By the standards of the Social Security Act, the Stark Law itself is almost pithy. Over the past 30 years, however, CMS has constructed on top of this relatively slight base a massive, complex regulatory structure. For Stark Law practitioners, it’s been clear from the moment the US Supreme Court decided Loper Bright1 that at least some of this construction might be challenged under Loper Bright’s “best reading” test for assessing an agency’s interpretation of a statute.
Here is one example. The Stark Law itself is essentially silent on the topic of whether a “financial relationship” includes an “indirect compensation arrangement” (ICA). CMS’s implementing regulations (the Stark Regulations), however, not only provide that a financial relationship includes both “direct” and “indirect” compensation arrangements, but provide a labyrinthine definition of the latter that is more than twice as long as the Gettysburg Address.
If there were any doubts that Loper Bright might have an impact on the Stark Regulations and, therefore, on the implementation of the Stark Law, those can now be put to rest. In what surely is a harbinger of things to come, pursuant to an order issued last week in a federal district court case in West Virginia (Order), it appears that the Stark Regulations in general, and CMS’s interpretation of financial relationships and ICAs in particular, are about to be put squarely to the test.
Background and Procedural History
US ex rel. Kyer v. Thomas Health System, Inc. (Kyer)2 is an FCA action filed in the US District Court for the Southern District of West Virginia against (i) Thomas Health System, Inc. (the System), (ii) its subsidiary hospitals (the Hospitals), (iii) its subsidiary physician practice group (the Practice Group), which employed over two dozen physicians (the Physicians), and (iv) an individual who served in an executive role for all of the foregoing (collectively, the Defendants).
The plaintiff (the Relator)—a nurse who worked at one of the Hospitals—filed her original complaint in November 2020. It appears that as of July 2023, DOJ was still investigating the Relator’s claims, but due to a deadline imposed by the district court, agreed to having the Relator’s complaint unsealed. At that time, DOJ specifically reserved the right to intervene for cause at a later date.3
The Relator subsequently filed a First Amended Complaint on March 1, 2024 (Amended Complaint). At a high level, the Amended Complaint alleges that from 2013 through at least 2022 (the Relevant Period), the Defendants caused the submission of false claims for reimbursement to federal health care programs through arrangements with the Practice Group and Physicians that violated the Stark Law and Anti-Kickback Statute.
On April 16, 2024, the Defendants filed a motion to dismiss the Amended Complaint and a memorandum in support thereof (Memorandum), arguing, as pertinent here, that the allegations in the Amended Complaint failed to establish a Stark Law violation. On May 21, 2024, the Relator submitted her opposition to the Motion (Response), and on June 4, 2024, the Defendants filed their reply brief (Reply).
The district court did not rule on Defendants’ motion to dismiss because on June 28, 2024, after the motion had been fully briefed, the Supreme Court issued its decision in Loper Bright. In light of that decision, on September 12, 2024, the district court ordered the parties to submit briefs describing what impact, if any, Loper Bright might have on the Relator’s Stark Law claim.
Relator’s Stark Law Claim
While the Relator’s Amended Complaint is not a model of clarity, the Amended Complaint appears to allege that there was a direct or indirect compensation arrangement between the Hospitals and the Physicians that did not qualify for protection under a Stark Law exception.
In her Amended Complaint, the Relator first argues that, for Stark Law purposes, the Hospitals had “direct” compensation arrangements with each Physician. While the Relator notes that the Physicians were “employed on paper” by the Practice Group, the Relator alleges that the System, the Hospitals, and the Practice Group essentially functioned as a single entity and that any corporate separation among them was a “legal fiction.” Thus, the Relator argues, any compensation paid by the Practice Group to the Physicians under their employment agreement really was compensation paid by the Hospitals—i.e., entities that furnish designated health services (DHS).
Alternatively, the Relator argues, the Hospitals had an “indirect” compensation arrangement with each Physician. While the Relator acknowledges that the ICA definition in the Stark Regulations changed during the Relevant Period, the Amended Complaint focuses on the definition in effect prior to January 19, 2021. Summarizing liberally, under that regulatory definition, an ICA would exist if the following three conditions are met:4
- Prong One. There is an unbroken chain of at least two financial relationships between the referring physician and the DHS entity.
