Strapped for cash and searching for new profits, Tennessee-based Erlanger Health System illegally paid excessive salaries to physicians in exchange for patient referrals, the US government alleged in a federal lawsuit.
Erlanger changed its compensation model to entice revenue-generating doctors, paying some two to three times the median salary for their specialty, according to the complaint.
The physicians in turn referred numerous patients to Erlanger, and the health system submitted claims to Medicare for the referred services in violation of the Stark Law, according to the suit, filed in US District Court for the Western District of North Carolina.
The government’s complaint “serves as a warning” to healthcare providers who try to boost profits through improper financial arrangements with referring physicians, said Tamala E. Miles, Special Agent in Charge for the US Department of Health and Human Services (HHS) Office of Inspector General (OIG).
In a statement provided to this news organization, Erlanger denied the allegations and said it would “vigorously” defend the lawsuit.
“Erlanger paid physicians based on amounts that outside experts advised was fair market value,” Erlanger officials said in the statement. “Erlanger did not pay for referrals. A complete picture of the facts will demonstrate that the allegations lack merit and tell a very different story than what the government now claims.”
The Erlanger case is a reminder to physicians to consult their own knowledgeable advisors when considering financial arrangements with hospitals, said William Sarraille, JD, adjunct professor for the University of Maryland Francis King Carey School of Law in Baltimore and a regulatory consultant.
“There is a tendency by physicians when contracting ... to rely on [hospitals’] perceived compliance and legal expertise,” Mr. Sarraille told this news organization. “This case illustrates the risks in doing so. Sometimes bigger doesn’t translate into more sophisticated or more effective from a compliance perspective.”
Stark Law Prohibits Kickbacks
The Stark Law prohibits hospitals from billing the Centers for Medicare & Medicaid Services (CMS) for services referred by a physician with whom the hospital has an improper financial relationship.
CMS paid Erlanger about $27.8 million for claims stemming from the improper financial arrangements, the government contends.
“HHS-OIG will continue to investigate such deals to prevent financial arrangements that could compromise impartial medical judgment, increase healthcare costs, and erode public trust in the healthcare system,” Ms. Miles said in a statement.
Suit: Health System’s Money Woes Led to Illegal Arrangements
Erlanger’s financial troubles allegedly started after a previous run-in with the US government over false claims.
In 2005, Erlanger Health System agreed to pay the government $40 million to resolve allegations that it knowingly submitted false claims to Medicare, according to the government’s complaint. At the time, Erlanger entered into a Corporate Integrity Agreement (CIA) with the OIG that required Erlanger to put controls in place to ensure its financial relationships did not violate the Stark Law.
Erlanger’s agreement with OIG ended in 2010. Over the next 3 years, the health system lost nearly $32 million and in fiscal year 2013, had only 65 days of cash on hand, according to the government’s lawsuit.
Beginning in 2013, Erlanger allegedly implemented a strategy to increase profits by employing more physicians, particularly specialists from competing hospitals whose patients would need costly hospital stays, according to the complaint.
Once hired, Erlanger’s physicians were expected to treat patients at Erlanger’s hospitals and refer them to other providers within the health system, the suit claims. Erlanger also relaxed or eliminated the oversight and controls on physician compensation put in place under the CIA. For example, Erlanger’s CEO signed some compensation contracts before its chief compliance officer could review them and no longer allowed the compliance officer to vote on whether to approve compensation arrangements, according to the complaint.
Erlanger also changed its compensation model to include large salaries for medical director and academic positions and allegedly paid such salaries to physicians without ensuring the required work was performed. As a result, Erlanger physicians with profitable referrals were among the highest paid in the nation for their specialties, the government claims. For example, according to the complaint:
- Erlanger paid an electrophysiologist an annual clinical salary of $816,701, a medical director salary of $101,080, an academic salary of $59,322, and a productivity incentive based on work relative value units (wRVUs). The medical director and academic salaries paid were near the 90th percentile of comparable salaries in the specialty.
