United States: Hospital CEO Indicted For Recruitment Fraud Scheme
Recommended Precautions for Physician Recruitment

Earlier this month, a grand jury in the United States District Court for the Southern District of California indicted Barry Weinbaum, CEO, Alvarado Hospital Medical Center in San Diego, on eight counts of violating the federal anti-kickback law by authorizing payments to referring physicians pursuant to allegedly fraudulent practitioner recruitment agreements and engaging in other illegal practices. The case has potentially broad implications because it suggests that the widespread strategy of recruiting new physicians into a community through the use of "host" physicians or medical groups may expose hospitals to criminal charges. Hospitals and physicians should examine their own recruitment activities to mitigate legal risks in view of this aggressive interpretation of the federal anti-kickback statute and related regulations adopted by the United States Attorney prosecuting the Weinbaum matter.

According to the indictment, Mr. Weinbaum arranged for payment of more than $10 million in relocation packages to doctors who joined medical groups (i.e., "host physicians") in the Medical Center's service area. It is alleged that much of the money retained by the host physicians was in exchange for referring business to the Medical Center. The indictment alleges that Mr. Weinbaum assisted in the recruitment of at least four physicians who affiliated with the practice of Dr. Paul Ver Hoeve and that with the Medical Center's knowledge, the recruited practitioners "kicked back" to Dr. Ver Hoeve at least $600,000 of these payments. In exchange for this remuneration, Dr. Ver Hoeve allegedly arranged for the referral of patients to the Medical Center. The government's theory, however, is undercut by the fact that Dr. Ver Hoeve did not admit a significant number of patients to the Medical Center.

Moreover, Dr. Ver Hoeve's testimony was the primary, but not exclusive, evidence against Mr. Weinbaum. The government's reliance on Dr. Ver Hoeve is further undermined because he was indicted in 1998 on 64 counts of mail fraud related to a scheme to defraud the Medicare program. In 2000, Dr. Ver Hoeve plead guilty to a single count of Medicare fraud, contingent on the promise to cooperate in future investigations. Officials of Tenet (the owner of the Medical Center) have asserted that Dr. Ver Hoeve avoided jail time in his own case in exchange for his agreement to testify against Mr. Weinbaum.

According to some accounts, the Medical Center used recruitment agreements from Tenet's manual of approved form contracts, and the challenged transactions were approved by Tenet's legal department and met the requirements set forth in Tenant's corporate compliance program. (Tenet management and its compliance program may not, of course, have been aware of the contents of any private conversations between Mr. Weinbaum and Dr. Ver Hoeve). The "boilerplate" disclaimers of remuneration for referrals in the contracts were unpersuasive to the United States Attorney when compared to direct (albeit suspect) physician testimony to the contrary. Dr. Ver Hoeve's checkered past was not a deterrent to prosecution; nor was Mr. Weinbaum's unblemished compliance record in his 12 years of service at the Medical Center.

Although the full implications of the Weinbaum prosecution remain unclear, hospitals and physicians engaged in recruitment activities should consider the following precautions:

1. Host Recruiting. The United States Attorney in San Diego believes that recruitment through a "host" physician such as Dr. Ver Hoeve is generally illegal due to the strong potential for abuse if the host receives payments over and above the direct and indirect costs attributable to the recruited physician. Accordingly, we recommend hospitals located in San Diego County and other portions of the Southern District of California (San Diego and Imperial Counties) suspend making payments to "host" physicians and medical groups for recruitment until it becomes clearer which, if any, such arrangements will be acceptable to federal prosecutors in the Southern District. Hospitals outside of the Southern District should carefully review the physician recruitment arrangements. Recommended steps include:

• Ensure the hospital and not the host physicians are driving the recruitment efforts.
• Make payments directly to the recruited physician. The compensation paid to the physician should be tailored to the specific needs and circumstances of the recruit.
• Approve the methodology for allocating fees and overhead by a group to a physician-recruit to ensure that the method is fair and equitable and does not result in profit to the host group during the time the hospital is making recruitment payments. Where appropriate, independent calculations of overhead by accountants knowledgeable in practice management are advisable.
• If the physician-recruits are paid directly to the host group, the hospital should secure the revenues of the host group in order to ensure repayment of recruitment assistance if the physician-recruit leaves the community or breaches his/her agreement with the hospital during the term for the recruitment arrangement.
• Enter into an agreement with the host group to specify its obligations, including that it will not alter the approved fees and overhead methodology without prior hospital approval.
• Monitor the recruitment arrangements and ensure that the hospital has the right to audit the books of the host group in order to ensure compliance with its obligations.
• Enforce compliance with the terms of the recruitment agreement.

2. Assessment of Community Needs and Reasonable Compensation Levels. Hospitals that engage in practitioner recruitment should establish processes designed to demonstrate that the goal of these activities is to increase the presence of practitioners who fill a community need within their service area. Hospital governing boards should actively participate in the review of recruitment arrangements, including (i) developing a recruitment policy that specifies the permissible scope of recruitment activities and roles/responsibilities for the board and hospital management in the development, implementation and oversight of recruitment arrangements, (ii) conducting bona fide assessments of community need for the recruited practitioner, and (iii) ensure reasonable compensation for physician specialists within the community. Consultants knowledgeable concerning the hospital's service area may be helpful in structuring the needs assessment and compiling data used to develop recommendations for the governing board. Management may wish to conduct the compensation survey by use of data from recognized industry sources, such as the Medical Group Management Association (MGMA). Tax-exempt hospitals should comply with the rebuttal presumption standards of the IRS Intermediate Sanctions Law if any member of the host medical group is or has been a member of the hospital board, medical staff officer or has held any other insider position with the hospital for the past five years. Further, the board and management may find compliance (or at least substantial compliance) with these standards beneficial in all cases because they reflect good corporate governance procedures that should assist a hospital in avoiding charges of wrongful behavior, based on either tax or other laws.

3. Maintaining "Accurate" Documentation. The indictment alleges that Alvarado Hospital Medical Center possessed documentation suggesting the facility was attempting to encourage increased referrals from Dr. Ver Hoeve's medical practice. Hospital compliance programs should educate administration and medical staff members concerning the legitimate purposes of physician recruitment, and ensure the maintenance of internal documentation consistent with those objectives.

4. Due Diligence. The influence of Dr. Ver Hoeve's testimony upon the Weinbaum indictment demonstrates the importance of conducting thorough due diligence on all recruited physicians, and where applicable, the host medical group or physician. At minimum, hospitals should verify that the physicians with whom they do business are unrestricted providers under the Medicare and Medi-Cal programs and have current unrestricted licensure and DEA permits. Litigation and criminal background checks are also advisable. Hospitals should also perform credit checks on physician-recruits and host medical groups.