When starting a business, you encounter a multitude of challenges, and an important obstacle for health care businesses is regulatory compliance. We wrap up Season 15 with series regular and ByrdAdatto Partner, Jay Reyero. Jay shares regulatory considerations for new health care businesses and the essential laws they need to keep in mind. We discuss pivotal regulations like the federal anti-kickback statute as well as state-specific laws. Tune to learn about the nuances of health care compliance and its pivotal role in entrepreneurial ventures.
Listen to the full episode using the player below, or by visiting one of the links below. If you have any questions or would like to learn more, email us at info@byrdadatto.com.
Transcript
*The below transcript has been edited for readability.
Intro: [00:00:00] Welcome to Legal 123s with ByrdAdatto. Legal issues simplified through real client stories and real-world experiences, creating simplicity in 3, 2, 1.
Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host, Brad Adatto, with my co-host, Michael Byrd.
Michael: As a business and health care law firm, we represent clients in multiple business sectors, especially health care. This season we’re diving deep into the exhilarating and terrifying process of opening a business. Our theme this season is starting a business.
Brad: Yeah, since starting a business is just one season of a business. What are the other seasons, Michael?
Michael: Yeah. So we have the building season, which is starting; the operating season, which is running a business; the scaling season, growing a business, and then the buying and selling season. And that’s when it’s time to exit or even grow faster, I guess, with purchasing another practice.
Brad: That’s right. [00:01:00] Well, Michael, before we get started for those watching us on TV land, they will notice we have welcomed back our series, regular partner, Jay Reyero here.
Jay: All right. Thanks for having me. I leave for one season, I come back, you do a whole new setup, I like it.
Brad: I know. It’s pretty nice in here, right? Yes, Jay, wait till you see what we do next time. But I’m glad you’re here, Jay. I think since Jay’s here, Michael, we can really start with our second sports podcast of the season.
Michael: Well, Brad, as we discussed earlier this season when we had former NCAA quarterback, Stephen Holly on, this is not a sports show.
Brad: Yeah. But Michael, I think it would be amazing. I mean, between how competitive the three of us are and how obsessional with all these different sports we follow, I think we could be like multimillionaires off this new sports show.
Jay: All right, Brad, as the CFO, I’d love where you’re going with this, but I’m pretty sure, and I think Michael will agree that the audience listening right now is wanting us to talk about legal education. I’m not quite sure they care about who the Cowboys are going to pick with the 24th pick. [00:02:00]
Brad: Okay. Fine. But here’s a question for both of you. Have you ever witnessed a sports moment that you were so excited about, only to have just ripped from you by some penalty or a really bad call?
Michael: Well, let me think about this. Oh, wait, now I’ve got it on the top of my head. I’m glad you asked. Or actually, I’m not glad you asked. Dez Bryant for the Dallas Cowboys against the Green Bay Packers in 2015. For the audience that knows, it was a catch. For those that don’t know, Tony Romo had thrown a bomb that would’ve given the Cowboys the lead, or practically the lead. That would’ve been on the one yard line and the refs incorrectly ruled it as an incomplete pass.
Jay: All right, as a fellow cowboy fan, Michael, I knew exactly where you were going with that because that was the same thought, so I’ll go a different way. This is a Longhorns moment. And it’s not a penalty or a bad call, but in 2008, undefeated [00:03:00] ranked number one in Lubbock against Texas Tech with eight seconds left, our defense did what it’s supposed to. Tapped the ball, the ball flew up, and I was going crazy because we had just locked up the game up by one, went straight to our safety, hit them in the hands, hit them in the gut, and then hit the ground.
Michael: My other eye has a tear now too, as you bring that memory back.
Jay: Yes. And needless to say, after that, it was the crab tree, tote tipping down the line, lost the national championship game on a fifth tiebreaker, or some craziness like that, couldn’t go to the national championship game. It just kept on getting worse throughout the year.
Brad: Yeah. Well, to no surprise, anyone in here, I’m going to go with the Saints won.
