As part of its plan to establish an open heart surgery program, St. Luke Hospitals, Inc. (St. Luke) sought a certificate of need (CON) and entered into an agreement with a group of surgeons to provide professional administrative coverage and clinical services, including provision of a full-time medical director, cardiac surgeon and on-call surgery physician, for $800,000 per year.
A competitor who opposed the CON obtained an order reversing the awarding of the CON to St. Luke, which effectively precluded St. Luke from operating an open heart surgery program. The competitor, which later merged with St. Luke, subsequently abandoned efforts to open the St. Luke heart program.
The merged hospital then ceased making payments to the physicians and sought reimbursement of all payments previously made under the agreement. St. Luke argued that the agreement required the physicians to provide open heart surgical services. None were provided, and therefore it was not required to pay. The physicians argued that they were entitled to be paid for their "willingness" to perform surgeries. The U.S. District Court held that the plain language of the agreement entitled the physicians to payment for their willingness to perform and that there was no provision that required that services actually be rendered. Hence, providers should carefully craft language in agreements for future services to accomplish their intentions.
St. Luke's successor next argued that its performance under the agreement was excused because the agreement was contrary to Stark Law. The hospital argued that, although the monthly payments were a flat fee, they exceeded fair market value and, therefore, must have taken into account the value or volume of referrals. However, the physicians referred only one patient during the duration of the agreement and there was no evidence whatsoever that the volume of these referrals affected the value of the hospital's monthly payments. The court dismissed the argument based upon the evidence and concluded that the agreement did not violate Stark Law, even though no services were actually provided by the physicians.
The agreement, however, provided that if the agreement or any activities contemplated therein were deemed by either party, upon the written advice of legal counsel, to be in violation of any lawfully adopted laws, procedures, rules, regulations or policies, the agreement could be amended to comply with the laws or terminated upon 30 days written notice. Despite its finding of the agreement's legality, the court upheld St. Luke's successor's notice of termination under the provision. The court concluded that the agreement requires only that a party terminate the agreement on the basis of the written legal advice of counsel. Enforcement of the provision does not require that the counsel's advice be correct. Therefore, parties must carefully consider the terms of a right to terminate provision in an agreement to achieve their goals.
A copy of the decision, Cardiovascular and Thoracic Surgeons Inc. v. St. Elizabeth Medical Center Inc., is available online.