Analysis Tracking Referrals: When Does a Hospital s Review of Referral Source Information Pose Stark Law Risks? By Joseph E. Lynch, King & Spalding LLP, Washington, DC This article examines a pending Florida federal district court case, U.S. ex. rel. Elin Baklid-Kunz v. Halifax Hospital Medical Center, 1 which raises the specter of Stark law risk in any circumstance where a hospital tracks the referrals of a physician with whom the hospital has a compensation arrangement. 2 Halifax Hospital suggests the government may construe almost any review by a hospital of a physician s referral information as evidence that the hospital took into account the physician s actual or anticipated referrals in establishing the hospital s compensation arrangement with the physician. Under such a construction, the hospital s compensation arrangement with the physician could never meet the Stark law fair market value definition because that definition excludes any compensation arrangement that takes into account a physician s actual or anticipated referrals. Since many hospital-physician compensation arrangements can only comply with the Stark law if they include fair market value compensation, Halifax Hospital indicates that a hospital may be in jeopardy under the Stark law if the hospital tracks referral information for any physician with whom the hospital has a compensation arrangement. The Halifax Hospital Case Halifax Hospital is a federal Stark law qui tam case in which the government intervened on November 4, 2011. According to the government, Halifax Hospital violated the Stark law by billing the Medicare and Medicaid Programs for services referred by a number of physicians who were receiving above fair market value employment compensation from one of the Hospital s affiliates. The government s key allegations and arguments to date in the case concerning the issue of referral tracking and its implications under the Stark law are as follows: 3 A wholly owned affiliate of Halifax Hospital, Halifax Staffing, Inc., employed on a full time basis ten physicians (three neurosurgeons and seven medical oncologists), all of whom made referrals to the Hospital for designated health services (DHS); 4 For each professional service performed by any of these physicians at Halifax Hospital there was a corresponding facility fee paid to the Hospital for the services furnished by the Hospital. According to the government, this means the compensation received by each of these physicians took into account the volume or value of referrals or other business generated by the physician for the Hospital; 5 Halifax Hospital tracked the referrals generated by each of these physicians. According to the government, this establishes both that [the Hospital and Halifax Staffing] knew they were taking into consideration the volume or value of referrals or other business generated [by these physicians] in setting [the physicians ] compensation, and establishes [the Hospital s and Halifax Staffing s] motive for entering into the prohibited relationships [with the physicians]; 6 Since the compensation received by each of these physicians took into account the volume or value of their respective referrals to or business generation for the Hospital, these physicians employment arrangements involved compensation in excess of fair market value; and Based on the foregoing, the government is alleging that the physicians DHS referrals to the Hospital, and the Hospital s bills for those DHS, violated the Stark law and were not permitted by any Stark law exception. The Government s case in Halifax Hospital centers on the Stark law definition of the term fair market value, which in pertinent part states: Usually, the fair market price is the price at which bona fide sales have been consummated for assets of like type, quality, and quantity in a particular market at the time of the acquisition, or the compensation that has been included in bona fide service agreements with comparable terms at the time of the agreement, where the price or compensation has not been determined in any manner that takes into account the volume or value of anticipated or actual referrals. 7 Emphasis added. In other words, if a hospital s compensation arrangement with a physician takes into account the volume or value of the physician s anticipated or actual referrals or business generation for the hospital, it is impossible for that compensation arrangement to meet the Stark law fair market value definition. That is the case even if the hospital has compensation surveys, other market data, expert opinions, or other evidence indicating that the financial terms in the arrangement are within the range of fair market value. The government s position in Halifax Hospital is that the subject physicians compensation arrangements cannot meet the Stark law fair market value definition because their compensation took into account the volume or value of their referrals to the Hospital. The government s position is based in part on an assertion that the Hospital s tracking of referrals from the subject physicians demonstrates the Hospital took 64 AHLA Connections June 2013
