AHLA's Speaking of Health Law

Structuring FMV Physician Compensation

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Christy Street, Horne, speaks to Anna Grizzle, Bass Berry & Sims, about structuring provider compensation models from a regulatory perspective. The podcast looks at compensation issues in light of the newly issued Stark Law final rules. Sponsored by Horne LLP.

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Speaker 1:

Support for A H L A in the following message comes from Horn, what's changing in healthcare valuation? The buy-in podcast from Horn engages healthcare attorneys and in-house counsel and lively conversation about trends and best practices in physician comp, hospital mergers, value-based arrangements, telehealth, and more brought to you by Horn Buy-In is available on Apple, Google, Spotify, and wherever you get your podcasts.

Speaker 2:

Hello everyone. Welcome to a h l a's speaking of Health Law podcast. My name is Christie Street, a senior manager with evaluation consultant on the Horn Healthcare Team. Horn is a top 100 national professional services firm serving over 600 hospitals, health system, long-term care, and physician clients across the country. And I would like to welcome everyone to the podcast, and I would like to have extend a very special welcome to my co-presenter, Anna Grizzle. Anna, would you like to take this opportunity to tell our listeners a little bit about yourself?

Speaker 3:

Sure. Thanks Christie. Hi, everyone, and thanks for joining us. I am Anna Grizzle, and I am a partner with the law firm of VA Sims and the healthcare group where I focus my practice exclusively on representing healthcare providers in regulatory compliance, litigation, and transactional matters.

Speaker 2:

Thanks Anna. And today we'll be discussing considerations when structuring physician compensation arrangements given the current enforcement environment and recent release of the final rule, uh, by c m s, uh, in connection with Stark and anti-kickback statues. With that in mind, um, Anna, I would love to get your opinion on how to best structure compensation models from a regulatory perspective.

Speaker 3:

And Sure. Christie, from my perspective in structuring compensation models, I, I look at four factors. The first is to create a simple compensation model and structure. The idea behind the simple model is that you want it to be easily administered so that your physicians can understand it. There are circumstances where certain compensation models may be more complex, but what we found from working with clients as well as what you see in the enforcement actions is the more complexity you add to compensation arrangement, the more potential you have to create issues that could lead to an enforcement action. The second factor to consider is in designing a compensation model, is to keep the compensation model consistent with minimal variation that's will only be driven by sound and appropriate business principles. If there is a consistent model for specialties across an organization by location, however you wanna set up those models, that consistency just helps in ensuring that high performers are not given special treatment, which of course can open the door to a, um, potential enforcement action if it's found that a compensation decision is based upon an improper consideration, such as referrals as opposed to objective standards. The third of the fourth factors I consider, is that you want the compensation structure to be auditable. Again, this goes back to having simple models. You, you want someone to be able to pick up that contract and to read the compensation formula and then, then be able to go and look at the data and be able to audit that to ensure that the compensation model is written in the contract is consistent with the payment model. If it's incredibly complex or if portions are missing from the written document, then that will make it hard to audit. And so having an auditable agreement I is important. It's also important to not only have it where it is audit audible, but to actually be periodically reviewing those arrangements to make sure that the terms are being followed and that they remain in compliance with the regulatory requirements. And that leads really to the final consideration, which is you want a compliant compensation model. You, when you establishing compensation, you want to link it to the services performed as well as if it's a productivity model, ensure that it's linked to appropriate production with appropriate conversion factors, if there is collections involved, to look at ensuring that the percentage that's set would be consistent with fair market value. And, um, that's looking at more of the fair market value concepts. You also want to ensure that you have a reason for that compensation model to meet the commercial reasonableness test. We'll talk more, I know, Christie, as we talk about the, these compensation models and how the new rules have impacted particularly fair market value and commercial reasonableness as well.

Speaker 2:

That's correct. Anna and I, I look forward to mm-hmm.<affirmative> that part once we get to that part in the conversation.

Speaker 3:

And you know, Christie, as we think about the structural compensation models, we've talked, talked about the factors that I would consider. But from your perspective, are there key considerations that stakeholders should have as they think of structuring those models?

