The Stark Law and Internal Physician Compensation

On Sept. 11, 2017, the U.S. Attorneys’ Office for the District of South Carolina announced a settle ment with the Family Medicine Centers of South Carolina based in part on allegations that the practice’s internal physician compensation approach violated the Stark Law, and resulted in the submission of false claims to the Medicare and Tricare programs. Family Medicine Centers are a physician-owned chain of family medicine clinics located in and around Columbia, South Carolina.

The allegations in this settlement arose from a lawsuit filed by a physician formerly employed by the Family Medicine Centers of South Carolina under the whistleblower provisions of the Federal False Claims Act. The allegations included violation of the Stark Law by the Family Medicine Center’s (FMC) incentive compensation plan that paid its physicians a percentage of the value of laboratory and other diagnostic tests they personally ordered through FMC, and then FMC billed the Medicare program. According to the government’s press release, FMC’s physician CEO allegedly reminded FMC’s physicians that they needed to order tests and other services through FMC in order to increase FMC’s profits and to ensure that their take-home pay remained in the upper level nationwide for family practice doctors.

The FMC settlement also resolved allegations that FMC submitted and caused the submission of false claims to Medicare and Tricare for medically unnecessary laboratory services by creating custom laboratory panels comprised of diagnostic tests not appropriate for routine measurement; performing these tests with out an order from the treating physician; implementing standing orders to assure these custom panels were performed with defined frequency and not in reaction to clinical need; and programming FMC’s billing software to systematically change certain billing codes for laboratory tests to assure payment by Medicare.

FMC agreed to pay the government $1.56 million, and FMC’s physician CEO and laboratory director agreed to individually pay $443,000 to resolve the overall allegations that FMC’s violation of the Stark Law and submission of medically unnecessary tests violated the Federal False Claims Act. The former FMC-employed physician who filed the whistleblower suit under the False Claims Act will receive $340,510 of the overall settlement.

Other Settlements

This is not the first settlement announced by the government based on alleged violations of the Stark Law from a physician practice’s internal compensation approach. In August 2014, the U.S. Attorney’s Office for the Northern District of New York announced that a cardiology practice had agreed to pay $1,336,636 to resolve allegations that it violated the Stark Law based on an internal physician compensation formula that directly considered the physician’s orders for CT scans and nuclear diagnostic tests from the cardiology practice and that were billed to the Medicare program. According to this settlement, compensation to physician partners of this cardiology practice was based on a formula that directly incorporated the volume or value of their orders for CT scans and nuclear diagnostic tests that the physicians did not personally perform from September 2007 to September 2008.

The Stark Law prohibits physicians from referring Medicare beneficiaries to health care providers, including their own practices, for certain services if a physician’s financial relationship does not fall within an exception to the Stark Law. Generally, physician practices rely on the in-office ancillary services exception for referrals for ancillary services subject to the Stark Law by physician owners, employees and contractors of the group practice. Reliance on this exception requires in part that a practice must meet the Stark Law definition of a “group practice,” which includes a broad prohibition on compensating a physician in a manner that directly takes into account the volume or value of the physician’s referrals for services that are not personally performed by the ordering physician.

However, the Stark Law does permit a group to pay individual physicians a share of the overall profits from ancillary services subject to the Stark Law (imaging and clinical laboratory services), and a productivity bonus based on services that the physician personally performed, provided the share or bonus is not determined in a manner that is directly related to the volume or value of the physician’s referrals for Stark services. The Stark Law regulations contain examples of compensation formulas that only indirectly are based on the volume or value of a physician’s referrals for services that are subject to the Stark Law.

These settlements send several messages to physicians, including that internal physician compensation should not be based directly on referrals for work not performed by a physician, and that the government will pursue violations of the Stark Law based on internal compensation formulas that may violate the Stark Law.

Clay J. Countryman, Esq., is a partner with Breazeale, Sachse & Wilson, LLP, in Baton Rouge, La. Reach him at Clay.Countryman@bswllp.com. The Stark Law and Internal Physician Compensation Medical clinic chain pays $2 million to settle alleged violations.