these physicians actual or anticipated referrals into account in setting these physicians compensation. This assertion by the government is very problematic for several reasons. First, and most significantly, the only support offered by the government thus far for its allegation regarding referral tracking by the Hospital is: A single December 2009 email message from the Hospital s Chief Financial Officer to its Director of Finance requesting the referral volume by three of the ten physicians involved in the case (i.e., three neurosurgeons); 8 and A single February 2010 document from the Hospital s Chief Financial Officer questioning why one of the medical oncologists involved in this case generated a comparatively low dollar value of referral services for the Hospital given that this physician saw more patients than any of the Hospital s other medical oncologists. 9 One can readily imagine many hospital administrators routinely requesting and reviewing the kind of information mentioned in these two documents, for a variety of perfectly legitimate reasons that are completely unrelated to the manner in which any of their hospital s physician employees is compensated. Indeed, it is surprising the government would even consider asserting that these two documents demonstrate Halifax Hospital engaged in any impermissible tracking of referrals or any other impermissible activity. Second, the government has provided no analysis or reasoning to support its bald conclusion that these two documents prove the Hospital and Halifax Staffing, in setting the subject physicians compensation, knowingly took into account the referrals or other business these physicians generated, or were expected to generate, for the Hospital. Given that the activity mentioned in these documents occurred in 2009 and 2010 many years after Halifax Staffing first began employing these physicians it is specious to suggest that these documents demonstrate the physicians initial compensation terms with Halifax Staffing took into account their then-current or anticipated referrals to or business generation for the Hospital. 10 Although these physicians compensation arrangements with Halifax Staffing changed over time, the two documents on which the government s referral tracking allegation relies say nothing to indicate or suggest that any previous or contemplated change in the compensation terms for any physician took into account the physician s previous, then-current, or anticipated referrals to or business generation for the Hospital. In short, it is difficult to understand why the government views the two documents mentioned above as demonstrating that the Hospital and Halifax Staffing knew they were taking into consideration the volume or value of referrals or other business generated in setting [the referring physicians ] compensation 11 Finally, since the two documents mentioned above refer only to four of the ten physicians involved in this case, it is not clear how the government concluded that those two documents show The Government s case in Halifax Hospital centers on the Stark law definition of the term fair market value... the Hospital was tracking the referrals of all ten of the physicians and setting their compensation based on those referrals. It is possible that as Halifax Hospital moves forward the government will offer additional evidence and analysis to support its conclusions regarding the meaning and import under the Stark law of the two hospital documents mentioned above. For the time being, however, the government s position in this case has created substantial uncertainty regarding when a hospital s review of a physician s referral information may pose Stark law risk for the hospital. 12 When Should a Hospital s Review of a Physician s Referral Information be Permissible under the Stark Law? The brightest of bright-line rules under the Stark law regarding the circumstances in which a hospital cannot use information on a physician s actual or anticipated DHS referrals is this: A hospital can never use information on a physician s actual or anticipated referrals to the hospital in establishing or modifying any financial terms in an arrangement with the physician that must qualify for a Stark exception which includes a fair market value compensation requirement. 13 A logical corollary to this bright-line rule is that there should be no problems under the Stark law if a hospital reviews or uses physician referral information for a purpose other than establishing or modifying the financial terms of a compensation arrangement between the physician and the hospital. For example, it should be permissible under the Stark law for a hospital to review and use physicians referral information in connection with general budgeting and strategic planning activities that do not relate specifically to any existing or contemplated compensation arrangement with a particular physician or physicians. Unfortunately, the government s allegations and arguments in Halifax Hospital indicate the government s perspective may be that any hospital review of physicians referral information is evidence that the compensation the physicians receive from the hospital cannot be fair market value compensation because such compensation takes into account the physicians actual or anticipated referrals to the hospital. Notwithstanding the uncertainty created by the government s position in Halifax Hospital, there are, in the author s healthlawyers.org 65
Analysis opinion, a few bright-line rules regarding when a hospital s review and use of physician referral information should be viewed as permissible under the Stark law. Tracking Referrals to Confirm Compliance with a Hospital s Referral Policy The regulations promulgated under the Stark law expressly permit a hospital to direct where its employed and independent contractor physicians make referrals that relate solely to such physicians services for the hospital, provided that the hospital s referral requirement and the hospital s compensation arrangement with each physician satisfy the following criteria: The compensation arrangement must be set in advance for the term of the arrangement; The compensation arrangement must be consistent with fair market value for the services performed (i.e., the compensation arrangement cannot take into account the volume or value of anticipated or required referrals); The compensation arrangement must comply with an applicable Stark exception; The referral requirement must be set forth in a written agreement signed by the parties; The referral requirement cannot apply if the patient expresses a preference for, or the patient s insurance requires, a referral to another provider, practitioner, or supplier, or if the referring physician determines a referral to another physician, practitioner, or supplier is in the patient s best interests; and The referral requirement must relate solely to the physician s services covered by his/her employment or independent contractor arrangement with the hospital, and the referral requirement must effectuate the legitimate business purposes of the parties compensation arrangement. 