DOJ Settles Self-Reported Referral Incentives With Dermatology Practice Manager

September 29, 2023

On Sept. 13, 2023, the U.S. Attorney’s Office for the Northern District of Texas announced a settlement with Oliver Street Dermatology Management LLC. Oliver Street agreed to pay the United States $8.892 million to resolve self-reported allegations that its acquisition of several dermatology practices over five years violated the Physician Self-Referral Law (Stark Law), the Anti-Kickback Statute (AKS) and the False Claims Act (FCA).

This settlement includes more than $5.928 million in restitution, essentially a payment of 1.49 times the amount the government believed was due to improper billing, after a voluntary disclosure to the Department of Justice (DOJ).

According to the DOJ press release, from January 2013 to July 2018, Oliver Street, doing business as U.S. Dermatology Partners (USDP), acquired numerous dermatology practices across the country. In September 2021, soon after a recapitalization, the company voluntarily self-disclosed that former senior managers had increased the purchase price of 11 acquired dermatology practices in exchange for the practice provider’s agreement to refer services to USDP-affiliated entities, including surgical centers and pathology laboratories that Oliver Street manages and operates. The disclosure noted that claims for certain referred services were submitted for payment to Medicare, thus invoking the reach of the implicated federal laws.

The settlement resulted from potential liability for violations of the AKS, the Stark Law and the FCA. Inflating the purchase price of an acquired asset, in exchange for referrals, can violate the AKS; when such referrals are between, for example, a dermatology practice and a pathology lab, and the referring physician has a financial interest in both, the referrals may violate the Stark Law. Further, when claims are submitted in violation of these laws, such conduct may separately create criminal liability under the FCA. This is an important reminder of the knock-on effects of seemingly innocuous conduct — incentivizing referrals — that is common in other industries.

While the exact nature and extent of the referral incentives are unclear, the matter does offer several lessons to heed when executing add-on acquisitions in the healthcare space. First, documenting the nonreferral business reasons for an acquisition could be helpful, especially when ancillary services exist that could generate problematic compensation between the parties. Further, if ancillary services are involved, there should be analysis to confirm compliance with the Stark Law and the AKS. Likewise, the initial valuation — and subsequent changes — should not consider prohibited referrals and should instead focus on the underlying economics, synergies, and quality or access to care improvements generated by the transaction. Finally, management should focus discussions with acquisition targets on the asset itself and not on potential referrals to other entities in the platform. Care in email and transactional slides is warranted.

If, however, an institution is concerned that its past practices have violated one of the fraud and abuse laws mentioned above, it may consider three avenues for a self-disclosure.

  1. DOJ Voluntary Self-Disclosure. An institution like Oliver Street may voluntarily self-disclose potential criminal conduct to the DOJ directly. If it has timely disclosed, fully cooperated and appropriately remediated its conduct, then DOJ generally will not, absent aggravating factors, seek a guilty plea or require an independent compliance monitor. DOJ recently published an approved policy and seeks to incentivize further self-disclosures. Additionally, DOJ may provide credit for such disclosure in reducing the settlement amount, as benefited Oliver Street; in other instances, DOJ has noted that “proactive, timely, and voluntary self-disclosures to the Department about misconduct will receive credit during the resolution of a False Claims Act case.” These are key reasons to self-disclose.
  2. HHS OIG Voluntary Self-Disclosure. The Office of the Inspector General (OIG) for the Department of Health & Human Services (HHS) also provides voluntary self-disclosure protocols for institutions to report healthcare fraud. Such self-disclosures provide institutions an opportunity to avoid disruptions and costs associated with government-run investigations and civil or administrative litigation. OIG recently expanded its informal guidance, although this remains nonbinding. OIG likewise credits timely self-disclosures in settlement amounts; generally, it seeks 1.5 times the amount at issue, a settlement amount similar to what Oliver Street agreed to pay.
  3. CMS Voluntary Self-Disclosure. If the issue strictly implicates the Stark Law, an institution may use the voluntary self-disclosure protocol (SDRP) to inform the Centers for Medicare & Medicaid Services (CMS) of noncompliance. CMS often settles such violations for a fraction of the full penalties authorized under the statute and less than the issues here would have yielded — albeit without addressing the AKS and FCA risks, therefore rendering this matter ineligible for this protocol. While historically there is a significant backlog around these disclosures, CMS recently updated its protocol to streamline them.

All three avenues provide incentives to timely self-disclose and actively cooperate with the government after compliance violations are discovered, although each presents various nuances. Note, however, these thorny issues can be avoided if assets are properly evaluated, and the deal is properly documented, to comply with the many requirements of federal healthcare statutes. More often, transactions may generate such disclosures due to discoveries in diligence unrelated to past practices.