2014 Health Care Law Update Georgia Academy of Healthcare Attorneys Kim H. Roeder Lessons from the...

2014 Health Care Law Update

Georgia Academy of Healthcare Attorneys

Kim H. Roeder

Lessons from the Trenches: Recent Stark and AKS Enforcement Actions

Overview: Recent Stark Law Cases

― Positions taken by government and relators in litigation

― Physician payment models: ― Volume/Value of

referrals― Fair market value― Commercially

reasonable terms― Medicaid; Damages

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Litigation and Settlements

Litigation and settlements involving the Stark Law and Anti-Kickback Statute

All Children’s Medical Ctr (2014 - $7 million) Halifax Hospital (2014 - $85 million) Tuomey Health System (2013 - $237.5 million

ruling under appeal) Bradford Regional Medical Center (2010 - $2.75 million)

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General Observations

• Stark Law is being enforced through FCA whistleblower lawsuits:

― Agency discretion and preamble guidance appear to be diminished

― Factual issues surrounding FMV and “volume or value of referrals” complicate the ability to obtain dismissal on pre-trial motions

― Scope of law (“indirect compensation”) and applicability of exceptions subject to FMV and jury

― Damages models create heightened risk

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• Recent case law has introduced uncertainty with respect to certain basic points in analysis of hospital-physician compensation: ― Compensation based on personally performed

physician services that involve a DHS procedure [facility/technical service] (“1 to 1 relationship”)

― Compensation package that may exceed professional fee collections

― Employee vs. IDC exceptions ― FMV always an element of proof?― Required referrals exception?

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• No single factor or course of action prevented the adverse rulings against providers:― FMV review by outside consultant― Legal review― Intense negotiations― Compliance officer― Employment/IDC relationship― Payment calculated on basis of physicians; personally performed services― Reliance on CMS preamble commentary

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General Observations• Some quirks that could

contribute to results:― Hospital efforts to avoid

competition by physicians― High compensation levels― Low productivity compared

to pay; or unusually high productivity

― Services structured in an unusual manner (part-time outpatient surgery)

― Incomplete consultant reports not focused on Stark rules

― Conflicting legal guidance; compliance warnings

― Failure to assess commercial reasonableness of entire arrangement

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How did we get here?

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History of the Stark Rules 1989: OBRA (Stark I)

1993: OBRA (Stark II)

1995: Stark I rules

2001: Stark II Phase I rules

2004: Stark II Phase II rules

2007: Stark II Phase III rules

2008 – 2010: 8/19/08 FR; 11/25/09 FR; PPACA

Annual MPFS, IPPS rules9

2001 Phase I Rules (66 FR 856, 860)“While the statutory

scheme … is, in large part, the key to its effectiveness, it obligates us to proceed carefully in determining the scope of activities that are prohibited.”

“… we have tried in … this rulemaking to interpret the prohibitions narrowly and the exceptions broadly, to the extent consistent with the statutory language and intent.”

“We have attempted to read the statute narrowly to avoid adversely impacting potentially beneficial arrangements.”

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2001 Phase I Rules (66 FR 856)“We expect that Phase I of this

rulemaking will result in savings by the program by providing physicians and entities with ‘bright line’ rules on how to avoid the prohibited referrals that can result in overutilization of covered services.” (66 FR at 951)

“…we have attempted, as much as possible, to establish ‘bright line’ rules

so that physicians and health care entities can ensure compliance and minimize administrative costs.” (66 FR at 860)

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History of the Stark Rules• Sheer volume and complexity complicate interpretation

of definitions and exceptions (“indirect compensation”)

• Long delays in issuance of proposed/final rules complicate the interpretation of overlapping standards (See US ex rel. Roberts v. Aging Care Home Health, Inc. et al. (USDC W.D. La., Civil Action No. 02-2199, 2-16-07 ruling)

• Some agency comments in preambles discuss or modify the agency’s thinking about certain issues and transactions without changing the text of the rule

• Reversal of agency positions on some key regulatory concepts (e.g., indirect compensation; “per click” rent)

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U.S. ex rel. Singh v. Bradford Regional

Medical Center, W.D. Pa. (2010)

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Bradford Case (2010)

• U.S. ex rel. Singh v. Bradford, W.D. Pa. (2010) (Civil No. 04-186 Erie)

• Relators brought a qui tam action alleging that hospital and physician defendants violated Stark and AKS as a result of (among other things) a nuclear camera subleasing arrangement.