14 If a hospital s agreement with an employed or independent contractor physician includes a referral requirement that satisfies the foregoing criteria, it stands to reason that the hospital should be permitted under the Stark law to monitor the physician s referrals in order to confirm the physician s compliance with the hospital s referral requirement. And if based on a review of a physician s referral information the hospital determines the physician has materially breached the hospital s Stark-compliant referral requirement, the hospital should be permitted under the Stark law to terminate the physician s employment or independent contractor agreement (subject to any notice and cure provisions or other relevant provisions in the hospital s agreement with the physician). 15 A Bright-Line Rule Based on the Tuomey and Villafane Cases United States ex rel. Drakeford v. Tuomey Healthcare System, Inc. 16 does not deal with referral tracking, but the Fourth Circuit s Stark law analysis and conclusions in Tuomey point The Fourth Circuit did not expressly clarify in Tuomey what it means for a contract to take into account, on its face, the volume or value of referrals. toward another bright-line rule regarding permissible referral tracking under the Stark law. Tuomey poses some of the same issues as Halifax Hospital, particularly concerning the Stark law implications of a physician employment contract under which there is an accompanying facility fee payment to the hospital for every professional service the physician-employee performs in the hospital. In considering these kinds of physician employment contracts, the Fourth Circuit in Tuomey stated that the question under the Stark law is whether the contracts, on their face, took into account the value or volume of anticipated referrals. 17 Emphasis added. The Fourth Circuit did not expressly clarify in Tuomey what it means for a contract to take into account, on its face, the volume or value of referrals. The Fourth Circuit did expressly agree with another court s conclusion, in U.S. ex. rel. Villafane v. Solinger, 18 that intent alone does not create a Stark law violation. As such, it is reasonable to assume the Fourth Circuit s on the face of the contract comment is in accord with the following statement in Villafane: Thus, where no violation appears on the face of the arrangement, either in the form of above-fair-market-value compensation or of a provision allowing for increases or decreases in payment based on the number of referrals made, the text and history of the Stark law s desire to create a bright-line rule would seem to argue against establishing a violation on the basis of intent alone. 19 Emphasis added. Like Tuomey, the Villafane case does not deal with the issue of referral tracking. Nevertheless, a bright-line rule regarding permissible referral tracking under the Stark law can be extrapolated from the on the face of the contract comments in these two cases. That is, a hospital s review and use of a physician s referral information should not pose any problems under the Stark law as long as: The financial terms in an existing or proposed compensation contract between the hospital and the physician do not provide for increases or decreases in payment based on 66 AHLA Connections June 2013
the number or value of the physician s actual or anticipated referrals to, or business generated for, the hospital; and The physician s compensation under the contract at issue is set in advance and is within the range of fair market value. This bright-line rule is completely consistent with the following statement by the Health Care Financing Administration (which was the predecessor of the Centers for Medicare & Medicaid Services (CMS)): 20 A compensation arrangement does not take into account the volume or value of referrals or other business generated between the parties if the compensation is fixed in advance and will result in fair market value compensation, and the compensation does not vary over the term of the arrangement in any manner that takes into account referrals or other business generated. 21 As such, based on Tuomey, Villafane and the above-quoted comment by the Health Care Financing Administration, a hospital s review and use of a physician s referral information should not pose problems under the Stark law if the hospital s compensation arrangement with the physician satisfies an applicable Stark law exception and meets the Fourth Circuit s on the face of the contract standard. Use of a Physician s Referral Information in Valuing the Physician s Practice The CMS preamble comments accompanying the January 4, 2001 Stark rule expressly state that the valuation of a physician practice, and the purchase price for the practice that is determined based on the valuation, may include the value of DHS furnished in the practice pursuant to referrals by the practice s physicians if: The DHS furnished by the practice qualifies for a Stark exception (e.g., the Stark exception for in-office ancillary services; and The purchase agreement and purchase price for the practice acquisition are not contingent on future referrals by any of the practice s physicians. 22 Based on this CMS preamble comment, it must be permissible under the Stark law for a hospital, in the context of acquiring or potentially acquiring a physician practice, to review information on the in-practice referrals by the practice s physicians. Of course, the hospital could not take that referral information into account in establishing the post-acquisition compensation for any of the practice s physicians who would work for the hospital or one of its affiliates following the acquisition. healthlawyers.org 67
