Kentucky Federal Trial Court Rejects Stark Challenge to an Academic Medical Center's Faculty Relationship

24 April 2008 Publication
Author(s): Laura J. Gage Maria E. Gonzalez Knavel Jonathan M. Lindeke Judith A. Waltz

Legal News Alert: Health Care

On April 8, 2008, a federal trial court in Kentucky issued its decision interpreting the Academic Medical Center (AMC) exception to the Stark law. In U.S. ex rel. Villafane v. Solinger, W.D. Ky., April 8, 2008 (Villafane), the court dismissed a whistleblower’s lawsuit against affiliates of the University of Louisville Medical School (the Medical School) and various other individual defendants alleging that the defendants violated the federal False Claims Act (FCA) by submitting Medicaid claims for reimbursement that were falsely certified to be in compliance with the Stark law. In dismissing the plaintiff’s claims, the court concluded that the defendants met the legal requirements of the AMC exception to the Stark law, giving the health care industry interesting insights into how courts might interpret the AMC exception in the future.

The Decision
The plaintiff, Juan Villafane, is a pediatric cardiologist and a former professor at the Medical School. He sued the Medical School’s research foundation (Foundation) and fund (Fund), his former medical group, and a number of its individual physicians who were members of the Medical School’s full-time faculty. He also sued Norton Hospitals, Inc. d/b/a/ Kosair Children’s Hospital (Kosair) and the chief of its medical staff. Kosair is Kentucky’s only free-standing, full-service pediatric hospital. All individual physician-defendants were medical staff members at Kosair and practiced extensively at the hospital.

The lawsuit concerned the flow of money between Kosair and the individual physician-defendants. Each of the physician-defendants participated in the Medical School’s faculty practice plan, an arrangement under which faculty salaries were funded not only by grants, donations, and contributions from various sources, but also by a portion of the revenue from the physician-defendants’ private practices. Most importantly, faculty salaries also were funded by contributions from hospitals, including Kosair, where all the physician-defendants extensively practiced and to which they referred their patients.

Thus, it was undisputed that faculty salaries paid to the physician-defendants were derived, in some part, from monies contributed by a hospital to which the physician-defendants referred their patients — raising a Stark issue.

The court noted that neither the FCA nor the Stark law provided for a private right of action, but the plaintiff could bring a private right of action under the so-called “qui tam statute, which allows private persons to bring civil claims for violation of the FCA. When Kosair submitted claims to the Medicaid program for reimbursement of its services to Medicaid patients, Kosair was required to certify that it was in compliance with all applicable laws and regulations. The plaintiff claimed that the certification was false because the money flow between Kosair and the physician-defendants through the Medical School’s faculty practice plan violated the Stark law as well as the federal Anti-Kickback statute, and thus also violated the FCA.

The court rejected these contentions, concluding instead that, with respect to the Stark law, the AMC exception shielded the arrangement under consideration. In so doing, it noted the dearth of cases interpreting this complex area of the law, stating that: “[t]he parties have noted and the Court has confirmed that almost no case law explores the precise contours of the AMC exception … [t]he Court has found limited guidance and nothing approaching a jurisprudential consensus about the meaning or applicability of the AMC’s many elements.” The court went on to state that “… the Court has concluded that throughout their successive rulemakings HCFA and CMS have focused on achieving a goal, namely prevention of healthcare fraud, more than on ensuring rigid adherence to any particular regulatory provision.”

The court then considered the applicability of the AMC exception to the facts at hand. At the threshold, it found that the physician-defendants were bona fide faculty employees of the Medical School and that they provided substantial academic and clinical services.

The plaintiff argued that because Kosair lacked a consistent system for reporting faculty time devoted to teaching and clinical duties, the physician-defendants’ commitment of time to these endeavors was a “sham” and consequently, the physician-defendants could not prove they were bona fide faculty members providing substantial teaching or clinical services at Kosair. Significantly, the court rejected a formalistic approach to the recording of time in order to prove that legitimate services were being performed, opting instead for an approach based upon a practical assessment of the overall operations of an academic medical center. The court stated that it “finds no indication that either Congress or HCFA/CMS intended that the fate of an academic medical center would hang upon its particular timekeeping practices where its broad operations seem entirely appropriate.”

