Allegations that Community Health Network Paid Doctors Above Fair Market Value and Rewarded Physician Referrals Survives Motion to Dismiss

This month the U.S. District Court for the Southern District of Indiana denied Community Health Network’s (“Community”) motion to dismiss the United States’ complaint-in-intervention alleging that Community submitted false claims based on underlying violations of the Stark Law. United States ex rel. Fischer v. Community Health Network, Inc., No. 14-cv-1215 (S.D. Ind.).  The complaint alleged that Community violated the Stark Law through physician compensation that exceeds fair market value (“FMV”) and is based on the volume or value of referrals.  The opinion is notable in concluding that even physician compensation at the 90th percentile of rates paid in the market can plausibly allege a financial relationship that is not FMV and thus violates the Stark Law.

These allegations were first raised in a qui tam complaint filed in 2014 by Community’s former Chief Financial Officer.  After an investigation that lasted over five years, Indiana declined to intervene, but DOJ filed a complaint-in-intervention alleging that Community feared that patient referrals would be directed to Community’s competitors and in response, devised a hiring policy that aggressively offered high salaries and bonuses that took into account the volume or value of referrals, in violation of the Stark Law.

In its motion to dismiss, Community argued that the employment arrangements satisfied the bona fide employment exception under the Stark Law.  However, the government argued that the financial arrangements did not meet this exception because they (1) exceeded fair market value, (2) were determined in a manner that took into account the volume or value of referrals, and (3) were commercially unreasonable.  The court first noted that whether financial arrangements satisfy a Stark Law exception is an affirmative defense that the government need not anticipate or address in its complaint, and thus was not appropriately the subject of a motion to dismiss.  However, the court explained that even if the applicability of the bona fide employment exception was appropriately before it at this juncture, the government had plausibly pled that Community could not invoke its protection.  First, the court explained that the government pled that the arrangements were outside of FMV because Community’s FMV expert had opined that to be considered presumptively fair, salaries should be “below the 75th percentile of national benchmark salary data, or the compensation per productivity needed to be less than the 60th percentile.”  Yet Community compensated certain of its physicians at the 90th percentile or above.  In addition, “to induce a favorable opinion,” Community allegedly did not provide its FMV expert with complete and accurate information.  Furthermore, a second FMV expert allegedly informed Community that its physician compensation arrangements were “high compared to productivity in all specialties and primary care,” but Community did not decrease physician compensation in response.

Finally, the court rejected at the motion to dismiss stage Community’s argument that its alleged Stark Law violations were not material, as demonstrated by the government’s continued payment of Community’s claims since July 2014, when the relator filed his initial complaint.  However, the court acknowledged Escobar’s guidance that such continued payment is “strong evidence” of a lack of materiality and hinted that such arguments may succeed at a later stage of litigation.

This opinion highlights that structuring arrangements to fall at the upper end of a FMV range carries additional risk and any decision to do so should be carefully evaluated.  As always, the protection an FMV opinion provides is tied to the accuracy of the underlying data and companies must ensure that the third party conducting the FMV analysis has access to complete and accurate data.

A copy of the court’s opinion can be found here.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.