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Financial Support Arrangements Between Academic Medical Centers And Faculty Practice Plans


Mark R. Fitzgerald
March 2003

I. INTRODUCTION

Academic medical centers (AMCs) present some of the most difficult problems for lawyers seeking to structure arrangements that will accomplish the AMC’s need for integration without running afoul of the federal self-referral laws. Typically, an AMC is organized with multiple legal entities that jointly fulfill the AMC’s mission of medical research, education, and healthcare services to the community. Most often, the faculty practice plan assumes a significant portion of the responsibility for fulfilling all three of these responsibilities on behalf of the AMC. Consequently, other components of the AMC, most often the hospital and the medical school, need to support the faculty practice plan financially. Often, however, the ability of the constituent entities to support each other is impeded by the federal self-referral laws. Institutions are compelled to structure support arrangements as purchases of services from the faculty practice plan, rather than simply provide outright financial support.

This article describes one set of common circumstances where an AMC may be more straightforward in its support arrangements with an affiliated faculty practice plan. It analyzes the application of the Stark law and the anti-kickback statute to support arrangements between a teaching hospital and a tax-exempt faculty practice plan that employs its medical staff. The article also explores how such an arrangement should withstand scrutiny under the Stark and anti-kickback laws.

II. THE SUPPORT ARRANGEMENT

For purposes of this article, an assumption is made that the physician faculty is employed by the faculty practice plan, which is organized as a non-profit tax-exempt organization. This scenario is a common structure for many AMCs. It is also assumed that the physicians are paid solely as employees and that their compensation is set consistent with fair market value using market surveys, and does not vary based on referrals to any provider. The physicians’ compensation does vary, however, based on personal productivity. In addition, the compensation plan includes a discretionary bonus component that is designed to reward physicians based on subjective criteria, such as academic achievement and teamwork.

It is further assumed that the faculty practice plan operates at a deficit, and needs support from its affiliated teaching hospital. The hospital proposes an annual budgeted transfer of $1,000,000 to support the faculty practice plan.

III. RELEVANT LAWS

The primary concerns raised by this support arrangement arise under the Stark law[1] and the anti-kickback statute.[2] The Stark law and the anti-kickback statute are similar in that they both apply to financial relationships between providers and physicians. Also, both laws are designed to prohibit physicians from profiting from their ability to direct referrals of Medicare and Medicaid business. There are, however, several significant differences between the laws.

The anti-kickback statute is a criminal statute that requires the government to prove, beyond a reasonable doubt, that the defendant acted with the deliberate intent to violate the law. In contrast, the Stark law is a civil statute that is intended as a “bright line” prohibition on physician self-referral.[3] The intent of the parties is irrelevant. If a referral falls within the Stark law, it violates the law unless it qualifies for one or more of the available Stark exceptions.

The two laws are separate and distinct, and neither the Congress, the Department of Health and Human Services (DHHS) Office of Inspector General (OIG), which is responsible for interpreting the anti-kickback statute, nor the Centers for Medicare and Medicare Services (CMS), which is responsible for interpreting the Stark law, has chosen to integrate the laws in any substantial way. Qualification for a safe harbor under the anti-kickback statute does not, as a legal matter, qualify an arrangement for protection under the Stark law. Similarly, qualification for a Stark law exception does not, as a legal matter, protect the arrangement under the anti-kickback statute.

As a practical matter, however, CMS has worked closely with the OIG in developing the regulations known as the “Stark II Final Rule,”[4] (Final Rule) and it appears unlikely that the government would challenge an arrangement under the anti-kickback statute if it clearly falls within a Stark exception. This point seems particularly true in the case of academic medical centers. In promulgating the Final Rule, CMS noted that faculty practice plans have “unique circumstances” warranting special treatment, including the “symbiotic relationship among faculty, medical centers, and teaching institutions, and the educational and research roles of faculty in these settings.”[5]

With these observations in mind, the Stark law and the anti-kickback statute are reviewed below.

