If you are a physician or provider, when was the last time you reviewed your written services contracts for compliance with the Stark Law?
Do you have written agreements for all of your financial relationships relating to designated health services? Do you have any financial relationships that generate compensation based on the value or volume of referrals? If you find yourself in any of these common circumstances, you may be at risk of violating the Stark Law.
Generally, the Stark Law, Section 1877 of the Social Security Act, 42 U.S.C. § 1395nn, et seq., prohibits a physician from having a financial relationship with another entity to provide designated health services (DHS) to Medicare patients, unless one or more of thirty-five statutory exceptions apply. Broadly speaking, these exceptions require that providers receive fair market value for their services, that written agreements be in place for said services, and that compensation be set in advance, and not depend on the volume or value of said services. Common exceptions include physicians in designated rural or Health Professional Shortage Areas, in-facility physician and ancillary services, arms-length rental of office space and equipment, and bona fide employment. The Stark Law is a law of strict liability, meaning that a party’s actual intent is irrelevant to the imposition of liability and damages, and that even a technical noncompliance with the law may provide grounds for liability. Damages under the Stark Law includes means full repayment of Medicare funds paid, penalties of up to $100,000 for each violating referral arrangement, as well as exclusion from future Medicare participation.
Most of the time, physicians and providers do not enter into relationships with the intent of rewarding referrals in violation of the Stark law; nevertheless, despite all good intentions, technical violations still commonly occur when parties mistakenly believe that an exception applies. Particular care and attention is warranted in all circumstances because the breadth and nuances of exceptions can be difficult to grasp, and make it all too easy for a physician or provider to misunderstand that an exception may apply when in fact it may not. Ongoing amendments and interpretations of previously gray areas of the law as applied to the myriad arrangements that may exist make it even more important that diligent review protocols are established and followed.
It should be apparent that the federal government’s ever-present need to meet budging shortfalls gives amply incentive to increase enforcement efforts. Indeed, to date in 2013 the Justice Department’s enforcement efforts have resulted in wave after wave of provider settlements involving Stark Law self-referral violations and unlawful physician compensation. Although current regulations have not formally extended Stark Law’s applicability to Medicaid, there appears to be increasing consideration by policymakers of whether, and how, to apply the Stark Law to Medicaid claims; a prudent physician or provider would be well-advised not to rely on that mere distinction to avoid liability under the Stark Law for false Medicaid claims.
In any case, it is important to understand the practical perspective that regardless of whether or when the Stark Law may apply to Medicaid claims, significant liability nevertheless exists under the False Claims Act, 31 U.S.C. § 3729 et seq. The False Claims Act provides an alternative cause of action for the government to seek damages for unlawful claims Medicare. Under the False Claims Act, a false claim is created upon an intentional failure to disclose a Stark Law violation within sixty days of identifying the overpayment due to the violation. Importantly, damages under the False Claims Act include additional penalties of up to $11,500 per claim, treble damages, and even imprisonment. Damages under the Stark Act may be cumulative to any additional penalties that may be imposed under the False Claims Act.
As always, it is important to keep in mind that enforcement of unlawful claims via referrals or kickbacks is not limited to claims brought directly by the U.S. Justice Department. The threat of whistleblower lawsuits is ever-present; the fact that whistleblowers stand to gain as much as thirty percent of each settlement or judgment gives them strong incentive to pursue legal action on behalf of the government, and is only further reason to ensure that diligent compliance measures are implemented and followed. Recent cases illustrate the impact that whistleblowers have on the Justice Department’s enforcement efforts.
For instance, in May, 2013, in a case that originated as a whistleblower action, after a retrial, the 242-bed Tuomey Healthcare System in South Carolina was found by a federal jury to be guilty of Stark Law violations and the False Claims Act. The jury awarded a judgment in excess of $39 million, representing more than 21,000 false claims in violation of the Stark Law, and Tuomey also faces up to $237 million in additional fines and treble damages under the False Claims Act. At issue in Tuomey was referral fees used to incentivize “part-time” physicians to refer business to the hospital. The government relied in part on the fact that the physicians received compensation that was far in excess of the fair market value for their services, as evidence that their employment agreements improperly took into account the volume or value of their referrals to the hospital.
Similarly, currently pending is a lawsuit seeking as much as $1.14 billion brought by both the Federal government and a whistleblower (the hospital’s director of physician services) against Halifax Health, a 678-bed public hospital system in Daytona Beach, Florida. At issue are more than 74,000 alleged false Medicare and Medicaid claims and Stark Law violations involving oncologists and neurologists who entered into contracts with the hospital to receive compensation in the form of bonuses based on the volume of business referred to the hospital’s oncology department. Part of the hospital’s defense, and one that is commonly relied on by providers, is that its compensation scheme was necessary to retain quality physician services, and that their compensation was in-line with fair market value. Some of the Justice Department’s allegations include the driving up of hospital census from the increased referrals, at the expense of quality patient case. The case is presently scheduled for trial in March, 2014.
While the largest, news-making judgments are often those involving institutional providers like hospitals and laboratories, due in part to the sheer number of allegedly false claims submitted, physicians and providers in smaller facilities have no reason to stand content of the prospect of “flying under the radar” or avoiding significant liability simply through a smaller volume of claims. Recall first that the False Claims Act allows for treble damages; a seemingly small number of claims may easily cause penalties to balloon under this framework. Consider also the fact that a smaller penalty amount may simply affect a smaller facility proportionately, but no less significantly, than a large penalty may affect a large facility.
Institutional providers often face scrutiny for false claims arising out of compensation to physicians based on volume of referrals. Smaller providers, on the other hand, are more likely to deal also with Stark Law violations for such things as compensation to out-of-facility providers for personal services without written agreements in place, or, particularly, leasing office space for less than fair market value. In each of these instances, written agreements for a term of at least one year should be in place, and the agreements should specify the compensation in advance, and not be based on revenue raised or per-unit of services rendered, and must be base on fair market value.
So, in light of the ongoing escalation in enforcement cases under the Stark Law, and the very real prospect of significant damages, penalties, and fines, what types of diligent compliance action can be taken? Providers should first be sure to review their arrangements under which referrals may be provided, to ensure that an appropriate Stark law exception applies; as part of this process, experienced legal counsel should be sought. In addition, written agreements should be periodically reviewed to ensure that they are current and not expired. Office leases should be periodically reviewed to ensure that they are current and not expired, at fair market value and/or are not tied to the volume of any referrals generated. Finally, providers should consider regular review of services contracts, particularly “evergreen” contracts to ensure that such services are still remunerated for fair market value and that such services are necessary and for legitimate business purposes.
Additionally, the CMS’ Self-Referral Disclosure Protocol should be implemented and stringently complied with to resolve any potential Stark Law violations that may be discovered throughout the compliance process. Self-disclosure of potential Stark Law violations is one way to mitigate potentially significant damages. However, before going straight to the SDRP, it is vitally important for providers to consult with legal counsel for an opinion as to the practices or conduct in question, and to devise a strategy for addressing past and future violations. It may well be possible that another Stark Law exception applies, or that the arrangement does not in fact violate the Stark Law at all. All of these measures will not only help negate or minimize the risk of exposure under the Stark Law and the False Claims Act, but will also help mitigate damages by increasing the likelihood of favorable settlement.
David K. Hou is a Senior Associate at Boylan Code LLP, concentrating his practice on Commercial Litigation, Employment Law and Intellectual Property matters. For more information, please contact David at (585) 232-5300 or dhou@boylancode.com.
