Volume 6, Issue 3 www.cchgroup.com February 18, 2003

On The Front Lines 4

The DiscountSafe Harbor — Part 2by Paul DeMuro, J.D.

HIPAA 1

■ Data-mining continues to raiseprivacy concerns

■ Privacy Rule court challenge continues

Fraud & Abuse 3

■ Hospital gets interest in surgical center— no ASC safe harbor

False Claims 7

■ State false claims case illustratesmulti-jurisdictional problem

Letters to the EditorThe CCH Healthcare Compliance teamwelcomes comments regarding articlespublished in the CCH HealthcareCompliance Letter. Send comments toJeff Reinholtz, Managing Editor atreinholj@cch.com. For more informa-tion about the CCH Healthcare Com-pliance Portfolio visit our online storeat http://health.cch.com.

Data-mining continues to raiseprivacy concernsby Gordon R. Shea, J.D. and Raio G. Krishnayya, J.D.

Senator Patrick Leahy, the Ranking Minorit y member of the Senate Judiciary Com-mittee, is raising concerns with the use of so-called “data mining” techniques by thefederal government, and particularly by the Department of Justice (DOJ).

Statistical trends. The concerns are expressed in a January 10, 2003,let ter that Leahy sent to Attorney General John Ashcroft. “I am interested indetermining the extent to which the Justice Department is relying on data-mining and how the Department is addressing… concerns with appropriatesafeguards on the collection, use and dissemination of information obtainedthrough data mining,” Leahy wrote. The “concerns,” Leahy identified, “in-clude the specter of excessive government surveillance that may intrude onimportant privacy interests and chill the exercise of First Amendment-pro-tected speech and associational rights.”

As reported in For security’s sake: homeland security trumps HIPAA protec-tions, CCH Healthcare Compliance Newsletter Vol. 6, Issue 1, (Jan. 21, 2003),“data-mining” rests on the premise that the electronic world contains tril-lions of bits of information that organizations who maintain electronic recordskeep in “data warehouses” for protection and maintenance purposes. How-ever, the vast amount of data makes analysis of the data for statistical trendsvirtually impossible without the use of data-mining techniques. The conceptof data-mining requires analysts to define the data that is to be sampled.Analysts then develop a model that explains the relationships of the data,which is tested through a sampling of the data. Data-mining experts are quickto caution that while data-mining results can provide statistical predictionsabout relationships, it cannot identif y a causal connection between the eventsquantified and the predicted outcomes.

After President Bush signed the Homeland Securit y Act of 2002 into law onNovember 25, 2002, a major crossover between homeland securit y and medicalprivacy was born. Specifically, the Homeland Securit y Act’s allowance for “data-mining” could test historical notions of privacy protection, especially with re-spect to medical privacy. The data-mining provision arguably contravenes thepurpose of the Privacy Rule of the Health Insurance Portabilit y and Account-abilit y Act (HIPAA).

Broad inquiry. Leahy’s recent letter to Ashcroft does not specifically mentionhealthcare privacy. Nevertheless, Leahy’s broad inquiry regarding DOJ data-mining

CCH Healthcare Compliance Letter • February 18, 20032

HIPAA (cont.)

Managing EditorJeff Reinholtz, J.D.

Coordinating EditorsRaio G. Krishnayya, J.D.

Gordon R. Shea, J.D.Geraldine S. Stroka, J.D., R.N.

Judith A. Tichenor, J.D., L.C.S.W.

CCH Washington BureauHHS, CMS–Brendan Frost

DOJ, FTC–Peter Feltman

Capitol Hill–Catherine Hubbard,Jeff Carlson

White House–Paula Cruickshank

DesignerPatrick M. Gallagher

Comments from readers are welcome and should bedirected to Jeff Reinholtz at REINHOLJ@CCH.COM,Tel. 847-267-7316, Fax 847-267-2514. Customerservice inquiries should be directed to 800-449-9525.

CCH Healthcare Compliance Letter is published 24times a year by CCH INCORPORATED, 4025 W.Peterson Avenue, Chicago, IL, 60646. Subscriptionrate is $305 per year. First-class postage paid at Chi-cago, Illinois, and at additional mailing offices. POST-MASTER: SEND ADDRESS CHANGES TO CCHHealthcare Compliance Letter, 4025 W. PETERSONAVENUE, CHICAGO, IL 60646. Printed in U.S.A. Allrights reserved. ©2003 CCH INCORPORATED.

