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The Patient Protection and Affordable Care Act Immediately Impacts Providers’ Compliance with STARK, the Anti-Kickback Statute, and False Claims Act Enforcement Efforts.

By Kathryn R. Gilchrist
Adams and Reese LLP

While we are all keenly aware of many of the changes the Patient Protection and Affordable Care Act (“PPACA”) will bring to the health insurance industry, employers of all sizes, and nearly all of us on an individual basis, the impact PPACA poses to the world of provider compliance issues has not been nearly so widely discussed. It is important to know that the legislation mandates several adjustments to existing STARK exceptions, several of which purport to be effective already.

This Client Alert focuses on the following changes:

  1. Amendments to STARK’s in-office ancillary services exception, whole hospital exception, rural area exception, and self-disclosure protocol;
  2. Changes impacting application of the Anti-Kickback Statute’
  3. Amendments to the False Claims Act (“FCA”) which are expected to increase whistleblower litigation; and
  4. Increased funding for fraud and abuse enforcement efforts.

Changes to STARK

  1. Mandatory Freedom of Choice Notifications for Imaging Services

    Generally speaking, the STARK Law prohibits a physician from referring a federally funded patient for designated health services to an entity with which the referring physician or an immediate family member has a financial relationship. Unless covered by one of many exceptions, any violation of this rule will result in the imposition of significant civil monetary penalties and the potential for being barred from future participation in the federal programs.

    One such exception, the In-Office Ancillary Services exception, is amended by the PPACA. The In-Office Ancillary Services exception permits physicians to refer federally funded patients for designated health services within the physician’s own group practice if certain conditions are satisfied. Those conditions concern (i) who performs the service, (ii) where the services are performed, and (iii) how the services are billed.

    Under PPACA, there is a new requirement that must now be met before the In-Office Ancillary Services exception may be relied upon in the provision of certain diagnostic imaging services – a “Freedom of Choice” notification to patients. Section 6003 of PPACA provides that referrals of MRI, CT and PET scanning services will be protected under the exception only if, at the time of the referral, the physician informs the patient in writing that the patient may obtain the same services from another source (not the physician or his group practice). The written notice must also provide the patient with a list of other providers of the service (physicians, IDTF’s, others) in the area.

    While the application of this rule is limited to those imaging modalities listed above, it also permits the Secretary of HHS, by rule, to impose a similar requirement on referrals of other DHS.

  2. Limits on Referrals to Physician-Owned Hospitals

    Also excepted from STARK’s general anti-self-referral rule are referrals to hospitals in which the referring physician owns an interest, so long as that interest is owned in the “whole hospital” and not merely a distinct part or department of the hospital. Section 6001 of PPACA prohibits the formation of new physician-owned hospitals and places significant limitations on future activities of existing facilities.

    Most notably, the changes imposed by Section 6001 are:

    • The “whole hospital” exception to STARK will not be available to any newly formed physician-owned hospitals after 2010. More specifically, in order to qualify for the exception, a physician’s investment must have been made and the hospital must have a Medicare provider agreement in effect on or before December 31, 2010.

    • The aggregate physician ownership in physician-owned hospitals is capped by PPACA at whatever percentage existed as of the enactment of the Act. For example, if, on March 23, 2010 (the enactment date), physicians owned 28% of the total ownership interest in a hospital (or in a hospital-owning entity), then the total physician ownership may not at any time in the future exceed 28%.
    o NOTE: This provision is seemingly inconsistent with the permission for physicians to invest in newly formed physician-owned hospitals through December 31. CMS will need to address.
    • Hospitals grandfathered in under the “whole hospital” exception may not, without the permission of the Secretary of HHS, expand in number of operating rooms, procedure rooms, or beds after March 23, 2010, in order to comply with the exception. A procedure for grandfathered hospitals to apply for an exception to this rule must be in place by February, 2012.

    • Physicians and hospitals who jointly own ASC’s may not avoid the impact of this section by converting the jointly owned ASC to a hospital. Referrals to hospitals which were formed by such a conversion after March 23, 2010, will not qualify for the “whole hospital” exception.

    • Grandfathered hospitals must have procedures in place which require referring or treating physicians to disclose their ownership interest in the hospital to their patients within a time that will permit the patient the opportunity to make a choice as to where to be treated.

    • Grandfathered hospitals must disclose the fact that they are partially physician owned. That notice must be published on the facility’s website and in any public advertising by the hospital.

    • All grandfathered hospitals will prospectively be required to submit an annual report to the Secretary of HHS with a detailed description of ownership structure and identity of physician and non-physician owners and the nature and extent of ownership. This notice will be published on CMS’s website.
  3. Rural Area Exception Limited

    STARK will permit a physician to refer patients for DHS at entities with which the physician has a financial relationship if the entity is a rural entity, such that substantially all of the DHS furnished are furnished to persons residing in a rural area (areas outside of any Metropolitan Statistical Area).

    This rural area exception has, previously, applied to any type of health care provider/services, so long as the requirement of the exception were met. That is no longer the case. Under PPACA’s Section 6001, beginning 18 months after the enactment date (or October 22, 2011), a physician-investor’s referral to a rural hospital will not be covered under the rural area exception unless the rural hospital meets all of the disclosure, reporting, ownership percentage and service expansion limitations imposed by the above-discussed “whole hospital” limitation.
  4. STARK’s Self-Disclosure Protocol

    In 2009, the OIG announced that its Self-Disclosure Protocol (for use by health care providers to disclose technical and unintentional violations of fraud and abuse laws) was not applicable to STARK violations. A great deal of uncertainty existed in the wake of that announcement for providers regarding whether to self-report, how to do so, and what consequences would result from such actions.

