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Inside the FCA blogInside the FCA blog features ongoing updates related to the False Claims Act (FCA), including insight on the latest legal decisions, regulatory developments and FCA settlements. The blog provides timely updates for corporate boards, directors, compliance managers, general counsel and other parties interested in the organizational impact and legal developments stemming from issues potentially giving rise to FCA liability.

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No Longer a Stark Contrast between Medicare and Medicaid Enforcement?

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November 21, 2013

Historically, both the federal government and the private healthcare bar have focused enforcement and compliance approaches to the federal physician self-referral law (the "Stark Law") on Medicare claims only. However, several recent pending False Claims Act ("FCA") cases alleging violations of the Stark Law have brought to light a provision of the law that extends the prohibition on self-referrals to Medicaid claims, but for which there remains little interpretive guidance. Based on the allegations in the cases discussed below, the private bar and healthcare providers may be forced re-consider their approaches to Stark compliance.

Background

In 1993, as part of the Omnibus Reconciliation Act of 1993, Congress enacted legislation, commonly known as "Stark II," which expanded the reach of the Stark Law in several ways, including extending aspects of the Stark Law to Medicaid claims. Specifically, Stark II amended § 1903(s) of Title XIX of the Social Security Act to provide that no Medicaid payments will be made to States for designated health services ("DHS") furnished pursuant to a referral that, if made with respect to a Medicare patient, would be prohibited by the Stark Law. In 1998, the Centers for Medicare & Medicaid Services ("CMS") issued a proposed rule to implement this provision, under which CMS would deny federal financial participation ("FFP") matching funds to a State for DHS furnished under a State’s Medicaid program that, if rendered to a Medicare patient, would violate the Stark Law.1 As CMS noted in the proposed rule, § 1903(s) does not prohibit providers from referring Medicaid patients or billing for Medicaid DHS furnished in violation of the Stark Law, but rather prohibits the payment of federal matching funds to States for furnishing such services. Therefore, stated CMS, it is up to each State to establish its own sanctions for situations in which physicians refer Medicaid patients to related entities in violation of the law.2

Noting the differences in coverage determinations and reimbursement between the Medicare and Medicaid programs, CMS stated that Congress "meant to provide [the agency] with some flexibility in applying the Medicare physician referral rules in the Medicaid context."3 However, the proposed rule to implement § 1903(s) was never finalized, leaving providers and other stakeholders with limited guidance as to how the Stark Law applies to Medicaid claims. In the pending FCA cases discussed below, whistleblowers and the government allege that the submission of claims based on prohibited referrals of Medicaid beneficiaries can provide the basis for actionable FCA claims. Unless and until courts rule otherwise, such allegations may necessitate a shift in the thinking that Stark is a Medicare-only issue.

Pending False Claims Act Cases

In U.S. ex rel Baklid-Kunz v. Halifax Medical Center, the relator alleged that the hospital had financial relationships with referring physicians that violated the Stark Law and that, accordingly, the hospital's submission of claims to Medicare and Medicaid as a result of such tainted referrals violated the FCA.4 Notably, the United States intervened in the case and filed a Complaint in Intervention specifically alleging that "[t]he Stark Statute also applies to claims for payment under Medicaid, and federal funds may not be used to pay for designated health services through a state Medicaid program."5 In response, the hospital argued that Medicaid claims submitted as a result of such referrals did not violate the Stark Law because under Medicaid, providers are reimbursed by the State, not federal, government. Therefore, the hospital argued, "even if one assumes that improper claims were submitted to Medicaid in this matter, neither the Stark Amendment nor the Medicaid statute prohibited the resulting reimbursement payments to the Defendants from the state of Florida, and therefore there could be no FCA violation."6

The District Judge for the Middle District of Florida refused to dismiss the Medicaid claims from the lawsuit. Relying on the language in § 1903(s) prohibiting FFP for Medicaid services that, if provided under Medicare, would have been non-reimbursable based on Stark Law prohibitions, the court found that the plaintiffs' theory that the hospital caused the state of Florida to submit false claims to the federal government for services furnished on the basis of improper referrals was sufficient to survive a Rule 12(b)(6) challenge. Under this theory, then, the claims submitted by the Florida Medicaid Program to the federal government for FFP would constitute the "false claims," rather than the claims submitted by the provider. Nevertheless, the provider could still be exposed to "cause to present" liability under the FCA. On November 13, 2013, the court granted partial summary judgment in favor of the United States, ruling that the hospital did violate the Stark Law. Because the court had already ruled that the Medicaid claims could proceed as a matter of law, however, the summary judgment order did not offer any further substantive analysis of Stark’s applicability to Medicaid claims, stating only that the Stark Law "prohibit[s] physicians from referring their Medicare and Medicaid patients" improperly.7