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Unless otherwise noted, all paragraph referencesare to the CCH Healthcare Compliance Reporter.

policies implicates the potential conf lictbetween data mining efforts and HIPAA’sPrivacy Rule. Leahy’s questions cover 5general topic areas:■ Data-Mining operations currently un-

derway within the DOJ;■ The Foreign Terrorist Tracking Task

Force; ■ Compliance With The Privacy Act of

1974;■ DOJ Coordination with the Depart-

ment of Homeland Securit y; and■ Admiral John Poindexter’s Total Infor-

mation Awareness Project (TIA) — AsCCH has previously reported, ReaganAdministration National Securit y Ad-visor John Poindexter is assisting theDefense Advanced Research ProjectAgency (DARPA) in an endeavorknown as the Total Information Aware-ness (TIA) Project to, as Leahy puts it,“develop technologies for rapid lan-guage translation, commercial transac-tion data-mining, and interagencyanalysis and decision-making tools.”Leahy has queried Ashcrof t, “[t]o

what extent are you and the Depart-ment of Justice consulting or collabo-rating with Admiral Poindexter or theDepartment of Defense in designingand implementing TIA surveillancetools and related programs?”

A copy of Leahy’s letter is available thor-ough the Senator’s on-line press page athttp://leahy.senate.gov/press/200301/011003.html. ■CCH Chicago Bureau, Feb. 03, 2003

Privacy Rule courtchallenge continuesby Gordon R. Shea, J.D.An appeal by the South CarolinaMedical Association (SCMA), joinedby other plaintiffs, seeking to overturnthe Privacy Rule of the Health Insur-ance Portabilit y and Accountabilit yAct (HIPAA) was recently heard be-fore the United States Court of Ap-peals for the Fourth Circuit in Rich-mond, Virginia, according to informa-tion released by the SCMA via itswebsite, http://www.scmanet.org.

2001 follow-up. The appeal is thecontinuation of an attack on the PrivacyRule that SCMA originally leveled in2001. SCMA reported that the three-judge panel of the Fourth Circuit thatheard the appeal included Judges RogerL. Gregory, William W. Wilkins, andWilliam B. Traxler.

SCMA’s complaint about the PrivacyRule is threefold:■ Congress improperly delegated its

power to write the Privacy Rule to theexecutive branch’s Department ofHealth and Human Services (HHS)

■ HHS exceeded the scope of the author-it y that the text of HIPAA itself vestedin the agency when it drafted the Pri-vacy Rule; and

■ the Privacy Rule’s preemption provi-sion is unconstitutionally vague.In August of 2002, the federal court

for the Dist rict of South Carolinaruled against SCMA’s challenge deem-ing the actions of Congress and HHSin promulgating the Privacy Rule “suf-ficient,” and the plaintiffs’ legal criti-cisms “not suff icient ly persuasive.”The South Carolina district court’sdecision — issued on the very day thatchanges to the Privacy Rule (such asan elimination of the Rule’s prior pa-tient consent requirement) were con-firmed — followed an earlier federalcourt decision in Texas that had like-wise upheld the Rule. The Texas deci-sion was not appealed.

Modicum of concern. The Dis-trict of South Carolina decision, how-ever, was accompanied by a writ tenopinion in which Judge Terr y L.Wooten expressed a modicum of con-cern about the way the federal govern-ment had handled the Privacy Rule.Wooten deemed Congress’s delegationof Privacy Rule authorit y to HHS “notoverly laden with detailed guidance.”Fur thermore, Judge Wooten calledSCMA’s argument that HHS exceededits authorit y “important;” and wrotethat he found HIPAA’s Privacy Rulepreemption language “troubling.” Thejudge also ventured out on a bit of aConstit utional limb by announcing

that he had applied a “less strict” Con-stitutional scrutiny of the Privacy Rulebecause the entities that are subjectto the Rule are business interests that“are in a position to plan and preparefor compliance carefully, well in ad-vance” of the Rule’s compliance date.Such a characterization would almostcer tainly be disputed by the manyHIPA A-covered ent it ies t hat havespent months and years grappling withHIPAA’s many complexities. ■CCH Chicago Bureau, Feb. 4, 2003

3CCH Healthcare Compliance Letter • February 18, 2003

Fraud & Abuse

Hospital gets interestin surgical center —no ASC safe harborby Geraldine S. Stroka, J.D., R.N.

The Office of Inspector General (OIG)permitted a medical center to acquire anownership interest in an orthopedic am-bulatory surgery center (ASC), indirectly-owned, by a physician group through aholding company, despite the failure of theproposed arrangement to meet the safeharbor criteria for jointly-owned ambula-tory surgery centers. The OIG would notimpose administrative sanctions under theAnti-kickback Act because the proposedarrangement contained multiple safe-guards that reduced the risk of fraud andabuse to an acceptable level.

Equity Interest and multiple agree-ments. This proposed arrangement in-cluded the following agreements: (1) themedical center’s acquisition of an equity in-terest in the ASC, under a two-phase op-tion agreement; (2) a credit agreement; (3) amanagement services agreement; (4) a facil-ity support agreement; (5) a surgical centerlease; (6) a group lease; and (7) a non-com-petition agreement. The proposed agree-ment was contingent on the last five agree-ments, called the ancillary agreements. Im-portant facts are (1) the hospital was a not-for-profit, and (2) the physician group(Group) met the group practice safe harbor.

Under Phase I of the Option Agree-ment, the hospital would purchase a 15%ownership interest in the ASC in exchangefor certain capital contributions and a lineof credit for the ASC. The Group wouldguarantee the pro rata share of the result-ing loan. If the hospital elected to exerciseits Phase II option, the Hospital wouldacquire a 40% interest under similar terms.