A. The Stark Law

The Stark law prohibits a physician who has a financial relationship with an entity from referring a Medicare or Medicaid patient to the entity for the provision of certain designated health services, unless an exception applies. Both inpatient and outpatient hospital services are included on the list of designated health services subject to the Stark law proscriptions. Further, the Stark II Final Rule clarifies that a financial relationship can be direct or indirect. In the AMC setting, physicians employed by a faculty practice plan clearly have a direct financial relationship with their employer that must qualify for an exception to the Stark law.[6] This article, however, focuses on the potential indirect financial relationship that may exist between a faculty physician and the affiliated teaching hospital.

Under the Final Rule, an indirect compensation arrangement exists between a faculty practice plan physician and the teaching hospital only if: (1) there is an unbroken chain of financial relationships from the teaching hospital to the referring physician; (2) the aggregate compensation received by the referring physician from the faculty practice plan varies with, or otherwise reflects, the volume or value of referrals or other business generated by the referring physician for the teaching hospital; and (3) the teaching hospital has actual knowledge of, or acts in reckless disregard or deliberate ignorance of, the fact that the referring physician received aggregate compensation that varies with, or otherwise reflects, the volume or value of referrals or other business generated by the referring physician for the teaching hospital.[7]

The government likely would view the support arrangement mentioned above (as well as other agreements between the teaching hospital and the faculty practice plan) as establishing the first requirement of the definition of an indirect compensation arrangement. A transfer of remuneration from the teaching hospital to the faculty practice plan, coupled with the faculty practice plan’s employment of physicians who refer to the teaching hospital, would create an unbroken chain of financial relationships between the parties.

The second criterion requires that a physician’s aggregate compensation from the faculty practice plan vary with or otherwise reflect the volume or value of referrals or other business generated by the referring physician for the teaching hospital. The financial relationship between the faculty practice plan and its employed physicians would not appear to create this relationship. Each physician’s compensation is determined using independent compensation surveys and the bonus compensation does not vary based on referrals. Nevertheless, the government could conceivably argue that the payments from the teaching hospital to the faculty practice plan pursuant to the support arrangement increase the amount of compensation that the faculty practice plan is able to pay to its physicians in the aggregate, thereby causing all of the physicians’ compensation to reflect, at least indirectly, the value of their referrals to the teaching hospital.

Even if the government were to find that an indirect compensation arrangement exists, there are two exceptions available to protect referrals from faculty practice plan physicians to the teaching hospital; they are the exception for AMCs and the exception for indirect compensation arrangements.

B. The AMC Exception

The AMC exception contained in the Stark II Final Rule should be the safe harbor of choice for AMC support arrangements. Unfortunately, the restrictions imposed on faculty practice plan compensation arrangements are so narrow that most AMC support arrangements will not qualify for the exception. For example, if a faculty practice plan’s compensation plan for its employed physicians includes a discretionary component—such as a bonus for academic achievement or a bonus tied to clinical section performance—any support that the faculty practice plan receives from its affiliated teaching hospital will not qualify for the AMC exception.

Fortunately, the Final Rule also includes a new exception for certain indirect compensation arrangements.[8] The wording of the definition of an indirect compensation arrangement and its corresponding exception are circular and confusing, but for purposes of analyzing the support arrangement, it is safest to focus on the terms of the exception. Under the exception, an indirect compensation arrangement will not trigger the referral prohibition if the compensation received by the referring physician is consistent with the fair market value of his or her services and does not take into account the volume or value of any referrals or other business generated by the referring physician for the entity furnishing designated health services (i.e., the teaching hospital). In other words, the indirect compensation arrangement exception permits a faculty practice plan physician to refer patients to the affiliated teaching hospital, even where the hospital provides financial support to the faculty practice plan, so long as the faculty practice plan compensates the physician at a level that is consistent with fair market value and in a manner that does not vary based on the volume or value of his or her referrals to the hospital. The hypothetical faculty practice plan would meet this test.

