United States: When Is Compensation Unreasonable?

Just what is reasonable compensation in the Medicare world is not a clearly defined, black and white concept. Instead, it is somewhat in the eye of the beholder, with the parties to each situation where that is an issue seeking to reach out for third party support for their conclusions. But sometimes when the government gets a chance to look at the conclusions, it is a "bridge too far."

The recent federal district court decision in Choice Care Health Plan, Inc.(CCHP) v. Azar [Case No: 1:17-CV-00311(TNM),2018 WL 3543498 (D.D.C. July 23, 2018)] (referred to as "Choice Care") shows just what can happen when compensation is scrutinized. The issue was the reasonableness of claimed reimbursement on health plan cost reports submitted to Medicare for the owner and CEO of CCHP, as well as a practicing cardiologist and the owner and CEO of a medical group, Quality Medical Care, or QMC. More specifically, a claim for $435,000 was asserted for work as the CEO of CCHP, $300,000 for work as CEO of QMC, $300,000 as a bonus for work as a CEO, and $2.1 million for cardiology services. These amounts were audited by a CMS auditor to determine the reasonableness of the costs claimed. The auditor determined that it was unreasonable to pay the physician/CEO what were perceived as "multiple full-time salaries" based on the claim that he was working about 127 hours/week for two years—when CCHP had no auditable, contemporaneous documentation of his hours. Ultimately, the CMS auditor recommended an allocation of 55% of the physician/CEO's time to his cardiology services, and directed CCHP to return nearly $5.75 million of the reimbursement it had received for payments it had made to the physician to the Medicare program. An administrative appeal was taken, and the Administrator ultimately determined that CMS correctly apportioned the salaries. Federal District Court litigation to review the Administrator's (CMS) decision followed.

The Reasonable Compensation Standard

The standard applied to reimbursement of HMOs that have a cost based contract is "reasonable cost," with the compensation for physician clinical work is to be "commensurate with the compensation paid for similar services performed by similar physicians practicing in the same or similar locality." [42 C.F.R. §417.800(c), 417.544(a)(1)] Finally the Court cited as one of the standards it was considering, a generally regulatory statement with respect to the principles of cost reimbursement where compensation of providers based on reimbursable cost, "Adequate data capable of being audited is consistent with good business concepts [and] is a reasonable expectation on the part of any agency paying for services on a cost-reimbursement basis. 42 C.F.R. § 413.24(c).

Applying the Standard in Choice Care

The allocation of 55% of the physician's time to the provision of cardiology services was based on a statement to the CMS auditor by the QMC CFO about what she "thought." The counter argument made by Choice Care was, in essence, that because the physician spent more time practicing cardiology than the average cardiologist he should be reimbursed as a full-time cardiologist, and ample time was also spent to justify full-time reimbursement for administrative duties. The problem was that there was no auditable record made on a contemporaneous basis to support that claim. While the plan sought to provide support by showing the number of procedures, and the time they take, thereby backing into what the numbers might have actually been, such "extrapolations" did not meet the test for "adequate cost data" required under the regulation. The court also found that the estimates, which yielded over sixty hours a week as a cardiologist, in addition to whatever time was spent on the administrative side (as the CEO), was ultimately seen as "hardly credible." Thus, CMS's calculation based on 55% of "a top paid" FTE cardiologist was the appropriate measure of reimbursement for that element of his time.

Ascertaining the Appropriate Amounts to be Paid to the Physician

The next inquiry was how to determine what the 55% time was actually worth. CMS looked at the 100th percentile based on Salary.com and corroborated that with the amount of actual compensation paid to a cardiologist working for a "different health plan in a nearby city." CMS was of a view that is was reasonable to use Salary.com because that source ostensibly reports compensation information only based on "statistically significant data" tested against "other market data such as data from the Bureau of Labor Statistics." Whereas there was a dispute as to how the 100th percentile was actually calculated, CMS ultimately determined that is was reasonable to simply pay "a salary considerably above the 75th percentile" for the time worked.

CCHP attacked this finding by arguing that what should have been used was MGMA data, as the "gold standard," and that the manner of calculation was flawed. The Court, however, ruling under the Administrative Procedure Act standards, affirmed the CMS decision, which review was limited to the record before it. And on that record, the Court could not find that there had been an arbitrary or capricious determination, or that there was no evidence in the record to support the decision. As the Court put it, the record did not show a "miserly effort to deny a hard working doctor his due, but [a determination which] provides high compensation to a doctor who inflated his Medicare reimbursement claims by millions of dollars."

The Lessons

Choice Care is a decision that takes place in the context of plan reimbursement. But there are two important lessons here:

  • First, while fair market value and reasonable compensation are not the same thing, the requirements of documentation and the need for such documentation to be contemporaneous with the effort to support the conclusion, apply to both.
  • Second, the case illustrates the skepticism that will attach to after the fact rationalization of time allocations when physicians have multiple positions. This is likely to be exacerbated when seven figure sums are involved.

One interesting element is the lack of any reference to expert testimony. Instead, both CMS and the plaintiff appeared to simply use standard compensation resources to support their claims, and this was deemed by each to be sufficient to support their claims. Had the provider been able to document the validity of the compensation with an expert in this case, would it have made a difference? Likely not.

Another element worth noting is the use of MGMA and Salary.com. The fact that CMS used Salary.com is noteworthy in that it provides a validation of that resource. In our experience, MGMA data is what is most often used, and few providers would actually rely on Salary.com. That may deserve another look. Finally, although Choice Care involved the question of what is reasonable cost reimbursement for a prepaid health plan under section 1876 of the Medicare Statute, the issue can arise also for critical access hospitals (CAHs) that are paid under a reasonable cost methodology and which may employ physicians that serve in an administrative capacity while also furnishing patient care.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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