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The Criminalization of American Medicine:1965-1993

The Criminalization of American Medicine:1965-1993 Madeleine P. Cosman, Ph. D., J.D.

The inauguration of President Clinton introduced a brave new world of American medicine. It is both terrifying and exhilarating. American medicine which never has done so much so well for so many is consistently attacked for its imperfections, inadequacies, and inequities. Probably the most criticized and the most praised programs are America’s most ambitious attempts to provide the best medicine for the most: Medicare and Medicaid.

Amazingly, the history of Medicare and Medicaid goes back a mere 28 years. During that 28 year span between 1965 and 1993, Medicare law and litigation has developed from civil law to criminal law.

Here on the edge of medical opportunity and disaster, we who wish to create medicine’s future, not simply respond to change, are obligated to know the substance and the style of these medical laws. Since criminal law has markedly different procedures, standards of evidence, specificity of claims, burdens of proof, fines and forfeits, punishments including prison terms, and social stigma, it is imperative that every physician—and every attorney who works with doctors— know the subjects of Medicare fraud and abuse legislation, emphatically, referrals of patients to laboratories or consultants, and the penalties under these criminal statutes. A practitioner convicted of one offense is subject to the formidable “3 Fs”: guilty of a felony, fined $25,000 per incident and five years in prison. Moreover, there is a minimum mandatory exclusion from Medicare for 5 years.

Since ignorance of the law is no excuse, imperfect knowledge of Medicare fraud and abuse law can be deadly. Moreover, current medical law no doubt will be the prototype of future medical legislation. Therefore it is valuable to examine the significant legislation which includes:

1) The Stark Law or The Ethics in Patient Referrals Act (Stark),

(2) The Medicare and Medicaid Patient and Program Protection Act (MMPPPA), and

(3) The Medicare Fraud and Abuse Safe Harbor Regulations (Safe Harbors) associated with MMPPPA .

Then let us briefly examine nine fraud and abuse cases prosecuted in the past eight years. In several I have had close contact with the physicians, their practices, and their attorneys.

The Medicare Fraud and Abuse legislation and litigation demonstrate the stunning power of the Department of Health and Human Services’ Office of the Inspector General, its unreasonably ruthless enforcement methods, and its administrative papers, called Medicare Fraud Alerts, given force of law. The cases also epitomize the theory that bad cases make bad law. The legislation and litigation require our confronting the criminal law context for Medicare and the concomitant philosophy of criminal punishment. To intelligently know where we are going in medicine, we must know where we have come from and where we are now.

Criminal Law

While every lawyer knows the difference between criminal and civil litigation, the physicians who must obey the laws do not necessarily know the implications of their obedience or transgression, and the courts have made some judicial interpretations upon criminal statute that force the benevolent observer and the honest doctor to ask basic questions: What is a criminal? Why do we punish crimes?

While every self-respecting criminal must voluntarily perform a criminal act, mere nasty or evil thoughts not being enough to ground criminal liability, every law student knows that the actus reus or criminal act must be performed consciously and volitionally, not compelled nor instinctually nor convulsively, but freely willed. Furthermore, that criminal act is not enough for a crime. Under Common Law as well as the Model Penal Code, criminal liability requires conjunction between the criminal act (or the omission to act) and a criminal state of mind, the mens rea.

For the Common Law crime to be a crime, in addition to the criminal act the perpetrator has to have the Culpability Four: specific intent or malice or general intent, or, for those crimes so socially obnoxious, such as raping children and mislabeling poisons, strict liability with intent irrelevant. Wechsler, Schwartz, and the American Law Institute codifying the Model Criminal Code in 1962 cleverly restated the four mental criteria for criminal culpability: acts performed purposefully, knowledgeably, recklessly, or negligently.

Criminal culpability criteria are worth contemplating as we move through the Medicare criminal legislation and litigation because fundamental, salient expectations of criminal law ominously have slipped into and slid out of administrative decisions. More menacingly, physicians and surgeons, unfamiliar with defenses and protections customarily granted to common criminals, sometimes are denied even the fundamental assumption of American jurisprudence that a person is innocent until proven guilty beyond a reasonable doubt for each essential element of the alleged crime.

