Health Law Update

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The federal government was busy over the summer when it came to decisions and settlements under the Stark Law, anti-kickback law and federal False Claims Act. This article revisits recent developments with respect to healthcare fraud and abuse.

Group Practice Pays Over $1 Million for Improper Compensation Formula

The New York Heart Center, a cardiology group with several offices, recently agreed to pay over $1.3 million to resolve claims that its compensation formula for partner physicians took into account the volume or value of referrals for designated health services for an 11-month period. The government alleged that revenue from designated health services, including nuclear imaging and PET scans, was inappropriately credited to the referring physicians who had not personally performed the services. The government further alleged that the compensation methodology was adopted by the group with knowledge that it might violate the Stark Law, thus constituting a violation of the federal False Claims Act. While the group contends its compensation practices were not in violation of the Stark Law, and that the settlement was entered into solely to avoid the expense of litigation, the case is a reminder to group practices that they should take special care in designing their compensation methods under the in-office ancillary services exception.

Whistleblower Fails to Meet 9(b) Requirements for Particularity in False Claims Act Case

Meanwhile, a federal district court in New York recently dismissed the fourth amended complaint filed by a whistleblower against a hospital in a False Claims Act case alleging that the compensation paid to physicians violated the Stark Law and anti-kickback law, among other illegal conduct. According to the whistleblower, the hospital considered the value of the physicians’ referrals when calculating the physicians’ compensation and paid the physicians more than the revenue generated from their professional revenue in violation of the Stark Law and anti-kickback law to induce such referrals to the hospital. The court held that the Federal Rule 9(b) particularity requirements were not met in the whistleblower’s pleading because the pleading failed to identify one or more false claims by, for example, demonstrating that the physician compensation alleged to be excessive was tied to referrals or constituted a kickback. The case demonstrates the importance of utilizing substantive and procedural defenses in False Claims Act cases involving the Stark Law and anti-kickback law.

$24 Million Settlement Reached in Stark Law Case

Two imaging clinics and a physician group agreed to pay $24 million to settle allegations that they violated the Stark Law and anti-kickback law by directly compensating referring physicians for their referrals to the clinics. The illegal compensation allegedly resulted from the clinics’ payments of a share of the revenues to the physician group as compensation for the acquisition of the imaging clinics from the group. The shared revenues allegedly included profits from imaging and laboratory services, which are considered “designated health services” for purposes of the Stark Law’s referral and billing prohibitions. The whistleblower, a physician who was formerly employed by the physician group at issue, reportedly received $4.1 million in connection with the settlement. Counsel for the physician group allegedly advised the group and the imaging providers in 2010 that the arrangement likely violated the Stark Law, thus facilitating a “knowing” violation of the federal False Claims Act.

Novel Recovery for Tortious Interference Based on Stark Violations

Earlier in the summer, a Florida jury determined that Millennium Labs (Millennium) violated the Stark Law and anti-kickback law by providing free point of care (POC) testing cups to physicians in exchange for referrals for specimen testing and ordered the company to pay the plaintiff, its competitor, nearly $15 million in damages. POC testing cups permit the physician to immediately read the results of the urine testing. The jury determined that the physicians’ agreement not to bill for the POC testing cups, which constituted remuneration, was offered in exchange for their referrals to Millennium in violation of the Stark Law and anti-kickback law. While Millennium never denied that it provided the cups free of charge to physicians, it contended that, because the physicians agreed not to bill for the cups, no remuneration was provided to them.

The federal district court disagreed with Millennium when it determined that the Stark Law and anti-kickback law were violated in two ways: (1) in many instances the physicians billed Medicare for chemical analyses, and the POC tests were not reimbursable for these same patients; and (2) in other instances the physicians could not receive reimbursement for the POC tests pursuant to its agreement with Millennium not to bill for such service. The court held that in both of these circumstances, the free POC testing cups constituted illegal remuneration paid by Millennium to the physicians. The competitor alleged the conduct violated the Stark Law and anti-kickback law, and such illegal activity constituted tortious interference with the competitor’s relationships.

The case highlights that, although there is no private right of action under the Stark Law and anti-kickback law, the laws may be used as predicate for innovative legal challenges by plaintiffs outside of the False Claims Act. In addition to the novel legal theory employed in the Millennium case, the lab industry continues to be a particular focus of the government with respect to anti-kickback law concerns, with the U.S. Department of Health and Human Services Office of Inspector General issuing a Special Fraud Alert in June regarding two recent trends in payments made by labs to referring physicians. The Special Fraud Alert identifies several factors that increase the potential for an anti-kickback law violation in two types of arrangements – compensation paid by labs to referring physicians for specimen collection, processing and packaging, and compensation paid to referring physicians for data reporting to registries.

These cases demonstrate that the federal fraud and abuse laws can be used in a variety of ways—from whistleblower plaintiffs in a False Claims Act to a competitor in a civil lawsuit with tort claims—and providers’ compliance efforts are more important than ever before. Providers not only need to structure new arrangements in compliance with the Stark Law and anti-kickback law but also need to review and take appropriate action on existing arrangements that may need restructuring before the government, a whistleblower or a competitor turn a refund or self-disclosure situation into litigation with potential False Claims Act damages and penalties.

Summer Fraud and Abuse Roundup