• Two internal medicine physicians (Physicians) referred patients to Bradford Regional Medical Center (BRMC) for nuclear imaging.

• BRMC learned of Physicians’ plans to purchase a nuclear camera.

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Bradford Case

• BRMC determined that the nuclear imaging business was worth $2.8 million; Physicians referred 42.5% of that.

• BRMC adopted a policy that practitioners would be ineligible for staff privileges if they competed with hospital services.

• Physicians purchased new imaging camera for use in their offices.

• BRMC notified Physicians that they would be subject to the privileges policy, but offered to discuss an imaging JV or sublease arrangement.

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Bradford Case• Eventually, the parties entered into a sublease under

which BRMC leased the nuclear camera for delivery of imaging services to hospital patients.

• Monthly sublease payments included $6,545 to cover Physicians’ existing lease payments to GE, plus $23,655 for all other lease rights, including a covenant not to compete.

• BRMC’s appraisal for lease payments included a specific valuation of the non-compete.

• Non-compete appraisal assumed that Physicians would refer their business to the hospital, and valued the revenues attributable to that business.

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Bradford Case• Relators argued:

― The lease payments “took into account the volume or value of referrals”; and

― The non-compete valuation was not consistent with the Stark fair market value definition.

• Defendants argued:― A fixed monthly lease payment could not “take into

account” the volume or value of referrals, and― Fair market value was supported by the appraisal and negotiation of the parties at arms’ length.

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Bradford Case• Court appears to accept the Relator’s argument that the initial

question is whether an indirect compensation arrangements exists, and that fair market value should not be addressed until an exception is raised (at which point the defendant bears the burden of proving compliance with an exception).

• However, the opinion as a whole is confusing insofar as the Court appears to conflate the indirect compensation exception analysis with a fair market value analysis.

• The Court found the compensation arrangement was arrived at by taking into account the anticipated referrals from the doctors, citing BRMC’s FMV report.

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Bradford Case

• An arrangement that takes into account the volume/value of referrals is not FMV: “We conclude that the compensation arrangement between BRMC and the doctors is ‘inflated to compensate for the [doctors] ability to generate other revenues’ …. Specifically, we find that the amount of the compensation … was arrived at by taking into account the anticipated referrals from the doctors. We therefore conclude that the compensation arrangement between BRMC and the doctors is not ‘fair market value’ under the Stark Act.”

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Bradford Case

• Finding that the lease payments took into account the volume or value of referrals, the Court concluded that there was indirect compensation arrangement between the parties and that the “fair market value” provisions of the exceptions argued by the defendants were not met on the same basis.― The Court concluded the defendants violated the

Stark Act, but was unable to conclude at this stage whether that was done knowingly for purposes of the FCA (briefing set on damages).

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Bradford Case• The Court also refused to grant summary judgment on the

AKS claims, but said “Defendants will have a difficult challenge to prove to the fact-finder that they did not have the requisite intent.”― The value of the non-compete is roughly the value of the physicians’

anticipated business.― After arrangement entered into, physicians did in fact refer their

business.― The parties were located in a rural area with few other referral

options.

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Bradford Case: Lessons / Questions• Hurdles in this Case:

― FMV report was not focused on Stark Law ― Economic credentialing + Non-compete Payment >

Referral?― Prior to entering lease, Physicians’ attorney

argued the hospital’s economic credentialing violated AKS

― Lack of formal written agreement

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Bradford Case: Lessons / Questions

• Direct/indirect compensation analysis was complicated -- ― This arrangement straddled a change in the

Stark rules effective in late 2007― The transaction involved some aspects that

led the court to conclude the physicians personally benefited (i.e., physicians had personally guaranteed an equipment lease paid off by the hospital)

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Indirect Arrangements• Indirect compensation arrangement:

― There is an unbroken link of financial (ownership or compensation) arrangements between the physician and the DHS entity

― The DHS entity has actual knowledge of, or acts in reckless disregard or deliberate ignorance of, the fact that the referring physician receives aggregate compensation that varies with or otherwise reflects the “value or volume of referrals or other business generated by the referring physician” for the entity― Evaluate this by reference to the compensation

arrangement closest to the physician, and without reference to special rules allowing certain per unit of time/service payments

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PhysicianEmployee

Indirect Payment Scenario• Consider the elements of the definition of “indirect compensation

arrangement” – With reference to the compensation arrangement closest to the physicians, does the aggregate compensation vary with or take into account the volume or value of physician referrals to the hospital?

