The U.S. Court of Appeals for the Third Circuit recently issued a False Claims Act (FCA) decision calling into question productivity-based physician compensation structures under the Stark Law, in reliance on a controversial interpretation of the Stark Law’s “volume or value” standard.

The case, U.S. ex rel. Bookwalter v. UPMC, involved employment arrangements between the University of Pittsburgh Medical Center’s (UPMC) subsidiary physician practice entities and neurosurgeons who performed procedures at UPMC’s affiliated hospitals. The decision is significant for hospitals and health systems in that the Third Circuit’s holding is contrary to guidance promulgated by the Centers for Medicare & Medicaid (CMS) and appears to call into question a common compensation methodology used by health systems to compensate physicians.

Overview of Allegations and Procedural History

The surgeons’ employment agreements in this case provided for a base salary and annual work relative value unit (wRVU) threshold beyond which there was potential for a productivity bonus of $45 per personally performed wRVU. If a surgeon failed to achieve his or her productivity threshold for the applicable yearly period, UPMC retained the ability to reduce the physician’s future base salary accordingly. The relators in this case – who filed the suit in 2012 – alleged that the foregoing compensation structure violated the Stark Law in that it constituted an indirect compensation arrangement with the hospitals not meeting any applicable exception. The underlying allegations involved several unique factors considered by the Third Circuit, including:

  • The physicians allegedly engaged in a variety of fraudulent actions to artificially boost their wRVU volumes, including reporting that they acted as assistants on surgeries when they did not, that they acted as teaching physicians when they did not, that they billed for parts of surgeries which never happened, and that they performed medically unnecessary or needlessly complex procedures. The Neurosurgery Department experienced wRVU growth rates of 20–50% in certain years the arrangements were in place and, in 2009, was the single highest-grossing neurosurgical department in the United States.
  • Most of the surgeons reported wRVUs putting them at or above the 90th percentile – in some cases, as much as 2–3 times the 90th percentile, which the Third Circuit acknowledged as “super human.”
  • Many of the surgeons received total compensation at or above the 90th In one case, the physician’s productivity bonus alone exceeded the 90th percentile of total compensation in some surveys.
  • At least three surgeons’ pay exceeded their collections, and the productivity bonus conversion factor exceeded what UPMC typically collected on a per-wRVU basis for the physicians’ services.

Notably, the government previously intervened in this case as to certain claims involving the physicians’ professional billings, and UPMC settled those allegations in 2016 for $2.5 million. The government did not intervene as to allegations of false claims on the hospital side but rather left those claims to be pursued by the relators. The district court dismissed the relators’ complaint for failure to state a claim, resulting in the appeal to the Third Circuit.

Third Circuit Reverses Dismissal, Adopting Controversial Tuomey Reasoning

The Third Circuit reversed the district court’s decision dismissing the case and, in so doing, adopted the controversial construction of the Stark Law’s “volume or value” test previously advanced by the U.S. Court of Appeals for the Fourth Circuit in U.S. ex rel. Drakeford v. Tuomey. The Third Circuit held that, to plead a “prima facie Stark Act violation” that “suggests potential abuse of Medicare,” a relator need only allege the existence of the following:

  • a referral for designated health services
  • a financial relationship (e., an ownership or investment interest or compensation arrangement)
  • a Medicare claim for services referred by the physician

In finding that the relators adequately pleaded an indirect compensation arrangement, the Third Circuit concluded the following in pertinent part:

  • “Varies with” means “correlation” when considering whether the surgeons’ aggregate compensation varied with referrals to the hospital. The Third Circuit reasoned, “If compensation tends to rise and fall as the volume or value of referrals rises and falls, then the two vary with each other.”
  • Even though the surgeons’ compensation structure was “facially based” on personally performed services, their aggregate compensation varied with the volume or value of their referrals to the affiliated hospitals. Each time they performed a surgery or other procedure, thereby protecting their base salaries or earning a productivity bonus based on wRVUs generated, they generated a referral for the associated hospital services.

In construing the indirect compensation arrangements definition, the Third Circuit concluded that “takes into account” means “actual causation” – in other words, the physician’s pay “must be based on or designed to reflect the volume or value of his referrals.” The Third Circuit found the relators pleaded sufficient facts that, viewed together, plausibly suggested the surgeons’ pay exceeded fair market value, including that the compensation exceeded collections and that the surgeons’ wRVU conversion factor in many cases exceeded what UPMC collected. The Third Circuit concluded, “Healthcare providers would not want to lose money by paying doctors more than they bring in. They would do so only if they expected to make up the difference another way. And that way could be through the doctors’ referrals.”

This decision is an interesting result as it runs counter to prior CMS commentary sanctioning the payment of productivity bonuses tied to personally performed work in the hospital setting. As noted above, the Department of Justice did not intervene with respect to any Stark Law claims on the hospital side. However, the allegations – including other indicia of fraud, abusive practices, and potentially excessive compensation not supported by fair market value – may have motivated the Third Circuit to find some basis for allowing the relators’ case to move forward. The outcome might have been different without the unique factors present, which may have made it difficult for the Third Circuit to view the arrangements as routine, industry-norm compensation structures. As noted by the Third Circuit in conclusion:

With all this smoke, a fire is plausible. So this case deserves to go to discovery. Once the discovery is in, it may turn out that there is no fire. We do not prejudge the merits. But this is exactly the kind of situation on which the Stark and False Claims Acts seek to shed light.

UPMC has moved for an extension of time to file a petition for rehearing en banc, which is due on October 15, 2019. The likelihood of success of a petition for rehearing increased with CMS’s release of a proposed rule directly contradicting the Third Circuit’s holding by noting:

With respect to employed physicians, a productivity bonus will not take into account the volume or value of the physician’s referrals solely because corresponding hospital services (that is, designated health services) are billed each time the employed physician personally performs a service.

Takeaway: Ensure Documentation of Compliance and Implementation of Appropriate Safeguards for Productivity-Based Compensation Arrangements

While this decision should not serve as a reason to discontinue the use of a productivity-based compensation model, particularly when considering CMS’s recent proposed rule that undermines the holding, the opinion does underscore the importance of ensuring all arrangements with physicians are consistent with fair market value based on internal or independent third-party valuations and commercially reasonable under the totality of the circumstances for the arrangement. If practice losses will result from an arrangement, the reasons supporting the commercial reasonableness of these losses, such as ensuring access to patient care or providing call coverage needed to meet a hospital’s EMTALA obligations, should be documented contemporaneously with the initiation of the arrangement. Providers should also consider incorporating safeguards, such as audits of services to ensure medical necessity and appropriate documentation and supervision of services, to help mitigate against the types of objectionable practices alleged in this matter.