St. James Healthcare and Sisters of Charity: Higher Share Values and Lower Rent

The $3.85 million St. James Healthcare medical office joint venture settlement addressed alleged hospital physician noncash kickbacks built into a property deal. According to the Department of Justice, a payment to the venture made physicians’ shares more valuable while making their office space cheaper.

St. James Healthcare was the hospital in Butte, Montana. Its parent, Sisters of Charity of Leavenworth Health System, was based in Denver. The Department of Justice announced their settlement on December 31, 2013, after the organizations disclosed the arrangements themselves.

What the Joint Venture Gave Referring Physicians

The joint venture owned and operated a medical office building on the St. James campus. Physicians and physician groups held shares in it, and physicians rented space there.

The office rents were below fair market value, according to the government.

The government also alleged below-market ground rent for the land beneath the building.

Shared facilities added another alleged benefit. The Department of Justice described below-market arrangements covering those facilities, their use and their maintenance.

Why the Hospital Cared About More Than Rent

A referring physician can bring a hospital business well beyond the physician’s own office visits. The business includes imaging, laboratory and surgical referrals. Those downstream services help explain why hospitals value relationships with physician practices. In a property arrangement, the rent ledger shows the price of the space. It leaves the value of the referrals elsewhere in the hospital’s accounts.

That is the economic tension behind this case. The alleged benefit went to people who could direct patients to the hospital, while the hospital expected payment for the care it provided. A cheaper office can be valuable to a physician without appearing on a salary statement. An increase in share value can do the same without appearing on the rent bill.

The Department of Justice described the alleged referral arrangements under both the Anti-Kickback Statute and the Stark Law. The kickback law prohibits benefits intended to buy referrals, while the Stark Law restricts hospitals’ financial relationships with referring physicians. Federal health care programs cannot pay claims that come from arrangements violating either law. That connects the property deal to the hospital’s claims under the False Claims Act.

Taxpayers pay for the care. The concern is that the private benefit helps decide where the patient goes.

Why Physician Rent Can Be Too High or Too Low

The Pacific Alliance Medical Center rent settlement shows the same problem with the rent moving in the opposite direction. In its June 28, 2017 announcement, the Department of Justice said the Los Angeles hospital agreed to pay $42 million over allegations involving above-market payments to rent space in physicians’ offices and marketing benefits for their practices.

At St. James, the government described rent below market value for physicians occupying the medical office building. The price moved in opposite directions, with the alleged advantage going to physicians in both.

The Pacific Alliance whistleblower’s complaint also alleged that the hospital tracked referral targets and considered reducing or ending payments when physicians fell behind. That is why the referral reports can explain more than the face of the lease.

What the Property Documents Can Show

A hospital property deal spreads its benefits across ownership interests, office rent, ground rent and shared facilities. The leases show the terms. The harder question is how those terms connect to the patient business the hospital expected, and who inside the hospital made that connection.

Ozarks Community Hospital’s Corporate Compliance Plan calls for independent appraisals and rent set without regard to referrals. It also requires compliance review of physician joint ventures. Under that policy, a lease should make business sense even if the physician sends the hospital no patients.

Types of Hospital Frauds: Nature and Methods of Prevention, published in the Journal of Forensic and Investigative Accounting in 2023, explains how collusion between staff can defeat controls that depend on independent checks.

The study examined 80 hospital fraud cases announced by the Department of Justice. In discussing illegal referrals, it proposed asking provider staff about referral patterns and comparing contracts with the work actually performed or rental space actually used.

Another Montana case shows how the referral economics can surface inside the business. In the Kalispell Regional Healthcare case, a whistleblower alleged that HealthCenter’s chief executive told surgeons that losses on their compensation were acceptable. The complaint attributed the explanation to the revenue their patients brought in: the surgeons’ referral revenue more than made up for those losses.

The allegation puts the physician expense and the expected referral revenue in the same conversation. That is the connection a favorable property deal can conceal behind a lease or a valuation.

St. James and Sisters of Charity Disclosed the Arrangements

St. James and Sisters of Charity voluntarily disclosed the arrangements to the government. If your hospital is reviewing physician leases and you know the reasons behind the terms, our whistleblower experts can work through what that review means for your information and a possible case.

An insider can also bring a qui tam case on the government’s behalf. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. The connection between the benefit, the referrals and the hospital’s claims is where our work with you begins.

The Reasons Behind the Property Deal

If you worked on a hospital’s leases, valuations or physician investments and know why the terms favored referring physicians, speak with our whistleblower experts about the deal. We connect the property economics to the referral decisions, build the case with you, and bring in hospital fraud whistleblower lawyers who understand real-estate benefits. We remain your partners from that first conversation through the case’s resolution.