Frank Carsonie, JD
Chair, Health Care & Life Sciences Practice Group Benesch, Friedlander, Coplan & Aronoff LLP, Columbus, OH
Nathan Sargent, JD
Associate, Health Care & Life Sciences Practice Group Benesch, Friedlander, Coplan & Aronoff LLP, Cleveland, OH
Hospitals and hospital-based physician groups enter various types of service contracts ranging from exclusive arrangements that span multiple sites to non-exclusive arrangements for an individual facility or location. Despite considerable variation, the contractual arrangements between these providers are associated with common risk factors. Such arrangements cover numerous specialties and services, but some of the most common—and most important for clinical, operational and budgetary reasons— are for anesthesia, emergency medicine, pathology and radiology services.
Given the regulatory environment, these types of arrangements—and those with other related entities—inherently involve a number of complex legal and compliance issues. It is critical for all parties involved to understand those risks, how and when they arise, and effective ways to minimize or eliminate them.
Hypothetical Fact Pattern
Consider the following hypothetical fact pattern:
- XYZ Anesthesia Associates, LLC (XYZ) is an independent group of anesthesiologists with an exclusive clinical services contract with Regional Health System (Regional). Regional is a non-profit health system with tax-exempt status.
- Regional is currently exploring ways to upgrade its information technology systems and capabilities to better position itself for value-based reimbursement opportunities.
- As part of its contract with Regional, XYZ has the right to participate in the evaluation of possible improvements to the anesthesia department across the health system, including technology and operational matters.
- Health-Tech Ventures (Tech) is a start-up that offers various healthcare technology solutions that Regional would like to consider implementing, including software solutions related specifically to anesthesia. Tech and its solutions are not widely known or used, so landing Regional as a client would be a huge win for Tech, its investors and future business prospects. It would also showcase Tech’s technology capabilities. As a result, Tech is willing to offer Regional a deep discount on its standard software pricing structure. Tech also plans to include other ancillary services related to implementation, training and maintenance at a reduced price (or possibly for free).
- Two of XYZ’s physician ownermembers are also among the initial investors in Tech who helped the start-up get off the ground financially. They are not involved in Tech’s day-to-day management.
- Chris Smith is a voting member of the Regional Health System Board of Directors (the Board). The Board reviews and approves key health system expenditures and projects, including updates to information technology systems. Smith is another initial investor in Tech who helped the start-up get off the ground prior to joining the Board.
The fact pattern above could have implications under the federal Anti- Kickback Statute (AKS), the federal self-referral laws (i.e., the Stark Law)and the federal civil monetary penalties, as well as the state law equivalents of each. In addition, if a conflict of interest arises and is not properly managed, there could be additional repercussions under the Physician Payments Sunshine Act (the Sunshine Act) or related to Regional’s tax-exempt status.
What are the Legal and Compliance Risks?
The AKS1 imposes criminal and civil monetary penalties if any individual or entity is found to knowingly and willfully pay (or offers to pay), solicit or receive anything of value, directly or indirectly, in exchange for the referral of patients for any item or service that is covered (in whole or in part) by a federal healthcare program (e.g., Medicare, Medicaid). A violation would be considered a “kickback.”
The Department of Health and Human Services Office of Inspector General (OIG) and the Department of Justice, both of which are responsible for oversight and enforcement of the AKS, have also cited situations where there could be a “reverse kickback.” In a reverse kickback, for example, a hospital-based physician group would make some payment or provide some benefit beyond the value of the underlying clinical arrangement. Such payment would be viewed as an inducement for the hospital providing an exclusive contract and thus locking up the franchise for applicable services. Essentially, the payment to the hospital is viewed as the price for guaranteeing exclusivity, which ensures business generation for the hospital-based physician group.
Why does this matter? A violation of the AKS is considered a felony and is punishable by criminal penalties of up to $25,000 per violation and imprisonment of up to five years. Further, a violation may result in exclusion from participation in federal healthcare programs and the imposition of civil monetary penalties equal to three times the damages plus $50,000 per violation. Such a violation may involve whistleblower claims that could also trigger sanctions under the False Claims Act.
In the fact pattern above, XYZ has an existing exclusive clinical arrangement with Regional. If the contract compensation is set at fair market value and upon commercially reasonable terms, and the contract passed legal and compliance review when executed, there is little risk of an AKS violation on the part of Regional or XYZ related to the clinical aspects of the relationship. However, given the fact that two XYZ physicians are investors in Tech, and Tech wants to provide Regional with substantial discounts or free services, Regional should consider the AKS when evaluating the offer.
Based on the facts above, there likely is no AKS violation for Tech offering Regional substantial discounts because there is no evidence that the discounts are being offered to generate or reward referrals. In short, there is no intent for inappropriate inducement. However, if Tech’s discounts were tied to or contingent upon Regional extending XYZ’s exclusive contract or other benefits to XYZ under its contract (e.g., increased subsidy), the analysis would change entirely and such facts could implicate the AKS.
