In response to the sweeping changes brought by healthcare reform, healthcare organizations are restructuring to position themselves to survive the challenges ahead. With reimbursement levels (and, thus, the bottom line) increasingly contingent on clinical performance, many acute-care providers are beginning to employ physicians in executive positions.
In many cases, these "physician executives" choose to maintain a clinical practice — and, at some organizations, are required by the organization to continue to practice medicine on a part-time basis. While these physician executives serve a crucial role in influencing physician behavior, they present specific challenges for tax-exempt organizations when evaluating the reasonableness of their pay.
Given the dual nature of the services rendered by physician executives, determining the reasonableness of pay can have an element of double jeopardy:
- Organizations that are tax-exempt under 501(c)(3) or 501(c)(4) must ensure the total remuneration provided to "disqualified" executives is reasonable for purposes of the "intermediate sanctions" regulations under IRC § 4958.
- Pay for practicing physicians must be "fair market value" and commercially reasonable under the Stark laws and the federal anti-kickback statute.
- A "disqualified" executive who also provides clinical services to the organization is subject to both intermediate sanctions and Stark/AKS regulations. Organizations that employ such executives should ensure that their pay meets the criteria for reasonableness under both sets of regulations.
- A single opinion, however, will not necessarily satisfy both sets of standards. While the objective of ensuring "reasonable" pay, embodied by both 4958 and Stark/AKS, is similar, the individual regulations serve different purposes:
- IRC § 4958 is intended to penalize "disqualified" persons at certain tax-exempt organizations who receive excessive economic benefits from the organization.
- The Stark Law and AKS are intended to protect taxpayer resources and the health of program beneficiaries by ensuring that physicians do not have financial incentives to make inappropriate medical decisions (e.g., profiting from referring patients for healthcare services).
- Given the different objectives of the two sets of laws, what's deemed reasonable under the intermediate sanctions regulations may not be determined to be FMV/commercially reasonable under Stark/AKS, and vice versa, for a couple of reasons:
- The intermediate sanctions regulations outline specific requirements for a "reasoned written opinion" to support a finding of reasonableness, which many FMV assessments do not meet.
- Similarly, Stark/AKS regulations specify that FMV and commercially reasonable compensation must not have been determined in any manner that takes into account the volume or value of referrals, which is not typically part of an assessment for purposes of intermediate sanctions.
As a result, tax-exempt organizations should be wary of relying on FMV opinions for purposes of determining the reasonableness of pay provided to physician executives under the intermediate sanctions rules, and vice versa.
Susan Sulisz is a director in Towers Watson's executive compensation practice in Detroit and a leader of the firm's not-for-profit consulting team. Annette Bussineau is a talent and rewards consultant in Detroit and Russ Wilson is an executive compensation consultant in Atlanta. They can be reached at susan.sulisz@towerswatson.com, annette.busineau@towerswatson.com, and russell.wilson@towerswatson.com.