The Third Circuit sustained an appeal of a lower court’s dismissal of a Medicare fraud complaint, finding the relators plausibly alleged the defendants violated the Stark Act by tying physicians’ compensation to the number of referrals they made for the hospitals’ services. The court found that the physicians’ extraordinarily high compensation suggested they were being compensated for referring patients to their own hospital for additional services. While not demonstrating causation, the court found sufficient correlation to allow the case to proceed. The court also rejected the defendants’ argument that the relators were required to show that no Stark Act exception applied to their False Claims Act complaint, explaining that arguing an exception is the defendant’s burden. Further, the court held that the complaint argued facts showing that no exception could apply.
The relators in a Medicare fraud claim appealed a decision by the U.S. District Court for the Western District of Pennsylvania dismissing their case for failing to state a plausible claim.
The relators alleged that neurosurgeons employed by the defendants lied about the number of medical services they performed in order to artificially inflate billings to Medicare and their salaries. For example, the relators alleged that the surgeons reported serving as assistants on surgeries when they did not; acted as teaching physicians when they did not; billed for parts of surgeries that never happened; and conducted surgeries that were medically unnecessary or needlessly complex. The relators alleged they did this with the full knowledge of the defendants, who could bill Medicare for hospital and ancillary services related to the fraudulent charges.
First, the appeals court considered whether the defendants alleged that physicians made improper referrals under a compensation agreement with their employer. The court found the relators made plausible allegations of Medicare abuse.
First, the relators explained that every time a neurosurgeon performed a surgery or other procedure at the UPMC hospitals, they made a referral for the associated hospital claims. The court agreed these referrals, which include bed and board, some hospital overhead, and nursing services, fell within the law’s definition of referral. Further, as the surgeons performed more procedures, including those alleged to be medically unnecessary, those procedures required the attendant hospital and ancillary services.
The court held that treating these services as referrals made sense, as the surgeons stood to gain financially from the arrangements. Further, the Department of Health and Human Services’ Stark Act rulemaking provides that any hospital service, technical component, or facility fee billed by a hospital in connection with a doctor’s personally performed service” counts as a referral.
The court also found the relators’ complaint alleged an indirect compensation agreement. To demonstrate such an agreement, the relators must show an unbroken chain of financial relationships connecting the referring doctor with the provider of the referred services; show that the referring doctor receives aggregate compensation that varies with the volume or value of referrals; and show that the provider knew or deliberately ignored that the doctor’s compensation varies in this way. The court found the relators plausibly asserted these factors.
The court found no dispute that the physicians involved in the case are employed by entities owned by the Medical Center. The court also found that the structure of the surgeons’ contracts was enough to plead correlation. Further, the court reasoned that their suspiciously high compensation—the neurosurgeons at the center of the dispute were among the top 10 percent highest-paid neurosurgeons in the country—suggested causation.
The court noted that at this stage of the litigation, the relators must show either correlation or causation between compensation and referrals. Under the Stark Act and its regulations, compensation varies with referrals if the two are correlated. If compensation tends to rise and fall as the volume or value of referrals rises and falls, then the two vary with each other. In contrast, the Act provides that compensation takes into account referrals if there is a causal relationship between the two. While correlation does not guarantee causation, the court held that it is evidence of causation. Where relators can show a correlation, the underlying facts may get a closer look.
The court found the relators plausibly alleged a correlation between the surgeons pay and referrals with regard to both their base salaries and bonuses. By performing a certain number of procedures, the surgeons protected their base salaries. By exceeding their quotas, they earned bonuses. On the surface, their pay was based only on the services they provided. However, every time they performed a surgery or other procedures at the UPMC Hospitals, they made a referral for the associated hospital claims for ancillary services, for which the defendants billed Medicare. Thus, the court found there was a correlation between the physicians’ referrals and the amount of services they provided and their base pay.
At this stage, the relators did not need to plead causation, but the court found they did. The court reasoned that compensation for personal services above the fair market value of those services can suggest that the compensation is really for referrals. The court found it common sense that a hospital would not pay the surgeons more than their worth unless it expected to make up the difference elsewhere, i.e.: via referrals.
The court noted the Stark Act differentiates between fair market value and the volume and value of referrals, but does not sever the concepts. While payments above fair market value may not be related to a physician’s referrals, the court reasoned that marked overpayments are a red flag. The court found it logical to question why the hospital would pay the physicians at the inflated level if it weren’t taking referrals into account.
The court held the relators pleaded five facts that, taken together, made plausible claims that the surgeons’ pay exceeded their fair market value. First, some of the surgeons were paid more than the Medical Center collected for their services. Second, many surgeons’ pay exceeded the 90th percentile of neurosurgeons nationwide. Third, many of the surgeons performed far more than the average number of procedures for their sector. Eight of the 12 named physicians reported in the 90th percentile and a few reported two to three times the 90th percentile.
Fourth, the surgeons’ bonus per procedure exceeded what the defendants collected from Medicare on most of those procedures. The court noted that Medicate is known as a bottom biller, so it was possible the defendants made up the difference through billings to other insurers. However, the relators argued that the majority of all claims submitted by UPMC were sent to Medicare and Medicaid, meaning the Medical Center made up the difference elsewhere, possibly through referrals. The defendants argued the surgeons’ pay was the result of their bargaining power, but the court found a bare claim of bone fide bargaining was insufficient to defeat the claim.
And finally, the government alleged in its settlement agreement that the Medical Center had fraudulently inflated the number of procedures. The government’s data showed that the Medical Center’s year over year growth far exceeded industry benchmarks. For example, the neurosurgery department realized annual growth of 20.3 percent, 57.1 percent, and 20 percent in 2007, 2008, and 2009, respectively. Two surgeons more than doubled their output in just a few years. The relators alleged this growth was fraudulent, as the surgeons claimed they performed services they did not and chose the wrong billing codes for procedures they did perform.
The court noted that the defendant settled with the government on some of its claims. While the settlement is not an admission of guilt, the government’s choice to intervene supported the plausibility of the relators’ complaints.
The court also found the relators plausibly alleged the hospitals knew the the surgeons’ compensation arrangement took referrals into account. The court found no real dispute as to scienter, given the relationships between the physicians, hospital entities, and UPMC and its executives.
Finally, the court considered whether the relators pleaded a plausible prima facie case under the False Claims Act, and concluded that they had. First, the court held the relators satisfied all three elements of a False Claims Act case, showing that the defendants knowingly submitted false claims for payment to the government. At minimum, the court found UPMC recklessly disregarded the possibility that the surgeons’ compensation arrangement—which took referrals into account—would violate the Stark Act and render its claims for payment false. The court also held the complaint satisfied Rule 9(b)’s particularity requirement.
Finally, the court examined how the Stark Act interacts with the False Claims Act. The defendants argued that the False Claims Act’s elements of falsity and knowledge turn the Stark Act’s exceptions into prima facie elements of the False Claims Act. By their logic, because exceptions may apply, it is the relators’ burden to demonstrate that no exception applies.
The court rejected that reasoning, explaining that it is the defendant’s burden to plead Stark Act exceptions under the FCA. Further, even if that were the relators’ responsibility, the court found it had been met. The parties identified four exceptions that could apply: for bona fide employment, personal services, fair-market-value pay, and indirect compensation. The court noted that all four exceptions require that the surgeons’ compensation not exceed fair market value and not take into account the volume or value of referrals. However, the relators already demonstrated the opposite, and therefore no Stark Act exception can be found.