Speaker 2:

Absolutely. And, and I think that, you know, you touched on this, it it throughout the, your discussion as it relates to thinking as the compensation model, having it simple, consistent, audible and compliant. I think those are, are are great. I love the, um, the simplicity behind the, that thought process, but it, it, you know, I think that that key consideration is you wanna ensure that the model is compliant with both with stark and anti-kickback, the, the technical requirements of it. And so as part of that, you know, looking and tying back to is, is that are you being consistent? Are you, you know, are they compliant? Is it tied to, is the model tied to production? Is it tied to collections? And, and even as we think about some of the changes, uh, or, or the final rule, um, and particularly when we look at commercial reason list, uh, aspect of that, and it says, you know, are you looking at the agreement and including, you know, their size type, scope and specialty of that? And we think about that specifically with a comp model. Mm-hmm.<affirmative>, there could be other qualitative factors that are at play are important to consider that, you know, that may not be, um, the quantitative ones in nature like your productions or collections, et cetera. But what are, what are some of those qualitative factors, uh, for consideration that supports the model to again, ensure that you are meeting those, um, the regulatory compliance structure. Um, and so proper evaluation of fair market value commercial reason list, um, within the comp model is, is very important. I think that, you know, uh, the c m s and its final rule, uh, noted three big questions that I think are, are worthy of asking. And so it's one, does the arrangement make sense as a means to accomplish the party's goals? You know, when I'm talking to clients, Anna, I like to, to ask the question, how does this arrangement tie to your mission, vision, and values? Or how does it, how does it elevate that? How does it expand, um, your ability to, um, uh, become the, the most valued healthcare provider in a b, c area, for instance? Um, so it's, I I, I think that that's a great question to ask. And then, you know, the second question to ask ourselves is, you know, how did the parties calculate the remuneration? And so, you know, as we know that c m s um, really, uh, separated, it's, it's still a part of, uh, being compliant, but they separated vo the volume and value standard from fair market value and commercial reason list. But, you know, I think the parties need to ask themselves, you know, is the remuneration, is it calculated such that it does factor in volume and value and, and, and, and take the necessary steps to ensure that it, that it does not. Um, and then finally, the third question is, did the calculation result in compensation that is fair market value for that item or service? And you know, that that question may be answered internally through your comp committee and a and a strong process review or, or that may require, um, an independent third party appraiser to, to help answer that question. But I think certainly asking that question and making sure that it's documented is, is really important. And, and Anna, as I as I make that statement, it, it makes me wonder, you know, are there best practices that you recommend to your clients or that you see our clients or prospects really should include when they look at their arrangement review process to answer those three questions in particular?

Speaker 3:

Yeah. Yeah. A absolutely. And, and Chrissy, I agree with you that I think those are just, I, I found that portion of the funnel rule very helpful with those three questions to ask for compensation, um, questions. And with the expansion on f fair market value and commercial reasonableness and the volume and value standard, all of that does tie into these three questions. And, and there are best practices that organizations can adopt to ensure that they have established compliant arrangements that do meet the requirements of the Stark and the ANA Kickback statute among other, uh, legal requirements. And the first really starts at a high level of actually having a contract management tool to manage agreements. And I know there are a number of third party vendors that sell these management tools. Um, some organizations decide to develop their own, but tracking the agreements, I, I think, is key to know as a starting point, what agreements do you have out there so that you then can then be able to review them to look for overlap just to, um, make sure renewals happen on time. And I don't think you can do that without a contract management system.

Speaker 2:

That's very true

Speaker 3:

