1. GSBlaw.com 1 Don’t Forget to Follow the MONEY: Stark and Anti-Kickback Analysis for Healthcare Transactions SANDRA T. JOHNSON, ESQ.

2. GSBlaw.com 2 Today’s Discussion Policy – Reasons for Anti-Kickback and Stark Basic Concepts Common Safe Harbors and Exceptions Examples and Application

3. GSBlaw.com 3 POLICY: Why Congress Cares Anti-Kickback Statute: Perception that entities and individuals were paying for federal healthcare business, e.g.: –Payments from clinical labs to physicians to induce physicians to use that lab; or –Payments from hospitals to physicians to induce physicians to refer to those hospitals (e.g., lower than fmv rents for offices). Evidence that these inducements: –Affect clinical decision-making; and –Increase health care costs to federal payment programs.

4. GSBlaw.com 4 Policy: Why Congress Cares (cont’d) Stark Evidence that referring physicians’ financial relationships with entities to which they refer: – Encourage overutilization of health care services; – Increase health care costs; – Compromise the trust relationship with patients; – Limit patient choice; and – Harm competition. The Stark Law was touted as a “bright line” test; therefore, a strict liability statute

5. GSBlaw.com 5 BASIC CONCEPTS THE FEDERAL ANTI-KICKBACK STATUTE First in our discussion because: –Violation of this law incurs both civil and criminal liability; and –Compliance can be difficult because the government enforcement agencies interpret its provisions very broadly.

6. GSBlaw.com 6 AKS: Reference Materials Anti-Kickback Statute, 42 U.S.C. § 1320a-7b Implementing regulations, 42 C.F.R. §§ 1001.951- 1001.952, 1003.100-1003.133 Department of Health and Human Services Office of Inspector General (“OIG”) Advisory Opinions (where OIG offers written guidance as to whether certain conduct would result in sanctions or prosecution under the Anti-Kickback Statute) OIG Fraud Alerts and other bulletins Compliance Program Guidance

7. GSBlaw.com 7 AKS: The General Rule The AKS prohibits: –paying or receiving, offering or giving applies to BOTH sides of the transaction –remuneration in cash or in kind anything of value, e.g., parking, meals, coupons –with the intent to induce referrals of items or services intent – “one purpose” –or recommending items or services –that are payable by a federal health care program (e.g., Medicare, Medicaid or Tricare).

8. GSBlaw.com 8 AKS: Enforcement OIG – responsible for civil enforcement Department of Justice (“DOJ”) – responsible for criminal enforcement Medicaid Fraud Control Units (“MFCUs”) – responsible for enforcement with respect to Medicaid beneficiaries Whistleblowers under the False Claims Act

9. GSBlaw.com 9 AKS: Penalties Violators of the Anti-kickback Statute are subject to both criminal and civil penalties: –Criminal Penalties $25,000 Up to five years imprisonment –Civil Money Penalties $10,000 per item or service 3 times amount claimed for each item or service Exclusion from Federal and State health care programs –AKS violations can trigger False Claims Act liability. Damages under the Federal False Claims Act are even more devastating: Up to $10,000 Treble damages for each false claim submitted Up to five years imprisonment

10. GSBlaw.com 10 AKS: Exceptions and Safe Harbors Recognizing that the language of the law is so broad that it could penalize beneficial activities, the federal government created “exceptions” and “safe harbors” for certain conduct. Relationships should fit under an “exception” or “safe harbor” in order to ensure that participants will not be subject to penalties under the Anti- Kickback Statute.

11. GSBlaw.com 11 AKS: Exceptions Statutory Exceptions to the Anti-Kickback Statute apply to: Discounts Payments to employees Vendor payments to certain group purchasing organizations Waivers of co-payment and deductible amounts Certain risk sharing arrangements

12. GSBlaw.com 12 AKS: Safe Harbors Statute instructs Congress to promulgate protective “safe harbors” for conduct that does not pose unreasonable risk of federal program abuse, but would otherwise violate the AKS. To apply, an arrangement must satisfy all safe harbor provisions. To date, there are 22 regulatory safe harbors. Safe harbors are narrow and can be difficult to satisfy.

