Physician employment arrangements with hospitals have remained a significant area of regulatory scrutiny in recent months with the announcement of several high profile settlements and decisions in key FCA cases involving Stark and AKS-related issues.

In July 2016, DOJ announced a $17 million settlement in U.S. ex rel. Hammett v. Lexington County Health Services District. The lawsuit resolved allegations that Lexington County Health Services District, Inc. d/b/a Lexington Medical Center (LMC) in West Columbia, South Carolina violated the Stark Law and FCA by acquiring physician practices and employing physicians on terms that were in excess of fair market value and on terms that were not commercially reasonable.

The relator alleged that LMC acquired the relator’s former practice, Columbia Medical Group (CMG) and its associated imaging equipment, for the purpose of securing the imaging referrals from the newly employed physicians. To incentivize the CMG physicians, LMC allegedly offered above fair market value, significantly more than they were previously earning to make up for the loss of ancillary income. The relator also pointed to unusually long-term physician employment contracts designed to lock in compensation as consideration for the value of ancillary services and the hospital’s tracking of imaging referrals to question physicians about referral patterns.

That settlement followed the district court’s approval of a $9.9 million settlement in U.S. ex rel. Schaengold v. Mem’l Health, Inc. That settlement resolved allegations that Memorial Medical University Center paid its physicians above-market rates to secure referrals for services the hospital billed to Medicare. To alleviate financial pressure due to declining patient volumes, Memorial allegedly aimed to expand its employed primary physician base to ensure that its specialists received referrals. Memorial allegedly acquired a practice projecting a financial loss of $650,000 for each of the five years after acquisition, and ultimately incurred a loss of roughly $3 million during a 30-month period, while paying the physicians approximately $1.5 million during the same 30-month period. Memorial’s Board of Directors was eventually informed by the relator of the fair market value issues and its implications. The Board allegedly rejected a plan to correct the overcompensation and voted instead to extend the contracts to avoid losing patient admissions and referrals to a competing hospital.

While the noted settlements evidence the potential liability for improper arrangements, several cases have demonstrated the regulatory flexibility and defensibility of employment if employment arrangements are structured appropriately under Stark and AKS. In U.S. ex rel. Wall v. Vista Hospice Care, Inc., 2016 WL 3449833 (N.D. Tex. June 20, 2016), the district court entered summary judgment in connection with relator’s FCA claims premised on alleged AKS violations. The relator alleged that employees were paid bonus incentives for hitting admission quotas and census goals, which caused Vista employees to falsify patient records by certifying ineligible patients for hospice care. The district court held that the bona fide employment safe harbor protected the bonus payments to its employees, as it applies to payments to employees of entities in the business of providing covered services, regardless of the specific task being compensated by the bonuses.

In Cooper v. Pottstown Hospital Co., LLC, 651 Fed. App’x. 114 (3d Cir. 2016), the Third Circuit affirmed dismissal of relator’s FCA claims premised on alleged AKS violations. The relator, an orthopedic surgeon, filed a qui tam complaint alleging that Pottstown contracted to pay physicians for on-call services as an inducement for Medicare referrals. Pottstown allegedly terminated the relator’s and two other physician’s on-call services agreements after they refused to exclusively refer patients to the hospital. Pottstown executives purportedly used the on-call services as leverage to pressure the relator to relinquish his financial interest in a new, competing surgical facility and offered him a salaried director position. After the relator refused, Pottstown terminated his on-call services agreement. Five months later, after signing another substantially similar on-call services agreement, the relator alleged that Pottstown again terminated the agreement because he began working for another local hospital and would not refer patients exclusively to Pottstown.

In affirming the district court’s dismissal of the relator’s claims, the Third Circuit noted that the relator failed to establish that the contracts were not arms-length contracts for services legitimately needed by the hospital or that he was compensated in excess of fair market value. The relator’s conversations with Pottstown executives failed to establish the hospital’s original contractual intent because they occurred seven months after the first agreement was executed. Pottstown was within its rights to terminate the first agreement when it learned of the relator’s financial interest in a competing facility and to terminate the second agreement because the relator breached an explicit restrictive covenant. Additionally, the second agreement’s provision allowing the relator to retain his affiliation with the competing facility undermined the relator’s theory that the hospital intended him to refer patients to Pottstown only.

In U.S. ex rel. Bingham v. HCA, Inc., 2016 WL 344887 (S.D. Fla. Jan. 28, 2016), the district court partially dismissed relator’s allegations of Stark Law, AKS and FCA violations. The relator, a real estate appraiser, alleged that HCA purposefully obscured remuneration it paid physicians to induce them to refer patients to HCA hospitals and locate their offices on HCA hospital campuses. The relator alleged that funds were funneled through third-party developers and landlords in two complex real estate schemes in violation of a CIA. Regarding the first scheme, the district court denied the defendant’s motion, finding the relator had plausibly pleaded a Stark Law violation. The district court concluded that HCA could have considered patient referrals through the third-party landlord when assigning office space. Further, the relator pleaded a scenario where physician tenants drew a profit that varied with the size of their leased office space, which could vary based on the volume or value of referrals. The district court also determined that the relator sufficiently stated a claim of alleged AKS violations, finding that provision of cash flows to tenant physicians, including proceeds from the sale of a medical office building, free parking and a lease arrangement below fair market value, indicated HCA could have been providing financial benefits to physicians to induce referrals.

Regarding the second scheme, the district court granted the defendant’s motion, holding that the relator failed to include adequate factual allegations necessary to state a claim under the FCA. Unlike the pleading of the first scheme, the relator did not provide information about specific physician tenants, including their cash flow participation agreements and Medicare referral numbers. Instead, the relator attempted to portray a factually dense scheme without data on clear compensation arrangements between physician tenants and HCA.