On March 15, 2017, the US District Court for the Western District of Pennsylvania, ruling on cross motions for summary judgment in U.S. ex rel. Tullio Emanuele v. Medicor Associates Inc. et al., provided the first interpretation by a federal court of the recently revised writing requirement that is an essential element of several important exceptions to the federal physician self-referral statute and its implementing regulations (collectively, the Stark Law), including the personal service arrangements exception (Personal Services Exception) and the fair market value compensation exception (FMV Exception).

Background

Medicor Associates Inc. (Medicor) historically served as the exclusive provider of cardiology services for Hamot Medical Center of the City of Erie (Hamot). In the early and mid-2000s, the parties expanded their relationship, entering into a series of medical directorship arrangements. The written agreements memorializing these arrangements expired on December 31, 2006. They were not formally renewed or extended until November 29, 2007, when the parties signed written addenda, each providing for a retroactive effective date of January 1, 2007. This pattern, whereby the parties' written agreements expired, but were subsequently and retroactively reinstated through the use of addenda, repeated itself on multiple occasions.

In 2010, Tullio Emanuele, M.D. (Relator), a cardiologist who formerly worked for Medicor, filed a qui tam complaint alleging that the contractual arrangements between Medicor and Hamot gave rise to unexcepted financial relationships that violated the Stark Law and (derivatively) the federal civil False Claims Act (FCA). Defendants countered that their arrangements were protected by the Personal Services and FMV Exceptions. The government declined to intervene in the case, but the Relator pressed forward on his own.

The March 15, 2017, summary judgment ruling focuses on the so-called writing requirement set forth in the Personal Services and FMV Exceptions. Specifically, the court addresses whether that requirement was satisfied during the periods of time in which the medical directorship agreements were allowed to lapse, particularly given recent guidance by the Centers for Medicare & Medicaid Services (CMS) regarding the writing requirement.

Discussion

The writing requirement is not new. What is new, however, is that in a rule effective January 1, 2016 (the Final Rule), CMS took the position that the “writing” at issue may take the form of a collection of documents, as opposed to a single, formal contract. Just as important, the agency also took the position that this always had been CMS's interpretation of the writing requirement. Consistent with this "clarification," the agency replaced the word “agreement” with the word “arrangement” in virtually every exception in which the word appeared. It also offered the following, non-exhaustive list of documents that might—either individually or in combination—evidence a written arrangement between the parties at issue:

  • Board meeting minutes or other documents authorizing payments for specified services
  • Hard copy and electronic communications between the parties
  • Fee schedules for specified services
  • Check requests or invoices identifying items or services provided, relevant dates and/or rate of compensation
  • Time sheets documenting services performed
  • Call coverage schedules or similar documents providing dates of services to be provided
  • Accounts payable or receivable records documenting the date and rate of payment and the reason for payment
  • Checks issued for items, services or rent

CMS cautioned, however, that the relevant writing or writings and the arrangement at issue must be contemporaneous in order to satisfy the writing requirement. At bottom, CMS noted, the inquiry is “whether the contemporaneous writings would permit a reasonable person to verify that the arrangement complied with an applicable exception at the time a referral is made.” CMS also cautioned that the arrangement must independently satisfy the related, but separate, signature requirement.

Court decision: The relator’s motion

The district court began its analysis by cautioning that the Stark Law’s “writing requirement is not a mere technicality” and that “[c]ompliance with the statutory requirements of the exception must be demonstrated at the time of each physician referral at issue.” Against this backdrop, the district court framed its inquiry as follows: The “critical question is whether sufficient documentation ‘evidencing the course of conduct of the parties’ exists for the periods of time in between the expiration of the agreements and the execution of the addenda.” Consistent with the Final Rule, the court noted that an arrangement does not need to be reduced to a single "formal" written contract. Rather, invoices, checks and prior written contracts might suffice in “evidencing the course of conduct of the parties.”

With respect to the majority of the medical directorship arrangements, the court concluded that the parties’ original agreements, coupled with the invoices and checks exchanged during periods of time when the contracts were expired, were sufficient to satisfy the writing requirement. With respect to two of the medical directorships, however, the court concluded that the various emails and memoranda, as well as unsigned draft agreement, were not sufficient to satisfy the writing requirement. The court acknowledged that the kinds of documents presented by defendants “may generally be considered in determining whether the writing requirement is satisfied[.]” However, the court hastened to add that it “is essential that [such] documents outline, at an absolute minimum, [1] identifiable services, [2] a timeframe, and [3] a rate of compensation.” The court found that none of the documents cited by defendants identified “those critical terms.” (The court further noted that none of the documents presented by the defendants contained the signatures of the parties.) The court also rejected defendants' efforts to use the Stark Law exception for isolated transactions. Although Hamot had made a single payment for many of the services performed under the two arrangements at issue, the court ruled that this exception is intended for uniquely singular transactions, rather than "discrete payments issued as part of an ongoing financial relationship.”

Court decision: The defendants' motion

The court also considered, but ultimately denied, defendants’ motion for summary judgment on the issues of scienter and materiality under the FCA. With respect to scienter, the court found ample evidence in the record that the parties appreciated the need to comply with the Stark Law (having received legal and consulting advice to that effect over the years) and made their various addenda retroactive in an effort to satisfy the writing requirement. The court further held that “based upon the record as a whole, a reasonable jury could conclude that Hamot and Medicor continued to submit claims for payment despite knowing that the underlying arrangements may not have been properly documented for purposes of Stark Law compliance.”

With respect to materiality, the court relied on the standard recently articulated by the Supreme Court in United States ex rel. Escobar v. Universal Health Servs., Inc. (Escobar):

In sum, when evaluating materiality under the [FCA], the Government’s decision to expressly identify a provision as a condition of payment is relevant, but not automatically dispositive. Likewise, proof of materiality can include, but is not necessarily limited to, evidence that the defendant knows that the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement. Conversely, if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. Or, if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material.

As an initial matter, the court in Emanuele v. Medicor Associates noted, the Stark Law “expressly prohibits Medicare from paying claims that do not satisfy each of its requirements, including every element of any applicable exception.” The exceptions relevant to the court's analysis expressly require that the financial arrangements at issue must be set forth in writing. This “writing requirement, ” the court stressed, “is not ‘minor or insubstantial.’” Citing Kosenske, the court stated that the Stark Law “insist[s] on the transparency and verifiability that comes from an express agreement reduced to writing and signed by the parties which specifies all of the services to be provided by the physician and all of the remuneration to be received for those services.” U.S. ex rel. Kosenske v. Carlisle HMA, Inc., 554 F.3d 88, 96 (3d Cir. 2009). Thus, the court ruled, the writing requirement was material to the lawful payment of claims.