• First Federal Court Opinion Analyzing Stark Law's Academic Medical Center Exception
  • May 9, 2008
  • Law Firm: Hinshaw & Culbertson LLP - Peoria Office
  • On April 8, 2008, the U.S. District Court for the Western District of Kentucky issued the first federal court decision analyzing the Stark Law’s Academic Medical Center (AMC) exception. The court followed a “purpose driven” interpretation and declined specific and technical timekeeping practices required under the exception where it was obvious that the entity operated a legitimate academic medical centers.

    The case, U.S., ex rel. Villafane, et al. v. Solinger, et al. 2008 WL 974703 (W.D. Ky.), involved a qui tam relator who was a former pediatric cardiologist and professor at the University of Louisville Medical School. Plaintiffs pursued a False Claims Act suit against Kentucky’s Kosair Children’s Hospital, the University of Louisville Medical School Fund, and the University of Louisville Research Foundation. The complaint was ultimately dismissed because the court found that the relationship among defendants qualified for the Stark AMC exception.

    Academic medical centers around the country may feel comforted by the court’s liberal interpretation of the AMC exception’s requirements. The court found that CMS intended in its exception a “purpose oriented approach . . . to ensure that AMC arrangements posed no risk of fraud or abuse.” Because no case law explores the precise contours of the AMC exception, the court reviewed the history and evolution of the AMC exception for guidance in its opinion.

    Reiterating prior case law that requires defendants to bear the burden of establishing eligibility for an exception under the Stark law, the court reviewed whether defendants met their burden of persuasion based upon a preponderance of the evidence standard. The court grouped the AMC exception’s many elements into three main categories for ease of analysis.

    A.       Referring Physicians

    In analyzing the first such category, which concerned the elements of the AMC exception focusing on referring physicians, the court discussed the various applicable timing requirements. The regulations state that a physician is “deemed” to meet the full-time or substantial part-time employment basis of a component of the academic medical center if he or she spends at least 20 percent of his or her professional time, or eight hours per week providing academic services or clinical teaching services. Plaintiff’s expert testified that, in his opinion, defendant’s timekeeping was a “sham” and that “no reasonable and consistent method was in place for calculating a physician’s academic services and clinical teaching services.” The court disagreed, finding that as the regulations state, a physician who does not meet the “deemed” requirement is not precluded from qualification under the AMC exception. The court found all of defendant’s evidence on this point “inherently reasonable.”

    B.         Compensation

    The court next analyzed the compensation elements under the AMC exception. Plaintiffs argued that “the total compensation paid by each academic medical center component to the referring physician should be interpreted to mean the defendant physicians’ entire income, whether derived from private practice or faculty salaries.” The court disagreed. It found that such a reading of the elements would require a medical school “to exert control over the internal salary decisions of any private practice whose physicians were faculty members.” The court further stated, “[s]uch an approach not only falls well outside the scope of the Stark laws prohibition on self-referrals, but also seems utterly impracticable.” Thus, for total compensation, the court examined only the faculty salaries paid to defendant physicians.

    As to whether compensation provided to physicians was “fair market value” (FMV), the court followed the Stark regulations’ Phase I and Phase II commentary in which the government states its intent to “accept any method that is commercially reasonable and provides us with evidence that the compensation is comparable to what is ordinarily paid for an item or service in the location at issue . . .” The court confirmed that no rule of thumb would suffice for all AMC situations. On fair market value, the court found that defendants complied “precisely with the regulations, presenting a comparison to aggregate compensation paid to physicians . . . in similar academic settings . . . demonstrating that their compensation is comparable to that of similarly situated academics.”

    C.         Accreditation and Organization/ Internal Financial Transfers

    The court last analyzed issues of accreditation and organization, and internal financial transfers between the academic institution and the hospital. Plaintiffs contested whether the majority of physicians on the AMC staff were faculty members and whether a majority of hospital admissions were made by faculty members. The court noted CMS’s “extremely permissive language regarding this requirement,” and indicated that “CMS did not want the regulations applied in a hyper-technical manner.” The court determined that CMS was more concerned with the AMC’s “core mission” rather than a strict application of any specific requirement. Despite plaintiffs’ arguments over the AMC’s absence of lengthy detailed written contracts, the court accepted several examples of documentation of the AMC relationship. Moreover, the court found no validity in plaintiffs’ assertions that the hospital had made “under the table” payments.

    Finding further that the AMC never violated the Anti-Kickback Statute, the court determined that all elements of the AMC exception were met by Kosair and the University of Louisville. The court held that plaintiffs’ False Claims Act claim had to be dismissed accordingly.

    All entities involved in AMCs should note that the court declined to engage in a highly technical interpretation of the AMC exception in this decision. Although the court discussed the Stark Law’s increasing complexity many times, it stated that the Stark Law’s purpose had to remain the priority in any analysis. The court’s flexibility towards the AMC exception’s technical requirements in this particular case did not extend to the Stark law in general. Also, the court did not broadly interpret the Stark regulations and declined substantive comment on its other exceptions.   Therefore, components of AMCs should continue to make every effort to comply precisely with all elements of the AMC exception and any Stark exception for which they are eligible.