How much is it appropriate for a hospital to pay a physician? Without explaining how the line was drawn, the Justice Department says it was crossed in Waterloo, Iowa, when Covenant Medical Center paid a handful of employed specialists sums as high as $1.8 million apiece.
The 231-bed hospital last week agreed to pay the U.S. government $4.5 million to settle allegations that its compensation to five specialists violated the Stark restrictions on physician self-referral and therefore also violated the False Claims Act with the related Medicare claims. The case, which echoes criticism levied by a local independent clinic in 2005, is one of a few instances so far in which the government has pursued a False Claims Act theory based solely on the Stark law, without also arguing that the arrangement constituted a kickback scheme.
The Stark law includes an exception for employed physicians, but the exception requires that the compensation is fair-market value, commercially reasonable and doesn't take into account the volume or value of referrals.
Bob Homchick, a partner in the law firm Davis Wright Tremaine who specializes in Stark issues, says he finds the case somewhat troubling. “I'm concerned that it places too much emphasis on a fair-market-value issue with employed physicians, that whether or not the facts of this case merit it, it will have the effect of simply increasing the transactional costs within healthcare by encouraging more and more fair-market-value assessments and having something in the file to justify the amount of the comp and so forth and so on.”
Covenant denies any wrongdoing in the agreement and issued a statement aggressively defending the pay as perfectly reasonable given the “exceptionally high level of productivity” of the physicians in question. What they were paid, spokesman Chris Hyers says, represents a straight calculation of revenue from services they personally performed, minus expenses. “The government never brought any evidence forth that we did anything,” Hyers says.
The government's analysis is not explained in the settlement agreement, and northern Iowa U.S. Attorney Matt Dummermuth declines to elaborate, except that the physicians in question were among the highest paid in their fields in Iowa and the U.S., and that “referrals were involved.” The settlement does not name the physicians. Dummermuth says their specialties are orthopedic surgery, neurosurgery and gastroenterology.
In 2005, Cedar Valley Medical Specialists in Waterloo filed a lawsuit accusing Covenant of unfair business practices and requested an injunction stopping Covenant from overcompensating its physicians, some of whom Covenant hired away from Cedar Valley.
The dispute generated media reports that Covenant orthopedic surgeon Gary Knudson, M.D., and gastroenterologist Victor Lawrinenko, M.D., each took home more than $2 million in the year that ended June 30, 2003.
The lavish pay was making it impossible for independent physician groups to compete, Cedar Valley CEO Gil Irey says. The parties reached a confidential settlement last year, Irey says.
The settlement with the Justice Department covers compensation paid to five physicians from 2005 to 2008. According to the Form 990s Covenant filed to the Internal Revenue Service for those years, the hospital's highest paid employees who weren't officers included physicians in the specialties Dummermuth identified.
They were paid between $719,000 and $1.8 million, and in each year included Knudson, Lawrinenko and orthopedist Richard Naylor, D.O.
“The lesson here isn't that hospitals can't pay doctors; it's that hospitals can't pay doctors twice as much as they were making in private practice,” says David Glaser, a shareholder in the law firm Fredrikson & Byron, who has represented Cedar Valley Medical Specialists but not in its lawsuit against Covenant.
Glaser says it strains credulity that doctors would make more—particularly 50% to 100% more—at a not-for-profit hospital than in a clinic that exists solely to produce income for its member physicians. “The only way they're going to make more in another setting is lower overhead, better contracts, high productivity—I'm running out of other good legal ways you can get there,” Glaser says. “Out there in the world, there aren't a rash of hospitals that find that when they hire doctors away from clinics, the doctors all of a sudden work a lot harder.”
Dale Armstrong, M.D., a psychiatrist and president of Mason City (Iowa) Clinic, says the reimbursement realities in Iowa make it extremely difficult to recruit physicians to his multispecialty group, about 85 miles northwest of Waterloo. “We don't have the deep pockets to offer that amount, though it could conceivably take that amount to get someone here,” Armstrong says. “I can't even get a gastroenterologist to come to our community for an interview.”
“For the hospitals, it's enormous pressure for them,” Armstrong says. “Doctors are the driving engine for them, although hospitals often want to keep that a secret.” He adds, though, that he believes it's wrong for the government to decide what's appropriate for hospitals to pay doctors, and he has seen hospitals cite the fear of government action as an excuse to hold salaries down. “It kind of goes both ways.”
Chip Hutzler, a principal in healthcare valuation consultancy HealthCare Appraisers, says that there are certainly physicians in those specialties who make seven figures, though the Medical Group Management Association's compensation survey puts such paychecks squarely in the upper tiers of the fields.
Compensation that's unusually high, Hutzler says, isn't necessarily in excess of fair-market value or commercially unreasonable, which in Stark terms means it wouldn't make sense for the hospital without regard to referrals for other services that will make money for the hospital. But the government hasn't explained how it reached its conclusion, he says.
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