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Halifax Hospital Settlement: Scrutiny of relationships between hospitals and physicians

April 2014
BY Mary M. Bearden and Elizabeth H. Jepson, Brown & Fortunato, P.C.

On March 11, 2014, the Department of Justice (DOJ) announced that Halifax Hospital Medical Center and Halifax Staffing, Inc. in Daytona Beach, Florida had agreed to settle various issues with DOJ for $85 million in order to resolve pending allegations that Halifax had violated the Stark Law and the False Claims Act. Among other things, the lawsuit alleged that Halifax had paid six oncologists, who were employed by Halifax Staffing and worked for Halifax Hospital Medical Center, in violation of the Stark Law and the Anti- Kickback Statute because the oncologists received bonuses that were intended to compensate them for their referrals to the hospital.

The Stark Law prohibits a physician from referring Medicare or Medicaid patients for certain designated health services to an entity in which the physician, or an immediate family member of the physician, has a financial interest. That financial interest may be either an ownership or investment interest in the entity or a compensation arrangement with the entity. For purposes of the Halifax case, it is important to note that designated health services include both inpatient and outpatient hospital services.

There are certain exceptions for arrangements that are considered permissible under the Stark Law. Because the Stark Law is a strict liability statute, the arrangement must fit completely within the criteria of the exception to qualify for protection. The exception at issue in the Halifax case was the bona fide employment exception, which provides that any amount paid by an employer to a physician (or immediate family member of a physician) is not a “financial relationship” as defined under the Stark Law if certain conditions are met. Those conditions include that the amount paid is consistent with fair market value of the services provided, is not determined in a manner that takes into account the volume or value of the referrals made, and is commercially reasonable even if no referrals were made to the employer.

Additionally, the lawsuit alleged violations of the False Claims Act, which provides a means for the government, as well as private citizens on behalf of the government, to pursue fraud perpetrated against the government. Individuals bringing cases under the False Claims Act are known as relators or whistleblowers. Relators are entitled to a percentage of the damages recovered by the government. Conduct that violates the Stark Law or the Anti- Kickback Statute may form the basis for a relator to bring a lawsuit under the False Claims Act. The False Claims Act provides for civil monetary penalties of up to $11,000 per violation, plus three times the amount of the government’s actual damages.

The relator in the Halifax case, Elin Baklid- Kunz, filed a qui tam lawsuit in 2009 in the United States District Court for the Middle District of Florida. She was a member of the hospital’s compliance office prior to filing the lawsuit and currently serves as the Director of Physician Services at Halifax. As the relator in this case, Elin Baklid-Kunz may receive at least 15 percent of the $85 million settlement amount, and an even higher amount in the settlement or in the event of a trial on related allegations currently scheduled in the summer.

A significant portion of the litigation concerned Halifax’s employment agreements with the oncologists, which provided that the oncologists would be paid a salary and a bonus. As a bonus, each oncologist would receive an equitable portion of an incentive compensation pool that equaled 15 percent of the operating margin for the medical oncology program. Although the employment agreements did not define the term “operating margin,” Halifax defined the term as revenue and direct expenses from outpatient medical oncology services. Halifax conceded that the revenue included fees for services not personally performed by the oncologists, such as fees for hospital services.

The Stark Law does not prohibit referrals for services personally performed by the referring physician. However, in this case, the court found that the bonus was not based solely on services personally performed by the physician, because the pool from which the bonuses were paid included fees for other services, such as outpatient prescription drugs and other services not personally performed by the oncologists. Consequently, the money available in the bonus pool varied with the volume and value of the referrals by the oncologists, because the size of the pool (and therefore the size of the bonuses available to each oncologist) would increase as the referrals to the hospital increased.

Because the bonus structure did not comply with the bona fide employment exception to the Stark law, the oncologists were prohibited from making referrals to Halifax for designated health services. The court found that the oncologists did, in fact, make referrals to Halifax for designated health services during the time bonuses were paid and that Halifax did, in fact, submit claims to Medicare for payment as a result of the prohibited referrals. In November of 2013, the court found that the payment of bonuses to the oncologists violated the Stark Law. However, the court was unable to determine the amount of damages at that time, and trial was set to begin on the amount of damages available for the Stark Law violations when the parties agreed to settle the claims.

Pursuant to the settlement, Halifax agreed to enter into a Corporate Integrity Agreement (CIA) with the Office of Inspector General (OIG). The CIA provides, among other requirements, that Halifax must implement procedures to internally review and monitor its arrangements with physicians and other referral sources, as well as engage an independent review organization to perform reviews and report to the OIG.

It should be noted, however, that a portion of this case remains unresolved. The relator brought certain claims against Halifax that the government declined to pursue. Those claims included allegations that Halifax unnecessarily admitted Medicare patients to the hospital in order to obtain higher reimbursements. Trial is set on those claims for later this year.

It is important for hospitals, physicians, and other providers of health care services to remember that anyone can be a whistleblower. As is the case with Halifax, the whistleblower worked in the compliance office at one time and is still employed by the hospital. The False Claims Act includes specific provisions that protect individuals from being discharged, disciplined, or discriminated against because the individual engaged in conduct that could reasonably lead to a viable action under the False Claims Act. Listening to employees who bring forward compliance concerns and taking action on those concerns should help to minimize the likelihood of potential whistleblower actions.