Quality Of Care, Medical Necessity, And The Peer Review Process: A Compliance Risk That Every Hospital Should Understand

Previously published in BNA's Health Law Reporter

For more than a decade, the Office of Inspector General (OIG) has encouraged hospitals to focus on strengthening their compliance programs with an eye toward ensuring the medical necessity of the services provided and improving quality of care.1 Despite OIG's guidance, government enforcement actions illustrate the challenges and compliance risks that hospitals face when medical necessity and quality of care concerns arise in the context of the medical staff peer review process.

For example, in 2003, the Tenet Healthcare Corp. paid $54 million to resolve its False Claims Act liability arising from allegations that two cardiologists at its Redding Medical Center performed unnecessary cardiac procedures and surgeries.2 Similarly, Lafayette General Medical Center in Lafayette, La. settled with the government in 2008, paying $1.2 million based upon allegations of unnecessary stenting by a local cardiologist. 3 More recently, in 2010, St. Joseph's Medical Center in Towson, Md., agreed to pay $22 million to resolve its potential False Claims Act liability in connection with allegations that one of its cardiologists implanted more than 500 medically unnecessary cardiac stents.4

While substantial False Claims Act settlements by hospitals hardly are unusual, each of these cases also involved allegations that the hospital was made aware of the conduct, engaged its medical staff peer review process, and, nevertheless, took no action to address the quality of care or medical necessity concerns raised.5 The cautionary tales of these cases require hospitals operating in the current enforcement environment to ask questions including: (1) How did the hospital's process fail to address these quality and compliance issues? (2) Why was there an apparent failure in communication between the peer review process and the compliance function? and (3) What can be done to avoid ending up in similar circumstances?

Background: Peer Review and Compliance

Traditionally, the responsibility for submitting accurate claims lies within the hospital administrative function—billing, coding, cost report preparation. The compliance department educates the employees, audits claims, investigates alleged compliance problems, and recommends refunds. It is responsible for reducing fraud and abuse and helping the hospital fulfil its legal duty to refrain from practices such as submitting false or inaccurate claims or cost information to the federal health care programs.6 Quality of care, on the other hand, was traditionally the responsibility of the medical staff. Physicians oversee the quality of care provided in a hospital by participating in quality assurance activities, acting as advisers to address medical necessity for admission, or by participating in peer review of a particular physician's performance.7 Continual efforts by Congress and CMS to improve quality have forced hospital compliance departments to include issues surrounding claims related to quality of care within their ambit. Despite this increasing mandate, evaluating the medical necessity of a given procedure often will end up last on the list of a compliance officer's concerns when juggling RAC audits associated with the medical necessity for admission, billing for readmissions and hospital-acquired conditions, and appropriate reporting and claims submission for value-based purchasing.

Under state and federal law, peer review is an essential process in a hospital's effort to fulfill its common law duty of exercising due care in selecting and maintaining a competent medical staff while promoting better overall patient care. Federal law requires that peer review actions must be taken (1) in the reasonable belief that the action was in the furtherance of quality health care; (2) after a reasonable effort to obtain the facts of the matter; (3) after adequate notice and hearing procedures are afforded to the physician involved or after such other procedures as are fair to the physician under the circumstances; and (4) in the reasonable belief that the action was warranted by the facts known after such reasonable effort to obtain facts and after meeting the requirement of paragraph (3).8

When the peer review process functions properly, by providing adequate notice and hearing in accordance with the medical staff bylaws, suspected quality problems generally are brought to the attention of the hospital administrator, a medical director, or chief of staff, and may proceed through the peer review process. The results can vary from no action because a determination is made that the physician's judgment was correct, to supervision by another physician because minor practice improvements are warranted, to suspending or terminating the physician from the medical staff...