© Originally published in COMMUNIQUÉ (October, Vol. 28, No. 10), the official journal of the Clark County Bar Association. All rights reserved.

• Federal Regulation of Health Care Transactions: A Minefield for Doctors and Lawyers
• Health Law: At A Glance

Federal Regulation of Health Care Transactions: A Minefield for Doctors and Lawyers

By Matthew T. Milone

Your client Dr. Smith returns from her medical school reunion with tales of how former classmates have made millions in the newest craze in the medical community. Dr. Smith now wants your help in setting up the new cash cow in Nevada. While at first glance this may seem simple, Dr. Smith's plans place both the physician and attorney in the middle of a minefield of federal regulation. Federal healthcare programs, including Medicare and Medicaid, are now the largest payers of healthcare services in the country, making up approximately 46 percent of the health care marketplace. http://www.hhs.gov/news/speech/2006/092606.html. As the federal government's responsibility for payment has expanded, so has the federal regulation of health care. Given the current regulatory environment and potential penalties for failure to comply (including fines, civil penalties, exclusion from federal programs and prison) any transaction involving health care requires careful scrutiny for compliance with federal law. The laws and regulations described in this article are a starting point for any conscientious physician or lawyer reviewing a health care transaction.

Stark (Self Referral Statute)

Stark, (42 U.S.C. § 1395nn) also known as the Physician Self Referral Statute, prohibits patient referrals to providers of "designated health services" (DHS) by physicians who have a financial relationship with the DHS providers. For the purposes of the statute DHS includes: clinical laboratory services, physical therapy services, occupational therapy services, radiology services (including MRI's, axial tomography scans and ultrasound scans), radiation therapy services, durable medical equipment, prosthetic devices, home health services, outpatient prescription drugs and hospital services. 42 U.S.C. § 1395nn(n)(6).

According to Stark, a "financial relationship" between a physician and a DHS provider can be either an ownership/investment interest or a compensation arrangement. The ownership/investment interest does not have to be a direct relationship, and the prohibition remains with any number of entities that can be interposed between the physician and the DHS provider. Instead, a financial relationship exists where the DHS provider has actual knowledge and acts in reckless disregard or deliberate ignorance that the physician has some ownership or investment interest in the DHS provider or receives aggregate compensation that takes into account or otherwise reflects referrals or other business generated by the referring physician for the DHS provider. According to the regulations, an ownership/investment interest in a DHS provider creates a direct compensation arrangement, since the owner/investor physicians will benefit from the profitability of the DHS entity.

Like the ownership/investment interest, a compensation arrangement can be indirect and/or filtered through any number of entities and still be prohibited. All that is required for referrals to be prohibited by virtue of a compensation arrangement is a chain of financial relationships that allows for direct or indirect payments to the physician, that compensation to the physician be is either directly or indirectly tied to the value or volume of the physician's referrals, and that the DHS provider knows, or has reason to know, that some part of the physician's compensation is tied to the value or volume of referrals to the DHS entity.

Stark is civil in nature and penalties for violation include repayment to federal health care programs, civil fines and exclusion from participation in federal health care programs. 42 U.S.C. § 1395nn(g)(3) & 42 U.S.C. § 1395nn(g)(4).

If an arrangement falls within Stark's general prohibition on self referral, the statute and regulations forbid engaging in the transaction (even if there is no intent to violate Stark) unless the transaction falls within a specifically identified regulatory exception. Commonly used exceptions include the indirect compensation exception (42 C.F.R. § 411.357), physician compensation exception (42 C.F.R. § 411.357), in-office ancillary services exception (42 C.F.R. § 411.355), and the bona fide employment exception (42 C.F.R. § 411.357).

The requirements of each of these exceptions are unique and are set forth in the Stark regulations. The final regulations (also known as "Stark III") were released on August 27, 2007 and will be effective ninety days from their publication on September 5, 2007. See http://www.cms.hhs.gov/PhysicianSelfReferral/Downloads/CMS-1810-F.pdf. The regulations regarding the exceptions describe the various arrangements that the Centers for Medicare and Medicaid Services ("CMS") has found do not pose a risk to federal programs or create a risk of patient abuse.

