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Stark Law DOs and DON’Ts: Physician Contracting

Best Practices

Bob Wade, Esq. Krieg Devault, LLC

Tuesday, September 17, 2015

Click here to begin the On-Demand recording of this Webinar

About the Speaker

BOB WADE, Esq., is a Partner and Health Care Practice Group Leader with the firm of Krieg DeVault in Mishawaka, Indiana. He has extensive experience representing health care clients — including large health systems, hospitals, ambulatory surgical centers, physician groups, physicians and other medical providers — on issues related to the Stark Law, Anti-Kickback Statute, False Claims Act, and Emergency Medical Treatment and Active Labor Act. Bob is nationally recognized in all aspects of health care compliance, including developing, monitoring and documentation of an effective compliance program. He has experience in representing health care clients with respect to issues being investigated by the Department of Justice and the HHS Office of Inspector General as well as experience negotiating and implementing Corporate Integrity Agreements. He is the legal editor of AIS’s A Guide to Complying with Stark Physician Self-Referral Rules. Recently he was appointed as the compliance expert to the Board of Halifax Health, which has the largest Stark settlement to date from a single hospital. Bob is the creator of Captain Integrity (www.captainintegrity.com), a unique compliance program branding and education resource that has received national recognition and has been used by many hospitals, health systems and other providers. Contact Bob at (574) 485-2002 or bwade@kdlegal.com.

Moderator: Francie Fernald, Managing Editor, AIS’s A Guide to Complying with Stark Physician Self-Referral Rules.

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Webinar Program• Introductions/Administrative Reminders

• Speaker’s Presentation

• 30-Minute Q&A Session

Webinar materialsStark Law DOs and DON’Ts: Physician Contracting Best Practices ................................................page 1

Presentation by Bob Wade, Esq.

Selected Report on Medicare Compliance Articles .........................................................................page 96

Webinar outlinePart 1: Bob Wade, Esq., Krieg Devault, LLC

• Stark Law: The Basics, Briefly Stated

• What is a Referral?

• Designated Health Services

• What Is a Financial Relationship?

• Exceptions

• Key Issues in Physician Contracts

• Halifax Health

• Tuomey Healthcare System

• Volume or Value

• What Is Commercially Reasonable?

• Fair Market Value

• Medical Directorships

• Real Estate

Part 2: Questions and Answers

Stark Law DOs and DON’Ts:

Physician Contracting Best

Practices Robert A. Wade, Esq.

Partner

Krieg DeVault LLP

4101 Edison Lakes Parkway, Ste. 100

Mishawaka IN 46545

574-485-2002

bwade@kdlegal.com

AIS Webinar

Sept. 17, 2015

What are the main components of best practices for physician

contracts?

Where do physician contract rules come into play with employee

physicians?

How can you determine whether the volume and value of referrals

will affect compensation?

What is a Stark-compliant bonus program? Which programs could

lead to trouble?

What are the restrictions on contracts with physicians for medical

directorships?

What are the chief pitfalls in leasing space to physicians?

Outline

Stark Law:

The Basics, Briefly Stated

Stark Act

42 U.S.C. 1395nn

The Stark II Act prohibits a physician from making a Referral to an Entity

for the furnishing of a Designated Health

Service

for which payment may be made under

Medicare

if the physician (or an immediate family member)

has a Financial Relationship with the entity

Stark II Act

Proof of

Intent is

Not Required

Penalty

Denial of payment or refund;

civil money penalties (up to $100,000) and

exclusions from federal and state

programs for improper claims or

schemes

What Is a Referral?

A referral

includes: Request for an item or a

service by a physician

Request by physician for

consultation with another physician,

and any tests or procedures the

other physician orders, performs or

supervises

Request for or

of plan of care that includes

provision of designated health

services

A referral is not a DHS personally performed by a physician

A referral does not include a request by:

Pathologists for clinical diagnostic laboratory tests and pathological

examination services

Radiologists for diagnostic radiology services

Radiation oncologists for radiation therapy

If the request for such additional services results from a

consultation initiated by another physician

What Is a Referral?

Designated Health Services Designated Health Services include:

Clinical laboratory services;

Physical therapy and occupational therapy services;

Radiology or other diagnostic services (including MRI, CAT scans);

Radiation therapy services;

Durable medical equipment;

Parental and enteral nutrients, equipment and supplies;

Prosthetics, orthotics and prosthetic devices;

Home health services;

Outpatient prescription drugs; and

Inpatient and outpatient hospital services (encompassing almost every type of medical procedure).

Note: Ambulatory Surgery Centers services are not DHS!

What Is a Financial Relationship?

A Financial Relationship includes:

Ownership interests

Through equity, debt , compensation or other

means; and

Compensation arrangements

Includes virtually any form of direct or indirect

remuneration (i.e., personal service contracts,

medical directorships, lease agreements, consulting

arrangements, medical service provider

arrangements)

What Is a Financial Relationship?

Remuneration is defined (42 CFR§ 411.351) as “any

payment or other benefit made directly or indirectly,

overtly or covertly, in cash or in kind …”

Exceptions Permitted Ownership and Compensation Arrangements:

Physician Services

In-office Ancillary Services

Services to Members of Prepaid Health Plans

Academic Medical Centers

Implants Furnished by ASC

Dialysis-related Drugs Furnished by End Stage Renal Disease Facility

Preventative Screening Tests, Immunizations and Vaccines

Eyeglasses and Contact Lenses Following Cataract Surgery

Intra-family Rural Referrals*

*New Phase II (7/26/04 effective date)

Permitted Ownership Interests:

Publicly Traded Securities

Mutual Fund Investment

Rural Provider (75% of DHS to Rural Residents)

Hospitals in Puerto Rico

Hospital Ownership (whole, not department or floor)

Applies only to physician-owned hospitals up to December

31, 2010 – such hospitals cannot (i) Expand physician

ownership percentage, or (ii) Expand capacity such as

patient rooms, procedure rooms, etc.

Exceptions

Permitted Compensation Arrangements: Rental of Office Space

Rental of Equipment

Employment Relationships

Personal Service Arrangement

Physician Recruitment

Isolated Transactions

Services Unrelated to Provision of Designated Health Services

Hospital-affiliated Group Practice Arrangements

Fair Market Value Payments Made by Physicians for Items and Services (i.e., clinical laboratory services)

Exceptions

Permitted Compensation Arrangements: Charitable Donations by Physician

Non-monetary Compensation (Benefits) up to $392 per Year (for 2015)

Fair Market Value Compensation

Medical Staff Incidental Benefits

Risk-sharing Arrangements (i.e., withholds, bonuses, risk pools)

Compliance Training

Indirect Compensation Arrangements

Referral Services

Exceptions

Permitted Compensation Arrangements: Obstetrical Malpractice Insurance Subsidies

Professional Courtesy

Retention Payments in Underserved Areas

Community-wide Health Information Systems

Electronic Prescribing Items and Services

Electronic Health Records Items and Services

Exceptions

Personal Service Arrangement Exception (Applies to Compensation Relationships)

Remuneration paid under personal service arrangement is not prohibited compensation arrangement if: Arrangement is set out in writing, signed by parties

and specifies services covered by arrangement

Arrangement covers all services to be provided by physician to entity This condition is met if contract:

» References all other arrangements; or

» References master list of contracts that is maintained with historical record of all arrangements

Term for at least one year

Personal Service Arrangement Exception (Applies To Ownership and Compensation Relationship)

Services are reasonable and necessary

Compensation to be paid over term of

arrangement is set in advance, does not

exceed FMV, is reasonable and determined

through arm’s length negotiations, and is

not determined in manner which takes into

account volume or value of referrals

between parties

Hold over month-to-month following a term of at

least one year, assuming all other provisions of

the exception are met, continuing on a month-to-

month basis for up to 6 months as long as the

terms during the holdover period are fair market

value will meet the personal service

arrangement exception

Personal Service Arrangement Exception (Applies To Ownership and Compensation Relationship)

Bona Fide Employment Exception (Applies to Compensation Relationships)

Employment is for identifiable services.

Amount of remuneration under employment is: Consistent with fair market value, reasonable and

determined through arm’s length negotiations

Not determined in manner which takes into account volume or value of referrals by referring physician; and

Remuneration is provided pursuant to agreement that would be commercially reasonable even if no referrals were made to employer.

Productivity bonuses can be paid if based on

services performed personally by the physician

(i.e., worked RVUs).

Requiring referrals

An employer can require an employee to refer to a particular provider, practitioner or supplier so long as: the compensation is set in advance

the compensation is fair market value

the referral requirement is in writing signed by the parties

is not required if the patient expresses a preference for a different provider

does not require physician to refer if patient’s insurance does not cover services at required providers

does not require physician to refer if the physician believes that the required referral is not in the patient’s best medical interest

Requiring referrals (Continued)

The required referrals relate solely to the

physician’s services covered by the scope of the

employment and the referral requirement is

reasonably necessary for the legitimate business

purposes of the compensation arrangement

between the employer and the employee.

