Community Health Network (CHN) in Indiana has agreed to pay $345 million to settle false claims allegations that it paid over-the-top salaries to hundreds of physicians and rewarded them for their referrals in violation of the Stark Law, the U.S. Department of Justice (DOJ) said Dec. 19.[1] The money flowed even though more than one valuation firm told CHN that some compensation was above fair-market value.
This is the largest False Claims Act (FCA) settlement in connection with alleged Stark violations ever, according to DOJ.[2]
The settlement includes a five-year corporate integrity agreement (CIA) that requires an independent review organization (IRO) to perform reviews of both fee-for-service claims and arrangements (e.g., for compliance with the Anti-Kickback Statute and Stark Law).[3] The HHS Office of Inspector General (OIG) also requires CHN to hire a “compliance expert” to review the effectiveness of its compliance program. The compliance expert’s reports must be reviewed by the board and submitted to OIG.
“Not only is the dollar amount significant, but the oversight OIG is imposing on Community Health is significant,” said attorney Bob Wade, with Nelson Mullins in Nashville, Tennessee. Typically, a CIA requires an IRO for claims or physician financial relationships, but not both, he explained. “And it’s extremely rare to see a compliance expert to the board,” Wade said. He can think of only one other case in the hospital False Claims Act (FCA) world: Halifax Hospital Medical Center’s $85 million Stark-based settlement in 2014.[4]
CHN’s settlement was set in motion by a whistleblower, Thomas Fischer, who was its chief financial officer for eight years. Fischer’s second amended complaint was filed in 2020 and DOJ intervened and filed its complaint in intervention Jan. 6, 2020.[5]
“The big thing was that many of the physicians were [allegedly] paid above the 90th percentile,” said attorney Adam Robison, with King & Spalding in Houston. “According to DOJ’s complaint, in many instances they didn’t have fair-market value analyses to support that compensation.”
In a statement, Kris Kirschner, director of corporate communications for CHN, said, “The civil settlement resolves the government’s claims with no finding of wrongdoing. Community has always sought to compensate employed physicians based on evolving industry best practices with the advice of independent third parties. Physician compensation is a complex and highly regulated issue. What is important to remember is this matter involved alleged technical violations and is completely unrelated to the appropriateness and quality of care Community provided its patients.”
According to DOJ’s complaint, in 2008 CHN embarked on a physician recruitment campaign, employing hundreds of physicians, including cardiovascular specialists, neurosurgeons and breast surgeons, in what it called “integrations” with the hospital. Many of them were from the Indianapolis area and already had privileges at CHN. “These integrations were ‘defensive’ in nature, meaning that CHN recruited and employed these physicians to secure their referrals and out of concern that their referrals would ‘leak’ to CHN’s local competitors,” the complaint alleged. They were recruited with salaries that were allegedly far higher than what the physicians made in their own practices and that were above FMV. For example, CHN basically doubled the salaries of cardiovascular specialists.
The money for the big salaries came from what CHN allegedly called the “hospital differential” or “provider-based differential”—the increase in Medicare reimbursement for services when they’re performed in a hospital instead of a physician practice.
Because upper management was aware of Stark Law requirements, CHN asked Sullivan Cotter, a valuation firm, to weigh in on the salaries. The valuation firm said for compensation to be FMV, it had to be less than the 75th percentile of national benchmark salary data or the compensation per productivity (measured by work units or collections) had to be less than the 60th percentile. If those two benchmarks weren’t met, Sullivan Cotter considered the compensation outside fair market value but it could be justified with certain other “business judgment factors,” such as community need for the services, according to the complaint.
“Despite the repeated and clear guidance it received from Sullivan Cotter, CHN set the physicians’ salaries by ‘backing into’ the 90th percentile of national benchmark data,” DOJ alleged. “Moreover, CHN did not provide Sullivan Cotter with accurate compensation information.”
CHN consulted other valuation experts. For example, in 2013, CHN hired Katz Sapper & Miller (KSM) to analyze the compensation it paid its physicians in 2012 and the first half of 2013. KSM determined it was “high compared to productivity in all specialties and primary care,” the complaint alleged. “Despite these findings, CHN continued to pay its physicians salaries that it knew were well above fair market value and continued to submit claims to Medicare for designated health services referred by the physicians in direct violation of the Stark Law and FCA.” The complaint also alleged that CHN gave physicians bonuses if they met a target of “hospital downstream revenue specific to the physician,” which means the compensation was calculated in a way that allegedly took into account the volume or value of referrals in violation of Stark.
