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Decision By Third Circuit Court of Appeals Questions Hospital Practice of Providing Free Use of Space, Equipment and Staff to Physicians
A recent decision by the Third Circuit Court of Appeals calls into question under the federal ‘Stark” law the common practice of hospitals providing free space, equipment and staffing to physicians who provide professional services to patients in hospital departments and clinics. Since hospitals bill their own facility fees for encounters in such settings, they typically considered it to be their responsibility to provide the related space, equipment and staffing. By holding that providing space, equipment and staff for the use of physicians in hospital facilities results in remuneration to physicians that must be exempt under the Stark law, the Court’s decision in U.S. ex rel. Ted D. Kosenske, M.D. v. Carlisle HMA, Inc., No. 07-4616 (3rd Cir. Jan. 21, 2009) could have a significant effect on many existing and future arrangements between hospitals and physicians, such as service agreements, coverage agreements and directorship agreements. Under the court’s analysis, all arrangements by which hospitals make their space, equipment and staffing available to physicians will have to be set forth in writing and will have to be scrutinized in terms of fair market value.
Kosenske, a former member of an anesthesiology medical group, brought a qui tam action alleging that a hospital where the group practiced submitted outpatient claims to the Medicare program (and other federal health care programs) and falsely certified that such claims were in compliance with the federal Stark law in violation of the federal False Claims Act. The Court held that the hospital’s exclusive agreement with Kosenske’s former medical group to provide anesthesia services to patients at the hospital failed to satisfy the Stark law’s personal service arrangements exception with respect to certain services that were not explicitly addressed in the Agreement. Those services were exclusively provided by the medical group at an outpatient pain clinic owned and operated by the hospital. The Court also questioned the fair market value of the arrangement, in light of its determination that the hospital had provided the medical group with “free” space, equipment and staffing at the pain clinic while the medical group was the sole provider of pain management services at the clinic. In reversing the district court, the Court also reversed the lower court’s ruling that engaging in arms-length negotiations conclusively establishes that the compensation paid under an arrangement satisfies the Stark law’s requirement that such compensation be consistent with fair market value.
Whether the Third Circuit’s Kosenske ruling will ultimately find its way to the 9th Circuit is unclear. It is notable, however, that 9th Circuit Judge A. Wallace Tashima, while sitting by designation, took part in the Kosenske decision. Thus, the ruling in Kosenske could be a sign of things to come for California hospitals and physicians.
As noted above, one of the allegations made by Kosenske was that the compensation paid by the hospital under the arrangement was not consistent with fair market value, as required by the Stark law. The term “fair market value” is defined by Stark law regulations to mean the “compensation that would be included in a service arrangement as the result of bona fide bargaining between well-informed parties who are not otherwise in a position to generate business for the other party … at the time of the arrangement.” See 42 C.F.R. § 351. In reversing the district court’s ruling that the arms-length negotiation between the medical group and hospital was sufficient evidence to establish that the parties engaged in a fair market value exchange, the Court held that, as a legal matter, a negotiated agreement does not “by definition reflect fair market value.” The ruling in Kosenske, therefore, cautions hospitals and physicians against the practice of relying solely upon the fact that there has been a good faith negotiation between the parties to establish the fair market value of an arrangement’s compensation. The ruling suggests that hospitals and physicians should instead seek additional independent means of verifying the fair market value of an arrangement’s compensation, such as by obtaining an independent appraisal.
A potentially even greater consequence of Kosenske is that hospitals and physicians may also be required to enter into a Stark compliant written agreement whenever a hospital provides the use of space, equipment and staffing to a physician, regardless of whether the physician is paid by the hospital for his or her services, and further that physicians may be required to compensate the hospital for the use of such items in order to comply with the Stark law’s fair market value requirement. Despite the Court’s ruling, there is a significant question as to whether such services constitute remuneration to physicians at all, given the fact that both the hospital and physician bill Medicare (and are paid for) their respective technical and professional fees. Indeed, the facility fee paid by Medicare to hospitals includes compensation for the space, equipment and staffing utilized by physicians, and physicians could not provide professional services to hospital patients without the use of such items. However, the Court in Kosenske expressly rejected an argument by the defendants’ that both the hospital and physicians were appropriately compensated by Medicare for their services.
While the physicians in Kosenske were hospital-based anesthesiologists, the ruling in Kosenske does not appear to be limited to hospital-based physicians. Any arrangement between a hospital and physician (or physician group) in which the hospital provides the physician with free space, equipment, or staffing could be at risk of violating the Stark law if there is no written agreement. While it appears unlikely that the Court’s analysis would be extended to a standard inpatient setting, the Court’s decision does not make this distinction clear. Interestingly, hospital-based physicians (like those in Kosenske) may actually be less likely to be affected by the ruling in Kosenske than other physicians because many hospital-based physicians (such as radiologists, pathologists and anesthesiologists) do not make Stark-covered referrals to hospitals, and therefore do not need to have Stark compliant agreements.
Because the provision of free services may be viewed as remuneration under the Stark law which must be consistent with fair market value, parties should (at the time an arrangement is entered into) document any independent evidence to support an arrangement’s fair market value, such as an industry survey or an independent valuation. Nevertheless, the possibility exists that the value of the services provided by a hospital to a physician under an arrangement could be found to exceed the value of services provided by the physician to the hospital. In such a case, the physician could arguably, under Kosenske, be required to pay the hospital for the use of these services.
If you have additional questions regarding the Kosenske case, or how it is likely to affect your business arrangements, please feel free to contact David Henninger at (310) 551-8177 or Karl Schmitz at (310) 551-8134 in the Los Angeles office, or Stephen Phillips at (415) 875-8508 in the San Francisco office.