Washington Watch

Referrals: The "Latest" Court Case and What Is Acceptable?

by James L. Thorne, Esq.

Introduction
Paying providers purely as an inducement to refer patients has long been considered unethical and inappropriate. In fact, the payment of referral fees constitutes a felony under many state statutes. E.g., Cal.Bus. & Prof. Code, Section 650. Yet, the applicable federal law is, perhaps, the most prominent prohibition against the payment of referral fees. The anti-fraud and abuse provisions of the Medicare and Medicaid programs, paraphrased, declare:

anyone who receives or pays any remuneration directly or indirectly, overtly or covertly, in cash or in kind for the referral of a patient to a person for the furnishing of any item or service for which payment may be made under Medicare or Medicaid is guilty of a felony punishable by five years imprisonment or $25,000, or both. 42 U.S.C. Section 1320a-7b(b).

In addition, referral fees are also prohibited by a federal statute known as the "Stark law," named for Congressman Fortney "Pete" Stark who championed it. Basically, the Stark law prohibits Medicare and Medicaid from paying for any services that physicians render or order through entities with which they have a financial relationship. 42 U.S.C. Section 1395nn.

So, the message is clear-referral fees are bad. Yet, confusion often reigns over precisely what that means. Further, implicit or explicit referral incentives do pervade most accepted and legitimate relationships in medicine. Thus, it is far from clear which are prohibited and which are not. M. Hall, I. Ellman, D. Strouse, Health Care Law and Ethics 268 (1999).

The "Latest" Court "Action" on Referrals
Our courts have, of course, addressed the issue of referrals. However, it is questionable how "helpful" they have been in clarifying what is prohibited conduct. As an example, on June 18, 2001, the 10th Circuit Court of Appeals addressed referral issues in the case United States v. LaHue, 261 F.3d 993 (10th Cir. 2001). Rather than providing "clarity" on what is or is not prohibited referral conduct, the LaHue case, particularly the involved instructions to the jury, are viewed by many as putting most financial arrangements between hospitals and physicians at risk.

Because of this concern, on December 14, 2001, the American Hospital Association, among others, filed their Brief of Amici Curiae with the U.S. Supreme Court. The purpose of the brief was to request the Court to grant LaHue's prior Writ of Certiorari-to hear the case-and "clarify" construction of the Anti-kickback Statute, "in order to maintain the legality of traditional financial arrangements between hospitals and physicians." However, on January 7, 2002, the Court denied certiorari, letting the 10th Circuit decision and its jury instructions stand.

The remainder of this article will attempt to briefly review for AAEM members: (a) the LaHue case; (b) the concerns of the American Hospital Association, and others, with the LaHue decision as stated in their Brief Amici Curiae to the Supreme Court, and (c) the current federal approach to answering your referral doubts and questions.

What Did the LaHue Decision Say and What, Exactly, Were Its Jury Instructions?

Defendant Anderson was president of a hospital. Defendants Robert and Ronald LaHue were osteopathic physicians. The defendants had entered into consulting contracts whereby the hospital paid the LaHues for certain medical services and the hospital received patient referrals. Based on the facts presented, the defendants were convicted by the lower court jury of violations of the Medicare Anti-Kickback Act ("Act"). 42 U.S.C. Section 1320a-7b(b). See United States v. Anderson, 85 F. Supp. 2d 1047 (D. Kan. 1999).

In the district court trial, that court concluded, among others, that the jury instructions on the Act correctly utilized the "at least in part" or "one purpose" standard for referrals first enunciated in United States v. Greber, 760 F.2d 68 (3d Cir.), cert. denied, 474 U.S. 988 (1985). The "one purpose" standard was also adopted in United States v. McClatchey, 217 F.3d 823 (10th Cir.), cert. denied, 121 S. Ct. 574 (2000). The "one purpose" standard (as restated by the Tenth Circuit in the LaHue appeal), concludes that "a person who offers or pays remuneration to another person violates the Act, so long as (any) one purpose of the offer or payment is to induce Medicare or Medicaid patient referrals."

In their actual appeal to the Tenth Circuit, the defendants asserted that the lower district court's jury instructions (Instruction #32 for Mr. Anderson and Instruction #33 for the LaHues) were incorrect and warrant a new trial. Specifically, they challenged the "one purpose" standard and argue that a defendant should not be convicted under the Act when his offer, payment, solicitation or receipt of remuneration was motivated merely in part to induce or in return for referrals. In essence, the LaHues argued that conviction is only appropriate when the motivation to induce or in return for referrals was the defendant's primary purpose-a "primary purpose" standard rather than the "one purpose" standard.

