Medicare Anti-Kickback Statute

March 18, 2021

Posted on by jwilbert

QUESTION:       I noticed that the first case in this week’s HLE discussed a Residency Assistance Agreement.  Does the Stark law permit a hospital to enter into such an agreement?  What are the practical and legal risks associated with such an agreement?

ANSWER:           Yes.  The Stark law permits hospitals to enter into a wide range of physician recruitment arrangements, either with the recruit or with a group that will employ the recruit.  A properly drafted recruitment agreement will comply with the Stark law, the Medicare anti-kickback statute and the IRS pronouncements on physician recruitment.

One unique form of recruitment agreement is to assist a physician financially during their residency program.  Such an agreement can be structured to comply with all legal requirements.  However, residency programs can last anywhere from three to seven years (as in the case discussed this week) and you are requiring a physician who is just beginning this training to make commitments that will extend for years after the training program has been completed.  As a result, inherent in this type of recruitment agreement are certain practical risks that often give rise to litigation.

A resident assistance agreement is typically an annual payment (usually a loan) that will be paid while the resident is in training but will then be forgiven if the physician returns and practices in the geographic area served by the hospital in the specialty described in the agreement for a certain period of time.

The situation in the case is not unusual.  There the physician entered into a five-year general surgery residency program.  The hospital agreed to pay her $25,000/year during the residency program.  While not stated in the case, this payment is typically a loan.  The physician agreed to return to the geographic area served by the hospital after the completion of the residency program, practice general surgery for a certain period of time (four years in the case) and if the physician practices in the manner described in the agreement for the full four years, the entire principal and interest will be forgiven.  Straightforward right – Not so fast.

Residents can change their mind – that is what happened in the case described in this week’s HLE.  There the physician wanted to pursue additional fellowship training as a thoracic surgeon.  However, not all hospitals need, or can support, such a subspecialist.  Besides, that is not what the hospital bargained for – they wanted a general surgeon.  Apparently, the hospital did not want to prevent the physician from obtaining the additional thoracic training but did not discuss the effect of her doing so on her commitment to the hospital.  Nor did they amend the agreement at the end of the general surgery residency program to address the change in circumstances.

So, they had an agreement that did not address the additional training.  As such, per its terms, the agreement stated that the physician would be in default if she did not practice general surgery for at least four years.  Apparently, that was not the physician’s understanding and she did not want to practice general surgery after obtaining additional training as a thoracic surgeon.  The result of this misunderstanding was litigation – which is still ongoing.  No general surgeon and legal fees-not the result that either party bargained for when they entered into the agreement.

Another issue that often arises in this kind of arrangement that often leads to litigation is how will the physician practice once they return.  If an employee what will their salary be and how will that salary be determined so far in the future?  If they are not offered employment by the health system, where will they practice and again under what terms?  The reality is that the physician has no idea of their market value before they start training but often become acutely aware as headhunters contact them as the training period ends – that complicates these employment-related issues.

We have also seen instances where a physician gets married during the residency program and their spouse either cannot find a job or does not want to live in the committed area.  Other issues arise if the hospital is sold, if demographic shifts have occurred so that the hospital can no longer support the physician’s specialty (even if the physician did not change or obtain additional training), or if unforeseen circumstances arise such as COVID.

Adding to this problem is that the amount of interest that accrues over the period of a lengthy residency program can be significant and can approach the amount of the principal – another fact that the physician did not realize when they signed the agreement.

So, what is a hospital to do?  Despite these issues, we continue to believe that a residency training assistance agreement is an excellent means for a hospital to recruit a new physician. It allows the hospital to recruit a physician in a needed service, although that need won’t be addressed until after the residency program is over.  It also allows the resident to concentrate on their training, eliminating the need to worry about whether there will be a position at the end of their training program.  It also assists the resident financially at a time when they often need the assistance.  But you need to appreciate the unique risks presented by this type of agreement, have an agreement that anticipates as many of those risks as possible, and if changes do occur during the course of the relationship, make sure that you memorialize those changes and their effect on the terms of the agreement in writing.

