Opinion ID: 4438745
Heading Depth: 1
Heading Rank: 4

Heading: the relators plead stark act violations

Text: A prima facie Stark Act violation has three elements: (1) a referral for designated health services, (2) a compensation arrangement (or an ownership or investment interest), and (3) a Medicare claim for the referred services. See United States ex rel. Schmidt v. Zimmer, Inc., 386 F.3d 235, 241 (3d Cir. 2004). This combination of factors suggests potential abuse of Medicare. When they are all present, we let plaintiffs go to discovery. Here, no one denies that the defendants made Medicare claims for designated health services. The issue is whether the 14 complaint sufficiently alleges referrals and a compensation arrangement. We hold that it does. The alleged Medicare abuse is plausible and deserves more scrutiny. A. The surgeons referred designated health services to the hospitals The relators allege that “[e]very time [the neurosurgeons] performed a surgery or other procedure at the UPMC Hospitals, [they] made a referral for the associated hospital claims.” App. 193 ¶ 234. They are right that these claims are referrals. As mentioned, the law defines referrals broadly. A referral is a doctor’s request for any designated health service that is covered by Medicare and provided by someone else. 42 C.F.R. § 411.351. Designated health services include bed and board, some hospital overhead, nursing services, and much more. 42 C.F.R. § 409.10(a). And the relators plead that as the surgeons performed more procedures, those procedures required (and the hospital provided and “increased billings for[)] the attendant hospital and ancillary services including . . . hospital and nursing charges.” App. 166 ¶ 104 (emphasis added). So the plaintiffs plead that the surgeons referred designated health services to the hospitals. Treating these services as referrals makes sense. The Stark Act’s first step is to flag all potentially abusive arrangements. And doctors who generate profits for a hospital may be tempted to abuse their power, raising hospital bills as well as their own pay. These financial arrangements thus deserve a closer look. And they will get a closer look only if we call these 15 arrangements what they are: doctors referring services to hospitals. The Department of Health and Human Services agrees. In Phase I of its Stark Act rulemaking, it considered this point. It determined that “any hospital service, technical component, or facility fee billed by [a] hospital in connection with [a doctor’s] personally performed service” counts as a referral. Medicare and Medicaid Programs; Physicians’ Referrals to Health Care Entities with Which They Have Financial Relationships, 66 Fed. Reg. 856, 941 (Jan. 4, 2001). This is true even “in the case of an inpatient surgery” where the doctor performs the surgery. Id. Then, in Phase II of its rulemaking, the agency revisited the question and considered narrower definitions. For instance, many commenters suggested excluding “services that are performed ‘incident to’ a physician’s personally performed services or that are performed by a physician’s employee” from the definition of a referral. 69 Fed. Reg. at 16063. But the agency reasonably rejected these suggestions. A narrower view, it reasoned, would all but swallow at least one statutory exception. Id. And it explained that the availability of that and other exceptions did enough to protect innocent conduct. Id. “[T]his interpretation is consistent with the statute as a whole,” which begins by casting a broad net to scrutinize all potential abuse. Id. 16 B. The relators’ complaint alleges an indirect compensation arrangement A referral is ripe for abuse only when the doctor who made it has a financial relationship with the provider. Only then can a doctor profit from his own referral. The financial relationship here is a compensation arrangement. Compensation arrangements can be either direct or indirect. 42 C.F.R. § 411.354(c). The hospitals did not pay the surgeons directly. So if there is any compensation arrangement here, it is indirect. That requires three elements: First, there must be “an unbroken chain . . . of persons or entities that have financial relationships” connecting the referring doctor with the provider of the referred services. Id. § 411.354(c)(2)(i). Second, the referring doctor must get “aggregate compensation . . . that varies with, or takes into account, the volume or value of referrals.” Id. § 411.354(c)(2)(ii). And third, the service provider must know, recklessly disregard, or deliberately ignore that the doctor’s compensation “varies with, or takes into account, the volume or value of referrals.” Id. § 411.354(c)(2)(iii). (The parties do not challenge any of the regulations at issue, so we likewise assume that they are valid.) The complaint plausibly pleads enough facts to satisfy each element. 