According to the Tenth Circuit, the defendants asserted that the "one purpose" standard was inappropriate because: (1) "[i]t converts a criminal statute passed with a specific aim-to deter and punish abusive practices that threaten the integrity of federally funded health care programs-into prohibitions of all arrangements, no matter how slight, that implicate patient referrals".and (5) it leads to "unduly confusing jury instructions and courts should utilize the actual language of the Act instead. Finally, anticipating this court's potential agreement with Greber, defendants argued the "one purpose" standard renders the Act unconstitutionally vague by vesting undue discretion in "government officials to decide what is legal and what is illegal."

The Tenth Circuit disagreed. It reaffirmed its adherence to the "one purpose" standard enunciated in Greber and restated in McClatchey. Here, the plaintiff U.S. government, argued that the defendants' challenges to jury instructions #32 and #33 were foreclosed by the stare decisis effect (to abide by decided cases) of McClatchey. The Tenth Circuit agreed with the government's position.

With regard to their assertion that the Act is unconstitutionally vague, defendants claim that "prosecutors and agency officials may choose to proceed criminally against virtually anyone in the health care community" under the "one purpose" test." Further, defendants assert the "one purpose" test has "limitless reach".and "makes virtually every arrangement between a hospital and a physician unlawful, because the hospital executive will always have patient referrals in mind, at least to some degree. " On this point, the Tenth Circuit also disagreed with the defendants, deciding that "defendants fail to point out any language in the Act or the 'one purpose' test that vests authority in law enforcement officers, prosecutors, and juries to assign their own subjective meaning to an element of the offense."

Further, the court concluded that the defendants' argument ignores the actual instructions given in this case. According to the Tenth Circuit, "the district court instructed the jury that Mr. Anderson (the hospital executive).cannot be convicted merely because [he] hoped or expected or believed that referrals may ensue from remuneration that was designed wholly for other purposes.mere oral encouragement to refer patients.does not violate the law." In addition, the district court further instructed the jury that "Robert LaHue and Ronald LaHue cannot be convicted merely because they received remuneration wholly in return for services and also decided to refer patients to the hospital.mere referral of patients because of oral encouragement.does not violate the law." Thus, to the Tenth Circuit, the Act "clearly allows business relationships between a hospital and physician where the motivation.is for legal reasons.and the Act, as applied in this case, does not make all conduct illegal when a hospital executive or physician has referrals in mind."

The American Hospital Association's Response to the Tenth Circuit's LaHue Decision
Again, the American Hospital Association was less than pleased by the decision. In the December 14, 2001 Brief of Amici Curie to the U.S. Supreme Court, the American Hospital Association was joined on the brief by the Federation of American Hospitals, the Association of American Medical Colleges, the American Osteopathic Association and the Missouri Hospital Association. In their brief, amici assert that the Tenth Circuit's decision "wrongfully puts most arrangements between hospitals and physicians at risk by permitting the jury to convict unless it finds that the reason for the financial arrangement is 'entirely distinct' from any 'hope for' referrals." See Amici Curie brief at p.4.

Further, according to the brief, "the many benign financial arrangements between hospitals and physicians that intrinsically involve referrals can rarely survive this standard. In today's health care system, inherent referrals are an inseparable part of the lawful motivation for hospital -physician arrangements." In their brief, the amici assert that the U.S. Supreme Court must "restore the plain meaning of the Anti-Kickback Statute and prohibit financial arrangements between referral sources only where the parties have criminal intent to pay remuneration to induce referrals."

In attempting to show the Court why it should grant petitioner Anderson's , Robert LaHue's and Ronald LaHue's petition for Writ of Certiorari, the amici advanced arguments to show that (a) Congress did not intend to condemn all arrangements that have "referrals" as an inherent component, (b) "referrals" are an inherent component of relationships between hospitals and physicians, and (c) the Court should grant review to remove the cloud cast over a wide array of benign health care arrangements."

Types of Referrals at Risk?
In their brief, the amici provided three important examples of common beneficial hospital-physician relationships that are threatened by the Tenth Circuit's "mistakenly broad construction of the Anti-kickback Statute, " each of which have ".two common, coexisting features: (1) an economic relationship is formed that is necessary for patient care; and (2) patients receive needed services from the referrals the physicians have made." Whether you agree with them or not, it may be useful for AAEM members to review the three examples.

In the first example, clinical and administrative services, amici assert that hospitals often ask physicians to provide medical administrative services such as serving as the medical director of a program or department. According to amici, the hospital may have an opportunity to hire a leading surgeon, as compared to a lesser-known candidate, who also will likely attract more referrals than a lesser-known candidate. The hired physician will, of course, expect to be paid when he/she starts work for the hospital. In this example, amici believes "the surgeon's acceptance of payments coupled with (his)/her desire to treat patients for the service (he)/she has been chosen to run could be sufficient evidence for the jury to convict (him)/her of a crime." See id. at 8.

