On September 21, 2015, the United States Department of Justice announced a settlement between the federal government; the States of North Carolina, Florida, Georgia, Illinois, Tennessee, and Texas; and Adventist Health System, a nonprofit organization that owns and operates hospitals, nursing homes, and home health agencies in those states.
Under the terms of the settlement, Adventist will pay the United States $115 million to resolve a lawsuit in which Adventist is alleged to have violated the Civil False Claims Act, 31 U.S.C. § 3729 et seq., ("Act") and other federal laws by engaging in a host of schemes designed to incentivize physicians to make referrals to Adventist health care facilities which created charges the facilities submitted to federal and state government programs, such as Medicare and Medicaid, for reimbursement. The settlement has been called the largest ever in a health care whistleblower case.
The case has specific ties to North Carolina. Three of the whistleblowers who brought Adventist's alleged practices to the attention of the federal government were employed by Park Ridge Hospital in Hendersonville, North Carolina. The complaint, which spanned 128 pages, alleged illegal conduct in numerous Adventist organizations across multiple states, however many of the allegations focused on Park Ridge and local physicians with whom Park Ridge had employment relationships.
The complaint alleged that Park Ridge adopted Adventist's alleged strategy of acquiring physicians' practices in order to maximize the number of referrals to Park Ridge. The charges for the services generated by such referrals were submitted by Park Ridge to state and federal governments for reimbursement from government programs.
The complaint also alleged that Park Ridge and Adventist knowingly engaged in illegal profit sharing schemes with referring physicians, paid excessive compensation and other illegal kickbacks to referring physicians in exchange for those physicians' referrals, and submitted false claims for reimbursement to the state and federal governments for health care services that were based on illegal financial relationships between the hospital and referring physicians.
The claims were brought pursuant to the Act and various state false claims acts, including the North Carolina False Claims Act, N.C. Gen. Stat. § 1-605 et seq. These statutes are the primary legal vehicles by which federal and state governments and whistleblowing private citizens can bring claims against private individuals or entities for defrauding government agencies.
In the Park Ridge case, the underlying basis for the "false" claims was the violation of multiple federal laws, specifically the Stark Law, 42 U.S.C. § 1395nn, and the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b. These laws were enacted to punish applicants for submitting illegal claims for reimbursement from government health care programs like Medicare and Medicaid. While this may sound simple enough, anyone who has ever attempted to read the Social Security Act and corresponding regulations is likely to agree that understanding and complying with these statutes and regulations is challenging, if not tortuous. Nevertheless, the Park Ridge case is a reminder that the penalties for violation are severe, and understanding these laws and the conduct they attempt to prohibit is the first step to ensure compliance.
The Federal False Claims Act
The Act is sometimes referred to as the "Lincoln Law" since it was passed during Abraham Lincoln's presidency in an effort to curb massive fraud by military contractors during the American Civil War. The Act has been amended several times, most recently by the Patient Protection and Affordable Care Act ("ACA"). The Act provides civil penalties for:
- Knowingly presenting false claims to the government for payment or approval;
- Using false records or statements related to fraudulent claims to the government;
- Conspiring to do any of the prohibited actions under the Act; and,
- "Reverse false claims," or making or using false records to avoid or decrease an obligation to pay or transmit property to the government.
Violation of the Act requires actual knowledge. The Act states that a person acts "knowingly" when the person:
- Has actual knowledge of the falsity of information;
- Acts in deliberate ignorance of the truth or falsity of the information; or,
- Acts in reckless disregard of the truth or falsity of the information.
No proof of "specific intent to defraud" is required. While the "knowing" requirement of the Act does preclude violations for mere negligence, failure to correct a prior claim later discovered to be false violates the statute.
Due to the complexity of most government programs – the United States Court of Appeals for the Fourth Circuit, which has jurisdiction over federal cases arising in North Carolina, once described the Medicare and Medicaid statutes as "among the most completely impenetrable texts within human experience" – violation of the Act should be a serious concern for any person or entity seeking reimbursement of medical charges under a government program.
Penalties for violating the Act are severe. Damages are calculated based on the difference between what the government actually paid as a result of the false claim and what it should have paid had the false claim never been made. Then, this amount is trebled! In addition, the Act provides for penalties of $5,500 to $11,000 per claim, and these penalties may be applied even in the absence of actual damages.
Criminal conviction and additional fines may also be imposed if parallel proceedings are brought under the "criminal" federal false claims act, 18 U.S.C. § 287. Other non-monetary penalties may also result and some of these are arguably more crippling than the potentially staggering fines. For instance, government contractors who defraud the government can be suspended (referred to as being "debarred") from conducting business with the government. Health care providers can be prohibited from any participation in federal programs such as Medicaid and Medicare.
