California Hospital Paid More Than $3.2 Million to Settle Allegations That It Violated Stark Law

The reality of Stark Law is always present and very real.

Last year, according to a press release by the Justice Department, Tri-City Medical Center, a hospital located in Oceanside, California, agreed to pay $3,278,464 to resolve allegations that it violated the Stark Law and the False Claims Act by maintaining financial arrangements with community-based physicians and physician groups that violated the Medicare program’s prohibition on financial relationships between hospitals and referring physicians.


The Stark Law generally forbids a hospital from billing Medicare for certain services referred by physicians who have a financial relationship with the hospital unless that relationship falls within an enumerated exception. The exceptions generally require, among other things, that the financial arrangements do not exceed fair market value, do not take into account the volume or value of any referrals and are commercially reasonable. In addition, arrangements with physicians who are not hospital employees must be set out in writing and satisfy a number of other requirements.


The settlement resolved allegations that Tri-City Medical Center maintained 97 financial arrangements with physicians and physician groups that did not comply with the Stark Law. The hospital identified five arrangements with its former chief of staff from 2008 until 2011 that, in the aggregate, appeared not to be commercially reasonable or for fair market value. The hospital also identified 92 financial arrangements with community-based physicians and practice groups that did not satisfy an exception to the Stark Law from 2009 until 2010 because, among other things, the written agreements were expired, missing signatures or could not be located.

“Patient referrals should be based on a physician’s medical judgment and a patient’s medical needs, not on a physician’s financial interests or a hospital’s business goals,” said U. S. Attorney Laura E. Duffy of the Southern District of California. 


This settlement illustrates the government’s emphasis on pursuing health care fraud cases and is another example of the Health Care Fraud Prevention and Enforcement Action Team (HEAT) initiative, which was announced in May 2009 by the Attorney General and the Secretary of Health and Human Services. 


One of the most powerful tools the Justice Department has is the False Claims Act. Since January 2009, the Justice Department has recovered a total of more than $27.1 billion through False Claims Act cases, with more than $17.1 billion of that amount recovered in cases involving fraud against federal health care programs.


What we can learn from this case is that for you as a physician group, hospital, or provider who is taking Medicaid or Medicare funds and doing Designated Health Services (DHS) is to ensure that your financial arrangements for clinical services and otherwise do not exceed fair market value (FMV), do not take into account the volume or value of any referrals, and are commercially reasonable. If you are a physician who is not hospital employee, then your agreement must be set out in writing. However, your arrangement may also fall into a ‘safe harbor’ exception to Stark Law, which means that Stark Law may not affect as much or at all.

If you have questions or comments, or if your arrangement could fit into a ‘safe harbor’ then please contact our office at any given time.  

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