Opinion
Civil Action No. 04-142 (JWB)
April 15, 2004
NORRIS McLAUGHLIN MARCUS, James J. Shrager, Esquire, Somerville, New Jersey, JONES DAY, Gregory M. Luce, Esquire Jesse A. Witten, Esquire, Washington, D.C., (Attorneys for Plaintiffs Robert Wood Johnson University, Hospital, Inc.; Robert Wood, Johnson University Hospital at Rahway; and Robert Wood, Johnson University Hospital, at Hamilton) and FOX ROTHSCHILD Jonathan D. Weiner, Esquire, Elizabeth G. Litten, Esquire, Thomas R. Hower, Esquire, Lawrenceville, New Jersey, (Attorneys for Plaintiff, St. Francis Medical Center).
ALEX M. AZAR, II, General Counsel, Paul Soeffing, Esquire, United States Department of Health and Human Services, Office of the General Counsel Washington, D.C.
JOHN ASHCROFT, Attorney General, Peter D. Keisler, Assistant Attorney General, Sheila M. Lieber, Esquire, Peter Robbins, Esquire, United States Department of Justice, Washington, D.C. and CHRISTOPHER J. CHRISTIE, United States Attorney, Susan C. Cassell, Assistant United States Attorney, Newark, New Jersey, (Attorney for Defendants).
OPINION
This Court has subject matter jurisdiction of this action pursuant to 28 U.S.C. § 1331. Questions of federal law are raised by plaintiffs Robert Wood Johnson University Hospital, Inc., Robert Wood University Hospital at Rahway ("RWJ — Rahway") and Robert Wood Johnson University Hospital at Hamilton (collectively, the "RWJ Plaintiffs") in their verified complaint for injunctive and declaratory relief filed on January 14, 2004 (the "Verified Complaint"). St. Francis Medical Center ("St. Francis") filed an intervenor complaint on March 24, 2004 (the "Intervenor Complaint").
The RWJ Plaintiffs and St. Francis will be collectively referred to herein as the "Plaintiffs."
Generally, Plaintiffs question the legality of a demonstration project approved by the defendant Secretary of the Department of Health and Human Services ("Secretary" of "HHS") — through the Acting Administrator of the Centers for Medicare and Medicaid Services ("CMS") — pursuant to statutory authority. That demonstration project was awarded to the New Jersey Hospital Association ("NJHA"), which is composed of 107 member hospitals, including plaintiff RWJ-Rahway. Of its members, however, only eight New Jersey hospitals (the "Participating Hospitals") are participants of the demonstration project. None of the Participating Hospitals are named parties to this action.
Dennis G. Smith, the Acting Administrator of CMS, is named as a defendant in this action as he was "delegated the authority by the Secretary to approve the creation and implementation of demonstration projects" including the one at issue here. See Intervenor Compl. ¶ 3.
DISCUSSION
I. Procedural History
The RWJ Plaintiffs initially moved for a preliminary injunction and expedited discovery in this matter. On February 9, 2004, the Court heard oral arguments on the preliminary injunction motion but decided to adjourn that motion, because the demonstration project in question was in the early stages of implementation and the complex issues presented required further consideration. Thus, the matter was adjourned until April 13, 2004 for the purpose of scheduling and conducting a consolidated hearing on the merits with the preliminary injunction application, under Federal Rules of Civil Procedure Rule 65(a)(2). See Order dated Feb. 13, 2004.
On March 5, 2004, St. Francis formally moved to intervene in this action as a party plaintiff. Shortly thereafter, on March 16, the NJHA sought leave of this Court to intervene, but as a party defendant. The Court entered an order dated March 22, 2004, that granted St. Francis's motion to intervene but denied the NJHA's request. Nevertheless, the Court authorized the NJHA to appear as an amicus. On April 13, 2004, this Court convened the consolidated hearing and disposed of this action on a threshold issue. This opinion reflects the Court's holdings.
II. Plaintiffs Have Demonstrated Standing
The United States Constitution's Article III "case and controversy" requirement necessitates that a party have standing to obtain judicial resolution of a dispute. Generally, for individual standing,
at an irreducible minimum, Art. III requires the party who invokes the court's authority to "show that he personally has suffered some actual or threatened injury as a result of the putative illegal conduct of the defendant," . . . and that the injury "fairly can be traced to the challenged action" and "is likely to be redressed by a favorable decision. . . ."Valley Forge Christian College v. Americans United for Seperation of Church and State, 454 U.S. 464, 472 (1982) (citations omitted); Public Int. Res. Group of N.J., Inc. v. Powell Duffryn Terminals Inc., 913 F.2d 64, 70 (3d Cir. 1990). In Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992), the Supreme Court expounded on this "irreducible minimum" requirement by articulating a three-part test for standing.
First, the plaintiff must have suffered an "injury in fact" — an invasion of a legally protected interest which is (a) concrete and particularized, and (b) "actual or imminent, not `conjectural' or `hypothetical.'" Second, there must be a causal connection between the injury and the conduct complained of — the injury has to be "fairly . . . traceable to the challenged action of the defendant, and not . . . the result [of] the independent action of some third party not before the court." Thirdly, it must be "likely," as opposed to merely "speculative," that the injury will be redressed by a favorable decision.Lujan, 504 U.S. at 560-61 (citations omitted).
