Modern Healthcare recently reported that Mercy Hospital Springfield and its affiliate clinic settled a case with the Department of Justice for allegedly submitting false claims to Medicare (Mercy pays $34 million to settle fraud, physician compensation claims). The case involved allegations of inflated physician compensation at an infusion center.

Modern Healthcare quoted the DOJ: “When physicians are rewarded financially for referring patients to hospitals or other healthcare providers, it can affect their medical judgment, resulting in a overutilization of services that drives up healthcare costs for everyone,” said acting assistant attorney general Chad Readler.

The hospital system acquired the infusion center from a group of oncologists. It was then able to charge hospital based fees and take advantage of 340(b) pricing for its medications. This is a common tactic used by hospitals to access favorable payments from CMS for hospital based services.

Inflated Physician Compensation

The DOJ alleged that the hospital paid the oncologists inflated amounts for management services following the transfer of ownership. This led to allegations of Stark Law and False Claims Act violations, ostensibly for exceeding fair market value and potentially encouraging referrals.

According to a National Law Review article regarding this case, the complaint alleged that “the compensation amount for the physician supervision work at the infusion center was approximately 500 percent of the wRVU for in-clinic work where the physician was actively involved in patient care… was not fair market value, nor was it commercially reasonable.”

Mercy agreed to pay $34 million to settle the lawsuit.

I addressed a similar issue in a popular post in 2016 (Physician Salaries and OIG Risk). I am re-publishing the content here for new readers. The previous article addresses inflated salaries. But the tactic of paying inflated management fees in order to maintain referral patterns has the same effect.

Pitfalls Involving Salary Surveys and OIG Allegations

I have been following news reports about recent OIG (Office of Inspector General) investigations related to physician compensation. These investigations have resulted in fines for alleged Stark Law and FCA (False Claims Act) violations. There seems to be more activity recently, including investigations in response to whistle-blower lawsuits.

Here is my take: Hospitals and health systems that use survey data (such as MGMA and AMGA) to set compensation levels for newly employed physicians are under intense scrutiny. This scrutiny results because:

• it appears that collections generated by the employed physicians do not support the salaries being provided, or
• salaries of newly employed physicians significantly exceed compensation previously generated in their independent practices.

The Stark and FCA regulations require that physicians that care for Medicare patients not be paid for referrals. And health systems must pay employed physicians based on fair market value. In the past, it was assumed that direct evidence of payment for referrals (e.g., emails, memos, board meeting minutes, etc.) was needed in order to demonstrate such a violation.

More recent cases seem to indicate that indirect evidence can support such an allegation. If a practice is not profitable, and a hospital system continues to pay a physician in spite of losing money on the practice, the OIG will infer that such losses are only being allowed as a result of referrals.

Example

It is fairly common for a procedural specialist such as a cardiologist or orthopedist to be paid at the median salary survey level. This may hold true even as their collections and worked RVUs only reach the 25th percentile or less.  This may represent a loss to the practice in excess of $100,000 per year.

I once asked a physician that was unable to build a practice to leave our medical group, in part because of his inability to generate the income needed to justify his salary (in spite of years of aggressively marketing his practice).

Such losses may be acceptable in situations where the system is the only provider of important services. But if board members or executives indicate that such losses are balanced by “downstream” services like imaging and surgical care, the OIG may interpret that as a violation of Stark and FCA regulations.

Recommendations

What can you do to reduce this risk as you hire new physicians into your medical group? Here are five suggestions:

1. Be aware of these issues and NEVER imply that your system can afford to pay a higher salary because of “downstream revenues.” Instead, focus on the actual patient encounters and procedures that the new physician must provide to generate collections needed to cover her salary.
2. Once hired, assist new physicians with marketing themselves. They need to build visits and worked RVUs as quickly as possible. Your organization can allow for a negative bottom line for a practice initially, but must strive for a financial break-even after a year or two.
3. Work closely with the billing office and teach new recruits about billing and coding. They must learn to appropriately capture the payments for the work that they do.
4. Provide employed physicians with regular (at least quarterly) reports listing the following: encounter volumes, coding distribution, billings, collections, worked RVUs and income and expenses for the practice. Teach physicians how to interpret these reports.
5. Require your management team to meet with their physicians regularly. During such meetings review their reports, track their performance, define goals for the practice and develop joint plans to meet those goals.

With teamwork, clear communication, and effective goal setting and execution, you should be able to:

• build a practice for your new physicians that they can be proud of,
• reach a financial break-even, and,
• avoid allegations of Stark and FCA violations.

[Disclaimer: I am not an attorney and I do not provide legal advice. I offer advice about management and leadership topics that can assist physician executives in addressing common management issues. You should always engage a qualified attorney in negotiating and executing employment agreements with physicians and in evaluating your organization's potential risk for OIG investigations related to physician employment.]

Summary

When recruiting highly trained proceduralists, it's easy to forget that their salaries cannot be linked to downstream (e.g., imaging and facility-driven) fees. There must be a reasonable relationship between the direct patient care revenues and expenses, and their compensation.

Is this a challenge for your group practice or health system? How have you addressed it?

What other employment issues have you had to address in your organization?

Until next time.

John Jurica