Fraud Alert for Attorneys Counseling Physicians and Medical Businesses

By Edward P. Richards, III, J.D., M.P.H.
(Originally published Summer 1991)

Medical businesses will have revenues in excess of 600 billion dollars in 1991. Most business lawyers have at least one physician or medical care business as a client. A new regulation from the Office of the Inspector General (OIG) of the Department of Health and Human Services will require many attorneys to call in their medical business clients for preventive law counseling.

On Monday, July 29, 1991, the OIG issued the final "safe harbor" regulations for the Medicare fraud and abuse laws. (42 CFR 1001.951, et seq.) Congress instructed the OIG to issue these regulations to clarify which medical business practices are legal and which are prohibited. These regulations pose a preventive law problem because they disallow many existing medical business arrangements. Attorneys have a duty to contact such clients if the non-complying activities were setup with the attorney's blessing.

Many attorneys who counsel physicians and medical business are unaware of the requirements of the Medicare fraud and abuse law. The conventional wisdom has been that the law is highly technical and only applies to fraudulent business practices. In fact, the relevant provisions are short and simple:

(1) whoever knowingly and willfully solicits or receives any remuneration (including any kickback, bribe, or rebate) [defined broadly as anything of value] directly or indirectly, overtly or covertly, in cash or in kind--

(A) in return for referring an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under subchapter XVIII of this chapter or a State health care program, or

(B) in return for purchasing, leasing, ordering, or arranging for or recommending purchasing, leasing, or ordering any good, facility, service, or item for which payment may be made in whole or in part under subchapter XVIII of this chapter or a State health care program,

shall be guilty of a felony and upon conviction thereof, shall be fined not more than $25,000 or imprisoned for not more than five years, or both. Besides the criminal penalties, physicians convicted under the law can lose their license to practice medicine.

Given the clarity of the law and the severity of the penalties, it seems that attorneys would have been scrupulous in advising their clients to adhere to the requirements of the law. This is not the case:

""I've talked about it with a lot of laboratory clients, and the reasoning almost always comes back, "The competition is doing it, so we have to do it to stay in business.''

"The 'it' in that observation by a Washington health care attorney refers to financial considerations built into business relationships between clinical labs and physician /hospital referral sources." (18 Med. Lab. Observer 23, July, 1986.)

To be more specific, the "it" is a remuneration prohibited under the Medicare fraud and abuse law. Many medical businesses engage in prohibited practices structured and approved by their lawyers. The interesting problem is how attorneys came to counsel their clients to violate the plain language of the law.

The first question is whether the law is unconstitutional or otherwise invalid. There are three federal appeals courts construing the fraud and abuse laws. United States v. Greber, 760 F.2d 68, 3rd Cir. 1985, involved a physician who ran a laboratory service that provided Holter monitors. A Holter monitor records a patient's cardiac activity while the patient is going about his daily routine. Cardiologists ordered these monitors from Greber. His business fitted them to the patient, collected the data, and prepared it for reading by the ordering cardiologist. The ordering cardiologist was paid a consultant's fee for analyzing his patient's Holter monitor data. In Greber's criminal prosecution for fraud, the government claimed that this analysis fee was an illegal inducement to persuade physicians to use Greber's services.

Greber argued that these were not illegal inducements to refer patients, but legitimate fees for evaluating the Holter monitor data. There was no evidence that these fees were higher than the market rate for analyzing Holter monitor data. (There was evidence, however, that some physicians received consulting fees when Greber had already evaluated the Holter monitor data.) The strongest support for the government was Greber's own testimony in a related civil case:

"In that case, he had testified that "... if the doctor didn't get his consulting fee, he wouldn't be using our service. So the doctor got a consulting fee." (Greber at 70.)

The court found, "If the payments were intended to induce the physician to use Cardio-Med's services, the statute was violated, even if the payments were also intended to compensate for professional services." (Greber at 72).

In the United States v. Kats, 9th Cir. 1989, the part-owner of a medical clinic was prosecuted for receiving from a medical laboratory. Kats claimed these were payments for drawing the blood and preparing the sample for shipment to the laboratory. The prosecutor alleged that this payment also was an inducement to use the laboratory and thus illegal under the law. The court rejected Kats' argument, finding: "... the jury could convict unless it found the payment "wholly and not incidentally attributable to the delivery of goods or services...". This ruling made it clear that the prohibited conduct was any payment that encouraged a referral, irrespective of whether the physician receiving the payment provided goods or services in return.

In the most recent case, U.S. v. Bay State Ambulance and Hosp. Rental Service, Inc., 874 F.2d 20, 1989, an ambulance service allegedly made payments to influence a decision to award a city ambulance contract. This case directly considered the constitutionality of the Medicare fraud and abuse law: "Defendants next claim that, if we read the Medicare Fraud statute to criminalize, under certain circumstances, reasonable payment for services rendered, the statute becomes unconstitutionally vague." The court rejected this reasoning, finding that congress's broad power to regulate commerce included the power to prohibit practices which might induce referrals, even if they had other, proper, motives.

