On September 17, 2019, the Third Circuit Court of Appeals issued a decision with potentially far-reaching implications for healthcare companies and providers facing allegations of violations of the Stark Law. In United States ex rel. Bookwalter v. UPMC, the Third Circuit reversed a lower court’s dismissal of a qui tam complaint that alleged violations of the Stark Law based on a compensation model for physicians that rewarded productivity, ruling that allegations that the compensation model rewarded referrals of patients to hospitals are sufficient for a complaint to survive a motion to dismiss, even in the absence of allegations that the increased referrals caused the increased compensation. The ruling may cause serious reverberations around the healthcare industry, where productivity-based compensation is exceedingly common for physicians and, with appropriate safeguards, acceptable under the Stark Law. Because there will almost certainly be a correlation between increased referrals and increased compensation under a productivity-based model for health systems that employ physicians, this ruling may create significant obstacles for healthcare companies seeking to dismiss allegations that such models violate the Stark Law.

In Bookwalter, the relators alleged that University of Pittsburgh Medical Center’s compensation for employed physicians, which included a productivity bonus for physicians who surpassed a certain level of “work units,” amounted to prohibited “indirect compensation” under the Stark Law. The Stark Law, a civil statute, prohibits a physician from making referrals for certain services to entities in which the physician has a “financial relationship,” which includes indirect compensation. Under the statute, indirect compensation for a physician includes compensation that “varies with” the physician’s referral volume. The Third Circuit concluded that “varies with means correlation,” and that the structure alone of the employment agreement with the physicians “was enough to plead correlation” because the physicians’ “salaries rose and fell with their referrals” to affiliated hospitals. In other words, the Court appeared to conclude that productivity-based compensation always “varies with, or takes into account, the volume or value of referrals” to hospitals within the health system, which would create a prohibited indirect compensation relationship.

Importantly, the presence of an indirect compensation relationship does not create liability under the Stark Law if the arrangement meets one of the many statutory or regulatory exceptions, including one specifically for indirect compensation. Indeed, the arrangement at issue in Bookwalter may also satisfy the employment, personal services and fair market value exceptions. But as the Bookwalter concurrence notes, because those exceptions are affirmative defenses, defendants may be required to proceed through costly discovery before being able to assert them, most likely at the summary judgment stage. Alternatively, the majority opinion suggests that the government may now move more aggressively to dismiss similar qui tam actions, the only vehicle through which private plaintiffs may bring Stark Law claims. While that may eventually prove to be true, there is likely to be a proliferation of relators in the meantime asserting violations of the Stark Law based on productivity-based physician compensation.