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The lurking risks of hospital-employed physicians: Stark, Anti-Kickback and False Claims Act compliance

The federal laws prohibiting hospitals from paying physicians for referrals are not new, but hospitals need to be on notice: Examine physician compensation structure because enforcement actions are becoming more frequent.

As hospitals continue to employ more physicians, more scrutiny of these arrangements has occurred. If violations of the Stark Law or Anti-Kickback Statute are found, hospitals face significant financial exposure.

Take for example, two recent court cases.

Following a jury trial, a South Carolina court imposed a judgment of more than $237 million on Tuomey Healthcare System for violations of the Stark Law and False Claims Act. The health system was accused of entering into contracts with part-time physicians that required those physicians to perform procedures at Tuomey. Purportedly, the hospital paid these physicians more than fair market value for their services and offered a bonus to them based on the reimbursement the hospital received.

And late this winter, Halifax Health in Florida reached an $85 million settlement with the Department of Justice, which had accused Halifax Health of providing improper incentive bonuses to its medical oncologists and paying more than fair market value for the services of its neurosurgeons.  

The Stark Law and the Anti-Kickback Statute prohibit hospitals from paying physicians to get their referrals. A third law, the federal False Claims Act, allows whistle blowers and the government to sue hospitals for damages when claims are submitted to federal healthcare programs in violation of the Stark or Anti-Kickback Statute. Hospitals that violate the FCA can face treble damages plus fines.

Both the Stark Law and the Anti-Kickback Statute permit hospitals to pay salaries and sometimes bonuses to physicians who are legitimate employees of the hospital. However, those exceptions cover situations where the employed doctor is paid for performing patient care and other similar services. The doctors cannot be paid to refer patients to the hospital.

Two key questions that are useful guidelines when evaluating whether physician compensation agreements violate the law are:

  1. Is the physician paid more if or because he or she sends business to the hospital?
  2. Is the payment arrangement with the physician commercially reasonable or considered  “fair market value” if you exclude the value of the referrals the hospital will receive from the physician?

It could be a violation of the anti-kickback laws if a physician’s pay is based, even if only in part, on the hospital’s profits or revenues from: the facility fee paid to the hospital to cover overhead associated with a physician’s service; outpatient drugs ordered by the physician; ancillary services; or inpatient referrals. Broadly speaking, the physician’s salary and bonuses can be based only on the value of services he or she personally performs.

Even if the physician’s salary or bonus structure appears to be independent of the value of referrals, it can still be problematic if the compensation greatly exceeds the fair market value for those services.

If a hospital pays its employed physicians a salary that is so high that the hospital consistently loses money on the arrangement, there is a risk that the Department of Justice will suspect that the excess payments are related to the value of referrals from that physician. The law presumes that amounts paid above fair market value may be disguised payments for referrals. 

The DOJ took just that position in a False Claims Act case against Tenet, where a whistle-blower and the government alleged the hospital paid certain physician-employees substantially more than they had made in private practice. Tenet had determined that it would lose money on the services the physicians personally provided, but would more than make up the difference through the lucrative laboratory referrals from the physicians. Tenet paid the government $22.5 million in 2004 to settle the case.

The application of the Stark, Anti-Kickback and False Claims Act statutes to hospitals has taken on new significance given the trend of increased physician practice acquisition by hospitals and increasing hospital employment of physicians. And cases like those mentioned here demonstrate why hospitals must understand the laws and examine their physician compensation structures.


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