Thursday, March 23, 2017

ARIZONA COURTS CONTINUE TO FAVOR ARBITRATION



In Gullett v. Kindred Nursing Centers West, ___ Ariz. ___, 758 Ariz. Adv. Rep. 12 (App. 2017),the Arizona Court of Appeals ruled that an arbitration agreement between a patient and a convalescent hospital was enforceable over a challenge that it is was unfairly one-sided. Mr. Gullett signed an arbitration agreement at the time of his admission to Hacienda Care and Rehabilitation Center. He died approximately one month later. His son brought suit alleging that Hacienda had violated Arizona’s Adult Protective Services Act, and caused his father’s death. Kindred, the parent of Hacienda, moved to compel arbitration. The son objected, arguing that the arbitration agreement was unenforceable, claiming the agreement contained provisions that unfairly benefited Kindred, and denied the son rights he would have in a lawsuit. The son specifically asserted that the agreement: substantially limited discovery; the arbitration administrator identified in the agreement lacked neutrality; and the agreement did not impose mutual obligations on each of the parties. The Court of Appeals disagreed.

The arbitration agreement allowed the parties to take six lay and two expert witness depositions. It also allowed limited written discovery. The parties could agree to more discovery or the arbitrator could order additional discovery, if deemed “necessary and proper.” Stating that arbitration limits on discovery are only unfair if the permitted amount of discovery is so low and the showing of a need for more discovery is so high that the claimant’s ability to vindicate his or her right is impeded, the Court found that the amount of discovery permitted in the Kindred arbitration agreement was fair, and did not render the agreement unenforceable.

The agreement also provided that the parties might use the services of a particular arbitration administration service. However, the agreement allowed the parties to choose a different administration service, and also allowed them to select the arbitrators. Because the agreement sought to use truly neutral arbitrators, the court found that this was not fundamentally unfair.

Finally, as to the lack of mutuality, the son argued that Kindred had no real claims against a former patient and so was not giving up any rights. The Court of Appeals disagreed stating that both parties were required to arbitrate all claims, not just medical malpractice claims. If Kindred had a claim against a patient, for example, one for non-payment, it would also be required to arbitrate, rendering the provision mutual.

Gullett makes clear that arbitration is still favored in Arizona. For an arbitration provision to be enforceable, especially in a consumer transaction, it should allow sufficient discovery, or, at a minimum, permit the arbitrator to set fair discovery parameters; ensure that the manner of selecting an arbitrator results in the arbitrator being truly neutral; and requires both sides to arbitrate their disputes. These issues should be taken into consideration when preparing arbitration provisions in contracts.

This blog is published by Dickinson Wright PLLC to inform our clients and friends of important developments in the field of arbitration law. The content is informational only and does not constitute legal or professional advice. We encourage you to consult a Dickinson Wright attorney if you have specific questions or concerns relating to any of the topics covered in here.

 
For more information, please contact Denise H. Troy in our Phoenix office. She can be reached at 602.285.5097 or dtroy@dickinsonwright.com.

Tuesday, March 7, 2017

SO YOU WANT TO ‘MAKE PARTNER’: A WORD OF WARNING TO JUNIOR PROFESSIONALS, WATCH WHAT YOU WISH FOR


by Ralph Levy, Of Counsel
Nashville Office
615.620.1733

 
Group medical and dental practices often look to expand their practices by hiring additional professionals, typically those with less experience than the equity owners of the practice group. Invariably, both the group practice and the potential new hire will insist on an employment agreement that will provide the practice group with protection that the junior professional will continue to provide services to the group during a specified time period and that will assure the professional of payment for providing services. In addition, the potential new hire will request that the employment agreement provide for the opportunity to “make partner” within a specified time period after the date of hire. This initial time period before the newly employed professional is considered for equity participation is typically viewed as a probationary period during which the parties will see if the relationship is a “good fit”. The group practice will accede to the junior professional’s request for equity participation after a limited time period of employment in order to “align the incentives” of the professional with that of the practice and also to facilitate in business succession of the practice group such that the group (or the junior professional) can pay the more senior equity owners for their equity interests in the practice as they retire. So far, so good?
 
