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Does your compensation formula pass the smell test?


This group's didn't. The doctors were being paid for referrals to their in-house lab--and settled the charges for $230,000.


Does your compensation formula pass the smell test?

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Choose article section... A disgruntled doctor blows the whistle "Hyper-technical" violations, or "outright fraud"? Does your compensation plan meet Stark regulations?

This group's didn't. The doctors were being paid for referrals to their in-house lab—and settled the charges for $230,000.

By Berkeley Rice
Senior Editor

Pastor Medical Associates was a busy, four-doctor group in Brookline, MA, with its own convenient on-site lab. Convenient for patients, perhaps, but ultimately a problem for the doctors. Because the doctors' compensation was linked to their lab referrals, the group recently paid $230,000 to settle Medicare fraud charges brought by the federal government.

This was not a typical case of billing fraud, and there were no allegations that the doctors had ordered or billed Medicare for unnecessary tests. Instead, the government charged that the group's compensation formula violated the federal Stark self-referral laws by tying the physicians' income directly to the value of their referrals to the in-house lab. The more patients each doctor sent to the lab for blood tests, the more he earned. In fact, the referral-based income amounted to a significant portion of each doctor's salary.

According to lawyers who concentrate on Medicare issues, this is one of the first cases in which the government has accused a private practice of violating Stark. "This should serve as a warning to physicians who believe that their compensation arrangements are none of the government's business," says Robert Mazer, a Baltimore health care attorney. It's also a warning for groups that think they're too small to be picked up by the government's radar.

A disgruntled doctor blows the whistle

Still, this case might never have been filed if cardiologist Randy Joyce Averback had left Pastor Medical Associates on better terms. When she left the group in 1996, she felt she didn't receive her fair share of the contributions she'd made to the group's retirement fund over the four years she'd been there. Unable to resolve the dispute, she sued the group and its owner, gastroenterologist Bruce Pastor, for breach of contract.

As the case dragged on, Averback grew increasingly bitter. In May 1999, based on information she obtained through discovery in that case, she filed a false claim suit on behalf of the federal government against Pastor Medical Associates and Bruce Pastor. In the false claim suit, she claimed that PMA's compensation arrangement violated federal laws against self-referral, citing the group's in-house blood lab, radiology lab, and other ancillary services. After a lengthy investigation, the US attorney's office in Boston agreed with Averback and joined her false claim suit.

Last August, Pastor Medical Associates agreed to pay $230,000 to settle the case. As part of the settlement, the group must also submit to a three-year compliance program imposed by the Department of Health and Human Services Office of Inspector General. The program requires PMA's physicians and staff to undergo special training in billing and coding, to keep detailed records for all Medicare and Medicaid claims, and to submit to regular audits.

The group certainly had a strong motive to settle. If it had lost the case at trial, it might have had to refund all improper Medicare payments for 1995 and 1996, plus pay penalties of up to $15,000 for each false claim. The total amount could have run into the millions.

Even under the settlement, Pastor Medical must pay Averback's attorney fees, costs, and expenses, which could run more than $50,000. As the whistleblower who brought the case to the government's attention, Averback will receive $41,400, or 18 percent of the total settlement.

(Because they are still engaged in pending litigation, neither Averback nor Bruce Pastor would comment on this article. Although the group—including Pastor—is still at the same location, he has sold the practice to Boston's Beth Israel Deaconess Medical Center, which closed the group in-house lab.)

"Hyper-technical" violations, or "outright fraud"?

Despite the settlement, Pastor Medical's Boston attorney, Paul Cirel, insists, "We still don't agree with the government's allegations." He claims that the case involves "a hyper-technical violation of an arcane statute," and points out that federal investigators found no evidence of inappropriate or medically unnecessary lab work.

Why then didn't the group pursue the case in court? "Our decision was largely an economic one," says Cirel, "because it could have easily cost more than the settlement amount to defend the case. We settled it with no admission of guilt by the group or the individual physicians. And none of them have been excluded from Medicare. This lets the group get on with the practice of medicine."

Max Borten, the Waltham, MA lawyer representing the plaintiff, Averback, scoffs at Cirel's characterization of the charges as technical violations. "These were not technicalities," says Borten. "This was an outright violation of the Stark law on self-referral. And that law is a strict liability statute: Intent is irrelevant."

Michael Pineault, the assistant US attorney who prosecuted the case, agrees. "This group's compensation arrangement was a clear-cut violation of the regulations on self-referral," he contends, "and there was evidence that the group knew it. Each doctor received compensation based, in part, on a formula that tracked the revenue generated by his referrals to the in-house clinical lab. So each doctor's compensation was directly based on the value of his referrals to that lab, which is an obvious Stark violation, because it creates a potential economic incentive to increase referrals and order more lab tests."

Does your compensation plan meet Stark regulations?

Most physicians are probably aware by now that under federal laws on self-referral—known as Stark I and II—it's illegal to refer Medicare or Medicaid patients to outside labs or other facilities in which the doctors have a direct or even indirect financial interest. As this case shows, however, Stark restrictions also apply to in-house or on-site labs if the physicians' compensation is based in part on the volume or value of their referrals.

One way to measure Stark compliance is the simple "smell test." Does the group's compensation arrangement encourage or reward physician members for referring their patients to an in-house lab? If it smells fishy, it's probably illegal.

Ignorance of the law is no excuse. According to Baltimore attorney Robert Mazer, "The government can impose penalties if a doctor knows—or should know—that the service being billed to Medicare resulted from a prohibited self-referral."

Doctors convicted of fraud under this statute are subject to penalties of up to $15,000 for each illegal claim, plus full restitution of all illegal reimbursements. They may also face exclusion from the Medicare and Medicaid programs.*

According to Bruce Johnson, a Denver health care attorney and consultant to the Medical Group Management Association, many medical groups rely on the Stark law's "in-office ancillary services exception," which allows them to refer Medicare and Medicaid patients to on-site clinical and radiology labs without violating the law. "But even under that exception," says Johnson, "the physicians' compensation cannot be based directly on the volume or value of their lab referrals."

Paul Cirel, who represented Pastor Medical Associates, says one lesson from this case is the importance of having a Medicare compliance program in place—something PMA didn't have at the time. "They weren't common back in the mid-'90s," he says, "particularly in small groups. But now that the OIG has issued recommendations for small group practices, you're tempting fate if you don't have a compliance program, even if you're only a two-doctor group.

"If you have a compliance program that covers the division of income and any ancillary services, you're protected because it's clear evidence that you made a good faith attempt to follow federal regulations. But that means having your program and your compensation formula reviewed by a competent legal counsel—not your regular business lawyer. You need a health care attorney who's familiar with Stark regulations. Sure, that means spending some money. But it's much cheaper to pay an attorney up front for his advice than to pay him to represent you after you've been sued by the government. Besides, you'll sleep better."

As for individual physicians, Cirel offers similar advice: "No doctor should join any group without having an experienced health care attorney review its financial structure and compensation arrangement. Otherwise it's a prescription for disaster."

*See "Stark reality: The latest self-referral regs," Sept. 3, 2001.


Berkeley Rice. Does your compensation formula pass the smell test?. Medical Economics 2002;4:72.

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