The medical center certified that eachof the five ancillary agreements met theapplicable safe harbors. For purposes ofthis proposed arrangement, the two safeharbors applicable are the investmentinterest in ambulatory surgical centersjointly-owned by hospital and physicians,42 C.F.R. §1001.952 (r) (4), and the per-sonal services and management con-tracts, 42 C.F. R. §1001. 952 (d).

Fraud and abuse issues. The OIGdetermined that there were five elementsin this proposed arrangement that made itsusceptible to fraud and abuse. The fiveareas of concern were: (1) the hospital couldinf luence referrals by its control over hos-pital-affiliated physicians; (2) eight of thegroup shareholders did not meet the one-third practice income test under the ASCsafe harbor; (3) the group holding companyheld the investment interest in the ASC;(4) the facility support and managementservice agreements did not meet the one-year requirement of the applicable safe har-bor; and (5) the arrangement was contin-gent on the execution of the non-competi-tion agreement that barred certain actions.

Safeguards. The OIG determinedthat its concerns in the five areas couldbe allayed. To counter the OIG’s concernsabout its control over referrals, the medi-cal center stated that it would limit itsabilit y to direct or inf luence referrals bynot tracking, paying or encouraging hos-pital-affiliated physicians’ referrals to theASC. The OIG determined that one-thirdpractice income test was achieved becausethe non-qualifying physicians performed

surgical procedures that met require-ments. The medical center made certaincertifications that decreased the OIG’sconcerns about the lack of the minimumone-year term requirement in the facilit ysupport and management service agree-ments. Lastly, the restrictions in the non-competition agreement were narrowlytailored for a legitimate business purpose.

Importance. In this opinion, theOIG would not sanction the participantsin this proposed arrangement if they com-plied with all of their certifications, eventhough all the elements of the jointlyowned ASC safe harbor were not met.In issuing this opinion, the OIG recog-nized that barring joint ownership ofASCs might place hospitals at a competi-tive disadvantage when they are forcedto compete with physician-owned ASCs.

Healthcare facilities and providers needto review all proposed arrangements todetermine their compliance with applicablesafe harbors. If all elements of applicablesafe harbors cannot be met, participantsneed to certify compliance in any areas thatfail to meet the safe harbor. ■OIG Advisory Opinion 03-02, Jan. 21, 2003, ¶150,199

Timothy P. Blanchard, Esq.McDermott, Will & Emery

Neil B. Caesar, Esq.PresidentThe Health Law Center

Paris Cavic, J.D., MBAThe Healthcare Compliance Group, L.L.C.

Bill Dacey, MBA, MHA, CPCPresident, The Dacey Group

Allan P. DeKaye, MBA, FHFMADeKaye Consulting, Inc.

Louis H. FeuersteinPartner, HIPAA Privacy SeriesErnst & Young

Michael A. Murer, J.D.Murer Consultants, Inc.

Elizabeth O’Kelly, Esq.Former Corporate Compliance OfficerNorthwestern Memorial Hospital

Cynthia F. Reaves, Esq.Honigman Miller Schwartz and Cohn

CCH Healthcare Compliance Editorial Advisory BoardTheodore J. Sanford, Jr., M.D.Chief Compliance Officer forProfessional BillingUniversity of Michigan Health System

William P. Schurgin, Esq.Seyfarth, Shaw, Fairweather & Geraldson

Jackie Selby, Esq.Vice President and Health Care CounselOxford Health Plans, Inc.

Nancy L. Shalowitz, MHA, J.D.Director for Health Law & Graduate ProgramsDePaul University College of Law

John E. Steiner, Jr., Esq.Chief Compliance Officer forCleveland Clinic Health System

Sanford V. Teplitzky, Esq.Ober, Kaler, Grimes & Shriver

L. Stephan Vincze, J.D., LL.M., CHCEthics & Compliance OfficerTAP Pharmaceutical Products, Inc.

4 CCH Healthcare Compliance Letter • February 18, 2003

On The Front Lines

The Discount Safe Harbor — Part 2by Paul DeMuro, J.D.

In this second part of his two-part series, Paul DeMuro, a partner in the SanFrancisco and Los Angeles offices Latham & Watkins, continues his discussionof the discount safe harbor with a look at the safe harbor protection it affordsofferors, U.S. vs. Shaw, et. al, and three relevant OIG Advisory Opinions.

The discount safe harbor also provides safe harbor protec-tion to offerors. The “offeror” of a discount is an individualor entit y who is not a seller under the safe harbor, but pro-motes the purchase of an item or service by a buyer under thesafe harbor at a reduced price for which payment may bemade, in whole or in part, under Medicare or a state healthcareprogram.1

To satisfy the requirements of the discount safe harbor,the offeror must comply with all of the applicable standardswithin the following three categories.

