Alerts and Updates

New Case Adopts "Common Sense" Approach to Academic Medical Center Stark Exception

May 2, 2008

Healthcare Litigation Alert

On April 8, 2008, the U.S. District Court for the Western District of Kentucky dismissed a multimillion-dollar claim in a whistleblower lawsuit against the University of Louisville Medical School, the Kosair Children's Hospital and several private physicians with medical school faculty appointments. The case, U.S. ex rel Villafane v. Solinger (W.D. Ky. 2008), was brought under the federal False Claims Act by a former faculty physician and his practice group, alleging that the financial arrangements between the hospital, medical school, and physicians were improper. The Court dismissed the False Claims Act allegations after almost five years of litigation.

Plaintiffs contended that the arrangements between the faculty physicians and the medical school were not properly structured or documented. In particular, plaintiffs objected to payments by Kosair to a medical school foundation out of which faculty salaries were paid. The contention was that the salary payments were indirect compensation payments to the faculty physicians by Kosair, which Kosair made because the faculty members were also private physicians in a position to refer patients to the hospital. According to plaintiffs, several million dollars in reimbursement claims that had been submitted to the federal government by the defendant physicians and facilities violated the federal Stark laws. Under the False Claims Act, which can be used to assert Stark violations, defendants can be found liable for three times the amount of all claims found to have been falsely submitted to the federal government and can also be fined $10,000 per falsely submitted claim; a successful whistleblower will collect a percentage of the total amount recovered.

The Stark law prevents physicians from referring patients to facilities with which they have a financial relationship for certain designated health services, including hospital services. Academic medical centers that regularly compensate physicians who also engage in private practice and regularly refer their patients to the medical center are protected from violating the Stark law by the "academic medical center exception." The exception exempts services provided by academic medical centers if the referring physician is a bona fide employed faculty member whose compensation does not exceed fair market value (subject to several more detailed requirements). The Villafane case is the first federal court opinion construing this exception. The Court analyzed the relationships between the physicians, the hospital and the medical school and found that the relationships fit into the "safe harbor" specifically carved out for these centers.

Although it was conceded that the physicians were bona fide employees of the medical school, plaintiffs claimed they did not provide "substantial" academic or clinical services in that role. The Court disagreed, holding that defendant physicians were responsible for training more than 100 medical residents and students at Kosair and that the absence of a specific timekeeping system for the physicians did not negate these facts. It also found that the physicians' salaries were acceptable because they were fixed at fair market value and did not vary once set, and that the absence of sophisticated and lengthy contracts did not controvert other evidence of a continuing relationship between the physicians and the medical school program.

The decision was remarkable both because it is the first published decision to address this particular safe harbor provision and also because of the court's pragmatic approach to application of the exception. Because the Stark law has no "intent" element, complying with an exception is the only way to avoid liability for improper referrals where there is a financial relationship. The Court's thorough analysis rejected theories based on technical violations and instead interpreted the law and implementing regulations based on their essential purpose.

Although the case is not binding on any other court, as a first analysis of the academic medical center exception, it should be persuasive to other courts facing similar matters. Notwithstanding the positive result, academic medical centers should learn from the case how to avoid litigation that may take several years to achieve a positive result by carefully following the requirements of the exception, particularly in the documentation of their physician relationships.

The attorneys of Duane Morris' Healthcare Litigation group are experienced trial litigators who also have a full understanding of healthcare law and the healthcare system. Based on this experience, the healthcare attorneys handle the full range of disputes that arise in the healthcare field, including healthcare fraud and abuse and False Claims Act investigations and lawsuits, termination of professional relationships between providers, reimbursement and managed care litigation on behalf of providers from administrative appeals to class action lawsuits, antitrust and unfair competition cases, hospital bankruptcy cases, matters involving patient care and information privacy, Certificate of Need appeals and litigation regarding research misconduct. They represent clients in court, arbitration and mediation sessions and administrative proceedings of all types.

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