Physician employers got two signals this year that seem to conflict. A federal appeals court said common pay practices aren’t evidence of fraud on their own. Six weeks earlier, HHS’ Office of Inspector General said a clean Stark law analysis doesn’t settle the question.
What the court said
On June 4, a unanimous Fourth Circuit panel upheld the dismissal of a False Claims Act suit against South Charleston, W.Va.-based Thomas Health System, its affiliated hospitals and its employed physician group. In the case, U.S. ex rel. Kyer v. Thomas Health System, a former nurse brought the suit as a whistleblower. She alleged the system’s physician pay broke the Stark law and the Anti-Kickback Statute.
The court rejected each of the theories:
- Work relative value unit-based pay. Pay tied to work relative value units, or wRVUs, rewards work the physician performs personally, and the Stark law excludes that from “referrals.” “Tracking referral volume and value is not the same as compensating physicians for their referrals,” the court wrote.
- High percentile pay. “Pay above the 90th percentile does not, by itself, support an inference of inducement,” the court wrote. By definition, 10% of physicians earn more than that.
- Hospital subsidies to the employed group. Transfers that covered the physician group’s losses were at least as consistent with lawful explanations, including the system’s provider-based billing model, as with kickbacks.
- A $5,000 marketing stipend. It was meant to bring patients to the physicians’ own practices, not send referrals to the hospitals.
The court also addressed a former executive’s remark about wanting to “own their referrals.” It called the comment suggestive but not enough, because it didn’t show that pay changed with referrals.
“The complaint must identify the fire,” Judge Julius Richardson wrote for the panel.
What OIG said
On April 23, OIG revised one FAQ and added another on its fraud and abuse guidance page. Together, they target two assumptions common in physician pay arrangements.
The first assumption is that Stark compliance means Anti-Kickback compliance. It doesn’t. OIG said a party “could be liable under the [Anti-Kickback Statute] even if the financial arrangement at issue satisfies the requirements of an exception” to the Stark law.he second is that paying fair market value protects an arrangement. The phrase “fair market value” doesn’t appear in the Anti-Kickback Statute itself. It is only one element of certain safe harbors. An arrangement paid at fair market value can still violate the statute.
What changes for physician employers
1. Productivity-only formulas are safer. Revenue-linked ones aren’t. The court separated wRVU pay from Tuomey, a 2015 Fourth Circuit case where a pay formula based on “collections” for personally performed services “tied physician pay directly to the hospital’s referral revenue,” because the collections pool “included the facility fees generated by the same procedures.”
“The wRVUs alleged here operate differently,” the court wrote. Formulas that pull in facility or ancillary revenue are still the high-risk design.
2. A high percentile alone won’t sink a deal. Pay far above the benchmark is different. The court contrasted the Third Circuit’s Bookwalter case, where compensation and work units were “multiples of the 90th percentile” with “year-over-year double-digit growth.”
3. Subsidies for money-losing groups are harder to attack when the reason is clear. The hospitals covered the physician group’s deficit after shifting to provider-based billing. The court said the transfers were “at least as consistent with lawful explanations” as with kickbacks, so the allegation fell short.
4. Kickback risk turns on intent. The Stark law is a strict liability statute, according to OIG. The Anti-Kickback Statute requires “knowing-and-willful intent that at least one purpose of the remuneration was to induce referrals,” the court noted.
5. A fair market value opinion is a starting point, not a shield. Erlanger Health System in Chattanooga, Tenn., faces a 2021 whistleblower suit and a July 2024 Justice Department suit alleging it paid physicians in violation of the Stark law. Erlanger said it paid physicians based on amounts that outside experts advised was fair market value. A federal judge still denied Erlanger’s motions to dismiss the Justice Department’s suit on Feb. 26 and the whistleblower suit on March 9.
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