Employed

Primary Care

– Inpatient

Medical

Director —

Inpatient

Fair Market Value Exception (Applies to Compensation Relationships)

Payments that are fair market value are

permitted compensation arrangements if:

In writing;

Covers all arrangements between parties;

Does not have to be 1 year term as long as terms

and conditions do not change during 1 year;

Compensation set in advance, FMV, and not related to volume or value of referrals

Commercially reasonable and furthers legitimate business interests

Complies with fraud and abuse provisions

Note: Applies to payments by (i) DHS entity to physician and (ii) physician to DHS entity. Also cannot base compensation on

(1) “per click” if physician/owner is source of referral or

(2) percentage

Fair Market Value Exception (Applies to Compensation Relationships)

Group Practice Definition

In-office Ancillary Services Exception

“Stand in the Shoes”

Other Stark Issues

1) Is compensation (a) based upon, or (b) varies

due to the volume or value of a physician’s

referrals?

2) Is the compensation to be paid to the physician

commercially reasonable?

3) Is the compensation to be paid to the physician

fair market value?

These issues have been litigated: Halifax and

Toumey.

Key Issues in Physician Contracts

Halifax Health

Allegations: Lawsuit brought by the former Director of

Physician Services at Halifax Health alleges that contracts with six (6) oncologists violated the Stark law and other relevant Medicare laws.

Allegations that Halifax submitted 74,000 false claims to Medicare with potential damages and penalties exceeding $1 Billion.

• Settlement: March 2014 – Stark Law allegations settled for

$85 Million

July 2014 – Short stay (observation vs. inpatient Admission) allegations settled for $1 million

Arrangement: Bonus pool would be equal to 15 percent operating

margin for the medical oncology program. The payments to individual doctors would be based on each individual oncologist’s personally performed services.

Halifax argued that the arrangement met the employment exception under the Stark Law since the physicians were employed.

Summary Judgment: The bonus was not based solely on personally performed services but also included services and the revenue from referrals made by the oncologists for DHS.

Halifax Health

Allegation: The government and relator alleged that the part-time

employment agreements for roughly 19 physicians in various specialties violated the Stark Law and the Anti-Kickback Statute.

Outcome: Jury originally found that Tuomey violated the Stark

Law, but not “willfully and knowingly” and thus had not violated the False Claims Act (FCA).

District court set aside jury verdict and granted judgment in favor of Government. Tuomey ordered to pay $44.9 million for the Stark Law violation.

Tuomey Healthcare System

Subsequently. . .

Judge acknowledged he erred when ruling that the

deposition of Tuomey’s COO was inadmissible, and

ordered a new trial specifically on the FCA issue (not

Stark Law).

July 16, 2010: Tuomey filed an appeal on the

determination of the Stark Law violation.

September 7, 2010: Tuomey filed a petition for

permission to appeal the District court’s order granting a

new trial.

October 26, 2010: Fourth Circuit Court of Appeals

denied Tuomey’s petition to appeal the District court’s

order granting a new a trial.

January 20, 2012: Oral arguments held in the Fourth

Circuit for the Stark Law violation.

Gov’t seeks to recover $300 million for the

alleged FCA violations.

March 30, 2012: Fourth Circuit vacated judgment

in favor of Government and remanded for trial.

New trial ordered by district court on FCA, in effect,

vacated jury’s findings, thus denying Tuomey Seventh

Amendment right to jury trial.

Fourth Circuit focused on facility fee/technical

component of referrals while performing services under

employment arrangement.

• March 30, 2012 (cont.)

Court held that jury can be instructed on preamble

regulations (Phase I-III).

Court rejected Tuomey’s assertion that the technical

component of a personally performed service is not a

“referral.”

“Taking into account the volume or value of referrals”

means anticipated and historical referrals.

• May 2013

Jury found that Tuomey had violated both the Stark

Law and the FCA.

Tuomey was required to repay $39.3 million plus

interest in Medicare payments and up to $337 million

in additional penalties.

The crux of the case focused on the fair market value

and commercial reasonableness of the employment

contracts.

• July 2014

Tuomey appealed as representatives of the

organization stated that paying the jury verdict

amount would effectively bankrupt the organization.

Court ordered Tuomey to place $40 million in an

account to continue the process of appealing the jury

verdict.

• July 2, 2015:

4th Circuit Court of Appeals upholds $237 million

judgment.

Held Toumey “shopped” for legal opinions to

obtain favorable opinion.

Rejected Excessive Fines Clause of 8th

Amendment (3.6 to 1.0 punitive – compensatory

damages ratio)

Contract Analysis 10 year terms

Contracts included requirements of only outpatient procedures

Exclusive use requirement – all outpatient surgeries at Tuomey

Yearly salary based on previous year’s net collections

80% of net collections of professional fees

Additional 7% of productivity bonus for other factors

Agreement not to compete – prohibited physicians from performing surgeries elsewhere within 30 miles of the hospital (during and post-two years)

Full-time benefits including health insurance, malpractice premiums (covered physicians for office and inpatient services), cell phones, journals, continuing medical education

Cejka, a valuation firm evaluated the contracts for purposes of the fair market value requirement at inception. Analysis indicated productivity levels of physicians were between the 50th

and 75th percentiles

Compensation level exceeded the 90th percentile

Evaluation did not include full time benefits

Government expert analyzed the contracts at trial. Impossible to ever make profit on these contracts

Full-time benefits for minimal hours per week

Cejka showed that certain physicians, across the country, received between 49% and 63% of net collections, but Tuomey paid, on average, 131% of net collections

Non-compete agreement locked in referrals

Reactive to competing ambulatory surgery center and physician groups informing Tuomey they may perform surgeries in their own offices rather than at Tuomey.

Clear Violations:

Physician is paid a fixed amount or percentage for each

ancillary service referred to the hospital.

Physician is paid at the upper end of the compensation

range recognizing that he/she is a high-volume referral

source.

Physician is paid a percentage of the reimbursement

received by hospital for every ancillary service referred

by physician.

Volume or Value

Compensation pool increases based upon the volume of

ancillary referrals or profit/margin generated from

ancillary referrals (i.e., Halifax)

Even if compensation pool is divided based upon personally

performed services?

Bonus/compensation pool is fixed but is based upon

quality, expense containment, and efficiencies based

upon service line or medical department?

Fixed bonus pool, divided based upon each physician’s

productivity, paid based upon financial success of

hospital or health system?

Volume or Value

Unclear Examples:

What Is Commercially

Reasonable?

Many of the exceptions under the Stark Act

require the payment to “be commercially

reasonable even if no referrals were made”

between the parties.

To be commercially reasonable, both

the SERVICES and PAYMENT must

be commercially reasonable.

Reasonable?

The following services may not be commercially reasonable: Two medical directors over a department when only

one is needed.

Paying the physician for questionable consulting services.

Renting a piece of equipment full-time when only used once a month (assuming rental for one day is less than full-time rental).

Purchase of physician’s medical office building with no intention to use building.

Reasonable?

Hospital/physician specific indicators:

1) Does the physician require a physician of a

particular specialty?

2) Can the service be performed by a non-physician

provider?

3) Does the physician have sufficient knowledge,

experience, and training for the position (i.e.,

medical informatics)?

4) Are the duties and responsibilities necessary from

both a medical and business perspective?

Reasonable?

1) Do the specific market conditions support the

level of compensation to be paid (i.e., high

demand but low supply for specialty, trauma

center versus non-trauma center)?

2) Is the compensation paid consistent with other

similarly situated hospitals (i.e., call

compensation, payment for indigent care)?

External Factors that Impact

Commercial Reasonableness

Fair Market Value

WHAT IS FAIR MARKET VALUE?

$ I want

market

value is

‘What do you mean by FMV?’

• In the health care context, there are essentially 3 basic views on the meaning of FMV: • “Person on the street” perspective;

• Professional appraisal perspective;

• Legal/regulatory perspective.

• Unfortunately, these 3 basic views frequently conflict.

• Parties can get “dazed and confused” when these 3 competing views meet to complete a transaction.

‘The Street’ View of FMV

• “What everyone is getting paid in the

market”

• “What the hospital down the street is

paying”

• “Incremental cost plus a profit margin”

• “What’s in a survey book”

• “What it’s worth to one party to the transaction”

“The price, expressed in terms of cash

equivalents, at which property would change

hands between a hypothetical willing and able

buyer and a hypothetical willing and able seller,

acting at arm’s length in an open and unrestricted

market, when neither is under a compulsion to

buy or sell and when both have reasonable

knowledge of the relevant facts.”

(International Glossary of Business Valuation

Terms)

Professional Appraisal View of FMV

• Based on the “hypothetical-typical” buyer concept

• FMV contrasts with investment value or strategic value

• Determination of FMV is based on 3 approaches to value: Cost

Income

Market

• Formal body of knowledge and professional standards governing the appraisal practice for real estate and business valuation (“BV”)

• No current body of knowledge or standards for compensation valuation (“CV”)

Professional Appraisal View of FMV

Legal/Regulatory View of

Fair Market Value

According to the Stark Law, fair market

value is “the value in arm’s-length

transactions, consistent with the general

market value.”

“General Market Value” means the price that an

asset would bring as a result of bona fide

bargaining between well-informed buyers and

sellers who are not otherwise in a position to

generate business for the other party, or the

compensation that would be included in a service

agreement as a result of bona fide bargaining

between well-informed parties to the agreement

who are not otherwise in a position to generate

business for the other party, on the date of

acquisition of the asset or at the time of the service

agreement.

42 C.F.R. § 411.351

Fair Market Value

The Stark Law also defines Fair Market

Value as the market price at which bona

fide sales have been consummated for

like-type assets in a particular market.