• Does the hospital have knowledge of that fact?• Consider the analysis pre- and post SITS rule

Physician

Group practice

Hospital

Equipment Lease (Flat monthly fee

that included payment for noncompete)

PhysicianOwner

PhysicianOwner

PhysicianOwner

Indirect Compensation Arrangement between hospital and physician owners/employees of group?

Bradford Case: Lessons / Questions

• FMV standard read back into the definition of indirect compensation

• FMV and volume/value of referrals: Is there necessarily a connection? ― If so, why isn’t FMV expressly included as a

part of the definition of an indirect compensation arrangement that is subject to the law (as distinguished from the IDC exception)?

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U.S. ex rel. Drakeford v.

Tuomey Healthcare System, Inc.

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Tuomey Case • United States ex rel. Drakeford v. Tuomey

Healthcare System, Inc. (4th Cir. 2012)• Two jury verdicts found a violation of the Stark

Law • Appeal to 4th Circuit Court of Appeals following

the retrial is pending • Whistleblower: Disgruntled surgeon who

refused the hospital’s employment offer and raised Stark Law issue in negotiations

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Tuomey Case • Arrangements in issue involve 19 long-term, part-

time employment agreements between a hospital affiliate and various specialists, in effort to stem ASC competition

• Employment relationship applied when the physicians performed outpatient surgery

• Physicians received base pay, 80% of professional fee collections, quality bonus, full-time benefits (value in the aggregate exceeded professional fee collections)

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Government’s Expert• Compensation and

benefits exceeded FMV [no rationale for exceeding 75th percentile]

• Employment agreements not commercially reasonable:― 10 yr term w/o allowing for

change in methodology― Material, increasing losses

incurred by Tuomey in practices

• Practice expenses not covered by collections before bonuses were paid

• Compensation/benefits exceeded professional collections

• Full-time benefits awarded; exceeded what other PT employees were allowed

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Tuomey Case: History

• Jury Verdict #1: Tuomey did not violate False Claims Act but did violate Stark Law

• Trial Court:― Set aside jury verdict and ordered new trial on False

Claims Act― Awarded government $45 Million in equitable

damages• 4th Circuit Court of Appeals (March 2012):

― Reversed damages award as a denial of Tuomey’s right to jury trial

― Opined on certain Stark Law issues

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Tuomey: 4th Circuit Decision• 4th Circuit addressed Stark Law issues likely

to recur on remand (issues of law):― The physicians were making referrals to Tuomey

in the form of the facility component of the physicians’ personally performed services.

― Compensation based on the volume or value of anticipated referrals implicates the volume or value standard of the definition of indirect compensation arrangements (citing Bradford, the definition of “fair market value,” and the terms of the rule allowing for required referrals).

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Tuomey: 4th Circuit Decision

• Jury Questions:― Whether the contracts, on their face, took into account the volume or value of anticipated referrals.― Clarifying footnote:

― Whether aggregate compensation to the physicians under the contracts varied with or took into account the volume or value of facility component referrals; and, if so,

― Whether the aggregate compensation received by the physicians is nevertheless lawful under the IDC exception of 42 CFR 411.357(p).

