OIG Approves Net Profit–Based Bonuses for Employed Physicians

The US Department of Health and Human Services Office of Inspector General (OIG) recently released Advisory Opinion No. 23-07, in which OIG approved a proposed arrangement to pay employed physicians bonuses based on net profits derived from certain ambulatory surgery center procedures performed by the physicians. The Advisory Opinion highlights the scope and flexibility of the statutory exception and regulatory safe harbor for bona fide employment arrangements under the federal Anti-Kickback Statute.

BACKGROUND ON ADVISORY OPINION NO. 23-07

The requestor of Advisory Opinion No. 23-07 is a multispecialty physician practice with approximately 11 physician employees. The physician group also operates two ambulatory surgery centers (ASCs) as corporate divisions of the practice (i.e., not as separate corporate subsidiaries or affiliate entities). The practice certified to OIG that each of its employed physicians is a bona fide “employee” (as defined at 26 USC § 3121(d)(2)).

In exchange for the services furnished by the employed physicians on the practice’s behalf, the practice proposes to provide bonus compensation in addition to the employed physicians’ base compensation. Specifically, the practice proposes a bonus compensation methodology under which its employed physicians will receive a bonus of 30% of the practice’s net profits from the ASC facility fee collections attributable to surgical procedures performed by the employed physicians at either of the practice’s ASCs.

Importantly, the employed physicians’ services (provided at the ASCs and elsewhere) would include services for which payment may be made under Federal Health Care Programs (FHCPs).

Under the Anti-Kickback Statute (AKS), both a statutory exception and regulatory safe harbor are available to protect employee compensation arrangements. Although worded slightly differently, they each protect “any amount paid by an employer to an employee” who has a bona fide employment relationship for employment in the provision of any item or service for which payment may be made by an FHCP.[1]

The practice also certified to OIG that it would not furnish any “designated health services” (DHS) and that its proposed bonus compensation arrangement would not implicate the federal Stark Law.

KEY TAKEAWAYS

In Advisory Opinion No. 23-07, OIG confirmed that the AKS would be implicated by the practice’s proposed arrangement because the ASC procedures referred and performed by the employed physicians that served as the basis for the 30% bonus would be reimbursable by FHCPs.

However, OIG concluded that the proposed bonus arrangement would not generate prohibited remuneration because the arrangement would satisfy the requirements of, and be protected under, the statutory exception and regulatory safe harbor for bona fide employees.

Notably, OIG stated that a similar bonus compensation methodology could raise fraud and abuse concerns under the AKS under different circumstances, including if implemented (1) for independent contractor physicians (or other nonemployees) or (2) under a different corporate structure (including, for example, one in which the physicians were owners of the ASCs and would be paid the bonuses as ownership distributions).

OIG emphasized that “[p]ayment structures that tie compensation to profits generated from services furnished to patients referred by the compensated party are suspect under the [AKS].”    

Accordingly, OIG noted that the practice’s proposed bonus methodology was protected under the statutory exception and regulatory safe harbor for bona fide employees “despite the potential risks of fraud and abuse this type of compensation generally could present.”[2] This statement illustrates the importance of satisfying the four corners of an applicable safe harbor when structuring physician compensation arrangements.

OIG’s approval of the proposed bonus structure tied to employed physicians’ performance of ASC procedures also highlights the flexibility of the bona fide employee safe harbor for structuring compensation for employed physicians. This is welcome guidance for healthcare industry participants desiring to recruit and retain physicians through competitive compensation arrangements that are compliant with the AKS.

While this Advisory Opinion can only be relied on directly by the physician group requesting it, the OIG’s analysis and application of the employment exception could apply beyond the practice’s proposal. For example, in Advisory Opinion No. 23-07 the ASCs were operated as unincorporated divisions of the physician group’s medical practice (e.g., they were not separate legal entities).

It is unlikely OIG would reach a different conclusion if the ASCs were structured as wholly owned subsidiaries of the practice group employing the referring physicians. Similarly, we do not see a distinction between the arrangement described in Advisory Opinion No. 23-07 and a situation where a medical group owns a partial interest in an ASC, receives ASC distributions based on the group’s ownership interest, and then awards bonuses to employed physicians in a similar manner to the methodology described in Advisory Opinion No. 23-07.    

Notably, as the practice certified that it would not furnish any DHS, OIG expressed no opinion with respect to the Stark Law’s application to the proposed bonus methodology. However, OIG did note that, if the proposed arrangement would violate the Stark Law, the Advisory Opinion would be viewed as posing a hypothetical situation and would not qualify as a proper request for an Advisory Opinion.

Healthcare industry participants should always evaluate physician compensation arrangements for compliance with both the AKS and Stark Law—the latter of which is a strict liability statute and requires satisfaction of an applicable exception.