Last week, the United States Third Circuit Court of Appeals issued a decision that should send hospital administrators and compliance officers
scrambling to ensure their physician contracts are current. The case, U.S. ex rel. Kosenske v. Carlisle HMA, Inc., stems from a qui
tam action brought by a former hospital anesthesiologist with the memorable name of Ted Kosenske. For Carlisle Regional Medical Center and
Health Management Associates, Dr. Kosenske might as well have been the Unabomber.
In 1992, the Carlisle, Pennsylvania hospital entered into an exclusive contract with its anesthesiology group, Blue Mountain, whereby the group
agreed to provide coverage at the hospital for all anesthesia and pain management services in exchange for the hospital providing all necessary
staff, space, equipment, and supplies and excluding any other anesthesiology groups from practicing there. In 1998, the hospital built a
freestanding ambulatory surgery center and pain management clinic about three miles away from the hospital. Blue Mountain and the hospital
operated the ASC and pain clinic just as they operated the hospital, where Blue Mountain provided all needed anesthesiology and pain management
services and the hospital provided all staff, space, and equipment. However, the 1992 contract was never revised to include the ASC and pain
clinic.
Dr. Kosenske, who had left Blue Mountain and established a competing pain management service, sued under the False Claims Act, claiming that the
hospital provided benefits to Blue Mountain in the form of free rent and services and that the relationship did not meet the requirements of the
personal services exception. The trial court found for the hospital, since it saw the relationship between Blue Mountain and the hospital as a
continuation of the 1992 contract. However, the Circuit Court reversed that decision, explicitly stating that the failure to update a
long-standing contract between a hospital and its anesthesiology group or enter into a new agreement that covered the pain clinic meant that there
was no "written agreement" as required to meet the exceptions to the Stark Law and the safe harbor to the Anti-Kickback Statute. The Circuit
Court also implied that because there was no renegotiation of the terms of the underlying contract (i.e., the provision by the hospital of space,
equipment, and personnel in exchange for the full coverage by Blue Mountain), the hospital could not prove that the exchange was fair market value.
As this case makes clear, hospitals must take great efforts to ensure that any relationship they have with physicians are subject to current
written contracts. The Stark Law exceptions have specific requirements: contracts must be in writing, must be for a term of one year, must be
complete, etc. Failure to properly document such a relationship, even if the relationship is otherwise fully defensible, can certainly blow up a
hospital's compliance plans.
If you have any questions regarding this e-Alert, please contact Jeff Drummond
at 214.953.5781 or jdrummond@jw.com.
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