Over the past 10 years, health systems have been acquiring physician practices at record rates. The concept is that if a health system is to function at maximum levels, there needs to be integration. Integration of IT systems, integration of operations, and integration of clinicians. However, the acquisition process has resulted in a shift of revenue on our health care system. Whereas formally, private medial practices operated on profits and losses, hospital-employed physicians practices almost universally operate at a loss. $141,000 per physician to be exact.
So how do health systems address this issue? Other revenue sources. To create an integrated delivery system most health systems focus on the overall business development of the system rather than one part. For example, imagine if a soft drink company knew that the apparel division lost money but the apparel actually increased downstream revenue of individuals purchasing the soft drinks. Physician practices are similar in that if a patient gets into the system, the value of acquiring that patient can be seen in multiple divisions. Unfortunately, Federal law prohibits health systems from compensating physicians for downstream revenue, unlike our soft drink example.
Meet the Stark Law
The Stark Law was enacted in the early 1990’s to combat the financial incentive physicians have to self-refer to themselves for services. For example, a physician may be more likely to refer you to their own lab rather than another lab due to the fact that the physician owned the lab. Over the years, the Stark Law has expanded to cover multiple financial arrangements between physicians and referring entities. This includes hospitals and the employment of physicians. The prohibitions are meant to ensure physicians are acting in the best interest of the patient rather than in the interest of potential revenue.
In short, it requires a hospital employer to pay a physician for the physician’s (a) identifiable services, (b) the amount of payment must be fair market value, (c) the arrangement is commercially reasonable, and (d) you cannot compensate or enter into an arrangement if it is based upon the volume or value of referrals (or downstream revenue).
It All Began in Rural Montana
The Stark Law has become a significant point of discussion in Flathead County, Montana. The county is about the size of Connecticut but has a little over 90,000 residents. To call the area rural and isolated would be an understatement. Given its isolation, providing healthcare and bringing in physicians is as unique as it gets in the United States. As you will see below, the local health system sought to deliver care but according to recent allegations ran afoul of the Stark Law.
A complaint has been filed against Kalispell Regional Healthcare (“KRH”) regarding violations of the False Claims Act. KRH operates in Flathead County. The whistle blower lawsuit includes allegations of kickback schemes and excessive compensation to physicians. Specifically, the complaint alleges that KRH has paid physicians for non-personally performed services and overall in a manner that is in excess of fair market value. This complaint and article contains allegations only and there has been no determination of liability.
What Happened in this Montana Case?
Jon Mohatt, an army officer, started at KRH in 2014 after a long career working in areas ranging from operations, to finance, and even acting as a chief information officer. As the CFO of the medical group, he managed the finances of over 220 medical providers with $100 million in net revenues. The KRH system included 300 beds, services 170,000 patients a year and covered a geographical region of 20,000 square miles. This represents an area about double the size of Maryland. Jon would eventually find out about the various financial arrangements, losses of millions of dollars in physician practices, and a culture within KRH that caused him to whistle blow on this small system in rural Montana.
Excessive Physician Compensation Allegations
The data surrounding the compensation to physicians highlights the crux of the issue. In 2016 at least 38 employed physicians were paid in excess of the 90th percentile utilizing cash compensation or compensation to collections ratios. Of the 38, only 6 of the 38 physicians had any minimum production thresholds. Finally, the collections for those 38 physicians was $10.5 million; however, KRH paid those same physicians $15.6 million. It is worth noting that allegedly the compensation to collections ratio was 1.8 times the national 90th percentile and the compensation per RVU was 1.64 times the national 90th percentile.
Several physicians are named in the complaint and their compensation was outlined. For example, one cardiologist worked a .1 FTE and was paid $311,000 even though he worked 4.5 months. The 90th percentile for the same specialty is $971,400. A gastroenterologist worked a .78 FTE and his production was between the 10th and 25th percentiles but was paid in excess of the 90th percentile. An oncology surgeon was a .78 FTE, generated below the 10th percentile, but was paid just under the 90th percentile. A radiation oncologist worked 4 days per week for 46 weeks and generated just above the 25th percentile but was paid above the 90th percentile. In addition, there were bonuses in many of these arrangements without any written goals.
Finally, the surrounding allegations paint an even worse picture for KRH. Specifically, it was routine for bonuses to be paid based upon absent goals. Retroactive agreements were made, sometimes going back 21 months. And, the ratios to collections and to wRVUs generated by the physicians were far in excess of the 90th percentile.
Culture of Referrals
According to the complaint, KRH focused significantly on the profits from referrals of physicians to cover the excessive losses of the practices. For example, the system CFO Velinda Stevens is purported to have regularly requested and monitored the volume of referrals from all employed physicians. She recently passed away but in the complaint, this data was shared with physicians, operational leaders, and allegedly became a part of conversations around individual physician’s compensation packages. The complaint alleged that “Stevens created a culture for physicians that emphasized referrals and minimized physician productively because referrals were the driving source of major hospital profits.”
Mohatt alleged that even when meeting with physicians, they were aware that their value to the system was not their personally performed services but their referrals to the hospital system. This included that the physicians knew the system was making profits from referrals which justified their salaries. In addition, according to the complaint there were presentations to executive leaders highlighting this referral focus was resulting in increased revenues. Although the focus appeared to be on referrals, Mohatt represented that he regularly voiced concerns starting in 2014.
According to the complaint, Mohatt made suggests and even received approval by the Board of KRH for a new compensation philosophy. The complaint states that these concerns and policy were ignored. On multiple occasions, Stevens authorized bonuses even though they were above common thresholds of fair market value. Also, Mohatt alleged there were several physicians who received large amounts for administrative services (ranging from $50,000 to $150,000 annually) with no documentation supporting the services were performed.
Although these allegations are now public, according to news sources a settlement has been reached in principal. However, cases such as these highlight the risks of compensating physicians in a manner that is not consistent with the Stark Law. This is another good example of
* The False Claims Act claims and allegations in the complaint are allegations only and there has been no determination of liability.