For physicians who are retained as independent contractors, the indirect compensation arrangement exception also requires that the compensation arrangement be set forth in a written agreement; however, written agreements are not required for employed physicians so long as the employment is for identifiable services and is commercially reasonable even if no referrals are made to the employer. Finally, the exception also requires that the compensation arrangement with the physician not violate the anti-kickback statute.[9]

C. The Anti-Kickback Statute

The more difficult issue raised by the hypothetical support arrangement arises under the anti-kickback statute.

The anti-kickback statute is a criminal provision that potentially applies to any individual or organization that makes referrals for covered healthcare items and services, or is in a position to influence the flow of business reimbursable under federal healthcare programs. The law prohibits the knowing and willful offer, payment, solicitation, or receipt of any remuneration in any form as an inducement or reward for either the referral of patients or the arranging for reimbursable services.[10] A violation of the statute is a felony. In addition, the DHHS OIG—the principal enforcement agency for Medicare fraud and abuse—may exclude a person or entity from participating in any federal healthcare program for violating the statute.[11] The OIG also has the authority to impose civil money penalties for violations of the anti-kickback statute.[12] The law is very broadly worded, and has been interpreted to apply to any arrangement, one purpose of which is to induce referrals.[13] It is not necessary for the government to prove that there was an actual agreement to refer program-related business in exchange for payment in order to prove a violation of the statute.

The difficult question for AMCs seeking to support their faculty practice plans is whether the support arrangement would be construed as an “inducement” for the faculty physicians to refer to the affiliated teaching hospital. There is no safe harbor under the anti-kickback statute that would protect the hypothetical support arrangement. Thus, the support arrangement needs to be analyzed under a facts and circumstances test and in reliance on relevant case law.

Clearly, the OIG views faculty practice plans as being in a position to influence referrals to a related hospital. In two fairly recent advisory opinions, the OIG addressed proposed donations by hospitals to their affiliated tax-exempt faculty practice plans.[14] In each ruling, the OIG concluded:

The Proposed Donation is as straightforward as it is problematic: a substantial one-time donation by a hospital to a major referral source. (Since Entity Y [the tax-exempt faculty practice plan] employs, and is affiliated with, physicians who make referrals to Hospital X, Entity Y is a referral source for Hospital X).[15]

As an intent-based statute, however, whether any particular arrangement violates the anti-kickback law depends on the facts and circumstances. In particular, proof of a violation depends on whether the conduct is knowing and willful and whether the remuneration offered or realized rises to the level of an inducement.

1. The Intent Requirement

The courts have consistently construed the “knowing” and “willful” elements of the anti-kickback statute to require a showing of specific intent to violate the law. One of the leading cases is Hanlester Network v. Shalala.[16] In Hanlester, the Ninth Circuit “construe[d] ‘knowingly and willfully’ as requiring appellants to (1) know that the anti-kickback statute prohibits offering or paying remuneration to induce referrals, and (2) engage in prohibited conduct with the specific intent to disobey the law.”[17] Similarly, in United States v. Jain,[18] the Eighth Circuit rejected the government’s position that “willfully” requires proof only of consciousness of the act, not consciousness that the act was unlawful,[19] and held that the government must meet a heightened mens rea (i.e., criminal intent) burden to establish a violation of the statute.[20] Also, in United States v. McClatchey,[21] the Tenth Circuit ruled that for a defendant’s conduct to constitute willfulness, it must be done “voluntarily and purposely and with the specific intent to do something the law forbids, that is, with the bad purpose either to disobey or disregard the law.”[22] Finally, in Bryan v. United States, the Supreme Court noted that the element of willful intent in a criminal statute requires a finding “that the defendant acted with an evil meaning mind, that is to say, that he acted with knowledge that his conduct was unlawful.”[23]

