In a significant decision for health care providers, the US Court of Appeals for the Third Circuit recently reversed and remanded a summary judgment ruling won by a hospital defendant against a False Claims Act (FCA) whistleblower who alleged that the hospital’s exclusive arrangement with an anesthesiology practice violated both the Stark Law and the federal health care Anti-Kickback Statute. In U.S. ex rel. Kosenske v. Carlisle HMA, Inc., 2009 WL 129888 (C.A.3 Pa., January 21, 2009), the Third Circuit tackled several complex Stark Law issues and ultimately rejected the finding by the US District Court for the Middle District of Pennsylvania's finding that the arrangement satisfied the requirements of the personal service arrangement exception. Accepting the theory that a false certification of compliance with the Stark or Anti-Kickback laws is actionable under the FCA, the appeals court held that summary judgment was inappropriate and remanded the case back to the district court for the relator to establish the remaining elements of an FCA claim (namely, the defendant’s knowledge that its claims were false).

The decision is significant for several reasons, particularly because it is one of the few cases to analyze the Stark Law and regulations in some detail. First, the Third Circuit definitively rejected the very loose fair market value standard that the district court had adopted. Second, the 2007 decision by the lower court in favor of the hospital, and the government’s decision not to intervene in the case, may have given defendants a degree of comfort that relators pursuing FCA cases that “bootstrap” Stark Law or Anti-Kickback Statute claims would face difficulty. The Third Circuit’s reversal of the lower court decision erases some of this comfort, and may increase the likelihood that whistleblowers will proceed with similar cases, even when the government declines to intervene. Third, the decision clearly demonstrates the risk under the fraud and abuse laws when a hospital provides free office space, equipment and services to a physician, even when the physician is hospital-based and does not typically refer patients to the hospital. Finally, the decision suggests the importance of some of the “technical” requirements in Stark exceptions, i.e., the importance of keeping written agreements updated so that they accurately reflect the services being performed.   

The Third Circuit's willingness to engage in a fairly sophisticated analysis of the arrangements under the Stark Law and regulations is notable. The decision largely depended on the court’s recognition that hospital-based anesthesiologists typically do not refer patients to a hospital while the same physicians, providing pain management services, are a potential source of referrals. Perhaps one irony of the case is the fact that the analysis and possibly the result might have been different if the defendants had raised and the court had used the indirect compensation arrangement analysis set forth in the Stark regulations. The failure to address this issue demonstrates the law’s extraordinary complexity. 

Nevertheless, since there have been few judicial opinions analyzing the Stark Law, there has been little independent review and interpretation of the law and its increasingly complex regulations. The continuing development of such precedent ultimately may help clarify some of the many “gray areas” in the Stark Law for providers so that they can structure their arrangements accordingly to better reduce exposure. 

Background

In 1992, Blue Mountain Anesthesia Associates, PC (BMAA),and Carlisle Hospital and Health Systems (the Hospital) entered an exclusive Anesthesiology Services Agreement (the Agreement). Under the exclusivity provisions of the Agreement, BMAA would provide all anesthesiology services, 24/7, to patients at the Hospital which would provide, at no charge, the space, equipment and supplies necessary for BMAA to provide anesthesiology services. The Agreement contemplated the future provision of pain management services and the potential expansion to other locations. 

Approximately 15 months after the Agreement was executed, Ted D. Kosenske, MD then a member of BMAA, began performing pain management services for Hospital patients. In 1998, the Hospital built a new provider-based facility containing an outpatient ambulatory surgery center and a pain clinic (Pain Clinic) about three miles from the Hospital. BMAA began providing pain management services at the Pain Clinic essentially under the same terms as the 1992 Agreement (e.g., BMAA provided exclusive physician services, and the Hospital provided space, equipment and personnel at no charge), although the Agreement was never amended, nor was a new written agreement executed to cover the provision of pain management services at the Pain Clinic. Nonetheless, BMAA submitted claims to Medicare for professional services performed at the Pain Clinic and the Hospital/HMA submitted claims for the facility and technical components of these visits.

