Court issues rare Stark ruling on physician-hospital agreement

The federal appellate ruling also highlights the potential for these joint financial arrangements to lead to false claims liability.

By — Posted Feb. 16, 2009

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A federal appeals court decision addresses the scope of federal anti-kickback and self-referral laws while raising several caution flags over joint financial agreements between physicians and hospitals.

A panel of the 3rd U.S. Circuit Court of Appeals found that a hospital failed to meet the personal services exception under federal referral regulations, known as Stark, when it contracted with an anesthesiology group. The exception generally allows physicians to contract with a hospital entity to provide particular services -- as long as the agreement meets certain criteria and does not violate federal laws prohibiting illegal referrals between entities that share a financial stake.

Carlisle Hospital and Health Services in Pennsylvania contracted exclusively with Blue Mountain Anesthesia Associates PC in 1992 to provide anesthesiology services at the facility in exchange for free office space, equipment, supplies and staff. In 1998 the hospital, now Carlisle Regional Medical Center, built an ambulatory surgery center and pain clinic. The anesthesiologist began providing pain management services there, also while receiving space, equipment and other support at no charge.

Carlisle argued the arrangement was an extension of the original 1992 contract, which referenced pain management even though the services were not widely provided at the time.

But the 3rd Circuit disagreed in a Jan. 21 opinion, saying the new deal opened up possibilities for illegal referrals and failed to meet a host of safe harbor requirements.

Unlike hospital-based practices such as anesthesiology, which do not involve referrals, "in pain management, a physician in an outpatient facility is in a position to generate substantial business for a hospital," the court said. In addition, "the only written contract in existence ... was negotiated in 1992 in a context wholly different from the one that existed six years later after the opening of the pain clinic."

Judges found the 1992 agreement did not detail the pain management relationship at the separate facility or any related compensation arrangement -- such as free space and equipment -- as required by the personal services exception. Because no renegotiation of the compensation terms occurred, there was no way to determine if they reflected fair market value, another requirement under Stark, the court said.

Carlisle is considering asking the full 3rd Circuit to rehear the case.

Strict standards

The ruling is one of only a few that interpret exceptions under federal Stark standards -- typically addressed through advisory opinions -- and lends further guidance on the complicated regulations, said Jeffery P. Drummond, a health care regulatory expert and partner with Jackson Walker LLP in Dallas.

"The message is: It doesn't matter how reasonable and defensible the underlying arrangement is if you don't meet all of the [Stark] requirements. And it has to be in writing," he said. "Even if [an agreement] is documented, whenever there is a big change, make sure it's updated."

The decision also highlights an additional liability risk for physicians, as well as for the hospitals with which they contract, warned Philip H. Lebowitz, a Philadelphia lawyer specializing in health care fraud and abuse.

The case was initiated by a whistle-blower under the False Claims Act, he noted. Because the court determined a Stark violation existed, it allowed the plaintiff to pursue his claim that the hospital had improperly billed the federal government for pain management services provided under the illegal arrangement.

"That connection is probably something that's here to stay," said Lebowitz, a partner with Duane Morris LLP. Although the physician group was not named as a defendant in this whistle-blower case, doctors might be liable in such arrangements under Stark or false claims violations, he added.

Physicians often rely on hospitals to handle contract details. "But after this decision, they really need to be careful themselves that there's an agreement in place that accommodates whatever financial relationships they have with hospitals or other entities they refer to," he said.

Carlisle's attorney Larry B. Selkowitz disagreed that Stark and anti-kickback laws were implicated, because no referrals were involved. "These were hospital patients in a provider-based clinic completely integrated in all respects with the main hospital."

Because the off-site pain clinic was connected to the hospital -- by offering patients who needed further care full access to all of Carlisle's services -- the hospital qualified under Medicare regulations to submit claims on behalf of the clinic, said Selkowitz, a former assistant U.S. attorney.

Once Carlisle opened the pain clinic, however, outside referrals did come into play, said G. Mark Simpson. He represented the whistle-blower in the case, Ted D. Kosenske, MD, who left Blue Mountain Anesthesia Associates in 2005 to open an independent pain management practice.

If Carlisle could continue to bill for non-hospital patient services, "Medicare ends up paying well more than if the same service had been provided across the street in a doctor's office, even though there is no additional benefit to the patient," Simpson said. The decision "addresses the exact situation Stark was intended to address ... and clearly establishes if you want to rely on a Stark exception, you better make sure the relationship is transparent."

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Case at a glance

Did a physician-hospital arrangement violate anti-kickback, Stark laws?

A federal appeals court said yes. The decision allowed a false claims case to proceed.

Impact: Experts say the rare ruling helps shed light on a complicated area of law and highlights several legal risks associated with physician-hospital financial arrangements.

U.S. ex rel. Ted D. Kosenske, MD v. Carlisle HMA, 3rd U.S. Circuit court of appeals panel

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