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Judge rejects key IG arguments in kickback case.

The Government's crackdown on fraud and abuse was dealt a blow in March when a judge declined to exclude from Medicare and Medicaid several parties accused of anti-kickback violations.

While all the cards have not yet been played, many observers believe the decision could curb the enforcement momentum Federal officials had built up in recent months (see "The Growing Crackdown on Laboratory Fraud and Abuse," February MLO).

The Department of Health and Human Services' (HHS) Office of the Inspector General had sought to exclude from Government health programs three limited partnership labs in California, the labs' general partner, and 10 individuals in a first test case of the IG's administrative authority.

The three labs were formed under a 1987 joint agreement between SmithKline Beecham Clinical Laboratories (SBCL) and the Hanlester Network. Under the arrangement, SBCL assumed day-to-day operating responsibilities for the labs, in exchange for approximately 80% of the revenues.

To the companies, the deal was merely a response to competitive pressures in the clinical lab industry. To the Government, its main purpose was to create "shell" laboratories and funnel business from physician investors to SBCL in exchange for remuneration.

Specifically, the IG charged that the arrangement violated Federal anti-kickback statutes covering Medicare and Medicaid since 1977. "Unlawful inducement" was alleged in artificially low risks and high returns for physician investors. The IG also said the purchase of joint venture shares was implicitly linked to physician referral volumes.

Other aspects of the deal investigators found illegal included the targeting of physician investors by specialty or geographic location, monitoring of referrals by physician investors, and the joint venture labs' dependence on those referrals.

Officials also threatened to exclude SBCL, but the company settled its end of the dispute in December 1989 by paying a fine of $1.5 million and agreeing to review some of its other arrangements with physicians. SBCL admitted to no illegal conduct under terms of the settlement. Hanlester, meanwhile, appealed the IG's administrative decision and pressed its case in a hearing before an administrative law judge (ALJ) last September.

In a 97-page decision issued March 1, ALJ Steven Kessel rejected the view that merely "encouraging" referrals is illegal inducement per se. Offers or payments "intended to influence provider choice, as opposed to agreements that foreclose provider choice," are not illegal, he wrote.

In another portion of the decision, Kessel suggested that payments for physician referrals must be explicit to be illegal: "It will not suffice to establish a violation to show that payments were offered or made in the hope that a provider would be encouraged to refer program-related business."

The judge went on to say that accepting the IG's interpretation of the statute would put in question many other arrangements that have become common in the health industry. He cited the example of a hospital's offer of payment to a doctor who joins its medical staff. "None of these practices involve agreements to refer business as a condition of the payment, yet all would be potentially illegal under the IG's interpretation because they contain 'inducements' to make referrals," according to Kessel.

The IG had asserted its interpretation was valid because payments could not be protected by "safe harbors" or by being "not excessive" in relation to the value of what was received in return.

Judge Kessel noted, however, that the Government has not yet issued its safe harbor regulations. He called the judgment of excessive payments "an imprecise and vague test that fails to provide anyone with a reasonable basis for determining whether his or her conduct" would violate the law.

Kessel ruled that none of Hanlester's principals had violated the law. He found, however, that the limited partnerships were in violation based on the conduct of a key Hanlester marketing representative. That representative, whose sales pitch was secretly tape recorded by investigators, erred by strongly suggesting to physicians that their purchase of partnership shares was conditioned by the extent of their referral of laboratory work, according to the judge.

Still, the judge declined to exclude the labs on those grounds, finding that the representative had been repeatedly reprimanded for making assertions outside company policy. Kessel said that although the company was vicariously liable for the actions of its now-former employee, "no remedial purpose" would be served by punishing respondents to the case.

Hanlester attorney Patric Hooper said the decision delivered a "big left hook" to the IG. He predicted it could have a chilling effect on the Federal crackdown effort.

S. Craig Holden, an attorney with Ober, Kaler, Grimes & Shriver in Baltimore, said the ruling "will have a significant impact on the health care industry."

Holden, who represented SBCL in the matter, added that the decision "represents an implicit rejection of the Inspector General's theories set forth in the joint venture Fraud Alert issued in the spring of 1989 and a return to more traditional and generally accepted interpretations of the statute."

Holden said that if the decision holds, the risks in physician joint ventures can be reduced to acceptable levels through careful structuring and close adherence to certain criteria. For example:

* The venture should have one or more legitimate business purposes.

* Each investor should have a bona fide financial risk in proportion to his contribution and degree of participation.

* Returns must be based on the percentage of ownership and unrelated to an investor's referrals.

* No punitive action may be taken against participants based on referral practices.

The IG still has at least one more card to play in the matter: Officials have already appealed the decision to the HHS Departmental Appeals Board, a panel of three Government lawyers.

Judge Kessel's ruling appeared to give the IG little choice but to appeal. Not doing so would have rendered the judge's finding an official HHS interpretation of the law and compromised the IG's exclusion authority.

Analysts expect the IG to base its appeal in part on Kessel's interpretation of the term "inducement." Some independent attorneys believe the judge took a much narrower definition than Congress intended when it drafted the legislative language in 1977.

The appeals board is the end of the line for the IG in terms of administrative review. Both sides in the dispute will be filing briefs, and a decision could come by this summer. If Kessel's ruling is upheld, it will become official HHS policy. If it is reversed, Hanlester could still pursue the matter in Federal court.

If the appeals process goes poorly for the IG, some observers suggest the office might tinker with the long-awaited safe harbor regulations in a way that would undermine Kessel's legal interpretation. Officials could also petition Congress for more specific legislative authority.

The wild card on Capitol Hill is being held by Rep. Pete Stark. The California Democrat issued no comment on the decision in the Hanlester case. A number of Washington insiders, however, see the ruling as support for Stark's contention that the existing fraud and abuse statute is too vague to enforce.

Those analysts believe that Stark might seize upon the decision to further his push for a total ban on physician ownership of health care facilities to which they refer patients.

HCFA announces

CLIA sanctions

On April 2 the Health Care Financing Administration (HCFA) published proposed sanctions for violations of the Clinical Laboratory Improvement Amendments (CLIA) of 1988. All sections of the CLIA regs have now been issued in proposed form, but it remains uncertain when the final regulations might be published.

The proposed sanctions allow for civil money penalties of $3,050 to $10,000 per day of noncompliance for CLIA violations that pose "immediate jeopardy" to safety. Violations that do not pose immediate jeopardy would range from $50 to $3,000 per day of noncompliance.

HCFA Administrator Gail Wilensky, Ph.D., said the availability of penalties other than Medicare exclusion will give the agency more flexibility in policing safety standards. "If you only have an all-or-nothing capability--to terminate or not--you're put in the position of using your atom bomb" for any disciplinary action, she said.

Details of the proposed sanctions and an update on the overall CLIA rulemaking process will appear in next month's Washington Report.
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Title Annotation:Department of Health and Human Services' Office of the Inspector General
Publication:Medical Laboratory Observer
Date:May 1, 1991
Previous Article:If performance palls, look below the surface.
Next Article:Strengthening the weak links in lab services.

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