A federal appeals court recently ruled that a lower district court erred in granting summary judgment to a hospital in a whistleblower action under the federal False Claims Act that was based on allegations that the hospital’s arrangement with an anesthesia physician group violated the Stark Law and the Federal Anti-kickback Act.

In United States ex rel. Kosenske v. Carlisle HMA, Inc., No. 07-4616 (3rd Cir. Jan. 21, 2009), the 3rd Circuit Court of Appeals found that a hospital failed to meet the personal services exception to the Stark Law because an earlier anesthesia services agreement between the parties did not cover pain management services provided by the anesthesiology practice as a hospital outpatient clinic. The court also found that the agreement did not reflect fair market value for compensation by the hospital to the anesthesiologists that included free office space, supplies, and support personnel.

This case had originally been brought by a former member of the anesthesiology group as a qui tam action under the FCA against the parent company of the hospital alleging that they submitted claims to federal health care programs that falsely certified compliance with the Stark Law and the Anti-kickback Statute. when it contracted with an anesthesiology group.

The hospital and the anesthesia practice had entered into an exclusive anesthesia services agreement in 1992. This agreement provided that the hospital shall offer the anesthesiology practice the opportunity to provide exclusive anesthesiology and pain management services at any new location or facility that the hospital obtains, opens, or operates. In 1998, the hospital built a stand-alone facility containing an outpatient ambulatory surgery center and a pain management clinic (“Pain Clinic”). The court noted that the hospital did not charge the anesthesiology practice rent for the space and equipment, or a fee for the support personnel it provided to the practice when they performed pain management services at the Pain Clinic.

A significant aspect of the court of appeals findings is that the court found that the arrangement between the hospital and the anesthesiology practice created a financial relationship for purposes of the Stark Law. The court noted that the practice received numerous benefits as a result of its relationship with the hospital, including the exclusive right to provide all anesthesia and pain management services, and the receipt of office space, medical equipment and personnel. According to the court, these benefits constituted remuneration in-kind from the hospital to the practice. From the hospital’s perspective, the court noted that a physician performing pain management services in an outpatient facility is in a position to generate substantial business for a hospital through the ordering of tests or procedures at a hospital, lab, or other facility.

Another important aspect in this ruling is the court’s comments that “the Stark Law is based on the recognition that where one party is in a position to generate business for the other, negotiated agreements between such parties are often designed to disguise the payment of non-fair-market-value compensation.” The court’s comments were also based overall on a distinction it made between anesthesia services at the hospital and pain management services at a hospital-owned outpatient clinic.