The Kosenske Case and Stark: An Important Lesson for Physician-Hospital Arrangements

July 2009Newsletters Staying Well within the Law

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A three-judge panel of the United States Third Circuit Court of Appeals recently reversed a summary judgment previously granted in favor of a hospital system finding that the hospital system’s relationship with its exclusive anesthesiology providers failed to meet the requirements of the personal service exception to the federal Stark Law and the safe harbor to the federal Anti-Kickback Statute applicable to personal services and management contracts.


In 1992, Blue Mountain Anesthesia Associates, P.C. (BMAA), a group of four anesthesiologists, was engaged by Carlisle Hospital and Health Systems (CHHS) to be the exclusive provider of anesthesiology services at a CHHS-hospital in Carlisle, Pennsylvania (the Hospital). Pursuant to the signed Anesthesiology Services Agreement between the parties, BMAA agreed to provide anesthesiology coverage at the Hospital, on an exclusive basis, 24 hours per day, 7 days per week. As part of the contract, the Hospital provided BMAA, at no cost, with the space, equipment, supplies and the services of certain personnel needed by BMAA to provide the services.

The Hospital constructed a new freestanding outpatient ambulatory surgical center and pain clinic (the Clinic) located approximately three miles from the Hospital in 1998. BMAA began to provide pain management services to patients at the Clinic as soon as it opened, and the Hospital similarly provided BMAA, at no charge, with the use of certain personnel, space and equipment. The parties billed for their respective services separately in accordance with the terms of the 1992 Anesthesiology Services Agreement.

Health Management Associates (HMA) purchased the Hospital and the Clinic from CHHS in 2001, and HMA and BMAA continued to operate under the terms of the existing Anesthesiology Services Agreement at both the Hospital and the Clinic. The parties never updated the Agreement to specifically address BMAA’s provision of pain management services at the Clinic.

The plaintiff in this case, a former anesthesiologist with BMAA, filed a qui tam action against Carlisle HMA, Inc. and HMA under the federal False Claims Act alleging that these entities submitted outpatient hospital claims to Medicare that were falsely certified as being compliant with the Stark Law and the Anti-Kickback Statute. While the District Court found that the relationship between BMAA and HMA implicated the Stark Law, it granted summary judgment in favor of the defendants because they were able to establish, to the satisfaction of the court, that the arrangement met the requirements of the personal service exception to the Stark Law.

The Third Circuit Court of Appeals later reversed the district court, concluding in its January 21, 2009, opinion that the arrangement was not in compliance with the Stark personal service exception. In rendering the opinion, the Third Circuit analyzed the arrangement solely under the Stark Law and corresponding regulations, stating that the requirements of the Anti- Kickback Statute and its related safe harbor regulations were indistinguishable from those of Stark as applied to the facts of the Kosenske case.

The Stark Law

The Stark Law prohibits a physician or immediate family member from making a referral to an entity with which he or the family member has a financial relationship, including a compensation arrangement, for the furnishing of a “designated health service” for which payment may be made under Medicare or Medicaid. (42 U.S.C. § 1395nn) Designated health services are defined by the Stark Law to include, among others, inpatient and outpatient hospital services. Violations of the Stark Law are punishable by civil money penalties for each tainted referral and for each claim submitted pursuant to a tainted referral, potential falseclaims liability, and exclusion from participation in Medicare. Where a physician has a compensation relationship with a provider or supplier of designated health services covered by Medicare or Medicaid, the physician’s referrals to that entity will be deemed to violate the Stark Law unless the arrangement fits within one of several regulatory exceptions, such as the personal service exception.

The Stark Personal Service Exception

Referrals by a physician to an entity in which the physician has a financial relationship will not violate the Stark Law where the arrangement between the referring physician and the entity meets the following requirements of the Stark personal service exception:

  1. The arrangement is set out in writing, is signed by the parties and specifies the services covered by the arrangement.
  2. The arrangement covers all of the services to be furnished by the physician (or an immediate family member of the physician) to the entity.
  3. The aggregate services contracted for do not exceed those that are reasonable and necessary for the legitimate business purposes of the arrangement.
  4. The term of the arrangement is for at least 1 year.
  5. The compensation to be paid over the term of the arrangement is set in advance, does not exceed fair market value and is not determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties.
  6. The services to be furnished under the arrangement do not involve the counseling or promotion of a business arrangement or other activity that violates any state or federal law.
  7. A holdover personal service arrangement for up to six months following the expiration of an agreement that meets the requirements in numbers 1-6 above, provided that such arrangement is on the same terms and conditions as the immediately preceding agreement. (42 C.F.R. § 411.357(d)).

The Third Circuit’s Analysis

The Third Circuit found, as an initial matter, that the provision of space, personnel and equipment by the Hospital to BMAA at no cost constituted in kind remuneration from HMA to BMAA, which created a financial relationship between the parties sufficient to implicate the Stark Law. The Third Circuit then concluded that summary judgment was wrongly awarded to the defendants by the District Court because the arrangement failed to satisfy the personal service exception to the Stark Law.

The Third Circuit stated that when the parties entered into the original Anesthesiology Services Agreement in 1992, BMAA did not provide pain management services at the Hospital, although the Agreement contemplated that pain management services might be provided at a future date. When the Clinic opened several years later, the parties did not enter into a new agreement with respect to BMAA’s services there. They also failed to amend the original Anesthesiology Services Agreement to address this increase in coverage and responsibility.

The district court had originally ruled that the language of the original Anesthesiology Services Agreement was broad enough to cover BMAA’s pain management services at the Clinic and, therefore, the first prong of the personal service exception, that the arrangement be set out in writing, was satisfied. The Third Circuit disagreed with this interpretation of the Agreement, finding that the only written contract in existence between the parties did not, and was not intended to, apply to services at a facility that was not yet in existence. Consequently, the Third Circuit held that there was no written agreement governing the parties’ relationship as required by the first prong of the Stark personal service exception.

The Third Circuit also found that, even if the Agreement could be construed to encompass pain management services at the Clinic, the Agreement failed to satisfy the compensation prong of the personal service exception, which requires that the compensation that will be paid over the term of the agreement be set in advance, because it failed to delineate the free personnel, space and equipment being provided to BMAA at the Clinic.

Finally, the Third Circuit held that the defendants failed to establish that the arrangement was consistent with fair market value because, according to the court, the negotiations between the parties in 1992 could not possibly reflect the value of services to be provided under materially different circumstances six years down the road.

What Can Physicians and Hospitals Learn from Kosenske?

Kosenske provides hospitals and physicians with a “stark” reminder (pun intended) of the importance of ensuring that all arrangements between hospitals and physicians are appropriately documented and updated whenever circumstances dictate. Both hospitals and physicians should take heed of the following lessons from Kosenske:

  1. The terms of any sort of financial relationship between a hospital and a physician(s) should be documented in a signed agreement;
  2. The arrangement should be structured so that it complies with an applicable Stark exception; and
  3. The written agreement should be reviewed on a frequent basis, and updated when needed, to ensure that the relationship remains in compliance with the applicable Stark exception, including the requirement that any compensation, in cash or in kind, is consistent with fair market value.

For more information about this topic, contact Victoria Heller Johnson at 610.458.4980 or [email protected].

This article first appeared in Health Law 360 and is reprinted here with permission.