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RICO / Fiduciary Duty

Physicians and their Profession: Do Racketeering Rules Apply?


National Law Journal, Monday, August 28, 1989, p. 38. By Edward P. Richards, Daniel J. Deters and Robin J. Gray

(Mr. Richards is Research Director for the National Center for Preventive Law at the University of Denver College of Law. Mr. Deters and Ms. Gray are senior students at the College of Law.)

One of the most controversial issues in medicine is the propriety of physicians having a financial interest in medical businesses. Attorneys for physicians must alert their clients to the risk of RICO actions posed by these financial interests.

There has been little medical RICO litigation.[1] This is partly due to a preoccupation with antitrust litigation. More fundamentally, it reflects the belief among medical care providers that violating their fiduciary duties is an ethical, rather than a legal, problem. There is a voluminous literature on the ethics of physician incentives.[2]

Other than Medicare/Medicaid fraud, this literature ignores potential criminal law violations. These criminal law violations form the predicate acts necessary for civil and criminal RICO actions against medical care providers. The risk of medical RICO litigation has been increased by the recent ruling in H.J. Inc. v. Northwestern Bell Telephone Company.[3]

In Northwestern Bell, the Supreme Court completed the expansion of RICO that began with Sedima, S.P.R.L. v. Imrex Co.[4] In Sedima, the Court held that RICO did not require that defendants be convicted of the underlying predicate acts that constituted the pattern of racketeering. Sedima, however, did not unambiguously define the pattern of racketeering that is at the heart of RICO. This allowed the Circuit Court in Northwestern Bell to limit the scope of RICO by narrowly defining the elements for a pattern of racketeering.

The Supreme Court reversed the lower courts' rulings in Northwestern Bell, holding that the RICO pattern requirements were meant to have a broad reach. In particular, the Court stressed that RICO was meant to apply to situations: ". . . in which persons engaged in long-term criminal activity often operate wholly within legitimate enterprises."[5] With this ruling, the Court makes it clear that the actions of a legitimate business such as a medical care enterprise can constitute the requisite pattern of racketeering for a RICO action.

The shifting economics of medical care has destroyed the traditional physician patient relationship. Physicians were once independent practitioners who intermediated between their patients and medical businesses such as hospitals and laboratories. Now these businesses use financial incentives to manipulate patient care to benefit a third party.

Managed care plans are systematic offenders. These include HMO's (health maintenance organizations), PPO's (preferred provider organizations) and other insurance schemes that provide financial incentives to reduce medical services provided to their insureds. They may offer physicians a cash bonus for reducing hospitalizations or referral to specialists. The most insidious strategy is to require the physician to accept a total capitation payment.

Total capitation shifts the risk of insurance to individual physicians. The physician or clinic group is allocated a fixed amount for the patient care. Services that the physician cannot perform must be paid for out of this allocation. This is a powerful incentive for the physician to not order tests or consult with other physicians about the patient's care.

Many hospitals offer physicians incentives to hospitalize insured patients and to not hospitalize indigent patients. These may be positive incentives, ranging from subsidized office space to non-recourse loans, or negative incentives. Negative incentives can include termination of medical staff privileges, usually in the guise of a peer review proceeding.[6]

Some freestanding medical businesses such as laboratories use the fiction of physician investors to reward physicians who choose their products and services. Others just pay bribes based on the volume of products or services.[7]

The kernel of the legal problem posed by all of these deals is that the physician patient relationship is a relationship of trust: a common law fiduciary relationship. This relationship has:

. . . its foundation on the theory that the former [physician] is learned, skilled and experienced in those subjects about which the latter ordinarily knows little or nothing, but which are of the most vital importance and interest to him, since upon them may depend the health, or even life, of himself or family. [T]herefore, the patient must necessarily place great reliance, faith and confidence in the professional word, advice and acts of the physician.[8]

Giving physicians incentives to violate their fiduciary duty violates both state bribery laws and the federal mail and wire fraud statutes. These violations constitute predicate acts for RICO. Potential plaintiffs include physicians who lose medical staff privileges for not participating in illegal schemes, medical care providers who lose business to providers who participate in illegal schemes, and third party payors whose charges are inflated by such schemes. Plaintiffs need only be injured by the pattern of racketeering, they need not be a direct target.[9]

State commercial bribery statutes have been drafted on the basis of the Model Penal Code, Section 224.8 - Commercial Bribery and Breach of Duty to Act Disinterestedly:

(1)A person commits a misdemeanor if he solicits, accepts or agrees to accept any benefit as consideration for knowingly violating or agreeing to violate a duty of fidelity to which he is subject as:

. . .(c)lawyer, physician, accountant, appraiser, or other professional adviser or informant; . . .

