In the present healthcare landscape, with patients reluctant to come into the clinic and high unemployment leaving them slow to pay, doctors are considering all options to protect their practices.
These include increasing partnership with hospitals, management services organizations (MSOs), clinically integrated networks (CINs), private equity investment and working for primary care companies such as OneMedical.
“We’ve seen a lot of consolidation, a lot of people talking about ‘I have a lot of cost on overhead, but now that Covid hit I don’t have any patients coming in my office for those couple of months, how do I survive?’” said Michele Madison, partner at Morris, Manning & Martin, LLP, in a virtual session organized by the American Bar Association last week.
While consolidating in times of extreme uncertainty may be wise business, such relationships can also leave physicians and providers under increased regulatory scrutiny and leave hospitals open to potentially devastating consequences such as antitrust violations, the loss of 501(c)(3) status and even closure.
Provider-system deals can open up a Pandora’s Box of liability under the Stark Law, Federal Anti-Kickback Statute (AKS) and False Claims Act (FCA), along with state law. How can you protect your business from both the Covid economy and the world of healthcare regulation?
Start With A Simplified Stark Analysis
“The old adage applies here: Pigs get fat but hogs get slaughtered,” said Baker Donelson’s Michael Clark in a phone interview, “which is to say if the promised return on investment seems excessive, it might draw scrutiny, so you need to honestly evaluate, is this valuation realistic or not?”
Clark says it’s best to start by analyzing whether your agreement implicates the Ethics in Patient Referrals Statute, commonly referred to as the Stark Law. Intended to keep physicians from making money by referring patients to entities with which they or their family has a financial relationship, Stark is implicated whenever a doctor sends business to a practice that is reimbursed by Medicare or Medicaid.
In the ABA presentation last week, Clark explained the pre-eminence of this regulation.
“Stark is the critical one in my book because the near miss is a complete miss,” Clark said. “Some things that are OK in a non-hospital setting, when they get put into a hospital setting may be transformed into a Stark Law issue unintentionally, but essentially you look at 11 categories of what are called ‘designated health services’ that are statutorily set out.”
Through an analysis of these categories, potential medical business partners can determine whether their agreement would fall under one of the statute’s many “safe harbor” exceptions.
But be wary of shortcuts: Physicians who try to “carve out” their practice from the application of Stark by refusing to accept any government payment for services and only accept private patients are in for a stark surprise, according to Willamette University College of Law Prof. Bruce Howell.
“The carve-outs were maybe fine five, 10 years ago but based upon recent case law, then recent trials and prosecutions by the government, the carve-out is not 100% guaranteed success,” Clark told ABA presentation listeners last week.
Carve-outs also fail to protect practices from fraud and abuse liability. He explained that many potential clients come through his door saying that they don’t intend to work with the government because the pay is low and there is an enhanced risk for fraud and abuse. Their belief is that fraud committed against a private payer isn’t as actionable as against the government. But that is a false understanding of law.
“You know, we have as part of HIPAA [Health Insurance Portability and Accountability Act of 1996] the enactment of the health care fraud statute, which was predicated on the traditional mail fraud wire fraud model.”
Clark explained this statute is “very broad based,” and he had represented clients defending themselves in what he calls “standalone private-payer fraud cases” where the courts are no longer tethering prosecution to the presence of a bill to Medicare or Medicaid.
Pandora’s Box of Kickbacks and Fraud
Even if a deal receives safe harbor under a Stark analysis, it might not pass the sniff test under the Federal Anti-Kickback Statute, especially if a physician involved in the practice wants to invest in the newly structured entity. While the physician’s receipt of a portion of the practice’s value is an “investment relationship” under Stark, it is also a potential “kickback” under AKS.
Further, even if the original agreement as written and signed falls within the law, regulators can find noncompliance if its day-to-day operations do not line up with those terms.
Even if your deal is found proper under the Anti-Kickback Statute, which requires that one of the parties to the deal “knowingly and willingly” fails to comply for a violation to be found, once the False Claims Act is brought in, the government stops caring if you willingly disregarded the law. Instead, the Department of Justice will prosecute based on “actual knowledge, deliberate ignorance or reckless disregard of the truth or falsity of information on which the claim is based.”
