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Recent Problematic Physician Employment Arrangements

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Recent Problematic Physician Employment Arrangements

On July 28, 2016, the Justice Department announced that Lexington County Health Services District Inc. d/b/a Lexington Medical Center located in West Columbia, South Carolina, agreed to pay $17 million to resolve allegations that it violated the Physician Self-Referral Law (the Stark Law) and the False Claims Act by maintaining improper financial arrangements with 28 physicians, including the relator. The qui tam complaint that prompted the settlement was filed by David H. Hammett, M.D., a neurologist who was employed by Lexington between 2011 and 2013.1

In the complaint, Dr. Hammett alleged that Lexington's employment agreements with the subject physicians were not commercially reasonable and in excess of fair market value (FMV). He also claimed that Lexington actively tracked referrals for imaging studies, and encouraged future referrals as a means of justifying the high compensation levels. In large part, he based these accusations on his own employment agreement, which had been negotiated by the owners of his prior private practice, and which he believed provided compensation that was above FMV.2

A review of the terms of Dr. Hammett's employment agreement reveals a number of issues that frequently emerge in discussions surrounding physician employment.  Specifically, any of the following individual terms that were included could raise questions about the commercial reasonableness and/or FMV of his employment agreement.

Term: Dr. Hammett's employment agreement was essentially a "no cut" seven-year agreement, with automatic one-year renewals and an optional seven-year renewal period.

Base Salary: Dr. Hammett received a base salary of $318,758, an amount that exceeded the 75th percentile national compensation for neurologists reported by MGMA in its Physician Compensation and Production Survey: 2010 Report based on 2009 Data.3 His base salary was guaranteed for so long as Dr. Hammett maintained production of approximately 5,500 work relative value units (wRVUs) annually, which approximated the 60th percentile national value reported by MGMA. In the event that Dr. Hammett's production exceeded his wRVU target by 10% or more, he could request an increase in his base salary. The complaint indicated Dr. Hammett had earned approximately $250,000 per year as an employee in private practice.

Productivity Incentives: The agreement provided a three-tiered production incentive model that increased the compensation rate as Dr. Hammett's wRVU production increased.

  • The tiered compensation model appeared to "reprice" every wRVU upon the crossing of a tier threshold. With this type of model, Dr. Hammett could have earned as much as $132,000 for producing (1) incremental wRVU.
  • To reach the highest tier, Dr. Hammett had to produce at least 5,500 wRVUs, a value that approximated the national 60th percentile wRVU production for neurologists according to MGMA. Upon reaching this tier, Dr. Hammett was compensated $98 for each wRVU, which equated to 128% of the 90th percentile compensation per wRVU value reported by MGMA for neurologists.  Based upon our interpretation of these terms, at 60th percentile wRVU production, he would have generated annual compensation of approximately $520,000, which far exceeded 90th percentile national compensation.
  • To complicate matters, Dr. Hammett's productivity incentive included wRVUs produced by midlevel providers (MLPs) under his direct supervision. His compensation was then intended to be offset by the MLPs' compensation and benefits.
  • Hammett's productivity incentive was contractually based upon the wRVU values set forth in the 2010 Medicare Physician Fee Schedule, rather than allowing for revised wRVU values as established by CMS from time to time.

These terms created a level of compensation that challenges the notions of FMV and commercial reasonableness. The complaint indicates that Dr. Hammett earned approximately $650,000 during his first year of employment, inclusive of a $40,000 signing bonus.  Assuming that amount was based solely on his personally performed services, Lexington appears to have paid Dr. Hammett more than 150% of the 90th percentile compensation for 75th percentile wRVU productivity (based upon MGMA data).

The court filings for the case indicate that Lexington relied upon a local accounting firm to provide valuation services in connection with the subject transactions.

FMV Pitfall

Employment compensation plans must be structured carefully to align the resulting compensation with the level of services provided by the physician employee. If the compensation provided to a physician does not match the personally-performed services of that physician, the arrangement may be subject to regulatory challenge. Engaging a qualified healthcare valuation expert to evaluate physician employment arrangements can mitigate the risk of a significant mismatch between physician services and compensation.

1United States ex rel. Hammett v. Lexington County Health Services District, Case No. 3:14-cv-03653 (D. S.C.)
2The complaint indicated that Dr. Hammett was a non-owner employee of the private practice.
3The most current version of the survey available at the execution date of Dr. Hammett's employment agreement

Chip Hutzler.jpg

Chip Hutzler, JD, MBA, CVA

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Jim Carr, ASA, MBA