Anti-kickback Statute and Stark Law Safeguards for Co-Management Agreement Performance Incentives

Anti-kickback Statute and Stark Law Safeguards for Co-Management Agreement Performance Incentives

Christine L. Noller, J.D., L.L.M.
Vezina Law Group

The Patient Protection and Affordable Care Act (“PPACA”) focused attention upon the need for greater collaboration between hospitals and physicians to deliver high quality efficient care. Co-management agreements present an increasingly popular means to that end. Inherent in such agreements is the need to incentivize physicians for meeting performance and quality conditions without running afoul of the anti-kickback statute and Stark law. Recently, the Office of the Inspector General (“OIG”) provided safeguards for providers to consider when entering into such arrangements.

OIG Advisory Opinion 12-22 addressed an arrangement whereby a rural hospital paid a cardiology group compensation including a performance bonus based on implementing patient service, quality and cost saving measures associated with procedures performed at the hospital’s cardiac catheterization laboratories.

Under the Management Agreement, the group provided management and medical direction services for the hospital’s labs in exchange for a co-management fee comprised of a guaranteed fixed payment (the “fixed fee”) and a potential annual performance-based payment (“the performance fee”). The performance fee consisted of four components, i.e. an employee satisfaction component (5%), a patient satisfaction component (5%), a quality component (30%) and a cost savings component (60%).

The OIG concluded that the cost savings component of the arrangement implicated the Civil Monetary Penalty (“CMP”)1 as the measures regarding standardization of devices and supplies and limiting use of specific stents, contrast agents and medical devices might induce physicians to alter their current medical practice to reduce or limit services. However, the fixed fee, employee satisfaction, patient satisfaction and quality components contained in the arrangement did not involve an inducement to reduce or limit services and did not implicate the CMP. Despite the fact that the cost savings component implicated the CMP, the OIG concluded that the arrangement had several features that, in combination, provided sufficient safeguards so that sanctions would not be imposed.

The hospital certified that the arrangement did not adversely affect patient care.2 The hospital monitored the group’s performance by having the hospital’s internal audit department review all supporting data and documentation related to the quality and cost savings components. An independent accounting firm reviewed the internal audit department’s findings. The firm reported its findings to the hospital’s compliance officer, who reported to the Board of Directors. The hospital’s Board of Director’s Compliance and Audit Committee reviewed the independent accounting firm’s findings and approved payment of any amount under the performance fee. Furthermore, the hospital’s Performance Monitoring Committee provided direct oversight to ensure that stinting on patient care, patient cherry-picking and other improper practices did not occur. The hospital’s Credentials and Peer Review Committee monitored and reported on the quality of care provided by the group and performed peer case review. The committee reported its results to the Medical Executive Committee. The Best Practices Utilization Review Committee, led by the hospital’s medical staff, reviewed quality assurance and utilization of the labs.3

The risk that the arrangement would lead the group’s physician to apply a specific cost savings measure, such as the use of standardized or bare metal stent, in medically inappropriate circumstances was low. The parties structured the benchmarks within the cost savings component of the performance fee to allow the group’s physicians flexibility to use the most cost effective clinically appropriate items and supplies.4 Under the arrangement, all commercially available stents and balloons were available as needed. A group physician could use the device or supply deemed to be the most clinically appropriate for each patient.5 Unique-sized or other types of drug-eluting stents remained available upon request by an interventional cardiologist and no physician was ever prohibited from requesting a particular device or supply required to address a patient’s unique health needs.6

The cost savings component’s financial incentive was reasonably limited in duration and amount. The performance fee was subject to a maximum annual cap7 and the agreement limited to three years. And, most importantly receipt of any part of the performance fee under the arrangement was conditioned upon the group’s physicians not stinting on care provided to the hospital’s patients, increasing referrals to the hospital, cherry-picking healthy patients or those with desirable insurance for treatment in the labs or accelerating patient discharges.8

The OIG further concluded that the arrangement posed a low risk of fraud or abuse under the anti-kickback statute.9 The Department of Health and Human Service promulgated safe harbor regulations that define practices that are not subject to the anti-kickback statute because such practices would be unlikely to result in fraud or abuse. However, the safe harbor for personal services requires that the aggregate compensation paid for the services be set in advance and consistent with fair market value in arm’s-length transaction.10

The arrangement did not fit in the safe harbor as the aggregate payment to the group was not set in advance due to the inclusion of the performance fee. However, the absence of safe harbor protection was not fatal. Upon evaluating the facts and circumstances the OIG determined that while the arrangement could result in illegal remuneration if the requisite intent to induce referrals were present, sanctions were not imposed based on a number of key factors.