If the buyer is an HMO or a CMP acting in accordancewith a risk contract, or under another state healthcare pro-gram, the offeror need not report the discount to the buyer.2

If the buyer is a cost reporting entit y, the offeror must complywith the following two standards:(1) The offeror must inform the buyer in a manner reason-

ably calculated to give notice to the buyer of its obliga-tion to report such a discount and to provide certaininformation requested, and

(2) The offeror of the discount must refrain from doing any-thing that would impede the buyer’s abilit y to meet itsobligation under the safe harbor.3

If the buyer is an “other category buyer,” the offeror mustcomply with the following two standards:(1) The offeror must inform the individual or entit y submit-

ting the claim or request for payment in a manner rea-sonably calculated to give notice to the individual or en-tit y of its obligation to report such a discount and toprovide certain information requested; and

(2) The offeror of the discount must refrain from doinganything that would impede the buyer’s or seller’s abilit yto meet its obligations under the safe harbor.4

The discount safe harbor appears to have been barely con-sidered by the courts. In fact, the one court that has consid-ered the discount issue, the court in U.S. v. Shaw, et al.,5

where a criminal defendant argued that his motion to dis-miss a count of a superseding indictment for failure to state acrime should be granted, actually construed the “discountexception” to the anti-kickback statute.

The defendant was the President of NMC Medical Prod-ucts (MPD), a wholly owned subsidiary of National MedicalCare, Inc. (NMC). NMC manufactured, sold and distrib-

uted products used in kidney dialysis. MPD sold these dialy-sis related products to the NMC-owned clinics and to facili-ties not owned by NMC. NMC also had another divisioncalled the Life Chem Division that provided clinical labora-tory blood testing services to the NMC-owned clinics and todialysis clinics not owned by NMC.

The government alleged that the defendant, as the presidentof MPD, conspired to pay remuneration to independent dialysisclinics for the purpose of inducing those clinics to use Life Chem’slaboratory services. The government alleged that the induce-ments took the form of rebates and special pricing, grants, en-tertainment and hunting trips, and write-offs of bad debts forblood laboratory tests of indigents, educational grants, etc.

The defendant argued that he should prevail on his mo-tion to dismiss, because the overt acts charged were pro-tected by the “discount exception” of the statute. The courtheld that the government did not have to state in the indict-ment that the defendant’s conduct does not fall within the“discount exception.” It noted that “the discount excep-tion” does not serve as an additional element of the crimi-nal offense. It serves, instead, as a framework around whicharguments of the parties regarding the evidentiary issues,such as how the government is to prove beyond a reason-able doubt that the defendant acted with the requisite stateof mind, may be presented at trial.

The OIG has authored three relevant advisory opinions:02-10, 01-8, and 99-3. In 02-10, a company manufacturedand distributed dialysis equipment and supplies. Throughone of its subsidiaries, the company sold its equipment andsupplies to providers and suppliers of dialysis services through-out the country. The equipment and supplies included equip-ment and supplies for both hemodialysis and peritoneal di-alysis. The hemodialysis equipment and supplies were usedprimarily in dialysis facilities and other institutional settings,while the peritoneal dialysis equipment and supplies wereused almost exclusively by self-dialyzers in the home or atwork. Some supplies are used in both home dialysis andperitoneal dialysis.

The company proposed to offer two t ypes of discount ar-rangements of dialysis equipment and supplies: (1) a uniformdiscount based on the aggregate annual purchases by thepurchaser of any and all dialysis equipment and supplies sold

5CCH Healthcare Compliance Letter • February 18, 2003

On The Front Linesby the company; and (2) a discount based on total annualpurchases of certain designated or all items if the purchaserbuys a minimum quantit y of one or more certain items.

The company agreed to meet the terms of the safe harborwith respect to reporting the discounts, informing the buyer,etc. The company also certified that the proposed discountswere not dependent upon any other arrangement among thecompany, its related entities, its customers, or any other part y.

The OIG noted that Medicare Part B reimburses for outpa-tient maintenance dialysis under three methodologies, and whileall are different, all three are capped at about the same amount.The OIG also noted that the proposed discounts encouragedthe company’s customers to purchase goods for which paymentmay be made in whole or in part under a federal healthcareprogram, and thus they implicate the anti-kickback statute.

The OIG held that the first proposed discount wouldnot be problematic, because it applied to a total value ofsupplies purchased, whereas the second proposed discountwas problematic because it did not apply equally to allproducts on the basis of sales price, and it required thepurchaser to buy a minimum quantit y of one or more ofcertain items. Although proposed discount one also in-cluded a bundled discount, in the case of proposed dis-count two, the identit y of the product is variable, and thus,the payment methodology is unknown. In addition, theOIG was concerned that it did not know whether the dis-counts would be “tiered” so that greater levels of productpurchasers would lead to greater discounts. The OIG con-cluded that it could not determine whether dialysis goodswould be supplied at a reduced charge in order to inducethe purchaser of a product or whether the federal healthcareprogram would share appropriately in the discount.

