On September 17, 2019, the U.S. Court of Appeals for the Third Circuit revived three whistleblowers’ claims alleging that the University of Pittsburgh Medical Center (UPMC) and neurosurgeons employed by three subsidiary entities of UPMC violated the False Claims Act by billing Medicare for services referred by the neurosurgeons in violation of the Stark Law. The United States District Court for the Western District of Pennsylvania had previously concluded that the relators failed to state a plausible claim and dismissed the relators’ suit. The Third Circuit reversed the District Court’s dismissal and remanded the case for further proceedings.
The appeal to the Third Circuit revolved around two questions: first, whether the relators offered enough facts to plausibly allege that the neurosurgeons’ pay varied with, or took into account, their referrals – part of plaintiff’s prima facie case for establishing a violation of the Stark Law under an indirect compensation arrangement – and second, whether the relators or the defendants had the burden of pleading that no Stark Law exceptions apply when the relators alleged False Claims Act violations based on Stark Law violations. As to the first question, the Third Circuit concluded that the relators plausibly alleged that the neurosurgeons’ pay varied with their referrals. As to the second question, the Third Circuit rejected defendants’ argument that to plead a False Claims Act claim based on Stark Law violations, a relator must plead that no Stark Law exception applied and that the defendant knows that none applies. The court explained that it is the defendants’ burden to plead a Stark Law exception, not the relators’ burden to plead that none exists.
Relevant to the first question, the neurosurgeons’ employment contracts were between the neurosurgeons and UPMC subsidiary entity and provided for each neurosurgeon to receive a base salary based on an annual quota of work relative value units (wRVUs), which “measure the value of a doctor’s personal services.” “The surgeons were rewarded or punished based on how many [wRVUs] they generated. If a surgeon failed to meet his yearly quota, his employer could lower his future base salary. But if he exceeded his quota, he earned a $45 bonus for every extra [wRVU].”
Under this type of compensation structure, the surgeons were incentivized to maximize their wRVUs, and the relators alleged the neurosurgeons engaged in fraudulent billing practices to artificially boost their wRVUs, and thus their compensation. Relators also alleged that the number of wRVUs billed by the Neurosurgery Department more than doubled between 2006 and 2009, largely because of the alleged fraud. The surgeons allegedly acted as assistants on surgeries when they did not, stated they acted as teaching physicians when they did not, billed for parts of surgeries that never happened, and performed surgeries that were medically unnecessary or needlessly complex. And per the relator, they did these things, “[w]ith the full knowledge and endorsement of” UPMC. Relator further alleged that UPMC made money off the neurosurgeons’ work on some of the neurosurgeons’ referrals and by billing for the hospital and ancillary services for neurosurgeries performed at one of the UPMC hospitals.
Every time the neurosurgeons “performed a surgery or other procedure at the UPMC [h]ospitals, [the neurosurgeons] made a referral for the associated hospital claims, like nursing services or hospital overhead.” UPMC then billed Medicare for those referred services. The majority opinion states, “As a result, the surgeons’ salaries rose and fell with their referrals. The more procedures they did at the hospitals, the more referrals they made, and the more they would earn by maintaining their base salaries and earning higher bonuses. And just as their salaries flowed, they also ebbed: the fewer procedures they did, the fewer referrals they made, and the less they got paid.” Thus, as to the first question, the majority opinion concluded that their aggregate compensation varied with their referrals’ volume and value.
The court’s majority opinion also concluded that the relators sufficiently pled causation, even though the court noted that the relators did not need to plead causation to sufficiently plead the second element of an indirect compensation arrangement – that the referring doctor must receive “aggregate compensation . . . that varies with, or takes into account, the volume or value of referrals.” In reaching this conclusion, the court noted that “[e]xcessive compensation is . . . a sign that a surgeon’s pay in fact takes referrals into account. So aggregate compensation that exceeds fair market value is smoke. It suggests that the compensation takes referrals into account.” The court highlighted five facts pled by the relators that, viewed together by the court, make plausible claims that the surgeons’ pay exceeded their fair market value. “First, some surgeons’ pay exceeded their collections. Second, many surgeons’ pay exceeded the 90th percentile of neurosurgeons nationwide. Third, many generated [wRVUs] far above industry norms. Fourth, the surgeons’ bonus per [wRVU] exceeded what the defendants collected on most of those [wRVUs]. And finally, the government alleged in its settlement agreement that [UPMC] had fraudulently inflated the surgeons’ [wRVUs]. That much smoke makes fire plausible.”
The relators first filed suit in 2012 and alleged that defendants submitted false claims for the neurosurgeons’ professional services. The government intervened as to these claims for professional services and settled those claims for approximately $2.5 million, as reported here. The government did not intervene as to the claims for hospital and ancillary services billed by UPMC, but it allowed the relators to continue to pursue these claims against defendants.
Circuit Judge Thomas L. Ambro concurred with the majority that the case should be revived, but he disagreed with its interpretation of the “varies with, or takes into account” part of the Stark Law that allegedly tied the surgeons’ pay to the amount of referrals they generated. Judge Ambro wrote that, “[a]lthough I concur with the judgment of the majority that the relators here have done enough to survive a motion to dismiss, I cannot agree that correlation alone is enough to show that compensation ‘varies with, or takes into account, the volume or value of referrals ….Instead I would hold that this language requires some showing of an actual causal relationship to establish an indirect compensation arrangement under the Stark [Law].”
Judge Ambro expressed concern that the majority’s “decision suggests . . . that any hospital that pays its affiliated physicians according to some metric of the work they personally perform at the hospital falls under suspicion of violating the Stark [Law], and it can only restore its good name by pleading one of the statutory exceptions— presumably at the summary judgment stage at the earliest, i.e., after discovery has already taken place.” Judge Ambro acknowledged that, “If this is so, I cannot see why most of the top hospitals in the country, many of whom likely employ similar compensation schemes to UPMC’s, would not be vulnerable to a Stark [Law] lawsuit that could survive a motion to dismiss and proceed to discovery.” “If compensation that merely correlates with referrals, including correlation based solely on a physician’s own work, is enough to place a hospital under suspicion of violating the Stark [Law] then the only way to evade suspicion altogether, short of abandoning the widespread practice of hospitals employing their own doctors (whether directly or, as here, through a subsidiary), would be to pay those doctors a flat annual salary—and a modest one at that.”
Judge Ambro expressed worry that the majority opinion’s reasoning would send “signals to hospitals throughout the Third Circuit, and the nation, that their routine business practices are somehow shady or suspicious and could leave them vulnerable to significant litigation, with all the trouble and expense that brings.”
The majority described Judge Ambro’s concerns as “overstated,” explaining that the Department of Justice can, as a first line of defense against abusive suits, dismiss qui tam actions over the relator’s objection. The majority noted that the Department of Justice recently took a more aggressive approach to dismissing qui tam actions by urging its lawyers to consider dismissal every time the government decides not to intervene. That guidance is set forth in the Michael D. Granston memorandum, summarized here.
The Third Circuit decision is available here.
