Proceed With Caution: Counsel Sign-Off Doesn't Guarantee Stark Law Compliance

Two hospitals that proactively received counsel approval for certain employment arrangements were recently found to be in violation of Stark law, according to a Lexology report.

Halifax Health
In November, a federal judged issued a summary judgment that found Halifax Health Medical Center, a public hospital in Daytona Beach, Fla., was in violation of Stark law in regard to employment agreements with six oncologists. The six physicians' employment agreements included the opportunity for a bonus that would be drawn from a bonus pool equal to 15 percent of the oncology program's profits. Each physician would receive a bonus based on the services he or she personally performed.

Halifax argued that the employment agreement was in line with the Stark law bona fide employment exception. However, the court ruled that since the bonuses were based on a percentage of a bonus pool and not the procedures themselves, the bonuses were contingent on the oncology department's profits which would increase with referrals, thereby violating the Stark law. Additionally, the court ruled the profit pool included revenue from services and outpatient drugs that were not performed by the medical oncologists themselves.

According to a report by The Daytona Beach News-Journal, Halifax had its counsel review the employment agreements, who concluded the arrangement appeared to violate Stark regulations. Halifax then went to an outside legal firm specializing in Stark law. The firm concluded "a 'reasonable argument' existed that the hospital's contract met an exception in the Stark [law]," according to the article.

Halifax's case is scheduled to go to trial in federal court in Orlando in March. The judge's decision discussed above pertains to only a portion of the allegations, as there are also claims Halifax improperly paid three neurosurgeons.

Tuomey Healthcare
In May, a jury found Sumter, S.C.-based Tuomey Healthcare System in violation of Stark law. The hospital received,a $237 million penalty. Courts ruled Tuomey violated the False Claims Act and Stark law by filing $39 million in false claims to Medicare and compensating physicians for not referring patients to competing hospitals or physicians.

In 2003, several local specialty groups told Tuomey they planned to perform surgical procedures in-office instead of at Tuomey's 266-bed hospital. To allegedly avoid this reduction in surgical case volume, Tuomey employed the 19 specialists as part-time employees. Each of the 10-year employment contracts included essentially the same terms, one being that physicians were required to perform outpatient procedures at a Tuomey hospital or facilities owned by Tuomey.

One question raised in trial was whether the facility fee Tuomey billed to Medicare constituted a "referral" under Stark Law, given the contractual agreements it held with physicians. Another question was whether, assuming Tuomey considered the volume or value of anticipated facility fees when computing physicians' compensation, those contracts violated Stark law by taking into account the volume or value of anticipated — not just actual — referrals.

Tuomey had reached out to a third-party for legal advice on the fair market valuation of its employment agreement before entering the contracts. According to previous coverage on Becker's Hospital Review, "the valuation described the transactions and concluded the compensation was consistent with FMV, but included little supporting documentation or explanation of the methodology behind the valuation opinion."    

Lessons learned
The examples of Halifax and Tuomey are cautionary tales for hospitals and health systems. In both cases, the hospitals received indication of legal concerns in their relationships with physicians, yet they ultimately proceeded. In an overview and analysis of the Tuomey case on Becker's Hospital Review, Scott Becker, JD, CPA, partner with McGuireWoods in Chicago, wrote, "[w]hen a strategy doesn't smell correct, notwithstanding how many legal and valuation firms weigh in, leadership ought strongly consider not pursuing the strategy," adding that when a hospital finds itself seeking more than one legal opinion, that in itself is a red flag.

False Claims lawsuits deal with incredible amounts of money, and hospitals can always use a reminder of the financial penalties of such a violation. Under the False Claim Act, the government can seek triple the amount of damages, as well as another $11,000 per claim. Tuomey was issued a $237 million penalty, which the health system is now saying would force the hospital to close.

Hospitals should also regularly review employment contracts for legal compliance to ensure compensation is still consistent with the fair market value and is line with any applicable laws. Mr. Becker recommends including job descriptions and physician responsibilities with each employee arrangement as well as any other documentation regarding sought out legal advice.

More Articles on Healthcare Lawsuits:

Prime Healthcare Faces $500M in False Claims Allegations
Supreme Court to Consider PPACA Contraceptive Mandate in March
St. Mary Medical Center to Pay $2.3M to Resolve Alleged Overpayments to Physicians

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