In OIG Advisory Opinion No. 01-08, a company proposedto market and sell to state-licensed nursing facilities a compre-hensive program to manage pressure ulcers. The programproposed to couple the purchases of the company’s therapeu-tic mattresses with the purchase of skin and wound care prod-ucts and a program warranty.

The program was a three-year contractual arrangementconsisting of three conjoined components: (1) the dis-counted sale of the company’s therapeutic mattresses andother support surfaces together with limited replacementwarranties; (2) a prospectively-fixed, per resident/per diempayment for skin and wound care products; and (3) a lim-ited warrant y for certain monetary liabilities resulting fromthe program’s failure to meet its stated objective: manag-ing pressure ulcers.

All of a facilit y’s existing mattresses would be replaced withthe company’s therapeutic mattresses. The facilit y would paya negotiated, fixed, discounted price per bed and receive (1) anon-powered therapeutic mattress for each bed, (2) a specifiednumber of wheelchair cushions and therapy pads based upon

the number of residents in the facilit y, (3) a sufficient quantityof advanced powered therapeutic mattresses to address resi-dents’ wound care needs, and (4) on-line access to a wounddocumentation system and a certified wound care specialist.

The second component of the program required a partici-pating facilit y to pay a fixed, daily fee per resident in exchangefor an extensive skin and wound care program which includesall non-prescription skin and wound care products requiredto meet the needs of the facilit y’s residents.

The final component of the program was the programwarranty. Under the program warranty, the company agreedto reimburse a participating facilit y for the first set amount ofliabilit y insurance deductible actually paid per resident dur-ing the contract term and resulting from judgments for skinor wound deficiencies.

The OIG noted that the items and services provided un-der the program were potentially reimbursable by Medicareor Medicaid, but they are not separately reimbursable underMedicare Part A, but included in a per diem payment underthe SNF prospective payment system.

The OIG also noted that the program’s pricing arrange-ment cannot fit into the discount safe harbor since it bundlesseveral distinct items and services. The OIG analyzed theprogram’s pricing arrangement in its entiret y to determinewhether, based on a totalit y of facts and circumstances pre-sented, it poses a risk of fraud and abuse.

The OIG concluded that the following factors which, takentogether, lead it to consider that the program’s pricing ar-rangement for therapeutic mattresses, other support surfaces,and skin and wound care products poses minimal risk offraud or abuse:(1) The program covers all beds and all residents of a par-

ticipating facilit y and pricing is uniform, regardless of aresident’s payor;

(2) Participating facilities are reimbursed pursuant to a glo-bal, all-inclusive rate, either by Medicare Part A or Med-icaid, for the vast majorit y of items and services includedin the program. There is little apparent risk of abusefrom the bundling of items and services, all of which arereimbursed primarily by a single, global, all-inclusive rate,since the financial incentive for the facilit y receiving afixed payment is to reduce total costs;

(3) Of all of the items and services provided in connectionwith the program’s bundled pricing arrangement, onlysurgical wound supplies are potentially separately reim-bursable under Medicare Part B, and the opportunit y tobill for such items are rare and are a very small percent-age of the program’s price; and

(4) There is no risk of potential “swapping” of low programprices for the company’s opportunit y to provide otherunrelated items or services to participating facilities since

continued on page 6

CCH Healthcare Compliance Letter • February 18, 20036

the program is the only other finan-cial arrangement between the com-pany and the participating facilities.

The OIG also evaluated the warrantyproposed as part of the program, andnoted that the warranty safe harbor onlyprotects warranties or “items,” not a war-ranty on a combination of items and ser-vices. It noted, however, that theprogram’s items, especially its mattressesand other support services, were thelinchpin of the program and programwarranty, and that the vast majorit y ofthe costs of the program were for theitems and the anticipated benefit is prin-cipally attributed to the mattresses andother support services.

In OIG Advisor y Opinion 99-3,company A, a wholly owned subsid-iar y of company B, a dist ributor oftherapeutic mat t resses used for thetreatment and prevention of pressureulcers, proposed an arrangement in-volving t wo t ypes of mat t resses orsupport services: a powered supportservice (a therapeutic mattress system)and a non-powered support service (apressure relieving mattress).

Company A proposed offering Medi-care-certified skilled nursing facilities(SNFs) special pricing for the therapeu-tic mattresses for patients undergoingtreatment for pressure ulcers. CompanyA rents the SNF a powered mattress for30 days at a fixed price. The price in-cludes provision of the non-poweredmattress at no additional charge, to beused when the patient’s condition im-proves such that he or she no longer re-quires the powered mattress. If the pa-tient continues to require a poweredmattress after the initial 30 days, com-pany A will provide the powered mat-tress for an additional 30 days at half ofthe original 30-day rental. The cost tothe SNF for all of this would be less thanwhat it would have to pay company Aunder standard pricing.

Company A wanted to market the pro-posed arrangement directly to its majorcustomers, and it also wanted to con-tract with durable medical equipment(DME) suppliers to serve as sales agents

to market the proposed arrangementsto some SNFs. The DME sales agentswould receive twent y percent of collec-tions as their compensation.

