Physician Compensation Diagnosis Under Fire After Citizens Settlement

May 15, 2015

The proper compensation of physicians, and the ability to justify such compensation, continues to be a critical risk area for hospitals and other healthcare providers. Failure to pay physicians appropriately led to the unfavorable outcomes for the providers in the high profile Tuomey and Halifax cases. Now comes new evidence that a straightforward comparison of pay levels to published industry median data is insufficient to avoid scrutiny and potential financial damages.

A few weeks ago, Citizens Medical Center (Citizens), a county-owned hospital in Victoria, Texas, agreed to pay the United States $21,750,000 to settle allegations that it violated the False Claims Act because it had engaged in improper financial relationships with referring physicians. This qui tam case, like many others in recent years, provides lessons for the healthcare compliance community. One critical takeaway comes from the judge’s ruling on a motion to dismiss earlier in the case. In denying dismissal of claims related to a group of cardiologists employed by Citizens, the judge stated:

“Relators have made several allegations that, if true, provide a strong inference of the existence of a kickback scheme. Particularly, the Court notes Relators’ allegations that the cardiologists’ income more than doubled after they joined Citizens, even while their own practices were costing Citizens between $400,000 and $1,000,000 per year in net losses. Even if the cardiologists were making less than the national median salary for their profession, the allegations that they began making substantially more money once they were employed by Citizens is sufficient to allow an inference that they were receiving improper remuneration. This inference is particularly strong given that it would make little apparent economic sense for Citizens to employ the cardiologists at a loss unless it were doing so for some ulterior motive—a motive Relators identify as a desire to induce referrals (emphasis added).”

Surprisingly to many, the judge rebuffed a widely-held industry belief that using median pay from physician compensation surveys is a relatively “safe bet” for fair market value (FMV) under healthcare regulations. Indeed, some industry participants have argued that national median compensation is, in fact, the minimum amount required to hire a physician. The judge, however, was not persuaded by such thinking. The mere fact that the Citizens physicians were paid less than median was overridden by two other economic factors that raised questions about the cardiologists’ compensation.

First, the allegation that the physicians received a substantial pay increase after being employed by Citizens called into question whether the compensation met the healthcare regulatory definition of FMV. Why would the physicians’ income nearly double just because they became hospital employees? What economic factors would account for such a significant increase, apart from the referrals generated by the cardiologists for the hospital? Second, Citizens lost hundreds of thousands of dollars on its employed cardiologists. Why would a hospital incur such losses? Given these questions, the judge was unpersuaded that survey benchmarking alone was sufficient to establish regulatory compliance.

The judge’s focus on economic factors beyond survey benchmarking, such as pay increases and practice losses, is consistent with other recent enforcement actions. In the Tuomey and Halifax cases, the government’s valuation expert argued practice losses were one indication of a kickback scheme, absent factual community need or other non-referral business reasons. This expert also noted one of the neurosurgeons in the Halifax case received a 67% increase in pay upon being employed by the hospital. Unfortunately, many market participants seem oblivious to the fact that sole, uninformed use of survey data can lead to fact patterns mirroring those of the employed cardiologists at Citizens. Recent studies have shown commercial payer rates in many local markets cannot sustain even median compensation rates for physicians. Basing compensation solely on median survey data—whether national, regional, or even state—can result in large pay increases for physicians and/or significant practice losses within these markets.

The lesson learned from the recent Citizens case, along with Tuomey and Halifax, is that a more robust economic and valuation analysis is needed to ensure compliance with the regulatory standards of FMV and commercial reasonableness. Reliance on survey benchmarking and market data alone does not appear to address the multiple economic factors examined by regulators and courts in fraud and abuse enforcement actions.

At Ankura Consulting Group, we’ve taken the lessons from Citizens and other key cases to heart. We don’t simply pull numbers out of survey books and call the result FMV. We use critical thinking and rigorous valuation analytics that go beyond mere survey data to help our clients comply with the regulatory standards of FMV and commercial reasonableness. This enables clients to apply a broader and more in-depth valuation perspective to their compliance programs.