Productivity incentives, or “unit-based compensation,” have been a common feature of physician compensation plans for more than 20 years because they are generally considered safe from allegations of impacting the volume or value of referrals, as defined by Stark Law. This perception of reasonable safety was shaken by two key cases: the 2012 landmark case U.S. ex rel. Drakeford v. Tuomey Healthcare System Inc. (Tuomey) and the September 2019 case U.S. ex rel. J.William Bookwalter, III, M.D. et al. v. UPMC et al (Bookwalter). The rulings of these cases influenced the 2019 revisions to the Stark and Anti-Kickback rules and have implications for how provider organizations incorporate production incentives going forward.
Relevant Case Highlights
U.S. ex rel. Drakeford v. Tuomey Healthcare System Inc.
The Tuomey case spanned 10 years, due to a sequence of appeals, and was notorious for the precedent it set. The US Court of Appeals for the Fourth Circuit ordered Tuomey Healthcare System (THS) to pay approximately $237 million in fines after it was found guilty of violating the Stark Law and False Claims Act. The key violation was, essentially, that the hospital paid physicians based on the expected revenue/referrals they would generate. THS’s physician compensation structure included a productivity bonus that equaled nearly 80% of the physicians’ net collections for that year. Thus, the volume and value of anticipated services was deemed to be a key determinant of compensation and productivity incentives were too high, with insufficient professional collections. This structure implied that the compensation plan incentivized physicians for referrals.
One of the physicians brought his concerns to the attention of the hospital, but the hospital disregarded the information. The hospital also ignored advice from an outside counsel and valuation firms that the compensation formula was unethical. THS continued engaging different valuation firms until one commented on the compensation plan favorably; albeit in just a three-page opinion letter with little supporting evidence.
The key takeaways
Tuomey directly challenged productivity incentives in compensation models. The outcome suggested that the efficacy of productivity incentives is legally problematic if a provider is considered a high producer in a fee-for-service environment when compensation levels are well above the 90th percentile.
U.S. ex rel. J. William Bookwalter, III, M.D. et al. v. UPMC et al.
Under Bookwalter, during September 2019, the US Court of Appeals for the Third Circuit, following the Tuomey precedent, concluded that productivity-based compensation paid by University of Pittsburgh Medical Center (UPMC) “varies with, or takes into account, the volume or value of referrals,” implicating an indirect compensation relationship, which is forbidden under Stark law. Bookwalter and Tuomey are distinct in that UPMC paid a compensation-per Work Relative Value Unit (WRVU) rate, which is a common feature of most physician compensation plans, whereas the THS plan included a strikingly high productivity incentive bonus. Despite these formulaic differences, the impacts are closely tied, ultimately alleging thatthe compensation per WRVU rates are correlated to the volume of the referrals for inpatient hospital services.
The second outcome of the Bookwalter case is that the ruling endorses the premise that if the compensation paid to physicians exceeds the professional collections of services generated, then the arrangement is not commercially reasonable, causing a potential Stark violation. This rationale is not generally upheld in court because of its failure to consider the inevitability that some hospitals operate at a loss due to financial realities and patient care obligations. However, in Bookwalter, this rationale was justified because of the following:
- The physicians fraudulently inflated their work RVUs to extremely high levels (resulting in compensation for work not performed).
- The physicians were paid compensation above the 90th percentile.
- The physicians were paid compensation per work RVU in excess of Medicare rates.
The key takeaways
Like Tuomey, Bookwalter confirms that compensation models with productivity incentives are now scrutinized more by the courts. Additionally, Bookwalter directly questioned commercial reasonableness of compensation in excess of professional collections.
Implications of the 2019 Proposed Updates to Stark Law
Had the October clarification to Stark law by HHS and CMS been provided sooner, it would likely have compelled the Third District to rule differently on the Bookwalter case.
The clarification states the following:
Unit-based compensation (including time-based or per unit of service-based compensation) is deemed not to take into account the volume or value of referrals if the compensation is fair market value for items or services actually provided and does not vary during the course of the compensation arrangement in any manner that takes into account referrals.
Indeed, on December 20, 2019, the Third District reversed its ruling that the indirect compensation arrangement is substantiated solely through the correlation of the compensation for personally performed services with the volume or value of physicians’ referrals to the hospital (i.e., simply because the compensation plan in question had an RVU-based component).
Additionally, the proposed new definition of commercial reasonableness would likely have debunked the second outcome of the Bookwalter case: compensation that exceeds professional collections and will have a meaningful future impact on the verdict of the case. In its proposed new definition of commercial reasonableness, CMS clarified that “an arrangement may be commercially reasonable even if it does not result in profit for one or more of the parties.”
Ensuring Compliance Moving Forward
Given the recent clarifications to Stark, unit-based incentives are likely to remain a key feature of many compensation plans. However, hospitals and health systems can be proactive in mitigating legal risk by closely monitoring their compensation plans to ensure compliance with federal regulations, fair market value, and commercial reasonableness standards.
Compliance procedures must constantly evolve with the ever changing and increasingly complex legislation regarding physician compensation. This is proven to become a challenging endeavor to keep up with for hospitals, especially given that federal regulation and scrutiny have only increased since the Tuomey case. With this information in mind, management and compliance professionals should:
- Provide continuous training and education to promote awareness and updates regarding Stark Law
- Establish clear and deliberate internal compliance protocols across all service lines
- Employ safeguards that mitigate the possibility of correlation between physician compensation and physician referrals
ECG is closely tracking the process and updates to Stark law and Anti-Kickback statute. Check out our blog, Stark Law and Anti-Kickback Statute Proposed Rules Announced , for more information.
The ECG Valuation team is often asked by our clients and colleagues to respond to challenging matters of healthcare valuation and physician compensation. Occasionally, answers to these questions are clear and uncomplicated, but frequently a nuanced and specific response is necessary. If you have any questions about the valuation process, please contact the ECG Valuation team.