The Government has been active in enforcing Stark violations and, as discussed below, Stark violations are becoming a common basis for qui tam actions under the Federal False Claims Act. Therefore, compliance with Stark is a must when considering physician joint ventures, establishing new health care businesses, or entering into contracts with entities that depend on physician referrals such as hospitals, labs and surgery centers.

Anti-Kickback

The Federal Anti-kickback Statute (42 U.S.C. § 1320a-7b) prohibits any person from knowingly and willingly soliciting, offering, receiving or paying anything of value in return for a referral for health care services or equipment that are reimbursable by a federal healthcare program. Unlike Stark, Anti-kickback is a criminal statute with penalties including fines and imprisonment. However, intent is a necessary element of a potential violation of the Anti-Kickback Statute. An illegal remuneration (remuneration in return for a referral) violates the act even if it is done in one instance. There is no de minimus exception. Further, the payment for the referral only needs to be a part of the decision to refer for the parties to violate Anti-kickback. United States v. Greber, 70 F.2d 68 (3d Cir. 1985).

The U.S. Department of Health and Human Services ("HHS") has identified twenty-three regulatory "safe harbors" which define certain practices permitted by the act. 42 C.F.R. § 1001.952. Unlike Stark, failure to meet a safe harbor does not make an arrangement per se prohibited. Fitting within a safe harbor, however, will protect the parties from potential prosecution under the Anti-kickback Statute.

One of the most commonly used safe harbors is the "personal services and management contracts" safe harbor. 42 C.F.R. § 1001.952(d). In order to fall within this safe harbor, the personal services or management contract must: (1) be set out in writing and signed by the parties; (2) cover all the services that will be provided under the agreement (if a part-time agreement it must set forth the schedule of services); (3) the term of the agreement is at least for one year; (4) aggregate compensation to be paid under the agreement is set in advance, consistent with fair market value and is not determined in a manner that takes into account the volume or value of referrals; (5) the services performed under the agreement do not involve the counseling or promotion of a business arrangement that violates state or federal law; and (6) the aggregate services contracted for do not exceed those which are reasonably necessary to accomplish the commercially reasonable business purpose of the services provided. Other safe harbors include provisions for investment interests, space rental, equipment rentals, bona fide employees, group purchasing organizations, price reductions offered to health plans, investments in ambulatory surgery centers and price reductions to eligible managed care organizations. 42 C.F.R. § 1001.952

While qualifying for safe harbor is not essential for compliance with the Anti-kickback Statute, it will protect physicians from potential prosecution and provide peace of mind. The HHS Office of the Inspector General (OIG) has an advisory opinion procedure for those seeking formal guidance regarding the application of the Anti-kickback Statute and its safe harbors.

Federal Antitrust Laws

The U.S. Federal Trade Commission ("FTC") and Department of Justice ("DOJ") monitor physician groups for compliance with the Section 1 of the Sherman Act. 15 U.S.C. § 1. Groups of physicians that join together for the purpose of negotiating prices with payers are considered cartels and are prosecuted by the FTC and DOJ under the federal Anti-trust laws.

There are, however, ways that physicians can negotiate as a group without violating the anti-trust laws. One such option is the "messenger" model. In this model, the physicians do not make any group pricing decisions. Rather the group communicates the prices of the individual physicians to the payer.

Another option is to fall within an FTC/DOJ designated "safety zone." See DOJ/FTC Statements of Antitrust Enforcement Policy in Health Care available at http://www.ftc.gov/bc/healthcare/industryguide/policy/index.htm. The requirements for these safety zones vary based on whether the physician joint venture is "exclusive" or "non-exclusive." Exclusive joint ventures/networks are those models where the member physicians are either forbidden or choose to not negotiate with insurers outside of the joint venture/network. Id. For an exclusive joint venture/network the FTC/DOJ will not challenge, absent extraordinary circumstances, the joint venture/network if the physician participants share substantial financial risk and constitute 20 percent or less of the physicians in each specialty with active hospital staff privileges in a relevant geographic market. Id.

