Healthcare Business News
Although incentive bonuses are not uncommon in healthcare, a federal judge in Orlando said this one was illegal. (Click to enlarge image.)
Although incentive bonuses are not uncommon in healthcare, a federal judge in Orlando said this one was illegal. (Click to enlarge image.)

Caught between competing pressures

By Joe Carlson
Posted: March 8, 2014 - 12:01 am ET

Six years ago, Elin Baklid-Kunz, the physician services director at Halifax Health in Daytona Beach, Fla., told the chief compliance officer and other executives that the hospital's payments to some of its employed physicians looked illegal. When the agreements weren't modified, she filed a whistle-blower lawsuit.

Last week, the 582-bed tax-assisted hospital tentatively agreed to settle part of her federal suit for $85 million, of which Baklid-Kunz, who still holds her position at Halifax, will receive $13 million. And the case is far from over.

She said she filed the case because she was afraid she and other hospital officials would face criminal charges. “I honestly felt that I didn't have a choice,” she said in an interview (See related story, at left).

Halifax declined to provide comment for this article. In an interview last October, Halifax spokesman John Guthrie said the hospital had gotten a green light from its lawyers for the legality of the physician payment arrangements. “That's why we feel we're right and we feel we haven't done anything wrong,” he said at that time.

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Many hospitals are hiring and contracting with doctors to boost referrals and serve members in their coordinated-care networks. But how to pay those doctors has become a legally perilous area under the federal Stark and anti-kickback laws and the False Claims Act, with whistle-blowers, their attorneys and the Justice Department watching these transactions closely. Halifax and other recent big-dollar whistle-blower cases involving allegations that hospitals violated Stark self-referral rules in paying physicians highlight the huge stakes for hospitals, which are at risk for triple damages under the False Claims Act. Those damages are based on total billings, making the potential damages in these cases enormous.

Last week's preliminary deal in the U.S. v. Halifax case is one of the largest settlements ever under the Stark law, the complex set of rules prohibiting payments that encourage unnecessary medical services and drive up federal healthcare costs. The hospital litigated the case all the way to jury selection before agreeing to pay $85 million—more than eight times Halifax's annual operating margin and nearly 18% of its $480 million annual revenue. The settlement could still fall apart, and a second phase of the same trial is already set for July.

That whopping settlement follows last year's $237 million verdict against Tuomey Healthcare System in Sumter, S.C., which was based on allegations that the system overpaid 19 physicians. And the Justice Department announced last year that it would intervene in a large case against Infirmary Health System, a safety net hospital in Mobile, Ala., that allegedly paid illegal productivity bonuses to doctors who ordered unneeded nuclear imaging testing on patients. In recent months, Justice intervened in and consolidated a series of eight False Claims Act cases, including several with Stark allegations, against Health Management Associates hospitals, which now are owned by Community Health Systems.

MH Takeaways

Some experts say it's not necessarily that the Justice Department has toughened its Stark enforcement, but rather that far more hospitals are signing integration contracts with physicians that raise potential Stark issues.
Some experts say it's not necessarily that the Justice Department has toughened its Stark enforcement, but rather that far more hospitals are signing integration contracts with physicians that raise potential Stark issues. In addition, there are more whistle-blowers and attorneys specializing in such cases looking for big paydays.

The tough part for hospital leaders is that these legal pressures are at odds with public policy and market forces pushing health systems toward greater integration to improve care coordination and reduce costs. The federal government hasn't reconciled its goal of encouraging integration with its desire to prove that it's tough on fraud and abuse. As a result, systems pursuing integration will need to be even more vigilant because they're stepping closer to the line where traditional Stark law enforcement might come into play.

“You have to be so careful about interactions between a provider and a referral source, because they are incredibly fraught with risk,” said Trevor Fetter, president and CEO of Tenet Healthcare Corp. Tenet has instituted major compliance reforms since its $900 million settlement of whistle-blower lawsuits in 2006, but has a pending whistle-blower case involving its relationship with a clinic providing Spanish-translation services for prenatal care. “There are conflicting goals out there.”

But an attorney who represents the American Hospital Association says Halifax and other cases show that Justice is pursuing Stark and False Claims Act cases more aggressively at a time when the government is under pressure to show it's taking strong action to curb waste and fraud in Medicare and Medicaid. “This is about DOJ not exercising the same restraint that it used to and pursuing close-call cases that ought to be resolved otherwise,” said Jonathan Diesenhaus, a Washington partner with Hogan Lovells and outside counsel to the AHA.

Whistle-blower attorneys counter by saying improper payment arrangements that drive unnecessary care are a legitimate target. “There are trade associations that will always say the False Claims Act penalties are draconian and the law is too strict,” said Marlan Wilbanks, the Atlanta-based attorney for whistle-blower Baklid-Kunz. “What they are missing is that it is the greatest fraud-fighting tool in the history of America.”

MH Strategies

How to protect against Stark whistle-blower lawsuits

Get advice from lawyers who are experts in the field.

Mind your exceptions

There are about two-dozen specific exceptions for buying patient referrals, including some that allow fair-market payments for staff doctors who refer patients.

Make sure you meet every condition of the Stark exception.

Hire an expert valuator

Make sure you are paying fair-market value for physician services. Relying solely on published salary lists for medical specialties is not enough.

Form a compliance department

Make sure compliance officials report directly to the board or the CEO, not the legal department.

