Recent DOJ and OIG Actions Show Growing Federal Scrutiny of Physician Financial Arrangements

Over the last month the Office of Inspector General (OIG) of the Department of Health and Human Services and the Department of Justice (DOJ) have each taken actions that suggest an increasing appetite to examine the financial relationships between physicians and recipients of those physicians’ referrals under the federal Anti-Kickback Statute (AKS). By announcing new OIG and DOJ enforcement actions and the new OIG fraud alert, the agencies are signaling to the health care industry that physician financial relationships are one of their priority areas. These announcements should prompt organizations to review their physician arrangements and contracting policies to help ensure compliance with the AKS as well as the Physician Self-Referral (“Stark”) Law.

OIG Fraud Alert

On June 9, 2015, the OIG issued a new fraud alert primarily aimed at warning physicians about how their financial arrangements can create personal risk of liability under the AKS. The fraud alert encourages physicians who enter into compensation arrangements, such as medical directorships, to “ensure that those arrangements reflect fair market value for bona fide services the physicians actually provide” by “carefully consider[ing] the terms and conditions of medical directorships and other compensation arrangements before entering into them.” Payments that take into account the volume or value of referrals, do not reflect fair market value for the services performed, or compensate the physician in ways that are unrelated to providing services—such as subsidizing office staff costs—raise compliance risks, according to the OIG. Similarly, not providing the services called for under the arrangement can also create liability issues.

Rather than provide new or updated AKS guidance to the health care community, however, this fraud alert’s apparent purpose was to publicize a series of 12 settlements under the OIG’s Civil Monetary Penalties Law (CMPL) authorities obtained over the past two years with individual physicians who had medical director arrangements with Fairmont Diagnostic Center and Open MRI Inc. (Fairmont), an imaging facility in Houston owned and operated by Dr. Jack L. Baker. In 2012, Dr. Baker and Fairmont entered into a $650,000 False Claims Act settlement concerning allegations that Dr. Baker and Fairmont engaged physicians in “sham” medical director agreements to induce patient referrals. Fairmont also allegedly placed its own full-time employees as “referral coordinators” in certain physicians’ offices to help patients obtain the ordered imaging study. The government alleged that these full-time Fairmont employees were performing office functions on behalf of the physician, which constituted improper remuneration intended to induce referrals. As part of the settlement, Dr. Baker agreed to be excluded from federal health care programs for six years.

Following the settlement, OIG pursued “spin-off” CMPL cases against 12 of the physicians who had these suspect medical director agreements and referral coordinators. In total, the OIG collected over $1.4 million in penalties from 11 physicians and excluded one physician for three years. The settlement amounts ranged from $50,000 to $195,016.

OIG Excludes Home Health Owner

At the end of May, OIG announced the five-year exclusion of the owner of A Plus Home Health Care, Inc., a Florida home health agency, for alleged AKS violations involving physicians and their spouses. OIG alleged that the owner, Tracy Nemerofsky, violated the AKS by hiring eight different physicians’ spouses for “sham” marketing jobs that involved few, if any, actual services in exchange for securing the physicians’ Medicare referrals. OIG alleged that the eight spouses were not bona fide employees of A Plus and did not qualify for safe harbor protection.

This case is another example of an administrative spin-off case following a FCA settlement. It also follows on OIG’s expressed desire to examine individual owners and executives for their personal involvement, and potential liability, for the conduct investigated in the FCA case. In September 2014, A Plus and Nemerofsky agreed pay $1.65 million to resolve the FCA liability for this conduct, with OIG expressly reserving its exclusion authority against Nemerofsky in the agreement. The DOJ A Plus settlement press release highlighted that it had already reached FCA settlements with five of the physicians involved in the conduct, showing DOJ’s interest in pursuing physicians as well.

DOJ’s Largest AKS Settlement with a Nursing Home

Barely a week after OIG issued the new fraud alert, DOJ announced a $17 million FCA settlement with a nursing home for alleged kickback violations concerning medical director arrangements. Hebrew Homes Health Network, Inc., a Miami-Dade County nursing home network, and its former president and executive director, William Zubkoff, agreed on June 16, 2015, to settle the qui tam suit brought by Hebrew Homes’ former CFO. According to DOJ, this is the largest False Claims Act settlement for a nursing home allegedly violating the AKS.

In the settlement agreement, the government alleged that from 2006 to 2013 Zubkoff and Hebrew Homes hired numerous physicians as “sham” medical directors who performed few or no actual services as a way to compensate the physicians for their Medicare referrals. In rather unusual language, the government included a recitation of certain alleged facts that DOJ characterized as “evidence proving” the alleged violations, although the settlement does not contain an admission of liability. First, DOJ alleged that physicians were given “uniform contracts that detailed numerous job duties for the medical director position” but that few if any actual services were provided. Second, DOJ believed that “the medical directors’ patient referrals, without exception, increased exponentially once the medical director contract and payments began.” Finally, DOJ contended that certain employees’ recommended by email increasing the salary of various medical directors because of their high number of patient referrals, and recommended decreasing the salary of, or terminating, medical directors for their lack of patient referrals.

These allegations give providers some insight into how the government approaches investigating AKS compliance. The DOJ and OIG try to identify patterns or a sign of a business strategy to compensate physicians by looking at 1) contemporaneous statements by employees, especially in email, and 2) physician referral patterns before and after an arrangement exists. The government also looks at whether the actual performance under the contract matches the contract’s terms. These issues go to whether the government believes it can show that “one purpose” of the arrangement may have been to improperly induce or reward referrals.