Non-exclusive physician networks or joint ventures are those models where the member physicians are permitted to negotiate with insurers outside of the joint venture/network. For a non-exclusive joint venture/network, the FTC/DOJ will not challenge—absent extraordinary circumstances—the joint venture/network if the physician participants 1) share substantial financial risk and 2) constitute 30 percent or less of the physicians in each specialty with active hospital staff privileges in a relevant geographic market. Id.

For the purposes of the safety zones, sharing "substantial risk" includes capitated payments, payment based on a predetermined percentage of premium or revenue of a health plan, withholding payments from all physicians based on group performance in meeting predetermined cost containment goals, physician financial awards or penalties for meeting or failing to meet overall cost or utilization targets for the network as a whole and agreeing to accept patients with a complex treatment plan for a predetermined price. Id.

If the physician joint venture/network is not the messenger model and does not fall within a safety zone, it must satisfy the "Rule of Reason" analysis to comply with federal antitrust statutes. Id. The rule of reason looks to see if the pro-competitive effects of a joint venture outweigh the anti-competitive practice of joint negotiation of prices. The heart of the rule of reason analysis is whether the joint venture results in increased efficiency. The factors the FTC will look at include the sharing of risk among the physicians, whether the network is exclusive or non-exclusive, the market share held by the physicians and the clinical integration of the network. Clinical integration includes centralized case management, coordination of patient care by a medical director, physician determined quality assurance guidelines, physician determined utilization review guidelines, use of information systems to monitor physician and network performance and central monitoring of patient satisfaction.

The FTC also looks to determine if the joint venture/network promotes efficiency through joint use of data and information systems, centralized medical records, use of an outside consultant to negotiate fees and contract with payers and providing cost and utilization reports to payers. In the event the joint venture/network is unsure of whether it satisfies a safety zone, FTC opinion letters can be obtained regarding the formation of a physician network/joint venture.

Food and Drug Administration Modernization Act

In order to secure Food and Drug Administration ("FDA") approval of a drug or medical device, the manufacturer must demonstrate that the drug or device is effective for each of its intended uses. 21 U.S.C. § 355(d). Use of a device or drug that is beyond FDA approved use (not included in the label) is considered an off-labeled use. Generally, it is impermissible for a manufacturer, or anyone acting on the manufacturer's behalf, to promote off-label use of a drug or device. See 21 U.S.C. § 331 and 21 U.S.C. § 352.

Congress has authorized limited off-label use of drugs and devices by physicians that satisfy the "practice of medicine exception." 21 U.S.C. § 396. The practice of medicine exception allows health care practitioners acting within their legal authority under state law to prescribe and administer legally marketed devices and drugs to the practitioner's patients for the treatment of "any condition or disease." Id. In order for the exception to apply there must be a "legitimate health care practitioner-patient relationship." Id. This exception does not apply to drugs or devices not legally available in the United States. Additionally, the practice of medicine exception does not protect physicians that are actively promoting off-label uses of drugs and devices to the general public.

Physicians seeking to use an FDA regulated drug or device for an off-label purpose walk a fine line. As long as the physician's use falls within the practice of medicine exception, the use will generally be permitted (subject to potential civil liability). Once the physician crosses the line and promotes off-label use, however, possible federal enforcement is a distinct possibility. Such was the case of Dr. Peter Gleason who was indicted in 2006 for illegally marketing the "date rape" drug Xyrem.

HIPAA

The Health Insurance Portability and Accountability Act ("HIPAA") provides for the accessibility and portability of health insurance. Of concern to physicians are the "Standards for Privacy of Individually Identifiable Health Information" also known as the Privacy Rule. 45 C.F.R. § 160.102. The Privacy Rule addresses the use and disclosure of individual health information by "covered entities," including most health care providers. Id.

The basic principle of the Privacy Rule is to limit disclosure of individually identifiable health information to those instances where disclosure is required or permitted by HIPAA or the individual explicitly authorizes disclosure. 45 C.F.R. § 160.502(a). HIPAA requires disclosure where the individual requests access to their information or if the information is requested by HHS in an investigation or enforcement action. Id. Permitted disclosures include disclosure for treatment and payment for health care services (45 C.F.R. § 160.506(c)), disclosure incident to a permitted or required disclosure (45 C.F.R. § 160.502(a)), where the individual has had the opportunity to agree or object to the disclosure in accordance with twelve specifically identified "national priority purposes" (45 C.F.R. § 164.512) and has failed to do so, and disclosure of limited data sets for which certain identifiable information was removed (45 C.F.R. § 164.54(e)).

