Shifts in fraud and abuse

By William H. Maruca, Esq.

For over a decade, physicians, hospitals and other health care providers entering into seemingly innocuous business transactions have risked draconian penalties if those deals did not meet narrow, ill-defined exceptions to the federal fraud and abuse laws. The addition of strict prohibitions against certain self-referrals under Stark I and II only further muddied the waters with equally vague and subjective exceptions.

The False Claims Act and its whistleblower provisions have raised the stakes by empowering a potentially unlimited pool of private “Medicare Cops” from the ranks of disgruntled former employees, competitors and bounty hunters.

Historically, it has been up to the federal courts to untangle the fraud and abuse mess, and they have done so with admirable restraint in the Ninth Circuit’s Hanlester decision and several cases in its wake. Other court cases have expanded the danger zone, occasionally without clear justification. New federal legislation now forces the Medicare system itself to evaluate transactions in advance before they spawn protracted litigation.

Several recent federal cases call attention to some of the risks associated with entering into agreements in which one party may benefit from making Medicare referrals to another party. One court has held that whistleblowers could not automatically apply the False Claims Act to kickback violations, but two other courts have expanded the kickback analysis to include marketing contracts.

Does Kickback=False Claim?

The first of these cases, United States ex. rel. Thompson v. Columbia/HCA Healthcare Corporation, was decided on July 24, 1996 and involved certain allegations of kickback and self-referral violations. Dr. Thompson was a private physician who brought a qui tam, or whistleblower, action against Columbia/HCA under the theory that Columbia’s agreements with various physicians and other providers violated the Medicare and Medicaid anti-kickback statute. Dr. Thompson alleged that the violations of the anti-kickback and self-referral statutes caused these claims to also violate the False Claims Act.

Under Dr. Thompson’s theory, since claims submitted to Medicare where a prohibited financial relationship exists are not properly reimbursable under Medicare, and since the parties should have known that such claims were improperly submitted, the submission of those claims was itself a fraudulent act and subject to the separate penalties under the False Claims Act. The court disagreed and held that simply violating the anti-kickback statute and/or Stark law is not sufficient to establish a False Claims violation. In order to proceed with a False Claims lawsuit, it must be alleged that the defendant presented a claim to the government, the claim was false or fraudulent, the defendant knew the claim was false or fraudulent, and the Medicare system suffered damages as a result of the false claim.

In this case, Dr. Thompson had failed to allege that any specific claim had been fraudulent or that Columbia/HCA had any reason to know that any elements of those claims were false or fraudulent.

This decision is certain to disappoint the Office of Inspector General (OIG), whose officials have informally indicated that kickback and Stark cases would be prosecuted as False Claims violations.

The federal courts have reached varying conclusions in other similar fact situations. In January, 1996, the U.S. District Court for the Middle District of Tennessee held that a violation of the anti-kickback statute would be sufficient to support a False Claims whistleblower case, United States ex. rel. Pogue v. American Health Corp., Inc.

The Ninth Circuit reached the opposite result in the case of United States ex. rel. Hopper v. Anton. In the Hopper case, the Ninth Circuit held that violation of laws, rules, or regulations alone do not create a cause of action under the False Claims Act, and that the whistleblower plaintiff must allege that some request for payment known by the defendant to contain falsities had been made for the False Claims Act to apply.

The significance of these cases lies in the ability of private individuals to bring cases under the False Claims Act, under the qui tam provisions of the law. False Claims Act cases may result in treble damages plus significant additional financial penalties as well as exclusion from Medicare and Medicaid. The “relator” or whistleblower, may share in a portion of the amounts recovered under these cases. The government’s own fraud investigators have relied heavily on the False Claims Act in recent years due to its streamlined requirements for proof.

Are Marketing Contracts At Risk?

Two additional cases illustrate the danger falling into unanticipated traps under the federal anti-kickback statutes. Both cases involve agreements between Medicare providers or suppliers and marketing organizations. The Florida case involved a durable medical equipment supplier who entered into an agreement with a marketing company, Medical Development Network. The marketing company negotiated a fee structure under which its fees would be based on a percentage of sales generated by its marketing efforts. Although this did not fit into the strict requirements of the safe harbor under the anti-kickback law, it was widely believed that marketing agreements were not subject to prosecution under the anti-kickback statute unless the marketing entity was otherwise in a position to make or influence referrals, such as an entity controlled by a hospital, physician or other provider. The court found the arrangement to be unlawful, and therefore unenforceable.

A similar case involved another DME supplier and an agreement with a marketing company, Nursing Home Consultants, under which the marketing company was paid on a per item basis. This case, which was decided by the U.S. District Court for the Eastern District of Arkansas, also resulted in a finding that the anti-kickback law had been violated.

In both cases, emphasis was placed on the failure of the parties to adhere to the safe harbor criteria as published by HCFA. Since their inception, the safe harbors have always been considered voluntary, and any transactions that did not strictly meet the terms of the safe harbors were not presumed to be illegal. Rather, there had to be a determination that the transaction resulted in an improper kickback or economic inducement to refer patients. At least in these two jurisdictions, this analysis may be changing to a “presumption of guilt” for deals outside of the safe harbors.

Both cases involved not government prosecutions or whistleblowers, but attempts by one of the parties to an agreement to void the agreement on the basis of public policy. In other words, the DME suppliers sought to invalidate the contracts and cease making marketing payments because the contracts were illegal.

Finally: Advisory Opinions

How can physicians and other health care players know when they have crossed the invisible line into unlawful behavior? The anti-kickback safe harbors were intended as a “bright line” test under which business transactions could be designed to clearly meet the requirements of the law. However, the safe harbors were too restrictive to apply to many situations, and also included a number of inherently subjective terms such as “fair market value.” Little of the intended certainty was achieved.

The Stark law was inspired by the perception that the intent-based anti-kickback law was failing to control improper utilization resulting from financial incentives. Again, the Stark law was intended to create clear categories of transactions which were prohibited or permitted. The regulations under Stark I, which was limited to laboratory services, raised as many questions as they answered, and the regulations involving Stark II, which added eleven more designated health services, have yet to be released.

The recently-enacted Kennedy-Kassebaum Health Insurance Portability and Accountability Act of 1996 will offer some relief to the uncertainty which has plagued health care transactions since the increased enforcement efforts began in the mid 1980’s. Under Kennedy-Kassebaum, private parties may seek advisory opinions from the Department of Health and Human Services to determine whether the terms of a proposed transaction would violate the anti-kickback statute. No advisory opinions will be available under the Stark law.

Since advisory opinions will be based only on those factors disclosed to the government by the parties involved, and since the anti-kickback law requires a showing of subjective intent, there remains to be seen how much protection will be available upon receiving a favorable advisory opinion from the Department of Health and Human Services. The OIG will have a prominent role in the issuance of the opinions, and their open hostility to the process may result in narrowly drawn opinions.

Had such opinions been available several years ago, the parties in the Medical Development Network and Nursing Home Consultants cases may have had some advance warning of the flaws in their contracts and a chance to correct them before any damage was done. Participants in new arrangements will now have that long-awaited opportunity.

William H. Maruca, Esq., is a director with the Pittsburgh law firm of Kabala & Geeseman who concentrates his practice in the areas of health care and closely-held businesses.