Health system to pay $9.3 million for alleged False Claims Act, Stark violations

Freeman Health System, a healthcare provider and hospital system located in Joplin, MO, has agreed to pay $9.3 million to resolve allegations that it violated the Stark Law and the False Claims Act by knowingly providing incentive pay to physicians in a manner that violated federal law, the Department of Justice (DOJ) announced recently.

The Stark Law forbids a hospital from billing Medicare for certain services referred by physicians that have a financial relationship with the hospital. A prohibited financial relationship includes an agreement between a hospital and a physician to compensate a physician based on the volume of the physician’s referrals or the revenue realized through those referrals.

Freeman disclosed to the U.S. Attorney for the Western District of Missouri that a number of its physicians were eligible for incentive compensation that might have taken into account the value and volume of their referrals. Based on its investigation of Freeman’s disclosures, the United States alleged that Freeman knowingly compensated some of its physicians in a manner that violated the Stark Law. Specifically, the United States alleged that Freeman provided incentive pay to 70 physicians employed at clinics operated by the health system based on the revenue generated by the physicians’ referrals for certain diagnostic testing and other services performed at the clinic. The United States alleged that this financial arrangement created an incentive to refer patients for such procedures.

Paula Baker, MS, president of Freeman Health System, issued a statement saying the 2009 internal review revealed that Freeman had inadvertently made errors in the way it structured its physician-compensation agreements. Administrators at the health system realized that those agreements did not meet what she described as “very complex’’ federal guidelines.

Freeman engaged outside experts to analyze and provide recommendations for improvements to the system. Their review confirmed that the health system’s physician contracts did not comply with the law, but it also found that no patient or governmental entity was billed for any service that was not provided, according to Baker’s statement.

The health system voluntarily disclosed that it was in noncompliance with the law and immediately changed its compensation formula to ensure full compliance.

The health system probably avoided a worse outcome by voluntarily disclosing the possible violations, suggests Lindzi Timberlake, JD, an attorney with the law firm of McGuire Woods in Richmond, VA, and Scott Becker, JD, a partner with the same firm in Chicago.

They offer these lessons from the Freeman case:

  1. Hospitals should proactively review physician contracts to ensure compliance with federal regulations. 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.
  2. It is wise to engage outside, expert assistance in the review process. The external review demonstrated a good-faith effort on Freeman’s part to correct its mistakes and bring its practices into compliance with federal law. In addition, the external audit revealed that all services billed to patients or government entities actually were provided. This was 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.
  3. 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.