Plaintiffs argue that the establishment and the implementation of the Demonstration Project will effectively and inevitably cause them to suffer economic injuries through an increase in illicit referrals by participating doctors to Participating Hospitals to the detriment of the non-participating hospitals. See, infra, § III.B n. 10. That injury although not proven "actual" to date is nevertheless "imminent." Defendants argue to the contrary by stating that Plaintiffs "have not seriously attempted to show that significant competitive injury looms so imminently that it is necessary for them to be protected by a preliminary injunction". Defs.' Mem. in Further Opp. to Prelim. Inj. at 7. Defendants' contention rings hollow, however, upon review of St. Francis's particular predicament considering the combination of geographic proximity and the shared pool of physicians with admitting privileges to both itself and a competitor — Capital Health System, one of the eight Participating Hospitals. St. Francis concludes unequivocally that the Demonstration Project will lead to losses that "would be financially devastating to St. Francis." St. Francis' Br. in Supp. at 11. Thus, Plaintiffs pass part one of the Lujan test for standing.
To satisfy step two, Plaintiffs must demonstrate that such financial injuries are "causal[ly] connected" to the Defendants' actions. Plaintiffs have supplied the necessary connection here. As explained above, Defendants dispute that the Demonstration Project will impact the bottom-line of non-participating hospitals. Plaintiffs, however, amply provide, inter alia, that their financial straits may be "fairly traceable" to the Secretary's inaction concerning the economic or competitive impact of the Demonstration Project on non-participating hospitals. See RWJ Pls.' Trial Br. at 27.
A secondary basis for Plaintiffs' "imminent" injuries is also fairly traceable to the Secretary's decision not to formally investigate the Demonstration Project's possible violation of non-waivable federal statutes, namely 42 U.S.C. § 1320a-7b (the "Anti-Kickback Statute") and 42 U.S.C. § 1320a-7a (the Civil Monetary Penalties Statute or "CMP"). See, infra, § III. Enjoying the Secretary's imprimatur on the Demonstration Project, the Participating Hospitals could act more cavalierly, possibly without opprobrium or fear of investigation, in the face of both the Anti-Kickback Statute and the CMP, whereas non-participating hospitals could not maintain comparable positions. Thus, the Participating Hospitals would effectively be shielded from criminal and/or civil penalties whereas Plaintiffs (and other non-participating hospitals) remain bound by those statutory requirements. That environment would result in competitive injury to Plaintiffs which is indirectly, but nevertheless fairly, traceable to the Secretary's actions.
In addition to satisfying the first two steps in the Lujan standing test, Plaintiffs have demonstrated that their injuries can be favorably redressed by this Court. As will be explained below, Plaintiffs' imminent, if not realized, financial injuries are of concern to this Court. See, infra, § III.B. n. 10. However, upon further review of the impact of the Demonstration Project, the Court more importantly determines that the Demonstration Project must be enjoined — a decision favorable to Plaintiffs — for facially violating the CMP, which prohibits hospitals from inducing physicians to reduce or limit services to Medicare funded patients — precisely the goal of the Demonstration Project. See id. § III.C. Consequently, Plaintiffs have properly met the "irreducible minimum" standard for standing. Furthermore, Plaintiffs have met this standard by carrying a heightened burden "to adduce facts" showing that the "government action or inaction [they] challenge" "have been . . . made in such manner as to produce causation and permit redressibility of injury." Lujan, 504 U.S. at 562 (citations omitted).
The issue of whether Plaintiffs have demonstrated actual losses as a result of the Demonstration Project can be put to rest here. In Roe v. Operation Rescue, 919 F.2d 857, the Third Circuit held that "[t]o establish a present case or controversy in an action for injunctive relief, a plaintiff must show that he or she is likely to suffer future injury from defendant's threatened illegal conduct." Roe, 919 F.2d at 864 (emphasis added) (citing City of Los Angeles v. Lyons, 461 U.S. 95, 105 (1983)). At a minimum here, upon Plaintiffs' plea for injunctive relief, future harm to Plaintiffs as a result of the Secretary's approval of the allegedly "illegal" Demonstration Project is adequately proffered. Plaintiffs have provided that the "threat" to their financial health — which would invariably affect the treatment of their patients — is "sufficiently `real and immediate.'" Id. (quoting O'Shea v. Littleton, 414 U.S. 488, 496 (1974)).
"[W]hen the plaintiff is not himself the object of the government action or inaction he challenges, standing is not precluded, but it is ordinarily `substantially more difficult' to establish." Lujan, 504 U.S. at 562 (citing Allen v. Wright, 468 U.S. 737, 758 (1984); Simon v. Eastern Ky. Welfare Rights Org., 426 U.S. 26, 44-45 (1976); Warth v. Seldin, 422 U.S. 490, 505 (1975)).
