Unhindered by the Stark law, some medical groups are successfully using productivity compensation that mimics Medicare’s shift to pay for performance. But some hospitals are behind the curve, more likely to use older models that perpetuate the fee-for-service system, such as rewarding physicians for racking up relative value units (RVUs), some attorneys say. The hospitals that are rapidly moving away from this model, however, will be better prepared for the transformation under way in Medicare and the commercial sector.

“If you look at accountable care organizations and value-based purchasing, those are manifestations of increasing demand to get away from volume-driven performance to value-driven performance, which means improved quality with contained costs,” says Philadelphia attorney Alice Gosfield of Alice G. Gosfield & Associates. “But if you have internal compensation that is all about work RVUs, you are working at cross purposes. That just incentivizes the hamster wheel of more complex and expensive procedures. It won’t work in the new world order.” The Stark law does not inhibit more effective forms of productivity compensation that reward physicians for improved clinical care and patient satisfaction and attending meetings to build culture, she says.

The Stark law prohibits Medicare payments to entities providing designated health services if they are ordered or referred by physicians who have a financial relationship with the DHS entity, unless an exception applies. People often think the Stark law will interfere with productivity compensation for physicians, but that’s not true, Gosfield says. “Even with Stark, you can pay people for quality and value, but you have to make sure the compensation formula in general complies with Stark if you have DHS in your group,” whether it’s hospital owned or not, she says. Hospitals that employ physicians should establish a separate subsidiary that qualifies as a Stark-compliant group practice to reap the benefits from productivity compensation under Stark exceptions, says attorney Bob Wade, with Krieg DeVault in Mishawaka, Ind.

Under Stark, physicians who meet the definition of a group practice can bill for “in-office ancillary services” and qualify for group practice arrangements. These exceptions open the door for productivity payments. Gosfield says there are three safe harbors for productivity compensation, which is the fruit of the physician’s own labor: (1) a bonus based on the physician’s total patient encounters or RVUs, (2) a bonus based on non-DHS revenues, and (3) revenues derived from DHS if they are less than 5% of the group’s total revenues and if the amount allocated to each physician is less than 5% of his or her total compensation from the group.

Stark permits hospitals to own group practices and then fit them within the in-office ancillary services exception, “which allows more flexible compensation arrangements,” Wade says. But hospitals have to ensure that DHS revenue remains the revenue of the group practice and doesn’t flow to the hospital, he cautions. For example, employed orthopedic surgeons can receive productivity compensation for X-rays they perform in the practice that are billed by the practice but not for X-rays they refer to the hospital that are billed by the hospital. Also, group practices can pay physicians for lowering the length of a hospital stay, but hospitals can’t pay employed physicians directly for lowering length of stay because that runs afoul of the civil monetary penalty law that penalizes hospitals for limiting services to beneficiaries, Gosfield says.

Gosfield debunks some Stark myths about productivity payments:

• Myth: Some base salary is required. Not true, she says. It’s allowable under Stark to pay physicians entirely on productivity, with no base salary at all. That’s how Everett Clinic in Washington state does it, Gosfield says. After implementing productivity payments in 2007, last year it went all the way, prompted by a change in leadership and a vote from physicians. Also, she says, “there was a general sense of some complacency of physicians at the clinic. They weren’t working as hard as they could” before the productivity model went into effect.

• Myth: You can’t pay independent contractors a percentage of revenue they generate. That’s not the case, Gosfield says.

• Myth: All revenue, including DHS and non-Medicare, must be treated the same way. On the contrary, she says. “Stark is only a Medicare statute, and a referral is only for designated health services.”

• Myth: DHS can’t be reflected in productivity compensation. No, Gosfield says, because anything physicians do themselves is fair game. “If the physician took the X-ray himself or infused chemo himself, you can give dollar-for-dollar credit,” she says.

• Myth: Revenue from services provided by a nonphysician practitioner incident to a physician’s services doesn’t count. Not true, Gosfield says. The physician’s bonus can include incident-to revenue. In fact, you can give physicians credit for non-incident-to evaluation and management services provided by nonphysician practitioners that are billed under their own provider numbers.

Another way to reward physicians is through profit sharing — “the fruit of others’ labors,” Gosfield says. Physicians get a share of all DHS profits provided by the group or at least five physicians in the group. The Stark statute provides three safe harbors for profit sharing: (1) per capita equal division of the profits, (2) a distribution of DHS revenues based on the distribution of the group practice’s revenues attributable to the non-DHS services, and (3) “any distribution of DHS if the group practice DHS revenues and no physician’s allocated portion of those revenues is more than 5% of the physician’s or the group’s total compensation,” Gosfield says.

There are creative approaches to setting up compensation for “pods” of five physicians, Gosfield says. For example, not all physicians in a group have to participate. Pods can be organized by content — imaging pods or infusion pods, for example. Or they can be separated by high, medium and low utilizers. “You can mix and match in any combination you want as long as each pod has five doctors for allocating profits,” she explains.

With different options for compensation, some medical groups are rewarding quality and value. It’s a slow process, but they are motivated by an array of Medicare and commercial initiatives, including:

• The physician value-based purchasing modifier: The health reform law mandated the implementation of a value-based purchasing modifier with Medicare physician fee schedule payments starting in 2014. Physicians with higher scores on composite measures of quality will be paid more than physicians with lower scores. The physician value-based purchasing modifier “holds hands with hospital value-based purchasing” (RMC 2/13/12, p. 1), she says.

• The bundled payments initiative: CMS is developing a bundled payment for all services (e.g., physician, hospital) linked to an episode of care (e.g., inpatient plus post-acute care for orthopedic procedures).

• Accountable care organizations (ACOs): With or without the survival of the health reform law, ACOs are taking off. The OIG-CMS fraud and abuse waivers make it possible for hospitals that can’t otherwise pay physicians for profit sharing to participate.

• Physician quality reporting system: CMS uses a combination of payment carrots and sticks to encourage reporting of quality information. For now, providers get incentive payments for reporting data on quality measures for covered services paid by the physician fee schedule. But in 2015, physicians who drop the ball will face payment losses.

• Commercial pay-for-performance efforts: One example is Bridges to Excellence, sponsored by the Health Care Incentives Improvement Institute, which rewards clinicians who provide excellent care.

Medical groups that base productivity compensation on quality and value use different approaches, Gosfield found when she surveyed some of them with the help of the American Group Management Assn. For example, at Fairview Clinic in Minnesota, 50% of the physician’s compensation is at risk for quality in a system designed by the physicians, she says. Some practices call it a bonus or a withhold; others pay a stipend for joining in quality projects. Some put base salary at risk, with the amount all over the map. The results are generally positive in terms of improving quality.

The lessons learned for everyone, Gosfield says, are:

(1) Start small.

(2) Use well-regarded evidence-based measures “without financial impact [the first year] so physicians learn how to document for them and how to apply them before money attaches,” she says.

(3) Give periodic feedback to physicians.

(4) Don’t measure too many things — eight to 10 at most.

(5) Include physicians in the decision-making process. “It is astonishing how out of touch hospitals are with what they could be doing with physician groups,” she says. According to a September 2011 HealthLeaders article, 52% of hospitals report that physicians have little or no influence over payment models, she says.

© 2012 by Atlantic Information Services, Inc. All Rights Reserved.

For practical help in reducing potentially enormous liabilities under complex, ever-changing physician self-referral regs, check out the comprehensive Guide to Complying With Stark Physician Self-Referral Rules at the AIS Marketplace.