A hospital system in Missouri recently agreed to settle with the US Department of Justice (DOJ) for $34 million to resolve claims related to alleged violations of the Stark Law. On May 18, 2017, DOJ announced a settlement agreement with Mercy Hospital Springfield (Hospital) and its affiliate, Mercy Clinic Springfield Communities (Clinic). The Hospital and Clinic are both located in Springfield, Missouri. The relator’s complaint was filed in the Western District of Missouri’s Southern Division on June 30, 2015.

The complaint’s allegations center on compensation arrangements with physicians who provided services in an infusion center. According to the complaint, until 2009 the infusion center was operated as part of the Clinic, and the physicians who practiced at the infusion center shared in its profits under a collection compensation model. In 2009, ownership of the infusion center was transferred to Mercy Hospital so that it could participate in the 340B drug pricing program, substantially reducing the cost of chemotherapy drugs. The complaint alleges that the physicians “expressed concern about losing a substantial portion of the income they had received under the collection compensation model as a result of the loss of ownership of the Infusion Center.” In response, the Hospital allegedly assured them that they would be “made whole” for any such losses. While it doesn’t provide precise details, the complaint alleges that the Hospital addressed the shortfall by establishing a new work Relative Value Unit (wRVU) for drug administration in the infusion center, which now operated as part of the Hospital. The value of this new wRVU was allegedly calculated by “solving for” the amount of the physician’s loss and “working backwards from a desired level of overall compensation.” Physicians were able to earn the wRVU for the patients they referred to the infusion center. The complaint alleges that the drug administration wRVU rate was 500 percent of the comparable wRVU for in-clinic work. In its announcement of the settlement agreement, DOJ characterized the compensation arrangement as being “based in part on a formula that improperly took into account the value of [the physicians’] referrals of patients to the infusion center operated by [the Hospital].” Continue Reading Physician Compensation Scrutiny Continues in Recent FCA Settlement

This April, providers cheered when a federal district court in the Middle District of Florida found insufficient evidence to support a relator’s theory that a hospital had provided free parking to physicians, in violation of the Stark Law and Anti-Kickback Statute (AKS). In the Report and Recommendation for United States ex rel. Bingham v. BayCare Health Systems, 2017 WL 126597, M.D. Fla., No. 8:14-cv-73, Judge Steven D. Merryday of the Middle District of Florida endorsed magistrate judge Julie Sneed’s recommendation that Plaintiff Thomas Bingham’s Motion for Partial Summary Judgment be denied and that Defendant BayCare Health System’s Motion for Summary Judgment be granted. However, as we discussed in a previous FCA blog post regarding these allegations, this type of case encapsulates a worrying and costly trend where courts allow thinly pleaded relator claims in which the government opted not to intervene, to survive past the motion to dismiss stage into the discovery phase of the litigation.

Bingham is a serial relator who practices as a certified real estate appraiser in Tennessee and was unaffiliated with BayCare. In his latest attempt, Bingham alleged that BayCare Health System had violated the Stark Law and the AKS by providing affiliated physicians free parking, valet services and tax benefits to induce physicians to refer patients to the health system. Continue Reading A Hospital’s Deserving Stark and AKS Victory—But At What Cost?

In a case of first impression, a federal court found that the federal physician self-referral law’s (Stark Law) requirement that financial arrangements with physicians be memorialized in a signed writing could be material to the government’s payment decision. This case raises troubling questions about applying the False Claims Act (FCA) to what many in the industry consider “technical” Stark issues, especially given the Supreme Court’s description of the materiality test as “demanding” and not satisfied by “minor or insubstantial” regulatory noncompliance.

United States ex rel. Tullio Emanuele v. Medicor Associates (Emanuele), in the US District Court for the Western District of Pennsylvania, involves Medicor Associates, Inc., a private medical group practice (Medicor), and Hamot Medical Center’s (Hamot) exclusive provider of cardiology coverage. Tullio Emanuele, a qui tam relator and former physician member of Medicor, alleged that Hamot, Medicor, and four of Medicor’s shareholder-employee cardiologists (the Physicians) violated the FCA and Stark Law because Hamot’s multiple medical director compensation arrangements with Medicor failed to satisfy the signed writing requirement in the Stark Law’s personal services or fair market value exceptions during various periods of time. The US Department of Justice declined to intervene in the case, but filed a statement of interest in the summary judgment stage supporting the relator’s position. Continue Reading Is the Stark Law’s “Signed Writing” Requirement Material to Payment: One Federal Court Says Yes

On November 15, 2016, as part of its 2017 Medicare Physician Fee Schedule update, the Center for Medicare and Medicaid Services reissued its prohibition on certain unit-based rental arrangements with referring physicians, adopted updates to the list of CPT/HCPCS codes defining certain of the Stark Law’s designated health services and implemented a minor technical change to its instructions for submitting a request for an Stark advisory opinion. These revisions can be found at 81 Fed. Reg. 80170, 80524-36.