Fair Market Value

For real estate, the Stark Law states that fair

market value is “the value of rental property for

general commercial purposes (not taking into

account its intended use). In the case of a lease of

space, this value may not be adjusted to reflect the

additional value the prospective lessee or lessor

would attribute to the proximity or convenience to

the lessor when the lessor is a potential source of

patient referrals to the lessee.”

Fair Market Value

A Fair Market Value Safe Harbor for hourly rates

was developed under Stark in the Phase II

regulations.

Safe harbor deleted in Phase III regulation.

However, OIG stated that safe harbor

methodology is still a prudent documentation

process.

Fair Market Value

Safe Harbor Deleted

An hourly rate is deemed to be fair market value

if it meets one of the following two tests:

(1) Hourly rate is less than or equal to the average

hourly rate for emergency room physician services

in the market, provided there are at

least three hospitals providing

emergency room services

in the market.

(2) Hourly rate is determined by averaging the 50th percentile national compensation level with the same physician specialty in at least four of the following surveys and dividing by 2000.

• Sullivan, Cotter & Associates, Inc. - Physician Compensation and Productivity Survey

• Hay Group - Physician’s Compensation Survey

• Hospital and Health Care Compensation Services - Physician Salary Survey Report

• Medical Group Management Association (MGMA) - Physician Compensation and Productivity Survey

• ECS Watson Wyatt - Hospital and Health Care Compensation Report

• William M. Mercer - Integrated Health Networks Compensation Survey

Fair Market Value

Safe Harbor Deleted

Legal/Regulatory View of FMV

• Stark regulations state that the definition of FMV “is qualified in ways that do not necessarily comport with the usage of the term in standard valuation techniques and methodologies.”

• Stark example: Exclusion of market comparables between parties in position to refer

• Stark example: FMV can be established by “any method that is commercially reasonable.”

• OIG anti-kickback statute example: Footnote 5 to Advisory Opinion 09-09 cautioning the use of the Discounted Cash Flow (DCF) method for an ASC valuation

Benchmark Data Typical third-party surveys include:

•Sullivan, Cotter & Associates, Inc. - Physician Compensation

and Productivity Survey;

•HayGroup - Physicians Compensation Survey;

•Hospital and Healthcare Compensation Service - Physician

Salary Survey Report;

•Medical Group Management Association - Physician

Compensation and Productivity Survey;

•ECS Watson Wyatt - Hospital and Health Care Management

Compensation Report

•William M. Mercer - Integrated Health Networks Compensation

Survey

Percentile Cash Compensation RVUs Compensation

per RVUs

25 125,000 3,500 $35

50 175,000 4,500 $40

75 225,000 5,500 $41

90 300,000 6,500 $46

Benchmark Data Data Example 1:

• Single tier model with a guaranteed cash compensation of

$175,000 with additional incentive compensation of $40 per

relative value unit (RVU) above 4,500 RVUs work.

• Base compensation, RVU production and compensation per

RVU all benchmarked at 50th percentile.

RVUs worked Compensation per RVU

4,500 and below $30

4,501 – 5,500 $35

5,501 – 6,500 $40

6,501 and above $42

• Multiple tiered model

• 100% RVU production

Benchmark Data Data Example 2:

Be careful with the compensation per work RVU

(wRVU) benchmark data.

90th percentile physicians, based upon productivity,

do not earn compensation per wRVU at the 90th

percentile.

For most specialties, compensation per wRVU should

remain approximately at the 50th percentile.

Benchmark Data

Specialty: Orthopedic Surgery

50th 75th 90th

wRVUs* 7,981 10,723 13,795

x $63.54(50th)* $507,113 $681,339 $876,534

x $105.18 (90th) * $839,442 $1,127,845 $1,450,958

Benchmark Range* $520,119 $682,541 $943,059

* Based upon 2012 Physician Compensation and Production Survey from the Medical Group

Management Association

Benchmark Data

The most commonly used productivity

measures, in order, are the following: wRVUs,

collections, net income, and patient visits.1

Productivity-Based Incentive

Measures

2011 Physician Compensation and Productivity Survey by Sullivan, Cotter & Associates, Inc. Of those that use

productivity based incentive measures, 74% use work RUVs.

Fair market value is based upon the specific financial

arrangement being entered into by the parties. Factors that

can cause compensation to exceed 90th percentile include:

Extremely high productivity

High demand/low supply for specialty

Considered leader in specialty

Historic compensation above 90th percentile for personally

performed services (do not include revenue from ancillary

services or midlevel providers)

Super sub-specialization or multi-specialty

Nationally renowned program

Exceed Benchmark Data Range

• Aggregate compensation versus each component of compensation.

• Benchmark data includes all sources of compensation from respondents

• When analyzing fair market value compensation, understand all sources

of compensation

• Can one physician really be more than a 1.0 FTE?

• Focus on number of hours worked by physician

Compensation Stacking

Employment

Medical Directorship

Medical Staff Officer

On-Call

Research

Under employment exception, compensation

cannot vary based upon volume or value of

referrals and bonuses are limited to personally

performed services.

Greater flexibility under in-office ancillary

services exception because profits from DHS

can be divided among the physicians in the

group practice.

Employment vs. In-Office

Ancillary Services Exceptions

Medical Directorships

Medical Director • Medical directorships are for administrative services,

not clinical services.

• Medical director benchmark data exists.

• Clinical benchmark data can be used if the

administrative services requires (a) a physician, and (b)

a physician of a specific specialty.

• Structure of compensation (and underlying fair market

value documentation) may depend upon legal status:

Employee vs. independent contractor

Medical Director

Independent Contractor:

(1) Hourly payment (with maximum number of hours

in contract)

(2) Annual payment (determined by projected number

of hours multiplied by FMV hourly rate)

Created by:

Robert A. Wade, Esq.

Krieg DeVault

4014 Edison Lakes Pkwy, Ste.100

Mishawaka, IN 46545

(574) 485-2002

bwade@kdlegal.com

Medical Director

If Annual Payment

method is used, need

to track hours to make

sure consistent with

contract.

EXHIBIT B

Real Estate

Fair market value v.

commercially

reasonable: Is there a

difference?

Real Estate

Fair market value: A Box is a Box is a

Box. So, I can charge what the

hospital down the street charges.

Right?

Real Estate

Fair Market Value: Is the physician

paying occupancy costs that are

consistent with arm’s length

relationships in comparable

properties in local market?

Real Estate Commercially Reasonable: Is hospital establishing

rental rates in amounts sufficient to generate

positive cash flows and a rate of return consistent

with (i) risk and (ii) other local real estate investors?

Is this space of an amount that is needed by the

physician?

Real Estate

10 %? 15%? 20%?

Commercially

Reasonable: What a

reasonable real

estate investor will

require as a rate of

return.

Real Estate

To be commercially reasonable,

unless extenuating circumstances

exist, real estate should generate

a reasonable rate of return.

Real Estate

Commercially Reasonable: (Amortized

cost of building + interest + expenses) -

rent receipts = 10%+ [market reasonable

rate of return]

Things to consider

Tenant Improvements (TI)

New Space (higher TIs)

Rehab (Presumption - lower TIs)

Standard TIs

Enhanced TIs

• Pay up front

• Prorate with lease payments with interest

Real Estate

Things to consider (Continued)

Leasing costs

Amenities (parking, security, Internet, etc.)

Total cost (design, construction, land, financing, HVAC,

taxes, janitorial, legal, etc.)

Real Estate

Quality of building

must be evaluated.

Class A, B or C

building?

Must allocate all costs to set FMV rental rate

Rental of space (half- or full-day slots)

Vacancy rate (project 20% vacancy?)

Supplies

Utilities

Staff (registration, nursing, etc.)

Equipment

Real Estate

Shared Space

Real Estate

Shared Space (Example)

Assume the following:

• $18 gross per square foot rental (exclusive use)

• 30% projected vacancy

• 1,000 square feet in suite

• Building has 6,000 square feet, with 1,000 square feet for

common area (5,000 square feet usable space)

• Suite capable of being leased in half-day increments (8:00 A.M.

– Noon; 1:00 P.M. – 5:00 P.M.)

• Furniture and equipment in suite determined to be

leasable at $2,000 per year using independent

third-party leasing company.

• Miscellaneous medical/office supplies projected to

be used in suite is approximately $5,000 annually

if suite leased 70% of the time.

Real Estate

$18 (exclusive use rate) + 30% (vacancy) = $25.71 per square

foot ($18 ÷ .7 = $25.71)

1,000 square feet (suite) ÷ 5,000 square feet (building not

including common area) = 20% (percentage of suite’s usable

space in building’s usable space)

1,000 square feet (common area) x 20% (suite to building)

= 200 square feet (common area allocated to suite)

Real Estate

1,200 square feet (suite plus allocated common area)

x $25.71 = $30,852

$30,852 + $2,000 (furniture and equipment) + $5,000

(medical/office supplies) = $37,852

$37,852 ÷ 52 (weeks) = $728 (weekly rate)

$728 ÷ 5 (business days in week) = $146 (daily rate)

$146 ÷ 2 = $73 (half day rate)

Real Estate

Example becomes more complicated if:

• Part of suite is leased (as opposed to full suite)

• Staff is provided by landlord/hospital

• Specialized equipment is used

• Non-standardized supplies are used by a tenant

Real Estate

Real Estate Complexities:

Office Space Rates Square foot measurement

Real estate appraisals

Gross lease v. triple net lease

Payment of increases in operating expenses

Tenant improvements

Holdover rent

Exclusive use

No percentage-based leasing arrangement

No per click rental for referrals from lessor

Time Share Lease Issues

• Specific days, # of days

• What is exclusive use? What must be used exclusively?

