2014 Health Care Law Update

1. 2014 Health Care Law Update Georgia Academy of Healthcare Attorneys Kim H. Roeder Lessons from the Trenches: Recent Stark and AKS Enforcement Actions

2. Overview: Recent Stark Law Cases • Positions taken by government and relators in litigation • Physician payment models: • Volume/Value of referrals • Fair market value • Commercially reasonable terms • Medicaid; Damages

3. Litigation and Settlements Litigation and settlements involving the Stark Law and Anti-Kickback Statute • All Children’s Medical Ctr (2014 - $7 million) • Halifax Hospital (2014 - $85 million) • Tuomey Health System (2013 - $237.5 million ruling under appeal) • Bradford Regional Medical Center (2010 - $2.75 million)

4. General Observations • Stark Law is being enforced through FCA whistleblower lawsuits: • Agency discretion and preamble guidance appear to be diminished • Factual issues surrounding FMV and “volume or value of referrals” complicate the ability to obtain dismissal on pre-trial motions • Scope of law (“indirect compensation”) and applicability of exceptions subject to FMV and jury • Damages models create heightened risk

5. General Observations • Recent case law has introduced uncertainty with respect to certain basic points in analysis of hospital-physician compensation: • Compensation based on personally performed physician services that involve a DHS procedure [facility/technical service] (“1 to 1 relationship”) • Compensation package that may exceed professional fee collections • Employee vs. IDC exceptions • FMV always an element of proof? • Required referrals exception?

6. General Observations • No single factor or course of action prevented the adverse rulings against providers: • FMV review by outside consultant • Legal review • Intense negotiations • Compliance officer • Employment/IDC relationship • Payment calculated on basis of physicians; personally performed services • Reliance on CMS preamble commentary

7. General Observations • Some quirks that could contribute to results: • Hospital efforts to avoid competition by physicians • High compensation levels • Low productivity compared to pay; or unusually high productivity • Services structured in an unusual manner (part-time outpatient surgery) • Incomplete consultant reports not focused on Stark rules • Conflicting legal guidance; compliance warnings • Failure to assess commercial reasonableness of entire arrangement

8. How did we get here?

9. History of the Stark Rules • 1989: OBRA (Stark I) • 1993: OBRA (Stark II) • 1995: Stark I rules • 2001: Stark II Phase I rules • 2004: Stark II Phase II rules • 2007: Stark II Phase III rules • 2008 – 2010: 8/19/08 FR; 11/25/09 FR; PPACA • Annual MPFS, IPPS rules

10. 2001 Phase I Rules (66 FR 856, 860) • “While the statutory scheme … is, in large part, the key to its effectiveness, it obligates us to proceed carefully in determining the scope of activities that are prohibited.” • “… we have tried in … this rulemaking to interpret the prohibitions narrowly and the exceptions broadly, to the extent consistent with the statutory language and intent.” • “We have attempted to read the statute narrowly to avoid adversely impacting potentially beneficial arrangements.”

11. 2001 Phase I Rules (66 FR 856) • “We expect that Phase I of this rulemaking will result in savings by the program by providing physicians and entities with ‘bright line’ rules on how to avoid the prohibited referrals that can result in overutilization of covered services.” (66 FR at 951) • “…we have attempted, as much as possible, to establish ‘bright line’ rules so that physicians and health care entities can ensure compliance and minimize administrative costs.” (66 FR at 860)

12. History of the Stark Rules • Sheer volume and complexity complicate interpretation of definitions and exceptions (“indirect compensation”) • Long delays in issuance of proposed/final rules complicate the interpretation of overlapping standards (See US ex rel. Roberts v. Aging Care Home Health, Inc. et al. (USDC W.D. La., Civil Action No. 02-2199, 2-16-07 ruling) • Some agency comments in preambles discuss or modify the agency’s thinking about certain issues and transactions without changing the text of the rule • Reversal of agency positions on some key regulatory concepts (e.g., indirect compensation; “per click” rent)

13. U.S. ex rel. Singh v. Bradford Regional Medical Center, W.D. Pa. (2010)

14. Bradford Case (2010) • U.S. ex rel. Singh v. Bradford, W.D. Pa. (2010) (Civil No. 04-186 Erie) • Relators brought a qui tam action alleging that hospital and physician defendants violated Stark and AKS as a result of (among other things) a nuclear camera subleasing arrangement. • Two internal medicine physicians (Physicians) referred patients to Bradford Regional Medical Center (BRMC) for nuclear imaging. • BRMC learned of Physicians’ plans to purchase a nuclear camera.

