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Health Care Providers: Watch out for Illegal Physician Employment Agreements

above-the-bar-logo.jpgThe New York State Attorney General’s Office recently settled a qui tam whistleblower case with Cayuga Medical Center (“Cayuga”) for $3,576,056. The allegations charged Cayuga with violating the federal Stark Act and the state’s False Claims Act by entering into illegal physician recruitment agreements with various medical practices.

In 2007, Dr. Daniel Jorgenson, a plastic surgeon with admitting privileges at Cayuga, filed this whistleblower lawsuit. Jorgenson alleged that Cayuga recruited physicians into the local area under a recruitment agreement and paid for expenses, which violated federal law. Cayuga then submitted claims for payment under Medicaid and Medicare, which were not in compliance with federal law.

Cayuga used to offer loans to new physicians to help them start their private practice and to recruit them into the Ithaca area. However, a regulatory change in 2004 made it so that these loans to the physicians joining an existing practice could no longer include any portion of that practice’s overhead, unless new staff or space was added. All contracts entered into before 2004 had to be changed, as the regulation did not “grandfather” prior recruitment contracts. In 2007, Cayuga discovered that 4 recruitment contracts signed prior to 2004 had not been corrected due to oversight and reported this to the Office of the Inspector General. During the investigation, Dr. Jorgenson filed his whistleblower lawsuit alleging that 2 additional contracts were in violation of the Stark Act. Although Cayuga disagreed that these 2 contracts were in violation, it settled the matter to avoid the high cost of lengthy litigation.

Of the settlement amount, New York State will receive over $426,000 and $3.1 million will go the federal health care programs. As the whistleblower for reporting the fraud and for cooperating with the investigation, Dr. Jorgenson will receive 18% of the settlement which is $567,000.

The Stark Act makes it illegal for a doctor to refer patients to a hospital or other provider of health care with which it has a financial relationship. It also prohibits hospitals from billing Medicaid for a referral if that referral was in violation of the law. The Stark Act is one of the most important laws affecting the compensation relationship between hospitals and its employed physicians. What makes it difficult to accept is that it is a strict liability statute so that your intent does not matter. In other words, even if you didn’t intend or mean to violate the law, you will still be held liable. There was no finding of fraud or abuse by Cayuga but just plain old administrative oversight which has now cost it millions.

If you are a physician or a health care provider, make sure you are in compliance with all state and federal laws regarding physician compensation. The Stark Act is easily implicated if you are using referrals with some type of financial compensation unless you fall under an exception. If you’re in doubt, call our Physician Employment Agreement Attorneys at Villanueva & Sanchala at (800) 893-9645 to help review your system and policy of referrals to ensure that you are not violating any state or federal laws.


Thank you for visiting our Blog. This blog provides general information and thoughts about various employment law issues primarily in the New York Tri-State area and occasionally in other areas. You are welcome to read the posts. However, do not construe any content on this blog as legal advice or the creation of an attorney-client relationship. Again, we provide the content only for informational purposes. You should not make decisions based information on our blog since the application of the law depends on the facts and each situation may be different. In addition, the law in most jurisdictions is different and changes constantly and we make no representations that any information on our blog has been updated. The Blog should not be used as a substitute for competent legal advice from an experienced employment law attorney in your state or jurisdiction.

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