Hospitals face the challenge of stiff competition, often times, from their own physicians’ ambulatory surgery centers. When dealing with these challenges, hospitals need to be mindful of the Stark Law if they intend to contract with surgeons to fend off their competitors. If difficult or risky issues are raised during the analysis of the arrangement, hospitals can either determine if the risks can be effectively managed or if is simply best to walk away from the arrangement.
The hospital in Drakeford v. Tuomey, No. 12-2219, 2015 U.S. App. LEXIS 11460 (4th Cir. Jul. 2, 2015) learned this lesson the hard way.
Tuomey Healthcare System implemented part-time employment agreements with independent surgeons who performed outpatient surgeries at the hospital and were compensated based on the volume and value of anticipated referrals. A physician it sought to engage declined to enter into the part-time employment agreement after the physician’s counsel advised him the contract would be illegal under the Stark Law and subject the parties to liability under the False Claims Act.
The Stark Law prohibits referrals by a physician to an entity for the furnishing of designated health care services (DHS), which includes hospital services, if the physician or his/her immediate family has a financial relationship with the entity unless one of the Stark Law’s exceptions are applicable to the transaction. Additionally, the law prohibits the payment of Medicare claims for DHS furnished pursuant to prohibited referrals. These prohibited payments create liability for the entity under the federal False Claims Act (FCA) which provides for treble damages and penalties up to $11,000 per claim.
To resolve the impasse between them, the parties jointly engaged a recognized health law expert. Upon the expert’s review of the arrangement, he determined it raised significant “red flags” under the Stark Law and concluded the hospital was treading on “thin legal ice” with respect to the arrangement’s chances of surviving government scrutiny. Id. at *23. After engaging two other attorneys for their views on the legality of the contract without disclosing all of the facts to one of the attorneys, the hospital told the expert to not provide his opinion in writing. Then it terminated its engagement with him.
A few months later, the physician filed a qui tam suit against the hospital under the FCA, alleging the hospital falsely certified to Medicare that its claims were in compliance with the Stark Law, forcing the government to pay thousands of false claims. After two trials, a jury found the hospital liable for a $237 million judgment. On July 2, 2015, the Fourth Circuit upheld the judgment.
A critical factor both in the jury’s finding and the Fourth Circuit’s opinion was the testimony of the expert. Because the expert (who was an attorney) represented both parties, the hospital had effectively waived its attorney-client privilege.
Although there are a wealth of lessons in the case, a few are highlighted here. First, when the physician raised the specter of legal problems with the arrangement, the hospital should have been wary about proceeding with the arrangement. Second, the hospital was unwise in seeking out the expert’s opinion under a joint engagement arrangement with the physician. If the hospital had sought out the expert’s opinion for itself, the opinion would not have been subject to disclosure. Finally, the hospital should have weighed all of the opinions and analyses of all the lawyers after a full disclosure of the facts to them before it had declined to follow the expert’s advice.
Although hospitals tend to favor accommodating physicians in concerns over the legality of a contract, in this era of qui tam suits, this practice is dangerous. In the wake of Tuomey, it is prudent for the hospital to obtain its own health law counsel to advise the hospital, and only the hospital, regarding a potential arrangement with referring physicians.