Healthcare valuation professionals must navigate a complex regulatory scheme to avoid violations of the anti-kickback statute and the Stark Law. Both seek to prevent kickback payments to physicians based on the volume and value of their referrals. A valuator must demonstrate a thorough understanding of critical statutory terms such as “remuneration,” “financial relationships,” and “fair market value” when assessing a physician compensation arrangement. Missteps may be costly, as one hospital just found out.
The case began as a whistle-blower action when an orthopedic surgeon claimed the hospital’s “unusual” part-time employment of 19 surgeons violated the Stark Law because compensation depended on the volume and value of referrals. The hospital contended it had legal and fair market value (FMV) opinions that proved the appropriateness of the arrangements.
Retrial leaves courtroom speechless. In March 2010, a federal jury found the hospital liable and awarded $44.9 million in damages to the government. In March 2012, the Court of Appeals reversed on other grounds and remanded. On retrial, the government presented an expert to show that the physicians received total compensation that exceeded the physicians' collections for services personally performed pursuant to the agreements. It argued that the excess compensation was to ensure that the physicians would continue to get referral fees for the clinical procedures. The jury agreed and assessed damages related to Stark Law violations in excess of $39 million.
Because the jury also found the hospital violated the False Claims Act (FCA), there will be additional monetary penalties, to be determined later. Under the FCA, the federal government can recover from $5,500 up to $11,000 per false claim and up to three times the monetary value of those claims.
According to a local report, a “visceral silence” fell over the courtroom when the verdict was read and the hospital’s CEO appeared “physically shaken.” In his closing argument, the defense lawyer said a verdict against the hospital would "annihilate" the organization. According to reports, total potential penalties could exceed $350 million. The hospital’s IRS Form 990 for 2011 showed net assets of $124 million.
The case is U.S. ex rel. Drakeford v. Tuomey Healthcare Systems, Inc., C/A No. 3:05-2858-MBS.(D. S.C.). Tuomey is a nonprofit, single hospital system based in South Carolina. More coverage on this landmark case will appear in future issues of BVWire as well as the BV Update.
Regulatory matters, including the Stark Law, and how they impact healthcare compensation valuation are fully examined in the BVR/AHLA Guide to Healthcare Industry Compensation and Valuation.