Stark Law-Based FCA Lawsuits Multiply: Relators Targeting Physician Compensation

Community Health Network Inc. (CHN) in Indiana, University of Pittsburgh Medical Center (UPMC) in Pennsylvania, Erlanger Health System (Erlanger) in Tennessee, and Steward Health Care System (Steward) in Massachusetts appear to be part of a disturbing trend. Over the past year, these health systems have been defendants in Stark Law-based False Claims Act (FCA) lawsuits, whose allegations focus on above fair market value (FMV) compensation to referring physicians.

In three of the lawsuits, former corporate executives were the relators—in the fourth, a physician employee. CHN paid $345 million to settle the Medicare side of the FCA case with the federal government. UPMC paid $38 million to settle Stark allegations in a case where the federal government declined to intervene. The claims against Erlanger were unsealed in late May, and the government announced its intention to intervene. The allegations suggest that Erlanger's exposure may exceed $60 million. The complaint filed against Steward in December 2023 alleges that Steward's chief of cardiac surgery was paid incentives for directing cases to Steward facilities, resulting in tens of millions of dollars in reimbursement.

Each of these FCA lawsuits has its own set of facts and unique allegations. However, they share a focus on hospital compensation practices, highlighting either an alleged lack of sufficient safeguards to ensure that physicians are paid within the range of FMV or a calculated plan to capture and retain referrals through excessive compensation. While the allegations are just that, the complaints paint a picture of hospitals willing to press the limits to ensure the growth of lucrative service lines.

The Stark Law, which prohibits physician referrals to entities with which they have a financial relationship unless an exception applies, is notoriously complex and poses ongoing compliance challenges for everyone in the healthcare industry. More than 20 years ago, the courts confirmed that Stark Law violations can be the basis for FCA claims. At that time, in part because of the technical nature of the Stark Law and its lack of an intent element, there were doomsday predictions that Stark Law-based FCA lawsuits would be the ruin of many hospitals. Doomsday didn't arrive immediately, but it may now be on the horizon. The CHN, UPMC, Erlanger, and Steward lawsuits suggest that the use of Stark allegations in FCA litigation is on the rise. This trend suggests that hospital systems would be well advised to reassess the level of risk arising out of their physician compensation practices.

Community Health Network Inc. (CHN)

The CHN case stands as a landmark in Stark Law enforcement, resulting in one of the largest FCA settlements to date. CHN, based in Indiana, agreed to pay $345 million to resolve allegations that it provided excessive compensation to specialist physicians in violation of the Stark Law. The case was initially brought by the health system's former chief financial and chief operating officer. The Department of Justice (DOJ) elected to intervene in the case.

According to the government's complaint, beginning in 2008 and 2009, CHN allegedly engaged in a scheme to recruit cardiologists, cardiothoracic surgeons, vascular surgeons, neurosurgeons and breast surgeons by offering them significantly higher salaries than they received in private practice – sometimes as much as double what they were earning – for the purpose of capturing the specialists' lucrative "downstream referrals." The inflated salaries allegedly included incentive bonuses tied to referral targets. While the health system engaged a valuation firm to assess its compensation practices, it was accused of furnishing false data to obtain a favorable opinion and otherwise ignoring the firm's warnings about overcompensating physicians.

The DOJ announced the $345 million settlement on December 19, 2023. The settlement includes a five-year Corporate Integrity Agreement with the Department of Health and Human Services Office of Inspector General (HHS-OIG).

University of Pittsburgh Medical Center (UPMC)

In May 2024, UPMC settled a Stark Law-based FCA lawsuit for $38 million, despite the DOJ's decision not to intervene. This case is notable as one of the largest FCA settlements where the government declined to take over the relators' claims.[1] The 2024 settlement ended over a decade of litigation.

The relators, including a neurosurgeon and two other UPMC clinicians, initially filed suit in 2012, alleging that UPMC incentivized its neurosurgeons to perform unnecessary and overly complex procedures at UPMC facilities by providing base pay and productivity bonuses far in excess of FMV. The excessive compensation was allegedly tied to the volume or value of referrals within UPMC's system, in direct violation of the Stark Law.

Erlanger Health System

The Erlanger case, currently ongoing, involves allegations that the Tennessee-based health system violated both the Stark Law and the Anti-Kickback Statute (AKS) by paying physicians above FMV for referrals. The DOJ has partially intervened in this case, indicating the severity of the allegations, with potential liabilities exceeding $60 million.

Two executives, the former chief compliance officer and former chief financial officer, allege that as early as 2013, Erlanger engaged in a scheme to pay excessive compensation to both employed and non-employed physicians to secure their referrals, compromising patient safety and care quality.

The lawsuit alleges that Erlanger made compensation decisions based on financial metrics that tracked physicians' expected referral patterns and their overall impact on the health system's financial performance. Additionally, it claims that Erlanger paid outside physician groups above FMV, including through sham directorships, to induce referrals. Erlanger allegedly ignored internal compliance concerns raised about these practices.

Steward Health Care

In December 2023, the government intervened in a case against Steward Health Care System, Steward Medical Group, and a Steward hospital facility in Boston. The complaint alleges that the hospital paid nearly $5 million in incentive compensation to the chief of cardiac surgery—an employee of Steward Medical Group—for increasing the number of surgical cardiovascular cases performed at the hospital. The complaint alleges that the arrangement resulted in the hospital's submission of more than 1,000 claims to Medicare in violation of the Stark Law, resulting in tens of millions of dollars in improper Medicare payments.

The relator in the case is the former chief financial officer of the hospital who worked in that capacity for just 18 months. During his time as CFO, the relator states that he expressed concerns regarding the chief of cardiac surgery's incentive compensation, noting that it directly took into account the volume of cardiac cases referred to the hospital. The relator reports to have had discussions with hospital and medical group leadership about his concerns and the potential Stark Law issues.

The complaint ties the Stark Law issue to the False Claims Act by alleging that the Steward parties acted knowingly in submitting false claims to Medicare for surgeries that did not comply with Stark. Specifically, the government noted the disconnect between Steward's annual Stark Law trainings and numerous internal policies requiring that compensation arrangements not vary based on the volume or value of referrals, on the one hand, and the compensation arrangements with the chief of cardiac surgery that directly rewarded him based on the volume of referrals, on the other.

Conclusions and Implications

The CHN, UPMC, Erlanger, and Steward cases collectively underscore the heightened scrutiny of physician compensation practices and the potentially severe consequences of Stark Law violations. Healthcare providers now more than ever should take steps to ensure that compensation arrangements are fair, transparent, and not tied to referral volumes. While every hospital has different factors affecting its physician compensation arrangements, most could benefit by implementing these risk-mitigation measures:

• Consistent Valuation Processes: Ensure that physician compensation is consistently evaluated and documented as falling within the range of FMV, using credible valuation data. The opinions of experienced independent valuation firms should be secured when circumstances merit.
• Effective Compliance Programs: The effectiveness of compliance programs is a recurring theme in Stark Law-based FCA cases. It is not enough for organizations to have a compliance binder on the shelf; the Compliance Program should be integrated into operations through measures such as compensation policies, training, audits, and evaluations.
• Take Whistleblowers Seriously: Healthcare organizations should foster a culture of transparency, encouraging employees to report potential compliance issues without fear of retaliation. Implementing strong whistleblower protection policies can help organizations address problems internally before they escalate.
• Legal Guidance: Seek legal guidance to navigate the complexities of Stark Law and ensure that compensation metrics and related terms comply with regulatory requirements.

These measures can help healthcare organizations mitigate legal risks and maintain the integrity of their operations in an increasingly regulated environment.