how to deal with them. Most issues in a business negotiation are more important to one side than the other. Experienced deal people look for points more significant to the other side than to themselves, and position themselves to grant the other side one or more “gives” on such points, in exchange for a concession important to them.
(n) Keep Business and Legal Issues Separate. Don’t let Attorneys get Stalemated; Make sure Yours Knows when to Hand-off an Issue. After the drafting side presents its initial draft of a transaction document, the commenting attorney reads the document, flags language possibly creating a problem or “issue” for his client, speaks to his client if necessary to clarify what are and what aren’t problems, replies to the drafting attorney with descriptions of the issues, and (usually) proposed text changes to fix them. When the commenting attorney describes issues with the drafter, he does so in legal terms, while he normally communicates issues to his client in business terms.
One of 3 things must result from the above: Either (i) the drafter agrees with the commenter about both the issue and the text change; (ii) the drafter agrees an issue exists and with the concept of the proposed resolution, but disagrees on the text change; or (iii) the drafter disagrees on the issue and the proposed text change. In case (i) things are obviously fine, and the process continues without interruption. In case (ii), competent attorneys will always be able to craft some mutually agreeable drafting fix, and get to case (i). In case (iii) however, if good faith discussion doesn’t produce case (i) quickly, prolonged haggling by the attorneys becomes wasteful. Your attorney (whether he is the drafter, or the commenter), should recognize the stalemate in this situation, table that discussion with opposing counsel, and add the issue to a list of issues to be referred to you. Further conversation between lawyers is probably useless, and your counsel should know this.
When all documents being drafted have been covered in the process described above, sit down with your counsel and review the full list of open issues. A skill absolutely vital for competent transaction counsel is the ability to translate each issue for you from legal to business terms with perfect clarity. From this conversation, decide what is and what isn’t worth negotiating. Issues falling into the former category are now identified as business issues. These you must resolve with your business counterpart in the transaction, failing which of course the closing process must halt. The point however is that lawyers must never be the ones to hold on to a stalemated issue.
(o) Be ready to Step In if other Professionals Over-Negotiate. If progress seems too slow in negotiating the legal documents, you may discover that opposing counsel is producing too many case (ii)s and case (iii)s in the process described above, which means he or she is either asking for or disagreeing with changes which aren’t really significant to their client. If that occurs, you should be prepared to complain politely but clearly to your counterpart.
I mention this with some hesitation, because it can easily be counter-productive, and you must tread carefully. It’s hard for you to know what is and isn’t truly significant for the other side. Also, be wary if it’s your lawyer who says the other is over-negotiating; perceptions like that are common but sometimes not fair. As you will appreciate, wrongly saying the other side’s attorney is behaving badly violates the courtesy and politeness rule above.
(p) Avoid Too Many Turns of Documents. This is most important in negotiating the umbrella agreement, but applies to other documents too. During the document negotiation phase of the closing process, there is a temptation to urge the drafting lawyer to hurry making redrafts of the umbrella agreement, in an effort to speed the closing process. The problem here is that each time the drafting attorney redrafts a document, the commenting counsel has to read it and perform the discernment process described in (l) above. This is the most exacting work a transaction lawyer ever performs, and as mentioned in the Introduction, is the single most expensive part of the legal process. The drafting lawyer should not use the redrafting process to tell the commenting lawyer which requested changes the drafter’s side disagrees with. Instead, any decline of requested changes should be communicated verbally, and redrafting should wait until all known issues in the document are resolved at least in principle. This means that redrafting must wait until the business people finish the negotiation described in (l). In rare cases, redrafting may proceed although business people are stalemated on an issue, and the relevant text is bracketed in the redraft when this happens. But the only surprises a commenting lawyer should ever find in an intermediate draft is how the drafter chooses to phrase some concept that has been agreed on. Otherwise both the redrafting work and the review and comment work tend to be wasted, and previously-flagged issues get flagged again and re-negotiated. This slows the closing process and wastes legal fees.
