Why providers must address the practice losses argument during fraud and abuse legal proceedings

A Law Review Q&A

Several recently settled qui tam cases filed by "relators" (i.e., whistleblowers) under the False Claims Act (FCA) reflect a growing trend that threatens to eviscerate the Stark Law's exceptions protecting the employment of physicians by hospitals or integrated delivery networks (IDNs).

We spoke with Matthew Jenkins and Mark Hedberg of Hunton & Williams, LLP to discuss some of these cases and explore why practice losses are not evidence of commercially unreasonable compensation practices by providers employing physicians.

Question: What are some recent physician compensation cases that should be on providers' radars?

Answer: Within the last few months, two health systems in Florida chose to avoid the risk of a catastrophic jury verdict similar to the one experienced by a health system in South Carolina by opting to settle qui tam cases for amounts that just several years ago would have seemed staggering if rendered as a jury verdict. In one case, a health system agreed to pay $69.5 million to secure the dismissal of the case alleging physicians were paid compensation that was in excess of fair market value and not commercially reasonable. Not even one week later, the another health system settled for a reported $115 million to secure the dismissal of a relator's claims which included charges that the organization paid employed physicians compensation in excess of fair market value and not commercially reasonable.

In both cases (and several others) relators allege that the compensation paid to physician employees constituted an impermissible financial relationship under the Stark Law because it failed to meet the requirements of the applicable exception, principally that the compensation be consistent with fair market value and commercially reasonable even if no referrals were made by the employed physician.

The most disquieting "fact" alleged by the relators in these cases was that the employing entities incurred losses on the employed physicians and that such practice losses were, in and of themselves, evidence of commercially unreasonable compensation. The relator's theory is simple, if misguided: no rational businessperson chooses to operate year after year with consistent financial losses; such operations are not sustainable and therefore commercially unreasonable. At least one federal court has found such losses sufficient to warrant a "particularly strong" inference "that it would make little apparent economic sense … to employ cardiologists at a loss unless it [the employer] were doing so … to induce referrals."

Q: What are the problems with this construct?

A: Although such reasoning may have superficial appeal, there are at least three significant problems with this construct. The first problem is that it ignores the context in which practice losses—the financial losses that result from totaling the physician's professional collections and subtracting the expenses associated with such physician's employment, including compensation and benefits—arise. That an IDN might incur a financial "loss" when the revenues and expenses of an individual physician are isolated should come as no surprise to anyone. Many if not most hospitals and IDNs that employ physicians have at least some employed physicians who would be seen as generating a "loss" if the equation is limited to professional collections minus practice expenses. But there are numerous valid business reasons why an entity that employs physicians may end up with practice expenses exceeding practice revenues, most of which have nothing to do with inducing referrals.

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For example, consider an urban hospital with a substantial indigent care burden and an emergency department designated as a Level I Trauma Center. Assuring the 24/7 availability of a cadre of trauma surgeons necessary to maintain Level I status would almost certainly demand the payment of compensation in amounts that exceed each surgeon's professional revenues less practice expenses, requiring the hospital to draw upon other revenues earned from other lines of business. Cross-subsidization among service lines within a hospital or an IDN is commonly done to assure the provision of needed but unprofitable services. Or, consider the IDN whose most recent negotiations with a substantial commercial payer resulted in an increased level of hospital reimbursement in exchange for reductions in professional fees paid for the hospital's employed physicians. One can easily imagine that trade-off as either causing or increasing the apparent "loss" associated with the employment of individual physicians. 

The second problem with the construct is that the introduction of the concept of "inducement" into the Stark Law's commercial reasonableness test turns the Stark Law on its head. As enacted, Stark disregards the subjective intent of the parties to a financial relationship and focuses solely on the objective analysis of whether that financial relationship satisfies an applicable exception. On the other hand, the federal Anti-kickback Statute (AKS) demands proof of intent to induce referrals in order to sustain a violation. But the AKS also includes an absolute protection for compensation paid to a bona fide employee in the provision of services paid for by a federal health care program without any requirement that the amount of such compensation be tested against benchmarks of fair market value or commercial reasonableness. The upshot is that the AKS imposes no barrier on a hospital's employment of a physician for the specific purpose of securing that physician's referrals, even if the compensation paid to that physician may result in a "loss" to the employer when subtracted from revenues earned on that physician's professional collections, but that same compensation now (according to the relators' bar) is not commercially reasonable under Stark.

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The third problem is that the construct completely ignores the steps CMS took to protect support payments between IDN components. In 2008, CMS executed a rapid about face when it promulgated the so-called "stand in the shoes" (SITS) rule that would have required every employed physician to stand in the shoes of the entity that employed him or her. As originally adopted, the 2008 SITS rule swept within the definition of a "financial relationship" many common employment arrangements that had theretofore been left untouched by Stark. Upon realizing that its new SITS rule would inadvertently cause routine support payments made within non-profit IDNs to fall outside of any applicable exception (and thereby effectively disable such systems from employing physicians), CMS promptly delayed the effective date of the SITS rule. Thereafter, CMS considered adding an exception the specific purpose of which was to facilitate "mission support payments" (financial transfers within an IDN), but opted instead to revise the entire SITS rule so as to avoid creating a special exception for some types of IDNs but not others. 

CMS revised the SITS rule specifically to accommodate the continued ability of entities that employ physicians to rely upon other revenue streams within the IDN to support the payment of physician compensation. The requirements of fair market value and commercial reasonableness where they are present were left intact, and CMS saw nothing inherently incompatible between those requirements and the inter-company support payments CMS preserved through the amended SITS rule.   

Q: What should providers do when encountering the practice losses argument during a Stark Law proceeding?

A: The foregoing issues demonstrate that the practice loss argument advanced in the recent cases is inconsistent with applicable law and it should be rejected vigorously when encountered. In the absence of other facts implicating the Stark Law, such as a compensation arrangement that algebraically takes into account the volume or value of a physician's referrals for designated health services in determining that physician's compensation, practice losses are not proof of commercial unreasonableness or compensation that is inconsistent with fair market value. 

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