By Joseph Keillor

In a settlement of stunning magnitude, an Indianapolis-based health system settled with the Department of Justice for $345 million to resolve Stark Law and False Claims Act allegations relating to its employed physician compensation arrangements. This massive settlement, finalized in December 2023 after nearly a decade of litigation, reflects the complexities and importance of appropriately structuring physician compensation, and the government's continued focus on fraud and abuse enforcement.

The health system's former chief financial officer and chief operating officer filed a whistleblower lawsuit alleging a laundry list of improper conduct in employed physician contracting. For example, the health system allegedly intentionally provided its appraisers false information on multiple occasions (including by inflating collections figures of the physicians), often doubled the salaries of physicians compared to what they had been earning in private practice, and persistently ignored multiple appraisers' warnings about large disconnects between very high compensation of numerous physicians and moderate productivity. For a limited number of specialties, an incentive component of compensation was allegedly explicitly dependent on the individual physician's technical referrals made in such compensation period, in flagrant violation of Stark Law restrictions on determining compensation in a manner that takes into account the volume or value of referrals (the Volume/Value Standard).

The government chose to join the whistleblower lawsuit, lending its extensive resources to the suit. The government’s publicly-accessible legal filings against the health system provide some interesting insights into how enforcement officials analyze and approach these matters. For example, the government recites the unseemly allegation that the health system calculated incremental ancillary profits it would likely receive from integrating physicians, discussed, and essentially negotiated the conceptual split of such profits with the physicians, with the health system in one case offering 40 percent and the physicians demanding 50 percent. That is certainly an unseemly negotiating approach that should be avoided, but the government seemed to stretch the Stark Law quite far in asserting that the negotiating approach caused the health system to fail the Volume/Value Standard.

While the parties seemed to essentially ‘back in’ to prospective compensation amounts through financial projections that included ancillaries, the actual compensation approach for many specialties was either fixed guaranteed compensation or wRVU-based compensation for personally-performed services. That is, the actual compensation formulas under the written employment agreements for a majority of the specialties were generally approaches that have long been widely accepted as fully appropriate vis-a-vis Volume/Value Standard, as only a limited number of specialties had an incentive compensation component dependent on technical referrals. So, while some of the government’s arguments seem to be on shaky legal ground, the most significant issue with backing into guarantee amounts and/or wRVU rates by estimating anticipated technical profits is that the resulting guarantee amounts and wRVU rates offered by the health system seemed exorbitantly high from a fair market value perspective. The key takeaway though is that even in cases where the resulting compensation is supportable from a fair market value perspective, despite the flexibility that technically should be available to providers under the special rules, health systems should focus on factors other than ancillary profits in their discussions and negotiations with physicians regarding salaries and/or wRVU rates.

One modest source of potential comfort to providers from the government's approach in its legal filings is that the government's filings did not endorse the whistleblower’s assertion that the employed physician's compensation additionally violated the Anti-Kickback Statute. This omission may indicate an implicit acknowledgment by the Department of Justice of the breadth of the bona fide employment safe harbor under the Anti-Kickback Statute, which would be consistent with a recent favorable advisory opinion from the Office of Inspector General of the Department of Health and Human Services. However, unknown strategic reasons might have driven the government's approach in this particular case, and it is not fully clear that the Department of Justice will consistently take such a flexible approach to the Anti-Kickback Statute's employment safe harbor in the future.

The settlement underscores the enormous stakes of structuring physician compensation appropriately, no matter how great of competitive pressures a health system faces. In addition to the $345 million settlement itself, the health system will be under an onerous five-year corporate integrity agreement with a legal Independent Review Organization, a claims Independent Review Organization, and a compliance expert to the Board. Because of the inherent subjectivity of the concept of fair market value, among other reasons, it may not be possible to ever fully eliminate Stark Law risk and related risk under the False Claims Act in employed physician contracting. But organizations that adopt and enforce a thoughtful policy with reasonable guardrails, especially regarding establishing fair market value documentation for highly-compensated physicians, should be best-positioned to avoid staggering Stark Law and False Claims Act financial penalties and related consequences.

About the author: Joseph Keillor is of counsel at Baker Donelson in Baltimore, Maryland. He is a healthcare attorney who focuses his practice on complex health care regulatory matters.