United States: Loan Or Other Financial Obligation Forgiveness– A Continuing Fraud And Abuse Challenge

There are many health care financial arrangements where one entity has a financial obligation to another, with whom it either does business directly, or to which it makes referrals, and that obligation is either past due or for one reason or another cannot be paid. This may come up, for example, in the context of leases to physicians in a hospital owned medical office building (MOB), a loan made to a physician by a supplier or other provider, or a loan by a hospital to a joint venture with physician or suppliers to get it started, in lieu of capital contributions, or a loan from an MSO to a physician organization. Each of these situations raises an issue with respect to potential violation of the physician self-referral law (Stark) or the Anti-Kickback Statute (AKS), which in turn can give rise to significant liability under the False Claims Act.

Recent Case Law

An example of the issues raised in this space was highlighted by the recent District Court ruling. In this False Claims Act qui tam case, the plaintiff initiated an action against Humana, Inc. and Humana Pharmacy, Inc. (collectively "Humana") and another defendant, based on the allegation that she was terminated in response to concerns she raised over the manner in which pharmacy rebates were being handled, particularly with respect to certain alleged rebate overpayments to Humana. Plaintiff alleged that the amount of overpayments that would need to be repaid was actually compromised in exchange for an agreement for products to be on the Humana formulary, and to exclude certain competing products. Plaintiff asserted that this transaction violated the AKS.

The Opinion recites that the allegations were initially addressed as a "routine, arms-length compromise involving a disputed contractual obligation," and thus is not prohibited remuneration under the AKS. Under the AKS, "anything of value" suffices, including such things as rebates, payments "disguised as rent or consulting fees, facility time, or waived insurance deductibles." And, as many cases note, even if there were a legitimate business purpose to the exchange, if "one reason" for it was to induce a referral, that is all that is required for an AKS violation to occur, absent an applicable statutory exception or regulatory safe harbor. As in past situations in which AKS issues had arisen in the context of forgiveness of debts for services previously rendered, or client billing waivers, or foregoing collection of outstanding client bills, an alleged acceptance of an amount less than was due could amount to remuneration under the AKS.

Among the issues that remained in the case, however, was the need to prove the intent element—the intent to induce referrals as a result of the arrangement. The critical nature of this element has been highlighted by the 5th Circuit in United States v. Omnicare, Inc. 663 Fed. Appx. 368 (5th Cir. 2016) ("Omnicare"). In Omnicare the Court considered a situation where a supplier sought to settle billing disputes with respect to verifiable debt "without unnecessarily aggravating...clients" and without wanting to "negatively impact its contract negotiations" or engage in "confrontational collection practices," which might discourage customers from doing business with them. It determined that because there was no evidence that the settlement negotiations or debt collection practices were "special benefits" that the customers were aware of, it could not be concluded the necessary intent existed, although there may have been hoped for referrals.

The same logic was applied by the Fifth Circuit in Omnicare to prompt pay discounts (PPDs). Absent specific evidence of an intent to induce a referral, the fact that PPDs were offered in contract negotiations and included in new contracts, was insufficient to show an illegitimate purpose to induce referrals. (The Court also noted that even where PPDs were allowed on late paid claims, there was either "additional consideration provided in the form of prompt payment of past due accounts receivables" or billing disputes that the customers had which prevented prompt payment").

Where Do These Cases Leave Debt Obligations?

First, it is important that the arrangement that created the obligation meet an applicable Stark exception, and , if possible an applicable AKS safe harbor. Where there is a lease or personal services arrangement at bottom, this is pretty straightforward. The applicable Stark exceptions and AKS safe harbors define the necessary elements, and those elements have been in place for a significant period of time and are generally well known in the industry. See e.g. 42 C.F.R. §§ 411.357(a), 1001.952(b).

