A Pennsylvania federal appeals court case that came out earlier this year underscores the importance to hospitals of maintaining a sound contract management system. The case, United States ex rel. Kosenske v. Carlisle HMA, Inc. et al., 554 F.3d 88, 94 (3d Cir. 2009), was a whistleblower suit brought by Dr. Ted Kosenske, an anesthesiologist who practiced with a group called Blue Mountain Anesthesia Associates, P.C. Dr. Kosenske claimed that an arrangement between the group and their hospital, Carlisle Hospital in Carlisle, Pennsylvania, violated the federal Stark law. The lower court granted summary judgment in favor of the hospital, finding that while the arrangement did implicate the Stark law, it did not violate Stark because the personal service exception under Stark had been met. The appeals court reversed that decision, finding that the exception had not been satisfied. Because there are relatively few published opinions interpreting Stark, this case is worth paying attention to.

The relevant facts of Kosenske are as follows. In 1992, Dr. Kosenske’s anesthesia group entered into a traditional exclusive contract with Carlisle Hospital pursuant to which the group would provide 24/7 anesthesia coverage at the hospital’s main in-patient facility. At the time the contract was entered into, the hospital was not offering pain management services. Recognizing that the hospital might open a pain management facility in the future, the contract gave the anesthesia group the opportunity to be the exclusive pain management provider at such facility. The applicable provision in the contract reads, in relevant part, as follows:  

In the event that Hospital … obtains, opens, or operates another facility or location at which anesthesiology or pain management services are required or offered, Hospital … shall offer (the anesthesia group) the opportunity to provide exclusive anesthesiology and pain management services at such new facility or location under the same terms and conditions as provided in this agreement, to the fullest extent that the Hospital … is able to contract with (the anesthesia group) to provide such services on the same terms and conditions as set forth herein.

In 1998, the hospital built a new pain management facility located three (3) miles from the hospital’s main campus. From the day the pain clinic opened, Blue Mountain Anesthesia was the exclusive provider of pain management services at the clinic. The hospital billed Medicare and the other payers the facility fee for the pain management, and Blue Mountain Anesthesia billed the professional component. The space, equipment and personnel of the pain clinic were provided by the hospital to the anesthesiologists free of charge. The 1992 contract between Carlisle Hospital and Blue Mountain Anesthesia was not amended to reflect that Blue Mountain Anesthesia was now providing pain management services at the new pain clinic. This lack of amendment turned out to be the deciding fact in the case.

The Stark law prohibits a physician from making a referral of a Medicare/Medicaid patient, for certain designated health services, to an entity with which the physician has a financial relationship, unless an exception applies, and the Stark law prohibits the entity receiving such a referral from billing Medicare/Medicaid for those services. Let’s break down each of the underlined elements to see how Stark applied to this case.  

  • Physician: The anesthesiologists of Blue Mountain Anesthesia.  
  • Referral: The anesthesiologists’ referral of patients under their care to Carlisle Hospital for certain tests and other services.  
  • Designated Health Services: The tests and other services for which the patients were referred to Carlisle Hospital by the anesthesiologists. These tests and services are included in the Stark definition of “Designated Health Services.”  
  • Financial Relationship: The “compensation arrangement” between Carlisle Hospital and Blue Mountain Anesthesia under which the anesthesiologists were the exclusive providers of pain management services, with the space, equipment and personnel of the pain clinic furnished by the hospital to the anesthesiologists free of charge. Many people are under the mistaken belief that in order for there to be a compensation arrangement, money needs to change hands. That is not the case. Essentially, all that is required for a compensation arrangement (and thus a financial relationship) to exist under Stark is for one party to receive something of value from another party. In this case, the right to be the exclusive providers of pain management at the new pain clinic, and the free space, equipment and personnel provided by the hospital to the anesthesia group at the pain clinic, were all items that had value to the anesthesia group.  
  • Exception: The personal services exception under Stark. The court found that this exception had not been met, and it was on this basis that they reversed the lower court’s decision, as discussed in more detail below.

The personal services exception under Stark requires, among other things, that there be a signed written agreement between the parties which specifies the services covered by the arrangement, and which covers all of the services to be furnished by the physician. Carlisle Hospital argued that the original 1992 agreement with Blue Mountain Anesthesia satisfied this requirement. The court disagreed, holding that the arrangement involving Blue Mountain Anesthesia and the new pain clinic fell outside of the terms of the 1992 agreement. Without a written agreement in place addressing the Blue Mountain Anesthesia/new pain clinic arrangement, the personal services exception was not satisfied. Unless the hospital can find another Stark exception to fall within (which is unlikely), the hospital’s arrangement with the anesthesia group relative to the pain clinic will be found to have violated Stark.

The ramifications of violating the Stark law are very significant for Carlisle Hospital. At a minimum, the hospital would be required to refund to Medicare/Medicaid the amount it received from every service provided pursuant to a prohibited referral from the anesthesiologists. This could cover, for example, every hospital diagnostic test ordered by the Blue Mountain anesthesiologists beginning in 1998. In addition, the hospital could be liable for civil monetary penalties equal to $15,000 per each service rendered pursuant to a prohibited referral. Carlisle Hospital could have avoided this liability if it had entered into a simple amendment to the 1992 agreement, which stated that the scope of services to be provided by the anesthesiologists was expanded to include pain management at the new pain clinic.

While probably most hospitals maintain some type of contract management system, it is a good idea for the hospital general counsel to randomly select and review physician contracts, on a periodic basis, to make sure that the system is working. As we learned from the Kosenske case, all it takes is one out-of-date provision to trigger a multitude of prohibited referrals under Stark.