• Is lease required?

Hospital patients – Can hospital arrange for specialists to see

hospital’s patients in hospital space?

If hospital schedules the patient but does not bill provider-based,

can hospital charge the physician the technical fee?

Time Share Issues

Robert A. Wade, Esq. Partner

Krieg DeVault LLP

4101 Edison Lakes Parkway, Ste. 100

Mishawaka IN 46545

574-485-2002

bwade@kdlegal.com

Copyright © 2015 by Atlantic Information Services, Inc. All rights reserved. Reproduction by any means — including photocopy, FAX or electronic delivery — is a violation of federal copyright law punishable by fines of up to $150,000 per violation.

Atlantic Information Services, Inc.

Tuomey Faces Big Fines After Losing Stark, False Claims TrialReprinted from the May 13, 2013, issue of AIS’s weekly newsletter, Report on Medicare Compliance. Visit the MarketPlace at http://AISHealth.com for more information.

Tuomey Healthcare System in Sumter, S.C., violated the Stark law and submitted 21,000 false claims to Medicare, a federal jury decided on May 8 after a four-week trial. According to the verdict sheet, Tuomey’s false claims have a monetary value of $39,313,065, which are subject to treble damages.

“Tuomey is obviously disappointed with the verdict. We’re going to be looking at all our options in the upcoming days,” says one of its attorneys, Dan Mulholland of Horty, Springer and Mattern in Pittsburgh. “However it’s important to note that there were no allegations that Tuomey ever upcoded, overcharged or billed for medically unnecessary services or services not provided. Tuomey is a fine hospital and its board, management, employees and medical staff are among the finest people I’ve ever worked with.”

The closely watched trial sent shock waves through the legal community. One mes-sage from the case seems to be that “any time a hospital does not have a solid fair market value opinion supporting payments made to referring physicians, they are on thin ice,” says Pittsburgh attorney William Maruca, who is with Fox Rothschild.

The trial was the Department of Justice’s second attempt to prove that Tuomey’s compen-sation agreements with 18 physicians violated Stark and therefore the False Claims Act. In June 2010, the U.S. Attorney for South Carolina persuaded a jury that Tuomey’s compensa-tion arrangements violated the Stark law, but not the False Claims Act. But the U.S. District Court judge who oversaw the trial set aside the false claims verdict — giving the govern-ment another bite at the apple — while granting the government’s request to recover $45 million from Tuomey in repayment stemming from the Stark noncompliance (RMC 6/14/10, p. 1, RMC 4/12/10, p. 3).

Appeals Court Triggered a Do-Over

Then the U.S. Court of Appeals for the Fourth Circuit sent both parties back to square one. In an April 2012 ruling, the appeals court said the trial judge had violated Tuomey’s 7th amendment right to a jury trial and threw out the entire case, which prompted the retrial (RMC 4/16/12, p. 1).

According to the government, Tuomey signed part-time employment agreements with 18 specialists when it seemed they would shift their outpatient procedures from the hospital to their private practices. Fearing a loss of revenue to the competition, Tuomey offered the phy-sicians 10-year compensation deals, the government alleged. The specialists were required to perform all outpatient procedures at Tuomey Hospital or its other facilities, and were paid an annual base salary that varied according to the net cash collections for outpatient proce-dures and a productivity bonus equal to 80% of net collections, the court decision states. On top of that, the specialists could earn an incentive bonus worth up to 7% of their productivity bonus.

The contracts were brought to the government’s attention by orthopedic surgeon Michael Drakeford, who turned down Tuomey’s offer and became a whistleblower. The U.S. Attorney’s Office took over his false claims lawsuit in 2007.

The jury’s verdict and its financial implications have always been possible, but still “take your breath away,” says Macon, Ga., attorney Alan Rumph. “Tuomey’s Stark position, while aggressive, was not frivolous. This is a potential game changer in terms of the government’s negotiation power and strategy. Unless the Fourth Circuit reverses again, it’s going to be tough for hospitals to litigate another Stark case with this much at stake. Let’s all thank our lucky stars for the CMS self-referral disclosure protocol.”

“The Fourth Circuit’s decision was seen as the potential legacy of the case,” according to Philadelphia attorney Jeb White, who is with Nolan Auerbach. “This opinion closed the door on the argument that fixed compensation arrangements between hospitals and physicians do not run afoul of Stark, even when the fixed compensation is based on anticipated referrals to the hospital. Needless to say, in the wake of Drakeford, a lot of compensation arrangements should have been revised,” says White, former president of Taxpayers Against Fraud.

Contact Maruca at WMaruca@foxrothschild.com and White at Jeb@WhistleblowerFirm.com. G

Eleven Tips for Hospitals to Consider After the False Claims Verdict Against TuomeyReprinted from the May 20, 2013, issue of AIS’s weekly newsletter, Report on Medicare Compliance. Visit the MarketPlace at http://AISHealth.com for more information.

Hospitals don’t necessarily have to run away from physician arrangements that aren’t ultra-conservative because of the May 8 false claims and Stark verdict against Tuomey Healthcare System (RMC 5/13/13, p. 3). But they may want to reconsider the big picture of their financial arrangements as well as the Stark technicalities in light of the staggering pen-alties that face the South Carolina health system and other hospitals that run afoul of the law.

“If it smells bad, think again,” says Macon, Ga., attorney Alan Rumph, with Smith Hawkins.

After a four-week trial, a jury in Columbia, S.C., found that Tuomey’s compensation agreements with 18 physicians violated the Stark law, which caused the submission of 21,000 false Medicare claims to the tune of $39.3 million. If the judge imposes even minimum fines and penalties, Tuomey will have to fork over $240 million, although the Department of Justice could accept less.

“If you spend a lot of time with Tuomey, you could get spooked very quickly,” says Nashville attorney Thomas Bartrum, with Baker Donelson. Prosecutors may be emboldened by the Tuomey victory to pursue more Stark cases, and Bartrum fears some areas may be more vulnerable — including the uncharted waters of clinical care networks and other con-figurations developed in response to the pay-for-performance movement.

In the Tuomey case, the U.S. Attorney for South Carolina alleged that Tuomey entered into part-time employment agreements with 18 specialists when it seemed they would shift

their outpatient procedures from the hospital to their private practices. Fearing a loss of rev-enue, Tuomey offered the specialists 10-year compensation deals as long as they performed all outpatient procedures at Tuomey Hospital surgery sites and signed noncompete clauses. The government alleged the compensation was above fair-market value and took into ac-count the volume or value of the physicians’ referrals. The health system always disputed the allegations and fought them through two trials (RMC 4/16/12, p. 1), which is rare consid-ering the stakes of the False Claims Act, with its treble damages and $5,500 to $11,000 per-claim fines.

Post-Tuomey Strategies for Hospitals

Tuomey’s fate is one thing, but what is the verdict’s impact on its hospital brethren? Stark lawyers offer the following insights and suggestions to hospitals as they enter into new ar-rangements and rethink existing ones post-Tuomey:

(1) Don’t take valuations at face value, says attorney Bob Wade, with Krieg DeVault in Mishawaka, Ind. An independent compensation valuation on an expert’s letterhead isn’t a get-out-of-jail-free card. “You need to evaluate the defensibility of any fair-market value valuation,” he says. Will the documentation really support the compensation if ever tested? Hospitals have to look both at the standard principles applied to business valuations and the regulatory definition of “fair-market value.” The Stark law doesn’t dictate how to determine fair-market value compensation — “you can use any methodology as long as it’s commer-cially reasonable” — but it better be convincing to a regulator, judge or jury, Wade says. For example, it wouldn’t pass muster to pay a physician compensation above the 95th percentile if his productivity were below the 25th percentile based on collections or work relative value units (assuming the work is purely clinical), he says (RMC 8/15/11, p. 1).

(2) Re-evaluate the trend of moving ancillary services from physician practices to hospital outpatient departments, where they can be reclassified as provider-based and billed to Medicare at a higher rate, Bartrum says. “We are seeing lots of these arrangements,” he notes. “We set them up to technically fit Stark exceptions, but Tuomey makes you go back and rethink ‘how safe are these arrangements?’ The government’s position in Tuomey can be read as essentially asserting that any uptick in physician’s compensation that can’t be accounted for should be characterized as compensation for future volume or value of referrals.”

(3) Don’t get spooked by “loss” arrangements, where hospitals pay employed physi-cians more than the hospital collects directly from the physician’s personally performed services, Wade says. In light of Tuomey, “people may have a knee-jerk reaction and say loss arrangements are per se not fair-market value. But this is simply not the case as there are situations where loss arrangements are necessary and defensible,” he says. For example, a hospital may open a clinic in a remote area, where it serves mostly uninsured and Medicaid patients. The hospital pays a cardiologist $200 an hour to staff the clinic, but collects only $100 an hour for her services. Wade thinks it’s still permissible because the hospital has a mission to serve the underserved.

(4) Consider taking financial arrangements into the CMS self-referral disclosure pro-tocol if they seem aggressive through Tuomey-colored glasses, Rumph says. “Hospitals need to be more proactive in exploring places where the self-referral disclosure protocol is useful. Once the government starts investigating or a whistleblower is involved, the matter is less likely to be favorably resolved,” he notes.