Company A advised that the marketfor the proposed arrangement would beprimarily SNFs that are being reim-bursed for Medicare Part A services us-ing the new prospective payment sys-tem. One purpose of the proposed ar-rangement was to encourage SNFs touse the non-powered mattress as a rou-tine step-down treatment and to dem-onstrate that such use can help preventrecurrences of ulcers, thereby savingcosts and minimizing the SNF’s risksunder the new PPS system.

The OIG noted that the statutory dis-count except ion did not prot e c tbundled discounts, and neither doesthe discount safe harbor. The OIGnoted that the proposed arrangementinvolved a bundled therapeutic mat-tress package consisting of an initial 30-day powered mattress rental, whichincludes a non-powered mattress, and,if needed, an additional 30-day rentalperiod at half price. The OIG declaredthat where no items are bundled, itwould examine the circumstances todetermine the desirabilit y of prosecut-ing such arrangements. The factorsthat the OIG will look at may include:(1) the amount of the benefit that isreported and passed along to the pro-grams, (2) whether the items are sepa-rately reimbursable, and (3) the intentbehind the arrangement.6

The OIG agreed not to subject theproposed arrangement to sanctions un-der the anti-kickback statute, notingthat it posed a minimal risk of kick-back violations. It also noted that themethodology used by company A to

apportion the discount between thepowered or non-powered mattress isreasonable, and assuming proper re-porting by SNF purchasers, will assurethat the price reported to any federalhealthcare program for each productwill fairly ref lect the value of the dis-count. Moreover, the mattresses thatare the subject of the proposed arrange-ment will be primarily in SNFs thatwill be reimbursed a fixed, prospec-tively determined amount for Part Abeneficiaries. The SNFs have an in-centive to be prudent purchasers.

From the three OIG Advisory Opin-ions that address the discount safe har-bor, and from the federal register’s safeharbor discussion, one can glean cer-tain major policy considerations inwhich the government seems to be in-terested. The government appears towant to strike a balance between thebenefits of market competition in low-ering prices and safeguarding againstfraudulent and abusive practices thattake advantage of the federal program.

The government also wants to makesure it gets its fair share of any discount.It closely scrutinizes how the discountsare apportioned among payors and prod-ucts. It wants to make sure accurate fullpricing and cost information is available.

The government also is concernedabout swapping, which is trading the dis-count for other federal business, and lock-ing in buyers and purchases. It examineswhether a discounting practice will havethe effect of leading to higher programcosts and utilization.Paul R. DeMuro is a partner in the San Francisco

and Los Angeles offices of the international law firm

of Latham & Watkins, where he practices corpo-

rate and healthcare law. He earned his M.B.A in

Finance from the University of California at Berke-

ley, his J.D. from Washington University (St. Louis),

and his B.A., summa cum laude, in Economics, from

the University of Maryland at College Park. He is

the author of over 50 publications. He can be

reached at 415.395.8180, 213.891.7330, or at

paul.demuro@lw.com.

1 See 42 CF.R. § 1001.952(h)(4).

2 Id.

3 Id.

4 Id.

5 106 F. Supp. 2d 103 (D. Mass. 2000).

6 See 56 Fed Reg. 35978.

On the Front LinesContinued from page 5

“The governmentappears to want tostrike a balance betweenthe benefits of marketcompetition in loweringprices and safeguardingagainst fraudulent andabusive practices....”

7CCH Healthcare Compliance Letter • February 18, 2003

State false claims caseillustrates multi-jurisdictional problemby Raio G. Krishnayya, J.D.

Last October, an Illinois state case, Peopleex rel. Levenstein v. Salafsky, focused on theissue of whether a university medical cen-ter could be considered a state entity forpurposes of the Illinois WhistleblowerReward and Protection Act (WRPA). Inaddition, however, Levenstein raises theissue about the conf lict between a statefalse claim suit and a federal case involv-ing a different claim, but both cases aris-ing from the same operative facts. The caseis important as it raises an otherwise un-tested area of False Claims Act (FCA) ju-risprudence about which law applies whenan employee believes that he or she hasbeen retaliated against for investigatingfalse claims that could arguably be raisedin both the federal and state forums.

MSP activities suspicious. In 1990,the whistleblower in the Illinois state case,Joseph Levenstein, M.D., joined theUniversit y of Illinois-Chicago College ofMedicine as a facult y member. One yearprior, Bernard Salafsky, M.D., becamethe Universit y’s regional dean, which puthim in charge of the Universit y’s finan-cial operations for its College of Medi-cine. Specifically, this authorit y placedSalafsky in control over the Universit y’sMedical Service Plan (MSP).

The MSP is a fund created by state lawfor the exclusive purpose of managing therevenue generated from the Universit y’sclinical services. Salafsky was chargedwith the responsibilit y for overseeing bill-ing, collection and fund disbursementrelated to the MSP.

