3 Steps to Reduce Fraud and Abuse Compliance Risks in Hospital-Physician Deals

The most astute executives in health systems are rightfully concerned about compliance risks in physician contracting. Among these risks are that a transaction or an arrangement between a hospital and a physician are consistent with fair market value (FMV) and are commercially reasonable (CR) as those terms are defined in the healthcare regulatory context.

Many such transactions and arrangements are susceptible to FMV and CR compliance risk, including acquisition transactions, direct employment relationships, medical directorships, part-time coverage arrangements, on-call arrangements, joint ventures, and leases. Components of transactions and arrangements that may raise red flags include the following: 1) payments inconsistent with fair market value, 2) contracts terms that are not commercially reasonable (i.e., long-term commitments, hospital-owned physician practices operating at a loss, and payments for efforts that cannot be documented), and 3) the inclusion of revenue in compensation that can be linked to the volume or value of referrals.

As an example, in United States ex rel. Reilly v. North Broward Hospital District, et al. [Case No. 10-60590 (S.D. Fla.)], a local orthopedic surgeon (Realtor) brought suit against the hospital district (North Broward), alleging systematic payments for physician referrals through employment compensation arrangements in excess of fair market value. Practice losses were identified in the complaint as key indicators that compensation paid to physicians was excessive and that the arrangements were not commercially reasonable. The Relator claimed that North Broward paid employed physicians “at levels which were determined based in part on the volume and value of inpatient and outpatient referrals to Broward Health hospitals and clinics.” The case was settled in September 2015 for $69.5 million.

In today’s environment, compliance risk in hospital-physician transactions and compensation arrangements cannot be fully eliminated. Motivated and informed relators operating on the inside of an organization, an aggressive and educated qui tam bar, an active government enforcement mindset with excellent ROI on taxpayer dollars, and a propensity to settle cases in the post-Tuomey environment all result in an elevated risk for vulnerable organizations. However, there are effective ways for mitigating fraud and abuse compliance risks in hospital-physician deals.

First, establish an enterprise risk management system that ensures an organizational compliance mindset, where risks can be detected and resolved, rather than ignored, with rigorous training, oversight, and monitoring.

Second, maintain well-documented polices and processes around FMV and CR, including the following:

  • Pre-transactional documentation of CR using facts, rather than anecdotes;
  • Segregation of duties around the FMV and CR functions;
  • Appropriate use of outside valuators and in-house analysts, ensuring competent, defensible conclusions of FMV;
  • Triggers for recognizing problematic contract terms and compensation arrangements,
  • Monitoring and mitigation of repeated, unexplained practice losses; and
  • Routine auditing of arrangements for ongoing compliance.

Third, avoid appearances of fraud that mar compliance efforts and provide fuel to authorities and would-be relators, such as analyzing or otherwise creating a nexus between practice losses and hospital referral profits, entering into physician arrangements based on outpatient or other hospital service line profits, creating compensation models that cause losses (i.e., a compensation formula that forces the practice to lose money), and maintaining practice losses without legitimate business reasons (e.g., charity care, practice startup, etc.).

Pause now and think about your organization’s compliance mindset, policies, and procedures around FMV and CR. Having a strong FMV/CR compliance plan is integral to a solid enterprise risk management system. Perhaps gaps exist in your organization that need to be filled. If so, seek the advice of legal counsel and compliance consultants with expertise in hospital-physician arrangements and FMV/CR.


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Topics: Physician Compensation, What is Fair Market Value

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