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A Liberal AMC Stark Exception

A federal trial judge in Kentucky recently dismissed a federal False Claims Act (FCA) action arising out of alleged violations of the Stark law. The case involved referrals to a free-standing hospital by certain medical school faculty physicians, and contributions by that hospital to the medical school’s foundation. The court concluded that the payments satisfied the academic medical center exception to the Stark law, and, therefore, dismissed the claim.

The case, U.S. ex rel Villafane v. Solinger, involved payments from the University of Louisville Medical School’s foundation to faculty physicians, and the faculty physicians’ referral of patients to free-standing Kosair Children’s Hospital — which referrals were allegedly rewarded by contributions from Kosair to the foundation.

Solinger is significant because the court refused to apply Stark regulations hyper-technically. Instead, the court analyzed the arrangement consistent with the goal of preventing health care fraud, rather than rigid regulatory compliance. However, Solinger’s significance is also tempered because a federal trial court opinion from Kentucky has limited precedential value in Maryland or elsewhere.

A. The AMC Exception

The Stark law prohibits a physician from referring designated health services (DHS), such as in-patient and outpatient hospital services, to an entity in which that physician has a financial relationship when the referred DHS is paid for by Medicare or Medicaid.

Financial relationships that satisfy the academic medical center exception to the Stark law, however, do not violate Stark. According to the exception, among other requirements, physicians must perform either “substantial” academic services and/or “substantial” clinical teaching services.

To qualify for the academic medical center exception, the compensation paid to the physicians must also pass both a referral test and a ceiling test. For the referral test, the compensation paid by each component of the academic medical center must be set in advance and cannot take into account the volume or value of referrals or other business generated within the academic medical center by the referring physician.

For the ceiling test, the aggregate compensation paid by all of the academic medical center components cannot exceed fair market value for the services provided by the referring physician.

Particularly relevant to Solinger, the financial relationships between the academic medical center and its affiliated entities also must satisfy certain formalities. One or more writings must document these relationships, and the writings must be adopted by each component of the center.

B. The Decision

Although the Solinger court reviewed different aspects of the parties’ relationships, the trial court’s treatment of the following issues demonstrates the court’s pragmatic approach to the academic medical center Stark exception.

1. Timekeeping. The faculty members did not keep accurate timesheets, yet the court held that faculty members merely had to demonstrate, in a reasonable and consistent manner, that “substantial” services were rendered to the academic medical center. The Medical School faculty documented only general time estimates, but demonstrated through affidavits and depositions that the faculty members were responsible for daily patient rounds with residents, trained over 100 medical residents and students, and completed other academic and clinical services. Even though time sheets demonstrating at least eight hours per week of services would have been a better way to show “substantial” services, the court held that the parties had used a reasonable and consistent method for calculating the physicians’ “substantial” services nonetheless.

2. The Ceiling and Referral Tests. The court observed that the faculty members were highly qualified neonatologists and pediatric cardiologists who had been compensated on a level comparable to that paid ordinarily for their services. The compensation did not exceed the fair market value ceiling because the amounts paid were comparable to other similarly situated academic faculty members, even though some faculty members were paid above the 75th percentile of compensation paid elsewhere, according to a pediatric faculty compensation survey.

The court also held that the compensation paid to the faculty members was set in advance and did not vary due to the volume or value of referrals or other business generated within the academic medical center by the referring physician. Although some faculty members with increased faculty and administrative responsibilities and a greater number of inpatient referrals to Kosair were compensated more highly, other faculty members’ salaries decreased even if their referrals to Kosair increased from year to year.

3. AMC Affiliation Formalities. The court held that there were sufficient writings that documented the relationships between the Medical School, Kosair and the foundation, despite the lack of a detailed contract to

document that relationship. Kosair and the Medical School had signed an agreement in 1962 to establish a continuing relationship to use Kosair to train medical residents. The agreement recited that Kosair and the Medical School would mutually agree upon the number of medical residents and interns each year until either party terminated the agreement.

The Medical School and Kosair memorialized their continued relationship in memoranda that stated the amount of financial support provided by Kosair to the Medical School annually for each year except one. Those memoranda were signed or initialed by Kosair and Medical School officials.

C. Conclusion

In a basic sense, the Solinger opinion is a victory for academic medical centers because the federal court interpreted the Stark exception liberally. Although courts in other federal circuits are not bound to follow this decision, the opinion would at least be persuasive should Stark law allegations arise at other academic medical centers.

On another level, this opinion represents a strange dichotomy between Stark regulations and judicial review of those regulations. There is an axiom that “technical violations of the Stark law are violations of the Stark law.” If a reviewing court refuses to analyze conduct with a hyper-technical lens, then perhaps hyper-technical interpretations by some regulatory enforcers may be tempered with a more pragmatic view, at least in regard to an academic medical centers' physician time keeping, compensation and affiliation formalities.


December 21, 2008




Rosen, Barry F.


Health Care