Failure to comply with the Privacy Rule can result in civil monetary penalties assessed by HHS. 42 U.S.C. § 1320d-5. Criminal penalties are possible if a person knowingly obtains or discloses information in violation of HIPAA. 42 U.S.C. § 1320d-6.

Federal False Claim Act

Many physicians and lawyers overlook the potential landmines of federal regulation under the belief that their practice is too small to draw the attention of the HHS, FTC or DOJ. Under the Federal False Claims Act (31 U.S.C. §§ 3729-3733), however, a whistleblower can bring an action on behalf of the government for illegal claims for payment submitted to the government. The Act entitles the whistleblower to a share of the United States' recovery plus costs and attorney's fees. 31 U.S.C. § 3730. The whistleblower's share can be up to twenty-five percent of the government's recovery if the government assumes prosecution of the case or up to thirty percent of the government's recovery if the government does not assume prosecution of the case.

Health care fraud is the most common basis for qui tam actions brought by whistleblowers under the False Claims Act. December 15, 2005 GAO Report on False Claims Act Litigation, http://www.gao.gov/new.items/d06320r.pdf.

Seventy-nine percent of all qui tam False Claims Act cases involving health care fraud and Fifty-four percent of the total qui tam False Claims Act cases allege that HHS was the defrauded agency. Id. Between 1987 and 2005, moreover, the government recovered more than five billion dollars in health care fraud qui tam cases. Id.

In many of these cases, the whistleblower is an employee or former employee of the defendant. Such an employee may become a whistleblower out of a crisis of conscience or a desire to profit and/or take revenge against an employer. Additionally, it is becoming more common to see violations of Stark as a predicate for a False Claims Act action.

The risk for potential prosecutions based on Stark, Anti-kickback and the other federal laws regulating health care, therefore, go beyond direct prosecution by the government. Employees and former employees aware of—and sometimes complicit in—the violation may bring a qui tam action against the physician. Thus, it is unwise for a physician to simply overlook a potential violation in hope that the government will never investigate their practice.

Conclusion

While many transactions will not violate federal law and can result in substantial profits, failure to consider applicable federal laws and regulations can be catastrophic for physicians. Penalties ranging from monetary fines to exclusion from participation in federal programs to prison can effectively end a physician's career. Further, employees, partners and other insiders are potential prosecutors as a result of the False Claim Act's qui tam provisions. Therefore, careful consideration of federal, as well as state, laws and regulations is essential when counseling physician clients or reviewing transactions involving health care.

Matt Milone is an associate at the law firm of Jones Vargas practicing in the areas of health care and insurance.

Health Law: At A Glance

By Annette L. Bradley

What is health law? It is complex, multi‑leveled, and multi‑dimensional. Health law encompasses diverse yet interrelated issues, from public health to ethics. It includes the regulatory push-pull between myriad government regulations and the impact of those regulations on the business of delivering health care. The health lawyer's practice can be equally diverse and multilayered, with clients ranging from traditional health care providers such as hospitals and physicians, to less traditional clients such as insurance companies and niche enterprises.

Integral to the health law jigsaw is the economic and social cost of health care in this country. For example, in 1987, the uninsured rate was 12.9 percent. In 2005, the rate was 15.3 percent. [U.S. Census Bureau, Housing and Household Economic Statistics Division, www.census.gov/hhes/www/hlthins/hlthin05/hlth05asc.html]. By 2005, total spending on health care was 16 percent of the gross domestic product and, according to the National Coalition on Health Care, it is expected to reach 20 percent by 2015. [National Coalition on Health Care, "Health Insurance Costs, Facts on the Cost of Heath Care," www.nchc.org/facts/cost.shtml].

