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Posts Tagged ‘physician compensation’

Stark Law Settlement – Physician Compensation Case

Wednesday, March 5th, 2014

Physician Compensation Stark Law Settlement

stark law physician compensation settlementA settlement has been reached in the most visible Stark Law case since the infamous Toumey case was decided a few years ago.   Halifax Hospital in Florida is reported to have agreed to a Stark Law settlement to avert further proceedings challenging compensation to come of its physicians. The Federal Court hearing the case had previously issued a ruling that the compensation structure at issue violated the Stark Law.

In order to assess the implications of this case, it is necessary to zero in on the precise compensation formula that was being challenged by the government. Allegedly, Halifax was paying six employed physician a production bonus based upon revenues from services that went beyond their own professional service revenues and included revenues generated by the Hospital for “designated health services” as defined under the Stark Law.

Under the Halifax compensation structure, designated health service revenue generated by all of the subject physician was placed in a compensation pool and divided among the physicians based on a proportion of their personally performed professional services. The Hospital was attempting to argue that this manner of dividing designated health service revenues between the physicians was not based on the “volume or value” of referrals for designated health services.

Those that are familiar with physician compensation structures and the Stark Law will understand that it is generally permissible for an independent physician group to compensation group practice physicians based on designated health service revenues in this manner. However, different rules and exceptions apply in the case of hospital employed physicians. This distinction in compensation structure between hospital-employed and group practice employed physicians has been well delineated in the Stark Law regulations and regulatory comments.

Given the regulatory history of this issue, the outcome in Halifax does not seem to be particularly surprising. Halifax put forth a potentially legitimate argument.  However, CMS has made it clear over time that hospital employed physicians cannot be compensated for their designated health services or services that are billed “incident to” their physician services. Hospital employed physicians can be compensated based on personal production from their own professional services; but even that compensation structure has limits. The Halifax outcome should enforce the concepts that we already know from the Stark Law; Hospitals cannot pay their employed or contracted physicians based on the technical component flowing from their services.

The other lesson to be reinforced by the Halifax case is that the cost of settling these cases, even if you believe there is an argument supporting your compensation structure, can be extremely high; in this case $35 Million (with 6 zeros). Unless you have this kind of money hanging around, it pays to structure compensation to employed physicians without inclusion of designated health service revenues as part of the consideration.

Fair Market Value Appraisal Judgment

Tuesday, February 18th, 2014

Fair Market Value Compliance – The Exercise of Appraisal Judgment

fair market value physician compensation appraisalAssessing Whether an agreement complies with fair market value is one of the most difficult compliance functions that exists.  Other issues have relatively clear answers; either something was billed correctly or it was not; adequate documentation to support the services that are billed either exists or it does not.  But fair market value determinations are largely a subjective determination.  Fair market value appraisals, particularly in the health care industry, involve more of an out than a science.

Looking at fair market value survey data is fairly easy.  Valuation gets much more difficult in situations where there is no true comparable.  Oftentimes, this is the case in remote areas, HPSAs, and other rural areas.  There is no benchmark data that provides a good comparable for the small hospital physician who does everything from delivering babies, treating nursing home patients to performing surgery and treating trauma patients.  These “jack of all trades” are often undervalued due to inappropriately limiting their value by not making appropriate adjustments to “comparables.”

Survey data is skewed against “small hospital” physicians.  Appraisers who are not familiar with the unique value that is provided by these physicians will often inappropriately assign benchmark amounts based only upon primary care.  This overlooks the true practice mix of these providers.  These providers are often longtime fixtures in the community.  They are the real face of the local health care community.  Often these physicians have practiced in the community for 20 plus years.

At some point someone may suggest (quite appropriately I may add) that the physician’s salary be reviewed based on fair market value screens.  If appropriate judgments of true value are not made, these valuable physicians will almost inevitably be found to be compensated above fair market value.  Is this because these physicians are paid too much or are out of compliance with the Stark Law?  I would argue vociferously that this is not the case.  Sure, there could be some instances where the physician is engaged in an ongoing referral scheme.  In most cases however, you would expect that these physicians would be well paid based on their longevity, experience, diverse services, expanded role, and importance to the community.  If you add to this mix the fact that it may be nearly impossible to replace the physician because of this remote or rural nature of the area that is served, justification for compensation well over the highest benchmark percentage is often very justifiable.