(5) Be on alert for the impact of the Tuomey verdict on the innovations in hospital-physician arrangements emerging from new models of health care delivery, Bartrum says. “Right now, with pay-for-performance, the whole fear is that hospitals are paying physicians for stuff that’s hard to value, such as changing care patterns, monitoring and collecting data and reporting it to the hospital,” he says. Does it mean hospitals are in the crosshairs because of Tuomey? And as hospitals, at the impetus of CMS, move from fee-for-service payments to compensation for outcomes and value, there is a question whether the less-is-more model will be perceived as above-fair-market compensation, Rumph adds. “It’s analytically difficult to fit this into Stark,” he says. Bartrum notes that with clinically integrated networks and accountable care organizations, physician referrals will generally increase to their hospital partners within the network. Medicare ACOs have a Stark and kickback waiver, but more ACOs are being set up in the commercial sector and these arrangements don’t qualify for waivers. Bartrum thinks these can be structured to comply with the Stark law’s risk-sharing exception, but because of the lack of CMS commentary and guidance on that exception, some hospitals are reluctant to rely solely upon that exception.

(6) Steer clear of employment arrangements that are carved out for specific services, Wade says. “I’m not opposed to independent contractor arrangements” for discrete services, Wade notes, but it seems suspicious when the hospital wants to employ physicians only when they are performing specific services, especially if the arrangement is motivated by the desire to expand or retain market share.

(7) Don’t shop for regulatory opinions, Bartrum says. If one lawyer says a financial ar-rangement violates Stark and/or the anti-kickback statute, there has to be a good justification to run to another lawyer for a different answer.

(8) Carefully consider non-compete clauses in physician contracts. If the government contends a hospital is paying physicians more than fair-market value, then the excess com-pensation could be tied to the covenant not to compete and construed as an inducement for referrals, Wade says.

(9) Avoid physician contracts of long duration, Wade says. Whether they are with em-ployees or independent contractors, service agreements generally should be no more than three years long — or perhaps five years in the case of acquisitions. They can automatically renew after the initial term, “which causes the parties to come back together to review the terms and ensure that compensation remains fair-market value,” Wade says.

(10) Remember that physicians on the hospital staff may become whistleblowers, which happened in the Tuomey and other false claims cases, Rumph says. “They are in a po-sition to see things that other people don’t see, particularly when negotiations with the hos-pital fall through,” he says. And when there are big rewards for physician-whistleblowers, “it won’t dissuade other doctors.”

(11) Include all noncash compensation in the fair-market valuation, Wade says. For example, when the hospital adds physicians to its malpractice insurance coverage for their hospital services and private practices, the value of the latter must be separately calculated in the compensation. If the physician’s fair-market value compensation is $200 per hour and the private-practice malpractice premium equates to $50 per hour, the hospital should pay the physician only $150 per hour, he says.

A lawyer representing Tuomey had no comment on whether it will appeal the verdict or what the prospects are for getting the fines and penalties reduced. The assistant U.S. attor-ney who prosecuted the case did not respond to RMC’s request for comment.

Contact Wade at rwade@kdlegal.com, Rumph at alan@shhrlaw.com and Bartrum at tbar-trum@bakerdonelson.com. G

As Tuomey Post-Mortem Continues, Judge Orders Health System to Pay $237 MillionReprinted from the Oct. 7, 2013, issue of AIS’s weekly newsletter, Report on Medicare Compliance. Visit the MarketPlace at http://AISHealth.com for more information.

A federal judge on Sept. 30 ordered Tuomey Healthcare System to pay more than $237 million for violating the Stark law and False Claims Act and declined to throw out the jury’s verdict or grant a new trial. The Sumter, S.C., hospital filed its notice of appeal the following day, continuing a saga over physician compensation that has rocked the legal and compli-ance world for three years.

On May 8, a federal jury found that the hospital’s compensation agreements with 19 em-ployed physicians ran afoul of the Stark law (RMC 5/13/13, p. 1), which turned the hospital’s claims for Medicare services referred by the 19 physicians into false claims.

In a statement, Tuomey said “it respectfully disagrees with the ruling” and will ask the U.S. Court of Appeals for the Fourth Circuit for a stay of the judgment pending appeal.

“When you see the numbers, it makes you gasp — even though we knew this would fol-low from the jury verdict,” says Atlanta attorney Alan Rumph, with Baker Donelson.

Meanwhile, former government officials, attorneys and compliance officers continue the post-mortem on the Tuomey case. One bottom line: compliance officers should be at the table for strategic planning. There is a perception they will be nay-sayers, but that isn’t the case. “You can always get to a deal you are comfortable with to satisfy strategic objectives…if management is truly informed and willing to accept risks,” said Margaret Hambleton, se-nior vice president of ministry integrity at St. Joseph Health System in California.

In the court order, U.S. District Judge Margaret Seymour in Columbia, S.C., told Tuomey to pay $39,313,065, on the jury verdict that 21,730 false claims were submitted to Medicare, and $237,454,195 in false claim fines.

The story began about a decade ago, when Tuomey panicked that its referring physicians would shift outpatient procedures from the hospital to their own practices or an ambula-tory surgery center. To prevent a loss of revenue, the hospital offered 10-year employment contracts to 19 specialists. In exchange for performing all outpatient procedures at Tuomey Hospital or its other facilities, the specialists were paid an annual base salary that varied according to the net cash collections for outpatient procedures and a productivity bonus equal to 80% of net collections, and were eligible for an incentive bonus worth up to 7% of their productivity bonus, court documents say. Not everyone went along for the ride. Orthopedic surgeon Michael Drakeford turned down Tuomey’s offer after raising concerns about it, and filed a false claims lawsuit alleging violations of the Stark law. DOJ signed on, and when Tuomey refused to settle, the case went to trial in U.S. District Court in Columbia, S.C. The jury declared the hospital in violation of Stark but not the False Claims Act. The

drama, however, was far from over. The judge decided he made a mistake excluding certain evidence and, in a post-trial ruling, ordered a new false claims trial while preserving the government’s Stark victory. Tuomey appealed to the U.S. Court of Appeals for the Fourth Circuit, which threw out the entire case on the grounds that the hospital’s 7th Amendment right to a jury trial was violated by the post-trial ruling (RMC 4/16/13, p. 1). The government took Tuomey back to trial in May with a new trial judge and this time the jury found the hospital violated both Stark and the False Claims Act.

Judge Disagreed With Tuomey’s Arguments

After the verdict was handed down, Tuomey filed motions asking the trial judge to throw out the verdict or grant a new trial. Here are some of Tuomey’s arguments, along with reasons why the judge turned it down:

(1) Tuomey argued there was no Stark violation because the government never proved the physicians’ compensation took into account the volume or value of referrals. But the judge said “a reasonable jury could have found that Tuomey took into account the volume or value of referrals” based on its perception of the credibility of a valuation consultant and the testimony of various witnesses.

(2) Because the hospital sought the advice of counsel in good faith, Tuomey argued that the government can’t prove it “knowingly” submitted a false claim. Tuomey relied on several consultants and lawyers, including its counsel, who said the contracts didn’t vio-late the Stark law. But another lawyer, Kevin McAnaney, former chief of the HHS Office of Inspector General’s Industry Guidance Branch, advised Tuomey that the physician contracts were problematic partly because the salaries were above fair market value. Tuomey sent McAnaney packing and told him not to put his opinion in writing. The judge said “a reason-able jury could have found that Tuomey possessed the requisite scienter once it determined to disregard McAnaney’s remarks.”

(3) The government failed to prove damages, Tuomey argued, and therefore it’s entitled to win “as a matter of law.” The government got the services it paid for and it would have paid the same amount of money if the services were performed at another hospital. But the judge didn’t buy it. She noted that Stark says “no payment may be made…for a designated health service” when it’s provided in violation of the law.

What bothers Rumph most about the way things have shaken out is that the appeals court applied a different standard to the volume or value issue than the trial judge did. The Fourth Circuit said the jury had to decide whether the hospital’s contracts, on their face, took into account the volume or value of the physicians’ referrals when setting compensation (i.e., how much money the hospital makes in facility or technical charges resulting from proce-dures performed by the employed physicians). “That was Tuomey’s primary argument in asking the court to set aside the verdict — that the documents on their face don’t take into ac-count the value or volume of referrals,” Rumph says. But in her order, Judge Seymour never addresses the issue. She uses a more “subjective and expansive” definition of “taking into account the volume or value of referrals,” he says. “This particular issue is the reason why we are all having so much trouble with Tuomey.” He notes, however, that the Fourth Circuit sent mixed signals on the issue.

The Role of the Board Said to Be Paramount

Compliance experts put the Tuomey case under the microscope at the Oct. 1 Fraud and Compliance Forum co-sponsored by the American Health Lawyers Association and Health Care Compliance Association in Baltimore. “We have the benefit of 20/20 hindsight,” but it’s instructive to look at the board’s role, said Lewis Morris, former chief counsel to the HHS Inspector General. Boards generally have a duty of reasonable inquiry. They are supposed to ask the right questions at the right time and use the compliance program as “a critical pipeline of information,” he said. When the proposed physician employment contracts were being hashed over at Tuomey, its board “did the right thing by hearing Drakeford out,” said Morris, who is with Adelman Sheff & Smith in Annapolis, Md. The hospital and Drakeford agreed to jointly retain an attorney (McAnaney) to review the contract. “This was a criti-cal opportunity for re-evaluation. But then they passed a resolution that no one could come before the board unless the CEO or chair approves it and they bring a lawyer….It seems extraordinary that they cut off communication with a guy who seemed to have a legitimate concern.”