These cases make it clear that the law is constitutional and is intended to prohibit all payments that induce referrals. This prohibition includes payments that have business legitimate business purposes other than inducing referrals. Yet there have been few prosecutions under the fraud and abuse laws. As one attorney put it:

"[T]he standard set in the United States v. Greber case is clear: If one purpose of payment is to induce future referrals, the Medicare statute has been violated. But, he adds, it is not followed absolutely. "You've got this case law that says everybody goes to jail and you know that can't be right." The question then becomes which of the transactions is more likely to stimulate the interest of a prosecutor, he says." (64 Hospitals #5, p36, 1990)

The lack of prosecutions leaves physicians and their attorneys in an ethical quandary. If attorneys follow the law and the cases interpreting the law, they would advise their clients that many common medical business practices are illegal. Physicians who follow the strict requirements of the law would be at a tremendous competitive disadvantage. Unless all attorneys recommended against these practices, physicians and other medical care businesses would gravitate to counsel with more generous views of the law.

This problem is exacerbated because some of the business practices that are outlawed are beneficial to patients and may even lower Medicare costs. This draws attorneys into rationalizations that the law could not really mean what it says because it would outlaw many beneficial practices. These rationalizations, combined with lack of prosecutions, lead attorneys to be overly generous in finding ambiguities in the law that support their clients's business practices.

Kats and Bay State Ambulance have stimulated efforts to eliminate gross violations, such as any payments tied to referral volume, but these do not reach the structural problems in many deals. Attorneys continue to believe that as long their clients do not intend to commit fraud, then their technical violations are acceptable. Even articles warning of the risk joint ventures between hospitals and physicians tend to concentrate on the business risks of the deals while ignoring their underlying illegality.

On July 29, 1991, the Office of the Inspector General of HHS (OIG) promulgated the final "safe harbor" regulations. When congress amended the fraud and abuse law, it directed the OIG to develop these guidelines to help physicians avoid unintentional violations of the law. The proposed safe harbor regulation was published in January, 1989, and the agency received extensive comments from physicians and other medical care businesses.

The final safe harbor regulation is much more restrictive than many attorneys anticipated. Rather than expanding the range of allowable activities, the regulations stick close to the statutory language that prohibits all inducements to refer patients. In the preamble to the regulations, the OIG specifically rejected requests to tailor the regulations to accept the legality of current business practices:

"Comment: Numerous commenters expressed concern about the difficulty in revising a business arrangement that they entered into with a good-faith belief that the arrangement did not violate the statute, but which they now find does not qualify under one of the safe harbor provisions. They suggested that the OIG either "grandfather" these arrangements or provide a reasonable period of time before initiating enforcement action to enable health care providers to restructure their arrangements to meet the safe harbor provisions.

"Response: The failure of a particular business arrangement to comply with these provisions does not determine whether or not the arrangement violates the statute because, as we stated above, this regulation does not make conduct illegal. Any conduct that could be construed to be illegal after the promulgation of this rule would have been illegal at any time since the current law was enacted in 1977. Thus illegal arrangements entered into in the past were undertaken with a risk of prosecution. This regulation is intended to provide a formula for avoiding risk in the future.

"We also recognize, however, that many health care providers have structured their business arrangements based on the advice of an attorney and in good- faith believed that the arrangement was legal. In the event that they now find that the arrangement does not comply fully with a particular safe harbor provision and are working with diligence and good faith to restructure it so that it does comply, we will use our discretion to be fair to the parties to such arrangements.

"Nonetheless, we believe that it would be inappropriate for us to provide a blanket protection, even for a limited period of time, for all business arrangements that do not qualify for a safe harbor. As we stated above, certain business arrangements that do not qualify may warrant immediate enforcement action. (56 FR 35952-01)

The safe harbor regulations draw a bright line between acceptable and unacceptable business practices. Some practices, such as the "sale" of an ongoing practice to a hospital, have been specifically disallowed. Others, such as businesses that do not meet the percentage ownership requirements for non-referring investors, are in clear violation of at least some aspects of the law. The legal significance of the regulations is that they put attorneys on notice that many existing business practices are illegal. The preventive law problem is what to do about these practices.

The OIG rejected "grandfathering" in existing medical businesses. Its position is clear: Show good faith by stopping practices that violate the law and we might not prosecute you. This creates a conflict for attorneys advising physicians about health care deals. Following the OIG's regulations would force an attorney to advise clients to get out of prohibited deals. This will be inconvenient and expensive for the affected physicians. They will ask the their attorneys embarrassing questions about the soundness of the original legal advice supporting the legality of the practices.

