Overly lucrative physician pay triggers huge fine for hospital

If a hospital pays physicians more than fair market value compensation, it could face huge penalties for making illegal kickbacks to physicians. A recent jury award illustrates this trouble spot.

Big penalty: The District Court of South Carolina has just ordered a hospital to pay $237 million for violating the False Claims Act. Earlier this year, a jury 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 the 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. The case is U.S. ex rel. Drakeford v. Tuomey Healthcare Systems, Inc., C/A No. 3:05-2858-MBS (D. S.C.).

The hospital, a nonprofit, single hospital system based in South Carolina, plans to appeal the court’s judgment. The hospital’s Form 990 for 2011 showed net assets of $124 million, so a judgment amount of $237 million is devastating.

What to do: Any opinion on the valuation of a physician compensation arrangement cannot in any way be based on any consideration of anticipated referrals. Before any arrangement is put into place, the fair market value and commercial reasonableness should be established. Also, benefits provided under these arrangements should be consistent with those provided to other hospital employees. If part of the compensation is for administrative duties, the arrangement should clearly describe those duties. What’s more, if arrangements are long term, they should be reviewed periodically for compliance.

Physician referrals can be part of a number of business dealings with physicians, including acquisitions of practices, joint ventures, noncompete agreements, and so on.

Regulatory matters, including the Stark Law, and how they impact the valuation of healthcare compensation are fully examined in the BVR/AHLA Guide to Healthcare Industry Compensation and Valuation.