Paying For Patients And The “One Purpose” Test

By Alex Bateman, Esq.
Health Law and Criminal Law

Hospital Administrators, and the physicians with whom they enter into consulting or other agreements which may result in the referral of patients, must pay careful attention to a decision involving kickback charges handed down by a Federal Appeals Court in Kansas City in June.  The difference between understanding and abiding by this decision when structuring deals and ignoring it may dictate whether you have entered into a legitimate business arrangement or a criminal conspiracy.  The decision by the U.S. 10th Circuit Court of Appeals in the case of United States v. La Hue is one of several in the life of a controversial prosecution and conviction of two Kansas City, Missouri physicians and a Hospital Administrator found guilty of receiving and paying kickbacks in exchange for patient referrals.
The defendants were convicted in 1999 for violations of the Medicare Anti-kickback Act and Conspiracy.  The Anti-kickback law criminalizes any remuneration knowingly and willfully offered, paid, solicited or received in exchange for Medicare or Medicaid patient referrals.  Although in this case the “remuneration” involved cash in the form of payments from the hospital to the physicians for consulting services, the statute is not limited to monetary kickbacks.  One can be involved in a kickback by paying for, or receiving, gifts, vehicles, vacations, discounts or anything of value to induce referrals.  The Act is violated as well by the mere offering to make such a kickback.

Two osteopathic physicians, Robert and Ronald La Hue, were directors of nursing homes in the Kansas City area, as well as principals in a medical group, which specialized in providing care to patients in such homes.  Dan Anderson was the former President and CEO of Baptist Medical Center (“Baptist”), also in Kansas City.  In 1985, the La Hues entered into a contract with Baptist, making them “Co-directors of Gerontology Services.”  This arrangement eventually resulted in consulting contracts between Baptist and the La Hues under which they were supposed to provide services to the hospital’s geriatrics program, such as clinical instruction and training of staff in all areas of geriatric care.  Between 1985 and 1993, the La Hues were paid annually approximately $75,000 each for these services.  Their private practice was later also provided with a de facto manager whose salary was paid by Baptist as if he were a full time hospital employee.

The government alleged that these consulting fees were actually disguised kickbacks from the hospital to the La Hues in return for the referral of their Medicare patients.  The La Hues received over $1.8 million from Baptist under the consulting contracts, including the value of the office manager supplied to their practice.  The hospital was paid $39.5 million from Medicare for services rendered to the La Hues patients.  Testimony at the trial described the consulting services actually provided by the La Hues as “minimal to none.”  They were, however, Baptist’s single largest referral source of hospital and clinic patients.

At trial, the La Hues, Anderson and another hospital administrator were all convicted.  CEO Anderson was sentenced to 50 months in prison and a $75,000 fine.  Ronald La Hue was sentenced to three years in prison and a $25,000 fine.  Robert La Hue was sentenced to 70 months in prison, a $75,000 fine and $142,040 in restitution.  Baptist Hospital entered a No Contest plea to similar charges and paid a $17.5 million fine.  It is significant to note that neither the medical necessity of treatments nor the quality of care were called into question by the government.  It is, in fact, technically irrelevant to a kickback prosecution.

The most significant issue in this appeal by the La Hues and Anderson involved the so called “One Purpose” rule which was applied by the trial Judge when instructing the jury on how to decide if the La Hues’ consulting agreement violated the Anti-Kickback Act (the “Act”).  The “One Purpose” rule means that one who offers or pays remuneration to another person provides an unlawful kickback so long as one purpose of the offer or payment is designed to induce Medicare or Medicaid patient referrals.  In other words, there could be a number of other legitimate purposes for the payment, yet if even one of them was in return for referrals, it is unlawful.  Numerous hospital and medical organizations in addition to the defendants urged the Appeals Court to adopt the less restrictive “Primary Purpose” rule instead.  Under this alternative rule, a person or hospital would only be in violation of the Act if their motivation to induce or in return for referrals was the primary purpose of payment of remuneration.  Hospital groups, as well as the defendants, argued that to require hospital s to structure transactions under the “One Purpose” rule would prevent many highly beneficial healthcare arrangements and, in effect, brand all transactions as suspect pay-for-patient schemes.

The Appeals Court decided the same way that three other Federal Courts of Appeal had before them and rejected the primary purpose rule adopting instead the broader sweeping “One Purpose” test.  Accordingly, the convictions were affirmed.  It is likely that this case will be appealed to the United States Supreme Court.  To date, that Court has not ruled on this issue.  In the meantime, administrators, physicians, as well as all other healthcare professionals, must be mindful of the pitfalls of trying to legitimize a pay-for-patient scheme by renaming it something else.

Some observations the Appeals Court made concerning proof at the trial of this case provides insight as to how to recognize when you may be entering into a kickback arrangement.  The hospital’s CFO testified, for instance, that the negotiations with the La Hues were “backwards” in that they established the fee first, then agreed to what services they would provide in return.  This scenario whereby the parties back into the fee amount agreed to is unfortunately all too common in many healthcare transactions and must be avoided.  If an investigation is commenced subsequently, you can be sure the details of the contract negotiations will be scrutinized carefully.  At trial, the La Hues claimed that they did, in fact, provide consultation services pursuant to the contracts.  Nevertheless, they had difficulty identifying all of those services or producing witnesses to confirm them.  Contemporaneous documentation of services provided by practitioners under such contracts is critical proof that may make the difference if and when the government asks questions about such arrangements.  Sometimes these inquiries will be made years after the services are provided, when memories are not as clear as you would hope, making documentation all the more critical.  Lastly, hospital administrators must remain vigilant in identifying such kickback schemes and act swiftly to correct them if they are uncovered.  The court, in the La Hue case, found it significant to their decision that CEO Anderson did not stop the payments to the doctors even after he learned the services were neither entirely bona fide, actually performed and more than fair market value was being paid.  Likewise, when the relationship with the La Hues was coming to an end, he made efforts to replace the patients they suspected the hospital would be losing, but made no efforts to replace the consulting services, thereby lending more support to the argument that the relationship was merely a pay-for-patients scheme.
It certainly goes too far to suggest, as some have, that under the “One Purpose” rule, leaving a box of doughnuts in the doctor’s lounge could lead to a criminal prosecution.  One would hope that the government will utilize its time and resources appropriately and focus on intentionally fraudulent conduct.  Healthcare professionals cannot, however, leave that to chance.  Anyone on either side of transactions between healthcare facilities and providers in a position to refer patients must remain vigilant to avoid violating the “One Purpose” rule when structuring such deals.

Alexander G. Bateman, Jr. is a partner in the Health Law Department at Ruskin Moscou Faltischek, P.C.  He can be reached at 516-663-6589 or