A recent case points out the dangers in using the fraud and abuse laws to justify a healthcare provider's failure to pay for services rendered by a referral source. In this case, the court found as a matter of law that a hospital that received services from a physician who was a referral source must still pay for services even though it did not have a written agreement with the physician that meets one of the safe harbors under the Stark law.
In Braun v. Promise Regional Medical Center-Hutchison Inc., physician Steven D. Braun sued for unpaid compensation for services that he provided to a hospital. For over ten years, the physician served as medical director for the hospital under a written employment agreement. In accordance with its terms, the hospital terminated the agreement on written notice to Dr. Braun as of the date specified in the notice. However, Dr. Braun continued to provide services to the hospital as its medical director for over thirty months without receipt of compensation for these services. In defense to the legal action for unpaid compensation, the hospital argued that it could not compensate Dr. Braun for his services because a written agreement was not in place with him as was required for the services arrangement to meet a safe harbor under the Stark law. In refusing to dismiss Dr. Braun's claim, the District Judge found that it was inequitable for the hospital to refuse to pay the physician for services he performed for the hospital after termination of his employment agreement. In reaching this conclusion, the court noted that "[t]he Stark Act, however, does not by its terms prohibit unwritten agreements [with physicians who have financial relationships with hospitals] or limit the power of a court to issue equitable remedies where there are no agreements."
This case severely limits the use of the fraud and abuse laws either by a healthcare provider to avoid paying for services or by a physician or other referral source as a legal justification not to perform services under an agreement with the provider. This tactic is often used in negotiations between a healthcare provider (such as a hospital, physician group or outpatient provider of healthcare services) and a physician, physician group or other service provider regarding the potential extension of a contract for services that by its terms will soon expire. Typically, the underlying service agreement will expire as of a specified date in the agreement and there is no contractual requirement for the continued provision of services to the healthcare provider after expiration. This problem is particularly acute where the remaining term of the agreement is less than one year- arguably a failure to comply with the one year Stark safe harbor requirement for the arrangement. Another potential use of this tactic would be where some provision of the written agreement does not comply with a regulatory safe harbor, such as failure of the compensation method contained in the agreement to meet a safe harbor requirement.
Regardless of which party to the services agreement asserts the illegality of the payment arrangement, both the recipient of services and the provider of services must look to local law to determine the legal rights and responsibilities of each party. For example, if under local law an illegal compensation method invalidates a contract for services, the recipient of services contemplated under the contract after its termination for illegality may still be required to pay fair value for the services received. In this instance, the value of these services need not be that which was specified in the now invalid personal services arrangement. As in the Braun case, most jurisdictions will require payment for services under the legal theory that it is unjust for the provider of services not to receive compensation for services rendered.
Healthcare providers should take heed of the Braun decision in negotiations with physicians and other providers of services-- particularly as to an expiring service arrangement or contract that the recipient of services wants to terminate. In the Braun case, if the hospital did not want to pay Dr. Braun for medical director services after it had terminated his employment agreement, it should have obtained services of the type provided by Dr. Braun from another physician for an agreed upon compensation under a written agreement that met a Stark safe harbor. This case also serves as a reminder to hospitals and other healthcare providers that bill Medicare or other governmental payors to make certain that, both as part of its policies and in practice, written agreements complying with the Stark and Antikickback safe harbors are in place with all referral sources to which the hospital or service provider also pays for services rendered.
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