California Hospital to Pay More Than $3.2 Million to Settle Allegations That It Violated the Physician Self-Referral Law Following Self-Reporting in 2011

Hospitals walk a narrow path when they contract with doctors to run departments, fill on-call panels and serve on committees. A federal anti-kickback statute prohibits exchanging anything of value for the referral of Medicare or Medicaid (called Medi-Cal in California) patients. 

Another set of complicated rules, often called the Stark law, bans doctors from referring federally insured patients to facilities where they have financial relationships. Yet another law, the False Claims Act, subjects hospitals to treble damages if they bill the government fraudulently.

A recent case shows how a hospital decides to bite the bullet, self report when new administration takes over, and avoid risk of whistleblower action. While ultimately there will be payment of a high financial fine, the benefit of final resolution is important.  

On January 15, 2016, Tri-City Medical Center, a hospital located in Oceanside, California, agreed to pay $3,278,464 to resolve allegations that it violated the Stark Law and the False Claims Act by maintaining financial arrangements (on-call agreements mainly) with community-based physicians and physician groups that violated the Medicare program’s prohibition on financial relationships between hospitals and referring physicians. 

The contracting lapses that led to Tri-City’s settlement do not involve patient steering, financial conflicts of interest or false claims. However, rates found in five of the nearly 100 documents, when taken in the aggregate, may have been above fair market value, according to a 2012 self-disclosure report the hospital filed with the Office of Inspector General.

Tri-City voluntarily disclosed the contracts to the federal government in 2011 and had been negotiating a settlement ever since. At issue were 97 physician contracts that were missing, unsigned, expired or otherwise not compliant with federal health laws.

The fine, one of the largest ever against a hospital in San Diego County, comes at a critical moment for Tri-City. In October, the hospital became affiliated with UC San Diego Medical Center in an effort to expand specialties such as neurology, cardiology and gynecologic oncology. 

The settlement resolves allegations that Tri-City Medical Center maintained 97 financial arrangements with physicians and physician groups that did not comply with the Stark Law.  The hospital identified five arrangements with its former chief of staff from 2008 until 2011 that, in the aggregate, appeared not to be commercially reasonable or for fair market value.  The hospital also identified 92 financial arrangements with community-based physicians and practice groups that did not satisfy an exception to the Stark Law from 2009 until 2010 because, among other things, the written agreements were expired, missing signatures or could not be located. Although the doctors’ names appear in Tri-City’s settlement agreement with the government, DHHS' position is that the M.D.s are not being scrutinized.

Tri-City’s internal investigation and the OIG’s settlement document specifically call out five contracts, all made with Dr. Juan Deza, former chief of the hospital’s medical executive committee. According to hospital documents, those contracts were flagged because, in the aggregate, they appeared to pay rates above market value and may not have been “commercially reasonable,” according to the settlement agreement. Dr.

Deza, who now has privileges to practice with Sharp HealthCare in San Diego, received nearly $190,000 in fiscal 2010 for various contracted services.

The total included $32,400 for emergency department call coverage, $70,000 to serve as chief of the medical staff, $25,025 to direct the hospital’s critical care department and $45,000 to run the hospital’s primary care physician call panel. In addition, Dr. Deza’s business, Dekro Medical Corporation, had a contract to supply Tri-City with on-call primary care doctors for patients who arrived at Tri-City with no established physician on file. That arrangement likely netted the doctor between $191,625 and $317,550 in 2010, the 2012 investigation report said.

The OIG self-disclosure report painted a picture of doctor contracting in disarray at Tri-City. The hospital then took steps to cease paying physicians unless a signed contract was in place. An electronic records-tracking program to make complying with contracting rules less cumbersome was installed. For the most part, the hospital had new contracts in place by the time the hospital first reported the problems to the federal government in 2011.

The Stark Law generally forbids a hospital from billing Medicare for certain services referred by physicians who have a financial relationship with the hospital unless that relationship falls within an enumerated exception.  The exceptions generally require, among other things, that the financial arrangements do not exceed fair market value, do not take into account the volume or value of any referrals and are commercially reasonable.  In addition, arrangements with physicians who are not hospital employees must be set out in writing and satisfy a number of other requirements.

Attorney Commentary: It is advisable that hospitals be very careful in structuring on-call payments for physicians to provide coverage to the hospital's emergency department.  It is recommended that the payments be determined in advance based upon a methodology that is grounded in a genuine fair market analysis.  Furthermore, the hospitals need to be aware that these on-call arrangements should be made available to all physicians on the medical staff and that they should not "cherry pick" certain physicians to participate.  Furthermore, the cost of the on-call funding should not be added to the hospital's Medicare Cost Report. OIG opinion letter suggests that the following protections will help ensure that there is a low risk of fraud:

1.      The requester certified that the per diem payments were based upon an independent valuation.

2.      The requester/hospital allocates the funds for call coverage for each participating specialty and calculates the per diem annually, in advance, based on the methodology created by the hospital.

3.      The participating physicians provide actual and necessary services for which they are not otherwise compensated.

4.      The hospital offers the opportunity to participate in the arrangement to all specialists on its staff who are required by its bylaws to take unrestricted call.

5.      The arrangement was structured so that the hospital incurred expenses do not accrue to the federal healthcare programs and are not included on its Medicare Cost Reports.

This is just a starting point for analysis of the on-call arrangements. 

Posted by Tracy Green, Esq.
Work: 213-233-2260