AKS, antitrust, fraud, abuse, OIG, fair market value, FMV, DOJ
The call for hospitals and physicians to work together has never been greater. Federal health reform initiatives are driving hospitals, physicians and other providers to modernize the delivery system through collaborative relationships that promote high-quality, patient-centered care. But while payment policy is pushing hospitals and physicians to come together and using payment to spur that behavior, federal fraud and abuse laws create a pull from another direction, questioning hospital-physician financial relationships. Hospital boards increasingly will be asked to engage in discussions regarding potential hospital- physician business strategies as hospitals attempt to navigate in this new environment.

This article presents two of the pathways that many hospitals are considering to achieve clinical integration with physicians and the related fraud and abuse trip wires to avoid. One approach is a renewed interest in the employment of physicians, which also may involve the purchase of a physician practice. The other is a Medicare-specific endeavor created by the Accountable Care Act: a Medicare accountable care organization. For each approach, a series of questions is offered to help the board when considering a potential strategy or if a specific business arrangement is presented for review and approval.

Federal Fraud and Abuse Laws

The federal antikickback statute and the federal self-referral law, also known as the Stark law, are the two federal fraud and abuse laws that will have the biggest effect on hospital-physician financial relationships. Both present barriers to clinical integration and need to be navigated carefully to avoid potential problems, survive scrutiny and demonstrate good faith.

The American Hospital Association is advocating actively for change or adaptation of these laws to enable hospitals and physicians to achieve the goals of delivery reform. While these laws continue to be a challenge generally, for the Medicare ACO program Congress responded to the concerns expressed by granting the secretary of Health & Human Services the authority to waive application of these laws. HHS effectively has created a glide path for hospitals and physicians to come together in an ACO, eliminating the usual hurdles.

Antikickback statute: The AKS is a criminal statute aimed at preventing inducements or rewards for referrals for services or items paid for by the Medicare or Medicaid programs. It is broadly drafted, and penalties apply to the person making a payment as well as the recipient. Penalties include fines, imprisonment and mandatory exclusion from participation in federal health care programs.

The AKS has certain exceptions called safe harbors, including one for compensation to employees. Arrangements that meet a safe harbor are protected from prosecution. While arrangements outside a safe harbor are not automatic violations, compliance with a safe harbor or near compliance will serve a hospital well in demonstrating its intent to comply with the law in the event an arrangement comes under scrutiny.

The employee safe harbor protects any amount paid by an employer to an employee where there is a bona fide employment relationship. The key to demonstrating that a relationship is bona fide is twofold: it is commercially reasonable (that is, it makes business sense to purchase the services) and the amount of compensation paid is appropriate (in other words, it is fair market value).

To determine if compensation is appropriate, it is important to evaluate the nature of the services for which the physician will be paid, and the amount and manner in which he or she is subsequently compensated for providing services to patients. The ability to demonstrate meeting these factors is important because under the AKS, if one purpose of a payment is to induce the referral of future Medicare or Medicaid program business, the AKS is violated, and payment in excess of fair market value may well be interpreted to be for the purpose of inducing referrals.

The Stark law: The Stark law prohibits a physician or an immediate family member from making a referral for certain designated health services paid for by Medicare or Medicaid, including inpatient or outpatient hospital services, to an entity in which the physician or family member has a financial relationship (for example, ownership or compensation arrangement), unless an exception applies. The physician is subject to a civil penalty if he or she knowingly makes a noncompliant referral, as is the entity (that is, the hospital) that knowingly makes a claim for services provided pursuant to a noncompliant referral. In addition, a hospital is liable for any reimbursement related to services ordered by the self-referring physician, regardless of whether the hospital knew the referral was noncompliant.

The Stark law creates exceptions under which arrangements that otherwise would be prohibited may go forward, one of which is an employment exception. Under this exception, any amount paid by an employer to an employed physician (or immediate family member) is permitted if:

  • The employment is for identifiable services;
  • The remuneration is fair market value and does not take into consideration the volume or value of any referrals by the physician (for example, paying the physician based on his or her referrals of patients to any of the hospital's laboratories or diagnostic services);
  • The remuneration would be commercially reasonable even if no referrals were made.

Productivity bonuses based on services personally performed by the physician are permitted. Under the Stark law, any referral covered by the law is a violation unless it can be demonstrated that an exception was met. As a result, any arrangement with a physician who will make referrals to the hospital must meet an exception.