Many Americans obtain their health insurance through their employer (or a family member's employer). According to the Kaiser Family Foundation's "Employee Health Benefits: 2006 Annual Survey," the percentage of workers covered by health insurance decreased from 59.8 percent in 2004 to 59.5 percent in 2005. While full-time employees fared better than part-timers, the number of full-time uninsured workers increased from 20.5 million in 2004 to 21.5 million in 2005. Although smaller employers cannot always afford to provide health insurance to their employees, an employee is not guaranteed health insurance simply because they work for a larger company. [Henry J. Kaiser Family Foundation, "Employee Health Benefits: 2006 Annual Survey," September 26, 2006, [www.kff.org/insurance/7527/index.cfm]. In 2005, the employer's contribution for employer-based health plans in Nevada averaged $3,061; while the employee's contribution averaged $691. This was slightly lower than the national average of $3,268 and $723. Family coverage for this same period came in at $7,211 for the employer contribution and $2,800 for the employee. While the employer contribution for family coverage was lower than the national average of $8,143, the employee's contribution was higher than the national average of $2,585. [www.statehealthfacts.kff.org.profileind.jsp?ind=270&cat=5&rgn=30].

Let us not forget children, race, and class. Between 2005 and 2006, the number of children without health insurance increased 11.7 percent. In 2005, 8 million children under the age of 18 were uninsured. In 2006, that number rose to 8.7 million. [U.S. Census Bureau, "Income, Poverty, and Health Insurance Coverage in the United States: 2006", August 2007, www.census.gov/hhes/www/income/income06.html]. In 2006, the percentage of uninsured African Americans, Hispanics, and Asians was 19.0 percent, 34.1 percent and 17.2 percent respectively. Id. The correlation between an individual's income and the probability of having health insurance is not surprising. Those households with less than $25,000 annual income endured an uninsured rate of 24.2 percent while those households with an annual income of $75,000 or more enjoyed an uninsured rate of 7.7 percent. Id.

The consequence of the lack of health insurance reaches the individual immediately and profoundly. It reaches society slowly, yet no less profoundly. Societal response to no care, poor care, or out of reach care is an amalgamation of laws - sometimes interrelated and sometimes conflicting. Yet, all intend to improve access and standardize the health care provided. For example, the Emergency Medical Treatment and Active Labor Act of 1986, ("EMTALA"), 42 U.S.C. § 1395dd, was enacted in response to growing concern over the availability of emergency health care for the poor and uninsured. This statute was designed to prevent "patient dumping," i.e., prevent hospital emergency departments from either refusing to provide emergency medical treatment to the poor or uninsured or transferring the poor or uninsured before their emergency condition stabilized. At its core, EMTALA seeks to ensure access to those persons who might otherwise go untreated. Although reports of patient dumping fueled EMTALA implementation, under EMTALA, a qualified medical professional must give all patients presenting to a hospital emergency department a medical screening examination. If that patient is determined to have an emergency condition, EMTALA requires the hospital to treat and stabilize that patient within its capabilities.

To expand coverage to America's low-income children (families earning too much to qualify for Medicaid and too little to afford private insurance), the State Children's Health Insurance Program (SCHIP) was authorized as part of the Balanced Budget Act of 1997. SCHIP is jointly financed by Federal and State governments. Upon enactment, SCHIP allocated approximately $24 billion over 10 years to help states expand health insurance for children. States had the option of expanding their current Medicaid programs or creating a new children's health insurance program. Within fairly broad federal guidelines, SCHIP allowed each State to design and administer its own program. After program approval, the state became eligible to receive a capped amount of funds on a matching basis based on their actual expenditures.

Nevada's SCHIP program, Nevada Check Up, was approved in 1998 and covers uninsured children of low income families from birth to age 18. To qualify as "low income," the family's gross annual income must be between 100 percent and 200 percent of the Federal Poverty Level guidelines. According to the Nevada Check Up website, as of November 2006, 29,969 children were enrolled. [http://nevadacheckup.state.nv.us].