13. GSBlaw.com 13 AKS: Common Safe Harbors Safe Harbors protect certain types of contractual relationships, including: –Personal services/management contracts –Space leases and equipment leases –Recruiting arrangements –Ambulatory Surgical Centers (“ASC”); –Certain investment interests; and –Certain managed care arrangements

14. GSBlaw.com 14 AKS: Use of the Safe Harbor Failure to fall squarely under a safe harbor does not mean an arrangement is per se illegal. –Can include safeguards to prevent program abuse –Can include provisions that support the absence of intent Parties who are unsure whether an arrangement violates Anti-Kickback Statute may request an advisory opinion from the OIG.

15. GSBlaw.com 15 AKS: Basic Examples Examples of personal service and lease agreements that implicate the Anti-Kickback Statute include: –Entity pays physician for Medical Director services without requiring physician to perform contracted duties. –Physician leases space from entity and pays rate below FMV. –Entity contracts to purchase items or services or lease space, in excess of its needs or for less than fmv. –Entity performs administrative services for physicians (e.g., billing) and physician pays less than FMV for service. –Physician utilizes entity’s employees, supplies or equipment at physician’s private office and pays entity less than FMV for those items or services.

16. GSBlaw.com 16 AKS: Transaction Example Transaction: Private equity firm seeks to invest in a nationwide diagnostic imaging company. Imaging company’s business model: –Install diagnostic imaging equipment near physician offices (may lease space from physicians). –Physicians lease time on the equipment, pay flat fee amount equal to imaging company’s cost + reasonable profit for each patient they refer for testing. –Physicians bill payors, including Medicare, for tests. –Flat fee paid to imaging company < payor reimbursement. Money flowing between parties for services paid by Medicare, so AKS is implicated.

17. GSBlaw.com 17 AKS: Transaction Analysis The Problem: Why does this arrangement exist? Compare to standard imaging referrals: –Physician orders diagnostic test at her practice –Patient goes to imaging center or hospital for test –Physician receives result – no money flows to physician for the diagnostic testing –Here, imaging company “locks in” a referral stream –Physicians profit in direct proportion to the number of referrals

18. GSBlaw.com 18 AKS: Transaction Analysis (cont’d) Payment or receipt of remuneration –In cash: YES – lease payments from physician to imaging co. –In kind: YES – difference between lease payments to imaging co. and reimbursement from payors. In return for referrals – relevant to intent –Relationship is impermissible if even one purpose of the arrangement is to encourage or increase referrals; i.e., an arrangement may have any number of legitimate purposes – increased efficiency, better quality, etc. – but if one purpose is to increase referrals, the arrangement would likely be considered to violate the AKS.

19. GSBlaw.com 19 AKS: Transaction Analysis (cont’d) Safe Harbor for equipment leases requires: –Written agreement signed by the parties: OK –Term of at least one year: OK –Aggregate compensation is set in advance “per patient” payment is not “set in advance” in the aggregate, because varies with the number of patients –is FMV: probably OK, because cost + reasonable profit is likely within fmv for payments to imaging co. by physicians –is not related to the volume or value of referrals or business otherwise generated between the parties NO, because physician profits increase with referrals –Commercially reasonable business terms: probably not, because imaging company accepting < reimbursement rate.

20. GSBlaw.com 20 STARK: The federal prohibition against physician self-referrals Now let’s talk about...

21. GSBlaw.com 21 Stark: Reference Materials Stark Law, 42 U.S.C. § 1395nn, et seq. Stark Phase I Final Rule, 66 Fed. Reg. 856 (Jan. 24, 2001) Stark Phase II Interim Final Rule, 69 Fed. Reg. 16,054 (Mar. 26, 2004) Stark Phase III, 72 Fed. Reg. 51012 (Sept. 5, 2007) Implementing regulations, 42 C.F.R. Parts 411 and 424

22. GSBlaw.com 22 Stark Law Statutory Prohibition “[I]f a physician (or an immediate family member of such physician) has a financial relationship with an entity …, then – (A) the physician may not make a referral to the entity for the furnishing of designated health services for which payment otherwise may be made under this subchapter, and (B) the entity may not present or cause to be presented a claim … or bill … for designated health services furnished pursuant to a referral prohibited under subparagraph (A).” Social Security Act §1877, 42 USC §1395nn