Conduct exit interviews

Find out if employees are leaving because they don't like what they were asked to do.

Watch what you say

in e-mails

Have legitimate reasons for hiring doctors

If it's to fill gaps in coverage to better serve the community, that's fine. If it's to gain referrals, that could be a Stark violation.

Automate, track and update physician contracts

Have a formal system for investigating and resolving employee complaints


If a violation is documented, don't wait for a whistle-blower lawsuit. Medicare may accept repayment of funds. Or self-reporting can help speed up the resolution process and gain leniency.

Source: Modern Healthcare reporting
Between 2008 and 2012, the federal government recovered $9.4 billion in civil healthcare fraud cases under the False Claims Act, according to an analysis by Jack Meyer, managing principal with the consulting firm Health Management Associates. (The consultancy has no connection to the former hospital chain of the same name.)

A key issue in these cases is whether the hospitals paid physicians more than fair-market value as a way to induce them to steer more Medicare patients to the hospital. One of the more than two-dozen legal safe harbors for paying doctors under the Stark law is the “bona fide employment exception.” Hospital attorneys are struggling to figure out how to make sure their institution's financial arrangements with doctors meet the criteria for this exception.

But it may not be enough to vet these physician deals ahead of time with hospital attorneys, which both Halifax and Tuomey say they did. For many hospital leaders, the biggest take-home lesson from these cases may be to listen closely to whistle-blowers when they first raise concerns, and take appropriate action promptly.

“The first thing is you want to encourage your employees if they feel anything is inappropriate to report it to you,” said Fetter, whose company self-disclosed a case to the government based on an e-mail he received from an employee. Tenet ended up paying a sizable settlement.

Baklid-Kunz's key allegation against Halifax Health is that the hospital overpaid specialty doctors to deliver unnecessary care to thousands of patients. Halifax administrators deny those allegations, saying the care was appropriate and officials had every reason to believe the physician payments were reasonable.

The first trial was supposed to deal primarily with the physician compensation issues. The Justice Department joined that fight against Halifax three years ago, saying Baklid-Kunz had presented clear evidence that the hospital's long-time leaders illegally overpaid neurologists and oncologists nearly 27,000 times between 2001 and 2011. A second trial against Halifax slated for this summer will address Baklid-Kunz's allegations of unnecessary inpatient care and inadequate documentation of medical necessity.

Civil War origins

Both cases are based on the False Claims Act, a Civil War-era law that makes it a civil violation to overbill government programs. The key to the law's effectiveness, proponents say, is that it empowers whistle-blowers to step forward with nonpublic information and file cases to recover misspending on the government's behalf. The law allows penalties of up to $11,000 per Medicare claim, in addition to triple damages, if the conduct is found intentional or arising from reckless disregard for the law. In hospital cases, the False Claims Act typically comes to bear when a whistle-blower can show the hospital broke another Medicare rule.

There is a powerful financial incentive for whistle-blowers to step forward, and a number of mid- to high-level hospital officials like Baklid-Kunz have done so. They can take up to 25% of the amounts reclaimed if the government intervenes in the case, or up to 30% if the government declines to intervene, as it did in the second Halifax case.

In U.S. v. Halifax, the alleged payment violation involves Stark—a law of such daunting complexity that its author, former California Democratic Rep. Pete Stark, has publicly called for its repeal. Federal officials have published, and regularly update, about two-dozen exceptions to the Stark law. One key exception, at issue in both the Halifax and Tuomey cases, is the “bona fide employment” exception. Under that rule, money paid to doctors is not considered compensation subject to the Stark law as long as the doctors receive no more than fair-market value for the services and the payments don't vary with the volume or value of the services done at the hospital.

At Halifax, the oncologists received incentive bonuses. They were allowed to split 15% of the hospital oncology department's operating margin, apportioned to each doctor based on who did the most work. Hospital officials knew this pay would vary with volume. But they argued in court records that the language of the bona fide employment exception is itself subject to an exception that says productivity bonuses are not considered compensation if they pay only for services personally performed by the doctor.

But U.S. District Judge Gregory Presnell in Orlando issued a summary judgment last November that Halifax's incentive bonus did not fall within the bona fide employment exception. That each oncologist “could increase his or her share of the bonus pool by personally performing more services cannot alter the fact that the size of the pool (and thus the size of each oncologist's bonus) could be increased by making more referrals,” he wrote.

The ruling came as a surprise because Halifax executives said the pay arrangement was vetted by their own lawyers as well as by outside counsel at McDermott Will & Emery. In a Jan. 24 statement of the case, Justice Department lawyers wrote that the review by McDermott Will & Emery found only “a reasonable argument” that the contract was legal.

The Halifax case may never have reached this point if executives there had listened to what whistle-blower Baklid-Kunz said were her warnings to them in 2008. HHS' inspector general's office has repeatedly urged hospitals to establish internal compliance programs and take prompt corrective action when concerns arise.

But Baklid-Kunz said that was not the culture at Halifax at the time. “I was always told that Halifax was not liable under (the False Claims Act) because we were a tax-supported hospital,” she said in an interview.

Whatever the roots of the Halifax problems, some hospital leaders say most False Claims Act cases result not from bad intent, but from sloppy practices. The Halifax case should serve as a wake-up call because it could happen to any hospital organization.

“There but for the grace of God could go anybody,” said Keith Pitts, Tenet's vice chairman.

Follow Joe Carlson on Twitter: @MHJCarlson

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