Covenant Healthcare: What the Hospital Was Paying For

In the Covenant Healthcare physician Stark settlement, the hospital paid $69 million to resolve allegations involving medical-director contracts, employment, forgiven rent and physician-owned equipment leases. For someone who works with physician compensation, the case reaches beyond the salary line to the duties performed, expenses absorbed and hospital business a physician brings in. The whistleblower’s complaint described a paid directorship without expected director duties and another allegedly offered in exchange for moving referrals from a competitor.

Covenant Healthcare System is a regional hospital system based in the Saginaw, Michigan area. The Justice Department’s March 29, 2023 announcement described alleged improper financial relationships with eight referring physicians and a physician-owned investment group, resulting in false claims to Medicare, Medicaid, TRICARE and other federal programs. Two physicians reached separate settlements over their relationships with Covenant.

The Financial Relationships Behind the Claims

The government alleged that Covenant used several kinds of financial arrangements to obtain referrals that generated government-funded claims. Its settlement announcement separated medical-director contracts, a neurosurgeon’s employment, forgiven office rent and an equipment lease with a physician-owned group. Those arrangements put different records in play, from work schedules to rent accounts.

Medical-Director Contracts

The government alleged that six physicians held medical-director contracts at various points between 2006 and 2016, and that none of those arrangements met the Stark Law’s or the Anti-Kickback Statute’s rules for paying a doctor. For an insider, the contract’s stated responsibilities give the payment something concrete to be compared with: the director’s work, meetings and reports. The complaint’s account of duties nobody expected the director to perform makes that comparison especially pointed.

The Neurosurgeon’s Employment

Covenant employed the neurosurgeon from 2006 to 2009. The government alleged that the financial relationship broke the Stark Law’s rules for paying a referring physician, so the neurosurgeon’s referrals for covered hospital services were prohibited. An employment agreement was therefore part of the alleged route to false claims, with the compensation relationship behind the hospital services the physician ordered.

Forgiven Office Rent

The government alleged that Covenant forgave a referring physician’s rent for office space leased from 2009 to 2013. It described the forgiven payments as compensation exchanged for referrals and alleged problems under both Stark and the Anti-Kickback Statute. The benefit sat in an expense the physician no longer had to pay, the same practical question raised by referral payments disguised as rent or free services.

Equipment Leased From Physician Owners

The government described Covenant Physician Investment Group as a group owned by Covenant-employed physicians to buy large medical equipment and lease it to the hospital. The government alleged that the group secured its lease through negotiations that were not at arm’s length, intended to induce patient referrals. Here, the ownership records and lease negotiations connect the physicians receiving the financial benefit with the hospital receiving their patients.

What the Whistleblower Said the Contracts Bought

The whistleblower’s complaint described the alleged arrangements from inside the hospital’s operations. Its account of one directorship put the fee beside the work Covenant allegedly expected:

We see an expensive job title with the job taken out, if the whistleblower’s account is right. The complaint alleged that another directorship came in exchange for a physician agreeing to switch referrals to Covenant from a competing hospital. In that account, the referral destination supplied the business purpose missing from the job description.

Staff and Notes Behind the Bill

The complaint also alleged that Covenant supplied employees to staff the neurosurgeon’s private practice, leaving the physician as the only person there not employed by Covenant. It described staff complaints about notes appearing in the physician’s charts over weekends when the physician had not worked or seen patients. Payroll, schedules and chart entries would tell connected parts of that alleged arrangement.

A separate complaint passage described surgical notes supplied by a physician assistant who had not attended the procedures. It tied those notes directly to government billing:

The whistleblower alleged that the arrangement saved the physician time while Covenant billed approximately $5 million in facility fees. We see the value of an insider’s account here: someone who knew who attended the procedure could explain the gap between the work and the documentation used to bill for it.

How Does the Stark Law Affect Physician Self-Referrals?

The Stark Law restricts referrals for designated health services when the referring physician has a financial relationship with the provider, unless an exception applies, and restricts billing for those services. Physician self-referral can therefore involve a compensation relationship as well as an ownership interest. In Covenant’s case, the government alleged that both employment and medical-director arrangements failed the relevant requirements.

The Justice Department’s announcement ties fair market value to the services the physician actually provided. For Covenant’s alleged empty directorship, the immediate question is what services the payment actually purchased.

Kickbacks in health care involve knowingly paying or accepting cash or other benefits in exchange for referrals for government-funded care. That value can be cash or a benefit such as forgiven rent. Covenant’s rent and equipment allegations show why we examine both the financial relationship and the alleged exchange for patient business.

Why the Hospital Wants More Than the Physician’s Work

A hospital referral can generate revenue beyond payment for the physician’s own time. The Robert Wood Johnson Foundation’s 2008 research synthesis, Physician Self-Referral and Physician-Owned Specialty Facilities, separates professional fees from facility fees and explains how physician owners can receive a share of profits from hospitals and ambulatory surgery centers. It identifies incentives both to recommend additional services and to send patients to a financially connected facility, with a further attraction for the physician:

That distinction helps explain why the alleged equipment lease matters: physicians could have a financial stake in the equipment arrangement as well as their work for the hospital. For the directorship and employment allegations, it also raises a question a hospital finance employee would recognize. Which revenue made the arrangement worth paying for?

The complaint alleged that Covenant kept loss-making cardiology contracts because the physicians’ high volume of internal referrals recovered the losses. It also described compensation arriving through expenses the hospital absorbed. Its allegation about electronic medical records and moving costs was explicit:

The complaint further alleged discounted malpractice coverage and physician bonuses that pushed net income above fair market value. A practice’s operating expenses and a physician’s compensation occupy different accounts, but absorbing the former can increase what the physician keeps. We follow the whole alleged benefit, including the costs that disappear before anyone reads the salary line.

What an Insider Can Connect

Someone in physician contracting, practice management or hospital finance may understand what the agreement was meant to buy and what happened afterward. In this case, the useful connections run from directorship duties to work performed, from rent charged to rent forgiven, and from equipment ownership to the negotiated lease. Those records can explain the financial relationship behind a referral.

The billing evidence supplies the next connection: the patient order, the service, the claim and the government program that paid. The complaint’s surgical-note allegation shows why staffing and clinical records belong beside the payment records. We work with the person who understands those differences to establish how the arrangement reached government money.

The Hospital and Physician Settlements

The government’s announcement describes three separate settlements and gives a different payment status for each physician. Alongside the hospital payment stated above, it reports these allocations and individual amounts:

The U.S. Attorney’s Office for the Eastern District of Michigan investigated the case with assistance from the Department of Health and Human Services Office of Inspector General, the Defense Criminal Investigative Service and the United States Postal Service Office of Inspector General. The resulting settlements addressed both the hospital and physicians receiving compensation.

The parallel with Tuomey’s physician compensation case is the connection between physician pay and hospital referral revenue. There, a jury found Stark violations and more than 21,000 false Medicare claims, and the government later accepted $72.4 million to resolve the judgment.

The Covenant case began with a physician’s qui tam complaint, and the announcement allocated approximately $12.4 million to the whistleblower across the three settlements. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know What the Hospital Expected in Return

If you saw a directorship without duties, rent quietly forgiven or practice expenses absorbed to secure referrals, talk with our whistleblower experts about the arrangement you know. We build the case with you around the contracts, the actual work and the government payments, and bring in healthcare fraud whistleblower lawyers experienced in hospital-physician financial relationships. You bring the inside knowledge, and we stay beside you as partners throughout the case.