23. GSBlaw.com 23 Regulatory Prohibition “… [A] physician who has a direct or indirect financial relationship with an entity, or who has an immediate family member who has a direct or indirect financial relationship with the entity, may not make a referral to that entity for the furnishing of DHS [designated health services] for which payment otherwise may be made under Medicare.” § 411.353(a)

24. GSBlaw.com 24 Stark = Strict Liability Stark’s prohibition is absolute: –If the financial relationship exists and no exception applies, the physician may not refer patients to the hospital for inpatient or outpatient hospital services or other DHS. –If the financial relationship exists and a referral is made, the hospital may not bill for the services it provides as a result of the referral.

25. GSBlaw.com 25 Penalties Penalties under the Stark Law are civil only The entity providing DHS cannot bill for services provided pursuant to a prohibited referral Billings that are improper under the Stark Law must be refunded in their entirety Failure to refund an illegally billed amount is subject to a fine of $15,000 per item billed and exclusion from federal healthcare programs A Stark Law violation may give rise to qui tam actions, False Claims Act liability Refund of Medicare Billings + Treble Damages + Penalties = $$$$$$$$$

26. GSBlaw.com 26 Definitions Definition of “Physician” See § 411.351 Includes a doctor of medicine, osteopathy, dental surgery, dental medicine, podiatric medicine, optometry, or a chiropractor Incorporates Medicare definition found at SSA 1861(r) Physical therapists, midwives, nurse practitioners, etc. are not covered by the Stark Law

27. GSBlaw.com 27 Definitions (cont’d) Definition of “Entity” See IPPS: Preamble and § 411.351 (73 FR 48726, 48751): Includes any organization that furnishes DHS A person or entity is considered to furnish DHS if the person or entity – –Has performed services that are billed as DHS; or –Has presented a claim for DHS, or has a right to be paid for the services under reassignment

28. GSBlaw.com 28 Definitions (cont’d) Definition of “Referral” See § 411.351: Requesting, ordering, certifying or recertifying the need for any DHS for which payment may be made under Part B; or making a request, a plan of care or certification that includes the provision of a DHS for which payment may be made under Medicare (can be written, oral, electronic, etc.) Referring physician = physician’s solely-owned PC Does not include DHS personally performed by referring physician

29. GSBlaw.com 29 Definitions (cont’d) “Referral” (cont’d) Does not include a request for consultation that result in particular services being requested and performed: –By or under supervision of a pathologist or his/her group (clinical diagnostic laboratory tests and pathological examination services) –By or under supervision of a radiologist or his/her group(diagnostic radiology service) –By or under supervision of a radiation oncologists or his/her group (radiation therapy)

30. GSBlaw.com 30 Definitions (cont’d) Definition of “designated health services” (“DHS”) See § 411.351 DHS includes only those services payable, in whole or in part, by Medicare The specific services defined as DHS are in most cases identified by reference to the “List of CPT/HCPCS Codes” (see §411.351, 72 FR 51081), which is updated annually as published in the Federal Register and on CMS Website [referred to in this outline as the “List”]

31. GSBlaw.com 31 Definitions (cont’d) DHS includes (cont’d): Clinical laboratory services identified by the List (§411.351, 72 FR 51080) Physical therapy, occupational therapy and speech language pathology services identified by the List(§411.351, 72 FR 51082) Radiology and certain other imaging services identified by the List (§411.351, 72 FR 51083) Radiation therapy services and supplies identified by List(§411.351, 72 FR 51083); Revised 11/21/05 to include nuclear medicine procedures (70 FR 70283)

32. GSBlaw.com 32 Definitions (cont’d) DHS includes (cont’d): Durable medical equipment and supplies furnished by a supplier or a home health agency means such equipment that: –Can withstand repeated use; –Is primarily and customarily used to serve a medical purpose; –Generally is not useful to an individual in the absence of an illness or injury; and –Is appropriate for use in the home See § 411.351 (72 FR 51080, referencing SSA § 1861(n) and § 414.202)