- Prong Two. The compensation arrangement closest to the referring physician, which we’ll call the “relevant compensation arrangement,” provides for aggregate compensation that varies with, or takes into account, the volume or value of the referring physician’s referrals to or other business generated for the DHS entity (Volume/Value Standard).
- Prong Three. The DHS entity has actual knowledge of, or acts in reckless disregard or deliberate ignorance of, the fact that the relevant compensation arrangement provides for aggregate compensation that varies with, or takes into account, the volume or value of the referring physician’s referrals to or other business generated for the DHS entity.
In her Amended Complaint, the Relator alleges that Prong One was met because (i) the Hospitals had a compensation arrangement with the Practice Group (in the form of subsidies and cash transfers from the Hospitals to the Practice Group) and (ii) the Practice Group had a compensation arrangement with each Physician (in the form of their employment agreement). The Relator alleges that Prong Three was met because, by virtue of the parties’ common ownership and control, the Hospitals were aware of the compensation terms of the employment agreement between the Practice Group and each Physician.
With respect to Prong Two, the Relator uses Tuomey-like reasoning to argue that the ICA’s Volume/Value Standard was met.5 According to the Amended Complaint, each Physician employment agreement included (i) base compensation that was conditioned on the Physician achieving a minimum number of wRVUs and (ii) incentive compensation consisting of a set dollar amount per wRVU generated in excess of the minimum. According to the Relator, this compensation methodology violates the ICA’s Volume/Value Standard because, among other things, the Physicians “received wRVU credit every time they perform[ed] a service or procedure” at the Hospitals.
The Amended Complaint goes on to assert that whether the compensation arrangements between the Hospitals and Physicians were direct or indirect, none of the financial relationships qualified for protection under any Stark Law or Stark Regulation exception, such as the statutory and regulatory exceptions for bona fide employment arrangements (Employment Exception) or the regulatory exception for indirect compensation arrangements (ICA Exception) because the amounts paid to the Physicians under their employment agreements exceeded fair market value (FMV) and were not commercially reasonable. More specifically, the Amendment Complaint alleges that (i) the wRVU calculations that were used to determine the amount of the Physicians’ base and incentive compensation were inflated due to the inclusion of wRVUs performed by non-physician practitioners and (ii) the aggregate compensation paid to several Physicians was at or near the 90th percentile according to MGMA data.
Defendants’ Motion to Dismiss
In their motion to dismiss, the Defendants appear to concede that the Hospitals and each Physician had a direct compensation arrangement, albeit for reasons other than those alleged by the Relator.6 The Defendants challenge, however, the Relator’s assertion that the Hospitals and Physicians had any indirect compensation arrangements.
The Defendants also contend that having raised the issue of exceptions in her Amended Complaint, the Relator bears the burden of alleging facts sufficient to establish that none of the compensation arrangements at issue qualify for an exception under the Stark Law and Stark Regulations. And, according to the Defendants, the Amended Complaint does not satisfy this burden.
For example, while both the Employment and ICA Exceptions have FMV requirements, and while the Amended Complaint alleges that the aggregate compensation paid to several Physicians was at or near the 90th percentile according to MGMA data, the Defendants argue that this is insufficient to establish that the Physicians’ compensation exceeded FMV because there was no authority that “establishes this percentile as the threshold for fraud.” Indeed, the Defendants argue, “CMS has held otherwise.” Specifically, in preamble to its 2020 Stark Law final rulemaking, CMS made clear that it was not “CMS policy” (i) that “compensation set at or below the 75th percentile in a salary schedule is always appropriate” or (ii) that “compensation set above the 75th percentile is suspect.”7
Similarly, while both the Employment and ICA Exceptions have Volume/Value Standards, and while the Amended Complaint alleges that Physicians “received wRVU credit every time they perform[ed] a service or procedure” at the Hospitals, the Defendants argue that this compensation methodology would be deemed not to take into account the volume or value of referrals by virtue of CMS’s unit-based special rules.8
Whether the Relator or the Defendants are correct as a matter of law with respect to these various issues is moot, for the time being, because to the extent that all of the parties principally are relying on the Stark Regulations and CMS’s interpretation thereof, a much larger question has arisen: are the Stark Regulations at issue the “best reading” of the Stark Law itself?