Michael: What?
Brad: I know. And for those who don’t know, the Saints did lose to the Rams in an NFC game, and that is probably one of the hardest games I’ve ever [00:04:00] had to live through. I was there in the audience when there was a pass interference call that everyone in the league admitted after the game was definitely a penalty, but for some reason, the refs didn’t call. And in fact, they said there was two different penalties. One, the guy jumped in the air and hit helmet to helmet, or two, he ran full speed in the wide open, wide receiver and knocked on the ground before you get there. Had they caught the ball, we would’ve been at the seven yard line.
Michael: Yes. And I’m sure you would’ve once say, I mean, you would’ve won the Super Bowl too, right?
Brad: And that would’ve been correct. We would’ve – thank you for knowing that.
Michael: Well, where is all the sports talk that especially crushing memories going today?
Brad: Well, there was a DC man who got his lottery ticket and he went to the website and he saw that the numbers matched his mega millionaire winning prize. It was a $340 million win.
Jay: All right. We’ve got some pretty high excitement here.
Brad: However, the numbers that were posted on the website was a mistake, some typos. [00:05:00] And the Powerball Company said you know, sorry, those aren’t the correct numbers.
Michael: That’s worse than the death situation.
Brad: Yes, $340 million. And so the man is now suing Powerball, the multi-State Lottery Association, and the company behind the website who basically put the wrong information up there for unlawful collusion, the defendants and their case responded that the ticket holders had some scheme to capitalize on an obvious error.
Jay: Wow. So, way to fail at inputting gaming numbers on the internet and also communication 101 all at the same time.
Brad: Yeah, Totally. Like, the guy’s getting crushed here, because one day he’s a multimillionaire and the very next day he’s being kicked while he’s down.
Michael: I’m not sure, I don’t feel very uplifted as we get ready to jump into today’s story, so we need to kind of rally ourselves. Oh, we’re going to be talking about regulatory stuff, never mind. Let’s jump into today’s story.
Jay: All right. Sounds good. So, star of today’s story is going to be Ms. Romo. [00:06:00] And Ms. Romo is a serial entrepreneur. Stop me if you’ve heard this before. In the health care space, lots of physician connections always finding new things to do, new ventures to start, different ways to partner with physicians. Well, for today and for today’s story, this time, her idea was to create a P.O.D.
Michael: So this is either the Tide pod challenge thing that we talked about a few seasons ago or a new vocabulary word. I’m going to go with vocabulary word because I like context and I think that’s what we’re going to have.
Jay: Yes. And so for today’s vocabulary word, a P.O.D. is what we call a physician owned distributorship. Not one of the big white boxes that are parked in your driveway when you’re moving. And yeah, right now I can see Michael’s eyes start to go glaze over as he thinks we’re going to have a regulatory space. But we’re going to keep it high level, don’t worry. For Michael’s sake and the audience’s sake, we’re going to try to only touch the things that we need to touch [00:07:00] on from a regulatory perspective, not get down into the weeds or really heavy. So Brad, I’m going to pass the hot potato over to you. And with our first vocabulary word, can you talk a little bit about pods and what they are?
Brad: Yeah. First, Michael and Jay, I got to say you’re bearing the lead here, guys. I’m not sure if anyone outside of Dallas would understand why you use the name Mrs. Romo and being the serial entrepreneur that they might not have followed based on the sports talk earlier that Jay was sliding in the former quarterback of the Dallas Cowboys, now CBS analyst Tony Romo. But to answer your original question on pods; physician owned device companies, that’s a place where typically you see these entities where have revenue going through them from selling them. And there’s implant medical device companies that the physician will order from. And then those devices will show up at the hospital and those physicians can then use them inside the procedure when doing an operation, typically inside that hospital or ambulatory surgery center. [00:08:00] And so, like a simple example of what a typical device company is that, there might some physician may have, or device company has a special medical screw that you have or maybe some type of hip implant that they have. So, those are kind of the devices that you see being utilized and inside pods too.
