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Incremental Expenses—What Happens When the Recruit’s Expenses Aren’t Really Incremental

on Thursday, 14 April 2016 in Health Law Advisory: Zachary J. Buxton, Editor

A recent Idaho case includes important reminders for income guarantee arrangements with recruited physicians and the potential liability that the practice group and the hospital can face when processes aren’t established for identifying and verifying incremental expenses.

The Stark exception for physician recruitment allows hospitals to provide income guarantees to physicians joining existing practice groups but requires that the costs allocated to the recruit by the practice group not exceed actual additional incremental costs attributable to the recruit. In addition, records of the actual costs must be kept and maintained for a period of at least five years. (There’s a limited exception that allows for a per capita allocation or 20 percent, whichever is less, in the case of recruiting to a rural area or HPSA to replace a physician who retired, relocated, or died within the past 12 months).

Dr. Jacobs was on OB-GYN recruited by an Idaho hospital to join a private women’s health practice group. As often happens in such cases, the hospital provided an income guarantee to the recruit. Consistent with the Stark exception, the hospital agreed to pay the income amounts to the physician and the practice group’s actual incremental expenses associated with adding the recruit to the practice group. At some point, the relationship between the recruit and the practice group soured and ended up in litigation over his employment agreement. Meanwhile, Dr. Jacobs brought a whistleblower suit against the hospital and the practice group alleging that the payments by the hospital to the group exceeded the actual incremental costs of the group and therefore violated Stark. He also claimed that the improper payments constituted a fraudulent scheme to induce referrals under the anti-kickback statute that implicated both the hospital and the group.

There was no allegation that the recruitment agreement on its face was illegal. Rather, Dr. Jacobs alleged that the hospital and the practice group failed to implement the recruitment agreement properly because the payments exceeded the actual incremental costs. As examples, he pointed to the following:

  1. The group claimed $26,521 of rent as an incremental cost, but the group did not require any additional space when the recruit joined the practice.
  2. The group claimed new equipment, including three new exam tables for the recruit in the amount of $24,036, and the recruit was told that while the group already had exam tables for him, the hospital would pay for new equipment, so that group wanted to make these purchases. Other employees of the group then used some of the equipment and supplies purchased for the recruit.

The district court refused to dismiss the case and found that the allegations were sufficient to state a claim against both the hospital and the group. In doing so, the court reiterated important principles for such recruitment contracts:

  • It is the defendant’s burden to prove it meets an exception.
  • One of the Stark requirements for meeting the exception is that the hospital maintain complete and adequate records of the actual costs it has subsidized to ensure that the funds are appropriately handled by the group. Failure to do so is alone grounds to find a violation.
  • The submission of excess costs by the practice group was sufficient to state a claim against the practice group.

The case is ongoing and no trial has yet been held, so that ultimate liability of the parties is uncertain. But the court did determine that the allegations against the hospital and the practice group stated claims which, if proven, would lead to liability by the hospital and the practice group.

The case highlights the importance for both the hospital and the practice group of properly tracking and verifying that the costs subsidized by the hospital are in fact actual additional incremental costs. It further highlights that both the hospital and the practice group can be liable when the costs are not verified in such manner.

John R. Holdenried

1700 Farnam Street | Suite 1500 | Omaha, NE 68102 | 402.344.0500