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DOJ settlement underscores need to scrutinize physician compensation

10/03/2016  |  By: Josh Brummett, CPA/ABV, CFF, Shareholder, Healthcare Valuation Services

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A former health system CEO has agreed to personally pay $1 million to settle allegations of his involvement in Stark Law violations. This news underscores the need for hospital leadership to ensure physician compensation arrangements are thoroughly scrutinized before entering into an agreement.  Former Tuomey Healthcare CEO Ralph “Jay” Cox III not only agreed to pay $1 million, but will also be barred for four years from participating in any federal health care programs.

The settlement stems from a case in which Sumter, S.C.-based Tuomey Healthcare was accused of entering into compensation arrangements with physicians that rewarded them for referring patients to the hospital. For its violations of the Stark Law and False Claims Act, Tuomey agreed to pay $72.4 million last year to settle the matter.

Federal regulations require compensation paid under arrangements between hospitals and physicians, or other healthcare entities in a position to refer to one another, be consistent with fair market value (FMV) and commercially reasonable (CR) in the absence of referrals.

As an essential part of an effective regulatory compliance program, executive leadership should consider the following regarding compensation arrangements with physicians:

  • Is there a formal process in place for identifying “high-risk” compensation arrangements? An independent third-party valuator may be needed to assess whether a compensation arrangement is FMV and CR in the absence of referrals. Hospitals and health systems should evaluate internally, along with outside counsel, what defines complex or high-risk arrangements requiring an outside opinion.
  • Is the outside valuator’s opinion truly reliable and defensible? Attempting to simply “check the box” by obtaining an outside opinion stating the compensation arrangement is not excessive may not satisfy regulators. Consider whether due diligence has truly been performed and evaluate the reliability and thoroughness of the outside opinions you receive. It is critical to engage reputable, experienced valuation experts to establish the credibility of third-party opinions.
  • Does the arrangement guarantee losses? An arrangement which compensates a physician in excess of professional collections for the physician’s services may be problematic. It may be perceived the hospital is paying the physician in excess of FMV with the expectation of making up for the loss through revenue from physician referrals. It is essential to be able to demonstrate the arrangement makes sense regardless of potential referrals.
  • How does potential total compensation for all services provided (i.e., compensation stacking) compare to the market for similar physicians? Consider all forms and sources of compensation (salary, call coverage, medical director, quality bonus, etc.) paid to a physician which may indicate an overpayment in total and a potential payment for referrals.

Don’t delay in asking these key questions and taking appropriate action. There is every indication that regulatory scrutiny of physician compensation arrangements is on the upswing, as the U.S. Justice Department said in announcing the settlement with Cox: “Today’s settlement demonstrates that the Justice Department and its law enforcement partners will hold individual decision makers accountable for their involvement in causing the companies and facilities they run to engage in unlawful activities.”

If you have any questions, please contact me at jbrummett@lbmc.com.