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Tuomey: Second Trial

• Defense focused largely on advice of counsel• Government argued Tuomey disregarded the

opinion of attorney consulted by both parties • Jury found violation of Stark Law and FCA

― 21,370 improper claims totaling ~ $40M ― Treble damages + $120M in civil penalties

($5500/claim) = $237.5 M

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Tuomey: Trial Court Post-Trial Order

• One-to-one relationship between physicians’ personally performed services and facility fee for surgery supported the jury’s finding of a Stark Law violation

• Jury could reasonably find that physicians’ compensation took into account volume/value of referrals based on Tuomey’s emails; and jury had right to disregard Tuomey consultant’s testimony that referral data was not used to compute compensation

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Tuomey: Trial Court Post-Trial Order

• Tuomey disputed methodology but failed to prove government’s damages calculations were incorrect― Whether “attending” and “operating” physicians

listed in claims forms made “referrals” was a question for the jury

• A reasonable jury could reject Tuomey’s advice of counsel defense due to rejection of one attorney’s advice

• Irrelevant that government received value in form of medical services in connection with claims “tainted” under Stark Law

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Tuomey – Second Appeal to 4th Circuit

• Appeal to 4th Circuit is pending [District Ct. -- $70 million in bond/escrow to stay judgment pending appeal]

• CEO, COO, some board members have resigned; bankruptcy threatened; credit rating downgraded

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Tuomey -- Second Appeal to 4th Circuit

• The parties are still contesting the “1 to 1” professional fee / facility fee relationship― “The fact that corresponding hospital services are billed

would not invalidate an employed physician’s personally performed work, for which the physician may receive a productivity bonus (subject to the fair market value requirement).” 69 FR at 16088-89.

• The government argues it was entitled to summary judgment based on the 1-to-1 relationship between physician/hospital services; and that this comment does not apply to indirect compensation or arrangements that are not FMV. [But see 69 FR 16067]

Kim H. Roeder, King & Spalding LLP 38

Tuomey - Second Appeal to 4th Circuit• 4th Circuit guidance –

review of the “contracts on their face” – appears to track CMS comments tying the “volume/value of referrals” standard to some fluctuation or variance in pay over the term of the arrangement in way that reflects referrals (See 63 FR 1659, 1700 (1/9/1998); 66 FR 877-78 (1/4/2001)

Kim H. Roeder, King & Spalding LLP

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Tuomey Case: Lingering Questions• The quality of professional opinions, particularly viewed

in hindsight, is limited by the facts― Part-time services (defined by reference to facility procedures) vs. full-time benefits; richer benefits than other part-time employees; long-term contract ― Red flags: Initiative to forestall ASC competition; assertions of

Stark Law problems in negotiations

• How to avoid opinion “shopping” (lawyers, experts) when the opinions

of qualified counselors differ? (See 12/13 AHA Amicus Brief to 4th Circuit Court of Appeals)

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Tuomey Case: Lingering Questions• How can physicians who practice in the hospital be paid based on personal productivity?

― Employment: Bonus based on personal productivity is an exception to the requirement that compensation cannot take into account volume/value of referrals

― Special rules for unit-based compensation (42 CFR 411.354(d)) apply in Stark exceptions

• “Commercially reasonable” issue if physician compensation/benefits exceed professional fee collections? What about indigent care, call, administrative services?

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Tuomey Case: Lessons• Theme in Tuomey and undertone in other

recent cases: Arrangements were not “commercially reasonable”― An element of several Stark exceptions― Certain Anti-Kickback safe harbors also refer to

business purpose of the arrangement― Not well defined by CMS or the OIG― Business purpose in absence of referrals ― Turns on the facts of the case; look at arrangement in broader context― Who determines?

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Commercial Reasonableness• In a Texas case challenging medical director agreements as

shams, the government’s expert addressed commercial reasonableness, asserting such arrangements should be “essential” to the functioning of the facility, considering: ― Size of the hospital and number of patients;― Patient acuity levels and patient needs;― Quality, activities and involvement of the medical staff and

the need for medical direction;― Number of regular committees and meetings that require

physician involvement; and― Quality of hospital management and interdisciplinary

coordination of patient services. U.S. ex rel Kaczmarczyk v. SCCI Health Services Corp. et al, 4:99-cv-01031 (S.D. Tex.)