In addition to "meeting all the normal standards for redressability and immediacy," see Lujan, 504 U.S. at 572 n. 7, articulated above, Plaintiffs also qualify for "procedural standing," which requires a "lowered" "requisite weight of proof for each element of the [Lujan three-part] test[.]" Churchill Cty. v. City of Fallon, 150 F.3d 1072, 1077 (9th Cir. 1998) (citing Lujan, 504 U.S. at 572 n. 7). In Churchill, the Ninth Circuit summarized that
[p]rocedural standing is standing based on a plaintiff's procedural injury. A plaintiff may claim "procedural standing" when, for example, it seeks to "enforce a procedural requirement the disregard of which could impair a concrete interest of [the plaintiff's]."Id. (citing Lujan, 504 U.S. at 572). The Supreme Court stated:
There is much truth to the assertion that "procedural rights" are special: The person who has been accorded a procedural right to protect his concrete interests can assert that right without meeting all the normal standards for redressability and immediacy. Thus under our case law, one living adjacent to the site for proposed construction of a federally licensed dam has standing to challenge the licensing agency's failure to prepare an environmental impact statement, even though he cannot establish with any certainty that the statement will cause the license to be withheld or altered, and even though the dam will not be completed for many years.Lujan, 504 U.S. at 572 n. 7.
Plaintiffs' position here is akin to the "dam resident" described in Lujan. Plaintiffs challenge the Secretary's approval of the Demonstration Project for his decision not to formally investigate the project's implications vis-à-vis non-waivable federal statutes and anti-competitive effects, much like the above-described challenge to the agency licensure of a dam project without the requisite environmental considerations. Although the Secretary's decision to approve the Demonstration Project might remain as is, even after he considers the issues proffered by Plaintiffs, Plaintiffs still have procedural standing at the outset of this dispute.
One articulated test for procedural standing, based on the Supreme Court's holding in Lujan, requires that "the plaintiff must show: (1) that it has been accorded a procedural right to protect its concrete interests, and (2) that it has a threatened concrete interest that is the ultimate basis of its standing."Churchill, 150 F.3d at 1078 (citing Douglas Cty. v. Babbitt, 48 F.3d 1495, 1500-01 (9th Cir. 1995), cert. denied, 516 U.S. 1042 (1996)). Churchill also requires that the plaintiff "establish the `reasonable probability' of the challenged action's threat to its concrete interest." Id. (citingDouglas, 48 F.3d at 1501 n. 6).
Plaintiffs have adequately voiced their procedural right to contest the Secretary's actions, or inactions as they appear to be, pursuant to the Administrative Procedure Act, 5 U.S.C. § 702et seq. See Verified Compl. ¶ 58; RWJ Pls.' Memo. in Supp. of Prelim. Inj. at 19-26. Plaintiffs argue that in implementing the Demonstration Project, CMS — a division of HHS that is responsible for the administration of the Medicare program — "acted arbitrarily, capriciously, and in excess of its statutory authority" by failing to consider the project's anti-competitive impacts. Verified Compl. ¶ 58; see Intervenor Compl. ¶ 30. Further, Plaintiffs aver that the Secretary's approval of the demonstration project in question violates federal statutes.See Verified Comp. ¶¶ 67-70. Because the APA strictly provides that an "[i]n all cases an agency action must be set aside if the action was `arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law," Plaintiffs have established a sound basis for procedural standing. Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 414 (1971) (quoting 5 U.S.C. § 706(2)(A)) (emphasis added), overruled on other grounds by Califano v. Sanders, 430 U.S. 99, 105 (1977);C.K. v. New Jersey Dep't of Health Human Servs., 92 F.3d 171, 182 (3d Cir. 1996). Most importantly here, it appears that the Secretary's act of approving the Demonstration Project was done "not in accordance with law." See, infra, § III.C.
Next, Plaintiffs' "concrete interests" rest upon the financial impact that the Demonstration Project will have on them. In particular, for St. Francis, the financial impact could be devastating. It is this and similar concrete interests that form the bases for Plaintiffs' standing. Further, as explained above, the Demonstration Project holds more than a "reasonable probability" of negatively affecting their financial viability. Consequently, Plaintiffs have hereby satisfied the test for procedural standing as well.
III. Because the Demonstration Project Expressly Violates a Governing Federal Statute, Its Implementation Must Be Enjoined
A. The Enabling Statute
Title XVIII of the Social Security Act, commonly known as the Medicare Act, establishes a federal program of health insurance for the elderly and the disabled. It is administered by CMS. Medicare Part A provides coverage for inpatient hospital care, whereas Part B provides supplemental coverage for physician services. A beneficiary who is admitted to a hospital by a private physician routinely receives services under both Parts A and B. See Defs.' Mem. in Opp. to Prelim. Inj. at 5-6.
With 42 U.S.C. § 1395b-1, the "Enabling Statute," Congress authorized the Secretary to engage in "demonstration projects" to "determine whether . . . changes in methods of payment or reimbursement . . . for health care and services under health programs [such as Medicare] . . . would have the effect of increasing the efficiency and economy of health services . . . without adversely affecting the quality of such services." 42 U.S.C. § 1395b-1(a)(1)(A). (Emphasis added.). Pursuant to that authorization, the "Hospital Performance-Based Incentives Demonstration" (hereinafter, the "Demonstration Project") was awarded to the NJHA after approval from the Secretary in September 2003. See Defs.' Mem. in Opp. to Prelim. Inj. at 8. For purposes of the present decision the Court assumes,arguendo, that the Demonstration Project presents "changes in methods of payment or reimbursement."