2. The “Inducement” Requirement

For an arrangement to violate the anti-kickback statute, absent proof of an actual agreement to pay for referrals or for recommending services, the government must also show that the remuneration offered constituted an “inducement” for referrals. The leading federal court case interpreting the inducement requirement under the anti-kickback statute has defined inducement somewhat narrowly, if hardly precisely. In Hanlester, the court noted that “the term ‘induce’ is not defined simply by reference to influence or encouragement.”[24] The court held that profit distributions from laboratory partnerships to physicians did not constitute an inducement for the physicians to refer laboratory tests to the partnerships where dividends were paid to limited partners based on ownership interests, and not on the volume of referrals. “[T]he fact that a large number of referrals resulted in the potential for a high return on investment, or that the practical effect of low referral rates was failure for the labs is insufficient to prove that appellants offered or paid remuneration to ‘induce’ referrals.”[25] Thus, Hanlester suggests that, for a payment to constitute a prohibited inducement under the anti-kickback statute, even though proof of an agreement is not required, there must be proof of a clear, conditional relationship between the payment and the desired conduct in order to prove that payments were made with the intent and expectation of inducing referrals.

Further, in order to constitute an inducement, the remuneration must be “sufficient to interfere with the [recipient’s] judgment based on legitimate considerations such as cost, quality, and necessity of the services.”[26] The “inducement” requirement has been described as requiring facts showing the use of “economic motivation in an effort to influence . . . referrals.”[27] Significantly, defendants “cannot be convicted merely because they hoped or expected or believed that referrals may ensue from remuneration that was designed wholly for other purposes.”[28]

In summary, the case law identifies several factors for analyzing whether an arrangement raises a significant risk under the anti-kickback statute.

First, the anti-kickback statute does not require proof of an agreement to refer in exchange for a payment.

Second, the mere opportunity to profit from an arrangement is not sufficient to constitute inducement.

Third, the remuneration offered or paid must be more than an encouragement to a particular course of conduct. There has to be an intent or expectation to actually exercise influence over the referral decision, and the remuneration must be sufficient to interfere with the party’s judgment or actions.

With this background, it is possible to identify several arguments that would exist in favor of a financial support arrangement between a faculty practice plan and an affiliated teaching hospital:

(1) Absence of unlawful intent. The purpose of the support arrangement would be to further the teaching hospital’s and faculty practice plan’s common mission of promoting research, teaching, and community healthcare service. Indeed, CMS has recognized that faculty practice plans present “unique circumstances” in the context of physician self-referral issues because of their inter-dependent relationships and common missions with teaching hospitals.[29] The OIG reached a similar conclusion in a recent advisory opinion, when it approved a proposed grant from a teaching hospital to an endowment that would support the hospital’s affiliated teaching physicians. In doing so, the OIG noted that the grant was consistent with the requestors' shared public and charitable mission, and commented that “relationships among components of academic medical centers are often organizationally and financially complex.”[30]

Moreover, because the faculty practice plan is a tax-exempt corporation, it would not pay dividends or other profit distributions to the physicians. Instead, the physicians’ compensation would solely come through their employment relationship. The faculty practice plan’s compensation plan would preclude financial incentives for referrals.

Finally, the teaching hospital probably would have little incentive to pay for referrals from the faculty practice plan. In many cases, the conditions imposed for staff privileges and faculty appointments at teaching hospitals already ensure that the hospital will receive the referrals of its affiliated faculty practice plan physicians. This factor should help rebut any inference that the support payment is being made to induce referrals, rather than to further the common charitable mission of the faculty practice plan and teaching hospital.

(2) Absence of an inducement. So long as the compensation plan adopted by the faculty practice plan does not cause faculty physicians to receive compensation that varies based on referrals, the support arrangement should not constitute an “inducement” under the anti-kickback statute. For a payment of remuneration to constitute an inducement for referrals, there must be a correlation between the payment and the desired conduct. This requirement was clearly demonstrated in Hanlester, in which the Ninth Circuit held that partnership profit distributions to physicians did not constitute an inducement for the physicians to refer laboratory tests to the partnership, where dividends were paid to limited partners based on each individual’s ownership share of profits, and not on the volume of their referrals.

