In a rare motion to dismiss ruling, a Pennsylvania federal judge rejected as “implausible” a theory that a hospital entered into on-call contracts with a physician with an illicit intent that was so covert that even the physician himself did not understand that the contracts were designed to induce him to refer Medicare patients in violation of the Anti-Kickback Statute (AKS).  Although the relator in Cooper v. Pottstown Hospital Co., LLC, No. 13-01137, 2015 WL 1137664 (E.D. Penn. Mar. 12, 2015) alleged that the on-call contracts were improper inducements based upon the later efforts of the hospital to pressure the physician to end his financial relationship with a competitor, the court found that the relator failed to plead enough facts to show that the hospital entered into the contracts with the intent to induce referrals.  This case is unusual because most AKS cases that turn on issues of the defendant’s intent involve factual disputes that survive motions practice and are slated for resolution at trial.

This case highlights how allegations of AKS violations can intermingle with the “economic credentialing” policies of hospitals who have a legitimate interest in preserving their ability to choose who to contract with and under what restrictions.  One takeaway from this case is the importance of hospitals having clear policies concerning competitive restrictions in its physician contracts and medical privileges.  Misunderstandings on this issue can result in unnecessary litigation.  While clear policies may decrease some misunderstandings, non-competes and other economic credentialing practices carry inherent risk under various laws, including the AKS.

The relator, an orthopedic surgeon, was employed by Pottstown Medical Specialists, Inc. (PMSI) and had privileges at Pottstown Memorial Medical Center (Pottstown) since 1999.  In 2005, Community Health Systems, Inc. acquired Pottstown and purchased a minority interest in PMSI.  In February 2010,  the relator entered into an on-call contract with Pottstown compensating him a fixed fee for any day he provided on-call coverage for the ER.  The on-call contract allowed either party to terminate without cause by providing 60 days’ written notice.  The relator alleged that in October 2010, Pottstown’s management learned that he had a financial interest in a new hospital opening a few miles away and pressured him to divest his interest in this new competitor and refer his patients to Pottstown.  After the relator refused, Pottstown exercised its right to terminate his on-call contract without cause.

The following year, the parties entered into a new on-call contract, which allowed the relator to continue his affiliation with the competitor, but added a restrictive covenant preventing the relator from entering into any agreement to provide services to any other facility within 30 miles without Pottstown’s prior written consent.  The relator alleged that while his second on-call agreement was in effect, his employment contract with PMSI was not renewed because of his financial interest in the competitor.  The relator then entered into employment with another hospital and, as a result of that new employment agreement, Pottstown invoked the restrictive covenant to terminate his second on-call contract.  The relator brought aqui tam complaint alleging that Pottstown’s on-call contracts, and the payments made under them, violated the AKS because Pottstown’s intended purpose behind the on-call contracts was to induce him to refer patients (particularly his Medicare patients) to Pottstown.  The United States declined to intervene.

The key weakness in this complaint was the absence of any classic hallmark of illegal intent by the hospital during the negotiation of the on-call contracts; instead the relator relied solely on the hospital’s behavior after the agreements were in place for several months.  Most significantly to the court, the relator failed to plead facts showing that (a) the on-call contract negotiations were not at arms-length, (b) the hospital lacked a business need for on-call coverage by orthopedic surgeons and (c) his compensation exceeded fair market value.  Combined with other more plausible explanations for the hospital’s behavior and the relator’s proclaimed ignorance of the hospital’s alleged illicit intent to induce referrals until after his employment and on-call contracts ended, the court concluded that the relator had not alleged sufficient facts showing that the on-call contracts were meant to induce referrals, reasoning that “[a]ny practicable scheme to induce referrals would not have left him [Relator] ignorant of its true purpose.”

Notwithstanding this decision, providers should proceed cautiously and seek legal advice related to arrangements with physicians based upon economic credentialing.  Courts, and regulatory agencies, may interpret tying certain contracts for physician services to economic criteria as giving a physician an opportunity to earn money, which may constitute an improper inducement if the requisite intent exists.  For instance in United States ex rel. Fry v. Health Alliance of Greater Cincinnati, No. 1:03-CV-00167 (S.D. Ohio Dec. 10, 2008), a federal trial judge denied a motion to dismiss a complaint alleging that defendants engaged in a “pay to play” scheme by assigning time to cardiologists in their hospital’s heart station in proportion to the volume of referrals of cardiac procedures made by the cardiologists to the hospital.  Ultimately, those defendants paid $108 million to the government in an FCA settlement.  And, while initially rejecting a Corporate Integrity Agreement as part of the resolution, the hospital entered into one after receiving a rare notice proposing exclusion of the hospital from the Office of Inspector (OIG) General following the settlement.  The significant payment and the very rare action by OIG to begin potential exclusion proceedings against a large hospital show the gravity of the possible risks of getting on the wrong side of the government on these thorny issues.