While it is common to see settlements for violations of the Physician-Self Referral Law (also known as the Stark law) or False Claims Act (FCA), very few are of the size and scale of a recently settled case. On December 19, 2023, Community Health Network (CHN) agreed to pay a $345 million settlement as well as enter into a five-year corporate integrity agreement with the US Department of Health and Human Services Office of Inspector General (HHS-OIG), including engaging with a legal and claims independent review organization (IRO) and adding a compliance expert to its board.
The payment is to resolve allegations that CHN violated the FCA and Stark law based on its arrangements with physicians in multiple specialties, including breast surgery, cardiology (including the subspecialties of invasive cardiology and electrophysiology), cardiothoracic surgery, vascular surgery, and neurosurgery. The claim was brought by CHN’s former chief financial officer and chief operating officer, Thomas Fischer, under the FCA’s qui tam provisions.
While CHN has settled this case, it is essential to mention that the claims are allegations only, and there has been no determination of liability.
Overview of the Allegations
Per the claim, as part of its growth initiatives beginning in 2008 and 2009, CHN sought to recruit physicians for employment to avoid the loss of referrals to competitor hospitals in the market and to capture downstream revenues as a result of services provided by the specialists. To support compliance, CHN engaged with multiple valuation firms to review its proposed compensation arrangements; however, these valuation firms generally applied a three-step rule to determine reasonable and fair market value (FMV) compensation:
Test 1: Total cash compensation (TCC) must be at or below the 75th percentile of national salary benchmarks.[1]
Test 2: TCC per WRVU must be at or below the 60th percentile of national survey benchmarks.
Test 3: TCC per professional collections must be at or below the 60th percentile national market benchmarks.
If a provider's compensation did not meet the criteria in tests one through three, the compensation may still be deemed at FMV based on the presence and documentation of certain business judgment factors. These “certain business judgement factors” included hard-to-recruit specialties, highly specialized or accomplished physicians, incremental administrative/academic roles or responsibilities, or other business justifications would have allowed the valuation firm to increase these thresholds.
However, in most cases, the physician employment arrangements were required to pass the three-test rule to be determined as compliant.
Breast Surgeons
CHN formed a breast care and surgical practice (referred to as the “Breast Care Integration” by CHN), initially employing five physicians. Based on the facts provided, upon employment the breast surgeons were to receive TCC at the 97th percentile and TCC per WRVU at the 84th percentile, which resulted in failures of the first two tests outlined above. When the valuation firm conducted the third test, the TCC per professional collections ratio was at the 56th percentile of market data, falling “within the bounds of FMV” for the first year of the arrangement. However, CHN included the technical component of the collections in its figures, which, according to the complaint, improperly inflated collections such that the arrangements passed the third test.
Cardiovascular Specialties
CHN purchased ownership interests of two cardiovascular medical groups and sought to employ several other cardiovascular specialists, forming a new corporate entity that was a subsidiary of CHN. Using a shift in reimbursement from physician office to hospital-based as rationalization, CHN proposed compensation increases of over 90% for cardiovascular specialty offers as outlined below.
To receive support for these arrangements, CHN discussed the terms of the arrangements with four valuation firms. The first was not engaged because they were deemed unduly conservative by setting the cap on compensation at the 90th percentile. CHN described the second firm to have “arbitrary cut-offs” of the 75th percentile for base compensation and the 90th percentile for TCC.
Per the complaint, those “arbitrary cut-offs” were the rationale for CHN leadership deciding to contract with a third firm. The third firm determined that the majority of the cardiovascular arrangements did not meet the “criteria previously discussed as a measure of reasonableness and FMV,” but CHN’s compensation committee approved the proposed compensation regardless, without a favorable FMV opinion from a valuation expert.
Through this committee, CHN increased its test two criteria from the 60th percentile to the 75th percentile of national benchmarks, which, as the third valuation firm described, put CHN at risk because there is a considerable disconnect between compensation and clinical production at the 75th percentile.