September 12 Order
As noted above, the Defendants’ motion to dismiss in Kyer was fully briefed as of June 4, 2024, but a wrench was thrown into the works when the Supreme Court issued its Loper Bright decision on June 28, 2024. On September 12, 2024, the district court issued the Order, directing the parties to prepare supplemental briefings on the impact, if any, of Loper Bright on the Relator’s Stark Law claim.
The Order begins by observing that, over the past three decades, “the Stark Law has grown complex, nuanced, and reliant on agency regulation to define key terms and safe harbors.” The Order then notes that the Relator’s Stark Law claim and the Defendants’ arguments for dismissal “rely heavily” on Stark Regulations, specifically with respect to the regulatory definition of an ICA and the regulatory ICA exception.
The Order goes on to state that historically, “under Chevron, federal courts could wade through Stark Law claims by deferring and defaulting to an agency’s interpretation.” However, due to Loper Bright, such deference is “no longer acceptable.” Rather, the Order states, the court must determine whether the regulatory definitions and exceptions at the heart of the parties’ claims “are consistent with congressional authorization and the statute.” Only once the court has “determin[ed] the contours of the statute” and whether the regulatory definitions and exceptions at issue are consistent with the “best reading” of the statute can the court determine if the Relator has stated a claim under the Stark Law.
To that end, the Order concludes by ordering the parties to file briefs and oppositions thereto on October 4 and 18, respectively, addressing Loper Bright’s impact, if any, on the Relator’s Stark Law claim.
The Order notes that there appears to be little thought leadership regarding the impact of Loper Bright on the Stark Law, and that “the parties should welcome the opportunity to lay out Loper Bright versus Stark for the first time.” In the meantime, we intend to fill this gap with our own thoughts, to be provided an upcoming post.
Buckle up, health care industry, this is going to be a bumpy ride.
- Loper Bright Enters. v. Raimondo, 144 S. Ct. 2244, (2024). ↩︎
- US ex rel. Kyer v. Thomas Health Sys., Inc., No. 2:20-cv-00732 (S.D.W. Va.). ↩︎
- On July 3, 2023, DOJ took the unusual step of issuing a notice of “no decision on intervention.” In that notice, DOJ explained that the district court had mandated that the agency announce its decision on intervention by July 3, 2023, but it was “impossible” for DOJ to make a decision at that time due to the “complex nature of the regulatory scheme and facts at issue,” as well as the fact that it was still reviewing over 500,000 pages of documents produced by the Defendants in response to a subpoena. DOJ went on to “reserve[ ] the right to intervene for cause at a later time should its investigation or evidence developed through discovery . . . provide good cause for such action.” ↩︎
- References to “immediate family members” in the regulatory ICA definition have been omitted for ease of discussion. ↩︎
- See US ex rel. Drakeford v. Tuomey, 675 F.3d 394 (4th Cir. 2012). While the Amended Complaint does not cite to Tuomey for this argument, the Relator’s Response references that case to support the argument that compensation paid on a per-wRVU basis can satisfy the ICA’s Volume/Value Standard, notwithstanding CMS’s position that compensation for a physician’s personally performed services does not take into account the volume or value of the physician’s referrals or other business generated for a DHS entity. ↩︎
- The Memorandum asserts that the Amended Complaint “fundamentally establishes a direct compensation arrangement” because the Physicians stand in the shoes of the Practice Group. However, given that the Amended Complaint describes the Practice Group as being a wholly-owned subsidiary of the System, it is unclear if the Memorandum is applying the “stand in the shoes” doctrine correctly. Under the “stand in the shoes” doctrine, a physician is deemed to stand in the shoes of their physician organization only if the physician has an ownership or investment interest in that physician organization. See 42 C.F.R. § 411.354(c)(1)(ii). ↩︎
- See 85 Fed. Reg. 77492, 77558 (Dec. 2, 2020). ↩︎
- See 42 C.F.R. § 411.354(d)(2). CMS retired the unit-based special rules effective January 19, 2021, on the grounds that the special rules were incorporated into the new regulatory ICA definition. Prior to January 19, 2021, CMS took the position that the unit-based special rules would not apply at the ICA definition stage, but could be used for the purpose of satisfying a Stark Law exception. In her Response, the Relator argues that the unit-based special rules would not apply to the Physicians’ incentive compensation because the special rules applied to compensation for services “actually provided” by a physician, whereas the Physicians received wRVU credit for services provided by non-physician practitioners. ↩︎
