BILL COPELAND’S HEALTH LAW INSIGHTS

This issue discusses "joint venture" arrangements between providers that have resulted in convictions, settlements, or civil monetary penalties. This provides the opportunity to review actual enforcement activity and to discuss what the focal point of that activity has been. I put the term "joint venture" in quotes because in most of these arrangements, the joint venture is nothing more than a sham arrangement to allow for the payment of moneys to entities in a position to refer patients or services to the payor.

UNIVERSITY HOSPITALS OF CLEVELAND

In August 2006, University Hospitals of Cleveland ("UHC") agreed to pay $13,880,000 to settle a False Claims Act lawsuit alleging that the hospital entered into illegal financial arrangements with physicians in order to induce referrals from the physicians to the hospital. The hospital also agreed to a corporate integrity agreement monitored by the Department of Health and Human Services Office of Inspector General ("OIG").

According to the Complaint,¹ the hospital entered into several illegal arrangements with physicians, including:

1. financing physician practice expenses, which enabled physicians to avoid expenses involved in their own private practices;
2. practice plan arrangements where "certain doctors, usually the clinical chairperson of a particular department would own outright the shares of a corporation organized for the practice of medicine. [UHC] would supply a [practice guarantee] for the shareholders of these ... corporations and also would supply [practice guarantees]" for other shareholders.
3. the advance of millions of dollars under the practice group arrangements. While these arrangements required repayment, there was a tacit agreement that it was not to be done. Most amounts advanced were never collected;
4. improper recruiting packages where UHC "paid for the cost of recruiting new physicians into the existing [practice plan arrangements] of 'loyal physicians' as a reward and inducement to the existing [practice plan arrangement] physicians for referring patients to UHHS facilities. These packages sometimes carried with them the promise of advances of at least $250.000, paid by [University Hospital Health Services] or UHC in order induce the recruited physician to join the [practice plan arrangements]. The packages offered to recruited physicians required them to refer all patients to [University Hospital Health Services] facilities;" and
5. phony directorships that paid a "director fee" for being a "director" at UHC. These arrangements paid approximately $150,000 annually for no substantial services performed.²

BEEBE MEDICAL CENTER

Beebe Medical Center in Delaware and two Delaware physicians have agreed to pay $1 million to settle a False Claims Act suit alleging kickbacks to the physicians. According to the U.S. Attorney's office, the dispute involved an arrangement between the hospital and the doctors to use the hospital rather than at a freestanding clinic the doctors owned to perform outpatient procedures. The hospital agreed to pay the two doctors a fee in addition to the reimbursement the Medicare program paid for the services. According to the hospital's president, the hospital received "incorrect legal advice."³

DR. ANANT MAUSKAR

Dr. Anant Mauskar entered into an arrangement with the owners of physical therapy clinics and motorized wheelchair providers where the owners paid him to sign charts so that they could bill Medicare for services that were not necessary. Actually, he never performed the claimed services or supervised them. He received 11 years and three months in federal prison, was required to pay restitution of over $14 million, and to forfeit $644,449 to the United States.

ANDERSON-LAHUE

While this case a about five years old, the lessons to be learned are very important. After a nine-week trail in the federal district court, a jury found two physicians and two hospital executives guilty of violating the statute. The physicians were members of a medical group that provided care to patients in nursing homes. Medicare covered most of these patients.

The indictment indicates that these physicians approached several hospitals in the area with the benefits of entering into "consulting agreements" with the medical group. Five hospitals entered into these agreements, but according to the indictment, they did not perform any consulting services.

The appeals court overturned the conviction of one of the hospital executives, but the upheld the remaining three convictions. An interesting aspect of the case is that the grand jury indicted the attorney who drafted the agreements and other nationally known healthcare attorneys were named as un-indicted co-conspirators, charges dismissed by the court.

