COMMERCIAL REASONABLENESS AND FINANCIAL ARRANGEMENTS WITH PHYSICIANS

Transcription

1 COMMERCIAL REASONABLENESS AND FINANCIAL ARRANGEMENTS WITH PHYSICIANS Daniel H. Melvin, Partner, McDermott Will & Emery, in consultation with Daryl Johnson, Managing Partner, Health Care Appraisers, Inc. I. SUMMARY A. The Meaning of Commercially Reasonable. Based on the OIG s and CMS s various uses of the term, commercially reasonable, the term can have one of two meanings. First, commercially reasonable can refer to whether the compensation arrangement has a legitimate business purpose at all, apart from consideration of the value of referrals or other federal program business generation. For example, if a device manufacturer is paying a physician practice to collect and report data that the manufacturer has no bona fide intent to analyze, or a hospital is leasing space from a physician for which it has no legitimate business need, the transactions are not commercially reasonable because they only make commercial sense if the value of the physician s referrals are taken into account. Second, commercially reasonable can refer to whether the scope of the transaction makes commercial sense apart from consideration of the value of referrals or other federal program business generation by one of the parties. For example, if a device manufacturer has a legitimate business need to consult with physicians that utilize its devices, or a hospital has a legitimate business need for medico-administrative services, but the manufacturer or hospital purchase more consulting or medico-administrative services from physicians than it has a legitimate business need for, the transactions are not commercially reasonable; the transactions only make commercial sense if the manufacturer or hospital is recognizing and paying for the value of the physicians referrals. B. Commercial Reasonableness and Fair Market Value. If a device manufacturer or a hospital pays more than the fair market value of consulting or medico-administrative services for which it otherwise has a legitimate business need, the transaction is not commercially reasonable, because it only makes commercial sense to pay above-market if the compensation is also recognizing and paying for the value of the physicians referrals. Thus, analytically, fair market value is a subset of commercial reasonableness. Although a compensation arrangement can be both consistent with fair market value and commercially unreasonable, a compensation arrangement that is inconsistent with fair market value (apart from referrals or other federal program business generation), is never commercially reasonable. C. Lack of Commercial Reasonableness Legal Implications. Compensation arrangements that are not commercially reasonable potentially: (a) create a

2 reasonable inference that one purpose or intent of the compensation is to induce or pay for referrals in violation of the federal anti-kickback statute; (b) fail to enjoy the protection of an anti-kickback safe harbor; and (c) fail to satisfy an exception to the federal physician self-referral or Stark law. II. ANTI-KICKBACK STATUTE AND COMMERCIAL REASONABLENESS (42 U.S.C. 1320A-7b(b)) A. AKS Violation Requires an Intent or Purpose to Induce or Pay for Federal Program Business. A violation of the AKS, in pertinent part, requires remuneration with an intent or purpose to induce or pay for referrals of federal health program business. United States v. Greber, 760 F.2d 68, 71 (3d Cir.), cert. denied, 474 U.S. 988 (1985) (holding that payment of consulting fee to physicians who referred patients for Holter-monitor (cardiac diagnostic device) deemed illegal remuneration if a purpose of the fee was to induce the ordering of services.... ); United States v. Hancock, 604 F.2d 999, (7th Cir. 1979), cert. denied, 444 U.S. 991 (1979) (rejecting, under original Anti-Kickback Statute, the notion that fees for legitimate services could not be illegal kickbacks); United States v. Katz, 871 F.2d 105 (9th Cir. 1989) (approving a jury instruction requiring only proof that obtaining money for the referral of services was one of the material purposes of the solicitation); United States v. Bay State Ambulance and Hospital Rental Serv., 874 F.2d 20 (1st Cir. 1989) (approving jury instruction which provided that if payments were found to be made for more than one purpose, the government had to prove that the primary purpose was to induce referrals). (The court rejected the defendant s argument that the jury had to find that the payments were not consistent with fair market value, and, citing Greber with approval, stated that [g]iving a person an opportunity to earn money may well be an inducement to that person to channel potential Medicare payments.... Thus, the court appears to have upheld a jury instruction stricter than what the court believed was required by the statute.) United States v. Davis, 132 F.3d 1092 (5th Cir. 1998) (rejecting a sole purpose standard, and holding that it is only necessary to prove that part of the purpose of the payments are intended to induce referrals)..united States v. Borassi, No (7th Cir. May 4, 2011) (holding that if at least part of a hospital s remuneration to a physician was intended to induce him to refer patients to the hospital, the statute was violated, even if the payments were also intended to compensate for professional services. (quoting United States v. Greber, 760 F.2d 68, 72 (3d Cir. 1985)). B. Commercial Reasonableness as Probative Evidence of Intent or Purpose. Evidence that remuneration is intended to induce or pay for referrals of federal health care program business can be direct, e.g., s, taped conversations, letters, or indirect, i.e., reasonable inferences from the facts and circumstances of the remuneration. Although the U.S. Government is not necessarily required to introduce evidence that remuneration paid as compensation for items or services is above fair market value or paid pursuant to an arrangement that is commercially unreasonable, in order to prove an AKS violation, such evidence is probative of the parties intent or purpose, e.g., if the remuneration or the

