A cautionary tale for physicians who lease space or provide medical director services to hospitals.  These common arrangements are coming under increasing scrutiny, and must be commercially reasonable to withstand challenge.
McAllen Hospitals L.P., d/b/a/ South Texas Health System entered into a settlement agreement with the Department of Justice on October 30, 2009 to pay $27.5 million to resolve allegations of violations of the Stark and Anti-Kickback law arising from lease and medical directorship payments to physicians.  A qui tam whistleblower suit was brought by a former employee fired by the health system who will receive $5.5 million from the settlement.  The system also agreed to a five-year Corporate Integrity Agreement.
The suit alleged that McAllen leased an unfinished office suite with a dirt floor from a referring physician for $8,000 per month, paid four physicians questionable medical director fees, wrote off a $150,000 loan to a cardiology group, and provided free rent, equipment, supplies and housekeeping services to other referring physicians, among other violations.  The small Texas community had attracted national attention earlier this year when an article in the New Yorker reported that its average Medicare spending per enrollee was nearly two times the national average, and $3,000 more than the average local annual income, without a notably sicker population or better medical outcomes.  These statistics may help the government publicize the connection between hospitals that pay kickbacks to induce referrals and increased costs passed along to Medicare.

For more information regarding this settlement agreement, please contact William H. Maruca.