On February 8, 2016, the United States District Court in the Southern District of Georgia approved the settlement agreement ending a whistleblower lawsuit initiated on March 9, 2011 against Memorial Health University Medical Center (“Memorial Medical Center”) and three affiliated entities in a case that highlights the Department of Justice’s (“DOJ”) vigorous scrutiny of physician compensation arrangements. The non-profit hospital, based in Savannah, Georgia, agreed to pay $9.89 million with $2.29 million going to the relator, the hospital’s former president and CEO, who initiated the action under the qui tam provision of the False Claims Act (“FCA”). The settlement is the largest civil healthcare fraud recovery recorded by the U.S. Attorney’s Office for the Southern District of Georgia.
The underlying lawsuit alleged that Memorial Medical Center acquired a physician practice for compensation in excess of fair market value (“FMV”), and that the acquisition resulted in a projected financial loss of approximately $670,000 per year over a five-year period. According to the complaint, the defendant hospital engaged in a complex scheme to compensate its employed and contracted physicians at rates above FMV in return for the promise of patient referrals–thereby violating both the federal Anti-Kickback Statute (“AKS”) and the physician self-referral law (“Stark Law”), and tainting Medicare and Medicaid payments.
Hospital System CEO Discovered Excessive Payments and Notified the Board
Relator Phillip Schaengold was hired as the president and CEO of Memorial Health, Inc. and Memorial Medical Center (collectively, “Memorial”). Schaengold allegedly discovered a scheme through which Memorial overpaid physicians, as detailed below:
- Excessive Bonus Compensation: Schaengold claims that erroneous data collection led to the payment of excessive bonuses ($4.2 million to employed physicians and $3.0 million to community-based physicians).
- Above-Market Base Compensation: Schaengold also initiated an investigational review of Memorial’s physician compensation, and allegedly determined that “several” physicians received approximately $1.8 million each year in excess compensation which was inconsistent with FMVguidelines.
The most troubling portion of the Relator’s allegation appears to be that Memorial’s Board of Directors may have known about the excessive payments and simply ignored these concerns. Schaengold claims to have repeatedly advised several Board members of the inflated bonuses and his investigation into the above-market compensation. He also alerted Board members about the potential legal consequences, including potential fraud and abuse risks associated with these payments, and the hospital system’s exposure under the FCA. The Board, however, allegedly ignored these concerns. Schaengold asserts that the Board rejected his revised compensation model, and instead, voted to extend the potentially improper compensation agreement with certain provider groups. The complaint also points to the Board’s financial projections that removal of certain provider groups would result in downstream volume and revenue losses as evidence that the Board recognized the unlawful referral scheme.
After rejecting Schaengold’s revised compensation proposal, on January 5, 2011, the Board terminated his employment. Following his termination, Schaengold refused to release claims under the FCA, the Stark Law and the AKS, and the Board allegedly re-classified Schaengold’s discharge as a termination “for cause.”
Evaluating Physician Employment Arrangements in Relation to Recent Stark Law Settlements
Traditionally, physician employment and compensation agreements have posed less risk than independent contractor arrangements. As the Memorial Medical settlement suggests, however, significant and persistent losses from employed physicians may be a factor in a whistleblower’s claims of non-FMV, non-commercially reasonable compensation.
The Memorial settlement represents a DOJ enforcement trend where they take the position that paying physicians at a loss is automatically “not commercially reasonable” and therefore violates the Stark Law. Yet, the fact that a hospital-affiliated physician practice operates at a loss does not mean that the Stark Law has been violated. In fact, a hospital-affiliated physician practice may lawfully operate at a loss as long each physician’s employment agreements fits squarely within the Stark Law’s “bona fide employment relationships” exception which requires the hospital to have substantive justification for the compensation paid under the agreements. In many cases, especially in situations where a health system is providing comprehensive and coordinated care for its patients, some physicians will operate at a loss in order to serve the entire community. This approach, especially in light of the Affordable Care Act, Accountable Care Organizations, and coordinated care, is commercially reasonable. In fact these arrangements are encouraged, and in many cases mandated, by the government. Therefore, DOJ’s position in these cases contradicts Medicare policy and, more importantly, is inconsistent with the regulatory definition of commercial reasonableness.
Lessons from Recent Settlements
Physician compensation arrangements have been targeted by the Office of the Inspector General following a fraud alert released in June 2015 highlighting the agency’s renewed interest in physician compensation agreements. This case, and others like it, provides several takeaways for health care organizations:
- All compensation arrangements with physicians should be vetted to ensure that payments to physicians reflect FMV and are “commercially reasonable” for bona fide services that the physicians actually provide. Compensation arrangements should not take into account the volume or the value of anticipated or actual referrals.
- Health systems and hospitals should ensure that all compensation contracts with physicians are in writing, signed by all parties, and do not take into consideration the volume or value of referrals. Internal documentation should be retained to support the FMV nature of the compensation. This documentation should include the manner in which the compensation was determined, the surveys utilized, and whether an opinion from a third party valuation firm evaluated the contracts.
- As part of periodic compliance reviews, hospitals and physicians should ensure that all agreements meet an exception under the Stark Law and comply or substantially comply with a safe-harbor to the Anti-Kickback Statute.
- Each compensation relationship should be periodically reviewed to ensure the compensation is still consistent with FMV and complies with applicable law.
- Hospitals should consider obtaining third-party support for physician compensation arrangements where the physician is unusually productive or the compensation structure is outside normal practice.
- Providers must exercise reasonable diligence in timely investigations of potentially non-compliant practices and policies. Upon discovery that the improper practice or policy has led to a potential overpayment, providers should consider voluntary disclosing such violations to the appropriate government agencies.