Over the course of the COVID-19 pandemic, the trend of physician’s moving from private practice to employment has accelerated. Many more physicians are now employed by either a hospital/health system or other entity, such as a private equity firm or health insurer. According to a study performed by Avalere Health and the Physician Advocacy Institute, between January of 2019 and January of 2021, approximately 109,000 physicians left private practice to become employees. Hospitals and health systems added more than 58,000 physicians, while other entities added approximately 51,000 physicians. This means that nearly 74% of all U.S. physicians are now employed.

The regulatory environment continues to present challenges for entities that have financial arrangements with providers. The Office of Inspector General’s  enforcement of Federal regulations, including the Stark Law, the Anti-Kickback Statute, and the False Claims Act remains steady.

Stark Law – The Stark Law (Stark) prohibits physicians or immediate family members who have a financial relationship with an entity from making referrals to that entity for specific designated health services unless an exception applies.

Anti-Kickback Statute – The Anti-Kickback Statute (AKS) makes it a crime to pay, offer, solicit, or receive anything of value, directly or indirectly, to induce or reward referrals or services of Medicare or Medicaid business. Similar to Stark exceptions, AKS has safe harbors. However, safe harbors are voluntary, not required like a Stark exception. It is recommended entities meet a safe harbor.

False Claims Act – The False Claims Act (FCA) imposes liability on persons and companies who defraud governmental programs. A claim for items or services resulting from a violation of the Stark or AKS constitutes a false or fraudulent claim under the FCA.

Establishing compensation which is consistent with fair market value (FMV), commercially reasonable (CR) and does not take into account the volume or value of referrals, is key to meeting Stark exceptions and AKS safe harbors.

The recent Stark final rule, effective January 19, 2021, slightly revised the definition of FMV applicable to provider compensation with the addition of the phrase “of the subject transaction”. Based on some of the commentary from CMS, this minor change is very important for any organization to consider. CMS commentary noted:

  • Based on certain facts and circumstances, compensation outside of survey schedules, both above and below, may accurately represent FMV for the services;
  • Ultimately, survey data may be a starting point, but “each compensation arrangement is different and must be evaluated based on its unique factors”; and
  • Compensation below a certain percentile may not always be appropriate and compensation above a certain percentile may not always be inappropriate.

The Stark final rule also codified a definition of CR, which documents the reasons a given entity is entering into an arrangement with a provider. To establish CR, the legitimate business purpose that is furthered by the arrangement must be assessed and documented, based upon the specific facts and circumstances (i.e., size, type, scope, and specialty).

It is important to note CR is separate and distinct from FMV. An arrangement could be paid at FMV, but there must be a legitimate business need for the arrangement, absent consideration of referrals. If FMV and CR are not established, the arrangement would not meet a Stark exception or AKS safe harbor.

The OIG scrutinizes both employment and independent contractor arrangements to uncover compensation for patient referrals and other fraud related to physician compensation. The scrutiny and large settlements in the industry for alleged violations of these regulations have led many entities to further develop internal controls surrounding physician arrangements of various kinds. Historically, due to cost constraints, many healthcare organizations have determined compensation for most arrangements internally, with only the most complex and high-dollar arrangements being reviewed by external counsel and valuation experts. However, several significant changes have occurred that make it more challenging than ever to establish reasonable, fair, and appropriate compensation for providers. Some examples include the CMS commentary from the recent Stark final rule noted above, the 2021 and 2022 Medicare Physician Fee Schedules, and the ongoing pandemic.

It is recommended, to enhance compliance and mitigate risk of Stark or AKS violations and FCA enforcement, healthcare entities should establish a consistent, formal contracting process, including (in part):

  • Centralized physician contracting oversight, particularly for a large healthcare system;
  • A formal physician contracting process to include contract requests and approvals; and
  • Evaluation of the terms and compensation in the proposed arrangement to 1) confirm that the arrangement meets a Stark exception and/or AKS safe harbor (as applicable) and 2) confirm that compensation is FMV, CR, and does not take into account the volume or value of referrals.

Many healthcare organizations rely on a compensation committee to oversee the various areas of governance related to physician contracting and compensation. The committee is typically responsible for establishing and/or updating existing compensation policies and procedures as well as reviewing and approving any new physician compensation models. Ultimately, organizations should have a defined process whereby exceptions receive sufficient diligence, review, and approval (potentially including the Board of Directors).

Once an agreement is in place, it is best practice to have a formal process for re-evaluating agreements. It is recommended that a formal, methodical, and periodic review of existing contracts is completed to ensure that a) there is continued need for the services, b) the arrangement remains commercially reasonable, and c) the arrangement continues to be consistent with FMV. It is common to see healthcare organizations review and support each arrangement every three years, at a minimum.

To help manage the process and cost of compliance with FMV and CR, many healthcare entities are beginning to leverage alternative solutions to enhance their compliance programs, standardize their internal processes, and ensure their arrangements are backed by an external valuation opinion. These emerging solutions allow for this in a much faster and more cost-effective way than ever before.

There are several currently available solutions from nationally recognized healthcare valuation and advisory services firms to address FMV and CR. As you evaluate potential solutions, there are several items to consider:

  1. Can the solution address the various financial terms found in most of your arrangements?
  2. Can the solution consider all forms of compensation and all services found in any given arrangement (i.e., stacked compensation and one-time payments)?
  3. Does the solution appropriately consider the impact of the Medicare Physician Fee Schedule?
  4. Does the solution provide an opinion of FMV and CR or is it just market data?
  5. Does the solution consider both qualitative and quantitative inputs?
    1. Are the facts and circumstances of the subject transaction considered; and
    2. Is the “size, type, scope, and specialty” of the arrangement considered;
  6. Is the solution cost-effective based on the organization’s needs?
  7. Finally, is the solution secure?

In summary, with more physicians employed now than ever before, the complex industry environment, and the OIG’s continued focus on enforcement of Stark and AKS, and by extension the FCA, the need for healthcare organizations to have robust processes for provider contracting is greater than ever. As your organization’s integration with providers expands and/or deepens, whether through employment, aligning with private practices or contracting with staffing companies, we recommend assessing your current contracting processes and reviewing FMV and CR solutions to enhance your compliance program.

LBMC’s Healthcare Compensation Valuation team combines our understanding of complex financial and regulatory matters with our ability to analyze voluminous financial and operational information to deliver efficient and supportable FMV and CR opinions. We also offer innovative solutions including our new Pulse FMV Calculator, which provides opinions and support for various types of provider compensation in less than a minute, including employment, call coverage and administrative services. For more information, visit PulseFMV.com or contact our team today.