Michael: And can I say it back to you, because I’m high empathy with the audience right now, so I want to make sure that I’m following this. So, for example, if a doctor had a screw that he had invented, he might have a pod. And so, through the pod would be made available for the cases that that doctor would do at a surgery center or a hospital, and then the doctor would presumably use that when operating. Did I say it right?
Brad: You did. Good job.
Jay: Wow. He stayed awake that whole time.
Michael: I was listening.
Brad: Oh, he’s asleep now, Jay. Okay.
Jay: And so in this case, Mrs. Romo had gotten connected to our doctor of the day Dr. Bryant. And their idea was a new spine plating system. [00:09:00] So kind of imagine a rectangular piece of metal that you screw into multiple vertebrae on the back and the screws kind of go in and hold that plate to stabilize the vertebrae. So, that’s the idea that they had. So what they wanted to do was create this pod as a joint venture to design it, to manufacture it, and then finally sell it to the public.
Michael: Well, this sounds pretty straightforward. I am going to note that we’re not very far into the story, so I’m thinking there’s going to be more to this.
Jay: Sure. So plans are always straightforward, but implementing it is anything but when you’re in health care. We’ve always said it many times in the past episodes, it’s complex because there’s a lot of rules. It’s highly regulated. And so, navigating these rules and regulations, this can become difficult because a lot of the times it’s not black and white, it’s gray, and so that’s where the nuance comes in.
Brad: Yeah. And gents, I think this is the second time for the audience keeping up that y’all buried [00:10:00] the lede. [unclear10:01] not filing, Jay is now referring back to the Cowboys receiver Dez Bryant who caught over 5,000 yards and 54 touchdowns from Tony Romo, so I think that’s where we get in the Romo-Bryant connection. Now again but back to the statement. Additionally, I completely agree with Jay and you need to understand how to apply these rules together. You can’t just look at like one rule by itself.
Jay: Yeah. And so, any time we have these situations, our first thing Brad and I did was ask Mrs. Romo to come to the office and we do a whiteboard session with her.
Michael: Good. And actually I think another lede was buried a few minutes ago. You were talking about not being black and white and shades of gray. Brad, is that why you insist on being called 50 shades of gray?
Brad: It’s a different story for different time.
Michael: Oh, okay. Sorry. back to the whiteboards and why do we do them? So, because this is so complicated, we create an environment where we can kind of real time strategize [00:11:00] and get in front literally of a whiteboard and visually draw out what’s happening. Because one little change can affect the entire assessment of what you’re trying to do, especially in the type of stuff that we’re talking about today with the heavy regulatory stuff.
Jay: Exactly. So with this whiteboard, Brad and I, our initial task with Mrs. Romo was, first, we had to identify kind of what was the playing field, right? What are the rules that are going to come into play? And we ask a lot of questions and try to find out revenue sources, and that kind of tells us where are the laws and rules that we’re going to be dealing with. And then the second piece, and kind of to your point Michael, is we’ve got to know all the moving pieces, all the different people, relationships. We really have to kind of see the entire board, if you will, to understand before we dive into the regulatory aspect of it.
Michael: Okay. So, Brad, climb up on your soapbox and tell the audience why this is so important.
Brad: Well, I mean, Jay was nailing a lot of it. First off, [00:12:00] it allows these parties to be on the same page. That’s the most, in critical part, us being part of that party as your attorneys looking at. But second, you kind of alluded this earlier, the smallest change, in fact, in circumstances can make the entire arrangement unlawful.
Michael: Alright, so Jay, what did you learn during this whiteboard?
Jay: Well, first we were able to narrow down with the laws, we were able to nail down. We were only dealing with state laws, which is pretty common. A lot of people try to do that because they’re so scared of the federal side of things. In this case, the state that we were dealing with actually pointed to the federal rules and regulation, so we did need to take them into account in some capacity.
