Federal Court Rules that Hospital Violated the Stark Law in Compensation Arrangement with Employed PhysiciansA federal district rule recently issued an important decision interpreting the bona fide employment exception to the Stark Law regarding compensation for hospital employed physicians. On November 13, the district court in United States ex rel. Baklid-Kunz v. Halifax Hospital Med. Ctr. et al., No. 6:09-cv-1002 (M.D. Fla.), granted a partial summary judgment in favor of the United States in a case based on whether an incentive bonus paid to six oncologists employed by Halifax Hospital Medical Center (Hospital) improperly took into account the volume or value of referrals of the physicians in violation of the Stark Law, 42 U.S.C. § 1395nn.
In the Halifax case, the relator (i.e., whistleblower) alleged in part that the Hospital submitted false claims under the False Claims Act resulting from referrals to the Hospital made by the six employed medical oncologists because their employment agreements did not satisfy an exception to the Stark Law. An interesting aspect is that the relator was the hospital’s compliance officer. The United States intervened in the case and also asserted common law claims of unjust enrichment and payment by mistake of fact.
The Hospital is a special taxing district that operates a community hospital in Volusia County Florida. An affiliated entity of the Hospital, Halifax Staffing, entered into employment agreements with the six medical oncologists under which the medical oncologists would be paid a salary and bonus based upon an incentive compensation pool. The medical oncologists’ employment agreements provided, with respect to the bonus portion of their compensation, that beginning in 2005 they would be eligible to receive an “equitable portion of an Incentive Compensation pool which is equal to 15% of the operating margin for the Medical Oncology program as defined by the financial statements produced by the Finance Department on a quarterly basis.” The Hospital described the operating margin for its Medical Oncology program as the “revenue and direct expenses from outpatient medical oncology services” and “revenue from outpatient medical oncology services, physician services, and related outpatient oncology pharmacy charges.” The Court noted that the revenues included fees for services that were not personally performed by the medical oncologists.
The Hospital had relied upon the employment exception to the Stark Law in structuring the physicians’ compensation arrangements. The employment exception provides in part that compensation paid to employed physicians must be consistent with fair market value of the services, and cannot be determined in a manner that takes into account (directly or indirectly) the volume or value of any referrals by the referring physician.
The Court held that the revenues of the Hospital’s Medical Oncology program (i.e., its profits) vary with the volume of patients that the medical oncologists treat at the Hospital, including the physicians’ referrals for designated health services under the Stark. The Court noted that the more patients that the oncologists treat at the Hospital, the greater the oncology program’s facility fee revenue. The Court emphasized that the fact that each oncologist could increase his or her share of the bonus pool by personally performing more services cannot alter the fact that the size of the pool (and correspondingly the size of each oncologist’s bonus) could be increased by making more referrals, and that the bonus was based in part on revenue from referrals by the medical oncologists for designated health services that were not personally performed by the oncologists.
An interesting aspect also was the Court citing CMS’s instructions for completing a UB-04 claim form as evidence that a physician made a referral under the Stark Law because the instructions require a physician to be listed as either the “attending physician” or “operating physician”. Because the Hospital did not present any evidence to rebut the UB-04 claims evidence, the Court granted summary judgment for the Government on the issue of whether the oncologists made referrals for purposes of the Stark Law.
Another important aspect mentioned in the Court’s opinion is that the Hospital obtained a letter from its outside legal counsel that the bonus compensation arrangement satisfied the employment exception to the Stark Law. This opinion from the Hospital’s counsel was provided after the agreement was already in place and was used to support the payment of the final year of the bonus arrangement. The Hospital waived attorney client privilege and used the outside counsel’s option letter as evidence that it did not act knowingly, and this may helped the Hospital avoid summary judgment on the False Claims Act liability issues. However, the outside legal counsel’s letter did not provide a defense on whether the Stark Law was violated because the Stark Law is a strict liability statute.