Federal Lawsuit Demonstrates Importance of Strong Fair Market Value Processes for Risk Management
This Bulletin is brought to you by AHLA’s Enterprise Risk Management Task Force.
- April 10, 2020
- Jason Lee , ECG Management Consultants
- Nadia Poluhina , ECG Management Consultants
In a recent Intervening Complaint (Complaint), the Department of Justice (DOJ) alleged an Indiana health system submitted false claims to the Centers for Medicare & Medicaid Services (CMS). Specifically, DOJ alleged that Community Health Network (CHN) knowingly submitted “claims to Medicare that were false because they resulted from violations of the physician self-referral law,” also known as the Stark Law. If found guilty, CHN could face millions of dollars in fines, treble damages, and civil money penalties under the False Claims Act. Filed on January 6, 2020, this case illustrates what can happen when internal compliance systems fail.
Using the five safeguards outlined below, health systems can limit regulatory risk and avoid similar pitfalls to those alleged in the recent case filing.
A standardized contract review process
Organizations should establish a standardized and transparent business review system for oversight and approval of arrangements and associated documentation. This process should be supported by a review framework that evaluates a standard set of business and legal concerns in a consistent manner. Approval documentation should demonstrate that comparable data was selected due to its relevance and reliability—not simply because it supported a predetermined level of pay.
In the CHN case the allegations suggested that the cited arrangements were rushed through the Compensation Committee and board approval processes. Seemingly, there was no review process in place, as evidenced by the Compensation Committee’s lack of follow-up on the problematic arrangements. For example, the committee allegedly approved one of the compensation plans in question, stating its approval was conditional on the receipt of a favorable fair market value (FMV) and commercial reasonableness (CR) opinion from a third-party valuation firm. However, when the contracted valuation firm was unable to provide a favorable opinion, the contract was neither terminated nor brought before the board for renegotiation.
An internal benchmarking tool
To improve the consistency of applying a contract review process and lower the associated costs, organizations should implement an internal benchmarking tool that will enable them to conduct contract reviews and benchmarking assessments using standard, approved benchmarks. This resource can help improve efficiency (related to both cost and time), promote consistency, and facilitate risk management. It will also allow organizations to identify risky contracts earlier in the review process so that these contracts can be evaluated with a higher level of scrutiny and properly moved to the required approval and escalation steps.
When reviewing the compensation plan for cardiology cited in , one can see the value of an internal benchmarking tool. Based on the information outlined in the case, CHN entered negotiations with the physicians without conducting an internal benchmarking analysis. Then, when negotiations were well under way, CHN hired a valuation firm to conduct a physician benchmarking analysis. Conducting the benchmarking internally would most likely have provided timelier information to the stakeholders about the significant differential between the proposed compensation and anticipated productivity, which was reportedly found by the valuation firm and internal stakeholders to be “staggering” and “astounding.”
A risk stratification process where higher-risk matters are subject to greater scrutiny
Risk stratification is a trade-off process, with lower risk thresholds necessitating a more involved review process for a higher number of contracts. For example, consider the difference between an in-depth review threshold at the 60th percentile of total cash compensation (TCC) versus the 75th percentile. A threshold at the 75th percentile would mean fewer arrangements would require review, yet those reviews would likely require more detailed documentation of relevant factors.
Looking again at the cardiology compensation plan cited in the Complaint , the network hired the valuation firm to provide only a benchmarking analysis instead of a full FMV and CR opinion, even though the full opinion would have been more appropriate given the alleged extraordinary compensation figures.
A defined FMV process with pre-established escalation mechanism
Ideally, the contract review process includes a robust FMV process with an approval escalation requirement when the benchmarking puts an arrangement over the pre-established risk tolerances set by the board of directors. Built-in escalation metrics would potentially avoid approval of high-risk compensation plans, particularly those that don’t receive favorable FMV opinions or present potentially problematic levels of compensation.
In the Complaint allegations, the DOJ suggested that as outside consultants were recommending limiting the proposed physicians’ compensation to the 75th percentile of TCC market benchmarks, the network was “backing into” the 90th percentile for a number of arrangements. Additionally, while the committee requested an annual review of the compensation plans as recommended by the third-party valuator, the reviews never happened due to the absence of an adhered-to FMV process.
Education for hospital and medical group administrators
Administrators need to be educated about the importance of following FMV and CR standards for physician compensation arrangements and kept informed of the latest internal policies and procedures. When an approving executive encounters information indicating a potential Stark or Anti-Kickback concern, they have a duty to exercise ordinary business care and prudence and object to the transaction if necessary. An approver who fails to object to a transaction that violates FMV and CR standards might be deemed a knowing participant and subject to personal liability.
In addition to the specific issues outlined above, CHN is alleged to have knowingly inflated the collections figures it provided to the third-party valuator to induce a favorable FMV opinion. This alleged failure of management to uphold its responsibility could potentially have been avoided through education on FMV and CR regulations and compliance.
Consistent, informed processes can reduce risks and reduce the temptation to work backwards to justify a desired compensation figure. Organizations are encouraged to review their processes and communication between the compensation committee, third party valuation consultants, management, and counsel relative to these five important safeguards to identify and minimize risks in physician compensation plans. The DOJ’s complaint contains allegations only.
Nadia Poluhina is a manager at ECG Management Consultants’ San Diego office. Nadia has extensive experience in the fair market value (FMV) and commercial reasonableness assessment of contractual relationships among hospitals, physicians, and medical groups. She has designed and implemented compliance review frameworks to streamline the contract review process and eliminate unnecessary FMV reviews. Editing assistance was provided by Jason Lee, an associate principal at ECG Management Consultants’ San Francisco office. Jason has extensive experience in strategic planning, hospital/physician alignment, and commercial contracting. Jason is a nationally recognized speaker and has written several published articles in areas such as value-based reimbursement and shared savings programs.