After the federal government’s victory against Tuomey Hospital, we have seen an increasing number of large False Claims Act (FCA) settlements with hospitals involving Stark Law allegations. Relators are even citing, as evidence of ongoing recklessness, that hospital executives have been e-mailing articles about the Tuomey case to their staff. Given the Stark Law’s intricate requirements, it is un-surprising that many hospitals are presented with Stark Law compliance questions. However, the U.S. Department of Justice (DOJ) has not shown much leniency in its treatment of these cases, as shown by two recent settlements.

First, there is the settlement with Columbus Regional Healthcare System (Columbus) and Dr. Andrew Pippas to resolve two separate qui tams filed by a former Columbus executive, Richard Barker, in the Middle District of Georgia. Mr. Barker alleged both billing and Stark Law misconduct in his complaints. While the first complaint largely focused on allegations of improper evaluation and management upcoding and intensity-modulated radiation therapy billing, it also included some cursory allegations of improper physician financial relationships. The government declined to intervene in this case in 2013. In 2014, Mr. Barker filed a second qui tam alleging compensation to Dr. Pippas in excess of fair market value, determined in a manner that took into account the volume or value of his referrals, and paid pursuant to an employment agreement that would not have been commercially reasonable but for Dr. Pippas’ referrals to Columbus. On September 4, Columbus entered into a FCA settlement to pay up to $35 million to resolve both cases.

The Columbus settlement contains several noteworthy characteristics:

• While DOJ declined Mr. Barker’s first qui tam, DOJ intervened in both cases at the time of settlement. This is common, but it appears that Mr. Barker’s second complaint may have prompted DOJ to take a closer look at the financial relationship between Columbus and Dr. Pippas. Mr. Barker’s second complaint alleged that Columbus compensation failed the Stark employment exception’s fair market value, “volume or value” and commercial reasonableness tests. He alleges this because it was more than what Columbus collected from his personally performed professional services; took into account the value of his chemotherapy and other referrals to Columbus; and was based in significant part on productivity that was allegedly artificially inflated by the productivity of other practitioners and his own upcoding of patient visits.  

• Even though the settlement resolves the allegations in both complaints, the Office of Inspector General’s (OIG) corporate integrity agreements (CIA) only contains provisions for oversight of financial arrangements with physicians and no billing/claims review. This difference would seem to indicate that OIG may have maintained its view that the billing allegations were weak or very difficult to prove or quantify from a damages perspective, and thus did not merit the inclusion of remedial measures in the CIA.

• Columbus was able to wrap conduct disclosed to the Centers for Medicare & Medicaid Service (CMS) self-referral disclosure protocol (SRDP) in October 2013 into the settlement. This strategy ensured that Columbus resolved all pending Stark Law issues with the government at once—avoiding an additional payment to CMS once it completed its review of the SRDP submission.

• DOJ viewed Dr. Pippas culpable enough to require a separate payment from him of $425,000. Consistent with the DOJ’s September 9, 2015, release of the “Yates Memorandum,” this requirement is an example of the government pursuing both entities and individuals that it believes are responsible for the conduct, particularly physicians on the other side of the financial relationship.

• The settlement payment is an example of how DOJ’s financial ability-to-pay process works. Generally, if the defendant expresses an inability to pay the amount DOJ believes is appropriate to resolve the case, DOJ’s financial auditors will examine the defendant’s financial situation to determine the amount the defendant can afford to pay. This examination is done with an eye towards fulfilling DOJ’s objective—maximizing the taxpayer’s recovery—and DOJ applies very strict standards when conducting this analysis. To achieve the highest payment possible, DOJ often will seek payments over time and contingency payments along the lines of the Columbus settlement. Here, Columbus is obligated to pay at least $25 million, with $10 million upfront and $3 million per year over the next five years. In addition, Columbus may owe up to $10 million more if it meets certain net-revenue targets or sells certain assets. This structure may be an indication that DOJ was seeking more than $35 million to resolve this case, or would not agree to an amount lower than $35 million, but limited the recovery to what DOJ believed Columbus could afford to pay.