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On July 12, 2016, the US Senate Finance Committee held a hearing to “examine ways to improve and reform the Stark Law” as a follow up to releasing a white paper on June 30 titled Why Stark, Why Now? Suggestions to Improve the Stark Law to Encourage Innovative Payment Models. The white paper summarizes comments and recommendations gathered during a roundtable discussion held by the Senate Finance Committee and the US House Committee on Ways and Means in December 2015 as well as written comments submitted by roundtable participants and other stakeholders on topics taken up by the roundtable in the weeks following the meeting.

Senate Finance Committee Chairman Senator Orrin Hatch commented in a press release that “[t]he health care industry has changed significantly since Stark was first implemented, and while the original goals of the Stark law were appropriate, today it is presenting a real burden for hospitals and doctors trying to find new ways to provide high quality care while reducing costs as they work to implement recent health care reforms. . . [The] paper reflects critical feedback from the stakeholder community on the law’s ambiguities, its unintended consequences and the need for reform, and I am hopeful it jumpstarts the discussion on how Congress can modernize the law to make it work for patients, providers and taxpayers.”

Congress’ attention to Stark Law reform would address the significant False Claims Act exposure Stark Law violations can pose, which has been a very active topic for relators and government investigations in recent years.

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In October 2005, Dr. Michael Drakeford filed his qui tam against Tuomey Healthcare System alleging Stark Law and False Claims Act violations. After ten years of investigation and litigation, including two jury trials, two trips to the Fourth Circuit U.S. Court of Appeals, and a staggering judgment of $237 million, on October 16, 2015, the Department of Justice announced that it reached a settlement with Tuomey to pay $72.4 million before its sale to Palmetto Health. Dr. Drakeford received a 25 percent share ($18.1 million) plus an additional $2.5 million payment for attorneys’ costs and fees.

We have previously analyzed the Fourth Circuit’s July decision affirming the 2013 jury verdict and judgment here, and the Tuomey litigation in great detail here.

Consistent with DOJ’s policy announced in the Yates Memorandum (see post), the settlement agreement only releases Tuomey, and does not release any corporate officers, directors or employees. Moreover, the settlement contains some unusual provisions concerning two such officers, noting that Tuomey had agreed to indemnify Jay Cox and Gregg Martin, the CEO and COO respectively during the relevant time period, for their attorney fees and expenses relating to the conduct covered by the settlement. According to the settlement, Tuomey has informed the United States how much Tuomey has already advanced Cox and Martin, and Tuomey assigned to the United States all claims or potential claims Tuomey has or may have against Cox and Martin for reimbursement of fees and costs advanced to them.

Tuomey also entered into a five-year corporate integrity agreement (CIA) with the Department of Health and Human Services Office of Inspector General as part of the settlement. The CIA requires that Tuomey retain a law firm as a “Legal IRO” to perform reviews of Tuomey’s process for entering into arrangements with referral sources as well as reviewing specific arrangements.  The CIA also contains a requirement that is starting to appear in more recent CIAs — certifications of compliance from both the compliance officer and the chief executive officer instead of only the compliance officer.

After the federal government’s victory against Tuomey Hospital, we have seen an increasing number of large False Claims Act (FCA) settlements with hospitals involving Stark Law allegations. Despite the intricacies of Stark Law compliance, the U.S. Department of Justice (DOJ) has not shown much leniency in its treatment of these cases, as shown by two recent settlements involving Columbus Regional Healthcare System and North Broward Hospital District. This On the Subject explores some “lessons learned” from these settlements as well as DOJ’s emerging interpretation of the Stark Law that may put vertically integrated health systems’ physicians arrangements at risk for scrutiny.

Read the full On the Subject.

