The Impact of Emerging Reimbursement Models on Physician Compensation

The Impact of Emerging Reimbursement Models on Physician Compensation By: Beth Connor Guest, Chief Counsel, Cigna HealthSpring and Patricia O. Powers, Office of General Counsel, Vanderbilt University. Provider Consolidation. Since the millennium, the health care industry has experienced unprecedented consolidation of the providers of health care services. 1 Hospitals are buying other hospitals, urgent care clinics, primary care clinics and primary and specialty care practices. Physician groups are acquiring other physician practices. Private equity companies are consolidating, and then managing single specialties like anesthesiology practices, across a large geographic area. The wave of acquisitions shows no signs of slowing down. Health care spending has outpaced inflation 2 and MedPac and the payer community allege that the consolidation has contributed to the increases in medical expense. 3 With the enactment of the Patient Protection and Affordable Care Act of 2010 ( PPACA ), 4 governmental and commercial payers are now looking to hospitals and physicians to contain costs, improve access and demonstrate quality. Physicians and mid level providers are integral to achieving improved quality (i.e., demonstrated improvement of outcomes and reduced costs), but physician compensation arrangements have lagged in rewarding quality and improved outcomes. Production based compensation models are deep rooted in provider culture and difficult to shed under the current regulatory scheme that was borne out of a fee for service environment. Changes in the methodologies used by third party payers to pay for health care services, whether Medicare, Medicaid, commercial payers or employers, have outpaced the evolution of applicable health care laws and regulations. This paper explores some of the issues that are challenging hospitals with emerging reimbursement models and the impact on physician compensation. 1 Cutler DM, Scott Morton F. Hospitals, Market Share, and Consolidation. 310 JAMA. No. 18 1964, 1965 66 (2013) ( Both horizontal and vertical consolidation has increased in health care. Sixty percent of hospitals are now part of health systems, up 7 percentage points from a decade ago... [f]rom 2004 to 2011, hospital ownership of physician practices increased from 24% of practices to 49% ). 2 White House Council of Economic Advisors, Trends in Health Care Cost Growth and the Role of the Affordable Care Act, 1, 3 (2013) ( Over the three years since 2010, the real per capita annual growth rate of national health expenditures is... 1.3 percent ). 3 Medicare Payment Advisory Commission, Report to the Congress: Medicare and the Health Care Delivery System, 36 (June 2013) ( The growth of hospital employment of physicians is leading to higher spending by private plans outside of Medicare and higher cost sharing for their enrollees ). 4 42 U.S.C. 11101, See, 10307. 1

Regulatory Framework. With respect to hospital physician compensation relationships, compensation paid to physicians must comply with the Anti Kickback provisions of the Social Security Act, 5 the federal physician referral law known as Stark, 6 state self referral and fee splitting laws and, if applicable, the IRS guidelines for tax exempt entities. 7 The bedrock of the policy underlying these laws is that such arrangements must be fair market value and on commercially reasonable terms to prevent influencing the physician s medical judgment related to the referral of patients for items or services reimbursable by a federal health care program. As payment for services moves away from fee for service toward value based compensation, those providers that demonstrate value by producing savings and a more healthy population will receive greater payment. For hospitals that participate in federal health care programs, hospital physician compensation arrangements, whether for employment, medical directorship, co management or other arrangements, must comply with Anti Kickback Statute, Stark Law, state fee splitting and self referral laws, and for tax exempt hospitals, IRS regulations. These laws and regulations are complex and differ in their application and reach; however, they generally share common elements: compensation must be fair market value and commercially reasonable. a. The Anti Kickback Statute prohibits any payment intending to induce the referral or purchase of items or services reimbursable by a federal health care program but the Employment Safe Harbor allows fair market value compensation to employees. 8 b. The Stark Law prohibits the submission of a claim for designated health services to Medicare (and now Medicaid 9 ) for a patient referred by a physician with which the provider has a financial relationship that does not fit into an exception. 10 The relevant exceptions generally used to pay physicians for services include the employment exception, which allows payment to a physician if the compensation is to a bona fide employee; fair market value; unrelated to volume or value of referrals; and commercially reasonable even if no referrals are made to the employer. 11 The second exception that permits payments to 5 42 U.S.C. 1320a 7b(b). 6 42 U.S.C. 1395nn. 7 26 C.F.R. 1.501(c)(3) 1(c)(2). 8 42 C.F.R. 1001.952(i). 9 42 U.S.C. 1396b(s); United States v. All Children's Health Sys., Inc., 2013 WL 6054803 at *5 (M.D. Fla. Nov. 15, 2013). 10 42 U.S.C. 1395nn. 11 1395nn; 42 C.F.R. 411.357(c). 2

