Health Law Update - October 12, 2017

Alerts / October 12, 2017

Welcome to this week's edition of the Health Law Update. In this Issue:

Structuring Clinical Practices to Prevent Pitfalls – Deeply Rooted Corporate Practice Doctrine Remains Strong

By Vimala Devassy and Ernessa B. McKie

With growing patient demands, advanced technology and payer restraints, healthcare providers are increasingly exploring management agreements with experienced companies to handle the daily operations of their clinical practice. However, healthcare professionals need to be aware of the potential pitfalls in doing so, especially given the deeply rooted corporate practice of medicine doctrine in many states, which provides that practitioners, not corporations, should retain control of the business decisions that affect the practice of medicine. While the corporate practice of medicine is often thought of as an antiquated doctrine, the New York and New Jersey courts recently affirmed that the doctrine is indeed alive and well.

At its core, the corporate practice doctrine prohibits non-physician-owned business entities from engaging directly in clinical practice. States adopting the doctrine, whether through statutory law, common law or otherwise, commonly state that it ensures a clinician is responsible for the control and direction of a medical practice. Many states have adopted provisions that enable healthcare professionals to enter into arm’s length arrangements for services by non-physician entities. However, the medical professionals should have an integral role in the direction of their clinical practice at all times.

Earlier this year, in Andrew Carothers, M.D., P.C. v. Progressive Insurance Company, 150 A.D.3rd 192 (2017), the New York appellate court upheld a jury’s decision that a medical practice was not entitled to insurance payments for patient care because the practice was fraudulently organized. Dr. Carothers, a radiologist, formed a professional corporation to perform MRI services at three locations in New York. While Dr. Carothers was the sole owner of the medical practice, he leased the equipment and space from a non-physician-owned entity who also exercised considerable control over the daily operations of the facilities. The Court found that the physician-owner lacked knowledge about the day-to-day operations and finances of the medical practice and that under the totality of the circumstances, the jury properly concluded that the physician was not involved in the management and control of the business. As a result, the Court held that the practice was fraudulently formed and not entitled to any insurance payments.

Similarly, in Allstate Insurance Company vs. Northfield Medical Center et al., 228 N.J. 596 (2017), the New Jersey Supreme Court affirmed a trial court’s conclusion that a lawyer and a chiropractor violated the state’s Insurance Fraud Prevention Act because they “promoted and assisted in the creation of a practice structure that was designed to circumvent regulatory requirements with respect to control, ownership and direction of a medical practice.” While the relationships between the various parties were complex, the Court’s decision centered on whether a medical practice was formed in accordance with the state’s corporate practice principles. Using a model known as “Practice Perfect,” a New Jersey chiropractor incorporated a management company and a medical corporation. The medical practice was owned by a physician and the management company was owned by the chiropractor. The management company controlled the day-to-day operations of the medical practice. The physician owner had no control over any decisions made by the medical practice nor did the physician owner appear “in charge” of any of the practice profits or design. The management company had responsibility for all financial matters and had the right to seize control of the practice at any time through an undated resignation letter signed by the physician. Based on the regulations, and the facts stated above, the appellate court upheld the trial court’s conclusion that the medical practice was essentially under the control of the management company and the physician was a nominal owner.

The common theme gleaned from these cases is that in states where there is an express prohibition on the corporate practice of medicine, the medical practices must be structured in a manner that ultimately vests control in the physician-owner. To that end, transactions should be arranged in an artful manner that addresses the following key areas:

  • Contractual agreements with non-physician entities for management services should demonstrate that the physician-owner possesses the power and decision making authority to govern, control and direct matters relevant to the medical practice.
  • Ownership in a clinical practice, transfers of stock, issuance of shares and other practice transactions should involve a review of the state’s corporate practice of medicine restrictions. Many states provide guidance on proper ownership requirements through the state medical board, administrative agencies decisions, attorney general opinions and legal case law.
  • Negotiations for services with non-physicians must be made in good faith and for commercially reasonable fees.
  • Transactions must not interfere with the medical professional’s independent judgment with respect to patient care.
  • Regulatory requirements for compliance with the corporate practice of medicine may vary based on the type of medical services rendered.
  • Oversight and knowledge of the material business operations, staff composition and finances of the practice should involve the physician-owner of the medical practice.
  • Leases for equipment and space are permissible as long as they reflect an arm’s length relationship between the medical practice and the lessor.

