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Stark, Anti-Kickback, False Claims Act Hypothetical Analysis

By Ronald W. Chapman

Hypothetical:

In our hypothetical a cardiologist with a large practice wishes to invest in a joint venture the hospital is starting with a local radiology group. He approaches the hospital administrator and expresses interest in investing in the joint venture and assures you he has sufficient referrals to keep the place running. He also wishes to be the paid medical director. Analysis and hypothetical response: Given the extensive oversight of health care from state, federal and accrediting bodies it is extremely important that all current and future transactions be thoroughly reviewed for compliance. As I am sure you are aware the failure to comply with certain federal regulations may expose you and the hospital to criminal penalties under section 1128B of the Social Security Act (42 U.S.C. 1320a-7b(b)), as well as potential expulsion from Medicare participation under Section 1128(b)(7) of the Act, 42 U.S.C. 1320a-7(b)(7)). In light of these new and existing business realities hospital management asked me to write to you regarding the recent conversation you had with the hospital.

Initially you spoke to the hospital about becoming an investor in one of the hospital’s proposed joint ventures with one of its existing radiology group partners. You offered some ideas and suggested that a recent OIG advisory opinion would be sufficient evidence of compliance with Stark (42 CFR §§ 411.350 et seq), anti-kickback regulations (section 1128B of the Social Security Act (42 U.S.C. 1320a-7b(b)), and potentially False Claim Act violations (31 USC §§ 3729-3732). The OIG does offer advisory opinions. However, advisory opinions ( 42 CFR Part 1008) are very limited and only offer guidance to those specific parties that requested the OIG opinion, only for the specific facts identified in the request for the advisory opinion, and only if the specific guidance of the advisory opinion is followed. Additionally, the advisory opinion does not offer protection against criminal penalties if the Department of Justice feels a criminal statute has been violated.[1] Therefore, while your suggested advisory opinion may offer a starting point for a review of the transaction it is not the ending point and cannot be relied upon.

You also expressed interest in becoming an investor in a cardiology scanning center the hospital is planning on opening in joint venture with a radiology group. Your request must be examined under a number of previously mentioned federal regulations. The two most important are Stark, which prohibits self-referral arrangements, and Anti-kickback laws that prohibit both civilly and criminally the knowing and willful solicitation or receipt of any remuneration directly or indirectly, overtly or covertly, in cash or in kind.[2]

Self- referral:

Stark analysis asks the questions: Does the arrangement involve a physician referring patients to an entity for the furnishing of designated health services covered by Medicare? One of the compelling factors you used when discussing the arrangement is that you and/or your group could refer enough patients to keep the center running. Unfortunately this arrangement would be a prohibited arrangement and subject you and the hospital to civil and criminal penalties. The fact that you would be a referral source to an entity that you had a financial relationship (investor) with creates the very economic benefit the law was designed to prevent. Stark is designed to prevent this type of arrangement under the theory that if you have a financial relationship with an entity and you are also a referral source that there is a greater probability that healthcare services would be over utilized in order to gain personal financial rewards.[3] Since your ownership interest is considered a direct ownership interest and you would be referring patients from your cardiology practice to the center it would be a direct violation. Stark is also considered a strict liability rule. This means there is no mens rea element. Either you are in violation or you are not. These violations carry with them severe civil and criminal penalties and may result in exclusion from further Medicare participation.

Medical Director:

Anti-kickback[4] and Stark rules also apply to the analysis of whether payments made to you as a medical director are proper. These direct compensation arrangements are looked at in light of the fair market value of the services provided and whether the arrangement is an overt way of directing additional revenue to a physician for referring patients. The term remuneration is viewed in its broadest terms and looks at anything of value.[5] Additionally, unlike Stark the anti-kickback rule does not have a de minimis amount and remuneration means anything of value. It is my understanding that you serve as the Medical Director for the cardiology unit at the hospital and are not paid. I am not totally familiar with your arrangement; however, one of the reasons the hospital does not compensate you for this service is to ensure that you are not given a reward for referring patients and are only paid for exactly what you do. However, paying a Medical Director is not prohibited as long as the compensation is within the fair market value of the service provided and there are sufficient safeguards to ensure that you are not being paid as an inducement for referring patients. To ensure against this you should be keeping track of your time spent performing administrative duties, the types of duties performed, etc. This will give the hospital a better opportunity to ensure that the remuneration, if any, is reasonable and at fair market value.

Unfortunately, your suggestion of being paid as the Medical Director of the proposed center, in light of the fact that one of the radiologists will in fact be the Medical Director is clearly a prohibited transaction both under Stark and Anti-kickback statutes. The additional compensation for not doing anything is a violation because the remuneration paid is not a one for one exchange at fair market value for services provided. Engaging in such a transaction would be a violation of Stark and more importantly would violate the anti-kickback rules and subject you and the hospital to civil and criminal penalties. The anti-kickback statutes do provide for safe harbors for specific transactions.[6] One of those safe harbors relates to “bona fide employment relationships”.[7] One of the elements of a “bona fide” employment relationship is that it is an arm’s length transaction wherein the hospital receives fair value in the form of actual services performed by the employee. Your proposed relationship is a one way transaction and the hospital is receiving no value from the relationship. Therefore, a fair look at the proposed transaction would conclude that the money is being paid to entice referrals from you and/or your cardiology group. This would be an illegal transaction.[8]

One Purpose Test:

“This test is currently used to determine if the anti-kickback law was violated. That means, for example, that even when payments between hospitals and physicians serve legitimate purposes, the payments are kickbacks if one purpose for them is to induce referrals.”[9] This is a very strict test that is currently applied by seven plus federal circuits. The test basically says if one part of the transaction is for an illegal purpose, even if a small part, it will invalidate the entire transaction. In your proposal, since the Medical Director remuneration was proposed to entice you to stay at the current hospital and would be compensation for work that someone else is performing, it would-in and of itself-invalidate the entire transaction.