In Osheroff v. Tenet Healthcare Corp., the relator, an owner of a real estate company, alleged that Tenet charged below fair market value rates to physicians for the lease of space in Tenet’s medical office buildings for the purpose of inducing or rewarding physician referrals.8 The relator alleged that Tenet’s claims submitted to Medicare and Medicaid arising out of these referrals for DHS were false by virtue of Tenet’s violating the Stark Law. In ruling on whether the relator sufficiently alleged that Tenet’s claims were false, the court noted that the United States, in a statement of interest brief, asserted that defendants certified compliance with Stark Law and that such compliance is "a condition of the government’s payments under Medicare and Medicaid."9 Subsequently in a 2013 order denying Tenet's motion to dismiss, the United States District Court for the Southern District of Florida ruled that Tenet certified compliance with the Stark Law through its Medicare Provider Agreement and submission of annual cost reports, and that such representations were "enough to ground a claim under the False Claims Act."10 Further, noted the court, "because…. cost reports submitted to Medicare can form the basis for liability under the False Claims Act, the court arrives at the same conclusion regarding the cost reports submitted to Medicaid and Tricare, in light of the fact that both Medicaid and Tricare rely on the representations made in the Medicare cost report."11 After jointly seeking a stay of the case to pursue a resolution between them, the parties notified the court on October 3, 2013, that they had reached a settlement agreement that was pending approval by the Department of Justice and sought an extension of the stay. The proceedings remain stayed as of the time of writing.

Future Impact

Arguably, the extension of the Stark Law to Medicaid claims is not a novel development, based on the plain language of the statute as amended by Stark II in 1993. However, the focus of Stark Law enforcement and compliance has been, in practice, limited to Medicare reimbursement. Moreover, in the absence of CMS regulations implementing this section of the statute, providers have little guidance as to how such extension will be applied. As noted above, the provisions of the Stark Law and implementing regulations that prohibit providers from making referrals to related entities apply only to Medicare claims. Notably in Halifax, however, the relator's and government’s position that the hospital caused the state of Florida to submit false claims to the federal government for services furnished on the basis of improper referrals, thereby serving as a basis for false claims liability, has far-reaching implications. Moreover, in cases such as Tenet, where FCA claims based on Medicaid reimbursement survive a motion to dismiss, such a ruling may increase the defendant’s exposure and could have a substantial impact even on settlement negotiations. As private whistleblowers and potentially even the federal government continue to seek the application of the Stark Law to Medicaid, providers should be aware that a shift in their approach to Stark compliance may be necessary.

If you have any questions, please contact any of the attorneys in our Healthcare Practice Group or Healthcare Fraud Task Force.

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1 63 Fed. Reg. 1659, 1672 (January 9, 1998).
2 63 Fed. Reg. at 1704.
3 63 Fed. Reg. at 1673.
4 2012 U.S. Dist. LEXIS 36304 (M.D. Fla., March 19, 2012).
5 Case No. 6:09-cv-01001-GAP-TBS, Dkt. No. 73, ¶ 59 (M.D. Fla. Nov. 4, 2011).
6 2012 U.S. Dist. LEXIS 36304 at *10.
7 United States ex rel. Baklid-Kunz v. Halifax Med. Ctr., Case No. 6:09-cv-1002-Orl-31TBS, Dkt. No. 396 at 6-7 (M.D. Fla. Nov. 13, 2013).
8 2012 U.S. Dist. LEXIS 96434 (S. D. Fla., July 12, 2012).
9 2012 U.S. Dist. LEXIS 96434 at *26.
10 United States ex rel. Osheroff v. Tenet Healthcare Corp., 2013 U.S. Dist LEXIS 44235 (S. D. Fla., March 27, 2013).
11 2013 U.S. Dist. LEXIS 44235 at *20.


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