On November 13, 2013, the United States District Court for the Middle District of Florida granted partial summary judgment in favor of the United States inUnited States ex rel. Baklid-Kunz v. Halifax Hospital Med. Ctr., et al. In its order, the Court provided clarification on the extent to which bonus compensation for referrals qualifies under the “bona fide employment relationships” exception to the Stark Law. A copy of the decision can be read here.

1. Factual Background

This case centers around how Halifax Hospital Medical Center (“Halifax”) compensated certain doctors within its hospital. Halifax, though its staffing instrumentality Halifax Staffing, entered into employment agreements with six oncologists. The employment agreements provided that the oncologists would receive both a salary and a bonus. The bonus for each oncologist was a percentage of a bonus pool which consisted of revenue from services directly performed by each oncologist and profits earned by the oncology department for fees and services not personally performed by each physician.

Halifax paid the bonus to its oncologists from 2005 through 2008. During this time, Halifax submitted thousands of claims forms to Medicare in which one or more of the oncologists were identified as an attending or operating physician. On June 16, 2009, the Relator, Halifax’s compliance officer, filed the qui tam action against Halifax alleging it violated the Stark Law by billing Medicare for items provided as a result of referrals from physicians with whom it had an improper financial relationship. On October 4, 2011, the Government elected to intervene in the Relator’s Stark lawsuit. The Court’s November 13, 2013 decision granted summary judgment for the Government and the Relator on the issue of whether the Stark Law was provided.

2. Stark Law Basics

1. Prohibited Referrals and Potential Liability

Generally speaking, the Stark Law, which was passed in two parts, “Stark I” and “Start II”, prohibits physicians from referring their Medicare and Medicaid patients to business entities in which the physicians or their immediate family members have a financial interest. 42 U.S.C §1395nn.

More specifically, Stark prohibits physicians from making referrals to an entity for clinical lab services if the physician had a prohibited financial relationship with the entity. In addition, Stark prohibits physicians from referring Medicare patients for the “designated health services” to an entity with which the physician (or immediate family member) has a financial relationship, unless an exception applies. Designated health services include:

(A)     Clinical laboratory services;

(B)      Physical therapy service;

(C)      Occupational therapy services;

(D)      Radiology services;

(E)      Radiation therapy services and supplies;

(F)      Durable medical equipment and supplies;

(G)      Parental and enteral nutrients, equipment, and supplies;

(H)      Prosthetics, orthotics, and prosthetic devices and supplies;

(I)      Home health services;

(J)      Outpatient prescription drugs;

(K)      Inpatient and outpatient hospital services;

(L)      Outpatient speech-language pathology services.

42 U.S.C. § 1395nn(h)(6).

The Stark Law provides:

(a) Prohibition of certain referrals

(1) In general

Except as provided in subsection (b) of this section, if a physician (or an immediate family member of such physician) has a financial relationship with an entity specified in paragraph (2), then,

(A) The physician may not make a referral to the entity for the furnishing of designated health services for which payment otherwise may be made under this subchapter, and

(B) the entity may not present or cause to be presented a claim under this subchapter or bill to any individual, third party payor, or other entity for designated health services furnished pursuant to a referral prohibited under subparagraph (A).

42 U.S.C. § 1395nn(a)(1)(emphasis added).

In order to understand Stark’s reach, it is important to understand how Stark defines a “financial relationship” and a “referral.” As explained by the Court:

The Stark Law broadly defines “financial relationships” to include an ownership or investment interest in an entity or a “compensation arrangement.” 42 U.S.C. § 1395nn(a). “Compensation arrangement,” in turn, is defined as “any arrangement involving any remuneration between a physician (or an immediate family member of such physician) and an entity.” 42 U.S.C.§ 1395nn(h)(1)(A). “Remuneration,” with certain exceptions not applicable to the instant case, includes, “any remuneration, directly or indirectly, overly or covertly, in cash or in kind.” 42 U.S.C. § 1395nn(h)(1)(B).

“Referral,” for purposes of the Stark Law, is defined as “the request or establishment of a plan of care by a physician which includes the provision of designated health services.” 42 U.S.C. § 1395nn(h)(5)(A).The regulations interpreting the statute also broadly define “referral” as, among other things, “a request by a physician that includes the provision of any designated health service for which payment may be made under Medicare, the establishment of a plan of care by a physician that includes the provision of such a designated health service, or the certifying  or recertifying of the need for such a designated health service.” 42 C.F.R. § 411.351. A referring physician is defined in the same regulation as “a physician who makes a referral as defined in this section or who directs another person or entity to make a referral or who controls referrals made to another person or entity.” Id. (emphasis added).

