Why Hospitals Buy Physician Practices: Facility Fees, Downstream Referrals and Physician Pay

Hospitals buy physician practices for the business the doctors bring with them: the imaging, tests and surgery they order, and, where payment rules permit, a facility fee on care once billed as an office visit. A practice can lose money on its own books and still bring profitable business to the hospital. The salary is on one set of accounts. The revenue it attracts is on another.

Facility Fees Change What the Same Visit Pays

Medicare pays a hospital facility fee and a reduced professional fee for care in a hospital outpatient department, while an independent physician’s office receives a single professional payment. That difference gives the hospital an interest in both where care happens and which provider bills for it.

Medicare’s provider-based rules let a purchased practice become part of the hospital for payment purposes and bill as a hospital outpatient department.

The D.C. Circuit’s 2020 opinion on outpatient payment described the historical incentive. In its 2017 comparison, hospital-affiliated outpatient departments received 68% to 114% more per patient for the same evaluation and management service than independent practices. The court described hospitals buying practices and converting them into off-campus departments with little change to the facilities or patients served.

Patients paid higher coinsurance for the same visit because a hospital owned the practice.

The Facility Fee Advantage Has Narrowed

A purchased practice’s Medicare payment depends on when the site began billing as part of the hospital and which services it provides.

The court’s account of the Bipartisan Budget Act of 2015 explains the dividing line: off-campus departments already billing before November 2, 2015 kept hospital outpatient payment eligibility, while new departments lost it.

In 2019, Medicare lowered clinic-visit payments at those grandfathered departments to the physician-office equivalent.

The 2026 outpatient payment rule extended site-neutral payment to drug administration at grandfathered off-campus departments, with an exemption for rural sole community hospitals. Those limits change what a hospital can expect to earn from a purchased practice.

Downstream Referrals Can Outweigh Practice Losses

Downstream referrals can bring a hospital revenue that never appears in the acquired practice’s own collections. Imaging, laboratory work, infusions, admissions and surgery generate hospital business beyond the physician’s professional fee.

That explains why a hospital salary can exceed what the physician’s own billings support. The practice’s accounts show the cost of employing the physician. Other departments collect the revenue from the care that follows. Looking only at the practice’s profit and loss leaves out the hospital’s reason for wanting the arrangement.

Tuomey illustrates the connection between physician collections, facility fees and anticipated referrals. The Fourth Circuit’s account describes a hospital trying to retain outpatient procedures that were moving into physicians’ offices and surgery centers. Tuomey used part-time employment contracts, with compensation tied to the physicians’ collections. The contracts also restricted physicians’ interests in competing surgery facilities and where they could perform outpatient surgery after the contracts ended. Each procedure brought money to the physician and a facility fee to the hospital.

The court said a jury could find that the pay reflected actual or anticipated referrals. The jury found that Tuomey knowingly submitted false Medicare claims. The same procedure generated both payments, which is why the physician’s own collections did not tell the whole story.

Physician Pay Puts a Price on the Referral Stream

In hospital kickbacks and physician compensation cases, the question is what the hospital paid for: the physician’s work, the referrals, or a compensation formula that mixed them together. Fair market value measures the pay against the work. Actual hours, services performed, bonus calculations and referral conditions give that comparison substance.

A referral forecast explains what the hospital hopes to earn. The salary or the purchase price shows what it was willing to pay to get it. These healthcare cases turn on the terms connecting those decisions.

Community Health Network’s Alleged False Valuation Inputs

Community Health Network agreed to pay $345 million in 2023 to settle allegations that it recruited physicians to capture downstream referrals through compensation arrangements that violated the Stark Law. According to the Justice Department’s settlement announcement, the Indiana system offered some specialists twice what they had earned in private practice.

Community Health Network allegedly supplied false compensation figures to its valuation firm to obtain a favorable opinion, then ignored repeated warnings about overpaying physicians.

The system’s former chief financial officer, who had also been its chief operating officer, brought the whistleblower case. The government later filed its own complaint over the compensation arrangements. It alleged that Community conditioned bonuses on physicians meeting minimum targets for referral revenue and knowingly billed Medicare for the resulting ineligible services.

The Purchase Price Can Buy Referrals, Too

Prime Healthcare allegedly overpaid for a cardiologist’s practice and surgery center to obtain referrals to Desert Valley Hospital. The Justice Department’s July 2021 settlement announcement also described an employment agreement allegedly based on the volume and value of the physician’s referrals.

In the government’s account, the purchase price and the employment agreement were two ways of paying for the same expected business.

The $37.5 million settlement with Prime and two physicians covered those allegations and separate billing allegations. A former Prime executive and two former hospital billing employees brought the two whistleblower cases. The government investigated and helped negotiate the settlement without joining the cases.

Hospital Specialist Pay and Actual Work Hours

Kalispell Regional Healthcare settled allegations that it paid excessive full-time compensation to more than 60 physician specialists, many of whom did part-time work. The Justice Department’s announcement identified the physician network’s former CFO as the whistleblower.

Broward Health shows the fair market value question without a complicated bonus formula. The hospital district settled allegations that it paid nine employed physicians more than their services were worth.

When a Physician Bonus Counts Referrals

A physician bonus can put the value of ordered services directly into the pay calculation. In Halifax Hospital‘s case, the government described oncology bonuses that included the value of prescription drugs and tests the physicians ordered and the hospital billed to Medicare. The Justice Department’s announcement reported that the court ruled the oncology contracts violated the Stark Law before the hospital settled.

Adventist Health System settled allegations that its physician bonus formula improperly counted the value of referrals to its hospitals. The evidence in that kind of arrangement is in the formula itself: which revenue enters the bonus, and whose orders generate it.

What an Insider Can See Behind the Valuation

The compensation figures sent to an appraiser, actual pay and valuation warnings can show an insider what a favorable opinion leaves out. Community’s alleged false inputs make that comparison concrete. Work hours and the terms of a purchase and employment agreement can explain what the hospital was paying for.

A study of Justice Department announcements about hospitals in the Journal of Forensic and Investigative Accounting explains why passing a deal through several departments can still leave the underlying arrangement unexamined: when the people involved collude, dividing duties among them stops working as a safeguard, which makes illegal referrals especially hard to prevent.

For referral schemes, the paper recommends comparing provider contracts with evidence that the services happened. Its examples include consulting deliverables, occupied rental space and documented bonus approvals. That is a useful distinction for the person who knows what happened after the paperwork was signed.

How the Financial Arrangement Reaches Medicare Claims

Hospital fraud can begin in the price paid for referrals and reach the government through the claims those referrals generate. The Anti-Kickback Statute addresses knowing and willful payments to induce or reward federal health care business. The Stark Law restricts Medicare referrals and billing where a physician has an improper financial relationship outside the law’s exceptions.

In these hospital billing cases, the contract and the compensation decisions can explain why the resulting claims should not have been paid. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know What Made the Deal Worth Doing

If you saw the referral forecast behind a practice purchase or the real compensation behind a favorable valuation, talk to our whistleblower experts about the deal. Your knowledge can explain why the hospital paid a price the physician’s work could not support. We help you build your strongest hospital whistleblower case, and we stay with you through it, bringing in whistleblower lawyers who know hospital referral deals.