11 Key Concepts on Compliant Physician Hospital Contracting

The federal government has greatly increased its regulatory efforts related to investigating, prosecuting and combating healthcare fraud.[1] This focus, combined with the movement of physician providers into employment, medical director or other compensation relationships with local hospitals, has led to an increased focus and scrutiny on hospital-physician financial relationships and contracting issues. Further, a number of recent cases based on alleged improper physician compensation arrangements demonstrate that significant settlements or damages may occur if an improper arrangement is alleged or prosecuted. The magnitude of potential damages has placed physician arrangements on the agenda of U.S. Attorneys and private citizens with the potential to recover a portion of the damages or settlement.[2] In response, hospitals and providers have become proactive in analyzing existing physician compensation relationships, developing the procedures and templates for establishing new relationships and initiating internal investigations of current arrangements. Such internal investigations allow the entity to address and correct any potential liability areas and consider self disclosure if necessary.[3]

The concepts and recommendations contained in this article are aimed at assisting hospitals and providers in analyzing and evaluating their current physician compensation arrangements, as well as presenting a number of best practices used to standardize physician contracting within an organization and to increase compliance with both the Anti-Kickback Statute and the Stark Law.

1. Financial relationship sign-off. A specific person, preferably from the hospital compliance department or a specially-formed compliance group (a "Compliance Committee"), should sign off on each direct and indirect financial arrangement between a hospital and a physician, including all employment agreements, management agreements and medical directorships. Ideally, an individual not involved in negotiating the arrangement between the hospital and the physician would be responsible for the sign-off. Similarly, the Compliance Committee should be comprised of individuals who are independent from the contracting parties and others invested in the potential relationship.

Further, when an arrangement is above a certain dollar threshold, or in the case of highly compensated management agreements or other types of agreements in which a physician provides purely management or administrative services, the hospital should consider greater levels of approval and sign-off on the relationship. Here, the approval of both a chief compliance officer and another individual or committee (i.e., a special compliance subcommittee), along with the general counsel's office, may be required. The committee would review and evaluate the fair market value nature and the commercial reasonableness of the compensation, document such determinations and present its findings to the chief compliance officer and the general counsel's office.

Finally, when a hospital enters into highly compensated, unusual or politically-charged arrangements, it is increasingly important that it develop, maintain and approve a clear record of the facts and need supporting such an arrangement. The facts, discussions, valuations and negotiations that gave rise to the agreement should all be documented and retained.

2. Internal valuation memo. For each hospital-physician financial relationship, including all employment relationships and medical directorships, there should be a specific valuation memorandum on file which articulates the manner in which the compensation was determined, the surveys utilized for comparison and benchmarking and whether an outside valuation opinion was sought. The Compliance Committee should review and sign off on this fair market valuation review. In terms of timing, this fair market review should be completed prior to final negotiations of the applicable contract and prior to execution by the parties. Valuation guidance or review should be conducted on each compensation relationship between the hospital and a physician (or an organization comprised of physicians). For compensation arrangements above a certain amount, an external valuation opinion should also be sought.

CMS has historically commented that the fair market value of physician arrangements is a significant element of any relationship:

We emphasize, however, that we will continue to scrutinize the fair market value of arrangements as fair market value is an essential element of many exceptions.

Reference to multiple, objective, independently published salary surveys remains a prudent practice for evaluating fair market value. Ultimately, the appropriate method for determining fair market value for purposes of the physician self-referral law will depend on the nature of the transaction, its location, and other factors. As we explained in Phase II, although a good faith reliance on an independent valuation (such as an appraisal) may be relevant to a party's intent, it does not establish the ultimate issue of the accuracy of the valuation figure itself.[4]

Based on the foregoing, full reliance on an appraisal may not suffice in defending a compensation arrangement. Rather, the hospital and the Compliance Committee should ensure that a full record, including all relevant analysis, is maintained.