Hambleton says it should have been a red flag that the board allegedly didn’t want to meet with Drakeford. “Compliance officers face this” — people who raise concerns may be treated like “disgruntled, belligerent troublemakers,” she says. Discounting concerns of peo-ple like Drakeford “is one of the biggest mistakes that compliance officers can make.”

Morris emphasized the importance of hearing people out. “Are all whistleblowers the type of people you want to take a 12-hour car ride with? Perhaps not,” he said. “But you have to listen to them. Otherwise they will be out the door, going to the government.”

None of the experts were clear on why Tuomey fought the allegations at trial, given the risk of staggering penalties if they lost. “Stark cases are turning into anti-kickback cases dressed up as Stark cases. Juries won’t care about technical Medicare payment rules, but they do understand bribes and payments for referrals,” said Chicago attorney Daniel Melvin, who is with McDermott, Will & Emery. “Letting Stark cases get before the courts is not a good idea” — at least until the courts sort out some Stark interpretations, such as the volume and value of referrals standard.

Four Corners of Stark Are ‘Not Sexy’

Because “the four corners of Stark are not sexy to a jury,” prosecutors spent little time there, Hambleton said. There’s a message here for compliance officers: In addition to worry-ing about fair-market value and commercial reasonableness, they should look at physician agreements in context “and have a voice as loud as the CEO,” she says. “Dig your heels in if problems are not adequately addressed.”

Melvin doesn’t think the Tuomey case “stands for the notion that getting a second opin-ion is shopping for opinions. The Stark law is sufficiently complex that to proceed in the face of dueling opinions doesn’t mean you are opinion shopping.” McAnaney said at the confer-ence that Tuomey asked him only for his “view of the risks — not his opinion.”

DOJ could still agree to settle for a smaller dollar figure in exchange for Tuomey drop-ping its appeal, according to Rumph.

In its statement, the hospital emphasized that “patient care, safety and the health of the Sumter community remain Tuomey’s number-one focus.”

In the Sept. 30 order, the judge assessed a higher fine on Tuomey, but corrected it in an Oct. 2 order.

Contact Rumph at arumph@bakerdonelson.com, Hambleton at Margaret.hambleton@stjoe.org and Morris at lmorris@hospitallaw.com. G

Appeals Court Upholds Tuomey’s $237M Stark, False Claims LiabilityReprinted from the July 13, 2015, issue of AIS’s weekly newsletter, Report on Medicare Compliance. Visit the MarketPlace at http://AISHealth.com for more information.

The knock-down, drag-out false claims case involving Tuomey Healthcare System in Sumter, S.C., apparently is over after two jury trials, two appeals court decisions and 10 years of litigation. The U.S. Court of Appeals for the Fourth Circuit on July 2 dealt Tuomey a blow in its appeal of both the May 8, 2013, verdict by a jury, which found the health care system violated the Stark law and therefore the False Claims Act (FCA), and the resulting order by the U.S. District Court for South Carolina to pay more than $237 million to the gov-ernment (RMC 10/7/13, p. 1). At issue were part-time employment contracts Tuomey had negotiated with 19 area physicians to retain outpatient business for the hospital. The whistle-blower, physician Michael Drakeford, refused to enter into an agreement with Tuomey be-cause he believed the compensation violated Stark.

After the first jury verdict, which found that Tuomey violated Stark but not the False Claims Act, the court decided it had made an error by not admitting certain evidence and ordered a new trial on the FCA prong of the case at the government’s behest. However, it ordered Tuomey to pay the Stark damages plus interest. Tuomey appealed, and the Fourth Circuit remanded the case, ordering the district court to start all over with a trial on both the Stark and FCA issues. The second jury found the health system violated both Stark and the FCA, which led to the payment order of $237 million.

Tuomey Argued New Trial Was Unwarranted

Tuomey, on appeal, argued that the lower court should not have granted the government a new trial on the FCA issue. The Fourth Circuit decided that a new trial was warranted, although for different reasons than the district court had cited. The lower court had ex-cluded conversations Tuomey had had with a noted Stark law attorney, who advised against the contracts. Tuomey, in essence, ignored the advice, terminated its relationship with the attorney and asked him not to record his views. This, the Fourth Circuit said, was the error that warranted a new trial because the attorney’s advice on the contracts’ compliance with Stark was critical to proving that Tuomey knowingly entered into the contracts in violation of Stark.

Tuomey also argued that it was not liable under the FCA because it had reasonably relied on advice of counsel in making its decision to go ahead with the contracts. But, the court said, “the record is replete with evidence indicating that Tuomey shopped for legal opinions approving the employment contracts, while ignoring negative assessments.”

Tuomey’s final arguments addressed the civil penalty. It challenged the calculation of the amount and the measure of actual damages and raised Fifth and Eighth Amendment

constitutional challenges. Tuomey argued that only the facility fees associated with the outpatient claims should be counted for purposes of the penalty. But, the court pointed out, once there is a Stark violation, the law prohibits the physician from making any referral to the hospital for designated health services. Tuomey also argued that the measure of actual damages should be based on the difference between “the true value of the services” and “what the government actually paid.” Not so, said the court. Once Stark has been violated, the government owes the entity nothing.

Finally, Tuomey argued that $237 million of damages and civil penalties violates the Fifth Amendment’s Due Process Clause and the Eighth Amendment’s Excessive Fines Clause. Both these clauses, in essence, limit the amount of a penalty attributable to pun-ishment rather than remedial and compensatory damage awards. The court applied three guideposts established by the Supreme Court to review punitive damage awards under the Due Process Clause, placing the most emphasis on the first guidepost, the degree of repre-hensibility of the misconduct. The court said “the Stark Law expresses Congress’s judgment of reprehensibility…by deeming services provided in violation of the law worthless.” The Supreme Court also has put forth five other elements to use to evaluate the degree of rep-rehensibility, including whether “the conduct involved repeated actions” and whether “the harm was the result of intentional malice, trickery, or deceit.” Considering these two ele-ments, the court said, Tuomey’s conduct “involved repeated actions, and while the penalty is certainly severe, it is meant to reflect the sheer breadth of the fraud Tuomey perpetrated upon the federal government.” The court also calculated the value of the actual harm and the punitive damages award. It determined that of the award, $51,106,985 was compensatory and $186,347, 210 was punitive. The Supreme Court has suggested that an award of more than four times the amount of compensatory damages might cross the constitutional line, the decision stated. Under its calculation, the Tuomey ratio is approximately 3.6, just under the ratio. Thus the award is constitutional.

Atlanta attorney Alan Rumph, with Baker Donelson, says it’s interesting that after 50-plus pages of wrestling with very complicated Stark and litigation issues, “the court had no problem stating that Tuomey committed ‘fraud.’ That’s very different from saying the hospi-tal may have violated the FCA’s ‘reckless disregard’ standard and couldn’t successfully rely on advice of counsel. The two statements may lead to the same result on the basic Stark and FCA issues, but I think the semantical differences are huge and should be respected. And the differences certainly might matter for the punitive damages issue.”

Contact Rumph at arumph@bakerdonelson.com. Read the decision atwww.ca4.uscourts.gov/Opinions/Published/132219.P.pdf.

Court: Halifax Hospital Violated Stark but Issues Are UnresolvedReprinted from the Nov. 18, 2013, issue of AIS’s weekly newsletter, Report on Medicare Compliance. Visit the MarketPlace at http://AISHealth.com for more information.

The U.S. District Court for the Middle District of Florida has found that Halifax Hospital Medical Center violated the Stark law. In an order on the Department of Justice motion for partial summary judgment, the court concluded that the hospital’s bonus arrangement with

six oncologists did not fit within the bona fide employment exception of the Stark law because the bonus pool was not restricted to the physicians’ personally performed services. The bo-nus pool was divided up only based on those services. Therefore, the court ruled, the oncolo-gists were prohibited from making referrals to the hospital and the hospital was prohibited from submitting claims to Medicare arising from these referrals for the facility fee.

However, the court found “genuine issues of material fact” that still need to be resolved. First, it could not resolve the extent of the violation based on the filings. Originally, DOJ asked for more than $34 million in damages but reduced the figure to approximately $27 million after Halifax disputed the calculations. But the government did not submit any calculation so the court could not verify the figure or address other Halifax arguments. “Despite diligent effort,” the order says, “the Court is unable to determine which of these arguments are allegedly addressed in which of the listed documents and therefore cannot determine which party ought to prevail in regard to them.”

As a result, the court denied summary judgment to the government on each of its theo-ries of recovery — the False Claims Act, payment by mistake of fact, or unjust enrichment. With regard to recovery under the FCA, the court found that there was a genuine issue of material fact regarding whether the defendants acted knowingly. Under the False Claims Act, the court must find that the defendant knew or should have known or acted with delib-erate ignorance or reckless disregard.

