In an opinion issued last Wednesday, the Eleventh Circuit affirmed the district court’s entry of final judgment in favor of a multi-state hospital system by dismissing the qui tam relator’s claims under the federal False Claims Act (FCA). The relator’s claims against the hospital system were predicated on allegations that it violated the federal anti-kickback statute (AKS) and the Stark Law by providing sweetheart deals to physicians who leased space in on-campus medical office buildings (MOBs) in exchange for referrals. Under arrangements with the hospital system, third-party developers constructed and managed the MOBs, leasing space to hospital system affiliates and independent physicians. The opinion is notable because it is one of the few opportunities courts have had to consider the Stark Law’s favorable treatment of indirect financial relationships.

In 2003, the multi-state hospital system began developing a medical center that included an on-campus MOB, which would include space for hospital-based diagnostic facilities and clinics, office space for employed physicians, and office space for independent physicians and medical practices. The hospital system engaged a third-party developer to build and manage the MOB. The arrangement between the hospital system and the developer consisted of three agreements:

• A development agreement under which the developer agreed to finance, develop, and construct the MOB. In exchange, the hospital system would enter into a ground lease with the developer for the MOB site; finance, develop and construct parking improvements for the campus; grant a parking easement in favor of MOB tenants and invitees; enter space leases with the developer to house system-owned or affiliated practices and facilities in the MOB; and execute a “burnoff lease” to help the developer secure construction financing.
• A ground lease under which the hospital system leased to the developer, for a term of 99 years, the MOB site. The ground lease contained restrictions prohibiting certain uses without the hospital system’s prior approval and a parking easement, which allowed the MOB’s tenants and invitees to park anywhere on the hospital campus.
• A “burnoff lease,” under which the hospital system initially leased certain space in MOB from the developer. The burnoff lease envisioned that the hospital system would release the space when the developer was able to secure new tenants.

The developer then entered space leases and “Cash Flow Participation Agreements” (CFPAs) with the MOB tenants. If a tenant agreed to a ten-year lease, the developer offered a CFPA under which the tenant would receive pro-rata share of the MOB’s operating cash flow, including proceeds from any sale of the building. In 2012, the developer sold the MOB to a third party and made payouts to the tenants that had entered into CFPAs.

Before the developer began entering into leases with physician tenants, the hospital system engaged an appraiser to determine the fair market value (FMV) ranges of the leases. The initial study assumed the tenants would receive free parking and did not take into account the CFPAs. The appraiser subsequently updated its study to reflect the use of CFPAs and confirmed the FMV range remained the same. At a later date, the appraiser concluded the FMV range for the rental rate had increased, but due to higher construction costs, rather than the CFPAs. Significantly, the relator acknowledged through interrogatories that “all of the [developer’s] leases at the…MOB were more or less at market FMV terms.”

In its briefing, the relator argued that when the hospital system planned the MOB, it “took into account the value” of the referrals of the physician tenants. Specifically, the relator argued that the hospital system intended to fund the MOB through providing subsidies to the developer to induce physicians—who would benefit the hospital system economically—to become tenants. The relator further alleged that the hospital system “poured money up front into the development, ensuing it would shower referring physicians at the other end,” and stressed that “even fixed compensation—which does not ‘vary’ with the volume of referrals—are implicated in Stark, when considerations otherwise reflect their value.”

In contrast to relator’s arguments, which the court characterized as “conclusory,” the hospital system introduced evidence showing that the amount of space that the physicians leased lacked any correlation with the volume of their referrals to the hospital system. In both the hearing before the district court on its motion for summary judgment and in its briefing before the Eleventh Circuit, the hospital system included a chart that showed tenants with larger spaces were, in fact, not the largest referral sources. The court ultimately affirmed the district court’s grant of summary judgment, agreeing the relator had failed to establish a genuine factual dispute about whether the leases formed an indirect compensation arrangement.

With respect to the AKS-predicated FCA claims, the relator alleged that as part of the MOB’s development, the hospital system paid the developer $4 million in improper subsidies, primarily through the initial ground lease and the parking easement, which the developer then passed on to physician tenants through the CFPA payouts, low initial lease rates, restricted use waivers, and free office improvements.

The Eleventh Circuit determined the relator failed to show that the hospital system conveyed any remuneration to the physician tenants. In rejecting the relator’s argument, the court noted that the rental rates were within the FMV range that had been established by the hospital system’s third-party appraiser, albeit at the lower end. The court also rejected the relator’s argument that the physician tenants received unlawful remuneration through the CFPAs. The court stressed the FMV appraisal accounted for the CFPAs and that those agreements were offered only to those tenants who entered into a ten-year lease, which was longer than the average length in the relevant market.

Based on the above, the Eleventh Circuit affirmed the district court’s entry of final judgment in favor of the hospital system with respect to all of relator’s claims.

The case is Bingham ex rel. United States v. HCA, Inc., Case No. 16-17059, and the Eleventh Circuit’s decision is available here.

The case now returns to the district court for further proceedings on the question of whether CMS violated the statute and/or acted in an arbitrary and capricious manner in collecting private payor data from only a small number of laboratories before setting national Medicare reimbursement rates.