Legality and Proportionality

Two additional powerful concerns in criminal law are intriguing to contemplate while reviewing Medicare legislation and litigation: legality and proportionality. No lawyer need be reminded that the principle of legality requires that no citizen be prosecuted, convicted, or punished for an act that was not a crime when it occurred. Not only does the Due Process Clause prohibit a court from retroactively enlarging the scope of a criminal law, but law must be understandable and must give fair notice to the reasonably intelligent people who must obey it, otherwise courts must declare it void for vagueness.

Gilbert and Sullivan’s Mikado expresses beautifully the worthy, constitutionally protected idea of proportionality. “My object all sublime/ I shall achieve in time/To make the punishment fit the crime/ the punishment fit the crime.” The Eighth Amendment prohibits cruel and unusual punishment, or disproportionality. Why do we punish criminals? For general deterrence, specific deterrence, denunciation of crimes, incapacitation of criminals, and retribution.

Drafters of the Model Penal Code especially celebrated deterrence. But deterrence can work only when the acts prohibited can be recognized and avoided. Medicare fraud statutes now used by an arrogant and overzealous bureaucracy to prosecute even innocent practices make honest physicians insecure and unsafe. This law works more akin to terror then deterrence.


Laymen assuming the formidable concurrence of criminal act with criminal mind as province of the murderer, arsonist, embezzler, and burglar, are surprised to find it also the legal context for physicians and surgeons covered by Medicare legislation and litigation. Medicare fraud and abuse legislation did not start out as criminal. A brief overview suggests where Stark, MMPPPA, and the Safe Harbors fit.

In 1965 Medicare and Medicaid were created in order to provide for all citizens in their wise but vulnerable years, after age 65, the medical care and physical assurances that the wealthy could buy but all Americans needed. Therefore the Social Security Act was amended, and under §1872 any potential frauds and abuses of these new entitlements would be prevented, curbed, and caught.

By 1972 special fraud and abuse legislation (Social Security Amendments of 1972) was created for Medicare and Medicaid. In 1977, activities prohibited under Medicare and Medicaid dramatically changed their nature through fraud and abuse amendments which became draconian. Prohibited activities escalated from misdemeanors to felonies: minimum fines for violations rose from $10,000 to $25,000 per incident; and maximum imprisonment per violation increased from one to 5 years.

One court case powerfully expanded the fraud statutes in 1985. In United States vs. Greber, the Medicare fraud and abuse legislation which had prohibited kickbacks, bribes, and rebates for referrals, reaffirming general ethical prohibitions against fee splitting, now was judicially expanded to initiate the infamous one purpose rule. If one of the purposes for reimbursing a physician who refers patients is inducement for future referrals, no matter whether payment also was for medical services, the practitioner is guilty of fraud and abuse.

The Medicare and Medicaid Patient and Program Protection Act (MMPPPA) of 1987 is primarily criminal legislation. That same year the Omnibus Budget and Reconciliation Act (OBRA) increased the authority of the Office of the Inspector General (OIG) of the Department of Health and Human Services (HHS) for civil actions against physicians and surgeons. The language describing intent changed from a physician who “knows or has reason to know” that a particular billing or referral action might be considered fraud to “knows or should know.”

HHS, the non-elected, self-regulating agency decided that knowledge was not necessary if the practitioner should have had knowledge, thus the vicarious liability of the doctor boss for the nurses’ and secretaries’ errors. Moreover, 1987 was the florescence of exclusion sanctions: physicians convicted of fraud and abuse were temporarily or permanently ousted from Medicare and Medicaid programs. For a physician with substantial numbers of patients over age 65, exclusion means financial ruin.

The Stark Law of 1989 is titled “Ethics in Patient Referral Act.” Like Stark, 1990 OBRA made further changes in criteria for punishments. Civil liability penalties, initially for “knowing acts” were now imposed for careless “negligent acts.” The Medicare and Medicaid exclusion standard was expanded from behavior “knowing and willful” or “negligent” to cover all “gross, flagrant, or repeated” violations of law. An inadvertent wrong billing code submitted for 100 patients flagrantly and repeatedly violated the law.

In this banner year for enforcers, 1990, HHS also began notifying State License Boards as well as the National Practitioner Data Bank of any action against a physician or surgeon pertaining to competence or conduct. HHS’s OIG further increased its enforcement authority by civil remedies within the criminal legislation, and was now able to prosecute without a criminal indictment and without a high burden of proof.

