Key Takeaways from the Recent Citizens Medical Center Settlement

The recent Citizens Medical Center settlement brings to resolution yet another qui tam action which, among other facts, underscores the compliance risks of hospital compensation arrangements with physicians in excess of fair market value. The USDOJ announced last month that Citizens Medical Center will pay $21,750,000 to settle the False Claims Act allegations involving over two dozen individual physicians of at least six different specialties and practice groups. The opinion of U.S. District Court Judge Gregg Costa of the Southern District of Texas in ruling on the Defendant’s motion to dismiss the plaintiff’s FCA allegations is instructive particularly with regard to the compensation by the hospital of its employed cardiologists.

Among a variety of allegations presented by the relators, it was alleged that three of the cardiologists’ combined salaries increased from $630,000 in 2006 to $1,400,000 in 2007, which was the first year of employment by Citizens. Moreover, it was alleged that Citizens’ cardiology practices experienced losses of $400,000 in 2008 and $1,000,000 in 2009. Interestingly, however, an expert report relied on by Citizens showed that the cardiologists’ salaries were below national median levels. Judge Costa noted that, if the allegations were true, it would make little economic sense for Citizens to employ the cardiologists at a loss, except when the motive is to induce referrals. Judge Costa denied the defendants’ motion to dismiss with respect to the plaintiffs’ cardiologist FCA claims.

This opinion is a chilling reminder that some statements may simply not be fact:

• “We pay our doctors based on published surveys. We default to the median [or insert other quartile/decile]. Anything at that level or below is FMV.”
• “It’s ok to lose money on physician practices. We make money in the hospital and on ancillaries.”
• “The doctors were underpaid in their private practice. We can increase their compensation based on survey data.”

CMS has been quoted more than once in this forum, noting that prudent valuation practice includes the use of as many valuation methods as can be reasonably applied, including where appropriate the income and cost approaches in addition to the use of market data. Thus, the inattentive use of published compensation survey data to set salary levels is risky business. Similarly, commercial reasonableness challenges the notion of operating physician practices at large losses over extended periods as a valid business purpose outside the referral relationship.

Some analyzes of the Citizens case point out that this is another case of bad facts. Judge Costa’s opinion refers to an earlier settled case between the parties in which the relators alleged discrimination and to docket entries in which retaliation by Citizens against the relators was alleged. I regularly refer to the old adage that “an ounce of prevention is worth a pound of cure,” which has never been truer in this area of regulatory compliance. A strong compliance plan and strict adherence are critical to controlling compliance risk and addressing concerns of employees.

While the plaintiff’s claims were never subjected to trial, Judge Costa’s analysis demonstrates an inference of an improper compensation arrangement due in part to the significant increases in compensation and operating losses in the practices, notwithstanding compensation at below-median levels. This should cause entities with physician compensation arrangements to reevaluate sole, unschooled reliance on published survey data, especially when the data leads to significant increases in compensation over historical private practice earnings and results in operating losses.

Generally speaking, referring provider financial relationships warrant consultation with qualified healthcare legal counsel, and experienced healthcare valuators should be strongly considered.