The recent decision in United States ex. rel. Drakeford v. Tuomey Healthcare Sys. Inc., No. 10-1819 (4th Cir. Mar. 30, 2012) provides a sobering reminder that hospital-physician contracts should be drafted carefully in order to avoid containing any provisions that could inadvertently result in Stark law liability.

Subject to certain limited exceptions, the federal Stark Law prohibits a physician from referring Medicare patients for the furnishing of designated health services to an entity with which the physician or a member of the physician’s immediate family has a financial relationship.

On March 30, 2012, for procedural reasons, the United States Court of Appeals for the Fourth Circuit in Tuomey vacated a $44.9 million judgment against a hospital for Stark law violations and remanded the case to federal district court.

Physician Employment Agreements

In Tuomey, a hospital entered into employment agreements with certain specialist physicians which provided that the physicians had to perform their outpatient procedures either at the hospital itself or at a facility owned by the hospital.  Under the contracts, each physician was required to assign all amounts payable to him or her to the hospital and the hospital would then be responsible for the billing and collecting of the due amounts.  The hospital’s billing included both the fee for the physician’s services as well as a “facility fee” for the use of the hospital’s facilities.  Although each physician was paid a base salary, the salary would vary depending on the hospital’s collections for the outpatient services.  In addition to the base salary, each physician would also receive a productivity bonus equal to 80% of the net collections and an incentive bonus.

While the court’s opinion addresses primarily certain procedural issues, the court provided guidance on two Stark law issues raised in the Tuomey case. The first issue was whether the “facility fee” constituted the type of “referral” prohibited under the Stark law, even though the physicians were personally performing the hospital services which were billed for under the contract.  The second issue was whether the compensation arrangements varied or took into account the volume or value of referrals or other business generated by the referring physician, which also are violations of the Stark law.

Facility Fee as Impermissible Referral

With respect to the first issue, the Circuit Court found that the facility fee did constitute an illegal referral under the Stark law.  In issuing its guidance, the Court relied on commentary from the Health Care Financing Administration (now the Centers for Medicare and Medicaid Services) on referrals which states that “when a physician initiates a designated health service and personally performs it him or herself, that action would not constitute a referral of the service to an entity . . . However, in the context of inpatient and outpatient hospital services, there would still be a referral of any hospital service, technical component, or facility fee billed by the hospital in connection with the personally performed service.” As a result, the Court concluded that claims for “facility fees based on patient referrals are prohibited under the Stark law if there was a financial relationship within the meaning of the law between the physicians and the hospital.”

Use of Anticipated Referrals also a Problem

With respect to the second issue, the court stated that compensation arrangements that take into account “anticipated referrals” implicate the volume or value standard under the Stark law. In support of its conclusion, the court reviewed agency commentary and the definition of “fair market value,” which is defined in the Stark law, in part, as compensation that “has not been determined in any manner that takes into account the volume or value of anticipated or actual referrals.” Thus, the court concluded that compensation based on the volume or value of anticipated referrals did implicate the volume or value standard.