In July 1991, the Medicare Fraud and Abuse Safe Harbor Regulations at last were made public, four years late. These 10 administrative pronouncements from HHS are metaphoric harbors and coves for physicians and surgeons adrift on the dangerous Medicare ocean.

Safe Harbors pertain to such topics as investments, space rentals, medical practice sales, and employment arrangements otherwise forbidden by the Fraud and Abuse laws. In 1993 the brave new world of American medicine has a formidable number of remarkable creatures in it, all are directly or indirectly associated with Medicare: HMOs, PPOs, IPAs, HCFA, HHS, OAI, OIG, DAB, GPO, DME, DRGs, PROs, ECPs, CAPs, NACAP, ICLs, RBRVS, CPT Codes, HCPCS, ICD9CM Codes, UB83, UB92, E: FL 77, NPDB, NAIC, FFDCPA, MCCA, and various permutations on MMPPPA.

Stark Law

The Stark Bill (named for its initiator, Fortney “Pete” Stark, Democratic Representative from California) or the “Ethics in Patient Referral Act” of 1989, is predicated upon unequal power. Stark establishes as a point of law that physicians have inordinate power to refer patients who do not have information, sophistication, time, or desire to intelligently choose among medical services, and consequently cannot make independent, cost-effective decisions.

The 101st Congress therefore amended Title 18 of the Social Security Act in order to free patients, physicians, and Medicare from abuse by physicians’ financial connections to laboratories, surgery centers, x-ray, scanning, and MRI centers. No physician or surgeon may refer a patient for a Medicare-reimbursed service to a laboratory, dispensary, imaging center, or provider, if the physician or his or her family has any ownership, investment, or compensation interest therein. The recommender cannot be rewarded by any Son of financial gain, kickback, or “lock-in” gift.

The Stark Law has stern civil sanctions for violators: denial of payment for any prohibited referral; refund to the government of payments already received for prohibited referrals; a penalty of $15,000 for each prohibited item or service. (One billing error performed 100 times results in a penalty payment of $1,500,000 plus twice the amount billed, or $3,000,000, totaling $4,500,000.) The violating practitioner also is excluded from Medicare if he or she knows or should know that the referral is prohibited. For circumvention schemes the penalties are $100,000 per incident plus permanent exclusion from the Medicare programs. Illegal strategies are punishable whether they are written or spoken, implicit or explicit, if a principal purpose is to obtain referrals.

Medicare and Medicaid Patient and Program Protection Act

More powerful than the Stark Lawis MMPPPA: the Medicare and Medicaid Patient & Program Protection Act of 1987, combining civil and criminal statutes. Fundamental prohibitions are against false claims for reimbursement, failures to report forbidden business transactions, excessive charges, and, with emphatic emphasis, remuneration for referrals. Anti-Kickback legislation has criminal sanctions for whoever knowingly and willfully solicits or receives (offers or pays) any remuneration, such as a kickback, bribe, or rebate, directly or indirectly, overtly or covertly, in cash or in kind, to induce referrals. Anyone guilty of so acting is punished via the “3 Fs”: judged a felon, fined $25,000 per incident, and sentenced to five years in jail.

Civil sanctions of MMPPPA are exclusions from Medicare. The Secretary of HHS has both obligation and privilege to expel practitioners and providers. Mandatory exclusions require the Secretary to end participation for a minimum of 5 years for anyone convicted of a criminal offense such as a fraud, theft, embezzlement, breach of fiduciary responsibility, neglect of a patient, or financial misconduct with any Medicare item or service.

Permissive exclusions allow the Secretary to expel from Medicare anyone convicted of a criminal offense or convicted of obstructing a criminal investigation pertaining to Medicare; and one convicted of criminal manufacture, distribution, or prescription for dispensing a controlled substance. Stunningly broad, permissive exclusions embrace any physician suspended from any state or national reimbursement program, whose license was revoked or suspended, who excessively charged, performed unnecessary services, failed to perform necessary services, or provided inferior services. Or defaulted on an education loan, had an adverse PRO determination, or failed to disclose an ownership interest in a laboratory or imaging center. Exclusions are not rescinded during appeals.

