$21.25 Million Settlement Highlights Problem of Hospitals Overpaying Physicians

A recent settlement highlights the potential perils associated with hospitals’ employment of physicians, where excessive compensation to physicians is deemed to be a reward for referrals in violation of Federal Anti-Kickback Statute (“AKS”) and the Physician Self-Referral Law (commonly known as the “Stark Law”).  As this case illustrates, physicians who are already employed by hospitals, or are considering an employment offer from a hospital, should not assume that the arrangement structured by the hospital passes regulatory muster.

The U.S. Department of Justice announced that the Ohio-based Akron General Health System (AGHS), will pay $21.25 Million to resolve allegations of submitting false claims to the Medicare program, based on AGHS’ improper relationships with certain referring physicians.  Between 2010-2016, AGHS was alleged to have paid compensation substantially in excess of fair market value to physicians for their services rendered to secure the physicians’ referrals of patients.  This practice violated both the AKS and Stark Law, and claims resulting from those ill-gotten referrals were deemed to violate the False Claims Act.

The Cleveland Clinic Foundation, which acquired AGHS at the end of 2015, reportedly voluntarily disclosed the improper arrangement (implemented prior to the acquisition) to the government and cooperated in the resolution of the matter.  The civil settlement included the resolution of claims brought under the qui tam “whistleblower” provisions of the False Claims Act by the former Director of Internal Audit at AGHS, and Ethical Solutions, LLC.  The whistleblowers’ allegations included:       “[AGHS] engaged in a scheme to pay improper compensation to physicians to induce them illegally to refer patients, including Medicare, Medicare Advantage and Medicaid patients, to [AGHS] for inpatient and ancillary services.”

Not only do excessive compensation arrangements violate the AKS, Stark Law and False Claims Act, but they also corrupt medical decision-making, and create an anti-competitive impact on the physician marketplace. Hospitals enjoy several competitive advantages that are not available to private practitioners. 340B drug discounts, when combined with the consistently higher reimbursements hospitals receive for services, increases the hospital’s coffers for the recruitment of private practice physicians, who are often compensated in excess of the amount a private practice could afford to pay them. In a climate where it is increasingly difficult for independent physicians to remain in the private practice of medicine, this disparity in compensation makes it challenging to attract and retain talent.  In fact, professional medical practices that are owned by, or affiliated with, hospitals typically lose money because the physicians’ compensation exceeds the professional fees collected, but hospitals are willing to subsidize the negative cash flows of these practices because the physicians are making referrals to the hospital and its affiliated facilities.  The impact of this practice is far-reaching.  By paying physicians commercially unreasonable compensation as a reward for referrals, hospitals create pressure on their employed physicians to refer, which results in overutilization and increased costs to the healthcare system.

How Frier Levitt Can Help

If you are a physician employed by a hospital system, or you are considering an offer of employment from a hospital, the agreement should be reviewed by experienced healthcare counsel.  If you are a physician engaged in the private practice of medicine and you are suffering the adverse impact of a local hospital system’s anticompetitive or otherwise illegal conduct, you may have a legal claim.   Call Frier Levitt to speak with an attorney.

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