12 minutes reading time (2322 words)

Third Circuit Addresses Hospital Contract with Hospital-Based Physician Group

Appeared in the July 2009 Physicians Organizations Practice Group Newsletter reprinted courtesy of the American Health Lawyers Association.

On January 21, 2009, in the case of United States ex rel. Kosenske v. Carlisle HMA, Inc.(1), the Third Circuit reversed the decision of the district court(2) which had dismissed an action under the False Claims Act(3) which alleged that an arrangement between an anesthesiology group and a for-profit hospital violated the Stark and Anti-Kickback Acts(4) (collectively, the Acts). The Third Circuit agreed with the district court that the arrangement implicated the Acts but disagreed with the lower court’s conclusion that a written agreement entered into in 1992 continued to meet all of the requirements of the personal service exception under the Stark Act. The Third Circuit applied the Stark Act broadly to the relationship between the hospital and physician group, but strictly construed the criteria necessary to qualify for an exception. The Third Circuit’s opinion provides useful guidance for hospitals and hospital-based physicians by clarifying that a hospital-based physician group’s relationship with the hospital must be documented by a written agreement that clearly sets forth the terms of an arrangement that currently meets the requirements of an exception under the Stark Act.


In December 1992, Blue Mountain Anesthesia Associates PC, a group of four anesthesiologists (Group), entered into an agreement (1992 Agreement) with Carlisle Hospital and Health Systems, Inc. (CHHS) to provide anesthesia services to the hospital facility (Hospital). The 1992 Agreement provided that: (1) the Group would provide anesthesia coverage on a twenty-four-hours-a-day, seven-days-a-week basis; (2) the Hospital would provide the space, equipment and supplies reasonably needed by the Group to provide the services without charge; and (3) the arrangement would be an exclusive one for both the Hospital and the Group. The 1992 Agreement did not mention the services being provided outside the Hospital and, at the time they entered into the 1992 Agreement, no pain management services were provided by the Group.

A little more than a year after the 1992 Agreement was signed, Ted Kosenske, a member of the Group, began providing pain management services in space that the Hospital used for other purposes.  In 1998, CHHS built a new, stand-alone facility containing an ambulatory surgery center and a pain management clinic (Pain Clinic). The Group provided pain management services at the Pain Clinic and CHHS did not charge the Group for the space, equipment or personnel. The Group’s physicians providing pain management services at the Pain Clinic did not provide anesthesiology services at the Hospital. For both the anesthesia and pain management services, the Group submitted claims to Medicare for the professional services and CHHS submitted claims for the facility and technical components. In June 2001, Carlisle HMA Inc. (HMA) purchased the assets of the Hospital from CHHS. The 1992 Agreement was not assigned by any written document. However, both the Group and HMA continued the arrangement with each other as if the 1992 Agreement was assigned.

Kosenske, a former member of the Group(5), brought a qui tam action under the False Claims Act against HMA and its parent company, Health Management Associates Inc., alleging that they submitted outpatient hospital claims to the Medicare program and other federal healthcare programs falsely certifying that such claims were in compliance with the Acts.


The district court considered the issues raised in the claim in connection with the parties’ cross-motions for summary judgment and held that the arrangement between HMA and the Group implicated the Stark and the Anti-Kickback Acts. The district court noted that both of the Acts prohibit a health care provider from paying physicians any form of compensation to induce them to refer patients to the provider, and from holding a financial interest in a healthcare entity to which they refer patients. The district court also held that the relationship between HMA and the Group involved both referrals and compensation.