Three Concurrent Civil Laws

Three civil laws almost always are alleged as violated in any transgression of MMPPPA. False Claims legislation (1988) demands that a physician who knowingly makes or conspires to make false claims for reimbursement for a medical service or item shall be fined a minimum of $5,000 to a maximum of $10,000 per claim plus 3 times the fine in punitive damages.

For Misleading Advertising (1991), if the words Medicare, Social Security, and Health Care Finance Administration are not used accurately, any offense in print is fined $5,000; any broadcast or telecast offense costs $25,000 each, plus suspension from Medicare and Medicaid and any state equivalents.

An indirect excrescence of the criminal statutes is the increasing number of qui tam actions since 1986. Few physicians know that a disgruntled employee, competitor, or acrimonious spouse might file such a suit. Qui tam derives from the quaint Latin phrase qui tam pro domino rege quam pro se ipso in hac parse sequitur: who sues on behalf of the State as well as for himself. An informer who reports a physician violating Medicare regulations is called a “relator” and shares with the government whatever fines are imposed. If the relator plans and initiates the fraud, the court may reduce his part of the booty. If the entrapper’s conduct is criminal, the qui tam action will be dismissed.

Though entrapment could be an affirmative defense against a qui tam, which a doctor defendant could raise and prove, it is unlikely to work since predisposition to perform the crime generally is fatal to the defense, and especially when the crime is referrals.

Three Concurrent Criminal Laws

Federal criminal statutes form another triad with MMPPPA accusations. Criminal False Claims adds to the civil penalties ($5,000 to $10,000 per incident plus 3 times the fine in punitive damages) an additional retribution of 5 years of imprisonment.

RICO statutes (pertaining to Racketeer Influenced and Corrupt Organizations) provide fines for violation up to $25,000 or up to 20 years in prison, or both, plus return of the illegally gotten gain. The third common charge under a criminal statute is Mail Fraud. Its fine is $1,000 per incident or 5 years imprisonment, or both.

Medicare/Medicaid Fraud & Abuse Safe Harbor Regulations 1991

Such stern, strict legislation required some mitigation. Though promised right after the MMPPPA of 1987, the Safe Harbors did not see the light of application until July 1991. The OIG issued the long awaited regulations, four years in the making, specifying those payment practices that would not be treated as criminal offenses or serve as bases for exclusion from the Medicare and Medicaid programs under the Anti-Kickback Statute. While welcome, they are ominous in their statement that but for the Safe Harbors the described conduct would violate the Anti-Kickback Statute. Some of the now permitted, heretofore prohibited, business activities are so routinely beneficial and benevolent that few attorneys would have thought to warn doctors of their peril.

Just as physicians are alarmingly vulnerable to fraud and abuse accusations for innocuous business practices, so lawyers are at risk for malpractice accusation if not current with F&A law, its administrative interpretation by federal and state agencies, and with the flood of agency-generated rules and regulations. Of the ten safe harbors, five directly pertain to medical practice sales and thus daily are part of my professional work.

1. Public and Private Investment Interests
2. Space Rentals
3. Equipment Rentals
4. Personal Service and Management Contracts
5. Sales of Practices Between Practitioners
6. Practitioner Referral Services 
7. Warranties
8. Discounts
9. Bona fide Employer/Employee Relationships
10. Group Purchasing Organizations

Seven new Safe Harbors as listed in the September 21, 1993 issue of the Federal Register include: financial arrangements for hospitals recruiting physicians relocating or practicing in a rural area; surgeon-owners of ambulatory surgery centers; liberalizing investment interests in rural hospitals and outpatient facilities; group practitioners referring within their own group practice; providing malpractice insurance subsidies to obstetricians and practitioners in Health Personnel Shortage Areas; referral arrangements for specialty services; and freedoms and restrictions for Cooperative Hospital Service Organizations.

Those of us working daily with Safe Harbors await the next ones with anticipation and hope. Meanwhile physicians and surgeons are being hauled into Federal courts for violating the law. Here are nine cases demonstrating how Medicare Fraud and Abuse law is being enforced.

The fact patterns suggest that some of these cases have made bad law.