1. An unbroken chain of entities with financial relationships connects the surgeons with the hospitals. An unbroken chain of financial relationships links the surgeons to the hospitals. First, the Medical Center owns each hospital. Second, the Medical Center also owns three entities: Pittsburgh Physicians, Community Medicine, and Tri-State. Third, each of these three entities employs and pays at least one of the surgeons. That 17 adds up to an unbroken chain of financial relationships. Neither party disputes this. 2. The surgeons’ compensation varies with, or takes into account, the volume and value of their referrals. Next, the relators allege that the surgeons’ aggregate compensation varied with, and took into account, their referrals. Under the Stark Act and its regulations, compensation varies with referrals if the two are correlated. And compensation takes into account referrals if there is a causal relationship between the two. The structure of the surgeons’ contracts is enough to plead correlation. And the surgeons’ suspiciously high compensation suggests causation. a. The relators must show either correlation or causation between compensation and referrals. To start, we have to tease out the difference between varies with and takes into account. Section 411.354(c)(2)(ii) uses both phrases. But in other places, like the exceptions, the Stark Act and its regulations use only takes into account, not varies with. 42 U.S.C. § 1395nn(e)(2)(B)(ii), (e)(3)(A)(v); 42 C.F.R. § 411.357(l)(3), (p)(1)(i). So varies with must mean something different from takes into account. Here is the most natural reading of both phrases: Takes into account means actual causation. The doctor’s pay must be based on or designed to reflect the volume or value of his referrals. But varies with means correlation. If compensation tends to rise and fall as the volume or value of referrals rises and falls, then the two vary with each other. This reading gives each phrase independent meaning. And it makes the scope of 18 indirect compensation arrangements broader than the scope of the exceptions. This makes sense. Correlation does not guarantee causation, but it is evidence of causation. So the agency reasonably decided to include as indirect compensation arrangements those where pay varies with referrals. 69 Fed. Reg. at 16059. That way, such arrangements get a closer look. Then, the defendant gets a chance to show that the correlation is mere coincidence, not causation. If it does, then the compensation arrangement can fit within a Stark Act exception. Id. Our concurring colleague adopts a less natural reading. Instead of treating varies with as a broader phrase meaning correlation, he reads takes into account as broader. Conc. Op. 4– 6. And he limits this broader phrase to causal relationships, whether explicit or “implicit (that is, unstated).” Id. So his reading of the causation requirement makes varies with (express causation) a subset of takes into account (express or implied causation). But the Stark Act’s text and structure are to the contrary. Textually, the concurrence is right that, read in isolation, varies with sometimes implies causation. Varies with can mean correlation, however, and often does. Mathematicians sometimes use A varies with B causally, to mean that A is a function of B. But statisticians often say that A varies with B if A correlates with B. Thus, a correlation coefficient expresses the covariance between two variables. Timothy C. Urdan, Statistics in Plain English 79–80 (2d ed., Psychology Press 2005); see also Paul McFedries, Excel Data Analysis 202 (4th ed. 2013) (“[A] correlation does not prove one thing causes another. The 19 most you can say is that one number varies with the other.”) (emphasis added). Courts likewise use varies with as a synonym for correlation. Our Court has explained that “a correlation coefficient . . . measures ‘how consistently’ the dependent variable varies in correspondence with the independent variable.” Jenkins v. Red Clay Consol. Sch. Dist. Bd. of Educ., 4 F.3d 1103, 1120 n.10 (3d Cir. 1993) (emphasis added). Other courts do too. E.g., NAACP v. City of Niagara Falls, 65 F.3d 1002, 1005 n.2 (2d Cir. 1995) (“A ‘correlation coefficient’ is generated, demonstrating how consistently voter support for a candidate or group of