Recent Settlement Underscores: FMV, CR, & No Payments for Patient Referrals in Practice Sales

A $37.5 million civil settlement for a joint resolution with the US Department of Justice, the California Department of Justice, Southern California-based Prime Healthcare Services (“Prime”)[1], and two California physicians over allegations of kickbacks for patient referrals, billing for a suspended physician’s services, and false claims for medical device reimbursements was made public this week. The settlement resolves alleged violations of the Federal and California False Claims Acts, the California Insurance Fraud Prevention Act, the Stark Law, and the Anti-Kickback Statute by Prime, its founding physician CEO, and a cardiologist who entered into employment with Prime after selling his practice and surgery center to the company.

Founded in 2001, Prime has been named the “fastest-growing hospital system in the country” by Modern Healthcare. From its headquarters in Ontario, CA, the health system operates 45 acute-care, not-for-profit hospitals in 14 states with 2.6 million annual patient visits (as reported in June 2021). One Prime affiliate in particular, Desert Valley Hospital (“DVH”), a 148-bed facility located in the high-desert town of Victorville, CA, was mentioned in the complaint discussed below. Specifically, the complaint noted that DVH opened its 50,000 square-foot “Heart Center” in March 2012. In 2015, Prime’s CEO voiced concerns, pointing out that the DVH cardiac catheterization labs were not operating at full capacity due to a certain local competitor, the cardiologist named in the settlement.

The qui tam complaint was filed in April 2020 by a former Prime Regional CFO. He related allegations of false claims based on inflated prices for implantable medical hardware and improper billing with a suspended physician’s billing number over two years. The relator also alleged the following:

• In 2015 Prime overpaid to purchase a physician’s interventional cardiology practice and associated surgery center, because the company wanted to increase the DVH Heart Center’s volume via the selling physician’s patient referrals. The purchase price exceeded fair market value (allegedly by triple) and was not commercially reasonable (in part because the surgery center was closed immediately upon acquisition).

Specifically, the complaint noted that while the inflated purchase price (i.e., goodwill) had been based on the supposed profitability of the practice and surgery center, the immediate closing of the surgery center upon purchase, followed several months later by the full closure of the practice’s remaining limited diagnostics and lab procedures, resulted in the complete loss of revenue for the practice and negated any prospects of justifying the amount paid. The services that had historically been provided by the acquired practice were reported as having been fully absorbed (along with associated revenue) by DVH.

• Compensation for the selling physician under the employment agreement was also “steeply inflated” above FMV and considered the volume and value of his patient referrals to DVH.

Specifically, the complaint noted that the physician’s salary was more than double that of other cardiologists employed by DVH, and more than double the national median salary for the specialty. Electronic communications between the physician and the relator clearly expressed the expectation for complete transfer of patient referrals to DVH.

After reaching what may be the largest settlement over alleged kickbacks paid by a health system to a single physician, Prime has entered into a five-year Corporate Integrity Agreement (CIA) with the U.S. Department of Health and Human Services’ Office of Inspector General. The CIA mandate requires implementation of a compliance program at Prime, along with independent reviews of all future or ongoing arrangements of Prime affiliates and subsidiaries. The selling physician also settled and has to pay $2 million within 180 days of the effective date of the settlement.

The company stated in a related press release,

“The settled matters related to an isolated, single physician practice in Southern California between 2015-2017 and billing of forty-five implantable device claims. The allegations did not involve patient care, but instead related to the valuation of a physician practice and the appropriate documentation for a limited number of implant claims totaling approximately $200,000. As soon as these matters were identified, Prime conducted an exhaustive internal review, fully cooperated with the DOJ and negotiated a mutually acceptable resolution.

In order to ensure continued transparency, Prime has agreed to amend its current Corporate Integrity Agreement (“CIA”) to include testing on physician compensation arrangements as part of the settlement. CIAs are standard monitoring agreements in the healthcare industry and Prime has operated successfully under a CIA since 2018 and remains in full compliance. This settlement has already been fully disclosed and reserved in the 2020 year-end financials and audit report.”

In summary, some related fair market value reminders:

• Prices paid for physician-owned practices should be based on fair market value and be commercially reasonable for the purchasing entity, without any consideration as to the volume or value of downstream referrals.

• Closing an acquired surgery center for the purpose of patient redirection is not commercially reasonable.

• Post-transaction compensation for selling physicians and providers should reflect the fair market value of the anticipated post-transaction clinical productivity and/or other personally performed work.

To support fair market value compensation for physicians and advanced practice providers, and for guidance in valuing medical practice assets, reach out to a healthcare valuation consultant for an opinion of fair market value and commercial reasonableness for provider employment agreements and/or service contracts.

Contact Darcy Devine to discuss FMV physician compensation and valuation assistance.

[1] Prime and its CEO (one of the two physicians cited above) paid $65 million to settle previous unrelated allegations of false claims and overbilling in 2018.