In the second example, physician recruitment, amici asserts that hospitals often consider ways to recruit physicians after they complete residency training. The recruitment usually follows the hospital's completion of a "needs analysis" for the community it serves and, often, the hospital provides the physician with a moving allowance and an income guarantee to ease the financial burden while the physician establishes a private practice. In addition, the physician is asked to obtain and maintain medical staff privileges at the supporting hospital. According to amici, "since the physician will likely admit patients to the hospital, both elements of the offense (remuneration and referrals) are present." However, in a footnote, the amici states the predecessor of the now Department of Human Services opined in a 1978 letter that such recruitment practices are permissible under the Anti-kickback Statute. See id. at 9.

In the third example, flight programs, amici asserts that hospitals in urban areas often sponsor flight programs whereby they fly physicians on the hospital's medical staff to rural areas to see patients. These flights are provided without charge and, therefore, the physicians may be considered to have received remuneration. Although the physicians earn a fee for the actual care they provide, the fee rarely would justify the flights if they paid the full cost themselves. Further, if more medical services are needed but not available locally, the physician will usually refer the patient to the sponsoring hospital. See id. at 10.

It is anyone's guess as to how much Court officials actually considered the arguments and examples stated in amici's brief. However, the Court's action on the brief is not subject to speculation. The Court denied certiorari on January 7, 2002. The Court's denial was, of course, not unexpected by many health care observers; the Court's denial of certiorari is the "norm." So, where do we stand? If the Court is not responsive or is, apparently, comfortable with the controlling case decisions, what can hospitals or physicians do concerning more definitive guidance on referrals?

If the Courts Continue to use the "One Purpose" Standard, Consider Looking to HHS for Help
As previously stated, Section 1128(B)(b) of the Social Security Act provides criminal penalties for individuals or entities that knowingly and willfully offer, pay, solicit or receive remuneration in order to induce or reward business reimbursable under the Federal health programs. Since the statute on its face is so broad, concern has been expressed, of course, for many years that some relatively innocuous commercial arrangements may be subject to criminal prosecution or administrative sanction.

A. Know the "Safe Harbors"
In response to this concern, Congress passed the Medicare and Medicaid Patient and Program Protection Act of 1987. Section 14 of Public Law 100-93, specifically required the now Health and Human Services Department to develop and promulgate regulations, the so-called "safe harbor" provisions. These provisions are meant to specify various payment and business practices which, although potentially capable of inducing referrals of business reimbursable under Federal health care programs, would not be treated as criminal offenses under the Anti-kickback Statute.

The HHS, in turn, did develop and promulgate its "safe harbor" regulations, effective on July 29, 1991. The final regulation amended 42 CFR, part 1001 by adding a new Section 1001.952. This new section set forth "safe harbors" in ten broad areas: investment interests, space rental, equipment rental, personal services and management contracts, sale of practices, referral services, warranties, discounts, employees, and group purchasing organizations. In years following the announcement of the initial ten "safe harbors," the HHS, through its Office of Inspector General (OIG), has issued several, additional "safe harbor" practices which are easily reviewable by AAEM members on the OIG web site at http://oig.hhs.gov/.

B. File Comments
If you desire to be more proactive, Section 205 of Public Law 104-191 (the Health Insurance Portability and Accountability Act of 1996) also requires the OIG to publish an annual notice in the Federal Register to solicit proposals and recommendations for developing new and modifying existing "safe harbor" provisions as well as developing new OIG Special Fraud Alerts. The latest OIG solicitation for new "safe harbor" recommendations was published on December 19, 2001, (66 FR 65460). The AAEM, as well as other interested parties, may submit new "safe harbor " proposals to the OIG by February 19, 2002.

C. Seek an Advisory Opinion
In addition, and usually in response to constituent complaints, Congress has also required enforcement agencies to institute a process for obtaining transaction-specific advisory rulings much like is done under the tax and antitrust laws. The OIG's Advisory Opinions are also easily reviewable by AAEM members at the above OIG web site, http://oig.hhs.gov/. As stated on the web site, "one purpose of the advisory opinion process is to provide meaningful advice on the application of the anti-kickback statute and other OIG sanction statutes in specific factual situations." AAEM members should be aware that if an advisory opinion is requested, it is binding and may legally be relied upon only by the requestor. No third parties are bound nor may they legally rely on these advisory opinions.

Conclusion
To date, as reemphasized in the Tenth Circuit's LaHue decision and the U.S. Supreme Court's reluctance to give additional clarity on "referrals," the "one purpose" standard remains the law. Personally, I think the Court would have been wise to grant certiorari in the LaHue case so that it could, in the words of the amici brief, provide needed "clarity in construing the Anti-kickback Statute to maintain the legality of traditional financial arrangements between hospitals and physicians while prohibiting only what is unethical and corrupt." Until the Court decides to do so, AAEM members would be wise to review the above OIG site or take a more proactive approach if you have a referral issue.

James L. Thorne is Washington Counsel for the AAEM. He can be reached at (202) 548-3218 or jnlt@erols.com.