physicians for professional services is the personal services exception. 12 This exception also requires fair market value consideration, which is set in advance and unrelated to the volume or value of referrals. c. IRS rules for tax exempt entities to avoid proscribed private inurement issues, compensation to employees of tax exempt entities must be reasonable. 13 d. State Law Restrictions on corporate practice of medicine, state self referral prohibitions, state anti kickback, and fee splitting may: Prohibit general business corporations from employing physicians; 14 Prohibit physicians from referring a patient to an hospital or health care provider in which the referring physician has an investment interest; Prohibit a hospital from paying or receiving kickbacks for referring or soliciting patients; Prohibit anyone from paying or receiving any compensation or engaging in any split fee arrangement for referral of patients; Generally, arrangements that comply with federal anti kickback or self referral laws comply with the state counterpart. However, structuring arrangements to comply with state corporate practice laws means the arrangement cannot be an employment relationship and must be an independent contractor relationship, a practice management arrangement, or a foundation model. 15 In addition to the fraud and abuse laws that prohibit payment to influence referrals or the purchase of items or services, the Civil Monetary Penalties provisions of the Social Security Act 16, authorizes the federal government to assess a fee of $2,000 each time a hospital pays, or a physician, or a physician accepts a payment to reduce or limit services to a patient who is entitled to the services. Recent Enforcement Actions. While compensation paid to independent contractors has generally been carefully structured and closely monitored by the parties to the agreements, physician employment relationships were viewed as relatively straightforward. Over the past 5 years, however, there has been an increase in the type and frequency of enforcement actions related to 12 42 C.F.R. 411.357(d). 13 26 CFR 1.501(a) 1(c), 1.501(c)(3) 1(c)(1)(ii). 14 See, e.g., Cal. Bus. & Prof. Code 2052(a); Tex. Occ. Code Ann. 165.156. 15 Generally, the foundation model is one in which a not for profit corporation or professional corporation employs the physicians. Depending on state law, this entity is owned or controlled by physicians or employees of a hospital system. 16 42 U.S.C. 1320a 7a(b) 3

compensation paid by hospitals to employed physicians. Of note, in United States ex. Rel. Drakeford v Tuomey Healthcare Sys. Inc., 2013 WL 5503695 (D.S.C. Oct. 2, 2013), following a convoluted procedural history, the court awarded $237.5 million judgment against Tuomey Healthcare System because it found its employment contracts with several part time employed surgeons violated the Stark law. The Court found compensation exceeded fair market value, was not commercially reasonable and was based on the volume or value of referrals. 17 An additional case addressing physician compensation to employed physicians is United States ex rel. Elin Baklid Kunz, Relator v. Halifax Hospital Medical Center, 2013 WL 6017329 (MD. Fla. Nov 13, 2013). 18 In Halifax, the Court granted a partial summary judgment and found the hospital violated the Stark law in the way the hospital determined the salary and incentive bonus for its employed physicians. 19 The bonuses were paid from an incentive compensation pool which included a percent of the operating margin of the medical oncology program, which program included revenue from the outpatient hospital service, the physician service and the outpatient pharmacy revenue. 20 The court rejected the hospital s argument that the revenue was appropriately included in the pool and was based on the services personally performed by the physicians, but held that the revenue was derived from referrals for designated health services. 21 These enforcement actions have created an uncertain environment for hospitalphysician compensation at the same time that hospitals are shifting to rewarding physicians for quality. Historical Compensation Methodologies. Historically, hospital physician compensation has been set in accordance with one or a combination of the following methodologies: a. Flat salary/fee + productivity bonus based on services personally performed b. Production (wrvus or other measure of production) c. Hourly rate for services performed 17 United States ex. Rel. Drakeford v Tuomey Healthcare Sys. Inc., 2013 WL 5503695 at *(D.S.C. Oct. 2, 2013) 18 See also United States ex rel. Baklid Kunz v. Halifax Hospital Medical Center and Halifax Staffing, Inc., 2013 U.S. Dist. LEXIS 163695 (M.D. Fla. Nov. 18, 2013 (denying defendants' Motion for Summary Judgment in a case challenging a compensation arrangement, base salary and bonus, for neurosurgeons, as noncompliant with the Stark law); United States ex rel. Baklid Kunz v. Halifax Hospital Medical Center and Halifax Staffing, Inc., 2013 LEXIS 167882 (M.D. Fla. Nov. 26, 2013) (denying relator's Motion for Partial Summary Judgment challenging the incentive bonus payments to oncologists as noncompliant with the Anti Kickback statute). 19 United States ex.rel. Elin Baklid Kunz, Relator v. Halifax Hospital Medical Center, 2013 WL 6017329 at *13 (MD. Fla. Nov 13, 2013). 20 Id. at *3. 21 Id. at *9. 4