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Tuomey Case: Lessons

Many kickback overtones in DOJ’s case; sounded like an Anti-Kickback prosecution (intent; fraud)

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U.S. ex rel. Baklid-Kunz v. Halifax

Hospital Medical Center (2013)

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US ex rel. Baklid-Kunz v. Halifax

• Relator/employee alleged FCA violations by Hospital based on Stark, Anti-Kickback laws: ― Incentive compensation pool for employed

oncologists was 15% of hospital’s operating margin for oncology program; physicians could increase compensation through referrals

― Compensation paid to neurosurgeons was above FMV (>90% MGMA)

― Payment of 100% of gross collections minus base compensation, billing expenses for psychiatrists was based on referrals, sharing in facility fees

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US ex rel. Baklid-Kunz v. Halifax• Rulings regarding the compensation for the

oncologists and the psychiatrists were not focused on FMV but on the structure of the payments, and the volume/value of referrals element of employment exception

• Employment exception applied even though the physicians were actually employed by Halifax Staffing, Inc., “alter ego” of hospital entity; IRS control tests applied

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• Government expert’s FMV assessment of neurologist compensation:― WRVUs of neurologists exceeded 90th percentile― Compensation/WRVU was within FMV, but this

was dismissed because each of the physicians was “excessively productive compared to his peers”; valuator should be “suspicious” of this fact

― WRVUs were likely inflated due to upcoding, unbundling, crediting midlevel services to physicians, improper documentation; also, relatively low levels of collections/WRVU

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• Pre-trial rulings: Stark Law exceptions are affirmative defenses; the burden is on the hospital to prove compliance with exceptions.

• Government granted partial summary judgment: The oncologists’ incentive compensation pool took into account the volume/value of referrals, and was not “based on” personally performed services because the pool was set as 15% of the program’s margin; oncologists’ referrals could impact the margin.

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US ex rel. Baklid-Kunz v. Halifax• Government did not intervene with respect to all

of relator’s claims, including compensation arrangements with employed psychiatrists

• Halifax’s FMV expert report concluded psychiatrists’ compensation was within FMV, citing compensation per WRVUs

• Relator focused on formula (base salary + 100% of collections less collection fee; no other expenses offset) and cited Tuomey

• Court applied employee exception and denied dismissal, citing Tuomey

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• Halifax settled in April 2014 for $85 Million― Settlement does not

extend to all of relator’s allegations (billing, short stay issues)

― Five year Corporate Integrity Agreement, including requirement for legal IRO to review arrangements with physicians

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Halifax -- Lessons• Relator (a current employee) alleged that her

compliance concerns were ignored• Advice of outside counsel on oncology

compensation arrangement acknowledged some risk in the arrangement involving reliance on margin

• FCA defendant bears heavy burden since burden shifted to defendant to prove compliance with a Stark exception

(FMV; not based on volume/value of referrals; commercially reasonable)

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All Children’s Health System

US ex rel. Schubert v. All Children’s Health System, Inc., et al. (2013 WL 6054803) (M.D. Fla.)

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All Children’s Health System, Inc.

• In US ex rel. Schubert v. All Children’s Health System, Inc., et al. (2013 WL 6054803) (M.D. Fla.), relator was director of operations for hospital-affiliated entity that managed physician staffing for the pediatric hospital

• Relator developed compensation plan for employed physicians, but alleged that other managers ignored the plan, paying in excess of 75th percentile when recruiting physicians

• Allegedly, physician staffing entity suffered a loss while hospital benefited from physicians’ referrals

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All Children’s Health System, Inc. • Citing the 4th Circuit decision in Tuomey, the

Court denied dismissal and held that the relator adequately alleged an indirect compensation arrangement under Stark -- ― Relator alleged the physicians’ salaries were

inflated above fair market value to compensate them for their ability to generate additional revenue for Defendants through referrals and tests (“anticipated referrals”)

― Case by case analysis required to determine volume/value of referrals standard

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• Although the Court upheld other portions of qui tam complaint, the Court dismissed allegations relating to a pediatric plastic surgeon’s “volume-based incentive for base salary”― Base Salary: 400 procedures/year performed― Bonus of $50,000 if 495 procedures performed― No allegation that compensation exceeded FMV― Court: Productivity bonuses are “not problematic”

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• Court rejected relator’s argument that she alleged an IDC agreement in violation of Stark because the arrangement was structured so that compensation would be increased if a certain number of procedures were performed at All Children’s Hospital:― There is “nothing inherently improper with volume-

based compensation agreements, as long as they do not take into account the volume or value of referrals and the procedures are personally performed by the physician ….”

