Kickbacks, Free Staff, and Inflated Payments: Sutter Health’s Path to Stark Law Violations
Referrals drive revenue.
Hospitals are often in a constant battle for patients. A steady stream of referrals from physicians can significantly boost a hospital's revenue and reputation. Here's why:
Increased Patient Volume
Physicians are often the first point of contact for patients seeking medical care. When they refer patients to a hospital, it can lead to a significant increase in patient volume.
Revenue Boost
More patients typically translate to more revenue for the hospital. This can come from various sources, including inpatient stays, outpatient procedures, and ancillary services like laboratory testing and imaging.
Enhanced Reputation
A hospital with a strong reputation for quality care is more likely to attract patients (see the first two items above). Referrals from trusted physicians can help to build and maintain a positive reputation.
Strategic Partnerships
By cultivating relationships with physicians, hospitals can establish strategic partnerships that benefit both parties. For example, hospitals might offer physicians office space, administrative support, or access to specialized equipment in exchange for referrals.
Market Dominance
A hospital with a large referral base can gain a competitive advantage in its market. This can make it more difficult for other hospitals to attract patients and grow their business.
Stark Law and Anti-Kickback Statute
Because referrals can be so lucrative, there are two laws regulating how those referrals can be made. At a very basic level, the idea is that referrals are made in the best interests of the patient rather than because someone has a financial incentive to make the referral. The Stark Law and the Anti-Kickback Statute (AKS) are two key federal laws aimed at preventing fraud, abuse, and conflicts of interest in healthcare. Both laws address financial relationships between healthcare providers and their impact on federal healthcare programs like Medicare and Medicaid. Here’s a detailed explanation of each, including common exceptions:
Stark Law (42 U.S.C. § 1395nn)
The Stark Law, also known as the Physician Self-Referral Law, prohibits physicians from referring Medicare or Medicaid patients to entities with which they (or an immediate family member) have a financial relationship for certain designated health services (DHS), unless an exception applies.
Key Elements of the Stark Law:
Financial Relationship: This can be an ownership interest, an investment interest, or a compensation arrangement (e.g., a salary, bonus, or payment of any kind).
Designated Health Services (DHS): These include inpatient and outpatient hospital services, clinical laboratory services, physical therapy, radiology, durable medical equipment, and home health services, among others.
Strict Liability: Stark is a strict liability statute, meaning that no intent to violate the law is required to establish a violation. If a prohibited referral is made, it automatically constitutes a violation, even if the physician was unaware of the prohibition.
Common Exceptions to the Stark Law:
Several exceptions permit otherwise prohibited financial relationships under certain circumstances. These include:
In-Office Ancillary Services Exception: Allows physicians to refer patients for DHS within their own practice group, provided certain conditions are met (e.g., the services are provided in the same building where the referring physician works, and the billing is done by the practice).
Employment Exception: Permits physicians to refer patients to DHS entities that employ them, provided the compensation is consistent with fair market value (FMV) and does not vary based on the volume or value of referrals.
Personal Services Exception: Applies to compensation for personal services (e.g., medical directorships) if the arrangement is in writing, specifies the services, is for at least one year, and the payment is consistent with FMV and does not account for referral volume.
Fair Market Value Exception: Permits financial relationships where compensation is consistent with FMV, not based on the volume of referrals, and complies with applicable federal and state laws.
Rental of Office Space or Equipment Exception: Allows physicians to lease office space or equipment to DHS providers, provided the lease is for at least one year, the space or equipment is reasonable and necessary for legitimate purposes, and the rent is set in advance at FMV.
Isolated Transaction Exception: Covers one-time transactions, such as a sale of property or equipment, provided the payment is at FMV and not tied to future referrals.
Anti-Kickback Statute (42 U.S.C. § 1320a-7b(b))
The Anti-Kickback Statute is a criminal law that prohibits the exchange (or offer to exchange) of any form of remuneration—whether cash or in-kind—to induce or reward referrals for services or items reimbursed by federal healthcare programs like Medicare and Medicaid.
Key Elements of the AKS:
Remuneration: This can include anything of value, such as cash, gifts, discounts, or free services. The statute applies to any entity or person that offers, pays, solicits, or receives remuneration for referrals.
Intent: The AKS is a knowing and willful statute, meaning that the parties must have knowingly and willfully engaged in the prohibited conduct. However, one purpose of the remuneration being for referral inducement is sufficient to trigger a violation, even if the payments were also for legitimate purposes.
Broad Scope: Unlike the Stark Law, the AKS applies to all federal healthcare programs (not just Medicare and Medicaid) and covers a wide range of individuals and entities, including hospitals, physicians, device manufacturers, and pharmaceutical companies.
Safe Harbors to the Anti-Kickback Statute:
To avoid potential prosecution under the AKS, the safe harbor regulations define certain practices that are not subject to the statute’s penalties, provided they meet specific criteria. Common safe harbors include:
Employment Safe Harbor: Allows payments to employees (salaried or hourly) as long as they are for bona fide employment relationships and are not tied to the volume or value of referrals.
Personal Services and Management Contracts Safe Harbor: Protects payments for legitimate personal services (e.g., medical directorships or consulting) if the agreement is in writing, specifies the services, is for at least one year, and the compensation is consistent with FMV and does not consider the volume or value of referrals.
Space and Equipment Rental Safe Harbor: Allows the rental of office space or equipment if the lease is for at least one year, set at FMV, and not tied to the volume of referrals.
