September 28, 2009

On August 25, 2009, Covenant Medical Center (“Covenant”) in Waterloo, Iowa agreed to pay the United States $4.5 million to resolve allegations that it violated the False Claims Act. Specifically, the U.S. government alleged that Covenant’s compensation to five employed physician specialists violated the federal Stark law and therefore also violated the False Claims Act with respect to related Medicare claims. The case highlights the importance of hospitals and employed physicians having their compensation arrangements reviewed for compliance with the federal Stark law.

[Bear in mind that the Stark law prohibits physician self-referrals. By and large the only anesthesiologists who refer patients are those providing pain management services to patients that they bring to the hospital inpatient or outpatient department, e.g., for chronic pain procedures – Ed.].

The Basis for the Claims Against Covenant

Although the U.S. Department of Justice (“DOJ”)’s allegations were denied by Covenant (and no admissions were made as part of the settlement), it was the position of the DOJ that:

• Covenant submitted false claims to Medicare by having financial relationships with five physicians that violated the Stark Law. The Stark Law prohibits a hospital from profiting from referrals of patients made by a physician with whom the hospital has an improper compensation arrangement. An arrangement is improper if a physician is paid above fair market value for their services and that compensation is not commercially reasonable. The Stark Law is intended to ensure that physicians’ medical judgments are not compromised by improper financial incentives and are based solely on the best interests of the patient.

  The United States alleged that Covenant violated the Stark Law by paying commercially unreasonable compensation, far above fair market value, to five employed physicians who referred their patients to Covenant for treatment.¹

This case is particularly noteworthy, as it is one of a few instances to date where the DOJ has brought an action based upon an alleged violation of the federal Stark law without also alleging a violation of the Anti-Kickback Statute.

How Much Is Too Much Compensation?

The federal Stark law includes an exception for employed physicians, but the exception requires that compensation be commercially reasonable, be based upon the fair market value for such services, and not take into account the volume or value of referrals.²

The allegations made by the DOJ against Covenant generally state that Covenant violated the federal Stark law by paying commercially unreasonable compensation to its employed physicians above fair market value. With respect to the five physicians at issue, the physicians were paid salaries in amounts between $719,000 and $1.8 million each. It is the position of the DOJ that the salaries were not commercially reasonable and were “far above” fair market value, as the physicians were “among the highest paid hospital-employed physicians not just in Iowa, but in the entire United States.”³ The settlement agreement fails to provide further explanation of the allegations against Covenant.⁴

Lessons Learned for Hospitals and Employed Physicians

Employed physicians, including anesthesiologists, are well advised to review their hospital compensation arrangements for compliance with the federal Stark law. According to the DOJ, we can cases similar to the one against Covenant in the future. U.S. Attorney Matt M. Dummermuth states, “[W]e will continue to aggressively pursue all types of fraud in order to protect federal health care dollars.”⁵ From a compliance perspective, hospitals and employed physicians must ensure their compensation arrangements comply with the federal Stark law, not only to prevent civil penalties associated with violations of Stark, but also to avoid False Claims Act scrutiny. In light of this settlement, anesthesiologists should consider obtaining an independent valuation expert opinions to support any compensation arrangement in excess of the highest percentile physician compensation figures (as compiled by the Medical Group Management Association (“MGMA”) physician compensation survey or other source).

This week’s Alert was authored by Jessica L. Gustafson, Esq. and Adrienne Dresevic, Esq., who are partners with The Health Law Partners, P.C. The firm represents hospitals, physicians and other health care providers and suppliers with respect to their health care legal needs. They can be reached at jgustafson@thehlp.com or adresevic@thehlp.com. Gustafson and Dresevic are also frequent contributors to the ABC Communiqué. We hope that the above summary of the recent Stark physician-compensation charges that a hospital settled with Department of Justice for nearly $5 million will help to keep everyone on the alert for potential Stark and antikickback law problems. Remember that the various healthcare reform proposals all anticipate covering some of the costs of increased coverage by attacking “fraud and abuse.”

Sincerely,
Tony Mira
President and CEO

_______________________________

¹See DOJ Press Release dated August 25, 2009, available at http://www.usdoj.gov/opa/pr/2009/August/09-civ-849.html (last accessed September 18, 2009).

²42 U.S.C. § 1395nn (e) (2). See also, 42 C.F.R. § 411.357 (c).

³See DOJ Press Release dated August 25, 2009, available at http://www.usdoj.gov/opa/pr/2009/August/09-civ-849.html (last accessed September 18, 2009).

On the other hand, it is the position of Covenant that the salaries paid to its employees were reasonable given the physicians’ “exceptionally high level of productivity.” Based upon a written statement published by Covenant, Covenant contends the physicians’ salaries were calculated based a calculation of the revenue for services personally performed minus expenses. See “Covenant Agrees to Pay $4.5M to Settle Fraud Allegations,” available at http://www.wcfcourier.com/articles/2009/08/25/news/breaking_news/doc4a94156271f78380125347.txt (last accessed September 19, 2009).

⁴ http://www.szdhealthlawscan.com/uploads/file/Settlement%20Agreement%20(H1627730).PDF (last accessed September 19, 2009).

⁵See DOJ Press Release dated August 25, 2009, available at http://www.usdoj.gov/opa/pr/2009/August/09-civ-849.html (last accessed September 18, 2009).

Pursuant to 42 U.S.C. § 1395nn (e)(2):

• Any amount paid by an employer to a physician (or an immediate family member of such physician) who has a bona fide employment relationship with the employer for the provision of services if—
  
  1. the employment is for identifiable services,
  2. the amount of the remuneration under the employment—
     1. is consistent with the fair market value of the services, and
     2. is not determined in a manner that takes into account (directly or indirectly) the volume or value of any referrals by the referring physician,
  3. the remuneration is provided pursuant to an agreement which would be commercially reasonable even if no referrals were made to the employer, and
  4. the employment meets such other requirements as the Secretary may impose by regulation as needed to protect against program or patient abuse.
  Subparagraph (B)(ii) shall not prohibit the payment of remuneration in the form of a productivity bonus based on services performed personally by the physician (or an immediate family member of such physician).