d. Percentage of revenue generated from personally performed services e. Bonus for participation in certain quality programs (Payment for Quality) In each of the above methodologies, except for Payment for Quality, physicians are rewarded for increased productivity which often means increased services, procedures, and hospital admissions. Under the Affordable Care Act, the Medicare Shared Savings Program added a framework for an alternative payment model intended to reward providers financially for meeting or exceeding nationally recognized quality measures while decreasing health spending for a defined patient population, and in some cases, penalize providers financially for not meeting certain quality measures. Changes in Reimbursement Landscape 1. Medicare Shared Savings Program On October 20, 2011, CMS and OIG issued waivers under the Medicare Shared Savings Program ( MSSP ) which cover payments to ACO participants, including physicians with respect to compliance with the Anti Kickback Statute, Stark and Civil Monetary Penalties 22 : i. Pre participation Waiver The pre participation waiver protects arrangements that pre date the ACO participation agreement and is broadly defined to cover start up activities and expenses required to form the ACO, including in kind and financial contributions reasonably related to the purposes of the MSSP. This waiver may only be used one time by an ACO. If all the requirements of the waiver are met, it would begin one year prior to the MSSP application due date, and would end on either (i) the date the ACO is accepted into the program; (ii) the date the application was denied, or (iii) the date it submits a statement of reasons for failing to submit an application. ii. Participation Waiver The participation waiver begins at the beginning of a participation agreement. The requirements include: the ACO has entered into a participation agreement under the MSSP and is in good standing; the ACO meets the governance, leadership and management requirements of the MSSP; the ACO s governing body must make bona fide redetermination that the arrangement is reasonably related to the purpose of the MSSP; and there is documentation of the arrangement and the authorization by the governing body. Each must be 22 Medicare Program; Final Waivers in Connection With the Shared Savings Program 76 Fed. Reg. 67991, 67994 (Nov. 2, 2011) (amending 42 C.F.R. Chapter V). 5

contemporaneous and the documentation must be maintained for at least ten years. iii. Shared Savings Distribution Waiver This waiver has many of the requirements of the Participation waiver (signed agreement, documentation). The shared savings that are to be distributed must be earned by the ACO pursuant to and during the MSSP. In addition, the participants can use any method of distributing savings as long as the savings are either: (i) distributed to current participants (or participants the year the savings were earned) or (ii) used for activities reasonably related to the purposes of the MSSP. In addition, with respect to payments by hospitals to physicians, the payments are not made to induce physicians to reduce or limit medically necessary care. iv. Compliance with Self Referral Law Waiver This waiver protects any arrangement under the Anti Kickback Statute and CMP laws if the arrangement complies with a Stark exception. The criteria are the ACO has a participation agreement with CMS and is in good standing; the financial relationship is reasonably related to the purposes of the MSSP and the financial relationship fully complies with the Stark law. v. Patient Incentives Waiver This waiver protects from CMP and Anti Kickback scrutiny the provision of in kind items or services for free or below market to beneficiaries if the items or services are preventative or further a beneficiary s treatment, care plan, or chronic disease management, that are reasonably related to the beneficiary s care. Of note, these waivers do not contain a requirement of fair market value or commercially reasonableness because the policy underlying the MSSP is to reward quality (i.e., improved outcomes at lower cost while maintaining access). Accordingly, hospitals can share the MSSP dollars with physicians who participate in ACO quality initiatives in a compliant arrangement. However, the waivers only apply to the participants in a Medicare ACO and do not cover participants in commercial ACOs, nor do they apply to general payment for quality arrangements. 23 Thus, hospitals that participate in commercial ACOs and commercial Medicare Advantage capitation agreements face challenges in crafting compensation arrangements for employed physicians who are actively participating in quality programs. Such physicians may have compensation arrangements that are based on wrvus or other production based metrics. 23 Medicare Program; Final Waivers in Connection With the Shared Savings Program, 76 Fed. Reg. 67991, 67994 (Nov. 2, 2011) (amending 42 C.F.R. Chapter V). 6