The court then looked at whether the total compensation paid to the physician-defendants was at fair market value. The plaintiff first argued that the court should take into account not only the amount received by the physician-defendants as faculty salary, but all income from their entire practices, including income received from their professional activities outside the academic medical center setting. The court declined to do so, stating that “such an approach not only falls well outside the scope of the Stark law’s prohibition on self-referrals, but also seems utterly impracticable.” As a result, the court based its assessment of fair market value solely upon the amount paid to the physician-defendants as faculty salaries.

The physician-defendants offered evidence that their faculty compensation was commensurate with national salary data compiled by the Association of Administrators in Academic Pediatrics in its Medical School Pediatric Faculty Compensation Surveys. The plaintiff’s expert disputed that the physician-defendants were paid fair market value because each of them was consistently paid above the 75th percentile in the surveys and one physician-defendant was consistently paid above the 90th percentile.

The court also rejected the plaintiff’s contention on this point, refusing to look only at statistical data about where the physician-defendants were paid on the percentile scale, but instead taking into consideration their overall duties, responsibilities, and qualifications in light of the survey results. On that basis, the court concluded that the physician-defendants were paid within a fair-market-value range.

The court next determined whether the physician-defendants’ compensation was calculated in a manner that took into account the volume or value of their referrals to Kosair. Although Kosair’s contributions to the Foundation were used in part to fund the faculty’s salary for the physician-defendants that were making referrals to Kosair, the court concluded that the existence of this relationship did not require the payments to the physician-defendants to take into account the volume or value of their referrals to Kosair. Since the physician-defendants’ faculty salaries initially were set at fair market value and did not vary once set, the court determined that the salaries would not be deemed to take into account the volume or value of their referrals to Kosair.

Interestingly, one of the physician-defendants received a significantly higher salary than the other physician-defendants and also generated substantially higher inpatient revenue for Kosair. The court refused to conclude that his compensation necessarily took into account the volume or value of his referrals. Instead, the court reviewed all of his duties and concluded that his higher salary was unsurprising, since he also had more substantial leadership responsibilities within the Medical School than the other physician–defendants.

The court considered a number of other challenges to the AMC exception advanced by the plaintiff, including that the relationship between the Medical School and Kosair was not sufficiently memorialized in a written contract as required by the Stark AMC exception. The court noted that there was no single detailed contract between the Medical School and Kosair. However, the court stated that the relationship between these entities dated back to 1962 and had been memorialized in various documents over the years. It further found that “[n]o authority requires a specific type of documentation to memorialize the relationship between the AMC and its components.”

Finally, the court considered the question of whether the physician-defendants’ arrangement violated the federal Anti-Kickback statute. It declined to follow the well-known 1985 decision in U.S. v. Greber that held that the statute is violated if one purpose of a payment practice is to induce referrals, notwithstanding that the practice may have other legitimate purposes. Looking instead at the totality of evidence before it, the court concluded that the physician-defendants’ arrangement did not violate the law.

Implications of the Case
The Villafane case is a federal trial court decision, not the decision of an appellate body. If the plaintiff appeals the decision, it might be modified or overturned; therefore, its precedent value is uncertain at this time. However, the decision is worth noting, primarily for the court’s pragmatic approach. In every instance, the court refused to follow a formulaic application of the Stark AMC exception, instead opting — to use the court’s own language — for a “goal and purpose-oriented perspective rather than a hyper-technical one.” If the Villafane case is not modified or overturned, assuming it is appealed, it may provide a degree of comfort that at least some courts are willing to take a pragmatic approach to interpreting the Stark law and its regulations, even in situations where the parties’ compliance with the precise letter of an applicable exception is open to debate.

Legal News Alert is part of our ongoing commitment to providing up-to-the minute information about pressing concerns or industry issues affecting our health care clients and colleagues. If you have any questions about this alert or would like to discuss this topic further, please contact your Foley attorney or any of the following individuals: 

Janice A. Anderson
Chicago, Illinois

Laura J. Gage
Milwaukee, Wisconsin

LaDale K. George
Chicago, Illinois

Maria E. Gonzalez Knavel
Milwaukee, Wisconsin

Richard W. Johns
Orlando, Florida

Jonathan M. Lindeke
San Francisco, California

Charles B. Oppenheim
Century City, California

Michael Scarano
San Diego/Del Mar, California

Judith A. Waltz
San Francisco, California

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