During his term overseeing the MSP,several of Salafsky’s colleagues, includingLevenstein, took issue with the waySalafsky managed the MSP. Subsequently,Levenstein, along with some colleagues,formed a committee for the purpose ofoverseeing Salafsky’s management of theMSP. The intervention by the committeeoccurred because of an April 1995 reportby Salafsky that indicated a $400,000 defi-cit in the MSP account. However, despite

False Claims

the deficit, Salafsky declared that the MSPwould fund the building of a clinic in Rock-ford, Illinois.

No-bid contract. What the commit-tee later learned was that the contract forthe clinic announced by Salafsky was theproduct of “no-bid” contractual negotia-tions. According to the complaint, in mid-1995 Salafsky entered into an agreementwith a corporation that did not technicallyexist until the end of 1995. Worse yet,Salafsky bypassed the statutorily requiredbidding process and simply entered intoan agreement with the contractor for thesale of the clinic to the University. Thecomplaint alleged that Salafsky’s offensewas his failure to notify the board of trust-ees about his interests in the contract.

Levenstein’s assertions against Salafskycontinued by asserting that as a result ofSalafsky’s improper conduct, the Univer-sit y grossly overpaid for the clinic. In es-sence, the complaint alleges that the Uni-versit y, pursuant to Salafsky’s authorit y,paid for the land upon which the clinicwas to be built, prior to signing the con-tract. Later, the land was conveyed to anintermediary who reconveyed the landback to the contractor. The contractorthen sold the land and completed con-struction on the clinic for which the Uni-versit y paid a second time.

Further offenses. Levenstein’s allega-tions against Salafsky continued to includeother abuses of the MSP. For example,Levenstein cited the Universit y by-laws,which allow for a “discretionary” MSP ac-count separate from the University’s gen-eral MSP. The discretionary MSP is fundedthrough a ten percent tax on the generalMSP. According to Levenstein’s accounting,the discretionary MSP should have main-tained a balance of approximately $200,000.The actual amount, prior to Salafsky’s trans-mittal of the funds to the contractor, wasin excess of $600,000.

Furthermore, Levenstein alleged thatSalafsky maintained unassigned MSPsthat were not reported within the list ofUniversit y accounts. The Universit yrecords indicated that this mysteriousaccount held approximately $29,400,000in credits and $2,900,000 in ambiguouscharges. While it was argued that its MSP

was merely a “bookkeeping device,” thebalance sheets showed substantial activ-it y for approximately one and one halfyears of its existing five, and that withinthat time period, the account grew byapproximately $23,000,000.

WRPA claim. Each of these asser-tions were fodder for Levenstein’s claimthat Salafsky had violated the Illinoisequivalent of the federal FCA or WRPA.WRPA states:

Any person who knowingly pre-sents, or causes to be presented,to an officer or employee of theState or a member of the Guard afalse or fraudulent claim for pay-ment or approval is liable to theState for a civil penalt y of not lessthan $5,000 and not more than$10,000, plus 3 times the amountof damages which the State sustainsbecause of the act of that person.

Under WRPA, Levenstein argued thatSalafsky’s improper manipulations ofMSP funds falsely caused the board oftrustees to overpay for the building ofthe clinic. Furthermore, Levenstein ar-gued that Salafsky’s maintenance of anunassigned MSP amounted to fraud, andtherefore caused improper expendituresby the board of trustees.

Interestingly, Salafsky countered withtwo arguments. First, Salafsky suggestedthat the Universit y could not be consid-ered a “state” entit y for purposes ofWRPA. Thus, even if the board of trust-ees had falsely overpaid for the clinic, thisaction was outside the scope of WRPA.His counter-argument was based on a pro-vision under the Illinois MSP law thatallows a Universit y entit y to “opt in” as astate agency. Thus, Salafsky presenteddocumentation demonstrating that theUniversit y had not exercised its right to“opt in” as a state entit y pursuant to theMSP statute’s requirements.

This argument, however, did not saveSalafsky from Levenstein’s pursuit. Al-though the Illinois Appellate Court forthe Second Circuit conceded that theUniversit y was not a state entit y in thetraditional sense or that the Universit yhad not “opted in” under the MSP stat-ute, the “opt in” provision alone was not

CCH Healthcare Compliance Letter • February 18, 20038

determinative as to whether the Univer-sit y could recoup under WRPA.

The appellate court noted that the lan-guage of WRPA had been intentionallymodeled closely after the federal FalseClaims Act. The importance of this simi-larity, according to the court, is that bothWRPA and the FCA were designed to com-bat fraud that occurred where a nexus be-tween government or state funding and falseor fraudulent transactions existed. Thus,the appellate court articulated that where asubstantial nexus between state fundingand the claim at issue is demonstrated, aclaim under WRPA could still survive.

In the case of Salafsky’s alleged mis-representations, Levenstein would needto show that a significant portion of thefunds disbursed to Salafsky’s contractorwere derived from state funding. Clearlythe Universit y, which is engaged in clini-cal services, would be entitled to Medic-aid reimbursements from the State of Il-linois as well as other state grant monies.Thus, if in further litigation Levensteinproved the existence of such a nexus, hisWRPA claim would survive under theruling of the appellate court.