Because a MSSP waiver only protects MSSP ACOs, quality based physician compensation by organizations that have not signed an ACO participation agreement must fit within a Stark exception and comply with the Anti Kickback Statute and CMPs, all of which require the arrangement be fair market value. Because traditional valuation models use productivity as a proxy for value, it can be difficult for payments for quality to fit neatly into a safe harbor or Stark exception. Pay for performance arrangements generally reward a physician for participating in quality initiatives such as electronic medical record adoption and having patient panels participate in preventative measures, such as mammograms, colonoscopies, and bone density screenings. While these initiatives are intended to achieve better clinical outcomes while decreasing overall medical costs associated with a covered patient population, a participating physician may not have additional wrvus or other production measures as a result. If a physician compensation arrangement is at the top of the fair market value scale and the arrangement is not covered by the MSSP waivers or managed care exceptions to the Anti Kickback Statute, 24 adding payments for quality may actually put the arrangement above fair market value and therefore, present an enforcement risk. The IRS also issued guidance for tax exempt entities that participate in the MSSP. While that IRS guidance does not strictly require ACO transactions to be at FMV, it does consider FMV as one of five factors used to determine if ACO transactions confer a private benefit or result in private inurement. 25 It is unclear how the IRS would treat those non profit MSSP participants that may have large numbers of transactions which are inconsistent with FMV, or those which have transactions that are inconsistent with FMV by large orders of magnitude. The IRS also indicated, with respect to non profits, that any MSSP shared savings payments must be distributed to the ACO members in proportion to their contributions to the ACO. Thus, the IRS guidance suggests that contributions of the ACO members must be measured, and though FMV is not strictly required, it is likely a prudent practice to measure contributions using the IRS version of the FMV standard (rather than the version used for Stark or the Anti Kickback Statute), to avoid any argument that a private benefit is conferred by payments that exceed FMV. 2. Re Admission Penalties. Another part of the Affordable Care Act that has started to influence physician compensation is the Hospital Readmissions Reduction Program which requires CMS to reduce 24 42 C.F.R. 1001.952(t). 25 See IRS Notice 2011 20, 2011 16 I.R.B. 652 (April 18, 2011), and the IRS Fact Sheet (FS 2011 11, October 20, 2011) which clarified certain comments in the Notice. 7

payments to IPPS hospitals with excess readmissions, effective for discharges beginning on October 1, 2012. 26 Excess readmissions are measured by a ratio, determined by dividing a hospital s number of predicted 30 day readmissions for heart attack, heart failure, and pneumonia by the number that would be expected, based on an average hospital with similar patients. A ratio greater than 1 indicates excess readmissions. The payment penalty began in October 2012, and began as a 1% reduction to Medicare reimbursement to a hospital determined to have excessive readmissions for the three measures. In October 2013, the penalty went up to 2% and in October 2014, it will go to 3%. In 2015, additional conditions/measures for the initial inpatient admission will be added. With strong incentives to reduce re admissions, hospitals are adding incentives for providers to engage in improved care coordination, discharge planning, education and follow up for discharged patients and to adoption of electronic medical records so that patient information can be shared across the continuum of health care providers to improve continuity of care. Under the current view of fair market value, a physician s effort to reduce readmissions may not generate sufficient value to support a meaningful payment, and therefore, it is unclear how a hospital could legally compensate physicians on its medical staff to prevent or reduce readmissions. 3. Payments for chronic care management. Medicare 2014 Physician Fee Schedule covers new physician services for managing patients with multiple chronic conditions in an effort to avoid further injury or illness. 27 Two additional services could be billed separately from patient visits. The services would be billed for managing care for a patient with two or more chronic conditions expected to last at least 12 months, or until death, and that place the patient at risk. The first complex chronic care management service would be billed for an initial visit and the second would be available for subsequent work. Improved Medicare reimbursement for primary care providers may take hold on the commercial side and the result may be overall increases in value of PCP compensation. 26 Section 3025 of the Affordable Care Act added section 1886(q) to the Social Security Act establishing the Hospital Readmissions Reduction Program, which requires CMS to reduce payments to IPPS hospitals with excess readmissions, effective for discharges beginning on October 1, 2012. The regulations that implement this provision are in subpart I of 42 CFR part 412 ( 412.150 through 412.154) 27 Revisions to Payment Policies under the Physician Fee Schedule, Clinical Laboratory Fee Schedule and Other Revisions to Part B for CY 2014 (CMS 1600 FC), 78 Fed. Reg. 74230, 74415 (Dec. 10, 2013). 8

Conclusion. Transition from a fee for service environment to a system that consistently rewards quality is in a state of flux. PPACA has created some regulatory safe guards to protect providers who participate in the MSSP; however, the private sector has forged ahead with commercial ACOs, clinically integrated networks and IPAs that use alternative payment methodologies to reward quality. With these new models, the regulatory framework and entrenched views of fair market value are ripe for reexamination. 9