candidates varies with the racial composition of the election districts.”) (emphasis added) (quoting district court)); Citizens for a Better Gretna v. Gretna, 636 F. Supp. 1113, 1126 n.32 (E.D. La. 1986) (same). So we can plausibly read varies with to mean correlation, not just causation. And that is the point. Here, varies with is about correlation, not causation. As our concurring colleague notes, we do not think the Stark Act requires relators to plead a “perfect positive correlation” between doctors’ pay and referrals. Conc. Op. 7. The beauty of the phrase varies with is that it carries little technical baggage yet “make[s] clear that there is no need to establish causation.” Loan Originator Compensation Requirements Under the Truth in Lending Act (Regulation Z), Supplementary Information, 78 Fed. Reg. 11280, 11325–26 (Feb. 15, 2013) (explaining that the final rule uses varies with as a nontechnical substitute for correlates with). More importantly, as he admits, our concurring colleague’s approach makes varies with into surplusage, robbing it of any 20 useful role in the regulatory scheme. Conc. Op. 8. In 42 C.F.R. § 411.354(c)(2)(ii), for example, varies with would be redundant of every takes into account. It would do no work. By contrast, our reading casts varies with as the star of § 411.354(c)(2)(ii). Takes into account gets its turn to shine in the Stark Act exceptions, where varies with does not appear. Id. §§ 411.355, 357. On this reading, the scope of indirect compensation arrangements is broader than the scope of the exceptions. Each phrase does real work and serves an independent purpose. Faced with two readings, one of which gives each phrase in a disjunctive list an operative meaning and another that makes a phrase surplus, we should follow the “elementary canon of construction” against surplusage. Colautti v. Franklin, 439 U.S. 379, 392 (1979); United States v. Kouevi, 698 F.3d 126, 133–34 (3d Cir. 2012) (collecting cases). Structurally, our approach also reinforces the Stark Act’s design. It casts a wide net of initial suspicion, followed by narrower safe harbors. A correlation between pay and referrals suggests that hospitals are rewarding doctors for referrals. And healthcare providers get to use the Stark Act’s exceptions to show that there is no problematic causal relationship. Only if they cannot should those cases go to discovery. Our concurring colleague’s approach would upend that structure by denying relators the discovery they need to prove their cases. In Tuomey, for example, hospital insiders linked pay with referrals only during discovery—not in the complaint. Compare First Amended Complaint, United States ex rel. Drakeford v. Tuomey, 976 F. Supp. 2d 776 (D.S.C. 2013) (No. 21 3:05-2858-MBS), ECF No. 151, with J.A. Combined Vols. I– XIII at 504–14, Tuomey, 792 F.3d 364 (No. 13-2219), ECF No. 39 (testimony of William (Paul) Johnson) (Tuomey’s CFO admitting that he feared losing money if doctors treated patients offsite, so he analyzed the value of doctors’ noncompete agreements that might recapture that revenue by requiring them to do their procedures at Tuomey’s hospitals); id. at 1809–22 (testimony of Kimberly Saccone) (same, by senior consultant); id. at 335, 4594 (statement by Tuomey’s lawyer Tim Hewson to CEO, several vice presidents, and key doctors at a recorded meeting on Jan. 19, 2004) (“Because of the Stark and Antikickback laws, you can’t explicitly say, ‘Well, it’s because we’re getting all the referrals for these patients,’ and of course that’s what we’re doing.”). And Tuomey was a close case at the motion-to-dismiss stage. Tuomey itself had received conflicting legal advice about whether its contracts violated the Stark Act. Compare Tuomey, 792 F.3d at 371–72 (advice from lawyer Kevin McAnaney), with First Am. Compl. 25 ¶¶ 97–98 (advice from law firm Hall & Render). The truth emerged only through the cleansing light of discovery, once the relators got to depose hospital executives and transcribe audio recordings of executive meetings. But our concurring colleague’s approach would shut that door, dismissing such cases before discovery. That would make it all but impossible for the relator in the next Tuomey to prevail. In short, at the pleading stage, a plaintiff must plead facts that make either correlation or causation plausible. Here, the relators do both. 22 b. The structure of the surgeons’ contracts plausibly alleges correlation between their pay and referrals. The relators plead that two aspects of the surgeons’ pay varied with their referrals: base salaries and bonuses. If the surgeons met their quota of Work Units, they protected their base salaries. And if they exceeded that quota, they earned a bonus for each additional Work Unit. So the surgeons’ pay was facially based only on the services they personally performed. But every time they “performed a surgery or other procedure at the UPMC Hospitals, [they] made a referral for the associated hospital claims,” like nursing services or hospital overhead. App. 193 ¶ 234. And the defendants got to bill Medicare for those referred services, which could be worth many times more than the surgeon’s own services. 