On Monday, Nov. 5, 2012, the Department of Justice (DOJ) announced that Freeman Health System (Freeman) in Joplin, Missouri, had agreed to pay $9.3 million to resolve allegations that it violated the False Claims Act and Stark Law by contracting with physicians to provide incentive pay based on referrals. The parties reached the agreement after Freeman voluntarily disclosed possible violations to the U.S. Attorney for the Western District of Missouri following its internal audit of physician contracts. By initiating an internal review of its contracts and disclosing the information to the DOJ, Freeman likely avoided more severe penalties, including a corporate integrity agreement and liability under the False Claims Act.

In this case, Freeman’s actions raise three important points for hospitals:

  • Hospitals should proactively review physician contracts to ensure compliance with federal regulations. Paula Baker, president of Freeman, emphasized that Freeman conducted an internal review, on its own initiative, and discovered that the hospital system made errors in the structure of its physician-compensation agreements. By conducting an audit of its contracts, Freeman caught its potential noncompliance with federal law prior to any investigation by federal authorities. Freeman’s proactive steps enabled it to quickly implement improvements in its contracting practices and likely helped Freeman avoid a more costly and invasive investigation.
  • It is wise to engage outside, expert assistance in the review process. As part of its efforts to address the contracting errors, Freeman engaged outside experts to analyze its records and provide recommendations for changes to improve its system. The external review not only demonstrated a good-faith effort on Freeman’s part to correct its mistakes and bring its practices into compliance with federal law, but also the external audit revealed that all services billed to patients or government entities actually were provided—a discovery that likely strengthened Freeman’s ability to negotiate a better agreement with the DOJ, given the circumstances, when it ultimately disclosed the information.
  • Hospitals should be especially careful in drafting contracts for physicians employed in clinic settings and seek outside counsel when necessary. In this case, Freeman allegedly provided incentive pay to physicians employed at clinics operated by the health system for referrals for certain diagnostic testing and other services performed at the clinic. By avoiding physician contracts structured on the revenue generated by a physician, hospitals can ensure that physicians make decisions based on a patient’s best interests and that the hospital does not jeopardize its own compliance with federal law. Additionally, when necessary, hospitals should seek outside expertise in drafting physician contracts. As Ms. Baker recognized when addressing Freeman’s compliance issues, the federal guidelines governing compensation agreements are “very complex.” To ensure that its own physician contracts are compliant with federal regulation moving forward, Freeman enlisted the help of outside experts—a move that likely will pay off in the long run.