On March 15, 2017, Chief Judge Joy Flowers Conti of the United States District Court for the Western District of Pennsylvania issued a decision in U.S. ex rel. Tullio Emanuele v. Medicor Associates Inc. et al., which contains the first judicial interpretation of recent clarifications of the Stark Law’s writing requirement issued by the Centers for Medicare & Medicaid Services (CMS) in 2015.1 In ruling on cross-motions for summary judgment, the court analyzed eight different arrangements between Medicor – a private physician practice group – and the Hamot Medical Center in order to determine whether the arrangements fell within either the personal services arrangement exception or the fair market value compensation exception to the Stark Law.
The Stark Law’s Writing Requirement
Under the Stark Law, when a physician (or an immediate family member of that physician) has a “financial relationship” with an entity, that physician is prohibited from making referrals for “designated health services” (DHS) to that entity, and that entity is prohibited from submitting claims for payment to Medicare or Medicaid for items or services resulting from such prohibited referrals.2 The term “financial relationship” is defined broadly to include both ownership/investment interests and compensation arrangements. Violations of the Stark Law can lead to significant civil liability under the False Claims Act (FCA), civil monetary penalties, and exclusion from federal health programs.
There are numerous statutory and regulatory exceptions to the Stark Law, and many of those exceptions require some sort of signed writing. For example, agreements to rent office space or equipment are excepted from the Stark Law’s general prohibition, so long as several requirements are met, including that the lease be set out in writing and signed by the parties. Up until fairly recently, CMS took a very strict view that these exceptions were not applicable unless there was an actual written contract signed by the parties.3 In 2015, however, CMS softened its position on the Stark Law’s writing requirement, stating:
[T]here is no requirement under [Stark] that an arrangement be documented in a single formal contract. Depending on the facts and circumstances of the arrangement and the available documentation, a collection of documents, including contemporaneous documents evidencing the course of conduct between the parties, may satisfy the writing requirement of the leasing exceptions and other exceptions that require that an arrangement be set out in writing.4
CMS went on to note the following examples of documentation that may suffice when viewed as a collection:
Board meeting minutes or other documents authorizing payments for specified services; written communication between the parties, including hard copy and electronic communication; fee schedules for specified services; check requests or invoices identifying items or services provided, relevant date, and/or rate of compensation; time sheets documenting services performed; call coverage schedules or similar documents providing dates of services to be provided; accounts payable or receivable records documenting the date and rate of payment and the reason of payment; and checks issued for items, services, or rent.
The Medicor Case
Beginning in 1998, Medicor was the exclusive outside cardiology provider at Hamot Medical Center. The relationship between Medicor and Hamot expanded such that Hamot entered into several medical directorship agreements with Medicor physicians. Six of the agreements between the parties were formally reduced to individual written contracts containing specific information regarding the services and responsibilities of the parties, the time period, and the applicable compensation. Those agreements were signed by the parties and contained provisions establishing that the agreements would begin on January 1, 2006, and terminate on December 31, 2006, if not formally extended. By January 1, 2007, none of the six agreements were formally extended, but the parties continued as if the agreements were still in effect such that Medicor continued to invoice Hamot for services rendered under the agreements and Hamot continued to pay Medicor for those services.
In November 2007, the parties formally executed addenda to the six agreements that were made to be retroactively effective from January 1, 2007. However, the addenda provided that the 2007 agreements would terminate on December 31, 2007, unless formally extended. Once again, none of the agreements were formally extended and, once again, the parties proceeded to perform under the agreements after they expired. This pattern of letting the agreements lapse and then executing retroactively-effective addenda occurred at least two more times, until Medicor and Hamot restructured their relationship into a global agreement that eliminated the need for multiple individual agreements.
In 2008, Hamot was considering creating a new medical directorship position for the Women’s Heart Program (WHP). There were emails, memoranda, and a draft written contract about the creation of this new position between Hamot and Medicor, but nothing formal was ever executed or signed by the parties. Despite the lack of any formally executed agreement, Medicor physician Dr. Kelly Hayes performed the role of medical director for the WHP from sometime in 2008 until March 31, 2010, and Hamot paid her for those services. Also in 2008, Dr. Robert Farraro assumed the administrative duties of the Chairman for Hamot's Department of Cardiovascular Medicine and Surgery (CV Chair) following the departure of the previous CV Chair. Medicor and Hamot agreed that Dr. Farraro should be paid for this role, and he was paid for this position until March 31, 2010, despite the lack of any formal contract.
In 2010, Tullio Emanuele filed a qui tam action against Medicor, Hamot, and multiple individual physicians under the FCA alleging that the medical directorship arrangements between the parties violated the Stark Law.6 In July 2016, the parties filed cross-motions for summary judgment, with Emanuele seeking a ruling that the medical directorship agreements between Medicor and Hamot were “financial relationships” under the Stark Law, and that the agreements did not qualify for any of the Stark Law’s exceptions.
It was undisputed that the arrangements at issue in Medicor constituted “financial relationships” for purposes of the Stark Law. The issue for the court was whether the various arrangements fell within the Stark Law’s exceptions for either personal services arrangements or fair market value compensation, both of which require a signed writing. The court noted that the Stark Law’s fair market value compensation exception required, among other things, that:
(1) The arrangement [be] in writing, signed by the parties, and cover only identifiable items or services, all of which are specified in writing.