ST. MARGARET HOSPITAL

This is a case where the hospital purchased the practices of a number of physicians and employed the selling physician at least one year after the purchase. Plaintiff alleged that the purchase price was in excess of fair market value and represented payment for an expected stream of referrals and orders following the sale. [Plaintiff/Relator] claims that the future referrals and orders violated both [Stark and the Anti-Kickback Statute]."⁴

In the complaint and in the summary judgment hearing, plaintiff argued that the hospital made no effort to ensure that its payments to physicians were consistent with fair market value. The court rejected this argument, stating:

That is flatly contradicted by the record, which indicates that practice purchases were made after receiving a market valuation from a well-- respected, independent consulting group and that loan rates were set after consultation with [the hospital's] institutional lending advisors to obtain the market rates. The amounts paid under leases or compensation agreements do not appear to be outrageous or otherwise unreasonable. Given this preliminary showing, it is incumbent upon [the plaintiff] to demonstrate that these arrangements were not actually for fair market value, and he has utterly failed to even attempt to meet this burden.⁵

MCLAREN REGIONAL MEDICAL CENTER

The McLaren case involves alleged kickbacks disguised as lease payments. After hearing the testimony of several experts, both the government and the defendants', the court determined that the leases were at fair market value and that there was no violation.

The regulations define fair market value for lease payments as:

[T]he term fair market value means the value of the rental property for general commercial purposes, but shall not be adjusted to reflect the additional value that one party (either the prospective lessee or lessor) would attribute to the property as a result of its proximity or convenience to sources of referrals or business otherwise generated for which payment may be made in whole or in part under Medicare or a State health care plan.

42 C.F.R. § 1001.952 (b).

The lesson from both these cases is to ensure that if the transaction is a sale or lease, you should always obtain a fair market value valuation from a reputable appraiser. If you can demonstrate that you are paying fair market value, it is difficult to prove that the purchase involved a payment for referrals.

Other cases that involve kickbacks disguised as legitimate arrangements are:

MT. VERNON HOSPITAL

This case involved alleged kickbacks disguised as administrative service contracts. In the complaint, the United States alleged Mt. Vernon entered into an illegal patient referral scheme with a consulting firm under the guise of an "administrative services agreement." The consultant was paid $60,000 per month to provide 22 separate administrative services to the hospital's substance abuse treatment unit, including the referral of patients. According to the complaint, other than patient referrals, the administrative services "were not needed, were not provided, or were worthless." Thus, according to the U.S. Attorney's press release, the administrative services agreement amounted to nothing more than a patient referral contract.

Mt. Vernon settled with the government for $2.65 million. In addition, Mt. Vernon entered into a corporate integrity agreement with the OIG.⁶

DIABETES TREATMENT CENTERS OF AMERICA/WEST PASES MEDICAL CENTER

This case, filed as a False Claims Act action in 1999 and is still ongoing in the U.S. District Court for the Middle District of Tennessee, involved alleged kickbacks disguised as medical directorships. Nevertheless, it gives an interesting insight into how seemingly innocuous contractual relationships can serve objectives that are more sinister. The complaint alleges that, between 1984 and 1996, West Paces Medical Center entered into a series of incentive--based contracts with Diabetes Treatment Centers Of America ("DTCA") whereby the medical center "would pay DTCA a commission based on the number of diabetes patients admitted into the medical center. In addition, the complaint states that DTCA entered into contracts with the various Atlanta Physicians, ostensibly to serve as medical directors of the diabetes center located within West Paces's [sic] facility. The complaint alleges that in actuality the physicians' compensation under these contracts was based not upon the medical services provided, but upon the ability of the physicians to refer large numbers of diabetes patients to the medical center."⁷

EDGEWATER

This case also involves alleged kickbacks disguised as consulting contracts. On September 29, 2006, the Federal District Court for the Northern District of Illinois ordered the former owner of Edgewater to pay $64.2 million in damages and penalties for his role in developing an elaborate kickback scheme that paid physicians and others to admit patients for unnecessary care.

Five others, including four physicians, went to federal prison in a fraud investigation that effectively closed the hospital. However, former owner was not criminally charged. The scheme involved luring homeless and elderly people to the hospital for care they did not need.⁸

According to the Court's Order, the complexity of the overall scheme was enormous and involved an elaborate fabric of management companies, trusts and contract management to hide the owner's true involvement and ownership interest.⁹

While a detailed discussion of the scheme is well beyond the scope of this article, the Court's discussion of one of these agreements shows how the scheme worked:

In the early 1990s, while at Edgewater, Rogan entered into a conspiracy with Ehmen [Edgewater's Vice President of Medical Staff Development] and Drs. Barnabas, Cubria, and others to provide kickbacks and engage in improper financial relationships in return for patient referrals. This conspiracy, in turn, generated patient admissions, which resulted in substantial profits to Rogan. The conspiracy was evident in the early 1990s, although the Government's claims are based on Medicare and Medicaid claims by Barnabas and Cubria submitted from 1995 to 2000.