Note that, for the AKS to apply, remuneration must actually be offered, paid, solicited or received. Also, many reasonable and appropriate arrangements may be covered by the scope of the AKS. As a result, the OIG has published various regulatory safe harbors,2 narrowly defining business arrangements that may implicate the AKS but would be considered non-abusive to federal healthcare programs and not subject to prosecution. All elements of the applicable safe harbor must be satisfied in order for an arrangement to be protected.
In addition to the AKS, such an arrangement may involve the federal self-referral law, typically referred to as the Stark Law.3 A critical difference between the Stark Law and other federal healthcare laws: failure to satisfy an exception when the Stark Law is implicated means a per se violation. There is no room to maneuver based on surrounding facts and circumstances.
The Stark Law identifies the circumstances under which a physician may refer a Medicare patient to an entity (such as a hospital) for certain healthcare services (known as designated health services or DHS) if the physician or an immediate family member of the physician has a financial relationship with the DHS entity.
If the elements of the law are satisfied, the referral for DHS is prohibited and the entity is prohibited from billing for the DHS provided as the result of an improper referral, unless an applicable exception can be satisfied. There are a number of regulatory exceptions to the Stark Law. Similar to the AKS safe harbors, all elements of the relevant Stark exception must be met. The Stark Law is typically implicated by payment streams from DHS entities to referring physicians. However, there could likewise be a payment from a referring physician enterprise to a DHS entity.
Under Stark, a financial relationship includes both direct and indirect ownership and compensation relationships. A direct compensation arrangement exists when the DHS entity directly compensates the physician making the referral without any intervening persons or entities. An indirect compensation arrangement exists if there is an unbroken chain of persons or entities with financial relationships between the physician and DHS entity, the referring physician receives aggregate compensation from the person or entity in the chain within which the physician has a direct financial relationship that varies with the volume or value of referrals (or other business generated), and the DHS entity has such knowledge of such activity (or recklessly or deliberately disregards it).
In the fact pattern, the direct financial relationship between Regional and Tech does not implicate the Stark Law. Tech is not a physician enterprise, nor is Tech in a position to make referrals to Regional. However, Tech does have two physician investors who are also owner-members of XYZ and in a position to make referrals based on XYZ’s clinical relationship with Regional. Regional’s relationship with Tech could potentially be considered an indirect financial relationship with the two physician investors under the Stark Law. An unbroken chain of compensation flows from Regional, through Tech, to the two physician investors. However, the aggregate compensation under the contract does not take into account the volume or value of referrals. As a result, the Stark Law would not apply.
Arrangements that violate the AKS or Stark Law could also potentially expose the involved parties to liability under the federal Civil Monetary Penalty Statute.4 The OIG has the authority to seek civil monetary penalties, assessments and program exclusion against an individual or entity based on a wide variety of prohibited conduct, including violation of the AKS or Stark Law. As outlined above, the repercussions can be serious—financially and criminally—based on the nature and extent of the violation.
In addition, arrangements between a hospital and hospital-based physician group could present conflicts of interest. Identifying and managing conflicts is critical due to the the Sunshine Act5 and for IRS purposes. The Sunshine Act requires certain manufacturers and companies to disclose physician ownership and investment held in such companies to the Centers for Medicare and Medicaid Services (CMS).
The Sunshine Act also requires disclosure of other payments, benefits or reimbursement given to physicians in forms such as travel, meals and continuing medical education, among others, by entities such as teaching hospitals. There are also required disclosures related to research.
It is important to note that the reporting obligation does not fall on the individual physician; it rests with the manufacturer, company, teaching hospital or other entity. In the hypothetical, there may be reporting requirements for Tech and for Regional depending on the extent and nature of their relationships with physicians. Such requirements should be reviewed and complied with when evaluating and entering new physician arrangements.
In terms of conflicts, the IRS defines a conflict of interest as follows: When an individual’s obligation to further the organization’s purposes is at odds with his or her own financial or other personal interests. For example, a conflict of interest would occur when an officer, director or trustee votes on a contract between the organization and a business that is owned (in whole or part) by the officer, director or trustee.
In addition, related to exempt organizations, the IRS requires certain policies, procedures and reporting to ensure such entities put funds to proper use and that individuals in leadership positions act in good faith and avoid private inurement. What are the ramifications of non-compliance? If the IRS determines a conflict results in an excess benefit, it can impose significant penalties on the individual who receives it. The penalty can take the form of an excise tax as well as a required payback to the exempt organization itself.
There are multiple potential and existing conflicts in the hypothetical. Related to the physician investors in Tech, there could be a conflict if the physicians themselves approached Regional with a proposal for Tech to provide technology improvements (as opposed to Tech’s sales personnel). Also, XYZ’s exclusive arrangement with Regional allows XYZ physicians to participate in the evaluation of possible improvements to the anesthesia department across the health system, including technology and operational matters. If the two physician investors are involved in the evaluation process, the conflict is intensified. Similarly, there is a conflict involving Chris Smith. If and when the Board is required to vote on Tech’s proposal, Smith would have a clear conflict due to the nature of his investment in Tech.