- The health system paid a neurosurgeon a base salary of $654,735, a productivity incentive based on wRVUs, and payments for excess call coverage ranging from $400 to $1000 per 24-hour shift. In 2016, the neurosurgeon made $500,000 in excess call payments.
- Erlanger paid a cardiothoracic surgeon a base clinical salary of $1,070,000, a sign-on bonus of $150,000, a retention bonus of $100,000 (payable in the 4th year of the contract), and a program incentive of up to $150,000 per year.
In addition, Erlanger ignored patient safety concerns about some of its high revenue-generating physicians, the government claims.
For instance, Erlanger received multiple complaints that a cardiothoracic surgeon was misusing an expensive form of life support in which pumps and oxygenators take over heart and lung function. Overuse of the equipment prolonged patients’ hospital stays and increased the hospital fees generated by the surgeon, according to the complaint. Staff also raised concerns about the cardiothoracic surgeon’s patient outcomes.
But Erlanger disregarded the concerns and in 2018, increased the cardiothoracic surgeon’s retention bonus from $100,000 to $250,000, the suit alleges. A year later, the health system increased his base salary from $1,070,000 to $1,195,000.
Health care compensation and billing consultants alerted Erlanger that it was overpaying salaries and handing out bonuses based on measures that overstated the work physicians were performing, but Erlanger ignored the warnings, according to the complaint.
Administrators allegedly resisted efforts by the chief compliance officer to hire an outside consultant to review its compensation models. Erlanger fired the compliance officer in 2019.
The former chief compliance officer and another administrator filed a whistleblower lawsuit against Erlanger in 2021. The two administrators are relators in the government’s July 2024 lawsuit.
How to Protect Yourself From Illegal Hospital Deals
The Erlanger case is the latest in a series of recent complaints by the federal government involving financial arrangements between hospitals and physicians.
In December 2023, Indianapolis-based Community Health Network Inc. agreed to pay the government $345 million to resolve claims that it paid physicians above fair market value and awarded bonuses tied to referrals in violation of the Stark Law.
Also in 2023, Saginaw, Michigan–based Covenant HealthCare and two physicians paid the government $69 million to settle allegations that administrators engaged in improper financial arrangements with referring physicians and a physician-owned investment group. In another 2023 case, Massachusetts Eye and Ear in Boston agreed to pay $5.7 million to resolve claims that some of its physician compensation plans violated the Stark Law.
Before you enter into a financial arrangement with a hospital, it’s also important to examine what percentile the aggregate compensation would reflect, law professor Mr. Sarraille said. The Erlanger case highlights federal officials’ suspicion of compensation, in aggregate, that exceeds the 90th percentile and increased attention to compensation that exceeds the 75th percentile, he said.
To research compensation levels, doctors can review the Medical Group Management Association’s annual compensation report or search its compensation data.
Before signing any contracts, Mr. Sarraille suggests, physicians should also consider whether the hospital shares the same values. Ask physicians at the hospital what they have to say about the hospital’s culture, vision, and values. Have physicians left the hospital after their practices were acquired? Consider speaking with them to learn why.
Keep in mind that a doctor’s reputation could be impacted by a compliance complaint, regardless of whether it’s directed at the hospital and not the employed physician, Mr. Sarraille said.
“The [Erlanger] complaint focuses on the compensation of specific, named physicians saying they were wildly overcompensated,” he said. “The implication is that they sold their referral power in exchange for a pay day. It’s a bad look, no matter how the case evolves from here.”
Physicians could also face their own liability risk under the Stark Law and False Claims Act, depending on the circumstances. In the event of related quality-of-care issues, medical liability could come into play, Mr. Sarraille noted. In such cases, plaintiffs’ attorneys may see an opportunity to boost their claims with allegations that the patient harm was a function of “chasing compensation dollars,” Mr. Sarraille said.
“Where that happens, plaintiff lawyers see the potential for crippling punitive damages, which might not be covered by an insurer,” he said.
A version of this article appeared on Medscape.com.