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Fraud Alert Signals Increased Scrutiny of Physician Compensation Arrangements

Aug 21, 2015 02:17PM ● By MED Magazine

By Tom Johnson

Recent regulatory guidance may be causing physicians and hospital executives to lose more sleep than usual these days.  In a Special Fraud Alert (Fraud Alert) issued earlier this summer, the Office of Inspector General (OIG), the Division of the Department of Health & Human Services tasked with combating healthcare fraud and abuse, reiterated its long-standing position that physician compensation arrangements are considered suspect under the Anti-kickback Statute, and by extension, the Stark Law, if the arrangement compensates a physician for his or her past or future referrals of Medicare/Medicaid business.    


The Fraud Alert referenced a recent settlement the OIG reached with twelve individual physicians who had entered into medical directorship and office staff arrangements that the OIG questioned.  The OIG alleged that the payments made to these physicians constituted improper remuneration because, among other things, the payments made to the physicians took the physicians’ volume or value of referrals into account and did not reflect fair market value for the services to be performed.  This settlement is also notable because it was reached between the OIG and individual physicians, not a healthcare entity.


While not announcing anything new, the Fraud Alert provides cause for the health care providers to reevaluate and scrutinize their physician compensation arrangements, notably medical directorships and office staff arrangements.  


Although Federal Law makes it illegal to pay, or provide value to, physicians in exchange for referrals, physician compensation arrangements can be structured to fall within a safe harbor to the Anti-kickback Statute, or an exception to the Stark Law.  Falling under an applicable safe harbor or exception provides assurances that the compensation arrangement does not run afoul of Federal Law.


For those hospitals and health systems currently utilizing or moving towards a direct-employment model for its physicians, compensation arrangements generally are structured to fall under the employment safe harbor to the Anti-kickback Statute and the similar bona fide employee exception to the Stark Law.  Alternatively, for those hospitals and health systems following an affiliated group practice model of integration, physician compensation arrangements can be structured to fall under different safe harbors or exceptions, notably the personal services safe harbor to the Anti-kickback Statute and the similar exception to the Stark Law. 


Although the applicable safe harbor or exception relied upon by a health care provider may vary, it is well-established that any compensation arrangement must (1) be consistent with fair market value, and (2) not be determined in a manner that takes into account the value or volume of referrals generated by the physician.  Even if a particular compensation arrangement is properly in place, the contracting parties would be well-served to appropriately and adequately document the transaction and include, in the compensation contract, all the required elements of the applicable safe harbor or exception, including that total compensation is consistent with fair market value and does not take into account the volume or value of the physician’s referrals.  For larger, more complex transactions, fair market value opinions from appraisers may be recommended.


The integration model of health care organizations certainly favors the practice of contracting with staff physicians or utilizing employed physicians to provide services either as medical directors or other roles. The Fraud Alert provides a signal to the health care industry that the OIG may be ramping up its enforcement efforts relating to these compensation arrangements, and serves as a reminder for providers to carefully evaluate its existing compensation arrangements and ensure that any future arrangements are structured to comply with Federal Law.

The Special Fraud Alert can be found by clicking here.


Thomas Johnson is an attorney with Boyce Law in Sioux Falls.