The safe harbor regulations make it clear that they do not prohibit any previously allowed behavior. Anything that is prohibited by the regulations has been illegal since 1977. Attorneys who initially structured these deals should have made a full disclosure of the potential legal risks and ambiguities inherent in them. If these disclosures were made, the affected clients have no reason to criticize their counsel. Physicians who were not informed of the tenuous footing of the deals may rightfully question their initial legal advice. This may make some attorneys reticent to stress the importance of modifying these deals. Until the OIG starts prosecuting physicians at a higher rate, it is tempting for these attorneys to ignore the regulations. It may be that the OIG will never prosecute any of their clients.

There is a significant question as to the ethics of allowing a client to unknowingly participate in an illegal activity that was originally approved by the attorney. A low probability of that client being prosecuted is not an adequate excuse for failing to inform the client of the problem. While it may be ethically defensible for the client to engage in civil disobedience to protest the law, this must be the client's choice. The client can only knowingly choose to continue to disobey the law if the client knows the conduct is illegal and knows the consequences of violating the law.

The problem posed by the regulations is that they eliminate the ambiguity that was used to justify many medical business practices. For the practices that have now been clearly disallowed, the client's risk of prosecution is greatly increased. The regulations, and the accompanying fraud alerts, undermine the client's excuse that he relied on the advice of counsel as to the legality of a regulated activity. This has the benefit, however, of preventing physicians from insulating themselves from liability by shopping for an attorney who will claim their practices are not prohibited.

Ethical questions aside, an analysis of the severity and probability of the risk of prosecution weights against not informing clients about the risk of continuing to participate in prohibited activities. While in the past there have been few criminal prosecutions, physicians have gone to jail under this law. In other cases physicians have avoided criminal prosecution by paying substantial fines to the OIG. In one settlement, the physician agreed to pay $875,000. Fighting the claim can be devastating: A dentist who rejected the chance to settle a case was assessed a penalty in excess of $18,000,000.

It is critical that clients understand that fraud and abuse settlements and court imposed fines are not insurable. These must be paid out of the physicians own funds. They must also appreciate the costs of legal representation. This can be several thousand dollars for a simple negotiated settlement, to tens of thousands of dollars to defend a criminal prosecution against a single physician. In addition, a criminal prosecution generates adverse publicity and can disrupt the physician's practice or the business' activities.

The greatest threat is that prosecutions will increase. It has always been a political decision whether to prosecute medical businesses under the fraud and abuse laws. The law has been clear since 1977, the only reason that it has been questioned is that it was not enforced. The delays and acrimony over the promulgation of the safe harbor regulations were because of the large number of non-complying physicians and medical businesses, not because of the complexity of the regulations. The final regulations themselves are quite short and simple. While the OIG has been silent on its reluctance to recommend prosecution in the past, even this reluctance may have been understated.

The OIG allows physicians and medical businesses to enter into confidential settlements. Unless discovered through freedom of information requests by reporters, these settlements are invisible. While these confidentiality agreements encourage settlement, they make it difficult for attorneys and their clients to estimate the true risk of violating the laws and regulations. There is evidence that the OIG has forced many physicians and medical business into paying substantial settlements. In many cases these settlements were for practices that had been approved by the settling parties' attorneys before the new and stricter regulations were promulgated.

It must be assumed that the OIG's strict interpretation of allowable practices, as reflected in the final safe harbor regulations, indicates a more aggressive posture toward prosecuting physicians and medical business. There are other political signs that point to increasing prosecutions. Congress and the Administration have proposed revised Medicare/ciad reimbursement guidelines that will reduce the overall payments to physicians. Increased fraud and abuse prosecutions are a convenient way to deflect criticism from medical groups seeking to assure adequate Medicare/caid reimbursement levels.

Attorneys who represent physicians and medical businesses should immediately read the safe harbor regulations and the accompanying preface by the OIG. They should then review their files to determine if any of their clients' business practices violate the provisions of the safe harbor regulations. Clients with non-complying business practices should be divided into two groups: those who were fully informed of risks of before entering to the business practices; and those who were not fully informed.

The clients who were fully informed of the risks should be told that what they were warned about has happened, the government has disallowed their business practices. They should be advised that they need legal advise at once, whether from you or another attorney. If these clients return to your office for advice, it is appropriate to charge them the full cost of developing a plan for complying with the regulations.

Clients that were not fully informed of the risks when the non-complying practices where instituted pose a difficult problem. They are potentially victims of legal malpractice. They must be informed of the problems posed by the regulations. If you are the attorney who failed to fully inform them, you have some duty to inform them of the problem. As an ethical matter, you should consider absorbing the legal costs restructuring these clients business arrangements. You also should discuss this problem with the risk manager for your legal malpractice insurance.

Clients who were not initially represented by your lawfirm, and were not fully informed of the risks of these business practices, may have a negligence claim against their original attorney. This claim will be greatly strengthened if any of the original attorney's clients with similar business practices were investigated or prosecuted by the OIG. Such an investigation would put the attorney on notice that business practices were suspect. You have a duty to inform the clients of this potential claim and to investigate it if requested.