Third Circuit Rules Outdated Agreements May Lead to Stark Law Violations

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1 Health Law Client Alert February 20, 2009 Third Circuit Rules Outdated Agreements May Lead to Stark Law Violations A decision by the U.S. Circuit Court of Appeals for the Third Circuit finding that a longstanding agreement between a physician group and a hospital was insufficient to protect them from Stark Law violations underscores the need for providers to review and, where necessary, update the written contracts and fair market value determinations used to document compliance with the personal services exception to the federal Ethics in Patient Referrals Act of 1989 (the Stark Law) and the safe harbor to the Medicare and Medicaid Anti-Kickback Statute (the Anti-Kickback Statute). U.S. ex rel. Kosenske v. Carlisle HMA Inc. noteworthy because of the limited number of court rulings in this area highlights the risks where operating relationships under long-standing service agreements between hospitals and physician practice groups have changed over time and no longer resemble the circumstances of the original agreements (e.g., hospital ownership, new facility development, scope of services). It also serves as a reminder that (1) in-kind remuneration, and not just cash payments, can serve as the basis for a finding of violation under the Stark Law; and (2) anesthesiologists who provide pain management services can make referrals as defined by the Stark Law. The case also shows that the False Claims Act may be the means through which Stark Law and Anti-Kickback Statute violations may be prosecuted and that disgruntled former partners and employees remain a key source of these qui tam actions. Outdated Agreement Leaves Providers Open to Prosecution Under False Claims Act In Carlisle HMA, the Third Circuit ruled in favor of Ted D. Kosenske, M.D., an anesthesiologist, in his False Claims Act action against Carlisle Hospital and Health Services (the Hospital), relating to patient referrals to the Hospital from a competitor, Dr. Kosenske s former anesthesiology practice, Blue Mountain Anesthesia Associates PC (BMAA). In its decision, the court found that the personal services exception to the Stark Law no longer applied to a 17-year-old agreement between the Hospital and BMAA (the Agreement) for anesthesiology services.

2 Under the Agreement, the Hospital granted BMAA the exclusive right to provide anesthesiology and pain management services at the Hospital and committed to provide BMAA office space, supplies, equipment and personnel for serving Hospital patients. In turn, BMAA committed to providing 24-hour-a -day, seven-day-a-week anesthesia service coverage at the Hospital and agreed not to practice anesthesiology or provide pain management services anywhere but the Hospital. The Agreement provided for in-kind consideration, and no cash payment, between BMAA and the Hospital. BMAA and the Hospital each submitted claims directly to Medicare for reimbursement for their respective professional and facility fees. The Agreement also stated that the Hospital shall offer BMAA the opportunity to provide exclusive anesthesiology and pain management services at any new facility of the Hospital that provides such services. In the 17 years following the execution of the Agreement in 1992, several events occurred that the Third Circuit found relevant to the relationship between the Hospital and BMAA relationship and Dr. Kosenske s qui tam claims. First, approximately 15 months after the Agreement was signed, BMAA began providing around-the-clock pain management services to Hospital patients, but the Agreement was never amended to reflect the new services provided. Second, in 1998, the Hospital built a new stand-alone facility that included both an ambulatory surgery center and a pain clinic (the Pain Clinic). BMAA provided pain management services to patients of the Pain Clinic on the same terms under the Agreement as those applicable to the anesthesiology services it provided at the Hospital. The Agreement was never amended to include BMAA s services at the Pain Clinic. Finally, in June 2001, the Hospital was sold in an asset transaction to its current owner, Hospital Management Associates, Inc. (HMA). Although there was no explicit assignment of the Agreement as part of the transaction, HMA and BMAA continued to abide by its terms. Dr. Kosenske brought his qui tam claim under the False Claims Act on the theory that a violation of the Act occurs when a person or entity falsely certifies compliance with laws, including the Stark Law and Anti-Kickback Statute, by signing a claims form. If an underlying arrangement violates the Stark Law, Anti-Kickback Statute or other applicable law, then this false certification violates the False Claims Act. The BMAA-Hospital Relationship Violated the Stark Law The Stark Law prohibits any physician from referring Medicare or Medicaid patients to any entity with which the physician has a financial relationship for the furnishing of certain designated health services, including inpatient and outpatient hospital services, unless an exception applies. The Stark Law also prohibits an entity from billing any individual, third-party payor or other entity for any services provided pursuant to a prohibited referral. In addition to receiving no payment from government payors for services rendered in violation of the Stark Law, referring physicians and providers face possible civil fines. The Stark Law includes an exception for certain personal service arrangements, provided that a number of requirements are satisfied. In Carlisle HMA, the requirements at issue were (1) the arrangement must be set out in writing and specify the services covered, 2