Brad: Yeah, and that’s an important point to remember Jay is describing that .many states do have these great – they don’t have really great guidance out there to tell us how to be compliant. Many states have attempted to track federal law, even if it’s poorly written, but a lot of them point towards the federal government saying [00:13:00] look to that. So a lot of healthcare attorneys will look at, how did the federal government analyze this type of relationship? How would the federal government enforce this? And what kind of guidance can we rely on to then navigate states who haven’t really gone through the entire risk assessment? I can give a ton of two examples of that. State of Florida has its own baby Stark law that has to do with referrals from physicians to other entities. And if you read through that, a lot of the language looks like it’s trying to steal from Stark, but then they add a whole bunch of language that makes it complicated. The State of Texas has its own version of the Anti-kickback statute or Anti-solicitation statutes, poorly written. But again, it points towards the federal government for help.
Jay: All right. So during our whiteboard, I’m going to shock you in the audience, and that is with the fact that when we went through this entire exercise, what we found was that Mrs. Romo actually had talked about and wanted to do everything that she had already told us about. [00:14:00] There were no surprises, there were no people involved in left field that we didn’t know about. It was, as she had originally described it, that’s how she described it again, and we clarified it, and so it was refreshing to see that we did have a complete picture of the board.
Michael: Wow. Okay. Well, so Brad, without getting too in depth and putting everyone to sleep, talk about some of the considerations you raised when talking with Mrs. Romo through some of the compliance considerations for this pod.
Brad: First off, I make no promises you’re not going to fall asleep. Second though, going back to understanding that what we had to go through in this particular circumstances, really look to the federal anti-kickback statute to really help us develop the best way to make this compliant. And the federal government has given us basically over 10 different safe harbors, allowing you as a someone in the health care world to come up ways that have compliant arrangements. [00:15:00] And they’ve added many more since that first 10 that they came out with. But the safe harbors encompass a ton of facts. And if a party meets all the applicable safe harbor elements, then it’s not a violation of the federal anti-kickback law. If they did not, they only meet some of the elements; it doesn’t mean it’s a per se violation. We would just have to examine what elements did they not meet. For safe harbors, for pods, I won’t go to all of them, but there are many elements that go into it to make it compliant. So even if the party meet all of them, the OIG, which is the enforcement arm of this, that Lori looks at these from a regulatory perspective, still has scrutinized his pods in general, and it’s issued many fraud alerts over the years.
Jay: Yeah. And just building on what Brad’s saying. One of the common things that people will refer to and that we do deal with, with the safe harbor, people refer to as the 60/40 rules. These are bright line tests. And essentially what they’re doing is they’re the government’s way of making sure that an entity’s not dependent on the referrals [00:16:00] of the investor physicians who are in a position to refer or do business. So quite simply, there’s an investment test. They want at least 60% of the investment interest to be held by people who don’t do business or won’t refer. And then there’s a revenue test. They want at least 60% of the revenue to come from people who don’t do business or refer to the P.O.D. So these are the two most common ones that we encounter, and a lot of kind of incorrect assumptions related to them can sometimes be something that Brad and I work with the client to get through.
Brad: Yeah. And going back to those fraud alerts I mentioned earlier – before having, you know, the best part really to understand about those fraud alerts is that they’re identifying the fact that these physicians are part of these joint ventures and are they part of it just because of their referral source. So even if you have all these other elements that Jay is describing, the OIG is really looking into a little bit behind the curtain even more is, are they really trying to induce these people [00:17:00] or is it truly a bonafide business venture they’re doing? And essentially, we would walk through each one of these items to make sure that not only are the anticipated structure would meet the requirements under the safe harbor, but also letting Mrs. Romo and Dr. Bryant understand how they plan to operate it. And once it’s operating, to continue to be compliant, not only under the safe harbor, but the way the fraud alerts let us know how important it is each step of the way to maintain that compliance.
Michael: Okay. I’m hanging on. I’m hanging in there with you guys. So Jay, talk a little bit about some of the things that Mrs. Romo had planned and how that lined up with the regulatory compliance requirements.
