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Citizens Medical Center Settlement Raises Renewed FMV Concerns

on Tuesday, 11 August 2015 in Health Law Advisory: Zachary J. Buxton, Editor

The recent settlement in the Citizens Medical Center case highlights fair market value (“FMV”) concerns in Stark cases, and particularly a trend to consider operating losses in hospital-owned practices. The case involved various physician relationships of Citizens Medical Center, a 344-bed acute care county hospital in Victoria, Texas. Like most Stark cases, the case began as a qui tam case. Here, it was brought by three cardiologists who had also previously sued Citizens based on a variety of claims for discrimination and conspiracy. While the Department of Justice did not initially intervene, it ultimately did so.

The initial allegations covered both anti-kickback and Stark and dealt with multiple physician relationships, both employed and independent. Most of the allegations alleged payments for referrals and some alleged compensation above FMV while others referred to other financial relationships as being inconsistent with FMV. The District Court addressed these in a motion to dismiss in September 2013 and dismissed all but four claims. Those surviving dismissal were allegations as follows:

  • Employed ED physician– bonus for referrals to Chest Pain Center
  • Employed Cardiologists – compensation above FMV, practice operates at a substantial loss, purpose to induce referrals
  • Independent GI physician – payment of directorships for participation in screening program
  • Independent Urologists – pay for referrals

The Department of Justice announced the settlement on April 21, 2015. It included a $21,750,000 payment by Citizens, of which the three cardiologists would receive a total of $5,981,250 as the qui tam plaintiffs, and a payment of $1.8 million to the plaintiffs’ attorneys. In announcing the settlement, the DOJ pointed to two allegations, both under Stark—that payment to the employed cardiologists exceeded fair market value and that bonuses to the ED physicians were for referrals. In doing so, the DOJ attached a list of 19 named physicians who received such excessive compensation, with time periods as to each.

The local newspaper reported that Citizens determined to settle because it would have cost several million dollars to fight the claims, the risk of loss would have jeopardized its financial stability, the settlement was a studied business decision based on advice of its lawyers, and that Citizens could not have afforded a potential liability of a $300-400 million settlement.

Significantly, the Court found: “Relators have made several allegations that, if true, provide a strong inference of the existence of a kickback scheme. Particularly, the Court notes Relators’ allegations that the cardiologists’ income more than doubled after they joined Citizens, even while their own practices were costing Citizens between $400,000 and $1,000,000 per year in net losses. Even if the cardiologists were making less than the national median salary for their profession, the allegations that they began making substantially more money once they were employed by Citizens is sufficient to allow an inference that they were receiving improper remuneration. The inference is particularly strong given that it would make little apparent economic sense for Citizens to employ the cardiologists at a loss unless it were doing so for some ulterior motive – a motive Relators identify as a desire to induce referrals.”

Because this case settled before trial, there is no binding precedent and no finding that operation at an economic loss is a basis for Stark liability. But the increasing concern about physician compensation coupled with the Judge’s comments about the commercial unreasonableness of operating a cardiology practice at a loss is cause for caution by hospitals and health systems that employ physicians. There are many reasons for operating a medical practice at a loss—other than securing referrals. These may include the need for physicians in certain specialties to meet the needs of the community, to have the necessary components of a population health arrangement, and the artificial nature of such losses when the allocation of physician ancillaries is made to other business units. The important lesson, however, is to make sure that the compensation is consistent with fair market value and then document the reasons for incurring such losses. The board should then be asked to consider and approve these reasons.

John R. Holdenried

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