Subsequently, Kosenske brought a qui tam lawsuit against HMA and its parent company, Health Management Associates, Inc., which had acquired the Hospital, alleging that the companies falsely certified that the claims they submitted to federal health care programs in connection with the Agreement were in compliance with the Stark Law and Anti-Kickback Statute. 

The District Court for the Middle District of Pennsylvania found that, under the Stark Law, a “financial relationship” existed between BMAA and HMA due to the numerous benefits BMAA received from HMA, including the exclusive right to provide all anesthesia services at the Hospital. The district court concluded, however, that HMA produced sufficient evidence that its arrangement with BMAA satisfied the Stark Law personal services exception, and thus granted summary judgment to HMA. Specifically, the district court determined that the 1992 Agreement constituted a written agreement that governed the arrangements at the Pain Clinic given the parties' intent and actions from 1992 forward. The district court also found that the mutuality of rights and responsibilities (e.g., the physicians’ right to provide exclusive services in return for free space, equipment and personnel, and the hospital’s benefit of having on-call anesthesiologists available for its patients, etc.) was “compelling evidence” that the parties engaged in a fair market value exchange.

The Third Circuit Kosenske Decision

The Third Circuit agreed that the arrangements between BMAA and the Hospital involved compensation by the Hospital to BMAA and chose to analyze the arrangements under the Stark Law, noting that the parties had agreed that the requirements of the Stark Law and the Anti-Kickback Statute were indistinguishable in this case. 1 The Third Circuit found that
BMAA and HMA had a financial relationship subject to the Stark Law as a result of the in-kind remuneration provided to BMAA by HMA, expressly recognizing the right to provide exclusive services as “remuneration.” However, the Third Circuit disagreed with the district court’s finding that the arrangements satisfied the Stark Law’s personal services exception. First, the court enforced a strict interpretation of the written contract requirement of the Stark Law exception, noting that the 1992 contract did not apply to services provided at a facility that did not exist at the time and that the contract did not specify much of the consideration being provided, i.e., the free office space, equipment and staff the hospital was providing for BMAA’s use at the Pain Clinic. The court deemed the opening of the Pain Clinic a “very substantial change” that would require a clear written agreement that set forth both the services and the consideration being received for the services BMAA was providing in order to qualify for the Stark personal services exception.

Second, the Third Circuit rejected the district court’s loose interpretation of the fair market value test. The court found that “there was no arm’s length negotiations that could vouch for the fair match of service and compensation that the whole statutory scheme is designed to assure” for two reasons. First, as a factual matter, compensation for anesthesiology services negotiated in 1992 could not accurately reflect fair market value for a different kind of services provided six years later when the Pain Clinic opened. Next, the court determined that, as a legal matter, “a negotiated agreement between interested parties does not ‘by definition’ reflect fair market value.” 

Finally, the Third Circuit emphasized the distinction between hospital-based anesthesiologists, who typically do not refer patients, and pain management physicians, who do refer. BMAA physicians provided both types of services under the Agreement and the fact that the Hospital was providing free office space, equipment and staff to BMAA, a referral source, likely was an important factor in the court’s analysis.

Accordingly, the Third Circuit reversed the district court’s grant of summary judgment to HMA and remanded for the court to determine if Dr. Kosenske satisfied his burden of demonstrating that HMA knew its certifications related to the claims were false. 

Conclusion

The Kosenske case indicates that health care providers are going to be held to high standards of Stark Law compliance, and that courts can and will engage in detailed analysis of the Stark Law and regulations. However, the fact that the case did not address the Agreement as a potential indirect compensation arrangement suggests that providers looking to reduce risk should ensure that they have experienced health care regulatory counsel developing, scrutinizing and, when necessary, defending arrangements with physicians.

If you have any questions about this case or the health care regulatory and litigation issues it raises, please contact the authors (listed on the left side of this page) or the Arent Fox attorney with whom you regularly work.

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1 The Anti-Kickback Statute’s personal services safe harbor requires that aggregate compensation be set in advance, and the Stark personal services exception does not. Moreover, the Stark Law is a strict liability statute, whereas the Anti-Kickback Statute cannot be violated absent improper intent. Given the significant differences between the requirements of these exceptions, the statement about the two statutes being indistinguishable should be read as limited to the facts of this case.