A federal district court recently addressed the issue of whether a fixed payment amount can take into account the volume or value of referrals for purposes of Stark Law compliance. In United States ex rel. Singh v. Bradford Regional Medical Center, No. 04-186 (W.D. Pa. Nov. 10, 2010), the court considered whether an arrangement between Bradford Regional Medical Center (Hospital) and Drs. Vaccaro and Saleh and their practice entity (Physicians) violated the Stark Law and federal anti-kickback law. Although the court held that the arrangement violated the Stark Law, the court cited insufficient evidence to conclude that the Hospital and Physicians acted knowingly for purposes of the False Claims Act or had the requisite intent to violate the anti-kickback law.

The whistleblower lawsuit, brought by several physicians on the medical staff of the Hospital, related to the Hospital’s lease of a nuclear camera from the Physicians who were former employees of the Hospital. After terminating employment by the Hospital and purchasing their practice, the Physicians installed a nuclear camera in their office. According to the opinion, the Hospital calculated lost revenue from the Physicians who accounted for 42.5 percent of the Hospital’s nuclear medicine studies. The Hospital subsequently entered into an equipment sublease with the Physicians, pursuant to which the Physicians were paid fixed sums for the nuclear camera and other services, including a noncompetition agreement by the Physicians. The nuclear camera was located in the Physicians’ office and the Hospital also paid the Physicians for space and services furnished by the Physicians relating to the nuclear camera, including billing and collection services reimbursed at ten percent of collections. The original nuclear camera was replaced by another camera leased by the Physicians, which also was subleased to the Hospital. The replacement nuclear camera was located in the Hospital and the Physicians were paid a fixed fee for lease and maintenance of the replacement camera, as well as a fixed fee to cover the Physicians’ liability to the lessor on the original nuclear camera lease, which was terminated early.

In assessing the Stark Law issues, the court first considered whether the various arrangements established a financial relationship between the parties. The court held that the sublease arrangement constituted an indirect financial relationship between the parties because the payments, although fixed in amount, took into account anticipated referrals from the Physicians. Specifically, the appraisal of the payment for the covenant not to compete was based, in part, on expected revenues the Hospital would receive with the noncompete in place. The accountant testified that the expected revenues were based on the assumption that the Physicians likely would refer business to the Hospital, although they were not required to do so; thus, the court concluded that the amount of the noncompete payments took into account the amount of referrals the Hospital expected to gain from the Physicians. The court also held that the ten percent billing and collection fee varied with respect to the volume or value of referrals from the Physicians.

The court then considered whether the arrangement qualified for an exception under the Stark Law. Noting that the compensation was determined in a manner that took into account the volume or value of referrals, the court held that this factor established that the compensation was not fair market value because an arrangement that takes into account anticipated referrals will necessarily be greater than payments between nonreferring parties. The various arrangements also were not set forth in sufficient written agreements. For example, the court held that the original sublease was not amended to reflect the replacement equipment or the payments specifically related to the replacement equipment. These factors precluded qualification for a Stark exception, thereby establishing a violation of the Stark Law.

Parties considering payments for noncompete agreements are advised to consider this case before proceeding. The case also underscores the importance of executing concise and up-to-date written agreements for all arrangements subject to the Stark Law.