Fraud and Abuse Compliance Review No. 1: Physician Services Agreements

With the federal government’s stated goal to help pay for the coming healthcare reform package through increased fraud and abuse enforcement, it is imperative hospitals conduct a compliance review of their contractual arrangements with physicians and other referral sources. Through a series of articles this year, I will summarize the regulatory requirements for a number of different types of hospital contractual arrangements. This first article focuses on personal services agreements with physicians.

Every financial relationship a hospital has with a physician or physician-owned entity must be reviewed and structured to ensure it complies with the Physician Self-Referral Law, 42 U.S.C. § 1395nn (Stark II) and the Federal Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b). Compliance must be and remain a central focus of any healthcare entity as it is virtually impossible to cure violations of the fraud and abuse laws and each violation can subject the parties to criminal charges and civil monetary penalties that can quickly bankrupt the parties.

I. Stark II Personal Services Exception, 42 C.F.R. § 411.357(d)

For every financial arrangement a hospital has with a physician, the hospital must first make certain the agreement fits into a Stark II exception. Generally, Stark II prohibits a hospital from billing for any designated health service (DHS) referred to the hospital by a physician with whom the hospital has a financial relationship unless the relationship meets each and every requirement of one of the available Stark II exceptions. Medical Director, On-Call Coverage and other personal services agreements with physicians will typically utilize the Personal Services Exception to Stark II, 42 C.F.R. § 411.357(d). The elements of the Exception are as follows:

1. The arrangement must be in writing and signed by the parties;
2. The arrangement specifies the services covered by the arrangement and covers all of the services furnished by the physician or a member of the physician’s immediate family;
3. The amount of services contracted for are reasonable and necessary for the legitimate business purposes of the hospital;
4. The agreement must be for at least one year;
5. The compensation paid is set in advance, does not exceed fair market value and does not take into account the volume or value of any referrals or other business generated between the parties; and
6. The services do not involve the counseling or promotion of an illegal arrangement or activity.

It is important to note that Stark II is a strict liability statute. Unless the arrangement meets each and every element of the Exception, every claim submitted pursuant to a referral from the physician will violate Stark II subjecting the hospital to financial penalties of $15,000 per claim, damages of triple of the amount of the claim and program exclusion. Stark II violations also subject the provider to potential prosecution under the False Claims Act.

The consequences of having a financial arrangement with a physician that does not comply with Stark II can be disastrous. For example, if a hospital was paying a medical director but failed to have a written contract or the contract was unsigned by only one of the parties, the hospital would violate Stark II each time it submitted a claim for any referral made by that physician. Moreover, it is virtually impossible to cure these Stark violations.

The Centers for Medicare and Medicaid Services (CMS) amended Stark II to allow parties to a contract that was unsigned to cure the Stark II violation by signing the Agreement. But this “cure” is only available if the parties sign the agreement within thirty (30) days of the contract effective date when they were aware of the defect or within ninety (90) days when the failure to sign was inadvertent. If the parties are outside of the 30/90 day window, the only option the parties have is to bring the arrangement into compliance is by signing the Agreement and refunding any Medicare payments the hospital received from referrals by that physician prior to that date. The past claims submitted pursuant to the prohibited financial arrangement remain Stark II violations, and any payments received by the hospital would be considered overpayments.

II. The Anti-Kickback Statute: 42 U.S.C. § 1320a-7b(b)

The second set of regulatory requirements hospital must ensure their physician agreements comply with is the federal Anti-Kickback Statute. The Anti-Kickback Statute makes it a criminal offense to knowingly and willfully offer, pay, solicit or receive any remuneration to induce or reward referrals of items or services reimbursable by a federal healthcare program. By its terms, the statute ascribes criminal liability to parties on both sides of an impermissible kickback arrangement. Remuneration is defined by the statute to include the transfer of anything of value, directly or indirectly, overtly or covertly, in cash or in kind.

The statute has a very broad scope and has been interpreted to prohibit any arrangement where even one purpose of the remuneration was to obtain money for the referral of services or to induce further referrals. Violation of the statute constitutes a felony punishable by a fine of $25,000 and imprisonment up to five years. Conviction will lead to automatic exclusion from the federal healthcare programs, including Medicare and Medicaid. The Office of Inspector General (OIG) of the Department of Health and Human Services (HHS) also has the option to impose administrative civil sanctions and fines or to use a violation of the statute as the basis for bringing a false claims act prosecution.

Because of the extreme breadth of the statute, HHS promulgated safe harbor regulations defining practices that are not subject to prosecution under the Anti-Kickback Statute because such practices would be unlikely to result in fraud and abuse. 42 C.F.R. § 1001.952. The safe harbors set forth specific conditions that, if met, assure entities involved that they will not be prosecuted or sanctioned for those arrangements qualifying for the safe harbor. However, safe harbor protection is only afforded to those arrangements that precisely meet all of the conditions set forth in the safe harbor.

The difference between the Stark II exceptions and the Anti-Kickback safe harbors is that compliance with a Stark II exception is mandatory; compliance with an Anti-Kickback safe harbor is recommended. The failure to meet a Stark II exception means the arrangement is strictly prohibited and violates the Stark II statute. The failure to meet the requirements of an Anti-Kickback safe harbor merely means the arrangement is not protected and would be evaluated on a case by case basis to determine if the requisite intent to induce referrals was present. Fortunately, the requirements of the applicable safe harbor closely parallel the requirements of the Stark II exception.

Medical Director, On-Call Coverage and other personal services agreements are typically drafted to comply, as closely as possible, with the safe harbor for personal services and management contracts, 42 C.F.R. § 1001.952(d). The personal services and management contracts safe harbor protects from prosecution arrangements that meet the following seven standards:

1. The agreement is set out in writing and signed by the parties;
2. The agreement covers and specifies all of the services to be provided;
3. If the services are to be performed on a periodic or part-time basis, the agreement exactly specifies the schedule, length and charge for the performance intervals;
4. The agreement is for not less than one year;
5. The aggregate compensation is set in advance, is consistent with fair market value in arms-length transactions and is not determined in a manner that takes into account the volume or value of referrals or other business generated between the parties payable by federal healthcare programs;
6. The services performed do not involve the counseling or promotion of a business arrangement or activity that violates federal or state law; and
7. The aggregate services contracted for do not exceed those which are reasonably necessary to accomplish the commercially reasonable business purpose of the services.

Increased enforcement of both statutes requires all healthcare providers to be constantly vigilant regarding their fraud and abuse compliance. As such, hospitals need to carefully review their existing arrangements and ensure that all future arrangements are carefully structured to comply with Stark II and the Anti- Kickback Statute.

“Fraud and Abuse Compliance Review No. 1: Physician Services Agreements.”

Louisiana Hospital Association Impact Lawbrief, Vol. 24, (No.8). Feb. 26, 2010

Michael R. Schulze