As part of the settlement, Zubkoff agreed to resign as an employee of Hebrew Homes on March 23, 2015. OIG expressly reserved its exclusion rights against Zubkoff, perhaps an indication that OIG is considering pursuing an exclusion case. Hebrew Homes also agreed to enter into a five-year Corporate Integrity Agreement (CIA) with OIG, which involves OIG monitoring Hebrew Homes’ arrangements with referral sources. The CIA also requires the board of directors to hire a compliance expert to review and report on the compliance program. The physicians who had the medical directorships were not a party to the settlement, and their potential liability was not released by the settlement. In light of OIG’s fraud alert, it remains to be seen whether OIG will pursue spin-off investigations of some physicians.

Practical Implications

We should expect to see more government scrutiny of physicians and their financial arrangements with the recipients of their referrals. Physicians are the health care “gatekeepers” who can control or influence what items or services federal beneficiaries receive and where, which directly impacts federal health care program spending. Given the level of federal spending on health care, DOJ and OIG have a perpetual interest in examining the financial ties between physicians and other providers, suppliers, and manufacturers. For many organizations, financial relationships with physicians are unavoidable and in fact critical to ensuring high quality care and to complying with certain federal and state regulatory requirements. Even when medical directorships are required by law (e.g., for skilled nursing facilities), the terms of the arrangement still must reflect fair market value for services required and actually performed.

The fraud alert and the Nemerofsky exclusion action indicates that the OIG is stepping up its own administrative enforcement activities of physicians and individual executives separate from the government’s more traditional False Claims Act efforts. With a large budget increase this year, the OIG is able to hire more lawyers to create a new team in the Office of Counsel to investigate and bring CMPL cases. The FCA cases discussed above illustrate the potential consequences when whistleblowers bring forward allegations of improper physician relationships.

The OIG has also renewed its efforts to issue industry guidance, which has focused mostly on physician-industry relationships. After a somewhat lengthy span without issuing much guidance, the OIG has issued a new fraud alert specifically addressing physician issues each year for the past three years. In 2013, the OIG warned the industry about its concerns with physician-owned distributors and other joint ventures. In 2014, the OIG cautioned labs and physicians about labs making certain suspect specimen collection and other payments to physicians.

To address this risk of scrutiny, health care entities should consider examining their compliance program’s policies and systems regarding the review and approval of physician arrangements. This review should examine 1) the process used to select physicians for arrangements, including specific skills and qualifications needed for the arrangement; 2) the business justification for the arrangement, including the number of physicians needed; 3) whether the entity maintains an appropriate internal and legal review process; 4) the process used to determine fair market value for payments.

Organizations should also review their system for monitoring physician performance of the services provided for in the arrangement (or rental payments by physicians in leases) to ensure the services contracted for are being provided and the arrangement is still needed.

Finally, while this article has not discussed Stark Law compliance in detail, many of the Stark exceptions require AKS compliance as well as other requirements. Since compliance with the AKS does not ensure compliance with Stark, attention needs to be paid to the relevant Stark exceptions when contracting with physicians.

Organizations should also review their contract management process to avoid “technical” Stark Law issues, such as documentation deficiencies.

Daniel H. Melvin
Daniel H. Melvin counsels clients on Stark, Anti-Kickback and Medicare compliance issues such as physician compensation matters, and assists clients in investigating and addressing potential or alleged violations, including self-disclosures and defense of Stark- and Anti-Kickback-related qui tam actions. He also works with hospitals and physicians on coordinated care and other alternative service delivery models, including bundled payment and cost savings models, providing regulatory and transactional counsel and support. Read Daniel H. Melvin's full bio.

Eric B. Gordon, MD
Eric B. Gordon advises clients on fraud and abuse and compliance issues and health care transactions. He is partner-in-charge of the California Health Industry Practice Group. Eric represents a wide range of clients, including proprietary and tax-exempt hospital systems, medical groups, academic medical centers and faculty practice groups, pharmaceutical companies and medical device manufacturers, and group purchasing organizations. Read Eric B. Gordon's full bio.

Jason B. Caron
Jason B. Caron provides strategic advice to health care and life sciences organizations, primarily focusing on regulatory, reimbursement and policy matters. He has extensive experience navigating coding, coverage, payment, medical necessity, clinical documentation, comparative research, certification, enrollment, and other payer participation and reimbursement issues, particularly in light of ongoing health reforms. Read Jason B. Caron's full bio.

Joan Polacheck
Joan Polacheck advises clients on a variety of health care compliance and regulatory issues, including fraud and abuse, Stark law, Anti-Kickback Law and Medicare reimbursement issues. She represents a broad range of health care industry clients, including hospitals, suppliers, and drug and device companies. Read Joan Polacheck's full bio.

Tony Maida
Tony Maida counsels health care and life sciences clients on government investigations, regulatory compliance and compliance program development. Having served as a government official, Tony has extensive experience in health care fraud and abuse and compliance issues, including the federal and state Anti-Kickback and Stark Laws and Medicare and Medicaid coverage and payment rules. He represents clients in False Claims Act (FCA) qui tam matters, government audits, civil monetary penalty and exclusion investigations, and Centers for Medicare and Medicaid Services (CMS) suspension, and revocation actions, negotiating and implementing corporate integrity agreements, and making government self-disclosures. Read Tony Maida's full bio.