The leading appellate court decisions upholding convictions under the anti-kickback statute further evidence the need for a clear correlation between payments and referrals. In United States v. Greber,[31] the seminal case under the anti-kickback statute, the defendant operated a diagnostic company that paid a percentage of each diagnostic test fee that it received from Medicare to the referring physician. In United States v. Kats,[32] the defendant was a partial owner of a medical clinic that referred tests to a medical laboratory and in return received 50% of the lab fees paid by Medicare for those tests. In United States v. Bay State Ambulance and Hospital Rental Service, Inc.,[33] Bay State and its president were convicted based on having given two vehicles to a co-defendant, John Felci, in exchange for Felci’s assistance in steering an ambulance contract to Bay State. In United States v. Jain,[34] the defendant psychologist was convicted based on his receipt of monthly payments of $1,000 from a hospital, which were ostensibly for marketing services. There was no documentation of any marketing services having been provided, however, and the hospital administrator testified that Dr. Jain demanded increased payments, threatened to refer patients elsewhere if the payments were not increased, and at one time showed the administrator a letter from a competing hospital offering to pay $2,500 for each referral. In United States v. Starks,[35] the defendant was convicted of making cash payments to community health aides on a per-referral basis.

Finally, in United States v. McClatchey[36] and United States v. LaHue,[37] two related cases that were closely watched by the healthcare industry, the chief executive officer (Dan Anderson) and the chief operating officer (Dennis McClatchey) of Baptist Medical Center in Kansas City were convicted, along with two physicians (Robert and Ronald LaHue), based on their involvement in contracts under which the physicians were engaged to serve as co-medical directors for payments of $75,000 each per year. The evidence showed that: (1) under similar arrangements in previous years, the physicians had reported only two hours of work per week at the Medical Center; (2) the staff members at the Medical Center did not want the services of the physicians; (3) McClatchey understood how important the physicians’ referrals were to the Hospital’s financial health; and (4) Anderson was “very knowledgeable” of these facts.[38] In all of these cases, the government established that payments were made as an “inducement” for referrals by proving facts that demonstrated a clear relationship between a series of payments and a stream of referrals.

In contrast to these cases, the faculty practice plan’s compensation arrangements would not be conditioned in any way on referrals from the physicians to the hospital. Therefore, the hospital could not affect a faculty physician’s compensation through payments made pursuant to the support arrangement.

3. The AMC as a Single Integrated Entity

A third argument that should support the permissibility of a support arrangement is the theory that the AMC constitutes a single integrated entity. If the various legal entities comprising an AMC merged into a single corporation, monetary transfers between the teaching hospital and the faculty practice plan would not implicate the anti-kickback statute. Under a single entity structure, the faculty practice plan would no longer be a separate entity capable of making or influencing referrals to the hospital. Further, compensation payable to faculty practice plan physicians would be protected under the employment exception to the anti-kickback statute and the employee safe harbor because the single legal entity would be the employer of the faculty physicians. Support arrangements between teaching hospitals and faculty practice plans implicate the anti-kickback statute only because the AMCs have not formally integrated into a single legal entity. Substantively, however, the entities comprising an AMC often have extensive integration of clinical, administrative, and financial operations.

Unfortunately, the OIG elected in November 1999 not to create a safe harbor for integrated delivery systems and arrangements between wholly-owned entities.[39] Nevertheless, in Advisory Opinion 02-11, the OIG justified its approval of a teaching hospital's grant to support its affiliated faculty practice plans by noting that the proposed grant “would be between components of an academic medical center that historically have shared both a common heritage as public institutions and a common mission in training physicians for, and providing quality medical care to, the people of [the state].”[40] At least in the circumstances presented in that ruling request, the OIG’s conclusion implies that the hospital and the faculty practice plans were sufficiently related so as to be treated as a single entity.

Finally, at least in many cases, a support arrangement between a teaching hospital and its affiliated faculty practice plan should not be considered problematic by the OIG. The arrangement would not decrease access to, or quality of, healthcare services and is unlikely to have any affect on patient freedom of choice or competition among healthcare providers. In most cases, patients already identify the teaching hospital and the faculty physician as being part of the same health system. Thus, when they choose to see a faculty physician, they are also choosing to receive services from the teaching hospital with which the physician is affiliated.

