The Stark Law prohibits any physician from referring Medicare or Medicaid patients to any entity with which the physician has a financial relationship for the furnishing of certain “designated health services,” including inpatient and outpatient hospital services, unless an exception applies. The Stark Law also prohibits an entity from billing any individual, third-party payor or other entity for any services provided pursuant to a prohibited referral. In addition to receiving no payment from government payors for services rendered in violation of the Stark Law, referring physicians and providers face possible civil fines.

The Stark Law includes an exception for certain personal service arrangements, provided that a number of requirements are satisfied. In Carlisle HMA, the requirements at issue were (1) the arrangement must be set out in writing and specify the services covered, and (2) the compensation to be paid over the term of the arrangement cannot exceed fair market value.

In Carlisle HMA, the Third Circuit found that a “financial relationship” existed between the Hospital and BMAA, and that the Hospital and BMAA referred patients to one another for pain management services – prohibited referrals (and billings) under the Stark Law absent an exception. In addition, although the court did not reach the issue of whether the Anti-Kickback Statute was violated in this case, it did find that the Anti-Kickback Statute applied.

The court concluded that the Agreement did not reflect the actual operating arrangement between the Hospital and BMAA because of the changes in their relationship in the years after the execution of the Agreement. Specifically, while the Agreement required BMAA to provide all of the anesthesiology services needed by patients of the Hospital, it did not impose a similar requirement with respect to pain management services, which BMAA first provided at the Hospital and later at the Pain Clinic. In addition, the court read the Agreement to limit the arrangement between the Hospital and BMAA to services provided by BMAA at the Hospital – the only facility at the time the Agreement was executed – and not at the Pain Clinic. The subsequent changes to the Hospital-BMAA operating relationship required either an amendment to the Agreement or a completely new contract in order to satisfy the written contract requirement of the personal services exception under the Stark Law.

The court also found that the fair market value element of the personal services exception was not met, stating it was not possible for the arms-length negotiations that preceded execution of the Agreement in 1992 to reflect the fair market value of the consideration exchanged in 1998 with respect to services provided by BMAA at the Pain Clinic. The fact that BMAA and the Hospital submitted separate claims to Medicare regarding their respective professional and facility fees, and that Medicare paid these claims, was not sufficient to establish fair market value because the reimbursement did not take into account the value of the consideration exchanged between BMAA and the Hospital under the Agreement. The Third Circuit also stated that, as a matter of law,  

[A] negotiated agreement between interested parties does not “by definition” reflect fair market value. To the contrary, the Stark Act is predicated on the recognition that, where one party is in a position to generate business for the other, negotiated agreements between such parties are often designed to disguise the payment of non-fair-market-value compensation. The court held that the Hospital failed to demonstrate that it had met the requirements of the personal services exception to the Stark Law because the Agreement no longer satisfied either the written agreement or fair market value requirements of the exception.

The Court declined to address the safe harbor under the Anti-Kickback Statute safe harbor, though presumably it would have reached a similar conclusion.

Practical Implications

In light of Carlisle HMA, hospitals and physician groups will want to review their longterm personal services contracts. For those contracts that involve referrals of patients for inpatient or outpatient hospital services, or any other “designated health service” under the Stark Law, all elements of the personal services exception must be satisfied to comply with the Stark Law, as well as to qualify for the parallel safe harbor provision in the Anti-Kickback Statute. (The court’s decision also serves as a not-so-gentle reminder that, although referrals to anesthesiologists for the technical component of anesthesiology services are not separately billable and do not qualify as “referrals” under the Stark Law, pain management services for which anesthesiologists act as the treating physician are treated differently). Arrangements between hospitals and physician practice groups can change over time, and written agreements should be updated to reflect the actual operating arrangements between the parties. In addition, what may have constituted fair market value consideration at the signing of an agreement must be able to withstand a current fair market value analysis in light of the changed circumstances. If not, some form of additional consideration may need to be provided by one party to another.