In the first false claims case where a real estate appraiser is the whistleblower, HCA agreed to pay $16.5 million to settle allegations that it overpaid a physician group for office space. HCA, a Nashville-based for-profit hospital chain, also allegedly freed the physicians from a separate lease obligation, according to the Department of Justice, which announced the settlement on Sept. 19.

HCA also entered into a five-year corporate integrity agreement with the HHS Office of Inspector General as part of the settlement.

The false claims lawsuit alleged that HCA made deals with a group of physicians to encourage and reward their patient referrals to Parkridge Medical Center, an HCA hospital in Chattanooga. The allegations center on Parkridge and Diagnostic Plaza IV, which is one of four on-campus medical office buildings. Diagnostic Plaza IV is owned partly by HCA and partly by Diagnostic Associates of Chattanooga (DAC), a Tennessee general partnership of multispecialty physicians, according to the second amended complaint. In 1998, DAC moved to the building.

There are 12 medical office condominiums in Plaza IV that total 86,810 usable square feet; HCA owns 45,252 of them and DAC owns 41,558. In 2007, DAC’s group practice was acquired by HCA Physician Services (HCAPS) as “a part of a broader compensation arrangement between DAC and HCA,” the complaint states. DAC was then renamed Chattanooga Diagnostic Associates (CDA).

At the same time, in July 2007, DAC agreed to lease 29,204 square foot of Plaza IV office space to HCA/Parkridge Medical Center for $12.59 per square foot for five years. Of that amount, HCA/Parkridge subleased 22,175 square feet to its subsidiary, Chattanooga Diagnostic Associates, on the same terms. The complaint alleges the lease payments were excessive and “inconsistent with fair market value.” HCA allegedly knew this because it used a property management service that it had under contract to do a fair-market appraisal. One of its employees, appraiser Thomas Bingham, concluded that “an equivalent net rental rate of approximately $8.10 to $10.10” per square foot was fair market value for the Plaza IV lease, the complaint said. His report was allegedly signed by HCA and Parkland executives.

HCA paid the higher rent anyway, the complaint alleges, “because DAC’s physician partners needed the extra money.” So, HCA got another appraisal from an “unlicensed and uncertified appraiser,” the complaint alleged.

Bingham ultimately became a whistleblower and filed the false claims lawsuit against HCA. The hospital chain did not admit wrongdoing in the settlement.

The complaint also alleged that HCA “engineered an assignment of DAC’s 15-year lease of 32,286 [square feet] of HCA-owned property in Plaza IV, which was set to expire in 2013, from DAC to CDA, an HCAPS entity, which completely and forever released DAC from its rental payment obligations under the lease.” The reason for the lease assignment was supposedly to provide office space for CDA, the complaint says, but it was really just a cover for unlawful remuneration to DAC’s partners. “It was not commercially reasonable,” the complaint alleged.

Since at least 2007, according to the complaint, the DAC physicians have referred many Medicare, Medicaid, TRICARE and other patients to Parkridge Medical Center after receiving remuneration in violation of the Stark law. As a result, HCA submitted false claims, the complaint alleged.

HCA Whistleblower Was Unique

It’s unprecedented for the person performing the fair-market appraisal for a health care organization to file a false claims lawsuit against the organization, says Bob Wade, an attorney with Krieg DeVault in Mishawaka, Ind. “You probably can’t stop an appraiser from going to the government,” but there are ways to work together, especially when hospitals believe appraisers made a mistake in their valuations. “If you disagree with the results of the opinion, continue to work with the person who gave you a fair-market value range and convince them their opinion is wrong,” he says.

Recently, a client of Wade’s got a third-party valuation “and we totally disagreed with it,” he said. “Once we got behind the comparables that the appraiser was using,” it became clear the initial assessment was wrong and did not reflect the market. “If you disagree with the opinion or don’t think it’s reflective of the market you’re competing with, sit down with the appraiser and find out why he thinks the fair-market value is too low.” The risk of more false claims cases from people in the real estate department or outside appraisers is high because “real estate is one of the primary sources of potential bad deals” (see tips for avoiding Stark troubles from leases, p. 3).

Hospitals should put in their contracts with appraisers and similar kinds of consultants a provision that requires these experts to tell the company immediately if any potential noncompliance comes to their attention, says Washington, D.C., attorney Jesse Witten, with Drinker, Biddle & Reath. Hospitals can’t prevent them from taking their concerns to the government, he says, but the consultants and appraisers can be compelled under the contract to report internally — “or potentially face liquidated damages if they fail to do that,” he says.

Generally, hospitals may find themselves in the government crosshairs if they don’t track and manage their physician arrangements, but it’s challenging, especially in large organizations, says Fort Lauderdale attorney Gabe Imperato, with Broad and Cassel. “For the most part it’s an operational exercise and the better an organization is at completing it, the more of a chance they have to ensure compliance with Stark and the anti-kickback statute.”

Imperato described an example of “the gold standard” when embarking on a hospital physician transaction: a legal opinion that’s supportable, a fair-market value opinion about the practice acquisition, and a fair-market value opinion about corresponding compensation. Once the deal is in place, hospitals have to monitor it (e.g., when agreements expire, there can be renegotiation of payments). “Someone has to be on top of that because it carries significant liability” under the Stark and kickback statutes,” Imperato says. “The backdrop to all that is the prospect of fighting these battles in court is not very good” if the government makes an accusation. “It’s expensive and bad publicity and the chance of prevailing is less than 50%.” If the hospital loses a false claims case, the court is required to impose triple damages and per-claim penalties of at least $5,500.

HCA’s attorney did not return RMC’s call. In a statement, Kathy Winn, director of marketing at Parkridge Health System, said “we are pleased the matter is concluded, and we will diligently fulfill the terms of the corporate integrity agreement.”