Analysis Tracking Referrals to Confirm a Hospital s Compliance with the Stark Law It is self-evident that to comply with the Stark law a hospital must have some system for monitoring every financial arrangement the hospital has or is considering with any physician who makes, or may make, DHS referrals to the hospital. Without such a system a hospital would have no way of knowing whether DHS referrals to the hospital were permitted or prohibited under the Stark law. Likewise, if a hospital has no system for monitoring which physicians make DHS referrals to the hospital, the hospital would have no way of knowing when the Stark law is implicated in financial arrangements the hospital has or is considering with any physician. While a hospital cannot use information on a physician s actual or anticipated referrals in establishing or modifying any financial arrangement with the physician, there should be no Stark law problem in a hospital maintaining, reviewing, and using such information to confirm that the hospital is complying with the Stark law concerning its existing and potential financial arrangements with each physician who refers, or may refer, DHS to the hospital. Conclusion Halifax Hospital calls into question the circumstances under which a hospital s review of its physicians referral information may be interpreted by the government as evidence that the hospital is paying its physicians above fair market value compensation. In any case where the government prevails on this fair market value argument, it may be impossible for the hospital-physician compensation arrangement at issue to qualify for any Stark law exception. That is because the Stark law exceptions commonly relied on to cover many hospitalphysician employment and independent contractor arrangements only apply if the physician receives fair market value compensation. While it seems unlikely that the government would prevail on its fair market value argument in every case involving any referral tracking by a hospital, Halifax Hospital demonstrates the government is prepared to raise that argument based on its interpretation of evidence regarding a hospital s review of physician referral information. 23 About the Author Joseph E. Lynch (jlynch@kslaw.com) a partner at King & Spalding in Washington, DC, represents academic medical centers, hospitals, physician practices, regional health information organizations, healthcare e-commerce companies, managed care organizations, provider networks and other healthcare providers in structuring, negotiating and implementing a wide range of clinical and administrative transactions. He has extensive expertise and knowledge regarding transactional, regulatory and compliance matters. Mr. Lynch has been recognized by Chambers USA: America s Leading Business Lawyers in Health Care Law, and by Nightingale Healthcare News as one of the top ten outstanding physician practice lawyers in the country. Endnotes 1 U.S. ex. rel. Elin Baklid-Kunz v. Halifax Hospital Medical Center d/b/a Halifax Health a/k/a Halifax Community Health System, a/k/a Halifax Medical Center and Halifax Staffing, Inc., (M.D. Fla. No. 09-1002). 2 The federal Stark law is set forth at 42 U.S.C. 1395nn, and the Stark regulations are set forth at 42 C.F.R. 411.350 et. seq. 3 This article focuses only on the aspects of the Halifax Hospital case related to the alleged referral tracking by the Hospital. It should be noted, however, that Halifax Hospital presents a number of other important issues that are beyond the scope of this article. For example, Halifax Hospital presents the issue of whether a hospital paying a physician compensation in excess of the hospital s collections for the physician s professional services invariably means the compensation arrangement is not a commercially reasonable fair market value compensation arrangement. Also, this case presents the issue of whether a physician s compensation should always be deemed to take into account the volume or value of referrals or other business generated by the physician for a hospital if for each professional service furnished by the physician at the hospital there is a corresponding facility fee paid to the hospital. And, this case presents the issue of whether a physician s productivity bonus that is calculated in part by reference to a hospital s margin on services ordered by the physician violates the Stark law prohibition against a hospital compensating a physician based on the volume or value of the physician s referrals to or business generated for the hospital. 4 Designated health services (DHS) under the Stark law are any of the following if refurnished for a Medicare or Medicaid beneficiary: clinical laboratory services; physical therapy, occupational therapy, and speechlanguage pathology services; radiology and certain other imaging services; radiation therapy service and supplies; durable medical equipment and supplies; parenteral and enteral nutrients, equipment and supplies; prosthetics, orthotics and prosthetic devices and supplies; home health services; outpatient prescription drugs; and inpatient and outpatient hospital services (not including lithotripsy services). 5 United States December 16, 2011 Opposition to Defendants Motion to Dismiss Complaint in Intervention, page 8. 6 Id. page 15. 7 The Stark law fair market value definition is set forth at 42 C.F.R. 411.351. 8 United States November 4, 2011 Complaint in Intervention, at paragraph 85. 9 Id. at paragraph 108. 10 According to the filings to date in Halifax Hospital, the neurosurgeons employment began in 2000, i.e., at least eight years prior to the Hospital s alleged tracking of the neurosurgeons referrals. Defendants November 68 AHLA Connections June 2013
