On April 21, 2015, the U.S. Department of Justice (DOJ) announced that Citizens Medical Center (CMC), a county-owned hospital located in Victoria, Texas, had agreed to settle with the United States for $21.75 million related to allegations that it violated the False Claims Act (FCA) by engaging in improper financial relationships with referring physicians. This recent Stark Law-based FCA settlement is symptomatic of emerging trends seen in recent years related to increasing government scrutiny of physician compensation arrangements that previously had passed regulatory muster.

Among other allegations, the DOJ announced that CMC had "resolved allegations that the hospital provided compensation to several cardiologists that exceeded the fair market value of their services." The CMC settlement is significant because the court previously ruled, in response to CMC's assertions in a Motion to Dismiss, that even though the compensation paid to the cardiologists was below the median (and thus clearly within the range of fair market value) for purposes of satisfying the "fair market  value" component of the Stark Law exception for "bona fide employees," the amount paid could not survive an inference that the compensation paid included the volume or value of referrals because the cardiologists began receiving significantly higher compensation once they became employed by CMC. The Court found: "Relators have made several allegations that, if true, provide a strong inference of the existence of a kickback scheme. Particularly, the Court notes Relators allegations that the cardiologists' income more than doubled after they joined Citizens, even while their own practices were costing Citizens between $400,000 and $1,000,000 per year in net losses. Even if the  cardiologists were making less than the national median salary for their profession, the allegations that they began making substantially more money once they were employed by Citizens is sufficient to allow an inference that they were receive improper remuneration. This cardiologists at a loss unless  it were doing so for some ulterior motive - a motive Relators identify as a desire to induce referrals."

Judging from the court’s ruling, the CMC settlement is illustrative of what appears to be yet another new "wrinkle" in the quest to comply with the Stark Law, and in particular, meeting the definition of "fair market value" for purposes of the "bona fide employee exception" and "personal services exception.”  Even if compensation is otherwise determined to be fair market value, the arrangement may still not qualify for a Stark Law exception where the compensation nevertheless takes into account the "volume or value of referrals." This apparent trend is a significant departure from the court's reasoning in the 2008 United States ex rel. Villafane v. Solinger case, which found that "...any definition of fair market value that would automatically deem anything over the median or indeed anything at the 80th percentile, as necessarily not being fair market value would seem illogical."

Additionally, the CMC settlement highlights the trend for the government to scrutinize increasingly lower compensation levels, i.e., compensation that was at, or below, the 50th percentile. Comparatively, in a 2013 case involving Halifax Medical Center , the government's expert, Kathleen McNamera, CPA (also the government's expert in the Tuomey Medical Center FCA Stark case), appeared to consider compensation that fell between the 50th (median) and 75th percentiles to fall within the range of fair market value so long as it was supported by the facts and circumstances surrounding the case.

The apparent "downward" trend toward a "preference" by the government in Halifax for a 50th percentile (median) compensation benchmark for purposes of determining the fair market value of physician compensation is a departure from the compensation benchmark accepted just one year earlier in 2012 by the same government expert in Tuomey. This apparent constriction in what  compensation levels the government will consider to fall within the range of fair market value coincides with the increased prosecution of fraud and abuse activities in the health care arena. As highlighted by the DOJ in the CMC settlement news release, "Since January 2009, the Justice Department has recovered a total of more than $24 billion through False Claims Act cases, with more than $15.3 billion of that amount recovered in cases involving fraud against federal health care programs." Therefore, there is a reasonable likelihood there will be a continued trend toward increased scrutiny (and possible prosecution) of certain health care provider compensation arrangements. Accordingly, health care providers and their legal counsel should be aware of this increased scrutiny of fraud and abuse related issues when reviewing and structuring physician compensation arrangements for compliance with Stark.

*While the topic of this Alert was primarily focused on issue of "fair market value" compliance as it related to FCA allegations, it is of significant note that the FCA/Stark related issues raised in the Halifax, Tuomey, and SCCI Houston cases centered on the additional compliance threshold of "commercial reasonableness, which requires that the compensation arrangement also make prudent business sense even in the absence of any referrals. Emerging trends related to meeting the requisite legal threshold of "commercial reasonableness" will be the subject of a future Client Alert.