Hospitals and Physician Relationships – Navigating Stark, AKS and Fraud Risks (Part III of III)

Chief compliance officers at hospitals face a crushing burden of risks.  The HHS-OIG has vigorously scrutinized hospitals compensation of physicians, especially for potential anti-kickback and Stark law violations.  Most of these suspect situations involve compensation for physician practice groups. 

Unlawful compensation and influence arrangements have involved favorable leasing and facility payments, such as below-market office leasing arrangements in exchange for exclusive referral of patients to hospital facilities.  This is the classic case and numerous prosecutions – civil and criminal – have captured these unlawful agreements.

To avoid these risks, more hospitals are hiring physicians as employees.  But such arrangements create their own set of risks that can violate the anti-kickback statute and the Stark Law. 

Hospitals can pay physicians a salary as a legitimate employee.  The hospital can compensate the physician for providing patient care and other similar services.  Indeed, physicians can be paid bonuses based on their productivity.  However, hospitals have to take care in how they structure such compensation and avoid incentives for physician-employees to engage in over-billing, upcoding and other improper use of and billing for services.

If a physician-employee is paid substantially higher than fair market value or compensated based on number of specific services are provided, HHS-OIG (and potential federal criminal prosecutors) may view the compensation arrangement as a means to reward the physician for over-utilization or improper delivery of unnecessary high-cost services.  Such practices could be prosecuted as unlawful kickbacks and false claims violations.

Government regulators view physician payment arrangements where the hospitals suffers persistent losses as indicative of a unreasonable commercial arrangement in violation of the Stark Law.  If a hospital can justify compensation arrangements with its physicians (or specific physician practices) as commercially reasonable, the arrangement will fall within the Stark Law exception for “bona fide employment relationships.”  Where a healthcare system provides comprehensive and coordinated care, some physicians may operate at a loss in order to serve the entire patient mix.  Such coordinated care is arguable commercially reasonable despite the fact that an individual practice may be assessed as unprofitable.

Hospitals have to carefully craft and review physician compensation arrangements to

  • Ensure they are commercially reasonable, reflect fair market value and compensate for actual services provided;
  • Avoid consideration of the volume or the value of anticipated or actual referrals;
  • Memorialize such arrangements in formal written agreements;
  • Ensure the specific arrangement is based on documented analysis of FMV calculation, including use of surveys and/or third-party valuations from consultants;
  • Confirm compliance with Stark Law exception and AKS safe harbor exception;
  • Subject physician compensation arrangements to periodic reviews to ensure continued adherence to FMV valuation;
  • Ensure adequate oversight and monitoring to identify potential non-compliant practices and policies and response to such non-compliance practices.

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