In 1989, Congress enacted the Ethics in Patient Referrals Act. Twenty-five years later, in United States ex rel. Drakeford v. Tuomey, the Fourth Circuit upheld the largest False Claims Act (FCA) judgment predicated on Stark Law violations to date: $237 million. Writing in concurrence, Judge Wynn summarized the situation as “[a]n impenetrably complex set of laws and regulations that will result in a likely death sentence for a community hospital in an already medically underserved area,” concluding that “even for well-intentioned health care providers, the Stark Law has become a booby trap rigged with strict liability and potentially ruinous exposure—especially when coupled with the False Claims Act.”

The court’s opinion did not quarrel with this assessment: “we do not discount the concerns raised by our concurring colleague regarding the result in this case. But having found no cause to upset the jury’s verdict in this case and no constitutional error, it is for Congress to consider whether changes to the Stark Law’s reach are in order.”

This is not the first time that serious concerns have been raised about the breadth, complexity, and inscrutability of the Stark Law as currently implemented. As part of the Balanced Budget Act (BBA) of 1995, Congress voted to repeal the Stark Law as applied to compensation arrangements, but the BBA was vetoed by President Bill Clinton. More recently, the law’s namesake, former Representative Fortney “Pete” Stark, has urged its repeal.

This article is not intended to summarize all the facts of Tuomey or its extended procedural history, which have been recounted elsewhere. Rather, we seek to comment on three key aspects of the case: (1) the defendant’s advice of counsel/ scienter defense; (2) the court’s application of the “takes into account” prong to Tuomey’s physician employment agreements; and (3) certain inherent tensions in the Stark Law that the Tuomey odyssey underscores.

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Defending False Claims Act litigation is often a costly budget item. The disposal of weak cases by the government through the intervention decision making process has always been a critical safety valve for non-culpable defendants. Two of the more concerning trends in False Claims Act litigation, however, are (1) the increasing likelihood of relators pursuing factually and legally weak allegations after the government declines to intervene, and (2) courts allowing such cases to survive a Rule 9(b) motion to dismiss. A recent case in the Middle District of Florida involving the unintended consequences of a health system’s adherence to a local zoning obligation serves as a prime example of these troubling trends.

On August 14, 2015, in U.S. ex rel. Bingham v. BayCare Health System, the court denied the defendants’ motion to dismiss relator’s claim that BayCare Health System (BayCare) and an independent third party real estate developer, St. Pete MOB, LLC (St. Pete’s)—referred to by relator as BayCare’s “proxy”—entered into a “scheme” to enable BayCare to pass remuneration to physicians in violation of the Stark Law and Anti-Kickback Statute (AKS). According to the relator, the heart of this “scheme” is BayCare’s ground lease to St. Pete’s on a BayCare hospital’s campus to build a medical office building (MOB).

In this ground lease, BayCare provided a non-exclusive easement for MOB tenants to use the hospital’s parking facilities.  As pleaded by the relator, and acknowledged by the court, this easement was included in the lease “to satisfy zoning and other governmental requirements.”  Despite this salient fact, relator turns this legally-required easement into illegal remuneration under the Stark Law and AKS simply by alleging that one of BayCare’s purposes in providing the easement was for St. Pete to avoid incurring the costs to lease additional land and to build a parking garage, and then for St. Pete to “pass some or all of the millions of dollars in savings to physician tenants to encourage them to make or increase referrals.” However, the relator does not appear to have mustered support for this bald conclusion. The relator does not appear to allege that the terms of the physicians’ leases with St. Pete’s are problematic, other than suggesting that amending the leases in 2013 to allow the physicians, staff and patients to use the parking facilities to access the MOB at no charge is another sign of improper remuneration.  The relator also asserts that BayCare provided a “rent concession” to the tenant physicians (even though BayCare is not the landlord) by claiming a tax exemption for what is alleged to be non-exempt property, which saved St. Pete’s about $140,000 in real property taxes. The relator alleges, with little support, that this tax exemption resulted in lower rent charged to the physician tenants and that BayCare is culpable for this alleged remuneration even though St. Pete’s was the lessor.

The legal theory and factual problems with this case are multifold. BayCare’s legal obligation to meet the local zoning requirement for the easement should raise significant challenges for the relator in proving the intent necessary for a criminal AKS violation. Nonetheless, the district court’s unwillingness to dismiss the AKS count demonstrates significant deference to the relator and forces the defendants to continue to expend costs litigating the matter. As for Stark, the relator’s complaint also appears to enjoy the broad benefit of the doubt from the court even though serious questions are presented as to whether the allegations could establish whether either direct or indirect compensation was paid to the physicians.