(2) The writing specif[y] the timeframe for the arrangement…; [and]
The court further noted that, in order for the personal services arrangement exception to apply,
“[e]ach arrangement [must be] set out in writing . . . signed by the parties, and specif[y] the services covered by the arrangement.”8 The court focused on CMS’ 2015 revised guidance (discussed above) to determine whether Hamot and Medicor complied with the writing requirements applicable to these two exceptions.9
The court first analyzed the six medical directorship agreements that took effect on January 1, 2006, and were then allowed to lapse several times until the relationship between the parties was restructured in March 2010.10 The court focused on whether each arrangement, at a minimum, had written evidence of the arrangement’s timeframe, compensation terms, and detailed descriptions of the identifiable services under the arrangement.11 For these arrangements, Medicor and Hamot argued that both the written invoices and corresponding checks, along with the lapsed written contracts, were enough to show their consistent course of conduct even during periods when the formal agreements had lapsed.12 Medicor and Hamot argued that the compensation terms were consistently followed, the written agreements were very detailed as to the relevant services under the arrangements, and the timeframe and signature requirements were satisfied both through the original written contracts and subsequent addenda.13 The court agreed, explaining that “[w]hen viewed in conjunction with the original written agreements and the subsequent addenda, each of which are formalized documents that meet the statutory standards, a reasonable jury could conclude that the defendants presented the necessary collection of documents.”14 Thus, as to the six original medical directorship arrangements, the court found that Medicor and Hamot had complied with the writing requirement in order to meet the applicable Stark Law exceptions.15
However, the court concluded otherwise as to the WHP and CV Chair arrangements.16 For the WHP arrangement, the defendants pointed to some emails, memoranda, and an unsigned draft of a written agreement.17 The court found that while this collection of documents did provide some indication of the identifiable services under the agreement, there was still a complete lack of written evidence as to the compensation and timeframe of the arrangement. The court concluded that “none of the documents referenced by the defendants ‘would permit a reasonable person to verify that the [WHP] arrangement complied with an applicable exception’ at the time that referrals under that compensation arrangement were made.”18
With regards to the CV Chair arrangement, the defendants pointed to a collection of documents including Hamot’s bylaws, Organizations and Functions Manual, meeting minutes, invoices, general ledger, and some electronic communications.19 The court concluded that, out of this collection, there was only reference to the arrangement’s timeframe or compensation in a single email, and that reference was not certain as to terms.20 The court was also concerned that neither the WHP nor the CV Chair arrangements were signed by the parties.21 Based on this evidence the court concluded that no reasonable jury could find that either of these arrangements met the Stark Law’s writing requirement.
Scienter and Materiality
The defendants in Medicor also sought summary judgment, arguing that the plaintiff could not establish the scienter or materiality requirements of the FCA. As to scienter, an FCA plaintiff must establish that the defendant either had actual knowledge, or acted with deliberate ignorance or reckless disregard.22 On this issue, the court concluded that the record before it was “replete with testimonial evidence from Medicor and Hamot indicating that their physicians and administrators believed that the medical directorship agreements complied with the Stark Act.”23 Further, the court noted that the parties sought to backdate addenda to six of the agreements in an attempt to comply with the Stark Law, and that they “continued to submit claims for payment despite knowing that the underlying arrangements may not have been properly documented for purposes of Stark Act compliance.”24 Based on this information, the court rejected the defendants’ scienter arguments.
The defendants also argued that, even if they did not comply with the Stark Law’s writing requirement, such violations would not rise to the level of materiality required under the FCA.26 The FCA defines “material” as “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.”27 In addressing materiality, the court in Medicor cited the Supreme Court’s 2016 decision in Universal Health Services Inc. v. United States ex rel. Escobar:
In sum, when evaluating materiality under the False Claims Act, the Government's decision to expressly identify a provision as a condition of payment is relevant, but not automatically dispositive. Likewise, proof of materiality can include, but is not necessarily limited to, evidence that the defendant knows that the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement. Conversely, if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. Or, if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material.28
Applying the reasoning from Escobar, the court in Medicor concluded that the defendants’ alleged violations of the Stark Law were material because the Stark Law’s writing requirement is not “minor or insubstantial” and it goes “to the very ‘essence of the bargain’ between the government and health care providers with respect to Stark Act compliance.”29 Based on this analysis, the court in Medicor rejected the defendants’ materiality arguments, as well.
The Medicor decision represents the first time that a federal court has attempted to interpret the Stark Law’s writing requirements since CMS issued its revised guidance in 2015. The “collection of documents” approach to the writing requirement provided some modicum of relief to the defendants in Medicor, and will likely benefit other healthcare providers facing similar issues in the future. Medicor demonstrates that while the revised CMS guidance provides a new option for providers to establish compliance with some Stark exceptions, it does not provide an automatic “out” for failure to comply with Stark. Thus, while providers might be able to establish sufficient compliance with the Stark Law’s writing requirement through a collection of documents after the fact, providers should be mindful of CMS’s revised guidance that stated, “[i]n most instances, a single written document memorializing the key facts of an arrangement provides the surest and most straightforward means of establishing compliance with the applicable exception.”30
Scott Grubman is a Partner with the law firm of Chilivis Cochran in Atlanta, Georgia. A former Assistant U.S. Attorney and DOJ Trial Attorney, Mr. Grubman represents healthcare providers of all types and sizes in connection with government and internal investigations, False Claims Act litigation, and other fraud and abuse matters. He can be reached at (404) 262-6505 or email@example.com.
Greg Tanner is an Associate with Chilivis Cochran, and focuses his practice on representing healthcare providers in government investigations, audits, and other regulatory matters. He may be reached at firstname.lastname@example.org.