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, their aggregate compensation varied with their referrals’ volume and value. The Fourth Circuit agrees. In Tuomey, as here, the doctors’ base salaries and bonuses rose and fell each year “based solely on” their “personally performed professional services.” 792 F.3d at 379 (internal quotation marks omitted). Our concurring colleague reads the Fourth Circuit’s opinion as limited to com- 23 pensation agreements that expressly give doctors a cut of expenses like technical or facility fees, beyond the work doctors do personally. Conc. Op. 9–11. But that reading overlooks Tuomey’s facts. The Tuomey court did not say that the doctors there took a straight percentage cut of referrals. It says only that as doctors did more procedures, the number of Tuomey’s referrals went up—and so did the doctors’ compensation. See 792 F.3d at 379. And the briefing in Tuomey clarifies any possible ambiguity about which collections affected pay by falling within the scope of a doctor’s “personally performed professional services.” Id. (internal quotation marks omitted). The hospital there insisted that “[n]o component of the physicians’ pay depended on the amount of Tuomey’s charges or collections for facility fees.” Appellant’s Final Br. 44, Tuomey, 792 F.3d 364 (No. 13-2219), ECF No. 50. In fact, the hospital had rejected “suggested modifications” to its contracts that would have made “technical fees . . . a component of the physicians’ compensation.” Id. Contrary to our concurring colleague, the Tuomey record shows that the doctors’ pay was “based on their professional collections for services that they personally perform[ed], not on any billings or collections of the Hospital for its services.” Mem. in Supp. of Def.’s Mot. to Dismiss 5, Tuomey, 976 F. Supp. 2d 776, ECF No. 64-1 (emphasis added). The same is true here. But as the Fourth Circuit observed, these personally performed services almost always came with referrals for ancil- 24 lary hospital services. 792 F.3d at 379. And the healthcare provider got to bill Medicare for those services. Id. The more procedures a doctor did at the hospital, the more referrals he made, and the more he could make in both base salary and bonuses. Id. Thus, the Fourth Circuit “th[ought] it plain that a reasonable jury could find that the physicians’ compensation varied with the volume or value of actual referrals.” Id. at 379–80 (emphasis added). We agree with the Fourth Circuit’s logic. It applies equally here. So the relators have pleaded that the surgeons’ pay varied with their referrals. Our concurring colleague fears that our rationale casts suspicion on any compensation agreement based on a doctor’s “own labor.” Conc. Op. 11. Not so. The Stark Act kicks in only when a doctor’s pay varies with Medicare or Medicaid referrals tied to that doctor’s personal labor. If a doctor’s pay does not vary with the volume or value of Medicare or Medicaid referrals, the Stark Act plays no role. But here, the relators have pleaded that the doctors’ pay correlated with the value of their Medicare referrals. That correlation is enough to plead the second element of an indirect compensation arrangement. The relators need not also plead causation. But they do anyway. c. The surgeons’ suspiciously high compensation suggests causation. Compensation for personal services above the fair market value of those services can suggest that the compensation is really for referrals. This is just common sense. Healthcare providers would not want to lose money by paying 25 doctors more than they bring in. They would do so only if they expected to make up the difference another way. And that way could be through the doctors’ referrals. This may not be obvious on the face of the statute and regulations. The Stark Act often treats fair market value as a concept distinct from taking into account the volume or value of referrals. For example, these two concepts are separate elements of many Stark Act exceptions. E.g., 42 U.S.C. § 1395nn(e)(2) (bona fide employment), (e)(3) (personal service); 42 C.F.R. § 411.357(l) (fair-market-value compensation), (p) (indirect compensation). And the definition of an indirect compensation arrangement includes taking referrals into account, but not fair market value. 