In two recent cases, hospitals that provided marketing services to physicians for less than fair market value faced allegations they had violated the False Claims Act, the Anti-Kickback Statute, and the Stark Law. In both situations, the hospitals settled with the government and ended up paying millions of dollars.
In December 2017, Pine Medical Center in Dallas, Texas paid a $7.5 million settlement over allegations that it provided kickbacks to physicians in the form of free marketing services. Former members of the hospital’s marketing department claimed that the hospital paid to advertise physician practices in magazines and newspapers and on billboards, radio, and television. The hospital also allegedly paid for website services, brochures, business cards, and promotional lunches on behalf of physicians. Per the complaint, the hospital was not featured in any of the ads, so the advertisements weren’t a joint marketing effort – their purpose was to induce physicians to send referrals to the hospital.
Earlier in 2017, Pacific Alliance Medical Center in Los Angeles agreed to pay $42 million to settle alleged false claims violations arising from improper payments to physicians. The suit was brought by a former Senior Manager of Physician Integration for the hospital. Included in the lawsuit were allegations that under various marketing agreements, PAMC would provide physicians and practices with free marketing services in return for patient referrals. The marketing services targeted Medicare and Medi-Cal patients and included radio and television ads, door hangers for physician offices, patient transportation, and marketers who would hand out flyers to pregnant women at WIC Nutrition stores and seniors at the Social Security office. Under some arrangements, PAMC would split the cost of marketing with a practice. Under other arrangements, it paid for all the marketing costs. The amount the hospital spent on the services ranged from $4,000 to $18,000 per month per physician or clinic. The complaint held that the purpose of the marketing benefit was to induce referrals to the hospital and that referral volume was considered when determining whether marketing benefits would be offered to a physician or clinic.
As these cases clearly show, hospitals need to be very cautious about providing marketing services (or any other services or products of value) to independent physicians. If a hospital wishes to provide marketing services to physicians, it should, at a minimum:
Make sure physician eligibility for receiving the marketing services, and the amount of services the physician ultimately receives, are in no way tied to the physician’s current or potential referral volume.
Ensure that there is a commercially reasonable basis (not related to referral volume) for providing the marketing services. For example, the hospital may generate a profit on the marketing services it provides; or, the hospital may benefit from a co-marketing effort with the physician or practice.
Determine the fair market value of the marketing services provided to physicians and document repayment by the physicians. If the marketing services are being provided under the non-monetary compensation exception – track the value of the services relative to the annual limit.
To establish the fair market value of marketing services, most appraisers will use some rendition of the cost approach. (The market approach may also be used; however, good market data may be difficult to obtain.) The cost approach involves valuing each component to the service separately and then aggregating the results to determine fair market value. In this process, it is important that all component costs are identified and that indirect costs, like marketing department overhead, are properly allocated. Once this is done, a markup on those costs should also be considered. As previously noted, generating a profit on marketing services helps show that there is a legitimate business reason, not related to referrals, for the hospital to provide the services to physicians in the first place. The amount of markup may be influenced by many different factors such as profit margins for advertising and marketing firms that provide similar services or the hospital’s hurdle rate for new projects.
In summary, as the two cases point out, the provision of marketing services to independent physicians should be approached with caution. It is important to remember that there should always be a solid business rationale – other than referrals – for a hospital to be providing marketing services to independent physicians. Also, if marketing services are going to be provided, it is critical that the physicians pay fair market value for the services they receive.
 The Non-Monetary Compensation Exception at 42 CFR 411.357(k) sets forth the exception to the physician self-referral law for certain non-monetary compensation (items or services). Under the exception, the compensation limit is adjusted each calendar year to the nearest whole dollar by the increase in the Consumer Price Index-Urban All Item (CPI-U) for the 12-month period ending the preceding September 30. For the 2018 calendar year, the compensation limit is $407. The exception requires that all the following conditions are satisfied:
(i) The compensation is not determined in any manner that takes into account the volume or value of referrals or other business generated by the referring physician.
(ii) The compensation may not be solicited by the physician or the physician's practice (including employees and staff members).
(iii) The compensation arrangement does not violate the anti-kickback statute (section 1128B(b) of the Act) or any Federal or State law or regulation governing billing or claims submission.