Based on the facts, there is an important distinction to note: XYZ’s agreement with Regional gives them the right to participate in the evaluation of improvements. That does not necessarily mean XYZ has decision-making authority. On the other hand, Chris Smith does have a role in decision making at the Board level. As a result, there could be serious ramifications from an IRS perspective if these conflicts of interest are not properly disclosed and managed.
How to Minimize or Eliminate Risk
With the risks identified, it’s even more important to identify effective ways in which such risks can be mitigated or eliminated. The following strategies based on the fact pattern apply generally.
As a general matter, transparency is critical when evaluating contractual arrangements. This applies universally. Negotiations often require confidentiality; however, internally and among Regional and Tech, there must be transparency related to the terms, objectives and appropriate rationale for what is proposed. To ensure this level of transparency exists, there must be no direct or indirect, overt or covert, attempt to influence or induce the exchange referrals for any item or service covered by a federal healthcare program. This could include actions taken to incentivize, gain or maintain the exclusive relationship between XYZ and Regional.
To avoid inappropriate activity, Regional should clearly document and outline the rationale for entering the proposed arrangement with Tech and ensure appropriateness from a legal and compliance perspective. If the financial relationship is on preferred terms, articulating, understanding and documenting an appropriate rationale is especially important. Both Tech and Regional should be comfortable and willing to undergo legal and compliance review by a qualified, independent third party. This level of transparency must exist throughout all stages of the proposal, negotiation, analysis and ultimate decision. If an appropriate rationale for the preferred terms cannot be articulated, the parties should be prepared to revise the terms to satisfy such concern or walk away from the deal.
In addition, Regional must follow a defined conflict of interest policy and procedure related to XYZ’s involvement in the evaluation process as well as Chris Smith’s involvement at the Board level. The IRS has published a sample conflict of interest policy as guidance.6 A conflict of interest policy is intended to help ensure that when actual or potential conflicts of interest arise, a process is in place under which the affected individual or group of individuals will advise the appropriate governing body about all relevant facts concerning the situation.
A conflict of interest policy is also intended to establish procedures under which individuals or groups who have a conflict of interest will be excused from voting on such matters. Regional’s decision-makers must understand and follow all conflict policies and procedures to ensure the arrangement is appropriate and that any conflicted parties are identified and excused from the decision-making process, when and as appropriate. XYZ can still participate in the evaluation process of Tech’s proposal. The two physician investors should probably not participate or should have their participation limited in a manner that would not influence any recommendations or direction provided by XYZ to Regional. Likewise, it is important to note that XYZ does not have decision-making authority; the non-conflicted physicians serve merely in an advisory capacity. Documentation related to the selection process should confirm this limitation.
Related to the conflict of interest policy and procedure, an objective board or governing body should ultimately make the decision related to implementation of the proposed contractual arrangement. In the above facts, the Board would review and ultimately decide on the implementation of Tech’s proposal. In terms of process, the Board should look to Regional management for a recommendation and a detailed explanation of the arrangement, including the rationale for entering it, the benefits to all parties involved, and an explanation of any associated risks (especially related to legal and compliance). As noted above, Chris Smith should be excused from any and all votes related to Regional’s business dealings with Tech.
Concurrent with or in advance of the Board process, Regional should engage outside counsel to perform a comprehensive legal and compliance analysis of the proposed arrangement with Tech. This will help ensure the arrangement is reviewed and vetted objectively and with the requisite level of knowledge and expertise. Critical components of such analysis, which should be compiled in a formal legal opinion, include:
- Review and analysis of existing contractual relationships between the parties and how a new contractual relationship might affect them
- Analysis of the facts and circumstances in relation to relevant law (at minimum, the legal authority outlined above) and how such facts and circumstances may be viewed by regulatory authorities
- Determination as to whether or not the proposed contractual arrangement fits within a safe harbor or regulatory exception to any federal or state enforcement authority, as applicable
- Recommendation and/or completion of a fair-market value analysis by a qualified party to ensure the arrangement is within fair-market value and is commercially reasonable
Contractual relationships between hospitals and hospital-based physician groups vary considerably across multiple specialties. Understanding the unique facts and circumstances of each arrangement is critical—as is how such facts and circumstances would or could be viewed in relation to applicable federal and state law. Despite such considerable variation, the above mitigation strategies and processes provide an established framework for hospital administrators, physicians and other related entities to vet, approve and implement contractual arrangements and guard against healthcare fraud, waste and abuse.
- 42 U.S.C. §1320a-7b
- 42 C.F.R. §1001.952
- 42 U.S.C. §1395nn
- 42 U.S.C. §1320a-7a
- 42 U.S.C. §403.900, et seq.
- See Instructions for Form 1023, Appendix A – Sample Conflict of Interest Policy, available at https://www.irs.gov/instructions/i1023