(q) Look out for Legal Opinion Letters. Smoke Them Out Early. Lawyers loathe giving written opinions, and perceive them as professionally risky, although very few lawyers are successfully sued over them. Clients seldom appreciate the time they necessarily require, and the resulting bills. Every law firm has rigid internal procedures to follow in signing opinions, and they usually involve partners who aren’t making money from the client in question learning the facts and law involved and approving the opinion. This is a disagreeable experience for all concerned.
Opinion letters are therefore occasions for delay and conflict in legal closings. The best practice is for each party to advise the other as early as possible (around the time the 1st draft of the umbrella agreement is produced) what opinions they will need, with requested text, and what qualifications the signing attorney must have (usually, of what state’s bar must he be a member). Get the texts of opinions your side must provide to the relevant lawyer promptly, and find out if he or she is prepared to give them. Some deviation from requested texts always occurs, but a competent attorney will be able to tell you what if any parts require significant changes. The goal here is for any negotiations over opinions to go on in parallel with the drafting of the documents, which allows time for issues to be resolved. Don’t let these negotiations start near the projected closing date, which is exactly what will happen if opinions are not addressed early.
(r) Arbitration. Arbitration clauses pass in and out of fashion, and are touted as cheaper alternatives to court litigation. Most of the cost savings in arbitration come from the reduced or absent discovery, which in court litigation is the most expensive part of 90% of all cases. In my experience arbitration produces a less predictable result, meaning verdicts which don’t naturally flow from the facts occur more often. I also believe the abbreviated process gives the arbitrators less confidence in their own conclusions than a judge usually has in a court case, creating a reluctance to select clear winners and losers. (It should be appreciated that our laws tend to force courts to determine clear winners and losers). So arbitrators more frequently just “split the baby”; and obviously this favors a contract breaching party. Based on this, my advice to clients is to decline arbitration clauses if they expect to be the party trying to enforce the hard contract terms in a business dispute.
Legal transactions require owner’s management to be efficient like any other part of a business operation. Selection of and reliance on an able transaction lawyer who works well with you is vital to an efficient closing process. Likewise, hewing to some simple rules and procedures that are proven over time can save time, legal fees, and wear and tear on the parties.
David Parker is the managing member of Liles Parker in our Washington, D.C. office. David handles corporate finance, structuring and negotiating secured debt and loans, corporate governance and compliance, and business transactions. If you are interested in buying or selling a business, or raising or lending capital, call David for a free consultation today at 1 (800) 475-1906.
Tags: business transactions, Efficient Business Transactions, negotiation
Guide to Efficient Business Transactions: Part II
June 24, 2012 by David Parker
(June 24, 2012): How a business person can manage attorneys and other professionals in the legal process of his business transactions, to minimize cost and risk and maximize efficiency – Part II of III. Click here for Part I. Check back soon for the third installments.
I. Precepts and Procedures.
(a) Choose an Attorney With Whom You are Comfortable. Obviously your transaction counsel must have a thorough working knowledge of the legal subject matter of your transaction, and sound work habits, so no discussion is needed on that. Instead, I mention that you should employ only attorneys you yourself are personally comfortable with.
Your comfort should be driven by your perception of the attorney’s loyalty, the sense he or she is looking out not just for the legal interests of the client entity, but for your personal interests in the context of your organization. In my experience, it is hard to protect the first without looking after the second. It should be driven by an ease of communication between you, which should explain itself. It should involve knowing you share a common understanding about priorities in your business & his or her law practice. This is difficult to describe clearly, and can take time to develop, but comes down to trust that, in looking at any set of facts, each will know instinctively what is important to the other.
The working relationship between a business person and his or her transaction lawyer should amount to a comfortable bond. This relationship aspect is at least as important as technical skills, and without both it will be hard for either of you to work efficiently.