(3)A person commits a misdemeanor if he confers, or offers or agrees to confer, any benefit the acceptance of which would be criminal under this Section.

The Model Penal Code broadly defines the "benefit or consideration" as: "gain or advantage, or anything regarded by the beneficiary as gain or advantage."[10] It is clear that incentive plans affect physician's clinical judgement.[11] While incentives may not always work to the patient's detriment, it does not affect their characterization as bribes. One may not defend a bribe by arguing that it was meant to do good.

Violations of state bribery statutes are a predicate act for RICO only if the violation can result in imprisonment for one year or greater. There are 9 states that specifically list physicians in their bribery statute and provide for imprisonment for a year or more.[12] In these states, physician incentive plans are clearly predicate acts for RICO.[13] An additional 13 states provide a one year penalty for bribing fiduciaries, without specifically naming physicians.[14] Two states provide a one year penalty for bribing agents.[15] These laws would apply to incentive plans directed to physicians in their role as the patient's agent for the procurement of medical care products and services.[16]

More problematic are the states that criminalize the bribery of fiduciaries, but provide a punishment of less than one year in prison.[17] Technically, these states pose the same legal question as states that only have common law prohibitions on bribery of fiduciaries: "May interference with a fiduciary relationship be the basis of a predicate act?"

Most RICO cases are based on violations of the federal mail and wire fraud statutes.[18] Any fraudulent conduct that directly or indirectly uses the mails or telephone is a violation of these laws. The courts use a very spacious definition of fraud in mail and wire fraud cases:

"It is a reflection of moral uprightness, of fundamental honesty, fair play and right dealing in the general and business life of members of society....[A]s Judge Holmes so colorfully put it ´[t]he law does not define fraud; it needs no definition; it is as old as falsehood and as versatile as human ingenuity.'"[19]

The Supreme Court reiterated the expansive reach of mail and wire fraud in Carpenter v. United States.[20] In Carpenter the Court affirmed the mail fraud conviction of a Wall Street Journal reporter who used the Journal's confidential information in an inside trading scheme. The reporter was held to have violated his fiduciary obligation to protect his employer's confidential information.

The duty of fidelity between employer and employee and between physician and patient are both common law duties. Paying physicians to violate their fiduciary duty is legally indistinguishable from bribing employees to violate their duty to their employers.

It has been argued that it is against public policy to apply RICO to medical care enterprises. This implies that it is more reprehensible to conspire against a person's business than his health. Given the Carpenter Court's concern with the duty of fidelity, it is expected that the courts will deal harshly with enterprises that attempt to compromise physicians' duties to their patients.

Attorneys who counsel medical care providers must assure that these clients do not enter into business arrangements that encroach on the independence of the physician patient relationship. The attorney must first determine if the incentives violate any state or federal laws.

It is common for attorneys to approve plans that violate the letter of the Medicaid fraud laws or state bribery statutes because these laws are seldom enforced. Enforcement policy, however, does not prevent a private plaintiff from enforcing these laws through a civil RICO proceeding.

If the plan comports with state and federal law, the attorney must then determine the effect of the plan on physicians' relationships with their patients. Ideally, the plan will be neutral, neither encouraging nor punishing some clinical decisions over others. If the plan does affect clinical decision making, then it is critical that the incentives do not adversely affect patient care.

Incentives that benefit the patient, such as allowing outpatient testing, are most defensible. Incentives to reduce hospitalization may be neutral, but they imply that the physicians are over hospitalizing patients. Incentives to reduce care that clearly benefits the patient, such as consultation with specialists, are clearly indefensible.

If the attorney chooses to recommend a plan that adversely impacts patient care, then the effects of the plan must be fully disclosed to the patients. Full disclosure includes telling the patients when they are being denied care because of financial considerations. Full disclosure is not a complete defense, but it does reduce the element of fraud. While few patients will have the money to purchase the care themselves, they must not be denied that option.

Medical care attorneys and their clients face difficult decisions. Physicians are under increasing pressure to compromise their professional judgement or lose their patients. Attorneys who advise medical care providers must recognize that contracts that interfere with physicians' fiduciary duties pose ethical problems for both counsel and client.

[1.]But see: Winston v. American Medical International, Inc., No. H-95-6193 (S.D. Tex. filed May 1987); Maxicare v. American Medical International, Inc., No. C678061 (Cal. Super. Ct. Los Angeles Cty. filed March 20, 1988); and Kantor v. American Medical International, Inc., No. C635366 (Cal. Super. Ct. Los Angeles Cty. filed October 19, 1987).