42 C.F.R. § 411.354(c)(2)(ii). But the Act’s different treatment of these concepts does not sever them. To start, just because a statute has two elements does not mean that one can never be evidence of the other. Theft requires taking another’s property with intent. Those are two elements, but the fact of taking property can be circumstantial evidence of intent. So too here. Perhaps not all payments above fair market value are evidence of taking into account the doctor’s referrals. But common sense says that marked overpayments are a red flag. Anyone would wonder why the hospital would pay so much if it was not taking into account the doctor’s referrals for other services. And we do no violence to the statutory text by seeking an answer to that question. 26 The agency confronted this question directly. It remarked that even “fixed aggregate compensation can form the basis for a prohibited . . . indirect compensation arrangement” if it “is inflated to reflect the volume or value of a physician’s referrals.” 69 Fed. Reg. at 16059 (emphasis added). The same is true of “unit-of-service-based compensation arrangements,” like the one here. Id. Excessive compensation is thus 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. And the relators here plead five facts that, viewed together, 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 Work Units far above industry norms. Fourth, the surgeons’ bonus per Work Unit exceeded what the defendants collected on most of those Work Units. And finally, the government alleged in its settlement agreement that the Medical Center had fraudulently inflated the surgeons’ Work Units. That much smoke makes fire plausible. i. Pay exceeding collections. Paying a worker more than he brings in is suspicious. And the complaint alleges that at least three surgeons (Drs. Bejjani, Spiro, and El-Kadi) were paid more than the Medical Center collected for their services. The complaint also alleges that the Medical Center credits surgeons with 100 percent of the Work Units that they generate, even if it cannot collect on all of them. So at least three surgeons (maybe more) were paid more than they bring in. 27 ii. Pay exceeding the 90th percentile. The relators allege that “[c]ompensation exceeding the 90th percentile is widely viewed in the industry as a ‘red flag’ indicating that it is in excess of fair market value.” App. 191 ¶ 223. The defendants do not deny this. Several surgeons were paid more than the 90th percentile. For example, the relators point to the compensation of Drs. Abla, Spiro, Kassam, and Bejjani between 2008 and 2011. Apart from Dr. Spiro in 2008, each of these surgeons was paid more than even the highest estimate of the 90th percentile for all U.S. neurosurgeons in all four years. And depending on which estimate of the 90th percentile you use, they were sometimes paid two or three times more than the 90th percentile. Dr. Bejjani’s 2011 bonus alone exceeded the 90th percentile of total compensation in some surveys. iii. Extreme Work Units. The relators also allege facts from which we can reasonably infer that the surgeons generated far more Work Units than normal. Many neurosurgeons “were routinely generating [Work Units] exceeding by an enormous margin the 90th percentile as reflected in widely-accepted market surveys.” App. 171 ¶ 126. Even if we look only at the highest industry estimates, all but one of the surgeons reported Work Units above the 90th percentile in 2006 and 2007. In 2008 and 2009, eight of the twelve named surgeons exceeded the highest estimate of the 90th percentile. A few even seemed “super human,” racking up two to three times the 90th percentile. App. 169 ¶ 117. 