Later, CHN engaged with a fourth firm to conduct a benchmarking analysis of the cardiovascular specialists’ compensation. The majority of TCC and TCC per WRVU rates were above the 90th percentiles and were described by the firm as “astounding” and “staggering” rates of compensation.
Neurosurgery
CHN began expanding its neurosurgery service line in 2006, and as part of that, it began employing physicians on compensation guarantees while they ramped up production, which is common in the market. However, when the TCC was set to be reviewed by a valuation firm, the compensation provided did not include the base guarantees and was only based on the TCC per WRVU rate.
As neurosurgeons are highly specialized and often in short supply, the valuation firm increased the TCC per WRVU threshold criteria to the 75th percentile in its analysis. Even with this higher threshold, the arrangements did not pass the three-test process based on projected WRVUs. Further, when the actual WRVUs were examined, all of the physicians exceeded the 75th percentile TCC per WRVU, and many were over the 90th percentile TCC per WRVU. The firm did not conclude that the compensation plan for the neurosurgeons was within FMV or reasonable.
Performance Incentive Payments
As is common in many organizations, CHN wanted to include incentives that aligned physician performance with organization objectives. However, CHN included a service line incentive conditioned on the referrals generated to the hospital and on hospital downstream revenue specific to the physician, a Stark law violation.
When compensating providers’ performance incentive payments, a key factor is having a substantive set of quality metrics. Outcome metrics based on nationally endorsed benchmarks are more valuable than process metrics based on internal benchmarks. Further, metrics that are supported by credible medical evidence for improving quality, efficiency, and/or patient outcomes allow organizations to ensure their provider compensation programs continue to align with federal fraud and abuse laws.
Key Takeaways
In this case, the allegations were that CHN ignored repeated warnings from valuation firms regarding the regulatory perils of overcompensating its physicians. Opinions were often provided, but in some instances the data supplied to valuation firms for analysis was incomplete or incorrect.
Additionally, every valuation is based on a specific set of facts and circumstances as well as the appraiser’s judgment and experience/expertise, which only a professional valuation services firm may provide. So, while it is important to have a third-party valuation firm periodically review arrangements, organizations also need to:
- Hire qualified strategic/advisory consultants who understand the regulatory environment.
- Evaluate all compensation components (i.e., base and productivity) and ensure that work performance is not influenced by other providers (i.e., advanced practice providers).
- Ensure there are no duplicative payments. Arrangements need to consider the entirety of the services provided.
- Make certain that no compensation elements are based on the volume or value of referrals.
- Establish written standards and policies for provider compensation arrangements.
- Implement or update employee training programs in regard to compliance with regulatory requirements; additionally, require all new and existing employees to repeat the training on an annual basis. This should include education on best practice in documentation of arrangements and ensuring that arrangements do not consider the volume or value of referrals in compensation arrangements.
- Prepare documentation to ensure the commercial reasonableness of each arrangement, including business judgement, is properly detailed and subsequently reviewed by legal counsel.
- Complete a periodic audit of physician payments to ensure consistency between written terms and payment amounts.
- Ensure that operators and administrators apply valuation appraisers’ opinions and recommendations.
About ECG’s Valuation Team
The OIG is expected to recover $3.44 billion from audits and investigations conducted during FY 2023. ECG's Provider Compensation Valuation Services team helps health systems mitigate compliance risks through a comprehensive suite of services, resources, and tools. We routinely assist clients in the evaluation of their financial arrangements with physicians to ensure they are consistent with FMV guidelines and commercially reasonable, as well as the establishment criteria for evaluating compensation arrangements specific to the organization and its risk tolerance. We firmly believe that integrating risk management into organizational strategy creates value and enhances protection against adverse outcomes.
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Edited by: Matt Maslin
[1] Examples include MGMA, ECG, AMGA, and SullivanCotter physician compensation surveys.
Published January 16, 2024
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