3. Compensation cap. The hospital should consider for each hospital-physician financial arrangement, especially if a productivity-driven compensation structure, or containing the potential for a significant bonus, including a reasonable compensation cap. This cap is particularly important in the cases of exempt hospitals and should be consistent with the fair market value of the services performed under the arrangement. A cap on the total compensation will be important for establishing a rebuttable presumption of reasonableness for any non-fixed payments and the compensation as a whole.[5]

4. Employed and/or highly compensated physician in private practice. A hospital system should take extra caution in situations where a substantially full-time physician employee, or highly compensated employee, has the right to earn outside income and in situations where a paid physician employee or indirect contractor is permitted to remain a private practice physician. The Compliance Committee, or individual responsible for signing off on the arrangement, should ensure that the services provided to the hospital are identifiable, measurable and recorded. Time and activity logs will assist the hospital in defending that the compensation paid to a physician who also engages in outside activities is consistent with the services he or she is actually providing and the time spent providing such services.

5. Stark Act and safe harbor regulatory compliance sign-off. As part of the compliance review, legal counsel, internal or external, should review the agreements to assure they meet a core exception under the Stark Act and a safe harbor to the Fraud and Abuse Statute. These may be exceptions and safe harbors that are related to "bona fide employees" or to personal services or independent contract arrangements. The fundamental concepts guiding many of the key thoughts in this article are based on these applicable exceptions and safe harbors. In general, a physician contract must (i) be set forth in writing, (ii) be for commercially reasonably purposes, and (iii) provide for compensation that is set in advance, consistent with fair market value and not determined in a manner that takes into account the volume or value of referrals or other business generated between the parties. Additional requirements will vary slightly depending on the safe harbor or Stark exception being utilized, but the core requirements set forth above will generally always apply.

6. Job descriptions and roles and responsibilities need assignment. All physician-employment contracts, management contracts and similar arrangements should contain a clear job description, which includes a list of the services to be provided and an approximation of the time commitment. The hospital's internal files should contain a copy of the particular job description along with an analysis and record as to why the position is reasonably needed by the system. Such file should be periodically reviewed to confirm that the position remains necessary. Similarly, in the case of newly created roles, there should be great clarity as to why such role is needed and what services it will provide. This assessment should also be placed in the contract file.

7. Contracting checklist/contract file. A hospital should develop, implement and maintain a simple contract checklist that can be utilized in virtually all physician compensation relationships. This checklist will provide a standard step-by-step process for creating, analyzing an implementing a financial relationship. If general, a hospital should maintain consistency throughout its physician-contracting. Each arrangement should be subject to the same type of review, analysis and documentation. If investigated, a hospital should benefit by demonstrating that it systematically analyzed each relationship in a meaningful manner. Any variations from this checklist or procedure should be documented and explained.

Similarly, a physician contract file should be maintained for each compensation arrangement. As mentioned throughout this article, the file would contain support for the services to be provided under the arrangement, the compensation to be paid, along with an explanation, analysis or valuation as to its fair market value, and any amendments or changes to the arrangement with a brief explanation as to why such modification was necessary.

8. Review of existing compensation relationships. When conducting an internal investigation or updating the hospital physician contracting procedures, the hospital should review each existing physician-employment agreement and each management, development and marketing agreement. This review should focus on (i) the fair market analysis of the compensation paid pursuant to the arrangement; (ii) the true need for the services provided pursuant to the arrangement; (iii) ensuring the job descriptions set forth in the agreement, if any, are property documented; (iv) ensuring the allocation of medical versus administrative services is consistent with the services that are actually being provided by the physician; and (v) whether the full-time or part-time designation or expected time commitment is consistent with the services being provided under the arrangement and taking into account the physician's outside activities. In cases where the physician is also providing clinical services through his or her private practice and separately billing and collecting for those services, the physician employee should not be designated a full-time employee. Finally, during the course of the review, an internal analysis and record should be created with respect to each compensation relationship which documents the findings and support for each relationship and which is retained in the contract file.

The review of existing arrangements may lead the hospital to restructure, renegotiate or improve the documentation of certain arrangements. In cases in which an arrangement must be restructured, the contract file should include an internal memo or analysis which supports and justifies each resulting change. If investigated, the hospital must be in a position to justify changes and modifications made to its physician compensation arrangements and to demonstrate that such changes were not carried out on a random, unsupported or arbitrary basis to unjustifiably reward a physician.

