The Halifax $85 Million Lesson: Compensation Arrangements Between Hospitals and Physicians Must Be Reviewed

The Department of Justice (“DOJ”) announced another multi-million dollar settlement of alleged False Claims Act violations on March 11, 2014. Specifically, Halifax Hospital Medical Center and Halifax Staffing, Inc. agreed to settle various issues with the DOJ for $85 million in order to resolve allegations that they violated the False Claims Act (“FCA”) by submitting claims to Medicare that violated the federal prohibition on physician self-referrals, 42 USC §1395nn (the “Stark Law”). United States ex rel. Baklid-Kunz v. Halifax Hospital Medical Center, et al., No. 09-cv-1002 (M.D. Fla.).

The Stark Law and the Bona Fide Employment Exception

The Stark Law prohibits a physician from referring a patient for certain designated health services (“DHS”) to an entity in which the physician, or an immediate family member, has a financial interest, such as an ownership or investment interest in the entity or a compensation arrangement with the entity. Certain exceptions for arrangements are permitted under Stark. However, because the Stark Law is a strict liability statute, the arrangement must fit completely within the criteria of the exception in order not to violate the statute. At issue in Halifax, as explained below, is the bona fide employment exception, which provides that if the exception is satisfied than any amount paid by an employer to a physician is not considered a “financial relationship” under the Stark Law. This generally requires an employment arrangement to meet the following elements: (1) the employment is for identifiable services; (2) the compensation must be consistent with fair market value; (3) the compensation must not take into account volume or value of referrals, except payment in the form of a productivity bonus based on services performed personally by the physician is permitted; and (4) the arrangement must be commercially reasonable.

Alleged Violations

The relator in the Halifax case, Elin Baklid-Kunz, filed a qui tam action in 2009. Ms. Baklid-Kunz was a member of the hospital’s compliance office prior to filing the lawsuit and currently serves as the Director of Physician Services. Among other issues, the lawsuit alleged that Halifax’s arrangements with six medical oncologists and three neurosurgeons violated the Stark Law, and therefore, that Medicare claims submitted by Halifax based on referrals from these physicians violated the FCA.

Specifically, the six oncologists were employed by Halifax Staffing and worked for Halifax Hospital medical Center. Their contracts involved incentive bonus payments, which included participation in a bonus pool equal to 15% of the operating margin of the hospital-based medical oncology program at Halifax. The bonus pool was split among the physicians in proportion to their personally performed services. However, the bonus pool also included revenue for hospital outpatient services referred by the physicians, and thereby arguably took into account the volume or value of the physicians’ referrals and failed to meet the bona fide employment exception to the Stark Law.

With respect to the neurosurgeons, the suit alleged the employment agreement was structured in a way to allow the neurosurgeons to operate their practice, receive a guaranteed salary and keep 100% of their collections without any overhead expenses. Halifax argued that this package represented fair market value, but the government introduced an expert stating that the surgeons were consistently paid twice what neurosurgeons in the 90th percentile are paid ($881,000), despite the fact that their collections were well below the 90th percentile.

Notably, Halifax failed to consult legal counsel prior to implementing these compensation arrangements. Halifax only sought a legal analysis from outside counsel after the arrangements had been in place for several years.

Summary Judgment Decision

On November 13, 2013, the district court ruled that the oncologists’ incentive bonus was not based on services personally performed by the oncologists as required by the bona fide employment exception because the percentage of the operating margin formula varied with the volume or value of oncologist referrals and consequently ruled that Halifax Hospital violated the Stark Law. Halifax ultimately conceded that the revenue included fees for hospital services, such as outpatient prescription drugs and other services not personally performed by the oncologists. Since the size of the pool and the size of the bonuses available to each oncologist would increase as the referrals to the hospital increased, the money available in the bonus pool varied with the volume and value of the referrals by the oncologists. The court did not rule whether the neurosurgeon compensation package violated the Stark Law, but instead ordered that a jury should decide this issue and scheduled a trial date for March 3, 2014 (which never took place due to the eventual settlement).


On the eve of trial to set the amount of damages available for the Stark Law violations, the parties agreed to settle the claims for $85 million. The relator will receive $20.8 million.

Pursuant to the settlement, Halifax agreed to enter into a five-year Corporate Integrity Agreement (“CIA”) with the Office of Inspector General (“OIG”). The CIA provides that Halifax must implement procedures to internally review and monitor its arrangements with physicians and other referral sources, as well as engage an independent review organization to perform reviews and report to the OIG. Halifax has admitted only to violating the Stark law and claims it settled because it had “a fiduciary responsibility to avoid the risks associated with trial and the potential of a lengthy appeals process.” It is reported that Halifax has spent $21 million on its defense of this case.

The relators’ claims that Halifax unnecessarily admitted Medicare patients to the hospital in order to obtain higher reimbursements, performed unnecessary spinal surgeries, and conducted fraudulent billing practices has remained unresolved and is scheduled to go to trial in July 2014. The government has declined to pursue these claims which could total around $240 million in damages and penalties.

As the silver lining, if Halifax pays the full $240 million for these remaining allegations, which would result in total payments of $325 million, that is still far lower than the initial $1.1 billion the government has asked for to settle the allegations in their entirety.

Ultimately, this case reflects the grave importance of carefully reviewing all physician compensation arrangements and exercising due diligence in documenting fair market value and commercial reasonableness. Moreover, when Stark Law violations are discovered, self-disclosures under the Self-Referral Disclosure Protocol (“SRDP”) or directly to the DOJ should be seriously considered.

For more information on hospital contracting, physician compensation arrangements, the Stark Law or related issues, please feel free to contact Daniel Meier or any member of our health care practice group for a further discussion.

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