With that contract management system. I think it's also important to have a centralized contracting process to consistently review and approve arrangements to, um, include in that which arrangements need to go to legal for review, which ones can be handled without legal, and to have specific individuals within the OR organization who will review those arrangements. And those individuals, um, need to be trained on what they should be looking for to make sure that they're only approving arrangements that can, um, be supported under the applicable regulations. After that centralized process is developed, I also recommend developing template agreements that can meet the legal requirements. The last thing an organization wants to do is to spend a lot of time developing a, a fair market value compensation arrangement. There's absolutely a business need. And then only find out months or years later that they missed a technical requirement under Stark. And having the template agreement does just allow you to ensure that you have a standardized process that's been centralized to meet all of the requirements, and that I would describe as more of process looking at the substance of the agreement. It is answering the questions that you mentioned. It's documenting the business justification for the arrangement. C m s says they ask, you know, does it, does it make sense to meet the party's goals? And we'll talk about the new definition for commercial reasonableness, um, in a few minutes. But having that business justification documented contemporaneously with the arrangement allows someone to answer questions if they're raised later. Or more importantly, people leave organizations. And if you don't have documentation contemporaneously with entering into the arrangement, people may not remember or may not know why arrangement was entered into. You also wanna confirm fair market value. And that can be through using, um, outside valuators like kom, like other, like what Christie does. Or you may be able to have your own processes to determine what that fair market value is. But again, you wanna confirm fair market value and document how you arrived at that, um, that number. And, and it's already a lot of work. But, but once the contract is signed, is really only the beginning, um, not the end where you wanna continue to track that arrangement to periodically reevaluate fair market value and commercial reasonable. And as the relationship changes, have a process in place to make sure that those arrangements are updated and as payments are made, ensure that you're tracking the payments as, um, they happen and have a rule of no payment without the documentation that's needed, um, for the arrangement. So those are best practices, but buried in those are what can be potential pitfalls for organizations. And Christie, from your work, where have you seen the top risk areas arise for physician compensation arrangements?

Speaker 2:

Anna, that's a great question and I, and I, I'm gonna kind of break that down into about four different risk areas and, and give some examples, but also I think you and I can dialogue a little bit back and forth on that mm-hmm.<affirmative> was you address, you know, some of the, how are the best compensation models structured? And then as you know, as you notice, like going back to some of the best practices. But, you know, I, I think fir you know, some of the first risk as you look at entering into this, um, an arrangement, uh, like we're discussing or, or a comp or you're building a compensation model, you know, I, I like to to call that as really a, or look at it from the aspect of a, a processing risk. And so, you know, and, and I think that some of the risk that you need to watch out for here is, um, in a lot of ways is are you, is the client or are, are you, as the person who's evaluating the risk, are you needlessly underestimating the risk associated with said arrangement or with said comp model? And, and, and I guess, let me say it another way, is that, you know, uh, there are oftentimes as I'm working with a, a new client or, and, and discussing some of the risk associated with it, I find that some of their internal processes, you know, may be, um, very aggressive, um, or there's a, a, uh, a standard at play that, you know, as long as, you know, comp is below. And this is something we're very familiar with in our world, and, and it's interesting that c m s addressed this or in the commentary as well as we looked at fair as look at fair market value. But, um, you know, as long as compensation is below 75th percentile, it's always okay. And I don't think that that's is true. And I'm, and I'm am excited that c m s is addressed, that that isn't always true. That, and so I think that there's a process risk of undervaluing, um, the risk associated with these, with these types of arrangements and compensation models. Um, Anna, you can speak to this much better than I can, but we've seen, uh, you know, just significant enforcement, um, of, of, and, and significant, um, uh, uh, how do want, the word I wanna, I'm looking for is, is, um, settlements that you, that have happened because of, um, I think an underestimation of risk associated with these deals. And I think a lot of times that goes back to, um, inconsistency as you mentioned, having a consistent, um, comp model and having a best practice that you have a system in place so you know which type of arrangements you have, and they're auditable. And so I think that, you know, that process risk if, uh, you can, um, you can get off the, off the track quickly if you mm-hmm.