[2.]For example, see: A. Relman, "American Medicine at the Crossroads: Signs from Canada", 320 N. Engl. J. Med. 590 (1989) and A. Hillman, "Financial Incentives for Physicians in HMO's: Is There a Conflict of Interest?", 317 N. Engl. J. Med. 1743 (1987).

[3.]57 U.S.L.W. 4951 (1989) [hereinafter Northwestern Bell].

[4.]473 U.S. 479 (1985).

[5.]at 4956, emphasis in the original.

[6.]D. Fanning, "Medical Benefits", Forbes p. 158 (October 3, 1988).

[7.]W. Bogdanich and M. Waldhole, "Warm Bodies: Hospitals That Need Patients Pay Bounties for Doctors' Referrals", Wall St. J. Vol CXX, #39, p. 1, col. 1 (Monday 27 Feb 1989).

[8.] Witherell v. Weimer, 421 N.E.2d 869 (1981). See also: Fure v. Sherman Hospital, 380 N.E.2d 1376 (Il 1978); Taber v. Riordan, 403 N.E.2d 1349 (Il 1980); Loudon v. Mhyre, 756 P.2d 138 (1988); and Hoopes v. Hammarger, 725 P.2d 238 (Nev. 1986)

[9.]Lewis v. Lhu, 696 F. Supp. 723 (D.D.C. 1988).

[10.]MODEL PENAL CODE sec. 224.8 comment 1 (1980).

[11.]A. Hillman, et. al., "How do financial incentives affect physicians' clinical decisions and the financial performance of health maintenance organizations?", 321 N. Engl. J. Med. 86 (1989).

[12.]ALA. CODE sec. 11.46.660 (1978); COLO. REV. STAT. sec. 19-5-401 (1983); HAW. REV. STAT. sec. 708-880 (1985); KAN. STAT. ANN. sec. 21-4405 (1988); MO. REV. STAT. sec. 570.150 (1979); NEB. REV. STAT. sec. 28-613 (1985); N.J. REV. STAT. sec. 2C:21-10 (Supp. 1989); OKLA. STAT. ANN. tit. 21, sec. 380 (Supp. 1989); TEX. PENAL CODE ANN. sec. 32.43 (Vernon 1989).

[13.]The court in U.S. v. Gaudreau 860 F.2d 357, 358 (10th Cir. 1988) determined that a "knowing violation of a duty of fidelity" can form the basis of a racketeering charge.

[14.]ALA. CODE sec. 13A-11-120 (1982); ARIZ. REV. STAT. ANN. sec. 13-2605 (Supp. 1988); CONN. GEN. STAT. sec. 53A-160, 161 (1985); DEL. CODE ANN. tit. 11, sec. 882 (1987); KY. REV. STAT. ANN. sec. 518-020 (Michie/Bobbs-Merrill 1985); MASS. GEN. LAWS ANN. ch. 271, sec. 39 (West 1985); MICH. COMP. LAWS ANN. sec. 750.125 (West 1968); MINN. STAT. sec. 609.86 (1987); N.H. REV. STAT. ANN. sec. 638:7 (1986); N.Y. PENAL LAW sec. 180.08 (McKinney 1982); N.D. CENT. CODE sec. 12.1-12-08 (1976); PA. STAT. ANN. tit. 18, sec. 4108 (Purdon 1983); S.D. CODIFIED LAWS ANN. sec. 22-43-1 (1988).

[15.]IOWA CODE ANN. sec. 722.10 (West 1979); R.I. GEN. LAWS secs. 11-7-3, 11-7-4 (1988).

[16.]M. Crane, "Why did it take for long to nail this crocked doctor?", 20 March 1989 Medical Economics, p. 54 (this journal does not use volume numbers).

[17.]ILL. ANN. STAT. ch. 38 para. 29A-1 (Smith-Hurd 1977); LA. REV. STAT. ANN. sec. 73 (West 1982); NEV. REV. STAT. ANN. sec. 207.295 (Michie 1986); N.Y. PENAL LAW sec. 180.00, 180.05 (McKinney 1982) (commercial bribery and bribe receiving in the second degree, but with punishment at least one year if second offense). See also VA. Code Ann. sec 18.2-44(1988) and ME. Rev. Stat. Ann. title 17-a, sec. 904 (1983).

[18.]18 U.S.C. secs. 1341, 1343 (1982 & Supp. V 1987).

[19.]Gregory v. United States, 252 F.2d 104, 109 (5th Cir. 1958), citing Weiss v. United States, 122 F.2d 675, (5th Cir. 1941), cert. denied 314 U.S. 687 (1941).

[20.]198 S.Ct. 316 (1987).

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