Second, where an unpaid obligation arises, it is important that it be dealt with by the parties in a compliant way. For example, suppose a physician group leases space in an MOB owned by a hospital to which the physicians in the group refer Medicare and Medicaid patients. The lease arrangement meets all the requirements of the space lease exception under Stark and the AKS regulatory safe harbor for lease arrangements. So far so good. However, the hospital discovers that, for whatever reason, the physician group has been underpaying the rent for over a year. An internal investigation reveals that no hospital executive had decided to give the physician group a pass on the full amount of rent, but rather the failure to catch the underpayments was simply due to an oversight. The problem may also be exacerbated when the lease contains "standard" provisions with respect to late payments, which include interest and potentially some penalty amounts.

At this point there is arguably no Stark violation because the arrangement itself complied with the exception (and there was simply an error on the part of the hospital in the execution of the arrangement), and no AKS violation because there is no evidence of an intent by the hospital to reduce the rent in order to reward past referrals or induce future referrals. However, if the hospital does not make reasonable efforts to collect the past due rent and other amounts which may be called for by the lease, there would be a new financial arrangement in the form of a gift (forgiveness of debt) for which there would be no Stark exception, and no AKS regulatory safe harbor. What constitutes reasonable efforts will depend on the facts and circumstances. For example, whether the party that is owed the debt would need to pursue litigation could depend on the amount of money at issue, and whether or the extent to which the debtor has legal or equitable defenses.

An extension of this scenario, which raises additional compliance issues, is when the physician indicates an inability to pay on a current basis, or a desire to fold the amounts due into a new lease, which is at a lesser amount due to a "falling rental market." There are also scenarios where the debt may be "contested" by belated claims that the suite services that were provided were "not up to snuff," or that promised (but not incorporated into the lease document) upgrades over time did not occur, and there should now be a rent offset taken. In each case, there must be a documented, and independent assessment made of the legitimacy and value of the claim. After the fact claims of value, raised for the first time in the effort to reduce a past due debt will, of course, invite significant scrutiny if an issue is raised as to whether the underlying purpose of acceding to the "demand" for a reduction is to retain physician "loyalty." Second, if there is to be a new lease, the fair market value of that lease must stand on its own, and the "paper trail" should reflect a rate (and other terms) that meets the necessary standard. The ultimate result should also be consistent with a commercially reasonable business purpose. Finally, irrespective of whether a change in the compensation terns of an existing arrangement do or do not raise concerns under the AKS, parties must ensure that a modified or new arrangement meet the requirements of a Stark exception. There are special rules that may need to be followed with respect to modifying compensation terms mid-stream.

One other scenario that occurs on a regular basis is that of an income guaranty loan obligation in a physician recruitment arrangement. A physician or the group through which the physician is employed or contracted on an independent contractor basis, has been appropriately recruited (See e.g. 42 C. F. R. § 411.357(e)), and the Group and the physician have entered into a loan agreement and executed a note. Something occurs and the physician leaves the group, and there is an acceleration of the repayment obligation under the note, with commercially reasonable penalties for a late payment. Under such a scenario, it would not be unusual for the physician and the group to ask for a forgiveness (which forgiveness might have otherwise have occurred over a period of years under the terms of the arrangement, if the arrangement had remained intact, as it is common for the hospital to forgive indebtedness in the loan if the physician stays in the hospital's geographic service area for a requisite period), or a write-down to avoid a cash flow problem. In some cases, the debtor(s) might also request that security that was provided not be realized, and/or that the entire arrangement now be renegotiated.

Like the lease scenario, this situation raises serious issues if the agreed remedies are not implemented, or if there is not a commercially reasonable, and documented reason why they were not implemented—one that can be clearly demonstrated as not being based on a desire to preserve referrals from either the group, or its departing physician. And part of that clear demonstration must be documentation of the facts upon which decisions are based. Thus, if the claim is that payment will force a severe financial hardship, documentation that such is actually the case will be important. For Stark purposes it may very difficult to modify the terms of an existing arrangement and stay within the recruitment exception.

Finally, if the result in any of the potential scenarios is that action will be taken other than what "typical" commercial lender or landlord would do, counsel will need to advise just what the risks are, and how serious they may be. It may also be advisable to obtain outside support to ensure there has been an independent review of the facts and circumstances, and that although they may not be "typical" from a commercial standpoint, they are not driven by the desire to induce referrals.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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