This article is more than 5 years old. Information may no longer be current.
Always ensure fair market value in transactions with the orthopedic industry
Michigan case demonstrates that lease agreements are under scrutiny by the government. Therefore, avoid even an appearance of impropriety.
The health care industry is under scrutiny by the federal government. In 2006, the FBI investigated 2,423 health care fraud cases resulting in 588 indictments, 532 convictions, and $2 billion in recoveries. During the same year, the Office of Inspector General for the Department of Health and Human Services excluded 3,425 individuals, and conducted 472 criminal and 272 civil actions related to federally funded health care programs. The pace of this activity has continued during 2007.
|
|
Like all aggressive government actions, there is the risk of discouraging legitimate and desirable conduct. No bright light separates corrupt and permissible behavior. As a result, laws relating to health care fraud are broadly written. The definition of illegal conduct often leaves the targeted subjects bewildered and anxious. Referring to the anti-kickback statute, one author has stated that it “… walks a fine line between being broad enough to encompass creative and unforeseen business arrangements and being clear enough to give adequate notice of what conduct will be considered criminal.”
Implied or inferred illegality
Establishing proof of criminal intent on the part of a physician is difficult. Only rarely is corrupt intent clearly identifiable, as in one civil action where a witness testified that “If the doctor didn’t get his consulting fee, he wouldn’t be using our service. So the doctor got a consulting fee.” More frequently illegality has to be inferred or implied from the facts surrounding a transaction. The recent case of United States vs. McLaren Regional Hospital, et al., shows how the U.S. District Court in Michigan interpreted the meaning and intent of the anti-kickback law.
McLaren started as a civil whistle-blower action that was eventually litigated by the federal government against defendants McLaren Regional Medical Center, an orthopedic group, and several orthopedic surgeons. The government alleged that the medical center and the surgeons had violated Stark II and the anti-kickback statute when the medical center paid the surgeons more than fair market value to lease space for physical therapy services. The government claimed that a part of the lease payment was paid solely for referrals by the surgeons to the hospital’s physical therapists. In addition to market data, the government introduced evidence of an exclusivity provision that prohibited the surgeons from leasing building space to other therapy providers.
Fees above market value
In the bench trial (a trial to the court without a jury) that followed, the government presented expert testimony to show that the medical center was paying approximately $4 per square foot above the market value. This evidence was introduced to show that the orthopedic surgeons violated the law by setting lease rates to take into account the value of patient referrals or other business generated by the parties. The orthopedic surgeons and the medical center countered that the leasing negotiations had taken place over a 9-month period, there were differences between the parties in the terms of the lease agreement, and furthermore the negotiations were “very intense” and “absolutely arms-length.” The lease agreement provided many favorable terms for McLaren Medical Center.
The defendants introduced their own experts to show that the lease rates were consistent with market values, and did not incorporate a “hidden” payment for patient referrals.
The court, finding in favor of the defendants, stated that “… the government has failed to present any evidence to establish that because of potential patient referrals, McLaren paid a higher rental rate than it otherwise would have paid or that … the defendant physicians received a higher rental rate than they would have otherwise received because of any patient referrals that McLaren might have received from the … physicians.” Victory came at a cost though; following the verdict defendants petitioned the court for fees and costs related to the trial, totaling about $650,000. The court denied the petition.
Fair market value importance
The McLaren decision is noteworthy for at least two reasons:
- One, the court focused solely on what the statute defined as illegal, ie, a lease payment that was partially based on the value of patient referrals. The facts supported the position that the hospital selected the orthopedic office as the site of its physical therapy center because it was, in part, desirable to have therapy close to the surgeons. In addition, the hospital was obviously an excellent and stable tenant for the orthopedic group. In rejecting the government’s claim, the court implicitly recognized that making lucrative business decisions is not illegal, so long as the parties comply with the law’s requirement that there be no payments for patient referrals.
- Two, the defendants in McLaren were able to show arms-length negotiations and offered expert testimony to show that the medical center was paying fair market value. This outcome should alert every orthopedic surgeon or device manufacturer to ensure that in business transactions, the orthopedic surgeons provide and the manufacturers receive “fair market value” for services provided.
McLaren left unanswered whether or not the failure to provide fair market service in and of itself establishes a criminal or corrupt intent. As one author states with regards to the anti-kickback law requirement that the conduct be ‘willful,’ “It implies, in other words, that a person acting willfully knows not only that she is doing something wrong, but also that she desires it, sets out a purpose to do it, and acts not according to reason, but instead according to her own self-interest.”
Next month
Orthopedic Medical Legal Advisor will address the role of judgment in preventing and defending malpractice claims.
For more information:
- B. Sonny Bal, MD, is associate professor of hip and knee replacement at the Department of Orthopaedic Surgery, University of Missouri School of Medicine.
- Lawrence H. Brenner, JD, is on the faculties of orthopedics at Yale University and the University of Southern California and practices in Chapel Hill, N.C. Address all correspondence to Brenner at lb@lawrencebrennerlaw.com.