Locking Up Referrals of Breast Care Physicians
For example, in April 2009, CHN formed Community Breast Care and executed employment contracts with five physicians who practiced elsewhere in Indianapolis. DOJ alleged that the “Breast Care Integration Concept Document” explains that the integration was designed to stop “leakage” (referrals) of these physicians to CHN’s competitors. “As part of its due diligence, CHN focused on the revenues it anticipated locking up from referrals from the breast surgeons for ancillary services, as it would use those revenues to finance the integration, including paying the salaries of the physicians,” the complaint alleged. “CHN stood to receive more from Medicare for the same services after the physicians became CHN employees, as CHN would be furnishing those services and receiving higher reimbursement than the physicians received for those services when they were performed by the physician practice.”
DOJ Alleged CHN Inflated Projected Collections
The proposed compensation for the breast center physicians, which included work relative value units (wRVUs) plus a share of the hospital differential, was sent to Sullivan Cotter for an FMV analysis, according to the complaint. “First, Sullivan Cotter evaluated the proposed compensation relative to the blended market data,” according to the complaint. If the total cash compensation (TCC) was less than the 75th percentile, it was deemed FMV. CHN’s was at the 97th percentile, DOJ alleged.
That triggered step two: evaluating TCC with wRVUs. If that was at or below the 60th percentile, the compensation was FMV. “Sullivan Cotter concluded that the TCC per wRVUs was at the 84th percentile of the market data,” DOJ stated.
Because the proposed compensation wouldn’t fly under steps one and two, Sullivan Cotter moved onto the third step, which was an evaluation of the TCC per collections ratio, according to the complaint. Relying on CHN’s representation that professional fees would generate $4.8 million the first year, Sullivan Cotter said TCC would be in the 56th percentile of the market data and compensation for the first year would be FMV.
But DOJ alleged that “CHN falsely inflated the $4,801,000 collections for personally performed professional services figure upon which Sullivan Cotter had based its favorable opinion.” CHN allegedly didn’t subtract $1.3 million in collections from technical services from the number it gave Sullivan Cotter. If it had, DOJ alleges the valuation firm wouldn’t have concluded the proposed compensation was FMV.
CHN also employed four neurosurgeons between 2008 and 2010 and later added a fifth. CHN asked Sullivan Cotter to do an FMV review of the five-year compensation plans. The valuation firm concluded proposed compensation for four of the five neurosurgeons exceeded FMV, the complaint alleged.
‘They Act Like a Defense Strategy Is Bad’
DOJ “hammered on” CHN’s physician recruitment and employment because it was a defensive strategy to avoid losing referrals, Wade said. “They act like a defensive strategy is bad,” he noted. “Taking a defensive position is not per se inappropriate but you have to be cautious to operate within the parameters of fair market value and commercial reasonableness to fit within Stark exceptions.” At the same time, “I don’t want people to read about this case and think they can never embrace a defensive strategy. They can. They just have to proceed cautiously.”
Wade also is comfortable with a compensation “bump” for newly employed physicians even when they’re already in the service area. Otherwise, why would they leave their practice? But he advises hospitals not to get crazy. “There has to be a justifiable reason for why you’re paying them more,” he cautioned. It’s possible the hospital would be more effective at collections but if the bump is considerable, “you need to think through whether it represents fair market value and is commercially reasonable.”
‘Everybody Can’t Be Above the 90th Percentile’
The CHN complaint also walks through the incentive compensation, which had three components: physician-driven metrics (50%); network financial performance (25%); and service-line financial performance (25%). The service-line performance was contingent on, among other things, “meeting targeted revenues generated by referrals from the physician to the hospital,” DOJ alleged. “These compensation arrangements did not qualify for an applicable exception to the Stark Law because the compensation paid by CHN took into account the volume or value of referrals to CHN and its subsidiaries and affiliates.”
Wade said it’s fine for a hospital to link a physician’s bonus to the financial success of the “entire enterprise.” But it’s another story if the bonus of a physician (e.g., an orthopedic surgeon) depends on the performance of a service line (e.g., orthopedic surgery) directly affected by their referrals. “You just can’t base part of their compensation on the financial success of the technical service line,” he explained.
Robison noted the importance of checks and balances with physician compensation. They include relying on FMV consultants and tending toward a conservative norm. “Use the lower benchmarks where appropriate,” he said. It raises a red flag to have a lot of physicians above the 90th percentile, Robison explained. “Paying above the 90th percentile is certainly not per se above fair market value, but everybody can’t be above the 90th percentile,” he said. “There has to be justification for that. You have to be extra cautious about not trying to justify higher compensation if it’s not warranted. Don’t try to push consultants to get to a higher number.”
Kirschner, CHN’s spokesperson, noted that the settlement resolves claims made by the government, but other allegations in the whistleblower’s second amended complaint that were not pursued by the government are still pending. “Community will continue to vigorously defend those claims.” She added that “Community has a bright future. Our commitment to providing exceptional care is unwavering.”
Contact Robison at arobison@kslaw.com and Wade at bob.wade@nelsonmullins.com.