The Stark Law further provides that should any amounts be billed in violation of the act, the biller shall be liable for the overpayment and must refund that amount to the Government. 42 U.S.C. § 1395nn(g)(2). Violators of the Stark Law are subject to potential civil monetary penalties for each service billed.

In addition, violators also face potential False Claims Act (“FCA”), 31 U.S.C. § 3729 et seq., liability for knowingly submitting prohibited claims. Although a detailed analysis of the FCA is beyond the scope of this article, generally speaking, the FCA empowers private persons, known as relators, to file civil actions known as qui tamlawsuits and recover damages on behalf of the United States from any person who: 1) knowingly presents, or causes to be presented, a false or fraudulent claim for payment; or 2) knowingly makes uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the Government. As it relates to this case, “[f]alsely certifying compliance with the Stark Law in connection with a claim submitted to a federally funded insurance program is actionable under [the FCA].”

2. Stark’s Exceptions for Certain Compensation Arrangements

The Stark Law also provides for several exceptions to the broad general prohibition on compensation arrangements between health care entities and referring physicians. If a hospital’s financial relationship with a physician comes under one of the exceptions, then it is not prohibited under the Stark Law. The complete list of compensation arrangements exceptions are found at 42 U.S.C. § 13955nn(e).

In this case, the issue centered around whether the hospital’s financial relationship with its doctors qualified under the “bona fide employment relationships” exceptions under Stark. Under the bona fide employment relationship exception, amounts paid to a physician by an employer will not be considered a compensation arrangement under Stark if:

(A) The employment is for identifiable services;

(B) The amount of remuneration under the employment –

(i) is consistent with the fair market value of the services, and

(ii) is not determined in a manner that takes into account (directly or indirectly) the volume or value of any referrals by the referring physician;

(C) The remuneration is provided pursuant to an agreement which would be commercially reasonable even if no referrals were made to the employer, and

(D) The employment meets such other requirements as the Secretary may impose by regulation as needed to protect against program or patient abuse.

42 U.S.C. § 1395nn(e)(2).

3. Analysis

In concluding that Halifax’s bonus scheme violated Stark and did not qualify as a bona fide employment relationship, the District Court focused its analysis on whether Halifax’s bonus compensation program “takes into account (directly or indirectly) the volume or value of any referrals by the referring physician.” 42 U.S.C. 1395nn(e)(2). In finding that the bonus compensation varied with the volume of referrals, the Court reasoned that because “[t]he bonus itself was based on factors in addition to personally performed services – including revenue from referrals made by the Medical Oncologists for [designated health services]. . . .the size of the pool (and thus the size of each oncologist’s bonus) could be increased by making more referrals.” Thus, the bonus compensation plan did not satisfy the requirements of the bona fide employment exception and therefore the oncologists were prohibited from making referrals to Halifax for designated health services and Halifax was prohibited from submitting Medicare claims for services furnished pursuant to such services.

However, in order to establish that a violation of Stark occurred, the Government was also required to establish that the physicians who were part of the bonus compensation plan provided referrals for designated health services for which Halifax submitted Medicare claims. In finding that this did in fact occur, the Court studied the listing of physician’s on Halifax’s Medicare claims forms  (Claims Form UB-04) either as the “attending physician” or “operating physician” and held that the claims forms were relevant evidence which, if not rebutted, established that a particular physician made a referral under Stark.

In addition, because Stark is a strict liability offense, the qui tamrelator need not prove that anyone at Halifax acted in knowing violation of the law in order to establish that a violation occurred. Thus, although Halifax presented evidence that it received a legal opinion letter which found that its compensation program was compliant with the bona fide employment exception, it could not rely upon this letter as a defense to a Stark violation. However, it must be noted that the Court did not grant summary judgment as to damages under the FCA. As explained above, although Stark is a strict liability offense, the False Claims Act requires that a party commit a knowing violation in order to establish liability. Thus, the Court found, at least partially based on the existence of the legal opinion, that a genuine issue of material fact still exists as to liability under the FCA.

4. Conclusion

The Court’s decision provides clarification on the breadth of the bona fide employment relationship exception of the Stark Law. The decision makes clear that a bonus structure which merely divides up bonus compensation based on the services personally performed by an employer’s physicians will not fall within the exception if the bonus formula is not based solely on the services personally performed by each physician. If the bonus is based on factors in addition to personally performed services which can result in greater compensation based on increased referrals, then regardless of whether an employer divides the bonus based on volume of services personally performed, the bonus plan will violate the Stark law.