Appraisers who apply an overly strict adherence to benchmark data without making appropriate adjustments to reflect the reality of the overall situation do a great disservice to both the physicians and the hospital.  Appraisals that do not consider all factors can lead to the hospital inappropriately making a self disclosure when the compensation paid to the physician is quite justifiable when all circumstances are appropriately considered.  Once self disclosure is made, there is no turning back.  The self disclosure process is not a form for the objective determination of fair market value.  Rather, the self disclosure is an admission of wrongdoing.  The only issue involved is how the institution that provides the designated health service will settle the case.  The temptation in these cases is strong to throw the communities most crucial health care resource “under the bus.”

The medical appraisal business is not easy.  Sometimes it is even more difficult because of the need to deviate from benchmarks and use judgment to arrive at a result that would accurately reflect value.  Appraisers are paid for the appropriate exercise of their judgment.  If the process was based simply on the calculation of compensation based on strict conformity to benchmark data, there would be no real need to pay for an appraisal.  Fair market value would simply be a matter of math.  Appraisers are not trained in the skills of math.  It is assumed that they have the necessary basic math skills.  Physician compensation appraisers are paid for the appropriate exercise of their judgment.  This judgment requires a weighing of all necessary factors and a subjective placement of value on these factors.

Fair Market Value Analysis of Physician Compensation

Friday, August 30th, 2013

The Importance of Context In Fair Market Value Reports

physician compensation fair market valueFair market value assessment of highly compensated physicians can be critical.  Context is crucial to a complete understanding of the nature and approach of the appraisal.  For example, compensation studies for the purpose of determining future compensation of a physician group that is contracting with a hospital requires a different approach from a report that is applicable to determining the maximum overall fair market value screen applicable to employee physicians who are paid on production basis.

Hospitals who are employing physicians must ask two slightly different questions when analyzing employed physician compensation.  The first question is what the maximum amount of overall compensation that can be paid without disqualifying DHS revenues from reimbursement under the Stark Law.  This analysis does not consider whether one component of compensation may be above fair market value but is rather focused on overall value.  For example, clinical compensation may be high on the fair market value scale but defined administrative or call responsibilities may be low.  Total combined compensation may still comply with the Stark Law when the two are netted out against each other.

This is an error we often see in appraisal reports that limit each segment of services to a fair market value screen.  Many reports fail to appropriately consider uncompensated or under-compensated services and therefore end up grossly understating fair market value of overall services.

The Stark Law employment exception only requires an overall screen and does not limit the services that can be valued to clinical compensation.  This is an example of why the context definition is important.  Undervaluation can have significant impact on hospital finances as the conclusions that are reached may lead to a self disclosure that is unnecessary if an appropriate context was considered for the salary report.  Once self disclosure is made, there is no further analysis of the consequences.  The consequences of course involve repayment by the entity of DHS service revenues that result from tainted referrals whether tainted referrals turns on whether compensation exceeded maximum fair market value.

Government Intervenes In Physician Compensation Case Alleging Compensation For Referrals

Wednesday, July 10th, 2013

Physician Compensation Stark LawThe Department of Justice has announced that it will intervene in a  False Claims Act lawsuit against a Mobile, Alabama based health system and diagnostic facility.  The lawsuit alleges that the provider billed Medicare for services referred by a group of physicians, in violation of the Stark Law and Anti-Kickback Statute.

The Stark Law forbids a clinic or hospital from billing Medicare for certain services referred by physicians who have a financial relationship with the entity.  The Anti-Kickback Statute prohibits offering, paying, soliciting or receiving remuneration to induce referrals of services or items covered by federal health care programs, including Medicare.  The lawsuit alleges that the physician group was improperly paid  compensation that included a percentage of the money collected from Medicare for tests and procedures the doctors referred to the clinic.

The original lawsuit was filed in  2011 by a former physician in the group under the qui tam, or whistleblower, provisions of the False Claims Act.  Those provisions authorize private parties to sue on behalf of the U.S. and receive a portion of any recovery.  The act also permits the government to intervene and take over a lawsuit.   In this case, the government has decided to intervene in the case.

The government’s investigation has been a coordinated effort by the Department of Justice, Civil Division, Commercial Litigation Branch; the U.S. Attorney’s Office for the Southern District of Alabama; the Department of Health and Human Services Office of Inspector General; and the FBI.

This case illustrates the risk of providers of designated health services compensating physicians based on the value of referrals.  The Stark Law permits physicians to be compensated based on their personal production in most cases.  However, when payments cross the line to include the fruits of referrals for the technical component of their services, the Stark Law is implicated.  It appears that in this case, the compensation arrangement is alleged to have crossed the line to include the value of referrals.

