The Erlanger Health System Stark law case is in active litigation, and the compliance implications for physician groups, health systems and ASCs are significant.
Here is where things stand and why it matters.
The background
Chattanooga, Tenn.-based Erlanger Health System is defending against two related False Claims Act lawsuits. The first was a whistleblower complaint filed in 2021 by former CFO J. Britton Tabor and former Chief Compliance Officer Alana Sullivan, who were let go in 2019 and 2021 respectively. The second was filed by the Department of Justice in July 2024 after the government intervened in the whistleblower case.
The lawsuits allege that Erlanger offered unlawful kickbacks and excessive compensation to employed and non-employed physicians who referred patients to the system, in violation of both the Stark law and the Anti-Kickback Statute. The government’s complaint alleges the violations resulted in false claims submitted to Medicare from 2014 through at least 2021.
The alleged scheme had a specific origin. Beginning in 2013, Erlanger allegedly implemented a strategy to increase profits by employing more physicians, particularly specialists from competing hospitals whose patients would need costly hospital stays. Once hired, physicians were expected to treat patients at Erlanger’s facilities and refer them to other providers within the system. According to the Department of Justice’s complaint, the system structured compensation around downstream referral value rather than the fair market value of physicians’ personally performed services.
This is not the first time Erlanger has faced these allegations. Erlanger previously paid $40 million in 2010 to settle similar Stark law allegations. The government’s current complaint also alleges the system dismantled or sidelined compliance controls put in place after a prior 2005 settlement involving similar allegations, including eliminating the chief compliance officer role in 2019.
Where the case stands now
A federal judge denied Erlanger’s motion to dismiss the government’s complaint Feb. 27. The court also denied the whistleblower lawsuit’s dismissal motion March 9. Both cases will now move into discovery.
The government’s 10 representative examples of false claims, naming six physicians, were sufficient to support the broader scheme alleged in the complaint. The government may now seek discovery pertaining to all physician employment agreements for which claims were submitted to Medicare during the relevant time period. Given the hundreds of physicians employed by Erlanger, the potential exposure could far exceed the $27.8 million paid by Medicare for the six sample physicians identified in the complaint, before civil monetary penalties or treble damages under the False Claims Act.
Total alleged taxpayer losses will not be known until discovery is complete, but potential damages and penalties under the False Claims Act could exceed $100 million.
Erlanger has maintained throughout that it paid physicians based on fair market value opinions from outside consultants and did not pay for referrals. The system said in a statement the allegations are without merit and it will “vigorously defend its practices in the months ahead.”
Why the outside consultant defense is no longer sufficient
The Erlanger case is one of the clearest signals yet that having a fair market value opinion from a third-party consultant does not guarantee protection from Stark law liability. The Justice Department has not disputed that Erlanger used outside experts. It has argued that the compensation was structured around downstream referral revenue, regardless of what those opinions said.
Physician compensation arrangements that appear commercially aggressive or that are justified by downstream referral revenue can attract government scrutiny under federal fraud and abuse laws, even when the compensation appears to fall within a range certified by a consultant, according to healthcare attorney Daniel Frier of Frier Levitt, who analyzed the case for Report on Medicare Compliance.
According to a March 10 news release shared with Becker’s by whistleblower attorney Marlan Wilbanks, the whistleblowers and Justice Department will now work in tandem to litigate the cases. While total alleged taxpayer losses will not be known until discovery is complete, the release said potential damages and penalties under the False Claims Act could exceed $100 million.
The Erlanger case is not an outlier. The Justice Department has now alleged downstream revenue-based physician compensation structures at Community Health Network, which settled for $480 million, and Steward Health Care. The pattern across cases suggests the practice is common enough that federal prosecutors have made it a sustained enforcement priority, even if no survey data quantifies how many systems currently use it.
What physicians and ASC operators should be watching
The case is significant on several levels beyond Erlanger itself.
The HHS Office of the Inspector General made it clear that fair market value documentation alone is insufficient in an April 23 update to its fraud and abuse FAQs. The agency stated that the better practice is to pair fair market value with documentation of a legitimate business purpose that would withstand scrutiny absent any referrals, which is a standard the Erlanger complaint suggests the system did not meet.
On discovery scope, Frier Levitt noted in its analysis of the ruling that the government may now seek discovery on all physician employment agreements for which Medicare claims were submitted during the relevant period, meaning potential exposure could far exceed the $27.8 million attributed to the six sample physicians in the complaint, before treble damages.
On the broader pattern, a blog post from law firm Davis, Wright and Tremaine said that the Erlanger case is part of a wave of Stark law FCA lawsuits targeting hospital compensation practices through either an alleged lack of sufficient fair market value safeguards or a calculated plan to capture referrals through excessive pay. For ASCs with hospital joint venture partners or co-management agreements, that enforcement pattern is directly relevant to any arrangement where physician compensation could be tied, even indirectly, to referral volume.
As of publication, the case has no resolution timeline and no trial date has been set.
At the Becker’s 32nd Annual Meeting: The Business and Operations of ASCs, taking place October 29-31 in Chicago, ASC leaders, surgeons and healthcare executives will explore strategies to drive growth, enhance operational performance, navigate reimbursement challenges and prepare for the future of ambulatory surgery. Apply for complimentary registration now.