Government Gives Health Care Companies More Leverage in Their Negotiations with Physicians

Recent Cases Demonstrate Potential Exposure for Both Physicians and ProvidersHealth care organizations that contract with physicians can face potential liability (including millions of dollars in civil, criminal, and administrative penalties), as well as exclusion from participation in federal health care programs, under various laws (such as the Stark Law), the anti-kickback statute, and the False Claims Act (FCA). The exposure frequently arises because physicians bargain hard for the highest possible level of compensation, and the government (or a whistleblower) later alleges that the compensation exceeds fair market value or is not commercially reasonable.

In the past, it usually has been the hospital, nursing home, or other health care company that has been penalized; rarely the physician. Some recent cases provide evidence that this situation is beginning to change, and physicians also could face exposure unless all financial arrangements are defensible as fair market value/commercially reasonable and otherwise meet the requirements of applicable law. Providing information about these cases may help health care providers demonstrate to physicians why compliance is so important, and why compensation cannot be excessive.

Background

There has long been a perception in the health care industry that larger organizations, such as hospitals and nursing homes, often are penalized when there are allegations that they have had improper financial relationships with physicians, while no action is taken against the physicians who benefited from the arrangements. (In the past, most cases against physicians involved allegations of upcoding or the provision of medically unnecessary services, and usually did not relate to their contractual arrangements.) A number of health systems and others have noted that the government’s failure to proceed against physicians as well encourages physicians to continue demanding excessive compensation. Government officials acknowledged the issue — at least informally — several years ago and indicated that enforcement would be more even-handed.

However, the situation is complicated. As a legal matter, under the AKS, the government has long taken the position that penalties may be imposed against both sides to a prohibited transaction. In contrast, under the Stark Law, when there is an improper financial relationship between a physician and a hospital, the law itself prohibits the physician from making referrals to the hospital, but prohibits the hospital from billing for services stemming from the improper referrals. As a result, government enforcement typically impacts only the hospital because it is the hospital that must return any reimbursement received for such improper referrals. Further, as a practical matter, because hospitals and other large providers have “deeper pockets,” they are more likely to be named as defendants by relators (whistleblowers) — as well as the government — in FCA cases. Nevertheless, there appears to be a gradual increase in the number of enforcement actions being brought against physicians for allegedly improper financial arrangements.

Examples of Cases That Penalize Physicians for Improper Financial Arrangements

• Physician Must Pay $200,000 for Alleged Stark Law/FCA Violations

The United States Attorney’s Office for the Northern District of Georgia recently announced that it has reached settlements with a Georgia hospital and with a cardiologist resolving allegations stemming from a lawsuit filed in 2008 under the FCA’s qui tam provisions.¹ The Department of Justice (DOJ) previously settled with Banks-Jackson-Commerce Hospital and Nursing Home Authority (BJC) for $329,000, and recently settled with Dr. Narasimhulu Neelagaru for $200,000. (While settlement was reached with BJC in 2010, the case remained under seal until settlement was reached with Dr. Neelagaru.) This case is particularly notable because the physician, as well as the hospital, was subject to sanctions by the government (and the physician paid two-thirds as much as the hospital).

The settlement resolves allegations that the compensation BJC paid to Dr. Neelagaru for professional and medical director services from 2000–2009 violated both the federal anti-kickback statute and the Stark Law because it was in excess of fair market value and because the hospital paid Dr. Neelagaru for “undefined” services or services that were not covered by BJC’s professional services agreement with the doctor.²

• Physician/Group Settles Stark Law/FCA Case for $1 Million in April 2014

Another recent case involved a settlement resolving allegations that a physician and a group practice had entered into improper compensation arrangements with two Ohio Valley hospitals.³ Dr. Devender Batra and Belmont Cardiology, Inc. will pay $1 million to settle allegations that their improper compensation arrangements led the hospitals to submit false claims for prohibited referrals in violation of the Stark Law and the FCA. The investigation into Dr. Batra and Belmont Cardiology arose from the DOJ’s previous investigation of alleged Stark Law/FCA violations by the hospitals with whom they had contracted. The hospitals settled with the DOJ in 2011 for $3.8 million.⁴

• Physicians/Group to Pay at Least $500,000 for Alleged Stark Law/FCA Violations

In U.S. ex rel. Singh v. Bradford Regional Medical Center, a qui tam relator filed a complaint alleging that the defendants — a hospital, a group practice, and its physician owners — caused the submission of false claims for payment which were ineligible for reimbursement due to a violation of the Stark Law. A US district court granted partial summary judgment against all defendants, finding that an equipment subleasing arrangement and a related non-compete agreement improperly reflected the volume of anticipated referrals in violation of the Stark Law.⁵ The hospital-defendant settled in 2012 for $2.75 million.⁶ The government recently filed notice of a settlement agreement under which the physician-defendants will pay a total of $500,000. However, it is possible that this penalty will increase since the relators have filed a Motion to Contest Fairness, Adequacy and Reasonableness of the Settlement Agreement, alleging that the physicians could afford to pay a higher penalty.

Implications for Health Systems, Nursing Homes and Other Providers

The DOJ’s settlements with Drs. Neelagaru and Batra, as well as the Bradford Regional Medical Center case, indicate that physicians who have financial relationships with hospitals and other providers should share the provider’s interest in ensuring that those financial relationships comply with the federal (and state) fraud and abuse laws. While large organizations are more likely to be targeted by whistleblowers, the DOJ’s increasing willingness to proceed against physicians as well may help providers convince physicians about the benefits of compliance for both sides to a financial arrangement. This, in turn, will hopefully make it easier for health systems and other providers to negotiate defensible financial arrangements with physicians.

If you have any questions or need assistance, please contact Linda A. Baumann, Samuel C. Cohen, Hillary M. Stemple, or the Arent Fox professional who handles your matters.