DOJ Continues To Scrutinize Medical Director Arrangements

On Jan. 16, 2026, the U.S. Department of Justice (DOJ) chose to intervene in False Claims Act litigation brought against Priority Hospital Group, three of its long-term care hospitals, and a physician, alleging violations of the Anti-Kickback Statute (AKS) and Stark Law related to medical director arrangements, among other things. This enforcement action serves as a reminder of the federal government's continued focus on physician compensation arrangements that may disguise improper referral incentives.

The DOJ's Allegations

Riverside Hospital, one of the long-term care hospitals, entered into three "medical director" agreements with Dr. Benjamin Newsom and paid him more than $450,000 between 2017 and 2022, according to the complaint. The government alleges these payments were intended to induce Dr. Newsom to refer and admit patients to Riverside, resulting in more than $2 million in Medicare payments for referred patients and more than $17 million for admitted patients. Communications cited in the complaint allegedly evidence the parties' understanding that payments were tied to referrals — including an instruction to staff to hand medical director checks to physicians "individually and ask for patients with them."

The DOJ asserts that the medical director arrangements failed to satisfy available AKS safe harbors and Stark Law exceptions for several critical reasons:

• Lack of Fair Market Value Analysis. Neither Priority Hospital Group nor Riverside conducted a formal fair market value analysis for Dr. Newsom's compensation under any of the agreements. The complaint emphasizes that fair market value must be determined without considering the physician's ability to refer patients to the entity.
• Commercial Unreasonableness. The DOJ contends that the amounts paid would not have been commercially reasonable absent patient referrals. The complaint alleges that no formal needs analysis was conducted to determine whether the services were actually required. Furthermore, the services allegedly duplicated those already provided by another physician under a separate agreement.
• False or Inaccurate Timesheet Documentation. The agreements required timesheets, yet the complaint alleges Dr. Newsom did not complete timesheets tracking his actual hours, and Riverside employees prepared inaccurate timesheets that reflected exactly 20 hours each month without tracking actual time spent. Dr. Newsom allegedly signed these timesheets without reviewing them.
• Compensation Exceeded Actual Services. The complaint asserts that Dr. Newsom did not work the hours required under his contracts and actually spent two to two and a half hours at Riverside on most rotation days. Despite contractual obligations, compensation remained fixed and was not adjusted based on services rendered.

Regulatory and Legal Risks for Organizations

Healthcare organizations utilizing independent contractor medical directors face increased risk under federal healthcare fraud laws. The AKS prohibits offering or paying remuneration to induce referrals for services covered by federal healthcare programs. The Stark Law prohibits physicians from referring patients for designated health services to entities with which they have a financial relationship unless an exception applies, and bars entities from billing Medicare for services furnished pursuant to prohibited referrals. Organizations may face treble damages, civil penalties of $14,308 to $28,619 per violation, exclusion from federal healthcare programs, and criminal prosecution.

The DOJ has emphasized that compliance with the AKS and Stark Law is material to Medicare's payment decisions, and these statutes play a key role in ensuring that services are not provided merely to enrich parties to a financial relationship at the expense of federal healthcare programs.

Practical Recommendations for Compliance

Organizations engaging medical directors who are independent contractors should consider implementing the following best practices to ensure compliance under AKS and the Stark Law:

• Conduct and Document Fair Market Value Analyses. Obtain a fair market value opinion for physician compensation arrangements. Ensure the analysis does not consider the physician's referral potential or "downstream revenue" and is updated periodically.
• Perform Formal Needs Assessments. Assess and document the organization's legitimate business need for the services (including the particular service line over which the medical director is responsible) and confirm that the arrangement does not duplicate existing agreements.
• Specify Services in Writing. Agreements should clearly describe all services to be provided and should not include responsibilities related to patient referrals.
• Implement Robust Timekeeping Practices. Require physicians to personally maintain contemporaneous timesheets documenting actual hours worked and services rendered.
• Ensure Compensation Reflects Actual Services. Tie compensation to documented services actually performed. While not a magic bullet, hourly compensation methodologies with commercially reasonable limitations on compensable hours provide an added layer of accountability.
• Maintain Comprehensive Documentation. Retain all documentation supporting the arrangement, including executed agreements, fair market value analyses, needs assessments, and timesheets.
• Provide AKS and Stark Law Training. Ensure that executives and staff involved in physician arrangements understand the requirements and risks associated with these laws.

Conclusion

This case underscores the government's sustained enforcement focus on physician arrangements that may serve as vehicles for improper referral inducements. Organizations should treat this enforcement action as a prompt to review existing medical director and similar arrangements for compliance gaps. Proactive remediation can mitigate the risk of False Claims Act liability, exclusion, and reputational harm. Organizations with questions about the adequacy of their physician compensation arrangements should consult with experienced healthcare counsel.

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