April 2011 Volume 7 Number 8

Stark Law Update: Determining Whether Compensation is Fair Market Value or Takes Into Account the Volume or Value of Referrals

By David L. Haron, Suzanne D. Nolan & Mercedes Varasteh Dordeski, Frank Haron Weiner, PLC, Troy, MI

AuthorAuthorAuthorHealthcare arrangements within the purview of federal Stark laws1 require a careful analysis of the manner in which physicians are compensated. Over the past year, three significant court decisions have emerged which add another layer of complexity to the “compensation” issue. Therefore, any attorney reviewing an arrangement for compliance with Stark should be familiar with these decisions.

Background

Generally, the federal Stark laws prohibit any physician (or an immediate family member) who has a financial relationship with an entity from referring patients for the furnishing of designated health services (DHS) that will be paid for by a federally-funded healthcare program.2 A “financial relationship” includes direct and indirect compensation arrangements, the latter of which exists if the referring physician receives aggregate compensation from the entity with which s/he has a financial relationship that varies with or otherwise reflects the volume or value of referrals or other business generated by the referring physician.3

Whether a transaction is within the scope of Stark can hinge on whether an indirect compensation arrangement exists – i.e., if a physician receives compensation that reflects the volume or value of referrals. Conversely, whether such compensation is fair market value (FMV), and is determined independently of the value or volume of referrals is a crucial element of qualifying for the indirect compensation exception to Stark. The indirect compensation exception provides that a financial relationship does not exist if (among other things) the compensation received by the referring physician is FMV for services and items actually provided, and is not determined in any manner that takes into account the value or volume of referrals.4

First, it is important to note that any “compensation” analysis differs depending on whether the indirect compensation definition or the exception is being evaluated. Notably, an assessment of FMV comes into play only when determining if a proposed arrangement satisfies the indirect compensation exception.

Next, attorneys should note that simply because compensation is set at a “fixed” amount or flat payment does not make it automatically comply with a Stark exception. Attorneys cannot rely on appraisals indicating that compensation is FMV without understanding whether the compensation was based on the volume and value of referrals. As the cases below illustrate, it cannot be assumed that a fixed fee meets the volume and value standard. These cases are especially noteworthy because of the dearth of Stark cases, particularly those with in-depth discussions of FMV and the indirect compensation exception.

U.S. ex rel. Singh v. Bradford Regional Medical Center5

In Bradford, a medical practice owned by two physicians entered into an arrangement under which Bradford Regional Medical Center (BRMC) would sublease a nuclear imaging camera used to perform diagnostic tests (i.e., DHS). As part of the sublease, the physicians agreed to a covenant not to compete with the provision of nuclear cardiology services by BRMC for the term of the agreement. Although there was no explicit requirement that the physicians refer their own patients to BRMC for tests, it was clear that the parties anticipated such referrals would be made. Prior to acquiring the nuclear camera and offering imaging services in-house, the two physicians and their subtenant were responsible for ordering approximately forty-two percent of BRMC’s nuclear medicine tests.

BRMC’s monthly sublease payments, made to the physicians’ group practice, consisted of a fixed “pass-through” amount to lease the camera (equal to the amount the physicians owned on the lease), and a fixed additional amount for the non-compete agreement.

The federal district court analyzed this arrangement as an indirect compensation arrangement6 and tested the compensation relationship between BRMC and the practice (as it was the non-ownership or non-investment interest closest to the referring physicians).7 The court concluded that the sublease agreement created an indirect financial relationship between the parties, because the fixed fee payments for the non-compete provision varied with the volume and value of referrals due to the manner in which it was calculated. Specifically, BRMC had based the fixed fee on the revenues BRMC expected to generate with the sublease in place, less the revenues it would generate without the sublease in place.

However, the court held that this arrangement did not qualify for the indirect compensation exception because “[BRMC’s] analysis of whether the non-competition agreement represents a fair market value is based, in part, on anticipated referrals from the doctors.”8 In reaching this holding, the Court noted that the definition of FMV precluded such a value from being determined in a manner that takes into account the volume or value of anticipated or actual referrals.9

U.S. ex rel. Drakeford v. Tuomey10

Whether an indirect compensation arrangement existed was the central issue in Tuomey, a case in which a jury returned a verdict that defendant Tuomey Health System violated Stark. Facing competition from a nearby ambulatory surgical center and potentially from physicians creating in-office ancillary services lines, Tuomey Health System created a for-profit entity to own four specialty limited liability companies (Specialty LLCs) which employed part-time physicians to perform outpatient surgeries and procedures (i.e., DHS) at Tuomey Hospital. The physicians’ employment agreements required them to perform all of their outpatient surgeries and procedures at Tuomey Hospital or other Tuomey facilities. The physicians received a base salary, productivity bonuses based on their collections and an incentive bonus for meeting certain quality goals. The amount paid to the physicians as compensation significantly exceeded the amount collected by the Specialty LLCs for the services that the physicians personally performed.

