Update: Third Circuit Allows Allegations of Improper Compensation under the Stark Law to Proceed, but Reverses Controversial “Varies with Volume or Value” Reasoning

Bass, Berry & Sims PLC

Bass, Berry & Sims PLC

On December 20, 2019, the U.S. Court of Appeals for the Third Circuit granted in part a petition for rehearing filed by the University of Pittsburgh Medical Center (UPMC) in a False Claims Act (FCA) case that has generated considerable attention among hospitals and health systems due to its treatment of commonplace, productivity-based physician compensation models. Ultimately, the Third Circuit vacated its original September 17, 2019 decision and issued a revised opinion reversing its holding that the relators could establish a problematic indirect compensation arrangement simply by alleging the employed neurosurgeons’ pay for personally performed services correlated with the volume or value of their referrals to UPMC’s facilities for the corresponding hospital services.

As discussed in our October 14 post, U.S. ex rel. Bookwalter v. UPMC involved employment arrangements between UPMC’s subsidiary physician practice entities and various neurosurgeons pursuant to which the physicians earned base salaries and potential incentive bonuses tied to their personally performed work relative value units (wRVUs). The Third Circuit previously held – in reliance on a controversial construction of the Stark Law’s “volume or value” test – that the relators pleaded facts sufficient to demonstrate the surgeons’ compensation both varied with and took into account the volume or value of their designated health service referrals to UPMC’s hospitals, thereby creating an impermissible indirect compensation arrangement.

UPMC’s petition for rehearing received amicus curiae support from several hospital and health system associations expressing concern that the decision had “already begun to reverberate through the hospital community” and threatened to “force hospitals to adopt fundamental changes” to their wholly lawful compensation practices “at significant cost and loss of productivity.” In issuing its revised decision, the Third Circuit recognized the parties’ disagreement about what it means for compensation to “vary with” referrals for purposes of creating an indirect compensation arrangement. However, the Third Circuit emphasized that:

We need not resolve the meaning of varies with here. Regardless, the complaint plausibly alleges that the surgeons’ compensation takes into account the volume or value of their referrals. Under the Stark Act and its regulations, compensation takes into account referrals if there is a causal relationship between the two. And here, the surgeons’ suspiciously high compensation suggests causation.

In reaching this conclusion, the Third Circuit relied heavily on the problematic allegations and other indicia of fraudulent conduct described in our previous post. The Third Circuit placed particular emphasis on the fact that the relators’ complaint contained “great detail” about specific physicians whose productivity and pay levels exceeded the 90th percentile, as well as “specific ways that surgeons padded their bills, by for instance falsely reporting unperformed work assisting other surgeons or physically supervising residents and interns.” In fact, while the Third Circuit noted its caution “not to overstate the point,” the existence of a prior FCA settlement in which the government accused the surgeons of engaging in fraudulent practices to boost their wRVUs likely made it difficult for the Third Circuit to reach a favorable conclusion on the “takes into account” prong.

Notably, this development does not obviate the importance of ensuring that productivity-based compensation arrangements with physicians are supported by fair market value analyses, commercially reasonable under the totality of the facts and circumstances, and appropriately monitored for compliance throughout the term. The Third Circuit’s revised opinion does, however, potentially alleviate what had been a considerable source of unease for hospitals and health systems by closing the door on a relator’s ability to plead a Stark Law violation simply by alleging that hospital-based physicians were paid a productivity bonus for their personally performed services.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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