Under the arrangement, HMA provided the Group office space, supplies, equipment and personnel without charge, as well as other benefits. Under the 1992 Agreement, the Group was granted the exclusive right to provide anesthesiology and pain management services. The district court agreed with the claimant, Kosenske, that these benefits constituted remuneration under the Acts. Kosenske also argued that the right to receive payment from a third-party payor for services to patients referred to the Group by the Hospital was a benefit that constituted remuneration for the purposes of the Acts. The district court rejected this argument, stating: “The court need not decide whether payment from third party payors or the expectation of payment constitutes remuneration for the purposes of the Stark Act. However, the court would be remiss if it did not express its doubts as to the merits of this attenuated argument.(6)

However, the benefits to the Group under the 1992 Agreement resulted in a compensation arrangement and financial relationship between the Group and the Hospital. The district court determined that the Group ordered numerous pain management services, and that these orders constituted referrals. Therefore, because the Hospital submitted claims to Medicare for these services, the arrangement would violate the Stark Act unless it qualified for an exception. The district court noted that the Anti-Kickback Act requires the “knowing and willful” payment of remuneration to a provider for the referral of services covered by a federal health care program, but it concluded without any additional factual consideration that the Anti-Kickback Act was also violated.

Although the relationship between the Hospital and the Group fell within the ambit of the Stark and the Anti-Kickback Acts, the district court determined that the Hospital demonstrated it met the requirements of the exception for personal services under the Acts. On Appeal, the Third Circuit agreed with the district court that there was clearly a financial relationship between the Hospital and the Group, but rejected the district court’s holding that the relationship qualified for the personal services exception.

The Third Circuit held that HMA had failed to show that the requirements of the Stark personal service exception had been met. The Third Circuit found the arrangement between the Group and HMA failed to meet the criteria of the exception by failing to have a written agreement that covered all of the services to be provided by the Group and by not adequately demonstrating that the compensation under the agreement was at fair market value.

The personal services exception applies if:

(i) the arrangement is set out in writing, signed by the parties, and specifies the services covered by the arrangement,
(ii) the arrangement covers all of the services to be provided by the physician…to the entity,
(iii) the aggregate services contracted for do not exceed those that are reasonable and necessary for the legitimate business purposes of the arrangement,
(iv) 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, and
(v) the services to be performed under the arrangement do not involve the counseling or promotion or a business arrangement or other activity that violates any state or federal law(7).

The district court held that the 1992 Agreement continued to satisfy the requirement that the “arrangement be set forth in writing,” even though there was no written assignment of the 1992 Agreement when the assets of the Hospital were sold to HMA. The district court pointed out that the 1992 Agreement contained a provision stating that it would be binding on the parties’ successors and assigns. The district court applied Pennsylvania law and held that, because the actions of the parties after the sale of assets demonstrated their intent that HMA succeed to the position of CHHS under the 1992 Agreement, no specific assignment of the 1992 Agreement was necessary to satisfy the requirements of the exception(8).  The district court also determined that the 1992 Agreement satisfied the second requirement of the exception that the written agreement cover all services to be provided by the physician. When the 1992 Agreement was entered into, the Group was providing only anesthesia services to the Hospital, and it was not until 1998 that the Hospital opened the Pain Clinic. However, the 1992 Agreement included language granting the Group the right to provide physician services in the event the Hospital obtained, opened, or operated another facility or location at which anesthesiology or pain management services were required or offered. The district court held that this language in the 1992 Agreement adequately described the full range of services provided by the Group to the Hospital and met the Stark exception’s second requirement.

The Third Circuit disagreed with the district court’s analysis and stated:

In this case, the only written contract in existence between the parties is one that did not, and obviously was not intended to apply to services at a non-existent facility. It was negotiated in 1992, in a context wholly different from the one that existed six years later after the opening of the Pain Clinic. . . and the opening of the Pain Clinic represented a very substantial change(9).

The 1992 Agreement did not mention the provision of space, equipment and personnel without charge, and the Third Circuit appeared to find that broad language contemplating that the parties might provide each other additional services at a future date was not enough to support an argument that these services continued to be covered by a written agreement.