The requestor certified that the compensation paid to the group under the management agreement was fair market value for services provided. In exchange for the fixed fee and performance fee the group oversaw lab operations, provided strategic planning and medical direction services, developed the hospital’s cardiology program, served on medical staff committees, provided staff development and training, provided credentialing for lab personnel, recommended lab equipment, medical devices and supplies, consulted with the hospital regarding information systems, provided assistance with financial and payor issues and provided public relations services.

As the group provided substantial services under the agreement, there was little risk that compensation was payment for referrals. Furthermore, compensation did not vary with the number of patients treated. An increase in patient referrals did not increase compensation paid to the group.11

The hospital operated the only cardiac catheterization laboratories within a fifty-mile radius of its campus. The group was the only cardiology group on the hospital’s medical staff and the only physician group in the town providing cardiac catheterization services. The group did not provide cardiac catheterization services at any location other than the labs. Thus, it was unlikely the hospital offered compensation to the group as an incentive for the group’s physicians to refer business to the labs rather than to a competing lab, as there was no other lab to which they could refer.

The specificity of the arrangement’s measures ensured that the purpose was to improve quality, not reward referrals. The quality component was clearly defined and included nationally recognized standards.12 The arrangement set out particular actions to improve quality improvements upon which the payments were based. Measures contained in the quality and cost savings components represent specific changes in lab procedures, for which the physicians were responsible for implementing13. The lowest, baseline achievement level for any measure reflected improvement over hospital’s status quo performance for that measure prior to the effective date of the agreement.14 Moreover, the management agreement was a written agreement with a three-year limit, i.e. limited in duration.15

As the physician self-referral law (Stark law) falls outside the scope of the OIG’s advisory opinion authority it expressed no opinion on the application of section 1877 of the Act to the arrangement although noted that it may be implicated in the hospital’s cost savings program. The Stark law prohibits physicians from referring patients to an entity in which they have an ownership interest or compensation arrangement for designated health services (DHS) covered by Medicare and Medicaid.

However, the general prohibition to compensation arrangements does not apply if the arrangement is set out in writing, signed by the parties and specifies the services covered by the arrangement; covers all services to be provided by the physician to the entity; the aggregate services contracted for do not exceed those that are reasonable and necessary for the legitimate purposes of the arrangement; the term of the arrangement is for at least one year; the compensation to be paid over the term of the arrangement is set in advance, does not exceed fair market value, and is not determined in a manner taking into account the volume or value of any referrals or other business generated between the parties; the services performed under the arrangement do not involve the counseling or promotion or a business arrangement of other activity violating any State or Federal law and the arrangement meets such other requirements as the Secretary may impose by regulation as needed to protect against program or patient abuse.16

Like the anti-kickback statute’s safe harbor, the Stark law’s personal service arrangements exception contains a “set in advance” compensation requirement. However, under the Stark law exception compensation will be considered “set in advance” if the aggregate compensation, a time-based or per unit of service based (whether per-use or per-service) amount, or a specific formula for calculating the compensation is set in an agreement between the parties before the furnishing of the items or services for which the compensation is to be paid. The formula for determining the compensation must be set forth in sufficient detail so that it can be objectively verified, and the formula may not be changed or modified during the course of the agreement in any manner that reflects the volume or value of referrals or other business generated by the referring physician.17

As discussed above, the formula for calculating the group’s performance fee was set forth in extensive detail for each component, objectively verified and most importantly not reflective of volume or value of referrals or other business generated by the referring physician.