    Section 6409 of PPACA requires the Secretary of HHS to develop and implement a disclosure protocol for STARK violations by September this year (6 months from enactment). That protocol, which is to appear on CMS’s website, must specify the person/office to whom disclosure is to be made as well as the effect of disclosure on corporate integrity agreements and corporate compliance agreements. Perhaps most notably, the provision permits the Secretary to reduce the penalties imposed for STARK violations disclosed to amounts less than what is provided by the STARK law. In making such a reduction, the Secretary may consider:

    a. the nature and extent of the improper or illegal action;
    b. the timeliness of the self-disclosure;
    c. the provider’s cooperation in providing additional information related to the disclosure; and
    d. any other factors the Secretary deems appropriate.

Changes to the Anti-Kickback Statute

As every provider should be able to recite at will, the Anti-Kickback Statute (AKS) makes it a criminal offense to “knowingly and willfully” offer, pay, solicit, or receive any remuneration in connection with referring an individual for medical items or services for which payment may be made by any federal health care program, including Medicare and Medicaid. 42 U.S.C. § 1320a-7b(b). Section 6402 of PPACA makes two changes to the AKS which may prove to be of great importance as we watch the ever-increasing rate of government enforcement actions against providers of all types.

First, the intent aspect of the AKS appears to be significantly undermined. Until now, there has been no express definition of “intent” as it is required for an AKS violation. In 1995, the Ninth Circuit Court of Appeals provided the closest thing we have to that definition, stating that a person could not be liable for an AKS violation unless he or she (1) subjectively knew that the statute prohibited offering or paying remuneration to induce referrals, and (2) engaged in the prohibited conduct with the specific intent to disobey the law. Hanlester Network v. Shalala, 51 F.3d 1390 (9th Cir. 1995). PPACA, in language seemingly intended specifically to undo the Hanlester mandate, provides that, in order to establish an AKS offense, “a person need not have actual knowledge of [the Anti-Kickback Statute] or specific intent to commit a violation of this section.” This language will undoubtedly make the already difficult road of AKS defense even more imposing.

Second, under PPACA, every claim submitted based on a referral made in violation of the AKS will now automatically constitute “a false or fraudulent claim” under the False Claims Act.

These two changes will make it easier to make an AKS case against a provider, and will create a two-for-one position for the government once an AKS violation is established.

False Claims Act Amendments

Finally, following on 2009’s Fraud Enforcement and Recovery Act (part of the Stimulus Bill), PPACA contains further changes to the False Claims Act, seemingly most specifically aimed at increasing whistleblower litigation.

Public Disclosure Parameter Altered

Prior to PPACA, the “public disclosure” provision of the FCA prevented a federal court from taking jurisdiction in any whistleblower action where the claims made were “based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or [GAO] report, hearing, audit or investigation, or from the news media.” 31 U.S.C. §3730(4)(A). Only if the whistleblower was the “original source” of the information would such an action be permitted, pre-PPACA.

PPACA has likely rendered the “public disclosure” rule non-jurisdictional. The phrase “no court shall have jurisdiction” has been removed, and instead the Act states that such actions will be dismissed “unless opposed by the Government.” This new language arguably vests in the Government complete discretion as to whether whistleblower actions, previously not capable of being brought, may now proceed despite the “public disclosure” rule.

Reporting of Overpayments

Section 6402(a) of PPACA also contains a “report and return” requirement for overpayments. Under the new law, providers are legally obligated to report and return overpayments by the later of either 60 days after the overpayment is identified, or the date any corresponding cost report is due. The 60-day period begins when the knowledge of the overpayment is obtained. A missed deadline constitutes an automatic violation of the False Claims Act.

Because this provision took effect upon the law’s signing (March 23, 2010), any pre-enactment overpayments known by providers must presumably be reported and returned within 60 days of the enactment date – or by May 22, 2010. Worthy of note is the fact that the term “identified” is not defined – an omission that will likely be the source of a great deal of discussion and debate in days to come over what does and does not qualify for this mandatory reporting requirement.

Additional Support for Enforcement

PPACA expands the jurisdiction of Recovery Audit Contractors (RAC’s) to Medicare Parts C and D, and to Medicaid. It also contains a $95 million first year increase in funding for federal enforcement actions. That amount grows to $250 over the first five (and more than $300 million over the first ten) years of the law’s enactment.


At the end of the day, the conclusion that must be drawn from these changes in combination with what we are seeing on an almost daily basis in the rapidly increasing level of government enforcement activity is two-fold:

  1. Get into compliance - take your compliance program VERY SERIOUSLY. If your facility or your practice does not yet have a formal compliance program, tailored to your operations, contact healthcare counsel and get one. If you do have a compliance program in place, take action now to be sure it is properly amended to reflect the changes imposed by PPACA.
  2. Stay in compliance – train, monitor, audit, review, correct. A good compliance program (see conclusion one!) will require that these activities are ongoing on a regular basis. Do not let your guard down.

Enforcement activities are on the rise. RAC’s, MIC’s, ZPIC’s, the OIG, CMS, the FBI, whistleblowers…. the list of types of enforcers is a very long list. The Government IS coming. And while it has never been an absolute requirement that all providers have a formal compliance program, the OIG leaves no room for doubt that the absence of such a program will be seen as a great negative in any investigation that takes place.

Get in compliance and stay there. To coin a phrase, “the life you save may be your own.”