"The purpose of the [Demonstration Project] is to test whether cost-efficiency can be improved by bringing the incentives of [Medicare Parts A and B] payment structures into more harmonious alignment, without sacrificing the quality of hospital care for Medicare beneficiaries." Id. at 7-8. The Enabling Statute accommodates this purpose to some extent by waiving "compliance with the requirements of titles XVIII and XIX of the Social Security Act. . . ." 42 U.S.C. § 1395b-1(b). Titles XVIII and XIX of the Social Security Act are codified at 42 U.S.C. § 1395et seq. and 1396 et seq. As such, 42 U.S.C. § 1395nn — "Limitation on certain physician referrals" — is waived by the Enabling Statute.
The statute continues: "[I]nsofar as such requirements relate to reimbursement or payment on the basis of reasonable cost, or (in the case of physicians) on the basis of reasonable charge, or to reimbursement or payment only of such services or items as may be specified in the experiment [or demonstration project]; and costs incurred in such experiment or demonstration project in excess of the costs which would otherwise be reimbursed or paid under such titles may be reimbursed or paid to the extent that such waiver applies to them. . . ." 42 U.S.C. § 1395b-1(b).
As currently enacted, 42 U.S.C. § 1395nn is commonly referred to as "Stark II." "In short, Stark II prohibits physicians from referring Medicare or Medicaid patients for designated health care services to entities in which they, or members of their immediate family, have a financial interest. . . ." Feldstein v. Nash Comm. Health Servs. Inc., 51 F. Supp.2d 673, 686 n. 8 (E.D.N.C. 1999) (quoting American Bar Association,Stark I Final Regulations: Implications for Health Care Providers and Suppliers, Health Lawyer 1 (Aug. 1995)). Stark II, however, specifically recognizes that there are acceptable referrals. Although Plaintiffs dispute it, for purposes of the present Opinion, the Court assumes that the Enabling Statute effectively waives Stark II. However, no such waiver is available for two other statutes implicated by the Demonstration Project, specifically, 42 U.S.C. § 1320a-7b — the Anti-Kickback Statute — and 42 U.S.C. § 1320a-7a — the CMP. These statutes are discussed immediately below.
"In December 1989, as part of the Omnibus Budget Reconciliation Act of 1989 (`OBRA 1989'), Congress amended the Social Security Act by passing the Ethics in Patient Referrals Act, 42 U.S.C. § 1395nn. The Ethics in Patient Referrals Act [`Stark I'] . . . prohibits physicians from referring Medicare patients for clinical laboratory services to entities in which they, or members of their immediate family, have a financial interest. . . . In 1990, the Omnibus Budget Reconciliation Act (`OBRA [19]90') . . . added an exception for financial relationships with hospitals if the financial relationship did not relate to the provision of clinical laboratory services. . . . The Omnibus Reconciliation Act of 1993 (`OBRA [19]93') amended and significantly changed Stark I. The OBRA [19]93 amendments have become known as `Stark II'." Feldstein, 51 F. Supp.2d 673, 686 n. 8 (quoting Stark I Final Regulations, Health Lawyer 1).
Although argued by Plaintiffs as another serious impediment to the Demonstration Project, the Court expresses no opinion here as to whether the Participating Hospitals jeopardize their tax-exempt status under the Internal Revenue Code.
Defendants repeatedly assert that Plaintiffs cannot "manufacture subject-matter jurisdiction" under the Anti-Kickback Statute or the CMP as both statutes preclude a private right of action for injunctive relief. See Defs.' Final Merits Br. at 29. Plaintiffs are not seeking to individually enforce the penalties provided through these criminal and civil statutes, however. For example, the RWJ Plaintiffs are not seeking to enforce criminal sanctions or to levy fines against the Participating Hospitals pursuant to the Anti-Kickback Statute or the CMP, respectively, if those hospitals make Medicare-related payments to induce physicians to reduce services as contemplated by the Demonstration Project. Such enforcement of those laws was Congressionally delegated not to private parties like Plaintiffs but to the Executive Branch. Nevertheless, the facial violation of these statutes, through the implementation of the Demonstration Project, is certainly reviewable by this Court because it has already determined that there are independent grounds for subject matter jurisdiction and Plaintiffs' standing to sue.
In describing the essence of the Demonstration Project, Defendants state that
The centerpiece of the project is to allow hospitals to `make incentive payments' to physicians that reward a combination of `high quality and efficient utilization of care' . . . `much like those paid by managed care organizations.'
Defs.' Final Merits Br. at 10 (Citations omitted.). Defendants aver, however, that the Demonstration Project does not seek to induce physicians to admit patients into Participating Hospitals that they would otherwise have admitted to non-participating hospitals. Plaintiffs point out that such a change in referral patterns is inevitable. See RWJ Pls.' Trial Br. at 27; St. Francis' Br. in Supp. at 17-18. Nevertheless, because the Participating Hospitals do not seek — with the requisite scienter — the direct inducement of patient referrals, it does not appear that the Demonstration Project violates 42 U.S.C. § 1320a-7b (the "Anti-Kickback Statute") which generally prohibits the receipt or payment of remuneration in return for referring patients for certain health care services.
"The Demonstration Project has no safeguards to prevent physicians from changing their referral patterns to increase patient admissions and therefore increase compensation from Demonstration Hospitals." RWJ Pls.' Trial Br. at 27.
