In March 2026, a federal judge in Tennessee denied Erlanger Health System’s motion to dismiss a Department of Justice complaint alleging that the Chattanooga-based hospital spent seven years compensating employed physicians well above fair market value to secure their referrals. The case originated as a qui tam lawsuit filed by Erlanger’s former Chief Compliance Officer and former Chief Financial Officer.
The government alleges that some Erlanger physicians were paid two to three times the national median salary for their specialty, with one orthopedic surgeon receiving more than $2.1 million in a single year, at a time when employed physician practices were generating over $100 million in annual losses relative to the revenue those physicians produced from their own professional services.
The court’s refusal to dismiss carries a broader implication. Erlanger’s defense was that it had relied on outside consultants who determined its compensation was at fair market value. The court allowed the case to proceed regardless, signaling that a favorable FMV opinion does not insulate a hospital when the facts suggest compensation was structured around the value of referrals rather than the value of physicians’ personally performed work.
What the Stark Law Requires
The Physician Self-Referral Law prohibits a hospital from billing Medicare or Medicaid for designated health services referred by a physician with whom the hospital has a financial relationship, unless that relationship satisfies a specific statutory exception. When a hospital employs a physician, the arrangement can qualify for an exception, but only if compensation reflects fair market value and is not tied to the volume or value of the physician’s referrals.
The statute is a strict liability law, meaning the government does not need to prove intent. If the compensation structure fails the exception requirements, every Medicare or Medicaid claim generated by those referrals becomes a false claim under the False Claims Act (FCA). The FCA permits the government to recover up to three times the amount of those improperly received payments, plus civil penalties per submission.
How Hospitals Structure Compensation to Capture Referrals
Enforcement actions have shown that hospitals rarely structure unlawful arrangements in explicit terms. Instead, compensation is assembled from components that each appear defensible in isolation but collectively produce compensation that tracks referral value. In the Erlanger case, the government identified three design features it contends crossed that line:
- Uncapped wRVU incentives with escalating rates. The per-unit rate paid to physicians increased as volume grew rather than declining, disproportionately rewarding high-volume referral generators.
- Medical director and academic salaries without documented work. Supplemental pay under directorship and academic titles was not tied to documented time on those duties, but to the downstream revenue those physicians generated.
- Bonuses concentrated in high-revenue specialties. Sign-on, retention, and program bonuses were directed to orthopedic surgeons, cardiothoracic surgeons, and electrophysiologists whose procedures generate substantial hospital revenue beyond their own professional fees.
In 2023, Community Health Network in Indianapolis agreed to pay $345 million to resolve allegations that it recruited specialists with above-market compensation tied to referral bonuses. Community paid an additional $135 million in January 2025 to resolve remaining claims from the same case, bringing the total to $480 million, the largest Stark Law settlement in False Claims Act history. In both cases, the whistleblowers were former senior executives who observed the compensation strategy from inside the institution.
Why the FMV Consultant Defense Has Limits
Hospitals routinely hire valuation consultants to assess whether physician pay falls within an acceptable market range, and many have treated a favorable opinion as a compliance safe harbor. The Erlanger litigation challenges that approach. The government’s complaint alleges that Erlanger received FMV assessments warning that projected compensation for certain physicians exceeded the 90th percentile of national benchmarks and that high wRVU volumes raised concerns about upcoding. Erlanger allegedly pressed forward despite those warnings.
The Community Health Network case made the same point: the government alleged that compensation was structured to reward referral volume regardless of what appraisals showed, and that the appraisals could not cure an arrangement whose purpose was to pay for referrals. What the government examines is whether total compensation can be explained by the fair market value of a physician’s personally performed services, or only by the value of what that physician refers to the hospital.
Who Is Positioned to Report Stark Law Violations?
These violations are rarely visible from outside an organization. Those who may have grounds for a qui tam claim include:
- Compliance officers, CFOs, or other executives who are aware that physician compensation was set at levels the institution knew exceeded fair market value for services actually performed.
- Physician contracting or HR staff who observed that compensation offers were driven by a physician’s referral potential rather than by specialty benchmarks or clinical scope.
- Finance personnel who recognized that employed physician practices were running large losses that the hospital absorbed based on the downstream revenue those referrals generated.
- Physicians recruited with packages they recognized as tied to referral expectations, or who observed colleagues receiving pay that bore no relationship to their clinical work.
Federal law protects employees who report Stark Law violations from retaliation and provides legal remedies, including reinstatement and compensation, for those who face adverse consequences for coming forward.
Speak With a Whistleblower Attorney at Keller Grover
If you work at a hospital or health system and have observed physician compensation arrangements that appear designed around referral value rather than the fair market value of clinical services, you may have the basis for a False Claims Act claim. The whistleblower attorneys at Keller Grover have experience in Stark Law cases and can evaluate what you know in confidence. Contact our team today to discuss what you have observed and what options may be available to you.