Compensation of employed physicians based on (non-DHS) services performed by anotherby Alan Rumph on 06/23/11
Let’s get back on the StarkAnswers message with this post—this is an issue for which I believe there is an answer, although that answer is apparently not common knowledge. The issue is whether the Stark exception for compensation paid to bona fide employees at 42 C.F.R. §411.357(c) allows physician employees of a hospital or other DHS entity to receive productivity bonuses determined in a manner that takes into account non-DHS services ordered by the physicians but performed by other individuals. For example, consider following scenario:
Hospital directly employs both physicians and non-physician practitioners (“NPPs,” e.g., physician assistants and nurse practitioners) to treat patients. Hospital pays each physician compensation that includes a bonus computed as (i) a fixed dollar amount per work-RVU personally performed by the physician, plus (ii) a fixed dollar amount per work-RVU performed by the NPPs who work with the physician. The second element of the bonus formula does not represent compensation solely for the physician’s supervision of the NPPs, and some of the NPP services are not “incident to” the physician’s services. Although most of the NPP services are ordered or otherwise generated by the physician, none of the NPP services are DHS. The physician’s aggregate compensation is consistent with the fair market value of the services the physician personally performs for the hospital, and the arrangement satisfies all other elements of the employment exception. The sole issue is thus whether each physician's bonus being determined in a manner that takes into account the volume or value of non-DHS services he/she orders but does not personally perform is prohibited under the employment exception.
Many “authorities” state or imply that the above compensation methodology is impermissible—that the employment exception allows productivity bonuses only with respect to services personally performed by the employed physicians. The basis for this conclusion is §411.357(c)(4), which provides: “Paragraph (c)(2)(ii) of this section does not prohibit payment of remuneration in the form of a productivity bonus based on services performed personally by the physician (or immediate family member of the physician).” By its terms, however, this provision does not limit a compensation methodology otherwise allowable under §411.357(c)(2)(ii). Paragraph (c)(4) instead only permits a methodology that would otherwise be prohibited under Paragraph (c)(2)(ii). I believe that a comprehensive analysis of the statutory and regulatory scheme strongly supports my interpretation.
The language of the regulation is operatively identical to the statute (SSA §1877(e)(2)) and has remained unchanged since its initial promulgation in the 1995 Stark I regulations. By their terms, SSA §1877(e)(2)(B)(ii) and the regulation at §411.357(c)(2)(ii) purport to allow the physician bonuses described above. These provisions state that the employed physician's compensation may not be “determined in a manner that takes into account (directly or indirectly) the volume or value of any referrals by the referring physician.” The term “referral” is defined in §411.351 to mean referral of DHS. Non-DHS services ordered by a physician but performed by someone else are “other business generated” under §411.354(d)(3).
The employment exception is unique in allowing physician compensation (outside a group practice) to be determined based on the volume or value of “other business generated” for the DHS entity: Each of the exceptions for personal service arrangements at §411.357(d), fair market value compensation at §411.357(l), indirect compensation arrangements at §411.357(p), and academic medical centers at §411.355(e) prohibits the physician's compensation from taking into account “other business generated” by the physician.
In the 1998 proposed Stark II regulations, CMS proposed to add the “other business generated” limitation to the employment exception. When the employment exception was finalized in the 2004 Stark II, Phase II regulations, however, CMS did not so limit physician employee compensation and specifically noted that the employment exception is unique in this regard. 69 Fed. Reg. 16066-67 (Mar. 26, 2004). As CMS further stated, “The ‘other business generated’ restriction applies only to those exceptions in which it expressly appears.” 69 Fed. Reg. 16068. Thus, the employment exception’s allowing the compensation methodology to take into account the volume or value of “other business generated” (i.e., non-DHS ordered by the employed physician but performed by others) appears to be clear and intentional.
Unfortunately, other statements in the Phase II preamble are not so clear and could be read to suggest that only personally performed services may be taken into account in determining a physician’s compensation under the employment exception. 69 Fed. Reg. 16087-88. I believe that these statements must be limited to DHS. To conclude otherwise—that even non-DHS must be personally performed by the ordering physician for it to be taken into account in determining the physician’s compensation—would effectively add the “other business generated” limitation to the employment exception. As noted above, CMS had proposed subjecting employment compensation to this limitation, but expressly rejected this position in Phase II.
The regulatory history sheds additional light on §411.357(c)(4). Under the statute, the 1995 Stark I regulations, and the 1998 proposed Stark II regulations, personally performed DHS was not excluded from the definition of “referral.” Paragraph (c)(4) was thus necessary to allow a physician employee’s compensation to take into account DHS the physician referred but personally performed, which would otherwise be prohibited by Paragraph (c)(2)(ii). After the 2001 Stark II, Phase I regulations excluded from “referral” DHS personally performed by the ordering physician, the only operative effect of Paragraph (c)(4) is to allow a physician’s family member to be compensated based on DHS referred by the physician but personally performed by the family member. Most importantly, the statute and the final regulations have never prohibited an employed physician’s compensation being determined in a manner that takes into account the volume or value of “other business generated,” as long as the physician’s aggregate compensation is fair market value for the services he/she personally performs.
The above is not absolutely exhaustive of the analysis, but I suspect most folks eyes are glazing.