By focusing on the business aspects of the employment relationship and possible equity participation, the tax aspects of the arrangement may be overlooked by the practice group and are generally ignored by the professional who is being hired. For example, the practice group owners and the junior professional are generally aware of the various “payroll taxes” (Medicare, Social Security and state and federal unemployment taxes) that apply during the initial phase of the employment agreement during which the professional is an employee but not an equity owner. During this time period, regardless of the structure of the practice for federal tax purposes (i.e., PC vs PLLC), the group practice as employer pays the “employer side” of payroll taxes and the employee pays the “employee side” of payroll taxes via tax withholdings. For example, the group practice and the employed professional will each pay old age, survivors and disability insurance (OASDI, or Social Security) taxes of 6.2% of compensation paid to the junior professional up to an annually specified cap ($127,200 for 2017). In addition, the group practice and the employed professional will each pay hospital insurance (Medicare) taxes of 1.45% of compensation paid to the junior professional (not capped).
 
However, depending on how the group practice is organized for federal tax purposes, the parties may overlook the federal tax consequences when the employed professional “makes partner” of the group practice, particularly as to payroll taxes for practices organized as a professional limited liability company (PLLC) or a professional limited liability partnership (PLLP). Specifically, subject to an exception for certain income of limited partners that will be discussed below, for professionals who perform services for PLLC’s or PLLP’s in which they are also equity owners, all compensation received by the professionals from the group practice will be subject to self-employment tax. For a junior professional being paid $100,000 in annual compensation before becoming an equity owner, the junior professional will pay through federal income tax withholdings Social Security taxes of $6,200.00 and Medicare taxes of $1,450.00, for a total of $7650.00 (7.65% of compensation). The group practice will pay the same amount for the “employer side” of these taxes. Once the junior professional “makes partner” of an unincorporated group practice (i.e., one taxed as a partnership for federal tax purposes), the professional will pay 15.3% in Social Security and Medicare taxes on income up to the annual Social Security income cap and 2.9% in Medicare taxes only on income above that annual limit. For the junior professional being paid $100,000, the Social Security and Medicare taxes for which the professional is responsible will increase from $7650 to $15,300, double what the employed professional paid before becoming an equity owner.

This often overlooked tax consequence to “making partner” was addressed in recent guidance issued by the Office of Chief Counsel (“OCC”) of the Internal Revenue Service. In Chief Counsel Advice (CCA 201640014, issued 9/30/2016), the OCC found that all of a franchisee’s share of earnings from a partnership that operates several restaurants is subject to self-employment taxes when the franchisee, an individual, served as the manager, President and CEO of the partnership. In reaching this conclusion, the OCC overruled the argument of the franchisee that the income derived from the partnership should be divided into two components, one that represented an investment return on contributed capital (exempt from self-employment tax) and another as compensation for services rendered by the individual to the partnership (subject to self-employment tax).

By asserting the argument that the franchisee’s income from the partnership should be “split” into two streams (one subject to self-employment tax and another not subject to self-employment tax), the individual tried to distinguish the activities of the restaurant partnership from Renkemeyer, Campbell & Weaver, LLP, a 2011 Tax Court case in which the Tax Court determined that even though the attorneys who provided legal services for a law firm that was operated as a partnership were limited partners of the law firm partnership, their income from the partnership was subject to self-employment tax.
 
The CCA found that for the same reasons adopted in the Renkemeyer case, all of the individual franchisee’s income from the restaurant partnership was subject to self-employment income and not just the guaranteed payments made by the partnership to the individual who was the principal owner of the partnership.
 
Despite the franchisee’s delegation of a portion of the services required by the partnership to operate the franchised restaurants to an executive management team, the individual’s entire distributive share of the partnership income should be treated as compensation for services rendered by the individual as president, chief executive officer and manager of the partnership. As a result, the income paid to the individual was not exempt from self-employment income tax under IRC §1402(a)(13) (exemption of limited partner’s distributive share of income). 
 
The main lesson to be learned from the CCA and from the Renkemeyer case is that before finalizing an employment agreement with a professional group practice that is organized as a PLLC or a PLLP, the professional should insist on an increase in compensation upon being admitted as an equity owner of the practice to compensate for the increase of self-employment and other payroll taxes. Otherwise, the professional’s take home compensation may actually decrease as a result of “making partner”. Hence, the title of this article …”Watch what you wish for…”.

This article will appear in the March/April 2017 issue of the Journal of Health Care Compliance and is being reproduced here with permission. Additional information about this publication can be found here.