(b) Address Cultural Differences before you Start a Deal. This Guide is pitched to transactions where both principals are people involved in commerce in English-speaking countries. Personally I have observed a common business culture to exist in the United States, Canada, England, India and Australia, such that business people from such countries can usually interact effectively with each other. I expect the same is true in all Common-law countries. Outside those areas, however, real cultural differences exist in business practices, in addition to any language barrier. It is outside the scope of this Guide to advise about specific cultural differences. Suffice it to say that before negotiating even the first term, a prudent person contemplating a transnational deal where cultural norms vary widely needs to secure not only attorneys knowledgeable about laws in all relevant jurisdictions, but also business-level advice for the transaction from someone experienced in the foreign culture.
(c) Start with a Letter of Intent. Go from the General to the Particular. On occasion I have had transaction clients say, “To save money and time, we are skipping the LOI and going straight to definitive documents.” Nothing is more counter-productive. Spend the time needed to draft and sign a letter of intent before anything else. Once deal terms are nailed down in principal, it is vastly easier to reach agreement on particulars. More detail is better than less. In my view it is less important whether the LOI is binding or non-binding, as long as both parties sign it. There is real value in both parties signing an LOI, even if it isn’t legally binding. In my experience a party may walk away from a deal with a non-binding LOI, but if they do proceed with it, they find it hard to go back on the terms in the letter.
(d) Establish a Closing Timetable, but Be Reasonable. Generally one or both parties to a transaction have hard business reasons why it must be concluded by a particular date, but even if this isn’t the case, your Letter of Intent should set the expected date for closing, and possibly for intermediate steps like completion of due diligence. Overly long closing processes create outsized legal bills, but so do unrealistically short ones. An experienced transaction lawyer will know what is reasonable. Expect all dates to slip, of course, so allow some margin of time. Once document drafting and negotiation starts, it should continue until completed and the documents are signed. When lawyers halt their drafting work for over about one week, time is inevitably required to get them back up to speed.
(e) Engage All Professionals Early; Get All Their Fingerprints on the Deal. At or before the LOI stage, identify what legal and other professionals will be needed to close the transaction, and engage all of them up front, not just your transaction counsel. For instance, most M&A transactions call for advice from a tax accountant or lawyer, whom you should consult before agreeing to any transaction structure. If the transaction will involve retirement fund issues, for example, engage ERISA counsel early on. Other specialist disciplines must be handled similarly. At early stages of the transaction, each specialist needs to do only enough work to advise you on the decisions required at that point. This need not be an invitation to heavy billing. Competent specialists will know how to monitor early transaction stages with minimal expenditure of time, while alerting you to issues which affect your LOI or other early process; and they should give you clear assurances on this point before their engagement. If the transaction fails early-on, these bills should not be burdensome. The aim here is to avoid having to re-do steps in the transaction process because of issues you knew about all along but failed to address early enough. The biggest inefficiency you can avoid is the drafting and negotiation of the same document multiple times.
(f) The Other Party Should Engage his Professionals in Synch with You. Get their Fingerprints on the Deal Too. Especially in cases where there is no binding agreement until definitive documents are signed, you will be at a disadvantage if the other party to your transaction postpones hiring his professionals while you move ahead with yours. What often happens in such a case is the other side’s attorney or other professional steps into the transaction after you have spent money getting documents drafted, and reveals issues which make the terms as drafted impossible for his client. You are forced to repeat significant drafting and other steps. If the other party insists on delaying the introduction of his professionals, it is generally a sign he is uncommitted to your deal, so be warned.
(g) One Lawyer as Quarterback for All Attorneys. When legal specialists are needed in a deal, they should report their advice and counsel directly to you, but their work should be scheduled and coordinated through your transaction counsel. They should keep him apprised of their progress and particularly any problems or delays they encounter; and in most cases your transaction counsel, who has full understanding of all aspects of your deal, will be able to help you evaluate a specialist’s advice, and make needed decisions based on it.
(h) Use Courtesy and Politeness Whenever Possible. Make sure Your Team Does Likewise. While not all practitioners agree on this point, I find that a party is best served by consistent politeness and courtesy with their counterparts except in the most extreme circumstances, and cloaking their adversarial emotions as much as possible. While it can be argued that each party will use every advantage available to forward their own monetary interests in any transaction, whether or not they feel personal animus against the other, my experience is otherwise. A transaction is never entirely a zero sum game, and pleasant dealings with the opposite party usually pay off. Transaction professionals (especially younger ones) may need reminding on this point.