MD Services Director Is the Whistleblower

The motion for summary judgment stems from DOJ’s false claims lawsuit against Halifax Hospital and its subsidiary, Halifax Staffing, of Daytona Beach, Fla. The case was filed in 2009 by whistleblower Elin Baklid-Kunz, director of physician services at Halifax Staffing, who accused the hospital of violating the Stark and anti-kickback laws and bill-ing Medicare for medically unnecessary admissions. The Department of Justice intervened only in the Stark part of the lawsuit, alleging that Halifax’s compensation agreements with three neurosurgeons and six medical oncologists included salary plus incentives based on the volume or value of their referrals (RMC 9/26/11, p. 1). The whistleblower pressed on, and all allegations will be presented in one trial, which is slated for March 3, 2014. Prosecutors will take the lead on Stark, while the whistleblower lawyers argue the kickback and medi-cal necessity allegations, says Atlanta attorney Marlan Wilbanks, one of the whistleblower’s lawyers.

“A judge has now ruled that there is no genuine issue of fact regarding the illegality of Halifax’s conduct and the jury will know that Halifax is liable for the Stark violations related to the oncologists when the trial commences,” says Wilbanks, with Wilbanks & Bridges.

Halifax’s attorney did not respond to a request for comments by RMC’s press time.The two sides have been battling furiously for more than a year over discovery (RMC

5/13/13, p. 1; 11/19/12, p. 1) and, more recently, over Halifax’s destruction of medical records (RMC 10/21/13, p. 1).

For more information, contact Wilbanks at mbw@wilbanks-bridgeslaw.com. G

Another Halifax Compensation Deal Gets Different Response From JudgeReprinted from the Nov. 25, 2013, issue of AIS’s weekly newsletter, Report on Medicare Compliance. Visit the MarketPlace at http://AISHealth.com for more information.

A federal judge on Nov. 18 said a jury will decide whether three neurosurgeons em-ployed by Halifax Hospital Medical Center were compensated in violation of the Stark law. U.S. District Judge Gregory Presnell for the Middle District of Florida declined to throw out the Department of Justice’s allegations and said the matter will proceed to trial March 3.

The ruling came down five days after the judge found that compensation received by six medical oncologists employed by Halifax violated the Stark law (RMC 11/18/13, p. 3). In a victory for the Department of Justice, which had filed a motion for partial summary judg-ment, the judge concluded the hospital’s bonus arrangement did not fit within the bona fide employment exception of the Stark law because the bonus pool was not restricted to the oncologists’ personally performed services. The bonus pool was divided up only based on those services. Therefore, the judge ruled the oncologists were prohibited from making re-ferrals to the hospital and the hospital was prohibited from submitting claims to Medicare arising from these referrals for the facility fee. However, the court found “genuine issues of material fact” that still need to be resolved, including the extent of the violation based on the filings. The court also denied summary judgment to the government on each of its theories of recovery — the False Claims Act, payment by mistake of fact, or unjust enrichment.

The two new motions for summary judgment stem from DOJ’s false claims lawsuit against Halifax Hospital and its subsidiary, Halifax Staffing, of Daytona Beach, Fla. The case was filed in 2009 by whistleblower Elin Baklid-Kunz, director of physician services at Halifax Staffing, who accused the hospital of violating the Stark and anti-kickback laws and billing Medicare for medically unnecessary admissions. The Department of Justice inter-vened only in the Stark part of the lawsuit, alleging that Halifax’s compensation agreements with three neurosurgeons and six medical oncologists included salary plus incentives based on the volume or value of their referrals (RMC 9/26/11, p. 1). The whistleblower pressed on, and all allegations will be presented in one trial.

The Nov. 18 ruling was prompted by Halifax Hospital’s motion for summary judgment. It had asked the judge to throw out the Stark allegations against the neurosurgeons. The hospital argued they are bona fide employees “in all respects — i.e., the employment was for identifiable services, the compensation was consistent with fair-market value and did not take referrals into account, and the agreements would have been commercially reasonable even in the absence of any referrals,” the judge said. The government countered that this is a matter of debate and the court agreed. The government’s expert witness on physician compensation says that for several years, the neurosurgeons “appear to have been paid more than twice as much as neurosurgeons at the 90th percentile of their specialty despite collec-tions from their work falling below…that rank,” the judge states.

Judge Did Not Rule on MD Comp and Stark

In contrast to last week’s ruling, the judge did not opine on whether the neurosurgeons’ compensation violates Stark. The difference between the two rulings is in the methodology of the compensation, says Atlanta attorney Alan Rumph, who is with Baker Donelson. The

neurosurgeons were paid 100% of collections. “There is nothing inherently wrong with a percentage of collections for personally performed services,” he says, but it’s not surprising that the 100% figure has attracted scrutiny. As the judge noted, “this allowed the neurosur-geons to...keep 100% of their collections with no overhead expense.” Rumph says that the doctors providing significant charity care and assuming onerous call burdens could possi-bly, as the hospital argues, justify this level of compensation. But he generally favors the now more common compensation methodologies based on work RVUs. Hospitals have to ensure the compensation doesn’t take into account the volume or value of referrals.

The judge in Halifax found the compensation methodology for the oncologists to be pro-hibited as a matter of law, because the bonus pool included revenues from designated health services referred by the oncologists. When hospitals employ physicians, compensation can’t directly or indirectly take into account income from referrals of designated health services, Rumph says. But if hospitals own a separate legal entity that qualifies as a “group practice” under Stark, the physicians may receive a share of the group’s designated health services income, as long as it’s only indirectly related to their referrals. Rumph says that the Halifax oncologists’ compensation would appear to have satisfied the indirect requirement, had they been employed by a group practice. The “price” for such increased flexibility in compensa-tion, he notes, is loss of the higher reimbursement generally available for physicians who work in provider-based clinics, which are not “group practices.”

Contact Rumph at arumph@bakerdonelson.com. G

Clarity on MD Pay Is Elusive as Halifax Hospital Settles Stark Case for $85 MillionReprinted from the March 10, 2014, issue of AIS’s weekly newsletter, Report on Medicare Compliance. Visit the MarketPlace at http://AISHealth.com for more information.

The tentative $85 million settlement of alleged Stark violations in the Halifax Hospital Medical Center false claims case leaves a cloud hanging over physician compensation ar-rangements. Because the allegations were not hashed over at trial as expected, it’s still un-clear what variations of compensation arrangements could be linked to the volume or value of a physician’s referrals in violation of the Stark law, lawyers say.

While some compensation arrangements obviously reward physicians for the volume or value of their referrals, others may have a tenuous connection. But they still could face en-forcement actions in light of Department of Justice successes in Stark cases, lawyers say.

Halifax Hospital and Halifax Staffing of Daytona Beach, Fla., were scheduled to go on trial March 3 before a jury in U.S. District Court for the Middle District of Florida when word came down of the settlement with the Department of Justice of the false claims lawsuit. It was originally filed by whistleblower Elin Baklid-Kunz, who worked in the hospital’s com-pliance department before becoming director of physician services at Halifax Staffing. She alleged violations of the Stark law and medically unnecessary admissions, but DOJ inter-vened only in the Stark part of the case (RMC 9/26/11, p. 1; 10/21/13, p. 1). The whistleblower continued with the medical-necessity allegations, and that aspect of the case is slated for a July 8 trial.

Sweetheart Deals With Docs Were Alleged

The lawsuit against Halifax describes a series of alleged sweetheart deals with nine em-ployed physicians — three neurosurgeons and six oncologists. The hospital allegedly used bonus pools to reward physicians for referring patients to the hospital. The oncologists, for example, were paid 15% of the net profits of the medical oncology program at the hospital, which meant they were rewarded for the hospital services they referred, the complaint al-leged. Stark has an exception for employment arrangements, but compensation must be at fair-market value and commercially reasonable, and can’t take into account the volume or value of a physician’s referrals. A federal judge already ruled on a motion for summary judg-ment that the Halifax oncologists’ bonuses violated Stark because they were not limited to their personally performed services, but he could not resolve the extent of the violation and the government still had to connect the dots to the False Claims Act (RMC 11/18/13, p. 1).

The volume or value of referrals is tricky business because potentially the government could see them behind every compensation corner, says attorney Bob Wade, who is with Krieg DeVault in Mishawaka, Ind.

“Where is the line? The Stark law was developed because there was a perception that when the doctor has a financial relationship there is the potential for overutilization, but now it’s come to the point where you may have an arrangement where you violate Stark even though compensation was fair market value and arguably services are medically necessary” because physicians were paid, in some form or fashion, on the volume or value of referrals, Wade says. In this environment, “the more that compensation arrangements are aligned with financial success, the greater risk the hospital has that the government can say they take into account the volume or value of referrals” — perhaps even when compensation is fixed in advance.

Four Potentially Risky Compensation Scenarios

Wade described four hospital compensation scenarios that he says are hazardous in terms of the volume or value of referrals under the Stark law, from the most risky (1) to the least risky (4):

(1) Paying physicians a certain amount for every referral or technical service obviously takes into account the volume or value of services and therefore runs afoul of Stark.

(2) Paying physicians a percentage of profits generated. “Compensation is not technically tied to each referral, but the pool of money from which bonuses are paid is generated from the referrals of those physicians,” Wade says. “The Halifax court concluded that, because the percentage was based on the profit generated from the referrals of those physicians and other physicians, it would take into account the volume or value of the referrals.”

