Lexington Medical Center: The Referral Stream Behind Physician Pay

Lexington Medical Center agreed to pay $17 million to settle allegations that its practice purchases and physician compensation violated the Stark Law. The whistleblower’s complaint described a pay formula that credited doctors for the business they sent to the hospital, including referrals expected in the future. For someone who has sat through a practice-purchase negotiation, this case asks a familiar question: what was the hospital actually buying?

Lexington County Health Services District Inc. operates as Lexington Medical Center in West Columbia, South Carolina. The Department of Justice announced the settlement on July 28, 2016. A physician the hospital had previously employed brought the qui tam case in federal court in Columbia.

What the Lexington Medical Center Stark Settlement Covered

The government’s allegations concerned practice asset purchases or employment agreements involving 28 physicians. It alleged that the deals counted the business the doctors sent to the hospital, lacked a sound business justification, or paid more than fair market value for their work.

The connection between physician pay and referral business also runs through hospital kickbacks cases.

The Broward Health physician compensation settlement shows the pay issue in a narrower form. The Justice Department alleged that the hospital district paid nine employed physicians more than fair market value for their services. The allegations against Lexington also reached practice acquisitions and the value of the referrals behind the arrangements.

The Complaint Put Future Referrals Into the Pay Formula

The whistleblower alleged that Lexington used past and expected referrals to set physician compensation. His complaint described the arrangement this way:

The allegation puts future hospital business inside the salary calculation. A physician’s referrals become something the hospital can price before the patients arrive. In that account, the patient’s destination becomes part of a business deal, and taxpayers pick up the Medicare bill.

The complaint alleged that Lexington told physicians from the acquired practice that their offered pay would account for profits they previously earned from ancillary services the hospital was buying. It also alleged that at least one former practice physician working in internal medicine received a salary exceeding $500,000.

Even the bonuses looked backward: the complaint alleged that Lexington paid them after the purchase closed for services performed before it bought the practice.

The whistleblower further alleged that Lexington’s referral tracking system showed how it considered referral volume and value when setting employee compensation.

Why the Practice and Its Referrals Were Valuable

A hospital can earn revenue from an employed physician beyond the health care delivered in that physician’s own practice. Imaging, laboratory work and surgery create business elsewhere in the hospital. Employment can bring that referral stream into the hospital’s network, even when the physician practice itself loses money.

The payment setting matters too. Medicare pays a facility fee and a reduced professional fee for a service furnished through a hospital outpatient department, compared with a single professional fee in an office. The D.C. Circuit described hospitals buying practices and converting them into outpatient departments without much change to the facilities or patients served.

The Business Records Behind the Medicare Bills

Compensation formulas, valuation inputs, practice-loss projections and referral forecasts can explain how a hospital arrived at a physician’s pay. The useful connection is between the decision that set the arrangement and the claims that followed. An acquisition file can explain what the hospital expected to receive. Referral reports can show where the business went.

At Community Health Network, the Justice Department alleged that the system supplied false compensation figures to a valuation firm to obtain a favorable opinion and ignored the firm’s warnings about overpaying physicians. That allegation shows why the information sent to an appraiser can matter as much as the opinion the appraiser returns.

For a physician, healthcare finance employee or acquisitions professional who recognized the Lexington allegations, the distinctive knowledge may be the explanation behind a number. What business did management expect the payment to bring in? How did referral expectations enter the offer? Those are questions about decisions made inside the hospital, before they appeared in a Medicare bill.

Tuomey Connected the Contracts to False Claims

Tuomey, another South Carolina hospital, paid specialists under contracts that required them to send outpatient procedures to the hospital. The compensation exceeded fair market value and included part of the Medicare money from those procedures. An orthopedic surgeon who refused a proposed contract brought the whistleblower case.

A jury found that the contracts violated the Stark Law and that Tuomey submitted false Medicare claims. The resulting court judgment was $237,454,195. The Justice Department later resolved that judgment for $72.4 million in 2015.

Tuomey’s contracts show the connection that matters in these cases: physician pay, the procedures directed to the hospital and the government’s payment for those procedures. The government also argued that Tuomey ignored and suppressed warnings about the contracts. The decisions behind the arrangement, and what management knew about them, were part of the case alongside the bills.

The Former Physician’s Lexington Whistleblower Award

The physician’s announced share of the Lexington recovery was approximately $4.5 million.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. In a physician-compensation case, the person who understands how the deal was priced may hold the explanation that a salary figure alone cannot give.

What the Hospital Expected for Its Money

If you heard a hospital price future referrals into a physician’s pay, speak to one of our whistleblower experts about that deal. We connect the hospital’s business decisions to the claims they produced and build your strongest case with hospital whistleblower lawyers who understand physician acquisitions and compensation. We stay on your side through the whole process, from understanding what the hospital bought to pursuing the recovery.