Another Stark Law qui tam settlement was unsealed on September 11, 2015, for $69.5 million with North Broward Hospital District (Broward) in the Southern District of Florida. This case alleged compensation to numerous employed physicians that did not meet the Stark employment exception. The relator alleged that the compensation was excess of fair market value and commercially un-reasonable, because it was over the 90th percentile of total cash compensation as published in physician compensation surveys, and generated substantial practice “losses” for Broward. In addition, because the physicians’ compensation was not financially self-sustaining from professional income alone, but would be self-sustaining if one added the value of facility fees, which Broward tracked, the complaint argued that the compensation took into account the volume or value of referrals to Broward for hospital services. The complaint also alleged that Broward pressured physicians to limit charity care, even though Broward is a public entity, and to keep referrals in-house, even when physicians believed the patient’s care needs were better served by another facility.

The FCA settlement only alleges Stark violations concerning nine physicians’ compensation. The agreement does not identify with which of the relators’ legal theories and factual allegations DOJ agreed. It is possible that DOJ was persuaded that the physicians were simply paid above fair market value based on their cash compensation as compared to their personal productivity. But DOJ has questioned before, the propriety of compensation that, in combination with practice overhead expenses, is in excess of collections from the physician’s personally performed services. And a DOJ fair market value expert has asserted in litigation that physician arrangements, even for employed physicians, for departments that “lose” money are commercially un-reasonable while conceding that there is no statutory or regulatory basis for such an assertion. DOJ has, moreover, asserted that hospitals that tolerate practice “losses” because of the value of the employed physician’s referrals to the hospital are highly suspect.

In other words, DOJ appears to advance an interpretation of the Stark Law that puts at risk vertically integrated health systems that treat a physician as a professional component cost of delivering a bundle of professional and facility/technical component services to patients and payors. Despite the fact that DOJ’s expert views on fair market value, including its subjective interpretation of the results of physician compensation surveys, are rarely tested in actual litigation before a judge or a jury, DOJ does not appear to accept that there are plenty of commercially legitimate reasons for a hospital to employ a physician who may not “cover” their costs from professional fees alone, such as the payor mix of the hospital the amount of un-compensated care; other clinical and non-clinical services provided by the physician; the need for the specialty in the community; and the fact that Medicare and Medicaid rates commonly pay below costs. Additionally, a fully integrated hospital-physician system will necessarily view its finances on an integrated and not piecemeal basis.

Hospitals may view Columbus and Broward with some comfort in this respect—DOJ did not base its theory solely on the allegation that the physician compensation failed to meet the employment exception because the physician’s professional fee collections did not cover their costs. In Columbus, DOJ could point to allegations of upcoding and that the compensation model encouraged upcoding, which, if true, would cause direct financial harm to the federal health care programs. In Broward, the complaint raised allegations of compromising the physician’s medical judgment and the public health mission of a county hospital. This could suggest the DOJ is attempting to look for additional allegations of “bad” conduct in pursuing a FCA theory. However, the allegations were not tested in litigation, and Columbus and Broward would likely dispute the truth of those allegations. Given the general way in which the covered conduct is typically described in settlement agreements, it is difficult to determine DOJ’s position.

Tuomey casts a long shadow over any hospital defending Stark Law allegations. The tremendous financial exposure under the Stark Law makes challenging DOJ’s positions on physician compensation un-tenable for many hospitals. Columbus’ chief executive officer explained why he settled with DOJ: he “learned from other hospitals fighting these types of lawsuits that going to trial was very risky.” Arguably, this dynamic serves neither the government nor the hospital community well. Settlements do not provide clear guidance to providers on how to properly structure arrangements and neither do relator or DOJ complaints or briefs—they simply advocate a particular position in litigation. CMS, the agency responsible for interpreting the Stark Law, is largely silent in this adversarial process.

At the same time, CMS is also encouraging greater clinical integration between physicians and hospitals as a step towards payment based on quality rather than quantity. Practically, the clearest way to get physicians on board with clinical integration is for hospitals to financially integrate with (or employ) physicians. But if “losses” on a physician based solely on professional collections is going to put the hospital-employer at risk of catastrophic Stark and FCA liability, this un-certainty may delay and distort clinical integration efforts at the same time that evolving payment systems are designed to incentivize such integration. This state of affairs is not tenable over the long term.