Exclusion:

In addition to civil and criminal penalties, one of the most serious penalties imposed is exclusion from participation in the Medicare/Medicaid program.[10] Additionally, most state licensing boards state that exclusion from Medicare/Medicaid is grounds for discipline, including revocation of your license. This exclusion remedy the OIG possesses would not only affect you, but also the hospital. As such, the imposition of the penalty would financially ruin the hospital and could potentially cause you to lose your license. Additionally, the exclusion remedy extends not only to those who have active participation but also to, “… any individual who (1) has a direct or indirect ownership or control interest in a sanctioned entity and has acted in ‘deliberate ignorance’ of the information or (2) is an office or a managing employee of a convicted or excluded entity, irrespective of whether the individual participated in the offense.” [11] Therefore, this transaction could not only harm you, your cardiology group, the hospital, but also the radiology group with which the hospital intends to enter the joint venture.

Conclusion:

While hospital management would love to continue to do business with you and your cardiology group, it is simply not in a position to do it in this manner. You should be aware that even the act of approaching someone to solicit remuneration to induce reimbursement under Medicare or state health care programs is a crime. The hospital is continually looking for new ways to expand services and revenue. However, it must comply with all provisions of Stark, anti-kickback laws, False Claims Act, and be mindful of the “one purpose test.” The False Claims Act makes it illegal to knowingly present or make a false claim to the government. Therefore, if we did proceed with your proposed transaction, even claims for services transmitted to the government for remuneration would be a violation of the False Claims Act. As such you, the hospital, the joint venture and others would be responsible for up to $10,000 per claim, plus three times the amount of the charges.[12] The current regulatory climate makes it very difficult to structure deals that comply with all the appropriate rules. Virtually every deal made under the pressure posed by you, when you stated you would pull your business unless the hospital “made it worth your while,” sets up one or more potential violations.

Comparison of Health Care Fraud Statutes and Penalties (click on chart to enlarge)

Chart: Health Care Fraud, Medicare Fraud, Stark, Anti-Kickback, False Claims, and Drug Trafficking Charges

This hypothetical situation could happen to you. If you have questions or concerns regarding business relationship analysis under Stark, anti-kickback, False Claims Act, or the “one purpose test” please call Ron Chapman at Chapman Law Group.

Chapman Law Group is a professional health care law litigation firm, with offices in Michigan and Florida. For over 25 years Chapman Law Group has defended the rights of health care professionals, providers and corporations involved in the delivery of health care at all levels. We believe the dedicated men and women who provide health care deserve an exceptional defense when their integrity and actions are called into question.

Ronald W. Chapman is the founder and shareholder of Chapman Law Group. For 30 years Ron has focused his practice in the defense of health care providers of all levels including correctional law, civil rights law, medical malpractice defense, and health care administrative law at the state and federal level in Michigan and Florida.


1. “We have concluded that we will not provide a mechanism responding to individual requests for advisory opinions about the legality of a particular business arrangement under the statute. The statute is primarily a criminal statute, and the Department of Justice is vested with exclusive authority to enforce all criminal laws of the United States. See sections 516, 519 and 547 of title 28 of the United States Code. For these reasons, this Department cannot, through advisory opinions, immunize health care providers from criminal prosecution under the statute.” 42 CFR Part 1001
2. The law of Healthcare Administration, J. Stuart Showalter, seventh edition, pp532-533
3. OIG Advisory Opinion No. 97-5 p 5
4. “This provision is extremely broad. The types of remuneration covered specifically include kickbacks, bribes, and rebates made directly or indirectly, overtly or covertly, or in cash or in kind. In addition, prohibited conduct includes not only remuneration intended to induce referrals of patients, but remuneration also intended to induce the purchasing, leasing, ordering, or arranging for any good, facility, service, or item paid for by Medicare or State health care programs.” 42 CFR Part 1001, RIN 0991-AA49
5. 56 FR 35952,35958 (July 29, 1991)
6. 42 CFR 1001.952
7. The law of Healthcare Administration, J. Stuart Showalter, seventh edition, p 534
8. Criminal penalties for individuals or entities that knowingly and willfully offer, pay, solicit or receive remuneration in order to induce business reimbursed under the Medicare or State health care programs are severe. The offense is classified as a felony, and is punishable by fines of up to $25,000 and imprisonment for up to 5 years. 42 CFR Part 1001
9. Report on Medicare Compliance, Volume 20, Number 17, May 16, 2011 p 1
10. “Public Law 100-93, the Medicare and Medicaid Patient and Program Protection Act of 1987, added two new provisions addressing the anti-kickback statute. Section 2 specifically provided new authority to the Office of Inspector General (OIG) to exclude an individual or entity from participation in the Medicare and State health care programs if it is determined that the party has engaged in a prohibited remuneration scheme. (Section 1128(b)(7) of the Act, 42 U.S.C. 1320a-7(b)(7)) This new sanction authority is intended to provide an alternative civil remedy, short of criminal prosecution, that will be a more effective way of regulating abusive business practices than is the case under criminal law.” 42 CFR Part 1001, RIN 0991-AA49
11. The Law of Healthcare Administration, J. Stuart Showalter, seventh edition, p 529
12. The Law of Healthcare Administration, J. Stuart Showalter, seventh edition, p 527