On September 15, 2015, the U.S. Department of Justice (DOJ) announced the settlement of a qui tam action in the amount of $69.5 million with North Broward Hospital District (NBHD). The amount is a small fraction of the $442 million in treble damages to the Medicare and Medicaid programs alleged in the Third Amended Complaint. The settlement resolves allegations that NBHD violated the False Claims Act and the Stark Law by engaging in improper financial relationships with referring physicians. This settlement is an example of a troubling trend in which the DOJ imposes its views of the fair market value (FMV) and commercial reasonableness of employment compensation arrangements upon hospitals and providers. As the DOJ continues to successfully challenge physician compensation by analyzing the monetary impact of such compensation on hospitals’ profits and losses, hospitals are increasingly hamstrung in their ability to rely on FMV opinions to set physician compensation.

NBHD is a special taxing district of the state of Florida that operates hospitals and other health care facilities in the Broward County, Florida region. NBHD was named in a whistleblower suit originally filed in 2010 by Dr. Reilly, an orthopedic surgeon who held staff privileges to practice medicine at Imperial Point Medical Center, a hospital within the NBHD system. The Third Amended Complaint alleged that nine employed cardiologists and orthopedic surgeons were provided compensation packages in excess of FMV, in a system that illegally compensates physicians for the volume or value of their referrals to NBHD. It alleged that from 2004 to present, the overcompensation of the orthopedic surgeons generated net operating losses of over $40 million – an amount offset by referral profits monitored by NBHD in purported “secretive Contribution Margin Reports.”

As in previous cases involving False Claims Act allegations premised on Stark Law violations, the contentions that the cardiologists and orthopedic surgeons were overcompensated relied chiefly upon comparisons of their compensation to national statistics on physician salaries. For example, the Third Amended Complaint states: “In 2009, Broward Health paid [a named physician] nearly $500,000 over the national 90th percentile for [compensation paid to] sports medicine orthopedic surgeons.” However, national data alone, absent information on regional variance, does not provide an informed basis upon which to determine the reasonableness of compensation.

Monetary penalties such as that agreed to by NBHD highlight the need for providers to carefully examine existing physician compensation arrangements for compliance with federal law. As this settlement suggests, compensation packages in excess of the top percentiles that result in significant net operating losses absent considerations of referral profits may raise red flags for the government.

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