(i) Match yourself with a Bargaining Partner on or near your Level of Seniority. Avoid Negotiating with a non Decision-maker. If you are the principal on your side of a transaction, and you bargain with someone lacking authority to make decisions on the other side, the conversation becomes a downward ratchet for you. You can make a concession which grants the other side a victory, finally and irrevocably, but the other side can’t. The best you can get from him or her is “I’ll go back to my Principal and see if they agree.” The absent principal isn’t psychologically involved in the concessions you are making, and seldom agrees to his side’s concession.
(j) Don’t Meet Alone with the other Side’s Professionals. By the same token, avoid placing yourself in a position to be lectured to by the other side’s attorney or other professionals, without your professionals being present. When this occurs the opposing professionals tend to describe the facts under discussion, and also the law, in ways subtly or not so subtly less favorable to you than they truly are. If your professionals are present, they will promptly object, or the other side won’t try this in the first place. Don’t let the other side play with your head in this way.
II. Final Comments:
Check back soon for Part III, and be sure to check out the rest of David Parker’s articles here.
Tags: business law, business transactions, Efficient Business Transactions, Healthcare Law
Guide to Efficient Business Transactions: Part I
June 18, 2012 by David Parker
(June 18, 2012): How a business person can manage attorneys and other professionals in the legal process of his business transactions, to minimize cost and risk and maximize efficiency? Let’s look at a few these issues below.
I. Goal of this Guide; Goals of Your Business Transactions.
This Guide is written for those handling important business transactions, who will need to engage and direct one or more attorneys and other professionals in the process. It will also be useful for a junior person in a business who expects to have responsibilities in legal transactions. The goal of course in any legal transaction is to get the deal closed at minimum cost, not just in money and time, but also in psychic energy, goodwill and risk.
The desire to save money and time are obvious; but a business person needs to focus his or her mental energy (a very finite resource) on many tasks and problems, and so should also manage business transactions to avoid over-sized drains on themselves.
Additionally, businesses depend on the goodwill of many constituents. In a transaction, they need principally the goodwill of the other transaction party. But they need the goodwill also of any banker or finance source, landlord and government regulator too. Customers’ and employees’ goodwill are always critical. Business transactions have potential to alienate any or all of these key players in your business life, and need to be handled with a view to avoiding unnecessary stress and inconvenience on them.
Attorneys and other business transaction professionals charge by the hour, so managing your deal so it can close in less time is the obvious way to save money. But if attorneys’ work can be done in an orderly sequence employing some simple rules, they will inevitably be more thorough in their work, communicate their advice to you better, strengthen your bargaining position with the other parties, and avoid your having to accept adverse deal terms. The result is that you and your business bear less risk from the transaction, meaning there is a reduced probability that you or your business will lose money after the deal closes.
Management of an orderly and predictable legal process in a closing also reduces the irritation inflicted on others involved. It will head-off conflicts with the other transaction party, with whom in many cases you will be having business dealings for a substantial time to come. It also lets you obtain the cooperation needed from other players with minimum fuss and bother.
This Guide sets out a few key considerations, and some simple steps to take (or avoid), in managing the legal closing process of a transaction to achieve these goals. We will also try to demystify the closing process of business transactions as well.
II. Introduction to Business Transactions.
(a) Parts of the Deal Document and their Function. Most business transactions of significant size are governed by a set of transaction or “deal” documents consisting of multiple documents which each perform a narrow function, plus an “umbrella” agreement which governs the entire transaction and ties the other documents together. In an acquisition, for instance, the umbrella document will be the Asset Purchase Agreement, Stock Purchase Agreement or maybe Agreement and Plan of Merger. In a bank loan it is usually a Loan Agreement. Normally 50% or more of the legal costs of a closing are spent on drafting and negotiating this “umbrella” agreement, so most of this Guide should be understood as How to Negotiate, Draft and Consummate Umbrella Agreements Efficiently.