Employing Physicians, Acquiring Physician Practices

Physician employment and practice acquisition can be a sound business decision, but there are a number of significant issues related to entering into the arrangement and its operations that should be evaluated first, particularly with respect to fair market value and commercial reasonableness. As noted above, potential referrals cannot be linked to physician compensation and the relationship must be commercially reasonable.

In the past, an arrangement typically was considered acceptable if a reasonable entity of similar type and size and a reasonable physician of similar scope and specialty would enter into a similar arrangement, even if there were not potential referrals. This is changing. Increasingly, federal regulators are looking at the relationship between compensation paid and revenue expected to be generated by employed physicians (cash in vs. cash out). When a physician is paid more than he or she is expected to generate in revenue, regulators are highly suspicious of the relationship's commercial reasonableness.

Cash-in/cash-out isn't the end of the analysis, however. Context can justify the economics when special circumstances other than referrals justify getting a particular physician, group or location in place. When that happens, a contemporaneous record of the circumstances, considerations and deliberations motivating hospital decisions can make the difference between an excruciating and costly investigation and quickly satisfying a regulator that a transaction is not, in fact, suspicious.

Accountable Care Organizations

ACOs are a creation of the Medicare statute and were created by Congress in the ACA as part of the Medicare shared savings program. They are a type of clinical integration in which groups of hospitals, physicians and other providers come together in one integrated model to coordinate services to a designated group of patients, providing quality care and sharing in cost savings realized as a result of their joint efforts.

The ACO program is designed to improve beneficiary outcomes and increase the value of care by promoting accountability and requiring coordinated care, as well as encouraging investment in infrastructure and redesigned care processes. Hospitals employing physicians or in partnership with physicians or other practitioners are eligible to form an ACO. Participants in an ACO may include any provider or supplier participating in the Medicare program (for a description of the ACO program and summary of the participation requirements, see "How to Build an ACO," February 2012 Trustee).

It is significant that Congress gave the HHS secretary the authority to waive federal fraud and abuse laws as necessary to carry out the ACO program. While the initial proposals from the Centers for Medicare & Medicaid Services and the HHS Office of Inspector General were very limited, strong advocacy from the AHA and others resulted in final waivers that are robust and comprehensive, covering the full range of activities necessary for ACOs to achieve Congress goals. There are waivers covering ACO activities from startup through operations, and one covering incentives to beneficiaries. Each of the waivers is self-implementing, meaning there is no "permission" process.

Finally, for hospitals and physicians clinically integrating as an ACO, the AKS and Stark law are waived as long as an ACO meets the specific conditions of one of the following waivers:

  • ACO pre-participation waiver. This waiver applies for startup arrangements that predate an ACOs participation agreement with Medi­care, provided the arrangements were made with the good-faith intent to develop an ACO that will participate in the ACO program starting in a particular year (the "target year") and submit a completed application to participate for that year. Arrangements that are reasonably related to one of the purposes of the ACO program are protected. Of note, the waiver places accountability with the governing body of the ACO to determine whether an arrangement meets that criterion. There are other specific conditions, including documentation and transparency requirements.
  • ACO participation waiver. This waiver covers the operation of an ACO and applies to any arrangement that is reasonably related to the purposes of the ACO program, provided that the ACO has entered into a participation agreement and remains in good standing. Similar to the pre-participation waiver, the ACO governing body is accountable for determining whether an arrangement is reasonably related. There are other specific conditions, many of which match those of the pre-participation waiver.
  • Shared savings distribution waiver. This waiver applies to the ACO's distributions or use of the specific savings the ACO earned as part of the cost savings arrangement with the Medicare program. (The same protection is provided effectively by the other two waivers. Initially, this was the only waiver the agencies intended to propose; it was maintained in the final rule.)

As hospitals seek greater integration with physicians to improve quality and coordination of care, they must remain alert to the potential for regulatory scrutiny. While Congress has enabled HHS to remove barriers to forming a Medicare ACO, hospitals opting to employ physicians or purchase practices still must demonstrate commercial reasonableness and appropriate context to avoid unwanted investigation.

Michael Levinson, M.D., J.D. (michael.levinson@hoganlovells.com), is counsel in the Miami and Denver offices, and Jonathan Diesenhaus (jonathan.diesenhaus@hoganlovells.com) is a partner in the Washington, D.C., office of Hogan Lovells US LLP. Maureen Mudron (mmudron@aha.org) is deputy general counsel, American Hospital Association, Washington, D.C.

Sidebar - Compliance Check: Physician Employment and Practice Acquisition

Sidebar - Compliance Check: ACOs