By Chase Doscher, Class of 2018; Emmie Futrell, Class of 2018; Alexander H. Mills, Associate at Waller

On March 15, 2017, the U.S. District Court for the Western District of Pennsylvania issued an opinion in United States ex rel. Emanuele v. Medicor Assocs. applying the materiality standard from Universal Health Services v. United States ex rel. Escobar to the “writing requirement” utilized throughout various exceptions to the Stark Law. The District Court found that this requirement, and the signature requirement specifically, represents a material component of the Stark Law for purposes of establishing liability under the federal False Claims Act (FCA). On August 25, 2017, the court denied the defendant’s motion for reconsideration, affirming its initial interpretation.

The Stark Law

The Stark Law exists for the purpose of prohibiting a physician (or an immediate family member of the physician) from making referrals for “designated health services” to an entity with which the referring physician (or immediate family member) has a financial relationship unless the parties comply with one of the exceptions set forth in the federal regulations. Additionally, Stark prohibits entities like hospitals from submitting claims for payment to Medicare or Medicaid for items or services that result from the prohibited referrals. Although the concept of a “financial relationship” may seem simple, Stark defines the term broadly and includes both ownership and investment interests and compensation arrangements between physicians (and their immediate families) and entities. Violation of the Stark Law can incur significant civil liability under the False Claims Act, civil monetary penalties, and exclusion from all federal healthcare programs. Included in the framework of the Stark Law are numerous exceptions to civil liability. One common theme among them is the requirement that any arrangement must be evidenced by signed writing.

Materiality Under Escobar

In 2016, the United States Supreme Court set out in Escobar that generally, when submitting a claim for payment from a government payor, a healthcare provider makes certain implied representations regarding the goods and services which are the subject of the claim. The Court held that when a provider fails to disclose certain critical information, the offense is actionable if it results in a material misrepresentation affecting the government’s payment decision. The Court noted that a misrepresentation is not material for the mere fact that the government designates compliance with a particular requirement as a condition of payment. Factors that are considered in determining materiality include:

• Whether the violation goes to the “essence of the bargain” or is instead a “minor or insubstantial” detail
• Whether the government has expressly identified a particular requirement as a condition of payment (which would weigh in favor of materiality); and
• Whether the government has consistently refused to pay claims due to noncompliance with a requirement (which would also suggest materiality), or has regularly paid claims despite actual knowledge that the requirement was violated (which represents “strong evidence” that the requirement is not material).

The Pennsylvania Court’s Analysis

The Western District of Pennsylvania further clarified the boundaries of the FCA materiality bar for healthcare providers. While Escobar may have left healthcare providers with a murky picture of the intended definition of materiality, the Emanuele court outlined the reach of this requirement, especially with respect to the interconnection of other fraud and abuse statutes.

In November 2016, the Centers for Medicare & Medicaid Services (CMS) codified amendments to the Stark Law to make it easier for healthcare providers to meet the writing requirement. Many of the Stark exceptions require a written agreement between a referring physician and an entity with which the physician has a financial relationship. This requirement was originally interpreted to be a writing in the form of a single signed agreement, but CMS amended language across the statute to relax this exacting standard. The amendments instead allowed for the writing to be codified in an “arrangement” or various contemporaneous documents evidencing the conduct between the parties. CMS explained:

In most instances, a single written document memorializing the key facts of an arrangement provides the surest and most straightforward means of establishing compliance with the applicable exception. However, there is no requirement under the physician self-referral law that an arrangement be documented in a single formal contract. Depending on the facts and circumstances of the arrangement and the available documentation, a collection of documents, including contemporaneous documents evidencing the course of conduct between the parties, may satisfy the writing requirement of the leasing exceptions and other exceptions that require that an arrangement be set out in writing.

Despite relaxing the standard for what constitutes a writing sufficient to meet a Stark exception, however, the Emanuele court illustrates that the writing requirement remains significant. The court initially noted that the Stark Law expressly prohibits payment on Medicare claims that do not satisfy each element of an applicable exception. As such, all claims submitted by healthcare providers to CMS inherently imply compliance with the requirements of any relevant Stark exception. The court, quoting Escobar, cautioned that although “statutory, regulatory, and contractual requirements are not automatically material, even if they are labeled conditions of payment,” they nevertheless represent “relevant” evidence in favor of materiality.”

The court went on to ultimately conclude that the Stark writing and signature requirements are material, after satisfying several of the factors of materiality from Escobar. A signed writing allows reviewers to consider whether agreements vary with the volume or value of services based on the timeframe, compensation and exact services that they contain and whether both parties consent to the agreement. These elements, therefore, go to the basis of the bargain between the government and healthcare providers, because of the role that they play in preventing fraud and abuse. Therefore, the court concluded, the writing requirement is “important, mandatory, and material to the government’s payment decisions.”

Emanuele represents the first time that a federal court has had the opportunity to interpret and enforce CMS’s 2016 amendment as to the writing requirement. It can’t be overstated that the writing requirement is essential to ensure compliance with exceptions and avoid liability under Stark. Although the linguistic shift to an “arrangement” intended to relieve healthcare providers from the necessity of strictly maintaining and updating written agreements, the collection of contemporaneous writings still must contain the minimum requirements set forth in the regulations, notably a signature. Without meeting these requirements, healthcare providers may be exposed to liability under both Stark and the FCA, since federal courts will likely continue to interpret the writing requirement to go to the “basis of the bargain” between healthcare providers and CMS.