Mid-Atlantic Health Law TOPICS

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Stark Warning for Hospital Employed Physicians

In its recent decision in U.S. ex rel Drakeford v. Toumey Healthcare System, the federal appellate court with jurisdiction for Maryland and several other states, announced an aggressive interpretation of the Social Security Act's physician self-referral prohibition, better known as Stark, in regard to hospital employed physicians.

A. The Law

Among other things, Stark prohibits Medicare from paying for any item or service provided by a hospital to a patient who was referred to the hospital by a physician with a prohibited "compensation relationship" with the hospital. A hospital-physician employment relationship is not generally a prohibited compensation relationship, but only so long as, among other conditions, the physician's compensation is set at fair market value and not tied to the volume or value of referrals between the parties.

If a provider knowingly bills Medicare for an item or service that Stark makes unpayable, the federal government may, among other things, sue the provider for up to three times the amount of the bill, under the federal anti-fraud law known as the False Claims Act.

B. The Facts

The Toumey case arose when South Carolina's Toumey Hospital entered into employment agreements with the physician members of a local gastroenterology group, after the group indicated it intended to withdraw its ambulatory surgery cases from the hospital.

In the agreements, the physicians promised to perform all their surgical procedures at Toumey Hospital as hospital employees, and to assign to the hospital the right to bill and collect all professional fees associated with the procedures. In exchange, the hospital agreed to pay the physicians compensation comprised of a salary, a percentage of net professional fee collections, and an incentive bonus based on net professional fee collections.

C. The Decision

In light of these facts, the court ruled that Toumey Hospital may have violated the False Claims Act when it billed Medicare for procedures referred to the hospital by the employed physicians. The court reasoned that when a hospital requires its employee physicians to refer patients to the hospital exclusively, there is a risk that even compensation at a rate set in advance may take into account anticipated referrals in violation of Stark, i.e., the exclusivity can be paid for by setting the fixed rate of compensation above fair market value.

The court left to a jury the question of whether the hospital actually overpaid the physicians for their services in this particular case.


September 23, 2012




Rosen, Barry F.


Health Care