15. Bradford Case • BRMC determined that the nuclear imaging business was worth $2.8 million; Physicians referred 42.5% of that. • BRMC adopted a policy that practitioners would be ineligible for staff privileges if they competed with hospital services. • Physicians purchased new imaging camera for use in their offices. • BRMC notified Physicians that they would be subject to the privileges policy, but offered to discuss an imaging JV or sublease arrangement.

16. Bradford Case • Eventually, the parties entered into a sublease under which BRMC leased the nuclear camera for delivery of imaging services to hospital patients. • Monthly sublease payments included $6,545 to cover Physicians’ existing lease payments to GE, plus $23,655 for all other lease rights, including a covenant not to compete. • BRMC’s appraisal for lease payments included a specific valuation of the non-compete. • Non-compete appraisal assumed that Physicians would refer their business to the hospital, and valued the revenues attributable to that business.

17. Bradford Case • Relators argued: • The lease payments “took into account the volume or value of referrals”; and • The non-compete valuation was not consistent with the Stark fair market value definition. • Defendants argued: • A fixed monthly lease payment could not “take into account” the volume or value of referrals, and • Fair market value was supported by the appraisal and negotiation of the parties at arms’ length.

18. Bradford Case • Court appears to accept the Relator’s argument that the initial question is whether an indirect compensation arrangements exists, and that fair market value should not be addressed until an exception is raised (at which point the defendant bears the burden of proving compliance with an exception). • However, the opinion as a whole is confusing insofar as the Court appears to conflate the indirect compensation exception analysis with a fair market value analysis. • The Court found the compensation arrangement was arrived at by taking into account the anticipated referrals from the doctors, citing BRMC’s FMV report.

19. Bradford Case An arrangement that takes into account the volume/value of referrals is not FMV: “We conclude that the compensation arrangement between BRMC and the doctors is ‘inflated to compensate for the [doctors] ability to generate other revenues’ …. Specifically, we find that the amount of the compensation … was arrived at by taking into account the anticipated referrals from the doctors. We therefore conclude that the compensation arrangement between BRMC and the doctors is not ‘fair market value’ under the Stark Act.”

20. Bradford Case • Finding that the lease payments took into account the volume or value of referrals, the Court concluded that there was indirect compensation arrangement between the parties and that the “fair market value” provisions of the exceptions argued by the defendants were not met on the same basis. • The Court concluded the defendants violated the Stark Act, but was unable to conclude at this stage whether that was done knowingly for purposes of the FCA(briefing set on damages).

21. Bradford Case • The Court also refused to grant summary judgment on the AKS claims, but said “Defendants will have a difficult challenge to prove to the fact-finder that they did not have the requisite intent.” • The value of the non-compete is roughly the value of the physicians’ anticipated business. • After arrangement entered into, physicians did in fact refer their business. • The parties were located in a rural area with few other referral options.

22. Bradford Case: Lessons / Questions • Hurdles in this Case: • FMV report was not focused on Stark Law • Economic credentialing + Non-compete Payment > Referral? • Prior to entering lease, Physicians’ attorney argued the hospital’s economic credentialing violated AKS • Lack of formal written agreement

23. Bradford Case: Lessons / Questions • Direct/indirect compensation analysis was complicated -- • This arrangement straddled a change in the Stark rules effective in late 2007 • The transaction involved some aspects that led the court to conclude the physicians personally benefited (i.e., physicians had personally guaranteed an equipment lease paid off by the hospital)

24. Indirect Arrangements • Indirect compensation arrangement: • There is an unbroken link of financial (ownership or compensation) arrangements between the physician and the DHS entity • The DHS entity has actual knowledge of, or acts in reckless disregard or deliberate ignorance of, the fact that the referring physician receives aggregate compensation that varies with or otherwise reflects the “value or volume of referrals or other business generated by the referring physician” for the entity • Evaluate this by reference to the compensation arrangement closest to the physician, and without reference to special rules allowing certain per unit of time/service payments

25. Indirect Payment Scenario • Consider the elements of the definition of “indirect compensation arrangement” – With reference to the compensation arrangement closest to the physicians, does the aggregate compensation vary with or take into account the volume or value of physician referrals to the hospital? • Does the hospital have knowledge of that fact? • Consider the analysis pre- and post SITS rule Hospital Indirect Compensation Arrangement between hospital and physician owners/employees of group? Equipment Lease (Flat monthly fee that included payment for noncompete) Group practice Physician Owner Physician Owner Physician Owner Physician Employee Physician

26. Bradford Case: Lessons / Questions • FMV standard read back into the definition of indirect compensation • FMV and volume/value of referrals: Is there necessarily a connection? • If so, why isn’t FMV expressly included as a part of the definition of an indirect compensation arrangement that is subject to the law (as distinguished from the IDC exception)?

