The $69.5 million settlement by North Broward Hospital District in Fort Lauderdale, Florida to resolve False Claims Act allegations paints a cautionary tale of the importance of hospital practices and optics in connection with physician employment arrangements. The settlement arose out of a whistleblower claim that combined the Stark Law and the False Claims Act, and the core allegation was that the establishment and maintenance of certain hospital-physician employment relationships violated the Stark Law. Given that most physicians in practice are now employed or aligned with a hospital or health system, the settlement provides important lessons and reminders relative to the minefields existing in today's complex health care business and compliance environments.
The case was brought by Michael Reilly, M.D., an orthopedic surgeon who spurred North Broward's invitation to become an employee and then complained that the hospital was unfairly competing by overpaying hospital-employed physicians. The specific allegations regarding North Broward acts and omissions are found in Reilly's 127 page complaint. The matter was settled before North Broward responded, so the hospital's counter arguments or defenses are not known. Nonetheless, on the surface, the complaint's allegations highlight key lessons and compliance concerns related to hospital-physician employment matters.
Practices
Some of the allegations regarding North Broward seem trivial or reflective of the hospital industry as a whole. Based on the complaint:
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North Broward employed a significant number of physicians, including primary care and specialists including orthopedic surgeons, cardiologists and others;
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Hospital "Contribution Margin Reports" referencing hospital and ancillary revenue generated by each employed physician constituted evidence that North Broward was essentially attributing hospital revenue to the physician practices; and
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The operation of employed physician practices at a loss violated Stark's requirement that physician employment relationships must be commercially reasonable without considering physician referrals.
Reilly made additional allegations that formed the basis of his claim that the Stark Law was violated. Specifically, that:
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Certain employed physicians were compensated above the 90th percentile of the MGMA published data and in excess of fair market value (FMV) for the physicians' work;
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Employed physicians were commonly paid through guaranteed and production-based compensation models, with production measured through wRVUs; and
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North Broward's physician practices were asserted to have negative cash flows (e.g., practice expenses, including physician compensation, exceeded practice revenues).
Optics
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Hospital management reports cited in the complaint used external (MGMA) physician compensation and cost benchmark data to evaluate the financial performance of the Hospital District's employed physicians;
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The employed physicians were alleged to have high levels of compensation (in most cases, over the 90th percentile of MGMA data), while internal benchmark reports indicated that individual physician personally performed production did not align by having comparable levels of physician work or production;
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The complaint asserted that the hospital used the Contribution Margin Reports to evaluate physician compensation proposals and assess employed physician performance, and that physician "downstream contributions" were used by hospital management to justify compensation levels and substantiate otherwise financially unsuccessful practices; and
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Hospital management reports showing financial deficits in the employed physician practices were alleged to demonstrate that the employed physician compensation arrangements were not commercially reasonable without considering the physicians referrals to the hospital – contrary to the Stark law's employment exception.
Implications
The North Broward Hospital District settlement is the latest example of the challenges facing health systems and their executives in an environment that has changed rapidly over the past decade. While the payment and delivery system is clearly moving from volume to value in 2015, the environment during the 2000-2010 time period identified by whistleblower Reilly was solidly volume-based.
The settlement is a harsh reminder that hospital systems need to critically evaluate the types of management reports and assessments it develops, who receives the information and how that information is used. It's difficult to conceive of how a health system (or other employer) can manage performance without any consideration of a wide variety of data, but North Broward clearly shows the potential importance of "siloing" information within an organization to ensure that otherwise valid and reasonable management information does not influence physician compensation. And while performance benchmarking by reference to MGMA and other data is commonly used by to evaluate medical practice performance in numerous settings, the complaint illustrates how otherwise appropriate management reports and assessments can be construed to be improper in an enforcement context.
The settlement also highlights the inconsistency of fraud and abuse laws with business practices that are common (if not essential) outside of health care. That is, in other industries, employers would be expected to consider what financial benefit is brought to a business from the actions of employees in evaluating employee performance -- but certainly not in hospital-physician employment relationships.
It would be incorrect to interpret the North Broward settlement to suggest that the government views any hospital-based physician practice that takes a loss as violating the Stark Law. But the settlement does suggest that such losses present a risk and open the door to whistleblowers. To mitigate this risk, prudent hospitals should understand why their physician practices show losses (if that is the case) and document the basis for continuing such practices (without consideration of physician referrals).
Overall, the precise implications of the North Broward settlement and others that will likely follow may suggest that historic practices that may otherwise make sense in business, may present considerable compliance risk in health care. It's noteworthy that the North Broward settlement of $69.5 million was linked to only nine physician employees. Given that most health systems in the United States directly or indirectly employ large numbers of physicians, in the absence of additional guidance regarding the interplay of the FMV and commercial reasonableness requirements and/or amnesty for past practices, the nation's health systems may be in for some turbulent times ahead.
