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Recent Developments on the Fair Market Value Front – Part 1

Over the last several months, a handful of federal court decisions—including two rulings this summer on challenges to the admissibility of proposed expert testimony—serve as reminders of the importance of (and parameters around) fair market value (FMV) issues in the context of the Anti-Kickback Statute (AKS) and the False Claims Act (FCA).

First, a quick level-set.  The AKS, codified at 42 U.S.C. § 1320a-7b(b), is a criminal statute that has long formed the basis of FCA litigation—a connection Congress made explicit in 2010 by adding to the AKS language that renders any claim for federal health care program reimbursement resulting from an AKS violation automatically false/fraudulent for purposes of the FCA.  42 U.S.C. § 1320a-7b(g).  Broadly, the AKS prohibits the knowing and willful offer/payment/solicitation/receipt of “remuneration” in return for, or to induce, the referral of federal health care program-reimbursed business.  Remuneration can be anything of value and can be direct or indirect.  In interpreting the “in return for/to induce” element, a number of federal courts across the country have adopted the “One Purpose Test,” in which an AKS violation can be found if even just one purpose (among many) of a payment or other transfer of value to a potential referral source is to induce or reward referrals—even if that clearly was not the primary purpose of the remuneration. (more…)

Jury Verdict for Prosecution Underscores Difficulty of Overcoming AKS Charges at Trial

On March 19, 2015, a federal jury convicted three former executives of Chicago’s Sacred Heart Hospital on violations of the federal Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b)(1) & (2) (AKS).  The government filed the criminal complaint on April 15, 2013, charging Edward Novak, former chief executive officer; Clarence Nagelvoort, former chief operating officer; and former chief financial officer Roy Payawal with conspiring to pay or receive kickbacks for referring Medicare and Medicaid patients to Sacred Heart Hospital.  It is rare for a case of this nature to advance to a jury verdict, which makes this case noteworthy.  In fact, of the 10 individuals charged as a result of the federal investigation, seven chose to cooperate with the government rather than risk a trial.

The government’s investigation initially focused on the medical necessity of procedures performed on patients.  During that investigation, the government uncovered the details of the alleged kickback scheme.

According to the testimony of former employees, defendants Novak and Payawal implemented a scheme to offer and pay kickbacks to physicians in return for patient referrals, hiding the referral payments in a number of ways such as sub-leasing space from physicians without ever using the space.

In addition to fictitious rentals, prosecutors also claimed that defendants made payments under medical directorship contracts without requiring that the physicians provide any services under the contract, and paid physicians for supervision and training of non-existent medical students.  Prosecutors pointed to spreadsheets, maintained by the CFO, which tracked patient referrals to the hospital, to support their theory of the case.

The defense pointed out that it was not improper for a hospital to develop policies to help generate business.  Its trial strategy centered on shifting the blame for the illegal arrangements to the government’s star witnesses, Anthony Puorro, the hospital’s former chief operating officer, and Noemi Velgara, a former vice president.  The defense attempted to use admissions made in connection with Puorro and Velgara’s guilty pleas to cast them as rogue employees who were the real masterminds behind the kickback scheme.  The jury, however, after evaluating evidence which included emails, testimony from physicians who allegedly benefited from the scheme and secret recordings, soundly rejected this proposition.

The verdict for the prosecution sends the message to potential litigants that overcoming the specter of fraud in an AKS jury trial can be a particularly treacherous uphill climb.  Ultimately, Edward Novak was convicted of all but one of the 28 counts against him, Clarence Nagelvoort, on 11 of 12 counts, and Roy Payawal, on 17 of 27 counts.  Each count carries a maximum penalty of five years in prison.