<affirmative> If you're, if you don't, um, set up your process correctly in the beginning. And you mentioned a lot of that earlier. Um, and then I think the next is it can be some circumstantial risk, and that's, you know, some of the facts and circumstances have changed since you set up the model and you can get in trouble when you don't, can, you know, um, reevaluate that periodically and you don't check it periodically. Um, and so I think that that's important and, and, you know, some of the circumstances can change in, in, in many different ways, but you know, o oftentimes it's, it's certain, I find it's, it's, it's unintentional, but you, you're stacking things together. So you may have a comp model that's pretty simplistic in nature mm-hmm.<affirmative> and, you know, it's, it's straight for clinical compensation. And then over time you've added excess call pay or, and, and then you've added maybe even day one call pay and you've added a directorship and an a c p supervision or some kind of educational teaching component mm-hmm.<affirmative>. And then all of a sudden, um, we're at covid and now it's telehealth and we're paying this different fee for telehealth than you look up. And there's all of these overlapping pieces and parts that, you know, we as, um, healthcare consultants, whether it's attorney or evaluator, we, you know, we know and love is the stacking risk. Mm-hmm.<affirmative>, but that's, that's certainly something to, to watch out for and can get out of hand very, very quickly. And, um, you know, and so, and I think that that then leads to another risk type that I see that's an outcomes risk. And you all of a sudden maybe your individual pieces and parts, they look like they're okay on the surface, but then when you stack'em all together and you realize that there's, you know, you're maybe paying for the same hour for lack of a better term, or double paying on the same worker, for lack of a better term, there's that outcomes risk of, you know, now this arrangement is this very high level out, you know, a high level of compensation that that goes into this, um, uh, substantially higher risk, um, scenario. Um, I will say that I was also excited that c m s, uh, addressed that just because a physician compensation is above, you know, a certain threshold, and I don't believe that they actually said the 90th percentile, but a certain threshold that is published in, you know, nationally recognized, uh, salary surveys. It also doesn't mean that that is not fair market value, that there may be qualit, you know, qualitative factors at play that would support that. And so, again, I think it goes back to your best practices that you suggested both in the comp design, but then also as, you know, as you look at that review process. And so it's, it's a, it's a ever-evolving. It's not a one and done and you put it in the shelf, it's, you continually breathe life into it and you, and you review it. And then I think the third risk is, is more of an internal, um, risk as well, but it's implementation risk. And that goes back to your suggestion of making sure that you can audit the risk if it's, and often if it's too complicated, it's implemented incorrectly. And so whoever's actually, you know, pegging the compensation and who's calculating the worker review or, or calculating what, what should the payout should be underst said model, um, the more difficult it is, you can certainly, um, open yourself up to implementation risk and, and, and unintentionally, um, overpay because you haven't implemented what was intended from the beginning. And so, as I see it, those are, those are some of the key risk factors that, um, that we run into, um, when, when evaluating these deals. And so, like to summarize that overly aggressive compensation or, you know, or even I've seen or heard of people tracking referrals, that's certainly an issue as well. But, um, really wanted to point out those four risk factors cuz they really tie into your best, your best practices recommendations that you discussed earlier. Um, and I guess I would, I, what I'd like to do, Anna, is kind of shift our conversation at this time a little bit and, you know, acknowledge, I mentioned the pandemic and as it related to telehealth and, you know, we're still in a pandemic crisis and, you know, um, covid numbers are going up and, and, um, because, you know, initially I guess back in, in, in March or the, we, there are stark waivers were enacted. And, and, um, I guess my question for you is, is how does that change knowing that we're living in a world of waivers and, and living in a world of final rule now, um, how does that change our key stakeholders actions now, but then also as they plan for the future, what, you know, what should they be thinking about and, and steps to take?

