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Important Federal Circuit Decision Raises Stark Law and Anti-Kickback Concerns for Hospital Based Physician Services


Recently, the Third Circuit Court of Appeals issued a decision that raises important issues under the Stark law and the federal anti-kickback statute. Because the hospital physician arrangement at issue involved the provision of anesthesiology – a hospital based service that typically is not viewed as involving the referral or the possibility of referral of patients by physicians to a hospital for designated health services – the decision bears attention by both physicians and hospitals.

In Kosenske v. HMA, et al, (3rd Cir. 2009) a whistleblower alleged that an exclusive service arrangement between a group of anesthesiologists and an HMA hospital executed in 1992, followed by the provision of pain management services at an HMA outpatient clinic, triggered the restrictions of the Stark law, 42 U.S.C. 1395nn and the Anti-Kickback statute, 42 U.S.C. 1320a-7b. The whistleblower also alleged that the arrangement did not satisfy the personal services exception to the Stark Act or the related safe harbor provision to the Anti-Kickback statute.

The facts of the case as outlined by the Third Circuit opinion were as follows. An anesthesiology group, BMAA, negotiated an exclusive agreement for anesthesia services with Carlisle Hospital in December 1992. Under the exclusive agreement, BMAA would provide exclusive anesthesia coverage for Carlisle patients on a 24/7 basis, the hospital would provide the space, equipment and supplies for BMAA to use for anesthesia purposes, the hospital would provide personnel, space, equipment and supplies for anesthesia as well as pain management, and BMAA would not contract with hospitals other than Carlisle or such other facilities that Carlisle might own in the future. The agreement also provided that if Carlisle opened any other facilities, it would offer an exclusivity arrangement at such facility for anesthesia services, but did not require BMAA to accept it. Of further note, BMAA did not commit to provide pain management services to the hospital’s patients, although Carlisle would offer space, equipment and supplies for same. Nonetheless, in 1994 Dr. Kosenske, a member of BMAA (and the whistleblower in the case) began to provide pain management services at Carlisle, using space in the hospital that was typically used for other purposes because there was no dedicated pain management clinic there.

In 1998, Carlisle built an outpatient ambulatory surgery center and pain clinic. From the outset, BMAA provided pain management services to patients in the pain clinic, but did not pay for any space, equipment or personnel that Carlisle provided for its pain clinic patients. BMAA, notably, was the only physician group providing pain management services there. BMAA submitted claims for professional services at the pain clinic, Carlisle submitted claims for the technical fee, just as in the hospital arrangement. In 2001, HMA purchased the assets of Carlisle (the Court treated the contract with BMAA as if it had been assigned, even though there was no formal assignment).

Dr. Kosenske asserted in his suit that the False Claims Act was implicated because of Stark law and Anti-Kickback violations that he alleged.

At the district court level, the court granted summary judgment to BMAA. While recognizing that BMAA received numerous benefits under the arrangement, that BMAA had thus received “remuneration” that established a “compensation arrangement” and “financial relationship” between BMAA and Carlisle for purposes of Stark, the district court also found that the arrangement satisfied the personal services exception under Stark (42 U.S.C. 1395nn(e)(3)(A)) and the related safe harbor under the Anti-Kickback statute. Among other things, the court found that the 1992 agreement satisfied the requirement of a writing, and further found that the services were exchanged for fair market value. The district court made this fair market value finding even though there was no appraisal or expert testimony as to the value of the services or remuneration; rather, the court held that because the services agreement reflected an arms length transaction it, by definition, reflected fair market value.

The Third Circuit, however, disagreed. The Court’s opinion recognizes that for Stark purposes, hospital based services such as anesthesia typically do not raise the concern of referrals from a hospital based physician to a hospital; instead, the concern is that physicians will directly or indirectly pay a hospital to obtain such an exclusive arrangement. However, as to pain management services, the Court stated that there is a significant risk of referrals for patients to the hospital for surgical and other services that constitute designated health services. Thus, the Stark Act and Anti-Kickback statute were implicated. Further, the Third Circuit found that the personal services exception was not met.

The Court offered several reasons for this decision. First, the Court held that the exclusive services contract did not bind BMAA to provide services at other facilities and did not cover the arrangement at the pain management clinic following its opening in 1998. Further, even if the agreement could be read to obligate BMAA to provide such services, it said nothing about the remuneration BMAA was receiving in exchange for such services, such as free space, equipment and staffing.

Second, the court held that the district court’s notion that an arms-length transaction ipso facto sets fair market value was incorrect, and further held that the 1992 contract could not set a market price for a transaction six years later when the ambulatory surgical center opened. Thus, the court reversed the grant of summary judgment.

This decision is important for several reasons. First, it suggests that a written exclusivity agreement that covers hospital-based services will not protect an arrangement between hospital-based physician providers (such as anesthesiologists, radiologists and pathologists) that implicates other services by such physicians unless the agreement covers such services with particularity. Second, it reinforces the desirability of having a fair market value assessment for any such arrangement. Third, it reinforces the need to have specific contracts governing both hospital-based services and other physician-hospital arrangements that is broad enough to cover future arrangements that are specifically contemplated or, in the alternative, for new written agreements to be executed whenever such new exclusivity or other arrangements are set at new facilities.

Robert C. Threlkeld is a partner in the firm’s Healthcare, Litigation and Exempt Organizations Practices. Mr. Threlkeld actively represents hospital systems, physician practice groups and other healthcare providers in a range of regulatory matters, and regulatory and business disputes. Mr. Threlkeld received his bachelor’s degree from Emory University, his master’s degree from Harvard University, and his law degree from Georgetown University.