That is exactly what happened in the “Tuomey case.” There, the government argued that a hospital offered physicians an excellent deal in exchange for the promise of future referrals, which the court determined to run afoul of both the Stark Law and FCA in a civil whistleblower case.
Fear the False Claims Act (FCA)
While Stark has been clarified to protect many of its previously unwitting victims, the FCA has only gotten more precarious to navigate, and easy to find liability under.
“You have to find at least one of the individual employers has all the relevant factual information to satisfy the knowledge standard on the False Claims Act; that means you just need to find one individual who knew that it was submitting claims to Medicare that were false,” Clark said. “Pretty easy burden here.”
In Tuomey, a group of 19 specialists made a deal with Tuomey Healthcare Systems to perform surgeries at the hospital as employees with full hospital benefits while retaining their practices. A 20th specialist, Dr. Michael Drakeford, declined the hospital’s offer and instead filed a Qui Tam suit. Drakeford successfully argued that the hospital’s compensation package in this deal was above Fair Market Value.
In its ruling, the federal jury found that Tuomey Healthcare Systems violated Stark Law and the False Claims Act by submitting $39 million in false claims to Medicare from January 2005 through November 2006. A federal judge calculated $237 million in fines — higher than the annual revenue of the hospital. In the end, Tuomey agreed to pay the federal government a total of $72.4 million and undergo compliance reviews for five years in exchange for release from further FCA liability. Tuomey merged with nearby Palmetto Health. After other mergers, the company is now called Prisma Health.
In a phone interview, Clark said: “Doctors aren’t trained in fraud and abuse laws, that are really traps for the unwary; I’ve had clients who get caught in the trap, down the looking glass, what’s gone on with my world?”
In Tuomey, “good lawyers had done the analysis but the court found it was not sufficient,” Clark said.
Further, even if your agreement is found compliant with Stark, if found noncompliant with the False Claims Act, you can still face crippling damages under the Civil Monetary Penalties Law, thanks to the “Escobar case.”
“The Escobar case stands for the principle that if an arrangement behind an invoice to the government is not compliant, then the invoice, no matter if it is letter perfect, is a false claim,” Howell said in his Wednesday presentation. However, if the government knew about the billing imperfection and kept paying, the Supreme Court said, then the falsehood becomes immaterial.
“False claims are not just healthcare,” Howell said, “they can be government contracts, they can be NIH grants; and so if you’re looking for how the courts are looking at the False Claims Act it, it’s wise to cast a wider net.”
Don’t Forget the State!
State licensing agencies have their own set of requirements, which run in parallel to these. As long as federal law does not preclude their application to your case, they will apply.
Some states have “Blue Sky” securities laws that regulate the offering and sale of securities, intended to protect investors from fraud. Many states that have these laws apply something called the “Howey test,” outlined by the Supreme Court in SEC v. Howey, to any contract, scheme, or transaction, regardless of whether it has any of the characteristics of typical securities.
“If I’m relying on somebody else’s efforts to get increased value in my investment, then it is probably going to be a security,” Howell said. “If it walks like a security and quacks like a security, it’s a security under ‘Howey.’”
How to Protect Your Deal
In a phone interview, Clark said the best ways to protect yourself from falling prey to one of these many traps is to be conservative in marketing, allocating value, and aligning incentives between the providers and the healthcare system — and get an independent consulting group to deliver a written opinion letter on the deal’s fair market value. Even then, if it feels too good to be true, it probably is.
Given the range of state laws that might apply, Clark and Howell recommend having one set of attorneys address the federal issues and another tackle the state before getting engaged, let alone married.
“There can be a lot of nuances here,” Clark said, “and if you’re not licensed in that jurisdiction it’s a risk that I just don’t think is one that I recommend taking on.”
The referenced cases are:
U.S. ex rel. Drakeford v. Tuomey Hospital System, 976 F.Supp. 776; NO 13-2219 (4th Cir. (2015))
Universal Health Services, Inc. v. United States ex rel. Escobar, (579 U.S. __, 136 S.Ct. 1989 (2016))
Securities and Exchange Commission v. W. J. Howey Co., (328 U.S. 293 (1946))
Photo: JamesBrey, Getty Images
