ALERT

How Not to Structure Hospital-Physician Compensation Arrangements (A Stark Law Refresher for Anesthesiologists)

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October 7, 2013

The latest court decision in the eight-year whistleblower litigation against Tuomey Healthcare System in Sumter, South Carolina, giving rise to perhaps the largest amount of damages—$276,767,260—ever awarded against a community hospital, provides an opportunity to review some Stark law.  The September 30 order and opinion from the federal district court also demonstrates some compliance strategies to be avoided, notably shopping around for the most obliging legal advice.

Tuomey was faced, in 2003, with a new, competing ambulatory surgical center (ASC).  Fearing that it would lose cases to the ASC, the hospital entered into employment contracts with 19 surgeons and gastroenterologists.  The contracts contained the following terms:

• Part-time employment covering only outpatient procedures, which the physician was required to perform at Tuomey facilities;
• Initial salary based on the previous year’s collections;
• Productivity bonus of 80% of collections;
• Incentive bonus of up to 7% of productivity bonus;
• All malpractice premiums (not just for outpatient procedures) paid by Tuomey;
• Reimbursements for continuing medical education, periodicals and cell phones, and a
• Ten-year term with a non-compete clause extending two years beyond the end of the contract.

Negotiations with one orthopedic surgeon were so unsuccessful that he filed a qui tam lawsuit under the federal False Claims Act (FCA), alleging violations of the Stark law’s prohibition on physician self-referrals.  The United States Government intervened in the lawsuit, i.e., took over as plaintiff.  A jury trial in 2010 resulted in a $44.8 million judgment for the Government.  The Court of Appeals for the Fourth Circuit vacated the decision, because the factual question of the existence of a “financial relationship” prohibited by the Stark law had not been decided by the jury, and remanded it to the district court for further proceedings.

The case went to another jury in April 2013.  After a four-week trial, the second jury also returned a verdict for the Government, finding that Tuomey had submitted 21,730 claims since 2005 in violation of the Stark law and the FCA.  The total value of the unlawful claims was $39.3 million.  Applying the FCA’s minimum penalty of $5,500 per violation plus damages of three times the jury verdict, the district court entered judgment against Tuomey for nearly $277 million.  Dividing that amount by Tuomey’s 242 beds yields a debt of $1.44 million per bed.  On October 2nd, the court reduced the award to $237.4 million, which is still enough to bankrupt Tuomey.  Both the hospital and the Government have told South Carolina newspapers that they will pursue a post-judgment settlement.

Stark Law Issues

The Stark Law and regulations prohibit a physician who has a “financial relationship” with an entity such as a hospital from making a “referral” to that hospital for the furnishing of certain “designated health services” for which payment otherwise may be made by the Medicare program.  They define a “financial relationship” to include “a compensation arrangement” in which “remuneration” is paid by a hospital to a referring physician “directly or indirectly, overtly or covertly, in cash or in kind.”  Inpatient and outpatient hospital services, for which Medicare makes a facility payment, are on the list of “designated health services.”  At issue in the Tuomey litigation were the facility payments received for the 21,730 claims.

The regulations provide that certain compensation arrangements do not constitute a “financial relationship.” An indirect compensation arrangement, such as the one between Tuomey and the 19 contracted physicians, does not constitute a financial relationship if the compensation received by the referring physician is (1) equal to the “fair market value for services and items actually provided”; (2) “not determined in any manner that takes into account the volume or value of referrals or other business generated by the referring physician” for the hospital; and (3) “commercially reasonable.”

Tuomey had argued that there were no “referrals” from the 19 physicians.  It is true that when a physician initiates a service and personally performs it, that action does not constitute a referral under the Stark law.  The question before the court was thus whether the facility fee that results from a personally performed service constitutes a “referral,” and the court held that it did.

The implication for structuring hospital compensation arrangements is very broad:  in the case of inpatient or outpatient hospital services, a Stark analysis will generally be necessary because there will always be a referral of the facility component whenever the physician performs a professional service—unless that service is anesthesia.  In providing an anesthesia service, the physician receives a referral from the hospital; she or she does not make a referral by scheduling cases or ordering anesthetic agents.  This exception does not extend to pain specialists, who are the providers who decide to perform a procedure on a given patient and thus generate a facility fee for the hospital.