Case Law

1. U.S. v. Greber First in time and first in right to name and fame is Greber. Dr. Greber, a cardiologist, established an ingenious monitoring service called Cardio-Med. He invited practitioners to recommend their patients for 24-hour Holter monitoring, routine electrocardiograms, stress tests, and other cardiographic tests his service performed. Dr. Greber in turn paid the practitioner a fee to interpret the test results: 40% of the amount billed to Medicare. In Greber the doctor admitted that physicians would not have referred patients to him unless he returned part of the Medicare fee to them, thus establishing the “in return” requirement in the statute. Greber had also committed fraud by claiming payment for certain cardiac tests lasting less than 8 hours (the limit below which Medicare does not reimburse). Dr. Greber thus could and should have been found guilty on charges of common law fraud and of statutory felony for making “payments in return for referrals.

“However, the Third Circuit read the Medicare Criminal Fraud statute “expansively,” adjudging his payments to practitioners referral kickbacks, whether or not the services were performed by the referrers. The court held that “if one purpose of the payment was to induce future referrals,” the law was violated.

The now notorious “one purpose rule” in Medicare legal lingo transmutes “one purpose” of remuneration for referrals—the statute’s “in return for” referrals, a clear quid pro quo, you give me this, I give you that, implying “principal purpose” or primary, paramount, predominant, controlling, cardinal, chief purpose—into the expansive “any one” of many purposes, incidental purpose of a major purpose, ancillary, collateral, possible, or foreseeable purpose of a payment. If any one such payment purpose is obtaining referrals, the criminal law is violated.

The holding on appeal did not require such expanded reading of the statute, and this case does not stand for what other courts have been using it. The Supreme Court denied certiorari, doubtlessly because its opinion would be only advisory or declaratory: the only issue being how to read “payment in return for referrals.”

2. U.S. v. Kats Kats was a part-owner of a clinic service which referred patients to an independent laboratory which in turn paid to the clinic 50% of all the fees got from Medicare. The Kats clinic collected specimens, for efficiency sending work out rather than testing on site, and interpreted the lab results. Kats was convicted of conspiracy to commit Medicare fraud. The 9th Circuit maintained that the jury could convict even if referral of services was not a material purpose for making payments and “whether or not it found the payment wholly and not incidentally attributable to delivery of goods or services.”Quoting Greber the court held that it is Medicare Fraud and Abuse if one purpose of payment is to induce future referrals even if also intended to compensate for professional services.

3. U.S. v. Bay State Ambulance In Bay State Ambulance, at first glance seeming a smalltime bribe case, the First Circuit upheld the conviction of John Felci, a hospital executive, given cars and cash after his hospital’s ambulance contract was granted to Bay State Ambulance. He had been consultant during the bid and award process. The defendant had asked the jury be instructed that the government had to prove that payments were not compensation for services; that they were not substantially more valuable than services Felci had provided; or that he was guilty only if substantially overpaid. Amazingly, the court held that “Giving a person an opportunity to earn money may well be an inducement . . . to channel potential payments towards a particular recipient.” Quoting Greber, the judge held that the gravamen of Medicare fraud is “inducement.” “Impressed” by the Third Circuit’s expansive reading of the Medicare criminal fraud statute, the First Circuit stated that Greber “implies that the sole versus the primary reason for payments is irrelevant since any amount of inducement is illegal.”

4. U.S. v. Levin Levin exemplifies bureaucratic arrogance and arbitrariness. Dr. Levin was prosecuted although HCFA and Medicare had issued written opinions that his actions were not violations of law. Every modem ophthalmologist, who performs anterior segment surgery and extracts cataracts, inserts a substitute intraocular lens (IOL) for the opaque eye-lens removed. Technology is elegant, quick, and effective. Competition among the IOL manufacturers is fierce; since substantive differences among products are minuscule, price and incentive often determine choice. The IOL manufacturer Cilco offered “buy four lenses, get one free.” Dr. Richard Levin (whose large once-beautiful practice I know well, having evaluated it in its two offices in Cincinnati, Ohio, and across the river in nearby Florence, Ky.) accepted the free lens offer, and from competing lens-makers, AMO and Ioptex, accepted a cash credit to his surgical supply account of $97.50 for each IOL purchased, respectively, at $390 or $375. Obsessively compulsive as many good ophthalmologists are, he checked with the authorities, filed their written opinions of permission, and accepted these incentives. The government then sued under three statutes: illegal kickbacks (42 U.S.C. 1395), false claims (18 U.S.C. 287) and mail fraud (18 U.S.C. 1341).