The parties agreed, because of the intervening LLCs, that if there was a financial relationship between the physicians and Tuomey, it would be an indirect relationship.11 For each procedure that a physician personally performed, there was also a referral to Tuomey for the technical component or facility fee associated with the procedure. Notably, CMS has stated in commentary that the technical components associated with such personally performed procedures are DHS.12

Each physician’s compensation, because it was based on a percentage of collections, increased with the volume of the physician’s personally performed procedures and with the concomitant increase in the volume of referrals for the associated technical components. Accordingly, the compensation paid to the physician varied with the volume or value of the physician’s referrals for the associated technical components.

The government estimated Tuomey was losing $1 to $2 million per year, computed as the amount it received for the physicians’ services less the amount it paid the physicians. In the government’s view, no hospital would enter into such an arrangement unless it was to secure a revenue stream through referrals. Such an agreement would be commercially unreasonable in the absence of such a referral stream. Accordingly, the government concluded that Tuomey must be using the income from the technical components of the procedures performed by physicians to be able to pay the compensation. In support of this, the government presented evidence, including testimony from the designers of the compensation plan that the designers took the physician groups’ outpatient referrals into account to determine a benchmark for compensation, and testimony of statements made by Tuomey’s Chief Operations Officer representing to a physician that the physician would be sharing in Tuomey’s facility fee.

Tuomey was decided by a jury verdict. Each party’s Stark analysis and position on the same was set forth in various briefs filed to support or oppose summary judgment motions.13 Given the jury verdict, attorneys do not have the benefit of a written opinion which would have analyzed each party’s position. Accordingly, there is some uncertainty about the impact of Tuomey. This case is currently on appeal and the resulting appellate decision should clarify how Stark is applied in this situation.

U.S. v. Campbell, et al .14

In Campbell, Defendant Joseph Campbell, a cardiologist, entered into an employment agreement setting forth his compensation and duties as a part-time Clinical Assistant Professor with the University of Medicine and Dentistry of New Jersey (UMDNJ). Campbell personally performed cardiac procedures for the UMDNJ University Hospital. The federal district court held that the associated referrals for hospital services and facility fees for the personally performed procedures were referrals within the meaning of Stark. Importantly, the court reasoned that Campbell was not a bona fide employee because he was not actually required to and did not perform the duties set forth in the employment agreement Accordingly, the arrangement was not protected by the bona fide employee exception.15 Thus, the court held that “the compensation could not be the fair market value for those services” and must serve some other purpose, such as compensation for patient referrals.16 The holding precluded Campbell from arguing he qualified for other Stark exceptions.

Conclusion

Taken together, these cases indicate that “fixed” fee compensation may actually vary with the volume and value of referrals or other business if the compensation was determined in a manner that took into account the volume or value of referrals.  Additionally, when evaluating an arrangement to determine whether it is within the purview of Stark or complies with an exception to Stark, technical components associated with services personally performed by a physician should be treated as referrals of DHS.

These cases (coupled with the ever-increasing emphasis on cutting healthcare costs by combating fraud and abuse), signify that the government will not only scrutinize the written agreement memorializing an arrangement, but will also review the manner in which parties perform under the contract and the basis on which compensation is determined.  Accordingly, courts will also subject transactions that potentially violate Stark and other laws to heightened scrutiny.

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1 42 U.S.C. §1399nn, et seq.
2 42 U.S.C. §1395nn(a).
3 42 C.F.R. §411.354(c)(2). Additionally, in order for an indirect compensation arrangement to exist, there must also be an unbroken chain of relationships linking the referring physician with the entity furnishing DHS, and the entity furnishing DHS must have actual knowledge of, or act in reckless disregard or deliberate ignorance of the arrangement.
4 42 C.F.R. §411.357(p).
5 2010 WL 4687739, __F.Supp.2d __ (W.D. Pa. Nov. 10, 2010).
6 This arrangement began before the regulations implementing the stand in the shoes doctrine went into effect on December 4, 2007. See 42 C.F.R §411.354(c)(2)(iv)(A).
7 42 C.F.R. §411.354(c)(2)(ii).
8 Id. at 19.
9 42 C.F.R. § 411.351. Litigation in Bradford is ongoing; the court will next address the issues of whether an Anti-Kickback Statute violation is present, and if the Stark violation gives rise to liability under the federal False Claims Act, 31 U.S.C. §3729 et seq. The court’s November 10, 2010 decision has not been appealed.
10 U.S. ex rel. Drakeford v. Tuomey, 2010 WL 4000188, slip copy (D.S.C. 2010).
11 The government’s backup argument was that the intervening LLCs should be ignored as the alter egos of Tuomey Hospital and the arrangement evaluated as a direct compensation arrangement.
12 66 Fed. Reg. 941 (Jan. 4, 2001); 69 Fed. Reg. 16054, 16063 or 16067 (March 26, 2004).
13 Tuomey is currently on appeal in the Fourth Circuit and the resulting appellate decision should clarify how Stark is applied in this situation. A date for oral argument has not been scheduled.
14 2011 WL 43013, Dkt. No. 08-1951, slip op. (D.N.J. Jan. 4, 2011).
15 42 U.S.C. §1395nn(e)(2).
16 Campbell at 8. See alsoU.S. v. Rogan, 459 F.Supp.2d 692, 723 (N.D. Ill. 2006).

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