Stark and Antikickback Problems – Draft
A large cardiology group that has historically admitted many patients to Hospital is to be
acquired by Hospital. Hospital and physicians desire that, after the sale of their practice to the
hospital, all of the physicians in the group will become employees of Hospital. Since there is no
prohibition on the corporate practice of medicine in the state in which Hospital is located,
everyone agrees that the employment relationship is permissible under state law. You are
regulatory counsel for the Hospital and you are being asked by Hospital’s CEO to address the
following questions:
1. Does a payment to the physicians for purchase of their practice constitute a “financial
relationship” that implicates the Stark Law? If a physician accepts the offer of
employment at Hospital, does the payment of salary and benefits to that physician
constitute a “financial relationship” that implicates the Stark Law?
2. If either (or both) the payment for purchase of the practice or payment of a salary to a
physician for services as an employee is a “financial relationship” that implicates the
Stark Law, what Stark law exception(s) may apply to each? What are the requirements
for the exception(s)?
After a long period of negotiations, Hospital and the cardiologists agree on a price for purchase
of the practice. On the same day and after an equally long period of negotiations, the
cardiologists execute employment agreements with Hospital. The employment agreements are to
become effective in 30 days, upon the close of the sale of the cardiology practice to Hospital. All
of the employment agreements provide for employee compensation that is at very top (but not
exceeding) the fair market value range for the physician’s clinical services as established by a
third party valuation firm. The hospital CFO has concerns about the magnitude of the
compensation that the physicians will receive as employees, and writes an e-mail to Hospital’s
CEO stating, “unless these physicians suddenly start sending more patients to our cardiac surgery
program after they become employees, this hospital is going to lose a lot of money on this deal.
If we pay these physicians the agreed purchase price for their practice plus the compensation that
is promised in their employment agreements, our net on the services of the cardiologists is
probably going to be less than zero.” The Hospital CEO responds, “Don’t worry. I have a good
relationship with these docs. It’s all going to work out.” Hospital’s CFO forwards the e-mail
chain to Hospital’s Compliance Officer and asks, “Do we have a Stark Law issue here?”
3. Do you think that Hospital will have a “Stark Law issue” as a result of the compensation
to be paid to the physicians through the acquisition transaction and their subsequent
employment? Does it matter that Hospital’s CFO believes that the hospital will lose
money as a result of its dealings with the cardiologists if the cardiologists don’t increase
the number of patients that they refer to Hospital’s cardiac surgery program? Does
Hospital’s knowledge that it will lose money on the transaction if the physicians don’t
increase their referrals suggest any other legal concerns, such as under the Antkickback
statute? If so, why? If not, why not?
Five days before the acquisition transaction with cardiology group is scheduled to close, Hospital
receives notice that a former hospital bookkeeper has filed a qui tam action under the Federal
False Claims Act. The qui tam complaint alleges that, for at least two years, Hospital has
violated the Stark Law and Antikickback Statute through its financial relationships with the
cardiology group. Hospital’s board of directors, on advice of outside counsel, asks Hospital’s
Compliance Officer to quietly investigate the “financial relationships” that Hospital has had with
the cardiology group over the last two years. The Compliance Officer learns that Hospital had a
one year agreement with the cardiology group that provided for compensation to the group for its
physicians to be “on call” and available to treat patients who need immediate specialist services
in Hospital’s emergency department and inpatient floors. The Compliance Officer knows that
this is a common type of compensation arrangement at Hospital, as well as at hospitals
throughout the United States, because the availability of specialist physician services is generally
regarded as necessary for hospitals to comply with EMTALA and other federal or state legal and
regulatory requirements, and physicians generally won’t provide the necessary availability
without some compensation. However, the Compliance Officer is concerned because she finds a
valuation report from an outside valuation firm, which is dated just one month before the
execution date of the on-call coverage agreement, that indicates that the maximum fair market
value compensation for on-call coverage by the cardiologists is 20% less than the amount that
the cardiologists were actually paid under their call coverage agreement. She is also concerned
because the on-call coverage agreement expired over a year ago and was not renewed, yet the
cardiologists have continued to receive monthly compensation as if the agreement were still
effective, up to and including in the current month.
