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Stark compliance for group compensation

By Nancy W. Miller, Esq.

Because the “Stark” law is generally understood to prohibit certain physician referrals, physician practices frequently overlook the fact that Stark also places limitations on their compensation plans. In essence, Stark prohibits physicians in a group practice from referring patients to other physicians within the group for certain Medicare “designated health services” (DHS) unless an exception applies to those referrals. Several of the exceptions which apply to physician groups require as a prerequisite that the medical practice qualify as a “group practice.” If the practice doesn’t satisfy Stark’s “group practice” definition, its physicians can’t deliver DHS through the practice or bill Medicare and Medicaid for the DHS.

This article will explore compensation strategies for group practices that comply with Stark.

The Basics

To qualify as a “group practice,” the practice must comply with several requirements which include special rules for sharing profit and paying productivity bonuses to its physicians. In general, Stark prohibits compensating a group physician for referring patients for DHS, even if the services are performed by other physicians in their practice. Stark does, however, permit the practice to pay a physician a bonus for personally performed services and a share of the overall profits of the group. The catch is that the share of profits or bonus can not be determined in any manner that is directly related to the volume or value of referrals of DHS by the physician. In other words, group practice compensation formulae that are only indirectly related to the volume or value of referrals of DHS are permissible.

The good news is that Stark’s compensation rules only apply to DHS that can be paid by Medicare, Medicaid or other federal health care programs. Stark includes only the following 11 items and services covered by Medicare/Medicaid as DHS (designated health services): clinical laboratory services, physical therapy, occupational therapy, radiology, radiation therapy, home health, durable medical equipment, parenteral and enteral nutrients, prosthetics and orthotics, outpatient prescription drugs and supplies, and inpatient and outpatient hospital services. This means that group practices can segregate their Medicare DHS revenues from other revenues and treat the two differently for purposes of their compensation plan. Groups are free to divide income derived from other sources (non-Medicare DHS) in any manner they choose.

Productivity Bonuses

The part of a group’s compensation plan most apt to run afoul of Stark relates to the payment of productivity bonuses because they are frequently based on a percentage of a physician’s revenue, including DHS performed by other group members.

The productivity bonus may include a component based on DHS services “personally performed” by the physician because such services are not considered “referrals” under Stark. Therefore, groups can pay a physician (both employees and independent contractors) directly on the physician’s own personally performed DHS, including “incident-to” services which meet Medicare’s billing requirements. Bonuses may not be based directly on referrals of DHS that are performed by someone else, whether that person is another physician or anyone else working for the group practice. For example, if an internist refers a patient with chest pain to a cardiologist in the same practice, and the cardiologist subsequently performs an echo cardiogram, the cardiologist could receive a bonus for performing the service, but the internist could not receive a bonus for the referral.

It is important to note in counting a physician’s “incident-to services” that only those services that are directly supervised by the physician are deemed to be incident-to services. To satisfy Medicare’s direct supervision requirements for purposes of the incident-to rules, the physician (or another clinic physician in the case of a physician-directed clinic) must be present in the office suite and immediately available to provide assistance and direction.

Stark does allow bonuses which are indirectly related to referrals of DHS and the law identifies four permissible methods (akin to “safe harbors”) for paying productivity bonuses:

Patient encounters/RVUs. A bonus can be based on the total patient encounters or relative value units (RVUs) that the physician personally performs. The patient encounter or RVU method is a good way to calculate bonuses because it reflects individual productivity.

Same calculation for DHS and non-DHS. A bonus can be based on the allocation of the physician’s compensation attributable to services that are not DHS payable by Medicare, Medicaid or any other Federal health care program or private payor.

Five Percent Rule. If DHS revenues are less than five percent of the group practice’s total revenues and no physician’s allocated portion of those revenues constitutes more than five percent of the physician’s total compensation from the group practice, then bonuses can be based on any formula the group selects. For example, if a physician’s salary is $100,000, then $95,000 cannot be derived from DHS. Likewise, the group must calculate whether DHS comprises less than five percent of its total revenue. However, this bonus formula needs to be watched regularly because, if the amount of DHS suddenly increases or one doctor in the group is a heavy DHS provider, the practice may no longer qualify to use this method.

Other reasonable and verifiable indirect bonus methods. Group practices may use any other distribution method that indirectly accounts for DHS referrals. However, there must be no direct correlation between the total amount of a physician’s compensation and the volume or value of the physician’s DHS referrals regardless of whether the services are personally performed. Further, these methods must be determined in a reasonable and verifiable manner. While this “safe harbor” allows groups to develop their own compensation methodologies, the practice essentially bears the risk of noncompliance because the methodology will be subject to case-by-case review to determine if it is compliant.