Failure to understand not only the regulations, but the penalties available under the Act for failure to comply with such complex regulations, makes compliance challenging. Additionally, where the Act makes "deliberate ignorance" and "reckless disregard" enough to satisfy the knowledge requirement, even failure to have robust compliance programs in place could arguably violate the Act.
Private citizens as well as the government can bring claims pursuant to the Act in what is called a "qui tam action." These private citizen plaintiffs are called "relators" in the lawsuit, but they are more commonly referred to as "whistleblowers." When a whistleblower decides to bring a claim, the Act contains specific procedural requirements for filing the lawsuit. These requirements include filing the lawsuit in a federal district court, under seal, and allowing the government a specific amount of time to investigate the allegations and decide whether it will intervene.
The Act provides several options for the government to intervene in whole or in part. If the government intervenes, it will control the lawsuit. If the government declines to intervene as to some or all of the complaint, the relator may, in some circumstances, proceed without the assistance of the government.
The Act incentivizes private citizens to become relators by providing for substantial monetary rewards for successful claims. If the government intervenes and prosecutes the action, the relator is entitled to receive between 15 and 25 percent of the amount recovered by the government through the qui tam action. If the government does not intervene and the relator proceeds successfully (whether through litigation or settlement), the relator's share of the reward is increased to 25 to 30 percent.
The Act also provides that relators are entitled to legal fees and other expenses. If the government intervenes in the suit and the government chooses to obtain recovery in another manner other than in a lawsuit, the relator is still entitled to the same share of this "alternate remedy" just as if the suit had been prosecuted pursuant to the Act.
To counteract the significant incentives for being a whistleblower, the Act provides some statutory bars to False Claims actions. Actions are not available if they are based on information that:
- Has been disclosed to the public;
- Is already the subject of a qui tam action (the "first to file" rule); or,
- Was the subject of a previous government qui tam action.
As for the first exception, a relator may proceed with a lawsuit even if information is in the public realm if the relator was the person who brought the information to light and caused its disclosure to the public at large. Recent amendments only require a relator to have knowledge that is independent of, and materially adds to, the publicly disclosed information. The Park Ridge complaint contains allegations that the relators brought specific, non-public information to the government's attention, satisfying this statutory requirement.
The Stark Law
One basis for the "false claims" in the Park Ridge case was violation of 42 U.S.C. § 1395nn (commonly referred to as the "Stark Law"). The Stark Law is an amendment to the Social Security Act prohibiting health care providers from submitting Medicare claims based on patient referrals from physicians who have, or who have an immediate family member who has, a "financial relationship" with the provider.
"Financial relationship" is defined broadly as ownership interests in investments or entities or compensation arrangements between the physician, or the physician's family member, and the provider. The Stark Law then sets forth specific exceptions, including compensation for "bona fide employment relationships" (if compensation is consistent with fair market value for such services and does not take into account the volume of referrals from the employed physician) or rental of real estate or equipment that is set forth in a written lease providing for rent that does not exceed what is reasonable and necessary for legitimate business purposes. Specific exceptions are also made for financial relationships between physicians and providers in rural areas where the provider may be the exclusive provider of the relevant health care service. While there are many exceptions, close attention must be paid to them to ensure compliance. The Park Ridge case serves as a reminder that the consequences of violation are severe.
In the Park Ridge case, the alleged violations of the Stark Act were significant. In large part, the allegations detailed various ways in which Park Ridge structured physician compensation so that it was tied directly to the volume of business a physician employed by Park Ridge referred to Park Ridge and other Adventist hospitals. The government alleged that these compensation arrangements created "improper financial relationships" between the hospitals and physicians that led to numerous referrals to the hospitals for services for which the hospitals sought reimbursement from government programs.
One of the primary ways in which the government alleged that the hospitals created such "improper" Stark Law financial relationships was through inflated physician bonuses resulting in annual income far above what would be considered fair market value for the time worked or services provided. The complaint alleged that physicians employed by Park Ridge were paid generous salaries despite the fact that the physicians' private practices were losing money each year. The complaint alleged that the hospital ignored the losses generated by the practices and continued to pay high salaries to the physicians because the physicians generated so many referrals to the hospital.
Similarly, there were numerous allegations of physicians being paid well in excess of what other similarly situated and experienced physicians were being be paid. One allegation referenced a pediatric urologist who allegedly had a second home near Park Ridge and who had an employment agreement with Park Ridge in which Park Ridge agreed to pay the physician a salary of approximately $300,000 per year for only three days of work each month.
The Anti-Kickback Statute
The ACA contains other significant amendments to the Act. One of the more notable amendments established that a violation of the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b, ("AKB Statute") can be a basis for a false and fraudulent claim for purposes of the Act. Alleged violations of the AKB Statute formed a significant basis of the claims in the Park Ridge lawsuit.