Tuomey also contended that there was no “financial relationship” and that the Stark law did not apply because the contracts with the physicians came within the exception for fair-market-value indirect compensation arrangements that do not take into account the volume or value of referrals.

The court disposed of the contention that the referring physicians’ compensation represented fair market value by noting that the packages paid 31% more than the physicians’ net collections as independent contractors.  Further, there was evidence that Tuomey had acknowledged that each time one of the physicians performed a procedure on a Medicare patient at the hospital, the physician’s compensation would increase.

The Court of Appeals decision in Tuomey affirmed the important principle that for a compensation arrangement to implicate the volume or value of referrals standard, it is sufficient that anticipated referrals be taken into account.  A hospital official had testified that she had calculated both the net present value of facility fees Tuomey would lose if the physicians took their outpatient cases elsewhere and the net present value of professional fees the physicians would earn for those procedures.

The decision left unanswered, however, the questions whether (1) arrangements where compensation exceeds collections always implicate the “volume or value” standard and (2) compensation that represents fair market value could nevertheless potentially be considered as “taking  into account” anticipated referrals because of the hospital’s business or strategic objectives for entering into the transaction.

Other indicators of a financial relationship that did not satisfy either the indirect compensation arrangement test, or the bona fide employment test, were the unusual nature of the part-time, partial services contracts; the ten-year length of the contracts and their non-standard non-compete clauses, and the fact that the full-time benefits received by the physicians were inconsistent with Tuomey’s normal policy of providing benefits to full-time employees only.

The basic guidelines for structuring compensation packages with referring physicians, then, are:

• The amount of compensation must reflect only the fair market value of the professional services being provided, and
• Anticipated referrals cannot be considered when establishing future physician compensation.

The “Advice of Counsel” Defense—Which Counsel?

The Tuomey case made much of the hospital’s apparent legal opinion-shopping.  The FCA requires that the defendant knowingly submit false claims to the Government.  The hospital contended that it lacked such knowledge because it relied in good faith on advice of counsel.

The attorney originally engaged to provide his opinion on the proposed contracts (Kevin McAnaney, formerly a high-ranking lawyer within the Office of the Inspector General), however, considered them risky in light of litigation pursued by the Government under similar circumstances.  Tuomey terminated McAnaney’s representation in September 2005 and directed him not to prepare a written opinion.

The next counsel retained by Tuomey gave it the opinion it wanted: that the Stark law did not apply to the contracts with the 19 physicians and specifically that the compensation did not take into account the volume or value of referrals.  The court found that the jury “could reject Tuomey’s advice of counsel defense once Tuomey decided to disregard McAnaney’s admonitions in favor of moving forward with the physician contracts.”

The lesson is clear.  An individual or organization is not free to retain multiple lawyers and then pick and choose among their contradictory views as to the legality of proposed conduct.  A secondary message is that directing counsel not to produce an adverse written opinion will not salvage the defense if, as happened in Tuomey, there are numerous e-mails written as if they were never going to be read by unintended parties.

After the District Court Decision

Several observers with Stark law litigation have commented that, because the second Tuomey jury deliberated for just five hours following four weeks of testimony and argument, the Government is going be more willing to take complicated cases before a jury and less eager to settle actions.  Defendants may lose leverage in pre-trial settlement negotiations.  Hospitals and physicians need to understand the importance of obtaining reliable fair market value analyses for arrangements that implicate the Stark law.

Tuomey lost no time in starting proceedings for another appeal to the Fourth Circuit.  If the amount of damages owed to the Government is substantially reduced in post-trial settlement, however, the appeal may be mooted.  The U.S. Attorney’s office that prosecuted the case has said that it remains open to settlement.  In Tuomey’s favor is the fact that the damage award is larger than the hospital’s total annual revenues—and the departure of Tuomey’s president and CEO and its COO, as well its lawyers.  Such changes at the top can help defendants demonstrate that they are serious about compliance.

Reading articles like this one, and paying attention to the Government’s position on important issues like fair market value, will help you show that you are serious about compliance—but we hope that that demonstration will never be necessary.

With best wishes,

Tony Mira
President and CEO

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