3 and (2) the compensation to be paid over the term of the arrangement cannot exceed fair market value. In Carlisle HMA, the Third Circuit found that a financial relationship existed between the Hospital and BMAA, and that the Hospital and BMAA referred patients to one another for pain management services prohibited referrals (and billings) under the Stark Law absent an exception. In addition, although the court did not reach the issue of whether the Anti-Kickback Statute was violated in this case, it did find that the Anti-Kickback Statute applied. The court concluded that the Agreement did not reflect the actual operating arrangement between the Hospital and BMAA because of the changes in their relationship in the years after the execution of the Agreement. Specifically, while the Agreement required BMAA to provide all of the anesthesiology services needed by patients of the Hospital, it did not impose a similar requirement with respect to pain management services, which BMAA first provided at the Hospital and later at the Pain Clinic. In addition, the court read the Agreement to limit the arrangement between the Hospital and BMAA to services provided by BMAA at the Hospital the only facility at the time the Agreement was executed and not at the Pain Clinic. The subsequent changes to the Hospital-BMAA operating relationship required either an amendment to the Agreement or a completely new contract in order to satisfy the written contract requirement of the personal services exception under the Stark Law. The court also found that the fair market value element of the personal services exception was not met, stating it was not possible for the arms-length negotiations that preceded execution of the Agreement in 1992 to reflect the fair market value of the consideration exchanged in 1998 with respect to services provided by BMAA at the Pain Clinic. The fact that BMAA and the Hospital submitted separate claims to Medicare regarding their respective professional and facility fees, and that Medicare paid these claims, was not sufficient to establish fair market value because the reimbursement did not take into account the value of the consideration exchanged between BMAA and the Hospital under the Agreement. The Third Circuit also stated that, as a matter of law, [A] negotiated agreement between interested parties does not by definition reflect fair market value. To the contrary, the Stark Act is predicated on the recognition that, where one party is in a position to generate business for the other, negotiated agreements between such parties are often designed to disguise the payment of non-fair-market-value compensation. The court held that the Hospital failed to demonstrate that it had met the requirements of the personal services exception to the Stark Law because the Agreement no longer satisfied either the written agreement or fair market value requirements of the exception. The Court declined to address the safe harbor under the Anti-Kickback Statute safe harbor, though presumably it would have reached a similar conclusion. 3

4 Practical Implications In light of Carlisle HMA, hospitals and physician groups will want to review their longterm personal services contracts. For those contracts that involve referrals of patients for inpatient or outpatient hospital services, or any other designated health service under the Stark Law, all elements of the personal services exception must be satisfied to comply with the Stark Law, as well as to qualify for the parallel safe harbor provision in the Anti-Kickback Statute. (The court s decision also serves as a not-so-gentle reminder that, although referrals to anesthesiologists for the technical component of anesthesiology services are not separately billable and do not qualify as referrals under the Stark Law, pain management services for which anesthesiologists act as the treating physician are treated differently). Arrangements between hospitals and physician practice groups can change over time, and written agreements should be updated to reflect the actual operating arrangements between the parties. In addition, what may have constituted fair market value consideration at the signing of an agreement must be able to withstand a current fair market value analysis in light of the changed circumstances. If not, some form of additional consideration may need to be provided by one party to another. 4

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