On January 21, 2009, the United States Court of Appeals for the Third Circuit handed down its decision in the matter of Kosenske v. Carlisle HMA, Inc., et al., finding that a common exclusive provider arrangement violated both the Stark and Anti-Kickback Acts, and thereby allowing a claim under the federal False Claims Act to proceed to trial. While most healthcare providers can breathe a sigh of relief that the Kosenske Court’s decision relative to Stark and Anti-Kickback compliance will likely be limited to the specific (and unfortunate) facts of that case, there are several valuable lessons to be gleaned from the Court’s opinion and the circumstances giving rise to this case.
The Facts
The Plaintiff, Dr. Ted D. Kosenske, sued Carlisle HMA, Inc. (“HMA”) and Health Management Associates, Inc. (HMA’s parent company), under the False Claims Act for allegedly submitting certain outpatient hospital claims to the Medicare program and other federal healthcare programs that falsely certified compliance with the Stark and Anti-Kickback Acts. According to Kosenske’s complaint, the Defendants had violated applicable Stark and Anti-Kickback Act restrictions through an exclusive service arrangement between Kosenske's former practice, Blue Mountain Anesthesia Associates, P.C. (“BMAA”), and the Defendants, in which BMAA provided pain management services at an outpatient HMA clinic.
In 1992, BMAA negotiated an Anesthesiology Services Agreement (“the Agreement”) with Carlisle Hospital and Health Systems (“CHHS”), under which BMAA became obligated to provide all anesthesia services required at CHHS’s hospital in Carlisle, Pennsylvania (the “Hospital”) on an “around the clock” basis. BMAA physicians submitted claims to Medicare for the professional services performed during these visits, and the Hospital submitted claims for the facility and technical components of patient visits. Under the Agreement, BMAA physicians also agreed not to practice anesthesia or pain management at any location other than the Hospital and other facilities (existing and future) operated by the Hospital or CHHS. In return for BMAA’s services and practice restrictions, the Hospital agreed to provide at no charge the space, equipment and supplies needed by BMAA to provide its anesthesiology services, and the Hospital also agreed not to allow anyone other than BMAA’s physicians to provide anesthesia or pain management services at the Hospital. While no pain management services were provided at the Hospital in 1992, the Agreement did contemplate BMAA potentially rendering those services in the future.
Importantly, the Agreement explicitly stated that if the Hospital or CHHS ever acquired or opened another location at which anesthesiology or pain management services would be provided, BMAA had to be given the opportunity to provide exclusive anesthesiology and pain management services at the new location under the same terms and conditions as the Agreement. Furthermore, the Agreement provided that if the Hospital or CHHS could not legally enter into a contract with BMAA to provide services at the new location on the same terms and conditions as the Agreement, then BMAA would be given the first opportunity to provide exclusive anesthesiology and pain management services at the new location on whatever terms Hospital or CHHS and BMAA could negotiate. Finally if BMAA and the Hospital or CHHS failed to negotiate an agreement for exclusive services by BMAA at the new location, the Agreement gave BMAA the right of first refusal for any contract entered into by the Hospital or CHHS with any other person to provide anesthesiology or pain management services at the new location. Thus, if BMAA were going to undertake the obligation of providing services outside of the Hospital’s current location either for its benefit or that of CHHS, a new contract would be required.
Approximately fifteen months after signing the Agreement, Dr. Kosenske began to also administer pain management services to the Hospital’s patients in spaces used for other hospital purposes. In 1998, the Hospital built a new, stand-alone facility, containing an outpatient ambulatory surgery center and a pain clinic (“the Pain Clinic”), which was located about three miles away from the Hospital. Although the parties did not amend the Agreement or sign a separate contract, BMAA was the exclusive provider of pain management services in the Pain Clinic, and the Hospital did not charge BMAA rent for the space and equipment, or any fees for Hospital-provided support personnel. As with anesthesia services performed at the Hospital, BMAA physicians submitted claims to Medicare for the professional services performed at the Pain Clinic, and the Hospital submitted claims for the facility and technical components.
In 2001, HMA purchased the Hospital from CHHS through an asset purchase arrangement. While the Agreement was not assigned to HMA, BMAA and HMA acted as if the Agreement were still in effect at the Hospital. In 2005, Dr. Kosenske left BMAA to open an independent pain management practice which would ultimately compete with BMAA and the Pain Clinic. When HMA sought to enforce the exclusivity provisions of the Agreement against Dr. Kosenske, he filed suit against HMA under the False Claims Act alleging that BMAA had a financial relationship with the Hospital/HMA that violated the Stark and Anti-Kickback Acts.
