It’s the moment of truth in a whistleblower case. The defendant claims the whistleblower’s claims aren’t legally valid and asks the court to dismiss the case without a trial. If the motion is successful, the whistleblower’s case is all but dead unless he/she can salvage the situation on appeal. But if the motion fails, trial looms and the risk shifts to the defendant and the whistleblower gains the leverage in settlement negotiations.
Now, imagine that there was a surefire formula that a whistleblower could use to survive dismissal and get to trial. Recently, a federal court came close to concocting such a formula. Here’s a look at the case and its significance.
The Legal Basics
The Stark Law bans physicians’ Medicare referrals for “designated health services,” including hospital and lab services, to an entity with which the physician has a direct or indirect financial relationship, unless an exception applies.
The False Claims Act makes it illegal to submit a false claim to Medicare.
The Interplay: Billing for services furnished as a result of a physician referral that violates Stark is a false claim banned by the FCA.
The “Take Into Account” Rule: One critical component of determining if a referral violates Stark is whether a referring physician is compensated in a manner that “varies with” or “takes into account” the volume or value of referrals. If so, the arrangement is instantly suspect. And when a provider bills Medicare for services provided under the arrangement, the FCA also comes into play.
The Magic Formula: Can a whistleblower suing for FCA violations stemming from a provider’s billing of services referred by a physician it employs under an arrangement that violates Stark survive a motion to dismiss merely by demonstrating facts showing that the physician’s compensation “varies with” or “takes into account” the volume or value of referrals?
The Bookwalter Case
This question was at the center of a new case, called U.S. ex rel. Bookwalter v. UPMC, involving employment agreements between neurosurgeons and subsidiary physician practices owned by the University of Pittsburgh Medical Center (UPMC). Under the arrangements, physicians earn base salaries and potential incentive bonuses tied to their personally performed work relative value units (wRVUs). Surgeons who exceed their quotas get paid a $45 bonus for every extra Work Unit; but missing the quota is grounds for lowering the surgeon’s future base salary.
Whistleblowers claimed that the arrangements violate Stark and that UPMC surgeons covered by the arrangements submitted false claims for both physician and hospital services. The Justice Department settled the claims related to physician services for $2.5 million but declined to intervene on the hospital services claims. Undeterred, the whistleblowers went forward only to have the federal district court rule that they didn’t have a valid legal claim and dismiss the complaint without a trial.
But the whistleblowers persisted and when they got to the Third Circuit in September, their luck turned around. Relying on a controversial construction of the Stark “volume or value” test, the Third Circuit held that the facts the whistleblowers pleaded were enough to make out a case and survive the motion for dismissal. The key fact was that the surgeons’ compensation both varied with and took into account the volume or value of their designated health service referrals to UPMC’s hospitals, which indicated that they had an impermissible indirect compensation arrangement. As a result, they would get a chance to prove their claims at trial.
The December Do-Over
The upshot of the September ruling was that a whistleblower bringing an FCA claim for billing hospital services generated by an improper Stark referral arrangement with a hospital-employed physician could beat back a motion to dismiss and get into court simply by claiming that the physician’s compensation varied based on the volume or value of his/her referrals to the hospital. But on Dec. 20, the Third Circuit beat a bit of a retreat. The revised opinion expressly declines to address the question of whether the mere correlation between compensation and value/volume of referrals means that the former impermissibly “varied with” the latter.
Even so, the court still ruled that the whistleblowers could go to trial—but for a different reason. The reason their complaint was legally valid was that the whistleblowers pleaded facts suggesting the link between compensation and referrals, namely, that the surgeons’ compensation was “suspiciously high” and far exceeded fair market value. The key facts:
- Some surgeons’ pay exceeded their collections;
- Many surgeons’ pay exceeded the 90thpercentile of neurosurgeons nationwide;
- Many surgeons generated Work Units far above industry norms;
- The surgeons’ bonus per Work Unit exceeded what the defendants collected on most of those Work Units; and
- The government alleged in its settlement agreement that UPMC had fraudulently inflated the surgeons’ Work Units.
The revised opinion eases concern that hospitals may run afoul of Stark and the FCA simply with a physician employment agreement containing a productivity bonus for personally-performed services. However, while backing away from the “magic formula,” the Third Circuit still found ample evidence of a close link between the surgeons’ compensation and the referrals they generated for the hospital. This highlights the importance of ensuring that compensation arrangements with physicians are for fair market value and commercially reasonable.