These recent cases are a reminder of the importance of ensuring that medical practices avoid structural pitfalls by maintaining control of the direction and decision-making for a medical practice. As new business models and care delivery systems evolve, the foundation of a medical practice will affect reimbursement and the practitioner’s ability to maintain a successful practice. Providers must look to their state-specific laws to ensure that the corporate structure is sound and in compliance with corporate requirements.

Physicians in the Bulls-eye

By Robert M. Wolin

Several recently reported cases highlight the growing risk physicians face if they succumb to competitive pressures, especially offers of remuneration from labs, pharmacies, home health agencies and other providers to whom they refer. In many cases, the effort to recoup fees may come years after the physician received and spent the fees, with no insurance coverage for the defense of the claim and/or to satisfy any potential liability.

Bankruptcy Trustee Recoups Specimen Handling Fees Paid to Physicians

The bankruptcy trustee for a diagnostic laboratory (Lab) filed over 1,000 lawsuits against physicians attempting to recoup, for the benefit of the Lab’s creditors, what he claimed to be excessively large specimen processing and handling fees paid to physicians. In 2015, the Lab agreed to pay $47 million to the U.S. Department of Justice (DOJ) to resolve allegations that it paid kickbacks to physicians in connection with these fees and the waiver of patient co-pays and deductibles. As a result, the trustee maintained that each physician payment also constituted a fraudulent transfer under the Bankruptcy Code and sued to recover the payments. Similar allegations were also made by the trustee to recover payments under state fraudulent transfer laws.

In the pleadings, the trustee characterized the physicians’ acceptance of the fees as “knowingly assisting [the Lab’s] insiders in perpetuating their illegal scheme … that exposed [the Lab] to catastrophic penalties and fines” and alleged that the enormous penalties and fines caused the Lab to be “catastrophically insolvent throughout its history.” The trustee further contended that the physicians receiving the payments:

–Aided and abetted breaches of fiduciary duty by certain officers and directors of the Lab;

–Engaged in a conspiracy with the Lab;

–Committed fraud related to unnecessary testing; and

–Received unjust enrichment and improperly converted the funds paid by the Lab for their own benefit.

As the federal government continues to impose large fines and penalties for violations of the False Claims Act and the anti-kickback statute, physicians receiving income supplementation from vendors are likely to see more of such actions by creditors and trustees of bankrupt providers. Care must be taken when defending and settling claims brought by bankruptcy trustees and creditors to avoid admissions that can be used by the DOJ or the Office of Inspector General. Further, as the DOJ seeks to hold individuals responsible for criminal violations, it is likely these same physicians may also have to defend civil and/or criminal claims asserted by federal authorities, including civil monetary penalties in excess of $74,000 per claim.

Prescription Fraud – The Pen that Scribes Prison Blues

  • A pediatrician prescribed opioids and other drugs in volumes so large the patients could not physically take all of the prescribed drugs, ignored drug tests indicating that patients were not taking the medications and submitted claims for back injections up to 17 times a year for patients who did not complain of back pain. Based on these acts, the pediatrician pleaded guilty to conspiracy to commit fraud related to medically unnecessary treatments and drugs. The pediatrician currently awaits sentencing, along with six other individuals, in connection with the $19 million Medicare fraud scheme.
  • A New Jersey osteopath recently entered a guilty plea for conspiracy to defraud a healthcare benefit program with an out-of-state pharmacy in a 15-month-long insurance scheme. Allegations include that the physician accepted $25,000 and other gifts for providing pre-printed, signed blank prescriptions to pharmacy sales representatives and that he prescribed medically unnecessary compounded medications for patients he had not examined. The plea agreement requires the physician to pay $25 million in restitution and forfeit $25,000 in criminal proceeds. He faces a maximum prison sentence of 10 years.
  • A Miami doctor was sentenced to eight years in prison and ordered to pay $4.8 million in restitution in connection with a six-year $20 million Medicare fraud scheme involving kickbacks from pharmacies for patient referrals and medically unnecessary prescriptions for controlled substances and home health services. The case, brought by the Medicare Fraud Strike Force, involves a number of healthcare facilities and co-conspirators who have been sentenced to multi-year prison terms.