27. U.S. ex rel. Drakeford v. Tuomey Healthcare System, Inc.

28. Tuomey Case United States ex rel. Drakeford v. Tuomey Healthcare System, Inc. (4th Cir. 2012) Two jury verdicts found a violation of the Stark Law Appeal to 4th Circuit Court of Appeals following the retrial is pending Whistleblower: Disgruntled surgeon who refused the hospital’s employment offer and raised Stark Law issue in negotiations

29. Tuomey Case Arrangements in issue involve 19 long-term, part-time employment agreements between a hospital affiliate and various specialists, in effort to stem ASC competition Employment relationship applied when the physicians performed outpatient surgery Physicians received base pay, 80% of professional fee collections, quality bonus, full-time benefits (value in the aggregate exceeded professional fee collections)

30. Government’s Expert • Compensation and benefits exceeded FMV [no rationale for exceeding 75th percentile] • Employment agreements not commercially reasonable: • 10 yr term w/o allowing for change in methodology • Material, increasing losses incurred by Tuomey in practices • Practice expenses not covered by collections before bonuses were paid • Compensation/benefits exceeded professional collections • Full-time benefits awarded; exceeded what other PT employees were allowed

31. Tuomey Case: History • Jury Verdict #1: Tuomey did not violate False Claims Act but did violate Stark Law • Trial Court: • Set aside jury verdict and ordered new trial on False Claims Act • Awarded government $45 Million in equitable damages • 4th Circuit Court of Appeals (March 2012): • Reversed damages award as a denial of Tuomey’s right to jury trial • Opined on certain Stark Law issues

32. Tuomey: 4th Circuit Decision • 4th Circuit addressed Stark Law issues likely to recur on remand (issues of law): • The physicians were making referrals to Tuomey in the form of the facility component of the physicians’ personally performed services. • Compensation based on the volume or value of anticipated referrals implicates the volume or value standard of the definition of indirect compensation arrangements (citing Bradford, the definition of “fair market value,” and the terms of the rule allowing for required referrals).

33. Tuomey: 4th Circuit Decision • Jury Questions: • Whether the contracts, on their face, took into account the volume or value of anticipated referrals. • Clarifying footnote: • Whether aggregate compensation to the physicians under the contracts varied with or took into account the volume or value of facility component referrals; and, if so, • Whether the aggregate compensation received by the physicians is nevertheless lawful under the IDC exception of 42 CFR 411.357(p).

34. Tuomey: Second Trial • Defense focused largely on advice of counsel • Government argued Tuomey disregarded the opinion of attorney consulted by both parties • Jury found violation of Stark Law and FCA • 21,370 improper claims totaling ~ $40M • Treble damages + $120M in civil penalties ($5500/claim) = $237.5 M

35. Tuomey: Trial Court Post-Trial Order One-to-one relationship between physicians’ personally performed services and facility fee for surgery supported the jury’s finding of a Stark Law violation Jury could reasonably find that physicians’ compensation took into account volume/value of referrals based on Tuomey’s emails; and jury had right to disregard Tuomey consultant’s testimony that referral data was not used to compute compensation

36. Tuomey: Trial Court Post-Trial Order • Tuomey disputed methodology but failed to prove government’s damages calculations were incorrect • Whether “attending” and “operating” physicians listed in claims forms made “referrals” was a question for the jury • A reasonable jury could reject Tuomey’s advice of counsel defense due to rejection of one attorney’s advice • Irrelevant that government received value in form of medical services in connection with claims “tainted” under Stark Law

37. Tuomey – Second Appeal to 4th Circuit • Appeal to 4th Circuit is pending [District Ct. -- $70 million in bond/escrow to stay judgment pending appeal] • CEO, COO, some board members have resigned; bankruptcy threatened; credit rating downgraded

38. Tuomey -- Second Appeal to 4th Circuit • The parties are still contesting the “1 to 1” professional fee / facility fee relationship • “The fact that corresponding hospital services are billed would not invalidate an employed physician’s personally performed work, for which the physician may receive a productivity bonus (subject to the fair market value requirement).” 69 FR at 16088-89. • The government argues it was entitled to summary judgment based on the 1-to-1 relationship between physician/hospital services; and that this comment does not apply to indirect compensation or arrangements that are not FMV. [But see 69 FR 16067] Kim H. Roeder, King & Spalding LLP