Tuesday, January 31, 2017

IRS Issues New Guidelines for Qualified Management Contracts for Facilities Financed with Tax Exempt Bonds

By: Craig Hammond


Health care providers with facilities financed with tax exempt bonds need to be aware of recent changes to the IRS rules for qualified management contracts.   On August 22, 2016, the IRS issued Rev. Proc. 2016-44 which replaced the safe harbors for management contracts previously set forth in Rev. Proc. 97-13 with new safe harbors that are intended to provide more flexibility with respect to term and compensation arrangements.  On January 17, 2017, in response to feedback received on the new rules, the IRS issued Rev. Proc. 2017-13, which supersedes Rev. Proc. 2016-44.   The safe harbors under Rev. Proc. 2016-44 became effective for any contract entered into on or after August 22, 2016 and may be applied to any management contract entered into before August 22, 2016.  The safe harbors under Rev. Proc. 2017-13 became effective for any contract entered into on or after January 17, 2017 and may be applied to any management contract entered into before that date.  In addition, the prior safe harbors in Rev. Proc. 97-13 may continue to be applied to a management contract that is entered into before August 18, 2017 and that is not materially modified or extended on or after August 18, 2017 (other than pursuant to a permissible renewal option).

 
Background.  Section 145 of the Internal Revenue Code permits nonprofit 501(c)(3) corporations to borrow money through the issuance by state or local units of government of tax exempt private activity bonds known as “qualified 501(c)(3) bonds.”   The proceeds of such qualified 501(c)(3) bonds are loaned by the bond issuer to the 501(c)(3) borrower to finance capital expenditures for facilities that will be used in furtherance of the charitable purposes of such institution.  Nonprofit hospitals, assisted living facilities, nursing facilities, senior retirement communities, universities and other nonprofit institutions frequently use this type of tax exempt bond financing for large capital projects.

 
The Internal Revenue Code restricts the amount of “private business use” which may occur at facilities financed with tax exempt qualified 501(c)(3) bonds.  Failure to comply with these restrictions may cause the bonds to lose their exemption from federal income taxes and may require the 501(c)(3) borrower to undertake certain remedial actions.  Private business use may occur as a result of a management contract or service contract with a party that is not a governmental entity or a 501(c)(3) corporation.  A management contract with respect to financed property generally results in private business use of that property if the contract provides for compensation for services rendered based, in whole or in part, on the net profits from the operation of the managed property.  The IRS rules for qualified management contracts are intended to provide guidance as to how to structure management contracts to avoid private business use.

 
More Flexible Approach to Compensation Arrangements.  The previous safe harbors under Rev. Proc. 97-13 were formula driven based on the nature of the compensation and duration of the contract.  Under the new rules of Rev. Proc. 2017-13, the IRS has adopted ostensibly a more flexible approach by permitting any type of fixed or variable compensation so long as it is “reasonable compensation” for the services rendered under the contract.  The compensation may not be based on net profits from operating the facility and cannot be contingent on the managed facility’s net profits or both revenues and expenses of the managed facility (other than any reimbursements of direct and actual expenses paid by the service provider to unrelated third parties).   

 
Incentive Compensation.  Incentive compensation is not treated as based on a share of the net profits if the eligibility for the incentive compensation is determined by the service provider’s performance in meeting one or more standards that measure quality of services, performance, or productivity, and the amount and timing of the payments meets the requirements described below.

 
Treatment of Certain Types of Compensation.  Rev. Proc. 2017-13 clarifies that compensation arrangements which are based on the familiar fee arrangements identified in Rev. Proc. 97-13 can continue to be eligible fee structures.  Thus, a capitation fee, periodic fixed fee, or a per-unit fee, or any combination thereof, as well as certain types of incentive compensation as described above, are all eligible.

 
Treatment of Timing of Payment of Compensation. A deferral of compensation due to insufficient cash flows from the operation of the managed property will not cause the deferred compensation to be contingent upon net profits or net losses if the contract includes requirements that:

            (a)       the compensation is payable at least annually;

            (b)       the qualified user is subject to reasonable consequences for late payment, such as reasonable interest charges or late payment fees; and

            (c)        the qualified user will pay such deferred compensation (with interest or late payment fees) no later than the end of five years after the original due date of the payment.

 
No Bearing of Net Losses. The contract must not impose upon the service provider the burden of bearing any share of net losses from the operation of the managed property.  An arrangement is not treated as bearing a share of net losses if: (i) the determination of the amount of the compensation and amount of any expenses to be paid by the service provider (and not reimbursed) do not take into account either the managed property’s net losses or both the managed property’s revenues and expenses for any fiscal period; and (ii) the timing of the payment of compensation is not contingent upon the managed property’s net losses.
 

