The amendments to the Stark rule that became effective January 1, 2016 have proved vexing to apply in at least one area: deciding whether an arrangement satisfies the writing requirements of the lease and personal services exceptions. A recent decision by the US District Court for the Western District of Pennsylvania provides some help.
Prior to January 1, 2016, the office space exception required that a “lease agreement” be set out in writing and signed by the parties. Presumably, this straightforward approach was part of CMS’ effort to create “bright line” rules for the Stark law; 1 however, it also resulted in many so-called “technical violations,” and consequent self-disclosure reports being submitted to CMS. Experience has shown that these disclosure reports take several years to resolve, and CMS recently stated that as of February 28, 2017, it had 143 disclosures under active review.
To provide some regulatory relief, and also presumably to help stem the tide of self-disclosure reports, CMS “clarified” the lease exception to provide that the writing requirement could be satisfied by a collection of contemporaneous documents. 2 The same test applies to personal services agreements as both of these exceptions now refer to “arrangements” rather than “agreements.” 3 CMS also amended the “holdover” arrangements exception (which applies to leases and personal service agreements) to allow for indefinite holdovers so long as the arrangement continues on the same terms and conditions, and the payment continues to be consistent with fair market value. 4 (Previously, the holdover exception was limited to a maximum of 6 months.)
But CMS did not make the indefinite holdover exception retroactive, so parties to an expired agreement are left to determine whether they have sufficient contemporaneous documentation to construct an agreement that extends after the expiration date of the original agreement, a not-at-all uncommon situation. 5 The commentary from CMS in the preamble to the 2016 update was not encouraging:
“If a written contract with an explicit term provision expires… but the parties nevertheless continue the arrangement past the expiration… [the] expired written contract, on its own, would not satisfy the writing requirement of an applicable exception. Without additional supporting documentation, there may be gaps in compliance, as it may take some time after the expiration of the written contract to generate sufficient documents evidencing the course of conduct between the parties after the contract expired.” 6
The CMS commentary makes it appear unlikely that a party could establish continuous compliance for an expired agreement. Fortunately, the decision in U.S. ex rel. Emanuele v. Medicor Associates takes a different view.
The Emanuele Decision
On March 15, 2017, the U.S. District Court for the Western District of Pennsylvania issued a ruling on a motion for summary judgment in a False Claims Act (“FCA”) case based on Stark law violations at Hamot Medical Center (“Hamot”) in Erie, Pennsylvania. 7 A whistleblower brought the lawsuit against Hamot, Medicor Associates (a physician group), and individual physician defendants, alleging that they violated the FCA by entering into a series of medical directorship arrangements that violated the Stark law and the Anti-Kickback Statute. The government declined to intervene. The defendants moved for summary judgment and the plaintiff filed a cross-motion for summary judgment with respect to several aspects of his Stark law claims.
The court ruled on the plaintiff’s motion for partial summary judgment, in which the plaintiff argued that (1) a financial relationship existed between Hamot and the physician defendants, and (2) no Stark law exception applied to the arrangements for several discrete periods of time. 8
The court’s opinion notes that the parties do not dispute the existence of a financial relationship, and, for purposes of that particular motion for summary judgment, “there is no argument raised about the commercial reasonableness of the arrangements or their fair market value.” 9 In other words, the case was before the court purely as a FCA claim premised on non-compliance with the technical requirements of the Stark exceptions.
Stark’s Writing Requirement
Six of the medical directorship arrangements contained an original written contract that was signed but had expired. 10 The court held that the writing requirement of the relevant Stark exceptions was satisfied for these six arrangements. 11 Even though the original contracts had technically expired, the court found that sufficient contemporaneous documentation existed to evidence a course of conduct following the expiration period. Specifically, the court relied on the fact that the original contracts clearly outlined the identifiable services to be provided under the agreement, the timeframe for the arrangement, and the compensation to be provided. The court also relied on checks and invoices that applied to specific services, covered discrete periods of time, and were commensurate with the rates of compensation specified in the written contracts. In addition, the court noted that the parties had executed subsequent addenda to the original contracts that incorporated the unchanged terms of the prior agreements. (The parties had backdated the addenda to the original expiration dates but this does not appear to have benefitted them in the court’s analysis.) The court concluded that the collection of documentation, taken together, satisfied the writing requirement.