Toumey Stark Law Case – Verdict In Second Toumey Trial

Friday, May 17th, 2013

Toumey Stark Law Case – Second Trial Finds Stark Law Violation

Toumey Stark Law Case Second Jury VerdictVirtually every lawyer in the country who is involved with physician compensation and Stark Law issues were waiting anxiously over the past couple of weeks for a jury verdict in the second Stark Law trial involving Toumey Healthcare System.  On May 8, 2013, we all got what we had been waiting for; a jury verdict in the much heralded case alleging Stark Law violations that were brought by a physician whistleblower.  Once the case went to jury, a verdict was reached in less than five hours.

The case alleged that Toumey had paid 19 part-time surgeons on its staff based on the business that the surgeons generated for the hospital.  The first trial in the case found that Toumey had violated the Stark Law and assessed $45 million in damages under the Federal False Claims Act.  An appellate court set the first judgment aside which lead to the necessity for a second trial.

A bulletin posted on the website of the firm that handled the case for the physician whistleblower states that Toumey could now be liable for up to $357 million under the False Claims Act.  The actual damages from the second verdict have not yet been determined.

We will be providing further analysis of this decision and possible implications for physician compensation arrangements with hospitals in future blog posts.  In the meantime, feel free to contact John Fisher at Ruder Ware Health Care.

Physician Compensation – Stark Law – Covenant Healthcare Settlement

Wednesday, February 15th, 2012

Physician Compensation – A Look In Time At The Covenant Healthcare

Waterloo, Iowa.  Population 70,000 (give or take).  Who would expect that this town would be the focal point of one of the biggest physician compensation/Stark Law settlements in history.

In 2009, Covenant Medical Center in Waterloo agreed to pay the Federal government $4.5 million to settle charges that it had overpaid five doctors.  The Stark Law is violated if a physician is paid in excess of fair market value for services or if the compensation is not commercially reasonable.

The Affordable Care Act made it clear that Stark Law violations can trigger liability under the Federal False Claims Act.  The result is that amounts that are billed under the “cloud” of Stark can lead to treble damages plus up to $11,000 per claim.  If the Stark Law violation involves payment in excess of fair market value to a physician, the basis for assessing damages can be three times the amount of the physician’s billing plus up to $11,000 for each claim.  The application of the False Claims Act to Stark Law violations has placed a renewed focus on physician compensation issues.

In the Covenant care, the government alleged that the five physicians were paid commercially unreasonable compensation, far in excess of fair market value.  The hospital denied any wrongdoing but paid the government $4.5 million plus interest to settle the claims.

 Physician compensation has become a more sensitive issue than it ever was in the past.  The Waterloo, Iowa case demonstrates that smaller towns are not immune from the impact of the Stark Law and False Claims Act.

Physician Compensation Stark Law Compliance Excessive Compensation

Monday, January 23rd, 2012

Physician Compensation – Recent Cases Illustrate Risks of Excessive Payments Under Medical Director Agreements

Physician compensation is changing along with the reconfiguration of payment incentives within the health care industry.  Physician compensation issues may be one of the biggest issues affecting the relationship between health care systems and physicians as these changes continue.  These changes are reflected in a number of recent decisions that provide some guidance on the legal topics that affect physician compensation.

One of the most important laws that affect physician compensation for physicians who are employed by a health care system is the Federal Stark Law.  The Stark law prohibits financial relationships between physicians and other providers to which the physicians make referrals for “designated health services.”  It is fair to say that virtually every relationship between a physician and a hospital will involve the referral of designated health services.  Therefore, the Stark Law will nearly always come into play and the payment pursuant to the employment agreement must be structured to comply with the Stark Law.

The Stark Law is a strict liability statute and does not require a showing of intent to violate its terms.  It is implicated based on referrals unless there is an applicable exception that applies to the referral arrangement.  In the case of employed physicians, there is an exception that covers bona-fide employment relationships that can be used to exempt the relationship provided that all of the conditions of that exception are strictly followed.  A bona-fide employment relationship must meet all of the following requirements:

  • the employment must be for “identifiable services”
  • the amount of remuneration must be consistent with fair market value
  • the amount of the remuneration cannot be determined in any manner that takes into account the volume or value of referrals by the referring physician
  • the compensation must be “commercially reasonable” even if no referrals were made between the physician and the organization

The recent cases have focused on the issue of “fair market value” and “commercial reasonableness” of the compensation paid from the hospital or health system to the employed physician.  These cases provide some guidance and parameters to examine when negotiating physician compensation.  However, the factual situations in the recent cases are unique and the extent that they will be of guidance to any specific compensation issue is uncertain.

