physician compensation arrangement

On October 9, 2019, the US Department of Health and Human Services Centers for Medicare and Medicaid Services (CMS) published proposed changes to the physician self-referral law (Stark Law). Physician practices are subject to the Stark Law, and the proposed rule includes an important clarification affecting certain group practices’ compensation models.

CMS proposes to revise its regulations to clarify the special rule for group practice distributions of income from Stark designated health services (DHS). Compliance with this special rule is a requirement of the Stark Law’s definition of a “group practice,” and compliance with the “group practice” definition is generally necessary for physician groups to have the protection of the in-office ancillary services (IOAS) exception to the Stark Law. The special rule for sharing DHS profits permits a group, or a pod of five or more physicians in the group, to pool their DHS income and distribute the pool in a manner that does not directly take into account the volume or value of any physician’s referrals for DHS.

For years, there has been a debate within the health law bar regarding how these DHS income pools can be structured under the special rule. One position is that the special rule permits pools to be organized by DHS, meaning, for example, that if the group’s only DHS are imaging and physical therapy services (PT), the group can have one pool for diagnostic imaging income in which one set of five or more physicians participate, and another pool for PT income in which another (perhaps overlapping) set of five or more physicians participate (split-DHS income pooling). The other position is that the special rule requires that the DHS income pool must include all the DHS generated by the participating physicians. In such a case, the imaging and PT pools described above would have to be consolidated (all-DHS income pooling).


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In U.S. ex rel. J. William Bookwalter, III, M.D. et al. v. UPMC et al., the US Court of Appeals for the Third Circuit endorsed two controversial interpretations of the Stark Law’s “volume or value” standard, known as the correlation theory and the practice “loss” theory. Specifically, the court held that the relators had made out a plausible allegation of an indirect compensation arrangement between surgeons and University of Pittsburgh Medical Center (UPMC)-affiliated hospitals. The court held that the relators were entitled to proceed to discovery because of the correlation between the amount of the productivity-based compensation paid to the surgeons and the volume of the surgeons’ referrals for inpatient hospital services (e.g., operating room and hospital room and board). Repeatedly invoking the concept of “where there is smoke, there might be fire,” the court also stated that the fact that at least three of the surgeons allegedly received compensation in excess of the hospital’s collections for their professional services supported the plausibility of the relators’ allegation that the compensation “takes into account” the volume or value of the physicians’ referrals to the hospitals.

If this holding sounds familiar, that is because it is based on the same logic advanced by the Fourth Circuit in U.S. ex rel. Drakeford v. Tuomey, the infamous Stark Law/False Claims Act (FCA) case that first put the hospital industry on notice that common productivity-based compensation to hospital-employed surgeons could implicate the Stark Law. While distinguishable from Tuomey, UPMC has important implications for hospitals and health systems that employ surgeons.

Summary of Allegations and Procedural History

In UPMC, the plaintiffs alleged that the UPMC hospitals where the neurosurgeons performed cases each had an indirect compensation arrangement with the surgeons and thus triggered the Stark Law’s prohibitions against referrals and the associated Medicare claims for reimbursement. Based on this alleged Stark Law violation, the plaintiffs claimed that the hospitals violated the FCA by submitting false claims for hospital services referred by the surgeons. The surgeons were paid a base salary and a productivity bonus of $45 per work RVU above a specified target. If a surgeon did not hit the target, her base compensation would be reduced the following year. The government had intervened in and settled another aspect of the case, but declined to intervene on these allegations.

The compensation arrangement between the surgeons and the UPMC hospitals was evaluated as a potential indirect compensation arrangement because the surgeons were employed by UPMC-affiliated medical practices, not directly by the UPMC hospitals. For Stark Law purposes, an indirect compensation arrangement requires, among other things, that the compensation paid to the physician “varies with” or “takes into account” the volume or value of the physician’s referrals to the hospital. In this case, the plaintiffs alleged that the compensation greatly exceeded fair market value and that at least three surgeons were paid more than the hospital collected for their services. The plaintiffs also asserted that “[e]very time . . . [the surgeons] performed a surgery or other procedure at the UPMC Hospitals, the Physicians made a referral for the associated hospital claims pursuant to the Stark Statute.”


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On June 9, 2015, the Office of Inspector General of the Department of Health and Human Services (OIG) issued a new fraud alert concerning physician compensation arrangements and compliance with the federal Anti-Kickback Statute (AKS). While the fraud alert itself does not break new ground interpreting the AKS, it signals OIG’s steadily increasing scrutiny and