When valuing a business arrangement or transaction between a healthcare entity and physicians, the valuation must not include a consideration of anticipated referrals. If it does, the hospital or healthcare system making payments under the arrangement could face huge penalties for making illegal kickbacks to physicians. This was the case of the nonprofit Tuomey Healthcare System in South Carolina, in which an appellate court upheld a $237 million judgment against the hospital.

Settlement: The hospital has agreed to settle with the government for $72.4 million, avoiding a penalty that would have been the largest levied against a community hospital. The $237 million penalty was about double the amount of the hospital’s net assets, so it would have been devastating.

A jury had found the hospital guilty under the Stark Law and False Claims Act of providing illegal kickbacks to a group of local doctors under part-time employment contracts that the government said paid well above fair market value. Although the deals made no mention of referral fees, the government argued that the excess amount was paid to ensure that they would continue to get those fees for clinical procedures. The hospital argued that it had both legal and fair market value opinions that backed up the appropriateness of the employment agreements. However, the jury disagreed, and the appellate court upheld the ruling. The case is U.S. ex rel. Drakeford v. Tuomey, No. 13-2219 (4th Cir. 2015).

The case was originally filed in 2005 by a whistleblower who declined to enter into an agreement offered by the hospital. Under the law, the whistleblower will receive $18.1 million from the settlement.

Extra: A recent BVR webinar included a discussion about the Tuomey case (and others) and issues surrounding the FMV of physician compensation. The webinar, conducted by Mark O. Dietrich (Mark O. Dietrich, CPA, PC) and Timothy Smith (Ankura Consulting Group LLC), is available if you click here (purchase required).