Appeals court ruling in Hanlester case adds to physician self-referral tumult

April 26, 1995

Congressional hearing on Stark II set for May 3A U.S. Court of Appeals panel this month significantly raisedthe standard that federal investigators must meet to successfullyprosecute cases of physician self-referral under Medicare

Congressional hearing on Stark II set for May 3

A U.S. Court of Appeals panel this month significantly raisedthe standard that federal investigators must meet to successfullyprosecute cases of physician self-referral under Medicare anti-kickbacklaws. The decision was considered a major blow to federal effortsto crack down on self-referral using the anti-kickback rules.It may also offer peace of mind to non-physician-owned companiesforming joint-venture arrangements with imaging centers.

The case stemmed from a Department of Health and Human Serviceseffort that began in 1988 to prosecute the Hanlester Network,a group of clinical laboratories that relied heavily on physicianinvestors. The government alleged that Hanlester broke federalanti-kickback laws by recruiting physician investors and compensatingthem through profit distributions to induce them to refer Medicareand Medicaid patients to Hanlester labs. The anti-kickback ruleswere passed in the 1970s to rein in self-referral abuses.

On April 6, however, the U.S. Court of Appeals for the NinthCircuit in San Francisco ruled against the government. The courtsaid that in order for the conviction to stand, prosecutors hadto prove that the parties involved in joint-venture arrangementshad specific intent to induce investor referrals.

The ruling is a serious setback for the feds, according toGary Fields, an attorney with Proskauer, Rose, Goetz and Mendelsohnin New York City.

"It is going to make the enforcement of the anti-kickbackstatute with regard to joint ventures and other ventures betweenphysicians, hospitals and integrated delivery systems much moredifficult for the government," Fields told SCAN. "Theynow have to prove that there was actual intent on the part ofthe participants to induce referrals."

The ruling will primarily impact joint ventures that do notdirectly involve physicians, who are already banned from self-referralarrangements in Medicare and Medicaid by the provisions of StarkI and Stark II, according to Fields. Stark I and Stark II werepassed after the government began its investigation of the Hanlestercase.

"I don't think this will have a profound impact on whatphysicians can do, but it will have an effect on all the otherplayers: public companies, hospitals, not-for-profit institutions,"Fields said. "It will give them greater latitude in structuringtransactions, but when they are structuring with physicians, theystill have to be concerned about the Stark statute."

Stark II hearing scheduled. Concerns about Stark II continueto build in Washington, DC. Rep. Bill Thomas (R-CA), chair ofthe House of Representatives subcommittee on health, is examiningStark II and may propose changes to the law (SCAN 3/15/95).

A hearing on Stark II has been scheduled for May 3. As thedate approaches, parties on both sides of the fence are preparingfor a legislative cat fight.

One group that opposes Stark II, the Medical Group ManagementAssociation, this month released a set of changes to the law thatit would like to see implemented. Among the proposed revisionsis a change in the list of designated health services coveredby Stark II. MGMA is proposing that some health services includingradiology -- except for MRI and CT -- be removed from the list.

MGMA's exemption of MRI and CT is significant. MRI serviceswere frequently cited as an area of self-referral abuse when thedebate over Stark II was raging, and since then the modality hasbecome a symbol for the perceived excesses of high-tech medicine.The exemption may indicate that there is a lack of political momentumfor removing the services from Stark II's mandate.

Indeed, Randy Teach, director of MGMA's Washington, DC, office,said MRI and CT were removed after meetings with other groupsthat advocate revisions to Stark II.

"There seemed to be a feeling among participants in ourdiscussion that (MRI and CT) are areas that could be controversialon their own," Teach said. "We've tried to create alist that is defensible."

There is political support to spare for revising the rest ofthe law, however. Stark II's ambiguities, which have been exacerbatedby a lack of implementing regulations, have baffled the health-careindustry since the law took effect Jan. 1, according to Fields.

Implementing regulations for Stark I appear to be on the way,and may help clarify the situation. The Health Care FinancingAdministration initially targeted late April for promulgationof the rules. It appears that they will miss that deadline, butthe agency is believed to be close to finishing its work. ProposedStark II rules are expected to follow by the end of the year.