The Department of Justice and Florida’s Halifax Hospital Medical Center have reached a tentative $85 million settlement in a case alleging violations of the federal physician self-referral law (commonly known as the “Stark Law”) and the federal False Claims Act (the “FCA”). The tentative settlement was announced on March 3, 2014, as the parties were preparing to select a jury for trial of the case. A final settlement on the claims in which the federal government intervened is expected by March 10, 2014.

The case, United States ex rel. Baklid-Kunz v. Halifax Hospital Medical Center and Halifax Staffing, Inc., was filed in June 2009 by a whistleblower who had served as Halifax’s director of physician services. The government intervened in the case in September 2011. The case alleged, among other things, that Halifax’s arrangements with medical oncologists and neurosurgeons violated the Stark Law, and that Medicare claims submitted by Halifax based upon referrals from these physicians violated the FCA.

The Stark Law prohibits physicians from referring Medicare patients for “designated health services” to entities with which the physician or the physician’s immediate family members have a financial relationship, unless the relationship meets one of the detailed exceptions set forth in the law and accompanying regulations. Likewise, the Stark Law prohibits an entity from submitting Medicare claims based upon such prohibited referrals and requires entities to refund amounts received for items or services provided pursuant to prohibited referrals. Sanctions for violating the Stark Law include denial of payment, civil monetary penalties of up to $15,000 per claim submitted, and exclusion from the federal health care programs. Knowingly submitting claims based upon prohibited referrals, and retaining sums paid on such claims, constitute violations of the FCA. The FCA provides for treble damages and civil penalties between $5,500 and $11,000 per claim.

The tentative settlement is notable for its size. The government alleged that the prohibited referrals in this case resulted in the submission of 74,838 claims and an overpayment of $105,366,000. Given the possibility of treble damages and civil penalties, Halifax faced a possible damage award in excess of $1.1 billion.

The case involved many important legal questions arising under the Stark Law and FCA. The parties and the court focused on two key elements common to many frequently-used Stark Law exceptions – that compensation cannot take into account the volume or value of referrals and that compensation must be within fair market value. The settlement leaves in place a number of trial court rulings on these and other issues, including the court’s conclusion that a violation of the Stark Law can lead to FCA liability for claims covered by Medicaid, that the Stark Law exceptions are affirmative defenses in FCA cases on which the defendant bears the burden of proof (rather than elements of the FCA cause of action on which the government bears the burden of proof), that damages can be proved through health care providers’ own claim forms rather than by detailed claim-by-claim proof based upon review of medical records, and that the attorney-client privilege provides only limited protection for communications between health care providers and their attorneys regarding the financial arrangements at issue in Stark Law/FCA cases.

The government argued that Halifax’s arrangements with the medical oncologists failed to comply with a Stark Law exception because those arrangements took into account the volume or value of the physicians’ referrals. The arrangements with the medical oncologists provided for a base salary and participation in a bonus pool equal to 15% of the operating margin of the medical oncology program at Halifax. The bonus pool was allocated among the physicians in proportion to their personally performed services. Because the bonus pool included revenues for designated health services referred by the physicians (i.e., services not personally performed by the physicians), the government argued that the arrangement took into account the volume or value of the physicians’ referrals, regardless of how the bonus pool was allocated among the individual physicians. In a ruling prior to trial, the court agreed with the plaintiffs and found that as a matter of law these arrangements violated the Stark Law. This ruling meant that the only issue at trial related to the medical oncologist arrangements was the amount of damages to be awarded to the government.

The government argued that Halifax’s arrangements with the neurosurgeons failed to comply with a Stark Law exception because those arrangements resulted in compensation in excess of fair market value. Those arrangements provided for a base salary, benefits, call pay, and a bonus equal to the difference between the base salary and the physician’s collections. According to the government’s expert witness, these arrangements resulted in compensation to the neurosurgeons in amounts over twice the compensation paid to neurosurgeons at the 90th percentile of their specialty, despite producing below the 90th percentile. Halifax argued that a number of factors justified the levels of compensation paid to the neurosurgeons. In a pretrial ruling, the trial court found that whether the arrangements resulted in compensation that fell within fair market value was a disputed issue of fact to be resolved by the jury at trial.

The settlement will largely bring to an end a case that demonstrates the high stakes involved in FCA cases arising out of alleged violations of the Stark Law, and the many difficult and unsettled legal issues that health care providers face in this area.