Final consideration must also be given to the issues of private inurement18 and private benefit19 under the IRS tax regulations in connection with section 501(c)(3) of the Internal Revenue Code. Section 501(c)(3) requires that an organization be organized and operated exclusively for exempt purposes. Treas. Reg. 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as operated exclusively for exempt purposes only if it engages primarily in activities that accomplish one or more of the exempt purposes specified in Section 501(c)(3). But an organization will not be so recognized if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. An organization that operates primarily in a manner that results in conferring impermissible private benefit on one or more persons does not satisfy that requirement. Any compensation arrangement between a Section 501(c)(3) organization and an employee or an independent contractor must not result in private inurement if that person is an insider and must not confer impermissible private benefit whether or not that person is an insider.20

Rev. Rul. 69-383 addressed the issue of whether a hospital exempt from Federal income tax under Section 501(c)(3) of the Internal Revenue Code jeopardized its exemption by entering into a professional services agreement with a medical provider. Rev. Rul. 69-383 provided that a fixed percentage compensation plan of an exempt hospital did not result in prohibited private inurement if: (1) the compensation plan is not merely a device to distribute profits to persons in control or to transform the organization's principal activity into a joint venture; (2) the compensation plan is the result of arm's-length bargaining; and (3) the compensation plan results in reasonable compensation by comparing the amounts paid to amounts received by physicians at similar hospitals having comparable responsibilities and patient volume. Whether these criteria are met, depends upon the facts and circumstances of each case.21

In that instance, the hospital, after arm’s length negotiations, entered into a written agreement with a radiologist. The hospital provided space, equipment and supplies, making nonmedical personnel available to the radiology department. The radiologist agreed to manage the department and participate in services required by hospital patients, employees and students. While the radiologist served as the professional and administrative head of the radiology department, he had no control or management authority over the hospital itself. Rather, the hospital, with the radiologist’s approval, established the amounts charged to patients for services provided. The hospital paid the radiologist a fixed percentage of the department’s gross billings, adjusted for bad debt allowance. The compensation was considered comparable to amounts received by radiologists having similar responsibilities handling comparable patient volume at similar hospitals and therefore not excessive. The agreement remained in full force and effect for a term of years, with each party having the right of cancellation upon prior notice.

While under certain circumstances, the use of a method based on a percentage of the income of an exempt organization can constitute inurement of net earnings to private individuals, under the circumstances described in Rev. Rul. 69-383, the radiologist did not control the organization and the agreement was negotiated at arm’s length. The amount the radiologist received was reasonable in terms of the responsibilities and activities assumed under the contract. The IRS concluded that the arrangement entered into between the hospital and the radiologist did not constitute inurement of net earnings to a private individual within the meaning of Treas. Reg. 1.501(c)(3)-1(c)(2). Thus, the organization did not jeopardize its exemption under Section 501(c)(3).

Applying 69-393 to the incentive compensation plan of OIG Advisory Opinion 12-22 the cardiology group certainly did not control the organization. The compensation arrangement was not a veiled mechanism by which to distribute profits. Nor did it reflect intent to transform the hospital’s principal cardiac catheterization activities into a joint venture. Once again, the compensation paid to the group under the management agreement, both fixed fee and performance fee, was fair market value for the substantial services provided. The performance fee was subject to a maximum cap and the term of the arrangement was limited to three years. Therefore, the arrangement between the hospital and cardiology group did not constitute inurement of net earnings or result in private benefit to the group.

The safeguards set forth in OIG Advisory Opinion 12-22 are applicable to any number of hospital service lines including orthopedics, neurosurgery and oncology. They could easily be incorporated into an anesthesia services agreement as well. Each specialty has key employee satisfaction, patient satisfaction, quality and cost savings components to their overall goals and contractual obligations. For example, implant choice, usage and cost are key financial drivers in orthopedic and neurosurgery service line success. Operating room throughput and on-time starts represent not merely cost savings but also patient satisfaction opportunities for anesthesia services. Best practices, national quality standards and benchmark data points are easily accessible in most healthcare organizations. But more importantly, incorporation of such performance measures provides meaningful opportunities for physician-hospital collaboration.

