Steve Harris
In February 2010, a Tulsa hospital filed suit in U.S. District Court seeking to invalidate its employment contracts with two Tulsa physicians. The hospital alleged that the employment contracts signed four years earlier were no longer “commercially reasonable” — the hospital was losing money on the deal — violated Stark Law and therefore were void.
The physicians countered, alleging that the hospital had diverted patients to other physicians employed by the hospital causing a decline in their performance. In other words, the physicians maintained the hospital had created the problem the hospital complained of.
To illustrate the seriousness of a Stark Law violation, this same hospital entered into a settlement agreement in 2009 with the Office of Inspector General (OIG) to resolve its violations of Stark Law. The hospital paid over $13 million to the U.S. Government.
The hospital’s attempted misuse of Stark Law in its federal suit was not the first time this tactic had been used. In 2009, Saint Agnes Medical Center (Fresno, California) filed suit against Michael Dogali M.D. claiming breach of a physician recruitment agreement. St. Agnes claimed Dr. Dogali had failed to repay a promissory note and owed St. Agnes over $622,000. Dr. Dogali raised a multitude of defenses including the defense that his contract with Saint Agnes violated Stark Law. Basic contract law holds that contracts which violate state or federal law are void and unenforceable. Illegal contracts typically leave the contracting parties without a remedy. Dr. Dogali was attempting to use Stark Law to invalidate his contractual obligation relieving him of any further duty to perform. The Tulsa hospital was attempting to do the same thing in its federal suit.
Dr. Dogali overlooked the fact that Stark Law was intended by Congress to benefit the government, not private contracting parties. The federal judge in the Dogali case held that “[T]he purpose of the Stark Law is to protect the government from Medicare fraud and there is no indication that any private right can be extrapolated therefrom.” The judge concluded that “…case law does not support a finding that private parties to a private contract can invoke the Stark Law to invalidate the contract.”
In West Allis Memorial Hospital v. Bowen, West Allis sued St. Luke’s Hospital claiming that a program started by St. Luke (a program where St. Luke waived certain deductible and coinsurance obligations for Medicare patients) violated Stark Law. West Allis, fearing a loss of business and desiring to remain competitive with St. Luke, wanted to start its own waiver program.
However, West Allis also feared a Stark Law violation if it implemented its own waiver program. To resolve its dilemma, West Allis asked the federal district court to either declare St. Luke’s waiver program violative of Stark Law and enjoin St. Luke’s continuation of its waiver program, or alternatively declare such programs non-violative of Stark Law and enjoin the U.S. Government (OIG/HHS) from enforcing Stark Law against Medicare providers such as West Allis which may seek to implement a similar waiver program.
The Tulsa hospital faced the same dilemma discussed in the West Allis case. The hospital sought a Court order declaring the physicians employment contacts void, or in the alternative if the employment contracts were determined valid, the U.S. Government should be bound by that determination.
The 8th Circuit concluded in the West Allis case that (1) Congress never intended to allow private parties like West Allis to directly enforce Stark Law, to remedy a competitor’s noncompliance with Stark Law and (2) the Government (not private parties) is charged with the enforcement of the Medicare program and Stark Law.
The Tulsa hospital’s suit was dismissed in April 2010 on motions filed by the physicians and the government defendants (OIG and Department of Justice). In its written opinion dismissing the suit, the District Court adopted the reasoning in the Dogali case, holding: “In fact, other courts have held that the Stark Law does not create a private right of action to invalidate a contract.” In other words, neither hospitals nor physicians can use Stark Law as a basis to attempt to avoid compliance with an employment or personal services contract.
Physicians should be wary of claims that their “personal services” or “employment” contract is subject to “re-evaluation,” renegotiation or termination because the contract compensation potentially violates Stark Law absent an express provision in the contract allowing for renegotiation.