33. GSBlaw.com 33 Definitions (cont’d) DHS includes (cont’d): Parenteral and enteral nutrients, equipment, and supplies(§411.351, 72 FR 51082, National Coverage Determinations Manual) Prosthetics, orthotics, and prosthetic devices and supplies (§411.351, 72 FR 51083, SSA § 1861(s)) Home Health Services (§411.351, 72 FR 51081, SSA § 1861(m) and 42 CFR Part 409, subpart E) Outpatient prescription drugs covered by Medicare Part B or Part D (§411.351, 72 FR 51082)

34. GSBlaw.com 34 Definitions (cont’d) DHS includes (cont’d): Inpatient and outpatient hospital services (§ 411.351, 72 FR 51081 and 51082, referring to SSA § 1861, psychiatric and critical access hospitals) Does not include lithotripsy -- American Lithotripsy Soc. v. Thompson, 215 F.Supp. 2d 23 (D.D.C. 2002) (Sec. Dismissed Appeal to Cir. Ct.); but see IPPS, 73 FR 48719, regulation of lessor/lessee arrangements

35. GSBlaw.com 35 Definitions (cont’d) DHS does not include services reimbursed as part of a composite rate (e.g. ASC services or SNF Part A services) unless part of a DHS payable through a composite rate (e.g. hospital services) Exception also made for certain implants furnished as part of ASC procedures Note: Physician ownership of ASCs has grown under the Stark Law

36. GSBlaw.com 36 Financial Relationship Defined in § 411.354 (72 FR 51086) May be an ownership or compensation relationship May be direct or indirect (§411.354(a)) Important definitions: –Ownership or investment interest (§411.354(b)) –Direct ownership or investment interest –Indirect ownership or investment interest –Compensation arrangement (§411.354(c)) –Direct compensation arrangement –Indirect compensation arrangement –“Stand in the shoes” (§ 411.354(c)(2)(iv) and (c)(3))

37. GSBlaw.com 37 Direct & Indirect Relationships Direct Financial Relationship Remuneration passes between the DHS entity and the referring physician (or his/her immediate family), without any intervening entities E.g., professional services agreement, space lease, equipment lease, etc.

38. GSBlaw.com 38 Direct & Indirect Relationships Indirect Financial Relationships –Remuneration passes through intervening entities –Some knowledge required on part of DHS entity –Doctors above have a direct relationship with the Group, an indirect relationship with the PT company, and an indirect relationship with the DHS entity.

39. GSBlaw.com 39 Ownership/Investment Interests Ownership = Equity, debt or “other means” –Includes “stock, stock options... partnership shares, limited liability company memberships, as well as loans, bonds, or other financial instruments that are secured with an entity’s property or revenue or a portion of that property or revenue” (but a physician’s security interest in equipment sold to a hospital is a compensation, not an ownership interest – see 72 FR 51086) –Includes an interest in an entity that holds an ownership or investment interest in a DHS entity –Interest in subsidiary not an interest in parent corporation (but can be part of an indirect financial relationship)

40. GSBlaw.com 40 Ownership/Investment Interests Indirect ownership or investment interest Between referring physician and DHS entity, there is an unbroken chain of any number of persons or entities having investment or ownership interests DHS entity has actual knowledge of, or acts in reckless disregard or deliberate ignorance of, the existence of some indirect interest Common ownership does not by itself establish an indirect ownership or investment relationship between the common owners

41. GSBlaw.com 41 Compensation Arrangements Any arrangement involving any remuneration, direct or indirect, between a physician or immediate family member and an entity “Remuneration” is itself broadly defined in §411.351 to mean “any payment or other benefit made directly or indirectly, overtly or covertly, in cash or in kind,” with limited exceptions (see 72 FR 51084)

42. GSBlaw.com 42 Direct Arrangements: SITS Direct Compensation Arrangement and SITS –A physician owner is deemed to stand in the shoes of his or her “physician organization” (§411.354(c)(1)(ii), (c)(2)(iv) and (c)(3)) –Result: A DHS entity having a compensation arrangement with a physician organization is deemed to have a direct financial relationship with each of that organization’s physician owners, except titular owners (See IPPS, 73 FR 48693, 48752)