"The inattention to the anti-competitive effect of the Demonstration Project has resulted in a design that encourages referrals at the expense of neighboring hospitals." St. Francis' Br. in Supp. at 17; see also RWJ Pls.' Memo. in Supp. of Prelim. Inj. at 29. St. Francis contends that "[a]ny financial and/or competitive advantage that [its competitor] enjoys over St. Francis as a direct result of [its competitor's] participation in the Demonstration Project will severely threaten St. Francis's ability to survive." Id. at 10. According to St. Francis's calculation, it could "suffer a loss of approximately $947,520 in [Medicare] reimbursement." Id. at 11.
As it might be applied here, for physicians participating in the Demonstration Project, the Anti-Kickback Statute provides that an illegal remuneration occurs when one
knowingly and willfully . . . receives any remuneration . . . directly or indirectly . . . in cash or in kind . . . in return for referring an individual to a person for the furnishing . . . of any . . . service for which payment may be made in whole or in part under a Federal health care program. . . .42 U.S.C. § 1320a-7b(b)(1)(A). In addition, for Participating Hospitals, the Anti-Kickback Statute provides that
whoever knowingly and willfully offers or pays remuneration . . . directly or indirectly . . . in cash or in kind to any person to induce such person . . . to refer an individual to a person for the furnishing . . . of any . . . service for which payment may be made in whole or in part under a Federal health care program. . . .
is guilty of illegal remunerations in violation of the Anti-Kickback Statute. Id. § 1320a-7b(b)(2)(A).
As originally drafted in 1977, the anti-kickback section of the Medicare-Medicaid Antifraud and Abuse Amendments, which augmented the Social Security Act, sought to address the "disturbing degree [of] fraudulent and abusive practices associated with the provision of health services financed by the medicare and medicaid programs." H.R. Rep. No. 95-393, pt. 2, at 44 (1977),reprinted in 1977 U.S.C.C.A.N. 3039, 3047. Congress was concerned with the "wasting of program funds through fraud" thereby leading to "adverse financial consequences." Id. That principal remains unwavering now and the Anti-Kickback Statute, in its present incarnation, seeks particularly to criminalize various payment and business practices intended to induce patient referrals, which contribute to such frauds.
In doing so, "[t]he anti-kickback statute . . . establishes an intent-based criminal prohibition." 64 F.R. 63518, *63519. As such, courts have held that "corrupt" intent is a requirement to prove a violation of that law. See Hanlester Network v. Shalala, 51 F.3d 1390, 1398 (9th Cir. 1995); United States v. Bay State Ambulance Hosp. Rental Serv., Inc., 874 F.2d 20, 33 (1st Cir. 1989); United States v. Greber, 760 F.2d 68, 69, 72 (3d Cir. 1985); Feldstein, 51 F. Supp.2d at 681. "The statute is aimed at the inducement factor." Feldstein, 51 F. Supp.2d at 681 (quoting Polk County v. Peters, 800 F. Supp. 1451, 1454 (E.D. Tex. 1992)).
"Even if the physician performs some service for the money received, the potential for unnecessary drain on the Medicare system remains. The statute is aimed at the inducement factor."Greber, 760 F.2d at 71.
It follows that "the intent requirement limits the reach of the anti-kickback statute somewhat." Feldstein, 51 F. Supp.2d at 681. Therefore, if an "incentive payment" — which comes from a Medicare Part A payment — is accepted by a physician in return for a patient referral to a Participating Hospital, then the physician may run afoul of the Anti-Kickback Statute. Similarly, if a Participating Hospital makes an "incentive payment" to a physician in order to induce a patient referral, then the hospital may also run afoul of the Anti-Kickback Statute. Here, however, such intents are not evident.
In Feldstein, the district court faced cross-motions for summary judgment as to the legality of a physician recruitment contract. In Feldstein, a hospital enticed an Arizona doctor to practice in North Carolina. The hospital guaranteed the doctor a minimum "cash collection for professional services" of $20,000.00 per month, for one year. In addition, the hospital provided $15,000.00 in moving expenses, paid premiums for medical malpractice insurance and professional fees, as well as furnished office space and employee assistance at cost, in addition to other benefits. See id. at 678. However, the agreement — in its plain words — did not explicitly require the physician "to admit patients to [the] hospital and that [the doctor's] compensation . . . was not conditional upon the use of any item or service offered by the [h]ospital." Id. at 677 ("[W]e [the hospital] clearly understand that the choice of services and the choice of service suppliers which you [the doctor] make on behalf of your patients must be, and will be, made ONLY with regard to the best interests of the patients themselves.") (Emphasis in original.). Instead, the contract simply noted that the hospital "is a convenient acute care medical facility for the majority of patients likely to utilize [the doctor's] services for medical treatment." Id. at 685.
Although the suit was filed by the doctor and the contract was disputed by the assuming hospital, the Feldstein court did not address whether the Anti-Kickback Statute creates a private right to enforce its criminal provisions.