Speaker 3:

Sure. And I mean, 2020 has definitely, it seems offended everything we're working, working on. And, and in no place have we seen more significant, um, impact than in healthcare since the healthcare providers have definitely been on the frontline of mm-hmm.<affirmative> addressing the pandemic. A and, and, and you're right that there have been changes where c M s, um, and h h s Rec, h h s recognize the need to grant section 1135 waivers to waive certain requirements of the regulations to allow for the flexibilities needed for healthcare providers to continue to provide, to care for patients and continue to operate during this unusual time. And one of those areas was through, um, C M S implementing waivers of the Stark Law and waiving certain requirements under some various exceptions in including allowing for payment of compensation or remuneration that might be outside of fair market value to, um, in to serve what they describe as a covid purpose of ensuring appropriate workforce, ensuring access to care and, um, and just allowing these providers to continue to operate. The impact on physician compensation of the stark waivers is, is important to consider, especially for any provider that's taken advantage of it or may feel they need to take advantage of a waiver. And the starting point is to very closely review that guidance to note that the stark logs are only waived if it meets one of the defined covid purposes is defined under, um, that guidance. It's not just free reign to, um, not comply with the Stark Law, and they're limited, they're only limited to what is specifically addressed in the waiver. So if a provider, for example, if a hospital decides that it wants to provide meals to all of its staff because of, you know, surge and workforce, then there is a waiver that would cover that for, um, under the non-monetary compensation exception that would allow to exceed those dollar values or the incidental benefits exception could come into play as well. Um, but what is important to remember about the waivers is these are not permanent. Um, I recently participated in another conference and someone asked that question of, well, do we think these will be permanent? And the stark waivers definitely not. And so they will come to an end at some point. Providers should be, who have taken advantage of the waivers, should ensure that they have a process in place to change any arrangement that was done, because that was done in reliance on the waivers to bring it back into compliance and document how they met the waiver in the first place, and then document the process of going back, um, into compliance, I suspect will be under public health emergency for another few months. And so those are still available, but again, it's important to understand they are limited and, um, you'll want to consider how to address them going forward. And Christie, I know we've touched on a few times the, the News Stark and Anna Kickback rules that, um, have just recently been published and of course have been the topic of all, um, people involved in, um, in, in areas that are touching on it. And the, some of the changes really address a number of the topics we've been discussing, and we obviously could spend a many hours discussing these changes. I know A H L A is, um, publishing significant fault leadership has sponsored webinars to be able to address it, but I think it's important to consider some of the concepts just in general for compensation arrangements separate, apart from the value-based, um, changes that have been made. These rules are impacting all, um, all physician compensation arrangements. And, and in particular, I wanted to highlight just some of the definitions, and you've alluded to some of these as well, that I think the, the Stark rule in particular brought some clarity to some concepts that have been difficult for providers to know how to apply. And there have been some enforcement actions that would seem to potentially muddy some of the waters. And, and one of the, one of the definitions I wanted to highlight was the definition for commercial reasonableness. This, as we know, is a requirement that an arrangement needs to be commercial reasonable, that, that a personal services arrangement should be commercially reasonable. And this is a concept that we've seen a number of the stark, um, exceptions and c m s is now given us a definition. And, and I think that definition is important and touches on some of the topics you've discussed, that definition has been defined as that the particular arrangement would further a legitimate business purpose of the parties to the arrangement and is sensible considering the characteristics of the party, including the size, type, scope, and specialty. And importantly, M C M S also added that an arrangement may be commercially reasonable even if it does not result in the profit, uh, for one or more of the parties. This was a very important addition after a number of enforcement matters appeared to take the opposite position. And that if a business arrangement was not profitable, then that would be construed as not being commercially reasonable because why would an entity enter two arrangement that's not profitable? Now, those of us in healthcare know there are a number of reasons that could happen. Um, if you're a hospital system, you may need to employ a physician or have a services arrangement, such a call coverage arrangement with a physician for call coverage to meet your inala obligations mm-hmm.<affirmative>. And that may not in and of itself be profitable if you look at just the four corners of what is the revenue generated from that arrangement. But you can't meet those legal requirements I under EMTALA if you don't have certain specialties. And so I was really happy to see that, um, inclusion there as well as some discussion of the comments of, of situations like EMTALA that are important for, um, for providers to enter into arrangements. Other definitions included, um, fair market value that they then expanded some guidance there, continue to find the fair market value, the value and an arms link transaction consistent with the general market value of the subject transaction. The definitions went on to explain that for compensation arrangements, the compensation that would be paid at the time the parties entered into the arrangement as a result of bonafide bargaining between well-informed parties that are other to that are not otherwise in a position to generate business for each other. So again, giving us just some additional guardrails and framework to consider. And the final definition I wanted to highlight was the volume and value standard, as you noted, that's been separated from fair market value and, and definitions have been given to that as well to help understand what does that mean, because that has been, um, questions over the years. Uh, what, when does a compensation formula take into account the volume or value referrals, or when does it not? So, c m s defined that term as compensation from an entity furnishing d h s to a physician will take into account the volume or value referrals only if the formula used to calculate the physician's compensation includes the physician referrals or other business generated as a variable resulting in an increase or decrease in the physician's compensation that positively correlates with the number or value of the physician's referral or generation of business for that entity. So breaking that down, um, they've noted that a positive correlation between two variables exist when one variable decreases as the other variable decreases, or as one variable increases, the other value increases. So I, I found that definition will be very helpful in structuring arrangements to ensure that they meet that volume or value standard and don't run afoul of it, um, as we move forward. Um, and Christie, I'd be interested in your perspective, particularly as evaluator and how you think that these final rules will impact us going forward?

