Is Your Group Keeping its Physicians Satisfied and Legal?

One important reason physicians form or join group practices is to gain the aggregate resources not often available to small medical practices to provide ancillary services to their patients, both to improve patient care and to generate additional revenue. It is well known that the Federal Stark Law excludes from its prohibition against physician self-referrals certain referrals for designated health services (“DHS”) within group practices. But, how is the group permitted to distribute its profits from DHS to physicians in the group? This too is regulated and compliance is mandatory to avoid Stark’s draconian penalties of refunding all DHS revenues, fines and penalties, including possible exclusion from Medicare and False Claims Act exposure.

 

It is unlawful for a group to bonus or distribute profits to its physicians in a manner that is directly related to the volume or value of that physician’s patient referrals for DHS. Many groups follow the Stark Law’s “safe harbors” for DHS profit distributions, by sharing them equally or according to the group’s distribution of non-DHS revenues, or if the DHS profits represent less than 5% of the group’s total revenues and less than 5% of the total compensation of each physician from the group.

 

However, the Stark Law also expressly allows group practices to distribute overall profits from DHS in a manner that may be more equitable where utilization of the group’s DHS facilities is not evenly distributed among its physicians, causing intragroup friction. Overall DHS profits may be distributed to any component of the group composed of at least 5 physicians. In the Preamble to the Stark Law, CMS expressed its view, supported by the regulatory language, that when DHS profits are shared among not less than 5 physicians within a group, such distributions will be considered only “indirectly” related to referrals and, thus, permissible under the Stark Law’s group practice definition. “Overall profits” are defined in the Stark regulations to mean “the group’s entire profits derived from DHS payable by Medicare or Medicaid or the profits derived from DHS payable by Medicare or Medicaid of any component of the group practice that consists of at least five physicians” [emphasis added].

 

CMS has not issued further guidance on how components of 5 physicians should be selected or paid (so long as not directly based on each physician’s DHS referrals), whether each component of 5 must share the group’s entire DHS profits from all of the group’s DHS or whether the group may form components of 5 physicians for separate DHS. Among health lawyers, interpretations differ regarding this issue, but consensus is that either approach may be legally defensible. The decision may depend on the group’s risk tolerance. Forming components, or “pods,” of 5 or more physicians who refer for a particular DHS and who then share the revenues derived only from those referrals, rather than having the pod share its portion of the entire DHS profits from all the group’s DHS regardless of referrals, while probably legal, may create a perception to the outside world (or disgruntled employees) that could result in a whistleblower case against the group! Such cases are costly to defend and a loss could be devastating.

 

While dividing DHS profits in pods of 5 is widely recognized and used by group practices nationally to better satisfy the different practice patterns of physicians in the groups, the Stark Law requirements (and those of its Florida law parallels) are complex and care must be taken to comply at all times. Groups should consult with qualified health law counsel and take into consideration many factors in dividing DHS profits and paying physician bonuses, including the nature and scope of their DHS, their specialties, the regulatory environment, their business objectives and how this fits into their Compliance Programs.

 

Stark compliance is one of the most challenging issues for physician group practices, but when done right, offers significant opportunities that groups today can ill afford to ignore.