Morris Manning & Martin, LLP

MMM Healthcare Update: New Settlement Underscores Challenges of Compliant Stark Law Exceptions

05.23.2017

Last week, the government announced that it was intervening and settling for $34 million a case brought against Mercy Hospital in Springfield, Missouri by a medical oncologist who had been employed by an affiliated physician group.  United States, ex rel. Holden v. Mercy Hospital Springfield, Case No. 15-03283-DGK (W.D. Mo.).  In electing to intervene in the case, the government stated that it was intervening in the part of the action that alleged that Mercy Hospital and its affiliates violated the Stark Law, 42 U.S.C. § 1395nn, by submitting false claims to Medicare for infusion services rendered to patients who were referred by employed physicians of Mercy Clinic to Mercy Hospital’s Oncology and Infusion Center.  The government noted, however, that it was not intervening with respect to the allegations surrounding the same conduct that the Relator contended implicated the Anti-Kickback Statute, 42 U.S.C. § 1320a–7b.  This case is another “stark” reminder that it is critical to structure physician employment and contracting relationships pursuant to a compliant Stark Exception.  As in this case, that sometimes means that it may be difficult for a physician to achieve the same level of compensation post-employment that he or she obtained in private practice.  But in all events, it is a reminder that atypical compensation plans require closer regulatory scrutiny.  A summary of the relevant allegations in this case makes this clear.

The relevant parties were Mercy Hospital Springfield, which operates a hospital and medical facilities, as well as Mercy Clinics Springfield Communities (the “Clinic”), a hospital affiliate consisting of medical oncologists that conducted business through multiple offices and clinics, including a clinic on the Mercy Springfield campus within what was known as the Chubb O’Reilly Cancer Center (the “Cancer Center”).

Until 2009, Mercy Clinic owned the Infusion Center on the campus of Mercy Hospital Springfield.  The Complaint alleged that profits from the Infusion Center were distributed among physicians practicing in the Clinic as compensation.  There would be a number of compliant ways for the physician practice to do this under an applicable group practice regulation.  These include distributing profits that include revenues from Designated Health Services on a per capita basis to shareholders or distributing revenues from Designated Health Services in the same way as the group practice distributes non DHS revenues.  42 C.F.R. § 411.352(i)(2).

In 2009, evidently the Infusion Center was transferred to Mercy Hospital.  The Complaint does not make it clear whether there was a payment involved with such transfer. Regardless, it is clear that the transfer took place because if patients were infused at a hospital-based center, then Mercy Hospital’s eligibility for the 340(b) Drug Pricing Program meant that there would be increased remuneration for infusion services which, of course, are a critical component of a medical oncology practice. 

The Complaint alleges that the 340(b) Program ultimately increased Mercy Hospital’s revenue by approximately $10 million per year.  According to the allegations in the Complaint, the medical oncologists at the Clinic were concerned about loss of income from the infusion program.  As a result, according to the Complaint, Mercy Hospital proposed that the physicians would be “made whole” for lost income as a result of the transfer of the ownership of the Infusion Center.

To do this, the Clinic’s physician compensation model provided wRVU credit as a “margin replacement based on work RVU for drug administration in the hospital department.”  This newly calculated work RVU was not based on physician work, clinical expense or malpractice overhead that typically are used to arrive at a wRVU value.  Instead, the Relator alleged, it was calculated to determine what level of proxy work RVUs for supervision would be needed to keep the oncologists’ compensation at the same level as when they owned the Infusion Center.  The Complaint alleged that in 2013 and 2014, the work RVU for drug administration supervision that the physicians obtained was approximately 500% of the total work RVUs for in-clinic work where the physician was actively involved in patient care.  If that were true, then that would have tended to drive the physician compensation above standard valuation ranges that are premised on personally performed services.

The Complaint further alleged that beginning in 2009, Mercy Hospital also paid management fees to Mercy Clinic supposedly for the physician’s management of the Infusion Center.  However, according to the Complaint, the physicians practicing in the Cancer Clinic were not responsible for management.  The Complaint alleged, and evidently the government agreed, that this arrangement did not meet the fair market value and commercial reasonableness provisions under relevant exceptions to the Stark Law.

Taking the substance of these allegations in the Complaint at face value, there are several important observations from a compliance standpoint.  First, particularly for a medical specialty like medical oncology, it is challenging to establish a professional services or employment arrangement that compensates the physicians at the same level of compensation as if they owned and operated the infusion center.  That is because the work RVUs for personally performed services for medical oncologists generally cannot rise to the same level as the additional compensation that the practice would receive for the additional provision of infusion services to patients.  But it is a significant reminder that a creative compensation arrangement that would provide for RVU credit for non-personally-performed services is difficult to defend if the end result drives compensation well above fair market value ranges as measured by personally-performed wRVUs.  In the medical oncology context, this is another reminder that it is crucial that a hospital obtain an independent fair market valuation of compensation in question as well as an independent legal assessment of the compensation model.  The case harkens back to the recent settlement in the Halifax Hospital Medical Center case where the medical oncologists were compensated by an incentive bonus that was funded in part by 15% of the operating margin of the medical oncology program at the hospital.  Fatal to that compensation arrangement was the fact that the program’s revenue included fees for designated health services such as outpatient prescription drugs and outpatient services that the physicians did not personally perform. 

Fundamentally, because the Stark Law is a strict liability statute, the intent of the parties in entering into their arrangement was immaterial to the resolution in Mercy Hospital’s instance.  The government’s intervention as to the Stark Law claims only highlights the fact that healthcare providers must continue to be cognizant of compliant employment relationships and wary of creative efforts to mimic compensation that a private group of physicians might qualify for under the Stark group practice definition, but that contracted or employed physicians could not receive.  While the Stark Law’s requirements may be elastic in certain instances, stretching too far to meet compensation demands can result in strict liability under Stark and potential False Claims Act liability.