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All Children’s Health System, Inc.“Moreover, nothing in … Stark … prohibits hospitals from requiring their employees to perform procedures at the hospital rather than elsewhere. … A ‘referral’ [does not include] any designated health service personally performed by the referring physician. As long as the procedures were personally performed by

[the physician] … then they cannot constitute a ‘referral’ in the manner required to allege a violation” under Stark.”

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Stark Law and Medicaid:Regulatory HistoryRecent Case Law

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Stark Law and Medicaid

• Stark I Scope: Clinical lab services; Medicare• OBRA 1993 added SSA § 1903(s) (42 USC §

1396b(s)), which restricts FFP “for expenditures for medical assistance under the State plan consisting of designated health services [as defined under section 1877(h)(6)] furnished to an individual on the basis of a referral that would result in the denial of payment under [the Medicare program if Medicare] provided for coverage of such service to the same extent and under the same terms and conditions as under the State plan ….”

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Medicaid: Proposed Rules (1998)

• §435.1012 and §455.109 of 1998 proposed Stark rules attempted to address Medicaid

• Agency commentary: Section 1903(s) is “strictly an FFP provision” and “does not, for the most part, make the provisions of section 1877 … apply directly to Medicaid physicians and providers … these individuals are not precluded from referring Medicaid patients or billing for designated health services …. A State may pay for these services, but cannot receive FFP for them.” (63 FR at 1704)

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Stark Rules and Medicaid

• Stark Phase I final rules issued in 2001 refer to the agency’s intent to address Medicaid in a separate rulemaking, Phase II (E.g., 66 FR 859, 912)

• Stark Phase II final rules issued in 2004 also failed to address Medicaid …

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• Stark Phase II Rules (2004) expressly carved out Medicaid:

“We had intended to address in this Phase II rulemaking section 1903(s) of the Act, which applies section 1877 … to referrals for Medicaid covered services and which we interpreted in the proposed rules at §435.1012 and §455.109. However, in the interest of expediting publication of these rules, we are reserving the Medicaid issue for a future rulemaking with one exception [prepaid plans exception amended to cover Medicaid managed care plans].” 69 FR 16055 (March 26, 2004)

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• Neither Stark Phase II rules nor any subsequent Stark rules address Medicaid, as referenced in the Phase I rules

• Until recently, enforcement efforts have focused on Medicare

• Stark disclosure protocol extends to Medicare

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All Children’s Health System• US and Florida did not intervene• Defendants moved to dismiss, asserting

(among other arguments) that the underlying alleged Stark Law violation was premised on an erroneous regulatory interpretation by citing claims submitted to Medicaid

• The court (relying in part on Halifax) held CMS cannot pay FFP for services provided under Medicaid if the payment would be prohibited under Medicare because a referral is illegal under the Stark law

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• “Certifying compliance with the Stark Amendment to ensure that CMS pays FFP for Medicaid claims that violate the Stark Amendment would be a violation of the False Claims Act in the same manner that certifying compliance for full reimbursement under Medicare would be.” ― The court rejected defendant’s reliance on HCFA’s

statements in a 1998 proposed Stark rule distinguishing FFP from application of Stark penalties to physicians’ Medicaid referrals

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The All Children’s case settled in April 2014 for $7 Million ($4 Million to

US; $3 Million to State of Florida)

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Stark Law / Medicaid: Open Questions• Proof of liability, damages

when Medicare and Medicaid coverage rules differ

• Impact of the agency’s deferral of rulemaking and lack of practical guidance

• Deference to state law and procedures with recovery of FFP from state at risk

• Note impact of increasing reliance on Medicaid managed care in light of exception for prepaid plans (42 CFR §411.355(c))

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Questions?

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Kim H. Roeder

King & Spalding LLP

1180 Peachtree Street

Atlanta, GA 30309

[email protected]

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2014 Health Care Law Update Georgia Academy of Healthcare Attorneys Kim H. Roeder Lessons from the...

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