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Sills Cummis Radin Tischman Epstein by EveryAvenue


January 2003            Hospital Law Issues            Volume III No. 7

     Hospital Pays $6 Million to Settle Alleged
         Stark Law Violations Relating to
          Below Fair Market Value Lease

      hospital agreed to pay the      nel, equipment and supplies, but
      United States $6 million to     the rent continued to remain the
      resolve allegations that it     same.
violated the Stark law by billing
Medicare for laboratory services          The Group’s physicians
referred by physicians with whom      referred patients to the hospital
the hospital had a below fair         for various services, the bulk of
market value lease.                   which were clinical laboratory
    This case is significant
because it may demonstrate a              The Administrator of the
new trend of increased federal        cancer center repeatedly com-
enforcement of the Stark law.         plained to the hospital’s manage-
Moreover, this case highlights the    ment about compliance issues in
importance of hospitals ensuring,     connection the arrangement
                                      between the Group and the
both initially and on an ongoing
basis, that their arrangements        hospital. When the hospital’s
                                      management refused to take any
with physicians are fair market
value.                                corrective action, the Admini-        CUMMIS
                                      strator filed a “qui tam” (whistle-
    Set forth below is: (1) a brief   blower) lawsuit against the
summary of the facts underlying
these allegations; and (2) an
                                      hospital under the False Claims
                                      Act, alleging that this arrange-      RADIN
explanation of the significance of    ment violated the Stark and Anti-
this matter to hospitals, along       kickback laws, and as a result,
with practical recommendations.       Medicare was improperly billed
                                      for various services.
   AND SETTLEMENT                         The United States intervened
    The hospital had a lease with
                                      and negotiated a settlement of $6
                                      million with the hospital. This
a group of oncologists (“Group”)
                                      amount was based largely on the
for 400 square feet in a hospital-
                                      fees paid by Medicare to the
owned building at $19,000 per
year. After the Group moved into
                                      hospital for clinical laboratory
                                      services referred by the Group’s
                                                                            & GROSS
larger space in the hospital's new
                                      physicians. The Administrator will
cancer center, and the hospital
                                      receive 15-25% of the settle-
began providing personnel,
equipment and supplies to the
Group, the rent remained the                                                ATTORNEYS AT LAW
                                          A related settlement of
same. As the Group grew over          $525,000 was negotiated with the
time, the hospital provided the       Group itself for “upcoding” its
Group with more space, person-        claims to Medicare. The Group
used the site-of-service modifier of “-11" for             In this regard, we strongly recommend that
office-based services in connection with              hospitals conduct reviews (either internally or
medical services provided at its office at the        using qualified third-party consultants) of the
cancer center. Medicare claimed, however,             fair market value and commercial reasonable-
that the appropriate modifier should have been        ness of all of their leasing and compensation
“-21" for outpatient services because, in light       arrangements with physicians. The results of
of all of the services provided to the Group by       such reviews should be well documented.
the hospital at below fair market value, the
Group was not burdened with the normal                    In order for such reviews to be accurate, it
overhead expenses of a medical office.                is essential that all of the terms of the
                                                      arrangements be considered. For instance,
2. SIGNIFICANCE AND                                   distinctions must be made between leases for
   PRACTICAL RECOMMENDATIONS                          bare office space, leases which include furnish-
    This matter is significant to hospitals for       ings, equipment, utilities and/or janitorial
several reasons. First, it may be indicative of       services, and leases which include personnel,
a new trend of increased federal enforcement          such as receptionists, clerks and/or nurses. In
of the Stark law against hospitals, physicians        this case, the government believed that the
and other healthcare providers. Now that the          Group had a “sweetheart” deal due to the
Stark regulations have been finalized, CMS and        many services being provided at minimal rent.
DOJ have increased their investigative and                Moreover, arrangements with physicians
prosecutorial efforts of Stark violations. There      should be monitored on an ongoing basis to
have been several other reported Stark                ensure that the arrangements, as they may
prosecutions, and this case represents the            change over time, remain consistent with fair
largest settlement thus far.                          market value. For instance, if the level of
    Second, this case demonstrates that the           services being provided or the amount of space
Stark law may become the preferred basis of           being leased increases (as happened in this
regulatory enforcement of Medicare program            case), then the rental amount should be re-
referral improprieties. The “qui tam” plaintiff in    assessed and increased in order to be
this case alleged violations of both the Anti-        consistent with fair market value.
Kickback and Stark laws.             Although the         Likewise, annual reviews should be
allegations contain substantial basis for             undertaken of arrangements in which hospitals
enforcement under the Anti-Kickback law, the          pay physicians for the provision of admini-
DOJ focused on the Stark law violations               strative and/or clinical services to ensure that
because of its strict liability feature, as opposed   the services being contracted for are being
to the Anti-Kickback violations, which require        performed by the physicians, and that the
proof of improper intent as well as a                 compensation being paid to physicians is
heightened criminal burden of proof.                  consistent with fair market value.
    Third, this case demonstrates to hospitals                              * * *
the importance, as part of their compliance           We send these Updates to our clients and friends
efforts, to ensure that arrangements with             to provide information on recent developments in
physicians are fair market value and otherwise        the law. The Updates, however, should not be
satisfy an exception under the Stark law (e.g.,       relied on for legal advice in any particular matter.
be in writing, have a term of at least one year,      If you would like additional information, please
be commercially reasonable, etc.).                    contact Gary W. Herschman at 973.643.5783 or

                                                         SILLS CUMMIS RADIN TISCHMAN EPSTEIN & GROSS
                                                                                   ONE RIVERFRONT PLAZA
                                                                                  NEWARK, NJ 07102-5400
                                                                         973.643.7000 ~ FAX: 973.643.6500
                                                               NEW JERSEY • NEW YORK • SAN FRANCISCO

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