For example, in OIG Advisory Opinion 12-22 an Interventional Cardiology Committee consisting of all interventional cardiologists who utilized the Labs generated initial product recommendations. It selected products and supplies following a review of evidence-based medicine, empirical trial data and proven effectiveness. The hospital then collaborated with the group’s physicians to reduce cardiac catheterization costs by contracting with a single vendor for drug-eluting and bare metal stents.22 Therein lies the overarching goal of the PPACA, i.e. to encourage hospitals, physicians and post-acute care providers to work together to achieve increased savings through collaboration and improved coordination of patient care. Meaningfully incentivized co-management agreements present an attractive mechanism by which physicians and hospitals can enhance their collaborative efforts.


1. Sections 1128A9b)(1)-(2) of the Social Security Act (the “Act”) establish a civil monetary penalty against any hospital or critical access hospital that knowingly makes a payment directly or indirectly to a physician (and any physician who receives such a payment) as an inducement to reduce or limit services provided with respect to Medicare or Medicaid beneficiaries under the physician’s care.

2. OIG Advisory Opinion 12-22, page 10

3. OIG Advisory Opinion 12-22, page 7

4. OIG Advisory Opinion 12-22, page 11

5. OIG Advisory Opinion 12-22, page 7

6. OIG Advisory Opinion 12-22, page 6

7. The potential annual performance-based payment was equal to a maximum of the amount equal to the fixed fee per year. The hospital paid an installment of the fixed fee and an estimated installment of the performance fee to the group quarterly. Every year the hospital reconciled the quarterly installment payments of the performance fee, OIG Advisory Opinion 12-22, page 3.

8. OIG Advisory Opinion 12-22, page 11

9. Section 1128B(b) of the Act (the anti-kickback statute) makes it a criminal offense to knowingly and willfully offer, pay, solicit, or receive remuneration to induce or reward referrals of items or services reimbursable by a Federal health care program.

10. 42 CFR 1001.952(d)(5)

11. OIG Advisory Opinion 12-22, page 13

12. To obtain the portion of the performance fee allocable under the quality component the labs were required to improve their performance as measured by standards promulgated by the Joint Commission, the Centers for Medicare and Medicaid Services, the American College of Cardiology and the National Cardiovascular Data CathPCI® Registry, OIG Advisory Opinion 12-22, page 4.

13. The hospital’s quality performance was measured against hospitals’ performance nationally and given a percentile ranking. Standards were subject to revision and update to reflect the appropriate standard of care consisting of reducing “door to balloon time” so that 85% of the Lab patient’s “door to balloon” time was below 90 minutes; prescribing a Beta blocker at discharge to rank between the 70th and 90th percentile of hospitals measured; prescribing an ACE-1 or ARB for left ventricular systolic dysfunction at discharge to rank between the 70th and 90th percentile for all hospitals measured; prescribing an Aldosterone blocking agent at discharto rank between the 70th and 90th percentile of hospitals measured; documenting LDL-c level in hospital record to rank between the 70th and 90th percentile of hospitals measured; reducing occurrence of Percutaneous Coronary Intervention complications to a level between 1.4% and 1.7% of patients; reducing the incidence of bleeding in Lab patients within 72 hours of surgery to a level between 0.9% and 1.1% of patients and reducing Percutaneous Intervention Risk Adjustment Complications Index to between 1.25% and /096% of patients, OIG Advisory Opinion 12-22, page 5.

14. The baseline achievement level for any measure reflected improvement over the hospital’s status quo performance for that measure prior to the effective date of the agreement. If the group meets the baseline achievement level for a measure within a performance fee component, it received 50% of the total compensation available for that measure; if it meets the middle benchmark, it received 75% and if it achieved the highest benchmark, it received 100%, OIG Advisory Opinion 12-22, page 4.

15. OIG Advisory Opinion 12-22, page 14.

16. 42 USV 1395nn(e)(3)(A)

17. 42 CFR 411.354(d)(1)

18. Treas. Reg. 1.501(c)(3)-1(c)(2) provides that an organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals.

19. Treas. Reg. 1.501(c)(3)-1(d)(ii) provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest. Thus, to meet the requirement of this subdivision, it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests.

20. IRS 2000 EO CPE Text, Physician Incentive Compensation, page 2.

21. IRS 2000 EO CPE Text, Physician Incentive Compensation, page 3.

22. OIG Advisory Opinion 12-22, page 6.