Stark Law Does Not Defeat Physician’s Unjust Enrichment Claim
Braun v. Promise Regional Medical Center-Hutcheson, Inc.,
No. 11-2180-RDR (D. Kan., Dec. 16, 2011)
By Charles M. Key, Wyatt, Tarrant & Combs, LLP, Memphis, TN*
The Ethics in Patient Referrals Act, 42 U.S.C. § 1395nn, which is commonly referred to as the “Stark law” or “Stark,” prohibits a physician who has a compensation arrangement or other financial relationship with a hospital from referring Medicare patients to that hospital for designated services, unless an exception applies. The statute and administrative rules promulgated under Stark recognize an exception for service contracts that are committed to writing and meet certain other requirements, but there is no exception for unwritten service contracts.1 For this reason, physicians and hospitals normally give careful attention in advance of the provision of a physician’s services to the hospital to the documentation of the terms of service.
But what about an expired contract that no one thought to renew? If the physician keeps providing the service and the service is accepted (not refused) by the hospital, what’s a law-abiding citizen to do? In a December 16, 2011 ruling denying a defendant hospital’s motion to dismiss under Federal Rules of Civil Procedure 12(b)(6) in the case of Braun v. Promise Regional Medical Center-Hutcheson, Inc.,2 Judge Richard D. Rogers of the United States District Court for the District of Kansas appears to have been the first to address the question in a reported opinion, holding that the common law remedy of unjust enrichment remains a potentially viable solution.
The Facts in Braun
Dr. Steven Braun was Medical Director of the Department of Radiation Oncology at Chalmer’s Cancer Treatment Center, a facility owned by defendant Promise Regional Medical Center-Hutcheson, Inc., under a contract entered into May 27, 1997. The contract required 90 days written notice of termination prior to May 31 of any particular year. In January 2008, the hospital sent a letter to Dr. Braun requesting a response to a proposal from the hospital, and on April 1, 2008 sent another letter notifying Dr. Braun that because he had not responded, the contract would be terminated on April 30, 2008.3
Notwithstanding the hospital’s letter of termination, Dr. Braun continued to perform medical director services for the hospital from April 30, 2008 through December 22, 2010. His services included business promotion, representing the hospital at medical staff meetings, training and educating the medical staff and clergy, contacting referring physicians, supervising staff, and community outreach. The complaint alleged that the hospital had knowledge of and accepted Dr. Braun’s services as medical director by billing for the time, observing Dr. Braun at meetings, “associating with Dr. Braun” in advertising and patient brochures, and receiving Dr. Braun’s time sheets, but that the hospital had not compensated Dr. Braun for his services since April 30, 2008.4
Among other claims for relief, Dr. Braun asserted his right to recover under a theory of unjust enrichment.5 Applying Kansas law, the court noted that recovery on a claim of unjust enrichment required proof of: (1) a benefit conferred upon the defendant by the plaintiff; (2) an appreciation or knowledge of the benefit by the defendant; and (3) the acceptance or retention by the defendant of the benefit under such circumstances as to make it inequitable for the defendant to retain the benefit without payment of its value.6 The defense argued in support of its motion to dismiss the unjust enrichment claim that allowing recovery under a theory of unjust enrichment would violate or frustrate the purpose of the Stark law because the Stark law requires a written contract, and “a compensation arrangement arising from an implied contract does not qualify for an exception to the Stark law.”7
In denying the defense motion, the court held first that the Stark law does not expressly limit the authority of a court to grant relief for unjust enrichment, and that without an express limitation, such a limitation should not be implied.8 Second, the court observed:
[P]laintiff’s unjust enrichment claim does not necessarily require the court to find that there was an illegal agreement between the parties. Plaintiff’s unjust enrichment claim is not asking the court to find a contract implied in fact . . . . This is important because a contract implied in fact is different from a contract implied at law or quasi contract.