The Court’s decision also makes clear that health care facilities cannot shield themselves completely from Stark liability merely by having a legal opinion on file which states that the facility’s compensation relationship satisfies a recognized Stark exception. This is different than liability under the False Claims Act or the Anti-Kickback Law, 42 U.S.C § 1320a-7b(b), both of which require knowing violations to establish liability and where legal opinion letters may arguably be used as a defense to prosecution.

The health law attorneys of Fuerst Ittleman David & Joseph have extensive experience handling the various regulatory and compliance issues surrounding the provision of Medicare and Medicaid services, including False Claims Act (qui tam cases) as well as violations of the Anti-Kickback and Stark self-referral laws, among others. Furthermore, when necessary, we can provide aggressive, experienced litigation services in civil and criminal actions related to all of these areas. FIDJ also handles provider acquisitions and provides strategic tax planning advice to health care providers and suppliers.

Fuerst Ittleman David & Joseph’s Health Care Practice Group combines experienced lawyers and consultants from several practice areas to provide comprehensive representation in all aspects of health care law.  Let FIDJ show you how we can help today.

For more information, please contact us at contact@fidjlaw.com or call us directly at 305-350-5690.

The American Health Care Association (“AHCA”) has reported that the Centers for Medicare & Medicaid Services (“CMS”) will be making efforts to streamline its audit structure. Among the changes will be the development of a new integrity contractor called a Unified Program Integrity Contractor (“UPIC”). These new contractors will focus on both Medicare and Medicaid integrity issues. Initial reports suggest that Zone Program Integrity Contractors (“ZPICs”), Program Safeguard Contractors (“PSCs”) and Medicare Administrative Contractors (“MACs”) will be folded into the UPIC structure. However, subsequent guidance from CMS suggests that ZPICs and MACs will still have some responsibilities independent of the UPIC structure.

CMS also plans to phase out Medicaid Integrity Contractors (“MICs”) while leaving Medicare Recovery Auditors (“RAs”) and Medicaid Recovery Audit Contractors (“RACs”) in place. AHCA also reported that CMS would be consolidating all Medicare and Medicaid data into one unified database.

You can read more about AHCA’s announcement here. We are hopeful that the proposed changes will actually streamline the audit process, prevent duplicative audits and limit duplicative records requests, rather than create an additional burden for providers.

Fuerst Ittleman David & Joseph, PL will continue to monitor the CMS audit landscape. For additional information concerning CMS audits, feel free to read our prior articles on this subject, including “The Latest Zpic Target: Medicare Cost Reports” and “ZPICs and Skilled Nursing Facilities: Medicare’s Wild Wild West”. Please contact us by email at contact@fidjlaw.com or telephone at 305.350.5690 with any questions.

(For additional information concerning ZPICs, please refer to our January 11, 2013 blog entry, “ZPICs and Skilled Nursing Facilities: Medicare’s Wild Wild West”).

A. Cost Reports, Generally

When Medicare was created in 1966, Medicare paid participating providers (e.g. hospitals and skilled nursing facilities) based on a portion of their costs. Medicare’s portion of costs was determined by multiplying total costs by the ratio of Medicare charges to all charges. Providers were paid an estimated amount on an interim basis; however, providers filed a “cost report” at the end of each year in order to compute a final settlement. Generally, the cost report aggregated a providers’ detailed financial data. If Medicare overpaid the provider from the interim payments, a payable was generated from the provider. If Medicare underpaid the provider from the interim payments, a receivable was generated to the provider. Medicare discontinued this payment system in 1983 (for hospitals) and 1998 (for nursing homes).

Medicare now utilizes a prospective-based reimbursement system which has no relation to a providers’ actual cost report. While providers are still required to file cost reports as a condition of participation in the Medicare program, the cost report no longer impacts the settlement process. Rather, the Centers for Medicare and Medicaid Services (“CMS”) utilizes the data to compute national reimbursement rates. In other words, a providers’ Medicare cost report is used by CMS for informational purposes only.

B. ZPIC Requests for Provider Business and Financial Data

As briefly referenced in our January 11, 2013 blog entry, “ZPICs and Skilled Nursing Facilities: Medicare’s Wild Wild West,” ZPIC auditors are demanding that skilled nursing facilities produce, in addition to patient/resident medical records, confidential and proprietary business and financial records. Generally, these demands include requests for the following: (a) detailed general ledgers; (b) audited financial statements; (c) organization charts; (d) journal entry descriptions; (e) chart of accounts; (f) board meeting minutes; (g) facility check register; (h) list of facility credit card holders and bills; (i) facility grouping schedule; (j) working trial balance; (k) balance sheets; (l) profit and loss statements; (m) floor plans; (n) facility and corporate policy and procedures manuals.