Term of the Contract and Revisions.  A significant change by Rev. Proc. 2017-13 is the permissible term of the contract.  Under Rev. Proc. 2017-13, the term of the contract, including all renewal options, may not be greater than the lesser of 30 years or 80% of the weighted average reasonably expected economic life of the managed property.  Rev. Proc. 2017-13 provides that land will be treated as having an economic life of 30 years if 25% or more of the bonds that financed the managed property financed land.  Under Rev. Proc. 2016-44 land was never taken into account, which could have reduced the permitted maximum term of the contract.  While Rev. Proc. 2017-13 sanctions the use of longer term arrangements, it does hold that all long-term -- or even short-term -- contracts will meet the safe harbor.  501(c)(3) borrowers must now more closely scrutinize the remaining useful life of the “managed assets” at the time of entering or materially modifying the contract to assess whether the contract’s term is permissible under the safe harbor.

 
Control Over Use of Managed Property.  The qualified user (the 501(c)(3) borrower) must exercise a significant degree of control over the use of the managed property.  This control requirement is met if the contract requires the qualified user to approve the annual budget of the managed property, capital expenditures with respect to the managed property, any disposition of the managed property, rates charged for use of the managed property, and the general nature and type of use of the managed property.  Rev. Proc. 2017-13 loosened the approval process by permitting a qualified user to show (i) approval of capital expenditures by approving an annual budget for capital expenditures described by functional purpose and specific maximum amounts, and (ii) approval of rates by approving a general description of the methodology for setting such rates or by requiring that service provider charge rates that are reasonable and customary as specifically determined by, or negotiated with, an independent third party (such as a medical insurance company).

 
Risk of Loss.  The qualified user must bear the risk of loss upon damage or destruction of the managed property.

 
No Inconsistent Tax Position.  The service provider must agree not to take any position that is inconsistent with being a service provider to a qualified user with respect to the managed property. For example, the service provider must agree not to claim any depreciation or amortization deduction, investment tax credit, or deduction for any payment as rent with respect to the managed property.  In other words, the 501(c)(3) borrower must remain the tax owner of the bond-financed property.

 
No Substantial Limitation of Rights.  The service provider must not have any role or relationship with the qualified user that, in effect, substantially limits the qualified user’s ability to exercise its rights under the contract.  A service provider will not be treated as having a prohibited role or relationship if:

            (a)       No more than 20% of the voting power of the governing body of the qualified user is vested in directors, officers, shareholders, partners, members and employees of the service provider or any of its related parties, in the aggregate;

            (b)       The governing body of the qualified user does not include the chief executive officer of the service provider or the chairperson of its governing body; and

            (c)        The chief executive officer of the service provider is not the chief executive officer of the qualified user or any of the qualified user’s related parties.

 
Nonprofit 501(c)(3) health care providers with tax exempt financed facilities will need to consider these management contract guidelines when negotiating service contracts with third parties who will use such facilities.
 
 
To learn more about Dickinson Wright, please contact Craig Hammond in the Troy office at 248-433-7256.

Tuesday, January 24, 2017

Expansion of Practice Autonomy of Physician Assistants Summary


This blog summarizes the original article written by Brian Fleetham.  For more information, please read the entire article that will be published in mid-February for the Kent County Medical Society quarterly newsletter, Winter 2017. 

As part of a flurry of activity at the end of 2016, Public Act 379 was enacted by the Michigan legislature and signed by Governor Snyder. That Act amends various provisions of the Michigan Public Health Code (the “Code”) regarding the professional relationship of physician assistants (“PAs”) with physicians and podiatrists and regarding the professional independence of PAs. The Act’s provisions take effect on March 22, 2017. Physician practices and other entities that employ PAs will need to address these changes by that date.

Previously, Michigan law required PAs to work under the supervision and delegation of a physician or a podiatrist. The new Act deletes those terms from the Code.  The intent behind these changes is to create a legal structure that fosters a more collaborative approach to patient care between PAs and physicians and that authorizes greater independence and autonomy for PAs treating patients within their general scope of practice.

Other changes include PAs as independent prescribers, PAs entering into a mandatory practice agreement, physician to PA ratio and licensing board authority, liability and professional liability insurance, billing and reimbursement, as well as independent rounding and house calls.

Physician group practices and other entities that employ PAs should begin addressing these matters soon to allow enough time to implement these new requirements before March 22, 2017. 

 


To learn more about Dickinson Wright’s Health Care Practice, please contact Rose Willis in the Troy or Saginaw offices at  248-433-7584.