3 transaction only makes commercial sense if the value of referrals of federal program business is taken into account, the reasonable inference is that one purpose of the remuneration is to induce or pay for referrals. To illustrate, the OIG has considered: whether discounted or free services or items to a buyer on one line of business is commercial reasonable apart from purchases or referrals by the buyer on another line of business when evaluating whether the discounted or free services or items are a kickback (referred to by the OIG as swapping arrangements. ) OIG Advisory Op (Feb. 26, 1999); OIG Advisory Op (Dec. 20, 2010) OIG Advisory Op (July 23, 2012). whether a lessee has leased more space, or leased space for more time, from a referral source than it has a commercially reasonable need, as evidence that rent is a pretext for payment for referrals. OIG Special Fraud Alert on Rental of Space in Physician Offices by Persons or Entities to Which Physicians Refer, 65 Fed. Reg (Feb. 24, 2000). whether data to be collected or research to be performed by a referral source has intrinsic value to the purchaser, i.e., has a legitimate business purpose, or is the arrangement a mere pretext for payment for referrals. 64 Fed. Reg (Nov. 19, 1999). whether there are legitimate reasons for paying physicians for emergency department call coverage. OIG Advisory Op (Oct. 23, 2012) (basing its favorable opinion, in part, on the Requesters certification that the payments for call coverage were commercially reasonable, in the opinion of an independent valuator, in addition to being in the range of fair market value); OIG Advisory Op (Sept. 20, 2007) ( the circumstances giving rise to the Arrangement suggest that the Medical Center had a legitimate, unmet need for on-call coverage and uncompensated care physician services ); OIG Advisory Op (May 14, 2009) ( the circumstances giving rise to the Proposed Arrangement suggest that the Hospital has a legitimate rationale for revising its on-call coverage policy. The Hospital reports that there are weeks when it does not have needed specialists on-call, that its [specialty practice group redacted] has reduced its on-call coverage to the minimum allowed under the Hospital s Medical Staff By-laws, citing the lack of compensation for on-call coverage, and that it is having to outsource its Emergency Department obligations ). The OIG also identified commercial reasonableness as a factor for hospitals to consider as part of their compliance review of compensation arrangements with physicians. Specifically, the OIG recommended that the hospitals ask:

4 Are the items and services obtained from a physician legitimate, commercially reasonable, and necessary to achieve a legitimate business purpose of the hospital (apart from obtaining referrals)? Assuming that the hospital needs the items and services, does the hospital have multiple arrangements with different physicians, so that in the aggregate the items or services provided by all physicians exceed the hospital s actual needs (apart from generating business)? OIG Supplemental Compliance Program Guidance for Hospitals, 70 Fed. Reg (January 31, 2005). C. Commercial Reasonableness and the AKS Safe Harbors. In 1999, the OIG amended key compensation safe harbors to the AKS to add a commercial reasonableness requirement. The space lease, equipment lease and personal services and management contracts safe harbors were amended to require that the aggregate space, equipment or services contracted for not exceed that which is reasonably necessary to accomplish the commercially reasonable business purpose of the arrangement. 64 Fed. Reg (Nov. 19, 1999). In the Preamble to this rulemaking, the OIG states: By commercially reasonable business purpose, we mean that the purpose must be reasonably calculated to further the business of the lessee or purchaser. In other words, the rental or the purchase must be a space, equipment, or services that the lessee or purchaser needs, intends to utilize, and does utilize in furtherance of its commercially reasonable business objectives. 64 Fed. Reg (Nov. 19, 1999). III. THE STARK LAW AND COMMERCIAL REASONABLENESS (42 C.F.R. 1395nn) A. Commercial Reasonableness is an Element of the Key Compensation Exceptions to the Stark Law The space lease and equipment lease exceptions both require that the lessee not lease more space or equipment than is reasonable necessary for the legitimate business purposes of the lease or rental, and that the agreement would be commercially reasonable even if there were no referrals between the lessee and lessor. 42 U.S.C. 1395nn(e)(1)(A)-(B); 42 C.F.R (a)-(b). The personal services exception requires that the aggregate services contracted for not exceed that which is reasonably necessary for the legitimate business purposes of the arrangement. 42 U.S.C. 1395nn(e)(3)(A); 42 C.F.R (d)(iii). The employment relationships and isolated transaction exceptions require that the compensation to the physician (or immediate family member) be paid pursuant to an agreement that would be commercially reasonable even if there were no referrals by the physician to the employer or the

5 entity involved in the isolated transaction. 42 U.S.C. 1395nn(e)(2)(C); (e)(6)(a); 42 C.F.R (c)(3); (f)(2). The fair market value exception requires that the arrangement be commercially reasonable (taking into account the nature and scope of the transaction) and furthers the legitimate business purposes of the parties. 42 C.F.R (l)(4). B. CMS s Definition of Commercially Reasonable Stark regulations do not define commercial reasonable. Discussing the concept in the Preamble to the proposed Stark II rule, CMS (then known as HCFA) said that an arrangement is commercially reasonable if it appears to be a sensible, prudent business agreement, from the perspective of the particular parties involved, even in the absence of any potential referrals. 63 Fed. Reg (emphasis added) (Jan. 9, 1998). In the Preamble to the Stark II, Phase II rule, CMS refined this definition, stating that [A]n arrangement will be considered commercially reasonable in the absence of referrals if the arrangement would make commercial sense if entered into by a reasonable entity of similar type and size and a reasonable physician (or family member or group practice) of similar scope and specialty, even if there were no potential DHS referrals. 69 Fed. Reg (March 26, 2004) (emphasis added). C. Commercial Reasonableness and Losing Money on Employment of Physicians. Not every physician employed by a hospital generates enough net revenue through her personally performed clinical services to cover her hospital employer s cost to employ her, let alone generate a margin. The physician employee might not even generate enough net revenue to cover the cost of her salary and benefits. This begs the question whether the physician s employment agreement would be commercially reasonable even if the physician made no referrals to the hospital-employer, a requirement of the Stark employment exception. In the Halifax litigation, the U.S. Government alleges that [g]iven that each neurosurgeon was paid total compensation that exceeded the collections received for neurosurgical physician services, Defendants could not reasonably have concluded that the compensation arrangements in those contracts were fair market value for the neurosurgeons services or were commercially reasonable. United States Complaint in Intervention, pp (filed by the United States on Nov. 4, 2011) (emphasis added). In the Toumey litigation, the U.S. Government does not go quite this far, stating: The evidence from the face of the contracts themselves demonstrates that the physicians will be paid more than 100% of the value of their collections. While there may be some circumstances in which paying a physician more than his

6 collections might be reasonable, paying more than 100% of the value of their collections at least raises a question... that would allow a court to look... to see if the deal were actually taking into account the volume or value of referrals. Reply to Defendant s Response to United States Motion for Partial Summary Judgment on Count IV of the Second Amended Complaint, pp (filed by the United States on Sept. 11, 2009).