Both HCFA and Medicare indicated that free IOLs were not reimbursement abuse, so long as Medicare did not have to pay for them. After years of trial by prosecutors (and more virulently by the press), and three quarters of a million dollars in legal fees, Dr. Levin was exonerated in both Ohio and Kentucky. The courts held that HCFA’s and Medicare’s written opinions that providing free goods with IOLs is not reimbursement abuse, thus not violation of Medicare regulations.

5. Hanlester Network & SmithKline Beecham Enforcement Actions. A group of physicians were limited partners through a partnership consortium called the Hanlester Network (the general partner of the limited partnerships which owned the labs). The Inspector General alleged that three California clinical laboratories plus SmithKline Beecham, which managed the labs, paid dividends to physicians for inducing referrals to the labs. The physicians as limited partners were not subject to the enforcement action. SmithKline Beecham settled the charges against it for $3.5 million. Hanlester therefore resembles Bay State Ambulance in that not the doctors but the partnership was prosecuted.

Administrative Law Judge Steven Kessel’s intelligently narrow reading of the Anti-Kickback Statute led to his ruling in March 1991 that in order for the Anti-Kickback Statute to be violated there must be a “quid pro quo for referred business.” The Inspector General appealed this decision to the HHS Department Appeals Board, which remanded the case in September 1991. The Board insisted that prosecution was not based on the limited partner physicians’ agreement to refer Medicare business to the partnership’s laboratory. A violation allegedly occurs whenever an individual or entity knowingly or willfully offers or pays anything of value, in any manner or form, with the intent of exercising influence over a practitioner’s reason or judgment for the purposes of inducing referrals of Medicare program-related business.

Moreover, the Appeals Board held a) that Judge Kessel improperly placed the burden on the Inspector General to show that the defendants were likely to harm Medicare and Medicaid; b) that the defendants were responsible for proving they lacked propensity to commit unlawful acts; and c) even if the defendants did not know with certainty their conduct violates law… [they] were aware or should have been aware that their conduct “danced close” to the edge of the law. The labs have been expelled from Medicare and are appealing in the California courts. Everyone in health law is watching this important case.

6. U.S. v. Lorenzo Dr. Lorenzo, a dentist, was fined more than $18,000,000 under the civil False Claims Act. He had submitted approximately 4,000 false claims for Medicare and Medicaid reimbursement for screenings for oral cancer in nursing home patients.

7. U.S. v. Kensington Hospital

Alleging fraud and illegal kickbacks, the U.S. Attorney’s Office in Philadelphia brought this civil action in the Eastern District of Pennsylvania against Kensington Hospital, its administrator, a clinical laboratory, and seven physicians. The complaint’s nine counts included violations of the False Claims Act (31 U.S.C. 3729); breach of fiduciary duty owed to the Medicare/Medicaid Trust Fund; violation of the federal government contracts anti-kickback law (41 U.S.C. 51), and some Common Law claims. One government claim alleged illegal kickbacks via doctors contributions to the Kensington building fund in return for exclusive rights to provide hospital-based services to patients.

While not dismissing the False Claims and some Common Law counts. the Court dismissed the breach of fiduciary duty counts, rejecting the government’s analogy to fiduciaries law principles, emphasizing that physicians simply submit claims for reimbursement to and have no responsibility to nor control over the Medicare/Medicaid Trust Fund. The Court also dismissed counts of violating the federal government contracts anti-kickback law.

8. Polk County d/b/a Polk County’ Hospital, Texas v. Peters.

Hospitals nationwide desiring to attract physicians and surgeons to undesirable locations, and county or city hospitals, routinely have used incentives: a loan, family moving expenses, reduced office rent, and income guarantee for the first year. There is good reason. Usually, the practitioner is young. has a family and medical school debt. thus no money to open an office. hire a staff, and pay a large medical malpractice premium. A local bank will not necessarily look favorably upon a new-comer with no local credit rating, no local family or friends, and no local political clout. Hospitals often serve as surrogate bankers. In Polk County Hospital v. Peters, surgeon Kenneth Peters was given an interest-free loan of approximately $30,000, obtained an income guarantee for the first year, and free office space, then reneged on the loan. His defense was ingenious; he claimed that the hospital’s Physician Recruitment Agreement was illegal, and his contract thus null and void.

