Freeman Health System has paid $9.3 million to resolve allegations it violated the Stark Law and the False Claims Act by knowingly providing incentive pay to physicians in a manner that violated federal law, the Justice Department announced Monday in a statement released from Washington.  

The Stark Law forbids a hospital from billing Medicare for certain services referred by physicians that have a financial relationship with the hospital. A prohibited financial relationship includes an agreement between a hospital and a physician to compensate a physician based on the volume of the physician’s referrals or the revenue realized from those referrals.

In 2009, Freeman disclosed to the U.S. attorney for the Western District of Missouri that a number of its physicians were eligible for incentive compensation that took into account the value and volume of their referrals.

Paula Baker, president of Freeman Health System, on Monday said the 2009 internal review revealed that Freeman had inadvertently made errors in the way it structured its physician-compensation agreements and that those agreements did not meet what it described as “very complex’’ federal guidelines.

Freeman engaged outside experts to analyze and provide recommendations for improvements to the system. The third-party review confirmed that the health system’s physician contracts did not comply with the law. The review also found that no patient or governmental entity was billed for any service that was not provided.

Baker said Freeman contacted the appropriate regulatory agency to voluntarily disclose that it was in noncompliance with the law. The hospital immediately changed its compensation formula to ensure full compliance.

“We caught this on our own. Nobody but us found the problem and we voluntarily disclosed it,’’ she said.

The settlement covers a 10-year period and is not based on the number of physician referrals during that period. The settlement names 70 physicians. The settlement amount was to be paid via electronic funds transfer within 10 days of the effective date of the agreement, which was Oct. 22.

Baker said the hospital “is always prepared for the unexpected event’’ in terms of a financial loss or settlement.

“In the future, patients will not see a difference in our costs because of this,’’ she said. “It has in no way affected the ongoing development of services by Freeman.’’

Baker said Freeman physicians have “always ordered whatever was necessary for patient care. Nothing has changed there. What has changed is how the contracts are written.’’

“All diagnostic testing or any other services or procedures ordered by Freeman physicians were clinically indicated and necessary. This was validated by utilization reviews conducted by private insurance companies and health plans,” said Baker

Freeman Health System is not subject to any ongoing oversight by the regulating entities.

 In July 2008, Cox Medical Centers in Springfield settled similar allegations in a $60 million settlement. As part of that settlement, Cox entered into a comprehensive corporate integrity agreement with the Office of Inspector General of the United States Department of Health and Human Services to ensure its continued compliance with federal health care benefit program requirements.

Said Baker: “I want to make sure that everyone understands that no patients were ever billed for a service they did not receive, nor was any governmental entity billed for a service that was not provided.’’

When Baker took over as president of Freeman earlier this year, she began working with the federal government to complete resolution of the settlement.

Said Baker: “Freeman physicians, employees, and the board of directors are proud to know that throughout this process the quality of care was never at issue, nor did our focus on providing superior patient care and access to the area’s largest network of physicians ever waver.’’

Based on its investigation of Freeman’s disclosures, federal investigators alleged that Freeman knowingly compensated some of its physicians in a manner that violated the Stark Law by providing incentive pay to physicians employed at clinics operated by the health system based on the revenue generated by the physicians’ referrals for certain diagnostic testing and other services performed at the clinic.

Federal investigators said the arrangement created an incentive to refer patients for such procedures.

“Today’s resolution underscores our commitment to ensure that health care decisions are based on the best interests of patients rather than the personal financial interests of referring physicians,” said Stuart F. Delery, acting assistant attorney general for the department’s civil division, in a statement released Monday.

The settlement is part of the government’s emphasis on combating health care fraud and another step for the Health Care Fraud Prevention and Enforcement Action Team (HEAT) initiative, which was announced in May 2009 by the Justice Department and the Department of Health and Human Services.

A powerful tool in that effort is the False Claims Act, which the Justice Department has used to recover $10.1 billion since January 2009 in cases involving fraud against federal health care programs.

The claims settled by this agreement are allegations only. There has been no determination of liability. Under the Stark Law, Freeman does not contest liability. With regard to liability under the False Claims Act, the settlement is neither an admission of liability by Freeman nor a concession by the federal government that its claims under the act are not well-founded.