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Allegations of Improper and Excessive Physician Compensation

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Allegations of Improper and Excessive Physician Compensation

Three times during September 2015, the Department of Justice (the “DOJ”) issued its now-familiar press release to announce a high-dollar-value settlement agreement to resolve allegations relating to improper and excessive compensation in hospital-physician arrangements.  All three settlements were the result of qui tam lawsuits and were among the largest on record.

Here is a synopsis:

On September 4, the DOJ announced that Columbus Regional Healthcare System of Columbus, Georgia (“Columbus”) and Dr. Andrew Pippas (“Dr. Pippas”), Medical Director of Columbus’s Amos Cancer Center, agreed to pay a collective total of up to $35.425 million to resolve allegations that they violated the False Claims Act by submitting payment claims in violation of the Stark Law. Columbus agreed to pay $25 million, plus up to $10 million in contingent payments. Dr. Pippas agreed to personally pay $425,000. A portion of the settlement amount will be paid to the state of Georgia for its share of Medicaid losses from the alleged improper arrangements. The settlement resolved pending claims in two qui tam lawsuits: United States ex rel. Barker v. Columbus Regional Healthcare System et al., Case No 4:12-cv-108 (M.D. Ga); and United States ex rel. Barker v. Columbus Regional Healthcare System, et al. Case No. 4:14-cv-304 (M.D. Ga).  As part of the settlement, Columbus was required to enter into a Corporate Integrity Agreement under which it agreed to implement extensive monitoring measures designed to avoid or promptly detect future conduct similar to that which was the basis for the allegations in the lawsuits.

These allegations included:  

  1. Allegations that a hospital purchase transaction with a physician was not a commercially reasonable transaction for fair market value (“FMV”) because of its reliance on certain intangible value;
  2. Allegations of non-FMV, non-commercially reasonable salaries and medical director payments, including payments for duplicative services and payments for work performed by others and not performed personally; and
  3. Allegations that claims for payment that were submitted to the Federal government misrepresented the actual level of services provided, possibly contributing to not only inappropriate government payments but also valuations based on incorrect assumptions and information.

On September 15, the DOJ announced that the North Broward Hospital District (“Broward Health”), a special taxing district of the state of Florida that operates hospitals and other health care facilities in Broward County Florida, agreed to pay $69.5 million to resolve allegations that it maintained improper financial relationships with referring physicians.  The settlement agreement resolved claims made in United States ex rel. Reilly v. North Broward Hospital District et al., Case No. 10-60590 (S.D. Fla.), which was a four year-old qui tam case that was initiated by a physician whistleblower. The allegations included:

The allegations included:

Allegations that multiple employed physicians were paid excessive compensation that exceeded FMV for their services, was not commercially reasonable, and was based on the volume or value of referrals to Broward Health. The evidence cited in support of these allegations included:

  1. Pro formas and records that indicated that the employment compensation resulted in substantial losses to Broward Health if the physicians’ referrals to Broward Health were not taken into consideration;
  2. Logs tracking hospital contribution margins from the physicians’ referrals; and
  3. Allegations that Broward Health permitted free or below FMV leasing of physician office space.

On September 21, the DOJ announced that Adventist Health System agreed to pay $115 million to the Federal government to resolve allegations that it violated the False Claims Act by maintaining improper financial relationships with referring physicians and by miscoding claims. News reports indicate that the settlement amount is the largest settlement to date involving alleged Stark Law violations. News reports also indicate that, in addition to the $115 million to the Federal government, Adventist agreed to pay $3.48 million to the state of Florida, $198,453 to the state of North Carolina, $66,897 to the state of Tennessee and $4,711 to the state of Texas.

Allegations that employment compensation arrangements resulted in above-FMV, non-commercially reasonable compensation through:

  1. High compensation amounts for part-time, low productivity work;
  2. Excessive productivity bonuses reflecting inflated and improperly calculated wRVU values, based in some cases on upcoded services;
  3. Incentive payments that were based on the value of DHS referrals to Adventist hospitals rather than the physicians’ personally performed services;
  4. Excessive benefits and remuneration that were not properly accounted for, including payment of physician car payments; provision of office staff, equipment and supplies without FMV charge; and payments to physicians for drugs and ancillary items that were provided by Adventist and not the physicians; and
  5. Pro formas and records that indicate that the employment compensation was expected to result and actually resulted in substantial losses to Adventist if the physicians’ referrals were not taken into consideration.
Allegations that the employment compensation was determined on the basis of volume or value of referrals, as evidenced by:
  1. Records indicating tracking of hospital contribution margins from physician referrals; and
  2. Records suggesting that terms of compensation agreements that were designed to prevent hospital losses were disregarded or ignored in order to ensure that physicians continued to refer to the hospital.
These cases involve similar allegations and themes to several others that have progressed and/or settled in the last few years. The details of the associated settlement agreements are a signal of the increasing stakes for hospitals and physicians entering into compensation arrangements, particularly in the context of practice acquisitions with subsequent employment or other arrangements with the selling physicians. FMV and commercial reasonableness are important elements of regulatory compliance, and their proper determination and consideration may be more important than ever for avoiding (or at least mitigating) the high costs of addressing a False Claims Act case.

FMV Pitfalls

  1. FMV determinations may not be accurate or reliable if based on erroneous underlying information. Therefore, parties should be careful to provide accurate information when requesting a valuation analysis.
  2. Commercial reasonableness plays a key role even when FMV may not be primarily at issue: employment compensation structures that guarantee losses, payment for administrative services not rendered or rendered by others, and provision of free office space are examples of issues in the September settlements that touch upon commercial reasonableness.
  3. Although there are many reasons that high compensation amounts may be FMV and commercially reasonable, and many legitimate reasons that physician practices experience losses, the devil is in the details. For this reason, good documentation of the details is important.
  4. Parties should be careful to consider the reasonableness of total compensation, taking into consideration the amount and structure of bonus amounts, the existence of payments that may be duplicative, and non-cash compensation such as reimbursements for personal automobiles and the payment of salaries and other expenses that would otherwise be the obligations of the physicians.