Dr. Peter’s Recruitment Agreement stated: “Surgeon shall utilize Hospital for his patients who require hospitalization, unless in Physician’s professional judgment the use of another facility is necessary or desirable in order to provide proper and appropriate treatment and care to such patient or to comply with the desires of a patient or the patient’s family.” The Magistrate’s Court held that the gravamen of the Physician’s Recruitment Agreement was remuneration for referrals. Dr. Peter’s patient referrals were illegal kickbacks according to Greber, Kats, and Bay State Ambulance. Moreover, an HHS Fraud Alert on “Hospital Incentives to Physicians” listed just such suspect hospital activities as constituting Medicare fraud (low interest loans, significantly discounted office space, income guarantees), thus giving this administrative paper virtual force of law. The Recruitment Agreement, being illegal, was void and unenforceable. The hospital lost and Dr. Peters kept the money.

Clearly the gravamen of the contract was not referrals, as the judge found, but attracting physicians to a rural county in Texas, which some might consider the duty of the county executive. The facts suggest that the county needed doctors, not patients for its hospital. Moreover, since the contract’s referrals clause allowed Dr. Peters at his discretion to refer patients to another hospital, it was not enforceable, and did not constitute consideration. Did the county fear that openly requiring Peters to practice medicine in Polk County for one year would seem too close to personal servitude?

Kennestone Hospital Center in Georgia is currently under similar threat for nine Physician Recruitment Agreements.

9. U.S. v. Rutgard The OIG and Criminal Investigative Services launched a criminal case against Dr. J.J. Rutgard. The first hearing of this case was scheduled for January 11, 1993. I know about this ophthalmology practice through my medical practice brokerage, a memorandum by Deputy State Attorney General Sanford Feldman’s office submitted to Office of Administrative Hearings, State of California, and the ophthalmology press (See Ophthalmology Times, November 15, 1992, pp. 1, 55, 56). Jeffrey lay Rutgard, M.D., of La Jolla, known as one of the “Big Cutters,” attracted vast numbers of cataract patients to his exquisite ambulatory surgery center and annually billed Medicare for millions. Memoranda describing his alleged perfidies resemble a composite litany of the worst abuses the department of HHS might fabricate to push Congress to increase its funding. Accused of having performed unnecessary surgery, Rutgard also was charged with falsifying records, failing to get patients’ consents to surgery, lying to patients, staff, and government, bribing a former employee to not report incorrect billings, rigging tests to achieve results justifying surgery, faking photos demonstrating requirements for eyelid surgery, fraudulently using Brightness Acuity Testing (BAT) indicating presence of cataracts, and reusing disposable needles and sutures. As Kenneth Wagstaff, Executive Director of the Medical Board of California, charged, Dr. Rutgard used his medical license “as a license to steal.” As a solo practitioner, the surgeon earned $4,000,000 last year, seeing 180 patients per day.

The Attorney General made public Dr. Rutgard’s astonishing personal journal which describes his surgical pride’s corruption by power and Medicare money. How did the Attorney General get his diary? In April of 1992, at 5 a.m. federal agents entered Jeff Rutgard’s home, with guns drawn, placed him under house arrestas his wife and children cowered, and proceeded to search every room, closet, desk, and drawer, while simultaneously other agents searched his offices. His license to practice suspended, without a hearing, he is forbidden to work; his gigantic overhead continuing, he may be bankrupt before the trials conclude. His diary reads: “I have a gift from the Lord. He has given me the ability to work and earn millions of dollars—billions to be accurate. He has given me the ability to be all-knowing all the time and be not only excellent but nearly perfect like Himself.”

Pride, however, is one of the Seven Deadly Sins usually left to God’s tribunal to punish, and megalomania is not one of the enumerated felonies.