43. GSBlaw.com 43 SITS Rule “Physician organization” (§411.351) means: –A physician and wholly-owned PC; –A physician practice; or –A group practice that meets § 411.352 FAQs published on CMS website: –Limited to medical practice entities –Does not include hospitals or medical schools that employ physicians

44. GSBlaw.com 44 Consequences of SITS Previously indirect comp arrangements become direct arrangements and must meet a direct (not indirect) comp exception Previously exempt/uncovered arrangements are now covered and must meet an exception CMS: Plugged a unintended “gap” between direct and indirect compensation arrangements But Note: Not all intervening entities are physician organizations subject to SITS; limitation in IPPS rules to physician owners allows structuring options

45. GSBlaw.com 45 Indirect Arrangements Indirect compensation arrangement: –There is an unbroken link of ownership or investment interests or compensation arrangements between the physician and the DHS entity –The DHS entity has actual knowledge of, or acts in reckless disregard or deliberate ignorance of, the fact that the referring physician or family member receives aggregate compensation that varies with or otherwise reflects, the “value or volume of referrals or other business generated by the referring physician” for the DHS entity

46. GSBlaw.com 46 Indirect Arrangements (cont’d) The physician receives aggregate compensation that varies with the “volume or value of referrals or other business generated by the referring physician for the entity furnishing the DHS”. Determine this – –By reference to the physician’s direct financial relationship, EXCEPT if that is an ownership/investment interest, then by reference to the compensation arrangement closest in the chain to the physician; and –Without reference to special rules on unit-based compensation (see 72 FR 51087)

47. GSBlaw.com 47 Special Rules on Compensation Set in Advance (§ 411.354(d), 72 FR51087-51088) –Aggregate compensation, time-based or per unit of service, or a specified formula for calculating compensation –Set in an agreement before services to be compensated are furnished –Formula for setting compensation must be objectively verifiable and may not be changed in a manner that reflects the volume or value of referrals or other business generated by the referring physician –Required for leasing, personal services, fair market value exceptions (§411.357(a), (b), (d) and (l))

48. GSBlaw.com 48 Special Rules (cont’d) Volume/Value of Referrals (§ 411.354(d), 72 FR 51087) –Unit-based compensation (including time-based or per unit of service) will be deemed not to take into account the “volume or value of referrals” if: –FMV for items or services actually provided –Compensation does not vary during the course of the agreement in any manner that takes into account referrals of DHS –But note restrictions on “per click” payments in leases. Required for leasing, personal services, fair market value and indirect compensation exceptions (§411.357(a), (b), (d), (l), (p))

49. GSBlaw.com 49 EXCEPTIONS Four types of exceptions, applicable to: –Ownership or investment interests –Compensation arrangements –General exceptions –Limited exception to permit billing for referrals when the arrangement is temporarily out of compliance Each applies ONLY to the type of arrangement specified; i.e., compensation-only exceptions cannot be applied to ownership arrangements, etc.

50. GSBlaw.com 50 Ownership Exceptions Publicly traded securities Mutual funds Specific providers (e.g., “whole hospital” exception, though this exception has been limited through ACA)

51. GSBlaw.com 51 METHOD: How to approach the analysis

52. GSBlaw.com 52 Transaction Types: Any transaction that involves a relationship with a healthcare entity of any kind, including: –Mergers and acquisitions involving healthcare entities –Space or equipment leases –Physician practice acquisitions or sales –Ancillary services entity transactions with physicians or other DHS entities (see imaging company example above) –Service expansions by physician clinics, hospitals, etc. –Co-management arrangements –Licensing and royalty arrangements involving physicians

53. GSBlaw.com 53

54. GSBlaw.com 54 Transaction Slide Notes: Critical to understand relationships: –Follow the money! –Find the physicians (or other referring/selling party) and trace from that party to the entities to which they refer. –Identify the type of each relationship between the physicians and the referral entities (ownership, compensation, direct, or indirect). –For every relationship, there must be an applicable exception and/or safe harbor. In the example on the prior slide, every red line represents a relationship that requires protection.

55. GSBlaw.com 55 QUESTIONS? If you have questions, contact: Sandy Johnson 206.816.1349 stjohnson@gsblaw.com Barbra Nault 907.273.2601 bnault@gsblaw.com