There are very few published court decisions interpreting the requirements imposed by the Stark law on financial relationships between hospitals and referring physicians. A recent decision by the Third Circuit Court of Appeals — U.S. ex rel. Kosenske v. Carlisle HMA, Inc.; Health Management Associates Inc. (C.A.3 PA, January 21, 2009) — serves as a timely reminder of the pitfalls that can occur when providers do not monitor Stark compliance on an ongoing basis.  


In 1992, a group of anesthesiologists entered into an exclusive contract to provide anesthesia services at a hospital located in Pennsylvania. While the contract contemplated that the group might also provide pain management services at some future date, the terms and conditions of the contract were primarily limited to anesthesia services. Six years later, the hospital built an off-campus provider-based facility containing an ambulatory surgical center and a pain management clinic. The new facility was located about three miles from the hospital. The anesthesia group that furnished anesthesia services at the hospital under the 1992 contract also furnished pain management services at the new facility. As compensation for their services, the anesthesia group had the right to bill and collect from Medicare for the professional component of pain management services. The hospital, which billed Medicare for the technical and facility components, did not charge the anesthesia group for the space, equipment or support personnel used by the anesthesiologists at the pain management clinic. The hospital and anesthesia group did not enter into a separate agreement for the pain management arrangement, nor did they amend their 1992 contract to cover the new pain management arrangement.

A former member of the anesthesia group brought a whistleblower suit against the hospital, alleging, among other things, that the hospital violated the federal False Claims Act by falsely certifying that claims it submitted to Medicare for pain management services provided at the new facility complied with the requirements of the Stark law. Specifically, the whistleblower alleged that the arrangement failed to meet the Stark law requirements for personal service arrangements. The district court ruled that the pain management arrangement satisfied the Stark law requirements for personal service arrangements and granted summary judgment in favor of the hospital. The court of appeals reversed the decision of the district court. It concluded that the pain management arrangement did not satisfy the Stark law requirements for personal services arrangements because there was no written agreement for the arrangement and because the hospital could not establish that the compensation received by the anesthesia group for pain management services was consistent with fair market value. According to the appeals court, the 1992 contract did not cover the services provided at the pain management clinic.

Lessons for Hospitals and Physician Groups

The Kosenske decision provides the following lessons for hospitals and physician groups:

  • Perhaps the most important lesson from the Kosenske decision is that hospitals and providers must establish a mechanism to ensure that they remain in compliance with Stark requirements as their financial relationships evolve over time. In Kosenske, the parties could have met the written agreement requirement of the Stark personal services exception by amending the 1992 contract to cover the arrangement at the pain management clinic or they could have simply entered into a new contract for services at that clinic. As an alternative, the parties might have been able to use the Stark exception for indirect compensation relationships which, under the regulations in effect at the time of the lower court’s decision, would not have required a written agreement between the hospital and the anesthesia group. The availability of the indirect compensation exception was not discussed in the decision of the court of appeals.
  • Under the Stark exception for personal services, the compensation paid over the term of the arrangement must be set in advance and cannot exceed fair market value. The Kosenske decision highlights the importance of establishing and documenting prior to the delivery of any services that the compensation received by referring physicians in a personal services arrangement is consistent with fair market value. The appeals court specifically rejected the lower court’s ruling that the hospital was not required to present evidence on the issue of fair market value because the agreement was the result of arm’s length negotiations between the parties. According to the appeals court, “as a legal matter, a negotiated agreement between interested parties does not ‘by definition’ reflect fair market value” under the Stark law.
  • Finally, the Kosenske decision serves as a reminder that the Stark law covers both cash and in-kind payments made to referring physicians, and that in-kind compensation must be considered in determining whether payments by hospitals to referring physicians are consistent with fair market value. According to the court of appeals, the exclusive right to provide pain management services, and the receipt of office space, medical equipment and personnel, constitute in-kind remuneration that is compensation under the Stark law.

Although federal courts in Michigan are not bound to follow the Kosenske decision, they would certainly consider it very carefully if presented with a Stark issue. Accordingly, hospitals and physicians should pay close attention to the lesson in the Kosenske decision.

A copy of the Kosenske decision may be obtained from the Dykema contact listed above