These requests not only appear to exceed the scope of a ZPIC’s authority, but also appear duplicative. When the ZPIC is questioned as to its authority to request such information, the ZPIC frequently responds citing generally to the Social Security Act. When pressed for specific citations to legal authority, the ZPIC may cite to 42 CFR §§420.301-304. Interestingly, 42 CFR 420.301-304 falls under Subpart D, “Access to Books, Documents, and Records of Subcontractors” (Emphasis added). A skilled nursing facility, however, does not fall under the definition of a “subcontractor” as defined in 42 CFR §420, Subpart D. Despite advising the ZPIC of this flaw, the ZPIC is generally unwilling to engage in any further discussion relative to the scope of its authority.

Further, the requested financial information is duplicative given CMS already obtained the financial data in the normal course of business via the provider’s Medicare cost reports. Of course, if CMS, c/o its Fiscal Intermediary/Medicare Administrative Contractor (“FI/MAC”), had an issue with the information contain in the provider’s cost report, the issue would have been addressed at that time. Yet, a request for a provider’s financial data from several years prior appears to be a means of harassing a provider into noncompliance following an endless barrage of detailed and dated financial document requests.

C. Are Medicare Cost Reports “Fair Game” for ZPICs? 

When a nursing home fails (or is otherwise unable) to produce such business and financial data, the ZPIC may instruct the FI/MAC to a issue “Notice of Change of Amount of Program Reimbursement” for each corresponding fiscal year end period. The result may be as severe as a reopening of each corresponding fiscal year end period and denying some or all of the provider’s Medicare costs referenced therein.

Interestingly, the regulations clearly state that the FI/MAC is the only entity with the authority to reopen provider cost reports and make determinations relative to same. See 42 C.F.R. §405.1801, et. seq. Further, while Section 4.7.1 of the Medicare Program Integrity Manual permits a ZPIC to compile and review cost reports, the ZPIC Zone 7 Statement of Workexpressly excludes cost report action from the scope of a ZPIC’s authority (e.g. reopening and denials).

However, the FI/MAC typically accepts the ZPICs directives without question or analysis. More importantly, the FI/MAC generally has no knowledge concerning the underlying basis for the ZPIC’s cost report action. In other words, the ZPIC and FI/MAC make it clear that the ZPIC is the sole entity making all decisions and determination relative to the providers cost reports. Thus, the FI/MAC is simply issuing correspondence based on ZPIC directives.

D. A Lack of Provider Business and Financial Data Cannot be the Basis of a ZPIC’s Adverse Cost Report Determination

ZPICs have asserted, in no uncertain terms, that the failure (or inability) to produceall of the demanded financial documentation will lead to the reopening and denial of all Medicare costs contained in the corresponding fiscal year end cost reports.

However, a provider’s failure (or inability) to produce all of the demanded financial and business records has no relation to the actual ZPIC cost report determinations. In addition to aggregating a provider’s financial data (for informational purposes only), a Medicare cost report also includes RUG scores (a/k/a the rate CMS will pay the provider for a given resident). These RUG scores are multiplied by a skilled nursing facility’s census to identify Medicare days paid. Despite requesting business and financial data, ZPICs are reopening cost reports relative to Medicare days paid and making their determinations accordingly. The ZPICs’ conduct is the equivalent of stating that no skilled nursing facility resident during the same periods qualified for Medicare and any payments received by the skilled nursing facility for those Medicare residents must be returned. Yet, whether a resident qualified for Medicare and whether that information was accurately included in the provider’s cost report has no relation to, for instance, a provider’s failure or inability to produce unrelated credit card statements and/or building floor plans. Instead, a determination relative to the accuracy of a provider’s resident Medicare costs would require an analysis of the actual facility residents during the corresponding periods. Even still (and as previously noted), a provider’s Medicare cost reports are merely informational.

E. Does a Provider Have Appeal Rights?

While providers are given the opportunity to appeal cost report reopenings/denials (whether before the Provider Reimbursement Review Board or the MAC, depending upon the amount at issue), appeals may be futile given regulations which permit CMS, c/o the U.S. Department of the Treasury, to begin recouping and/or offsetting Federal and certain eligible state funds due the provider. In essence, the provider is at risk of being choked out of business with millions of dollars earmarked by the ZPIC for recoupment/offset before the provider can assert its appeal rights, even in an action arguably void at its inception. Whether a provider should exercise its appellate rights or seek some other type of relief from a cost report reopening/denial is ultimately a fact-intensive analysis which should be made in light of all of the circumstances affecting the provider’s business.

Fuerst Ittleman David & Joseph, PL will continue to monitor the ZPIC landscape. For more information concerning the foregoing, please contact our firm’s litigation department by calling 305.350.5690, or by emailing us at contact@fidjlaw.com.