The Court’s Analysis
It is important to note that HMA initially prevailed at the trial court level on a motion for summary judgment by arguing that the relationship between BMAA and the Hospital/HMA fell within the “personal service arrangements” exception to the Stark and Anti-Kickback Acts. In finding in favor of the Defendants, the trial court agreed with HMA’s argument that the Agreement between BMAA and the Hospital/HMA established the necessary elements of the “personal service arrangements” exception to Stark and Anti-Kickback restrictions.
The Third Circuit Court of Appeals reversed, however, finding that the Agreement had no application to BMAA’s services at the Pain Clinic. The Court found that BMAA was not providing pain management services in 1992 when the Agreement was signed, and that no free Hospital space, staff or facilities were devoted solely to pain management at that time. The Pain Clinic opening, however, presented a substantial change from that condition and the Agreement, as written, could not have governed BMAA’s pain management services at the Pain Clinic. Otherwise, the Court found there would have been no reason to include provisions in the original Agreement giving BMAA the first opportunity (including a right of first refusal on any agreements the Hospital signed with other providers) to provide anesthesia and pain management services at new Hospital locations.
The Court also discussed at length the “fair market value” aspects of BMAA’s services at the Pain Clinic in relation to the pre-existing Agreement. In doing so, the Court held that the Agreement which was signed in 1992 could not possibly reflect the fair market value for BMAA’s services at the Pain Clinic which were being rendered under different circumstances, and six years after the Agreement was originally signed. The Court also roundly rejected the contention that a negotiated agreement (such as the subject Agreement here), by itself, necessarily reflects fair market value because the purpose and intent of the Stark and Anti-Kickback legislation was to prohibit so-called agreements designed to disguise the payment of non-fair-market-value compensation. Thus, the Court found that even if one tried to extend the Agreement to BMAA’s pain management services at the Pain Clinic, it could not ultimately satisfy the “fair market value” requirements of the “personal service arrangements” exception.
While the case ultimately remanded to the trial level for further proceedings, it is important to note that the Court pointed out the fact that there was never a determination at the trial court level as to whether the Hospital/HMA’s violation of applicable Stark and Anti-Kickback requirements was a knowing violation, which would ultimately have to be established for Dr. Kosenske to prevail in his action under the False Claims Act.
Conclusions
The Court’s ruling that the exclusive provider arrangement in Kosenske violated applicable Stark and Anti-Kickback requirements was based on the lack of a proper agreement in connection with BMAA’s services at the Pain Clinic. However, health care executives can draw a number of valuable lessons from this case.
First and foremost, this case illustrates precisely why all health care providers should carefully monitor and document their arrangements with physicians on an on-going basis. The facts of the Kosenske case are not unusual in that the arrangements between various healthcare providers and physicians will change over time. As those changes occur, existing contracts should be re-evaluated, if not superseded by new agreements to avoid the unfortunate finding that a new arrangement does not meet existing regulatory requirements.
Second, while HMA and BMAA may have both been comfortable with their relationship concerning the Pain Clinic, the Kosenske case demonstrates that the courts will examine all provider arrangements with the utmost scrutiny, and interpret applicable Stark and Anti-Kickback requirements strictly in relation to those arrangements. All health care providers must accordingly ensure that competent legal counsel is engaged not only to appropriately document any personal service arrangement, but to be sure that the arrangement (or any changes to the arrangement) fully complies with applicable Stark and Anti-Kickback requirements.
Finally, the Kosenske case can and should be read with a sense of foreboding. Stepping back, Dr. Kosenske essentially filed a lawsuit under the False Claims Act to leverage his way out of the exclusivity provisions of the original Agreement that prevented him from opening his own pain management practice. While this is certainly not the first such claim to be made, one can certainly expect that the results of this case will encourage any doctor looking to achieve their personal goals to make similar claims hoping for negotiation leverage.
If you have any questions regarding this case or other Stark and Anti-Kickback Act issues that may impact your operations, please feel free to contact either the Chairperson of the Tallman, Hudders & Sorrentino, P.C. Health Care Practice Group, Matthew R. Sorrentino, Esq., or the Vice-Chairperson, Sandra Jarva-Weiss, Esq., via telephone at (610) 391-1800, or by email at their respective addresses below.
Matthew R. Sorrentino, Esq. msorrentino@thslaw.com
Sandra Jarva-Weiss, Esq. sjarvaweiss@thslaw.com
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