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Stark demands strict compliance

By Mary M. Bearden and Allison Shelton, Brown & Fortunato, P.C.

On July 21, 2014, the Department of Justice (DOJ) announced that Infirmary Health System (IHS), two IHS-affiliated clinics, and Diagnostic Physicians Group (DPG) in Alabama agreed to pay $24.5 million to settle a suit brought under the False Claims Act (FCA). In the suit, the United States alleged that the health system and physician group entered into arrangements that financially rewarded the physicians for Medicare referrals in violation of the Stark and anti-kickback laws.

In 2011, a former DPG cardiologist, Dr. Christian Heesch, initiated the suit under the FCA’s whistleblower provisions. Dr. Heesch joined DPG in 2003 and practiced with the group until 2011. From 2011 until 2013, the DOJ investigated the allegations asserted by Dr. Heesch, and in July of 2013, the Government officially took the lead in the suit. Dr. Heesch will receive $4.41 million from the settlement.

The amended complaint filed by the U.S. Attorney General on August 7, 2013, highlighted the manner in which the arrangements between the health system and the physician group violated the Stark law. Under Stark, an entity may not seek Medicare reimbursement for “designated health services” (DHS), including radiology and certain imaging services, ordered by a physician with whom the entity has a financial relationship that does not qualify for an exception under the law. The Stark law was initially adopted to protect Medicare from the over-utilization of DHS that may result when financial incentives interfere with physicians’ medical judgment. According to the DOJ, the arrangements between IHS and DPG involved such illicit financial incentives.

In the eighties, IHS created Infirmary Medical Clinics, PC (IMC) to acquire physician practices. IMC acquired IMCDiagnostic and Medical Clinic (IMC-DMC) in 1988. IMC-DMC then entered into an arrangement with DPG for physician services that remained relatively unaltered, according to the DOJ, until 2011. In 2008, IMC acquired IMC-Northside Clinic which entered into an arrangement with DPG that was substantially similar to the arrangement between DPG and IMC-DMC.

DPG had a physician services agreement (PSA) with both clinics. Under the PSA, the clinic provided all overhead, such as office space and non-physician personnel, while DPG provided all physician services. Physicians were paid based on the clinic’s collections. A physician’s share of “Non- Stark collections” (i.e., collections not related to DHS) was based on his or her productivity. Under the terms of the PSA, a physician’s compensation related to “Stark collections” (i.e., collections from DHS) was based on a “Preset Stark Bonus” that was purportedly based on a “predetermined formula.” According to the DOJ, however, no mathematical formula existed for calculating the bonus. Rather, the bonus was a percentage of the clinic’s collections. The DOJ claimed that a review of the clinics’ annual financial statements of bonuses revealed that the bonuses correlated with the physicians’ referrals. Furthermore, the DOJ emphasized that the clinics prepared monthly “Stark reports” that listed the clinic’s DHS collections by ordering physician. Based on this evidence, the DOJ concluded that a physician’s bonus was based on the volume and value of the physician’s DHS referrals.

The terms of the PSAs stated that the agreements were designed to comply with the group practice requirements and inoffice ancillary services (IOAS) exception under the Stark law. If certain requirements regarding location, billing, and performance are satisfied, a physician may refer patients to his or her group practice for DHS under the IOAS exception. Furthermore, a physician in a group practice may receive a productivity bonus as long as the terms of the bonus comply with special rules under the Stark law.

The DOJ alleged that the arrangements between DPG and the clinics did not satisfy the exceptions for IOAS and productivity bonuses. According to the DOJ, the bonuses paid to physicians did not meet the special rules for productivity bonuses outlined under Stark. Also, because the parties did not qualify as a “group practice,” the DOJ concluded that the arrangements between DPG and the clinics did not meet the IOAS exception. The Stark law defines a group practice as a single entity. DPG was a separate legal entity from and an independent contractor to the clinics.

The DOJ stressed that the parties knew that the arrangements did not satisfy the IOAS exception. In the press release on July 21, 2014, the DOJ stated that “in June 2010, an attorney for DPG warned employees of both IMC and DPG that the compensation being paid to the physicians likely violated the law. Nevertheless, the agreements allegedly were neither modified nor terminated for another 18 months.” Specifically, the attorney for DPG advised DPG and IMC that “CMS would likely rule that because 2 entities exist we do not meet the strict definition of a ‘Group Practice’ and the IOAS exception was not available.”

CEO for IHS, Mark Nix, issued a statement on the date the settlement was announced. He emphasized that the “suit focused solely on highly complicated contracts with physicians” and that the “complaint resulted from what has been a disagreement with the government over our interpretation of the law as written.” According to Nix, IHS agreed to the settlement terms in order to “move past litigation about what has been a very complex issue and allow us to end this distraction so that we can focus on our mission and purpose as a community healthcare provider.” In addition to the payment of $24.5 million, IHS, IMC-DMC, IMC-Northside, and DPG are required to enter into Corporate Integrity Agreements with the U.S. Department of Health and Human Services Office of Inspector General.

Health care providers can glean two important lessons from the settlement. First, to avoid a violation of the Stark law, it is necessary for arrangements to comply with every requirement of the applicable exception. A claim that fair market value was paid and that the arrangement complied with the spirit of the law will not suffice under Stark. Second, the DOJ is no longer targeting only hospitals for violations of the Stark law. Physicians are increasingly being named as defendants in FCA suits and being held accountable for compliance with the Stark law.