Here’s What Happens When Physician Alignment Is Out of Line

May 8, 2014

Do you like riddles?

When isn’t a hospital’s physician alignment in line?

When it’s a False Claims Act violation.

Two False Claims Act, or “whistleblower,” cases against hospitals over the past year, one of which resulted in approximately $237 million in fines and the other of which resulted in an $85 million settlement, illustrate the result of improper physician alignment.

Last October, a federal trial court ordered Tuomey Healthcare System to pay approximately $237 million as a result of Stark Law failures that gave rise to a False Claims Act violation.

To prevent almost two dozen specialists from taking their outpatient surgeries from the hospital to their own facility, Tuomey entered into part time employment agreements with those physicians. In addition to paying the physicians for their personally performed services, the employment agreements included financial rewards based on the hospital’s overall net profit from the outpatient procedures. Bad idea.

More recently, Halifax Hospital Medical Center and Halifax Staffing, Inc. consented to an $85 million False Claims Act settlement in connection with allegations that they submitted claims in violation of Stark. Among other things, the settled suit focused on Halifax’s contracts with medical oncologists: a portion of the compensation paid to the physicians was based on the value of the drugs and tests they ordered. Bad idea.

One common theme in both of these cases is the fact that in order to be compliant with both Stark and the federal Anti-Kickback Statute, payments from a hospital to physicians must be consistent with fair market value and can’t take into account the volume or value of referrals. Here, both of the arrangements based compensation in part on the value of referred hospital business. Bad idea.

There are many ways to structure business arrangements between physicians and physician groups, on the one hand, and hospitals and other facilities, on the other hand. These range from employment relationships to complex joint ventures. As the above lessons indicate, those arrangements must be carefully structured, both for their business content as well as for compliance with federal, as well as state, law dealing with self-referral and kickbacks.

Note that it’s not as if these two defendants didn’t engage counsel in connection with planning these deals. But somehow, somewhere, the ball got dropped and that ball wasn’t one of those balloon-like supermarket ones, it was more like a 50 pound medicine ball that fell on the hospital’s toes. Well, not 50 pounds, but $237 million and $85 million, respectively.

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