Kusserow’s Corner: New Stark Enforcement Sends Shockwaves through Hospitals

The Department of Justice (DOJ) is increasing its enforcement efforts focused on questionable physician arrangements. Qui tam “whistleblowers” are leading them to new False Claims Act (FCA) cases daily. In the last few months there have been two landmark FCA decisions involving the Stark Law, which have created strong shock waves throughout the hospital/physician community. The first was the $238 million award of damages after a jury trial against the Tuomey Healthcare System in South Carolina; and most recently, the resolution of legal action against the Halifax Hospital in Daytona, Florida. Where confronted with up to $1.1 billion in damages and civil penalties, Halifax Hospital decided upon a tentative $85 million settlement. These are the two largest cases in the history of the Stark Law. Both cases were similar on three points. First, they were initiated by “whistleblower” qui tam relators; second, the DOJ asserted that the hospital compensation of physicians violated the Stark Law’s prohibition against paying for Medicare referrals; and third, both relied upon opinions from outside counsel that the arrangements complied with the Stark Law.

The background on the Tuomey case was that the hospital entered into exclusive part-time employment arrangements with affiliated specialist gastroenterologist physicians to prevent these physicians from moving their outpatient services out of Tuomey’s ambulatory surgery center and into lower cost competing locations, some of which would be owned by the physicians themselves. The physicians agreed to enter into exclusive part-time employment agreements with Tuomey that included performing surgery exclusively in its facilities and paying them a bonus for productivity; and thus, keep all of their outpatient business at Tuomey in exchange for very favorable compensation arrangements. In the case of Halifax, the physicians were employees of the hospital and were paid from a bonus pool in proportion to their personally-performed services. The allegations were that the hospital’s compensation of its six employed medical oncologists violated the Stark Law. At issue was the oncologists’ bonus formula which the DOJ alleged that paid each physician a portion of an incentive pool equal to 15 percent of the “operating margin” for the hospital’s medical oncology program. The pool included not only the physicians’ billings for the professional services they personally performed, but also the fees earned by the hospital for the physicians’ referrals to the hospital. In addition, the case included neurologists who the government alleged were not paid at fair market value (FMV) rates.

What Hospitals Need to Do

Tom Herrmann, JD, who served more than 20 years with the HHS Office of Inspector General (OIG) Office of General Counsel and six years as an Appellate Judge for the Medicare Appeals Board before becoming a compliance consultant, was queried on the subject. His career focused on issues related to the implications under the Anti-Kickback Statute and Starks Law of hospital/physician arrangements. Herrmann stated that since the Tuomey case and now with the Halifax case, there have been an ever-increasing number of inquiries as to the appropriateness of current hospital/physician arrangements and efforts to ensure compliance with both the Anti-Kickback Statute and Stark Law. He observed, “although physician arrangements have long been the top enforcement priority of both the OIG and DOJ, most Compliance Officers have not addressed this high risk area in their ongoing auditing and review activities. In part, this omission is due to the fact that physician arrangements are viewed as the responsibility of legal counsel and therefore outside their scope of the compliance officer’s authority.” Herrmann says, “this is definitely not the case, but the reluctance of Compliance Officers is understandable.” He notes, “the arrangements at both Tuomey and Halifax were prepared by legal counsel and they were not viewed by the government as in compliance with the law.” His advice to hospitals is to review all existing and proposed physician arrangements to ensure that they meet applicable regulatory and legal standards. He believes this kind of review is best done by qualified, independent experts that avoid any concern about offending internal parties, responsible for developing and implementing agreements. He also suggests that this type of review may be best done under direction of legal counsel. At a minimum this review include encompass the following:

  • Has the business necessity for an arrangement been established?
  • What is the basis for selection of the physician?
  • Is there a supportable fair market value (FMV) determination for compensation?
  • Does the arrangement meet the “Commercially Reasonable” standard?
  • Does the written agreement meet the requirements of the “personal services” safe harbor under the Anti-Kickback Statute or an exception to the Stark Law’s coverage?
  • How is physician performance been evidenced in order to receive payment?

In addition, Hermann states, “it is critical that there is a process in place to evidence and ensure physician performance under the arrangement, prior to any compensation being paid. This can take the form of a time sheet or invoice certifying performance of the specified physician services. Review of these factors will help ensure that hospital/physician arrangements pass compliance muster.”

Richard P. Kusserow served as DHHS Inspector General for 11 years. He currently is CEO of Strategic Management Services, LLC (SM), a firm that has assisted more than 3,000 organizations and entities with compliance related matters. The SM sister company, CRC, provides a wide range of compliance tools including sanction-screening.

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Copyright © 2014 Strategic Management Services, LLC. Published with permission.