The most recent case United States v. Campbell, 2011 U.S. Dist. LEXIS 1207 (2011) and arises out of the United States District Court of New Jersey.  The case involved the University of Medicine and Dentistry of New Jersey (UMDNJ) which was at risk of losing its Level I Trauma Center license due to a shortage in the number of cardiac procedures performed at the facility.  In order to secure its Level 1 Trauma Center status, UMDNJ developed a recruitment initiative directed towards increasing the number of cardiothoracic patients being served at the hospital.  This initiative focused on entering part-time employment arrangements with local cardiologists who were in a position to refer cardiology patients to the hospital.

The part time arrangements involved entering Clinical Assistant Professor Agreements with these cardiologists which enumerated a list of teaching, lecturing and research activities that the physician were to perform.  The physician in turn received salaries ranging from $50,000 to $180,000 per year.  The physician at issue in the case, Dr. Campbell, entered a part time employment agreement to perform a specific list of teaching related services for UMDNJ.

The US Attorney brought charges against Dr. Campbell and UMDNJ based upon alleged violations of the Stark Law and the Anti-kickback Statute.  The government contended that the primary service actually performed by Dr. Campbell under his part time employment contract was to refer cardiology patients to the hospital and that the contract was actually a sham arrangement designed to cover up payments for referral of cardiology patients.  Through the process, a federally appointed monitor reviewed the arrangements and concluded that the hospital’s program was an illegal device to compensate cardiologists for patient referrals.

The Court in the case was faced with deciding whether the case should be dismissed for failure to state a claim.  In refusing to dismiss the claims made by the government, the Court analyzed the Stark Law employment exception which requires that the payment of compensation to an employee who is in a position to make referrals for designated health services be at fair market value for the services  that are actually provided and that the arrangement be commercially reasonable.

The Court refused to dismiss the case noting that if “there was no requirement to actually perform the duties of [the contract] then the compensation could not be the fair market value for those services….”  The Court concluded that the payment above fair market value for the services that were actually required to be performed would serve some other purpose, such as compensation for referrals.  In the Court’s opinion, the excess payments would violate the Stark Law and would make claims made to Medicare for those services false claims.

This case points out an important point under the Stark Law fair market value employment exception.  Even though there might be a detailed listing of obligations under a contract, there must be some assurances that those services are actually provided.  If the services are not provided, the excess compensation will be considered to be for another purpose such as the inducement for referrals.  As a compliance matter, health care organizations should monitor their contracts to assure that the specific services are actually being performed.  The employed physician and the facility have equal interest in assuring this as both would be in violation of the Stark Law if the services are not provided.

A recent criminal case under the Anti-kickback Statute provides another illustration of the risks associated with medical director agreements that are not properly monitored or, in extreme cases are entered for improper purposes.

The recent criminal case of United States v. Borrasi further reinforces this point and illustrates that there are cases where “sham” medical director payments can lead to criminal liability under the federal anti-kickback statute.  In Borrasi, a physician was convicted criminally under the Anti-kickback Statute for conspiring to receive bribes from a nursing home for referring patients to the facility.  The jury found that the physician and others were placed on the organization’s payroll as “service medical directors.”  They were provided with compensation for a list of services that, according to testimony at trial, they were never really expected to perform.  There was also testimony from employees that the “medical directors” were rarely seen around the facility and that time reports had been falsified in order to make it appear that they performed services at the facility.

In addition to compensation for what were found to be “sham” medical director services, the nursing home also paid for a secretary for the physician’s company and paid lease payments for the building owned by the physician.  There was also testimony that the physician had said to others that he was receiving “free money” from the facility.

From the published case, it appears that the facts in this case were extreme.  However, the case holds value because it further indicates the risks involved with medical director contracts.  In this case there were criminal consequences for the “sham” medical director agreement.  In Borrasi, the government carried its burden of demonstrating that the payments were intended to induce referrals.  In order to prove a criminal conviction, the government must show that “intent” to induce referrals was one of the purposes for the payment arrangement.

Cases where intent cannot be proved may still lead to liability under the Stark Law.  Although no one goes to jail under the Stark Law, the financial consequences can be severe and involve repayment of reimbursement and civil penalties.  Penalties are not inconsequential and can be large enough to cause a great deal of financial damage to the party who is found to be in violation.

John H. Fisher

Health Care Counsel
Ruder Ware, L.L.S.C.
500 First Street, Suite 8000
P.O. Box 8050
Wausau, WI 54402-8050

Tel 715.845.4336
Fax 715.845.2718

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