December 6, 2018

Posted on by hortyspringer

QUESTION:        A certain medication has gotten to be so expensive that our hospital has decided to stop stocking it.  As a result, we will not be able to treat certain patients.  The drug company that manufactures this medication has offered to provide the medication to the hospital FREE of charge, although it is our understanding that insurance will cover the drug after the patient is discharged.  This seems to us like a win-win.  Surely the government cannot object to such an arrangement.  Is this legal?

 

ANSWER:            Unfortunately, the Office of Inspector General cares a great deal about an arrangement such as the one that you have described and has recently opined that under certain circumstances a manufacturer providing an expensive drug free of charge to a hospital could violate the Medicare Anti-Kickback Statute.

The Anti-Kickback Statute prohibits any form of remuneration, in cash or in kind, that is provided with the intent to induce the referral of business that is paid for in whole or in part by a federal health program such as Medicare or Medicaid.  The free drug is remuneration under the law.  In OIG Advisory Opinion 18-14 (posted Nov. 16, 2018), the OIG opined that under the circumstances presented, the free drug could constitute an unlawful inducement and prohibited the arrangement.

Why?  The drug at issue had multiple uses, one of which was to treat a particular syndrome.  Once started, the drug had to be tapered or the patient would suffer serious side effects.  Most insurance, including the Medicare program, will pay for the drug on an outpatient basis.  However, when provided to a hospital inpatient, the cost of the drug was included in the hospital’s DRG payment.  At the current price of $38,892 per vial, many hospitals have decided that they could not afford to stock the medication.

The drug manufacturer’s response was to offer to provide the medication to hospitals free of charge while the patient was an inpatient.  Because the medication was covered on an outpatient basis, the drug company could be paid for the medication following discharge.  However, if the patient’s insurance would not cover the medication on an outpatient basis, the manufacturer would continue to provide the medication free of charge until either insurance coverage is obtained or the patient is tapered off of the medication.

Why did the OIG object to such a program when in the past the OIG has approved several arrangements in which drug manufacturers provided free medication to financially needy outpatients?  In order to answer that question, you need to examine how the OIG viewed this particular arrangement.

Typically, the OIG limits its review in an Advisory Opinion to the facts that are submitted by the entity requesting the opinion.  However, in this opinion, the OIG took the unusual step of considering publicly available information.  The OIG noted that the drug at issue was not new and that at one time it cost only $40.  The OIG also noted that at its current price of $38,892 per vial, the drug “has the highest total annual spending per use and the highest price per unit among drugs that CMS examines that met certain criteria.”  The OIG also considered the fact that the drug manufacturer had entered into a $100 million settlement with the FTC of an antitrust claim that was alleged to stifle competition for this medication.

The OIG also considered the fact that insurance, including Medicare, covered the drug on an outpatient basis.  Also important to the OIG was the fact that the program did not consider the financial need of the recipient.  The manufacturer only provided the drug at no cost on an outpatient basis if the patient had no insurance coverage for the medication and then only until insurance coverage could be obtained or the patient could be safely tapered off of the drug.

This led the OIG to conclude that providing the medication for free to hospitals “could function as a seeding arrangement.”  The OIG noted that the full course of treatment typically extended beyond the patient’s hospital stay.  Factors such as the length of the treatment, the fact that alternatives to the medication exist, and the need to taper the medication in order for the drug to be discontinued led the OIG to conclude that the manufacturer’s intent appeared to the OIG to be to induce hospitals to start patients on this medication while an inpatient, so that the manufacturer would eventually be paid for the drug after the patient was discharged.  The OIG was also concerned that providing the medication free to hospitals would steer patients to this medication as opposed to other medications that could be used to treat the syndrome.

These facts caused the OIG to determine that such an arrangement could violate the Medicare Anti-Kickback Statute and, as a result, the OIG would not approve the proposed arrangement.

If you want practical examples as to what is and what is not permitted by the federal fraud and abuse laws, join Henry and Dan in New Orleans from April 11 to 13 for the Physician-Hospital Contracts Clinic.