A federal judge ruled that an acute care hospital violated Stark laws by submitting claims to Medicare that were induced by referrals.

The judge ruled that Stark prohibitions against self-referral were violated as a matter of law, which means they did not even have to go before a jury.  Anti-kickback claims are still pending.

According to PR Newswire, the hospital could face penalties over $20 million dollars:

In a 69-page opinion issued November 10, 2010, Judge Maurice B. Cohill, Jr. held that the hospital’s relationship with Drs. Peter Vaccaro and Kamran Saleh and their medical practice, V&S Medical Associates, LLC, violated the federal Stark Act, which generally prohibits hospitals from submitting claims to Medicare based on referrals from physicians with whom the hospital has a financial relationship.  In addition, the court held that a jury will have to determine whether the relationship also violated the federal Anti-Kickback Statute, which prohibits hospitals from paying physicians for Medicare referrals.

The ruling was issued in a whistleblower lawsuit filed under the federal False Claims Act, which allows individuals, known as "relators," to bring an action on behalf of the government to recover losses caused by fraud.  The relators are four physicians who were members of the medical staff at BRMC.  The physicians are represented by G. Mark Simpson of Atlanta, Georgia, and Andrew M. Stone of Pittsburgh, Pennsylvania.

"This case is especially important because it targets fraudulent and abusive practices that drive up the cost of health care, that we all end up paying for in the form of higher taxes," said Mr. Stone. "BRMC pursued an ill-conceived and illegal strategy to control cardiac services in the community," Mr. Stone said.  "The administration compounded their misjudgment with a bet-­the-hospital legal defense.  As a result, they are facing many millions of dollars in potential damages and penalties."  Mr. Stone noted that, under the False Claims Act’s treble damages provisions, the hospital’s liability could exceed $20 million, plus millions more in mandatory penalties.

Lawsuit Alleges That Sublease Arrangement Was Disguised Attempt to Induce Referrals

The primary issue in the lawsuit concerns an arrangement under which BRMC subleased a nuclear imaging camera from V&S, which V&S was using to perform diagnostic tests in-house, rather than referring patients to the hospital, which had its own nuclear camera.  As part of the sublease arrangement, BRMC agreed to pay V&S $23,655 per month, purportedly for certain "noncompete" agreements by V&S and Drs. Vaccaro and Saleh. [Order, p. 10-12]

The lawsuit contends that the arrangement was not in fact a bona fide sublease of equipment needed by the hospital, but was rather a disguised attempt to pay Drs. Vaccaro and Saleh for referrals.  In his order, the judge agreed that the purpose of the sublease arrangement "was not simply to acquire a piece of equipment."  Rather, according to the order, BRMC’s CEO, George Leonhardt, "expected BRMC would get substantial referrals from Drs. Vaccaro and Saleh as a result of the sublease," and stated "that he would not have entered into the sublease arrangement if he knew that BRMC would not receive any referrals from Drs. Vaccaro and Saleh."  Indeed, the order states that "BRMC did not believe that the GE camera was suited to its long-term needs, and knew that it would shortly replace the GE camera with another camera."  In fact, the nuclear camera was never even relocated to the hospital, but remained in V&S’s office, and was not used for nuclear imaging tests after a few months. [Order, p. 11-13].  

Judge Holds That Arrangement Violates Stark Act as a Matter of Law

In his order, the judge found as a matter of law "that Defendants have violated the Stark Act."  [Order, p. 62].  Mark Simpson, attorney for the relators, noted that the judge’s ruling came on a motion for summary judgment, where the evidence is viewed in the light most favorable to the defendants.  "In essence," said Mr. Simpson, "the judge is saying that this issue doesn’t even have to go to a jury, because the evidence is undisputed that the hospital violated the Stark Act."

Judge Thinks BRMC Will Have Difficulty Convincing Jury That Arrangement Did Not Violate Anti-Kickback Statute

In addition to the Stark Act claim, the lawsuit also contends that the arrangement violates the Anti-Kickback Statute, which makes it unlawful to knowingly and willfully offer or pay any remuneration for referrals of services covered by a federal health care program.  The court held that a jury must decide whether the defendants possessed the necessary intent to be liable under the Anti-Kickback Statute.  However, the judge stated that "[i]n light of the record evidence, Defendants will have a difficult challenge to prove to the fact-finder that they did not have the requisite intent."  [Order, p. 65].

Millions of Dollars of Potential Damages and Penalties

According to documents filed in the lawsuit, V&S made thousands of inpatient and outpatient referrals to the hospital during the relevant time period, resulting in several million dollars of Medicare payments.  [Order, p. 61-62].  Relators’ attorney Andrew Stone noted that, based on claims already identified in the record, treble damages could be in excess of $20 million.  "In addition," he said, "the False Claims Act imposes mandatory penalties of between $5,500 and $11,000 for each false claim, and there are many thousands of claims at issue."

BRMC is an acute care hospital located in Bradford, Pennsylvania.  Last year, BRMC and Olean General Hospital of Olean, New York integrated their operations under a new parent company, Upper Allegheny Health System.  

Case:   United States ex rel. Singh, et al. v. Bradford Regional Medical Center, et al., Case No. 1:04-cv-00186, U.S. District Court for the Western District of Pennsylvania, Erie Division

G. Mark Simpson and Simpson Law Firm, LLC, located in Atlanta, Georgia, represent whistleblowers in qui tam actions throughout the country.  Mr. Simpson is a member of the Taxpayers Against Fraud network of national qui tam attorneys. Andrew M. Stone of The Stone Law Firm is a Pittsburgh-based lawyer that represents whistleblowers locally and nationally in the fight to stop fraud on government programs.

Individuals and entities that create management services contracts between management entities and physician and other health care practices must ensure that these arrangements are not seen as disguised attempts to pay for referrals.  Arrangements that may seem legitimate to the parties can be viewed by regulators as disguised:

  • kickbacks
  • violations of Stark
  • violations of state self-referral laws
  • violations of state fee-splitting rules
  • violations of the corporate practice of medicine:

It is true that the management services model is commonly used in the industry. However, as this case shows, regulators can find that these arrangements may be sham or vehicles for disguised kickbacks. Thus, there is no guarantee that an MSO model, even if it provides appropriate services at fair market value, will in fact withstand regulatory scrutiny. From a corporate practice of medicine perspective, regulators may be concerned that the MSO model is designed for laypersons to control medical practices, or extract maximum profits from them.

It is important to consult with a health care law firm whose attorneys are experienced in Stark, kickback rules, fee-splitting, and the corporate practice of medicine and who can give legal advice tailored to specific situations.  Simply drafting a management services agreement or setting up a management services organization is no panacea is regulators come knocking.  Fair market value must be respected and the arrangement must be carefully analyzed for compliance with applicable laws and regulations.


Michael H. Cohen is a thought leader in health care law, pioneering legal strategies and solutions for business law clients in traditional and emerging healthcare. wellness, and lifestyle markets.  As a corporate and regulatory attorney who has also handled litigation matters, Mr. Cohen represents conscious business leaders in a transformational era.

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