Legal Review & Commentary: Hospital system pays $9.3 million to settle False Claims Act and Stark Law violations

News: In November 2012, a multi-hospital healthcare system settled allegations of improperly compensating physicians from its many clinics for referrals of Medicare and Medicaid patients. It was alleged by the United States Department of Justice Civil Division that these actions were in direct violation of the False Claims Act and Stark Law. The hospital system agreed to pay $9.3 million to settle those allegations.

Background: A multi-hospital healthcare system, consisting of three hospitals, paid $9.3 million to settle allegations that it violated the False Claims Act and Stark Law. The Stark Law limits the referrals of designated health services provided to Medicare and Medicaid patients if the physician making the referral has a financial relationship including compensation arrangements that are based on the volume of referrals, generated revenue of referrals, or investment interests, with that entity. This practice of physicians referring patients in which they have a financial interest is known as physician self-referral. In this case, the financial interest was a compensation agreement based on the amount of patient referrals, but it might be as conspicuous as an ownership interest. The False Claims Act and Stark law exist to protect the integrity of the government-funded health care benefit programs.

The multi-hospital healthcare system allegedly provided improper incentive pay to 70 physicians. This incentive pay program was based on the revenue generated by the physicians’ referrals for services provided within the multi-hospital healthcare system. Such services included diagnostic testing. This incentive compensation might have taken into account the value and volume of those physicians’ referrals.

The physician compensation for referral agreements in violation of the False Claims Act and Stark Law was discovered by the multi-hospital healthcare system during an internal review conducted in 2009. The multi-hospital healthcare system self-disclosed these errors to the United States Attorney in its district and claimed the errors were made inadvertently. The hospital system expressed that the complexity of federal guidelines was a major cause of the errors. In 2012, after a lengthy investigation of the disclosures in conjunction with the Federal Bureau of Investigation, the U.S. Attorney’s Office for the district, and the Office of Inspector General of the U.S. Department of Health and Human Services, the United States Department of Justice Civil Division alleged that the hospital system knowingly violated the False Claims Act and Stark Law by compensating some of its physicians with incentive compensation.

This is just one example of many since the Health Care Fraud Prevention and Enforcement Action Team (HEAT) initiative to prevent Medicare and Medicaid financial fraud was announced in 2009. Since January 2009, the United States Department of Justice has applied the False Claims Act and the Stark Law to recover $10.1 billion in cases involving fraud by doctors and hospitals against federal healthcare programs such as Medicare and Medicaid. This amount is significant considering the fact that the United States Department of Justice has recovered a total of over $13.8 billion in all False Claims Act cases since January 2009.

What this means to you: In today’s healthcare world of regulatory compliance, it is not difficult to become lost or distracted in the multiple state and federal regulations and requirements and the interpretation of those rules. The False Claims Act of 1986, the Ethics and Patient Referral Act of 1989, the Omnibus Budget Reconciliation Act of 1989 (effective Jan. 1, 1992, and includes Stark I), and the Omnibus Budget Reconciliation Act of 1993 (includes Stark II) are but a few examples of the regulatory requirements healthcare providers must be knowledgeable of and comply with on a daily basis. Terms such as “kickbacks,” “fraud,” and “false claims” have become common, negative words familiar to government agencies, healthcare providers, and consumers alike.

Developing, enacting and maintaining a compliance program are not simple or easy tasks. The “Federal Sentencing Guidelines Manual” recommends seven core elements for an effective compliance program:

leadership and structure (including a compliance officer and a corporate compliance counsel);

written standards;

education and training;

internal lines of communication;

auditing and monitoring;

responding to potential violations;

corrective action procedures.

A compliance program is costly and time-consuming, yet without an effective program in place, the risks of penalties, litigation, and harm rise even higher in both cost and time. It is imperative to be cautious and take regulatory compliance seriously.

In an Office of Inspector General’s (OIG) “Open Letter to Health Care Providers” dated March 9, 2000, Inspector June Gibbs Brown stated the following: “The best evidence that a provider’s compliance program is operating effectively occurs when the provider, through its compliance program, identifies problematic conduct, takes appropriate steps to remedy the conduct and prevent it from recurring, and makes a full and timely disclosure of the misconduct to appropriate authorities.”

The pitfall in this case was related to incentive compensation. Compensation packages of any type within the healthcare industry require due diligence to ensure compliance with regulations. Reviews by legal counsel, compliance officers, and risk managers are one means of making every effort to avoid perceptions of kickbacks, fraud, or false claims. Financial disclosure is also necessary to avoid conflict of interest and compensation issues, especially when referrals to system-owned clinics and outpatient services might be involved.

In this case, the multi-hospital healthcare system met several of the core elements as recommended in the “Federal Sentencing Guidelines Manual.” They conducted an audit, responded to potential violations, and as per the Office of Inspector General open letter of March 2000, identified problematic conduct and disclosed their findings to the appropriate authorities. Although the health system leaders self-reported their audit findings to the authorities, a lengthy federal investigation was conducted, and the allegations were settled at a cost to the healthcare provider of $9.3 million. Recovery of Medicare and Medicaid funds related to regulatory non-compliance, whether intentional or unintentional, has been and continues to be an active goal of the United States Department of Justice. Since 2009 they have proven to be successful in doing so.

What does this mean to you? Be diligent, comply, audit and monitor, identify, and take action whenever and wherever necessary.


This case was handled by the United States Department of Justice’s Civil Division, the U.S. Attorney’s Office for the Western District of Missouri, the Office of Inspector General of the U.S. Department of Health and Human Services, and the Federal Bureau of Investigation. The claims in this case were settled between a government agency and the hospital. No trial or court information is available for purposes of citation.