An  orthopedic surgeon agreed on two separate occasions to an on-call coverage contract with a local hospital in which he warranted that no portion of his compensation was in exchange for referrals.  When the contracts were terminated by the hospital after the surgeon invested in a competing surgery center, the surgeon brought a whistleblower False Claims Act action against the hospital, alleging that the contract was intended to induce his referrals.

The U.S. District Court for the Eastern District of Pennsylvania, in Cooper v. Pottstown Hospital Co., LLC, et al., dismissed the surgeon’s complaint.  The district court’s description of the failure of the complaint illustrates the characteristics of on-call contracts that make them a permissible relationship between hospitals and physicians. 

The court found the claim that the contract was intended to induce referrals implausible for several reasons.  The surgeon failed to plead facts to show that the contracts were not arms-length agreements for his services.  There was no allegation that the hospital lacked a business need for on-call coverage.  The surgeon’s compensation of $650 per day of being on-call was not alleged to be in excess of fair market value.

Finally, the warrants in the contract that no portion of the compensation was in exchange for referrals was believed by the surgeon to be correct at the time the agreements were signed.  The court found that “[a]ny practicable scheme to induce referrals would not have left him ignorant of its true purpose.”

Hospitals and physicians entering into on-call arrangements may take some guidance from this decision in formulating their agreements.  Contracts should be the result of arms-length negotiations and reflect a legitimate business need of the hospital.  Any compensation paid for the physician’s on-call service should be defensible as the fair market value for those services.

Including a contractual provision reflecting both parties’ understanding that no portion of the compensation is in exchange for referrals is particularly helpful.   This provision could prevent a whistleblower or the government from successfully alleging at a later date  that the parties understood there to be an improper inducement, unless the entire agreement were voided as fraudulent.