Since enactment, 2 million fewer American children are uninsured. Almost 7 million children were enrolled in this program during 2006. Despite the number of children covered, according to a recent New York Times article, this still represents only 30 percent of the children who should be enrolled. [New York Times, "Many Eligible for Child Health Plan Have No Idea," August 22, 2007]. SCHIP, set to expire on September 30, 2007, was recently reauthorized by the Senate and the House of Representatives. As with anything else, SCHIP has its promoters and detractors. The rise in the number of uninsured, skyrocketing health care costs, and health care fraud, abuse, and waste set the stage for increased government financial and regulatory scrutiny on health care providers. In its continuing effort to control costs and improve the quality of care, in August 2007, CMS put hospitals on notice that, effective October 2008, Medicare would no longer pay for the treatment of preventable conditions. As the rule currently stands, hospitals will not be reimbursed for infections developed after heart surgery, pressure ulcers, urinary tract infections and vascular infections resulting from improper catheter use. It is anticipated that CMS will expand this list before the October 2008 effective date.

To combat fraud and abuse, the False Claims Act, (FCA), 31 U.S.C. § 3729 et. seq. provides for penalties, including treble damages, for anyone who knowingly submits—or causes to be submitted—a false or fraudulent claim for payment to the federal government. The FCA also authorizes private citizens (called Relators) to file suit on the government's behalf. If the suit is successful, Relators can recover between 15 percent - 25 percent of any Federal damages recovered. In November 2006, the Department of Justice announced it recovered $3.2 billion in fraud and false claims during fiscal year 2006. Health care fraud accounted for $2.2 billion in settlements and judgments. [Department of Justice, News Release, November 21, 2006]. The FCA puts health care organizations on notice that, to defend against a false claims charge, they must have a robust compliance program with a demonstrable internal investigation component. Building on the above, the Deficit Reduction Act of 2005 (DRA), 42 U.S.C. 1396a(a)(68), became effective January 1, 2007 and applies to all health care organizations receiving $5 million or more in annual Medicaid funds. These organizations are required to educate their employees and establish written policies for their employees, contractors, and agents about the FCA, comparable state anti-fraud and abuse laws, and whistleblower provisions for those laws. The DRA significantly ups the ante in the war against fraud and abuse by creating financial incentives for states to pursue fraud claims. States that either had or enacted a false claims law that was at least as exacting as the federal FCA would be entitled to receive an additional 10 percent of any monies recovered under that State's false claims act action. The Office of Inspector General (OIG) published specific guidelines that it would consider in determining whether a state's false claims law met the requirements. Nevada's False Claims Act law was approved by the OIG in August 2007. Any discussion about health law should include the Health Insurance Portability and Accountability Act of 1996, (HIPAA). HIPAA applies to any health information created or maintained by a health plan, health care clearinghouse, or health care provider (a "Covered Entity") who transmits a patient's health information in electronic form. Generally, HIPAA establishes national standards for the use and disclosure of a patient's health records and the security of electronic heath care records. Specifically, HIPAA governs the manner in which a patient's health information (called protected health information or PHI) can be used and precludes disclosures unless authorized to do so by the patient. The exception (you knew there would be an exception, right?) is that PHI may be disclosed without patient authorization for purposes of furthering core health care activities, i.e., treatment, payment, and health care operations. HIPAA security rules include administrative, technical, and physical security procedures designed to ensure the confidentiality of electronic health information. HIPAA privacy and security rules are the most comprehensive Federal legislation affecting health care since the 1965 enactment of the Medicare and Medicaid programs.

Health law's complex environment is made even more so by the fact that both federal and state law come into play where health care is concerned. Whether it's constitutional principles or federal and state statutes and regulations, resolution of any health care issue is, unavoidably, a fact-driven process. While Federal statutes may get the lion's share of the focus, more stringent state laws that co‑exist with the federal law must also be addressed.

I appreciate the incredibly broad strokes of this discussion. Each area discussed herein could easily headline its own discussion. This discussion opened with the question, "What is health law?" The answer could be a matter of perspective depending on who's asking, and who's answering. Is it health law as a driver of public health issues? Is it structuring a deal in furtherance of a client's financial goals? Or, is it health law as a developer of internal checks and balances to satisfy various federal and state regulatory compliance issues. What is health law? Who wants to know?

Annette L. Bradley is the Executive Director of Risk Management at University Medical Center.