Speaker 2:

Yeah, thanks Anna and I, and I guess what I'd like to say and, and some degree wrapping up our, our time together is that I think I'm, I'm personally, I'm excited about the changes that are at play. I think that, um, the value-based care arrangements and themselves are going to, um, to be exciting times and mm-hmm.<affirmative>, you know, new opportunities for our, um, you know, our environment, our healthcare world that we live in, um, to, to really create some new and interesting things. But, and as you said, we could talk about that for another, you know, days and, and, and, and plan and talk about that. So I'll kind of put that on the table, but, and focus, you know, purely on, I, um, I'm excited about the clarity or, and, and, and, um, I'm gonna call it untangling, if you will, of fair market value commercial reason list and volume and value standard. I, I like that they build on one another, um, more than, you know, this kind of this braided together and, and the vagueness that, that maybe once was. Um, and, and I really, I really like the commentary in particular around the fair market value as, as I mentioned before mm-hmm.<affirmative>, um, that there's, I, I feel like there's, there's clarity around the definition. And yet, uh, you know, c m s in my mind is accomplished in a lot of ways the goal to, to, um, to create the breadth needed to be able to, um, create a, a compliant environment with, with some guardrails, but they're not so rigid that you can't be creative and have healthcare be a thriving business. And so I I really like the, you know, the reference of of, you know, just because a physician makes above 90th percentile doesn't necessarily mean that isn't fair market value. Um, there could be a number of qualitative, um, and quantitative mm-hmm.<affirmative>, but a number of qualitative factors that support that. And I really love that there's also, uh, you know, discussion of just because, you know, um, so somebody's paid less than median or is paid median, that also doesn't then mean that that is fair market value or that is the best touching on commercial reason list. That that is, that's a commercially reasonable arrangement there, va there may very well be a viable, a better alternative that is, um, more cost effective. And so I, I'll, I really like and appreciate that direction. And I particularly like, oh, go ahead. I'm sorry, Anna.

Speaker 3:

Yeah, I was just gonna say, I think, you know, for those two areas that you just highlighted, those are, those are discussion points that I, I I, I know we frequently had with evaluators and with other, you know, healthcare attorneys where we've always fought that was the case. But it's so helpful for c m S to actually put that in writing to, to, to say, yes, you know, here are the guardrails and, and here are the considerations to make.

Speaker 2:

I completely agree. And then, you know, and the only other point that I, I really wanted to make is touching on commercial reason list. Mm-hmm.<affirmative>, I really like that they highlight, you know, that it, it makes legitimate business sense and you should factor in like the, the size, the type, the scope, the specialty, those, those things. And, and you know, in my mind, again, this is my opinion, but I've seen commercial reason list and fair market value is two separate and distinct things. But I appreciate that c m s has cla, you know, brought clarity to that and, and to me, in bringing the clarity that they've emphasized the importance of really documenting that said arrangement is commercially reasonable. I, I, I think that there has been certainly an unintentional, but there's, there's been maybe some within our community that really sees fair market value and commercial reason list as one and the same. And if you get a fair market value opinion, for instance, from a third party appraiser, then they're also inevitably saying that the arrangements commercially reasonable. And that's not necessarily the case. And so I really like the clarity behind, um, the separation of those two definitions.

Speaker 3:

Yeah. Yeah. I mean, I mean, a classic example there could be that if you have a medical director arrangement that's paid, say$150 an hour, which is, you know, a raise that would probably always fall within fair market value that meets fair market value, but you can't have 10 of them, um, all exactly$50 that would not be commercially reasonable. And so I agree, I think some of those distinctions are helpful.

Speaker 2:

Exactly. So Anna, I I just wanted to thank you so much for joining me in the podcast today in this, in this exciting topic. And it is particularly in the, in the day and age that we're, that we're in. And I, uh, I can't thank you enough for joining me in this podcast and thank A H L A for, uh, allowing us the opportunity to share these insights and opinions, um, on, on this topic. So thank you so much.

Speaker 3:

Sure. Happy to participate. Thanks for having me on.