The AKB Statute, which is part of the Social Security Act, imposes penalties on those who receive payment (a "kickback") in return for referring a patient for Medicare or Medicaid-covered services. It also forbids such payment in return a for purchase, lease, or order of any good, facility, service, or item which will be paid for under either Medicare or Medicaid.
Violation of the AKB Statute comes with a hefty penalty – a fine up to $25,000 and/or five years in federal prison. The AKB Statute prohibits players on both sides of a transaction from profiting from Medicare and Medicaid referrals. Thus, the AKB Statute makes both the payor and the payee of the "kickback" liable for a violation. Under the recent ACA amendment, a person "need not have actual knowledge or specific intent to commit a violation" of the AKB Statute.
The Park Ridge case serves as a reminder that "kickbacks" are not limited to cash and can take many forms. The language of the AKB Statute makes this clear. It specifically prohibits "any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind" in exchange for referrals to persons or institutions for items or services that will be paid for under a federal health care program or in return for purchasing or leasing goods or facilities that will be paid for under a federal health care program.
While there are some specific exceptions as to what constitutes a "kickback," such as a reasonable salary or market rate rentals of space or equipment, the exceptions are very specific and health care providers need to understand these exceptions to avoid potential violation of the AKB Statute. For example, tickets to sporting events, meals, and other such gifts are some of the more obvious types of prohibited "remuneration" other than cash that the statute prohibits.
In fact, the Park Ridge case involved just this kind of kickback. The complaint contained a claim that Park Ridge paid the lease payments on one physician's BMW and Mustang for years, allegedly in return for referrals from the physician, despite the fact that there was no provision for such payment in the physician's contract.
Other kickbacks alleged in the Park Ridge complaint included:
- The hospital footing the bill for a referring physician's staff and equipment as well as supplying drugs and medical malpractice insurance for the physician's private practice;
- The hospital supplying necessary lab materials to physicians' offices in addition to paying the physicians a "charge back" for referring all lab work to the hospital instead of to other labs;
- The hospital's forgiveness of a physician's debt to it; and,
- The hospital's payment of kickbacks for "disproportionate share hospital" ("DSH") referrals (a DSH provides greater care to low-income patients and receives additional income from the federal government for doing so).
Ultimately, the complaint contained hundreds of allegations of kickbacks, some obvious, others more nebulous, all of which were allegedly designed to incentivize physicians and other providers to refer patients to Park Ridge. While it is important to remember that the case settled before any liability was determined by a court, the detailed allegations make clear that the government exhaustively examined Park Ridge's employment relationships with its physicians, searching for any potential evidence of illegal kickbacks and cataloging everything it found.
Many of the alleged improper compensation arrangements described in the Park Ridge complaint arguably violated both the AKB Statute and the Stark Law in one form or another. These inflated salary and bonus structures were said to violate the Stark Law by creating improper compensation arrangements that led to referrals resulting in reimbursements from government programs. Simultaneously, they were said to violate the AKB Statute because they incentivized physicians to make referrals in exchange for remuneration.
North Carolina False Claims Act
In addition to the numerous alleged violations of the federal False Claims Act, the Park Ridge case also included claims brought pursuant to the North Carolina False Claims Act, N.C. Gen. Stat. § 1-605 et seq. The North Carolina False Claims Act is similar to the federal statute in both substance and language and provides for prosecution of the same types of false claims submitted to the state and its agencies. The causes of action and the definition of "knowingly" are the same as in the federal statute. The potential percentage rewards for the relators are also the same. As part of the settlement of the Park Ridge case, the defendants agreed to pay nearly $200,000 to the state of North Carolina, including $149,391.02 for Medicaid claims.
The unprecedented amount of money that Park Ridge, Adventist, and the other named hospitals will pay in settlement of the Park Ridge lawsuit serves as a cautionary tale for physicians, hospitals, government contractors, and others who submit (or are employed by individuals or entities who submit) claims for reimbursement from government programs. The statutes providing for civil and criminal liability for false claims are broadly drafted and the penalties for violation are severe.
While the statutes at issue in the Park Ridge case – the state and federal False Claims Acts, the Anti-Kickback Statute, and Stark Law – have exceptions, they are often very specific and should be carefully analyzed to ensure that a certain action or practice falls squarely within an available exception. The laws addressed in this article incentivize insiders to "blow the whistle," which should, in turn, incentivize health care employers who seek reimbursement from government agencies to spend the time and money necessary to ensure compliance.
 Rehabilitation Assoc. of Virginia, Inc. v. Kozlowski, 42 F.3d 1444, 1450 (4th Cir. 1994).
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