How A Hospital Can Assure That It Will Be Required To Pay Punitive Damages

During the federal fiscal year ending in September, 2022, the Department of Justice collected more than $1.7 billion in False Claims Act (FCA) settlements and judgments involving fraud in Medicaid, Medicare Advantage (MA) overpayments, unlawful kickbacks and substandard care. In our experience working with hospitals, the significant financial penalties associated with FCA violations usually provide a powerful incentive for the hospitals to engage in careful diligence in structuring the terms of acquisitions of physician practices, the structure of physician relationships, and physician compensation formulas in compliance with healthcare regulatory requirements so as to avoid exposure to liability for violations of the FCA or other healthcare regulatory authorities.

However, this careful attention to regulatory compliance upon establishment of its physician relationships does not guarantee that a hospital can avoid significant financial liability for claims related to healthcare regulatory compliance which arise out of the hospital’s subsequent failure to follow contractual requirements, employment laws, and other requirements applicable to all (not just healthcare) workplaces. In this article, we present a case study of a hospital’s repeated failure to manage a physician employment relationship properly which ultimately resulted in a jury awarding the physician $5 million, including $2.8 million in punitive damages.

Here is how it happened. The Physician, a prominent cardiovascular surgeon, was employed by the Hospital in 2013 to serve primarily in a medical executive position, but also to spend 20% of his time to continue his surgical practice. Compensation for the Physician’s physician services was established using the same productivity-based compensation plan applicable to the Hospital’s other employed physicians, while the salary for his executive duties was established in accordance with the Hospital’s regular compensation philosophy. Third-party consultants provided opinions that the Physician’s compensation under each contract – executive and physician – constituted fair market value.  However, a question arose about whether the combined compensation under the two contracts constituted fair market value.

During his first performance evaluation in 2014, the Physician received high marks as an executive, although the CEO questioned his “commitment” based on his continued part-time surgical practice (notwithstanding the fact that it was expressly permitted and encouraged by his contracts).

In his 2015 executive evaluation, the Physician received uniformly high marks in all categories from his executive peers, direct reports, and “all observers,” with his highest score being for his “commitment.” However, the CEO gave him low marks, in stark contrast to the high marks from everyone else.

Shortly after the Physician’s 2015 evaluation, the CEO gave the Vice President of HR permission to meet with the Physician to discuss his executive salary. During this meeting, the Vice President of HR told the Physician that the Hospital had made a unilateral, final decision to cut his executive salary by approximately 32%. In response, the Physician’s counsel sent a letter to the CEO and the Hospital’s Chief Counsel describing what the Vice President of HR had told the Physician and giving the Hospital thirty days to cure the material reduction in the Physician’s executive salary.  The letter, which met the employment agreement’s requirements for written notice to the Hospital, stated that the Physician was terminating his employment agreement for “good reason” as set forth in the terms of that agreement. Providing this notice triggered the Physician’s entitlement to certain valuable benefits.

Shortly thereafter, the CEO sent an email to the entire organization announcing the Physician’s resignation, effective at the end of the 30-day cure period.  The CEO announced the Physician’s resignation again in a Board meeting attended by the Physician.  The Board gave the Physician a standing ovation for his service as an executive.

After his executive agreement terminated, the Physician repeatedly asked about his contractual benefits, and he was reassured several times that these would be provided. Eventually, however, the Hospital’s representatives informed the Physician that the Hospital was not going to pay his contractual benefits, relying on the excuse that payment of the Physician’s productivity compensation as a surgeon had “filled the bucket” and there was no more money “in the bucket.”

Five days later, however, Hospital executives made a formal presentation to the Compensation Committee of the Hospital’s Board of Directors at a called meeting.   According to the Committee’s meeting minutes, the formal report to the Compensation Committee included the following statements:

  • All administrative compensation and bonus under the [Physician’s] [employment agreement] has been paid in full.” (Emphasis added)
  • “For the period through September 30, 2015, the [Physician’s] compensation was as follows: $629,383 paid for administrative services (including management incentive bonus and benefits).”  (Emphasis added)
  • “The [Physician’s] administrative services compensation over the period of his employment for administrative services is reasonable for the services rendered and consistent with [the Hospital’s] executive compensation guidelines.” (Emphasis added)

According to the minutes, the Committee was also told the supposedly-paid (but actually unpaid) benefits and bonus were “consistent with fair market value for comparable services.”

