Whistle-blower worries: Hospitals likely to see more False Claims suits tied to doctor compensation

Dr. Michael Reilly's lawyer gave his client strong advice after reviewing a lucrative employment contract that the North Broward Hospital District offered him 15 years ago.

“I should throw this in the trash,” Reilly, a now-retired orthopedic surgeon, recalls the attorney telling him.

The contract, the lawyer said, had major problems, including that it violated the federal Stark law, which bars physicians from referring Medicare patients to hospitals, labs and other doctors that the physicians have financial relationships with unless they fall under certain circumstances.

Reilly didn't sign the contract.

That moment marked the beginning of Reilly's quest to hold North Broward Hospital District—a taxing district that operates five hospitals in Broward County in South Florida—accountable for alleged violations of the law. Reilly later filed a whistle-blower lawsuit against North Broward under the False Claims Act. In September, North Broward and the government settled the case for $69.5 million, with Reilly getting $12 million. North Broward did not admit to any wrongdoing. It declined to comment for this article.

Both plaintiff and defense attorneys predict that more False Claims Act cases alleging Stark violations are on the way, with whistle-blowers largely driving the U.S. Justice Department's enforcement—exponentially multiplying the government's regulatory eyes inside healthcare facilities. That's partly because two giant cases, involving Tuomey Healthcare System and Halifax Health, alerted potential whistle-blowers inside hospitals to the riches they could pocket by bringing such cases, some attorneys say.

In October, Tuomey in Sumter, S.C., agreed to settle with the government for $72.4 million, resolving allegations that it paid doctors in ways that rewarded them for referring patients to the hospital. Last year, Halifax in Daytona Beach, Fla., agreed to pay $85 million to settle allegations that it also had compensated physicians in illegal ways. Halifax did not admit to any wrongdoing. The whistle-blower in the Tuomey case got $18.1 million, while the whistle-blower in the Halifax case bagged $20.8 million.

In addition, in September, Florida-based Adventist Health System settled a similar case for $118.7 million, setting a record for the largest settlement reached without litigation under the Stark law. The whistle-blower awards have not yet been determined.

“Tuomey and Halifax were probably the ones that kicked off this most recent sort of spike,” said J.D. Thomas, a partner at Waller Lansden Dortch & Davis who usually represents providers. “While I think (potential whistle-blowers) were aware of Stark, I don't think they appreciated how much potential recovery there would be.”

In the past, Stark cases weren't brought to court as frequently under the False Claims Act. Historically, Stark violations were simply treated as overpayments to be refunded, and the government didn't spend much time on enforcement, said Judy Waltz, a partner at Foley and Lardner who usually represents healthcare providers.

That has changed in recent years for a number of reasons. For one thing, defense attorneys say that as hospitals increasingly employ physicians, they're more often getting tangled in the Stark law's complex and confusing requirements. Under the False Claims Act, damages are tripled and whistle-blowers are entitled to a percentage of whatever the government can recover.

More cases also might be surfacing partly because of a change in federal law several years ago, said Karl Thallner, a partner with Reed Smith who usually represents providers. In 2009, Congress passed the Fraud Enforcement and Recovery Act, which tweaked the False Claims Act to also apply to organizations that avoid their obligation to repay the government, such as for money received because of Stark violations, Thallner said.

That 2009 change to the law “really made it abundantly clear” that the False Claims Act could be a viable vehicle for bringing Stark violations to court, if it wasn't totally clear already, Thallner said.

Among the most significant drivers in the increasing frequency of such cases are hospitals' compensation arrangements with physicians. All three of the big recent settlements—Tuomey, Adventist and North Broward—stemmed from allegations that hospitals paid physicians for the volume or value of their referrals.

In those cases, hospitals allegedly paid doctors above fair market value and in ways that were not commer-cially reasonable unless the value of the doctors' referrals was taken into consideration. Those actions violated the Stark law and in some cases the anti-kickback statute, the lawsuits alleged.

In the North Broward and Adventist cases, the whistle-blowers alleged the hospitals paid physicians so much that the hospitals seemed to sustain millions of dollars in losses for the physicians' practices. “That just doesn't make sense unless you're paying for the referrals, too,” said Tim McCormack, a partner at Constantine Cannon who represents whistle-blowers.

Such overpayments for physicians are common at hospitals throughout the country as they employ ever-growing numbers of doctors, McCormack said. In 2014, hospital-owned multispecialty groups lost a median of $193,316 per physician, according to a 2015 report from the Medical Group Management Association.

Overpaying physicians, McCormack said, can be legal and practical in some situations, such as when hospitals need certain medical specialties to serve their communities. But “when you're overpaying the fifth, eighth, 10th orthopedic surgeon or cardiologist who just so happened to generate a lot of revenue for the hospital, that doesn't really make a lot of sense,” he argued.

Bryan Vroon, an Atlanta attorney who represented Reilly in the North Broward case, also believes such arrangements are prevalent throughout the hospital industry. “In a very competitive environment within healthcare delivery, it's a financially lucrative strategy,” he said. But patients, he added, don't expect their physicians to be paid based on how many tests the physicians order for them. “It's just an inherent conflict.”

But hospital defense attorneys argue that whether a hospital loses money on physicians should not serve as the basis for alleging that it is paying for referrals. Thallner said hospitals can lose money on doctors for a number of legitimate reasons. For instance, overhead costs for hospital-owned physician practices may be higher than for independent practices, or the payer mix may include a higher percentage of Medicaid patients. “That kind of allegation, if it is determined to support a Stark violation, is pretty concerning because I think it's not uncommon for hospital-owned physician practices to lose money,” he said.

Defense attorneys also say that the Stark law is complicated and hospitals have difficulty staying on the safe side of its many rules. And the law imposes strict liability, meaning there's no need to demonstrate improper intent. “It's easy to mess up,” said Danielle Sloane, an attorney at Bass Berry & Sims who represents providers.

Even the federal appellate judge who wrote the decision for the three-judge panel in the Tuomey case criticized the Stark law as he ruled against Tuomey. “It seems as if, even for well-intentioned healthcare providers, the Stark law has become a booby trap rigged with strict liability and potentially ruinous exposure—especially when coupled with the False Claims Act,” wrote Judge Albert Diaz of the 4th U.S. Circuit Court of Appeals.

Whistle-blower attorneys argue back that the heart of the law is simple—don't pay physicians based on the value of their referrals. They say hospitals have been breaking the law to make money and beat the competition. Stark violations can lead to compromised quality of care for patients, they allege.

McCormack said it's ironic that providers and their attorneys complain about the law's complexity because that complexity grew out of federal efforts to make the law more flexible and accommodating for different provider arrangements.

Health systems “deal with incredibly complicated things all the time without a hitch. It's only in the area of honesty and integrity that it's just all too complicated,” said Patrick Burns, a co-executive director of the Taxpayers Against Fraud Education Fund, a not-for-profit supporting whistle-blower incentive programs.

The CMS recently finalized changes to the Stark law within the Medicare physician fee schedule for 2016. Those changes, however, are unlikely to affect cases against hospitals involving whether physicians were paid fair market value, Bass Berry & Sims' Sloane said. She and others believe such lawsuits will continue to roll in.

“When you have (so many) hospitals that employ doctors, and you've only had a handful of cases, what does that tell you?” asked Reilly, the Broward whistle-blower. “I think you'll start seeing more.”