IV. CONCLUSION

In summary, while any analysis of a financial relationship between a provider and a referral source is fact specific, strong arguments exist in favor of the financial support arrangements between many teaching hospitals and their affiliated faculty practice plans. A straightforward arrangement recognizes the integrated relationship and common mission of these organizations, while eliminating the numerous service agreements often used to rationalize the support provided by a teaching hospital to an affiliated faculty practice plan. Of course, participants in these arrangements should consider the appropriateness of seeking an advisory opinion from the OIG.

ENDNOTES

  1. 42 U.S.C. § 1395nn.

  2. 42 U.S.C. § 1320a-7b.

  3. In practice, application of the Stark law has proven unwieldy because of its numerous and complicated exceptions.

  4. 66 Fed. Reg. 855-965 (Jan. 4, 2001).

  5. Id. at 916.

  6. The most likely exceptions are the employment exception and the in-office ancillary services/group practice exception.

  7. 42 C.F.R. § 411.354(c)(2).

  8. 42 C.F.R. § 411.357(p); 66 Fed. Reg. at 962.

  9. The author views this requirement as largely redundant because any arrangement that meets the requirements of the indirect compensation exception is unlikely to violate the anti-kickback statute.

  10. 42 U.S.C. § 1320a-7b.

  11. 42 U.S.C. § 1320a-7(b)(7).

  12. 42 U.S.C. § 1320a-7a(7); 42 C.F.R. § 1003.102.

  13. United States v. LaHue, 254 F.3d 900 (10th Cir. 2001); United States v. Davis, 132 F.2d 1092, 1094 (5th Cir. 1998); United States v. Katz, 871 F.2d 105, 108 (9th Cir. 1989); and United States v. Greber, 760 F.2d 71, 71-72 (3d Cir. 1985).

  14. See Adv. Op. 02-11 (Aug. 12, 2002) and Adv. Op. 00-6 (Sept. 29, 2000). Available at http://oig.hhs.gov/fraud/advisoryopinions/opinions.html. The OIG has established the advisory opinion process to enable parties to obtain advice from the OIG on the application of the anti-kickback statute to specific factual situations. 42 C.F.R. § 1008.1-.59.

  15. Adv. Op. 00-6 (Sept. 29, 2000).

  16. 51 F.3d 1390 (9th Cir. 1995).

  17. 51 F.3d 1390, 1400 (9th Cir. 1995) (emphasis added).

  18. 93 F.3d 436 (8th Cir. 1996).

  19. Id. at 440.

  20. Id.

  21. 217 F.3d 823 (10th Cir. 2000).

  22. Id. at 829.

  23. Bryan v. United States, 524 U.S. 184 at 193 (1998) (emphasis added).

  24. 51 F.3d at 1398 (emphasis added).

  25. Id. (emphasis added).

  26. The Hanlester Network, Decision No. 1275, at 57 (HHS Dep’t App. Bd., App. Div., Sept. 18, 1991).

  27. The Hanlester Network, Decision No. 1347 at 12, note 11 (HHS Dep’t App. Bd., App. Div., July 24, 1992).

  28. McClatchey, 217 F.3d at 834.

  29. 66 Fed. Reg. at 916.

  30. Adv. Op. 02-11 (Aug. 12, 2002).

  31. 760 F.2d 68 (3d Cir. 1985).

  32. 871 F.2d 105 (9th Cir. 1989).

  33. 874 F.2d 20 (1st Cir. 1989).

  34. 93 F.3d 436 (8th Cir. 1996).

  35. 157 F.3d 833 (11th Cir. 1998).

  36. 217 F.3d 823 (10th Cir. 2000).

  37. 261 F.3d 993 (10th Cir. 2001).

  38. McClatchey, 217 F.3d at 829; LaHue, 261 F.3d at 1006.

  39. 64 Fed. Reg. 63518 at 63520.

  40. Adv. Op. 02-11 (Aug. 12, 2002).



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