Health Law
APRIL 2003
Sour Grapes Make Bad Whines:
Angry Physician Alleges Hospital’s Physician Practice Acquisition Program Was Defective
Dr. Perales (Perales) is an occupational
medicine physician whose relationship with St.
Margaret’s Hospital in Illinois disintegrated.
Perales’ practice had been acquired by St.
Margaret’s Hospital. At some point during that
relationship, a dispute emerged over the
payment of an amount allegedly due to the
Hospital from Perales. That dispute worked its
way into state court where, surprisingly, the
state court determined that the employment
agreement was unenforceable and unlawful.
(which required at least 12 admissions), loans to
physicians in the form of physician guarantee
thresholds, rental payments to physicians who
used their private equipment at the hospital,
differing amounts paid for restrictive covenants
and goodwill, and excessive physician
compensation.
The case is interesting because of the plethora
of claims raised by Perales and for the court’s
handling of the same issues that hospitals
grapple with in every physician acquisition and
physician recruitment situation.
The case was decided on summary judgment,
which means that the Defendant Hospital sought
to have the case dismissed before any testimony
was taken. This is a common procedure in
federal court. Essentially, the Defendant
Hospital’s argument was that even if the court
accepted Perales’ version of the “facts” as true,
there was no underlying violation of the FCA.
To counter the Hospital’s motion, Perales’
obligation at this stage is to “show his cards” and
convince the court that he has legitimate evidence
of statutory violations. After looking at Perales’
evidence, the court concluded that all Perales had
was allegations, that he had no substantive
evidence to support his claims, and that his
allegations did not and could not prove a
statutory violation. Accordingly, the court
dismissed the case. The lack of evidence is
important because Perales had over 4 years to
conduct discovery, request documents, and
depose individuals and yet, even with that
enormous amount of time, he could not produce
a shred of evidence to substantiate his claims.
Perales claimed that every aspect of the
Hospital’s physician recruitment and/or
physician acquisition program was flawed. This
included the purchase of physician practices, the
requirement to maintain active staff privileges
The Perales case is the second physician
whistleblower case to come out of Illinois in the
last 13 months. In January of 2002, the federal
court for the Northern District of Illinois
dismissed a case (also before evidence was
Apparently buoyed by that decision and still
upset at the Hospital, Perales filed a
whistleblower action in federal court claiming
that St. Margaret’s entire physician acquisition
program was unlawful under both Stark and the
anti-kickback statute (AKS). Perales brought the
whistleblower suit under the False Claims Act
(FCA). He claimed that the violations of Stark
and the AKS made claims for payment submitted
under Medicare/Medicaid tainted or “false.” The
federal government declined to intervene in the
case, which is often a good indication of the
merits of a whistleblower’s allegations.
Kirkpatrick & Lockhart LLP
submitted) against a hospital brought by a
whistleblower physician alleging virtually the
same set of allegations. Read together, these two
cases illustrate that a physician has to convince a
court that it has very specific information
establishing unlawful conduct, and that
allegations of illegality, by themselves, will not
be sufficient.
e
Let’s take a look at Peralas’ individual
allegations.
1. Perales first alleged that the Hospital paid
more than fair market value for the practices
it had acquired. Perales was not able to
generate any evidence to support this claim.
The Hospital had conducted appraisals of the
practices when it acquired the practices. In
one instance, Perales’ expert criticized the
assumption of the Hospital’s appraiser by
indicating that he (Perales’ expert) had never
a
“ ...
physician has to convince a
court that it has very specific information
establishing unlawful conduct, and that
allegations of illegality, by themselves, will
not be sufficient.”
seen a projected practice revenue increase of
30% over two years. However, he had also
admitted on cross-examination that he had
“no problem at all” with the method that was
used by the appraiser, that this particular
physician had not been pursuing his accounts
receivable, and that the physician was
charging prices that were below the industry
standard. The court held that this count
would be dismissed unless Perales could
produce evidence that the acquisition price
was in excess of fair market. Peralas could
not do that and the court dismissed this count
of the complaint.
2. Perales also alleged that the motive behind
practice acquisitions and the continued
employment of the physician for a year after
2
the acquisition was to keep admissions
flowing to the Hospital. In other words, at
least one purpose of the acquisition was to
continue to receive referrals. The court
acknowledged that the CEO’s affidavit
indicated that the Hospital desired to retain
patient flow from physician practices that
were acquired by the Hospital. Perales used
this point to demonstrate that the Hospital
had the requisite intent to encourage
referrals.
But the court disagreed, finding instead that:
“SMH’s internal thought process that
patients might keep coming to SMH after a
practice purchase and employment situation
is a far cry from an admission or even
circumstantial evidence that SMH paid for
the value of future referrals in purchasing
these practices.” This is a tremendously
important finding. It reflects that, even
though a hospital CEO may have wished for
or sought additional referrals, as long as the
CEO did not overpay for the value of the
practice, such a mindset is not actionable.
In other words, it is okay to dream about
additional referrals as long as you do not
pay for them.
3. Perales alleged that the Hospital paid more
for noncompetition agreements for
physicians who had bigger referrals. Perales’
pointed to this as proof that more patients
means more Hospital money. The court’s
reaction: “With all due respect, so what?” In
other words: size matters. Physicians who
have larger practices can acquire or extract a
higher value for a noncompetition payment
because the practices are bigger.
