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The U.S. Court of Appeals for the Third Circuit recently issued an opinion in United States ex rel. Kozenske v. Carlisle HMA, Inc. and Health Management Associates, Inc., No. 07-4616 (3rd Cir. 2009), which reversed summary judgment in favor of the defendants and permitted a qui tam case under the False Claims Act ("FCA") to go forward against a hospital and its anesthesia providers who asserted protection under the "personal services" exemption to Federal Stark Law ("Stark") and the Federal Anti-Kickback Statute. The court's decision mandates that hospital based physician exclusive arrangements provide specific fair market value support for exclusivity and other items or services routinely provided in hospital-based physician agreements.

The Plaintiff in the qui tam action was a former member of the anesthesiology group, Blue Mountain Anesthesia Associates, PC ("the Group") which entered into a 1992 written agreement (the "Agreement") with Carlisle Hospital and Health Services (the Hospital's prior owner, hereinafter referred to as "Carlisle") for the exclusive right to provide anesthesiology and pain management services at the Hospital. Pursuant to this exclusive service arrangement, the Hospital agreed to provide office space, supplies, equipment and personnel for the Group's use at no charge in exchange for the Group's provision of anesthesiology service coverage for the hospital's patients. In addition, the Group agreed not to provide anesthesiology service coverage or pain management services at any location other than the Hospital or any of its affiliated locations. The Agreement contemplated that the Group would administer pain management services in addition to its anesthesiology related responsibilities under the same terms and conditions as provided in the Agreement, although, importantly, no pain management services were being provided with the Agreement was executed in 1992.

In 1994, approximately 15 months after the Agreement was executed, the Group began providing pain management services to hospital patients. In 1998, the Carlisle built a new stand-alone facility containing an outpatient ambulatory surgery center and a pain clinic, located about three miles from the hospital. The Agreement was not amended to address the new facility, and no new agreement was entered into by the parties. From the day of its opening, the Group provided pain management services to patients in the pain clinic and, in exchange, was given rent-free space and equipment in the pain clinic and support personnel at no charge. As with the anesthesia services, the Group's member physicians submitted claims to Medicare for the professional services performed during these visits, and Carlisle submitted claims for the facility and technical component of the visits. The parties did not amend the Agreement to include this additional facility or new range of responsibility. In 2001, HMA (the "Hospital") purchased the hospital from Carlisle in an asset transaction, and the parties continued to operate as if the Agreement was still in effect although the Agreement was not assigned to HMA by Carlisle.

Plaintiff discontinued his practice with the Group, opened a competing pain management practice, and sought to unwind the arrangement between Group and Hospital by filing a qui tam action in 2005 alleging that the Hospital was noncompliant with Stark and the anti-kickback statute because the Hospital did not charge the Group for office space, supplies, equipment or personnel. The Stark Law prohibits any physician from referring Medicare or Medicaid patients to any entity with which the physician has a financial relationship for furnishing certain "designated health services," including inpatient and outpatient hospital services, unless an exception applies. The Stark Law also prohibits any entity from billing any payor for any services provided pursuant to a prohibited referral. Plaintiff alleged that the Hospital received referrals from the Group because it submitted claims to Medicare for facility costs and technical services rendered at the pain clinic, and the hospital provided free office space, supplies, equipment and personnel in exchange for the Group's referrals.

The federal district court ruled on a summary judgment motion that the arrangement complied with the personal services exception to the Stark law, however the federal appellate court reversed the district court decision, and made several important holdings:

1. False certification of compliance with the Stark and/or Anti-kickback laws is actionable under the False Claims Act
2. The office space, medical equipment and personnel provided by the Hospital to the Group at no charge constituted remuneration in-kind and evidenced a financial relationship arrangement under the Stark Law
3. No written agreement documented the pain management relationship because the pain management clinic was substantively different from inpatient anesthesiology services addressed by the 1992 agreement
4. Even if the 1992 contract was construed to apply to the pain management clinic relationship, the agreement did not contemplate the provision of free office space, equipment and staff provided at the pain center. Therefore, the 1992 agreement did not specify the compensation to be paid over the term of the arrangement, as required by the personal services exception.
5. Fair market value is the price resulting from bona fide bargaining between buyers and sellers "who are not otherwise in a position to generate business for the other party," thus "a negotiated agreement between interested parties does not reflect fair market value"
6. Provider-based status for the pain management clinic does not alter the Group's status as a referral source or eliminate the requirement under the Stark law, that applicable financial relationships be consistent with fair market value

According to the Kosenske court, the personal services exception excludes from referral prohibition those financial arrangements that exist for reasons independent of referrals. Under the personal services exception, compensation to be paid over the term of an arrangement must be set in advance, must not exceed fair market value, and may not be determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties. The federal court acknowledged that, although arrangements between hospitals and hospital-based physicians typically do not raise Stark or Anti-kickback law concerns because hospital-based physicians generally do not refer patients to the hospital, physicians seeing patients in a pain management clinic may refer patients to the hospital for tests or other procedures. After the Group expanded into providing pain management services, its members developed their own patient base capable of being referred to the hospital; thus, the Group was no longer a disinterested contractor, but a referral source with a compensation relationship with the hospital.

Conclusion

The Kosenske case serves as a reminder of the importance of being specific and complete and adequately documenting all relationships between hospitals and physicians. Hospitals must assure that all of their physician contracts are current, accurate and complete. In the event of changes in the type or location of services rendered between the parties, the parties must amend the existing agreement or enter into a new agreement to specifically address the changed arrangement. Exclusivity rights and use of office space, equipment, and personnel may be viewed as remuneration under Stark, therefore providers should contemporaneously document evidence supporting the arrangement's fair market value. This case notes that a hospital's provision of office space, equipment and personnel to its hospital-based service provider is not per se illegal; rather, the value of the space, equipment and personnel must be factored into an analysis of whether the overall arrangement is consistent with fair market value. Theodora Oringher Miller & Richman has substantial experience in helping hospitals and medical groups to comply with Anti-Kickback Law and Self-Referral Prohibition laws. If you have any questions or desire additional information please contact Michael Dowell at mdowell@tocounsel.com or the lawyer in the firm who generally handles your health care legal matters.