When Hand-signed Fraud isn’t Fast Enough – Automate!

  • A Chicago podiatrist was sentenced to seven and a half years in prison and ordered to pay $7 million in restitution for creating an electronic medical record (EMR) system to defraud Medicare. The doctor’s customized EMR system used “automated language” that required the treating podiatrist to click on a service description that mirrored “the Medicare billing requirements for podiatry services.”

On each screen, the podiatrist had to select one of the options and could not move forward to the next screen if they did not make a selection. When the podiatrist made a selection, the EMR software auto-populated the patient record with pre-determined language. When the podiatrists entered specific billing codes in the EMR, the system automatically populated the assessment part of the progress note with … canned language.

     At times, “practice employees, who were not podiatrists, would create progress notes by simply entering billing codes into the EMR system, which would automatically populate the progress notes with templates. These employees prepared these progress notes at the direction and with the approval of [the doctor].”

  • The podiatrist’s wife is currently serving a one-year prison term. Four other podiatrists involved in the scheme are awaiting sentencing.•A physician-owned chain of family medicine clinics recently agreed to pay the government $1.56 million. Its principal owner and former chief executive officer along with his wife, the practice’s former laboratory director, agreed to pay $443,000 to resolve whistleblower allegations that they:

–Programmed the billing system to systematically change or flip billing codes to codes that would be paid;

–Paid employed physicians a direct share of their laboratory tests as a bonus in violation of Stark Law;

–Created custom laboratory panels that included medically unnecessary tests;

–Used standing orders to set testing frequency rather than clinical need; and

–Billed for office visits for patients having blood drawn when no evaluation and management services had been performed.

According to federal authorities, the former laboratory director “manipulated the billing software so that any time [when] CPT code 86141 was entered” the software would substitute another code for which Medicare would provide reimbursement.

The couple’s personal liability for a significant portion of the settlement reflects the DOJ’s continuing efforts to hold individuals accountable for corporate fraud. The settlement also provides that the principals will have no management role in the clinics for five years and obligates the clinics to undertake internal compliance reforms, including hiring an independent review organization to conduct annual claims reviews.

I Kinda Sorta Saw the Patient

In another case, brought as part of the Medicare Fraud Strike Force, a Texas physician with an ownership interest in a home health company was sentenced to 16+ years in prison and ordered to pay $34 million in restitution for Medicare fraud. According to the plea, the physician had allowed the home health company to use his provider number to bill Medicare for services performed by others, including physicians, nurse practitioners and physician assistants. Additional allegations include billing Medicare for 90-minute physician visits when the actual visits took 20 minutes in most cases, improper certifications for home health care and on occasion, submitting claims for more than 24 hours of service in a single day.

Five New Team Members Join BakerHostetler’s National Healthcare Practice

Partner Mark A. Kadzielski and Counsel Jeeyoung Kim have joined BakerHostetler in our Los Angeles office. Mark focuses his practice on representing hospitals, medical staffs, managed care enterprises and institutional and individual healthcare providers through government regulatory and licensing matters, peer review, joint commission accreditations, credentialing, compliance and corporate government oversight, and Medicare certification. Jeeyoung will work closely with Mark on these matters while also focusing on patient privacy and telemedicine.

Elizabeth Goldman has joined our team in the Washington, D.C. office. Elizabeth has a strong background of working with clients on complex Medicare reimbursement and coverage disputes, as well as many other healthcare regulatory and compliance issues. She will work with hospitals and health systems, medical staffs and other healthcare providers. Elizabeth will work closely with Lee Rosebush in our Washington, DC office.

Our Houston office also has two new healthcare team members. Kathryn Carey and Jessica Adams will be working closely with our established full-service Houston healthcare team. Kathryn focuses her practice on regulatory work for clients in the healthcare industry, with an emphasis on healthcare privacy and data security. Jessica focuses her developing practice on healthcare law, particularly on regulatory and compliance matters.

Baker & Hostetler LLP publications are intended to inform our clients and other friends of the firm about current legal developments of general interest. They should not be construed as legal advice, and readers should not act upon the information contained in these publications without professional counsel. The hiring of a lawyer is an important decision that should not be based solely upon advertisements. Before you decide, ask us to send you written information about our qualifications and experience.

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