Investment Interests Safe Harbor: Protects certain investment arrangements, such as ownership in publicly traded entities, as long as there is no intent to induce referrals.
Discount Safe Harbor: Permits providers to receive discounts on items or services, provided the discount is properly disclosed and does not involve illegal kickbacks.
Group Practice Safe Harbor: Protects certain financial relationships within a group practice, such as profit-sharing and productivity bonuses, provided that they meet the requirements of the Stark Law in terms of in-office ancillary services and employment exceptions.
The scheme
The arrangements between Sutter and the physicians were specifically designed to induce referrals by providing financial benefits that were tied directly or indirectly to the volume or value of patient referrals. Below are the key mechanisms through which these arrangements operated to induce referrals:
Compensation Beyond Fair Market Value (FMV)
Sutter paid physicians and medical groups significantly more than the fair market value for services such as medical directorships, call coverage, and administrative roles. These excessive payments were designed to incentivize physicians to refer patients to Sutter hospitals. For instance, Sutter provided $1.9 million annually in excessive compensation to Sacramento Cardiovascular Surgeons Medical Group (SCSMG), including free physician assistants and inflated payments for call coverage and directorships. This encouraged SCSMG physicians to refer patients to Sutter hospitals rather than competing facilities.
Provision of Free Services and Staff
Sutter provided physicians and physician groups with free or heavily subsidized staff, such as physician assistants, who supported their practices. These free services helped physicians manage larger patient loads, thus generating more referrals for Sutter hospitals. Sutter paid for four full-time physician assistants, relieving the surgeons of labor and cost burdens. These free resources effectively functioned as financial inducements, motivating the group to refer patients to Sutter.
Exclusive Call Coverage Arrangements
Sutter entered into exclusive call coverage agreements with certain physician groups. These agreements ensured that only specific physicians would handle emergency cases or specialty referrals at Sutter hospitals. By compensating physicians with inflated call coverage fees (up to $2,500 per 24-hour shift), Sutter created financial dependencies that strongly incentivized physicians to refer patients within the Sutter system rather than to other hospitals. Sutter's exclusive arrangement with SCSMG physicians provided 24-hour, year-round call coverage, paying above-market rates to induce referrals.
Dr. Liu: The arrangement with Dr. Liu involved Sutter Health paying him excessive compensation for exclusive call coverage, designed to ensure that he would continue to refer a high volume of patients to Sutter hospitals. The payments were far beyond fair market value, violated the Stark Law due to the financial relationship, and constituted illegal kickbacks under the AKS because they were intended to induce referrals. This arrangement was part of a broader scheme by Sutter to use financial incentives to generate referrals from key physicians.
Linking Compensation to Referral Volume
Several arrangements explicitly tied physician compensation to the volume of services they referred to Sutter hospitals, which directly violated the Stark Law. For example:
East Bay Perinatal Medical Associates: Sutter paid this group over $7 million annually, with compensation that increased as the number of deliveries referred to Sutter’s hospitals grew. This created a clear financial incentive for the physicians to send more patients to Sutter.
East Bay Cardiac Surgery Center Medical Group: Sutter paid $1 million annually to two cardiothoracic surgeons for medical directorships and vague "data collection" services, which were structured to reward them for generating high volumes of patient referrals.
Duplicative Medical Directorships
Sutter frequently created multiple overlapping or duplicative medical directorships for the same physicians, paying them for hours that far exceeded the actual time spent on directorship duties. These excessive payments were a clear inducement for physicians to refer more patients to Sutter.
Dr. David K. Roberts: Sutter paid him up to $392,040 annually for a duplicative medical directorship while he maintained a full-time private practice. This arrangement incentivized him to refer patients to Sutter even though he was already occupied with his private practice.
In summary, Sutter’s financial arrangements with physicians were structured to induce referrals by providing excessive compensation, free staff, inflated call coverage payments, and compensation linked to referral volume, all of which violated the Stark Law and Anti-Kickback Statute. These mechanisms created financial incentives for physicians to keep referring patients to Sutter hospitals, regardless of patient need or the quality of care provided at alternative facilities.
When the whistleblower effectively put a stop to the illegal payments, Dr. James Longoria allegedly threatened to shut down the Operating Rooms if the payment stop was not lifted. Sutter gave in to Dr. Longoria’s threat.
The scheme described above and the claims resolved by these settlements are allegations only and there has been no determination of liability. You can read the full Complaint here.
The penalty
Several hospitals owned and operated by Sutter Health (Sutter), a California-based healthcare services provider, and Sacramento Cardiovascular Surgeons Medical Group Inc. (Sac Cardio), a practice group of three cardiovascular surgeons, have agreed to pay the United States a total of $46,123,516 to resolve allegations arising from claims they submitted to the Medicare program
The whistleblower
The whistleblower in this case is Laurie M. Hanvey, who served as the Compliance Officer for Sutter Medical Center, Sacramento. Hanvey had direct access to internal financial arrangements and compliance data at Sutter, giving her unique insight into potential violations of federal laws such as the Stark Law, the Anti-Kickback Statute (AKS), and the False Claims Act (FCA). She will receive $5,891,140 as her share of the federal government’s recovery in this case.
Under the qui tam provision of the False Claims Act, a private party (also referred to as a whistleblower or relator) may file an action on behalf of the United States and receive a portion of the recovery, typically between 15-30%.
If you think you’ve observed fraud or misconduct, we can evaluate your options. Vivek Kothari is a former federal prosecutor who represents whistleblowers. For a free consultation, contact Vivek by email, phone, Signal, or fill out the contact form.