The Third Circuit also disagreed with the district court’s holding that the compensation under the 1992 Agreement satisfied the “fair market value” requirement under the Stark exception. The district court held that there was a “mutuality of rights and responsibilities imposed by the 1992 agreement” and that this was evidence that the compensation to the parties was a fair market value exchange. The district court went on to conclude the following, “By definition, the terms of the contract reflect the fair market value of the benefits conferred on each party(10).”  Not surprisingly, the Third Circuit rejected this argument. The Third Circuit concluded that it is impossible for a contract entered into six years earlier to reflect current fair market rates and further dismissed the lower court’s interpretation of the definition. Instead, the Third Circuit corrected the district court and stated that “as a legal matter, a negotiated agreement between interested parties does not ‘by definition’ reflect fair market value.” The Third Circuit concluded that the arrangement between the Group and the Hospital was exactly the type of situation which the Stark Act recognizes as potentially abusive. The Hospital and the Group were in a position to generate business for each other; therefore, their negotiations were not arms’ length(11).

The Third Circuit and the district court agreed that the exclusive arrangement between a hospital and a hospital-based physician group implicated the Acts. Both Courts concluded that the reciprocal responsibilities are enough to create a financial relationship and referrals governed by the Acts. The Third Circuit specifically rejected HMA’s argument that there is no fair market value issue because the Hospital and the Group were being compensated for their services by a third-party payor. The Third Circuit also rejected HMA’s argument, based on 42 C.F.R. § 413.65(d)(2)(vi), that the arrangement did not include referrals, and that the Stark Act did not apply because the facility was provider-based and the patients treated by the Group were Hospital patients:

HMA reads this sub-section [42 C.F.R. § 413.65(d)(2)(vi)] as depriving physicians at the facility of any discretion in making referrals of their patients, i.e., as mandating referrals to the main provider. We believe HMA reads too much into this provision. While Pain Clinic patients clearly must have access to all services provided by the Hospital in order for it to be considered a part thereof, we are unpersuaded that BMAA physicians at the Clinic have been deprived of the right to refer their patients in accordance with their best medical judgment(12).


Even if the Third Circuit had upheld all of the district court’s holdings, the result in this case would have supported the position that arrangements between hospitals and hospital-based physicians fall within the ambit of the Acts and should be structured to qualify for an exception under the Stark Act and a safe harbor under the Anti- Kickback Act.

In addition, Kosenske makes it clear that the parties’ intent to extend an arrangement that might have originally fallen within an exception to the Acts will not necessarily continue to protect the parties from prosecution if there has been a significant change in circumstance. Compliance with the Acts requires that hospitals and physicians review and revise their contracts when an arrangement has developed into something more than the original services, or when enough time has passed that the compensation’s value may have changed. Finally, the Third Circuit decision once again reminds providers and their lawyers that a complete and well drafted paper trail is important to compliance under Stark and the Anti-Kickback Act.

1. 554 F.3d 88, 98 (3d Cir. 2009), rev’g No. 1:05-CV-2184, 2007 WL 3490537 (M.D.Pa., Nov. 14, 2007).
2. 2007 WL 3490537
3. 31 U.S.C. §§ 3729-3733 (“False Claims Act”).
4. 42 U.S.C. § 1395nn (“Stark Act”); 42 U.S.C. § 1320a-7b (“Anti-Kickback Act”).
5. Kosenske left the Group in 2005 to establish an independent pain management practice.
6. 2007 WL 3490537 at *7, n.9.
7. 42 U.S.C. § 1395nn(e)(3)(A); see also 42 C.F.R. § 411.357(a)(1).
8. 2007 WL 3490537 at *8 & n.14 (citing Bogart v. Phase II Pasta Machines, Inc., 817 F.Supp 547, 548 (E.D.Pa. 1993) for the proposition that, under Pennsylvania law, acquiring corporations become successors if they expressly or impliedly agree to assume the liabilities of the seller or if they continue to operate the seller’s business).
9. 554 F.3d. at 96-97.
10. 2007 WL 3490537 AT *10.
11. 554 F.3d. at 97.
12. Id. at 98.

Opportunities Abound at PodCamp Nashville
Stephen Zralek Speaks on “How to Protect Against a...

Related Posts

By accepting you will be accessing a service provided by a third-party external to https://bonelaw.com/