Federal case. Salafsky’s second counter-argument against Levenstein’s WRPA chal-lenge focused on a pending federal case withSalafsky and Levenstein as parties. The ba-sis for the federal case involved allegationsby Salafsky, along with several other col-leagues, alleging that Levenstein had sexu-ally harassed certain individuals at the Uni-versity. Levenstein filed the federal suit inthe U.S. District Court for the NorthernDistrict of Illinois (Levenstein, M.D., v.Salafsky, N.D. Ill., No. 97 c 3430, Feb. 4,2002) asserting that Salafsky and his col-leagues had abrogated his procedural dueprocess and equal protection rights, whichamounted to constructive discharge whileinvestigating the sexual harassment claims.

While the record indicated that sev-eral of the complainants declined filingformal actions against Levenstein, somepursued action through the Universit y’sadministrative process. The Universit yadministrative process was initiated by aletter sent to Levenstein advising him ofthe sexual harassment claims by his col-leagues and students.

The letter indicated that University policyallowed Levenstein to respond to the claimsin writing, but that he was required to doso within ten days of receipt of the letter.Levenstein responded within the allottedtime, denying the accusations. Following theexchange of written correspondence, theUniversity conducted a formal investiga-tion, which included an interview of thecomplainants. The outcome of the investi-gation resulted in a recommendation thatLevenstein be restricted from positions ofauthority over female colleagues and stu-dents. Levenstein appealed this finding butwas denied, opening the door for Salafskyto initiate Levenstein’s termination fromthe University.

In late December 1995, Salafsky wrotea letter to the Dean of the University sug-gesting that Levenstein be “removed fromthe facult y of the Universit y.” Salafskyfurther noted that the recommendationsof the investigating panel that Levensteinbe restricted from positions of authorityover female colleagues or students wouldbe untenable. Thus, Salafsky concluded,“it is quite impossible to place Dr.Levenstein in a teaching, research, or clini-cal position where he would not have somesort of supervisory responsibilit y or be ina position of authorit y which he couldagain abuse.” Concurring with Salafsky,the Dean posed Salafsky’s recommenda-tions to the University Chancellor, whoturned the matter over to the UniversityPresident. The process continued untilover a year later Levenstein resigned fromhis post, and according to a letter byLevenstein to the president, “certain thatthe system had been rigged against him….”

WRPA revisited. The bitter seriesof facts surrounding Levenstein’s federalcase became the basis for Salafsky’s argu-ment that the WRPA case (the Illinoiscase) was an improper forum for redresssince the operative facts of the federalcase were intertwined with Levenstein’sWRPA case. The appellate court, how-ever, dismissed this argument on the basisthat although the operative facts are in-tertwined, the legal elements of each casewere substantially different and therefore,not legally related. In other words,Levenstein was required in federal court

to demonstrate that his civil rights hadbeen violated in conjunction with allega-tions of sexual harassment, whereas inthe Illinois case, Levenstein was requiredto prove that a substantial state nexusexisted for the claims paid by the Univer-sit y and that Salafsky knowingly causedthe Universit y to falsely pay those claims.

In retrospect, Salafsky’s argument thatthe Illinois forum was improper for theWRPA claim may not have been entirelyoff base. WRPA does contain an anti-retal-iatory provision that would prohibit anemployee from being “discharged, demoted,suspended, threatened, harassed, or in anyother manner discriminated against….”Thus, arguably Levenstein’s civil rightsclaim could have been attached to hisWRPA suit asserting that Salafsky and theUniversit y violated the anti-retaliationclause of WRPA. It would seem that boththe Illinois appellate court and the federaldistrict court were fully cognizant of thefact that Levenstein’s accusations of finan-cial fraud were, to a greater or lesser ex-tent, intertwined with his constructive dis-charge claim. Thus, Levenstein could havebrought all his claims within the WRPArealm without resorting to federal litigation.

In contrast, however, Levenstein couldnot have necessarily brought his WRPAclaim into federal court, or could he? Onthe one hand, if the appellate court’s nexustest is derived from FCA precedence, thenLevenstein could have asserted that someof the funds improperly paid by the Uni-versit y were derived substantially fromfederal funding vis-à-vis Medicare reim-bursements for clinical services. Even ifLevenstein felt that a FCA claim was tooattenuated, he could have sought the fed-eral court to exert supplemental jurisdic-tion over his WRPA claim.

Why Levenstein did not attach an anti-retaliation claim to his WRPA suit or whyhe did not file a federal FCA suit to attachto his civil rights claims is not entirely clear.However, this case is probably one of thefew cases that factually approaches the ques-tion of what law applies if an employee isretaliated against by his or her employer forinvestigating a false claim, federal or state? ■People ex rel. Levenstein v. Salafsky, Ill. Ap. Ct. 2nd Dir.,

No. 2-01-0378, Oct. 31, 2002, ¶ 370,017

False Claims (cont.)