A contract implied in fact arises from facts and circumstances showing mutual intent to contract. . . . A contract implied in law, or quasi contract, exists regardless of assent. It is a fiction of the law designed to prevent unjust enrichment. . . . A quasi contract is no more than a legal device to enforce noncontractual duties. Restitution and unjust enrichment are the modern terms for the doctrine of quasi contracts.9
The Braun court explained that the term “compensation arrangement” under the Stark law refers to “a kind of an agreement” between a physician and a healthcare entity, and not to an equitable remedy that may be imposed by a court to prevent unjust enrichment. Thus, Dr. Braun’s unjust enrichment claim would not necessarily violate the Stark law by requiring the court to engage in a legal fiction, where there has been no agreement between the physician and a healthcare entity.10 Nor, the court noted, would an award of damages on the basis of an unjust enrichment theory amount to enforcing an illegal agreement.11
The defense also argued that permitting an unjust enrichment remedy would frustrate the purpose of the Stark law, to which the court responded that the Stark law “does not by its terms prohibit unwritten agreements or limit the power of a court to issue equitable remedies where there are no agreements,” but merely “carves out an exception from its prohibition of referrals for persons and entities who have certain written personal service arrangements.”12
[The Stark law] does not directly prohibit unwritten compensation arrangements between doctors and hospitals. The term “compensation arrangement” includes “any arrangement” including those involving covert remuneration. [42 U.S.C.] § 1395nn(h)(1). Such arrangements are not prohibited; they simply must be reported. Moreover, it is possible to recover for unjust enrichment in Kansas without showing that there was an agreement. A court-imposed remedy for unjust enrichment where the parties did not have an agreement does not necessarily frustrate a statute allegedly requiring a writing where the parties do have an agreement.13
The hospital’s motion to dismiss Dr. Braun’s unjust enrichment claim was thus denied, allowing his case to proceed.14
Braun as Precedent
Although the ruling in Braun was on an FRCP 12(b)(6) motion and not on the merits of the claim, it nevertheless provides guidance as to the viability of unjust enrichment theory in the context of what would otherwise be a Stark-regulated, but noncompliant, “compensation arrangement.” The problem addressed by the court in Braun is not uncommon in the real-world application of the Stark law. Humans being human, and especially in the context of the often hectic daily operations of a hospital or other healthcare facility, it is all too easy to let an expiration date pass while essential, even life-saving, services are allowed to continue. Then a conscientious compliance officer, general counsel, or manager happens to notice that the agreement has expired, but the physician has gone right on providing the service, expecting, of course, to be paid.
The fact that the question has not previously been the subject of a reported ruling suggests that this common occurrence has been addressed in many cases through practical means not involving resort to the courts. The Braun case now provides at least some legal basis for a partial resolution of such practical issues in the future.
But Braun answers only part of the question – it provides a basis for compensating the physician for services actually rendered, but it does not fully address the consequences to the payor facility. More than the mere reporting requirement, noted by the Braun court,15 Stark specifies that a facility providing a service pursuant to a prohibited referral must not bill Medicare, the patient, or any third party for such service, unless an exception applies, and further provides for denial of payment for any claims improperly made, potential imposition of civil monetary penalties for knowing violation, and possible exclusion from government payment programs.16 So while under Braun a hospital could be justified in paying a referring physician for services the physician provided even without a written agreement, the question remains whether the hospital can present a claim for services it provided pursuant to that physician’s referrals without the risk and potentially dire consequences of an enforcement action under Stark.
Following the Braun court’s reasoning, if the term “compensation arrangement” under the Stark law contemplates an agreement between a physician and a healthcare entity, and if one acknowledges – as the court did in Braun – that the equitable remedy imposed by a court to prevent unjust enrichment is in fact not an agreement between the parties, one might reasonably conclude that a damage award to the physician based on a theory of unjust enrichment is not a “compensation arrangement” within the meaning of the Stark law, that the physician’s referrals are thus not “prohibited referrals,” that the Stark prohibition is not implicated, and that the hospital may validly assert its claim for Medicare reimbursement.