Jay: Yeah, I mean, for the first time in a long time, Mrs. Romo had all the right answers. Every time we asked about a safe harbor element or a particular concern, she had all the right answers. And the running joke that we always have in these situations is that everyone comes in and meets with Brad and I, [00:18:00] and the first thing they say is, I want to be compliant. And then we go through the exercise like we do with Mrs. Romo. We tell them all the things that they need to do to be compliant. And then Brad, how do they respond?
Brad: “Well, that’s not going to work. So what if…” And then they go through all the processes that throw out all these different scenarios, trying to find a situation that they would be more comfortable with, that may not be as compliant.
Jay: But here, Mrs. Romo had done her homework truly sounded like the intent behind everything was to operate this, following the rules as closely as possible. Brad and I walked through each of the safe harbor elements, the fraud alerts, just all the different safeguards, everything. And she planned on implementing them and meeting them.
Michael: Well, give us a couple of examples.
Jay: Yeah. So there were going to be real capital outlay requirements for Dr. Bryant and business risks involved for Dr. Bryant, which are really important. [00:19:00] Their intent and business plan, and this was really important to us, was to primarily market these products to other physicians, not just for Dr. Bryant and the use for his own patients. So, they really were trying to create a market for this product.
Michael: So taking us back a few seasons ago actually one of our most listened to episodes. This does not sound like the Breaking Bad MSO situation.
Jay: Yeah, you’re exactly right. And Brad and I didn’t get that feeling, but we also did confirm. And what really helped give us peace of mind too was that Dr. Bryant was the only doctor was going to be involved in this venture. What there was no anticipation of allowing others to invest or bringing on other owners, which with pods is a really big deal and has been a big fraud issue throughout their course of history.
Michael: Okay. So Brad, what did you and Jay do next as part of the building of this pod?
Brad: Typically, after a whiteboard, what we do is we basically summarize all [00:20:00] the facts and circumstances that we learned and then we send it back to them and say, Hey, this is what we discussed. That’s what we did with Mrs. Romo. Outline the requirements and the safeguards that need to be put in place for this pod to be compliant.
Michael: Okay. We got through it. Let’s take a break. I’m going to take a little nap, get ready for the other side.
Jay: 15 minute nap.
Michael: Let’s go into a commercial. And after my nap, we will wrap up with some legal insights from our discussion today.
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Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host, Brad Adatto, with my co-host, Michael Byrd. And we’re still here with series regular, Jay Reyero. Now Michael, now that you got back for your power nap; today, we’re really concentrating on in the season starting a business and we really been working a lot on that building of that season. And a lot has happened since starting this business, and now Michael, Jay tells this great story and interesting story about Mrs. Romo and Dr. Bryant.
Michael: Yeah, I was able to make it all the way through the story and to my nap time, and so audience members, this was a pretty tamed story, which when you’re trying to build a business is probably what you want. You have a story of someone wanting to build a P.O.D., a physician owned distributorship, and it has a lot of regulatory landmines. But as Brad and Jay went through the process, [00:22:00] things were lining up that this was something though risky from a regulatory perspective, looked promising from a compliance perspective.
Jay: Yeah, and I like the word that you use, process. because when you’re in the building season and you’re dealing in health care and you have a lot of regulations, it really is a process. When you first – we have to figure out, okay, what rules, laws, regulations are we playing with? What does our field look like, so that we can then kind of start taking a step into applying the facts and circumstances and how it relates to those rules. And for me and Brad in the federal world, it’s really important to know all the moving pieces because facts and circumstances, one change, can change the entire analysis. But even in the aesthetic space where it’s a cash-based world, there still needs to understand all of the moving pieces because again, one change can change the entire equation. And so, it’s really important for us to kind of [00:23:00] analyze where we are and what we’re doing. And that’s why we find whiteboards so powerful because it helps, as Brad mentioned earlier, get everyone on the same page, clarify any lingo that they may use that isn’t familiar to us or vice versa. And really draw and map out exactly what the structure’s going to look like, so at the end of the day, we have, this is what we’re going to be building and let us tell you how to build that in the most compliant way.
