April 2, 2009

Update—Exclusive Contracts in Peril?? 

In a recently decided case in the Federal 3rd Circuit Court of Appeals, the court held that an exclusive arrangement for the provision of anesthesia services implicated the Stark law (Stark II) and could provide the basis for a False Claims Act. 

U.S. ex rel Kosenske v. Carlisle HMA, 554 F.3d 88 (3rd Cir.2009) (2009 WL 129888) is a pending whistle-blower case, brought by an aggrieved competitor of an anesthesia group which had an exclusive dealing arrangement with the hospital for pain management services.  The whistleblower alleged that the provision to the group of free space and certain other services in the hospital owned surgery center were items of value that the parties had failed to document as being “fair market value” for the hospital’s assurance of the anesthesia group’s guaranteed presence and availability.  The hospital and the anesthesia group had a written contract for the exclusive arrangement at the hospital—but not for pain management at the surgery center, and they had failed to update the contract to include the new arrangements.  It did not matter that the hospital and the anesthesia group were in the midst of negotiations to update the contract—there was still no contract covering this arrangement. As such, their arrangements did not satisfy the Stark II exceptions for space rental, equipment rental and personal services.  So, if, at trial the physician whistleblower can now demonstrate that the parties actually knew about the lack of Stark ii compliance, or acted with deliberate ignorance or in reckless disregard of the requirements, all those claims submitted by the hospital could lead to huge exposure—and a big whistleblower’s recovery.

Where does this leave exclusive contracts?  Truth be told, they aren’t going away, and mere exclusivity by itself has never been the issue in this case.  But exclusive arrangements always mean someone is left out in the cold—and sometimes bitter.  If you have an exclusive arrangement with a hospital, be sure the contract arrangements are “buttoned-up” securely.  Where Stark or the anti-kickback prohibitions are implicated (as they almost always will be), make sure you’ve properly documented fair market value and otherwise complied with the safe harbor requirements for Stark and have considered each and every benefit accruing to one party or the other to make sure you’ve not left yourself open to charges of improper referrals.

We’ll keep you posted as this case progresses.