Umbrella agreements necessarily address the same matters, and so tend to be organized in a predictable pattern, including:
Recitals. Umbrella agreements normally begin with recitals or Whereas clauses, which explain the background and circumstances of the business transaction, and say Who we are and how we’ve come to be signing this document. On a 30,000 foot level they should explain what each party hopes to get out of the deal. While the rest of the agreement is written for the parties, recitals are addressed to a stranger coming onto the transaction cold. Any lawyer who has found himself in court trying to explain to a judge and jury why some particular wording in a contract was a vital part of his client’s bargain can attest to the importance of recitals. Nuances and circumstances that are obvious during a business transaction are often very unobvious years later when an agreement gets enforced. Without a clear understanding of these things, however, a trier of fact will inevitably misunderstand the significance of many terms even in a simple deal. Recitals are the normal way to address this.
Definitions. One section contains definitions of words used repeatedly in the agreement. Often a word or term will become a shorthand expression for a complex process or concept, and can therefore control major deal terms. Definitions are always the focus of some negotiations.
Description of the Transaction Itself. The heart of the agreement describes the actual deal, such as exactly what is being bought and sold, or what moneys are being loaned or invested, and exactly what the money-provider is giving for it, and when. Some of this may require listing in attachments or “schedules” to prevent the document from getting too long.
What each Party says to be True. These are the representations and warranties each party makes to the other. Many facts will be un-knowable or difficult to discern to the party to whom they are important. So the other party, if he has a clearer view of the subject, will state what the facts are and agree that the first party can rely on them. The seller, the borrower or the securities issuer in a transaction (whichever is involved), will generally make more of these statements than the money-providing party because of the former’s greater knowledge of the business in question.
What has to Happen First. In most cases certain steps must be taken as preparation before business transactions can close, such as governmental or other third-party consents. Often, both parties have their own list of Conditions Precedent which are written as tasks the other side (or less often, themselves) need to complete before the party is bound to go forward with the deal.
Things the Parties agree to Do or Avoid Before, During & After the Closing. These covenants may address things as diverse as operation of the subject business, tax filings to be made, or handling of an important side-matter.
Risk-transferring. Each party normally agrees to take on himself certain risks that circumstances otherwise place on the other side, meaning “If X bad event occurs, I will pay for it.” This Indemnity section is the most technical writing in the document. In most cases, there are dollar or other limits on how much the indemnifer can be asked to pay, and time limits after which he cannot be asked. Most significantly, this is the teeth to the representations and warranties; and like reps and warranties, this section is more likely to be useful to the money-providing party than to the seller, borrower or securities issuer.
Other Things. The rest of the umbrella agreement is supporting text to the above, such as descriptions of where and how the closing will be conducted, and agreement on what jurisdiction’s laws and/or courts will govern if there is a dispute.
III. History of Business Transaction Documents:
It is an open secret that business transactions lawyers spend their lives plagiarizing from each other, and few if any transaction documents are ever drafted from scratch. All of us maintain sets of document templates and copies from prior deals, which we mine in our drafting work. The document bank of my own law firm is intricately divided into myriad subjects for easy reference, and runs to over a thousand documents. An experience that all business transactions lawyers share is reading a document drafted by another firm, seeing text that makes one say “Hey, that’s good language”, and then grafting the improved text into one or more of your own model documents.
There is a powerful reason for these practices, and our clients are the beneficiaries of them. You see, 99% of the substantive terms in business transaction documents were initially drafted, whether recently or in some predecessor agreement in the dim mists of history, to address an event that caused a lawyer’s client to lose money. My own documents contain many provisions I added or rephrased over the years after seeing business deals go sour.
Check back soon for Parts II and III.
David Parker is the managing member of Liles Parker in our Washington, D.C. office. David handles corporate finance, structuring and negotiating secured debt and loans, corporate governance and compliance, and business transactions. If you are interested in buying or selling a business, or raising or lending capital, call David for a free consultation today at 1-800-475-1906
Tags: business law, business transactions