Following the formalization of this agreement and after the doctor moved his practice and his family to North Carolina, the hospital was involved in a merger, which led to a successor in interest to that agreement. The succeeding party refused to pay the guaranteed cash collections because it "believed that the physician recruitment contracts [it] had assumed violated 42 U.S.C. § 1320a-7b and consequently, were illegal." Id. at 679. The doctor then sued to enforce the contract. The Feldstein court determined that, due to the ambiguities in the agreement as to whether patient referrals were intended, genuine issues of material facts existed to warrant the denial of the summary judgment motions. That determination was made pursuant to the holding that "[b]ecause the anti-kickback statute is a criminal statute with a scienter requirement, the court must find that the [h]ospital entered the [a]greement with the intent to induce referrals or that [the doctor] solicited the remuneration in exchange for referrals in order to conclude that the agreement violates § 1320a-7b(b)." Id. at 684. Neither "intent[s] to induce" could be determined from the facts before the Feldstein court.
The Feldstein court noted that "any recruitment contract, particularly one involving the relocation of a physician, will involve the extension of significant monetary benefits to that physician." Feldstein, 51 F. Supp.2d at 688. That court also acknowledged that such economic benefits, including direct payments of money, occurred between the parties. Nevertheless, that Court concluded that the transfer of monies alone, without the intent to induce patient referral, was not enough the violate either the Anti-Kickback Statute or Stark II. See id.
Similarly, in the case at bar, the scienter requirement is not evident. "The anti-kickback statute, with a scienter requirement . . . ha[s] been designed to set forth payment practices and business arrangements that will be protected from criminal prosecution and civil sanctions." Id. at 687 (quoting 60 F.R. 41961). The Demonstration Project and the anticipated payment activities by the Participating Hospitals appear to be protected from criminal prosecution because there is no clear evidence that the Demonstration Project envisions such inducements of patient referrals. The Demonstration Project, as explained by the Defendants, seeks to provide physicians with "financial incentives solely for producing cost efficiencies in their practice of medicine . . . without sacrificing the quality of patient care." Defs.' Final Merits Br. at 10 31 n. 17 (Emphasis added.). According to Defendants, the Demonstration Project is "not to reward doctors merely for making referrals to participating hospitals." Id. at 11. Therefore, physicians are not receiving a portion of Medicare Part A payments "in return for referring" patients and Participating Hospitals are not making such payments "to induce" doctors "to refer" patients. As such, it does not appear that the Demonstration Project violates the Anti-Kickback Statute.
In addition, the goals of the Demonstration Project, as provided by Defendants, do not constitute the type of "fraudulent and abusive practices" targeted by the Congress when it first "strengthened" the Social Security Act in 1977 with the Anti-Kickback Statute. See United States v. Shaw, 106 F. Supp.2d 103, 110 (D. Mass. 2000). The Demonstration Project instead seeks to reduce the amount and duration of patient services provided, which would correspondingly decrease hospital costs. Such an outcome is not a target of the anti-fraud effort envisioned by Congress through the enactment of the Anti-Kickback Statute. That outcome is a target of the CMP, however.
C. Civil Monetary Penalties Statute
In many ways, Stark II — a civil statute — addresses the same possible abuses of Medicare that the Anti-Kickback Statute criminalizes. Both recognize that "[t]he gravamen of Medicare Fraud is inducement. Giving a person an opportunity to earn money may well be an inducement to that person to channel potential Medicare payments towards a particular recipient."Bay State Ambulance, 874 F.2d at 29 (Emphasis added.). The inducements that both those statutes seek to eliminate are illegal patient referral inducements which would "earn" physicians and hospitals money. The CMP's objective, however, stands apart from those two statutes.
Title 42 U.S.C. § 1320a-7a provides that
If a hospital . . . knowingly makes a payment, directly or indirectly, to a physician as an inducement to reduce or limit services provided with respect to an individuals who . . . are entitled to benefits under part A or B of title XVIII [of the Social Security Act] . . . and are under the direct care of the physician, the hospital . . . shall be subject, in addition to any other penalties that may be prescribed by law, to a civil money penalty. . . .42 U.S.C. § 1320a-7a(b)(1)(A) (B) (Emphasis added.). Further, "[a]ny physician who knowingly accepts receipt of [such] a payment . . . shall be subject, in addition to any other penalties that may be prescribed by law, to a civil money penalty. . . ." Id. § 1320a(b)(2). In other words, "a hospital is prohibited from making a payment, directly or indirectly, to induce a physician to reduce or limit services to Medicare and Medicaid beneficiaries under the physician's direct care" and physicians cannot receive such payments. 64 F.R. 37985, *37985; Admin. Rec. at 435 ("Publication of the OIG Special Advisory Bulletin on Gainsharing Arrangements and CMPs for Hospital Payments to Physicians to Reduce or Limits Services to Beneficiaries") (hereinafter, the "OIG Bulletin"). As such, the inducement that the CMP seeks to eliminate is the inducement to reduce or limit services in exchange for payment. This inducement is a practical reality because Medicare Part A payments are made on a prospective basis — "hospitals are paid a pre-determined amount per Medicare case. The amount is largely determined by the diagnosis-related group (`DRG') into which the case falls." See Defs.' Final Merits Br. at 6 (citing 42 U.S.C. § 1395ww(d)(3)). Therefore, the fewer costs the hospital incurs per patient case, the greater profit or lesser loss results. In fact, in amending the CMP, via the Medicare and Medicaid Patient and Program Protection Act of 1987, the Senate Report stated that
This brief, direct Bulletin is so material to the case at bar that, although quoted frequently herein, it is also annexed hereto as Exhibit A.