These nine Medicare cases suggest that someday soon an innocent doctor will be prosecuted, found guilty, and convicted under the Greber One Purpose rule. A competent attorney will get the Circuit Court to reverse. Eventually the Supreme Court will be obliged to resolve the conflict between circuits. Meanwhile, physicians and their attorneys correctly will argue that Congressional intent was to punish payments in return for referrals, where “in return” is a matter of fact to be decided by a jury. In each case the jury should be obliged to decide whether it is beyond reasonable doubt that the payment was made solely or substantially in order to induce referrals. But if juries are instructed, as in Greber, that that law is broken if one purpose of payment was to induce referrals, then, as in Greber, it will be inevitable for the jury to find a felony had been committed. The logical though pernicious conclusion to the Greber line of cases in adumbrated in Kats where the jury was informed that any payment, even if not material, that is, “immaterial,” for inducing referrals constituted felony. That is tantamount to making any payment to any referrer a statutory felony. Congress had the power to legislate physicians’ strict liability for the crime of referral. It did not.

Medicare Fraud and Abuse legislation and litigation yield eleven ominous surprises.

1) The gravamen of Medicare fraud accusations against practitioners is inducement for referrals, not medical abuse of patients or over-billing or false claims, as one would expect.

2) Referring patients to consultants, labs, and x-ray centers is a potential criminal offense with draconian punishments: conviction of felony, fine of $25,000 per incident, and 5 years in prison plus mandatory exclusion from the Medicare-Medicaid system.

3) Forbidden referral inducements need not be quid pro quo, as Hanlester demonstrates, but can be direct or indirect, overt or covert, explicit or implicit, actual or simply “dancing close” to the edge of the law.

4) Innocuous commercial incentives such as “buy four, get one free,” as Dr. Levin mistakenly attempted, and de minimis technical violations are prosecuted as felony kickbacks. Even when exonerated, practitioners suffer financial and emotional ruin.

5) Benign and beneficial medical business activities, such as Physician Recruitment Agreements, are suffused with so powerful a stench of criminality that, as in Polk County, they void contracts.

6) Risks of inadvertent violations are monstrous if practitioners, as Dr. Levin learned to his sorrow, cannot obtain and if obtained cannot rely upon official, written Medicare and HCFA pronouncements on correctness or legality of their acts.

7) The malevolent one purpose rule misinterpreting the statute in Greber makes any referral suspect of illegitimate compensation; apprehensive physicians will interpret test results for free rather than risk one purpose.

8) The Inspector General insists that rather than burdening the Prosecutor with proving physicians guilty of activities deemed criminal, the burden is placed upon the practitioner to prove his innocence.

9) Administrative pronouncements as Fraud Alerts listing activities construable as illegal are being given force of law in state courts, as Polk County suggests.

10) Health and Human Services has loose, comprehensive, permissive exclusions terminating practitioners’ privileges in Medicare and Medicaid programs; opportunities for swift appeal are meager.

11) Safe Harbors in dangerous waters are exceedingly welcome but not plentiful nor broad nor deep enough.

This is one expert’s view from the edge. By nature, experience, and achievement, I am a maker of new enterprises and new institutions. But before going forward, I am grateful to see where I am now. Critical Medicare legislation already is criminal. The Inspector General, not elected nor answerable to anyone but the President, has foreboding freedoms to generate regulations, promulgate them via a flood of informal and often unreadable administrative directives, and to enforce law via civil actions without indictments nor high burdens of proof. Future laws guiding and guarding medical care in America are not likely to become gentler nor kinder towards physicians. Plans for increasing medical coverage for all citizens and de-escalating costs for medical care inevitably will restrict liberty of American physicians and surgeons. No country in the world has innovated so much in medicine for so long for so many.

No country in the world has benefited so brilliantly from medical free enterprise. Standing on the brink of managed care, restricted care, and universal care, I appreciate the excellence of our recent past and view the brave new world of American medicine neither with fear nor optimism, but with consternation and caution. Not enough doctors know the laws they are obliged to obey. Not enough attorneys know the perils of their medical clients. Not enough Americans recognize that as medical care evolves from a privilege to a right, medicine transforms from a profession to a government responsibility. While it may be possible to provide high quality universal health care coverage to all 250 million American citizens, we must have people creating and directing that vast program other than those who presuppose America’s doctors are criminal exploiters of Medicare patients and programs. Medicine must not be America’s first profession whose brilliant inventions and independent practices are forever ended. For as American medicine goes, so goes the nation.
  Dr. Madeleine Cosman, an expert in medical law, is president of Medical Equity, Inc. and an Associate Editor ofTrial Lawyer Publications.
President 32 Knickerbocker at Oak
Tenafly, New Jersey