AHLA s office will be closed July 4-5, 2013, in observance of Independence Day Collective Experience. Collaborative Culture. Creative Solutions. Brouse McDowell adds value to your health care business. The challenges faced by health care providers may also be opportunities for growth and prosperity. This requires a comprehensive knowledge of the law, and a clear understanding of health care as a business. Brouse understands the operations, market trends and economics of the health care industry. It s more than legal advice, it s a business solution. For more information, please contact: Daniel K. Glessner, Esq., Practice Chair 330.535.5711 x316 dglessner@brouse.com Christopher M. Huryn, Esq., Partner 330.535.5711 x389 churyn@brouse.com Akron Cleveland Avon www.brouse.com 29, 2011 Memorandum in Support of Motion to Dismiss Complaint in Intervention, page 15. Likewise, the medical oncologist s employment began sometime in or before 2004, i.e., at least five years prior to the Hospital s alleged tracking of this medical oncologist s referrals. Government s November 4, 2011 Complaint in Intervention, at paragraphs 93 and 94. 11 See supra, note 5. 12 As this article was going to press the government submitted a motion for partial summary judgment in Halifax Hospital. While that motion clarifies the government s arguments and positions concerning a number of important issues in this case, that motion offers no insight regarding the government s perspective on referral tracking by a hospital. 13 This bright-line rule is based on the abovequoted portion of the Stark law fair market value definition, which says that any compensation that takes into account the volume or value of a physician s actual or anticipated referrals or business generation cannot constitute fair market value compensation. 14 42 C.F.R. 411.354(d)(4). This provision under the Stark regulations applies to any DHS entity. 15 Needless to say, in any termination case it would be critically important for the hospital at issue to be able to demonstrate that: (i) the hospital s referral requirement actually satisfies the Stark criteria listed above; (ii) the referral requirement actually has been breached (which may be difficult to show given the breadth of the mandatory exceptions that must be included in order for a referral requirement to satisfy the Stark criteria listed above); and (iii) the termination is in fact due to the physician s material breach of the hospital s referral requirement, and is not based on the hospital s concerns that the physician is not making enough referrals to the hospital. 16 United States ex rel. Drakeford v. Tuomey Healthcare System, Inc., (D.S.C. No. 3:05-2858-MBS), remanded from the Fourth Circuit, No. 10-1819 (4th Cir. Mar. 30, 2012). 17 Tuomey, page 26. Although this statement by the Fourth Circuit only mentions anticipated referrals, it seems likely that the Fourth Circuit would take the same position regarding actual referrals. 18 543 F. Supp. 2d at 678 (2008). 19 Villafane, 543 F. Supp. 2d at 693. 20 The Health Care Financing Administration was the federal agency authorized to interpret the Stark law at the time of the statement quoted above. 21 66 Fed. Reg. 877-878 (Jan. 4, 2001). Quoted in Villafane at pages 693-4. 22 66 Fed. Reg. 877. The Stark exception for in-office ancillary services is set forth at 42 U.S.C. 1395nn(b)(2), and 42 C.F.R. 411.355(b). 23 Although this article focuses on the federal Stark law risks arising from a hospital s tracking of its referrals, it is worth noting that the Department of Health and Human Services Office of Inspector General (OIG) has a longstanding concern under the federal anti-kickback statute (AKS) regarding arrangements in which an entity furnishing items or services payable under a federal healthcare program tracks the sources of its referrals. The OIG s Special Fraud Alert Joint Venture Arrangements, originally issued in August 1989 and reissued in December 1994, is one of the OIG s earliest statements of its concern regarding referral tracking. Special Fraud Alert, Joint Venture Arrangements (OIG-89-4), reprinted in 59 Fed. Reg. 65372, 65373 (Dec. 19, 1994). The Special Fraud Alert states that a joint venture between a referral source and a referral recipient may be viewed as suspect under the AKS if various facts and circumstances exist, including, for example, when the joint venture tracks its sources of referrals, and distributes this information to the [joint venture s] investors. The OIG has never provided much analysis or guidance as to why tracking referrals can make an arrangement suspect under the AKS, but OIG statements in a number of AKS Advisory Opinions indicate the OIG believes hospitals and other providers that track the referrals they receive do so to direct or influence the referral decisions of physicians and other referral sources. See, e.g., OIG Advisory Opinions 97-5, 00-6, 01-17, 02-11, 03-12, 05-11, 07-07, 08-08, 09-09, and 10-15. In each of these AKS Advisory Opinions the OIG based its conclusion in part on various steps the parties committed to take to limit [their] ability to direct or influence referrals, including, for example, a commitment to not track referrals under the arrangement at issue. healthlawyers.org 69