[t]he purpose of [the CMP] is to deter hospitals from improperly charging Medicare beneficiaries for inpatient services covered by Medicare and included in the prospective payment rate. The [CMP] is also intended to deter hospitals operating under prospective payment, their employees, or others from providing their Medicare patients with false or misleading information that is intended to encourage premature discharge to the financial advantage of the hospital.
Sen. Rep. No. 100-109 (1987), reprinted in 1987 U.S.C.C.A.N 682, 696.
The Demonstration Project's stated objective is to reduce services provided to patients, albeit without "sacrificing the quality of patient care." Defs.' Final Merits Br. at 10. Defendants admit that the "[a]ltered practice patterns could include shorter inpatient stays, fewer marginal but costly diagnostic tests, conversion to generic drugs, shorter operating room times, more cost effective use of intensive care units, etc." Id. Although such reductions in services do not implicate either the Stark Law or the Anti-Kickback Statute because both those statutes are particularly aimed at preventing and punishing the inducement of patient referrals, such service reductions in exchange for a portion of Medicare Part A payments directly violate the CMP and appear to endorse the very conduct (e.g., "encourage premature discharge to the financial advantage of the hospital") that Congress sought to deter.
Further, the OIG Bulletin points out that the CMP, as initially enacted by Congress, prohibited payments by both hospitals and Medicare managed care plans to induce physicians to reduce clinical services. See OIG Bulletin at *37985 (citing Section 9313(c) of the Omnibus Budget Reconciliation Act of 1986 (P.L. 99-509)). The Social Security Act, however, was "subsequently amended to delete the reference to Medicare managed care pans, and to add a new subsection . . . that permitted Medicare managed care plans to implement physician incentive plans, provided the managed care plan did not induce the reduction of medically necessary care to individual patients and did not place the physician at substantial financial risk for services not provided by the physician." See id. at *37985-*37986.
Here, Defendants readily acknowledge that the Demonstration Project seeks to "make incentive payments" to physicians "much like those paid by managed care organizations." Defs.' Final Merits Br. at 10. As such, Defendants are attempting to resurrect the very payment incentives that remain illegal for hospitals, but are now permitted for managed care plans pursuant to a statutory amendment. Without a similar Congressional act, Defendants are attempting to pursue a limited hospital program that, as described above, waives the Stark Law and does not contravene the Anti-Kickback Statute, but on its face violates the CMP. At oral argument, Defendants' counsel acknowledged that the Demonstration Project was directly contrary to the terms of the CMP. Such a project is so much in derogation of the CMP that it should not be countenanced.
Instructively, the OIG Bulletin also provides a summary of the legislative history surrounding the enactment of the CMP:
The prohibition was prompted in party by a General Accounting Office (GAO) report for the Chairman of the Subcommittee of Health of the House Ways and Means Committee regarding the physician incentive plans being implemented by hospitals in response to the then-recently enacted diagnostic related group prospective payment system and their potential detrimental effects on quality of care for Medicare patients. The report analyzed four types of hospital-physician incentive plans, of which at least two bear strong similarities, and contain safeguards comparable, to the gainsharing arrangements currently being marketed by the healthcare consulting industry. While the GAO report discussed several features in these plans that reduced the incentive to give substandard care, it concluded that no combination of features could guarantee that such plans would not be subjected to abuse.
OIG Bulletin at *37986 (Citations omitted.) (Emphases added.). Congress agreed with that conclusion and the House Committee Report stated that "[t]he Committee believes that such incentive payments may create a conflict of interest that may limit the ability of the physician to exercise independent professional judgment in the best interest of his or her patients." Id. (citing H.R. Rep. No. 99-727, at 441 (1986)). The Chairman of the Subcommittee on Health of the House Ways and Means Committee stated that "the House held firm in its insistence on outlawing certain physician incentive plans. We must not tolerate hospitals paying incentives to reduce or limit services to the elderly." Id. (citing 144 Cong. Rec. H11, 446 (Oct. 17, 1986)) (Emphasis added.).
"Gainsharing arrangements pose a high risk of abuse." Id. As noted in the OIG Bulletin, "[w]here Congress intended the Department [of Health and Human Services] to regulate physician incentive plans, such as plans offered by risk-based Medicare managed care plans, it did so explicitly. Congress' omission of comparable regulatory authority for the Secretary over hospital-physician incentive plans represents its considered judgment that such plans are flatly prohibited." Id. Because no such explicit Congressional action exists here, the CMP remains as a guardian against Medicare abuse, namely, the impermissible reduction of services for the elderly. Absent legislative relief, the Demonstration Project's direct goal of decreasing services to Medicare patients (even with the professed safety net of not sacrificing quality) is in direct contravention of the CMP.
