Keep Physician Compensation Contracts in Compliance to Avoid Stark Law Violations

By Calvin Swartley
Director
Moss Adams

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Original Publish Date: January 8, 2019

Determining physician compensation requires a multifaceted approach and annual auditing to make sure hospitals and health systems don’t expose their organizations to fraud and abuse claims by potentially and inadvertently violating the Stark Law and anti-kickback statute.

Over the past decade, an increasing number of hospitals employed physicians to augment their networks and leverage negotiations with insurers.

Following the increased regulatory demands of the Affordable Care Act, and exacerbated by the shift from fee-for-service to value-based reimbursement models, independent physician organizations are overwhelmed with technological and regulatory burdens. Addressing these concerns can consume valuable practice time. Failing to do so has resulted in emerging penalties and settlements due to physician agreements or contracts violating Stark and anti-kickback regulations.

Cautionary Tales

In fields outside of health care, it would make sound business sense to compensate professionals for their volume of referrals generated. Under Stark Law, however, compensating physicians based on their referrals is a federal crime with steep penalties.

Several high profile settlements made headlines in recent months and are a dire reminder for health organizations to ensure their physician compensation agreements are absolute, and that physicians aren’t paid above fair market value (FMV) or granted below-market lease payments or office rent.

In October 2018, two prominent cases emerged for Stark Law and Anti-kickback violations related to physician agreements. One involved a Montana hospital along with six of its subsidiaries and related entities for allegedly overpaying more than 50 part-time employed specialists, including cardiologists, gastroenterologists, and surgeons. The hospital was accused of improper compensation agreements with the doctors based on referrals to its hospitals. The hospital and its related entities agreed to pay $24 million to resolve allegations that they violated the False Claims Act by paying physicians more than FMV and by conspiring to enter into arrangements that improperly induced referrals, the Department of Justice announced. A second Michigan hospital reached an $84.5 million settlement to resolve allegations claiming eight referring physicians received above-fair-market-value compensation and below-fair-market-value rent under the False Claims Act of improper relationships.

Prohibited Services

Stark Law poses a challenge for hospitals and health systems in relation to FMV because of the explicit requirement that transactions with a physician or physicians group follow a prudent business arrangement absent referrals. It also highlights the importance of considering compensation services or arrangements that could be prohibited. It’s imperative to be careful to not wrap in other types of compensation into a “compensation arrangement” which has specific definitions as outlined in the regulations. These include:

Rental of office space or equipment
Bona fide employment relationships
Personal service arrangements
Physician incentive plans
Physician recruitment
Isolated transactions such as one-time sale of property
Certain group practice arrangements

The Center for Medicare & Medicaid Services (CMS) and the Office of Inspector General (OIG) established fraud waivers with respect to physician incentives based on money, goods, or services provided to referring physicians for those participating in accountable care organizations (ACO), clinically integrated networks, alternative payment models, and value-based incentive programs such as the Medicare Shared Savings programs.

As organizations expand their participation in value-based programs, physician compensation and other arrangements need to be carefully reviewed, especially if physicians participate in those programs as well.

Compensation Models

Often a physician’s compensation plan or arrangement is based on their relative value units (RVU) or work relative value units (wRVU).

RVUs are the government’s mechanism to measure the overall consumption of resources committed by a provider for any of the many individual medical procedures and services, while a wRVU is a component of the total RVUs that represent the estimated work completed by the physician or provider(s). Many payers utilize RVUs as payment. Hospitals, health systems, and other health care entities utilize wRVUs as a method to track productivity or performance. This allows for the physician work to be measured on professional productivity and not technical services.

The complaint against the Montana hospital previously referenced alleged that part-time specialists, including gastroenterologists, surgeons, and cardiologists, were paid based on volume of their referrals and without regard to their RVUs, according to an October 2018 Report on Medicare Compliance. Physicians compensated above their positive economic contribution should be scrutinized to confirm they aren’t compensated based on referrals or admissions. The hospital lost money on a subset of physicians from fiscal year 2014 to 2016. In 2015, $29.7 million in losses were offset by hospital profits from $41 million in referrals by employed physicians.

One method to reduce risk is to make sure the physician compensation and value per wRVU are properly valued and additional services are validated to the overall package.

Fair Market Value

The valuation process for determining physician compensation begins by understanding FMV.

FMV as defined by the American Society of Appraisers’ Business Valuation Standards Glossary:

The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller. The parties must act at arm’s length in an open and unrestricted market, when neither is under any compulsion to buy or sell, and when both have reasonable knowledge of the relevant facts.

Put in the context of a health care valuation, especially for transactions that could face regulatory scrutiny, it’s important to consider the FMV definition included in the provisions of Stark and anti-kickback regulations.

FMV under Stark Law:

The value in arm’s length transactions consistent with the general market value, where general market value is the price that an asset would bring as the result of bona fide bargaining between well‐informed buyers and sellers who aren’t otherwise in a position to generate business for the other party.

FMV can also be viewed as compensation that would be included in a services agreement as a result of bona fide bargaining between well‐informed parties to the agreement who aren’t otherwise in a position to generate business for the other party, on the date of the acquisition or at the time of the services agreement.

Commercial reasonableness should also not be overlooked when creating and justifying physician arrangements.

To further complicate physician compensation, however, no single, universally accepted definition of commercial reasonableness exists. Rather, guidance can be ascertained from the Internal Revenue Code (IRC), Treasury regulations, other IRS publications and pronouncements related to reasonable compensation from the OIG Advisory Opinions and pronouncements, anti-kickback regulations, the US Public Health Code, and pertinent case law.

Take Action

Assuming the original physician employment agreements are compliant, organizations must be diligent and perform regular internal audits or monitor their contractual agreements.

Compliance Steps

Review annually and define FMV for each specialty or unique physician’s compensation. If additional services are provided, the entire physician package would also need to be assessed to establish if it meets FMV.
Make sure data is readily available and develop succession plans that account for key departures and talent development at multiple layers within the organization.
Identify and review other compensation related arrangements, such as professional services agreements (PSAs), management services agreements (MSAs), and other contracts that may require FMV assessments.
Review investment and investor physician agreements. Hospitals must identify every owner and investor and implement procedures requiring referring investor and owner physicians to inform patients of their ownership interests and disclose physician ownership on hospital’s website and advertising.
Verify and document legal review of physician contracts.
Educate key personnel of the regulations impacting physician contracting and the risks associated with non-compliance.
Document and review policies and procedures for physician contracting.

We’re Here to Help

To help keep your physician compensations and other agreements compliant and secure, contact a Moss Adams health care professional.

About the Author

Calvin E. Swartley is a Director in the Valuation & Litigation Services Group of Moss Adams LLP, with over 20 years of experience. Mr. Swartley’s responsibilities are focused in the business valuation area, specializing in health care valuation. He can be reached at (503) 471-1294 or calvin.swartley@mossadams.com.