In 1993, Barnabas approached Ehmen and suggested that Ehmen recruit a surgeon named Dr. Antonio Ramos, whose patients Barnabas had been treating at another hospital. Ramos agreed to refer patients to Edgewater but informed Ehmen that he (Ramos) wanted Edgewater to assist with his malpractice premiums, possibly by including Ramos on Edgewater's own insurance policy. Ehmen reported this to Rogan. Ultimately, Rogan agreed to pay Ramos $75,000 per year as a "Hispanic physician liaison" to induce Ramos to refer patients to Edgewater. Prior to creating this position for Ramos, Rogan had never identified or discussed the need for such a position at Edgewater. Ramos immediately began admitting upwards of 20 to 30 patients a month to Edgewater.¹⁰

Personal services and management contracts are allowable under the Anti- Kickback Statute so long as their purpose is not to influence referrals of federal healthcare business. There is a safe harbor for these types of contracts, and if one meets its requirements, there will be no enforcement action taken. These arrangements require an executed agreement that specifies services, their schedule and the exact charges. The term of the agreement must be at least one year, with compensation set in advance and based on fair market value, not the volume or value of referrals. The services performed must not include counseling or promotion of activities that violate the Act.¹¹ The regulations define an agent as anyone, other than a bona fide employee, who has an agreement to perform services for, or on behalf of, a principal.¹²

It is very important to get good legal advice from an attorney experienced in healthcare fraud and abuse issues. These kinds of arrangements and joint ventures are fraught with legal pitfalls for the unwary. Reliance in good faith on the advice of an attorney can be a defense against violation of the anti-kickback and Stark self-referral laws. As stated by the OIG in the original safe harbor regulations "many health care providers have structured their business arrangements based on the advice of an attorney and in good- faith believed that the arrangement was legal. In the event that they now find that the arrangement does not comply fully with a particular safe harbor provision and are working with diligence and good faith to restructure it so that it does comply, we will use our discretion to be fair to the parties to such arrangements."¹³

¹ United States of America ex rel. Kirby v. University Hospitals Health System, Inc., et al, No. 1:03-cv-1579, Doc. 1-1 (N.D. Ohio 2003).
² Id. at 16-18.
³ O'Sullivan, Sean, " Beebe, doctors to pay $1 million to settle," Delawareonline The News Journal, (http:/ /www.delewareonline.com/apps/pbcs.dll/article?AID=/20060320/NE WS/60320015) , Mar. 20, 2006.
⁴ United States Of America ex rel Perales v. St. Margaret`s Hospital, 243 F. Supp. 2d 843, 846- 7 (C. Dist. IL 2003)
⁵ Id. at 865.
⁶ U.S. Attorney's Office, Southern Dist. Of New York, News Release, "U.S. Settles False Claims Act Lawsuit Alleging Illegal Medicaid Patient Referral Scheme Against Mount Vernon Hospital," August 1, 2005.
⁷ United States Of America, ex rel. A. Scott Pogue v. American Healthcorp, Inc., et al., 977 F. Supp. 1329,1333 (M.D. Tenn. 1997).
⁸ Jabsen, Bruce, "Ex-Hospital Owner Ordered to Pay $64 Million,"Chicago Tribune Online Edition, Sept. 30, 2006.
⁹ United States v. Rogan, "Memorandum and Order," Case No. 02 C 3310, Doc. No. 215 (N.D. Ill. Sept. 29, 2006).
¹⁰ Id. at 9-10.
¹¹ 56 Fed. Reg. at 35985.
¹² Id.
¹³ 56 FR 35952, July 29,1991.
Copyright 2006 William Mack Copeland. You can reprint any part of this newsletter by providing the following acknowledgement: "Reprinted with permission. William Mack Copeland, www.wmcopeland.com."