Notably, the court does not appear to have conducted a day-by-day review to determine whether the writing requirement was satisfied at the time of each particular referral – surely, there was at least a short period of time between the expiration date of the original agreement and the next invoice and canceled check where the writing requirement may not have been satisfied independent of the expired contract. Instead, however, the court took a slightly broader view, stating that “when viewed in conjunction with the original written agreements and the subsequent addenda” the check requests and invoices presented by the defendants could lead a reasonable jury to conclude that the defendants presented the necessary “collection of documents, including contemporaneous documents evidencing the course of conduct between the parties, to satisfy the writing requirement of the leasing exceptions and other exceptions that require that an arrangement be set out in writing.” 12
With respect to directorship arrangements that had no original signed contract, however, the court came to a different conclusion. 13The court noted that the terms and conditions of those arrangements were never memorialized in a formal signed document. Further, the contemporaneous documents failed to outline identifiable services, a timeframe, and a rate of compensation, as required under the Stark law. The court also emphasized that at least one of the writings considered as part of a collection of documents must bear the parties’ signatures, but none of the contemporaneous documents submitted by the defendants contained signatures. Those documents included email, memoranda, and an unsigned draft agreement.
FCA Scienter and Materiality Elements
The court also ruled on the defendants’ motion for summary judgment, which argued that the plaintiff could not show the scienter (intent) and materiality elements necessary under the FCA. 14 The court held that the scienter element was met for both Hamot and Medicor because there was evidence to support that they were aware of the possibility that not all their services were being performed pursuant to a current and valid agreement, and yet continued to submit claims for payment: “a reasonable jury could conclude that Hamot and Medicor continue to submit claims for payment despite knowing that the underlying arrangements may not have been properly documented for purposes of Stark Act compliance.” 15
With respect to the individual physician defendants, however, the court held there was no evidence to support that any of the physician defendants (as contrasted with the group practice entity) knowingly submitted false claims. 16 Each of the physicians had provided a sworn statement that he believes the medical directorships complied with all relevant regulations and laws, and he relied on Hamot’s administrative staff to ensure compliance. The claims against the individual physicians were dismissed.
The court also held that compliance with the writing requirement in the Stark exceptions is material to the government’s payment decision for purposes of the FCA. 17 The court analyzed the materiality requirement under the standards adopted by the Supreme Court last year in Universal Health Services, Inc. vs. Escobar, 136 S.Ct. 1989 (2016). Applying the Escobar factors, the court had no difficulty finding the alleged violations to be material, noting that the statute expressly prohibits Medicare from paying claims that do not satisfy each of its requirements, and that the writing requirement is not “minor or insubstantial” because it helps assure transparency and prevent fraud and abuse.
Lessons to be Learned from Emanuele
The court’s decision supports a reasonable approach to determining whether holdover arrangements need to be disclosed: arrangements where there was no original, signed agreement are unlikely to be defensible under the “collection of contemporaneous documents” approach, but arrangements where there was an original, signed agreement that expired likely can be defended if there is ordinary documentation of a continued course of dealing.
The case also points out, however, that the risk of whistleblower suits for “technical” violations of the Stark law is real. Even though the plaintiff did not challenge the commercial reasonableness of the arrangements or their fair market value and even though the “[p]laintiff’s own testimony supports the notion that the medical directorships were ‘perfectly legitimate,’” 18 the defendants continue to face a substantial FCA liability risk in this case. A self-disclosure of the undocumented arrangements might not have precluded the whistleblower suit, as CMS is not authorized to provide an FCA release, but it likely would have discouraged plaintiff’s counsel from bringing the case.
The Emanuele litigation will proceed on the basis of the undocumented arrangements and other kickback allegations not considered in the motion for summary judgment.
1 72 Fed. Reg. 51012, 51013 (Sept. 5, 2007).
2 80 Fed. Reg. 70886, 71315 (Nov. 16, 2015).
4 Id. at 71318.
6 Id. at 71319 (emphasis added).
7 U.S. ex rel. Emanuele v. Medicor Associates, No. 10-245 (W.D. Pa. Mar. 15, 2017).
8 Id. at 11.
9 Id. at 13.
10 Id. at 18.
11 Id. at 18-20.
12 Id. at 19 (citing CMS commentary in the self-referral update, 80 Fed. Reg. 70886, 71314-71315.)
13 Id. at 19-23.
14 Id. at 26.
15 Id. at 32.
16 Id. at 35-36.
17 Id. at 32-35.
18 Id. at 29.
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