Note, however, that even if one accepts the argument that the relationship between a physician and facility resulting from the adjudication of the physician’s unjust enrichment claim is not an “agreement” and thus not a “compensation arrangement” regulated by the Stark law, the settlement of such a claim in lieu of litigation would entail an agreement and thus might still be viewed as a regulated “compensation arrangement,” and the physician’s referrals as “prohibited referrals.”17 The consequences of such a settlement would then present a worst-case scenario for the hospital, in which it has to pay the physician for services rendered but cannot lawfully bill for any service the physician provided to a Medicare beneficiary.18
Until further action by the courts or by Congress, it appears that the facility in such a situation will continue to bear the ultimate risk of Stark enforcement. Braun thus does little to help hospitals and other facilities maintain compliance, and, in fact, re-emphasizes the need for facilities to assure that non-compliant compensation arrangements are not allowed to continue.
Charles M. Key is a partner in the Memphis office of Wyatt, Tarrant & Combs, LLP, where he advises physicians, other healthcare providers, and related organizations in business planning, regulatory compliance, Medicare reimbursement, insurance, risk management, and medical staff relations. Mr. Key is the current Chair of the Tennessee Bar Foundation Board of Trustees, and is a member of the American Health Lawyers Association, the American Bar Association Health Law Section, and the State Bar Associations of Missouri and Tennessee. He is a Past Chair of the Tennessee Bar Association Health Law Section, Co-Chair of the ABA Health Law Section Publications Committee, and serves on the Editorial Boards of the ABA publications The Health Lawyer and Stark & Anti-Kickback Toolkit. He may be contacted by email at email@example.com, or by phone at (901) 537-1133.
Social Security Act § 1877, 42 U.S.C. § 1395nn (2010); 42 C.F.R. Part 411, Subpart J (2011).
|2 ||Braun v. Promise Regional Medical Center-Hutcheson, Inc., No. 11-2180-RDR (D. Kan., Dec. 16, 2011).|
Slip Op. at 3-4. Dr. Braun pled alternative theories of breach of contract and unjust enrichment. In sustaining Dr. Braun’s breach of contract claim, the court acknowledged a material question of fact as to whether the contract was or was not terminated, or was effectively renewed. See Slip Op. at 5, 13 – 15. If, after a hearing on the merits, the court were to conclude that the contract in fact was not terminated and that the hospital was in breach for non-payment, then the unjust enrichment claim would be moot. This article assumes, for purposes of discussion, that the termination was in fact effective, and that the breach of contract claim would thus fail.
Dr. Braun also asserted a viable claim for breach of contract, on the theory that the pre-existing contract in effect continued, notwithstanding the hospital’s notice of intended termination. See Slip Op. at 5, 20.
Slip Op. at 5 – 6, citing Haz-Mat Response, Inc. v. Certified Waste Services Ltd., 910 P.2d 839, 847 (Kan. 1996); and J.W. Thompson Co. v. Welles Products Corp., 758 P.2d 738, 745 (1988).
Slip Op. at 8.
Slip Op. at 8, citing Atkins v. United States, 556 F.2d 1028, 1039-40 ( Ct. Cl. 1977) cert. denied, 434 U.S. 1009 (1978).
Slip Op. at 8 – 9 quoting from Mai v. Youtsey, 646 P.2d 475, 479 ( Kan. 1982) and Sharp v. Sharp, 154 Kan. 175, 178, 117 P.2d 561 (1941) (other citations omitted).
Slip Op. at 9.
Slip Op. at 9 – 10. Again, the court stated, “a contract implied at law or quasi-contract is not an agreement, it is a remedy for unjust enrichment.”
Slip Op. at 11.
Slip Op. at 12.
Slip Op. at 20.
Slip Op. at 8, 12.
42 U.S.C. §§ 1395nn(a)(1)(B) and 1395nn(g).
This is not a foregone conclusion, but nothing in the Braun decision addresses this issue. Stark itself defines “compensation arrangement” as “any arrangement involving remuneration . . . between a physician (or a member of a physician’s immediate family) and an entity” that provides designated health services (with certain exceptions). 42 U.S.C. § 1395nn(h)(1)(A); 42 C.F.R. § 411.354(c) (2011). Arguments might be made that an amount paid in settlement of a claim for compensation for services rendered is “remuneration” within the meaning of the Stark law, and that it is not. Full discussion of this point is beyond the scope of this article.
The same rule should also be applied to the beneficiaries of services financed under Medicaid. 42 U.S.C. § 1396(b)(s) (2010).
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