4. Do you think that what the Compliance Officer has uncovered suggests that there is merit
to the allegations in the qui tam complaint? Consider the following questions:
a. Is the on-call coverage agreement a “financial relationship” that implicates the
Stark Law?
b. If so, must the financial relationship meet a Stark Law exception? (This question
relates to whether the physicians are reasonably assumed to be making referrals of
“designated health services” to Hospital)
c. Is there a Stark exception that may apply to the on-call coverage arrangement? If
so, what are the requirements for meeting this exception?
d. Do the amounts that the physicians received for providing on call coverage
constitute “remuneration” that could implicate the Antikickback Statute? If so,
does the arrangement fit within a safe harbor? If you believe that it does fit within
a safe harbor, please explain why by listing the requirements for the particular
safe harbor and the evidence that each was met. If you do not believe that the
arrangement fits within a safe harbor, please explain why by listing the
requirements that the arrangement fails to meet, and why you believe that it fails
to meet those requirements. Based solely on the information presented above, do
you believe that there is sufficient evidence to support a finding that Hospital
violated the Antikickback Statute through its on-call coverage arrangement with
the cardiology group?
Once her information gathering is complete, Hospital’s Compliance Officer sends an e-mail to
Hospital’s CFO indicating that all payments to the cardiologists for on-call coverage should
cease. Upon notification that they will no longer be receiving their now-expected compensation
for providing on-call coverage, the physicians in the cardiology group become very angry. The
President of the cardiology group sends an angry e-mail to Hospital’s CEO, telling Hospital’s
CEO that she and her partners were under the impression that their on-call coverage
compensation would continue even after they became hospital employees, and that they never
would have signed their employment agreements if they thought this was not the case. The email goes on to point out that the cardiologists have been receiving and responding to calls from
Hospital’s emergency department at all hours of the day and night, that these calls are disruptive
to their other practice responsibilities and to their family lives, and they unanimously believe that
they are entitled to additional compensation for accepting this burden. The President of the
cardiology group tells the CEO, “We are not going to accept a situation in which we get less total
annual compensation working for Hospital than we did when we were on our own, regardless of
how much we are getting in the purchase and sale transaction.” The e-mail also goes on to state
that the cardiology group will “walk away” from the acquisition deal with Hospital and start
considering a different purchase offer from the hospital across town if Hospital’s CEO can’t
guarantee that the on-call coverage compensation will not be reduced or eliminated, and also that
Hospital’s CEO “will be sorry if that happens because Hospital’s cardiac surgery program will
be all but dead.” Hospital’s CEO sends an e-mail to Hospital’s Compliance Officer and CFO
stating, “You guys need to work this out. We don’t want to lose this deal. The physicians have
been very loyal to the hospital and we need to be respectful of what they are asking. Once they
are employees, we meet the Stark employment exception and the Antickback Statute won’t be an
issue. Chill out and listen to what I am telling you."
5. Do you agree with Hospital’s CEO that, once the cardiologists are employees working
under an employment agreement with Hospital, the relationship between the
cardiologists and Hospital will fall under the Stark employment exception? Do you agree
with Hospital’s CEO that, at that point, the Antikickback statute will “not be an issue”?
Does your opinion vary based on whether past arrangement for call coverage
compensation is made part of the employment arrangement? When formulating your
answers, please consider the following questions:
a. Does the employment arrangement demanded by the President of the cardiology
group (which includes the same compensation for on-call coverage that the
physicians received previously) comply with all of the requirements for the Stark
employment exception? If you believe that the answer is yes, describe the factors
that are the basis for your opinion, including the requirements for the Stark
employment exception and the reason that you believe that this arrangement
complies with each requirement. If your answer is no, please describe the factors
that are the basis for your opinion, including the requirements for the Stark
employment exception and which of those requirements you believe are not met
by the arrangement.
b. Is the Antikickback Statute implicated by the planned employment arrangement?
Is your opinion on this issue affected by whether or not the arrangement violates
the Stark Law? Would your opinion be different if the cardiologists ultimately
accepted the employment arrangement without payments for on-call coverage?
What if the cardiologists ultimately agree to lower payments for on-call coverage,
payments that are consistent with the amount deemed fair market value by the
third party valuation firm?
6. If you were counsel for Hospital, what advice would you give your client at this point?
Would you advise going forward with the contemplated arrangements with the
cardiologists? If so, would you recommend any changes to the arrangements before the
parties execute the documents?