(3) Paying physicians fixed fees based on the operation of a department. Suppose the hospital rewarded them for meeting certain indicators. Maybe physicians were paid $500,000 if they met quality, efficiency and utilization goals. “They will tie that to the ser-vices performed by the physicians or the anticipated success of the department to determine the fixed fees,” Wade says. Because the bonus is fixed, this arrangement is safer than the first two, but there is still risk. When hospital bean counters project the success of the department from a budgetary perspective, they may take into account the volume or value of referrals. Hopefully that’s not the case, he says, “but that hasn’t been tested yet.” The government may try to make this argument.

(4) Paying physicians based on the financial success of the hospital as a whole. “Is that diluted enough” to pass the volume-or-value-of-referrals test under Stark?

It is unclear how far down the slippery Stark slope the government and whistleblowers will go in pursuing the connection between compensation and referrals. “The absurd thing is, in almost every compensation arrangement, when determining the amount, someone could allege hospitals were taking the volume or value of the business the physicians were generating into account,” Wade says. Suppose the fair-market value (FMV) compensation range for a physician is $40 to $50 per work relative value unit. If the hospital decides to pay the physician the high end of the FMV range, the government might argue it was influenced by the volume or value of the physician’s referrals and was not commercially reasonable — especially if there is a memo or email to that effect, he says.

Certain Types of Comp Deals Should Be Avoided

As all of this plays out, Wade is advising clients to steer clear of compensation arrange-ments that are percentage based or incorporate the financial success of the department or entity they have influence over.

Both Halifax and another big-dollar Stark case — Tuomey Healthcare, which paid $237 million after losing at trial on May 8, 2013 (RMC 10/7/13, p. 1, 5/13/13, p. 1) — “have poten-tial reach far beyond the specific facts,” says Atlanta attorney Alan Rumph, with Baker Donelson. Although some of the arrangements with physicians in those cases appeared to be aggressive, Rumph says, “the government and whistleblowers took relatively extreme posi-tions, with which the courts largely agreed.” He fears similar positions may be taken against more common, “nonabusive” arrangements.

The cases also create a Catch-22, Rumph says. As hospitals move toward integrated delivery systems, they are employing more physicians, who are reluctant to join health sys-tems unless they are paid competitively. Yet hospitals don’t want to be hit with false claims lawsuits for overly generous compensation, Rumph says. And there will be more lawsuits in light of the Halifax and Tuomey successes, he predicts. Hospitals should consider using CMS’s self-referral disclosure protocol (SRDP), which offers reduced penalties for eligible hospitals that confess their Stark sins, Rumph says. The largest SRDP settlement so far has been about $600,000, he notes.

Rumph hopes the Stark pendulum will begin to swing in the other direction. “Maybe the courts will interpret Stark a bit more reasonably in terms of some of these technical issues, particularly if the government attempts to extend Tuomey and Halifax to more common arrangements,” he says. “The government has taken an aggressive position on some of these issues — the volume or value standard and fair-market value — and so far the courts have agreed with them.”

The Halifax Stark arguments will still be aired in court, even though there is a settlement pending, says Atlanta attorney Marlan Wilbanks, who represents the whistleblower. The allegations of medically necessary admissions that will be presented in the July trial are in-extricably linked to the Stark allegations, he says. “It is the same core group of decision mak-ers in the finance and compliance departments who chose to put their head in the sand and allow both of these [alleged] schemes to go on for a decade,” Wilbanks contends.

He says Halifax no longer pays the oncologists and neurologists in the manner that led to the lawsuit.

An attorney for the hospital did not respond to RMC’s request for comment. Halifax will reportedly not admit liability in the settlement. A spokesman for the hospital also did not return RMC’s call.

Meanwhile, the settlement has not been formally filed yet. Judge Gregory Presnell, who is presiding over the case, said it must be signed, sealed and delivered by March 10 or jury selection will begin March 12.

Contact Wade at rwade@kdlegal.com, Rumph at arumph@bakerdonelson.com and Wilbanks at mbw@wilbanks-bridgeslaw.com. The case is USA and Elin Baklid-Kunz v. Halifax Hospital Medical Center and Halifax Staffing, Inc. (U.S. DC MD of Fla., No 6:09-cv-1002-Orl-31TBS). G

In First Stark Case Without Hospital Referrals, Medical Group SettlesReprinted from the Aug. 25, 2014, issue of AIS’s weekly newsletter, Report on Medicare Compliance. Visit the MarketPlace at http://AISHealth.com for more information.

Enforcement of the Stark law keeps taking new directions, and for the first time it veered into physician compensation inside a practice, unrelated to hospital referrals. New York Heart Center, a cardiology group practice with seven offices, agreed to pay $1.336 million to settle false claims allegations stemming from Stark violations, the U.S. Attorney’s Office for the Northern District of New York said Aug. 14.

According to the settlement, compensation for physicians who were partners in New York Heart Center allegedly was based on a formula that directly incorporated the volume or value of their orders for CT scans and nuclear diagnostic tests they didn’t personally per-form, but referred to others in their medical group, from September 2007 to August 2008. That allegedly violated the Stark law, which bans Medicare payments to an entity for “des-ignated health services,” such as radiology and certain other imaging services, if they were ordered by physicians who have a financial relationship with the entity, unless an exception applies.

“The issue of internal physician practice compensation under Stark has been a sleeping giant,” says Atlanta attorney Alan Rumph, who is with Baker Donelson. “It’s not like physi-cian compensation from a hospital,” which has dominated Stark-based false claims cases, including the $85 million settlement with Halifax Health (RMC 3/10/14, p. 1) and the $237 million judgment against Tuomey Healthcare after a trial (RMC 10/7/13, p. 1).

Thomas Spina, chief of the civil division for the U.S. Attorney’s Office, tells RMC there was no whistleblower who exposed alleged compensation violations at New York Heart Center or an audit under way when problems came to the U.S. attorney’s attention. “Someone tipped us off,” he says, but declines to be more specific. The exception to the Stark law for group practices providing in-office ancillary services, which could have gotten New York Heart Center off the hook, did not apply, Spina says.

The compensation plan that led to the Stark settlement was retired a long time ago, says Stewart Weisman, an attorney for New York Heart Center. Even so, the physicians believed it was legal, and had obtained counsel’s advice before implementing it. “The practice went to great lengths to comply with the opinions,” Weisman says. According to the compensation

formula, physicians referred certain diagnostic tests to other physicians in the medical group. Because the referring physicians didn’t personally perform the technical compo-nent, the government alleged the referrals violated the Stark law, he says. “We disagreed,” Weisman says. Rather than risk litigation, however, New York Heart Center settled the case. It has since switched to a productivity compensation arrangement, he says.

Weisman notes that no unnecessary medical procedures were performed when the alleg-edly noncompliant compensation plan was in effect. “Looking at the records, the physicians didn’t earn any more money after the productivity plan than they did before because there were caps on compensation, so there was no appreciable increase in tests other than the va-garies in medicine,” he says. New York Heart Center did not admit liability in the settlement.

Notwithstanding the allegations against New York Heart Center, which operates in Syracuse and other upstate cities, physicians generally have more leeway than other DHS en-tities to reap the fruits of their referrals, Rumph says. Compensation from hospitals, labs and other DHS entities can’t take the volume or value of referrals into account in any manner, whether it’s direct or indirect, he says. Congress and CMS made a policy decision, however, that physicians may receive from their group practices a share of income from DHS if it’s indirectly related to their referrals. “This is a place where group practices are treated more favorably than any other compensation relationship under the Stark law,” Rumph says.

But CMS has made it clear that group practices must steer clear of compensation based directly on referrals, he says. “If you refer 100 CT scans and get the profits based on the 100 CT scans, that’s clearly improper,” he says. It’s often possible, however, to achieve something like this, perhaps by sharing profits with doctors based on their compensation from non-DHS services or personally performed work relative value units — which CMS considers permissible compensation methods only indirectly related to referrals, Rumph says.

“The bottom line is, it’s all very complicated,” says Rumph, who was not involved in the New York Heart Center case. “The arcane rules can really bite a practice. It’s a very complex area and many practices don’t realize Stark reaches in and regulates how they can distribute their DHS income. Other practices are aware of the rules and try to comply but may miss something.”

One Stark evasive tactic is the de minimis rule. If DHS revenues are less than 5% of a group practice’s total revenues and DHS revenues allocated to each physician are less than 5% of his or her total compensation, “you can use any method of compensation you want” and are home free with regulators and enforcers, Rumph says. “The de minimis rule often saves practices that are not aware of it.”

In the end, he anticipates more whistleblower cases built on the New York Heart Center settlement. “They will see that practices are not satisfying Stark,” Rumph says. Also, more practices may self-disclose to CMS under its self-referral disclosure protocol even though there are no hospital referrals implicated. “You would hope that CMS would be more forgiv-ing in settling for a smaller than normal fraction of DHS referrals” because practices often lack the compliance resources enjoyed by hospitals, which are the usual hat-in-hand DHS entities that use the self-disclosure process established by the Affordable Care Act.

In a statement, another attorney for New York Heart Center, Kirk Ogrosky, former deputy chief of the fraud section for the Department of Justice’s criminal division, said the medical group “is committed to providing only the best in quality cardiology services in the region.” Ogrosky, with Arnold & Porter in Washington, D.C., contends “the underlying

dispute was a compensation arrangement that paid the group physicians less than they made prior to the agreement, and it had absolutely no impact on the number of tests ordered or provided.”

Contact Rumph at arumph@bakerdonelson.com. Read the press release on the heart cen-ter case at http://go.usa.gov/NXZP. G

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