Compliance Compass: The Erlanger Complaint – A Cautionary Reminder About the Importance of FMV

Although most health care lawyers and compliance officers who review and analyze physician compensation understand that fair market value (FMV) is important, the nuances around FMV are sometimes missed.

The July 26, 2024 Complaint for United States ex rel. Sullivan v. Murphy Medical Center Inc. d/b/a Erlanger Western Carolina Hospital et al., Case No. 1:21-CV-219-MR-WCM (W.D.N.C.), attached to the U.S. Department of Justice’s (DOJ’s) Press Release, presents several reminders/warnings for health care organizations’ executive suites, attorneys and compliance staff.

Please note: The Complaint’s facts are viewed through the DOJ’s lens, and as such, there are likely missing facts and circumstances and good rebuttal arguments to be made. However, the Complaint raises some useful compliance reminders.

 Unlike the Federal Anti-Kickback Statute’s employees safe harbor (42 CFR 1001.952(i)), the bona fide employment relationships exception under the Federal physician self-referral law (commonly known as the “Stark Law”) requires FMV (42 CFR 411.357(c)). 

In the Complaint, DOJ emphasized underlying issues with the FMV assessments and the resulting lack of Stark Law compliance for Erlanger and noted the following:

1. Valuation consultants and internal valuations reported FMV ranges, and Erlanger paid above those ranges.
2. The values assessed in some of the physicians’ compensation did not account for total compensation – i.e., the compensation missed certain components (e.g., call pay) – so the valuations were incorrect and based on lower compensation numbers.
3. Physician coding and clinical documentation audits revealed overcoding and medical necessity issues, which inflated work Relative Value Units (wRVUs) (used to assess the costs associated with that work activity), so wRVU-based productivity compensation was falsely inflated.
4. Certain administrative and academic work required timesheets that were not maintained by physicians or obtained by Erlanger, so it was unclear whether the payments were FMV for work actually performed.
5. Erlanger’s corporate integrity agreement (CIA), entered into with the U.S. Department of Health and Human Services’ Office of Inspector General (OIG) and spanning from 2005 to 2010, was noted in the Complaint, and included a structured process that required tracking, legal review and compliance oversight of all existing, new and renewing physician financial arrangements. Those processes were similar to what was in Tuomey Healthcare System’s CIA. According to the Complaint, those CIA arrangement review processes, which had been “lived with” for five years, were put aside beginning in 2013 in Erlanger’s strategies to capture more revenue. See Complaint at ¶¶ 72-81

Based on the compliance issues raised in the Complaint, compliance suggestions to hospital teams include:

1. Implement written compensation procedures that assess FMV ranges for all physicians, then pay within those ranges.
   1. If there is some question about FMV or Stark Law compliance, seek outside advice.
   2. In many situations, you may be able to use survey data to determine FMV. However, highly compensated physicians deserve special attention though a more rigorous process (e.g., a valuation consultant’s opinion) and ideally through an educated compensation committee’s review.
2. Assess FMV of the total compensation for each physician – including clinical, administrative, call, academic, quality and incentive compensation.
   1. FMV is calculated in ranges (not a specific dollar assignment), based on geography, specialty, unique skills and productivity of the physician, which includes everything a physician does (not just wRVUs).
   2. Maintaining FMV throughout the arrangement is required in order to meet the Stark Law exception.
   3. The appropriate compensation should be set from the beginning of physician arrangements because clawbacks (based on payments determined to be in excess of FMV) impact relationships. Further, in this context, the Stark Law provides for penalties to the designated health services entity (here, the hospital), so there is no pain of penalties felt by the physicians. However, unchecked Stark Law compensation issues could lead to Federal Anti-Kickback Statute criminal and civil allegations and penalties on both sides – hospital and physician.
   4. It is prudent to avoid setting compensation at the top of the FMV range because having some flex to account for changes in productivity can be important in maintaining FMV.
   5. Unlike what is stated to the Complaint, the median compensation or the 75^th percentile is not necessarily the only compensation that is consistent with FMV. If the physician is productive, then paying commensurate with the physician’s personal productivity can move above median and the 75^th percentile and still be FMV.
   6. Personal productivity is key for compensation. If the physicians work with multiple advance practice practitioners (APPs) and bill “incident to,” split/shared and for global surgical packages including APPs’ services, then the assessment of productivity based on billed services (e.g., collections/wRVUs) should be reduced to accurately reflect personal production of the physician.
3. Coding and clinical documentation audits drive billing and medical necessity compliance, but also drive wRVU accuracy.
   1. If you are paying productivity incentives to physicians based on wRVUs, those wRVUs must be tied not only to each physician’s personal productivity, but also must be based upon accurate coding of each physician’s claims.
   2. Physicians should be trained in documentation and coding, but there must be auditing of each physician’s documentation and coding.
4. Organizations should require timesheets to document that physicians are providing the administrative and academic services that are paid under the arrangements.
   1. No one enjoys doing timesheets. However, if you are paying for 40 hours/month of work, and the person is working 20 hours/month, then (1) you are not paying for services performed (query commercial reasonableness) and (2) you may be exceeding FMV.

A healthy relationship between your executive, compliance and legal teams is key. Having adequate resources for both compliance and legal operations is also important. We understand that neither legal nor compliance functions are seen as revenue generators for the organization; however, the impact of poor compliance negatively impacts revenue as do government investigations and litigation.

Our Foley team has a wealth of experience to address any legal issue that may come your way.

Foley is here to help you address the short- and long-term impacts in the wake of regulatory changes. We have the resources to help you navigate these and other important legal considerations related to business operations and industry-specific issues. Please reach out to the authors, your Foley relationship partner, our Health Care & Life Science Sector, or to our Health Care Practice Group with any questions.