28 In short, most of the surgeons generated Work Units at or above the 90th percentile. Some of their numbers were unbelievably high. And because their pay depends in large part on their Work Units, it is fair to infer that most of their pay was also at or above the 90th percentile. iv. Bonuses exceeding the Medicare reimbursement rate. Once a surgeon had enough Work Units to earn bonus pay, the bonus per Work Unit was more than Medicare would pay for each one. The surgeons’ bonus per Work Unit was $45. But the Medicare reimbursement rate was only about $35. So once surgeons became eligible for bonuses, the defendants took an immediate loss on every Work Unit submitted to Medicare. On its own, this would not show that the surgeons were overpaid. Medicare and Medicaid are well known as bottombillers. They pay less than private insurers. Though the defendants lost some money on Medicare Work Units, perhaps they made it back with Work Units billed to other insurers. But the relators also allege that “the majority of all claims submitted by the [defendants] . . . were submitted to federal health insurance programs such as Medicare and Medicaid.” App. 193 ¶ 233. We cannot assume that private payments suffice to make up the difference. Doing so would disregard our job at this stage: to draw reasonable inferences in favor of the plaintiffs. In short, the defendants took an immediate financial hit on Work Units for a majority of their claims. This is yet another sign that the surgeons’ pay took referrals into account. 29 The defendants disagree. They argue that the surgeons earn high salaries because of bona fide bargaining with their employers. Their salaries supposedly represent the market’s demand for their surgical skill and experience. This argument fails for two reasons. First, the complaint says nothing about the surgeons’ skill and experience or the Pittsburgh market for surgeons. On this motion to dismiss, we cannot go beyond the well-pleaded facts in the complaint. Second, a bare claim of bona fide bargaining is not enough. The Stark Act recognizes that related parties often negotiate agreements “to disguise the payment of non-fair-market-value compensation.” Kosenske, 554 F.3d at 97. We trust that bona fide bargaining leads to fair market value only when neither party is “in a position to generate business for the other.” Id.; 42 C.F.R. § 411.351 (defining “fair market value” and “general market value”). But that is not true here. The surgeons and the Medical Center can generate business for each other. So we cannot assume that any bargaining was bona fide or that the resulting pay was at fair market value. v. The possibility of fraud. Finally, the surgeons’ high pay may have been based on fudging the numbers. Not only were their individual Work Units “significantly out of line with industry benchmarks,” but the Neurosurgery Department as a whole realized astounding “annual growth rates of work [Units] . . . of 20.3%, 57.1% and 20.0%” in 2007, 2008, and 2009. App. 171 ¶¶ 127–28. Two of the surgeons more than doubled their output in just a few years. The relators allege that the defendants got this growth by “artificially inflat[ing] the number of [Work Units] in a number of ways.” App. 171 ¶ 130. 30 Alleging this fraud, the relators’ first complaint included claims “relating to physician services submitted by” the defendants along with the “hospital claims” currently before us. App. 189 ¶ 217 (emphases in original) The government chose to intervene as to the former claims, settling them with the defendants for almost $2.5 million. The relators’ current complaint quotes that settlement agreement. In it, the government accused the surgeons of many fraudulent practices: They claimed to have acted as assistants when they did not. They claimed to have done more extensive surgeries than they did. And they chose the wrong codes for surgeries. So “claims submitted for these physician services resulted in more reimbursement than would have been paid” otherwise. App. 188–89 ¶ 216. We are careful not to overstate the point. This settlement is not an admission of guilt. It proves no wrongdoing. But at the 12(b)(6) stage, we are looking only for plausible claims, not proof of wrongs. And the government’s choice to intervene after years of investigation and its allegations in the settlement are cause for suspicion. The question is not whether a doctor was able to use an otherwise-valid compensation scheme as a vehicle for fraudulent billing. Not every fraudulent Medicare bill made at a hospital will give rise to a Stark Act violation. Here, however, where the compensation scheme produced results bordering on the absurd, relators plausibly assert that the system may have been designed with that outcome in mind. 31 The relators allege five sets of facts that suggest that the surgeons’ pay exceeded fair market value: pay exceeding collections, pay above the 90th percentile, extreme Work Units, bonuses above the Medicare reimbursement rate, and the settlement. That is plenty of smoke. We need not decide whether any of these allegations alone would satisfy the relators’ pleading burden. Together, they plausibly suggest that the surgeons’ pay took their referrals into account.