On March 10, 2014, just days before trial, Halifax Hospital Medical Center and Halifax Staffing, Inc. (collectively “Halifax”) entered into an $85 million settlement with the U.S. Department of Justice resolving allegations that they violated the False Claims Act (“FCA”) by submitting Medicare claims that violated the Stark law.  See Notice of Settlement and Settlement filed in U.S. ex rel. Baklid-Kunz v. Halifax Hospital Medical Center, Civ. Act. No. 6:09-CV-1002 (M.D. Fla.)  The settlement effectively ended a qui tam action that had been filed by an insider in June 2009.  The Government had intervened based on employment agreements with six medical oncologists that compensated the physicians based on the operating margin of Halifax’s medical oncology program.  The compensation arrangement, referred to as an “Incentive Bonus,” covered a four-year period—from 2005-2008.  There are a few lessons to be learned from this case.

First, the consequences of a finding that the Stark law (which bars certain physician referrals) has been violated cannot be underestimated.  The settlement occurred after the District Court (Judge Gregory A. Presnell), on November 13, 2013, granted the Government’s motion for partial summary judgment with respect to the Stark law claims only.  This is not surprising, since the Stark law imposes strict liability, while the FCA requires scienter—indeed, the District Court found that a genuine issue of material fact “remains as to whether Defendants acted knowingly.”  (November 13, 2013 Order at 22.)  The District Court’s grant of summary judgment on the Stark law claims effectively set up the circumstances for settlement of the remaining claims.

Second, the Stark law’s bona fide employment exception (42 U.S.C. §1395(e)(2)) is strictly construed.  The District Court found that the Incentive Bonus did not satisfy the bona fide employment exception because it “was not a ‘bonus based on services personally performed’ by the Medical Oncologists, as the exception requires,” but “[r]ather, as described by the Defendants themselves, this was a bonus that was divided up based on services personally performed by the Medical Oncologists.”  (Order at 16.)  As the District Court further explained:

The bonus itself was based on factors in addition to personally performed services – including revenue from referrals made by the Medical Oncologists for DHS.  The fact that each oncologist could increase his or her share of the bonus pool by personally performing more services cannot alter the fact that the size of the pool (and thus the size of each oncologist’s bonus) could be increased by making more referrals.

While it is possible that another district court could view the Incentive Bonus differently—Judge Presnell did not cite case law in support of his conclusion or indicate whether similar arrangements have been judicially reviewed—the Order does serve as a clear warning to those who seek to invoke the bona fide employment exception.  Thus, hospitals and other providers should immediately review existing compensation arrangements in light of Judge Presnell’s analysis, and should re-think any prior determinations that similar arrangements do fall within the bona fide employment exception.

Third, a legal review of new compensation arrangements should always be undertaken and documented prior to implementing those arrangements.  Doing so can not only avoid legally questionable arrangements, but can also support a potential advice of counsel defense.  A legal review can also potentially negate scienter under the FCA.  The FCA prohibits “knowingly” submitting false claims, and “knowingly” is defined as “actual knowledge,” “deliberate ignorance,” or “reckless disregard.”  Thus, the failure to review an arrangement could be evidence of reckless disregard of whether claims are in compliance with applicable law, and therefore false.  Unfortunately, Halifax failed to vet the compensation arrangement with counsel before implementation—it was only after the compensation arrangement had been in place for several years that Halifax sought a legal analysis from outside counsel.  In a February 2009 memorandum, outside counsel concluded that although “there is a reasonable argument that the Contingent Bonus qualifies for the Stark employment exception … we cannot provide any assurances that CMS or a court would more likely than not concur with that analysis.”  Halifax aggressively relied on this legal analysis to take the position that it was permissible to pay out bonuses for 2008.

Fourth, insider concerns must be taken seriously and prompt action should be taken to redress those concerns.  The relator raised concerns about the compensation arrangement in October 2008.  In a November 2008 internal memorandum from Halifax’s associate general counsel to its general counsel, it was acknowledged that “it appears that this arrangement is not permitted under the STARK regulations,” but then merely advised that “[t]hought should be given to the prudence of self-reporting, and an analysis of potential payback of Medicare claims for the disallowance period should be conducted.”  The later interpretation of outside counsel’s advice as permitting the payout of 2008 bonuses seems to have superseded this acknowledgement that the Stark law had been violated, and it appears that the relator’s concerns were not satisfied.

Fifth, where it appears that there have been Stark law violations, disclosure to CMS under the Self-Referral Disclosure Protocol (“SRDP”) should be given serious consideration before a situation escalates and a whistleblower complaint is filed.  Although the SRDP applies to Stark law violations only and settlements provide narrow releases, i.e., there is no release from liability under other statutes, such as the FCA, a hospital or health care provider can certainly display good corporate citizenship by stepping up and making such a disclosure.  Of course, in Halifax’s case, disclosure would not necessarily have barred a subsequent qui tam action, since the relator would appear to qualify as an “original source” under 31 U.S.C. §3730(e)(4), but it could have potentially mollified the relator.

In sum, the Halifax settlement reflects that care must be taken to ensure that physician compensation arrangements do not violate the Stark law in the first place—and that any doubt about whether an arrangement clearly satisfies the bona fide employment exception should be resolved by not entering into the arrangement.

This post first appeared in the Government Contracts Blog.