Like virtually every other sector of the economy, COVID-19 has presented novel challenges to health care providers. As the pandemic has forced physicians to adapt to changing patient care demands and a drop in non-COVID-related procedures and office visits, commensurate adjustments must be made to physician arrangements. We take a close look at how COVID-19 may change physician compensation both in the near- and long-term.
How We Arrived at a System That Is So Financially Vulnerable to an Event Like COVID-19
With fee-for-service reimbursement, health care provider revenue rises and falls in direct proportion to the volume of care provided. The primary components of a typical physician compensation arrangement include a guaranteed base payment as clinical compensation and productivity incentives. If elective procedure and office visit volume drops severely, as it has during the COVID-19 pandemic, so does fee-for-service revenue for health care provider entities. This, in turn, puts downward pressure on physicians’ compensation when such compensation is strongly tied to productivity.
Financial Assistance for Providers During COVID-19
The federal government has provided multiple sources of funding assistance to providers who face significant financial strain due to the pandemic. Providers that meet certain conditions are eligible to apply for these funds.
Coronavirus Aid, Relief and Economic Security (CARES) Act Provider Relief Fund
Funds must be used by providers for health care-related expenses or lost revenue attributable to the COVID-19 pandemic. Providers must attest to certain certification and reporting requirements to accept the funds. If the terms and conditions are met, the funds do not need to be repaid. Funds are distributed in two ways: (1) General Distribution and (2) Targeted Distribution.
In order to be eligible for General Distribution, providers must have treated patients after January 31, 2020, and billed Medicare fee-for-service in 2019. Targeted Distribution is based on specific criteria, such as providers in areas that were particularly hard hit by COVID-19; rural providers; providers who mainly serve Medicaid patients; and providers treating uninsured patients (skilled nursing facilities, safety net hospitals, rural hospitals and hospitals in high-impact areas).
CARES Act Patient Protection Program
Forgivable, short-term loans are provided to business with 500 employees or fewer, including health care entities, as long as the borrower uses at least 60% of the loan on payroll expenses within 24 weeks of receipt of funds. The Paycheck Protection Program (PPP) resumed accepting applications on July 6, 2020.
Emergency Regulatory Relief
The onset of the COVID-19 pandemic created the need to provide additional compensation to physicians who were not able to work with sufficient productivity to earn expected revenue in order to prevent the potential loss of essential community providers. The Centers for Medicare and Medicaid Services (CMS) and Office of the Inspector General (OIG) responded by issuing various waivers to some of the more restrictive regulations. These leniencies end with the conclusion of the Emergency Declaration.
Stark Law Blanket Waivers
Through the end of the Emergency Declaration, 18 temporary “blanket waivers” apply to the Stark Law. The waivers apply only where providers are entering into arrangements for COVID-19 purposes, including “addressing medical practice or business interruption” due to the pandemic “in order to maintain the availability of medical care and related services for patients and the community.”
Common elements of the 18 waivers include:
- Forbearance of the normal limitation that only fair market value amounts be paid to or received from physicians for items, services and/or rent.
- The ability to loan funds to physicians on terms that are otherwise unavailable from commercial lenders.
- The flexibility to enter into compensation arrangements with physicians that may not satisfy the Stark Law’s technical writing and signature requirements.
Examples of waived transactions include:
- Paying compensation above fair market value (FMV) for personal services performed by a physician to make up for business losses.
- Paying compensation below FMV for personal services performed by a physician if the physician practice has received PPP loans or other sources of relief.
- Renting out medical office space below FMV notwithstanding what may otherwise be required by the preexisting lease arrangement.
- Loaning funds to a physician with an interest rate more favorable than FMV or with terms that would not otherwise be available from commercial lenders.
Anti-Kickback Enforcement Discretion
- On April 3, 2020 the OIG issued a Policy Statement designed to assure providers of its flexibility during the pandemic but reiterating that the Anti-Kickback Statute still applies and that arrangements cannot be entered into with the intent of inducing referrals.
- OIG assured that it will use its enforcement discretion not impose administrative sanctions under the Statute for arrangements falling within the compensation-related Stark Law blanket waivers during the COVID-19 pandemic, but only to extent that the parties lack the intent to induce referrals.
- These are waivers, not new exceptions! Providers must still satisfy all provisions of the preexisting Stark Law exceptions.
- The Stark Law’s set-in-advance requirement for compensation arrangements still applies. If compensation arrangements are made or changed during the COVID-19 pandemic, they need to be made in such a way that a formula for payment or compensation is set in advance of the services leading to such compensation being rendered.
- Compensation arrangements are still subject to the one-year term requirement. However, CMS will allow two sets of changes within a one-year period: First, to set a new compensation rate for pandemic purposes, and second, to reset the arrangement to the pre-pandemic formula or a new one once the pandemic is over.
- Providers should consider inserting provisions within their amended arrangements calling for automatic reversion to the original terms, or automatic termination with the end of the Emergency Declaration period.
- If you do not need a Stark Law waiver, do not rely on one! The definition of “COVID19 purposes” may be interpreted differently over time, particularly if abusive arrangements emerge and when whistleblower activity resumes. Consult with your Faegre Drinker counsel to see if your arrangement, in fact, does satisfy FMV and is commercially reasonable.
Our Prediction: The COVID-19 pandemic will help speed federal reform.
The Future of Physician Compensation Agreements
- Employers made decisions to modify or sever existing employment arrangements due to unprecedented financial strain.
- Salaried and guaranteed physician employees have been more insulated than those who are productivity-based.
- Many initial changes are being challenged legally but the courts are backlogged due to the pandemic.
Expected Short-Term Changes
- Expect to see flexibility on both sides: Physician employees and employers.
- Productivity-based compensation must change in order to protect physician employees from future unforeseen circumstances.
- Guaranteed minimum salaries may become more common and be based on historical productivity or a COVID-19 pandemic baseline.
- We will see a shift from completely open-ended provisions (e.g., “until services return to pre-COVID-19 levels”) to more defined terms (e.g., “within X days of the end of the Emergency Declaration”).
- Agreements that postpone payment may supersede those that eliminate payment altogether.
The Long-Term Impact
- Volume to value: The new approach to physician compensation will mimic what we have seen in recent Medicare models, such as accountable care organizations. Outcomes-based, quality-based, and population-based compensation arrangements will become more common.
- Duties: We have seen during the COVID-19 pandemic that defined sets of duties are not helpful when providers need to be nimble and re-deployed in new or changed environments.
- Term and termination: Few current provider employment arrangements are at-will; however employers require more flexibility with regard to term and termination in the pandemic environment. General force majeure clauses are likely to become more specific to permit changes to the term of an agreement the employer or physician employee.
- Covenants of noncompetition: In states that permit these clauses, waivers for certain circumstances will be built in to allow providers to practice elsewhere as needed. This will also trigger questions of who (employer or physician employee) will provide compensation and professional liability insurance in these instances.
- Exit clauses: Many current provider agreements do not address the possibility of furlough. Ownership interests must be addressed to allow flexibility for providers to maintain interests for longer time periods, or indefinitely.
Special thanks to Faegre Drinker summer law clerk Savanna Williams, who assisted in drafting this alert.
Faegre Drinker’s Coronavirus Resource Center is available to help you understand and assess the legal, regulatory and commercial implications of COVID-19.