Notwithstanding this report, the Hospital had not paid the Physician any of the disputed benefits or bonus for the period through his last day as an executive, and it never did so. The Physician was forced to file suit to obtain the very benefits that the Board’s Compensation Committee had been told had been “paid in full.”

After the Physician filed his lawsuit, the Vice President of HR testified in his deposition that the 32% reduction in salary was actually not a final decision, but merely a proposed recommendation. Although the Hospital’s Chief Counsel showed the letter from the Physician’s counsel (describing the “final decision” which had been communicated to the Physician) to the Vice President of HR upon receipt, the Vice President of HR made no effort at that time to tell the Physician that the decision was actually not final, and neither did the CEO, the Chief Counsel, nor anyone else. Had anyone told the Physician the truth, then the Physician could have entered into good faith negotiations with the Hospital regarding his executive salary.

At trial, the Vice President of HR was asked whether he had ever told the CEO that he had not told the Physician that a final decision had been made to cut his executive salary by 32% (as stated in the letter); his answer was “I  don’t recall.” The inference from the Vice President of HR’s lack of recollection was that (a) he did, in fact, tell the Physician that a final decision had been made to cut his executive salary by 32%, and (b) consistent with the CEO’s low written evaluations of the Physician, the CEO had authorized the Vice President of HR to tell the Physician that a final decision had been made. Of note, notwithstanding the CEO’s low written evaluations of the Physician, the Hospital replaced the Physician with two executives to perform the same executive duties which the Physician had been performing, and who, collectively, were paid more than twice what the Physician had been paid (before an attempted 32% pay cut) to perform those same duties.

The jury found that the Hospital committed fraud during the meeting between the Physician and the Vice President of Human Resources. Moreover, the jury also found that the Hospital specifically intended to harm the Physician and awarded $2.82M in punitive damages on top of $750K in unpaid contractual benefits.

Lessons to be Learned

  1. When an employee receives uniformly enthusiastic and positive evaluations from everyone except one senior executive, this is a red flag that some extrinsic factor(s) may be in play. While the mechanism for this will vary from facility to facility, ideally such a “red flag event” should be forwarded for review by Legal and/or Compliance personnel to confirm the objective validity of the one negative evaluation and rule out the substitution of inappropriate (or possible unlawful) considerations for those matters which were supposed to be considered during the evaluation process.
  2. A discussion of substantial changes to an executive’s job description, compensation, and other significant terms and conditions of employment, whether “proposed” or a “final decision,” should certainly involve senior HR management. However, when such substantial changes are to be verbally discussed (versus being more formally proposed in writing), a hospital’s policies and/or standard procedures should require the presence of a third party – ideally, the hospital’s counsel, but if not, then another neutral member of the hospital’s senior management team. Had that occurred in this case, the chances would have been greatly improved that someone would have been able to communicate truthfully with the Physician and that good faith negotiations could have succeeded (or at least been attempted). The Physician’s letter describing the meeting with the Vice President of Human Resources –to which the Hospital never responded or attempted to refute – was the highest and best evidence of what was said.
  3. The presence of a third party during communications such as this can only accomplish the intended purpose if the senior HR executive provides a short briefing to the third party in advance about the matters to be discussed, the reasons why, and the current status of any formal decision-making process. The point of this exercise is not to undermine the senior HR executive’s authority to hold these discussions, but to provide a neutral source of accurate information in the event of any later dispute over the content of the discussion. In many cases, the neutral third party will take notes of the discussion and provide copies to the other participants in the discussion.
  4. Minutes of Board and Board Committee meetings should always be thoroughly vetted to ensure accuracy and consistency.
  5. Many hospitals are large organizations with significant resources and social/political power in the areas in which they are located; moreover, they wield a significant amount of control over how medicine can be practiced by both employed and community physicians. However, a hospital should never fall into the trap of believing that its physician employment contracts are somehow different from other contracts and that physicians will uniformly “fall in line” in response to a hospital’s unilateral pressure to make changes.
  6. Making errors is part of the universal human condition. Nobody likes making them or finding that they have been made by others, and the consequences of errors can be difficult. However, there is no error so bad that it cannot be made worse by trying to hide it or pretending that its consequences arose for a different, unrelated reason– efforts which will ultimately assure that a hospital (or any other entity) will be required to pay punitive damages.

Smith, Gambrell & Russell’s attorneys routinely represent hospitals, physicians, laboratories, medical device and pharmaceutical companies, and research organizations in litigated matters; mergers and acquisitions; and regulatory compliance. For more information, contact Susan Atkinson or Tony Cochran.

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