4. A state court had determined previously that
the Hospital’s employment contract was
unlawful and unenforceable. Perales used
this finding to argue that the AKS was
automatically violated as soon as the
inducement (in this case, the contract) was
offered to Perales and that all referrals
thereafter flowing from that employment
relationship were tainted and automatically
actionable under the AKS. The court did
not agree with Perales but assumed that if
his theory was correct, at most it proved a
violation of the AKS. Fascinatingly, Perales
indicated that he never referred a patient
KIRKPATRICK & LOCKHART LLP HEALTH CARE ALERT
under the terms of his employment
agreement. In other words, he admitted to
having breached his employment agreement
but defended that breach on the basis that
the contract was unlawful. Perales’
admission that he never made referrals
proved fatal to his FCA claim because the
court concluded that at best (and applying
although not accepting Perales’ theory),
Perales had proved a violation of the AKS.
That violation in and of itself did not trigger
the FCA until or unless Perales had
submitted a claim, because the submission
of a claim (which he says he never did) is a
jurisdictional prerequisite for the FCA to
apply.
5. Perales claimed that loans to physicians
occasioned through the physician
recruitment program were excessive,
although he could never prove that. The
loans were at the IRS’s imputed rate and
were all paid back. This claim was
dismissed.
6. He also argued that provisions of the
employment agreements which required the
employee-doctor to refer to the Hospital
was a FCA violation. The court disagreed,
claiming that there were specific exceptions
in Stark and the AKS for an employment
relationship, and dismissed these claims as
well.
simply a code for a minimum number of
admits and referrals. The court strenuously
disagreed and indicated that “A category of
active staff status cannot reasonably be
construed as a volume-based referral
requirement when the wording of the
bylaws clearly indicates that levels of
physician privileges are merely a method of
classification.”
9. With respect to the application of the FCA
and the “reckless disregard of the truth”
standard, the court found that there had been
no showing that the Hospital had “buried its
head in the sand” and ignored the law. On
the contrary, the Hospital “received and
considered relevant publications in this area
of the law, established a corporate
t
“ . . . he Hospital received and considered
relevant publications in this area of the law,
established a corporate compliance
committee, and routinely consulted counsel
in drafting the contracts and agreements.”
compliance committee, and routinely
consulted counsel in drafting the contracts
and agreements.”
7. Perales claimed that lease arrangements
whereby an ophthalmologist who performed
surgery at the Hospital using the
ophthalmologist’s own equipment and
charging the Hospital a “per click” rental fee
also violated AKS and Stark. The court
found this was not the case because the rental
amount was reasonable, “per click” usage
was permitted under the regulations and
Perales could not produce any evidence that
the rate was unreasonable.
10. Finally, the court noted the lack of
consensus among courts over whether a
whistleblower can use the False Claims Act
as a recovery vehicle for purported
violations of the AKS or Stark.
8. Perales’ most interesting argument was that
a contractual provision requiring a
physician to maintain active staff status is
equivalent to a referral requirement. The
Hospital required that in order to maintain
active staff status the physician had to have
at least 12 admissions per year. Perales said
that that maintaining active status was
It is hard to say how much reliance should be
placed on this decision. It was clear throughout
the 20-page opinion that the court was frustrated
with Perales and his failure, after repeated
efforts, to produce any evidence supporting his
claims. But this decision, coupled with the
prior Illinois District Court decision, indicates
that mere allegations are not enough to survive a
APRIL 2003
WHAT DOES ALL
OF THIS MEAN FOR HOSPITALS?
Kirkpatrick & Lockhart LLP
motion to dismiss. A plaintiff must produce
legitimate evidence of overpayment, i.e., some
departure from fair market value. One can only
wonder how the court would have decided this
case if Perales had done a better job of
producing evidence of overpayment. (This
assumes, of course, that such evidence existed.)
The court did indicate that, had Perales
produced tangible evidence, it would then be
entitled to draw “inferences” that were
unfavorable to the hospital.
The second interesting question is whether this
court would have made the leap from a violation
of the AKS or the Stark law to a violation of the
FCA. Courts are divided on this point.
Both decisions reinforce the absolute
imperative to have credible evidence of a
transaction’s fair market value. This is
critically important because this court was
willing to let the secret fantasies of a CEO for
more admissions live on, as long as there was
no evidence of overpayment. Both of these
decisions reflect a recognition that hospitals
that use prudent business practices, that use
appraisers, and that use counsel, are going to
be perceived favorably and that the plaintiffs
are going to have a difficult burden of showing
activity outside the law. Mere allegations or
sound bites to the contrary are not going to be
sufficient.
All in all, this is a favorable outcome for the
Hospital, although it was perhaps in large part
preordained by the inability of Perales to
produce any evidence to support his allegations.
So the Hospital wins, but not after having to
defend itself in a state court and in a lengthy
federal court action. But a win is a win, and it
beats a loss any day.
ED WEISGERBER
eweisgerber@kl.com
412.355.8980
Perales v. St. Margaret Hospital, 243 F. Supp. 2d 843 (C.D. Ill. 2003).
Obert-Hong v. Advocate Health Care, 211 F. Supp. 2d 1045 (N.D. Ill. 2002).
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