Lessons from the Trenches: Recent Stark & AKS Enforcement Actions

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
Volume/Value of
Fair market value
reasonable terms
Medicaid; Damages
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)
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
General Observations
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?
General Observations
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
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
reasonableness of entire
How did we get
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 rules
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
 “We
have attempted to read
the statute narrowly to
avoid adversely impacting
potentially beneficial
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)
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, 216-07 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)
U.S. ex rel. Singh v.
Bradford Regional
Medical Center,
W.D. Pa. (2010)
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.
Bradford Case
BRMC determined that the nuclear imaging business
was worth $2.8 million; Physicians referred 42.5% of
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.
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.
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.
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.
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.”
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).
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.
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
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)
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
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
Indirect Compensation
Does the hospital
Arrangement between
hospital and physician
have knowledge
owners/employees of group?
of that fact?
Consider the
Equipment Lease
analysis pre- and
Group practice
(Flat monthly fee
that included
post SITS rule
payment for
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
U.S. ex rel.
Drakeford v.
Tuomey Healthcare
System, Inc.
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
Tuomey Case
Arrangements in issue involve 19 long-term, parttime 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, fulltime benefits (value in the aggregate exceeded
professional fee collections)
Government’s Expert
Compensation and
benefits exceeded FMV
[no rationale for
exceeding 75th
Employment agreements
not commercially
Practice expenses not
covered by collections before
bonuses were paid
exceeded professional
Full-time benefits awarded;
exceeded what other PT
employees were allowed
10 yr term w/o allowing for
change in methodology
Material, increasing losses
incurred by Tuomey in
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
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
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).
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
Whether the aggregate compensation received by the
physicians is nevertheless lawful under the IDC
exception of 42 CFR 411.357(p).
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
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
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
• Irrelevant that government received
value in form of medical services in
connection with claims “tainted” under Stark Law
Tuomey – Second Appeal to 4th Circuit
Appeal to 4th Circuit is
pending [District Ct. -$70 million in
bond/escrow to stay
judgment pending
• CEO, COO, some
board members have
resigned; bankruptcy
threatened; credit
rating downgraded
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
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
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)
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?
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?
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.)
Tuomey Case: Lessons
Many kickback
overtones in DOJ’s
case; sounded like an
prosecution (intent;
U.S. ex rel. BaklidKunz v. Halifax
Hospital Medical
Center (2013)
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
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
US ex rel. Baklid-Kunz v. Halifax
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
US ex rel. Baklid-Kunz v. Halifax
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.
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
US ex rel. Baklid-Kunz v. Halifax
Halifax settled in April
2014 for $85 Million
Settlement does not
extend to all of
relator’s allegations
(billing, short stay
Five year Corporate
Integrity Agreement,
including requirement
for legal IRO to review
arrangements with
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)
All Children’s Health System
US ex rel. Schubert v. All Children’s Health
System, Inc., et al. (2013 WL 6054803) (M.D. Fla.)
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 hospitalaffiliated 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
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
All Children’s Health System, Inc.
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”
All Children’s Health System, Inc.
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 volumebased 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 ….”
All Children’s Health System, Inc.
“Moreover, nothing in … [the physician] … then
Stark … prohibits hospitals they cannot constitute a
from requiring their
‘referral’ in the manner
employees to perform
required to allege a
procedures at the hospital violation” under Stark.”
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
Stark Law and Medicaid:
Regulatory History
Recent Case Law
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 ….”
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)
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 …
Stark Law and Medicaid
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)
Stark Law and Medicaid
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
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
All Children’s Health System
“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
All Children’s Health System
The All Children’s case
settled in April 2014 for
$7 Million ($4 Million to
US; $3 Million to State of
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))
Kim H. Roeder
King & Spalding LLP
1180 Peachtree Street
Atlanta, GA 30309
[email protected]

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