9. Ongoing periodic reviews.
The hospital should task the Compliance Committee (or some other specially formed group or department) with developing a schedule pursuant to which each compensation relationship is periodically reviewed on an on-going basis. In the physician-employment context, the review should focus on the services being provided and the submitted time and activity sheets. The review should also ensure that proper documentation and justification supports any changes to the relationship or compensation. With respect to other compensation relationships, the review should ensure that the parties are complying with the terms of the agreement and that the proper documentation supports the compensation and services being contracted for.

10. Medical director agreements and other clinical/administrative agreements. Often, hospital systems utilize an hourly compensation arrangement for medical director or clinical administrative systems. However, when a contract for administrative or medical director services sets forth an aggregate compensation, the Compliance Committee should ensure that such amount is consistent with the time and services being provided. For example, if a physician is annually compensated thirty thousand dollars ($30,000) for his medical director services, and there are strong arguments that the hourly rate for such services is equal to approximately two hundred dollars ($200 per hour), the physician should be spending between one hundred (100) and two hundred (200) hours a year providing medical director services to the hospital. The hospital may employ a similar calculation to determine the appropriate compensation under an arrangement and to periodically confirm that a physician is providing both the time and the services required to support his or her compensation.

11. Standards for department chairs; special chairs, medical director. For similar positions that exist in numerous departments (e.g., department chair and department vice chair), a relatively standard set of responsibilities and hours expectation should be internally established by the hospital. An hourly rate and an annual compensation should be determined for such position, regardless of the department. Then, any variations in annual or hourly rates, as determined in contract negotiations or otherwise, should be signed off by the Compliance Committee or some other specially designated committee.
There may be reasonable and persuasive justification for compensating one department chair at a much higher rate (e.g., time commitment, number of employees being managed, etc.), but when great disparity exists between similar positions throughout the hospital, and justification for such variance is not recorded or contained in internal files, the hospital may face a greater challenge in defending the compensation of certain positions.

Contact Scott Becker at sbecker@mcguirewoods.com.

1 The Patient Protection and Affordable Care Act (PPACA), Pub. L. No. 111- 148, 124 Stat. 119 (2010), together with the Health Care and Education Reconciliation Act of 2010 (Reconciliation Act), Pub.L. No. 111-152, 124 Stat. 1029 (2010), provide over $300 million for the purpose of fraud and abuse enforcement.
2 See. McAllen Hospitals, located in Houston, Texas, which settled claims of "sham" transactions with physicians for $27.5 million, with the qui tam plaintiff (i.e., the "whistle blower") receiving $5.5 million of such settlement.
3 While self-disclosure does not guarantee lesser damages, recent changes due to the Patient Protection and Affordable Care Act ("PPACA"), may increase the benefits of this option when a Stark Law violation is identified. Under the Centers for Medicare and Medicaid Services ("CMS") "Self-Referral Disclosure Protocol" (SRDP), CMS has authority to reduce the damages associated with a Stark Law violation based on a number of factors including: (i) the nature and extent of the improper illegal practice; (ii) the timeliness of the self-disclosure; (iii) the cooperation in providing additional information; (iv) the litigation of risk associated with the matter; and (v) the disclosing party's financial position. This potential reduction, however, does not apply to violations of the Anti-Kickback Statute.
4 72 Fed. Reg. 51012 (Sept. 5, 2007).
5 See. 26 C.F.R. 53.4958-6(d)(2): If the authorized body approves an employment contract with a disqualified person that includes a non-fixed payment (such as a discretionary bonus) subject to a specified cap, the authorized body may establish a rebuttable presumption with respect to the non-fixed payment at the time the employment contract is entered into if: (i) prior to approving the contract, the authorized body obtains appropriate comparability data indicating that a fixed payment of up to a certain amount to the particular disqualified person would represent reasonable compensation; (ii) the maximum amount payable under the contract (taking into account both fixed and non-fixed payments) does not exceed the amount referred to in paragraph (d)(2)(i) of this section; and (iii) the other requirements for the rebuttable presumption of reasonableness under paragraph (a) of this section are satisfied.

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