The United States Court of Appeals for the Eleventh Circuit Issues Helpful Ruling For Providers Concerning Fair Market Value in Space Rental Agreements

The United States Court of Appeals for the Eleventh Circuit Issues Helpful Ruling For Providers Concerning Fair Market Value in Space Rental Agreements

By Jim Hoover

On July 31, 2019, the United States Court of Appeals for the Eleventh Circuit issued a ruling that provides clarity and helps healthcare providers with space lease agreements.  The ruling in Bingham v. HCA, Inc., Case No. 1:13-cv-23671 (11th Cir. 2019) provides that a relator or whistleblower in a false claims/qui tam case has an affirmative burden of proving that the rental rate charged in the lease agreement was below fair market value (FMV), which is an essential element to establishing the existence of remuneration. Equally as important from a litigation procedural view point, the Eleventh Circuit also held that a relator cannot rely upon information obtained in discovery to satisfy the Federal Rule of Civil Procedure Rule 9(b)’s pleading requirements.

In Bingham v. HCA, Inc, the Relator alleged that HCA, Inc. violated the False Claims Act (FCA) due to improper arrangements with physicians who rented space at HCA facilities. Specifically, the Relator’s claims related to leases for medical office building space between HCA-hired developers and physicians who had the ability to refer patients to HCA hospitals. The Relator alleged that HCA provided subsidies to the developers, which the developers then used to provide physician-tenants with “benefits” such as free marketing, office improvements, low initial lease rates, restricted use waivers, and cash flow participation agreements for tenants who signed long-term leases. In return for these “benefits,” the Relator alleged the physician-tenants referred patients to HCA hospitals. Thus, according to the Relator, these arrangements violated the Anti-Kickback Statute (AKS) and led to Stark Law and FCA violations.

Relator argued that the arrangements violated the AKS and Stark Law despite HCA having received fair market value opinions that the rental rates offered were consistent with FMV. The Eleventh Circuit disagreed with Relator and affirmed the district court’s granting of summary judgment because Relator had not established that the alleged “benefits” to the physicians were in excess of fair market value. Significantly, the court ruled that the issue of fair market value is not limited to a healthcare provider’s safe harbor defense, but is something the Relator must affirmatively prove in order to show that a defendant offered or paid remuneration to physician-tenants. The court reached this conclusion by analyzing the definition of “remuneration,” an essential element of an AKS violation. Based on the dictionaries the court consulted, remuneration requires that a benefit be conferred; thus, “[i]n a business transaction like those at issue in this case, the value of a benefit can only be quantified by reference to its fair market value.” The civil monetary penalties statute, 42 U.S.C. § 1320a-7a(i)(6), corroborated this conclusion, according to the court, because the statute defines remuneration to include the “transfer of items or services for free or for other than fair market value.” Although the physicians did receive financial benefits as part of the lease agreements, Relator had not presented evidence that these benefits were outside of the range of fair market value benefits for physicians signing the type of long-term leases used in the arrangements.

The important AKS takeaway from this case is that there is no “remuneration” for AKS purposes unless a benefit is conferred that is other than the FMV. Stated another way, as long as compensation, which includes the value of benefits, to/from a referral source is consistent with fair market value, the AKS is not implicated.

Relating to the Stark Law allegations, the Court found that there was no genuine factual dispute over whether a prohibited indirect compensation arrangement under the Stark Statute existed because it plainly did not. First, any relationship between HCA and the physician-tenants could only be indirect because remuneration flowed through the developers. Second, the Stark Law defines an indirect compensation arrangement to require “that compensation received by a referring physician ‘varies with, or takes into account, the volume or value of referrals or other business generated by the referring physician.’” Finally, because HCA showed that there was no correlation between the physician tenants’ space leases and their referrals to HCA and Relator failed to show that the rental rates or other benefits allegedly given by HCA physician-tenants were at all correlated with the volume or value of referrals from the physician-tenant, Relator failed to create a genuine factual dispute as to whether an indirect financial relationship existed and implicated the Stark Law’s prohibitions.

Also an important ruling on a procedural point when defending a false claims/qui tam case, the federal district court initially allowed the Relator to survive a motion to dismiss and proceed with discovery. The Relator subsequently amended the allegations in the complaint after discovery had begun. HCA filed a subsequent motion to dismiss, which the federal court granted, refusing to allow the Relator to use information gained through discovery as the basis to amend the complaint.  The 11th Circuit affirmed the district court’s ruling and explained that although courts should freely grant leave to amend pleadings, the amendments that include information obtained during discovery may not be appropriate in cases in which the heightened specificity pleading standard of Rule 9(b) applies if the amendment would allow the Relator to circumvent the purpose of Rule 9(b). The Circuit Court, therefore, affirmed the lower court’s decision to grant HCA’s motion to strike information in the amended complaint that was obtained through discovery. The Court then affirmed the dismissals of the related claims because, absent information learned in discovery, the Relator did not satisfy the pleading requirements of Rule 9(b) because “Relator does not provide specific details or evidence to support his claims that long-term ground leases were grossly undervalued or included overly generous terms.”

These holdings should be welcomed by defendants of alleged AKS, Stark Law, and False Claims Act violations. This case is especially welcomed since the ruling was issued by The United States Court of Appeals for the Eleventh Circuit. Accordingly, the federal district courts in the Eleventh Circuit, such as all of the federal district courts in Alabama, must follow the Eleventh Circuit’s ruling.

Jim Hoover is a Partner at Burr & Forman LLP practicing in the Health Care Industry Group.

Posted in: Legal Watch

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