Further, the "gainsharing arrangements" specifically addressed by the OIG Bulletin "[were] designed to bridge the gap by offering physicians a portion of the hospital's cost savings in exchange for identifying and implementing costs saving strategies." Id. The OIG concluded that it could "perceive no meaningful difference between the kinds of incentive plans proposed in 1986 at the time of enactment of [the CMP] and the variants being promoted by hospitals and health care consultants" at the time of that report. Id. Similarly, here, those arrangements are not distinguishable from the "incentive payments" provided in the Demonstration Project. Therefore, the same concerns Congress held in 1986 when the CMP was enacted and the OIG had in 1999 when the OIG Bulletin was released necessarily remain today — "no combination of features could guarantee that such plans would not be subject to abuse." Although the Secretary now "guarantee[s] that the quality of patient care [will] not [be] adversely affected by the financial incentives designed to promote cost-efficiency", see Defs.' Final Merits Br. at 13; such a guarantee was previously found by Congress as untenable. Thus, in spite of the Secretary's important countervailing interest in reducing health care costs, the operation of the Demonstration Project is not supportable in light of the CMP.
Defendants acknowledge that the Demonstration Project violates the CMP on its face, particularly when its gainsharing provisions are analyzed against the OIG Bulletin. Moreover, the importance of the OIG's review of the clash between the Demonstration Project and the CMP was obvious to all participants in the approval process. In an internal memorandum dated June 18, 2002, HHS's Deputy Director of Health Plans for the Center for Beneficiary Choices observed:
Incentive payments to physicians are restricted by several laws, including the anti-kickback law and the civil monetary penalty law administered by the [HHS's] Office of the Inspector General (OIG), by the Stark laws administered by the [CMS], and by Internal Revenue Service restrictions on private inurement that affect payments by non-profit hospitals. We have had several conversations with the OIG and IRS, and believe that the demonstration will be granted favorable advisory opinions by them if CMS approves the demonstration.
Admin. Rec. at 213.
However, no such formal advisory opinion was ever sought from OIG by either the Participating Hospitals or the NJHA, either during the next 15 months preceding CMS approval of the Demonstration Project (September 2003) or during the three-plus months thereafter up to the date of implementation: January 1, 2004. Compare this inaction to the path properly followed by the "Requestors" described in OIG Advisory Opinion No. 01-1. Id. at 441-56. Whatever may have motivated the Participating Hospitals and the NJHA to forgo this important process, that failure leaves the Demonstration Project in fatal conflict with the CMP.
That Advisory Opinion, however, provides no substantive support for implementation of the present Demonstration Project. It was limited strictly to the facts of the application then before the OIG with "no applicability to other arrangements, even those that appear similar in nature or scope." Admin. Rec. at 455.
The present Demonstration Project, approved by the Secretary, without a favorable OIG Advisory Opinion secured by the applying hospitals, facially violating the CMP, a statute (unlike Stark II) which the Secretary was powerless to waive, is invalid as a matter of law and cannot be implemented without, at the very least, further proceedings before the Secretary designed to cure these defects, if that is possible. The Secretary should have required the proposed participants in the Demonstration Project to secure an Advisory Opinion from the OIG which at least assured forbearance from the imposition of sanctions as per OIG Advisory Opinion No. 01-1. Id. at 454. Any further proceedings on remand should include this requirement.
IV. The Remedy
The parties have presented different points of view regarding the remedy or judgment which this Court should grant in light of the decision reflected above. While the continuation of the Demonstration Project will be permanently enjoined, a question arises as to whether this action should be brought to a conclusion or rather remanded to the Secretary for action consistent with this Opinion. Also, if the latter, what should be the scope of this Court's retention of jurisdiction? The conclusion of this case, without remand, is the course that is more likely to lead to the abandonment of the Demonstration Project at this point, through the Secretary's election not to initiate new proceedings to consider it. While it would be within the Secretary's power to choose that course even upon remand, presumably the Participating Hospitals and the amicus NJHA would have a better opportunity to be heard in such a situation if they wished to press their application for the re-approval of the Demonstration Project, after compliance with the requirements addressed in this Opinion and any others which proceedings on remand reveal to be necessary. None of those eight hospitals is a party to this action. While their absence is not fatal regarding the decision reached here, this Court should consider the impact of certain courses of action upon those absent parties and, if appropriate, choose a remedy which minimizes that impact. Remand is that better remedy.
Accordingly, as reflected in the Order for Judgment accompanying this Opinion, the Court permanently enjoins the implementation of the Demonstration Project and remands this matter to the Secretary for action consistent with the present Opinion. The Court retains jurisdiction only for the purpose of enforcing or modifying the present Order for Judgment. However, if, after further action or inaction by the Secretary, any aggrieved party properly invokes the jurisdiction of this Court through the filing of a new lawsuit related to this Demonstration Project or its successor, any party to such a lawsuit may request that it be assigned to the author of this Opinion. Any such request will receive full and fair consideration.
CONCLUSION
Both Stark II and the Anti-Kickback Statute seek to address the inducement of fraud resulting from patient referrals, which is not directly implicated by the Demonstration Project. Also, for the purpose of the present decision the Court assumes that Stark II is effectively waived by the Enabling Statute. The CMP, however, takes aim at curtailing the diminution of patient care and services for the sake of increased profits or reduced losses — the very goal and/or inevitable result of the Demonstration Project. Therefore, the Demonstration Project violates the CMP, and its further implementation will be enjoined. In addition, this matter is remanded to the Secretary for further consideration, consistent with this Opinion.