Notably, Thomas Bingham, the relator, is a serial whistleblower who has been previously successful at extracting settlements in prior FCA matters. Mr. Bingham is a certified real estate appraiser based in Nashville and admits to developing his qui tam allegations, not from insider knowledge, but rather from working with another client in the area, reviewing publically available information, and using “his skills and experience as a commercial real estate appraiser in uncovering the schemes.” He has brought at least two other FCA cases alleging AKS and Stark violations in hospital real estate transactions involving physicians. In 2008, he filed an FCA case against the Healthcare Corporation of America (HCA) and its Chattanooga hospital, Parkridge Medical Center, claiming that Parkridge made rental payments for office space to a physician group in excess of fair market value. This case settled in 2014 with HCA paying $16.5 million to the Government, of which Mr. Bingham received a $2.9 million relator share. Mr. Bingham has filed another FCA case against HCA, this time in Florida, alleging conduct similar to his Tennessee case. His complaint was unsealed on February 23, 2015, after the government declined to intervene. At minimum in his case against BayCare, Mr. Bingham’s admission about having no insider knowledge calls into question his ability to properly qualify as a relator under the FCA’s public disclosure bar.

Unfortunately, in at least some jurisdictions, it seems to be becoming easier for relators to pursue highly questionable fraud claims, after the government declines to intervene. While appellate courts are increasingly being called upon to reverse this trend (the Seventh Circuit’s recent rejection of implied certification claims is an apt example), hospitals and other providers are forced to assume the costly defense of meritless claims and weigh whether to take cases to trial to discourage whistle-blowers or settle matters to mitigate the often outsized risk of a “runaway” jury verdict.

There has been a flurry of judicial and administrative activity regarding the Stark Law in recent weeks, bringing both promises of reprieve for the health care industry in complying with the technicalities of the law, and reminders of the need for executive vigilance when evaluating and approving transactions with referring physicians.

  • On July 15, 2015, the Centers for Medicare & Medicaid Services (CMS) issued a notice of proposed rulemaking to amend the Stark regulations and to solicit comments from the health care industry on whether the Stark Law is a barrier to health care reform. Among other proposed amendments, CMS proposes: (1) to add two new compensation exceptions, (2) to expand the grace period for the signature requirement of various exceptions in some instances, and (3) to extend the six-month holdover provision of various exceptions. CMS also made several agency policy statements, including clarifying that signed writings do not need to be formal agreements and that the one-year term requirement of certain exceptions is satisfied when an arrangement in fact lasts for at least one year.  For a detailed overview of the proposed rule and its implications, see the Special Report. CMS’s proposals to relax the technical requirements of various Stark Law exceptions, if implemented, would be a welcome reprieve to the health care industry by addressing the potentially draconian consequences of such seemingly innocent situations as a late signature on an agreement with a referring physician.  Comments on the proposed rule are due September 8, 2015.
  • On July 2, 2015, the U.S. Court of Appeals for the Fourth Circuit upheld a $237 million False Claims Act judgment based on Stark Law violations related to part-time employment contracts between a hospital system and referring physicians in United States ex rel. Drakeford v. Tuomey, rejecting the defendant’s request for a new trial based on multiple errors by the trial court and its constitutional challenges to the trial court’s award of damages and penalties. We previously posted about this decision. (For more details, see here.) The ruling raises questions related to the advice of counsel defense and scienter, and the meaning and application of the Stark Law’s “volume or value” standard.
  • On June 12, 2015, the U.S. Court of Appeals for the District of Columbia Circuit struck down CMS’s regulatory prohibition on “per-click” equipment rental arrangements with referring physicians, but upheld CMS’s prohibition on “under arrangements” transactions. We previously posted about this decision. As we noted in that post, while it is not clear how CMS will respond to the ruling, if at all, per-click equipment rental arrangements still face scrutiny by the Office of the Inspector General (OIG) under the federal anti-kickback statute.  The OIG has not taken the position that such per-click equipment rentals automatically create liability under the anti-kickback statute, but the risk of such potential liability under the federal anti-kickback statute (as well as state anti-kickback statutes) should be carefully considered.