39. Tuomey - Second Appeal to 4th Circuit • 4th Circuit guidance – review of the “contracts on their face” – appears to track CMS comments tying the “volume/value of referrals” standard to some fluctuation or variance in pay over the term of the arrangement in way that reflects referrals (See 63 FR 1659, 1700 (1/9/1998); 66 FR 877-78 (1/4/2001) Kim H. Roeder, King & Spalding LLP

40. Tuomey Case: Lingering Questions • The quality of professional opinions, particularly viewed in hindsight, is limited by the facts • Part-time services (defined by reference to facility procedures) vs. full-time benefits; richer benefits than other part-time employees; long-term contract • Red flags: Initiative to forestall ASC competition; assertions of Stark Law problems in negotiations • How to avoid opinion “shopping” (lawyers, experts) when the opinions of qualified counselors differ? (See 12/13 AHA Amicus Brief to 4th Circuit Court of Appeals)

41. Tuomey Case: Lingering Questions • How can physicians who practice in the hospital be paid based on personal productivity? • Employment: Bonus based on personal productivity is an exception to the requirement that compensation cannot take into account volume/value of referrals • Special rules for unit-based compensation (42 CFR 411.354(d)) apply in Stark exceptions • “Commercially reasonable” issue if physician compensation/benefits exceed professional fee collections? What about indigent care, call, administrative services?

42. Tuomey Case: Lessons • Theme in Tuomey and undertone in other recent cases: Arrangements were not “commercially reasonable” • An element of several Stark exceptions • Certain Anti-Kickback safe harbors also refer to business purpose of the arrangement • Not well defined by CMS or the OIG • Business purpose in absence of referrals • Turns on the facts of the case; look at arrangement in broader context • Who determines?

43. Commercial Reasonableness • In a Texas case challenging medical director agreements as shams, the government’s expert addressed commercial reasonableness, asserting such arrangements should be “essential” to the functioning of the facility, considering: • Size of the hospital and number of patients; • Patient acuity levels and patient needs; • Quality, activities and involvement of the medical staff and the need for medical direction; • Number of regular committees and meetings that require physician involvement; and • Quality of hospital management and interdisciplinary coordination of patient services. U.S. ex rel Kaczmarczyk v. SCCI Health Services Corp. et al, 4:99-cv-01031 (S.D. Tex.)

44. Tuomey Case: Lessons Many kickback overtones in DOJ’s case; sounded like an Anti-Kickback prosecution (intent; fraud)

45. U.S. ex rel. Baklid-Kunz v. Halifax Hospital Medical Center (2013)

46. US ex rel. Baklid-Kunz v. Halifax • Relator/employee alleged FCA violations by Hospital based on Stark, Anti-Kickback laws: • Incentive compensation pool for employed oncologists was 15% of hospital’s operating margin for oncology program; physicians could increase compensation through referrals • Compensation paid to neurosurgeons was above FMV (>90% MGMA) • Payment of 100% of gross collections minus base compensation, billing expenses for psychiatrists was based on referrals, sharing in facility fees

47. US ex rel. Baklid-Kunz v. Halifax Rulings regarding the compensation for the oncologists and the psychiatrists were not focused on FMV but on the structure of the payments, and the volume/value of referrals element of employment exception Employment exception applied even though the physicians were actually employed by Halifax Staffing, Inc., “alter ego” of hospital entity; IRS control tests applied

48. US ex rel. Baklid-Kunz v. Halifax • Government expert’s FMV assessment of neurologist compensation: • WRVUs of neurologists exceeded 90th percentile • Compensation/WRVU was within FMV, but this was dismissed because each of the physicians was “excessively productive compared to his peers”; valuator should be “suspicious” of this fact • WRVUs were likely inflated due to upcoding, unbundling, crediting midlevel services to physicians, improper documentation; also, relatively low levels of collections/WRVU

49. US ex rel. Baklid-Kunz v. Halifax Pre-trial rulings: Stark Law exceptions are affirmative defenses; the burden is on the hospital to prove compliance with exceptions. Government granted partial summary judgment: The oncologists’ incentive compensation pool took into account the volume/value of referrals, and was not “based on” personally performed services because the pool was set as 15% of the program’s margin; oncologists’ referrals could impact the margin.

50. US ex rel. Baklid-Kunz v. Halifax Government did not intervene with respect to all of relator’s claims, including compensation arrangements with employed psychiatrists Halifax’s FMV expert report concluded psychiatrists’ compensation was within FMV, citing compensation per WRVUs Relator focused on formula (base salary + 100% of collections less collection fee; no other expenses offset) and cited Tuomey Court applied employee exception and denied dismissal, citing Tuomey