Michael: And when you’re talking about regulatory compliance, you can’t be in this starting a business phase and getting it set up and dealing with compliance without us at least taking a peek into the operating season. Because what you do today matters, and what you do once the doors are open matters as much. And so I’d love Brad, for you to kind of connect those dots.
Brad: And going back to what Jay was just talking about, a lot of times people get the mistake that they believe to be compliant, I need document A or document B, [00:24:00] and they’ll call and say, this is what I need to begin this business. And that’s just an element of it. The document itself is not the only piece of it. So we always talk about form and substance and form being, yes, you need these documents, but then you have to keep that substance behind it. Meaning, if that physician starts changing the referral pattern or you add new physicians to it, and that’s going back to what you were talking about in the operating season. A lot of times when we get pulled into this initial piece, they’re trying to start that business and the initial hour we spend with them and then all the documentation, they’re compliant when they walk out the door because we have the form and substance put in place.
Unfortunately, often the case is they start kind of the word we use is drifting out of compliance, in the sense that they forgot why they had to do that. Someone else comes along, starts managing it. Oh, they heard from their buddy, they could do it this way. And they really start adding new elements to it, new owners, new product, new hospitals, and they don’t realize [00:25:00] every single time they change that little bit of circumstances, they’ve completely moved the ball. And all of a sudden they’ve gone from a very compliant model in the beginning when they started it to, while they’re in the operating season to just fall out of that compliance. And it’s not purposeful, it’s not like they meant to do it. They just didn’t realize that how important it was to keep that arrangement locked solid, or if they were going to just drift and add new players to reach back out to their health care journey to understand the issues they face. But I guess we’re getting close to the end guys, that maybe some final thoughts from both of y’all.
Jay: Yeah, for me, I think you can almost think about it as entering into a building season each time you decide to want to do something during the operating season that may be a little different. You have to kind of take a step back, take a quick look at it, analyze it before you do it. Because once you do it, if you did it in a non-compliant way, you can’t really, as we’ve heard, un-ring the bell, and so you always want to be kind of forward thinking and prepare and do it on the front end. [00:26:00]
Michael: Yeah. I mean, when you’re trying to start a health care business and you start hearing about these regulations, you go into these whiteboards, it date myself, but feel like you’re trying to solve a Rubik’s cube just to figure out how to open a business. And so, you do all this mental gymnastics of how you can do it correctly. A lot of it’s counterintuitive, so you just feel that friction of this does not make sense. You finally get comfortable with it, and then you get it, and there is that feeling of like, oh, okay, I’m done. So, my final point is just to kind of back up Brad’s point and say it a little bit differently and just – I can’t emphasize this enough. Compliance is not stagnant. It is ever moving. You use the word facts and circumstances. I mean, things change. And it may be the things that you talked about, new partners, new service [00:27:00] lines, new laws, and so it is a moving target, and so turning into compliance is more of a culture than it is an event.
Brad: Yeah. And I guess as we’re leaving, knowing about we started off with someone being crushed, is you have a very compliant situation in which you’re going to make $340 million. And then it turns out that you went non-compliant because you got stagnant and now you owe the government $340 million. Maybe that’s kind of where we’re going to end today because I don’t want to go back to the sports talk. I’m still upset. Consider it hurts.
Michael: It was past interference.
Brad: Everybody knows that. Well guys, believe it or not, this is going to end season 15 in the building season. But as we alluded to, audience members, do not panic. We’re about to get ready to open up season 16. I guess we get a driver’s license maybe, at this point. But we’re going to enter into the operating season kicking off next week. [00:28:00] Thanks again for joining us today. And remember, if you like this episode, please subscribe, make sure to give us a five star rating and share with your friends.
Michael: You can also sign up for the ByrdAdatto newsletter by going to our website at byrdadatto.com.
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