According to a federal district judge in Mississippi, a cancer center’s investors bought themselves a lawsuit because of a conscious decision not to structure the ownership arrangement in compliance with a safe harbor. A federal district court in Mississippi recently denied a motion to dismiss filed by Magnolia Regional Health Center (MRHC) and its joint venture cancer center partners in a False Claims Act (FCA) lawsuit brought by the cancer center's former executive director. The relator alleges that MRHC and its physician-investors violated the FCA because of alleged violations of the Anti-Kickback Statute (AKS) and Stark Law.  The alleged violations originate from an alleged illegal kickback scheme inherent in the investment structure. It was clear that although the physician-investors were not required to make referrals to their investment—Magnolia Cancer Center (MCC)—the more they referred, the more they would profit. This was allegedly known at the time of MCC’s offering memorandum. 

MCC was a joint venture formed in 2007 between MRHC and several physician-investors to treat cancer patients. MCC was voluntarily dissolved in 2020 after a consultant advised them that the structure could possibly be perceived as contrary to the AKS or Stark Law. The relator described a "bombshell" disclosure when he was personally present at the time the former MRHC CFO stated that "MCC had to be dissolved because it violated federal law." Since the time the relator obtained his position, there were multiple attempts to unwind the joint venture and restructure MCC. However, the complaints regarding the alleged violations went unaddressed and the structure was not voluntarily dissolved until 2020. Defendants admit the dissolution occurred after a consultant advised them “that the structure could possibly be perceived as contrary to the AKS or Stark laws.”

The relator filed his qui tam lawsuit alleging that certain physicians and medical clinics violated federal statutes including the AKS and the Stark Law, by referring patients to a MCC in which they were investors. The AKS makes it illegal to offer or pay remuneration to induce referrals of individuals for the furnishing of services paid for by a federal health care program. The Stark Law provides that, if a physician has a "financial relationship" with an entity the physician "may not make a referral to the entity for the furnishing of designated health services for which payment otherwise may be made under" Medicare, and "the entity may not present or cause to be presented a claim" to Medicare for such services. The complaint further alleged that, by falsely certifying that their Medicare billings were compliant with the law, the investors violated the FCA.

To be clear, the case is still pending and not close to final.  What was before the court were motions to dismiss the qui tam complaint filed by MRHC and the other investors.  The court noted that the complaint contained considerable objective written proof in the record supporting the contention that MCC was unwound based on concerns among its participants regarding its legality. Among such proof was an email in which a physician expressed his concerns about the legality of the venture to the relator: the joint venture was set up in such a way that participating physicians had a financial incentive to refer patients to MCC, since doing so increased their own investment income. Specifically, the physician noted that, while he was not required to refer patients to MCC, "the more I refer, the more I make."

The court relied heavily on language in the offering memorandum that warned of possible non-compliance with the AKS.  The judge opined that the investors made a conscious decision that they were not going to "due diligence" their way out of a good investment (or "kickback scheme"), and it further appeared to the court that, in making that decision, the investors "bought themselves the current lawsuit." The fact that the physician investors knew that they were "living dangerously" in the interests of investment profits was further confirmed by the offering memorandum's notation that certain "safe harbors" existed under the AKS which allow physicians to invest in a manner which would give them reassurance that they were complying with the law, but that the MCC would not be structured in a way to comply with an AKS safe harbor. The court did however recognize that the defendants may have affirmative defenses to the alleged Stark law violations.

Although this case is still in its infancy and there are many unknown facts, there several reminders that health care providers can take away from the case.  First is the importance of complying with the Stark law, which reasonably appears to be called into question.  Unlike the AKS, the Stark law requires strict compliance with a Stark exception.  Thus, if there is any concern that the business arrangement does not comply with a Stark exception the health care providers should not enter into the arrangement as presented.  The arrangement must be compliant with Stark or the health care provider-investors should walk away.

Second, often times investors and management believe relators are the rank and file of the organization trying to make a buck by filing a qui tam lawsuit.  However, as is often the case, the relator is usually another physician or member of management. As a result, compliance concerns or complaints from investors or management should be taken extremely seriously. 

Finally, it is interesting to note that MCC decided to dissolve the organization.  There may be numerous reasons for such a course of action. However, another alternative is to correct the organizational structure and make a Stark self-disclosure.