Fourth Circuit "Smokes" Stark- and AKS-Based FCA Lawsuit
In a well-reasoned decision issued on June 4, 2026, the U.S. Court of Appeals for the Fourth Circuit affirmed the dismissal of a False Claims Act (FCA) qui tam action against Thomas Health System, its affiliated hospitals, its employed physician group, and a former executive (collectively, "Thomas Health"). The relator, a former nurse, alleged that several of Thomas Health's physician relationships violated the federal Physician Self-Referral Law (Stark Law) and the Anti-Kickback Statute (AKS), thereby tainting claims the system submitted to government healthcare programs.
The Fourth Circuit focused on the underlying elements of the alleged Stark and AKS violations and concluded that the relator's "inflammatory" and "conclusory" allegations did not satisfy the pleading requirements for an FCA lawsuit. The panel declined to infer fraud from common healthcare business practices, including productivity-based physician compensation and intercompany financial support of physician groups. The opinion is notable both for its careful analysis of indirect financial arrangements under Stark and for its refusal to credit a relator's nefarious characterization of ordinary industry practices. The court's key holdings are summarized in three parts below.
Productivity-Based Compensation Is Permissible Under the Stark Law
The Fourth Circuit squarely rejected the contention that physician compensation based on work relative value units (wRVUs) necessarily takes into account the volume or value of referrals in violation of the Stark Law. The court concluded that compensating a physician based on wRVUs reflects the physician's own personally performed services, rather than the volume or value of the physician's referrals.
Importantly, the court held that this conclusion does not change merely because the services are performed in hospital or provider-based facilities that charge facility fees. In reaching this conclusion, the court distinguished its earlier decision in United States ex rel. Drakeford v. Tuomey Healthcare System, Inc. (Tuomey II), where the court suggested that paying for certain professional services could be considered compensation based on the volume or value of referrals because the physicians' services corresponded with hospital facility charges. The Centers for Medicare & Medicaid Services has expressly rejected the Tuomey II analysis. Likewise, in Kyer, the Fourth Circuit confirmed that compensation is considered to be based on the volume or value of referrals only when the formula used to calculate the compensation includes the physician's referrals as a variable.
Hospital Subsidies and Above 90th Percentile Compensation Are Not, Without More, Evidence of Fraud
Turning to the AKS claims, the court refused to treat common industry practices as evidence of fraud. First, the relator based his AKS claims, in part, on cash transfers from the defendant hospitals to an affiliated physician group. The court recognized that physician groups are often subsidized and held that, without more, those subsidies could not be construed as unlawful remuneration intended to induce referrals.
Second, the relator alleged that Thomas Health compensated several physicians at or above the 90th percentile reported in physician compensation surveys. The relator characterized compensation at this level as excessive and as evidence that the payments were intended to induce physicians to refer to the hospital system. The Kyer court again rejected the theory and refused to accept that compensation at or above the 90th percentile was, by itself, evidence of fraud. The court observed that, by definition, 10% of physicians will always fall above that threshold, making above-benchmark compensation, standing alone, an unremarkable statistical fact.
Rule 9(b)'s Heightened Pleading Standard Requires More Than "Smoke"
Kyer also confirms that FCA lawsuits are subject to Rule 9(b)'s heightened pleading standard. Rule 9(b) requires fraud claims to be pleaded with particularity. The Fourth Circuit applied that principle in rejecting a complaint that sought to establish fraud by combining a series of ordinary healthcare business practices rather than identifying a specific fraudulent act. The court put it bluntly: "Perhaps what Kyer means to suggest is that each allegation is smoke; combined, there must be fire somewhere. Sometimes that is so. But that is not how the law works. The complaint must identify the fire."
Key Takeaway
Although Kyer is a helpful decision for healthcare providers, it should not be read as a broad shield against Stark—or AKS-based FCA exposure. The court's ruling turned on the specific allegations before it and on the relator's failure to plead facts tying ordinary compensation and financial-support arrangements to an identifiable violation. Other courts may view similar allegations differently, particularly where a complaint includes more detailed facts suggesting intent or undermining the fair market value or commercial reasonableness of the arrangement. Because Stark—and AKS-based FCA theories continue to appear with regularity, courts are likely to reach a range of outcomes depending on the specificity of the allegations and the jurisdiction in which they are tested. Healthcare organizations should therefore treat Kyer as a useful reaffirmation of pleading limits while continuing to maintain well-documented, well-supported physician compensation practices and alignment strategies.
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Darby Allen is a partner and chair of DWT's healthcare law practice and is located in the firm's Seattle office. Robert Homchick is a partner, also located in the firm's Seattle office. Drawing on our deep experience helping healthcare organizations navigate Stark, AKS, and FCA risk, we are available to help assess how Kyer fits into your existing compliance strategy and where targeted refinements may strengthen your position. For questions, please reach out to Darby, Robert, or another member of our healthcare team. To stay informed, sign up for our alerts.
*Megan Birmingham is a 2026 summer associate at DWT.