Share Of Overall Profits

With regard to distributions of overall profit shares, Stark’s use of the word “profits” means all of the profits or revenues a group can distribute in any form to group members, bearing in mind that Stark only applies to the distribution of revenues derived from DHS.

Stark allows group practice physicians to receive “shares of the overall profits” of the group as long as those profits are unrelated to the volume or value of referrals. For compensation purposes, a “share of the overall profits” can be based on a share of the group’s entire profits derived from DHS. For example, a practice could divide DHS profits equally among its physicians.

Alternatively, a group practice can create a separate cost center with its own compensation methodology for productivity for any sub-group within the practice. This “pod” can be based on specialty, location, or other criteria, as long as it consists of at least five physicians. The pod is permitted to distribute the profits from DHS and/or technical components among its members.

Stark specifies the following permissible “safe harbors” for distributing overall profits that indirectly account for DHS referrals:

Per physician. The plan can use a per capita (per physician) division of the overall profits.

Same calculation for DHS and non-DHS. The profit-sharing methodology can distribute DHS revenues based on the distribution of the group’s revenues attributed to services that are not DHS payable by Federal or private payers.

Five Percent Rule. Any plan for profit-sharing is acceptable if DHS revenues are less than five percent of the group practice’s total revenues and no physician’s share is more than five percent of the physician’s total compensation from the group practice.

Other reasonable and verifiable indirect bonus methods. Group practices may use any other distribution method that indirectly accounts for DHS referrals. However, as with productivity bonuses, there must be no direct correlation between the total amount of a physician’s compensation and the volume or value of the physician’s DHS referrals regardless of whether the services are personally performed. These methods must be determined in a reasonable and verifiable manner that is not directly related to the volume or value of the physician’s referrals.

One of the “safe harbors” for paying productivity bonuses and distributing profit provides that the physician’s share must be determined based on allocations of the physician’s services that are “not DHS payable by Federal or private payers.” This means that group practices can carve out Medicare/Medicaid DHS revenues from other revenues as part of overall Stark Compliance, but for purposes of determining a physician’s share of profits or productivity bonus, the physician cannot receive financial “credit” for services that would be classified as DHS if they could be paid for by Medicare or Medicaid. Thus, each physician’s proportional share would need to be based on his/her professional services and not include any credit for services that would be classified as DHS if they were payable by Medicare or Medicaid.

Group practices are not restricted to the use of the profit sharing or productivity bonus “safe harbors.” However, if the practice wants absolute assurance that compensation is not directly related to referrals of DHS, the group should employ one of the suggested methodologies.

Documentation

Whatever method is used to determine productivity bonuses and profit shares, it is critical that the group practice document its methodology because Stark requires that supporting documentation regarding profit shares and bonus calculations must be made available to the Department of Health and Human Services upon request.

Another fundamental principle is that compensation paid to a physician must be for reasonable and necessary services. For example, hiring a specialist for the purposes of creating a pod of at least five physicians for profit-sharing purposes would not acceptable.

Prospective Determination of Income

One of the criteria necessary to satisfy the group practice definition requires that income from the group practice must be distributed in accordance with methods “previously determined.” Stark will treat a distribution methodology as “previously determined” (or determined in advance) if it is determined prior to receipt of payment for the services producing the income. This approach permits groups to adjust their methodologies prospectively as often as they deem appropriate. However, a compensation method that is retroactively adjusted would violate the Stark Law.

In summary, the compensation plans of group practices must be structured to comply with Stark regulations if the practice provides DHS. However, Stark only affects the distribution of revenues derived from DHS, not monies earned from other services.

The key principle in designing a compensation plan is that group practice physicians can be paid in a manner that directly correlates to their own personal labor in providing DHS. In other words, “productivity” refers to a physician’s own work but does not include the physician’s efforts in generating DHS performed by others. Nonetheless, physicians can receive shares of overall profits, including revenues divided from DHS, so long as those shares do not directly correlate to the volume or value of referrals generated by the physician for DHS performed by someone else.

Likewise, Stark permits groups to pay productivity bonuses to their physicians based directly on personally performed services, including services incident to personally performed services, but precludes any bonus based directly on referrals of DHS performed by someone else. By incorporating the “safe harbors” into their compensation plans, groups can be assured they are complying with Stark.

Nancy W. Miller, Esq., is an attorney with Houston Harbaugh, P.C., in Pittsburgh.

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